Interest in converting farms to dairying is likely to be rekindled by an almost 20% increase in the price Fonterra expected to pay dairy farmers for milk this season.
Fonterra announced yesterday a revised milk price of $6.05 a kg of milk solids, the second highest in nine years, an increase of 95c a kg/ms on the most recent forecast, but a massive rise of $1.50 kg/ms on this season's opening forecast.
The ANZ Bank estimates the higher payout will add $1.2 billion to the economy, or 0.7% of GDP.
It comes at a time when confidence in the sheep, beef and grain industries has plummeted, leading observers to predict renewed interest in converting farms to dairying.
"There will be a resurgence of interest," Rabobank southern South Island regional manager Jeffrey Morrison said.
After a profitable year for sheep meat and beef last year, returns have been decimated by an export-unfriendly exchange rate, with expected lamb prices falling from close to $90 a head last year to less than $70 this year.
"People will be asking the question and doing the numbers, but whether it comes to anything, I don't know," Mr Morrison said.
It depended on farm debt loading and viability.
Craig Wyatt, a partner in the Dunedin accountancy firm Harvie Green Wyatt, agreed, saying some farmers may resurrect conversion plans which had been put on hold.
"It may well rekindle people's interest in dairying and it might be the impetus to push land sales along," Mr Wyatt said.
However, he warned that prices would remain volatile.
Just a few months ago, the forecast dairy payout was $4.55kg/ms and sheep meat farmers looked like enjoying another year of lambs selling for close to $90.
Now, forecast milk prices were the second highest in nine years and lamb, beef and grain returns were falling.
"People thought last year was the start of a renaissance [for lamb] and suddenly prices are down $20 to $25 a head."
For dairy farmers the higher payout would be spent on reducing debt and restoring cash flow, which had been under pressure over winter, Mr Wyatt said.
It could also kick-start rural land sales, which had been quiet for several months, making it difficult to determine where land prices were.
Balclutha accountant Jim Johnstone doubted there would be a wave of new conversions, saying the problems of high-profile dairy investments would temper interest, while some new conversions needed several seasons of high payouts to become viable.
Mr Morrison said price volatility would make investors and banks cautious, but he expected plenty of interest.
Banks were more closely adhering to lending criteria but with banks having to hold more capital, the cost of borrowing could be higher, he said.
In the year to spring 2008, Meat and Wool New Zealand estimated 330 sheep, beef and deer farms had converted to dairying, compared with 70 for the same period a year earlier.
Fonterra chairman Sir Henry van der Heyden said although consumer demand and the global economic situation remained fragile, there was confidence recent market gains were sustainable and Fonterra had factored in the exchange rate and had hedging.
"A big gain like this in the payout forecast just shows how much volatility there is in the market."
In the past four months, the average price for whole milk powder sold on the internet-based globalDairyTrade has increased 88%.
The forecast was made up of a milk price of $5.70kg/ms, a lift of $1.10kg/ms on earlier forecasts, and a value added or distributable profit of 35c kg/ms, which was 15c lower.
Chief executive Andrew Ferrier said this was because the recovery of powders had been stronger than for that of products such as cheese and casein.
At a glance
Fonterra payout (kg/ms) Average lamb price*
2001-02 $5.05 $66
2002-03 $3.16 $60
2003-04 $3.77 $59
2004-05 $4.59 $62
2005-06 $4.10 $53
2006-07 $4.46 $52
2007-08 $7.66 $56
2008-09 $5.20 $82
2009-1 $6.05 less than $70.
(forecast)
*for 15.3kg YM grade lamb
Source: Fonterra and Meat and Wool New Zealand
