A high exchange rate looks to be taking the cream off what should be a profitable year for farmers.
Forecasts by Westpac Bank and BNZ Capital both paint a positive outlook for agriculture, but Westpac has tempered its optimism with warnings that lamb prices could be 10% lower and beef 12% lower due to an export-unfriendly exchange rate.
The fundamentals are strong for primary exports with both banks predicting improved international prices for dairy exports on the back of growing demand and a global shortage of lamb underpinning demand and prices.
The beef sector has been hit by the recession, and while global supplies are starting the shorten, it is unlikely prices will return to the peaks of last season.
Westpac's Agribiz newsletter forecasts a $4.70 a kg milk solids (kg/ms) payout for the coming season, which includes an added-value contribution of 50c kg/ms.
It is based on a NZ-US exchange rate of US66c.
The bank based this forecast on improving international prices for all dairy commodities on the back of recovering economic sentiment and falling milk production, especially in the United States where milk flows are picked to fall 1.8% compared with 2008.
BNZ Capital agreed, but said a 30% appreciation in the exchange rate since early July had outstripped much of those gains.
It was less bullish about the milk price, sticking with Fonterra's forecast of $4.55 kg/ms, but saying there was a chance it could increase.
In the BNZ's commodity wrap publication, it warned there was no sign the dollar would fall "meaningfully" over the next 12 months.
But the BNZ said there were signs international dairy prices were improving, with prices in US dollar terms for all dairy prices increasing 17% in recent months.
Global lamb prices have eased from last season's peak but remain "at elevated levels", according to Westpac.
The average price last season was $5.50 a kg, well above the five-year average of $3.90 a kg.
"We have been positive on the outlook for lamb prices for some time and remain so.
We think international lamb prices are going to remain firm over the 2009-10 season with scarce supply, both home and abroad, a major reason."
The exchange rate would reduce prices by about 10% from last season, to an average price of about $5 a kg.
Demand for beef in Asia and the US has been weak, the Russian economy has retracted 3%, also dampening demand, and a high US dairy cow kill has also put pressure on prices.
Westpac said supplies were finally starting to decrease in the US, which should stabilise prices.
The impact of a drought in Argentina remained an unknown, with some predictions the world's largest beef consumer may have to import beef for the first time.
Again, the exchange rate would have an impact, with Westpac saying the average price last season was $3.30 a kg, but that could fall to $2.90 due to the impact of the higher dollar.
Agricultural production has grown 60% over the past 20 years, equating to compound growth of 2.4% a year, and Westpac expects the sector to grow in the coming year, but less than 2.4%.