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Economists say a combination of rising international dairy prices and favourable farming conditions bode well for New Zealand's economic growth, which is already expected to outpace most other developed nations this year.
Dairy product prices in Tuesday night's GlobalDairyTrade auction rose 1.4 per cent from the last sale on January 8, led by surging prices for butter and cheese. Those two products have posed problems for Fonterra as their prices lagged behind whole milk powder.
The average winning price was US$5025 ($6040) a tonne from US$4953 a tonne at the last auction. About 41,024 tonnes of product was sold, down from 46,418 two weeks ago, for about US$206.1 million.
And while farmers were hit by the worst drought in 70 years last summer, conditions are looking much better.
"Without a doubt the revenue to the dairy industry this year compared to last year will be a lot higher," said BNZ economist Doug Steel. "We're still looking at something like five billion dollars additional revenue [for the current dairy season] - that's an enormous sum of cash that's going to filter its way through the economy in various ways."
Although Steel said the extra dairy revenue would support strong economic growth, he also warned that higher dairy prices would encourage more supply globally.
"It's our view that [additional supply] will start pushing down prices once it comes on stream."
ASB economists said the latest GlobalDairy-Trade results were encouraging, with strong prices across the board and an apparent convergence in product prices that may be more favourable to Fonterra's current production capacity.
"Overall, the dairy markets remain very robust," ASB said. "This season's production continues to look favourable, and price signals encouraging. Accordingly, we continue to think the prospects for 2014 dairy sector income remain solid."
Exceptionally good farming conditions during the 2011/2012 summer lifted New Zealand's gross domestic product growth to 1.1 per cent during the first quarter of 2012 - the strongest rise in quarterly economic activity in five years.
The Organisation for Economic Co-operation and Development (OECD) has forecast New Zealand's economy to expand by 3.3 per cent this year, which would be one of the fastest rates of growth in the developed world.
Steel said the lift in prices seen in the latest GlobalDairyTrade auction - especially those in value-added products like cheese and butter - supported further gains in Fonterra's milk payout.
Last month the dairy co-operative maintained its forecast payout farmgate milk price at $8.30 per kg of milk solids for 2013/14, which would surpass the previous record of $7.60 per kg in 2010/11.
Federated Farmers chief executive Conor English said that while the combination of good grass growing conditions and higher dairy prices were positive, the stubbornly high NZ dollar, which erodes returns on this country's exports, continued to be a problem.
The kiwi was trading above US83c early yesterday and some economists are expecting the Reserve Bank to increase the official cash rate next week, which would push the currency even higher against the greenback.
Tim Mackle, chief executive of industry body DairyNZ, said farmers were generally feeling "fairly positive" about 2014.
"But I'd temper that with saying the farmers who were affected by the dry conditions last year are wary because they know how quickly things can turn."
- Christopher Adams of the NZ Herald/additional reporting BusinessDesk