Wellington, May 25 NZPA - Federated Farmers has welcomed Fonterra's prediction that the payout to farmers next season may top $8/kg of milksolids, but has warned farmers not to count on milkflows turning into white gold.

"Farmers and Fonterra need to make hay while the sun shines," said Federated Farmers dairy chairman Lachlan McKenzie. "If anyone thinks this will lead to another dairy boom then they should think again."

The Fonterra forecast, based on an initial milk payment of $6.60/kg plus dividends of up to 50c a share, is expected to be stepped up with reviews through the 2011 season which starts in a few weeks time.

It is already 50c/kg above the forecast for the 2010 season just finishing.

But the farm lobbyist said next year "will not be 2007 revisited".

A record payout in the 2007-2008 season of $7.90/kg of milksolids meant Fonterra's 10,500 suppliers averaged payouts of more than $900,000, and those with interests in multiple farms received multi-million dollar payouts.

A similar cash injection for dairying regions will be not only be significant for those economies, but the national economy: Fonterra generates more than 7 percent of New Zealand's gross domestic product and has annual sales of around $16 billion.

But Mr McKenzie noted that there had been few conversions of drystock properties to dairying in recent times, and only half a dozen dairy farms were reported to have been sold in April.

"Federated Farmers advice is to budget conservatively and use any windfall to retire debt, especially expensive short-term facilities".

"Federated Farmers analysis highlights volatility of upwards of $2kg of milksolids is increasingly the norm," Mr McKenzie warned. "We urge caution both inside and outside the farm gate," he said. "Expectations have to be realistic".

The present season opened with an "eye-watering" $4.55/kg but improving commodity prices means Fonterra is on track for total of $6.50-$6.60 to be available from payments and dividends. Retentions by Fonterra are expected to mean farmers receive $6.10/kg, equivalent to an average payout of $740,000 each.

Mr McKenzie said Ministry of Agriculture and Forestry computer models showed that 1kg of milksolids could cost a "staggering" $4.88 to produce one kilogram of milksolids.

A cold start to the European spring had hit the milk production there, tight credit was constraining the United States dairy industry, and hot weather had affected farming in the Australian state of Victoria, which accounts for 60 percent of Australian milk production. Some New Zealand farmers were affected by drought.

"While the drought has now seemingly broken, its tail will hamper spring production and pasture in many parts of the country will need renewal," Mr McLachlan said.

But Fonterra Shareholders' Council chairman Blue Read said the cooperative's $6.90- $7.10 opening forecast for the 2011 season was "great news" for Fonterra's supplying shareholders.

"With many farmers still feeling the impact of the recent drought this strong forecast cashflow will be most helpful," said Mr Read, who also advised farmers to remain "vigilant" in managing their businesses.

Fonterra chairman Sir Henry van der Heyden said the cautiously-framed opening milk price forecast represented an increase of 50c on the forecast milk price for the current 2010 season, and that if international dairy prices and foreign exchange currency rates did not change too much, then the 2011 payout could be well over $8.00.

Market analyst Peter McIntyre from Craigs Investment Partners estimated a price over $8 could give the nation a $2.5 billion boost, with a big multiplier effect for the wider economy.

But rural real estate agents said that despite confidence in an increased Fonterra payout, they did not expect the rural property market to improve significantly for another 12 months.