The Ministry of Agriculture says improved milk payouts have given dairy farmers a morale boost, but they're still taking a cautious approach as they seek to reduce high debt levels.
MAF's latest farm monitoring report for the dairy sector, based on surveys of 160 dairy farms, is predicting a 3% lift in the average or model farm's pre-tax profit for the current season.
The model farm is budgeted to finish the year with a $30,000 cash surplus and a surplus for reinvestment of more than $120,000.
Despite the big lift in Fonterra's forecast milk payout, MAF is expecting a 10% drop in the average dairy farm's after-tax profit, compared with the 2009-10 season.
MAF's North Island regions manager, Phil Journeaux, says farm working expenditure is expected to increase, tax payments are expected to be higher due to increased profits last year, and farmers are making more of an effort to repay debt.
Mr Journeaux says dairy farmers have increased their debt repayments by more than 60% since last season, but high debt levels have also forced more farms, mostly dairy farms, into receivership.