Fonterra's increased payout for 2013-14 would lend a sizeable boost to the economy, Westpac said in a commentary.
The cooperative dairy giant this morning raised its forecast milk price to farmers by 50 cents for the 2013/14 year to $7.50 per kg of milk solids, reflecting constrained global supply and the lower New Zealand dollar. The milk price forecast is a $1.70 improvement last season's price of $5.80 per kg. Fonterra forecast a 2013/14 dividend of 32c, unchanged from the previous year.
Westpac said 2013/14 was shaping up to be a bumper dairy season.
"The lift in the milk price, combined with an expected rebound in production, represents a sizeable boost to New Zealand's national income," Westpac said in a commentary.
"The $1.70 lift in the milk price and a 5 per cent lift in production would boost the economy by around $3.4 billion or around 1.6 per cent of nominal GDP compared to the 2012/13 season," the bank said.
Fonterra chairman John Wilson said the higher forecast farmgate milk price for the new season reflected continuing strong international prices for dairy.
"At the beginning of this season, our forecast was that dairy commodity prices would continue at or near current levels until the fourth quarter of 2013," he said.
"However, supply constraints in Europe and China during the Northern Hemisphere spring have contributed to an increase in dairy prices of 3 per cent over the past two months,' Wilson said in a statement.
Rising milk prices are an added cost to the manufacturing, or dividend paying, side of Fonterra.
Units in the Fonterra Shareholders Fund, which give investors access to Fonterra's dividend flow, fell by 24c or 3.2 per cent to $7.34 in early trading on the NZX.
Chief executive Theo Spierings said international dairy trade growth is currently being led by strong demand for whole milk and skim milk powders.
"This trend, relative to prices for cheese and casein, currently would have a short term negative influence on product mix returns during the first half of 2014," Spierings said.
"As we drive for growth in our consumer businesses, during the first half of 2014 we are likely to have to absorb some of the expected substantial increases in the cost of goods arising from current high commodity prices, and this could have an impact on margins," he said.
The milk price upgrade comes after Fonterra last week warned that its 2012/13 annual earnings for the 2012/13 financial year, which ends today, were likely be 7.3 per cent below forecast due to the local drought at the start of the year and problems with its Australian business.