Rural lending specialist Rabobank expects farmgate milk prices to lift towards the low $6.00 per kg mark, up from its previous forecast of a price in the the mid to high $4s, if world dairy production continues to decline.
New Zealand dairy analyst Emma Higgins, commenting ahead next week's quarterly report by the bank on the world's dairy sector, said wholemilk powder prices could reach US$3300 a tonne by early next year.
A wholemilk powder price of between US$3000 to US$3500/tonne, which compares with the last GlobalDairyTrade price of $2782 a tonne, would put most Kiwi farmers back on a more solid financial footing after two years of heavy losses.
Higgins joins ASB Bank rural economist Nathan Penny, who has for some time been at the optimistic end of the market with a $6.00/kg milk price forecast for the current year.
She said declines in world production could lead to wholemilk prices reaching US$3300 a tonne by the second quarter of next year and $3400 by the third.
"It could be a low $6.00 figure, which is obviously fantastic news for farmers and also for the wider New Zealand economy," Higgins told rural broadcaster Jamie Mackay on The Country.
"In these markets, things can move very quickly and that's what we have seen quite recently," Higgins said.
"We have seen a rapid tightening of market fundamentals - largely around global production reducing at a very rapid rate, given that those low farmgate milk prices are biting right around the world and that's really impacting on production," she said.
Strong demand in Europe and the US had further reduced the volume of product available for the export market, she said.
Higgins said much would depend on the exchange rate, but that a milk price over $6.00/kg would be "great news for New Zealand dairy firms and the greater New Zealand economy".
"We are certainly more positive and have lifted our expectations for the coming season, given how quickly that production is plummeting and around the globe in the face of some steady demand," Higgins told the Herald.
European milk production has decreased for the first time since early 2015, with volumes in June down 2 per cent compared to last year.
Fonterra, in its latest global update, said Asia had returned to strong import growth in the last month, and in China and Latin America growth continued. Middle East and Africa imports had slowed, it said.
The co-op expects milk collection in New Zealand for the 2016/17 season forecast to be down by 3 per cent compared with last season.
Fonterra's payout for 2015/6 came to $4.30/kg, comprising a farmgate milk price of $3.90 per kg and a dividend of 40 cents per share. The co-op last month revised up its farmgate milk price for the current season by 50c to $5.25 a kg.