Westpac has revised up its farmgate milk price forecast for 2016/7 to $5.00 a kg of milksolids from a previous forecast of $4.60/kg on the back of big gains in international dairy prices.

A $5.00/kg milk price would compare with DairyNZ's estimated average break-even point of $5.05 a kg.

Fonterra's current forecast is for a farmgate milk price of $4.25 a kg.

World dairy prices rallied sharply at the latest GlobalDairyTrade (GDT) auction, driven mostly by double digit gains in whole milk powder and butter milk powder.


Overall, the GDT price index gained by 12.7 per cent since the last sale on August 3, which itself showed a 6.6 per cent gain.

Wholemilk powder prices - which have the biggest bearing on Fonterra's farm gate milk price - rose by 18.9 per cent to US$2695 a tonne - well above futures market pricing.

"Even with a relatively cautious interpretation of the lift in dairy prices over the last month, prices to date have been stronger than expected," Westpac senior economist Anne Boniface said.

"Consequently, we have revised up our milk price forecast for this season from $4.60 to $5," she said in a commentary.

"We will be watching forthcoming GlobalDairyTrade auctions closely, and are conscious of upside risk to this forecast if there is no retracement in prices from current levels," Boniface said.