Fonterra has just announced it has raised its farmgate milk price forecast for 2016/7 by 50 cents to $4.75 per kg of milksolids.

When combined with the forecast earnings per share range for the 2017 financial year of 50 to 60 cents, the total payout available to farmers in the current season is forecast to be $5.25 to $5.35 before retentions, it said.

The move follows sharp upward moves in the futures market and two very strong GlobalDairyTrade auctions.

The latest forecast compares with DairyNZ's $5.05 per kg estimated break even point.


At last week's auction, the GDT Price index gained 12.7 per cent, driven mostly by double digit gains in whole milk powder and butter milk powder.

Whole milk 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 at the auction.

Westpac said the announcement came as no surprise given the extent of the improvement in world dairy prices in recent weeks.

"We recently revised up our milk price forecast to $5.00/kg, which we regard as a cautious estimate," the bank said. "It's still early in the season, and there was a similar surge of buying around this time last year which proved to be short-lived."

Westpac said global milk production has fallen in recent months in response to low prices, but that it remained at elevated levels.

Globally, growth in milk supply continues to moderate, most notably out of Europe but in the Southern Hemisphere as well.

There have also been encouraging signs of renewed demand from China - the world's biggest dairy importer.

Chairman John Wilson said current global milk prices remained at unrealistically low levels, but have started to improve as global demand and supply continue to rebalance.

This will give farmers some cash in their bank accounts now and it will make their bank managers much more cheerful.


"Milk production is reducing in most dairying regions globally in response to low milk prices and this is bringing the world's milk supply and demand back into balance," he said in a statement.

Milk production in the EU is now in decline and our New Zealand milk collection at this early stage is around 4 per cent lower for the year to date.

"Prices have increased on GlobalDairyTrade but the increasing NZD/US dollar exchange rate continues to offset some of these gains," he aid.

Wilson said he expected the dairy market to be volatile over the coming months.

Federated Farmers dairy industry spokesman Andrew Hoggard said the Fonterra announcement today will boost farmer optimism and would "ease their bank manager's worries".

"It's still early days but this is a very positive signal for the guys out there who are struggling and need to know there is some relief in sight," Hoggard said in a statement.

"This will give farmers some cash in their bank accounts now and it will make their bank managers much more cheerful," he said.

"Internationally markets are still volatile and we don't want to rely on the global trading trends just yet, but this is a positive move and gives us room to be cautiously optimistic."