The outlook for New Zealand's dairy farmers turned suddenly brighter today after Fonterra raised its farm gate milk price by 50c to $5.25 a kg of milk solids - its highest point in two years and its second upgrade in less than a month.

News of the lift precedes what is likely to be one of Fonterra's biggest profits since its inception in 2001 when it reports its results for the July 2016 year tomorrow.

Fonterra said in today's announcement that, 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 $5.75 to $5.85 - before retentions.

That compares with DairyNZ's breakeven estimated break-even point of $5.05/kg. The milk price came to $3.90/kg in 2015/6, $4.40 in 2014/5 and a hit a record $8.40 in 2013/5. The co-op had earlier raised its forecast on August 25, also by 50c.


Chairman John Wilson said global milk supply had continued to reduce and demand had remained stable since its last forecast in August.

Milk production in the European Union for 2016 is beginning to flatten out and New Zealand milk collection is currently more than 3 per cent lower than last season.

"While we have seen some improvement in GlobalDairyTrade auction prices recently, the high NZD/US dollar exchange rate is offsetting some of these gains," he said.

Fonterra's announcement, which followed a modest improvement in prices at this morning's auction, came largely out of blue, although the co-operative was expected to comment on the milk price at tomorrow morning's annual result.

"I think that Fonterra is probably aware of the cashflow constraints for farmers so they will do anything they can to aid that," ANZ Bank rural economist Con Williams said.

"Tomorrow morning's announcements will all be aimed at alleviating any short term financial stress for farmers," he said.

At this morning's GlobalDairyTrade auction, the GDT price index rose by just 1.7 per cent - well short of market expectations.

Whole milk powder prices - which have the greatest bearing on Fonterra's farm gate milk price forecast - eased by 0.2 per cent to US$2782 a tonne after gaining by more than 30 per cent since July. All other key Fonterra "reference" products gained in price.

I think that Fonterra is probably aware of the cashflow constraints for farmers so they will do anything they can to aid that.


Williams said the decline in whole milk powder prices should not have come as a big surprise, given that prices have rallied by 35 per cent since early July. "The market was showing signs of exhaustion," he said.

However, Williams said the rally looked to be more sustainable than previous upturns.

"If we look at this morning's prices, I think the rally has more durability than the last ones that we have seen over the last couple of years, and the news flow has been more supportive of that," Williams said.

Federated Farmers dairy chairman Andrew Hoggard said Fonterra's announcement was an unexpected confidence booster for the sector, but he once again urged caution because of the way that Fonterra's advance payment system works.

"We have got to be careful in terms of timing because if it does pan out at $5.25/kg - and breakeven is $5.05 - we don't actually get the full amount of that until October 2017, so there will be no cheque in the mail tomorrow," he said.

"But it does mean - from a so called helicopter view - that we will be going through that breakeven point of $5.05 on the milk price alone, and so that does look extremely positive," he said.

"But it does not change the reality that for the next six months, there will be some pretty tight cashflows on the farm," he said.

Share market analysts expect tomorrow's result to come it at around $783m to $887 million - which would be a record or close to it.

ASB Bank rural economist Nathan Penny - who has long forecast a $6.00/kg milk price - said the timing of today's upgrade was a surprise.

"In a way, the new milk price forecast will steal some of the thunder from tomorrow's Fonterra annual results announcement," he said.

The milk price forecast upgrade signalled that Fonterra was increasingly confident that recent auction price lifts would stick, he said.

Penny said markets have fundamentally shifted and that there would be more declines in production levels this year.

"In this respect, this season is different and we expect that August and September's price recovery is sustainable," he said.