Fonterra has lifted its 2020/21 forecast farmgate milk price range to $7.30-$7.90 per kg, up from $6.90-$7.50 per kg.
The midpoint of the range, off which farmers are paid, increased to $7.60 per kg.
At that level the milk price would be one of the highest in Fonterra's 20-year history and comfortably above Dairy NZ's breakeven estimate of $5.80-$5.90/kg.
The co-op paid $7.59/kg in 2007/08, $7.60/kg in 2010/11, a record $8.40/kg in 2013/14 and $7.14/kg last season.
Chief executive Miles Hurrell said the lift in the forecast was a result of consistently strong demand for New Zealand dairy products.
"We've seen Global Dairy Trade (GDT) prices continuing to increase since February when we last updated on our forecast farmgate milk price and then this week there was the 15 per cent increase in GDT prices," he said.
Hurrell said today's price lift would the see co-op contribute more than $11.5 billion to the New Zealand economy through milk price payments this year.
Fonterra has decided to maintain its plus or minus 30 cent price range, reflecting the continued uncertainties in the global dairy market.
Hurrell said the higher price would dampen the co-op's earnings.
"A $7.60 per kg forecast farmgate milk price also increases our input costs, putting further pressure on our earnings in the second half of the 2020/21 financial year," he said.
The co-op is due to report its first-half result on March 17.
Hurrell said the rise in dairy prices was "very much a China-demand led" story but that there was also good demand for New Zealand dairy across southeast Asia and the Middle East.
"China's strong economic recovery, following the initial impact of Covid-19, is flowing through to strong demand for dairy and we've seen this through sales during the Chinese New Year," he said.
"China's local milk supply is being used in fresh dairy products and they are looking to us to provide longer-life dairy products – in particular, whole milk powder which has a big influence on the forecast farmgate milk price.
"Customers know we are continuing to get products to market, despite the challenges in the global supply chain and they are looking to us for this reliability.
"We're also seeing customers want to buy more of our products than usual to help mitigate the risk of global supply chain delays," Hurrell said.
But he said it was important that farmers recognised there were are a number of downside risks to the mid-point of the range.
For example, he said the EU and US were heading into their season and their milk supply would soon start increasing.
There was also general volatility surrounding disruption caused by Covid-19, he said.