2013-14 forecast raised to $7.40

Westpac has upgraded its milk price forecast to $7.40 per kilogram of milk solids for the 2013-14 season, and suggested Fonterra could even ''go north'' of that.

Banks have already signalled dairy farmers could be looking at a record season.

Westpac expected Fonterra to lift its $7 forecast following a board meeting this week, while its own 90c upgrade was prompted by ''surprisingly high'' GlobalDairyTrade auction prices and the fall in the New Zealand dollar.

The forecast still incorporated a pessimistic assessment of China's growth trajectory and a prediction the kiwi would rise to US83c by the end of the year.

Economist Nathan Penny also predicted a rebound in production from drought of about 5% on last year's level, while Fonterra had previously signalled production growth of 2%.

World prices remained very high while growing conditions had generally been very good since the drought broke.

The lower currency was ''the icing on the cake'', Mr Penny said.

The bank was surprised prices had stayed at such high levels.

''This time three months ago, we expected world prices would be around 7% lower by the end of July.''

Tight world supply had contributed to the buoyant prices, however he doubted the market had ''gotten its head'' around prospects for growth in New Zealand production this season.

As a result of Westpac's forecast of a 5% lift in production, the bank still expected world prices to fall over 20% by the end of 2013 from the July levels.

The bank had also upgraded its 2014-15 forecast by 30c to $6.50 a kg on the back of a lower dollar.

NZX Dairy Futures recorded a record trading month for July, with 5225 lots traded, surpassing the previous highest traded month (March 2012) by 1050.

Whole milk powder led the way with 2310 lots traded, followed by skim milk powder (2215) and anhydrous milk fat (700).

NZX launched its dairy futures market with whole milk powder futures in October 2010, followed by skim milk powder and anhydrous milk fat futures in 2011.

Levels of volatility in dairy markets remained high, which meant demand for viable risk management tools was also high and growth in participation in the Dairy Futures contracts reflected those market conditions, NZX head of derivatives Kathryn Jaggard said in a statement.

The trading activity seen in June and July augured well for the remainder of the year and it was expected activity would be further enhanced when the NZX went to extended trading hours, allowing greater access for traders in Europe and the US, she said.

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