Improved dairy prices have prompted Fonterra to bump up its 2016-17 forecast farm-gate milk price by 50c to $4.75.
That meant a total payout available to farmers of $5.25 to $5.35 before retentions, with a forecast earnings per share range of 50c-60c.
Current global milk prices remained at "unrealistically low levels" but had started to improve as global demand and supply continued to rebalance, Fonterra chairman John Wilson said.
Milk production was reducing in most dairying regions globally in response to low milk prices and that was bringing the world’s milk supply and demand back into balance.
EU production was now in decline and New Zealand milk collection, while early in the season, was about 4% lower for the year to date, Mr Wilson said in a statement.
Prices had increased on the GlobalDairyTrade auction platform but the increasing NZD/USD exchange rate continued to offset some of those gains, he said.
Westpac acting chief economist Michael Gordon said the forecast upgrade was unscheduled but was no surprise, given the rising world prices in recent weeks. Prices rose more than 20% in the past two GDT auctions.
Westpac recently revised up its own milk price forecast to $5 which it regarded as a "cautious estimate".
"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," Mr Gordon said.
Global milk production has fallen in recent months in response to low prices, but it remained at elevated levels, he said.
Federated Farmers dairy industry spokesman Andrew Hoggard said the announcement would boost dairy farmer optimism and, even more usefully, ease their bank managers’ 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," he said.
PGG Wrightson Real Estate general manager Peter Newbold said some dairy farmers reacted directly to the GDT’s recent positive movement, considering buying or selling land "within hours" of the auction.
"Many have held off on property for at least a year, waiting for the sector to emerge from its trough," Mr Newbold said.
For the three months to July 31, Real Estate Institute statistics indicated dairy farm sales and values were "holding steady".
Salesmen and women suggested farms were selling at between 10% and 15% below their peak of two years ago.
"Even when returns are at their highest, there are always a few who need to sell property under bank pressure. At present, the number of forced dairy farm sales is no greater than it generally is.
"While that could change, farmers now appear likely to be rewarded for their considerable efforts to trade through tough times.
"As confidence rises, buyers and sellers should rediscover the conviction they need to agree on the value of a dairy farm. If so, a particularly busy spring awaits, as many proceed to make up for lost time," Mr Newbold said.
NZX’s NZ milk price futures contract reached a milestone on Wednesday: more than 10million kilograms of milk solids traded since the product launched, less than three months ago.
Initial trading in the contract has exceeded expectations.
Activity was driven by a significant movement in GlobalDairyTrade prices, and a lift in forward prices for dairy commodities in the futures market.
NZX senior manager derivatives Nick Morris said the futures contract was quickly establishing itself as an effective way for dairy farmers to hedge their milk price risk.
