Dairy giant Fonterra has lifted its milk price by 75 cents in response to the recent lift in dairy prices at the GlobalDairyTrade auctions.

Fonterra's 75c lift to its forecast milk price has injected $1.3 billion into farmer incomes and delivered a $3b increase to the country's GDP since the beginning of the season, according to DairyNZ.

The new revised forecast of $6 per kilogram of milk solids has pushed budgets above break-even levels. Since the start of the season, the co-operative's milk price has risen by $1.75/kg MS, increasing average dairy farmer incomes by $260,000, DairyNZ senior economist Matthew Newman said.

"Many farmers have increased debt and have deferred maintenance expenditure over the last season or two. The increase in advance payments kick in on the 20th December, lifting 50 cents per kilogram milksolids.

"Any further increases in milk prices will go towards repaying Fonterra loans for the majority of farmers who have them."

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Newman said the increase was very timely for Waikato dairy farmers. The wet spring has had a major impact on Waikato milk production this spring. Many farms are more than 10 per cent down on the same time last season. Milk production will likely be below the 1000 kilogram per hectare mark for the first time since 2012-13.

This latest increase would deliver an additional $90,000 income for an average Waikato farm and a $470 million increase for the region's GDP.

"However, not all of this will result in increased profits as some additional farm work expenditure, a catch up in deferred payments and maintenance will occur, plus the impact of reduced milk production. But the $6 milk price is still well above the break-even level required to meet the main cash costs."

ASB rural economist Nathan Penny has long predicted the forecast lift, which reflected a rapid global dairy supply correction.

"For us, this supply correction and subsequent price lift came as no surprise. With farmgate milk prices very low, farmers had to respond and change behaviour – farm losses could not continue indefinitely."

The recent wet weather in the North Island had the potential to send milk prices even higher.

"For now, though, we sit tight with our $6.00/kg forecast. And join in with NZ farmers' collective sigh of relief."

ANZ believed Fonterra was being conservative with its new forecast. If prices maintained their current levels, there could be further upside of $0.20- 0.30/kg MS, according to its latest Dairy Update.

This was based on November auction prices tracking slightly above $7/kg MS and the presumption of a slight moderation in prices for the remaining 40 of product to be sold.

In the short-term there could be a further squeeze higher in powder prices and supply conditions would improve in the New Year period.

Purchasing demand has been steady, but a lot of support for GDT pricing had centred around China, which remained a swing buyer according to local supply conditions.

This demand was likely to be moderate with recent buying activity plugging a short-fall in local supply that had opened up and as the New Zealand-China free trade agreement window finished for this year.

For a fully shared up farmer it has pushed the total payout available to farmers to $6.50-$6.60/kg MS before retentions.

Fonterra chairman John Wilson said the increase reflects improvements in pricing since September, following the gradual rebalancing of global supply and demand.

"We've seen falling production in the major exporting regions, particularly Europe and Australia, and an unprecedented decline in New Zealand milk supply due to wetter than normal spring conditions across most regions.

"On balance, demand continues to be firm. As a result there has been a steady improvement in global dairy commodity prices and this is reflected in the improved forecast."

Lift in forecast a great boost for morale

Federated Farmers dairy chairman Andrew Hoggard said it would lift farmers' spirits nationwide after a tough, wet spring.

"The weather's been kicking our guts over the last few months and it's been a rough couple of years, it's going to boost everyone's morale."

The new forecast had pushed the advanced payment rate to farmer by 51 cents to $4.10/kg MS for November and $4.15/kg MS for December, which would get cash in the back pockets of farmers sooner rather than later and make a big difference.

"It's an extra 75c for the season, the advance rate has gone up. It's only good news."

Hoggard said the extra cash will be used to pay off some of the debt accumulated over the past few years and to carry out maintenance that was deferred when the forecast fell.

There was also a possibility it will see the banks put more pressure on farmers to pay off debt and it was important for them to keep on budgeting to remove that risk, he said.

Hoggard doubted farmers would take advantage of the lifting milk price and buy supplements to boost production because it meant wasting grass in the paddock.

"You're not going to get any extra milk, you might as well throw dollar bills in the feed bins."

However, if there was another summer drought, the extra cash will allow farmers to buy in feed for their cows, he said.

Fonterra chief executive Theo Spierings​ said the co-operative had had a strong first quarter performance. Its first quarter revenue of $3.8 billion was up six per cent on the same period last year.

Sales volumes were up two per cent to 4.9 billion litres liquid milk equivalent, while the gross margin of 22 per cent remained largely unchanged.

These revenue gains reflected the volume and margin growth across the business, and an ongoing focus on cost controls.

"Our operating expenses have reduced by two per cent to $621 million and we continue to keep a close rein on them, in line with the financial discipline shown last year."

The co-operative has moved an additional 128 million litres into higher-value consumer and foodservice products compared with the same period last year.

"The consumer and foodservice business achieved an improved gross margin of 31 per cent, up from 28 per cent. This reflects the increasing strength of our brands in key markets and our focus on chef-led solutions in foodservice."

However, Fonterra's earnings face emerging head-winds for the remainder of the financial year, he said.

"Our current milk collection forecast is 1460 million kilograms of milk solids (kgMS), down seven per cent on last season, and this is constraining sales.

"In addition there is a potential impact from the price of milk price reference products, such as whole milk powder, rising faster than non-reference products."

Federated Farmers North Canterbury dairy spokesman Michael Woodward said the price hike would be a morale boost for bother farmers throughout the country as well as to those in areas hit by this week's earthquake.

"It's definitely going to take a weight off the minds of North Canterbury and Kaikoura farmers, they can now focus on getting their farms up and running. It's a shot in the arm for guys who are getting very tired."

More generally it would put more money into people's bank balances.

Reports Woodward was receiving were that, even though North Island production is down, Southland could be up on last season.

"They could be up as much as 5 per cent, it's been a good season due to the right amount of rainfall at the right time. Canterbury should be even or perhaps down 1-2 per cent, rain has been good but lack of sunshine has been a problem."

Woodward said he hoped other processors would follow Fonterra's lead and raise their forecast payout because all the signals were pointing to a continuing increase in global prices. He supplies Synlait, along with 199 other Canterbury farmers.

Regarding the situation in Kaikoura, Woodward said two or three sheds were write-offs, and some cows would be transported to Waiau as soon as the road would allow. Most cows would remain on farms in Kaikoura and it was hoped tankers would be able to collect milk soon.