Fonterra's lifted its forecast Farmgate Milk Price for the 2013/14 season by 35 cents to a record level of $8.65 per kilogram of milk solids.

The Kiwi dollar swiftly rose against the US dollar to about US83.1c from US82.9c immediately before the announcement.

The rise in forecast price is the third Fonterra's done in this financial year (which runs to July 31) after the dairy co-operative initially picked a price of just $7.50 last July.

The increase – along with a previously announced estimated dividend of 10 cents per share – amounts to a forecast cash payout of $8.75.

In increasing the forecast milk price again Fonterra's retained the 70c gap that it had in its December forecasts between the forecast milk price and the theoretical farmgate milk price, which is now $9.35 per kgMS calculated in accordance with the Milk Price Manual.

When the gap - along with a slashing of the dividend from 32c to just 10c, and a near-halving of forecast operating profits, was announced in December, Fonterra Shareholders' Council chairman Ian Brown said it was a "practical" decision given the unusual market conditions.

Fonterra said at that time that while the Milk Price Panel had then recommended a price of $9 per kg/MS this was "not the price Fonterra is being paid for its cumulative product mix".

In announcing the latest increase in milk price forecast today, Fonterra's chairman John Wilson said the higher forecast was "good news for farmers, and for New Zealand".

"The increase reflects continuing strong demand for milk powders globally."

In referring to the gap between the recommended price derived under the Milk Price Manual (now $9.35) and the latest forecasted price, Wilson said: "The board has the discretion to pay a lower Farmgate Milk Price than that specified under the manual, if it is in the best interests of the co-operative."

The Fonterra board has also approved an increase in the Advance Rate schedule of monthly payments to farmer shareholders. Payments from March through to June will be 25 cents per kgMS higher than the previously published schedule.

"We will provide an update on business performance when we announce our Interim Result on March 26"

Fonterra is required to consider its Farmgate Milk Price every quarter as a condition of the Dairy Industry Restructuring Act (DIRA).

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The payout history for all major New Zealand dairy companies is here.