Dairy co-operative Fonterra is forecasting a higher payout to its farmer-owners next season because of strong demand for its products.
New Zealand's largest company has set its opening forecast before retentions for the 2013/14 season at $7 per kilogram of milk solids - a rise of $1.20 above the milk price forecast for this season.
In addition, a dividend payment to the 10,500 farmers will be decided when the company sets its budget in July.
Fonterra has confirmed its payout for the season just ended at $6.12, comprising $5.80 per kilogram of milk solids and a dividend of 32 cents a share.
Global dairy prices have climbed in recent months as the drought cut back dairy production in New Zealand in the first quarter of the year.
Supply is also slowing globally due to unfavourable weather conditions in Europe, while production growth is modest in America.
Fonterra chairman John Wilson says dairy prices have peaked, but are expected to remain near current levels until the end of the year and stay strong in 2014.
Mr Wilson says the co-operative has taken a further step to help farmers recover from the impact of this season's drought, by increasing the advance payment for their milk to $5 per kilogram.
The chairman of Federated Farmers dairy wing, Willy Leferink, says rise in the forecast payout is very welcome to dairy farmers whose bills have mounted during the drought.
Mr Leferink said many farmers had to borrow money to purchase feed for cows, while having very little income because they had to dry off herds early.
Industry body Dairy NZ has calculated that higher feed prices, combined with the drop in milk production, will cost the average farmer about $100,000 and some much more than that.
It estimates that more than 40% of North Island farmers could be struggling to meet both their cash expenses and interest costs for this season.
But with next season's forecast $7 payout, it says that could drop to 5%.
Boost for economy
Economists say the jump in Fonterra's forecast payout is expected to be worth at least an extra $2 billion to the economy, or about 1% of gross domestic product.
BNZ economist Doug Steel says if an expected production boost from farmers expanding their operations and extra conversions are included, the payout could jump to $2.7 billion or 1.25% of GDP.
Mr Steel says the increase raises the possibility that the Reserve Bank may start lifting the official cash rate from its record low of 2.5% as early as the end of the year.