Fonterra's higher forecast payout to farmers for the new season is predicted to help boost the New Zealand economy by up to $3.6 billion.
The dairy processor and exporter on Wednesday lifted its forecast payout to its 10,500 farmers due to higher global prices for dairy products.
Fonterra is estimating farmers will receive a cash payout of $7.82 a kilogram of milk solids for the current season. That is made up of a milk price of $7.50 per kilogram of milk solids - 50 cents higher than its initial forecast set in May - and a dividend of 32 cents a share.
The company says dairy prices have risen 3% in the past two months due to unfavourable weather conditions in Europe and China reducing supply, while a falling New Zealand dollar has lifted returns at the farm gate.
Fonterra chairman John Wilson says a large chunk of the forecast payout will go to farmers early to help with the cost of the drought earlier this year. He says while farmers will repay debt, local communities will benefit quickly.
"Dairy farmers' money always flows very rapidly into the economy. That's the first thing we do ... These dairy farming systems are very good for local communities - that's the nature of the dairy farming business."
Boost for economy
Economists estimate the increase to the forecast payout represents a $3.6 billion boost to the economy, or about 1.7% of gross domestic product.
BNZ economist Doug Steel says the higher forecast suggests Fonterra believes the dairy boost to the New Zealand economy has just got bigger.
"And when you've got about a quarter of your exports getting very good prices it's going to feed through to the wider economy."
Mr Steel said $7.50 per kilogram of milk solids is "getting right up there" in the historical context.
He predicts a 6% gain in milk production compared to the drought-induced dip last season, but said it was still very early in the season and weather dependent.
Fonterra said the higher commodity prices could squeeze margins, but Doug Steel said the effects would be short term. He said if milk prices go up, powder prices go up relative to value-added products such as cheese and casein which put pressure on the margins in the short term.
But Mr Steel said higher milk prices also encouraged more production and more volume growth in New Zealand in the longer term, which ultimately meant that higher prices were good for the New Zealand dairy industry and economy.
Northland dairy farmer representative Ashley Cullen says the milk price lift and increase in the advance rate in monthly payments to farmers, also announced on Wednesday, is the best news dairy farmers could have, especially those recovering from the summer drought.
"It'll certainly ease the cash flows, especially with all the extra costs of going through the drought. In our case it will definitely help hugely."
For the last season, which ended in May, farmers are due to get $6.12 per kilogram of milk solids, though that is still to be finalised.