Fonterra has scaled back milk supply forecast due to the drought, and, instead of an increase, is now expecting milk production to be about the same as last year.
Chairman Sir Henry van der Heyden says the tight supply is helping to drive the current lift in world dairy prices, as demand starts to lift. Production is down slightly in Europe, the United States and Australia, he says.
"You've got a global scene where milk supply's starting to tighten and at the same time you've actually got demand just starting to pick up again, particularly driven out of the Middle East and Asian markets."
The forecast increase of 40c to $6.10 a kilo of milk solids means Fonterra will be expecting to pay out about $500 million more for the milk it buys this season.
Sir Henry has also told farmers they should budget for a similar milk price for the new production season, starting in June.
'Extremely helpful' - Northland farmer
A Northland dairy farmer, Ashley Cullen, whose milk production has dropped by 20% this season because of the drought, says getting the early advice about next season's price along with the latest increase is extremely helpful.
The higher price has put more pressure on Fonterra's value added ingredients and consumer products businesses, because they'll have to pay more for the milk they process.
However, Fonterra isn't changing its dividend from profit forecast at this stage. It will confirm its final price for the season later in the year.