Fonterra has raised its milk price forecast to $6.30-$6.60 a kilo of milk solids.
Fonterra milk tanker. Photo: RNZ / Rebekah Parsons-King
The co-operative decided on the rise of 30 cents on the previous forecast because of a lift in world prices.
Prices in the fortnightly global dairy auctions have been rising since the end of last year and are at their best level in two years.
Fonterra chairman John Monaghan said better prices and a more balanced supply and demand outlook justified the rise.
"Global demand has strengthened. This is driven predominantly by stronger demand from Asia, including Greater China."
He said global supply was above last season's levels, but growth has slowed because of challenging weather in some of major supplying countries, while demand especially in China and other countries in Asia had improved.
"We expect demand to remain stronger relative to supply for the rest of the season," Mr Monaghan said.
However the higher milk prices have led the co-operative to reduce its forecast payout from its consumer operations to between 15 and 25 cents a share. A higher milk payout also increases the raw material costs for high-value consumer products.
Mr Monaghan said Fonterra was still underperforming and earnings were not satisfactory.
Fonterra is reviewing its operations, has put its Tip Top ice cream company up for sale and is looking to cut costs to reduce its debt by $800m.
"We are taking a close look at our business with our portfolio review, where we can win in the world, and the products and markets where we have a real competitive advantage. We need a fundamental change in direction if we are to deliver on our full potential."
Fonterra will report its half year earnings next month.