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Fonterra is being tipped to raise its forecast payout for the 2013-14 season.
Westpac economist Nathan Penny says 2013-14 is shaping up as a bumper dairy season.
"World prices remain very high, while growing conditions have been generally very good since the drought broke. The icing on the cake is a lower currency," he says.
The bank has raised its forecast to $7.40/kgMS, from $6.50/kgMS. It expects Fonterra to follow suit. Fonterra's board meets on Wednesday.
Penny says Fonterra may even go north of its $7.40/kgMS forecast. He also expects the co-op to update its production outlook.
"We predict a rebound in production from drought of around 5% on last year's level, while Fonterra has previously signalled production growth of 2%," he says.
Penny is surprised global dairy prices have stayed at very high levels.
"To be frank, we are surprised by that. This time three months ago, we expected world prices would be around 7% lower by the end of July.
"Tight world supply has contributed to the buoyant prices. However, we doubt that the market has gotten its head around prospects for growth in New Zealand production this season. We predict a rebound in production from drought of around 5% on last year's level. Fonterra has previously signalled production growth of 2% - any lingering difference in production outlooks, following Fonterra's update next week, may explain much of any difference in milk price forecasts."
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