Fonterra Cooperative Group, the world's biggest dairy exporter, lifted its forecast milk price for 2009/10 by 7%, citing rising global demand and dairy prices begin to outstrip supply.

The cooperative expects to pay its farmer-suppliers NZD6.10 (US$4.40) a kilogram of milk solids in the year ending May 31, up from its previous estimate of NZD5.70 (US$4.11), it said in a statement today (Apr 27).

"The global supply/demand balance for dairy products has shifted to a slight supply deficit," said Chairman Henry van der Heyden.

Demand from Middle East/North Africa and Asian markets continues to grow while global milk production has declined, he added.

The price increase may be bittersweet news for North Island farmers, who are drying off in large numbers as drought withers grass supply. That means any price gains will be offset by dwindling production.

"Many farmers, especially those north of Taupo, are suffering from worsening drought conditions," Heyden said. "We recognise that the weather has made it very difficult for many farmers going into the winter."

Fonterra, which will make a more formal forecast at the end of May, said its farmers should assume a similar payment for 2011.