Economists are tipping a lift in dairy payout after a 10.4 per cent surge in the average price on Fonterra's latest Global Dairy Trade (GDT) auction, as product-hungry international buyers reacted to a shrinking world dairy supply.

The BNZ and Westpac predicted Fonterra's payout forecast for the 2012-2013 season would get a nudge up from the auction result, which saw the average price of wholemilk powder break through the US$4000 ($4810) per tonne barrier for the first time since March 2011.

BNZ economist Doug Steel said the big jump in average price last night was driven by drought in New Zealand, shrinking milk production in Australia and robust world demand for protein. Product volumes offered were 14 per cent down on predictions and a record number of overnight bidders went away unsatisfied, Steel said.

He expected GDT prices to warm a little further as these conditions continued, and payout prospects to follow. However, he cautioned against too much payout optimism because rain would eventually arrive in the North Island and the northern hemisphere dairy season would start in a few months.

The New Zealand dollar took the auction result in its stride, rising to US83.10c from US82.92c last night.

BNZ market strategist Mike Jones said the 10.4 per cent price increase was a "stunning result, much better than expected and as a result [the] NZ dollar has appreciated, but it hasn't been a massive increase".

Westpac today lifted its 2012-2013 payout forecast from $6 a kilogram of milksolids to $6.10/kg. Fonterra's current forecast is $5.90-$6 for a fully share-backed farmer. This includes a milk price and dividend.

Westpac also increased its payout forecast for the 2013-2014 season, which officially starts on June 1, by 20 cents to $6.40.

Fonterra, which controls nearly 90 per cent of New Zealand's raw milk supply, last week held its milk payout forecast for farmers at $5.50/kg, raising eyebrows among economists who had expected a string of small GDT increases in recent weeks to bump it up by at least a few cents.

Last night's GDT auction saw the average price of wholemilk powder rose a whopping 18 per cent to US$4298 a tonne, while the skim milk powder price was up 4.6 per cent. All major product categories posted increases of 4.6 per cent or more.

Westpac said GDT prices had risen 54 per cent on a trade-weighted basis since the May 2012 trough in dairy prices. Over the same period the Kiwi dollar had strengthened by about 7 per cent, only partially offsetting the world dairy prices gains, the bank said.

Its economists expected New Zealand drought conditions to drive world dairy prices higher.

Westpac said the longer-term outlook also remained positive with the world economy set to improve over this year and growth centred on "the hungry part of the world, eg China".

- © Fairfax NZ News