Milk prices may be on course for a jump of more than 20% thanks to a squeeze in supplies caused by robust developing-world demand at a time of "constrained" supplies, the world's biggest dairy exporter said.

Fonterra, the New Zealand dairy co-operative, pegged its first forecast for its payouts in 2010-11 at NZ$6.90-7.10 per kilogramme of milk solids, of which NZ$6.60 would apply to milk, representing a rise of some 8% year-on-year.

However, it admitted that this forecast reflected "cautious" assumptions after a volatile spell for prices, and stood to be beaten handsomely even if ongoing market conditions held.

"If international dairy prices and foreign exchange rates were to hold to current levels for most of the coming year, it is possible that the [total] payout could be well over NZ$8.00," Sir Henry van der Heyden, the Fonterra chairman, said.

"We could be looking at a significant improvement during the course of the year."

With the huge bulk of farmer payouts from Fonterra coming from milk payments, this would be likely to mean a jump of at least 20% in the milk price.

Market squeeze 

The group's assessment was based on a "favourable" outlook for dairy prices, Andrew Ferrier, the Fonterra chief executive, said, noting strong growth in dairy consumption in the Middle East, North Africa and Asia – and in particular China.

The comments follow a strong recovery in dairy prices. At Fonterra's latest monthly auction, three weeks ago, whole milk powder sold for an average of US$3,932 a tonne, 83% higher than a year before.

'Most helpful' 

Fonterra's 2010-11 forecast was welcomed as "great news" by farmers, who have suffered dry weather as well as their own credit constraints.

"With many farmers still feeling the impact of the recent drought this strong forecast cashflow will be most helpful," farmers' representative Blue Read said.

The co-operative left its estimate for 2009-10 payments unchanged at NZ$6.50-6.60 per kilogramme of milk solids.