The weather setbacks which have sent grain market soaring may revive flagging dairy prices too, Fonterra said, as it ditched plans – for now – to cut its forecast for milk price payments to farmers.

Sir Henry van de Heyden, the co-operative's chairman, said there were "a number of factors signalling a potential improvement in dairy markets later in the year", after a fall of one-quarter in milk prices since April.

"We are seeing signs of potential strengthening of international prices further into the season," he said.

Fonterra, the world's biggest dairy group, cited the damage to agricultural hopes caused by dry weather in Europe and Russia, and floods in China and Pakistan, while acknowledging that the extent of the impact on dairy producers was "unknown".

Europe is the world's biggest milk producer, while China and Russia are significant importers.

Grain market impact

Andrew Ferrier, the Fonterra chief executive, said that the rise in grain prices, caused in particular by Russia's ban on grain exports, "could lend support to dairy prices".

Higher feed costs could slow the recovery in dairy production from a low during the global recession, with output in the major producing countries returning to growth in May.

Expectations of further increases in output, at a time when hopes for the global economic revival are waning, have been cited as a significant factor in the sharp decline of milk prices since the spring.

"The fundamentals for global markets continue to point to balanced supply and demand," Mr Ferrier added.

Price forecasts

The comments came as Fonterra, which warned two weeks ago it may cut its forecast milk payout to its farmers for 2010-11, kept the estimate for the payment unchanged at NZ$6.60 per kilogramme of milk solids.

Members will receive a further payout, pegged at $0.30-0.50 per kilogramme of milk solids, from the co-operative's other operations.