The step up will see prices increase from the opening season price of $4.75kgMs to $5.10kgMS.

The forecast closing price for the 2016-17 season, that concludes at the end of the financial year, has been revised to $5.20kgMS.

The step up will bring modest profits for farmers, as it costs about $5kgMS in production costs to make milk.

Fonterra Australia managing director René Dedoncker said the revised price reflected strengthening global dairy prices.

“Although the global market remains volatile, since the beginning of the season, global milk supply has continued to decline significantly while demand has remained relatively stable,” Mr Dedoncker said.

Mr Dedoncker said Fonterra had strong progress in investing in the business and had achieved some key milestones that would strengthen its place in the market.

The milestones include the expansion of cheese production capacity at the company’s Wynyard plant and the continued construction of its Stanhope factory, that was destroyed by fire.

Positive movement in Global Dairy Trade auction prices in August and September have also contributed to the turnaround, with a 26 per cent increase in the price index since July.

“Winning in cheese and nutritionals is core to our strategy to become Fonterra’s global ingredients hub for cheese, whey and nutritionals, complementing our consumer and food service businesses,” Mr Dedoncker said. 

Tasmanian Farmers and Graziers Association dairy council welcomed the news of the step up.

“This will deliver much needed cash flow to our producers early in the season,’’ dairy council chair Andrew Lester said.

“It is also a positive sign that demand for our product is growing and the global over supply is decreasing.

“We remain hopeful that the state’s dairy industry is turning the corner after what has been a challenging year.”

Fonterra’s announcement comes after the state’s second largest milk processor Murray Goulburn announced it would suspend its controversial Milk Supply Support Payment (MSSP) and revise the outlook price for the 2016-17 season.

Suppliers to Murray Goulburn can expect a revised outlook price of $4.70 per kilogram of milk solids (kgMS), which is revised down from an expected $4.88kgMS.

Farmers are receiving on average $4.46kgMS after application of the MSSP repayment. The suspension of the payment is expected to put back an average of 14c kgMS into the farmer’s pocket.

Both processors shocked the industry in April when they announced cuts to the farmgate milk price that plummeted the price below the cost of production for most farmers.