The step-up - retrospective to 1 July 2007 – equates to 17 cents a kilogram for butterfat and 42c/kg for protein.

It will be paid to suppliers on June 15.

Fonterra national milk services manager, Heather Stacy, says the strong milk price is encouraging for farmers as they plan ahead for next season in an environment where input costs were high and seasonal conditions variable.

"We are determined to vigorously compete in this market to retain and grow our milk supply," Ms Stacy said.

"This step-up provides a further opportunity for our suppliers to consolidate their commercial positions in readiness for next season."

New Dairy Australia figures released this week indicate Victorian and Tasmanian farmers are more positive about the industry's future than in any time in the past four years.

Milk supply in both States is tipped to grow as much as 2pc next financial year.