Dairy co-operative chairman Henry van der Heyden said more stable pricing and lower milk production from the United States and Europe had encouraged an increase in Fonterra's forecast payout to $5.20 a kg of milk solids (kg/ms) for this season.
The increase meant the company's 10,700 suppliers would receive almost $130 million extra this season, but the company was still to finalise exactly how much it would pay.
Mr van der Heyden said March milk production in the US was below that of a year earlier, and European dairy farmers did not expect to meet their production quotas which were signs world milk production was falling in response to lower prices.
He said international prices were still "bouncing around the bottom a bit", but there were signs they were improving.
"We've got a high degree of confidence around $5.20 a kg/ms."
Dairy farmers welcomed the announcement which reversed months of negative news and two reductions in the forecast, which started with an initial prediction of $6.60kg/ms.
Mr van der Heyden warned that should the final payout for this season rise above $5.20 kg/ms, the co-operative might retain some money to strengthen its balance sheet.
"We need to tread a fine line between maximising payout to our farmers and strengthening the co-op's balance sheet in these uncertain and challenging financial times."
Federated Farmers dairy chairman Lachlan McKenzie said the news was welcomed given the difficult season, and it signalled dairying had reached the bottom of the commodity price cycle.
The lower forecast had forced farmers to prune costs and find cheaper ways to get their cows through the winter, while the dry autumn in some parts of the country meant some farmers had dried their cows off earlier than usual.
Banks had also tightened their liquidity.
Mr McKenzie called for that to end.
"Banks should not have any doubt that dairy remains an excellent business to be in for well-run farms."
