UPDATED 10.25am: Hope for dairy farmers, and the country's economy.

LISTEN: Andrew Kelleher speaks to Rachel Smalley on KPMG Early Edition

There's been a good Global Dairy Trade auction overnight, backing up the turnaround of two weeks ago.

Whole milk powder prices rallied by 12.1% and are now back up to June levels.

Overall the index gained by 10.9%.

The rise is expected to boost confidence - a vital factor in restoring faith in the way the economy's heading.

Business correspondent Andrew Kelleher told Rachel Smalley this is great news.

"We still need it to keep going but I think it is very positive development. Most importantly, this is all about confidence."

"Results like this will really speak to confidence and it will get that confidence lifted. That's a really key ingredient if people are to keep consuming, keep going really."

Why did the price rise?

Falling supply and changing market sentiments have helped push up dairy prices.

Fonterra has lowered its volumes as a way to push up prices.

ASB rural economist Nathan Penny said those efforts have succeeded and sentiments have turned.

"The markets were very pessimistic over July and early August," he said.

"Now they're seeing there may be less milk, particularly out of New Zealand."

The sharemarket meltdown in China is yet to rattle dairy prices.

Nathan Penny said the Chinese recession may affect the market further down the track.

"Last week we saw dairy futures fall back a little," he said.

"That was in part due to China's uncertainty around sharemarkets and global sharemarkets."

While New Zealand dairy farmers remain very competitive, dairy prices are likely to remain volatile.

Nathan Penny is predicting a $6.50 payout for next season.

But he admitted that was optimistic.

"We've always remained the long-term prospects of dairy are positive," he said.

"Even our current season forecast is more optimistic than most."

However, further substantial gains may be unlikely.

Westpac senior economist Michael Gordon said prices have fallen in response to forecasts of lower supply.

"I think we're the market react to that forecast of a drop this year," he said.

"The real issue is whether that forecast actually turns out to be accurate over the course of the season."

Michael Gordon said higher dairy prices aren't sustainable unless dairy-exporting countries reduce their production like New Zealand has.

"Europe in particular has been cranking up a lot recently, now that they've removed the quota system," he said.

"There's a couple of countries that I think are fighting to establish market share."

Westpac will increase its forecast payout for this season to above $4.00.

Additional reporting by Michael Sergel