ASB Bank has revised its 2022/23 milk price forecast from $9.20 to $10.00 per kg of milksolids, which would be the first double-digit milk price on record if it comes to pass.
The bank's view is based on "woeful" global dairy supply and its "dramatically adjusted" view of the New Zealand dollar.
The upgraded forecast follows a lacklustre Global Dairy Trade auction overnight, which saw prices dip by 1.3 per cent.
Whole milk powder — which has the biggest influence on Fonterra's farmgate milk price — fell by 0.6 per cent to an average US$4125 a tonne.
ASB said dairy prices had underperformed the futures market at the latest dairy auction, "but it's not a biggie and we are focusing on the fundamentals".
Fonterra's opening forecast farmgate milk price for the 2022/23 season is $8.25-$9.75 per kg, with a midpoint of $9.00 per kg.
"Despite mounting headwinds circling the global economy, dairy demand continues to hold up well and prove relatively inelastic," ASB said.
"Buyers appear to be lifting their purchasing, but with North Asia still below where it usually is at this time of year in terms of market share, there is more room for growth.
"With global dairy supply still extremely tight and production showing little momentum, securing product is still a priority for most buyers and the contract curve remains nice and stable."
Weather conditions were looking positive for the New Zealand season, which got underway this month.
The bank highlighted the weakness of the New Zealand dollar, which gives exporters a boost.
"A fresh bout of risk aversion among investors and aggressive moves by the Federal Reserve to boost US interest rates have helped snuff out any tentative lift in NZD/USD."
ASB said Fonterra would have done something like 60-70 per cent of its hedging for the season but, with the NZD dramatically underperforming impact on its effective exchange rate for the season will be significant.
"We think a $10 per kgMS farmgate milk price could well be on the cards.
"It may seem odd to boost our forecast after an auction where prices have underperformed, but it's our view on the fundamentals (and more significantly the change in our expectations for the season's effective exchange rate) that really matters" ASB said.