Fonterra dairy co-operative says prices are holding at higher than expected levels because of the supply squeeze caused by a drop in New Zealand milk production because of the drought.

That was one of the factors behind Fonterra lifting its forecast milk payout for the season by a further 40 cents to $7.30 a kg of milk solids.

The agribusiness banking specialist, Rabobank, shares Fonterra's view.

Rabobank international dairy specialist Tim Hunt says prices are likely to remain at relatively high levels for several years, despite some resistence in overseas markets to the unprecedented boom in commodity prices.

Source: Radio New Zealand