Warrnambool Cheese and Butter has announced a further step up in its average farmgate milk price for the 2016-17 season to $5.25 a kilogram of milk solids.

The company announced last week it would increase its payments for butterfat by eight cents a kilogram and by 20 cents a kilogram for protein.

In a letter to suppliers, WCB senior vice president and general manager Richard Wallace said the price increase was retrospective and applied to milk supplied from July 1, 2016.

Mr Wallace said the payment would be made with March 2017 proceeds during April 2017.

The price rise lifts it above that of Fonterra, which is paying $5.20/kg milk solids.

Another major local dairy processor, Murray Goulburn, is currently paying $4.92/kg milk solids and has forecast a closing price for the season of $4.95/kg milk solids.

Mr Wallace said dairy commodity prices had recovered in the first half of the season from the low levels that had been experienced in the previous season.

"However, in recent weeks there has been sharp decline in dairy commodity prices, in particular in milk powders," he said.

"This highlights the continuing uncertainties in the global market."

Global Dairy Trade (GDT), which provides market-based reference prices for more than 30 dairy ingredient products trading on GDT events, said the GDT Price Index dropped during the first quarter of 2017, the first quarterly drop since the first quarter of 2016.

Mr Wallace said world inventory levels for dairy commodities remained high and there were some signs that milk production in key dairy regions including the European Union and New Zealand might be better than previously expected.

"These factors have led to the recent weakening of prices, and in this environment it remains difficult to predict the global dairy market conditions going forward," he said.

"We remain positive about the outlook for next season but are cautious given the continuing uncertainties."