A move away from long term supply contracts has driven up Fonterra's profits, says chief executive Theo Spierings.

The average contract period is now three months, meaning Fonterra is no longer locked into supplying at a low fixed price for a longer term when milk prices increase.

For the past 12 months the contract price has been consistently above the Global Dairy Trade price.

As a result the division called NZ Milk Products had a strong year, with a 23 per cent increase in normalised earnings to $515 million. Revenue increased by one per cent to $15.72 billion for the year, thanks to effective product mix management, a seven per cent rise in sales volumes to 2.8 million MT and the ability to attain prices above GDT through continued efforts to add value to products, says Theo.

Year-end inventory levels were $373 million lower at $2.13 billion, with a 14 per cent increase in volume on hand offset by lower prices.