Prices in Fonterra's latest online auction have been pushed to record levels but the volatility of the past few years means picking the top of the cycle is proving tricky for industry experts.
The 3.9 per cent rise in the average price for a basket of products in the bi-weekly auction continued a steady rise since the start of December - up 24 per cent in total and the highest level since the auction was launched in July 2008.
Amid concerns about skyrocketing milk prices, Fonterra on Friday announced it had frozen the wholesale domestic price for the rest of the year - just a day after the Government ordered a review of whether the local market was working well for consumers. Chief executive Andrew Ferrier, speaking before the latest auction last week, said higher prices were the new normal.
"The price can probably move up from today's price a way before we start burning off demand," Ferrier said.
Whole milk powder prices would likely stay at least 50 per cent above historical averages in the longer term, he said.
Another measure of international value, the ANZ Commodity Price Index, showed dairy products more than doubled between August 2006 and November 2007 but then it lost more than half its value by March 2009 before recovering to be at its highest level in about 2 years.
NZX Agrifax dairy analyst Susan Kilsby said New Zealand was the world's biggest dairy exporter and had huge influence on the whole milk powder and anhydrous milk fat markets.
"The rise in dairy commodities in general really relates to tight supplies in recent months and that has been driven primarily by New Zealand and production here not being as great as anticipated earlier in the year."
Fonterra has said production this season is expected to be pretty much in line with last year.
The dairy co-operative's forecast payout for this season is $7.30-$7.40 a kg of milksolids before any retentions, with a $7.40 payout based on stable production potentially worth about $9.5 billion.
Kilsby said demand for dairy products had been strong, including a drought in Russia stoking up volumes out of the European Union.
In the past month there had been large government purchases of milk powder by Algeria, while demand in China had increased substantially in the past year.
"They are the biggest single purchaser of New Zealand milk powder and they just keep growing."
Dairy Australia's February outlook update said China imported 68 per cent more whole milk powder last year, and was expected to stay strong this year.
Production in Europe had slowed because of a cold winter and growth in the US would be curtailed by rising feed grain costs and tight credit conditions, the outlook said.
Kilsby said milk powder prices were still below the high levels of a couple of years ago but no one really knew when they might peak and fall back.
"Over the next few months we'll start to see a lot more production come out of the Northern Hemisphere, which should clip prices back down but it's picking that balance between supply and demand."
In Fonterra's latest auction prices for anhydrous milk fat - used in products such as chocolates, icecreams and cakes - had fallen back.
"I think that's probably the first real clear indication that the market for milk fats may have peaked."
BNZ economist Doug Steel said: "It certainly wouldn't surprise if world prices continued to push a little bit higher from here."
- additional reporting Bloomberg