Fonterra chief executive Theo Spierings says the latest GlobalDairyTrade auction shows that the market is recovering after prices slumped in May and June.
Spierings, commenting on the 6 per cent lift in prices at the latest GlobalDairyTrade (GDT) auction, said the 2011-12 year was an extraordinary one for production in New Zealand and around the world.
"I thought that that huge supply would have caused a softening [in] prices faster, but demand was strong for a long period of time and then you saw a softening in prices, which was a bit of an overreaction in my opinion," Spierings said.
"I think that we saw the bottom in June, GDT wise," he said.
Results of the last few auctions showed that the market was recovering, and prices are now 23.3 per cent above their mid-May lows.
Spierings said in contrast to last year, growing conditions around the world are now not so favourable - it's the monsoon season in India, the European summer has been poor and the drought in the United States was making its presence felt, he said.
Economists said the gain in international dairy prices had given farmers renewed confidence in Fonterra's payout forecast for the current 2012-13 season.
It was the third straight gain in GDT prices, with increases for all eight products on offer.
The average winning price rose to US$3174 a tonne from US$3054 a tonne at the previous auction.
Prices for whole milk powder - the main product by volume - rose 4.3 per cent to US$2978 a tonne and skim milk powder prices jumped by 7.5 per cent to US$3211 a tonne.
The price of anhydrous milk fat (butter) climbed 11.8 per cent to US$3530 a tonne and cheddar rose 5.3 per cent to US$3593 a tonne.
The auction follows the release on Tuesday of the ANZ's New Zealand commodity price index, which rose by 0.5 per cent in world price terms in the month of August following seven consecutive months of decline.
ANZ National Bank rural economist Con Williams said the strength of skim milk and anhydrous milk fat prices at the auction suggested tight market conditions in the United States and Europe.
The New Zealand dollar was softer, trading at US79.50c - down from US81c at the last auction.
Fonterra said late last month that it had downwardly revised its forecast payout to farmers for the 2012-13 season due to ongoing strength of the New Zealand dollar.
The revised forecast comprised a lower Fonterra farmgate milk price of $5.25 per kg of milksolids, down from a previous forecast of $5.50.
Meanwhile, the Commerce Commission's decision on whether to allow Fonterra to buy the NZ Dairies plant at Studholme is now not expected until September 14. The plant was placed in receivership on May 17.
- APNZBy Jamie Gray Email Jamie