Price jumps in recent Global-Dairy-Trade auctions have surprised economists, yet they believe prices could go higher over the next few auctions.
This week's auction saw prices increase 14.2 per cent on a trade-weighted basis. Dairy prices have increased nearly 50 per cent in the past four auctions and have doubled since May last year.
Westpac economist Nathan Penny said domestic milk prices would go up. When the milk price Fonterra paid to farmers went up, there was a flow-on effect, although there were other factors that went into the price of milk.
Westpac has revised its 2012/13 season farmgate milk price forecast from $5.65 per kg ms to $6.10 per kg ms as drought, coupled with strong Chinese demand, continued to push Globa-lDairy-Trade prices skyward.
That equated to a total payout before retentions for a fully-shared up farmer of $6.60, which was previously $6.10.
That farm-gate milk price estimate was conservative and, if prices stayed at current levels, the price could go as high as $6.40, Penny said.
Westpac's forecast was 30c higher than Fonterra's current forecast and the difference reflected the dramatic price movements over the past two auctions which might not have been fully incorporated into the dairy co-operative's forecasts, he said.
With prices moving so fast, a wide range of final results were possible and auctions over the next three months or so would be critical in determining the final farm-gate milk price.
Westpac has also increased its forecast farm-gate milk price for the 2013/14 season by 30c to $6.20.
While the bank expected dairy prices to eventually settle at a lower level, underlying demand, particularly from China, remained strong, while global supply also remained constrained this year.
Milk production in the south had not been affected as much as in the drought-stricken North Island.
While revenue might be higher than last year costs would be up and production down in the North Island, while South Island revenue would be up and costs should largely be the same, Penny said.