International dairy product prices are pushing sharply higher, driven by strong demand from China.
Results from the latest GlobalDairyTrade auction yesterday showed the GDT Price Index rose by 3.9 per cent compared with the last sale two weeks ago. The average winning price was US$4973 ($6060) a tonne compared with US$4805 a tonne a fortnight ago.
The wholemilk price index - the most important indicator for New Zealand producers - was up 3.4 per cent to an average price of US$5035 a tonne. Prices were higher across almost all products on offer and were also stronger for longer dated contracts.
Yesterday's price action was amid an air of expectation that prices would soon start to ease after what has been an extraordinarily strong run.
ANZ Bank rural economist Con Williams said demand out of China had overtaken last summer's drought as the market's driving force.
"The dynamic is that China has been short with its domestic production and there has also been continued expansion in overall demand, which has led to higher import prices," he said.
Williams said the big question facing the market was whether elevated prices were a temporary phenomenon, or something more structural.
Economists said yesterday's price movement added more upward pressure to Fonterra's $8.30 a kg farmgate milk price forecast for 2013-14.
As it stands, the dairy sector is looking at a record year for both price and production. Fonterra is expected to update its 2013-14 forecast next week, and Westpac has nudged its forecast farmgate price up by 10c to $8.40 a kg.
Westpac senior economist Anne Boniface said the apparent strength in demand, given the high prices and strong production growth in New Zealand, had been impressive.
Economists said the litmus test for the market would come early next year, when the supply in the Northern Hemisphere was expected to increase in response to exceptionally high prices.
Domestically, the season has shrugged off the effects of last summer's drought and has progressed strongly. Nationwide, production was up 7.2 per cent in the four months to September - driven mostly by increased production in the South Island.
Dairy production in Australia and New Zealand peaks in October, while production in the Northern Hemisphere giants of the EU and the US peak in about May. US production has been consistently running ahead of last year's levels in recent months. Milk production in the top 23 US states was up 1.2 per cent in October on the same month last year, Westpac said.
"Combined with a lift in milk production per cow, and improved margins thanks to lower feed costs, this should see the lift in (US) milk production extend in 2014," the bank said.
Bank of New Zealand economist Doug Steel said yesterday's auction was an important one in the greater scheme of things.
"Moreover, the forward price curve is starting to slant upwards," he said.
"It's probably counter to what many had been thinking - that prices would come down," Steel said.