Dairy prices kicked off the 2016/7 season on a strong note, with gains in butter milk and skim milk powder prices driving the GlobalDairyTrade (GDT) price index up by 3.4 per cent at this morning's auction.

Analysts were not reading too much into the gain but said it was nevertheless an encouraging start to the season.

"In aggregate things are moving in the right direction, but how the market handles the stronger seasonal uptick in supply from July will be key," ANZ Bank said in a market commentary.

Prices were mostly firmer with the exception of whole milk powder - the key product for determining Fonterra's farmgate milk price - which dropped by 1.7 per cent to US$2205 a tonne and rennet casein, which dropped by 1.6 per cent to US$5035 a tonne.

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The biggest increases came from butter milk powder, up 14.2 per cent to US$1765 a tonne and skim milk powder, up 12.1 per cent to US$1867 a tonne.

Fonterra's latest farmgate milk price forecast of $4.25 a kg rests on whole milk powder stabilising at around current levels and gradually improving as the season progresses.

Dairy NZ estimates the average break even price for most farmers to be $5.25 a kg.
Jon Spainhour , a broker and partner at Chicago-based dairy specialist Rice Dairy, said it was an encouraging result.

"We are not off to the races yet but I think we have seen the floor for the moment," he said.

Among the other movements, anhydrous milk fat prices were up 2.8 per cent to an average price of US$3,444 a tonne while butter prices gained 3.2 per cent to US$2762 a tonne. Cheddar prices gained 7.8 per cent to an average price of US$2669/tonne.

Dairy prices have been mixed over the last few months, GDT price index registering six falls and five gains since January.

The AgriHQ's theoretical "snapshot" milk price lifted 12c to $4.21 per kilogram due to the weaker NZ dollar. The snapshot indicates what the farmgate milk price would be if all of the season's product was sold at June 1 GDT prices and at the current exchange rate.

Susan Kilsby, AgriHQ dairy analyst, said the weaker whole milk powder price was likely to have been driven by the larger volumes on offer combined with ongoing weakness in demand. Fonterra put up 10,712 tonnes of whole milk powder - nearly twice the volume on offer at the previous event.

"Overall the dairy commodity market is currently tracking in the right direction but prices are going to take some time to recover to a level where dairy farmers can turn a profit," Kilsby said.

Milk price futures commenced trading on the NZX dairy derivatives market at the end of last week. The September 2017 contract, which relates to the 2016-17 dairy season, last traded at $4.50/kg - 25c above Fonterra's current forecast.

The September 2018 contract, for the 2017-18 season, traded at $5.60/kg.

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