World dairy prices have shot higher at the latest GlobalDairyTrade auction, with the GDT price index gaining 6.6 per cent since the last auction in mid-July, most likely reflecting concerns about tightening supply.
Whole milk powder prices, which have the biggest bearing on Fonterra's farmgate milk price, shot up by 9.9 per cent to US$2265 a tonne.
That price, while still well short of the US$3000 a tonne required to put loss-making farmers back in the black, will nevertheless act as a confidence booster for the sector.
Prices have generally been low but steady over the previous three auctions.
"Tonight's move will undoubtedly be predicated on the concern around slowing supply growth," Mike McIntyre, director of derivatives at First NZ Capital said.
"While the globally traded market remains out of balance if current trends continue, then equilibrium should be restored at the back end of the current year and so buyers locking away some of their purchases at what are still historically low prices is a prudent move," he said.
AgriHQ dairy analyst Susan Kilsby said dairy commodity markets were waking up to the fact that milk production is slowing across the globe.
"The majority of the extra milk produced in recent years has come from Europe - but output there is now being stemmed by low returns," she said.
Kilsby said there was still production growth in the US but that it was largely being met by increased domestic demand.
"It is excellent to see such a strong lift in dairy commodity prices this early in the season," she said. "New Zealand has a large volume of dairy product to trade in the coming months so it is important that these products achieve higher prices if returns to farmers are to lift," Kilsby said.
Another important product, skim milk powder, gained by 2.1 per cent to US$1,965 a tonne and rennet casein prices lifted by 16.3 per cent to US$6,161 a tonne.
Prices were higher in the other product groups, except cheddar, which dropped by 0.8 per cent to US$2,889 a tonne.
DairyNZ this week said cost cutting by farmers had helped to drag down its estimate of break-even to $5.05 per kg of milk solids from $5.25 previously.
The farmer-funded industry body said the prospect of an increased dividend from Fonterra and a steady farmgate milk price of $4.25/kg was good news for farmers with shares in the co-operative. The full payout, including the Fonterra dividend and after retentions, is expected to come to $4.65/kg for the 2016/7 year.