Dairy farmers are in line for a confidence booster if futures market pricing for this week's GlobalDairyTrade (GDT) auction is anything to go by.
The last auction saw the GDT price index gain 6.6 per cent while whole milk powder prices, which have the greatest bearing on Fonterra's farmgate milk price, rallied by 9.9 per cent to US$2265 ($3148) a tonne.
Futures market pricing for Wednesday's auction is pointing to a 9.6 per cent lift in whole milk powder prices to US$2385/tonne.
Prices need to get to US$3000 a tonne to put most farmers back in the black but the market has had more than its fair share of false starts.
Whole milk powder went from US$1856 a tonne in August last year to US$2824 in October - a gain of almost US$1000 or 52 per cent - only to drop back to US$2148 by November.
AgriHQ dairy analyst Susan Kilsby said the market last year had been gazumped by an unexpected lift in production from the European Union.
"The difference this time around is that milk production around the world is easing, particularly in those European markets," she said. "I think that situation is very unlikely to repeat itself for that reason."
Kilsby said improved prices over the next two auctions would be an encouraging sign.
Prices so far this season, which started on June 1, had been largely flat before exploding into life at the last auction on August 2.
Fonterra's farmgate milk price of $4.25 a kg of milksolids for 2016-17 is still short of DairyNZ's breakeven estimate of $5.05/kg but in another positive pointer, NZX's new milk futures contract rose another 5c on Friday to NZ$4.70kg of milksolids.
World dairy markets have been ravaged by oversupply, particularly from European Union producers, and slack demand from the world's biggest dairy importer, China, over the past two years but analysts said there were early signs of the market moving back into balance.
New Zealand milk production is starting to rise towards its peak months of October, November and December but Fonterra expects its milk collection this season to be down by 3 per cent.
Chicago commodities house HighGround Dairy noted comments in the market that this rally could follow a similar track to the one between last August and October.
"While it is entirely possible to see the same sort of rise in the coming month ahead, perhaps waiting for a retracement come November would be a dangerous procurement game to play given the gloomy global milk production outlook," it said.
Fonterra chairman John Wilson said last month the co-op's milk price reflected continuing global uncertainty and the high exchange rate which continued to affect competitiveness. He expects global supply and demand to balance over the course of this season.