Farmers and their bankers were offered some reassurance that they may be over the worst of the dairy downturn after the market put on its third significant gain in a row at yesterday's GlobalDairyTrade auction.

While wholemilk powder prices, which have a big bearing on Fonterra's farmgate milk price, gained a respectable 3.7 per cent to US$2793 ($3758) a tonne they were still short of the 10 per cent gain anticipated by the futures market.

However, wholemilk powder prices have soared by a whopping 35per cent since early July, suggesting a recovery is under way.

Overall, the GDT price index rose by 7.7 per cent since the last auction in mid-August.


A return to US$3000 a tonne for whole milk powder would take farmers close to break-even, and $3500/tonne would see most farmers back in the black. Unhelpfully for Fonterra and exporters in general, the NZ dollar rallied to a 16-month high on the back of the auction result and in response to poorer-than-expected US economic data.

Federated Farmers dairy chairman Andrew Hoggard said a few more positive GDT results, back to around $3000 a tonne by Christmas, would see farmers start "doing a few high fives", but he said it looked like price volatility was here to stay.

"Beware of volatility and make sure that your business can withstand shocks like this because it's going to happen again," Hoggard said.

In the dairy heartland of the Waikato, Federated Farmers provincial president Chris Lewis said yesterday's result would make farmers feel more optimistic about the future.

Continued gains in GDT prices would mean farms would be close to a profit this year, and in a position to pay back the loans taken out during the two-year downturn, Lewis said.

"The banks were getting a bit grumpy, so this will help farmers when they present their budgets to their banks."

Lewis estimated that it would take two or three seasons of reasonable prices for farmers to get their balance sheets back in order.

A Federated Farmers survey last month said more farmers were experiencing "undue pressure" from their banks and the Reserve Bank, in its May financial stability report, said problem loan levels in the dairy sector were expected to increase significantly over the year.

At yesterday's auction, price increases were across the board. Skim milk powder, another important reference product for Fonterra, gained by 10 per cent to an average price of US$2224 a tonne.

Westpac said fundamentals have clearly turned in favour of dairy producers in the past month or so, with improved demand coinciding with lower milk supply in key global exporters including Australia and, perhaps most importantly, the European Union.

Among the other increases anhydrous milk fat prices rose by 15.4per cent to US$4769 a tonne, butter was up 14.9 per cent to price $3764/tonne and butter milk powder was up 6.8 per cent to an average price of US$2070/tonne. Cheddar gained 9.0 per cent to US$3436 tonne.

Looking ahead, much depends on NZ production trends in the seasonal peak months of September, October and November as to where prices go from here.

ASB Bank rural economist Nathan Penny said he expects prices to consolidate over coming auctions.

"From there, we expect prices to lift again later in the season," he said.

"Indeed, while the market now anticipates weak global production, we see scope that the weakening in supply accelerates faster than most analysts expect.

"With that in mind, we look to New Zealand spring production data for a key test of our view."

Fonterra last month increased its 2016/17 forecast farmgate milk price by 50c to $4.75 per kg of milksolids, reflecting higher GDT prices. At the time, chairman John Wilson complained that the rising New Zealand dollar was acting to offset gains.

When combined with the forecast earnings per share range for the 2017 financial year of 50c-60c, the total payout available to farmers in the current season is forecast to be $5.25-$5.35/kg, just more than DairyNZ's break even estimate of $5.05 a kg.

The company will release its annual result on September 22.NZME