NZX dairy futures have rallied sharply, suggesting next week's GlobalDairyTrade (GDT) auction will show a big rise.
There were big moves in NZX whole milk powder futures overnight, with the August contract gaining US$5 to US$2245 a tonne, September rising US$90 to US$2530 and the October contract rising by US$120 to US$2650.
Further out, November was up US$85 to US$2680, December was up US$100 at US$2700 and January was up US$90 at US$2710.
The August to December "contango" - the difference between the short dated contract and the longer dated contract - has widened US$100 out to US$455 a tonne.
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"There are large premiums being built into the futures over the last GDT suggesting another large rise is on the cards," Nigel Brunel, director financial markets at OM Financial, said.
World dairy prices shot higher at the latest GlobalDairyTrade auction last week with the GDT price index gaining 6.6 per cent.
Whole milk powder prices, which have the biggest bearing on Fonterra's farmgate milk price, rallied by 9.9 per cent to US$2265 a tonne.
"Even though we are a week away from the next GDT - momentum appears to be in place suggesting we could get a repeat of the last event," Brunel said in a commentary.
Fonterra's latest forecast is for a farmgate milk price of $4.25 a kg of milksolids for 2016/7 - $1/kg short of DairyNZ's breakeven estimate of $5.25/kg.