Economists upbeat on milk price outlook after strong GDT sales

Economists are looking to upgrade their milk price forecasts. Photo / File

Economists are looking at revising up their milk price forecasts after this morning's GlobalDairyTrade auction, which saw whole milk powder put on its biggest gain in two years.

The 6.7 per cent gain in the GDT price index was greater than market expectations, and appeared to be driven by the onset of a dry spell in the South Island and in parts of the North.

ASB senior rural economist Nathan Penny said markets were factoring in the risk of drought disrupting New Zealand production.

The average price was US$3,265 a tonne, compared with US$3,057 a tonne three weeks ago. Whole milk powder prices jumped by 8.4 per cent to US$3,027 a tonne.

On the back of this result and earlier gains, ASB lifted its 2018/19 milk price forecast by 25 cents to $6.25/kg compared Fonterra's range of $6.00 to $6.30/kg.

In particular, the move higher in whole milk powder prices - which have the greatest influence over Fonterra's farmgate milk price - indicated that markets were factoring in an New Zealand-specific risk, he said.

However, there was a chance that the price gains could prove temporary.

New Zealand is production is on a strong footing, running at more than 5 per cent ahead of last season on a season-to-December basis.

"Also, it's still relatively early days in this dry spell, with a drought declaration some time away."

Nonetheless, the price gains were significant and came on top of the solid gains over December and January.

Westpac said the gain was probably due to the prospect of New Zealand supply being disrupted by the hot, dry weather in recent weeks.

"Pasture conditions were excellent late last year, but have started to deteriorate in the top of the South Island, Northland and parts of the East Coast of the North Island," the bank said.

The bank said there was now "upside risk" to its current season forecast of $6.30/kg.

"What's more, if prices remain near current levels for the remainder of the current season, 2019/20 prospects are also shaping up better, with upside risk to our current $6.75 forecast for the 2019/20 season," Westpac said.

At this morning's auction, product prices gained for fifth consecutive time.

Offer volumes for whole milk powder were down on the previous event, even though they were up 19 percent on the previous year, NZX dairy analyst Robert Gibson said in a note.

"Firm demand from Asian countries is likely to have helped to support prices," Gibson said.

- Additional reporting, BusinessDesk