Economists were encouraged by a sharp surge in world dairy prices that emerged from Fonterra's Global Dairy Trade auction overnight, but said it was too early to speculate as to whether the downward trend in prices had been reversed.

Fonterra's Global Dairy Trade-Trade Weighted Index rose 13.5 per cent, with an average selling price of US$2,899 per tonne. It was the first rise in four auctions and the biggest single increase since September 2010.

The index, which hit a near four-year peak in March last year, has fallen 27.5 per cent over the past year.

See more details of the auction here.


"We are not saying that this is a turning point, or that it's going to put a floor under things, but it is a very encouraging result, especially given the global backdrop," Bank of New Zealand senior economist Craig Ebert told APNZ.

Con Williams, rural economist at ANZ National Bank, said it looked like China had re-emerged as an active buyer.

The auction showed prices were strong across the board, with near-term delivery contracts registering solid increases.

Milk powder prices moved up, with skim milk powder (SMP) rising by 21.3 per cent and wholemilk powder (WMP) increasing by 8.5 per cent.

Anhydrous milk fat (AMF) prices bounced off their recent lows, rising by 24.4 per cent.

AMF had previously been trading at a discount to butter on a milkfat equivalent basis, Williams said.

The results suggested purchasers were looking to buy SMP and AMF in combination to use in food manufacturing, he said. Lower volumes on offer - as the New Zealand season came to a close - would have helped prices along, he said.

"However, reported lower production of domestic SMP in China and reduced imports in recent months suggests Chinese purchasers returned to the market en masse last night," he said in a commentary.


Fonterra last month cut its forecast payout for the 2011/12 season by about 4.5 per cent to $6.45-$6.55 a kg of milk solids. It has made an initial forecast for the new season of $5.95 to $6.05, made up of a milk price of $5.50 per kg of milk solids and an added dividend of 45c to 55c.

Fonterra chairman Sir Henry van der Heyden said at the time that prices had softened because there was too much supply.

"We think that supply and demand should move more into balance later in 2012 which may help ease the downward pressure on prices," he said then.

The next auction is on June 19.