Severe drought conditions in the United States played a part in today's big lift in dairy prices, ANZ National rural economist Con Williams said.
Prices of dairy products posted their third-biggest gain in about two years in the latest GlobalDairyTrade, the GDT-TWI Price Index rising 7.8 per cent compared to the last sale a fortnight ago.
According to Businesss Desk, today's gain has only been exceeded by the June 5 result, when prices jumped 13.6 per cent, and a September 1, 2010, gain of 17 per cent.
The average winning price at this morning's auction was US$3,054 a tonne.
Whole milk powder rose 7 per cent and skim milk powder gained 7.3 per cent.
ANZ National's Williams said the US market, which is suffering its worst drought since 1956, was one of the big drivers for the increases in auction prices.
The auction showed that there had been some rebalancing between supply and demand after a seasonal lull, and the US market would have been a big influence.
"Prices have firmed quite a bit and we are starting to see a quicker alignment with price action in the United States," Williams told APNZ.
US prices are starting to reflect higher feed costs, which had risen as a result of the drought, and lower milk supply, he said.
Williams said today's auction result would go some way towards reassuring farmers that Fonterra will reach its forecast farmgate milk payout of $5.50 per kg for the 2012-13 season.
"They will be more comfortable, but the New Zealand dollar will remain quite a big bug bear in terms of reaching the $5.50 payout that Fonterra came out with in May," Williams told APNZ.
Fonterra expects global supply and demand to come more into balance in the second half of the year.