The international dairy trade has become the most volatile of all commodities markets.
The GlobalDairyTrade auction price for whole milk powder went from US$5000 ($7583) a tonne in February last year to less than half that at US$2229 in December.
It then rallied to US$3272 a tonne in February, only to slump to US$1590 on August 5.
Last week, it spiked by 19.1 per cent to US1856, and futures markets have been rallying ever since.
NZX futures prices have corrected somewhat, but they still command a healthy premium over the equivalent GDT price - the September contract trading at US$2220 compared with the GDT contract two price of US$1795. Further out, the January contract was at US$2480 compared with a GDT contract six price of US$1980.
Analysts said the price action on the GDT and futures markets reflected a more open market now that governments have moved away from regulation and stockpiling of dairy production, which masks the inherent volatility of the market.
"What we are seeing with milk is volatility that has been there for many years when markets started to free up and move away from regulation," said Nigel Brunel, director of financial markets at OM Financial. "What we are seeing now is the most volatile commodities market in the world."
Milk had a 50 per cent historical volatility over a 50-day average compared with 30 per cent for corn and wheat.
Futures have continued to rally sharply after last week's GlobalDairyTrade auction, which saw the GDT price index gain 14.8 per cent.
There was talk - unconfirmed - of China re-entering the market after an 18-month absence.
"There is some talk of China returning," said ANZ rural economist Con Williams. "If it proves to be the case, then it will be positive for the market."
Williams expects to see a US$300 to US$400/tonne improvement in the whole milk powder price over the next one or two auctions.
Against that backdrop, New Zealand production is expected to decline, which should help support better prices.
According to data from Statistics NZ, imports of palm kernel - the supplementary feed of choice for most farmers - fell to 88,590 tonnes in June, down from 232,971 tonnes in May, and down from 135,612 tonnes in June last year.
Palm kernel prices, which tend to adjust quickly to demand, have fallen to $188 a tonne from $220-$230 a tonne last year.
The cumulative cow cull exceeded one million in the 43 weeks to July 25 - up 19.3 per cent on the same period last year.
Culling has picked up markedly in recent weeks. In the week ended July 25 the cull was up 51.2 per cent in the North Island and up 81 per cent in the South, compared with the same week a year ago.
There is also evidence farmers are cutting back on off-farm grazing and adopting less intensive farming techniques to lower their costs.
Dairy Companies Association of NZ's data show production was strong in April, May and June.
Fonterra's milk collection in July reached 10 million kg of milksolids, up 1 million kg on July last year.
Fonterra nevertheless expects production to fall 2 per cent in the current season, from last year's record of 1.6 billion kg. Most analysts expected a bigger reduction than that - ANZ's Williams expects a 5 per cent fall.
Whole milk powder rollercoaster
• US$5000 a tonne in February, 2014.
• US$2229 in December, 2014.
• US$3272 a tonne in February.
• US$1590 on August 5.
• US$1856 last week, up by 19.1%.