Fonterra's moves to reduce the amount of product on offer on the GlobalDairyTrade platform appear to be having the desired effect, with prices rising by 10.9 per cent at yesterday's auction, but the market has a long way to go before the co-op's milk price forecast can be realised, say economists.

Whole milk powder prices, which are the key to determining Fonterra's farmgate milk price, rose by 12.1 per cent to an average US$2078 a tonne. Most product groups posted gains at the auction, with butter milk powder rising by 30 per cent to US$1829 a tonne and skim milk powder by 11.7 per cent to US$1698 a tonne.

Fonterra last month cut its farmgate milk price to $3.85 per kg of milksolids, from a previous forecast of $5.25 - well short of DairyNZ's break-even estimate of $5.40 a kg.

Whole milk powder prices need to reach US$3000 a tonne by next year for Fonterra to deliver on its latest farmgate milk price forecast.

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AgriHQ's theoretical farmgate milk Dairy prices rise at auction as Fonterra cuts offering

price increased to $4.19 per kg milksolids after the sale.

Susan Kilsby, AgriHQ's dairy analyst, said the dairy derivatives market indicated whole milk powder prices would rise a further 34 per cent by the end of the season.

The volume of whole milk powder offered by Fonterra yesterday was 50 per cent lower than a year ago.

"The lower volume of product on offer is lending support to the market in the short term," Kilsby said.

But analysts said there needed to be a meaningful reduction in global milk production before a sustained recovery in prices could occur.

ASB Bank's Nathan Penny said dairy sentiment had turned but that the focus had now turned to production.

Farmers had culled aggressively, supplementary feed use was expected to fall, and there was a high risk that El Nino would cause a drought this summer, Penny said.

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There was talk leading up to the sale that China - the world's biggest dairy importer - had returned to the market after a long absence. Robbie Turner, head of European markets for Rice Dairy International in Chicago, said the auction suggested the Chinese had returned.

But despite yesterday's encouraging lift, prices remain more than one-third below levels at the start of March.

Fonterra has said it expects local milk production to fall by 2 per cent this season. Economists also expect local production to decline this year, some by as much as 5 per cent.

However, a decline has proved elusive. Dairy Companies of NZ data showed production remained strong in April, May and June and was running well ahead of those months last year, thanks to a productive late autumn flush.

Auction up

• GlobalDairyTrade price gains for second time in a row.

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• Fonterra's whole milk powder (WMP) offering down 50 per cent on last year.

• Future price gains will depend on production falling.