Farmers wary of celebrating too soon after 18.9% jump at international auction.

Federated Farmers dairy chairman Andrew Hoggard had a "yabba dabba doo" moment when he woke up to news of an 18.9 per cent lift in whole milk powder prices at the latest GlobalDairyTrade auction.

While there was good cause for celebration, Hoggard said he was reluctant to get carried away, thanks to a series of false starts the sector has suffered in recent years.

Farmers have seen two successive seasons of sub-par milk prices and the signs so far have pointed to a third.

Hoggard said the auction, which saw the GDT price index rise by 12.7 per cent, would help "add a bit more positivity" to the industry.


"It adds more certainty to Fonterra's farmgate milk price forecast of $4.25, with hope of some upside," he said.

Whole milk powder went from US$1856 ($2556) a tonne in August last year to US$2824 in October - a gain of almost US$1000 or 52 per cent - only to drop back to US$2148 by November.

"It is still too early to start counting our chickens because we have had the same sort of thing last year when we had a similar rise - then it crashed," Hoggard said. "We feel that things may have turned but will just have to wait and see."

Whole milk powder prices - which have the greatest bearing on Fonterra's farmgate milk price - hit US$2695 a tonne at yesterday's auction, but they need to reach US$3000 a tonne to put farmers on a firmer footing.

ASB rural economist Nathan Penny, who has forecast $6.00/kg of milksolids for 2016/17, said he was confident that last year's boom-bust performance would not be repeated this year.

Last year's short-lived rally was based on expectations that the El Nino weather pattern would mean lower New Zealand production.

As it turned out, production fell only slightly and El Nino was not a factor.

After two successive seasons of high cow cull rates, there was now far greater certainty that New Zealand - the world's biggest dairy exporter - would produce much less milk.


"It's not hit and miss like El Nino," Penny said.

Added to that was the prospect of lower production in most other southern hemisphere dairy nations and the European Union, and improved demand from China.

Dairy production is still running high in the United States, but so is domestic demand.

Penny said the reduction in the New Zealand dairy herd was big and unprecedented.

"The supply correction is also irreversible. Once farmers cull at this level, there is no going back," he said. "These factors give us confidence that the auction price lift over August will be sustained and built upon over the season."

Westpac raised its farmgate milk price to $5.00/kg of milksolids from its previous forecast of $4.60 on the strength of the past two auctions.


ANZ Bank rural economist Con Williams said the bank was maintaining its high-$4/kg of milksolids forecast for 2016/17.

"We would need to see the price gains achieved so far held onto post October, and the NZD/US dollar [exchange rate] to behave, to change this view," Williams said.

Fonterra's report on its annual result, due on September 22, will contain an update on the milk price.

Chairman John Wilson this month said he was confident that global supply and demand would move into balance this season but that the high New Zealand dollar "continues to impact the competitiveness of New Zealand dairy exports".

Fonterra expects to see a 3 per cent reduction in its New Zealand milk collection for this season.

Have a listen to the full interview in the Soundcloud embed below: