International dairy prices improved slightly at this morning's Global Dairy Trade auction, the GDT price index gaining by 1.4 per cent since the last sale early this month.
Wholemilk powder prices, which have the greatest bearing on Fonterra's farmgate milk price, gained by 2.9 per cent to US$2760 a tonne.
Today's gain partly offsets the previous sale's 3.0 per cent decline in the GDT index, which occurred after a sharp spike higher over August and September.
The futures market had pointed to prices stabilising at this morning's sale after Fonterra said it would reduce the amount of product available for sale at the auction because its Waikato milk volumes for October were down 10 percent from the same time last year due to a wetter-than-usual spring.
In other so called reference products for Fonterra, skim milk powder fell by 0.3 per cent to an average price of US$2,204 a tonne, butter milk powder firmed by 0.2 per cent to US$2,583 a tonne, butter rose by 2.6 per cent to US$3,984/tonne and anhydrous milk fat gained by 1.1 per cent to US$5,007/tonne.
In the other products, prices were a mixed bag. Cheddar dropped by 3.7 per cent to US$3290/tonne and rennet casein fell by 4.5 per cent to US$6286 a tonne while lactose firmed by 5.6 per cent to US$780 a tonne.
Fonterra last month raised its farm gate milk price by 50c to $5.25 a kg of milk solids - its highest point in two years and its second upgrade in less than a month.
Combined with the forecast earnings per share range for the 2017 financial year of 50 to 60 cents, the total payout available to farmers in the current season is forecast to be $5.75 to $5.85 - before retentions.
That compares with DairyNZ's breakeven estimated break-even point of $5.05/kg. The milk price came to $3.90/kg in 2015/6, $4.40 in 2014/5 and a hit a record $8.40 in 2013/4.
Westpac senior economist Anne Boniface said the auction supported the bank's view that there was some "upside risk" to the bank's $5 farmgate milk price forecast.
"While we have been sceptical that the recent lift in dairy prices would be entirely maintained in the coming months, we have also warned that New Zealand pasture conditions would be a particularly important determinant of NZ milk production this season," she said. "Indeed this is proving to be the case."
ANZ has revised up its farmgate forecast to $5.25-$5.50 a kg from its previous forecast of $4.75 to $5.00 a kg.
"Dairy markets look to be consolidating around current price levels, supporting the view that a milk price around the $5.25-$5.50/kg mark should be achievable in 2016/17," ANZ rural econmist Con Williams said.
Much would depend on how supply dynamics evolve from here, he said.
"With the catalyst for lower GDT supply being wet weather conditions in the Waikato, it appears buyers are prepared to take a wait and see approach for now, Williams said. "Our feeling is that things will improve as temperatures heat up, but GDT supply will remain restricted due to low inventory levels providing Fonterra with flexibility."