Dairy farm finances have taken on a vastly improved hue today after whole milk powder prices soared to the highest point in more than two years at the latest auction.

Some economists revised up their farmgate milk price forecasts after the GlobalDairyTrade auction price index jumped by 11.4 per cent.

The price of whole milk powder - which has the greatest influence over Fonterra's farmgate milk price - shot up by 20 per cent to US$3317 a tonne at the twice-monthly auction.

At current prices, most dairy farmers will be well ahead of the estimated break-even point of $5.05/kg of milksolids after suffering two consecutive seasons of very low prices, heavy losses and burgeoning debt.


The GDT auction set off a rally in an already strong dairy futures market with December through to March 2017 contracts for whole milk powder all trading at well over US$3400 a tonne.

"It was clearly a big night and the stars all aligned," said OMF director-financial markets Nigel Brunel.

"There are some happy dairy farmers around," he said. "It will take more than one season to put their ships back on an even keel, but this is a very good start."

Chris Lewis, president of Federated Farmers Waikato, said farmers were wary, but the rally had a more durable feel to it.

"We are at a stage where we are almost starting to believe it," Lewis said.

Lewis said he would expect the dairy companies to upgrade their farmgate forecasts if the next GDT auctions showed continued gains.

Fonterra chairman John Wilson declined to be drawn as to whether Fonterra would raise its farmgate milk price in reaction to the latest gains.

Wilson told The Country radio station that production in New Zealand and in most other dairy producing countries was declining and it looked like there would be less milk around over the next four to five months. Inventory levels appeared to have come back to more normal levels.


"It does feel like supply/demand is coming into balance," Wilson said.

Commentators had previously been cautious about gains on the auction, particularly after a short, sharp spike higher late last year was followed by an equally sharp and sudden fall.

The talk in the past has been about possible tariff-related buying - Chinese importers seeking product during a low-tariff window - before the end of the year.

This time around, the rally had a more durable feel to it, analysts said, especially since it was inspired by a sharp decline in production in the dairy heartland of the Waikato in the peak producing month of October.

Last week Fonterra said it reduced its forecast milk volume for the 2016-17 season in New Zealand to 1,460 million kilogram of milk solids, 6.8 per cent below the volume collected last season.

Analysts said the gain was a sign that the market was short of whole milk powder.
"It seems that there is a bit more substance [to the auction] than there was spin and noise, but the market can turn pretty quickly," said ANZ chief economist Cameron Bagrie.


ASB rural economist Nathan Penny, who has been at the more optimistic end of the market with his farmgate milk price forecasts, said the gain was driven by news from Fonterra that production had taken a hit over October.

"That was a big result and we are now ahead of where we thought we would be, even with our bullish forecast of $6.00/kg so there is an increased probability that the milk price will go past $6.00/kg," Penny said.

Westpac revised up its farm gate milk price this season to $5.80 a kg from a previous forecast of $5.30 and ANZ said there were "upside risks" to forecasts into the low $6.00/kg mark.

Westpac senior economist Anne Boniface said Chinese bidders were notably more active in the latest auction, crowding out buyers from other regions.

"This suggests a genuine concern about being left short of stock is helping drive prices higher."