ASB Bank has raised its New Zealand farmgate milk price forecasts for this season and the next, based on an expected slowdown in global production.

The bank said it had revised up its forecast for 2016/7 to $6.50 a kilogram of milksolids from $6/kg and to $6.75/kg from $6.50/kg for the following year.

The revision follows a phenomenal recovery in key whole milk powder prices, which have more than doubled in less than 12 months.

At this morning's GlobalDairyTrade (GDT) auction, the GDT price index fell 0.5 per cent and whole milk powder dropped by 0.8 per cent to US$3568 ($5147) a tonne but the declines were not enough to put a dent in recently-revised milk price forecasts from Fonterra and the banks.


ASB rural economist Nathan Penny, who appeared the overly optimistic outlier by holding to his $6/kg for most of this year, said his forecast upgrades were based on what he expects to be lingering weakness in global production.

"The $6/kg forecast served us well as we effectively drew a line in this dairy cycle's sand," he said. "In other words, our $6/kg forecast demonstrated our confidence that this season the milk price would turn," he said.

Penny said prices have lifted sooner and higher than the bank had factored in.

"Secondly, we believe global dairy production is going to get worse before it gets better. And in turn, we expect dairy prices can go higher in early 2017," he said.

Renewed weakness in the New Zealand dollar would further boost the milk price, particularly heading into 2017/18.

"While farmers can now take time out over Christmas and look forward to better times over 2017, we can already see the next dairy cycle taking shape," he said. "Indeed, should prices overshoot our current expectations and lead to a large global production response, a low milk price could follow in 2018/19."

ANZ rural economist Con Williams said it had been a remarkable recovery led by the biggest supply contraction in 10 years and improved Chinese import demand.

"If prices can continue to hold in the new year, this will create upside in the milk price toward the $6/kg range," Williams said.


"A fair chunk of this will be focused on Fonterra loan repayments and working capital requirements for the 2017/18 season, as opposed to a discretionary spend-up," he said.

Westpac said it remained comfortable with its $6.20/kg forecast for this season.

Fonterra last month increased its 2016/17 forecast by 75 cents to $6/kg based on what it saw as a gradual rebalancing of supply and demand.

"We've seen falling production in the major exporting regions, particularly Europe and Australia, and an unprecedented decline in New Zealand milk supply due to wetter than normal spring conditions across most regions," chairman John Wilson said at the time.

The latest data from the Dairy Companies Association of New Zealand (DCANZ) showed that New Zealand milk production was down by 4.5 per cent in November compared with the same month last year.

For the season to date, production was down 3.0 per cent, it said, while production for the 12 months was down 1.5 per cent against the same period last year, DCANZ said.


Fonterra, in its latest production update, said milk collection across the country for the six months to November 30 reached 695 million kg of milksolids, 6 per cent lower than the same period last season.

Milk collection during the peak was affected by unfavourable weather conditions across most dairying regions. This resulted in November collections reaching 194m/kg, 7 per cent behind the same month last season, Fonterra said.

Among the world's other big dairy exporters, production is on the decline Australia and in the European Union, and is growing only slightly in the United States.