Global Dairy Trade auction prices fell sharply towards the end of last year but have bounced back strongly so far this year.
NZX dairy futures pricing has also been strong.
Looking ahead to 2026/27, the bank’s opening forecast is pitched at $8.70/kg.
That forecast assumes dairy prices drift lower once the current rush loses momentum and the reality of strongly growing global supply reasserts itself, Dilly said.
“The global supply and demand fundamentals that drove prices down in the second half of 2025 are largely still in place, but in hindsight the selloff was overdone,” Dilly said in a report.
Milk production is growing strongly in almost every key market, mainly in response to high prices, with low feed costs, he said.
“The signal was there in 2024 but was thwarted by poor weather and animal disease issues everywhere but New Zealand,” Dilly said.
“Now every key exporting country has their foot on the accelerator.“
Market participants and observers may have over-reacted to the surge in milk production in late 2025.
“Essentially, the market overshot on the downside as participants tried to work out where the bottom would be, and prices have now bounced back to more realistic levels,” Dilly said.
“Regardless of the cause, the bounce is great news for dairy farmers even though prices remain a lot closer to the bottom than the top, because it virtually guarantees a milk price somewhere in the mid-$9 range,” he said.
By the time this price surge loses momentum, most of the current season’s production will have been sold, he added.
“This takes a lot of the downside (and upside) risks out of the equation.”
Last year, Fonterra struck a deal to sell its consumer arm – Mainland - to French dairy giant Lactalis for $4.22 billion.
The sale will result in a tax-free $2 per share capital return, equivalent to about $3.2b, to farmers.
The capital return goes to the vote on February 19 and Fonterra now expects the sale process to be complete within the first quarter of this year.
If all goes to plan, farmers will soon stand to pocket the Mainland windfall, plus Fonterra’s interim dividend, on top of a firm milk price.
Jamie Gray is an Auckland-based journalist, covering the financial markets, the primary sector and energy. He joined the Herald in 2011.
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