Dairy prices are expected to largely track sideways before drifting higher later in the year, ASB senior rural economist Nathan Penny says.

In this week's GlobalDairyTrade auction, overall prices lifted 1.6%, following a similar rise at the previous auction.

After a hectic period where prices had spiked one way or the other, a period of relative calm prices might be a welcome contrast, Mr Penny said.

Whole milk powder prices were up 2.4%, casein up 6.9% and anhydrous milk fat posted a 2.5% increase, while skim milk powder continued its weak trend, falling 0.8%.


Strong US production and the early stages of an EU production recovery, along with still high stocks, were combining to put downward pressure on SMP prices, he said.

The WMP to SMP premium was at its highest level since SMP was first offered on the auction platform in March 2010.

With the better than expected New Zealand summer and autumn production now largely priced in, WMP prices were expected to ''tread water'' around the current levels.

Heading into next season and, as the New Zealand production fillip cleared markets, he expected WMP prices would remain well supported and would drift higher.

Westpac has upgraded its forecast for this season's farm-gate milk price from $5.90 to $6, in line with Fonterra's latest forecast update.

Westpac economist Sarah Drought said demand from China remained solid this week. While there had been a rise in buying from South America in the previous auction - potentially reflecting the significant contraction in Argentina's milk production in recent months - that buying was not sustained this week.

After the sharp fall in prices in early March, there had been concerns about further near-term downside risk for prices.

''But dairy markets had more resilience than we gave them credit for, as buyers stepped in to take advantage of lower prices,'' she said.