Clear upside seen in $6 forecasts

Prices for whole milk powder had surged about a third over the last four auctions.

Overall prices increased 3.5per cent in last week's auction, paced by a 4.9per cent lift in whole milk powder prices.

Prices have now risen 56per cent since July, led by a 74per cent surge in whole milk powder prices which now sit at $US3593 a tonne.

ASB senior rural economist Nathan Penny said the relative strength in the price of whole milk powder reflected the market's ongoing reaction to the rapid decline, from an already weak position, in New Zealand production.

Prices for whole milk powder, New Zealand's key product, had surged about a third over the last four auctions while skim milk powder prices had jumped 18per cent.

Mr Penny believed whole milk powder prices might have further to go and might challenge $US4000 per metric tonne in the new year.

"In particular, we expect the data on New Zealand and European Union production are set to get worse before they get better.

"For example, we expect New Zealand production to fall 5per cent over the season as a whole from the 3.1per cent decline for the season to date.

"Also, we expect flat production in the EU this calendar year, which is less than official EU forecasts of a small rise."

Westpac senior economist Anne Boniface said interest from China appeared to have been a little softer in this week's auction, following strong interest in the last couple of auctions.

However, buyers from other regions appeared to have taken the opportunity to "fill the gaps", providing ongoing support for prices.

Westpac last week bumped up its forecast to $6.20, which should be well above break-even levels for most farmers, Ms Boniface said.

BNZ lifted its forecast to $6.40 and economist Doug Steel said the milk price could well end up higher than that if global milk supply continued to contract more than anticipated - or lower if production held up. Demand would also play its part.