Dairy price correction under way

Dairy prices posted another solid rise at this week's GlobalDairyTrade auction, signalling the first step in a price correction is complete, economists say.

The headline global dairy trade index was up 7.7%. Whole milk powder prices lifted 3.7%, while skim milk powder and anhydrous milk fat jumped 10% and 15.4% respectively.

The price correction over August and now September had been both swift and large and it was time to ''take a breath'', ASB rural economist Nathan Penny said.

Prices were expected to consolidate over coming auctions as dairy markets would need time to digest the rapid price turnaround and assess ''where to next''. From there, prices were expected to lift again later in the season, Mr Penny said.

With the EU's production now clearly ''on the wane'', the wedge between New Zealand-dominated products (WMP) and EU-dominated ones (SMP) was expected to narrow, he said.

The New Zealand dollar surged to a 16-month high after this week's auction and data showed growth in the US services sector was weaker than expected.

The kiwi rose to US74.12 cents at 8am on Wednesday in Wellington from US73.16c late on Tuesday.

The trade-weighted index climbed to 78.38 from 77.77, to be well above the 76 average level the Reserve Bank has projected for the third quarter.

The auction result reaffirmed ASB's 2016-17 milk price forecast of $6 and it saw the risks around that forecast starting to balance.

''For example, the high NZD is slowing dairy price gains in NZD terms.

''On the flipside, auction prices are above where we expected them to be at this stage,'' Mr Penny said.

ANZ continued to hold a high-$4 milk price view for 2016-17, its latest Agri Focus report said.

If recent price gains could be held on to in October-November when the Chinese free trade window closed - and the NZD did not get ''turbocharged further'' - that would create upside towards the mid-$5.

Longer term, the bank still saw the milk price sitting in a mid-$5 to mid-$6 range, which was 25c-50c below the trend before the downturn.

The next nine to 12 months would provide a better guide of where the new equilibrium would sit as the market recovered from its cyclical low.

The offset to a lower milk price was dairy companies executing on value-add strategies, changing the product mix and providing some underlying improvement in financial results.

That would provide additional returns via extra premiums or dividend payments.