Milk makes money in global market

Milk prices are consolidating at higher levels. Photo / Mark Mitchell

Economists were buoyed by gains in Fonterra's overnight global dairy trade auction, maintaining their end-of-season forecasts above Fonterra's $6 farm gate milk price prediction.

Overall auction prices rose 1.3%, following a 0.6% gain a fortnight ago, while the crucial element of whole milk powder prices rose 1% to $US3314 ($NZ4541) per tonne.

The gains were generally against market expectations of a slight decline. The combination of Chinese demand and the global shortage underpinned the gains, which put many Fonterra farmers beyond the break-even mark, after two seasons of losses for many.

ASB senior rural economist Nathan Penny reconfirmed his 2016-17 forecast payout of $6.50 per kilogram of milk solids, while Westpac economist Sarah Drought stuck with $6.20.

Mr Penny had expected a decline in whole milk prices of 1%-3%, based on futures pricing, as opposed to the 1% gain.

''Since the surge in prices from July to November in 2016, prices have consolidated at these higher levels,'' he said in a statement yesterday.

Given there had been two price rises and two price declines since early December, the majority of the overall 56% surge in milk prices ''remains intact,'' he said.

''From here, we expect prices to track largely sideways,'' Mr Penny said.

He said while New Zealand milk production had stabilised in recent months, he expected national production to post a ''chunky fall'' for the season, up to 5% down.

Westpac's Ms Drought expected national production for the season to decline 3%-4%, but noted the potential for a ''sharp end'' to the season for some North Island areas given the rapidly drying conditions. New Zealand production for the seven months to December was down 3.6%.

She said buyer interest from China improved in the first few weeks of the year.

''The fact that it held up in this auction that coincided with the Chinese New Year, provides a positive signal for demand ahead,'' Ms Drought said.

She said tight global supply remained an important factor to underpinning prices at the present levels, with production from most of the major exporting regions continuing to decline, on a year-on-year basis.