Milk price rise 'sooner rather than later'

Fonterra is likely to raise its milk price forecast from $5.25 to at least $5.75 ''sooner rather than later'' on the back of another strong GlobalDairyTrade auction result, ASB senior rural economist Nathan Penny believes.

Overall prices in this week's auction were up 4.5% and prices for all products on offer were higher.

The increase was led by a 9.8% lift in skim milk powder prices, while whole milk powder prices - the key determinant of Fonterra's farm gate milk price - were up 3.2% to their highest level since mid-2014.

Listen to Nathan Penny interviewed on The Country above

With another solid result there was now clear upside to ASB's $6 milk price forecast and it had placed that forecast under review, Mr Penny said.

Westpac senior economist Anne Boniface said strong buying interest from China at this week's auction helped give some confidence that higher prices were not just a reflection of tighter supply but also, in part, reflected firmer demand.

Supply offered on the auction platform continued to decline, reflecting reduced local milk supply, particularly in parts of the North Island, and that was amplifying the usual seasonal reduction in supply on the platform, she said.

Volumes sold in this week's auction were down 14% on the previous auction a fortnight ago and Fonterra expected to offer significantly less product at auctions over the next two months relative to the same period a year ago.

As higher prices were an incentive to lift production, Westpac remained sceptical the drop in nationwide milk production this season would be as severe as the almost 7% decline Fonterra was forecasting.

The latest auction result suggested some upside risk to Westpac's current farm gate milk price forecast of $5.80, Ms Boniface said.

In the Waikato region, which accounted for 23% of New Zealand's dairy herd, late October milk volumes were down around 14%, compared with the corresponding time last season.