Mild improvement in dairy prices tipped

Despite indications of a slight improvement, the big dairy themes that have dominated the season -- world overproduction and slack demand from China - are not expected to go away any time soon.

A mild improvement in dairy prices is expected at this week's GlobalDairyTrade auction - the last for the 2015-16 season - but any such gains are unlikely to have a positive bearing on Fonterra's opening forecast for the coming season, analysts said.

Farmers will be keen to put current season - which ends on May 31 - behind them as they struggled with a farmgate milk price of $3.90 a kg of milksolids -- well below the average cost of production.

Overall the big themes that have dominated the season -- world overproduction and slack demand from China - are not expected to go away any time soon.

AgriHQ dairy analyst Susan Kilsby said she expected to see a small improvement in prices at Wednesday morning's auction, which will be very light in volume terms - with just 5,500 tonne of wholemilk powder on offer, compared with 7,500 tonnes at the last auction and 12,500 tonnes at the corresponding auction last year.

Fonterra is expected to issue its forecast for 2016/7 towards the end of this month.

DairyHQ has a $4.70 a kg farmgate milk price forecast for 2016/7 which Kilsby said that may come down if this week's auction disappoints.

Analysts said there were encouraging signs that the overproduction problem was starting to correct itself.

"New Zealand production is slowing quite quickly now, because it has generally been dry around the country than is normally the case for this time of year," Kilsby said.

ANZ rural economist Con Williams said a milk price "in the mid $4s" was likely for 2016/7 if this week's auction comes up short.

New Zealand production is slowing quite quickly now, because it has generally been dry around the country than is normally the case for this time of year.

Williams said the downward revision in Australia by embattled dairy co-op Murray Goulburn and its main competition - Fonterra - was likely to lead to lower production across Tasman.

"There is more evidence that there is more farmgate pain being felt in other regions, which should help slow supply growth and help to rebalance the market in time," he said.

At the last sale early this month, the GDT Price Index dropped by 1.4 per cent from the previous event and the average price came to US$2203 a tonne.

Chicago-based commodities specialist HighGroundDairy said it expects the non-event that was the El Nino-induced dry spell would mean Fonterra's production would fall by just 2.5 to 3 per cent in the current season.

HighGround expects to see strong demand for skim milk powder at this week's auction, and for whole milk powder to have found a floor.

Fonterra, in its latest global market update, said lower milk collections were largely a result of the low milk price environment, with farmers reducing stock rates and supplementary feeding to reduce costs.

However, the Fonterra said favourable weather conditions across many dairying regions, had supported late season milk production.

For the 2015/16 season, which ends this month, production is forecast to fall to 1,558 million kg of milk solids, down 3 per cent on the previous season's, compared with earlier forecasts of a 5 to 6 per cent decline.