Milk price surges to highest point in 2 years

At the latest GlobalDairyTrade auction the key whole milk powder price went up nearly 20 per cent.

Economists went back to the drawing board to revise up their farmgate milk price forecasts after wholemilk powder prices hit their highest point in just over two years at this morning's GlolbalDairyTrade (GDT) auction.

The GDT price index jumped by 11.4 per cent but the price of whole milk powder - which has the greatest influence over Fonterra's farmgate milk price - shot up by a much stronger than expected 20 per cent to US$3317/tonne.

Westpac revised up its farm gate milk price this season to $5.80 a kg from a previous forecast of $5.30 and ANZ said there were "upside risks" to forecasts into the low $6.00/kg mark.

ANZ said there appeared to be an element of buyers scrambling to meet near-term demand against a backdrop of reduced local supply, which has been curtailed by a wet and colder than normal spring.

"The key question now is whether or not gains can be maintained, especially with the possibility of warmer temperatures seeing improved North Island pasture growth," ANZ said in a commentary.

"Even so, farmers will no doubt welcome the move and it certainly suggests upside risks to milk price forecasts, perhaps into the low NZ$6 mark per kg of milk solids," ANZ said. ASB Bank and Rabobank have predicted a $6.00 milk price, compared with Fonterra's forecast of $5.25/kg.

After several auctions, when prices remained broadly stable, markets seem to have reacted strongly to Fonterra's revised production estimates for the 2016/17 season, Westpac senior economist Anne Boniface said.

In particular, Chinese bidders were notably more active in the latest auction, crowding out buyers from other regions, she said. "This suggests a genuine concern about being left short of stock is helping drive prices higher," she said.

Fonterra has been drawing attention to the poor October milk flows in parts of the upper North Island. The catalyst for the downward revisions to local production has been too much rain during October in key dairying regions including the Waikato, Northland and Bay of Plenty.

Consequently, Fonterra is now expecting to collect seven per cent less milk this season than last.

ASB rural economist Nathan Penny, who has long forecast a $6.00/kg milk price, said the lift in prices on the basis of rapidly falling production was just a matter of time.

"The 'big wet' has also sped up the dairy price correction, meaning we are ahead of where we thought prices would be at this stage of the season," he said. "In fact, prices have both lifted earlier and higher than we anticipated," he said.

As a result, if New Zealand production is indeed as weak as we anticipate, then prices are likely to stabilise at current levels, if not lift further, he said.

"In this respect, we see an increasing probability that this season's milk price lifts above our current $6.00/kg forecast," Penny said.