Auction boosts milk price outlook

Economists are touting improved milk price forecasts following a jump in prices at this week's GlobalDairyTrade auction.

Overall, prices were up 11.4%, driven by a whopping 19.8% lift in whole milk powder prices, which were now at their highest levels since mid-2014.

Markets seemed to have belatedly responded to Fonterra's reduced milk flows and decision to reduce product volumes on offer over the next 12 months, Westpac senior economist Anne Boniface said.

There was a muted reaction in markets a fortnight ago to news that Fonterra offerings were down, but a further downgrade last week seemed to have induced a bigger reaction this week. There was also a big lift in Chinese demand, she said.

The auction result came during a critical period for New Zealand farm gate milk prices and had given ''a considerable boost'' to prospects for farmer incomes this season.

Clearly, there was material upside risk to Westpac's $5.30 milk price forecast for this season and it had upgraded it to $5.80, she said.

ASB senior rural economist Nathan Penny said it reinforced the bank's $6 milk price forecast and there was growing risk the milk price would surpass the bank's already bullish forecast this season.

Prices had lifted a little earlier and higher than the bank had anticipated.

''As a result, if New Zealand production is indeed as weak as we now anticipate, then prices are likely to remain at current levels or lift further. In this respect, we see an increasing probability that this season's milk price lifts above our current $6 forecast,'' he said.

BNZ has also lifted its milk price forecast from $5.30 to $6. It could well end up higher than forecast if global milk supply continued to contract more than anticipated or lower if production held up, economist Doug Steel said.

''Of course, demand will play a part too. But the current overall signals are good for above break- even milk price this season.''

A recent Rabobank report said Asian milk demand continued but export margins had been squeezed and could potentially tighten further.

Competition in Asian markets would remain fiercely competitive as both international and local brands fought for market share and consumer spend.

The automatic premium that international brands had historically received was unlikely to be repeated, Rabobank senior dairy analyst Michael Harvey said.

''It wasn't long ago that being an imported brand automatically provided a retail price premium but that is no longer the case,'' Mr Harvey said.

That had particular consequences for New Zealand and Australia given the previously ''alluring'' retail price premiums combined with trade opportunities and relatively low capital outlays fuelled a period of significant investment in liquid milk processing capacity across Oceania.

That increased capacity had been specifically geared towards Asia's liquid milk markets, the short-term consequence of which had been a contribution to diminishing export margins.

The flood of investment in the regions had resulted in capacity almost doubling across New Zealand and Australia, with additional investment potentially in the pipeline.

The region's dairy exporters were also competing with their European counterparts, many of which had large-scale and highly efficient processing plants complemented by a growing milk supply, he said.