BNZ had lifted its 2018-19 milk price forecast up to $6.10 from $5.70, although that figure sat within a very wide range of outcomes that were possible when the price was finalised in around 18 months. Risks to any milk price forecast were large and ever present, Mr Steel said.
The bank believed international dairy prices would drift "a bit lower" over the coming year as world milk supply expanded at a solid pace, driven by more milk out of the EU despite declining cow numbers.
It also reflected very large EU intervention stockpiles of skim milk powder — more than 370,000 tonnes — that still overhung the market, albeit with an ageing profile.
In addition, operational changes to EU intervention this season could see further downward pressure on SMP prices from already very low levels.
All eyes were on Europe, although stocks were also at elevated levels in the US. Dairy prices also still looked a little stretched relative to international grain prices.
Fonterra recently lifted its 2017-18 milk price forecast to $6.55kg from $6.40, and BNZ also bumped up its own forecast from $6.30 to $6.55.
With the majority of product sold for the season, any milk price changes from here were likely to be relatively small, Mr Steel said.
Overall payments to Fonterra shareholding farmers for the 2017-18 season looked healthy-to-strong.
A forecast $6.55 milk price plus a dividend of between 25c and 35c meant a total of between $6.80 and $6.90.
That was above last season's $6.52 and the previous five-year average of $6.03. It was "miles above" the extreme low of $4.30 in the season before last.
But the push higher on the milk price side of things needed to be set against generally lower New Zealand milk production this season.
"We remain of the view that New Zealand milk production for the 2017-18 season as a whole will be down around 2% compared to the previous season. This suggests milk revenue to dairy farmers this season will be marginally higher on average compared to the previous season."
The circa 2% volume decline expected for the season included January's New Zealand milk volume coming in 7.4% down on a year ago, as the worse of the dry conditions took effect.
Rain helped lessen the dent in February with production down by a lesser 3.9% compared to last year.
The bank expected March milk supply would be well behind last year's strong result.
"All this will likely see agriculture GDP subdued in the first quarter of the year, following the hit it took in the final quarter of last year," Mr Steel said.
