Whole milk powder, which has the most impact on farmgate milk prices, gained 2.9% at the overnight auction, taking the average price to US$3207 (NZ$5018) a tonne.

Keall noted that prices for both whole milk powder and the GDT index were now roughly at or even slightly above their usual averages.

Global dairy prices have started to pick up this season as demand improves, including from China, the world’s biggest dairy importer and Fonterra’s largest market for whole milk powder.

That prompted Fonterra earlier this month to increase its farmgate milk price forecast to between $7 and $8 per kilogram of milk solids, lifting the midpoint, which farmers are paid off, by 25 cents to $7.50 per kgMS.

However, Fonterra noted that while demand was starting to re-emerge from China, it was from a low base and lagged behind levels a couple of years ago.

Fonterra says that while demand is starting to re-emerge from China, it is from a low base.
DAVID HALLETT / STUFF

Keall said China was still proving “relatively absent” from the global auctions.

The North Asia region took 46% of the product on offer at the latest auction, well below typical levels, he said.

“While Chinese whole milk powder inventories have eased and the domestic economic outlook is looking brighter, it’s worth remembering that the Chinese economy is still expected to grow at a below-trend rate next year – not a particularly conducive environment for dairy prices,” he said.

“While China is still missing in action, stronger demand from other regions means that a milk price at or above the midpoint of Fonterra’s guidance range is looking pretty achievable.”

Still, about 60% of product has already been priced, limiting the benefit to prices for this season, he said.

DairyNZ estimates the average farm needs a farmgate milk payment of $7.79 per kgMS to break even this season.

ASB will review its $7.35 per kgMS forecast in the new year, when it knew how conditions over the summer were shaping up, Keall said.

Following the auction, Westpac revised up its forecast from $7.25 per kgMS to $7.50 per kgMS, bringing it in line with Fonterra’s forecast.

“Expectations of reduced production data in New Zealand and offshore may still be supporting prices,” Westpac chief economist Kelly Eckhold said in a note titled “Santa rally”.

“On the demand side, this auction saw improved demand from China and solid support from Southeast Asian buyers,” he said.

Still, Eckhold said he remains cautious on prospects for the Chinese economy and associated Chinese dairy demand, noting recent data had confirmed ongoing deflation in consumer and producer prices in China.