A useful lift in whole milk powder prices from the latest GlobalDairyTrade auction has underpinned the New Zealand forecast farmgate milk price at $6.40/kg milksolids.

Whole milk powder (WMP) prices rose 4.2%, the biggest percentage rise since April.

Some increases for longer delivery periods (May and June) were up 5%, including a mark of US$3000/tonnes for Fonterra’s instant WMP.

The effects on milk production from lack of rain in major dairying regions had forced Fonterra to revise its seasonal collection expectation to 1480 million kg of milksolids (MS), and reduce the volumes of WMP offered on its GDT platform.

“Dry conditions are expected to continue, and even if the rain forecast early in 2018 eventuates, it will not be enough to bring production back to previously anticipated levels,” Fonterra said in a statement on December 29.

Despite rising milk production in Europe and the United States, and because NZ supplied more than half of world-traded WMP, the revised NZ production forecast boosted a flagging market.

Fonterra said it now expected the negative effect of weather conditions to result in 4% less milk this season, compared with the previous season.

Since the recent peak season of 1614m kg MS in 2014-15 Fonterra suffered three consecutive seasonal falls in milk collection, totalling 8.3%.

As a result it now had about 15% processing overcapacity at peak because it built more plants to cope with what was expected to be growing milk production, and its legislative obligation to process all milk that farmers produce.

Fonterra said better dairy product optimisation for added-value was the plus-side of overcapacity, but there must also be maintenance costs and capital expenditure loan interest payments.

The AgriHQ milk price forecast rose one cent to $6.10 after the auction, but movements in futures prices were mixed. They lifted a little for WMP but eased for skim milk powder, anhydrous milkfat and butter futures.

The AgriHQ snapshot price, based solely on the January 2 GDT results, lifted 6c to $5.71.

Senior AgriHQ dairy analyst Susan Kilsby said the lift in commodity prices at the first 2018 GDT was partly offset by a rise in the NZ dollar, now US71c.

“Our revised forecast at $6.10 remains well-shy of Fonterra’s $6.40, but the likelihood of reaching this forecast has improved given that WMP prices are tracking higher again.”

Demand for WMP remained steady, as China continued to use imported powder to make up the shortfall in its domestic milk production.