Shrinking New Zealand milk production saw global dairy prices lift to their highest level for four months on the GlobalDairyTrade (GDT) auction on Tuesday night.
But an Australian market analyst has warned that a glut of milk in Europe has caused a slump in the 'commodity milk' value.
Analyst Freshagenda said it expected the commodity milk value to significantly worsen - with an up to 20 per cent drop - in 2018/19 with continued weakness in commodity prices.
It acknowledged that NZ's production slow down had "helped steady and lift results from recent GFT events".
"New Zealand is having a shocker of a season – too wet, too dry, wet again and then too hot – the upshot of which is limiting milk output," Freshagenda said.
But it said with limited upside for skim milk powder prices because of European Union stockpile of this product and favourable vegetable oil values, there was a cap on whole milk powder returns.
The GDT rose 5.9 per cent to $US3553 on Tuesday night, following rises of 2.2 per cent and 4.9 per cent in January.
It is now at its highest point since early October.
The price of whole milk powder (WMP) was up 7.6 per cent and cheddar 7.2 per cent.
Butter continued its recent upward momentum, rising 7.9 per cent, following on from an 8.8 per cent increase last auction.
NZ's ASB economist Nathan predicted production there would lift following rain in the past month and come out higher than Fonterra's projection of a 3 per cent drop in production forecast for the total season.
As a result, some of the price strength would be temporary.
AgriHQ said buyers seemed to be "more nervous that they will not be able to fulfil their requirements if New Zealand milk production continues to fall.
"There were a few more winning bidders from North Asia at the February 6 event than at the January 16 event, and more product was sold to this region."
A total of 22,197 tonnes of product was sold at the overnight auction, down from 23,319 tonnes three weeks ago.
Freshagenda said its estimate for the southern Australian Commodity Milk Value for 2017-18 was $5.25-$5.35 a kilogram milk solids.
Its forecast for 2018-19 is $4.30-$4.50/kg MS.
"The likely 'value capture' achievable by companies and paid to milk producers above the underlying CMV may vary considerably," it said.
"This will depend on the whether local wholesale cheese prices can withstand the expected pressure of additional EU and US supplies, and the global demand for butterfat at still elevated prices."
Competition for milk would also influence prices, as companies continued to bid for milk following the demise of Murray Goulburn.
Freshagenda said the global market deterioration was behind the forecast slump.
"You’d have to have been living under a large rock to be unaware of the risks that lie ahead for global dairy markets, and therefore Southern Australia’s milk prices," it said.
"The key factor is the continued expansion in European milk supply and the changes to Intervention policy affecting the ageing SMP mountain.
"Extended high milk prices, good weather and cheap supplementary feed are expected to propel EU milk ahead of last year by about 3-4 per cent during the spring flush."
Freshagenda said it expected additional EU milk output would be largely soaked up by higher cheese production.
The US was also producing more cheese than its consumers were demanding and building stocks to historic highs.
"Hence, cheese is the major risk for NZ and Australian milk values," it said.
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