Whole milk powder prices were yet to show the type of recovery required to support Fonterra's $4.70 per kilogram of milksolids farm-gate milk price, Forsyth Barr broker Andrew Rooney said yesterday.
Speaking after the latest GlobalDairyTrade auction, Mr Rooney said prices climbed across the board, driving the index up 3.6%, and the average price up to $US2709 ($NZ3491) a tonne.
Whole milk powder prices climbed 1.6% to $US2307, slightly behind the Fonterra forecast price dictating the $4.70 kg/ms forecast.
The Fonterra price forecast implied a price between $US2400 a tonne and $US2500 a tonne was now expected.
Fonterra expected the whole milk price to recover to about $US3500 a tonne by July, a 52% increase from the spot price, he said.
Skim milk powder prices, the key market for Westland Dairy, rose 2.8%.
Butter was up 13.2%, butter milk powder was up 10.5%, cheddar was up 3.2% and rennet casein rose 4.2%.
Mr Rooney noted total volumes sold on the GDT platform remained well below the previous corresponding period, with only 33,669 tonnes sold versus about 46,500 tonnes sold early last year.
Part of the reason was due to increased long-term platform contracts having been established between Fonterra and other parties, he said.
ASB economist Nathan Penny said a fall in overall auction volumes might explain some of the 3.6% overall price rise.
''While auction volumes normally are declining at this point of the season, Fonterra continues to rein in auction volumes faster than this would usually dictate.''
Fonterra had previously revised down its milk production growth forecast for this season compared with the last from 2% to flat, or zero, growth, he said.
Fonterra cited the lower milk price as likely to induce a lower supply response from farmers.
In particular, Fonterra expected farmers to dry off their herds earlier this summer or autumn, as buying additional feed over the dry months would not stack up for many farmers.
''For now, though, markets are aware production growth to date this season remains healthy.
''Production by Fonterra farmers is up 4% for the season to date, while nationwide the rise is closer to 6%. That said, we do expect production growth to slow through the summer and autumn.''
Markets would take more convincing the ample supply milk growth was slowing before they started bidding up prices in earnest, Mr Penny said.
With expectations dairy prices would rise this year already built in, the latest auction result had no implications for the $4.70 kg/ms price forecast for the season.
Beyond this season, ASB remained ''broadly positive'' on dairy prospects, he said.
Farmers would ultimately respond to this season's lower milk price by slowing their production.
And as that happened, demand was expected to firm, particularly as the Chinese economy improved.
Mr Penny expected the 2015-16 milk price to rebound to around $6 kg/ms.
