Drought conditions have pushed international dairy prices to record highs and may bump up farmgate returns but the country's farmers have no cause for celebration.
Prices at Fonterra's latest online dairy auction soared to five-year highs on Tuesday night, marking the seventh straight gain.
The price of a basket of dairy goods surged a massive 14.8 per cent compared with the last sale two weeks ago, reaching its highest point since December 2007.
"While it's nice to see very big price gains on international markets, it's not a good news story when you look at what's driving it - which is a lack of milk in New Zealand," BNZ economist Doug Steel said.
The volume of dairy products sold has halved in the space of a month to 15,994 metric tonnes as production winds down through the tail end of the season.
"It's economics 101, really," Steel said.
"With very tight supply, we've seen a big squeeze with higher prices."
The entire North Island was declared an official drought zone last week and parts of the South Island also remain very dry.
Steel said there was likely to be some upside to Fonterra's forecast payout of $5.50 per kilogram of milk solids, plus a 40c-50c dividend.
However, he warned that the dairy co-op had already factored in rising prices during its last forecast update in late February, so it would be a question of degree.
The average winning price at the auction rose to US$4683 (NZ$5685) per metric tonne, up from US$4216.
Seven of the nine product categories rose and two weren't traded.
The key wholemilk powder product category, the largest by volume, rose 21.2 per cent.
The auction recorded 185 participants out of 785 qualified bidders taking part, with 82 winning bids.
The successful result also had Westpac economists firming up their return forecasts.
The bank's agri-economist, Nathan Penny, was picking a payout of at least $5.65 a kilogram plus dividend for the current season, and $5.90 a kilogram plus dividend next season.
However, the total income that many farmers will receive is not so rosy.
Westpac is warning that the country's milk production could drop for the first time in five years if the drought conditions persist.
Penny said milk production for the 2012-2013 season might fall by as much as 2 per cent, despite growing herd sizes and a bumper spring.
"It all depends on when the rains come," he said.
As recently as last month, Westpac was still expecting total production to rise slightly from last year but the drought had since pushed production levels "off a cliff".
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Westpac agribusiness head David Jones warned that the full financial effects of the drought might still be several months away.
FLOW-ON EFFECTS Fonterra, which collects most of the milk that ends up in New Zealand household fridges, won't be drawn on whether surging world dairy prices will soon lead to price rises at the supermarket chiller.
Fonterra Brands, which says it has to buy its milk from Fonterra at world prices, said it would not be making any immediate changes to its wholesale pricing in New Zealand. Fonterra's only real competitor at the dairy product chiller is Goodman Fielder, which also buys its milk from Fonterra. Fonterra Brands managing director Peter McClure said it took time for international prices to flow to the domestic market.
International prices were trending up but Fonterra Brands needed to get a firmer feel for prices longer term, he said.
http://www.stuff.co.nz/taranaki-daily-news/8453272/Drought-drives-up-dairy-prices