Falling dairy production in key dairy export regions across the world is underpinning global dairy prices.
But concerns remain about the ongoing impact of the COVID-19 pandemic on economic growth and subsequent demand for dairy.
The soft production picture has prompted one New Zealand bank to forecast record farmgate prices in that country for 2021/22.
The latest figures from Dairy Australia reveal Australian production is down 3.6 per cent for the start of the year - matching a similar picture in NZ and the European Union.
The Global Dairy Trade auction was steady on Tuesday evening, with price rises in most commodity groups offset by a slight 0.4pc fall in the key whole milk powder index.
Butter milk powder led the rise, up 9.7pc.
The result consolidated gains in the previous four auctions, which had reversed the trend since March.
Falling dairy production worldwide
Westpac senior agri economist Nathan Penny said falling NZ dairy production was a key factor, with production now forecast to fall 1pc for the year, after previously being forecast to lift by the same amount.
"NZ production has started the season on the back foot," he said.
"Winter and spring so far have been either wet or cold or both in many parts of the country.
"As a result, production for the first three months of the season is running at 1.8pc behind the same stage of last season.
"We expect this production softness to continue in the short term."
Mr Penny said given the first four months account for about 20pc of the season's production, it would be difficult to see the shortfall being made up later.
ASB economist Nathaniel Keall said production data was increasingly pointing to tighter supply over the remainder of the season.
"NZ dairy production in August was down 4pc annually on the previous season, and the latest overseas data that has been soft pretty much everywhere, from Australia to Europe and North America."
Mr Penny said weather has impacted European production, with production for the first seven months of the year down 0.1pc compared to the same time a year ago.
US production and Chinese domestic production were being constrained by high feed costs and limited feed availability.
High prices forecast prices
The NZ production fall has prompted Westpac to lift its forecast farmgate milk price in NZ to $NZ8.50 a kilogram milk solids (up NZ75 cents).
"If achieved, this would be a record high, surpassing the previous record of $8.40/kg set back in 2013/14," Mr Penny said.
"We do add a note of caution though.
"At $8.50/kg we believe that the milk price is getting towards the upper limit of what Fonterra can pay."
ASB is also confident in its current $NZ8.20/kg MS forecast price in NZ, despite concerns about global economic growth.
"Recent weeks have seen a lot of column inches about the 'wall of worry' that will derail global growth - stalled vaccination progress in some jurisdictions, rising energy prices, the withdrawal of stimulus and the woes of the Chinese property giant Evergrande," Mr Keall said.
"Still, global growth forecasts remain positive and the experience of COVID tells us that dairy's status as a staple food keeps prices supported, even in times of volatility.
"The growing share of south-east Asian buyers at auction of late is also a welcome bit of diversification too."
Australian production falls
Australian milk production has followed a similar pattern to NZ on the back of wet and cold conditions in much of the country.
Nationally production was down 3.6pc for August and for the season-to-date.
Tasmania led the decline, down 12.5pc for August and 10.3pc season-to-date.
Victorian production was also hit hard with western Victoria down 7.1pc for the month and 5.3pc season-to date, while Gippsland was down 2.3pc for August and 4.3pc season-to-date and northern Victoria was down 2.5pc for August and 3.1pc season-to-date.
WA down 5.5pc for August and 4.8pc season-to-date and SA down 4.6pc for August and 4.1pc season-to-date also followed the broader trend.
NSW was the only state to record an increase, up 3.7pc for August and 2.8pc season-to-date.
Queensland recorded a smaller decline, down 0.4pc for the month and 1.6pc season-to-date.
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Carlene Dowie
Carlene Dowie is the editor of the Australian Dairyfarmer magazine and has more than 30 years' experience as a rural journalist.
Carlene Dowie is the editor of the Australian Dairyfarmer magazine and has more than 30 years' experience as a rural journalist.
