A strong result in this week's GlobalDairyTrade auction has been described as a ''double-edged sword'', coming off the back of dry weather and rapidly slowing milk production growth.
Overall dairy prices lifted 9.4% with whole milk powder, a key product, surging 19.2% and skim milk powder up 6.7%. Overall prices have lifted 15.9% over the past four auctions.
The latest result removed much of the down-side risk to ASB's forecast milk price of $4.70 - which was also Fonterra's current forecast price - for the current season, rural economist Nathan Penny said.
But given slowing production because of dry conditions it was a ''double-edged sword'' and further price rises, or falls in the New Zealand dollar, were still necessary over the remainder of the season, he said.
Generally, farmers had begun to respond to lower global farm-gate milk prices by slowing their production, which had been prompted further by dry conditions.
Demand was expected to firm in the second half of 2015, particularly as the Chinese economy perked up, aided by lower energy prices, Mr Penny said.
BNZ economist Doug Steel believed the big price bounce primarily stemmed from slowing global milk supply growth among major exporters, including the EU, United States, Australia and New Zealand.
Some of that was a result of low prices discouraging production generally, some was probably caused by regulations (EU) and some, such as in the case of New Zealand and Australia, was because of the dry weather.
Uncertainty about how the New Zealand season in particular would finish might have also encouraged some buying, Mr Steel said.
This week's big price gains were likely to result in many lifting their 2015 views for dairy prices and it was ''certainly encouraging''.
''We see dairy prices higher in 2015, with a slowdown in supply an important factor and rising unsatisfied bidders a near-term positive signal.''
But the bank was also conscious of some challenges this year, including the ongoing impact of the Russian ban on some Western food products and the ''strife'' it was causing in Europe; questions around Chinese supply and demand; lower international grain prices; and the removal of EU production quotas.
Westpac economist Michael Gordon said this year's dry conditions were shaping up to be one of the one of the harshest in recent history in terms of milk production.
Last week, Fonterra announced its full-season milk collection was likely to be down 3.3% on the previous yearThe short but severe drought in 2010 led to a 2% drop in full-season production, while the prolonged drought of 2007-08 resulted in a 4.3% drop, Mr Gordon said.
Westpac has raised its forecast milk price for the current season from $4.80 to $5, but that was ''conservative'' and was highly subject to how prices performed over the next few auctions.
It has also lifted its forecast milk price for next season from $6.20 to $6.40, which puts it slightly above the average of the last decade.
