After surging a combined 21% over the last two auctions, overall prices posted a modest 1.1% gain this week.
The results were mixed across products, with a small drop in whole milk powder prices but sizeable gains for skim milk powder, butter and cheese.
While Fonterra recently held its farm-gate milk price forecast at $4.70 for 2014-15, both ASB and Westpac economists were still picking it would end the season at $5.
Dairy markets had now taken stock of the weaker New Zealand production outlook.
The drought and low milk price had combined to ''put the brakes'' on production.
Prices had responded quickly as dairy markets remained very sensitive to changes in that outlook, ASB rural economist Nathan Penny said.
He expected a period of price stability at around current levels, with a hint of a lift.
Prices did tend to trend upwards at this time of year as the New Zealand season wound down.
However, additional price strength would require an improvement in dairy demand on top of the now tighter dairy supply and the ASB did not expect to see that until the second half of the year.
Demand was sluggish and many buyers were well stocked, but indications were that the situation would improve.
In particular, lower energy prices and interest rates in China should boost disposable incomes in that country and, in turn, demand, Mr Penny said.
It was interesting that, at this week's auction, Fonterra had lifted its forecast annual auction supply by 1.7% and volumes sold were more than the co-operative indicated at the previous auction.
''In other words, the strong price gains look to have given Fonterra confidence to reintroduce some product back into the market, which contrasts with the general steady reductions in auction volumes over the second half of 2014 and early 2015,'' he said.
In late January, Fonterra advised it expected full-season milk collection to be 3.3% lower than the previous season.
While production was on track to be down, Westpac suspected the impact could be less severe than Fonterra had signalled, senior economist Michael Gordon said.
To meet Fonterra's full-year forecast, production for the remainder of the season would have to fall to around the levels seen in the latter part of the 2012-13 season.
Given dairy cow numbers had increased since then, that forecast would imply an even bigger hit to per-cow production than during the drought in early 2013, which was described as the most severe in decades.
''That looks to be a bit of a stretch based on the current run rate,'' Mr Gordon said.
