Global dairy prices bounced higher this week but there is still a long road ahead in terms of price recovery.
As predicted, international dairy prices lifted 10.9% in the GlobalDairyTrade auction, the second consecutive increase after a 10-auction falling streak.
Whole-milk powder prices posted another strong lift, up 12.1%, while skim-milk powder recorded an 11.7% rise.
But Westpac senior economist Michael Gordon was hesitant about assuming further substantial price gains in coming auctions, as the milk supply situation remained unclear.
While the global market had so far reacted strongly to Fonterra's forecast of a 1.5% drop in milk collection this season, farmers would have to do their part over the coming months for that forecast to be fulfilled, Mr Gordon said.
Other major dairy-exporting nations also needed to join in, although somewhat dated figures - up to June - showed an acceleration in northern hemisphere milk production, not a slowdown, he said.
ASB rural economist Nathan Penny said farmers had culled aggressively this year as supplementary feed was uneconomic for most, and there was a ''high risk'' the El Nino pattern would cause a drought this summer.
On that basis, the bank forecasted this season's production to fall 1% compared with last season. But markets were yet to be convinced New Zealand production was slowing, he said.
''They prefer cold hard data to forecasts, and data to confirm weak production may not be available for several months.''
Robbie Turner, head of European markets for Chicago-based Rice Dairy International, said the gain in prices suggested the Chinese had returned.
Prices were coming off a low base, and still had a long way to go to measure up to Fonterra's farm-gate milk-price forecast.
''We have touched the bottom. We have had our bounce, but it's too early to turn around and become bullish,'' Mr Turner said.
Dairy prices led the declines in the ANZ commodity price index for August, falling 10.1% month on month to their low-est level since mid-2004. Skim-milk and whole-milk powder prices led the declines, falling 16% and 11.2% respectively.
International prices for butter, cheese and casein also declined, but the recent lift in dairy prices suggested the ''worst may be behind us'', ANZ chief economist Cameron Bagrie said.
The overall index dropped 5.2%, the fifth consecutive fall, with prices falling across the majority of other major sectors. - Additional reporting The New Zealand Herald
