Dairy prices lifted modestly in this week's GlobalDairyTrade auction, breaking a run of three consecutive falls.
Overall prices posted a 3.6% rise, broadly in line with expectations. Whole milk powder lifted 5.3% and skim milk powder rose 3.2%.
Westpac senior economist Anne Boniface said the auction result left the bank comfortable with its farmgate milk price forecast of $4.50 for the current season, while ASB was sticking with its $4.60 forecast.
ASB rural economist Nathan Penny said prices were still ''out of whack'' with dairy fundamentals, despite the auction price rise.
New Zealand production was down 3.3% in the season to October and it was expected to fall 6% for the season as a whole compared with last season.
The market assumption that other producers, like the European Union, would pick up New Zealand's slack was misplaced. Lost New Zealand exports were too big to cover, Mr Penny said.
The market was factoring in some milk powder scarceness later in the season, with prices of later-dated whole milk powder contracts about $250 MT higher than near-dated ones.
A price correction might be gradual and, in particular, the bank would be watching for any pick-up in China demand.
October data hinted at improved demand but November's data would provide a more definitive answer, he said.
Ms Boniface said Westpac believed Chinese consumer demand could remain muted in the year ahead with the Chinese economy forecast to slow further in 2016.
Meanwhile, a slowdown in Chinese demand for live dairy heifers has New Zealand exporters and traders questioning if the ''boom period'' is over, a report from Rabobank says.
Structural changes in China's dairy industry had dampened demand, with volumes and prices expected to remain well below 2014 levels over the medium term, report author and senior dairy analyst Michael Harvey said.
Last year, New Zealand's exports of dairy heifers hit near-record levels with China accounting for nearly all of them.
But trade volumes to China had fallen sharply throughout this year and prices had also taken a hit.
China's dairy sector was becoming increasingly self-sufficient in raising heifers, aided by improvements in fertility rates and herd management practices, reducing the need to replenish herds through importing heifers, Mr Harvey said.
It was important not to neglect China, which would still remain a major destination for New Zealand dairy heifers with potential for future spikes in demand, but also ensure there were channels in place to supply alternative markets.
New Zealand was well positioned to trade heifers with South East Asia, although trade with Indonesia, Sri Lanka, Pakistan, Malaysia and Vietnam, might require adjustments to breeding and sourcing strategies, and a particular focus on sustainability and animal welfare.
