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Moves by Fonterra and the Ministry of Primary Industries following the agrichemical scare appear to have largely assured markets that New Zealand dairy products are safe, Westpac economist Nathan Penny says.
An increase in dairy prices in this week's GlobalDairyTrade auction followed the recent announcement that small traces of a nitrate inhibitor, dicyandiamide (DCD), had been discovered in milk.
In addition to earlier reassurances that the reported levels posed no risk to food safety, Fonterra announced before the latest auction that none of the product available for the auction was manufactured during the period DCD was detected.
The surge in prices indicated demand for dairy products remained robust, Mr Penny said.
Overall, prices in the auction rose 2.4% on a trade-weighted basis, building on the buoyant start to 2013 in the first two auctions of the year.
The trade-weighted dairy price index had risen in seven of the last eight auctions. Whole milk powder and anhydrous milk fat prices led the way, increasing 5.4% and 7.2% respectively while skim milk powder recorded a more modest 0.5% rise.
The high New Zealand dollar continued to ''take some of the gloss off'' rising dairy prices, he said.
ANZ's latest Agri Focus report said dairy markets were expected to continue to strengthen in the first quarter of the year, driven predominantly by ''the supply side of the equation''.
Production of dairy commodities and stock levels had generally contracted in the northern hemisphere and export volumes coming out of both the United States and Europe were now declining. A strong start to the first half of the New Zealand milk production season had helped fill the gap in supply left by competitors.
However, production was now well past its seasonal peak and growth rates relative to the previous season were because of dry conditions in the North Island.
That was expected to result in a further contraction in global milk supplies before the seasonal lift in production in the northern hemisphere in the second quarter.
The flow of product continued to be towards China and total exports of New Zealand's main dairy products to China had doubled over the past six months, compared with the same period a year before.