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Dairy prices continued to accelerate in the latest GlobalDairyTrade auction, as dry conditions in the North Island squeeze milk production.
Overall, prices rose 3.1% on a trade-weighted basis this week, building on the buoyant start to 2013 in the first three auctions of the year.
The trade-weighted dairy price index has risen in eight of the past nine auctions and, in the four auctions to start 2013, prices have lifted 9%.
Whole milk powder prices led the way in this week's auction, increasing 5.8%. Whole milk powder was now trading at a premium to skim milk powder for the first time since October.
Anhydrous milk fat and butter milk powder also posted solid gains, both rising about 4%.
Dry weather in the North Island was slowing milk production faster than normal for this time of year, particularly in the Waikato and Taranaki, Westpac economist Nathan Penny said.
South Island production was faring much better, with Canterbury and Southland continuing to post solid production gains compared to a year ago.
Milk production for season to date, as at December 2012, was up about 7% on the previous season. However, more recent indicators showed that falling in January and February, Mr Penny said.
Overall, for the season ending May 2013, he expected annual production growth to be flat or up to 1%.
He expected prices to continue to rise over the first half of the year, with the tightening supply conditions in New Zealand, coupled with rising Asian growth, particularly in China, providing upward pressure.
Primary Industries Minister Nathan Guy has welcomed a new accord for the dairy industry, aimed at lifting environmental performance on dairy farms.
He described the draft Sustainable Dairying: Water Accord as ''a real step forward'' which showed the industry was serious about improving its practices.
It was more comprehensive than the Clean Streams Accord, which it would replace, as it would cover all dairy farmers, not just Fonterra suppliers, he said.
The Accord aimed to have 100% exclusion of dairy cattle from significant waterways by 2017, for farms to manage nitrogen levels, and had strict conditions for new dairy farm conversions.
It will now be taken to farmers for consultation and formally launched in time for the 2013-14 season.