Westpac has revised its 2013-14 milk price forecast up 90c to $8.30kg ms, saying world milk prices ''continue to defy gravity''.
The bank had expected the New Zealand supply rebound and China slowdown would bring prices down, economist Nathan Penny said.
The reduction in auction volumes offered by Fonterra has had a major impact. The co-operative expected the volume of whole milk powder offered in the GlobalDairyTrade auctions this season would fall by 20%, compared with last season, Mr Penny said.
The first-round impact of reduced auction volumes had been apparent with buyers supporting prices at what were very high levels. After falling to about $4600 per metric tonne in June, weighted average whole milk powder prices had held above $5000 per metric tonne over the past four auctions.
The second-round impact was ''really interesting''. As Fonterra moved into retail markets such as the market for Chinese infant formula, increasing competition, retail prices should fall, he said.
The recent Chinese pricing inquiry had already forced some reduction in retail prices. Lower retail prices would increase the quantity of milk consumers demanded.
In turn, those higher quantities would put upward pressure on wholesale prices, such as GDT auction prices. Breaking down retailers' pricing power benefited both consumers and wholesalers, Mr Penny said.
He saw world prices holding at ''very high levels'' for another couple of months before the rebound in New Zealand milk supply kicked in.
''Back in July we had anticipated a 20% fall in whole milk prices by the end of the year. Now we expect a fall closer to 10%.''
Prices dropped 1.1% in this week's GlobalDairyTrade auction. The biggest fall was in milk protein concentrate, down 3.8%, followed by cheddar (down 3.2%) and rennet casein (down 2.1%), while anhydrous milk fat lifted 3.1% and butter was up 2.7%.
Synlait Milk has followed in the footsteps of Fonterra and Westland Milk Products and bumped up its forecast milk price.
As well as lifting its forecast from $7kg ms to $8kg ms, the Mid-Canterbury milk processor has also lifted its advance rates for the season from $4.50 to $5.
The company will process more milk than forecast this season following a decision to take a ''significant'' allocation of milk under the Dairy Industry Restructuring Act in the year to July 2014.
The decision was made after further planning and a small investment in plant and equipment resulted in an opportunity to increase production capacity of its ingredients products without impacting the forecast infant formula and nutritional products business, the company said.
While the total volume of milk expected to be taken was still to be finalised, an allocation of up to 50 million litres was available.
Higher-than-forecast revenue from high commodity prices and additional processing volumes meant the company remained confident of achieving its forecast financial result, managing director John Penno said.
