Recent price increases seen for dairy commodities are likely to slow, according to New Zealand bank ASB.
In a recent analysis of the dairy market it said that sentiment has turned and that prices have mostly regained the losses incurred over July and August.
Farmers have culled aggressively so far this year, supplementary feed is uneconomic for most, and there is high risk that El Nino causes a drought this summer, ASB said.
However, over the next few months, ASB said it expects price increases to slow.
Markets are yet to be convinced that New Zealand production is slowing and that markets prefer cold hard data to forecasts, and data to confirm weak production may not be available for several months, it said.
At the latest Fonterra Global Dairy Trade (GDT) auction, prices rose 10.9% for the second time in a row.
ASB said that the lift was broadly in line with expectations and as indicated by dairy futures prices.
For now, available Kiwi milk production data are still strong and June month production was 11.7% higher than June 2014, it said.
While June milk production accounts for less than 1% of a season's production, June data is all the market has to hang its hat on, according to ASB.
It said that there won't be meaningful milk production data until the August data becomes available (August accounts for 6% of the season’s production).
ASB said that this auction lift reinforces its milk price forecast of $4.50/kg by season end. However, the uplift from the change in sentiment is nearing its limit - further material price lifts from here require weak or even better, falling, New Zealand production over this season.