Dairy prices extended to nearly 30% their revival over the last six months, helped by a jump in cheddar prices, and despite talk of New Zealand farmers boosting output well beyond even last year's bumper levels.

Dairy prices at the latest GlobalDairyTrade auction rose by an average of 0.7% from the last event, two weeks ago, taking values to their highest since February.

The increase was led by a 12.4% leap in prices of cheddar, reflecting a convergence of values between the US, where cheese has traded strongly since the summer, and those of the GlobalDairyTrade, which is based in New Zealand, the top dairy exporting country.

"Demand is pretty good for cheese," Robert Chesler, vice-president at FCStone's food service division, said.

"But production has been limited in Oceania, which has tended to use milk for making powders," popular in key Asian markets, such as China, for uses such as infant formula.

'Production rising very significantly'

The rise in GlobalDairyTrade cheese price offset a slight weakening in prices of most other products, including whole milk powder, which makes up the bulk of volumes on offer, and dropped for a second successive auction.

However, even the latest decline, of 1.9%, could be "construed as bullish", given the talk of New Zealand milk output enjoying another strong season, after rising 11.1% to 19.9m tonnes in 2011-12, on industry data.

"We are hearing reports that New Zealand milk production is rising very significantly," Mr Chesler told Agrimoney.com.

Talk suggested a rise of 6-10%, "and I believe towards the upper end of that," he said, ahead of field trip to New Zealand.

Given the rise that output growth suggests to milk powder production, "with prices holding up pretty well, that suggests demand is still strong".

'Considerable genetic potential'

Strong growth in New Zealand's milk output, from largely pasture-based farms, would contrast with a downward trend in output in many northern hemisphere countries, such as the US, where producers are more dependent on feed, whose price has been elevated by the grains rally.

While European Union output rose 0.1% in the April-to-August period, growth was concentrated in Poland – at 7.2% - with the likes of Germany, the Netherlands and the UK seeing declines.

New Zealand's strong milk output reflects another season of decent weather for pasture growth, besides a switch by farmers from sheep to dairy, and herd investment.

The country's recent record of rising milk output is "testament to the considerable genetic potential of the New Zealand dairy herd that was just waiting for the right environmental conditions to be expressed", US Department of Agriculture staff in Wellington said last month.

Nonetheless, they forecast a drop in milk output in calendar 2013, the first for five years.

"The run of excellent weather conditions has to come to an end at some point, and with it the extraordinary production increases," they said.