Ideas of a revival in dairy markets gained ground after prices at GlobalDairyTrade auction jumped to their highest in six months, led by a 15.8% jump in butter milk values.

Prices, as measured by a GlobalDairyTrade index, rose by 6.0%, taking to 23% their recovery from a mid-May low, when values fell to their lowest in nearly three years.

The rise came despite a decision by Fonterra, the New Zealand dairy giant which runs the twice-monthly auctions, to raise by 8,000 tonnes, to 38,000 tonnes, the volume on offer of whole milk powder, which accounts for the bulk of product at the events.

Whole milk powder prices rose by 4.3%, lagging other products, including skim milk powder, for which buyers paid 7.5% more than last time, and continuing a recent trend.

Prices of whole milk powder, of which Fonterra has increased output to feed growing Chinese demand, have rebounded by 16.3% from May's nadir, compared with a 30% recovery in skim milk powder values.

'Trending upwards'

The auction result represented the latest in a series of upbeat signals for dairy producers, notably on Monday, when Arla Foods forecast that prices are to rise "significantly", boosted by demand from emerging markets.

Separately, the UK-based DairyCo dairy bureau noted that wholesale markets were "trending upwards", with price increases "for certain products, gathering pace… with milk supplies the main concern".

"Milk production in the US and Europe has been affected by poor weather conditions and rising input costs."

"Europe continues to be plagued by poor weather and with milk prices decreasing, milk deliveries have fallen away quickly into the summer."

In the US, the ratio milk prices to feed prices, a key measure of farm profitability, fell to a record low of 1.29 in July, and showed only a small improvement last month.

'Stocks lower'

In New Zealand, the top dairy exporting country, although market forecasts "suggest a 4-5% increase in production" in the newly-started 2012-13, "product stocks are believed to be lower than in previous years", DairyCo added.

And, for European Union producers in particular, demand hopes have been raised by Moscow's entry to the World Trade Organization last month, which has meant reduced import tariffs on many products.

Dairy imports from the EU face a 14.9% tariff, compared with a previous figure of 19.8%.

"The fact that Russia will now be a member of the WTO and hence reduce tariffs on dairy imports is good news for the EU," the bureau said,

'Improvements in market returns'

New Zealand producers are yet to feel the benefit of the market recovery thanks to the strong Kiwi dollar, which Fonterra blamed for a cut last week to its forecast for payouts to farmers in 2012-13.

However, the reduction contrasted with an uplift by Australia's Murray Goulburn in its forecast for its milk price payments, to an average of Aus$4.63 per kilogramme of milk solids.

The co-operative cited "improvements in market returns", besides cost reductions, for the increase.