Cotton mills aggrieved at the 21% jump in prices of the fibre this year should spare a thought for dairy buyers.

Prices at GlobalDairyTrade, the benchmark auction of physical dairy products, soared 14.8% on Tuesday – posting a five-year high and taking their gain so far in 2013 to 38%, making them one of the top-performing assets.

They have handsomely beaten cotton, or indeed natural gas, the second-best performing of the major listed commodities with a 15% rise.

Dairy has also outstripped the Dow Jones Industrial Average, up 10%, and the 20% jump in Tokyo shares (which for foreign investors has been offset in part by the yen weakness which has fuelled it).

Highest since 2007

The gain at GlobalDairyTrade - twice-monthly auctions run by New Zealand's Fonterra, the biggest dairy exporter – took prices to their highest since December 2007.

The jump reflected concerns over the impact of in New Zealand, the top dairy exporting country, of drought which has been billed as the most widespread in 30 years, and which could cost the country's economy NZ$2bn.

The whole of North Island was on Friday declared a drought zone.

While statistics revealed New Zealand milk output continuing to grow in January, extending a record of unbroken year-on-year output in monthly data stretching back to 2010, production is expected to show a sharp drop-off in February thanks to the decline in pasture, and expense of alternative feed.

'Drought has increased severely'

"Since early February the drought has increased severely and the area has expanded much further south," analysts at consultancy Agrifax said.

"Over the past month pasture growth rates have virtually been nil."

While New Zealand did receive widespread rain at the weekend, "the quantities that have fallen so far have been very small and will do little to revive pastures in the drought-struck region", Agrifax said.

And even if pastures do recover, milk output will take time to recover, with farmers having culled many animals to save on feed - dairy cow slaughter rates so far in 2012-13 are 45% above the five-year average - and with concerns over the impact of drought on conception rates potentially hampering efforts to rebuild herds next season.

'Market uncertainty'

The drought has come at a time when "people may not have had enough coverage" of dairy products, Dave Kurzawski, senior broker at FCStone's Chicago-based dairy division, told Agrimoney.com.

"It wasn't only the drought that has concerned people, but the uncertainty over what it means for dairy output, and how much production will decline at the end of what has been a record season.

"That has caused them to reassess what they have covered or not covered."

Meanwhile, prospects for the northern hemisphere, which is approaching a seasonal ramp-up in output, are weak too, with co-operative FrieslandCampina last week forecasting a decline in Western European output in the first half of the year, while the US foresees only a small rise in production in 2013.

"There are still many farms in the western US grappling with drought," Mr Kurzawski said.

'Voracious demand'

Tuesday's rally in GlobalDairyTrade prices - which have now rebounded 70% from a mid-July low - was led by whole milk powder, which soared 21% to an average of $5,116 a tonne, the highest on records going back to 1999.

Fonterra halved to 5,500 tonnes the volume of product on offer, a cut which comes at a time of strong demand from China, a major trading partner.

"Chinese demand for whole milk powder is voracious, and New Zealand has supplied nearly all of Chinese WMP imports," the US-based Milk Producers Council said.

Prices of anhydrous milk far were also particularly strong, soaring 16.3%.