Dairy prices rose to a 19-month high at GlobalDairyTrade, amid growing concerns that dry weather is prompting a sharp slowdown in milk production in New Zealand, the top exporting country.

Prices at the auction, which is run by Auckland-based Fonterra, the top dairy exporting company, rose 3.1% from the last event, two weeks ago, to the strongest since July 2011.

The rise was led by whole milk powder, which forms the bulk of volumes sold, and of which values soared by 5.8% to a two-year high.

New Zealand is a particularly strong exporter of whole milk powder, with its shipments set to hit 1.3m tonnes this year – three times as much as those from the second-ranked European Union - on US Department of Agriculture estimates.

Signally, prices of whole milk powder were particularly strong for further-ahead contracts, soaring 8.0% for delivery in July, around the low point of the New Zealand production season.

'Remains dry'

Data out overnight from industry group Dcanz showed that New Zealand's milk production continued to rise in December, hitting 2.60m tonnes, up 6.7% year on year.

However, Agrifax, the New Zealand-based consultancy, flagged that the country's North Island "remains dry", with the "majority of the island at least 20mm drier than normal for this time of year".

"From a milk production perspective, Waikato is the region where the impact will likely be seen the most, with February bringing less than 50% of the normal amount of rainfall to most parts.

"If these conditions persist it will likely see farmers dropping back to once-a-day milking and/or drying off earlier than they would prefer."

'Prices have generally been increasing'

Abroad, the UK-based DairyCo bureau flagged that "New Zealand has continued to suffer with drier-than-normal weather which has mainly affected the North Island", adding that output from other regions was depressed too.

"With weather and feed costs continuing to impact milk production global supplies remain tight. As a result prices have generally been increasing or stable," DairyCo said.

Prices of anhydrous milk fat and butter milk powder also rose particularly strongly at the GlobalDairyTrade event, rising 4%.

Last week, Rabobank cautioned that dairy prices would "continue to trend" upwards as importers' appetites increase at a time of notable decline in output from New Zealand.

Volume cutbacks

The rise in prices again coincided with falling volumes on offer by Fonterra, which runs the auction and provides the majority of product sold through it.

The total volume on offer equated to 33,467 tonnes, a drop of 12.6% on the previous auction.

Fonterra recently announced plans to cut the volume of milk products sold in GlobalDairyTrade auctions by around 3% to 850,000 tonnes.

The detection of dicyandiamide (DCD) in New Zealand dairy products has also created concerns, prompting officials to address the need for testing regimes and regulations worldwide.