"Significant" rain is needed in New Zealand within the next fortnight to protect the last remnant of milk production growth in the world's top diary exporting country this season, Rabobank has warned.

The caution came Fonterra, the New Zealand milk co-operative, lifted its hopes for payouts to its member farmers, flagging a "continuation of high international dairy prices".

Growth in New Zealand's milk output, which began 2010-11 at 5%, had slipped back to 2% for the season up to the end of November, hampered by a cold spring, Rabobank said.

However, dry weather, which prompted the country on Wednesday to declare part of North Island a drought zone, "has seen current milk flows now falling behind in most regions", with Canterbury, where land is irrigated, a notable exception.

"Significant rain is now required prior to Christmas to avoid a sharp and early tailing off of milk flows," the bank said.

'Solid demand' 

New Zealand's drought contrasts with the heavy rains which are proving a mixed blessing to Australia's eastern dairy farms.  While cutting Australia's milk output by 1.9% in September, the spate of quality downgrades to milling wheat crops caused by the rainfall will prompt a "surge" in supplies of feed grain.

And the drought was acknowledged by Fonterra in a market update in which it lifted by NZ$0.30 to NZ$6.90 per kilogramme of milk solids its estimate of its payout to members in 2010-11.

"Milk production in the North Island is declining and we know farmers in some regions are struggling," Sir Henry van der Heyden, the Fonterra chairman, said.

The co-operative attributed its raised payout forecast to a market which had "generally held up better than initially expected", with growth in supply from northern hemisphere producers being met by "solid demand".

Prices at Fonterra's latest GlobalDairyTrade internet auction, held last week, were up 1.6% from the previous event held two weeks before, led by whole milk powder values.

Export surge 

Indeed, data for October showed New Zealand whole milk powder exports jumping 37%, with China alone buying 35,000 tonnes, one-third of shipments.

"The upward bias evident in international [dairy] pricing... tells us much about the ongoing strength of import buying, with China and Russia continuing to lead from the front," Rabobank said.

China's demand for dairy products is being attributed largely to growing affluence, at a time when melamine contamination continues to lower faith in domestic supplies.

Russia's needs for imports have been increased by its summer drought, which depressed domestic milk production.