Fonterra gave weight to ideas that New Zealand's milk production is falling sharply in the closing months of 2012-13, by warning of a fall-off in its own collections – as it forecast higher prices ahead.

The Auckland-based group, the world's biggest dairy exporter, said that dry weather, particularly in North Island, in mid-December and January had "resulted in a slowdown in milk supply growth".

Theo Spierings, the Fonterra chief executive, said:  "We had a strong start to the season and milk collection volumes were running 6% ahead of last season on a year-to-date basis.

 "However, the dry conditions mean we are currently forecasting total milk collection volumes to finish approximately 1% ahead for the full season."

Price impact

The comments represent some of the most firm evidence yet of of a fall-off in New Zealand milk production – speculation which has helped lift dairy prices at Fonterra's GlobalDairyTrade auctions to a 19-month high.

On Monday, Commonwealth Bank of Australia noted that "New Zealand milk deliveries in the first half of 2013 are at risk because of dry conditions", with North Island receiving less than half normal January rainfall.

"The sharp rise in Fonterra auction prices over the past month, particularly for deferred deliveries, is indicative of expected tightness in future supplies."

Fonterra itself forecast that prices, up 5% in February at GlobalDairyTrade, had further still to rise.

"Global dairy prices are likely to move higher in the second half of the season [2012-13]," the co-operative said.

Farmgate prices

However, Fonterra declined to raise, from NZ$5.50 per kilogramme of milk solids, its estimate for the milk price it will pay its farmers over 2012-13, a forecast reflecting the strength of the New Zealand dollar.

"If there was a further significant strengthening of the New Zealand dollar against the US dollar then this may adversely impact on the forecast farmgate milk price," the group said.

Milk production data from industry group Dcanz for the five seven months of 2012-13, to the end of December, show output running 7% higher than a year before, at 12.4m tonnes.

New Zealand's milk output has not shown a year-on-year decline since December 2010, boosted by industry expansion, in part at the expense of sheep farms, and by – until recently - largely benign weather conditions.