Dairy prices rose again at GlobalDairyTrade auction, taking their gain in two months to more than 20%, as growing doubts over milk production spurred orders from buyers back into restocking mode.

Dairy prices, as measured by a GlobalDairyTrade index, increased by 2.4%, as a gain of 4.7% in skim milk powder values offset declines in the milk fat and protein segments.

Higher prices of whole milk powder, which accounts for more than half of volumes sold, also supported the index.

The overall rise took to 21% the rebound in dairy values from a mid-July low, and lifted the index to a seven-month high.

Values of skim milk powder - an increasingly important Chinese import, given its demand for the product in infant formula but limited domestic production capacity – have soared 24% in the last two months.

Production doubts

The price recovery comes against a background of growing uncertainty over milk production growth, following the bumper 2011-12 season which saw output increases from a number of leading dairy exporting countries.

"Lower milk per cow is expected in the third and fourth quarters of this year due to high summer temperatures that likely adversely affected milk yields as well as tight alfalfa supplies," US Department of Agriculture analyst Rachel Johnson said on Tuesday.

For 2013, "the dairy cow slaughter rate and the prices of replacement heifers suggest a continued gradual decline in the dairy herd".

Last week, analysts at the UK's DairyCo bureau noted "indications that US milk solid levels as well as yield per cow have been affected by hot dry conditions, while poor profitability and feed availability is thought to be leading to higher culling rates".

Weather setbacks

Meanwhile, in Europe, while milk output has been strong in France and Denmark, cool weather has hurt German output, by limiting pasture growth – which in southern countries has been curtailed by dry and hot conditions.

In Ireland, which is gearing up to lift output once quotas are removed in three years' time, "there have been steeper-than-average declines" in Ireland "due to much-wetter-than-average weather", DairyCo said.

And, importantly, in New Zealand, pasture growth conditions have proved mixed of late, thanks to cool weather, as the country ramps up to its seasonal peak in output in October.

"Temperatures across the lower North Island and parts of the South Island plummeted in the middle of last week following a snowfall," analysts at New Zealand-based Agrifax said.

'Lowest prices behind us'

Rabobank analysts said that the "wave of product availability has now passed and milk production growth rates are easing – in some cases rapidly, as weather events and the reality of lower milk prices and higher feed costs takes hold for most producers.

"Buying interest has been sparked over recent weeks as it has become apparent that the market has moved through the trough of the current price cycle, and that the risks surrounding future product availability have generally increased."

Indeed, buyers will be "looking to secure product while prices remain favourable, and to cover their future requirements as far as possible in case supply availability deteriorates further".