Milk prices surged by 25% at Fonterra's latest auction, breaking a three-month losing streak and defying widespread forecasts of a market downturn.

The price of the near-term whole milk powder contract at the co-operative's globalDairyTrade auction rebounded $707 to $3,624 a tonne, recovering more than half losses notched up in a declining streak since April.

The result appeared to "indicate a firmer tone has returned to the market over the last month", Paul Grave, the globalDairyTrade manager, said.

And it defied a series of warnings, from banks such as Rabobank and companies such as Irish-based dairy group Glanbia, that prices were likely to soften in  late 2010, as southern hemisphere production enjoys the so-called "spring flush", limited economic prospects cap demand.

'Challenging autumn'

Arla, the Danish dairy co-operative, on Wednesday warned that it faced a "challenging autumn", largely because of weaker milk price prospects.

"The first half of the year was characterised by higher prices in international commodity markets where Arla sells butter, cheese and powder to industrial customers," the group said, unveiling profits for the six months of DKK697m, more than double the DKK263m a year before.

"However, it is not anticipated that these high prices will continue for the remainder of the year."

'More visibility' 

Other products lagged whole milk powder in the Fonterra auction, with prices of skimmed milk powder rising by 15.7%, for November delivery, and near-term anhydrous milk fat, a dairy byproduct used by bakers and ice cream makers, appreciating by 5.5%.

The co-operative will from this month hold two auctions a month, with the next being held on September 15.

"Having two events a month will provide a lot more visibility when it comes to assessing the market direction," Mr Grave said.

The auction result came as Fonterra also revealed it had hired First NZ Capital-Credit Suisse, Deutsche Bank-Crags Investment Partners and exchange operator NZX to advise it on the next stage of its structural reforms, which will allow its 10,500 members to trade shares.

"Trading is not expected to begin until late in 2011 at the earliest," Jonathan Mason, the Fonterra chief financial officer, said.