Export dairy prices continue their hot trot with another price leap at the Global Dairy Trade auction on Tuesday night.
The GDT index was up 4.1 per cent with all commodities posting increases.
The $US4630 a tonne average price is the highest since March 2014.
Westpac senior agri economist Nathan Penny said the jump in prices built on the gains from the previous auction.
Prices were up 12pc on the start of the year, with the key whole milk powder price up 9pc.
"Taking a longer-term perspective, overall prices are around 38pc above their five-year average," he said.
Soft production worldwide - particularly in New Zealand - is driving the price surge.
"Bad weather and surging costs have hit New Zealand dairy production from all sides," Mr Penny said.
Westpac now expect NZ production to fall by 3pc compared with last season.
ANZ agricultural economist Susan Kilsby said dairy production was also relatively weak in the other major dairy-exporting countries.
Australian production to November was down 2.4pc, while milk output in the US was up just 1.4pc for 2021, which was likely to be absorbed by its domestic market.
Production across the European Union was marginally lower in 2021 than 2020 - although some countries recorded increases.
"In South America there has been a little more production from Argentina, but this has been offset by reduced output in Brazil, Uruguay and Chile, meaning the region as a whole is currently tracking behind last season," she said.
Farm costs are increasing globally - putting the brakes on any big lift in production in the short term.
Mr Penny said global feed costs had spiked again and this was expected to continue to constrain EU and US production.
Other costs, including fertiliser and fuel, were sky-high, further constraining production.
Ms Kilsby said NZ on-farm costs had also risen rapidly, due to rising compliance costs, higher interest rates and increasingly scarce and expensive labour.
"These factors are taking the shine off of the record milk price that is expected to be delivered this season," she said.
ASB economist Nat Keall said markets expected supply to remain tight for some time to come.
At Tuesday's auction, later-dated contracts traded at the highest premium, with buyers clearly concerned about securing product not just in the immediate future but into the beginning of next season.
"With demand remaining robust, the NZX futures market sees WMP holding at or above $US4000/MT out to the end of the year," Mr Keall said.
ASB has lifted it forecast NZ farmgate milk price to $NZ9.25 a kilogram milk solids.
"We open next season's farmgate milk price forecast at a lofty $NZ8.80/kgMS (albeit with a very, very, very wide margin of error at this stage in proceedings)," Mr Keall said.
"There's little doubt next season will kick things off on the front foot given the near-term direction of global dairy supply, particularly with demand still looking robust."
But Ms Kilsby warned the high prices were likely to lead to some decrease in demand for dairy products.
"Prices are now at such exceptionally high levels that they will be priced out of reach of consumers in some of the poorer nations," she said.
"Typically demand from North Africa/Middle East, and parts of South East Asia tends to ease when prices are this strong.
"Demand from China tends to be less price sensitive but any reduction in demand from this massive importer of dairy products would have a meaningful impact on the dairy markets."
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