DAIRY prices started the year on a 12-month high and are expected to continue to rise in the next six months, according to analysts.
The average price at the first online GlobalDairyTrade auction this year was 2 per cent higher - the strongest since mid-January last year - than the previous sale, held on December 19.
The GDT website shows the average of $US3357 a tonne at last week's sale was boosted by strong prices for skim milk powder, which rose 4.7 per cent.
The price for whole milk powder rose 1.6 per cent to $3199/tonne but cheddar cheese fell 1.9 per cent to $3458/tonne.
Rabobank senior dairy analyst Michael Harvey said these rates reinforced forecasts of better prices, although the recovery was slower than previously expected.
"The 2 per cent higher GlobalDairyTrade auction result showed that it's heading in the right direction," he said.
Mr Harvey said this was likely to continue, based on a combination of tighter supplies and "healthy enough" demand.
The supply of milk in the US had fallen as a result of lower prices and higher feed costs because of the impact of drought on the corn crop.
And milk production was contracting in Europe for similar reasons, exacerbated in some areas by unfavorable weather.
Production in New Zealand, where pasture growth was lower than usual last month, could be hampered by flooding last week in the South Island, which damaged pasture.
Mr Harvey said the continuing strength of the Australian dollar - which almost broke US105 cents yesterday morning - meant the nation's dairy farmers would only see the full benefit of higher milk prices through improvements in the commodity market.
"It might not be until next year's milk price that you see it come through." Processor Murray Goulburn announced two step-ups for 2012-13, in August and October, when it raised its full-year forecast to $4.80-$5/kg of milk solids. Fonterra announced a step-up in November. Milk supply general manager Heather Stacy said Fonterra's full-year price outlook remained at $4.80-$5 per kilogram of milk solids.