Buyers in no hurry to commit further

Key drivers of this lift are the a deteriorating milk production outlook for New Zealand and reduced GDT offer volumes, but the speculation is that these alone may be insufficient for a sustained recovery.

Hence it was not totally unexpected when the GDT Price Index fell slightly in late October, signalling the possible end of additional demand brought on by the bottoming of the price cycle.

Ultimately needed to see prices meet or exceed 'average' levels of recent years is market rebalancing -- elusive for much of the past 18 months as sluggish demand has met persistent supply growth from the biggest exporters.

The removal of milk quotas and a reduction in sales opportunities because of the Russian import embargo have placed Europe at the centre of the oversupply facing dairy markets.

Although European milk production has not grown as rapidly as some had expected in the post-quota period, it has been sufficient to weigh on global markets. Europe's growth of 1.1% (976 million litres to July 2015) represented roughly half the total increase from the world's four major exporting regions for that period.

With a weaker currency and mountains of product to sell, European exporters have competed aggressively on price in traditionally Oceania-dominated demand regions such as Southeast Asia.

There has been no wholesale slowdown in production growth in Europe but Oceania is a different story. Australian production is up 3.1% season-to-date, although dry conditions are causing growth to slow.

Of particular note at the regional level, warnings of a sharp contraction in NZ's milk intakes are beginning to be borne out. September numbers from the Dairy Companies Association of NZ reveal a 7.5% fall, relative to September 2014.

Fonterra has reported a milk flow peak about 4% lower than last season, with some year-on-year recovery evident during October. High culling partly explains the lower production; the weather during the spring peak has so far been favourable.

A full season decline of up to 10% has been flagged by industry observers; Fonterra is forecasting its own full season intakes will be 5% below last year.

In the US a milk production response is evident also, albeit less dramatic. Growth is at its slowest since December 2013: September output was 0.4% higher than the same time last year (7.5 billion litres), compared to a 1.4% increase year-to-date.

Growth has come from a strong domestic market helping to insulate the US dairy industry from global price movements. This and a stronger US dollar caused exports to fall sharply. But rising global markets have brought domestic and international prices closer together, hence US export offers are increasing.

Consequently, while Oceania supply-side issues are beginning to pressure the prices, this is being mitigated by European and increasingly US competition, with
the continuation of northern hemisphere production growth likely to provide some comfort to buyers who don't specifically require Oceania product.

While prices seem to be finding support at current levels, further short term upside appears limited and a period of range-bound trading around the current level is likely.

Production trends during the southern hemisphere spring peak will help provide further direction, but a supply response in the northern hemisphere and a broader demand recovery are what the market needs. Expectations are for that to happen mid 2016 at the earliest.

• John Droppert and Amy Bellhouse are Dairy Australia industry analysts.