Conditions for a new dairy price cycle have begun to emerge, with the key implication initially being higher prices, ASB senior rural economist Nathan Penny says.
Global dairy supply was tightening and there was little backstop in terms of stocks.
ASB saw upside to its 2018-19 milk price forecast of $6.25 and has set its 2019-20 forecast at a bullish $7.
Prices at this week's GlobalDairyTrade auction increased for the sixth consecutive time, although less than signalled by futures markets, and the overall price index was up 0.9 per cent.
Since spring 2016, global prices had traded within a relatively narrow range.
The range for whole milk powder prices, for example, had been around $US1000 ($NZ1455) per metric tonne, Penny said.
That relative price calm followed the other extreme; in the three or so years prior, the range was a massive $US3700 ($NZ5386). That was global dairy's ''super cycle'', he said.
He expected the new price cycle would be more moderate than the super cycle, but more amplified than the recent price calm.
The conditions for the start of a new cycle had begun to emerge and essentially boiled down to supply growth increasingly lagging behind demand growth, and there was little prospect of a catch-up in the short term.
Over 2018, very strong New Zealand production had offset supply softness in the EU, United States and Australia. EU and US supply were both set to end 2018 up a modest 1 per cent or so on 2017, and more of the same was expected over 2019.
Meanwhile, Australian production was down 5 per cent on a season to December basis. In contrast, New Zealand supply was 5.6 per cent ahead of last season on a season to January basis.
Penny expected that was ''as good as it gets'' for New Zealand supply.
Growing conditions had been very favourable over the first eight months of the season, but that was unlikely to last.
Already, very hot weather had started to ''put the brakes on'' production over February.
In addition, the country's dairy herd was smaller than in previous seasons.