A slowdown in milk supply in Europe and New Zealand has led to a sudden rebound in dairy market sentiment.

Wednesday’s price quotes from the Dutch Dairy Board refected the improved mood, with whole milk powder and skim milk powder strengthening by 7% on last week. Butter was 3% higher at €3,220/tonne; it has risen by 18% since the start of the year.

Meanwhile, the Irish Dairy Board’s Purchase Price Index (PPI) for January was 93.1, a drop of just 1.3% from December.

While it is the lowest PPI since July 2012, it is better than had been expected last November when the IDB issued their price forecast for 2015. At that time, they had predicted a PPI of just 86 for January.

January’s PPI does not tell the full story, as there has been a significant lift in market tone since Fonterra’s January 29 announcement that 2014/2015 milk solids output would be down 3.3%.

Furthermore, early season deliveries in Europe are back on last season as farmers strive to avoid potentially massive superlevy bills.

A PPI of 93.1 means that dairy product returns for January were 6.9% lower than the base year, 2010. For farmers, January’s PPI points to gross returns of 32.44c/litre. After processing costs of 6c/litre, this would mean a farm gate return of 26.5c/litre (28 c/litre including VAT).

While current prices are ahead of this level, Irish processors are now selling into a market where sentiment – and prices – have improved very significantly.

IFA dairy committee chairman Sean O’Leary said that “co-ops can and must hold their prices for the next two months”.

The competitiveness of European dairy exports has been boosted in recent weeks by the 17% weakening of the euro against the dollar over the past six months.

“European and Irish processors are achieving gains at the currency level. This means that Irish farmers will be justifiably demanding a higher price in 2015 than had been previously anticipated,” said ICMSA’s Pat McCormack.