International dairy product prices dropped again at latest GlobalDairyTrade (GDT) auction, showing the effects of Russian sanctions and putting renewed pressure on already lowered farmer payout forecasts.
Prices are now 42.2 per cent down from where they were this time last year.
Big falls were registered in the two key segments for New Zealand producers - whole milk powder and skim milk powder - at the auction.
At the previous auction two weeks ago, prices showed signs of stabilising but this time around the GDT price index dropped by 6.0 per cent to US$2,787 a tonne.
Whole milk powder prices fell by 4.3 per cent to an average price of US$2,673 a tonne while skim milk powder prices dropped by 9.5 per cent to US$2,600 a tonne.
ANZ said the market appeared to be struggling to digest the seasonal lift in New Zealand supply and the recent Russian sanctions on European Union dairy exports looked to be flowing through "in full force". The effect of the Russian bans was showing up in skim-milk powder, which have dropped by 26 per cent since sanctions were announced.
In times of surplus milk, Europe gravitates toward skim milk powder and butter production due to a longer shelf life compared with other products, and government support programmes.
The European Commission last week said it would open "private storage aid" for butter, skimmed milk powder and certain cheeses in order to alleviate the impact of Russian restrictions on imports of EU dairy products and to limit the negative effects on the internal market.
"So despite European supply now heading into the seasonally lower period and the European Commission announcing last week they will open Private Storage Aid until the end of the year the market seems to be anticipating high supplies," ANZ said.
ANZ said the latest price action suggested a sharply lower farm gate milk price. "Dairy farms will need to budget accordingly with a material gap between current spot prices and Fonterra's current $6/kg forecast," the bank said.
"We would suggest toward the bottom of our current forecast band of mid-to-high $5's/kg. But even this looks optimistic given last night's results," the bank's rural economist Con Williams said.
Fonterra, New Zealand's biggest dairy cooperative, last month said it had maintained its forecast Farmgate Milk Price for the 2014/15 season at $6.00 per kg of milksolids after earlier reducing it from $7.00 a kg.
Just days later, the second biggest cooperative, Westland Milk Products, said it had would cut its pay out by 60c a kg of milksolids to a range of $5.40 to $5.80 a kg, before retentions, in the coming season.
Federated Farmers said at the time that Westland's decision would cause "serious belt tightening" on the West Coast. Skim milk powder is a substantial proportion of Westland's production.
Fonterra last week announced plans to ramp up milk powder production with a $555 million investment in new plant for its South Waikato and Southland operations. At the same time, Fonterra said it intended to take a stake of up to 20 per cent in Chinese infant formula partner, Beingmate.
The New Zealand dollar dipped below US83c cents for the first time since February on the back of the weaker auction and on renewed strength in the US dollar. The local currency touched a low of US82.89c, and was trading at US83.14c at 8am in Wellington, from US83.46c at 5pm yesterday