Futures pricing is pointing to dairy prices flattening at tomorrow's GlobalDairyTrade auction as the sector continues to grapple with the same issues that held sway last year - oversupply and low demand.
The January 6 auction kicked off the year on a weak note, with the all-important whole milk powder price dropping by 4.4 per cent to an average US$2210 a tonne. Prices for another significant product - skim milk powder - eased by 0.8 per cent to US$1890 a tonne.
Fonterra's current $4.60 a kg of milksolids farm gate milk price forecast rests on wholemilk powder prices reaching US$3000 a tonne in the first half. At $4.60, the forecast is short of the estimated break-even point of $5.40.
Dairy futures trade since the first sale of 2016 has been very light but the pricing for wholemilk and skim milk powder contracts suggested the market would be flat this week, OM Financial dealer, Michael Peters, said.
ASB Bank said there was a chance of a small tick up in dairy prices at this week's auction , "but the overall trend remains still weak and highlights one of the key areas of downside risk to the NZ economy," the bank said.
Fonterra has previously forecast that it expects low prices to translate into a 6 per cent decline this 2015/6 season and data released yesterday showed production was in line with that forecast.
The co-op's milk collection across New Zealand in December was 3 per cent lower than last year. For the season to December 31, it reached 932 million kg - 4 per cent behind the period last season.
Fonterra said the lower production was largely the result of a low milk prices, where farmers have reduced stocking rates and supplementary feeding to reduce costs.
North Island production was down 6 per cent in the season to date and was down by 1 per cent in the South Island. Australian production was flat in the season to date.
ANZ rural economist Con Williams said the market could struggle to improve from here.
"Anecdotal feedback suggests that buyers are relatively comfortable with their inventory positions at the moment, and think that with perhaps an improvement in New Zealand seasonal conditions that they are going to be less willing to build stock," he said.
The US Department of Agriculture expects the familiar themes of oversupply and low demand to persist this year, and that it did not see prices improving in the first half.
The department said milk production during 2015 among the world's major suppliers is estimated to have expanded by 1 per cent over the previous year, sharply down from the 4 per cent growth seen in 2014.
For the current year, low milk prices are expected to restrain growth in milk output, which it expects will decline in Oceania but will increase in the EU, Argentina and the United States.
"Although the pace of increasing milk production is forecast to slow, prices for such dairy products as skimmed milk powder and whole milk powder are expected to remain relatively weak," the USDA said.
These products face strong headwinds due to the continuation of the Russian ban on imports of dairy products and weak import demand from China.