Results of the latest GlobalDairyTrade auction, which saw whole milk powder prices drop by 10.3 per cent to their lowest point since 2008, will weigh heavily on Fonterra's board meeting on Friday when the co-op is expected to slash its 2015/6 farmgate milk price forecast.
The forecast, which sits at $5.25 a kg of milksolids, is likely to be revised downward, with some picking a revised forecast as low as $3.50 a kg - well down from the estimated average breakeven point of $5.70 a kg.
"Fonterra is due to provide an update of their milk price forecast this Friday, and signs are not looking good with the likelihood of a second successive season of low dairy incomes looking to be an inevitability," ANZ said in a commentary.
Today's auction result, which saw whole milk prices - which are key to determining Fonterra's farmgate milk price - drop to 1,590 a tonne - was well short of the $3500 a tonne needed to make the $5.25 forecast a reality. Further falls in wholemilk prices look likely, analysts said.
"It would not surprise to see prices fall further in the coming weeks and months given the US Department of Agriculture's expectation that global milk production will be a record 580 million metric tonnes in 2015," Nigel Brunel, director financial markets at OM Financial, said.
ANZ said the auction was "about as bad as it could have been".
Since March 4, cumulative fall in average dairy prices has been 46 per cent, taking the level of dairy prices below global financial crisis troughs and to around 12 year lows.
The volumes sold on the GDT portal were significantly up, with 46,527 metric tonnes sold, the highest since last October.
"Given that the next seven auctions account for a significant chunk of annual (GDT) WMP sales, it doesn't take a rocket scientist to work out that auction prices of the next two months will weigh heavily on the final milk price outcome for the 2015/16 season," ANZ said.
The current $5.25/kg MS forecast may have looked reasonable a few months ago, but developments move quickly in commodity markets and we now expect a milk price in the mid 3's/kg.
Overall, the GDT price index dropped by 9.3 per cent since the last sale in mid-July - its 10th consecutive decline.
Brian Rice, principal and owner of Chicago-based commodities broking house - Rice Dairy - said the GDT result showed that Fonterra's milk price might struggle to get over $3.00/kg.
"It is not pretty for the global dairy trade and not pretty for New Zealand farmers," he said.
"We are close to the bottom but I don't think we are quite there yet," Rice said.
Sam Tuck, senior foreign exchange strategist at ANZ Bank, said the New Zealand dollar's reaction to the auction was muted initially, despite the "horrendous" result.
The currency dropped to US65.80c from US66.0c just before the auction, then carried on down to US65.25 on the back of renewed strength in the US dollar.
"The market was prepared for a weak auction and that's what they got," Tuck said.
Out of the 637 qualified bidders there were just 142 winning bidders, compared with the usual 200 or so.
The price of skim milk powder - a key product for the country's second biggest dairy co-op - Westland Milk - dropped by 14.4 per cent to US$1,419 a tonne.
Among the other products, anhydrous milk fat prices fell by by 11.7 per cent to US$2,253/tonne, butter by 6.1 per cent to $2,293/tonne, butter milk powder by 5.1 per cent to $1,700/tonne and rennet casein by 2.7 per cent to $5,289 a tonne.
Lactose was steady at $535 a tonne and cheddar gained by 0.2 per cent to $2,663/tonne.