ANZ Bank economists said the auction all but confirmed that a further cut to the farm-gate price was on its way. "While some of the other products showed a bit more promise, the persistent weakness in milk powder prices has cemented farm-gate prices in the low $4/kg for the past four auctions," the bank said. "Given that this is the peak sales period, this will weigh heavily on the outlook for the season," it said.
Given the required run rate and the bank's view of a later recovery, ANZ's current forecast is for a $4.85/kg milk price in 2014/15. "That means the December board meeting could be a doozy again this year," it said.
The AgriHQ Seasonal Farmgate Milk Price for the 2014-15 season has fell by 20c to $4.55 per kg on the back of the auction result.
AgriHQ dairy analyst Susan Kilsby said a recovery in dairy commodity prices was expected to be protracted. "A very sharp recovery in prices is now required if the $5.30/kgMS price forecast by Fonterra is to be maintained," Kilsby said in a commentary.
See more details of the overnight auction here.
Federated Farmers said the 3.1 per cent drop in dairy prices at this morning's auction would be a huge disappointment to New Zealand producers.
"It goes without saying that the lowest auction price in five years is going to be a blow to the industry," Federated Farmer's dairy chairman Andrew Hoggard said.
"Dairy farmers were hoping to see a lift or at least a plateau to realise Fonterra's $5.30 forecast in December. So this further drop increases the uncertainty of how realistic that goal is," he said in a statement.
West Coast provincial president, Katie Milne, added that Westland Milk's payout will be hard to hold as a result of the GDT, with Westland selling more milk powder than anything else.
"Westland suppliers should be prepared that there may be a drop in the payout after the board meeting at the end of the month, she said.
Read also:
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• Confidence down among dairy farmers
ASB has revised its milk price forecast down by 40c to $4.70/kg of milk solids. "This revision includes a much more protracted recovery in prices, although note we still expect prices to rise over 2015," the bank said.
The falls come as Fonterra has reduced auction volumes to try to generate upward pressure on prices. Fonterra's forecast auction volumes for the 12 months ahead has fallen by 14 per cent since June. "But the market isn't buying," ASB said. Fonterra's milk production remains up over 4 per cent for the season to date. "There is still plenty of milk to go around," ASB said.
Dairy prices have fallen sharply this year, due to a build-up of inventory in China, the effects of a ban by Russia on many Western food imports - mostly dairy - and increased production worldwide.
The average price at the morning's auction was US$2,561 a tonne, down from US$2,649 a fortnight ago, but not all product prices were weaker.
Anhydrous milk fat prices were up 6.1 per cent to an average price of US$3,490 a tonne, butter prices were up 6.0 per cent at US$2,656 a tonne, butter milk prices were up 1.4 per cent to US$2,511 a tonne and cheddar prices were up 5.0 per cent to US$2,861 a tonne. Rennet casein prices were down 12.2 per cent at US$6,681 a tonne.
