Westpac economists still expect a "bumper" season for New Zealand dairy production, despite the first GlobalDairyTrade (GDT) auction for 2013/14 starting on a soft note.

Dairy product prices fell for the third auction in a row at the overnight GlobalDairyTrade (GDT) auction, with the The GDT-TWI Price Index falling by 5.3 per cent compared to the last sale two weeks ago. The average winning price fell to US$4,443 a tonne from US$4,549 a tonne.

Whole milk powder, the biggest product by volume and the most important category for New Zealand producers, fell by 7.1 per cent to US$4,643 a tonne.

Fonterra last month raised its forecast 2013/2014 farmgate milk price to $7.00 per kg of milksolids, up $1.20 per kg for the season just ended.


Westpac said its own forecast for the upcoming season was $6.50 a kg - 50c short of Fonterra's opening forecast - because increased production after the drought would put more downward pressure on prices than Fonterra had factored in.

"In the same way drought here pushed prices skyward this season, we think increasing local production next season will dampen prices by more than Fonterra is anticipating at this stage," Westpac said.

"Either way, whether Fonterra or our own forecasts prove closer to the money, production volumes and average prices will be higher in 2013/14 than in 2012/13," the bank said. "Overall, it's a shaping up as a bumper season," it said.

The Bank of New Zealand said the auction was consistent with its view that recent drought-inspired gains in dairy prices would ease. The BNZ said there would be a "negative bias" for dairy prices over coming months but the bank noted that prices were 54 per cent above year-earlier levels. "We also believe this result will not threaten Fonterra's recent dairy payout forecast," the bank said.

But ANZ said prices could continue to soften over the next few months as the sector headed towards its seasonal peak - around the middle of November. "This could create a few jitters about whether Fonterra's impressive opening $7 milk price estimate for 2013-14 will be achievable," the bank said.

The New Zealand dollar dipped to around US79.7 cents in after the auction results came out early this morning. The currency later recovered to US80.22c.