The pressure is on Fonterra's $7.00 a kg farmgate milk price forecast for this year after another sharp fall in international dairy prices overnight.

The GlobalDairyTrade price index dropped by 8.9 per cent to its lowest level since December 2012 at the auction, making for a cumulative 35 per cent decline in prices since early February.

The magnitude of the fall came as a surprise to many economists, as they had generally expected prices to flatten after a series of falls throughout the year.

"We had long forecast lower prices for New Zealand's key commodity export on the back of rising global dairy supply, but even we are a little taken aback by the magnitude in the year to date," Bank of NZ said in a commentary.


ANZ rural economist Con Williams said few would have correctly anticipated a price decline of that size. "But dairy prices are very volatile -when they move they move pretty quickly," he said.

The New Zealand dollar - which had been flirting with post float highs at over US88c - dropped by about half a US cent on the back of auction news, which currency strategists said was a modest move given the extent of the dairy price falls.

Williams said it appeared that China had a lot of product inventory - domestically produced and imported -- which would need to be worked through before prices could stabilise.

For the moment, overseas investors were focusing on New Zealand's relatively high interest rates, and the prospects of them rising further still at next week's official cash rate rate review, rather than sharp falls in the price of dairy and another important local commodity - logs.

"But importantly, the fall has likely broken the back of any near-term push towards the post-float high of 0.8842," the BNZ said in a commentary.

ANZ has estimated a farmgate price of $6.50 a kg would result in farmer incomes dropping by a total of $3 billion, which would result in a commensurate decline in demand in exporter demand for Kiwi dollars over 2014/15.

Rabobank, in its agribusiness market commentary for July, said global prices for dairy commodities were still showing fundamental weakness.

"Milk production around the world has responded to high farmgate milk prices, leaving the global commodity market with plenty of product to go around," Rabobank said.

"Additionally, inventories in China remain high, which is keeping some large importers out of the market temporarily to work through accumulated stock."

Rabobank said it expects the fundamental situation to largely remain in place through the remainder of the year before the market churns its way through the excess volumes and the market finds its feet again.

At the auction, the price of whole milk powder - the most important product line for New Zealand producers - fell by 10.9 per cent to an average US$3,088 a tonne.

Skim milk powder prices fell by 7.1 per cent to an average US$3,516 a tonne and anhydrous milk fat dropped by 10.0 per cent to US$3,250. Rennet casein prices fell by 8.9 per cent to US$9,761.

The GDT price index dropped 8.9 per cent to US$3,309 a tonne from US$3,595 a tonne two weeks ago. Some 36,656 tonnes of product was sold, down from 41,513 tonnes two weeks ago.

Butter milk powder prices declined by 4.6 per cent to US$4,426 a tonne and cheddar cheddar slipped by 1.6 per cent to US$4,164 a tonne.

See more details of last night's auction here.
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with BusinessDesk