International dairy prices showed signs of levelling off today with the GlobalDairyTrade price index gaining 1.4 per cent at the fortnightly auction.

The average winning price was US$2,640 a tonne.

Wholemilk powder - the most important category for New Zealand producers - sold for US$2503 a tonne, up 3.1 per cent from the last auction early this month.

Fonterra has said that wholemilk powder prices would need to reach US$3500 a tonne by March next year if its revised farmgate forecast of $5.30 a kg of milksolids is to be achieved.

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See more details of the overnight auction here.

Prices have fallen by close to 50 per cent since February due to a variety of factors, including a buildup of inventory in China, the effects of a ban by Russia on the importation of some food groups - mostly dairy - from some western countries, and increased production both in New Zealand and around the world.

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At this morning's auction, the price of another important commodity group, skimmed milk powder, fell by 3.6 per cent since the last auction to US$2,462 a tonne.

In total, there were 167 bidders at the auction and 50,816 tonnes of product was sold.

The AgriHQ Snapshot Farmgate Milk Price indicates that if the latest GlobalDairyTrade prices were achieved across the entire season the milk price would be just $3.90/kgMS.

"The improvement in prices at last night's auction result is a good start but we need to see a continuation of this upward trend in order to for farmgate milk prices to improve," AgriHQ dairy analyst Susan Kilsby said in a note. "Despite a higher whole milk powder price the AgriHQ Seasonal Farmgate Milk Price has fallen further as the recovery in dairy commodity prices is now expected to be slower."

The NZX Dairy Futures market indicates that whole milk powder will not exceed US$3,000 per tonne tonne until April 2015, whereas a fortnight ago prices were expected to be back above at this level by the end of 2014.

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"A farmgate milk price below $5/kgMS will make it extremely difficult for farms to turn a profit this season," according to Kilsby. "Farmers will cut spending wherever they can, which in turn will impact businesses that supply products and services. The lack of profitability in the dairy sector will initially be felt in our small rural towns but eventually the downturn will impact New Zealand's whole economy."

Last week Fonterra reduced the volume of whole milk powder which they plan to sell on GlobalDairyTrade over the next 12 months by 7 per cent.

"The lower volume of product on offer is likely to provide some support to prices, but as volumes are close to their seasonal highs it will take some time for this market to fully recover," Kilsby said.

with BusinessDesk