All eyes turning to Fonterra’s half-year result next week as dairy prices tumble by 8.8 per cent in the latest auction.

Farmers will be looking to Fonterra's dividend to at least partially offset what is likely to be a low farmgate milk price this season after dairy prices fell by 8.8 per cent at the latest GlobalDairyTrade auction.

Fonterra's forecast farmgate milk price stands at $4.70 a kg but suppliers will be looking to the co-operative, when it reports its first-half result next Wednesday, to provide a partial offset through the dividend, which is forecast to be in a 25c to 35c range.

Low milk prices have the effect of lowering input costs for the manufacturing, and dividend-paying, side of Fonterra's operations, and Forsyth Barr analyst James Bascand said farmers would be looking for discussion on the subject next week.

Read more:
Global Dairy Auction: International dairy prices fall by 8.8 per cent
Jamie Gray: Wild swings look like becoming part of the dairy landscape


Last year's record high milk prices hit Fonterra's margins in its consumer and food service businesses hard, with the company's net profit falling to $179 million from $736 million a year earlier.

Yesterday's auction was the first to be held since last week's threat to contaminate formula with the poison 1080, but economists said the fall in prices was more about the market retracing its steps after big gains in February.

Whole milk powder - the most important product for New Zealand producers - fell by 9.6 per cent to an average price of US$2928 a tonne. The second most important category, skim milk powder, fell by 5.5 per cent to US$2731 a tonne.

The decline brought to an end a six-auction winning streak that started last December and featured two big improvements in February.

AgriHQ Dairy analyst Susan Kilsby said futures prices had taken a dive in the past fortnight as additional volume had been added back on to the GDT platform.

Whole milk powder prices are 29 per cent higher than at the end of last year, but are well below the US$3500 needed to guarantee the $4.70 milk price, which is still 30c a kg below the estimated average cost of production.

In its latest update, Fonterra stuck by its production forecast for this season of 1532 million kgs - 3.3 per cent below the 2013/14 total - despite data showing that production was up by 1.5 percent in the nine months to February 28.

ASB Bank rural economist Nathan Penny said he could not completely rule out a price impact from the contamination scare.


"But we believe the greater impact is down to the market factoring in a less pessimistic production outlook," he said.

"The production outlook is simply not that bad," Penny said. "Rain has come to many parts of New Zealand, easing the fears around the worst impacts of the drought.

"Also, while New Zealand milk production growth continues to slow, it is not falling off a cliff."