International dairy prices continued to reverse gains made early this year at this morning's GlobalDairyTrade (GDT) auction, putting downward pressure on Fonterra's $4.70 a kg farmgate milk price forecast and raising concerns about next season's likely payout.

The GDT price index fell by 10.8 per cent compared with the last sale a fortnight ago, when prices dropped by 8.8 per cent. Big falls were recorded for the key products of wholemilk powder - down 13.3 per cent to US$2,538 a tonne, skim milk powder - down 9.9 per cent to US$2,467/tonne.

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Wholemilk prices are now just 11 per cent higher than than they were by the end of 2014.
ANZ rural economist Con Williams said that with milk powder making up the bulk of New Zealand's product mix, the GDT result suggested a payout of $4.50-4.70 a kg this year.


The largest price falls at the auction were generally seen in the longer-dated contracts, up to 6 months out - into the new season.

"While these prices remain higher than those for the end of this season, the curve has flattened, suggesting less price recovery is now anticipated - not boding well for next year's payout," Williams said.

The fall comes as the New Zealand season enters its final phase, with about 80 per cent of production now out of the way.

Most of the price weakness was put down to better-than-expected supply, with the effects of this year's drought being offset by rain in many parts of the country.

See recent movements in the GDT auctions here:

Fonterra, the world's largest milk processor and dairy exporter, had early in the year revised its production forecast down by 3.3 per cent compared with the previous year, due to the drought, but at last week's interim result the co-op revised that to a 2 per cent reduction.

Analysts said that too might prove to be overly pessimistic, with many expecting production to be flat or just slightly down on last year's.

ASB Bank said it expects production for all New Zealand processors to be steady for the season, and for Fonterra's to fall by about 1 per cent.

"From this perspective, we suspect that the early season pessimism contributed to the subsequent price volatility, particularly once markets realised that the production outlook was simply not that bad," ASB rural economist Nathan Penny said.


ASB has revised its milk price forecasts down by 10c to $4.60/kg for this season and by 30c to and $6.20/kg for next season.

Fonterra smooths its payments to cushion the effects of volatility in world commodities markets, so farmers are still benefiting from last year's record payout. However, economists said the sector can handle one bad season but not two together.

The co-operative last month confirmed its forecast payout for the current season of $4.70 kg/MS, down from a record $8.40 kg/MS last season, with guidance for dividends trimmed to a range of 20c to 30c, from a previous range of 25c to 35c.

Meanwhile, uncertainty abounds on world markets as to much more milk EU farmers will produce, now that the impediment of quota restrictions has been removed on April 1.

At the auction, butter milk powder prices dropped by 25.1 per cent, cheddar by 10.5 per cent, rennet casein by 8.0 per, butter by 7.6 per cent, and anhydrous milk fat by 5.3 per cent.

Read more information about today's dairy auction here