The retreat in export commodity prices turned into a rout last month. ANZ's commodity price index fell 11.2 per cent, its steepest monthly decline, to a six-year low.
The dairy sub-index plunged 23.1 per cent to its lowest level for 11 years, as whole milk powder prices fell 35 per cent and skim milk powder 11 per cent.
ANZ sees the weakness in dairy prices as more than cyclical. Structural factors will lower dairy prices by 10 to 15 per cent on average over the medium term, it argues.
Even with a lower exchange rate over the cycle, that would mean farmers need to think about removing 25c to 50c a kilogram of milksolids from their cost structures in a sustained fashion.
Among the adverse medium-term changes are downward pressure on the global cost of production from lower energy, feed and fertiliser costs and a lower cost of capital leading to more large-scale developments.
"The economics is simple; prices sit below the marginal cost of production so supply should be curtailed." But that was being trumped by political considerations, as the difficulty of securing acceptable market access terms in the Trans Pacific Partnership talks attested.
But the plunge in last month's commodity price index was not all about dairy. Most other sectors also fell. Among the 17 commodities the ANZ index tracks, 13 fell and beef was the only one to rise.
Last month's declines in world prices outran the flagging kiwi. Even with a 3.6 per cent fall in the exchange rate on a trade-weighted basis, in New Zealand dollar terms the ANZ index fell 6.7 per cent last month to be 7.3 per cent down on a year ago.
In June, by contrast, the commodity price index had risen 3 per cent in New Zealand dollar terms, despite a 3.1 per cent fall in world prices; meat, forest products, fruit, seafood and aluminium prices were all higher than a year earlier.
ANZ economist Con Williams said a weaker exchange rate was helpful but last month's sizeable fall in New Zealand dollar prices told us it was not moving fast enough in response to commodity price falls.
In world price terms, aluminium prices fell 2.6 per cent last month to be 15.5 per cent down over the year.
Forest product prices fell 2.2 per cent, largely thanks to a 3.5 per cent fall in log prices.
"Forestry exports are under pressure from softer Asian demand, in particular China," Williams said.
The exception amid the red ink was a 5.5 per cent rise in beef prices, supported by a strong United States market. It offset declines of 2.7 per cent in lamb prices, 4.2 per cent in wool and 2.9 per cent in skins.