Dairy prices fell for the second time in a row at the latest GlobalDairyTrade auction, but analysts say the 3.9 per cent average decline has not changed the positive outlook for farmers this season.

Whole milk powder prices - which have the greatest bearing on Fonterra's farmgate milk price - dropped 7.7 per cent at the auction this morning to an average US$3294 a tonne.

Another important reference product - skim milk powder - rose by 2.3 per cent to US$2660 a tonne, the highest point since March 2015.

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The number of bidders was the lowest for 15 auctions.

At the last sale for 2016, the GDT price index dropped by 0.5 per cent.

Fonterra's forecast farmgate milk price for the current season is $6.00 a kg of milksolids - well above the estimated breakeven point for farmers of $5.05 a kg.

Economists expect to see upward revisions to the price as the worldwide supply and demand imbalance rectifies itself after a near two-year price slump.

ASB Bank economists today saw the price drop as a consolidation and said they remained upbeat on the dairy outlook for the season.

The bank last year revised up its 2016/7 forecast to $6.50/kg from $6.00.

At today's levels, wholemilk powder and skim milk powder prices have risen by 52.2 per cent and 41.3 per cent, respectively, over the last 12 months.

Jon Spainhour, a broker and partner at Chicago-based dairy specialist, Rice Dairy, said the outlook remained favourable, despite the weaker auction result.


"New Zealand skim milk powder prices are significantly higher than the rest of the world's, so there are downside risks," he said.

"Right now it keeps moving higher," he said. "I think it (the firming trend) persists," he told the Herald.

"Another thing to look at is that Australian production is really down, so I think that only helps to serve the cause," he said.

Another Chicago-based commodities house, HighGround Dairy, said a strong rise in China's dairy import volume, along with a contraction in global supply, was expected to support dairy commodity prices in 2017.

"While the primary commodity (whole milk powder and skim milk powder) imports remain well below their highs from 2013, the incremental growth and recent spike in categories such as whey products, infant formula, fluid milk and cream and cheese could keep underlying support to all commodities until production growth returns," HighGround said.

Fonterra's forecast milk collection in New Zealand for the 2016/17 season is 1,460 million kg, 7 per cent down from last season.


Australian production in October decreased by 11 per cent compared to the same month in 2015 as milk supply continued to be hit by unfavourable pasture conditions.

Production is down in all the large-producing states including Victoria, New South Wales and Tasmania.

European production decreased for the fourth consecutive month, with September down 3 per cent compared to the same month the previous year.

The United Kingdom was down 8 per cent, France was down 7 per cent, Germany was down 3 per cent and Ireland was down 4 per cent.

Among the world's major producers, the United States is the odd one out. US production in October increased 3 per cent compared to the same month in 2015.

US milk production for the 12 months to October increased 2 per cent compared to the same period the previous year.


Analysts said the relative weakness in whole milk powder reflected Fonterra's move to increase its offerings of the product at the expense of skim milk powder and milkfats.