Dairy prices fell sharply at this morning's GlobalDairyTrade auction. The GDT price index dropped 6.3 per cent, driven mostly by a sharp fall in skim-milk and whole-milk powder prices.

Whole-milk powder prices, which have the greatest bearing on Fonterra's farmgate milk price, dropped by 12.4 per cent to US$2782 ($3982) a tonne and skim-milk powder prices fell by 15.5 per cent to US$2118 a tonne.

Fonterra last month confirmed its farmgate milk price forecast for 2016/7 at $6 a kg of milk solids, based largely on a recovery in whole-milk powder prices in the second half of last year.

However, since last December whole-milk powder prices have dropped by US$811 a tonne, or 22.5 per cent.


AgriHQ dairy analyst Susan Kilsby said the auction result was "dismal".

"The result confirms that Fonterra's decision to hold their milk price forecast for the current season at $6 a kg for milksolids was the right one," she said.

Movements in commodity prices in the later part of the season have a smaller effect on the price farmers are paid for their milk because of the lower volumes being traded at this time of the year.

Normally at this time of the season the volume of product being offered on GDT starts to fall away but improved milk intakes in recent months mean Fonterra has more to sell than it thought, thanks to more favourable growing conditions.

"To see prices falling again before the market has fully recovered will be a disappointment to farmers," Kilsby said.

"One poor result doesn't have a huge impact on the milk price [but] it will be difficult for prices to recover quickly while there is surplus product available," she said.

"Last night's result shows just how tightly balanced the market is - there just isn't the depth of demand in the market to absorb any extra product at the moment."

Last week Fonterra increased volume of skim-milk powder by 49 per cent and the amount of whole-milk powder available increased by 6 per cent. Many grades of product failed to lift from their opening prices.

Despite the poor prices most of the product offered was traded.

There were fewer bidders in the auction than at recent sales, but the number of bidders who secured product was similar to the previous events.

The NZX Dairy Derivatives market had anticipated a weak GDT result but last night's prices were even lower than expected, AgriHQ said.

Among the other products offered at this morning's auction, anhydrous milk-fat prices dropped by 0.8 per cent to US$5653 a tonne but butter firmed by 1.2 per cent to US$4653 a tonne.

Butter-milk powder firmed by 8.4 per cent to US$1846 a tonne and cheddar dropped by 4.2 per cent to $3435 a tonne.

Lactose fell by 4.3 per cent to US$924 a tonne and rennet casein fell by 6.6 per cent to an average price of US$5678 a tonne.