Westpac has downgraded its farmgate milk price forecast to $6.70 a kg of milksolds based on what it expects to be weaker demand from China following a reversal of prices on the Global Dairy Trade platform this morning.
The bank had previously forecast a $6.90 milk price for 2019/20, compared with Fonterra's forecast range of $6.25 to $7.25.
"We expect the recent escalation in the US-China trade war to lead to weaker consumer demand in China," Westpac economist Anne Boniface said in a commentary.
"On the back of this we have downgraded our milk price forecast to $6.70," she said.
Developments in markets this week have been dominated by the escalation of the trade war between the US and China.
US President Trump surprised markets by tweeting his intention to apply a 10 per cent tariff on the US$300 billion of Chinese imports to the US which had previously been unaffected by the trade war.
Wsetpac has warned that Chinese demand is a key swing factor in the outlook for dairy prices over the coming year.
"And while growth in milk supply in key exporting regions still looks likely to be modest, recent developments suggest the outlook for Chinese consumer demand and global growth has deteriorated," Boniface said.
"On this basis, we have downgraded our milk price forecast for this season to $6.70."
Prices fell across the board at the Global Dairy Trade auciton as weakness in the Chinese yuan made its presence felt.
The GDT price index dropped by 2.6 per cent compared with a 2.7 per cent gain at the last auction in mid-July.
The auction, the first since China allowed its currency to drop to an 11 year low on Monday, yielded an average auction price of US$3253 a tonne against US$3412/tonne at the last auction.
"Offer volumes were higher but the weaker yuan would have restricted the buying power of Chinese buyers who tend to buy about half the dairy commodities sold via GDT," ANZ said.
The price of whole milk powder, which has the greatest bearing on Fonterra's farmgate milk price, fell by 1.7 per cent US$3039 a tonne, following a 3.6 per cent gain at the last auction.
Skim milk powder, another key product used for calculating the milk price, fell by 1.6 per cent to US$2482 a tonne.
Among Fonterra's other reference products, butter prices fell by 5.5 per cent to US$4168, butter milk powder dropped by 5.6 per cent to U$2405, and anhydrous milk fat shed 5.1 per cent to US$5246/tonne.
China is New Zealand's biggest export destination for dairy, logs and meat.