Wholemilk powder - the most important product for New Zealand dairy farmers and for the country's biggest dairy co-operative, Fonterra - fell in price by 10 per cent to a much lower than expected US$2443 a tonne.
At that level, prices are well short of the $3500 a tonne required by March if Fonterra is to meet its already reduced $5.30 a kg forecast farmgate milk price for 2014/15.
The blow has been softened by a sharply weaker New Zealand dollar, which yesterday traded at US78.35c, down US10c (11.3 per cent) from a peak in July.
But the fall has not been great enough to offset the decline in auction prices.
Yet again, bank economists were revising their farmgate milk price forecasts after the auction result.
Westpac said it would cut its forecast for 2014/15 to $4.80 from $5.30. The bank also said it would be taking a "long, hard look" at its $6.60 forecast for 2015/16.
ANZ cut its forecast for the 2014/15 payout to $4.85/kg, "assuming a modest bounce-back in global prices".
Milk prices in the $4 region would result in many farmers struggling to cover their cost of production.
"This sits well below the average cost of production for farmers and will have a significant impact on discretionary spending," ANZ said.
"A lower dairy price also has significant implications for the wider economy and monetary policy."
The price of skimmed milk powder - an important line for New Zealand's second-biggest dairy co-operative, Westland Milk, fell by 2.7 per cent to an average of US$2540 a tonne.
Buttermilk powder prices dropped by 11.3 per cent to US$2723 a tonne and sweet whey powder prices by 9.3 per cent to US$1175 a tonne.
Milk powder is New Zealand's biggest export and last season's very strong performance by the dairy sector has helped drive economic growth over the past year or so.
ASB chief economist Nick Tuffley said lower dairy prices could have implications for the Reserve Bank, which is expected to keep interest rates on hold at least until March.
"If we continue to see further weakness and the dairy price gets revised down even further, that will become more of an influence on monetary policy," Tuffley said.
That could mean the bank keeps the official cash rate at its current level of 3.5 per cent for longer, and the adoption of a milder tightening cycle.
Yesterday's prices are in stark contrast to last year's very strong levels, which translated into a record payout by Fonterra of $8.50 a kg for the 2013/14 season.
Tuffley said farmers knew last year's strong prices would not continue, and many would have budgeted accordingly.
