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Fonterra is blaming the global financial crisis for the latest big drop in dairy prices.
The dairy giant's latest internet-based auction has returned an average price for whole milk powder of US$2917 per tonne - 11.8 per cent down on the previous sale a month ago.
Fonterra commercial director GlobalTrade Guy Roper said the price drop was expected and continued a decline from an unprecedented high last year.
Dairy commodity prices had soared with world economic growth, demand from emerging markets, reduced supply, drought in Australia and biofuel production. The ANZ Commodity Price Index for dairy products rose for 15 consecutive months from 127.6 in August 2006 to peak at 291.9 in November.
"The spreading global financial crisis, and concurrent economic slowdown, is curbing demand for all commodities and dairy is no exception," Roper said.
Global milk supply continued to grow, particularly out of the United States.
"This combination of factors means there remains a short-term excess of supply in the market, although positive signs are emerging of increased demand for [whole milk powder] in the New Year."
Fonterra last month cut its forecast payout to farmers for the current season from $7 to $6.60 a kg of milksolids, compared with $7.90 the previous season.
Fonterra held back 24c per kg from the $7.90 payout to protect the balance sheet. Federated Farmers said this season's forecast compared with $7.66 was the equivalent of sucking $1.2 billion out of the economy.
The ANZ Commodity Price Index dropped 4.9 per cent in September - the biggest monthly fall in 21 years.
Dairy products dropped 7.9 per cent to 219.8 and made up more than a third of the overall weight of the index.
ANZ economist Steve Edwards said prices had dropped about 25 per cent from the peak, with a rule of thumb that commodities cycles could drop 50 per cent.
"The way the world is sort of imploding at the moment it [the dairy index] could go a bit further but again it's hard to pick where it's going to go exactly."
Westpac economist Doug Steel said although dairy prices were expected to drop back the speed was faster than anticipated. "So prices in September are where we thought they might be in November."
