KEY POINTS:
The golden run for the dairy industry could have reached its peak, says ANZ.
The ANZ Commodity Price Index for dairy products dropped 5 per cent to 272.2, following a 1.8 per cent drop in December.
The dairy products index had previously risen for 15 consecutive months - more than doubling from 127.6 in August, 2006 to hit 291.9 in November.
ANZ economist Steve Edwards said dairy commodity prices had been overextended.
"You got to imagine if it's going to go anywhere it's going to go down," Edwards said. "We'd imagine it [would] come back but how far we're not quite sure."
ANZ said prices in Oceania looked to have stabilised during the final two weeks of January and European prices had picked up with the re-emergence of interest from buyers.
"Rather than one year of 100 per cent growth we'd like to see five years of 20 per cent growth," Edwards said. "Something that would be much more sustainable."
The drop in the dairy products index in January reflected more production from overseas.
The overall ANZ Commodity Index fell 1.4 per cent in January - the first drop since June last year.
Dairy product exports totalled more than $7.5 billion last year, which was a fifth of all exports of merchandise trade.
The commodity price index reflected trading in relevant international currencies, which when converted to a New Zealand dollar price index showed a lower peak, reflecting the impact of the value of the New Zealand dollar.
Dairy co-operative Fonterra is forecasting a payout to farmers this season of $6.90 per kilogram of milksolids, up from $4.46 last season.
Kelvin Wickham, managing director Fonterra Global Trade, said the 5 per cent drop in January was within expectations.
"Fonterra has said for some time that there will be a softening of commodity prices over 2008 and we've factored it in," Wickham said.
ANZ's Edwards said historically food prices tended to fall by 50 per cent from the peak of a boom. But even that would leave dairy prices at good levels.
Meanwhile, meat commodity prices increased with beef up 3.2 per cent, venison up 2.5 per cent and sheepmeat rising by 1.1 per cent.
