Price drop predicted for milk

Bank economists have cut their 2016-17 milk price forecasts on the back of sliding prices following this week's GlobalDairyTrade auction.

Prices dropped 6.3% overall with key products whole milk powder and skim milk powder down 12.4% and 15.5% respectively.

ASB has cut its forecast by 50c to $6 while Westpac has shaved 30c off its forecast to $5.90. Fonterra's forecast sits unchanged at $6.

Better milk volumes out of New Zealand had been the key catalyst for the sharp fall in prices, Westpac economist Sarah Drought said.

Last month, Fonterra upgraded its forecast for this season's milk collections to a 5% decline, from 7% previously.

That was reinforced last week by a 4% upward revision to Fonterra's expected offering on the GDT platform over the next 12 months.

European production was also improving, although Westpac was sceptical about how sustainable some of the gains were given low profitability in some countries, especially with global prices turning down again.

Some fall in prices had been expected this year, as New Zealand and global supply improved.

But even with summer production tracking better than expected, the decline in prices over the past fortnight had been sharper than anticipated, Ms Drought said.

Whole milk powder prices had fallen 16% over the past fortnight, taking them back to levels seen in October last year.

With dairy prices known to gather momentum in both directions, prices might push a bit lower in the near term.

''But with Chinese demand looking to be holding steady for now, and global supply still well shy of 2016's peaks, we expect prices to remain well off 2016's lows and expect to see some improvement in global dairy prices over the second half of this year,'' she said.

For next season, Westpac was forecasting a $6.10 milk price, although, this far out, there were wide uncertainty bands around that.

ASB was maintaining its ''relatively healthy'' outlook for 2017-18 and its $6.75 forecast, senior rural economist Nathan Penny said.

The volume of meat and dairy product manufacturing fell in the December 2016 quarter, although sales values rose due to higher prices, Statistics New Zealand figures show.

After adjusting for seasonal effects and removing price changes, meat and dairy product manufacturing volumes fell 5.7%.

''The fall in meat and dairy sales volumes followed rises in the previous two quarters. In contrast, sales values were up more than $350 million, mainly reflecting a sharp rise in dairy product prices,'' business indicators senior manager Neil Kelly said.

Business Price Indexes reported a 14% rise in dairy product manufacturing output prices in the December 2016 quarter.