Key dairy commodity whole milk powder took another hit in the latest global dairy trade auction overnight, putting even more pressure on Fonterra to reduce its forecast milk payout to farmers.
Whole milk powder plunged by a further 7.1 percent to an average price of $US2229 a tonne.
Prices rose for all other products traded at last night's auction by a range of 5 to 9 percent, leaving the overall price index 1.1 percent below a fortnight ago. The index is now sitting at its lowest point since August 2009.
The latest auction follows a 5 percent drop in the whole milk powder price a fortnight ago.
Whole milk powder has the biggest influence on the price Fonterra pays its farmers. New Zealand's biggest dairy company is due to review the farmgate milk price next week.
It is currently sitting at $5.30 a kilo of milk solids, which most commentators say is unsustainable with global prices at their current levels.
Fonterra has previously said the whole milk powder price needs to rise to about $US3500 by March if it is to maintain its forecast payout to farmers.
The director of Dairy Research at Rabobank, Hayley Moynihan, told Morning Report the drop will put further pressure on payouts from all dairy companies.
"As we are now half way through the selling season for exporting companies it does mean the chances of lifting that seasonal average to support current milk price forecasts becomes less and less likely."
Ms Moynihan said cheaper milk for consumers was unlikely to be a spin-off from the continued fall, as prices in the shops did not rise much when farmgate prices were high and any reduction now would be modest.
Federated Farmers dairy chair Andrew Hoggard says farmers will feel the pinch - but probably not until next year.
"Right now most of us would have received the final payout from the record season we've just had so all our bank balances will be looking fairly healthy. It's this time next year where the cashflow hit is really going to impact on farms."
Rural economists have previously warned a payout to farmers below $5 per kilo of milk solids could knock nearly $6 billion from the New Zealand economy.
Fonterra price drop 'inevitable'
AgriHQ dairy analyst Susan Kilsby believed it was inevitable that Fonterra would lower its forecast milk payout to farmers and the extent of the latest drop in the whole milk powder price was a surprise.
"The factor that drives whole milk powder more so than other commodities is that New Zealand supplies so much of the powder that's traded globally and China is the biggest buyer, so it's usually one or other side of that market that impacts the whole milk powder price.
"At the moment we are seeing this continued weak buying out of China, although their own milk production is at its seasonal low now and there are indications that that (demand) should improve, but it doesn't seem to be playing out in the GDT auction yet.
"And of course there's been pretty strong milk production out of New Zealand. Just yesterday, official data for October milk production was released which showed production was up by more than 5 percent that month, so that's a huge amount of extra milk coming out at the peak of our season."
Ms Kilsby said AgriHQ, which calculates its own seasonal milk price, has lowered that to $4.25 as a result of the latest auction.
"We're a full dollar lower than where Fonterra's sitting at the moment, so we're definitely expecting a downwards revision in their forecast when that's revised next week. I would say we'd need to see a reasonably significant reduction to bring it down anywhere near the level where we see it being.
"But also the futures market has come back. We pretty much saw a 20 percent drop in pricing for futures contracts from now through to July 2015, so it's looking like that recovery is going to take a long time - or that's what the markets are saying at the moment that it's not going to happen in a hurry."
BNZ economist Doug Steel meanwhile believes whole milk powder prices will remain weak for now, but could rise next year.
"We thought there was going to be a little bit more weakness at this auction and that's what we got, at least in the headline numbers ... driven entirely by that whole milk powder, with every other product posting quite solid gains.
"Even within the whole milk powder pricing, if you look through the detail of the contracts, prices in the near-term are quite weak. Prices that are being negotiated out into the middle of next year are a lot stronger," Mr Steel said.
