Prices took another dive in this week's GlobalDairyTrade auction, down 7.2% on a trade-weighted basis and down for all products, with the biggest declines in whole milk powder - a benchmark for global trade - which was down 10% and butter milk powder, down 11.3%.
Whole milk powder prices dropped to $2443 per tonne and prices needed to recover by $1000 per tonne over the season to $3400 if a milk price forecast of $5.30 was to be achieved. Yesterday's result was a ''big risk'' to the forecast, ASB economist Chris Tennent-Brown said.
Federated Farmers dairy chairman Andrew Hoggard described the auction as ''a kick in the guts'', saying farmers would be preparing for an ''austere'' 2014-15 season.
Westpac has revised its milk price forecast from $5.30 to $4.80 and the bank said it would also be ''taking a long hard look'' at its $6.60 forecast for the 2015-16 season over the next few weeks, while ANZ has reduced its forecast to $4.85.
Achieving 2014-15 milk price forecasts remained challenging without an earlier-than-expected commodity price recovery, a lower NZD/USD exchange rate, or both, Rabobank's latest dairy quarterly report said.
An ongoing bear market might also see opening 2015-16 milk prices below the historical five-year average, the report cautioned.
However, the bank's director of dairy research in New Zealand and Asia, Hayley Moynihan, said the medium-term outlook remained favourable and prices were expected to trend up towards a more sustainable trading range through the course of 2015.
''The next year promises to be challenging for New Zealand's dairy producers. However, the longer-term outlook remains positive, with prices expected to return to more profitable levels for farmers into the 2015-16 season,'' Ms Moynihan said.
Rabobank firmly believed the downturn in prices was cyclical, as agricultural commodity prices often were, rather than a more fundamental structural change.
While not anticipated, market pricing could improve more quickly, should Russia elect to remove the ban on dairy imports or if Chinese import buying resumed earlier and more strongly than expected, she said.
Westpac senior economist Anne Boniface said it was difficult to identify a particular catalyst for the drop in this week's auction.
Global milk production continued to grow strongly, spring conditions for New Zealand farmers around much of the country had been favourable, Russia's ban on food imports from a number of Western countries remained in place, and it did not look as if Chinese wholesalers had been hurrying back into the market to replenish stocks.
While a lower currency helped ''soften the blow'' for farmers, it was not nearly enough to offset the fall in this week's auction, she said.
The auction result showed New Zealand's over-reliance on the dairy industry put its economy in a vulnerable position, acting Labour leader David Parker said.
The fall in prices would have knock-on effects for the rest of the economy, he said.
