Although a 1% rise in this week's auction meant prices had now gained 7% over the past three auctions and that was encouraging, the gains were small and there was a long way to go, ASB economists said yesterday.
The ANZ, which cut its forecast payout the day before the auction, warned the next 18 months would be difficult for farmers' cash flow and ability to balance the books, particularly in regions where pasture conditions had deteriorated and softer production appeared likely.
The price of key product whole milk powder highlighted the auction, lifting 3.8% while skim milk powder was up 1%. Butter milk powder was down 6.4% and anhydrous milk fat dropped 5%.
The ASB report said that, importantly, global production and export growth of whole milk powder was slowing and, over time, that would further support New Zealand dairy prices.
However, demand in China remained weak and consumer sentiment was at a low ebb.
Low oil prices would also lower incomes in oil-producing countries and, with it, demand for dairy products.
The ASB was holding steady its price forecast of $4.70 kg/ms for this season, which was the same as that of Fonterra. Beyond this season, it remained ''broadly positive'' on dairy prospects.
Farmers would respond further to this season's lower milk price by slowing their production and, as that happened, demand was expected to firm, particularly as the Chinese economy perked up, eventually aided by lower energy prices.
The risk of current dry conditions worsening and putting upward pressure on dairy prices was flagged, although it was ''still early days''.
The ANZ has cut its forecast milk price to $4.35, saying that figure was ''well below break-even'' for many dairy farmers and would represent a $6.9 billion hit to overall dairy revenue, compared with last season.
The bank's economists cited a more prolonged and modest recovery in dairy prices, combined with a strong New Zealand dollar.
The uptick in supply from the major global exporters had been the largest in eight years. The bow wave in milk and inventory would take the market some time to clear, the ANZ said.
There was increased competitive pressure from Europe. Chinese domestic milk supply appeared to have increased and more whole milk powder was likely to have been manufactured.
While current international prices were below the cost of production, it was taking longer than expected for them to feed through to all major markets and farm-gate prices, the ANZ said.
Oil dependent nations had been a key source of demand in recent years and some pull-back was already being seen, as collapsing oil prices affected their economic outlooks.
It would necessitate a cut in not just capital and discretionary expenditure, but also core operating expenditure to break even and avoid a debt blowout. That would create some ''gestation issues'' across the economy.
