Economists have slashed their new season milk price forecasts to as low as $4.50 after yet another drop in global dairy prices.
ANZ has dropped its 2015-16 season forecast from $5-$5.25 to $4.50, while ASB is predicting $5, down from $5.70. Fonterra's forecast sits at $5.25.
Overall prices slid 5.9% in this week's GlobalDairyTrade auction, the eighth consecutive fall, taking the index to a six-year low. Whole-milk powder, a key product, was down more than 10%.
The result suggested the market was going to struggle to digest higher seasonal powder volumes from New Zealand over coming months and that most buyers' immediate demand requirements were covered, ANZ economists said.
Those factors, combined with a strong US dollar, continued competition from Europe, an expectation Russia's import ban would be extended, a lack of import demand from China and downward pressure on the cost curve (energy and feed) were expected to see prices remain below fair value for an extended period.
Tighter supply from the big three exporters, New Zealand, the United States and Europe, would be required to turn the market, ANZ's dairy update said.
ASB rural economist Nathan Penny said the falling dollar was partly offsetting some of the price falls but not by enough to prevent the bank's forecast revision.
Chinese demand remained weak and was unlikely to lift quickly. Both New Zealand and Chinese dairy production needed to slow over the next year for demand to catch up, Mr Penny said.
Westpac senior economist Michael Gordon said the bank saw no reason to change its forecast of $5.40 as it believed the weaker dollar had balanced out the recent falls in prices.
A weak result in this week's auction was generally expected given the international backdrop for the auction was ''far from ideal right now'', Mr Gordon said.
Meanwhile, Fonterra has begun consultation with staff on proposals to ''streamline its business structures'' as part of a review announced last month. Hundreds of jobs at the dairy co-operative are under threat as part of the review, which began last December.
In an update yesterday, Fonterra chief executive Theo Spierings said the consultation was starting with procurement, finance, information services, human resources, strategy and legal functions, and other parts of the business would follow in the coming months.
An update on the impact to Fonterra's business structures would be provided once consultation was completed, which was expected later this month.
The ANZ commodity price index declined 3.1% in June, led by aluminium prices, which were down 6.4%, and dairy prices, down 4.4%.
Weaker butter prices led the drop in dairy prices, falling 7.8%, while skim and whole-milk powder prices fell 5.2% and 4.7% respectively.
