Whole milk powder prices are key to determining New Zealand dairy giant Fonterra's farmgate milk price.
Overall, the GDT price index dropped by 9.3 per cent since the last sale in mid-July - its 10th consecutive decline.
The average winning bid at the auction was US$1815 a tonne, down from $2082 a tonne at the last sale in mid July.
Futures market pricing had suggested whole milk powder prices would fall by about 10 per cent at the auction.
Fonterra's board will meet on Friday to review the farmgate milk price for 2015/6. The forecast, which sits at $5.25 a kg of milksolids, is likely to be revised downward, with some picking a revised forecast as low as $3.50 a kg - well down from the estimated average breakeven point of $5.70 a kg.
"Fonterra is due to provide an update of their milk price forecast this Friday, and signs are not looking good with the likelihood of a second successive season of low dairy incomes looking to be an inevitability," ANZ said in a commentary.
Today's auction result, which saw whole milk prices drop to 1590 a tonne, was well short of the $3500 per tonne needed to make the $5.25 forecast a reality. Further falls in wholemilk prices look likely, analysts said.
"It would not surprise to see prices fall further in the coming weeks and months given the US Department of Agriculture's expectation that global milk production will be a record 580 million metric tonnes in 2015," Nigel Brunel, director financial markets at OM Financial, said.
Today's auction will be important for where Fonterra's forecast is pitched, particularly as the next eight auctions will account for some 45 per cent of its annual sales for wholemilk powder.
Brian Rice, principal and owner of Chicago-based commodities broking house Rice Dairy said the GDT result showed Fonterra's milk price might struggle to get over $3.00 per kg.
"It is not pretty for the global dairy trade and not pretty for New Zealand farmers. We are close to the bottom but I don't think we are quite there yet," he said. "In the general scheme of things, over a longer term horizon, these prices are extremely low."
Sam Tuck, a senior foreign exchange strategist at ANZ Bank, said the New Zealand dollar's reaction to the auction was muted, despite the "horrendous" result.
The currency dropped to US65.80c from US66.0 just before the auction.
"The market was prepared for a weak auction and that's what they got," Mr Tuck said.
Out of the 637 qualified bidders there were just 142 winning bidders, compared with the usual 200 or so.
Most product groups posted price declines at the auction.
Skim milk powder prices fell by 14.4 per cent to US$1,419 a tonne and anydrous milk fat dropped by 11.7 per cent to US$2253 per tonne. Butter prices fell by 6.1 per cent to $2293 per tonne, butter milk powder by 5.1 per cent to $1700/tonne and rennet casein by 2.7 per cent to $5289 a tonne. Lactose was steady at $535 a tonne and cheddar gained by 0.2 per cent to $2663 per tonne.
- By Jamie Gray of the NZME News Service