Fonterra's latest milk price forecast appears under a shadow, following yet another tumble in global dairy prices.
Overall prices were down 7.4% in this week's GlobalDairyTrade auction, the third consecutive fall for the year.
Whole milk powder, a key component for determining milk prices, fell 10.4% and skim milk powder dropped 2.2%.
Last week, Fonterra downgraded its milk price forecast for this season from $4.60 to $4.15.
Yesterday, ASB rural economist Nathan Penny said the bank was sticking with its $4.10 forecast ‘‘for now'' but the ongoing weakness increased downside risks.
Fears of a summer drought in New Zealand, owing to the strong El Nino pattern, had largely receded. Good growing conditions were a surprise.
It had been thought the low milk price and dry summer, would ‘‘slam the brakes'' on New Zealand milk production.
Instead, good growing conditions meant the production slowdown was more gradual.
In an oversupplied dairy market, gradual was not fast enough.
The risk was now that global production might hold higher for longer than previously thought, Mr Penny said.
‘‘While we maintain a positive long-run dairy view, the lower prices go in the short-term, the harder it gets to reach our milk price forecasts,'' he said.
The latest GDT result reinforced the bank's Official Cash Rate view, that there would be two further cuts in June and August, taking the OCR down from 2.5% to 2%.
Westpac senior economist Anne Boniface said it was a bigger fall than both the bank and the market had been expecting.
While futures prices had moved lower in recent days, they had been pointing to about a 6% fall in whole milk powder prices.
The result introduced some downside risk to Westpac's recent $4.20 payout forecast for this season and also threw its $5.20 forecast for 2016-17 into the spotlight.
‘‘While there is plenty of water to go under the bridge between now and the end of next season, our 2016-17 farm-gate milk price forecast assumes WMP prices average about $2400/tonne.
‘‘But with WMP prices just $1952/tonne after [this week's] auction, these levels currently look some way off,'' she said.
Dairy Women's Network is holding a Tracking Your Cash workshop in Clinton on Tuesday, February 9, to help farmers deal with the challenging times, by taking control of their finances.
