Meat and dairy products led the fall in total manufacturing sales in the March quarter.
Figures released by Statistics New Zealand yesterday showed the volume of total sales fell 1.2%. Meat and dairy product manufacturing volumes fell 7.8%.
Petroleum and coal led the increases across the rest of manufacturing.
Fonterra's weaker-than-expected opening season milk price forecast of $4.25 was likely to lead to a greater production decline over the new season, ASB rural economist Nathan Penny said in the latest Farmshed Economics report.
ASB was expecting production to fall 5% compared to this season, whereas based on a milk price forecast closer to $4.80, the bank had expected a more modest 3% fall.
A bigger New Zealand supply adjustment would reinforce the eventual uplift in global dairy prices and, on that basis, the bank continued to expect a milk price of $6 by the end of the season.
Tightening supply of lamb had given prices a "short-term shot in the arm'', Mr Penny said.
The price of 17.5kg lambs had jumped about 11.4% over the past month, which was on top of the normal seasonal increase expected at this time of the year, he said.
While weakening New Zealand supply had been expected to support prices, tightening Chinese domestic supply could also be added.
Chinese producers were reportedly now no longer receiving a 30% local premium as a result. Local supplies were expected to fall and Chinese buyers to turn to New Zealand to fill much of the gap.
ASB was similarly bullish on the longer term, where the deal to export chilled meat to China might provide longer-lasting support to lamb prices, he said.
