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A big slump in dairy prices overnight has been driven by large Chinese stockpiles, but demand for milk powder will eventually bounce back, a dairy analyst says.
Dairy product prices dropped 8.4 per cent overnight in the GlobalDairyTrade (GDT) auction, bringing prices to their lowest level since October 2012.
The drop comes after prices slumped 9 per cent a fortnight ago, with prices dropping 41 per cent since February.
Agrifax senior dairy analyst Susan Kilsby said it was disappointing that whole milk powder prices were down by so much -- a drop of 11.5 per cent.
"It is really disappointing, because we've seen quite a lot of strength in other dairy markets around the world," she told Radio New Zealand.
"In the US, some of the products are at record prices at the moment. But there we're talking cheese and butter, and the whole milk powder market is quite a different story, very much driven by supply out of New Zealand and buying out of China."
Ms Kilsby said China had bought a lot of product earlier in the season and was still working through those supplies.
"So while they are still buying some product, they're not buying enough product to put any upwards pressure on prices. So we're just seeing these really weak results on GDT at the moment."
However, the long-term outlook for the Chinese market was still very strong.
"It's just a matter of time for this process to work itself out and these stocks to be cleared," she said.
"We definitely are expecting it to bounce back."
Federated Farmers dairy chairman Andrew Hoggard told Radio New Zealand the drop was "not pleasant".
However, the GlobalDairyTrade price was not what farmers got paid. Those prices are set by dairy co-operative Fonterra, which dropped its payout from $7 to $6 per kilogram of milk solids last week.
Mr Hoggard said the GlobalDairyTrade auction gave farmers an indication of what prices products would fetch.
"And that gives us an indication as to whether or not things might be going down or up in terms of the milk price that we get paid, so it's a good indicator of whether we need to tighten things up in the business, or whether we can afford to look at capital expenditure or not in the coming seasons."
The full impact of the GDT drop might not be felt until later, if Fonterra dropped the milk price further.
"They are linked, but there is a lag effect. And if the GlobalDairyTrade turns around quite quickly and comes right, then we may not actually see a change."