Turmoil in global markets and commodity prices have increased the likelihood of downward price pressure on Fonterra's global dairy trade (GDT) auction tonight.
The first GDT auction in 2016 saw whole milk powder prices fall 4.4%, raising the prospect that Fonterra's farm-gate payout of $4.60 per kg of milk solids could be at risk.
Even if the forecasts of $4.50-$4.60 are reached, the majority of Fonterra dairy farmers would still be in a negative cash-flow position.
Westpac chief economist Dominick Stephens said yesterday a further slowdown in the Chinese economy would "undoubtedly'' affect demand for all commodities, not just oil, which is the headline-grabber at present.
That was bad news for New Zealand and other commodity exporters, he said.
"Already this year, we've seen dairy prices come under renewed pressure.
"Combined with the global backdrop ... it's not hard to see down-side risks building, not only to our 2015-16 farm-gate milk price payout forecast of $4.50, but potentially beyond this.''
The backdrop for the agriculture sector was also "likely to remain soggy'' for meat and forestry exporters, Mr Stephens said.
ASB senior economist Jane Turner said tonight's GDT auction might see "a small tick up in dairy prices'', but the overall trend remained weak and highlighted one of the key areas of negative risk to the New Zealand economy.
Mr Stephens said many other countries that relied on income from commodity exports, including Australia and countries in the Middle East, were "also likely to be feeling the pinch''.
"That's another source of bad news for New Zealand, as these countries are a significant destination or our exports,'' he said.
