Increasing volumes on offer are being cited as the cause of a third consecutive fall in prices on the GlobalDairyTrade auction this week.
Prices dropped by 5.3% on a trade-weighted basis, with whole milk powder down 7.1%, skim milk powder down 3.2%, anhydrous milk fat down 4.3% and butter down 2.6%.
Maximum supply was 25,888 tonnes, up from 18,985 tonnes at the previous auction on May 15. The average winning price was $US4443 ($NZ5540), down from $US4549. Westpac economist Nathan Penny said the fall was in line with the bank's expectations.
Westpac has revised its 2013-14 season milk price forecast up by 30c to $6.50kg ms, 50c below Fonterra's opening forecast of $7kg ms.
The bank expected a strong rebound in New Zealand production following this year's drought would put more downward pressure on world prices than Fonterra had factored in, Mr Penny said.
Fonterra's forecast implied that world prices, after coming off their highs, would stay at an elevated level for the majority of the season.
The dairy co-operative cited weak world production in other producers, such as the EU, as providing ongoing support for prices.
''We agree with Fonterra's view on the outlook for competitors' production levels this season, however, we expect supply here to rebound strongly. We have pencilled in a 5% rebound in production volumes at this stage, and there is room for more,'' Mr Penny said.
In the latest ASB commodity report, Prof William Bailey, from the department of agriculture at Western Illinois University, said some analysts were not as positive on demand as Fonterra, and saw Europe in a recession, Chinese and Japanese economies continuing to slow and the US Federal Reserve poised to raise interest rates.
Skim milk powder prices led the fall in commodity prices in May, dropping 12% in the ANZ commodity price index, while butter fell 7% and whole milk powder dropped 4%.
Dairy prices in aggregate declined 5% in the month but were the second highest on record.
World commodity prices fell 1.6% in May, largely due to a 4.6% decrease in world dairy prices, Mr Penny said.
