Dairy prices tipped to keep dropping after 5.1pc fall

International dairy prices fell again in Fonterra's online auction yesterday and economists expect more to come as a high currency adds to the pain.

NZ currency strategist Mike Burrowes said milk prices were now down 13.5 per cent since early June and down 20 per cent from early March.

The declines were starting to put pressure on Fonterra's payout forecast, Burrowes said. "Probably not enough to cause a downward move, but we would not want to see global prices ease much further and/or the currency push even higher."

The average price for a basket of products in Fonterra's online auction fell 5.1 per cent yesterday, having fallen 6.7 per cent and 2.2 per cent in the previous two events.

The average winning price in the auction was US$3677 a tonne, the lowest since the start of December.

BNZ economist Doug Steel said the latest result was further confirmation of the downward trend.

"It's probably all the more meaningful because it's happening with the backdrop of the Kiwi dollar continuing to strengthen."

Steel expected the decline to continue, but in the medium term dairy prices would remain relatively high.

Fonterra's opening forecast for the 2011/12 season was $7.15-$7.25, which the company said reflected a realistic outlook towards global dairy markets.

"I guess if these trends were to continue with prices falling and the currency pushing higher, then a downward move in payout forecast could result, but I don't think we're at that point yet," Steel said.

ANZ rural economist Con Williams said he had expected some softening in dairy markets.

"I think there'll be a little bit of further softening before we see things then stabilise and maybe move up."

Prices would still be at historically high levels.

Agricultural market analyst NZX Agrifax said US exports of non-fat dry milk and skim milk powder increased 48.7 per cent in the first five months of 2011 compared with the previous year, while the European Union was up 40.8 per cent.

- Additional reporting: NZPA