ASB now expects a $7.40/kg milk price, compared with Fonterra's range of $7.00 to $7.60/kg.
The bank said the change reflected downward impact on prices of the coronavirus outbreak in China, partly offset by the likely upward price impact of the drought on prices as a result of curtailed production.
Listen to Jamie Mackay interview Fonterra chief executive Miles Hurrell on The Country below:
ASB has trimmed its 2019/20 dairy production growth forecast to half a per cent decline compared to last season.
"The impact of the coronavirus on dairy markets is starting to run its course," ASB senior rural economist Nathan Penny said in a commentary.
The disruption to dairy markets was most notable in supply chains, with many Chinese factories (that use dairy inputs) closed.
"Nonetheless, the price impact has been modest to date," he said.
In total over February, whole milk powder prices have fallen 8.6 per cent, which does not make the top 30 of monthly auction falls, he said.
Moreover, Chinese buyers remained active, albeit cautious, on the auction platform.
"These signs remain consistent with our central view that the coronavirus impact on dairy prices will prove modest and short-lived," he said.
Meanwhile, key dairy regions are very dry, and an official drought has been declared in Northland. A declaration for the Waikato and other regions may not be far away.
In trimming its forecast, ASB said there were many moving parts to dairy markets and that its forecast may require further tweaks over the coming months.
"We also note for some farmers hit by the dry, the lost production will be the more significant impact on farm bottom lines," he said.
At this morning's auction, butter prices dropped by 3.9 per cent to US$4090 a tonne and anhydrous milk fat fell by 5.5 per cent to US$4379 a tonne. No butter milk powder was offered.
Outside the reference products, cheddar prices gained 5.3 per cent to US$4526/tonne and rennet casein eased by 0.9 per cent to US$9873/tonne.
