Bank of New Zealand economist Doug Steel is picking global dairy prices to keep falling as the outlook for future supply from New Zealand firms up, which could mean a higher payout next season for dairy farmers.
The average winning price at Fonterra's latest fortnightly auction fell 7.3% to $US4597 per metric tonne, the first decline since early December.
Whole milk powder experienced the biggest drop, falling 10%, followed by a drop in skimmed milk powder and a decline in butter.
However, volumes rose 15% to more than 17,000 tonnes, with more of next season's supply being traded.
Mr Steel said the drop in the average price shouldn't have been a surprise to the market.
He says it's more about the outlook of next season's supply and the recent rain has reduced the risk of what might happen next season.
As well as tight supply in New Zealand because of the drought, Mr Steel said supply has been tight globally with Australia down and flat production in the European Union and US, while demand has been strong particularly out of China.
He said underlying demand should see a better payout for dairy farmers in the coming season.
Mr Steel said production is well down at the end of this season but a 6% increase in milk production is expected next year, although the weather could change that view.
He said the strong currency could dampen any increase if there is any.
