A milky cloud loomed over South Canterbury's economy yesterday with the drop in dairy prices.
There was an 8.9 per cent decrease in prices for dairy products at Fonterra's fortnightly Global Dairy Trade (GDT) auction yesterday.
The GDT is a platform for selling dairy commodities and provides a reference point for what farmers are going to be paid at the farm gate. ASB rural economist Nathan Penny said the sharp drop would have an impact on spending by farmers in South Canterbury.
"There will still be some momentum from the last payout of milk solids.
"That will continue through to October," he said.
However, with dairy being such an important sector to the local economy, there would be a knock-on effect to other businesses, as farmers become more cautious of their spending, he said.
"That means they won't be spending as much in cafes and other places," he said.
But Penny said it was not all doom and gloom for the local economy.
There would still be a flow-on from the Christchurch rebuild, he said.
"The volume of produce from farmers should be fine so there shouldn't be any impacts on the port deal either," Penny said.
He predicted milk solids would get $6.00 to $6.20 a kilo in the 2014-15 season. The current farmgate milk solid price is $8.40.
Meanwhile Bayleys Real Estate South Canterbury rural manager Paul Brown believed a drop at auction in the off-season was not significant.
"If the drops continue, then we may see a rural decline but there is nothing in it at the moment.
"When things like that happen, what happens is there tends to be a reduction in sales rather than people taking the hit and selling for a reduced value," he said.
Brown said a new season was just around the corner and the price of product variance can happen in the off season.
"We don't usually see anything at this stage," he said.
The falls meant dairy product prices were at their lowest level since December 2012.
Fonterra would not reviewing its estimates after yesterday's slump.
A spokesman for the dairy giant said a review would require a board meeting, and the next update was likely to be in August, as scheduled.
At the last review Fonterra reduced its farm-gate milk price to $7 a kilogram of milksolids for next season, and cut this season's forecast from $8.65 to $8.40.
A DairyNZ report earlier this week estimated the New Zealand economy earned $17.6 billion from dairy exports.
It said regions throughout New Zealand milked $14.32b in dairy earnings, up 40 per cent on last year.
A $2.77b chunk of that was from Canterbury.
- The Timaru Herald