Southern dairy farmers have been urged to spend cautiously after an unexpectedly sharp drop in global dairy prices.
Prices fell 8.9 per cent in Fonterra's latest Global Dairy Trade auction and are now down by a third since January.
According to the Global Dairy Trade exchange, prices are now the lowest since the end of 2012.
Federated Farmers Southland dairy chairman Allan Baird said there was some "dismay" at the drop and he urged farmers to spend cautiously but said auction prices were often "soft" in July.
Prices for whole milk powder, down 10.9 per cent, led the decline, while butter prices fared better, down by only 1.1 per cent.
Tapanui sharemilker James Hartshorne said the drop in the Global Dairy Trade price was a concern but it was important to look at the big picture.
"There will always be a demand for milk products and milk powder because of the growing global population." There were always ups and downs in the auction system but he believed prices would level out and it was more important to have a long-term industry perspective. Fonterra was always looking overseas for new markets for its milk products, which was "very encouraging".
A spokesman for Fonterra said it would not be reviewing its forecast milk price of $7 per kg/milksolids for next season for farmers and the next update was likely to be late this month or early next month, as scheduled.
However, bank economists have cut their forecast returns sharply.
ANZ chief economist Cameron Bagrie said the bank had already slashed its forecast payout to $6.25 after the previous auction and further cuts were likely.
ASB slashed its forecast from $7 to $6.20 and Westpac cut its expected return to $6.
Based on last season's milk production of 1.6 billion kilograms of milksolids, that would equate to a payout of $9.6 billion, excluding shareholder dividends, a huge decline from the estimated payout of $8.40 per kilogram, for a total return of $13.4b.
Westpac senior economist Anne Boniface said the bank would monitor forthcoming auction results closely, while ASB rural economist Nathan Penny said prices had been expected to stabilise but "it hasn't got there yet".
Penny said the price slide was mainly due to producers, particularly those in New Zealand, having strong seasons and effectively flooding the market, but it also appeared China had bought strongly at the start of the
year and did not need to go to market as much.
The weakening dairy market would have widespread implications for the economy, Penny said.
"It's going to reduce farmer incomes and, depending on where this ends up - it's hard to tell where this is going - it could put downward pressure on interest rates," he said.
The fall was a "wake-up call" for New Zealand farmers, Federated Farmers dairy chairman Andrew Hoggard said.
"Farmers budgeting for the coming season need to be conservative and wary, and not to assume that we're going to get a $7 a kilogram milksolids payout and to prepare for something less than that," he said.
Farmers had to plan far ahead. They would not know until October if the final payout figure for the season would be the $8.35 forecast.
- The Southland Times