The July whole milk powder futures contract last traded on the NZX at US$1910 a tonne. Because the price was an average of two fortnightly auctions and the contract was priced at US$2000 a tonne in last week's auction, traders predicted a decline of 10% to US$1800 a tonne next week.
The longer-dated whole milk powder futures contracts were all trading at a discount to the GDT, suggesting traders expected prices to fall.
Dairy prices had remained lower for longer amid higher global supplies in NZ, Europe and the United States, weak demand in China and an import ban in Russia.
NZ production was rising, heading into the country's peak supply period in October, while US farmers were reportedly dumping milk into holes used for livestock manure and the European Union had ended its quota limits.
"It’s pretty negative. There’s a lot of selling in the futures and there’s not much buying – this market looks completely stuffed," OMF financial markets director Nigel Brunel said.
"Whole milk is looking to be down another thumper and then it gets worse because the volume starts to step up again as we get into August.
“There is just a gap between what is being produced and what is being consumed."
Weaker dairy prices were weighing on NZ's economy, cited as a reason for decade-low rural confidence levels, deteriorating business confidence and were firmly on the radar of the Reserve Bank which had begun cutting interest rates to bolster slowing growth.
"It’s going to put more pressure on the Reserve Bank to ease," Brunel said.
Traders were pricing in a 96% chance the Reserve Bank would cut the benchmark interest rate at this month's meeting, according to the Overnight Index Swap curve.
Some economists were forecasting three further interest rate cuts this year, which would fully reverse the central bank's tightening in policy last year when it raised interest rates by a percentage point.
The NZ dollar touched a fresh five-year low of US0.6619 overnight, with traders citing the impact of weaker commodity prices.
"The kiwi is under pressure," Brunel said.
"It has a real trickle-down effect on other parts of the economy."
Weak dairy prices prompted analysts to pull back their expectations for Fonterra's payout to farmers this season, with most forecasts now sitting below Fonterra’s $5.25 a kilogram of milksolids. Market expectations ranged between $4.50/kg MS and $5.40/kg MS. – BusinessDesk
