Photo: Adam Simpson
Farmers chasing the high dairy prices seen last season are partly behind the current oversupply now putting them under pressure, according to an economist.
The average price fell three percent to US$3678 a tonne at last night's global dairy trade auction - the 7th consecutive drop and a new 15-month low.
However, ASB senior economist Chris Tennent-Brown said the price fall was not unexpected.
He said there were early signals that milk production would be very strong this season.
"That price weakness has been something we've had in our forecasts since May, when we started making predictions for the season ahead," he said.
"We came in with what seemed like a conservative forecast there of 9.75 when Fonterra had a starting forecast of $10 but with a really wide range.
"Let's face it, even if it was 9.50, if it wasn't for the fact that we'd just had a milk price north of $10, we'd be thinking this is fantastic news."
Tennent-Brown said they'd stick with their forecast price for now, though the weather might impact supply.
He said this was the case when last year's summer drought saw production taper off over the final months of the season, helping farmers get to a record 10-dollar-per kilo of milk solids payout.
"It's a classic response that prices are going to be good. You're going to be motivated to do what it takes to keep production high as an individual farmer but that adds up to the sort of production growth we've seen.
"From a farmer's perspective, you want to make as much milk as you can and capture the good prices so it's not like anyone will be praying for a drought so prices can pick up.
"But if conditions remain favourable, I think we'll see good production numbers and in turn, it's hard to see prices really turning around and heading north."
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