News: FSF UPDATE 1-Dairy prices fall at auction, volumes rise

(Adds analyst comment, market reaction)

WELLINGTON, Aug 2 (Reuters) - Overall global dairy prices fell at an auction on Wednesday, though a rise in sales volumes and strong gains for whole milk powder suggested a mixed outlook for farmers.

The Global Dairy Trade (GDT) Price Index dipped 1.6 percent, with an average selling price of $3,343 per tonne, in the auction held in the early hours of Wednesday morning.

Prices have now dropped at three of the last four auctions, though this was not yet causing alarm given it followed a strong three-month rally.

The index rose 0.2 percent at the previous sale, according to GDT Events, which runs the auction.

After two years of declining prices, farmers and analysts had been concerned that a 50 percent rebound during 2016 could be temporary, but prices got back on track the past few months as global supply tightened.

Whole milk powder, the key export for New Zealand, rose 1.3 percent.

Losses were led by anhydrous milk fat and butter, which both fell by 4.9 percent.

"We suspect that the slowdown in milk fat prices may be temporary. Demand continues to surge and inventories are now very tight," ASB said in a research note.

"As supply struggles to keep up, we expect that any further lift in milk fat prices will lift dairy prices more generally."

A total of 32,768 tonnes was sold at the latest auction, a 22.8 percent increase from the previous one.

The auction results can affect the New Zealand dollar as the dairy sector generates more than 7 percent of the nation's gross domestic product. The currency was little changed on the day, trading around $0.7472.

GDT Events is owned by New Zealand's Fonterra Co-operative Group Ltd (FCG) but operates independently from it.

U.S.-listed CRA International Inc is the trading manager for the twice-monthly Global Dairy Trade auction.

The auctions are held twice a month, with the next one scheduled for Aug. 15.