News: FSF UPDATE 1-NZ farmers eye dairy recovery despite global price fall

(Recasts and updates with farmer and analyst comment)

A dip in global dairy prices on Wednesday added to farmers' concerns that a nascent recovery could be short-lived, although analysts said it was too soon to tell whether the decline was a one-off.

Prices in the fortnightly Global Dairy Trade Auction fell 3 percent to $2,880, abruptly ending a two-month rally that farmers had hoped would cap two years of plummeting prices amid global oversupply and a slow-down in demand from China.

"It is a 'wait and see time' and I think for farmers it's a case of carrying on with tight budgets and not getting carried away," said Andrew Hoggard, dairy chairman for industry lobby group Federated Farmers.

The New Zealand dollar fell to $0.7188, its lowest level since August, after the auction, reflecting the fact dairy accounts for more than seven percent of the country's GDP.

Although a drop at one auction alone was not cause for panic, analysts said, further falls could call into question last month's hike in milk price forecasts by Fonterra (FCG), the world's largest dairy exporter.

Fonterra in September lifted its farmgate milk price forecast for the current season by NZ$0.50 to NZ$5.25 ($3.84) per kilogram of milk solids, citing reduced global supply and steady demand.

"We'd need to see at least another auction of prices coming down before we see that Fonterra milk price under pressure," said Susan Kilsby, analyst at AgriHQ.

Con Williams, agri-economist at ANZ, said a continued recovery was still likely given solid demand in countries other than China and a supply contraction in major markets bar the United States as producers reacted to lower prices.

"Despite this (auction) we continue to believe the recent rally in prices has more durability than recent years," Williams said.

The Federated Farmers' Hoggard said farmers were looking for the majority of auctions to be positive by December before relaxing.

"The concern would be that suddenly the taps get turned back on around the world," he said.

The next Global Dairy Trade Auction takes place on Oct 18.