Dairy Prices Fall as Increased Supply Halts Industry Recovery

International milk prices fell for the first time in more than two months in an auction early on Wednesday as a recent recovery in the dairy industry unexpectedly reversed course.

The Global Dairy Index fell 0.5 percent, with an average selling price of $3,656 per tonne.

The fall is the first fortnightly slide since Oct. 4, ending a rally that has seen prices rise some 20 percent.

"The index dropped 0.5 percent largely due to whole milk powder prices softening," Susan Kilsby, dairy analyst at AgriHQ, said in a research note.

"Fonterra increased the volume of whole milk powder on offer ... there was not quite enough demand to soak up the additional product offered."

A total of 22,321 tons was sold, a decrease of 0.7 percent from the previous auction, Fonterra said.

The fall was a blow for dairy farmers who have been squeezed after prices for dairy ingredients like milk and butter fell sharply for more than two years by a global oversupply.

Dairy analysts had expected a continued recovery in prices as a global supply surplus is eroded amid stronger international demand.

The auction results can affect the New Zealand dollar as the dairy sector generates more than 7 percent of the country's gross domestic product.

The kiwi was trading around $0.6912, or down 0.23 percent, after the auction.