Milk production in New Zealand has fallen 6% in February, compared to the previous month, according to DairyCo.
It says drought has been impacting on the country's grazing conditions as dairy production moves towards the seasonal trough.
However, it also says that concerns over the drought have been eased according to some market reporters.
The Global Dairy Trade auction has seen prices fluctuate on the back of these developments by increasing nearly 20% in February before falling by a similar margin in March/April.
DairyCo says this shows how drought developments in New Zealand could be key to whether buyers will become more active in the market over the coming months.
The price correction follows the swing in NZ’s production outlook as markets initially feared the worse following the drought declaration.
According to ASB bank in New Zealand Rural Economist Nathan Penny Fonterra was particularly pessimistic early in the year when it signalled a 3.3% forecast drop in its production for the season.
He said in contrast, ASB have held its nationwide (i.e. for all processors) production forecast steady at flat for the season, which equates to a circa 1% fall for Fonterra.
"We did find it strange how Fonterra was so pessimistic so early in the season.
"From this perspective, we suspect that the early season pessimism contributed to the subsequent price volatility, particularly once markets realised that the production outlook was simply not that bad, he said.
Furthermore, Penny said markets may have misinterpreted the implications of the official drought declaration for parts of the South Island.
"The criteria for drought declaration include a community’s ability to cope both socially and economically.
"So the declaration may have reflected dropping dairy incomes from the low milk price as much as from lower production owing to drought," he said.