As previously expected, international dairy prices dropped at the first GlobalDairyTrade auction after Fonterra's botulism scare that resulted in China declaring an import ban on some of the company's milk products.

The GDT Price Index dropped to a relatively modest rate of 2.4 per cent. The price of whole milk powder dropped by 3 per cent at $US5,021 per tonne, while the price of skim milk dropped to 3 per cent at $US4,451.

Bank of New Zealand strategist Mike Jones said with milk prices falling 2.4 per cent, investors were still relieved at the relatively modest price index. Mr Jones said the dairy auction was proof that the international dairy market was spooked with Fonterra's infant formula scare. Milk prices remained high in general. Compared to milk prices in 2012, the current dairy price remains 71.5 per cent higher.

Fonterra, New Zealand's premier dairy giant, received a confirmation report from the Ministry of Primary Industries that China has issued a temporary ban on imports of Fonterra's dairy-based powder and whey powder.

Fonterra is the biggest seller the GlobalDairyTrade auction. Farmers in New Zealand consider whole milk powder as the most important product in the auction. Whole milk powder makes up 60 per cent of total milk products sold at the auction.

Westpac economist Nathan Penny said the results of the dairy auction could have been much worse, considering the international coverage of Fonterra's contamination scare.

Fonterra's skim milk prices dropped while skim milk from Dairy America and Arla, a Scandinavian dairy company, saw an increase in price. In the skim milk market, Fonterra held a market share of 20 per cent over Dairy America. In the recent dairy auction, Fonterra's premium dropped to 14 per cent.

ASB chief economist Nick Tuffley said the results of the dairy auction were not entirely reliable due to the fact the auction happened just a few days after news of Fonterra's milk contamination issue broke out.

Mr. Tuffley said it would be difficult for food manufacturers to find a readily available substitute of Fonterra's milk products since the company is a significant global player.

The Fonterra milk scare caused the New Zealand dollar to drop but the local currency has quickly bounced back. The Kiwi dollar traded at $78.98 U.S. cents in Wellington from $78.51 U.S. cents in August 6. At the current exchange rate, the New Zealand dollar has returned from where it was before news of Fonterra's milk contamination spread.

The dairy auction sold 60,600 tonnes of milk products sold compared to 38,000 tonnes sold during the last two auctions.

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