Bank cuts forecast milk price

"After a drought-driven false dawn earlier this year, prices are at their lowest in five years," says ASB's rural economist Nathan Penny.

"This is driven by a potent mix of domestic production getting a second wind and demand remaining weak. However, we still expect production to slow down to the point where demand can catch up, just later than previously expected."

ASB has cut its forecast for the 2015-16 season to $5.70/kgMS as well as adopting Fonterra's lowered 2014-15 milk price forecast of $4.50/kg MS.

Penny says it also now expects the RBNZ to cut the OCR this year, most likely by 25bp in each of September and October.

"The lower interest rate outlook has let some of the hot air out of the NZD, and it has started to fall against most major currencies. Also in the end, the NZD never reached its threatened parity with the AUD. If we do see the NZD weaken over the year, the lower NZD will support farmers' export returns in NZ dollars and make NZ products more competitive in international markets."