The Global Dairy Trade's four-auction winning streak came to an abrupt end this morning when prices fell by 3.1 per cent, led by declines in whole milk powder, skim milk powder and butter.

Whole milk powder prices, which are key to determining Fonterra's farmgate milk price, dropped by 4.6 per cent to US$2694 a tonne.

Another key product, skim milk powder, fell by 4.5 per cent to US$2178 a tonne while butter prices lost 11.1 per cent to US$2850 a tonne.

LISTEN TO JMIS'S ANDREW KELLEHER SPEAK TO RACHEL SMALLEY ON KPMG EARLY EDITION ON THE DAIRY TRADE AUCTION ABOVE

Today's price action was against market expectations, which were for a levelling out of prices and a for slight gains in some product groups.

"It is certainly looking like a bit of a setback because we were expected to see some gains," Eric Meyer, president of Chicago-based risk management, advisory and brokerage firm HighGroundDairy, said. "It's well below expectations."

After this morning's auction, whole milk powder prices are still short of the US$3000 a tonne level that Fonterra is understood to be comfortable with.

The co-operative currently has a $4.60 per kg of milksolids farmgate milk price forecast on its books - still well short of the $5.30 a kg required to reach the estimated average breakeven point for most farmers.

Fonterra has forecast its milk production to fall by 5 per cent this season and some forecasters expect New Zealand's total production to fall by as much as 10 per cent.

There are also concerns that the current El Nino weather pattern will result in drought, which will further inhibit output and put upward pressure on prices.

The average winning price at this morning's auction was US$2735 a tonne.