The ASB says trade tensions between the United States and China are behind the plunge in prices at the latest global dairy auction.
Average prices tumbled by 5 per cent per cent to reach US$3232, the most dramatic decrease seen in the index this year.
The price for New Zealand's key export whole milk powder (WMP) was US$2905, a fall of 7.3 per cent. Futures markets had suggested WMP might fall by 1 per cent.
ASB rural analyst Nathan Penny said dairy markets were nervous and last night's fall in dairy auction prices reflected the nervousness.
"We stick to our positive dairy market view, but note the increasing potential for further dairy market fallout," he said.
Chinese tariff increases on US exports, scheduled for July 7, include dairy and other agricultural products.
Mr Penny said New Zealand would ironically stand to benefit from increased Chinese tariffs on US dairy products.
"These tariffs will make NZ dairy products cheap relative to US equivalents. In turn, Chinese are likely to increase their demand for NZ dairy products, boosting NZ dairy prices.
"For now though, dairy buyers are more nervous about the fallout from the increasing trade tensions and the potential impact this could have on dairy demand.
"Already, currencies for key dairy buyers have fallen, with the Chinese yuan down around 3 per cent since the last auction.
"Meanwhile, Chinese stockmarkets have also taken a hit with the Shanghai Composite Index down nearly 10 per cent over the same period."
The NZ dollar had also fallen about 3 per cent against the US over the past fortnight, but the spot milk price was still sitting at a "healthy" $7.00 per kilogram of milksolids.
AgriHQ said Fonterra's latest Global Dairy Update appeared to have given the market the jitters, especially for WMP.
It showed its May production was up 6.6 per cent and that it expected to collect 1.3 per cent more milk in the 2018-19 season. There was 20 per cent more WMP sold than at the last auction but buyers were not willing to pay more for it.
All products except butter milk powder and rennet casein fell. Skim milk powder (SMP) was down 4.6 per cent to US$1913, and butter slipped 4 per cent to US$5390.
Anhydrous milkfat (AMF) was down 1.7 per cent, and cheddar prices also fell 4.3 per cent. But buttermilk powder lifted 6.4 per cent, as did rennet casein (3.6 per cent).
Fonterra said production over the past 12 months had been up in many major dairy countries. The European Union and Australia both recorded 3 per cent rises, and the United States 2 per cent. New Zealand on the other hand had flatlined with a zero per cent growth rate.
Meanwhile this week the Global Dairy Trade marked 10 years of auctions with more than US$22 billion cumulative value of dairy products to buyers from over 80 countries.
GDT director Eric Hansen said the auctions re-wrote the rules of engagement for buying and selling dairy commodities.
"In the era before Global Dairy Trade existed, buyers and sellers were struggling to understand what constituted a current market price in the midst of unprecedented volatility," he said.
"Dairyfarmers had limited access to information about what the milk in their vats was worth in international markets.
"By applying advanced auction methods to create a new sales channel for globally-traded commodity dairy products, Global Dairy Trade's auctions provided assurance to buyers that they were paying a fair market price. Buyers and sellers were able to better manage price risk.
"And farmers had a regular market-based price signal around which they could plan their farming businesses."
The platform launched at the height of the global financial crisis and dairy prices initially crashed but eventually recovered.