Average dairy prices fall 6.3 pct at fortnightly auction Points...

• Average dairy prices fall 6.3 pct at fortnightly auction
• Points to slower-than-hoped recovery
• Demand not matching ramped up supply -analysts

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Prices dropped more than 6 percent at a key international dairy auction on Wednesday, suggesting stronger supply could take the edge off an ongoing recovery in the sector.

The fall in prices at the fortnightly Global Diary Trade auction worried farmers in major milk supplier New Zealand, stoking fears they could receive lower payments from dairy giant Fonterra (FGC) next season than the NZ$6 ($4.18) per kg forecast earlier.

The decline underscores the fine balance between supply and demand in global dairy markets at the moment, with sharp improvements in prices last year prompting more supply.

"If we were to get a trend of a couple of drops of the scale we had last night it doesn't take much to get back to some pretty poor prices," said dairy farmer Andrew Hoggard, who is the head of New Zealand's Federated Farmers dairy group.

Average prices fell 6.3 percent at the sale, with an average selling price of $3,512 per tonne. Prices for whole milk powder, a major New Zealand export, plummeted over 12 percent.

A total of 22,328 tonnes were sold at the auction, up 9 percent from the last sale.

"It will be difficult for prices to recover quickly while there is surplus product available," AgriHQ dairy analyst Susan Kilsby said in a research note.

Prices fell 3.2 percent at the previous sale and also dropped in January - stalling a trend of tightening supply that drove up prices by 50 percent in 2016.

However, analysts said the underlying trend for stronger prices would broadly remain on track.

"With Chinese demand looking to be holding steady for now, and global supply still well shy of 2016's peaks, we expect prices to remain well off 2016's lows," said Sarah Drought, an economist at Westpac.

The New Zealand dollar hit a two-month low in the wake of the auction, falling 0.6 percent to NZ$0.6962 on a combination of U.S. dollar strength and investor reaction to the dismal results.

Global Dairy Trade is owned by New Zealand co-operative Fonterra but operates independently from the dairy giant. Companies including Dairy America and Murray Goulburn (MGC) use the platform to sell milk powder and other dairy products.

The next auction is due on March 21.

($1 = 1.4347 New Zealand dollars)