In its Agribusiness Rural Commodities Wrap, NAB says Australian milk production is expected to rise another 2.2% per cent in 2011-12 and New Zealand production is set to increase 5% - which is forecast to lead to a 7% fall in prices compared with 2010-11.

NAB Agribusiness general manager Khan Horne says milk production to date in 2011 is 2% higher than the same time last year – driven by strong seasonal conditions in many dairy regions, falling feed costs and favourable pricing.

"Much of the increase has been coming from northern and western Victorian, where production is up 11.4% and 5.5% respectively," Horne says. "We've also seen a 10% jump in Tasmania."

He says meanwhile a strong season in the northern hemisphere has resulted in a considerable exportable surplus.

"Global demand has not kept pace with supply and the key question is who is going to absorb this surplus. Looking ahead, these market fundamentals point to further falls in the world dairy price during the year, but it's important to note that prices are still 48.5% above their average over the past decade."

Dairy prices – which have fallen for seven consecutive months – continue to fall, with the decline from their peak to approach 20% by next June, the report says.

Report author, NAB agribusiness economist Michael Creed, says the peak in the recent cycle in dairy prices has well and truly passed. Creed highlights pullbacks in demand from major customers, including Russia, whose buy-ins have "slowed through 2011", and China.

"While a considerable exportable surplus has been building up in the big exporters, demand has not," he adds.

Indeed, separate data from Global Trade Information Services shows China's whole milk powder imports tumbling by more than 50%, year on year, below 10,000 tonnes in October.

While an improvement of 2000 tonnes month on month; the rate of decline was steeper than seen in September when China's whole milk powder imports hit their lowest for nearly three years.

Thanks to a strong start to the year, imports so far in 2011 remain ahead of those a year before.

But the rate of increase has narrowed to 7% for the first 10 months of the year, from 13% as of September.

Australian dairy farmers are being shielded from world pressures by the ready availability of fodder.

"Australian producers are more likely to keep margins positive in an environment of falling global prices for dairy," Creed adds.