Milk prices have fallen at their fastest in at least two years, undermined by a revival in production spurred by the market's recovery since last summer.

The price of whole milk powder tumbled by 14.8% to $3,224 a tonne in the latest monthly internet auction run by Fonterra, the world's biggest dairy group.

The decline, the third successive monthly fall, was the biggest since the globalDairyTrade auctions started in July 2008, and took prices to their lowest since October, half way through the price spike late last year.

And it reflected "supply increasing globally, in response to what has been a very strong price signal over recent months", said Paul Grave, the globalDairyTrade manager.

The price of some whole milk powder for near-term delivery rose above $4,000 a tonne in April, well over twice levels at the bottom of the market last July.

Supply vs demand 

The price falls, which were reflected in other dairy products, follows warnings from analysts that the market was in danger of decline after output in the main exporting countries returned to growth in May.

Rabobank warned a month ago that "the supply tide is coming in".

Many farmers had cut back herds last year in response to the dairy market slump caused by the global recession, with some Argentine and Australian producers also battling drought.

Meanwhile, hopes for demand have been cut back alongside expectations of growth in economies such as the US and China, which has emerged as a major dairy importer, thanks both to the growing wealth of its population and a mistrust of local milk after the melamine tainting scandal.

Fears fade 

Mr Grave also flagged the relatively strong fall in prices of near-term contracts, reducing their premium over products for delivery in six months' time.

"Concerns in the market about short term product availability, which to a large extent underpinned recent high prices, appear to have eased," he said.

The trend was especially strong in skimmed milk powder, for which the price of the near-term contract fell by 15.7%, to $1,064 a tonne, almost losing its advantage over the furthest away January-to-March lot, which eased by 9.1% $1,048 a tonne.

EU sales 

The declines come as the European Union has put up for sale some of the skimmed milk powder it bought through intervention buying to support farmers while international prices were low.

However, it rejected as too low bids in the first two auctions.

The European Commission in a report last week said that the release of its skimmed milk powder, and butter, from intervention stores had so far had no negative effect on the market.

"At present, EU and world prices appear to be stabilising for most commodities despite the seasonal increase in EU and US milk production," the commission said.