Whole milk powder prices on the monthly auction fell 7% from the previous sale in December, ending a five-month run in which prices had risen 95%.
Fonterra's globalDairyTrade manager Paul Grave said in an interview that even with yesterday's correction, whole milk powder prices were still well above their long-term average, which should prompt a response from other dairy producers.
The average whole milk powder price paid yesterday was $NZ4500 ($US3309) a tonne, a drop of $NZ340 a tonne from December's auction.
Prices yesterday ranged from $4420 to $4870 a tonne and were still well above the long-term average range of between $2000 and $2500 a tonne.
Demand was still strong, evident by a premium paid for powder to be supplied in three months, as buyers ensured their future supplies.
Prices for anhydrous milk fat, an industrial butter, averaged $6218 a tonne, a lift of $260 or 4% on December's price.
Specialist rural lender Rabobank previously warned of a price correction, saying the rapid increase in price might not be sustainable and could create another boom-and-bust cycle.
Mr Grave said the sale result showed the market had undergone a "minor correction".
"This is one signal that the markets are now more closely in balance.
The result is within the range of price movements we would expect to see in the current market environment," he said.
Any international supply response would take time as farmers had culled cows in response to the collapse in milk prices a year ago.
Westpac rural economist Doug Steel wrote recently that United States dairy farmers culled 250,000 cows in 2009, which resulted in October milk production 1% lower than a year earlier.
The US Department of Agriculture has forecast US milk production to fall in 2010, making it the third successive year milk supply has declined, the first time that has occurred since 1969.
Production in South America has been hit by drought, with milk flows from Argentina down 3.2% in the three months to December, while the start of the Australian dairy season has been slow and milk flows were forecast to be down 4%.
Production for the three months to December alone were 5.6% lower.
Mr Steel said the key to supply and demand balance this year was how European farmers responded to higher prices.
This week's Fonterra auction was for 25,000 tonnes of whole milk powder and 3600 tonnes of anhydrous milk fat.
Mr Grave said skim milk powder would be offered from March, meaning 20% of Fonterra's New Zealand-sourced milk products, about 400,000 tonnes annually, would be sold on globalDairyTrade.
