SYDNEY, Dec 21 (Reuters) - Dairy giant Fonterra said on Wednesday its milk collection in New Zealand fell 5 percent during the peak production month of October due to wet weather, a potential boost to prices.
Milk production in New Zealand - the world's largest dairy exporter - has fallen steadily this year after farmers reduced their herds in response to a slump in prices, but October's decline was sharper than in recent months.
"New Zealand milk supply generally peaks in October and the recent challenging conditions have had a significant impact on peak milk volumes," Fonterra said in a statement.
"These lower volumes are expected to flow through the remainder of this season," it added.
Dairy prices unexpectedly fell at the latest fornightly global diary auction earlier on Wednesday, but have still rallied about 20 percent over the past two months following a two-year price slump due to global oversupply.
"The recent rally in milk prices has been supported by declines in supply in places such as New Zealand and so bigger declines in output could push prices higher," said Phin Ziebell, agribusiness economist, National Australia Bank
Fonterra said milk production at its smaller Australian operations also fell 11 percent in October.
Prices may be further supported by continued strong export demand. Fonterra said monthly exports in September rose 16 percent year-on-year.
Much of the growth in Fonterra's exports was driven by South American demand, which has grown 34 percent between August 2015 and August 2016.
Chinese imports over the year are up 5 percent, Fonterra said.
Reporting by Colin Packham; Editing by Richard Pullin