WELLINGTON, June 2 (Reuters) - Global dairy prices continued to improve on strength of skim milk powder sales, though whole milk prices dropped at this month's first auction. The Global Dairy Price Index climbed 3.4 percent, with an average selling price of $2,329 per tonne, in the auction held in the early hours of Wednesday morning. Skim milk powder (SMP) rose 12.1 percent while whole milk powder (WMP) dropped 1.7 percent. "The weaker WMP price is likely to have been driven by the larger volumes on offer at this event combined with ongoing weakness in demand," said AgriHQ dairy analyst Susan Kilsby in a research note, noting that volumes of whole milk powder sales had nearly doubled to 10,712 tonnes from the previous auction. A total of 24,046 tonnes was sold at the latest auction, an increase of 32.8 percent from the previous one. The rise in global dairy prices was an increase for the second auction in a row and in four of the last five auctions, suggesting an ongoing modest improvement in dairy prices. Dairy giant Fonterra last week forecast a farmgate milk price for the 2016/2017 season of NZ$4.25, up from NZ$3.90 in the season just ending, however this was still below an estimated break-even level of NZ$5.28. Until recently, dairy was the backbone of New Zealand's economy, representing around 25 percent of exports. But prices have tumbled by more than half since early 2014, hurt by China's economic slowdown and global oversupply. Weak dairy prices have put significant pressure on New Zealand farmers. More than 85 percent of dairy farmers were already estimated to be running at a loss. The New Zealand dollar rose to $0.6819 from as low as $0.6761. The auction results can affect the New Zealand dollar as the dairy sector generates more than 7 percent of the nation's gross domestic product. The auctions are held twice a month, with the next one scheduled for June 15. (Reporting by Charlotte Greenfield; Editing by Diane Craft)
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