ANZ rural economist Con Williams said lower profitability was driving changes in farm management.
Westland Milk, New Zealand's second biggest dairy co-operative after Fonterra, said its seasonal production peak, which came mid-way through this month, was 2.5 per cent down compared with last season's peak.
In its latest production update, Fonterra said national milk collection fell by 4 per cent in October.
Rural lending specialist Rabobank estimates milk production across all companies fell by about 3 per cent in the season to date.
The bank said production was expected to come under more downward pressure as the effects of the El Nino weather pattern start to kick in.
In the meantime, farmers continue to cull their herds at a higher than normal rate.
The total cow slaughter is now 26 per cent higher than this time last year - about 238,000 more cows for the 12 months to September.
Rabobank expects this season's production to be down by 7 to 10 per cent compared with last season.
Drier weather is beginning to affect the key dairy regions, particularly Waikato and Canterbury.
Farmers are using less palm kernel - a cheap but controversial supplementary feed which can act to "turbo-charge" production.
ANZ's Williams said farmers were cutting back on the more expensive, domestically grown wheat and barley.
Palm kernel imports fell more than a third in October to 138,762 tonnes compared with the same month last year, according to data from Statistics NZ.
The imported feed has played a key role in increasing New Zealand dairy production over the past decade. Imports increased from 96,000 tonnes in 2003 to just over 2 million tonnes in 2014.
But in September, Fonterra made moves to limit farmers' use of palm kernel, which can alter the composition of its milkfat.
Reduced dairy supply is making its presence felt in the futures market, which has seen contract prices rally over the last week. The market is pointing to a lift in product prices at next Wednesday's GlobalDairyTrade auction.
