Fonterra said it had cut its farmgate milk price forecast for the current season to $4.70 per kg of milk solids, down from previous forecast of $5.30 a kg, representing an estimated $6.1 billion reduction in farm income since the boom season of 2013/14.
The giant dairy co-operative said that, when combined with the previously announced estimated dividend range of 25-35 cents per share, its cash payout would be $4.95 to $5.05 for the current season.
Some market commentators had expected Fonterra to revise up its dividend forecast, but the co-op said it would look at the dividend outlook when it announces its interim result next year. The New Zealand dollar dropped on the back of the milk price news to US76.85c from US78.07 just before the announcement.
Westpac said the drop from season's record $8.40 farmgate milk price to $4.70 was equivalent to a reduction in income of $6.1 billion for the New Zealand dairy industry, or 2.7 per cent of the nation's gross domestic product.
To date, rural confidence had remained surprisingly robust in the face of falling payout forecasts, and the general sentiment had been that farmers can weather one low payout, Westpac said.
"We suspect that the reality of a payout as low as $4.70 is going to dent that confidence," it said. "What is more, we are now forecasting a fairly low farmgate milk price of just $6.20 for the 2015/16 season - and that is assuming that global milk prices rise rapidly over 2015," Westpac said.
Fonterra chairman John Wilson said the revision would put pressure on farm budgets.
"There is still considerable volatility in global dairy markets," Wilson said in a statement.
"Today's revised forecast reflects the board and management's best estimates at this time," he said. "Given the uncertainty we are advising farmers to continue to be cautious with budgeting and we will update them as the season progresses," Wilson said.
Wilson said global milk supply remains greater than demand, which has resulted in GlobalDairyTrade prices for whole milk powder falling 16.9 per cent since late September, while skim milk powder prices have fallen 7.7 per cent.
"Falling oil prices, geopolitical uncertainty in Russia and Ukraine, and subdued demand from China as it continues to work through inventory are all contributing to ongoing volatility and weak demand," Wilson said.
Chief executive Theo Spierings said Fonterra was undertaking a targeted programme to generate more cash to support farmers.
"Cash is important for our farmers and for our Co-operative," Spierings said. Fonterra would be further strengthening controls on operating expenditure and on deferring capital expenditure.
Prices on the GlobalDairyTrade platform have fallen steeply since February and economists have long been predicting a cut in the farmgate milk price forecast. Market expectations were for the price to drop to around the $4.70 to $4.80 kg range, although some forecasts were much lower.
Other dairy companies have also been cutting their milk price forecasts.
North Island dairy company Open Country Dairy has notified suppliers of further reductions in its milk price forecasts. It is now forecasting a total average milk price for the 2014/15 season of $4.50-$4.80 kg, down from a previous forecast a month earlier of $4.70-$4.80 kg.
Westland Milk Products, the Hokitika-based dairy co-operative, has cut its forecast milk payout for the second time in four months, to a range of $5 to $5.40 per kilogram of milk solids, from a previous range of $5.40 and $5.80/kg.