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Fonterra's budget for a 3 per cent rise in milk production this season has withered in the face of the La Nina drought now hitting even dairying regions such as the Waikato, and Southland.

Fonterra - the world's biggest exporter of dairy products - warned today that the big "dry" was not only eroding New Zealand's milk production but might restrict new export orders.

"At this stage, we are ... confident we can meet all our customers' contracted orders but supply is tight," said Fonterra chief executive Andrew Ferrier.

"We now find ourselves effectively booked up for the season. This is forcing us to advise customers that we may not be in a position to take all new orders for New Zealand supply."

The company had budgeted on a 3 per cent rise in production this year to about 14.8 billion litres, but now expects the drought to cost its 10,000 farmers as much as $500 million by the time the season ends in May.

"The dry spell has already cost farmers about $60 million in milk payout, and on-farm losses would continue to mount unless there is significant rainfall," said company chairman Henry van der Heyden.

"Every day without rain is hurting farmers, and will have a flow-on impact for local communities and the broader economy."

"This has really taken the shine off what should have been a fantastic season for our farmers, with a record payout."

Fonterra said in December it was lifting its forecast for this season's milk payout to a record $6.90/kg milksolids - a windfall which will pump a massive $3.25 billion into farmer incomes.

Mr van der Heyden said Fonterra was holding to its $6.90 payout forecast even though it was now facing "something of a double whammy" with a drop in milk production and exchange rate close to US80c.

"The record dry summer over much of the country means season-to-date milk production is now falling below last year," he said.

Fonterra last year collected 14.34 billion litres of milk.

Mr van der Heyden said the widespread dry spell was hitting farmers hard in most parts of the country.

On a daily basis compared to the past year, Waikato production was down 27 per cent, Bay of Plenty milkflows were down 21 per cent, Taranaki was down 9 per cent, and Southland was down 1.5 per cent.

The Waikato and the Bay of Plenty, together account for about 40 per cent of the national dairy herd.

He said farmers in dry regions were facing up to challenges in terms of lost cash flows and also in managing their farms with very little feed available.

Fonterra had been looking at supplementary feed options and how it could support farmers, "but the stark reality is that there is a real feed shortage both in New Zealand and overseas."

In many parts of the country, January rainfalls were the lowest or second lowest on record, temperatures have been hotter than usual and soil moisture levels are falling.

The lack of feed was causing sheep farmers to sell stock early and dairy farmers were recording lower production as many were forced to dry-off their milking herds.

Waikato was yesterday declared a drought zone after its driest January in more than 100 years.

A combination of low rainfall, near record high temperatures, extremely dry soils and falling river levels prompted what is reported to be the region's first drought declaration.

"People can't count on the rain coming anytime soon ... with drought conditions predicted to continue to the end of autumn, Waikato regional council chairman Peter Buckley warned.

Even if rain fell it was unlikely to put enough moisture into the soil to boost pasture growth to normal levels.

Agriculture Minister Jim Anderton - who will stage a national drought meeting of government officials and sector leaders at 4.30pm on Tuesday at 4.30pm - said if the dry weather persisted, the situation would become very serious in some areas.

* In the capital, Wellington regional council chairwoman Fran Wilde warned that low levels in storage lakes mean urban residents are likely to face a sprinkler ban and possibly more severe water restrictions.

High water demand and continuing sunny weather have seen the level of the water supply lakes drop by 10 per cent," Ms Wilde said. Water levels in the Wainuiomata catchment are so low that the water treatment plant there may have to close.