Fonterra has stumped up $15 million to help struggling dairy farmers pay for essential supplies as they are squeezed between high debt-servicing costs and lower payout levels.

The co-operative will lend the money to its 50 per cent owned rural servicing subsidiary RD1, which will in turn extend existing interest-free terms for farmers on key dairy supplies.

"This opens up another option and some flexibility for farmers needing essential supplies to keep their farms running in what is going to be a difficult season for many," said Fonterra director of milk supply Barry Harris.

After two years of pointed warnings from the Reserve Bank about soaring levels of rural debt, particularly in the dairy sector, falling milk payouts from Fonterra have sparked concerns many new entrants have their backs to the wall.

"It's a tough time for a lot of suppliers," Fonterra's general manager for milk supply, Jason Minkhorst, told the Weekend Herald yesterday, "but the levels of farm debt have been overstated in some reports.

"There is a small minority of farmers who are under pressure and need support. Fonterra is doing all we can to help."

Tough times for some farmers have stoked fears that animal welfare may suffer, and while Minkhorst said the measures announced yesterday were primarily focused on helping with farmers' cash flows, livestock should benefit "given the lines that are targeted include cleaning and animal remedies".

Federated Farmers chairman Lachlan McKenzie said the supplies available under the arrangement included "the goods that ensure farmers remain productive, and no doubt it will help some avoid false economies".

McKenzie also said the assistance "fully vindicates the co-operative model as I couldn't imagine a non-co-operative acting in this way".

The $15 million short-term loan, on which RD1 itself must pay interest, was part of a package of "targeted initiatives" by the co-op to assist farmers under financial pressure, Harris said.

Other initiatives include a partnership with Dairy NZ to provide seminars, written material and advice on managing farm budgets through tough times and support through Fonterra's network of farmers and frontline staff.

"And we're doing all we can to advocate with the rural lenders and the Reserve Bank to get support for our farmers," said Minkhorst.

"The banks are being quite receptive and quite clear that the level of farm debt has been sensationalised."

Fonterra is forecasting a 2009/10 payout of $4.55 a kilo of milksolids.

At that level the average dairy farm would lose $222 a hectare this year, according to a recent report from Macquarie Private Wealth.

Blue Read, chairman of Fonterra's shareholders' council, told Radio New Zealand last week "a fair number" of the 10,500 farmers were exposed to losses at the $4.55 payout level.