Fonterra's decision to freeze domestic milk prices until the end of the year has baffled some in the dairy industry, who say it is unnecessary and could "end in tears".

The dairy co-operative announced the freeze yesterday after widespread criticism that milk had become unaffordable for many families.

Federated Farmers dairy spokesman Lachlan McKenzie today said he was surprised and confused by the move.

"I'm scratching my head to understand why Fonterra would do it," he told NZPA.

"It won't cost Fonterra anything, it'll cost the owners and farmers that supply Fonterra.

"If they sell milk for a lower price then farmers get less money for it."

Farmers were not making as much money as some people thought, Mr McKenzie said.

"The current high milk prices has many thinking that farmers must be creaming it but we're not.

"Most dairy farmers, myself included, got less than $0.60 for a litre of milk last season. From these 60 cents, we had to pay all the costs of production, including, wages, vets, tax, as well as paying the mortgage."

The Government needed to step in and evaluate the retail margins on all primary produce, not just milk, Mr McKenzie said.

"There needs to be a true unbundling of the retail margins involving our primary produce.

"It would also be great if the Government put the same pressure on the costs it and local government impose. Some more discipline in its spending goes a long way."

Agriculture Minister David Carter yesterday ruled out introducing government subsidies to keep prices down.

Mr McKenzie said he found it difficult to understand why some people could not afford to buy milk when many other products were cheaper than ever before.

"The markets are adjusting all the time, as our commodity prices have risen our exchange rate has gone up, that means that the clothes you buy, the televisions you buy, the bananas you buy, are cheaper."

Fonterra chief executive Andrew Ferrier said the price of milk had risen steadily over recent months, with world dairy prices going up by more than 26 per cent since December.

"We recognise milk is an important part of the diet in New Zealand and we want to ensure that future generations of New Zealanders grow up enjoying it every day," he said.

The price freeze came as Fonterra predicted a bonanza payout for the current dairy season of $7kg-$7.10/kg, with 10,463 farmers each expected to receive an average gross payout of more than $800,000. Some industry observers predict average payouts may be closer to $900,000.

The money paid to farmers -- most of it from export earnings -- will provide a $9 billion shot in the arm for the economy.

The high cost of milk came under severe criticism this week, with Northland's Manaia Health primary health organisation chief executive Chris Farrelly saying it was a national outrage that a country which produces 15 billion litres annually could not supply cheap milk to the domestic market.

Mr Farrelly said that the price of a two litre bottle of milk in Whangarei supermarket was up to $4.79 and the cheapest was $3.65.

"Milk is vital for children's health and bone development. Milk and milk products provide energy, protein, fats, vitamins and minerals," he said.

"It should be seen as an essential food - not a luxury," he said.

- NZPA