Hokitika-based Westland Milk, New Zealand's second biggest dairy cooperative after Fonterra, said it would cut its forecast farmer payout for 2014/15 by 40c a kg of milksolids to a range of $5.00 to $5.40 a kg.
Advance payments to shareholders will also be adjusted to reflect the lower dairy prices and, therefore, the lower cash flows into the business, chairman Matt O'Regan said.
"This will be unwelcome news for shareholders, but not unexpected," O'Regan said in a statement.
"At our October shareholder meetings we warned suppliers that the high level of in-market stocks held by dairy customers was producing downward pressure on prices, especially in the area of bulk milk powders where the majority of our business is still conducted," he said.
Bank and industry commentators have widely predicted continued downward pressure on pay-outs throughout the industry after a near 50 per cent in international dairy product prices since February.
Fonterra is widely expected to take a big knife to its $5.30 a kg farmgate milk price when it updates farmers early next month.
O'Regan said that the inventory position for many of New Zealand's dairy customers was a reflection of some overstocking earlier in the year following supply concerns due to drought, food safety and regulatory changes.
He said customers were "generally comfortable" with their inventory positions into the first quarter 2015, "so we do not expect a sudden uplift in demand".
"The lesson from this is that Westland's drive to produce more value added products - such as our move into base infant formula powders and our recent announcement of an investment in a UHT milk plant - is the right direction to take so we are less reliant on the highly volatile commodity markets in future," he said.
O'Regan said the pay-out will undoubtedly be a challenge for many farmers and budgets will be tight. The company had systems and processes in place to offer every support it can to shareholders who might struggle financially, he said.
Westland is holding its annual meeting of shareholders today.