Fonterra - New Zealand's biggest exporter - has lowered its farmgate milk price for 2015/6 to $3.85 a kg of milksolids, down from a previous forecast of $5.25 a kg.
The co-op raised its dividend forecast for the year and slashed its capital expenditure by $500-$600 million.
Fonterra said its forecast total payout available to farmers in the 2015/16 season would be $4.25-$4.35 a kg, comprising the farm gate milk price $3.85 per kilogram of milk solids and a forecast earnings per share range of 40 - 50 cents per share.
Fonterra said milk production was expected to fall by 2 per cent this year compared with last season.
The surprise announcement was news of a 50 cent advance to farmers this season on top of the milk price and dividend.
This will be interest-free for two years and will be repaid when the milk price recovers above $6.00/kg, to be funded by reduced capital spending.
The lower farmgate milk price follows sharp falls in whole milk powder prices, which have plummeted by 51.4 per cent on Fotnerra's GlobalDairyTrade platform since March this year.
AgriHQ, estimated that a $1/kg drop in the milk price equates to about $2 billion less income for dairy farmers.
Chairman John Wilson said the fall in the milk price forecast was due to the continued "significant imbalance" in the global dairy market between weak demand and surplus supply.
"This imbalance and the challenge of lower prices continuing for longer than anticipated is a global issue, which dairy farmers around the world are increasingly grappling with," he said in a statement.
Fonterra has a dividend policy of paying out 65-75 per cent of its adjusted net profit.
Chief Executive Theo Spierings says the co-op has reviewed its capital spending and was targeting a spend of $500million - $600million less for 2016 financial year compared with 2015.
See the full announcement here:
How will this affect farmers?
A price around $5.70 is regarded as breakeven for many farmers. Those with high debt from converting other farms to dairy are more vulnerable but banks have said they are working closely with them to avoid problems.
What about dairy prices for New Zealand consumers?
They could fall, but slowly.
Fonterra points out the latest CPI figures shows the average price for 2 litres of blue-top milk is down 9.4 per cent from its peak in November 2014. The price of fresh milk is the lowest it's been since August 2013.
If the farmgate milk price were to drop the company says it would expect to make some reduction in our wholesale prices. However, there will be a lag because it would not start buying milk at a lower farmgate price until October 1. In other countries there are milk price wars where supermarkets sharply discount, incurring a loss to attract customers.
What's the long term outlook?
It could take some time for the price to recover. Around the world all dairy farmers are suffering but internationally New Zealand remains a low cost producer of milk and is better placed to ride out the storm.