Falling oil prices, geopolitical uncertainty in Russia and Ukraine and subdued demand from China has continued to weigh on prices at a time when production was running hot in New Zealand and elsewhere.
"Luckily, the New Zealand pasture-based model is good at adapting to these fluctuations quite quickly," said Fonterra's chief financial officer, Lukas Paravicini.
"It is going to be a difficult year, but I think farmers will look through it and that they will look over a longer period of time to assess the profitability of their farming operations."
Fonterra said it would be further strengthening its controls on operating expenditure, driving its working capital harder and deferring capex to generate more cash.
But Paravicini said the co-op's plans to spend $555 million to establish a high-efficiency milk powder dryer at Lichfield, in South Waikato, and three new plants at its Edendale site in Southland would proceed.
Installation of a $200 million dryer at Pahiatua, in Wairarapa, is already under way.
Paravicini said Fonterra had not provided an updated dividend forecast because of volatility on world dairy markets.
Market expectations are that lower milk prices will mean lower input prices for Fonterra, which should mean a higher dividend. Fonterra will revise the estimated dividend range at its first-half result next year.
ANZ rural economist Con Williams said Fonterra's comments on belt-tightening implied it would look at paying a higher proportion of its earnings as dividends.
"I think that dividend earnings should look quite good," he said.
Much of Fonterra's thinking is based around wholemilk powder prices returning to US$3500 a tonne from US$2229 a tonne at the last auction. The farmer-funded DairyNZ said the drop in Fonterra's forecast milk price would test farmers.
"We've calculated that around a quarter of dairy farmers are facing some business risk this season at the $4.70 milk price," said DairyNZ chief executive Tim Mackle. "That means they will have difficulty meeting their interest payments, rent and farm working expenses without incurring more debt."
Westpac said the drop from last season's record $8.40 farmgate milk price to $4.70 was equivalent to a reduction in income of $6.1 billion for the New Zealand dairy industry, or 2.7 per cent of the nation's gross domestic product.
To date, rural confidence had remained "surprisingly robust" in the face of falling payout forecasts, and the general sentiment had been that farmers could weather one low payout, Westpac said.
"We suspect that the reality of a payout as low as $4.70 is going to dent that confidence."
Westpac predicts a low farmgate milk price of just $6.20 for the 2015/16 season, assuming that global milk prices rise rapidly over next year.
ANZ said the industry could manage one tough year, but two years of a sub break-even payout would become problematic and would entail material economy-wide consequences. ASB Bank has shaved its 2015/16 forecast back to $6/kg from its previous forecast of $6.50.
Time to tighten belts
• Fonterra cuts forecast farmgate milk price to $4.70 a kg from previous forecast of $5.30.
• Low prices blamed on geopolitical uncertainty, strong production and weak demand.
• Drop from last season's $8.40 farmgate milk price equivalent to $6.1 billion fall in income, or 2.7 per cent of GDP.
• DairyNZ estimates reduced income for Waikato alone to $1.8 billion.
