Fonterra has confirmed it will keep its forecast milk payout for the current season at $7.90 per kg of milk solids, amounting to $9 billion.
That is an increase of 40 cents per kilogram on the previous forecast of $7.30/kg. It includes a small increase in the value added component of the payout, to 22c per kilogram.
The dairy giant says it will also hold back 24c as a buffer against volatility on international money markets.
The cut in this season's payout could carve more than $1 billion out of the New Zealand economy.
Fonterra chief executive Andrew Ferrier says dairy producers around the world have flooded the market in response to last year's record prices. He says the glut will eventually work its way through the market, but gave no timeframe.
Economists say turmoil on world markets mean prices could continue falling for another 12 to 18 months but the long term outlook for incomes is still positive, with global milk production predicted to increase by 150 billion litres by 2014.
In the 14 months to 31 July, Fonterra made a profit of $NZ235 million on revenue of $NZ19.5 million.
Fonterra collected 1,192 million kilograms of milk solids, including contract milk, a 4.3% decrease on the previous season due to drought conditions across much of New Zealand.
Fonterra says the contamination of milk powder in China, that has left four children dead and 54,000 ill, had affected its investment in China dairy goods group Sanlu, which distributed the powder.
Fonterra's 43% stake in Sanlu is now worth $NZ62 million after booking a charge of $NZ139 million to reflect product recall costs and brand value decline.