The European Union's decision to restore some subsidies to its dairy products could further depress prices and slow economic recovery, according to New Zealand dairy giant Fonterra.
The EU dropped export subsidies for its producers of butter, cheese and milk powder two years ago, but they will come into effect again next week.
The move has been condemned by the New Zealand Government as a distortion of world trade that would affect many countries.
Fonterra says the reintroduction of subsidies will put pressure on the world market at a time that is already difficult for dairy exporters worldwide.
Fonterra senior executive Kelvin Wickham says the EU policy could further depress dairy prices and slow economic recovery because it sends the wrong market signals in Europe.
"Their farmers are not getting a realistic price signal back for how much that milk is worth, and therefore could keep on producing milk which is in excess to demand required in the world," he says.
"That overhang of stock will continue to depress the world dairy market until that's cleared or until those mechanisims disappear for good."
Trade Minister Tim Groser described the EU's decison as "a backward step" in trade talks which could have benefited New Zealand producers and does nothing to promote confidence in gloabl trade negotiations.
Mr Groser believes the move could push down international dairy prices.
He says New Zealand's farmers would gain about $1 billion a year if the subsidies were scrapped, but the EU's decision is terrible timing.
He says the World Trade Organisation is making progress with the Doha trade talks, which aim to remove such subsidies.