Average incomes for dairy farmers are expected to fall by half this year compared to last year, because of falling milk solid prices and high costs.
Fonterra on Friday slashed its forecast payout to farmers for the year to May 2009 by 60 cents to $6 a kilogram of milk solids. At the end of last season farmers were paid a record $7.66 a kilogram of milk solids.
Ministry of Agriculture and Forestry figures show average dairy farmers' incomes will fall from $384,000 last year to $192,000 this year - a 50% drop.
The predicted fall in income is greater than the drop of 20% in milk solid prices, because many business costs have remained high while incomes have fallen, cutting into net profits.
The ministry says its projections will probably change over the coming months as exchange rates, interest rates and fuel prices are factored in.
The drop in forecast payout to dairy farmers is a $714 million hit to a New Zealand economy already struggling with a recession.
Fonterra cited a fall of 24% in international dairy commodity prices in the past eight weeks as a contributing factor, and warned that world prices would remain weak.
Chairman Henry van der Heyden said declining prices across all commodities, including dairy, have been exacerbated in recent weeks by the global financial crisis.
He said the revised forecast payout has been brought forward so farmers could budget accordingly. Given current conditions, demand was unlikely to recover by mid-2009 as initially expected.
Fonterra chief executive Andrew Ferrier said the situation has also been made worse by a build-up of world stock levels and a rebalancing of the market is unlikely in the short term.
The impact of the demise of Chinese company San Lu was another factor in the reduced forecast.
Fonterra has a 43% stake in the joint venture. San Lu was at the heart of a tainted milk scandal in China. Four children died and tens of thousands were made ill this year after drinking milk products tainted with the industrial chemical melamine.
Farmers watch spending
Rural services and supplies companies say they expect farmers to continue curbing their spending.
Taranaki district manager for PGG Wrightson Don Newland says because the news was expected, he has already noticed customers forgoing luxury items.
Mr Newland says farmers have also been choosing cheaper alternative products when buying everyday items, particularly fertilisers and manure.
Agents in Waikato and Southland also expect farmers to spend cautiously for the next three to six months and predict a drop in the amount of machinery being sold.