Fonterra’s announcement that its 2015-16 Forecast Farmgate Milk Price is reducing from $5.25 to $3.85 means a further reduction of $150,000 for the average dairy farm income for this season, according to New Zealand industry body DairyNZ.

DairyNZ chief executive Tim Mackle says the drop in the level of payments over a season will keep dairy farmers’ cash income constrained for at least the next 18 months and it will take some farmers many years to recover from these low milk prices.

“At a national level the $1.40 reduction means another $2.5 billion dropping out of local economies. This obviously impacts on farmers and their own already stretched business cashflows. It makes it even harder for them to manage their way through.

“Milk price is now half what it was in 2013/14. We calculate around nine out of 10 farmers will need to take on extra debt to keep going through some major operating losses. For the average farmer you are looking at covering a business loss of $260-280,000 this season but for many it will be a lot more than that,” he says.

“There are a lot of other rural servicing businesses that will be affected too. More than half a farmer’s business income is spent on farm working expenses. Drops like this have a cascading effect through rural economies.

“We have had a number of rural businesses tell us that they are very quiet at the moment and expect things to get even quieter. Times are tough for all businesses in the rural areas,” he says.

According to DairyNZ the Fonterra announcement will mean the lowest milk price since 2002 and since then dairy farm costs have risen more than a dollar per kilogram of milksolids and average debt levels have doubled.

Mackle said this why it has to help dairy farmers as much as it can to reduce the costs associated with producing milk.

“Low interest rates are helping but our analysis shows the average farmer now needs a milk price of $5.40 to breakeven, and this latest forecast is well short of that.

“Farmers know they can’t control the milk price but they have some control over what it costs them to produce their milk. They’ll be doing all they can to focus on profitable production at minimal cost,” he said.