Fonterra's latest cut to its dairy payout forecast means up to $7 billion could be knocked out of the economy compared to last year's payout.

The dairy co-operative is blaming international dairy prices for today's drop in forecast farmgate milk price from $4.70 per kilo of milksolids to $4.50.

Photo: AFP

With a forecast dividend of 20 to 30 cents a share on top of that, the new price will give the co-operative's farmers a total cash payout for the season of no more than $4.80; last season farmers received a record payout of $8.50 per kilo of milksolids, which included a 10c per kilo dividend.

Photo: RNZ / Kim Baker Wilson

Fonterra chairman John Wilson said the reduction was because of continuing volatility in international dairy commodity prices caused by over-supply in the market.

In an emailed statement, Mr Wilson said the market had not yet rebalanced with global dairy trade prices falling 23 percent since February.

"Our farmers are already managing very tight cashflows," he said.

"Although this reduction is not the news that anyone wants, it is important we keep our farmers updated given the significant market uncertainty."

Fonterra chief executive Theo Spierings said geopolitical unrest also contributed.

"Remote as they are, events such as the flow of refugees from Libya to Europe come together with factors like lower oil prices to soften dairy demand."

The change in milk price announced today follows a drop from $5.30 to $4.70 in December - at the time, the third cut of the season since the opening forecast of $7 per kilo of milksolids in June.

Dairy analyst at AgriHQ Susan Kilsby said most farmers would end up with a financial loss from this year's payout and would rely on capital to get them through, while the wider economy would also suffer.

"When we compare it against last season's record payout it's really knocked around $7 billion out of the economy," she said.

"If you compare it against a more average season with the milk price around the $6.50 level then it would be around $3.5 billion out of the economy."

Today's revision means Fonterra will also be lowering its monthly advance payments to farmers, putting them under even more financial pressure.