The plunge in dairy prices at this week's international auction has caught the Government by surprise, but it remains confident prices will soon rebound.
But opposition parties argue there is no sign that they will and say they are worried the dairy industry and the economy are in for a battering.
Dairy prices fell almost 11 percent this week. Photo: RNZ / Alexander Robertson
Dairy prices fell by nearly 11 percent this week, and Minister for Primary Industries Nathan Guy said he did not see such a big fall coming.
But Mr Guy said that, while the next six to 12 months would be volatile, he was confident prices would bounce back.
"I am concerned about the fall in the GDT [Global Dairy Trade] this week. It was expected to fall but perhaps not to the level of almost 11 percent and whole milk powder even being down to about 13 percent.
"Let's give ourselves some time to work this through. The outlook into 2016 and beyond is still looking very good for the dairy industries."
Nathan Guy said he did not see the big fall in dairy prices coming. Photo: RNZ / Alexander Robertson
Federated Farmers Wairarapa provincial president Jamie Falloon said it was not just dairy farmers who were feeling the pain.
"Most farmers have shut the chequebook up. So you're not spending on anything which you don't need to spend on. All the discretionary items, all the nice to have on the farms... you've said, 'No, I'm not going to do it'."
He said spending was now only on necessities and things that would get farmers through the challenging times.
Mr Falloon said the likelihood of several straight seasons of low payouts, combined with a drought in the region, had seen farmer support networks fire into action.
"A lot of the support networks have kicked in. The Rural Support Trust has been activated... Dairy NZ have been running farmer field days.
"We had a meeting the other day with local accountants and local bank managers and they are talking with their farmers and saying, 'Come on, let's look at the plan, let's look at the cash-flow and let's sort out a plan to do it'."
But Ropere Consulting economist Peter Fraser believed low dairy prices could be here to stay.
"I think what we're looking at is structurally low dairy prices. The world at the moment is, I think in terms of the Prime Minister's own phrase, awash with milk at the moment and that means that we've got plenty of other producers in the world that can actually increase production faster and at greater volumes than what we can," he said.
Westpac chief economist Dominick Stephens, meanwhile, told Morning Report he predicted the Reserve Bank would cut the Official Cash Rate (OCR) to a record low of 2 percent to combat weak inflation and the tumbling dairy prices.
Listen to Dominick Stephens
Labour Party finance spokesperson Grant Robertson said spending had dried up in rural communities and they were bracing themselves for an economic downturn that could last years.
Grant Robertson says rural communities are bracing themselves for a long economic downturn. Photo: RNZ / Diego Opatowski
The Government was partly to blame for not having diversified the economy, he said.
"The reality is even if the prices were to rebound over that $5 figure in the year after next that will then be taken up with debt repayment, which will mean that there won't be that spending in those rural communities.
"And I guess that's the real lesson out of this - dairy represents such a large part of our exports, but it's also such an important commodity in terms of the communities that are around those dairy farms."
Green Party primary industry spokesperson Eugenie Sage said the Government had encouraged dairy farmers to intensify and now many were over-extended and in trouble.
"Ten years ago, 70 percent of dairy farms were a low-intensity model, now it's less than a third. So they have intensified because the Government has encouraged people to take on more debt to spend on dairy conversion."
Fonterra announced yesterday it was slashing more than 500 staff to try to stay profitable in the current environment.