The Government says it now expects dairy prices to stay lower for longer, and it is concerned about a reduced forecast payout from New Zealand's second biggest dairy processor.
Open Country has reduced its forecast farmgate milk price to below $4, the first to do so as international dairy prices continue to fall.
Finance Minister Bill English: "We've yet to see how this will flow through to the economy but it's likely to have a dampening effect." Photo: RNZ / Alexander Robertson
Finance Minister Bill English refused to say if he thought Fonterra's payout to its farmers this season would also be under $4.
Mr English said Open Country's forecast payout in the $3 range would make life tough for some farmers.
"A payout with a three in front of it will inevitably cause some pressure, quite significant for a minority of dairy farmers," he said.
"We've yet to see how this will flow through to the economy but it's likely to have a dampening effect."
Fonterra's forecast payout to its over 11,000 farmers this season is $5.25 per kilo of milk solids, but it is due to review that early next month, amid a plunge in global dairy prices.
Mr English said he now expected them to go lower and stay there for longer, and that rural land values could fall too.
"I think the industry has a positive view about its long-term prospects and that's indicated by the still ongoing investment there. Land prices have held up so far anyway.
"I think [land values] will probably adjust if it looks like there's going to be low dairy prices for longer," Mr English said.
Green Party co-leader James Shaw said he believed a $3 payout for Fonterra was conceivable.
"[A $3 payout] barely covers the cost of production. It doesn't cover the cost of interest payments on debt, so I think you could see a number of farmers start to go bust," Mr Shaw said.
He said, while that would be tragedy for those farmers involved, it would also pose a real risk to the economy.