ANZ has dropped its milk price forecast to $3.95 for the current season and suggested the opening round of forecasts for 2016-17 could well be sub-$5.
The bank's revision, which included a $5 forecast for 2016-17, meant cashflow for the average Fonterra farmer that was fully share backed of $3.81 this season and $4.89 in 2016-17.
Fonterra's current milk price forecast for this season sits at $4.15.
In a dairy update, chief economist Cameron Bagrie and rural economist Con Williams said the bank's estimates suggested a cumulative loss of about $1.50kg/ms over the two seasons if those forecasts became reality, or further cost efficiencies could not be found over coming months.
The bank believed the average break-even had gone from the mid to high-$5 kg/ms to the low to mid-$5 kg/ms range.
The economists were encouraged by the steps being taken to drive cost efficiencies and improve productivity amid a "challenging'' payout backdrop.
More of the same would be required and a return to positive cashflow would now not likely be seen until 2017-18.
The dairy sector was just under 5% of GDP directly and with the indirect channel, close to 10% of GDP.
A further step lower in dairy prices was also coming at a time funding costs were on the rise and that was a "nasty mix'', the report said.
The bank's latest Agri Focus report said year-to-date turnover for dairy properties in 2015-16 was lower, and average prices were back 10%-15% over the same period a year earlier.
However, the latest transactions at the end of 2015 showed a pick-up in prices, with higher turnover in the more expensive regions of Waikato and Taranaki.
The main pressure for dairy prices was coming from seasonal dynamics and continued milk supply growth offshore.
Europe was the focal point with volumes up 2.2%, or 3.2million tonnes, over the past year, which was equivalent to 15% of New Zealand's milk supply.
Much of the excess continued to be turned into skim milk powder (up 8.6%), butter (4.3%) and cream (3.4%).
US supply had been stronger than anticipated. Improved seasonal conditions and low grain prices were raising the prospect of more skim milk powder and butter from California.
Seasonal conditions in New Zealand had improved, implying more milk than earlier anticipated.
It remained to be seen what that would be turned into and how it would be sold.
Increasing GlobalDairyTrade auction volumes would probably apply additional pressure given buyers' short-term needs seemed "fairly well covered'', the report said.
