Fonterra, the world's biggest dairy exporter and the second-biggest dairy processor in Australia, on Thursday cut its 2014-15 farmgate milk price forecast by NZ10¢ to to $NZ4.50 ($4.23) per kilogram of milk solids, the lowest level in eight years.

Chairman John Wilson said the cut, which follows on from a NZ20¢ cut in April, reflects the sustained weakness of prices for key dairy commodities such as milk powder.

"World markets are oversupplied with dairy commodities after farmers globally increased production in response to the very good prices paid 12-18 months ago," he said.

"This supply imbalance has heightened due to continuing good growing conditions in most dairy producing regions."

The milk price cut follows on from a profit downgrade by ASX-listed Bega Cheese two weeks ago. Bega said at the time that "the lower-than-forecast result for FY15 reflects the impact of a weaker recovery in global dairy commodity prices than was previously expected by the company."

The tough backdrop for dairy producers comes as Australia's biggest dairy exporter, Murray Goulburn, is preparing to list a unit trust on the ASX and raise up to $500 million.

Fonterra listed in Australia and New Zealand in 2012 and since a well-supported float, the unit price and dividend payments have been disappointing for investors.

The co-operative is now facing growing unrest from its New Zealand farmer base because of the low milk price at the same time as non-farmer investors question its capital-allocation policies.

Earlier this month Fonterra chief executive Theo Spierings told Fairfax Media dairy markets are being hit by "extreme volatility" and he wants farmers and investors to back his long term plan to improve returns.

Mr Spierings on Thursday reiterated the longer term fundamentals supporting a strong outlook for dairy.

"Given the season we are coming out of, we are absolutely focused on improving farmer returns and driving the co-operative's performance," he said.

Fonterra said that it expects to pay its Kiwi farmer-owners a farmgate milk price of $NZ5.25 a kilogram for the season ending May 2016. 

"We can expect prices to recover going forward, and to see a rebalancing of supply and demand over the season," Mr Wilson.

"However it is more difficult this early in the season to determine exactly when this recovery will lead to a sustained price improvement."

Dairy prices have slumped to a five-year low after booming to record highs 18 months ago.

The sharp drop has hit farmer incomes in New Zealand and directly impacts the nation's economy given dairy is its key export.

Fonterra's farmer payment has dropped from a record $NZ8.40 a kilogram last season.

Fonterra is a regulated monopoly in New Zealand with almost 90 per cent of the nation's milk pool.

The milk price it pays its farmers is linked to the prices of key dairy commodities.

The New Zealand dollar rose to US72.68¢ at 9.10am AEST from US72.44¢ before Fonterra's statement.

The cooperative maintained its estimated dividend for the financial year ending July 31 of NZ20¢-NZ30¢ a share.

with Bloomberg