International conflicts and political unrest are among the factors affecting the incomes of New Zealand dairy farmers, and that volatility is not likely to change in the short term.

That's the belief of Fonterra CEO Theo Spierings, who told a press conference this week that geo-political situations in Russia, the Middle East and West Africa are all having an impact on international milk prices.

Conflicts and political unrest are being blamed for volatile global milk prices.

'The geo-political situation in many ways is worse than at the end of World War II in terms of refugee numbers,” says Theo. 'All this has an impact on demand.”

Theo believes the uncertainties caused by conflicts and political tensions are unlikely to be resolved 'any time soon”.

Fonterra chairman John Wilson says at current global milk prices, dairy farming in not sustainable for farmers anywhere in the world. He expects falling prices to result in decreased production but he too believes the markets will remain volatile.

'Volatility used to be a five-to-seven year cycle, but it's a lot shorter now,” he says.

New Zealand dairy farmers are used to volatility and the $4.70 milk price forecast made by Fonterra is designed to give them the best signals possible for managing their businesses, he adds.

Many farmers are already cutting back on feeding supplements to their herds because the current pay-out doesn't justify the extra cost of milk production. Fonterra is encouraging farmers to be conservative with their spending in light of the forecast pay-out.

Following the announcements from Fonterra, Federated Farmers is urging dairy farmers to keep their budgets tight.

'Farmers were hoping for some good news, but this announcement enforces the need to maintain their frugal mindset,” says Andrew Hoggard, Federated Farmers Dairy chair.

'The worst is not over yet, with farmers going into winter with the lower pay-outs starting to take affect and the drought affected regions, meaning farmers will be needing to buy in more supplementary feed than usual.

'What will be the biggest disappointment to farmers is Fonterra's drop in its dividend. The dividend's role is to reflect the value in Fonterra's value add products.

'The belief amongst farmers has been that a low farmgate milk price would then reduce the cost of producing value add products which would be reflected in a higher dividend returned to farmers.

'Obviously these result shows that this isn't the case, but Fonterra will need to explain that well, and clearly, to their shareholder farmers.”

Fonterra Shareholders' Council Chairman, Ian Brown says farmers will be disappointed with the announced interim dividend of 10 cents per share and forecast range of 20-30 cents per share for the 2014/15 season - especially given the current Milk Price.

'That Fonterra has maintained the 2014/15 forecast Farmgate Milk Price at $4.70 per kg/MS is a positive given the volatility experienced throughout the season to date,” says Ian.

'However, shareholders had an expectation that their co-operative would have delivered a higher dividend.

'Shareholders rightfully want to see the strategy provide a return on their investment - especially given the low milk price environment farmers are currently experiencing.

'A sound strategy is key to adding value long term and it is important that shareholders understand the factors that influence this.