The company also took two-thirds off the value of its troubled Chinese investment following the melamine milk contamination.
Federated Farmers dairy chairman Lachlan McKenzie warned next season's lower forecast payout of $6.60 a kg of milk solids would take $1.2 billion off the economy, the equivalent of between 4% and 5% of gross domestic product.
The gloomier outlook would stem the flow of sheep and beef farms converting to dairying.
Mr McKenzie offered domestic consumers little hope the lower milk price would mean cheaper dairy products, saying the industry structure meant con-sumers were already being subsidised, and companies would re-coup rising costs.
"Dairy is not the one-way bet some commentators, politicians and policy-makers may have believed until now."
Much of next year's price for milk solids would be taken up with rising farm input costs.
Fonterra chairman Henry van der Heyden said consumer resis-tance to record dairy prices and increased milk production, particularly from the United States, had sent global prices falling faster than recent falls in the New Zealand-United States exchange rate.
Fonterra executives say they have written off the Sanlu brand used by their Chinese joint venture.
"The Sanlu brand cannot be reconstructed," Fonterra chief executive Andrew Ferrier said yesterday.
"Sanlu has been damaged very badly."
The company has written down by $139 million to $62 million the value of its 43% stake in Sanlu.
Mr van der Heyden said the write-down reflected the cost of recalling product and loss of brand value, but the board supported the actions of Fonterra management and intended to remain in China.
He expressed sympathy for those affected, but said Fonterra was now focused on supplying safe dairy products to Chinese consumers.
The company would continue its global growth strategy of sourcing and processing milk in selected off-shore markets, but would put a greater emphasis on food safety.
"It remains a core growth strategy. I believe we have got the skills within Fonterra to provide good quality dairy products," he said.
Mr Ferrier said the most effective way it could help was to get affected product off the shelves, and it had to do so within the Chinese system.
He was relieved when earlier this month the Chinese Government broadened the recall of products and yesterday referred many times to the contamination being caused by "a criminal act".
China State Council investigators have alleged Sanlu received complaints about its milk powder as early as December, and knew of melamine contamination in June.
Fonterra yesterday expressed surprise over the claim that Sanlu knew of problems in December.
"If this allegation proves to be correct, that would be absolutely appalling," Mr Ferrier said.
"If they were lying about it, then they were lying about it to us too."
Chinese Health Ministry officials said 12,892 ill babies remained in hospital, with 104 babies still in serious condition.
About 1579 babies have been "cured" and discharged. - Additional reporting NZPA/Reuters