A 5% increase in subsidies paid to dairy farmers in Europe and the United States could suck more than $120 million a year out of the New Zealand economy, an analysis by consultant NZIER says.
The actual impact on world dairy prices of a resumption in subsidies has not been accurately quantified.
However, the NZIER analysis assumed a 5% increase, which would translate to a 5% fall in dairy output from New Zealand dairy farms but an 8% decline in the value of dairy exports.
That combination would worsen New Zealand's trade balance by about $86 million and the economy by more than $120 million.
"This is mostly because of a fall in its terms of trade as dairy export prices fall."
The European Union and the United States have both resumed subsidising their dairy industries.
In January, the EU, the world's largest exporter of dairy products, announced it would refund farmers the difference between the world and domestic prices of butter, milk fat, skim milk powder, cheese and products containing whole milk powder.
A few months later, the US retaliated by paying cash bonuses to its dairy producers to allow them to sell at prices below the prevailing world price.
NZIER deputy chief executive John Ballingall said the move was a concern for New Zealand's largest export earner.
"In simple terms, dairy export subsidies give farmers incentives to overproduce dairy, as producers effectively receive an artificially inflated supply price that does not reflect their true costs of production."
He said, in an interview, that his analysis tried to illustrate how the increase in subsidies would affect the New Zealand economy.
"We tried to point out that even though, on a global scale, these subsidies were not enormous, they do have a fairly significant impact on countries like New Zealand."
Australia could also be hit hard, with its value of exports under the 5% subsidy increase scenario declining 9.5% and its milk output falling 2.5%.
Fonterra's managing director of global trade, Kelvin Wickham, said it was difficult to quantify the impact of subsidies on world dairy prices, but they had put a floor on prices and kept them within a band.
The level of subsidies were being reviewed by the EU and US governments every two weeks, so it was difficult to predict where prices were heading.
He credited the US and EU with being "prudent and responsible" about how they implemented the subsidies, saying the EU was buying domestically produced product and putting it in storage, while the US was looking to use milk powder for food aid and for a milk-in-schools programme.
While their actions still created a milk product overhang, Mr Wickham said they were trying to manage the internal situations rather than influencing the international scene.
"It's the lesser of two evils," he said.