Fonterra to lend NZ farmers NZ$430 million

New Zealand banks are about to get some help in supporting mostly loss-making dairy farmers over the next year.

The country's largest co-operative, Fonterra, announced on Friday it would lend farmers 50 cents per kilogram of milk solids this season to supplement a forecast payout of NZ$3.85 per kilogram.

Dairy prices have tumbled this year because of increased supply in Europe and the United States and weaker demand in China. Fonterra cut its forecast payout from NZ$5.25 per kilogram but softened the blow by announcing the loans, which would be interest-free for two years.

Most farmers are loss-making below NZ$5.50 per kilogram. Fonterra said farmers could repay the loan once the payout rises back above NZ$6, which it expects next year once suppliers in the northern hemisphere reduce their production to adjust to the "unsustainable" prices.

Fonterra estimated farmers would borrow up to NZ$430 million in the first half of the season, although a full acceptance of the offer by all suppliers for all of the season could lift the loans to almost NZ$800 million.

Dairy farmers owe over NZ$35 billion to New Zealand's Big Four Australian-owned banks and Rabobank, and lending to farmers has risen by over NZ$2 billion in the last two months as losses have mounted.

ANZ has the largest exposures to New Zealand's dairy sector, although has pared them back over the last two years. ANZ reported its agricultural lending, which includes sheep, beef, horticulture and wine was flat at NZ$16.1 billion over the year to March. Its market share has fallen to 31 per cent from 34 per cent over the last three years.

National Australia Bank's BNZ and Commonwealth Bank of Australia's ASB have been growing market share in dairying in recent years. ASB's market share in farm lending rose to 16 per cent from 14 per cent over the last two years, while BNZ's rose to 22 per cent from 21 per cent.