Recently, the forecast Fonterra pay-out (per kg of milk solid) has significantly dropped again after falling down to $6 per kg, now down to $5.30 per milk solid per kg (depending on which research we look at). Dairy pay-out has fallen after a sanction was made in Russia that banned imported foods resulting in a surplus of dairy products available globally, and after a build-up of inventory (milk stock) in China has resulted in a decrease in their demand for imported milk. This has resulted in the prices for dairy products to drop to an all-time low globally since December 2012. This has especially been hard hitting to the NZ dairy industry as China and Russia is our number one and number two importers of dairy products. Fonterra is the largest dairy company in NZ and has been facing losses in profits (4 billion dollar drop in income), resulting in the lowering of their ability to pay income to NZ dairy farmers; hence the lowering of the pay-out. The drop in dairy pay-out has many repercussions on the producer sector which is directly impacted by this economic event. Although, according to the law of supply as price for a good or product goes down, quantity supplied decreases as the product (raw milk) becomes less profitable and relatively less profitable to other products, this is not necessarily what has happened to NZ dairy farmers. Dairy forms around 25%-31% of NZ’s exports and Fonterra produces the majority of this. With the recent high record pay-out of $8.40 per kg last season and the hopes and signs of dairy pay-out possibly returning back upwards (for global markets to restore), dairy farmers have been (forced to) cutting back on their budgets significantly (as currently breakeven point for dairy farmers sits at around an average of $6.00 per kg which is above the forecasted $5.30) in order to still make a profit, while increasing milk production in order to maintain their level of income with the decreased profitability due to the drop of pay-out. With a drop in payout, farmers may need to start borrowing more money, increase loans from the financial sector in order to be able to pay off their costs. With decreasing costs while increasing production dairy farmers will be doing both or either of these two things; increase the proportion of production completed by the farmers use of their own resource of labour (which may include family members), or to increase productivity by using more of their entrepreneurial skills to co-ordinate resources and to make production more efficient. What this means is a decrease in demand for dairy farm workers from dairy farms as farms will require less labour per unit of milk. Since dairy farmers and farm workers are interdependent, as dairy farmers are requiring fewer workers to complete production; less labour is being paid for, this means they are cutting costs and decreasing their money outflow of payment to those producers of labour or to other producers who complete labour tasks in milk production, (eg. Vets, Ab technicians). So farmers will be employing/using fewer, or for less hours, or for a lower wage/rate of payment, workers or service providers. This may mean having to lay-off some workers. Farmers will be decreasing their outflow of payment for goods (resources) to other producers as they find ways to increase producti