DairyNZ senior economist Matthew Newman said the trend of increasing production per cow showed farmers were opting for animals that were more efficient at converting grass into milk, the industry's national breeding objective.
"We are producing similar milk quantities from fewer cows, partly because we are breeding better animals and feeding them well," he said.
"The average herd is now 414 cows, down from 419 in 2015-16. Currently we are at the lowest level of cows milked since 2012, North Island cow numbers declining 90,000 to 2.89 million, while South Island numbers decreased 46,000 to 1.97 million."
LIC general manager NZ Markets Malcolm Ellis said the statistics reflected a shift in the industry.
"Farmers are acknowledging that, as an industry, if they are not going to be milking more cows then they need to be milking better ones," he said.
"The lower payout in previous seasons certainly forced some farmers to reconsider their cow numbers as part of a wider farm system review, but these stats prove it can really pay off for a farming business.
"It boils down to the fundamentals of herd improvement — creating high-quality herd replacements that will out-perform their mothers in productivity, longevity and fertility."
