Fonterra's unit price slumped by 60 cents or almost 10 per cent after the co-operative warned of a big cut in its dividend and a sharp drop in its earnings for the current year.

But by late morning the units, which offer investors access to Fonterra's dividend flow, were trading at $5.50 - equal to its issue price and the lowest ever traded price since they debuted on the NZX in November 2012.

Fonterra earlier maintained its forecast payout farmgate milk price at $8.30 per kg of milk solids for 2013/14, against market expectations of an upward revision, and cut its dividend forecast for the year to 10c from an earlier forecast of 32c.

The co-op also said its earnings before interest tax would fall to around $500 million to $600 million in the July 31, 2014 year, down from $1 billion a year earlier.


Economists had expected an upward revision to the forecast - which would still be a record if it comes to pass - thanks to very high Global Dairy Trade auction prices.

The estimated full-year dividend will deliver a forecast cash payout to farmers of $8.40 - down from a previous forecast of $8.62.

Chairman John Wilson said milk powders were continuing to sell at very high prices because of the strong global demand and limited supply.

Just four months into the season, the cooperative was in an "extraordinary" situation, with the gap between prices for milk powders compared to cheese and casein being greater than ever.

The forecast farmgate milk price, which is calculated under the Fonterra's milk price manual, is based on processing and manufacturing milk powders. The calculation is also based on the costs involved in production for an efficient manufacturer of Fonterra's size and scale.

"However, Fonterra's actual asset base includes a number of cheese and casein manufacturing plants which means that we are not able to maximise profits from these plants in the current environment," Wilson said.

In abnormal circumstances, the board had the discretion to pay a lower farmgate milk price than that specified under the manual.

"Today's forecast is our best estimate, but given the current volatility it may change over the course of the season," he said.

"As a result of this volatility, the board has also lowered the dividend forecast for the 2014 financial year to 10 cents per share," Wilson said.

At $8.30, the farmgate milk price forecast will be 70c per kg below the theoretical farmgate milk price of $9 per kg calculated in accordance with the manual.

Chief executive Theo Spierings said Fonterra would maintain its financial discipline and not pay the milk price out of borrowings.

Fonterra is required to consider its Farmgate Milk Price every quarter as a condition of the Dairy Industry Restructuring Act.

The board has also approved an increase in the Advance Rate schedule of monthly payments to farmer shareholders. The December payment, paid in January 2014, will be increased by 30 cents to $5.80.

Fonterra processes its milk into two main product streams - powders, such as whole milk and skim milk powder, and other products, including cheese, casein, milk protein concentrate, nutritionals, and liquid milk.

"This season, we have devoted the maximum possible volume of milk to whole milk powder and skim milk powder streams to maximise payments to our farmers," Spierings said.

"However, we have not been able to lift powder production above the current 70 per cent level as we are limited by the nature of Fonterra's existing production facilities in New Zealand," he said. "That is why the remaining 30 per cent of milk is being converted to cheese and casein which are currently generating lower returns."

The current strong prices for milk powder are being driven by increasing levels of demand from China, and emerging economies in Asia and North Africa.

Fonterra Shareholders' Council chairman Ian Brown said the announcement to hold the forecast farmgate milk price below the milk price panel's recommendation and lower the dividend to 10 cents was a practical decision "given the unusual market conditions".