Fonterra's problematic 18.8 per cent holding in China's Beingmate Baby & Child Food, a big legal settlement with France's Danone, and generally higher milk prices are expected to weigh on the co-operative's first half result, due on Wednesday.
Beingmate, which develops and sells children's food and infant milk formula in China, in January downgraded its earnings for 2017 to a loss of NZ$171–NZ$214m.
The Hangzhou-based company's share price has slumped to 5.37 yuan from Fonterra's purchase price of 18 yuan a share, for a total of $756 million, in 2015.
Since January, the price of Fonterra's units - which give investors access to the co-operative's dividends - has slumped from $6.66 to $5.89, largely reflecting the uncertainty around Beingmate.
Analysts expect to see a substantial write-down of the Beingmate investment to reflect the share price slump at this week's result.
Adding to Fonterra's woes was last December's announcement that an arbitration tribunal had ruled it must pay $183m to Danone in the wake of 2013's whey protein product recall.
At the time, Fonterra revised its earnings per share range for the 2017/18 financial year to 35 to 45 cents from 45c to 55c to reflect the settlement.
The good news for farmers is that a significant change in the current 2017/18 milk price forecast of $6.40 per kg of milksolids looks unlikely, thanks to a recovery in whole milk powder prices since December.
However, with milk prices being Fonterra's biggest input cost, elevated prices will make their presence felt on the co-operative's earnings.
Devon Funds Management's managing director Slade Robertson said that given Beingmate's soft share price, the potential write down for Fonterra could be as much as $380m.
"This together with $183m of Danone damages .... means that Fonterra could report charges of up to $563m in this result," Robertson said.
"Combined with tough stream returns, a European market seemingly awash with skim milk powder, and weak collection volumes, leaves little room for optimism," Robertson said.
Harbour Asset Management senior research analyst Oyvinn Rimer said the result was likely to contain more "negatives than positives".
In the big picture, Rimer said Fonterra faced the challenge of achieving a reasonable rate of return from its considerable assets.
"There are challenges with this business in terms of its fixed asset base, which they need to earn a good return on," he said.
"That's always been hard and I don't see that changing in the short term," he said.
Aside from its issues with Beingmate, Rimer said Fonterra had made incremental improvements in its business, and there had been a substantial turnaround in its Australian operation.
Fonterra has a lot riding on China, the country last year accounting for $3.4 billion of its sales revenue.
Forsyth Barr analyst James Bascand expects Beingmate and the Danone settlement to weighing heavily on the outcome.
He expected growth on Fonterra's value -added volume to be offset by the higher cost of milk it pays its farmers.
"The combination of damages payments due to Danone and a likely Beingmate write-down will weigh on the actual profitability and balance sheet," he said.
"In summary, we expect a soft result to justify recent share price weakness," Bascand said in a research note.
"Fonterra has historically ignored market valuations when determining the value of its holdings in Beingmate," he said.
"The combination of a disconnect between directors and management as well as sustained operating losses suggests Fonterra needs to write down its holdings to a more realistic level - potentially by $370m," he said.
Bascand estimates Fonterra's the first half's underyling earnings before interest and tax will come to $619m, broadly flat on the previous comparable period.
This excludes $183m in damages to Danone, and any impact from a write down of Beingmate.
Meanwhile, Fonterra's high court injunction is in force to a weekly rural publication publishing or using any "confidential" information it received from former director Leonie Guiney.
The injunction also prevents other unnamed media, including the New Zealand Herald, from disseminating any information it may have received from Guiney.