A strong dollar, more global supply and uncertainty in markets has wiped about $200 million off the forecast payout by dairy giant Fonterra.
The country's biggest company yesterday cut its forecast payout for the 2011/12 season by 15c to $6.75-$6.85 - comprising a milk price of $6.35 a kg of milksolids and a 40-50c a share distributable profit.
However, good weather in many areas has seen production running ahead of last year and Fonterra's forecast payout is still higher than the average of $6.50 for the previous five seasons.
Agricultural market analyst NZX Agrifax last week said milk production in December was up 14.7 per cent on the same month the previous year and dairy analyst Susan Kilsby in January said dairy production for the season was expected to be up by 7-10 per cent.
The drop in Fonterra's payout forecast, based on a 7 per cent rise in production, could be worth about $216 million, leaving a total of about $9.9 billion.
Federated Farmers Dairy chairman Willy Leferink said farmers would be a little disappointed but the forecast would still be one of the highest payouts ever. "So I think we will do well out of this ... and it might still go the other way," he said.
Most farmers would have been conservative in their budgeting "and they just see this as a little bit less on top".
Fonterra chairman Sir Henry van der Heyden said the lower forecast reflected declining commodity prices and a stronger New Zealand dollar.
Prices had dropped in five out of the last six of Fonterra's online dairy auctions and overall the average price for a basket of products was down 5.7 per cent since the company had previously increased the payout forecast by 20c in December.
The dollar's continuing strength, higher levels of global milk production and uncertainties in international markets had led to the decision to lower the forecast, van der Heyden said.
Chief executive Theo Spierings said dairy commodity prices were likely to remain under some pressure through to the middle of the year and trends indicated stronger global production continuing this year.
"International milk powder demand, however, currently appears robust which should help offset the impact of the stronger milk supply growth," Spierings said.
Global markets seemed to be reacting to the economic difficulties in Greece, potential for conflict in the Middle East and China's reduced growth forecast, he said.
BNZ economist Doug Steel said the mid-point of the new forecast was still good by historical standards.
"It's still good cash flow, farmers are generally profitable at that sort of level and I think still you could characterise the dairy industry as being a support to the New Zealand economy."
The dollar dipped slightly on news of the lower forecast and ended the day at US81.79c from US82c at 8am.
BNZ's outlook was for the currency to remain strong in the low to mid US80c range this year.
"If it was to stay there I think that does lift the effective rate for most exporters that would have hedged at a lower rate over previous years but ultimately we do see the currency lower but more into 2013," Steel said.
The currency would be expected to be reasonably strong because international dairy prices were still reasonably good, he said.
Milk powder was selling for about US$3500 ($4279) a tonne, which was well above historical averages.
"The world's in a bit of trouble and it's going to affect us one way or another.
"Having a floating currency it comes out in the stronger dollar, if it was fixed then the pain would just come out in a different way, lower economic growth or lower employment, very much what we're sort of seeing in Greece."
ASB Bank chief economist Nick Tuffley expected the strong New Zealand dollar to become "much more of a headwind" for the dairy giant in the year ahead.
"Our view is that we are likely to see global dairy prices remain pretty elevated over the long term," Tuffley said.
"Short term, there has been a surge in supply, and that's certainly the case here in New Zealand, and at the moment we are dealing with a high currency, which we expect to go higher."
- additional reporting APNZ