Fonterra has cut its forecast farmgate milk price for the current season to $4.50 a kg of milk solids from $4.70 because of volatility in world markets caused by oversupply, with much of it coming from New Zealand.
Combined with the previously announced estimated dividend range of 20-30 cents per share, the forecast amounted to a forecast cash payout of $4.70 - $4.80 for the current season - well below DairyNZ's estimate of break-even for most farmers of $5.40 a kg.
New Zealand is a player in world markets, and local production patterns have a big bearing on world prices.
Fonterra, the world's biggest diversified milk processor, did an about face on its estimate of local production after earlier this year saying production would fall by 3.3 per cent compared with last season's record production because of the drought in parts of the country.
The co-operative later revised that figure to a 2 per cent reduction but today had abandoned forecasts of a cut, saying it estimated milk production would come to 1,607 million kg, or up 1.45 per cent from last season's total of 1,584 million kg.
Chairman John Wilson in a statement the milk price forecast reduction reflected the continuing and significant volatility in international dairy commodity prices caused by over-supply in the market.
"We have confidence in the long-term fundamentals of international dairy demand, however the market has not yet rebalanced and GlobalDairyTrade for products that inform our farmgate milk price have fallen 23 per cent since February," he said in a statement.
"This reduction will impact cash flows for our farmers, who will need to continue exercising caution with on-farm budgets," he said.
"Our farmers are already managing very tight cashflows. Although this reduction is not the news that anyone wants, it is important we keep our farmers updated given the significant market uncertainty," he said.
Fonterra has also lowered the advance rate of scheduled monthly payments to our farmers.
Chief executive Theo Spierings said geopolitical unrest in places such as Russia, the Middle East and North Africa was affecting global dairy demand.
"Remote as they are, events such as the flow of refugees from Libya to Europe come together with factors like lower oil prices to soften dairy demand," Spierings said.
Farmers benefited from a record payout of $8.50 a kg last season, and payments from that season have extended into the current year. Economists said farmers could weather one bad season but that two bad seasons in a row would cause problems.
AgriHQ yesterday revised its forecast farmgate milk price for 2015/16 down to $5.70 a kg of milksolids from a previous forecast of $6.50, based on NZX dairy futures prices for the first six months of the season.
Hokitika-based co-operative Westland Milk Products - the second biggest cooperative after Fonterra - said it had cut its forecast payout for the current season to $4.90-$5.10 per kg of milk solids, before retentions, compared with a previous forecast of $5 to $5.40 a kg.
See recent movements in the GDT auctions here: