Fonterra's unit price dropped by 3.5 per cent in early NZX trading after the co-operative lowered its dividend forecast range for 2014/15.
By 10.20 am, the units - which give investors access to Fonterra's dividend - were at $5.78, down 21c from Tuesday's closing level.
Fonterra's farmer suppliers expecting a higher dividend to compensate for a lower farmgate milk price had their hopes dashed when the co-operative announced a 16 per cent fall in its first half net profit to $183 million and reduced its dividend forecast.
Fonterra stuck with its farmgate milk price forecast of $4.70 a kg of milk solids but, contrary to expectations, cut its forecast dividend payout for the year to a range of 20c to 30c from a previous range of 25c to 35c a share, taking the total forecast payout for the year to $4.90 to $5.00 per kg.
At $4.70, the farmgate milk price is below the average cost of production of around $5.00.
Chairman John Wilson said the results reflected continued volatility in international prices.
"These half-year results are below our farmers' expectations, in a period when the farmgate milk price is low and we are reducing the forecast dividend range," Wilson said in a statement.
The results were a snapshot of tough conditions in dairy with variable production, demand and pricing, he said.
"There was also the challenge of generating profit from inventory made in the previous financial year when the cost of milk was higher, but sold in the first quarter of the financial year when global dairy prices were falling," he said.
See recent movements in the Global Dairy Trade auctions here:
New Zealand milk production got off to a strong start over the period, but a very dry summer in most regions curtailed production in the last three weeks of January, with the co-operative reducing its milk volume forecast to slightly below last season's production.
"Our current milk supply forecast for the 2014/15 season has increased to 1,551 million kg of milksolids, two per cent below the 2013/14 season," he said.
The cooperative had previously estimated that production would be 3.3 per cent down compared with the previous year.
Oversupply from dairy producing regions around the world in the early months of the financial year saw the trade-weighted GlobalDairyTrade price index hit a five-year low in December.
Supply outweighed demand and buyers undervalued milk, which was reflected in prices that declined to unsustainable levels, Wilson said.
Lower commodity prices placed downward pressure on our farmgate milk price in the first half. This was partially offset by the weaker NZ dollar, with a benefit of about 30c per kgMS to the forecast farmgate milk price, as at 31 January.
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"Volatility continues to influence international dairy commodity prices and given this, we recommend caution with regards to on-farm budgets," Wilson said.
Chief executive Theo Spierings said opportunities in the first quarter to improve ingredients, consumer and foodservice gross margins were restricted until carryover inventory from the previous financial year was cleared.
Spierings said there was often a lag between when product is produced and when it is sold.
During the first quarter, the value of Fonterra's ingredients inventory was relatively high as it was mostly produced when whole milk powder (WMP) prices were higher.
"However, these higher inventory costs were not recovered due to rapidly falling WMP prices in the first quarter of this financial year, which dropped to a low of around US$2,400 per tonne.
"This gap between the value of inventory and selling prices created a margin squeeze in the first quarter. This contrasts with the first quarter last year when the value of inventory was based on a lower milk cost, and was sold at a higher price," he said.
For the six months, Fonterra declared a 10c per share dividend, up from 5c for the same period in the previous year. Revenue over the half year dropped by 14 per cent to $9.7 billion.