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Fonterra's farmers will be hit by an average $100,000 fall in income this season, as the dairy giant today confirmed a big cut in its forecast payout.

The co-operative today announced that the forecast dairy payout for the 2008-2009 year has been cut to $5.10 per kg - a reduction of 90 cents on the previous forecast of $6 per kg of milksolids.

Fonterra's available payout last season was a record $7.90 per kg. Originally it was expecting to payout $7 per kilo this season. A fall to $5.10 means an expected $2.28 billion injection into New Zealand's economy will not happen.

The average dairy farmer's annual income has now been cut by more than $100,000 Fonterra said.

Last season's record payout of $7.90 a kilogram meant an annual payout of $800,000 for the average dairy farmer.

That reduction will slice more than a billion dollars off many dairy incomes and therefore out of the New Zealand economy.

In December Fonterra chairman Henry van der Heyden warned that a continuing fall in international commodity prices, fluctuations in the New Zealand dollar, and the worsening effects of the global financial meltdown meant a cut was increasingly likely.

Economists were forecasting a figure today of between $5 and $5.50 per kg.

Based on last season's collection of 1.19 billion kg of milksolids a 90c cut means a loss to the economy of more than $1bn.

At the lower milk price, total annual payout is likely to be just over $6 billion compared to $9.4 billion last year.

Along with the forecast payout drop, Fonterra is also changing the way it pays out its "Value Return" component, which is the share of profits earned from sales of consumers goods like cheese and yoghurt.

This payment makes up 45c of the $5.10 forecast payout. Usually paid out in two tranches - April and October - this year it will be paid in one go, probably in October.

The Fonterra Shareholders' Council, which represents the interests of the farmers to the co-operatives board, issued a news release saying it was "disappointed by the magnitude of the drop" in the forecast payout.

Council chairman Blue Read said although the Fonterra had signalled that global financial and market conditions were putting pressure on payout, the 90 cent drop announced today would still have surprised many Fonterra farmers.

"After a record payout last year, we went into the season with a payout forecast of $7.00 per kilogram of milksolids. We are now confronted by a reduction of more than 25 per cent in our farm revenues for the season.

"Dairy farmers are used to fluctuating forecast adjustments and the uncertainty this creates but in this environment we would like to see more timely updates.

"These are challenging times and like many New Zealanders, Fonterra farmers are feeling the pinch," said Read.

Asked what proportion of Fonterra's farmers would be put under financial stress by the fall in payout, chief executive Andrew Ferrier said he couldn't give a specific number, "but Kiwi dairy farmers are incredibly resilient and they know how to tighten things up when prices go down, so obviously the vast majority of farmers will be able to ride this out.."

Chairman van der Heyden said cashflows would be stressed by the payout reduction.

"Look this $5.10 is going to put a good number of farmers' cashflows under significant pressure. Make no bones about that and I understand that."

"But at the same time, Andrew's [Ferrier's] point about farmers is that they are resilient and that's why we're giving the message as clearly as we can. But there are one or two little things starting to head in the direction in favour of the farmers as well."

Interest rates were coming down and the first signs of farmer input costs coming down - including fertiliser and fuel, were now being seen.
"But I do want to stress that this will put a good number of farmers' cashflows under pressure."

Federated Farmers dairy chairman Lachlan McKenzie said the lowered payout will make it "tough but manageable for farmers.

"This comes at a time when there is a glimmer of light appearing at the end of the tunnel for other commodities and the revised payout is still the third best payout this decade."

He said while it was disappointing, it was not a calamity.

McKenzie said farmers had drawn up their budgets based on a $6.60 payout only six months ago.

He said because farmers will get a base payment of $4.05 per kg of milk solid with the increments on top of that not coming through until October, farmers are actually bank rolling Fonterra's interest payments.

"This is not just unprecedented, it will require some farmers to immediately call their banks to arrange or extend overdraft facilities.

This will impact the economy at many levels," McKenzie said.

Asked if the payout would have been higher had it not been for the EU's re-introduction of subsidies for its dairy farmers, Ferrier said it was hard to say by how much.

"I don't know if we'll ever know if it would have been higher.
If the subsides are not a material impact on the market, we could be above $5.10."

The market, said Ferrier, "anticipates these things" and there had been a material drop in prices in the past few weeks, following the EU move.

Ferrier said government intervention in the dairy market was a "newer, worrying trend".

Any regional subsidies or intervention had the potential to distort the market, potentially delaying recovery to more sustainable price levels.