Federated Farmers says today's Fonterra financial results show the dairy giant is on the right track.

The co-operative says its revenues fell $300 million in the past half year, but that world dairy prices were continuing to recover.

Fonterra's financial results for the six months to the end of January, show revenue fell 3.7 per cent to $7.7 billion.

Higher sales volumes have helped to maintain revenues during what it describes as "a period of recovering dairy ingredient prices globally".

Chief executive Andrew Ferrier said Fonterra faced continued volatility in both international prices and exchange rates during the six months.

He said lower average selling prices were largely offset by a growth in product volumes sold and positive net foreign exchange impacts.

Ferrier said demand from customers rose through the half year as consumer confidence continued to improve in key markets around the world.

"This led to an increase in product sales, meaning our inventory levels were also at more normal levels compared with the unusual highs of a year earlier, during the worst of the financial crisis."

Federated Farmers issued a press release saying it was confident that Fonterra was on the right track.

"This time a year ago, Federated Farmers applauded Fonterra's board and management for navigating some of the roughest trading conditions in a generation," said Lachlan McKenzie, Federated Farmers Dairy chairperson.

"While revenue is down 3.7 per cent, this really reflects the rollercoaster ride commodities went through and despite everything, overall profit for the past four years is up 19 per cent.

"Fonterra suppliers are still in line for the second best payout since formation, showing just how well it's done. The news out of ingredients is especially welcome as this goes to heart of how value add is built.

"This half-year result should finally put the naysayers to bed, in respect of Fonterra's capital structure review. Fonterra's debt has been tracking down and is now 53.3 per cent - a 15 per cent reduction in the space of a year.

Henry van der Heyden, Fonterra chairman, said the strong recovery in global dairy prices underpinned the improved milk price performance.

In November last year Fonterra increased the 2009/10 forecast milk price to $5.70 per kgMS (kilogram of milksolids) - from the season's opening forecast of $4.10 per kgMS.

Key financial highlights for the six months to January 31 2010:
Revenue was down 3.7 per cent from $8 billion to $7.7 billion. Lower average selling prices cut more than $1.6 billion from Fonterra's revenue but this was partly offset by $1 billion of additional revenue as a result of higher sales volumes, and positive net foreign exchange impacts of $0.3 billion (including hedging gains).

The forecast Milk Price for the 2009/10 season stays at $5.70 per kilogram of milksolids (kgMS), as announced in December 2009. This compares with an opening forecast of $4.10 per kgMS.

An interim dividend of 8 cents per share will be paid to shareholders on April 20. The full-year target dividend range remains at 20-30 cents per share.

Operating expenses increased by 5.8 per cent, mostly due to an increase in investment in advertising and promotion to grow and defend market share in Fonterra's regional consumer brands businesses.

Van der Heyden said Fonterra was currently on track in 2009/10 to achieve the second-highest cash returns to farmers.

"Our milk price remains forecast at $5.70 per kgMS and our target dividend range is 20-30 cents per share (as announced previously)," he said.

"Returns at these levels would mean that the most recent three seasons rank among the top four in terms of total cash returns paid to farmers since Fonterra's formation, in spite of the significant challenges we have encountered during this period."

Chair of the Fonterra Shareholder's Council, Blue Read said it was "extremely satisfying" to see the co-operative's balance sheet improving.

Today's result shows Fonterra's debt gearing strengthened to 53.3 per cent, down from 61.5 per cent at the same time a year earlier.

This bolstering of the balance sheet includes the impact of the $263 million raised from shareholders in January, following the first two stages of a capital restructuring.

The improvement in the group's balance sheet would help Fonterra manage continued volatility in international prices and uncertain world markets.

"I believe these interim results show our co-operative has more flexibility to react to market volatility and this sort of outcome is encouraging." said Read.