Dairy giant hopes to save $60m a year in wages as it deals with major drop at auction for wholemilk powder.

Dairy giant Fonterra cut 523 jobs yesterday - in a bid to cut its payroll bill by up to $60 million a year - on a day of bad news for the economy.

Prices for wholemilk powder, the country's key commodity export, dropped more than expected in an international auction, sending the kiwi to its lowest point in five years.

To add to the woes, latest inflation figures show prices rose just 0.4 per cent in the June quarter, one of the country's largest fund managers has slashed expectation for this year's gross domestic product and Westpac predicts the Reserve Bank will this year cut interest rates to a record low.

Fonterra chief executive Theo Spierings, who earns $4.18 million a year, released a statement saying it had been unsettling for the people affected. But the co-operative had to change if it was to remain strongly competitive in the global dairy market, he said.

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The "disestablishing" of the roles will cost the company between $12million and $15 million and is part of an ongoing business review, Fonterra said.

Affected staff would begin to leave the co-operative in September.

Mr Spierings said staff had been informed that consultation on new business structures would begin on August 5.

The affected roles included administration, sales and ingredients, consumer, marketing, research and development, communications, health and safety, food safety and quality, group resilience and risk, property, procurement and change management.

It is understood employees have known about the changes for three weeks - but they are unsure if their jobs have been targeted.

Employees entering and leaving Fonterra head office in Princes St in Auckland yesterday refused to comment on the situation.

A spokesman said he could not say whether there would be further job cuts. He also could not say whether the next round of consultation would be on the same scale.

Federated Farmers said top management should be leaving Fonterra Group if results don't start improving in the next couple of years.

Dairy chairman Andrew Hoggard said he hoped the job losses were part of a wider strategy to redirect resources in new areas rather than a knee-jerk reaction to cut costs as dairy prices continued to fall.

"Fonterra has had a history of knee-jerk reactions like that where it gets rid of a whole bunch of people and then two years later hires them back again, or rather having got rid of people with institutional knowledge, they hire new graduates who can't do as good a job."

But Fonterra group director of co-operative affairs Miles Hurrell said the job cuts were signalled as early as March.

"That was the first announcement and clearly we've seen the market retract since then," he said. "It's important to note while we're talking staff cuts today, the programme is wider than head count reductions and covers the end-to-end of the business and what is needed to generate more value for shareholders."

Newly elected Fonterra Shareholders' Council chairman Duncan Coull said Mr Spierings and his team were employed to make decisions that were sometimes difficult.

Last year, the firm had 2590 New Zealand staff paid $100,000 or more a year and 17 staff earning more than $1 million, according to its annual report.

World dairy prices continue to sink, with prices in the latest Global Dairy Trade auction falling 10.7 per cent to US$2082, the lowest level since July 2009. The NZ dollar fell as low as US65.08c yesterday.

Fund manager AMP Capital slashed its expectation for gross domestic product growth to 2.3 per cent in 2015, from 3.2 per cent annual growth it forecast in its April quarterly briefing. Units in the Fonterra Shareholders' Fund fell 0.2 per cent to $4.76, and have declined 21 per cent this year.

Westpac Bank chief economist Dominick Stephens is now forecasting the official cash rate to be 2 per cent by December, with a series of 25 basis point cuts from next week.

"We now expect the [Reserve Bank] to reduce the OCR to 2.0 per cent by the end of this year."

Fonterra's predicament

Why is Fonterra cutting jobs?

The job cuts are part of a major review taking place across the entire business. The 523 redundancies are expected to reduce the firm's annual wage bill by up to $60 million. Chief executive Theo Spierings said yesterday the co-operative needed to remain competitive. Fonterra also needs to be seen to be making changes as its farmer shareholders struggle with falling dairy prices.

Why are farmers facing tough times?
Dairy prices have been in freefall, plunging an average 10.7 per cent to a six-year low in the GlobalDairyTrade auction on Wednesday night. Wholemilk powder prices, which are central to Fonterra's farmgate milk forecasts, fell 13.1 per cent to US$1848 a tonne. Wholemilk powder was selling for $5245 a tonne in April 2013. Fonterra's 10,500 shareholder farmers will collectively earn up to $9 billion less this year than they did at the peak of the commodity cycle. Fonterra is forecasting $5.25/kg farmgate milk price for the current year, up from $4.40/kg in the 2014/15 season. However, the ongoing decline in wholemilk powder prices could put pressure on that forecast.

Why are dairy prices falling?
High levels of milk production in New Zealand, Europe and the United States have contributed to the drop. Weak demand in China and an import ban in Russia are also having an impact.

What has Fonterra's financial performance been like?
Not great. Fonterra's half-year net profit was $183 million, down 16 per cent on the same period a year earlier and well below market and farmer expectations. The company also lowered its dividend forecast to a range of 20-30c per share from 25c-35c previously.

Units in the NZX-listed Fonterra Shareholders' Fund, which provides investors with access to the co-operative's dividend stream, have lost 41 per cent of their value since May 2013.

What is Fonterra doing to improve its performance?
The company wants to increase its exports of value-added products to major export markets, such as China. That would reduce the company's exposure to volatile commodity prices. Moves include the company's partnership with Chinese dairy firm Beingmate Baby & Child, which provides a major distribution deal for Fonterra's Anmum infant formula brand. The company also wants to create more marketing roles to sell its products better into overseas markets.

For more analysis from Liam Dann and Jamie Gray: tinyurl.com/nzhfonterrabusiness

- BusinessDesk, NZ Herald