Fonterra's top brass cooked up a $430 million parachute so that the dairy co-operative could offer farmers a cushion for yesterday's brutal cut to the forecast milk payment.

Fonterra chief executive Theo Spierings and chief financial officer Lukas Paravicini began work on the deal five to six days ago along with a couple of the co-operative's farmer directors.

The upshot was that the Fonterra board was able to yesterday tick off a plan to leverage savings from the company's transformation project and pump them out to farmers in the form of interest free loans.

The strategy pulled the company back from a knife edge where directors risked a massive backlash from farmers over the decision to slash the forecast milk price payout from $5.25 to $3.85 a kilogram of milk solids. With the company forecasting earnings of 40-50 cents a share the total forecast payment to farmers for the 2015/16 season is now forecast to be $4.25-$4.35.


While Fonterra has provided an earnings shield for its farmers much - if not all - of the available loans it will offer for up to 50 cents per shared-up kilograms of milk solids will likely pass straight to banks to meet debt-servicing costs.

Capping the loans at 50 cents will prevent a farmer raid on the company's balance sheet. The interest free period is for two years only. Farmers will only have to pay back the loans when and if the farm gate price gets above $6 kg/milk solids. But billions of dollars will still be sucked out of rural economies leading to weakening consumer demand.

Spierings reckons the overall package which was announced at what had been dubbed a Black Friday press conference proves that "this is a bloody strong co-operative. Farmers should be proud of this". At a later call with investors and analysts, the chief executive made the point that the co-operative had to standby its farmers. They were the lifeblood of the company and needed to be supported to get through a difficult period. "Unit-holders are not interested in massive casualties to the farming base." The co-operative board has also placed a large bet that the global dairy prices will bounce back above their long-term average by tying the repayment of the planned interest free loans to the resumption of milk price payments above the $6 kg mark.

After a lengthy slump in which prices have been chased down repeatedly on the GlobalDairyTrade auction platform the company's implied forecasts looks heroic.

But Spierings reckons the international intelligence the company has sought and soundings out of China indicate that demand will pick up again.

It's also clear that Fonterra plans to take a more proactive and aggressive approach to the GDT auction platform which has lately been subject to rumours that some traders have colluded to drive prices down.

There is a catch. Despite the confidence displayed by Fonterra's top brass in their telephone news conference yesterday there is no hard evidence to indicate the global dairy slump will bottom out and recover anytime soon.

Right around the world dairy farmers and companies are feeling the impact of the lengthy dairy commodities slump.


Farmers have rioted in Ireland and elsewhere and firms face liquidity issues even in dairy strongholds like the Netherlands.

Chairman John Wilson was adamant the global dairy market would improve - "the hard thing is to call at the moment exactly when and how quickly".

The farmer parachute has been carefully calibrated.

The company said that given the pressures facing its farmers, it had reviewed capital expenditure for the next two years. As a result it was now targeting a spend of $500-600 million less for the 2016 financial year compared to the 2015 financial year.

The $430 million (dependent on take-up rates) would be funded by one-off savings generated within the business such as improving working capital.

Their message was well sold. The Fonterra Shareholders Fund units strengthened from $4.66 at yesterday's opening to $4.90 after the company made its announcement.


But prudence will be the name of the game in NZ dairy for months to come.