Fonterra may dust off last year's support package or boost the percentage of earnings paid as dividends to help farmers hit by the dairy downturn, when it releases its first-half result tomorrow, say analysts.

Out of the two options, analysts said the higher dividend payout would be "cleaner" because revisiting last year's soft loan scheme would add strain to Fonterra's balance sheet.

Some said a mixture of the two was possible.

Last year's loan scheme, hatched in August when the farmgate milk price forecast went as low as $3.85 a kg of milksolids, was taken off the table in December when the forecast went back up to $4.60 a kg.


Now that the forecast has dropped back to $3.90 a kg - well below the average breakeven point of $5.25 a kg - expectations are that the package could be resurrected.

Under the scheme, farmer shareholders could apply for an interest-free loan of 50c for every kilogram produced from June 1 to December 31 last year. The loan was interest-free until May 31, 2017, after which Fonterra could charge interest.

"A loan obviously pulls on Fonterra's balance sheet and that comes at a cost," said ANZ agri economist Con Williams.

"It helps with farmers' cash flow requirements but equally it's only a loan, so it becomes a bit circular."

Fonterra is expected to pay out about 75 to 80 per cent of its earnings as dividends. Typically, funds are held back in the form of retentions which are used for reinvestment - but reducing the level of retention was seen as the cleanest and easiest way to lessen the pain for farmers.

Fonterra is not expected to issue its first milk price forecast for the new season until May, but tomorrow's announcement is expected to contain some commentary on prices.

Commentators have raised the issue of Fonterra's high debt levels, but the company still has large undrawn banking facilities.

"While the half-year results often make it difficult to gauge the underlying direction of the balance sheet, overall there should be some improvement as planned capacity expenditure is scaled back and business units have been made self-funding," Williams said.

"Overall the result should be better, providing some rays of light in what is an otherwise challenging environment for dairying."

Paradoxically, the current low milk price environment should be favourable for Fonterra as it lowers its input costs for the manufacturing and dividend paying side of the operation.

Analysts generally expect to see a big lift from the previous corresponding period, which was unusually poor.

Brokers Forsyth Barr expects the co-op's normalised earnings before interest and tax to jump from $376 million to $687 million and the interim dividend up to 18.5c from 10c.