Fonterra's NZX-listed units dropped a three year low after the co-op announced a cut in its milk price forecast forecast and poured cold water on the likelihood it paying a second half dividend.
In a statement to the NZX, Fonterra said it would cut its milk-price forecast for 2017/18 by 5c to $6.70 per kg and said it won't pay farmers and investors a dividend for the second half of that financial year.
Fonterra's units, which allow investors outside the co-op access to its dividend flow, weakened immediately after the news and by 12.20 pm were down 16c or 3.13 per cent, to $4.95.
The dairy giant is blaming a poorer-than-expected financial performance on increased margin pressure arising from high milk prices - which are its highest input cost.
Fonterra's chief financial officer Marc Rivers told the Herald that the co-op's moves were aimed at protecting its balance sheet and preserving its favourable credit rating.
He said the curent high milk-price environment had put pressure on Fonterra's margins.
In a statement, new chairman John Monaghan said: "Our forecast performance was not where we expected it would be."
The co-op had previously forecast a full-year dividend of 15c-20c.
Fonterra said that its financial performance would be at, or slightly below, its previously announced 25-30 cents per share earnings guidance range.
Monaghan said the board has made these decisions in the best long-term interests of its farmer shareholders and unit holders.
"It is important for our co-operative to have a strong balance sheet and, as we indicated in May, the higher milk price, which is good for our farmers, has put pressure on Fonterra's earnings, and therefore our balance sheet in a year which was already challenging due to the payment to Danone and the impairment of the Co-operative's Beingmate investment," he said in a statement.
"You never want to have to reduce the milk price at the season's end, but it is the right thing to do and $6.70 remains a strong milk price."
Monaghan said he wanted to be "upfront" with farmers and unit holders that to achieve this the board has taken the step to depart from the amount calculated under the Farmgate Milk Price Manual. This is permitted within Fonterra's Constitution, he said.
"During the process of closing our books for the financial year end, the need for these actions has become clear," he said in a statement.
"While the numbers are not finalised, our margins were less than we forecasted right across our global Ingredients and Consumer and Foodservice businesses."
In May, Fonterra increased its 2017/18 forecast Farmgate milk price by 20 cents to $6.75 per kg but warned that the high milk price would put pressure on Fonterra's earnings.
Fonterra's farmers usually receive two dividend payments, and may have been anticipating a dividend of around 15-20 cents for the 2017/18 season.
Following today's announcement farmers' revenues for the 2017/18 season will be around 10-15c lower than they may have previously been expecting to receive, Westpac estimated.
Fonterra faced some big one off items in the financial year just finished, such as the settlement to French food group Danone over the 2013 botulism scare and write-down of its Beingmate Baby & Child Food investment.
Analysts said Fonterra faced challenges in year ahead around it capital structure.
"There are some excellent businesses within Fonterra, but others within the group that seem to be very challenged," Harbour Asset Managment portfolio manager and analyst Shane Solly said.
"As with the case of other New Zealand businesses that are facing challenges, these events are hopefully a catalyst for change," he said.
The co-operative's full-year results are due on September 13.