Fonterra Cooperative Group has raised its forecast payout to farmers on rising Asian demand but has canned its interim dividend due to the increased cost.

The dairy processor now expects to pay $6.30-6.60 per kilogram of milk solids in the current season, up from its December forecast of $6-6.30/kgMS. It paid $6.69/kgMS in the 2018 season. Fonterra has also scaled back its milk collection forecast by 20 million kg to 1,530 million kgMS, which is still 2 per cent more than last season.

"Since our last milk price update in December, global demand has strengthened," chair John Monaghan said in a statement. "This is driven predominantly by stronger demand from Asia, including Greater China. The European Union's intervention stocks of skim milk powder have also now cleared for the season and, as a result, we expect demand for SMP to be strong."

The regulated Dairy Industry Restructuring Act price and advance rate have been set at $6.45/kgMS. The new forecast will see farmers paid $9.4-10.1 billion compared to $9.3-9.77 billion.

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Monaghan said he expects demand to remain relatively strong for the rest of the season.

The increased cost of milk will squeeze Fonterra's margins and it cut its forecast earnings to 15-25 cents per share from 25-35 cents per share. Nor will it pay an interim dividend, which outside investors in the Fonterra Shareholders' Fund are exposed to.

Fonterra's board will decide on whether to pay a final dividend and is reviewing its dividend policy as part of its wider strategic review. Monaghan said he will update progress on the review at the cooperative's first-half result on March 20.

"We are taking a close look at our business with our portfolio review, where we can win in the world, and the products and markets where we have a real competitive advantage," he said. "We need a fundamental change in direction if we are to deliver on our full potential."

Chief executive Miles Hurrell said Fonterra's underlying performance isn't where it needs to be, with challenges in its Australian ingredients and Asian foodservice businesses. It's also been hit by difficult trading conditions in Latin America.

Fonterra is reviewing its entire asset base, including putting its Tip Top ice-cream business up for sale, and is on track to cut debt by $800 million this financial year. Its net debt was $6.2 billion at a gearing rate of 48.4 per cent at July 31.

Fonterra Shareholders' Fund units last traded at $4.50, and have dropped 25 per cent over the past 12 months. Fonterra's shares, which can be owned only by farmers who supply Fonterra, were last at $4.51, down 24.7 per cent.

- BusinessDesk

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