"It is a surprise to me. I would have expected better," he said.
Most dairy farmers expected returns to drop from the top of the market, where they had been for the last two years, but not to plummet in one season, said Pedersen.
"The reality of that on the cashflow and the total performance of the on-farm businesses next season will be a shock to most of us when we see it in our balance sheet."
At meetings just last week farmers had wondered what Fonterra would deliver, especially in light of efficiency savings anticipated to top $300 million a year eventually, Pedersen said.
"I thought Fonterra was forecasting that we would hit a bottom about now but we would see some resurgence in prices over the end of the season ... and that there would be a bounce that would drag the average up to $4.50."
WestpacTrust economist Richard Sullivan described the $4 payout as normal but said the bank had not expected such a quick drop "after the heady heights of $5.30".
"Obviously the impact of European and US subsidies has depressed the market a lot quicker than could have been expected."
From a historic perspective $4 was a good payout, and only three years ago was the highest level ever attained, Sullivan said.
"It's just that there have been two exceptional years.
"It's a level our bank has been suggesting farmers budget at, and anything above that is extra profit that is nice but can't be relied on forever."
BNZ chief economist Tony Alexander said $4 was no surprise, especially after the September 11 terrorist attacks in the United States.
Some farmers might have made their revenue predictions on $4.50 or $4.75 and be caught out, but most would be well-prepared for the lower figure, he said
"Overall things will be okay but worth keeping an eye on in case you get a further drop the year after that."
Alexander doubted that the payout decline would have great impact on dairy-dependent service industries and towns.
"It will be more the absence of exceptionally good spending levels rather than wallet-slashing, cutback territory."
Fonterra chairman John Roadley advised farmers that the lower payout was caused by falling commodity prices and a strengthened New Zealand dollar.
Fonterra had reported negative market sentiments since the middle of last year and the events of September 11 had added to the uncertainty.
In November, the European Union began to re-introduce export subsidies and had continued to increase them regularly.
The US has disposed of a significant quantity of milkpowder and had also boosted subsidies, Roadley said.
"Since February, market prices have continued to fall at a rate not previously experienced.
"Commodity prices are now close to their lowest levels in 20 years although a $4 payout would still be among the highest in recent years."
Fonterra's hedging portfolio would limit the impact of a strengthened New Zealand dollar to about 10c a kilogram.
Roadley said in Farmlink, this month's newsletter to Fonterra shareholders, that clear signs began to appear last month of a more stable international market, after the steep fall in prices that started last July.
"Prices generally are still at very low levels, particularly for milkpowders and butter, and any recovery is some way off and expected to be slow."
The more settled market mostly arose from the European Union and US price support arrangements.
The EU began propping up skim milkpowder prices at the beginning of last month through an arrangement in which member Governments buy surplus milkpowder and hold it in stock to support minimum prices.
"The EU has also been buying surplus butter to support prices, with more than 10,000 tonnes taken off the market in March alone. There has been similar activity in the United States," Roadley said.
The measures had resulted in a significant buildup of surplus stocks with no immediate outlet.
More than 100,000 tonnes of butter and 20,000 tonnes of milkpowder was being held in the European Union.
Even more ominously, US Government stocks of milkpowder now topped 400,000 tonnes, he said.
The stocks were prevented from greatly influencing export prices by World Trade Organisation limits on subsidised exporting.
The US was now out of the export milkpowder market until July.
nzherald.co.nz/dairy
International Dairy Summit
