Fonterra's decision to slice 30c/kg from its milk payout forecast for this season will mean around $500 million less for the New Zealand economy this year.

The cut, announced by the dairy giant's board today, follows softening global dairy commodity prices, and will result in the average production farmer being $42,000 worse off than expected this season.

The cut is the fourth change to the payout forecast this season, the roller coaster ride reflecting the volatile world economy.

It takes the forecast payout for 2011-2012 season before retentions to $6.45-$.6.55. The milk payment component of this has been reduced to $6.05/kg milksolids.

On the bright side, the Fonterra's board announcement of an opening forecast of $5.95-$6.05 before retentions for the 2012-2013 season which officially starts on June 1 is better than expected, given global economic pressures.

BNZ economist Doug Steel said while the latest cut in this season's payout forecast was heavier than expected, the opening season forecast was "mildly positive".

"The new season could have been worse," he said.

The new season's payout forecast comprises a milk price of $5.50/kg plus a forecast net profit after tax range of 44-55c a share.

Fonterra today held its fair value share price for the new season at $4.52.

Steel said today's payout reduction would mean around $500m less revenue for the dairy industry.

The 2011-2012 season opened with a payout forecast of $7.15-$7.25 in May last year. The milk price component was $6.75.

In October, falling global prices prompted Fonterra to cut the milk payout forecast by 45c/kg to $6.35.

In December the milk payment forecast was bumped up again to $6.50 as global commodity prices improved only to be squeezed down again in March to $6.35, as they deteriorated again.

Steel said "all eyes" in New Zealand are now on the European economy, international commodity prices and the exchange rate.

"The decline (today) is a negative, but it's not as bad as it could have been. In some sense there is always some confidence (to be gained) that our macroeconomic set up is working through the crisis."

New Zealand's floating currency meant flexibility in hard times, he said.

"Let's fix it a la Greece and have no flexibility.

Fonterra chief executive Theo Spierings said today's updated forecast for this year comprised a lower forecast milk price of $6.05/kg milksolids and a forecast net profit after tax range of $570 million to $720 million, equating to 40-50c a share.

This means Fonterra is forecasting that a 100 per cent share-backed farmer will earn on average in the range $6.45-$6.55/kg before retentions this year.

Spierings said the continued easing of commodity prices was reflected in the company's Global Dairy Trade internet auctions, where the trade weighted index had declined 20.3 per cent since Fonterra's last forecast of $6.35 in April.

"Dairy production levels in the US and Europe are high, while we continue to have higher-than-normal production levels from New Zealand. All this is occurring at a time of heightened uncertainties in global markets."

He said with the softening global prices, operating earnings were expected to be marginally ahead of 2011.

Fonterra chairman Sir Henry van der Heyden said the opening forecast for next season reflected a realistic outlook by the board towards global dairy markets over the coming months.

"There's a lot of milk out there and prices have softened," van der Heyden said.

"We think that supply and demand more into balance later in 2012 which may help ease the downward pressure on prices."

There was however no agreement among outside experts on how soon prices could be expected to recover.

Spierings said Fonterra was still doing its budget for the 2012-2013 year but was targeting a net profit after tax in the range of $670m to $820m, equating to 45-55c a share. The mid point to this forecast is 5c per share higher than the current season mid point.

The board has yet to forecast a dividend range for 2013.

Fonterra's dividend policy is to pay out 65-75 per cent of net profit after tax, adjusted for one-off items and other factors.

- © Fairfax NZ News