A currency-driven cut in Fonterra's payout means $500 million less for the New Zealand economy than predicted for this dairy season.

Fonterra said today it was revising its milk payout forecast range for the 2012-2013 season down 30c, to $5.25/kg milksolids from $5.50/kg.

The opening season forecast was $5.65-$5.575 before retentions for a fully shared-up farmer.

Fonterra has also lowered its forecast net profit after tax range to 40-50c, from 45-55c a share at the season opening.

The dairy giant blamed the continuing strength of the kiwi dollar for the cut.

BNZ economist Doug Steel said the reduction was no big surprise.

Given the mix of international dairy prices and the strength of the currency, there was always some downside risk to the opening payout forecast, he said.

Steel said the reduction shaved $500m from the expected benefit to the national economy.

The reduced forecast comes despite improving prices on Fonterra's online auction Global Dairy Trade (GDT), considered a barometer of world market prices.

Overall, the GDT trade weighted index was up 4.1 per cent over the past four trading auctions, underpinned by a 7.8 per cent rise in the average price on August 15.

But prices were low compared to a year ago and the New Zealand dollar remained strong against the US dollar, van der Heyden said.

Chief executive Theo Spierings said Fonterra's consumer businesses were under pressure because of the unfavourable foreign exchange translation effects in many markets, and a difficult retail trading environment affecting the dairy giant's Australia-New Zealand business.

"Accordingly we have lowered our forecast net profit after tax range to 40-50 cents a share."

FINAL PAYOUT

While today's cut in payout confirms economists' predictions that the 2012-2013 season payout could come in well below that of the still-to-be-announced 2011-2012 season payout, there is still a lot of milk to flow under the bridge before the end of this season.

The final payout for the 2012-2013 season will not be known until October next year.

The 2011-2012 payout was $7.90. That season was marked by a string of payout forecast changes because of international price softening and the strong kiwi dollar.

The latest fall was in May this year when Fonterra revised down its 2011-2012 payout range before retentions by 30c to $6.45-$6.55.

Van der Heyden said despite today's cut the advance payment rate to farmers would not change, which means their cash flows will not be crimped.

There were some signs of strengthening dairy prices, partially driven by global weather extremes, including drought in the US, he told Fonterra's 10,500 farmers in an email.

Spierings, however, warned that even if international prices increased, the currency would continue to eat into any gains.

"Our forecasting anticipates some recovery in global dairy prices but we don't know how strong this recovery will be or when it will kick in. For this reason our farmers should continue to plan cautiously."

- © Fairfax NZ News

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