Southland farmers were shocked at Fonterra's announcement yesterday it would drop its share dividend to 10 cents.
Fonterra announced yesterday it would hold its milk price forecast at $8.30kgMS but drop the forecast dividend from 32c a share to 10c.
Southland Federated Farmers president Russell MacPherson said farmers in the region were shocked by the share dividend drop.
"The news came out of the blue. However, once farmers get over the shock, they will understand why it was done."
Fonterra was a multi-product business and the high milk price put profits at risk, he said.
Although the milk price was frozen at $8.30, it was still a record price for farmers, he added.
That said, he warned Fonterra that other milk companies were paying more for milk.
"Fonterra needs to be put on notice that other milk companies are paying more and it needs to assess its structure."
Fonterra also approved an increase in the advance rate schedule of monthly payments to farmer shareholders.
The December payment, paid in January 2014, will be increased by 30c to $5.80 so farmers could continue to feel positive about the outlook for the season.
It was the Fonterra Unit (external investors) shareholders who would be most affected, he said.
Fonterra chairman John Wilson said milk powders were selling at high prices because of strong global demand and limited supply, but "only four months into the season, we are in an extraordinary situation".
Fonterra's asset base included a number of cheese and casein manufacturing plants and the gap between prices for milk powders compared to these was greater than it had ever been before, he said.
While milk powders were fetching high prices, 30 per cent of milk production was used for cheese and casein products, which were in less demand.
"In such abnormal circumstances, the board has the discretion to pay a lower farmgate milk price than that specified under the [milk price] manual if it is in the best interests of the co-operative," Mr Wilson said.
"Given the current volatility, it may change over the course of the season."
The new forecast payout was well below the $9 a kilogram that would have been paid if the milk price manual had been strictly followed.
Fonterra chief executive Theo Spierings said: "We will maintain our financial discipline and not pay the milk price out of borrowings, particularly in a year when we are forecasting a record payout for our farmers."
Fonterra Shareholders' Council chairman Ian Brown said it was a practical decision given the unusual market conditions.
"It has been made clear that there is a significant gulf between the higher price the market is paying for Whole Milk Powder (WMP) and the price paid for Fonterra's other products such as cheese and casein," he said.
Meanwhile, Fonterra is investing $235 million in a new plant in Pahiatua, Manawatu.
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