At $4.25, Fonterra's new season forecast payout yesterday came in well below market expectations, but the dairy giant will bring forward several payments to assist its struggling farmers.
Against some expectations, the present season final payout was kept at $3.90, and no mention was made of the dividend payment, which March guidance had at 35c-40c. A dividend announcement is due in July.
The market was expecting the new season payout in a range of $4.50-$4.80 per kilogram of milk solids.
Westpac expected $4.60 and ASB $4.80.
Fonterra's Shareholders' Council described the $4.25 forecast as a "tough number for farmers'', but it was "the reality of where the market was at present''.
"The signal farmers have received from their board is that while there are encouraging signs and the market should move in a positive direction over the next 12 months, it would be slow to do so,'' council chairman Duncan Coull said.
The New Zealand dollar fell against its US counterpart, declining to US67.23c.
Economists are predicting a wide range of final payout estimates for the new 2016-17 season, ranging from $4.60 up to $6, a testimony to the unpredictability facing the sector.
The bleak New Zealand outlook follows hard on the heels of the controversial decision in Australia of Fonterra and that country's largest dairy company, Murray Goulburn, to cut their new season payout forecasts in recent weeks, prompting widespread farmer condemnation and protests.
The Australian cut is from $5.60 per kilo to a range of $4.75-$5, prompting the Australian Government to respond this week with $A555million ($NZ595million) low interest loan package, spread over two years.
While the increase of 35c per kilogram of milk solids will be welcomed, the large majority of Fonterra's New Zealand farmers will remain in the red.
Their break-even point is above $5.20 per kg, meaning a third season with negative cashflows.
This season's forecast payout was kept at $3.90 by Fonterra yesterday, but it will be paid earlier than normal, while the new 2016-17 season's usual advance payment, set at $3.01 yesterday, will be brought forward.
The new dairy season begins on June 1.
Fonterra chairman John Wilson said the co-op's new season forecast took into account the high New Zealand dollar against the US exchange rate, supply volumes from other major dairying regions, current global inventory levels, and the economic outlook of major dairy importers.
"We are expecting global dairy pricing to gradually improve over the season as farmers globally reduce production in response to ongoing low milk prices. However we continue to urge caution with on-farm budgets,'' Mr Wilson said in a statement yesterday.
ASB rural economist Nathan Penny said the $4.25 was "much lower'' than expectations, from the market's $4.60 to his $4.80 prediction.
"We had expected Fonterra would pitch its forecast and/or advance payments a bit higher in order to support farmers' cashflows,'' he said.
While Fonterra ‘‘modestly'' lifted its retrospective payments - "top-ups'' for August and September by 10c - that would still leave farmers' cashflows weaker than anticipated, he said.
Westpac economists said the recent Global Dairy Trade (GDT) auctions had been "mildly encouraging''.
The mainstay product, whole milk powder, had risen 19% since mid-February.
"Given the recent moderate gains in the GDT auctions, markets were slightly disappointed in the $4.25 forecast,'' Westpac said.
The ANZ's chief economist Cameron Bagrie, said the $4.25 forecast was below the bottom range of market expectations and appeared to be modelled from current market pricing.
"Perhaps more importantly, it continues to ‘pay it forward' by increasing the advance rate and paying the dividend income earlier than normal,'' he said.
While cashflow in 2016-17 looked to be better than during the past 12 months, there was only a "marginal increase'' and it was not enough to restore profitability, he said.
"Even under a price-rebound scenario, where the 2017-18 payout looks better, positive cashflow will not return until 2018,'' Mr Bagrie said.
Across the wider economy, continued dairy cashflow pressures would weigh heavily on many other support businesses.
Dairy land values would also remain under pressure, he said.
Fonterra's chief executive, Theo Spierings, said the long-term fundamentals for global dairy remained positive.
Demand was expected to increase by 2%-3% a year, due to the growing world population, increasing Asian middle classes, urbanisation and favourable demographics.
"In addition to global supply growth slowing, we're seeing imports into major dairy markets improving compared to a year ago.
"China dairy consumption growth remains positive and its demand for imports has been steady over recent GlobalDairyTrade events,'' Mr Spierings said in a statement yesterday.
