A forecast payout of $4.90-$5 is being touted as below break-even for many Fonterra suppliers, especially those worst affected by drought.
Fonterra has held its forecast farmgate milk price for the 2014-15 season at $4.70 but lowered its dividend estimate range by 5c to 20c-30c per share, while rival company Synlait Milk yesterday upped its forecast milk price from $4.40 to $4.50-$4.70.
Fonterra announced its half-year results yesterday, which included a 16% drop in net profit after tax to $183 million.
Farmers had been hoping for good news but the announcement enforced the need ''to maintain their frugal mindset'', Federated Farmers dairy chairman Andrew Hoggard said.
''The worst is not over yet, with farmers going into winter with the lower payouts starting to take effect and the drought affected regions, meaning farmers will be needing to buy in more supplementary feed than usual,'' Mr Hoggard said.
The biggest disappointment to farmers was the drop in the dividend. Farmers had believed a low farmgate milk price would reduce the cost of producing value-added products, which would be reflected in a higher dividend returned to farmers.
''There's not a lot of money in the system this year so the five cent drop in the dividend is going to hurt. All farmers can do now is sit tight, plan ahead and budget well,'' he said.
Fonterra chairman John Wilson said the financial results were below farmers' expectations and a ''snapshot'' of tough conditions in dairy with variable production, demand and pricing.
There was also the challenge of generating profit from inventory made in the previous financial year, when the cost of milk was higher, but sold in the first quarter of the financial year when global dairy prices were falling, he said.
Chief executive Theo Spierings said Fonterra was strongly committed to the V3 strategy it formulated three years ago, which had been a ''huge change'' for the co-operative. Change so far had not been easy.
It had a single-minded focus on delivering results: increasing sales volumes, reducing complexity and taking costs out to maximise returns.
To accelerate delivery on strategy, he and his team were leading a comprehensive business transformation programme which would require some ''tough decisions''.
''We are committed to improving performance. We have made good progress so far but we need to increase the pace of change,'' Mr Spierings said.
Fonterra has also lifted its production forecast for the season to 2% below last season, from 3%.
ASB rural economist Nathan Penny said there was little surprise in the milk price announcement and markets were largely unchanged following the result.
ASB maintained its milk price forecast at $4.70 and looked to next season ''for better things to come''. It maintained its 2015-16 forecast at $6.50, although recent dairy price falls pointed to some risk.
The drop in net profit would be ''somewhat disappointing'' for farmers and shareholders, Mr Penny said.
Cheddar and casein prices had been good relative to milk powder prices for most of the season, and the lower milk price would normally help Fonterra's margins. The co-operative had also signalled that it had been tightening its belt, he said.
Nationally, the drop from last season's $8.40 farmgate milk price equated to a more than $6 billion hit to the economy.
ANZ rural economist Con Williams said the sector could manage one tough year but two in a row would be a ''real test''.
Tighter cash-flow would necessitate cuts in not just capital and discretionary expenditure but core operating expenditure to avoid a debt blowout.
While cashflow looked tight, there were some key mitigating factors, Mr Williams said.
Cost structures were far better controlled after the record-breaking 2013-14 season compared with previous surges, leverage was heavily concentrated with about half the debt held by 20% of farmers, productivity growth had been impressive, and there had been a huge amount of investment back into dairy operations over the past five years.
Synlait Milk's managing director John Penno said the company's increased milk price forecast would be well received by suppliers, given how financially difficult the season was.
Synlait believed the market would continue to recover in the medium-term as consumption expanded and production growth slowed in response to lower pricing.
However, it remained mindful of additional milk growth likely to come from Europe as milk production quotas were removed on April 1.
