Wellington, Jan 28 - New Zealand dairy export giant Fonterra Co-operative Group Ltd cut its payout forecast for the 2008/09 season by 15 percent on Wednesday because of weak commodity prices, dealing a billion dollar blow to the recession hit economy.
Fonterra said it now expected to pay its farmer shareholders NZ$5.10 ($2.68) a kilogram of milk solids for the current season, against its previous forecast of NZ$6.00 a kilo.
Fonterra, an unlisted co-operative owned by around 11,000 farmers, is New Zealand's largest company and controls about a third of the world's dairy exports. It generates more than 7 percent of the country's gross domestic product.
"We are now taking a much more pessimistic view than we were at the end of last year. This reflects the worsening impact of the global economic environment," Fonterra chairman Henry van der Heyden said.
The cut could result in around NZ$1 billion in direct earnings being lost to the economy, analysts estimate. Dairying accounts for around a quarter of New Zealand's NZ$42 billion annual export earnings.
In May Fonterra initially forecast a NZ$7 a kilo payout for the current season, after a record NZ$7.90 payout in the 2007/08 season as dairy prices climbed.
However, dairy prices have dropped sharply in the past few months, as oversupply in the market and the global economic crisis hit demand.
On Jan. 7 Fonterra said the average selling price for whole milk powder at an Internet auction had fallen 54 percent since it started the auction process in July, while a survey from the ANZ bank found dairy prices had fallen to a two-year low.
Chief executive Andre Ferrier said the outlook for the next 18 months looked to be difficult, with the added complication of governments offering support to their domestic industries.
"Any regional subsidies or intervention have the potential to distort the market, potentially delaying recovery to more sustainable price levels," Ferrier said.
Last week, the European Union said it would reinstate export subsidies, suspended in 2007, for a range of dairy exports to help struggling exporters compete on world markets.
Fonterra, whose brands include Anchor and Fresh n'Fruity, competes on world markets against food conglomerates such as Nestle, Kraft Foods Inc and Danone.
It owns 99 percent of Chilean dairy company Soprole, and has a 43 percent stake in the bankrupt Chinese dairy firm San Lu, which has been embroiled in a tainted milk scandal. Fonterra has written off its NZ$200 million investment in San Lu, after milk tainted with the industrial chemical Melamine killed at least six children and made 300,000 sick. ($1=NZ$1.90)