Fonterra has announced a fresh forecast for its payout for the current 2009/10 season, keeping it at NZ$4.55/kg of milk solids as a 10 cent increase in the profit component to 55 cents compensated for a 10 cent fall in the commodity milk price to NZ$4.00.

However Fonterra lowered its forecast for milk production because of bad weather and cash-strapped farmers skimping on feed and fertiliser. This will put an extra squeeze on regional New Zealand and overall GDP.

Here is the full Fonterra statement below.

Fonterra announced today the Co-operative's total forecast payout for the 2009/10 season remains at $4.55 per kilogram of milksolids (kgMS), with a 10 cent increase in profit compensating for a fall of 10 cents in the Milk Price.

Fonterra Chairman, Henry van der Heyden, said the New Zealand Dollar had strengthened significantly against the US currency since the opening forecast in May this year, which assumed an exchange rate of around US59 cents, and was putting downward pressure on the Milk Price.

However, on the positive side, Mr van der Heyden said there were tentative signs of strengthening demand and firming prices for some products in international dairy markets. This had been taken into account in the new forecast Milk Price of $4.00 per kgMS "“ 10 cents lower than the May forecast of $4.10.

"Along with other exporters, we've been hurting with the Kiwi dollar up around 65 cents against the US dollar. The fall in our Milk Price forecast would have been larger if we hadn't seen what are some early and encouraging signs in international markets."

Fonterra CEO, Andrew Ferrier, said the 22 percent increase in the forecast profit from 45 cents to 55 cents was the result of continued improvements in the performance of the consumer businesses and lower working capital requirements and lower funding costs.

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"Our combined consumer businesses are benefitting from shifts into higher-value products, as well as growth in market share in some areas. In addition, acquisitions in Australia are having a positive impact on earnings.

"We're also running a very tight ship, looking at every opportunity to reduce operating expenses and free-up cash for our business priorities. That means we have some capital constraints but the flip side is that, with inflationary pressures easing and lower interest costs, we're starting to see the payback from this disciplined effort across the business."

Mr van der Heyden said the volatile currency and continued uncertainty in international dairy markets made forecasting extremely difficult in the current environment: "But we need to make sure our farmers have the best possible information about payout and any upside or downside, particularly when they're tightening their belts and farming with lower cash flows this season".

Mr van der Heyden said the previous 2008/09 season forecast payout remained on track for $5.20, and the final figure would be confirmed in September.

Mr van der Heyden said the Co-operative had lowered its projections for milk supply in the 2009/10 season as a result of cold and wet winter weather conditions affecting pasture growth, and also tight cash flows reducing farm inputs.