Fonterra yesterday lowered its forecast milk price to its 10,500 shareholders for next year by 12.5%, from a predicted $5.20 a kg of milk solids (kg/ms) this season to $4.55 kg/ms for 2009-10.
It was made up of a milk price of $4.10 and a value added contribution of 45c kg/ms.
Banking sources said budgets for next year had been calculated on a $5 kg/ms payout.
Fonterra chairman Henry van der Heyden said yesterday the dairy co-operative had been advising shareholders to budget on this figure until the exchange rate started appreciating.
Fonterra's 2009-10 forecast was based on a New Zealand-United States dollar exchange rate of US59c, a 1c movement in the dollar equating to a 10c movement in the milk price.
Next year's forecast was a massive 42% lower than the $7.90 kg/ms paid to suppliers in the record 2007-08 season and, according to a report by investment banker Macquarie Group, hit a heavily indebted sector.
The report said some farmers had production costs of $5.50 to produce 1 kg/ms, while most had costs of about $3.50 kg/ms.
Federated Farmers claimed the figure was $4.54 a kg/ms.
But it was the level of debt, especially in the dairy sector, that was a major concern.
Of the $44.7 billion agricultural debt as at March 31, 61%, or $27.5 billion, was lent to the dairy sector.
During a media conference yesterday, Mr van der Heyden acknowledged the cash flow difficulties caused by the lower payout, but was unable to offer much comfort.
He said the forecast was based on the best information available.
Chief executive Andrew Ferrier said the shifting exchange rate had created uncertainty, but added to the mix were the recent dairy export subsidies initiated by the United States and Europe and already unsteady markets.
Mr Ferrier said the trade war came just as there were signs dairy markets were recovering.
It would delay any recovery by at least nine months.
"Any significant uplift is now probably not likely to occur until later 2009 or early 2010," he said.
Fonterra has little of next season's production covered by hedging finance, and senior management were reluctant to divulge details of its hedging policy.
Mr Ferrier said the company had strengthened its balance sheet, and by the end of this financial year the debt equity ratio would be 53.5%, a better result than the 55% it expected to strike.
It had been as high as 61%, but should reach 50% or lower next financial year, he said.
It had been helped by sales from April to June being ahead of budget, and by fresh equity coming in from contracted suppliers required to buy shares, and by farmers who have increased production also buying shares.
Mr Ferrier estimated that 40% of shareholders would need to buy extra shares to equate shareholding with milk produced, but the remaining 60% would be able to sell surplus shares from last season at $5.57, and buy new shares they may need for next season at the new value of $4.52.
Shareholders were required to own one share for every kg/ms they produce.
Milk production had recovered from last year's drought, with milk flows this year expected to be 7.5% ahead of last year at 1280 million kg/ms, compared with 1193 million kg/ms in 2007-08.
