KEY POINTS:
Fonterra will this week make an unscheduled update to its forecast which could cut payouts to farmers by more than $350 million.
The world's biggest dairy exporter in September reduced its forecast payout to farmers from $7 to $6.60 a kg of milksolids.
The next scheduled update was in December but a Fonterra spokesman confirmed there would be an announcement on Friday. Company policy is to make public adjustments when forecasts change by at least 30c.
Based on last season's collection of 1.19 billion kg of milksolids, which was down 4.3 per cent because of the drought, a cut of 30c in the forecast could cost farmers $357 million.
National Bank rural economist Kevin Wilson said this week's update was likely to drop the forecast.
"The trend is very sharply downwards at the moment, albeit we've still got eight or nine months of the season to go, which has got to be remembered ... but the trend certainly is not good at the moment."
The National Bank expected the payout to be below $6 by the end of the season.
"But the thing also to stress is that a $6 payout on an historical basis is still a very good result," Wilson said.
The current forecast of $6.60 is below last season's record payout of $7.90 - 24c of which Fonterra held back because of uncertainty in the currency, commodity and financial market - but well above $4.46 the previous year.
Dairy commodity prices soared due to world economic growth, demand from emerging markets, reduced supply, drought in Australia and biofuel production.
However, Fonterra said international milk powder prices which peaked at about US$5000 ($9116) a tonne in late 2007 had fallen back to about US$2600 a tonne.
National Bank's Wilson said supply was still increasing out of Europe and the US.
"There is probably an aftermath result to the very high prices we had 12 months ago in terms of buyer pressure and you've got the financial markets implications themselves," he said.
Buyers had to fund their businesses, with probably tighter credit, smaller inventories and purchases made closer to "just in time".
Fonterra Shareholders' Council chairman Blue Read said the global credit crunch was hitting home in New Zealand.
"Our false summer caused by the elections, or whatever, is over and there's no good news anywhere in the world at the moment and so I think reality's just going to hit home pretty bloody quick," Read said.
"I think that farmers are becoming more and more aware of that by the day but are by no means sure of what the implications ofit are for us, other than it probably won'tbe good."
In the annual report issued this week, Fonterra said more volatility in global dairy prices was likely after a year.
"It is clear that 2007/08 has fundamentally changed market dynamics and volatility is more likely to be the norm, rather than the exception, in the medium term," chairman Henry van der Heyden said.
"With global financial confidence tenuous at best and the inevitable lag between price signals guiding farmer decisions around production, there is every possibility of an imbalance between demand and supply influencing prices."
Tragic events in China had overshadowed what should have been an annual result to remember, van der Heyden said.
Fonterra's 43 per cent-owned Chinese dairy company Sanlu was one of 22 firms caught up in a scandal in which the industrial chemical melamine was added to watered-down milk to boost protein levels.
Tens of thousands of infants were made ill and at least four died.
Chief executive Andrew Ferrier said Fonterra continued to work with Chinese authorities to see if the company could help to restore safe supplies.
SALARY NEARS $4 MILLION MARK
The highest-paid employee at dairy giant Fonterra - likely to be chief executive Andrew Ferrier - took home close to $4 million in the latest financial period.
According to Fonterra's annual report sent to farmers this week, the most-rewarded employee for the 14 months ending July 31 was paid between $3.97 million and $3.98 million.
On an annualised basis using the upper band limit, Fonterra's top pay packet was worth $3.41 million, compared with $3.37 million for the year ending May 31, 2007 - equivalent to a 1.2 per cent rise.
This year's New Zealand Herald executive pay survey showed the country's top executives' pay soared by an average of 25 per cent last year. The list was topped by former Telecom boss Theresa Gattung, who made $5.41 million.
