UPDATE 1-NZ's Fonterra cuts 2014/15 milk payout price

Tue May 27, 2014 5:31pm EDT

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WELLINGTON, May 28 (Reuters) - New Zealand dairy giant Fonterra Ltd on Wednesday made a 17 percent cut in the forecast price it expects to pay farmer shareholders for milk in the coming season, because increased global dairy production has knocked prices lower.

The world's largest dairy exporter, also New Zealand's largest company, set its opening forecast for its 2014/15 payout price, at NZ$7.00 ($5.97) per kilogram of milk solids before retentions.

"Dairy commodity prices have come off the peak reached in early February this year, as global supply and demand have rebalanced," chief executive Theo Spierings said in a statement.

Fonterra also reduced its final payout price to NZ$8.40 for the 2013/14 season from a forecast NZ$8.65, although it was still a record high payout.

An analyst said the forecast was still high compared with previous years and would ensure solid incomes for farmers, but would dent broader economic growth.

"It will result in around NZ$2.2 billion lower dairy income which is about 1 percent of GDP," said ANZ Bank rural economist Con Williams.

Dairy products accounted for about 30 percent of New Zealand's NZ$50 billion export earnings in the year to April 30.

The cut in the forecast payout comes as global dairy prices have fallen more than 20 percent since the start of the year, retreating further from a record high hit just over a year ago.

Increased production both at home and in other countries, such as the United States, has knocked benchmark global dairy prices set at Fonterra's fortnightly auctions off record highs hit last year.

Fonterra updates its forecast milk payout on a quarterly basis to reflect market conditions.

It made a similar NZ$7/kilo initial forecast last year, which was revised higher several times as prices surged on the back of strong demand and tight supplies.

Fonterra has ridden a wave of surging demand from China and other emerging economies and high global prices.

Spierings said China was expected to remain a strong buyer of dairy products.

The reduced payout will lower farmers' incomes and comes at time when the Reserve Bank of New Zealand is moving to tighten monetary policy further, creating a headache for highly indebted farmers who will face an increase in debt servicing costs.

For Fonterra, which processes around 80 percent of all milk produced in New Zealand, the payout cut will lower input costs after sky-high costs have pummelled margins this season, prompting a warning that earnings will be halved this year.

($1 = 1.1716 New Zealand Dollars) (Reporting by Naomi Tajitsu; Editing by David Gregorio)

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