July 29, 2014 / 5:11 AM / 3 years ago

UPDATE 1-NZ's Fonterra cuts farmer payout forecast as prices tumble

* Fonterra cuts forecast farmer payout by 14 pct

* Cites slowing demand, high stocks, lower prices

* NZ dollar falls about quarter of a cent (Adds quotes, currency reaction)

WELLINGTON, July 29 (Reuters) - New Zealand dairy giant Fonterra Ltd cut its forecast payout to its suppliers in the new season by 14 percent because of tumbling world prices and a high exchange rate.

The world’s largest dairy exporter, also New Zealand’s largest company, said on Tuesday it was reducing its 2014/15 payout price to NZ$6.00 ($5.12) a kilo of milk solids from an initial forecast of NZ$7.00 made in May.

Fonterra said it was expecting a dividend from its consumer operations of 20 to 25 NZ cents, which is on top of the milk price it pays farmer suppliers.

“We have seen strong production globally, a build-up of inventory in China, and falling demand in some emerging markets in response to high dairy commodity prices,” Fonterra chairman John Wilson said in a statement.

Dairy prices have fallen 34 percent in Fonterra’s global auctions since February, while the New Zealand dollar touched a near three-year high in mid-July.

Fonterra said it expected to see some improvement in prices later in the season.

The kiwi dollar, which is sensitive to the fortunes of the dairy industry which earns nearly a third of the country’s export earnings, fell to a six-week low of $0.8516 from $0.8544 after the announcement.

Fonterra paid out a record NZ$8.40 per kilo in the 2013/14 season on the back of surging demand from China, which drove prices higher.

The latest forecast represents a drop of about NZ$4.3 billion in the country’s earnings, equivalent to about 1.9 percent of gross domestic product.

“At this stage of the season, the final payout remains very uncertain,” Westpac chief economist Dominick Stevens said.

“We do expect a very substantial recovery in auction prices, but not until the last quarter of this year. Presumably, Fonterra’s assumptions are similar.”

For Fonterra, which processes around 80 percent of all milk produced in New Zealand, a reduced payout would lower input costs and help to improve margins for its consumer products such as yoghurt.

The 2014/15 dairy production season is about to start and Fonterra updates its payout forecast quarterly through the season.

$1 = 1.1727 New Zealand Dollars Reporting by Gyles Beckford; Editing by Stephen Coates

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