Fonterra braced dairy farmers for a bigger fall in milk prices this season than it feared, warning that the international market had not revived as it had hoped, and scrapping a forecast decried as based on "nonsense" thinking.

The New Zealand co-operative, the world's biggest dairy exporter, cut from NZ$6.75 per kilogramme of milk solids to NZ$6.30 per kilogramme its forecast for milk payouts to its members in 2010-11.

The downgrade leaves farmers facing a cut of 17% from last year's milk payout of NZ$7.60 per kilogramme of milk solids, which helped raise the total payment to a record NZ$8.25 per kilogramme, giving an average cheque of about NZ$1m apiece.

However, Sir Henry van der Heyden, the Fonterra chairman, said that the group was "not yet seeing the recovery of international dairy prices we initially anticipated" when issuing its first payment forecasts, in May.

The market's "softness" was being reflected in results from the much-watched globalDairyTrade auctions which have suffered "eight successive price falls – and one uptick – since May", Sir Henry added.

Furthermore, the group is fighting on export markets against a revived New Zealand dollar, which has boosted the appeal of shipments from trade rivals, such as the US.

Production rises 

Nonetheless, many foreign observers too have been downbeat over dairy price prospects, with Stewart-Peterson analyst Steven Schalla two weeks ago warning of a 20-30% decline in US milk values, a forecast reflecting "historical price patterns".

Besides concerns over demand from importers such as China and Russia, amid trimmed world economic growth forecasts, price expectations have been trimmed by resilient output, in the European Union and US, but particularly New Zealand.

Milk output in New Zealand, the top dairy exporter, has made a record start to 2011-12, requiring the government to relax restrictions on lorry weights to enable tankers to keep up on pick-ups.

'Sounds like nonsense'

The US-based Milk Producers Council earlier in the month questioned Fonterra's adherence to its initial forecast for milk payouts, despite the surge in production and signs of a weakening market.

"Fonterra said they will be using some of their increased supply to produce products with lower value, but said that would not affect their [price] projections. That sounds like nonsense, doesn't it?" the council's John Kaczor said.

"Every bit of that additional milk production from the southern hemisphere has only one outlet –convert it to products that will sell and ship them out."

The "best outcome" for producers "would be for China, Russia, and India to continue to require higher volumes of dairy products to help to keep global demand in reasonable balance with the short-term milk production surge from the southern part of the globe", Mr Kaczor added.