Fonterra cautioned dairy farmers over a drop in incomes as it cut its forecast for milk prices less than two months into the new season, acknowledging the high inventories held by Chinese buyers.
The New Zealand-based co-operative, the world's top dairy exporter, cut by NZ$1.00 to NZ$6.00 per kilogramme of milk solids its forecast for its payouts to farmers in 2014-15, which started last month.
The downgrade leaves producers on track for a 29% slump in prices compared with last season's record payout, when they benefited from strong volumes too, with Fonterra's collections rising by 8.3% to 1.58bn kilogrammes of milk solids.
John Wilson, the Fonterra chairman, highlighted that the forecast fall in milk prices "will have an impact on our farmers' cash flows".
He urged "caution over farm budgets in line of the continuing volatility in international dairy markets".
In fact, dairy prices, as measured by Fonterra's GlobalDairyTrade auctions, hit a 21-month low this month, down 16% already from the start of 2014-15.
The decline has been blamed by many observers on reduced demand in China, with the US Milk Producers Council speaking for many commentators in saying that "Chinese buyers clearly got ahead of themselves when they brought in such huge volumes of milk powder around the turn of the year.
"Chinese milk powder inventories are burdensome and the world's most-watched dairy importer will likely need to go through a period of lower purchases to correct its past exuberance," the council said.
However, Chinese milk powder imports, while last month falling 24% from May, typically show a summer decline, and remained 93% above levels in June 2013, and the US Department of Agriculture, for instance, has highlighted production increases in declining dairy prices.
Fonterra, which last month reassured over Chinese dairy demand, on Tuesday acknowledged a "build-up of inventory" in the top dairy importing country.
However, Mr Wilson also highlighted "strong production globally", and "falling demand in some [unspecified] emerging markets in response to high dairy commodity prices".
In New Zealand itself, the season started off with a 10.1% rise in Fonterra milk collections, although volumes are a fraction at this time of year of those at the October seasonal peak.
"In addition the New Zealand dollar has remained strong," undermining the competitiveness of the country's exports, Mr Wilson said.
At broker TD Securities, analyst Annette Beacher said that the drop in Fonterra's forecast could have been worse, if the full drop in dairy values had been passed through.
"Dairy prices have collapsed by 30% year to date, and taking the historical correlation literally between dairy prices and Fonterra payouts, the farmgate price 'could' have been closer to NZ$5 per kilogramme of milk solids," Ms Beacher said.
However, there was the potential for further reductions.
"The history of downgrades to date suggests that Fonterra prefers to adjust payouts in smaller increments, so we cannot rule out another downgrade in the coming months," potentially on September 24 when the co-operative unveils annual results.
Fonterra said that its price forecast "anticipates some recovery" in milk prices, but added that it was "too early to predict how strong this recovery will be, or when it will kick in".