Wellington, May 27 NZPA - Fonterra today tightened up the economy for the coming year by cutting its opening forecast payout for the 2010 season to just $4.55/kg of milksolids.

"A payout at this level would take hundreds of millions of dollars out of the economy," Fonterra chairman Henry van der Heyden warned today.

On the eve of the first budget by Prime Minister John Key's National Government, he said the low payout is "bad news for the whole country".

The opening forecast for the 2010 payout is 12.5 percent down on this season's figure of $5.20/kg, and a massive 42.4 percent plunge from the record $7.90 in the preceding 2008 season, when Fonterra farmers received milk cheques averaging over $800,000 each.

The company has warned farmers that it will retain any earnings in the current season over $5.20/kg.

The payout forecast was lower than expected because of the recent strengthening of the New Zealand dollar's exchange rate against the US dollar. The exchange rate was today over US62c. Mr van der Heyden said Fonterra's calculations were based on an average exchange rate for its overseas earnings equivalent to US59c in the coming season.

"We'd certainly like to see the exchange rate come down and stay lower," he said.

"That would benefit our farmers and New Zealand's export returns.

"Our farmers are already under severe financial pressure and it's also bad news for the country as a whole."

Fonterra farmers use a rule of thumb that says a US1c movement in the exchange rate over a year lifts or lowers their milk price by NZ10c/kg, with the payout dropping as the exchange rate rises.

In the 2010 season starting on Monday, farmers have been told to expect a commodity milk price of $4.10/kg and a "value return" on branded consumer goods and other added-value products of 45c/kg.

This compares with the current season's forecast payout of $5.20, made up of a $4.75/kg milk price and an added value return of 45c/kg.

"We had expected dairy prices to be bouncing along the bottom at the moment, but the exchange rate has been a big negative," Mr van der Heyden said in a statement.

The company hedged its foreign exchange requirements to remove volatility and provide certainty for farmers, but the exchange rate "has a huge influence on the milk price forecast when you go into the new season with a large chunk of your sales unhedged, which is always the case at this time of the year".

Mr van der Heyden said that in the current economic outlook, "sustaining our earnings for the current season is a good outcome".

"We were looking at a forecast over $5 when the Kiwi was at 50 cents, but the rebound means we're now working with a dollar that's 10 cents higher," he said.

And he noted that just as there had been some tentative signs of recovery in the global dairy market, the US Government had re-started export subsidies for its farmers, "which is bad news for our farmers".

With farmers' cash flows extremely tight, and a "somewhat improved" balance sheet, Fonterra directors have brought forward to August this year a payment of 20c/kg of the value return for the current 2009 season.

Business uncertainty meant the $250m payment was previously deferred to be paid with this season's final payment in October.

"We remain on track to achieve the $5.20/kg (for this season). And, we have said to our farmers that anything above $5.20 is likely to be retained."

NZPA