New Zealand's Fonterra, the world's biggest dairy exporter, cut its forecast payout to farmers by 8 percent on a global slide in prices, but the reduction was smaller than expected and it said expected milk prices to stabilise amid robust demand from China.

Global dairy prices have slumped to a 2-1/2 year low as optimal pasture conditions in New Zealand have created an oversupply of milk while other regions such as Australia, North and South America, and Europe have also boosted milk production.

Fonterra Co-operative Group Ltd, also New Zealand's biggest firm, set its 2012/13 opening forecast payout range before retentions at NZ$5.95 to NZ$6.05 ($4.54-4.62), above analysts' expectations of a bigger cut of around 14 percent to NZ$5.60.

Fonterra said the better-than-expected payout figure had factored in weakness in the New Zealand dollar, which has fallen some 6 percent versus the greenback this month after scaling a near lifetime high earlier this year.

"The outlook...displays some confidence in the international dairy market in the medium term, through the end of the year and into 2013," said Doug Steele, commodities analyst at Bank of New Zealand.

The co-op, owned by around 10,500 dairy farmers, controls a third of the world's dairy exports and accounts for around 7 percent of New Zealand GDP and a quarter of its exports. Fonterra is also keen to expand overseas and is putting the final touches on proposals for a radical share trading scheme to free up capital.


For the season just ended, the co-operative lowered its final payout to NZ$6.45-NZ$6.55, down from a previous forecast of NZ$6.75-NZ$6.85 and a record NZ$8.25 a kilo in 2010/11 when production and sales boomed.

New Zealand's biggest agricultural union estimated that the lower payout for 2011/12 would cut NZ$500 million from the country's NZ$200 billion economy.

Fonterra Chairman Henry van der Heyden said production in the coming season would probably be lower, helping milk prices stabilise, as New Zealand was unlikely to have two years running of stellar weather conditions.

He also brushed away concerns that signs of a slowdown in China's booming economy could affect demand for dairy products, which he said were being increasingly sought out by wealthier local consumers.

"We're still seeing robust demand particularly from the developing world, driven out of China and other parts of Asia," he told Reuters in an interview.

"We're not expecting anything to get in the way of that. We think demand will keep growing at 2.5 to 3 percent."

The forecast payout, which Fonterra revises throughout the season, is made up of NZ$5.50 a kilo of milk solids and an added dividend of between 45-55 NZ cents from Fonterra's commercial consumer products operations.

Federated Farmers Dairy Chairperson Willy Leferink added that farmers are in a better position to weather the lower payout than in 2008/09, when a drought in the country led to a drop in global prices.

"Farm finances are now much better prepared and a downwards trend in global milk prices was well telegraphed," he said in a statement.

"While 2008/09 was a bolt out of the blue, we always knew 2012/13 was shaping up as a tough season."

The Global Dairy Trade-Trade Weighted Index, a barometer for international prices in Fonterra's fortnightly auctions, has fallen around 40 percent since peaking roughly a year ago.

Worries about the euro zone' debt crisis have also weighed on commodities, pushing the Thomson Reuters-Jefferies CRB index to a seven-month low this month.

Fonterra's shareholders are due to vote on the new share trading scheme in June. The scheme is designed to allow farmers to trade their shares amongst themselves, while also setting up a fund to tap outside investment.

Under the proposal, which was overwhelmingly approved in principle by shareholders in 2010, the dividend payouts of a portion of shares will be converted into "financial units" and traded on New Zealand's stock exchange. ($1 = 1.31 New Zealand dollars) (Editing by Edwina Gibbs)