Fonterra's margins could continue to be squeezed if predictions of an increased payout for the current season are realised, an analyst says.
Some economists believe the forecast payout for the 2014 season, currently set at $7, could be increased as soon as next week following a sharp rise in global dairy prices since the start of the year.
Westpac economist Nathan Penny predicts Fonterra may raise its forecast payout for the next season to $7.40 or more per kilogram of milk solids.
"We've seen world dairy prices hold up at very high levels for longer than we first thought and on top of that the kiwi dollar has come down from earlier high levels around April / May and those two factors together have led us to bump up our own milk price forecast."
Mr Penny says the dairy firm may also raise its production outlook from the current estimate of 2% growth. He expects production will rebound by about 5% from the drought.
The drought, high milk prices and a struggling Australian business are to blame for Fonterra announcing on Thursday that its earnings for the 12 months ending July are likely to be about $1 billion, which is less than previously thought.
The co-operative is facing margin squeezes on both sides of the Tasman, with its New Zealand ingredients business facing higher costs, and intense competition in Australia.
Craigs Investment Partners private wealth research head Mark Lister said a bigger payout to farmers this season could put further pressure on Fonterra's margins next financial year.
"You can't necessarily look at a higher potential payout and assume that's a good thing for Fonterra as a company, because it can often be a drag on earnings," Mr Lister said.
"It's certainly a positive for the dairy farmers out there but it's not always a one-for-one positive for Fonterra the company."
Shares in the Fonterra Shareholder Fund fell as much as 28 cents to $7.20 before ending Thursday at $2.27.
