The Fonterra Shareholders' Council said farmers are disappointed with today's announcement of an interim dividend of 10 cents a share and a trimmed forecast range of 20 cents to 30 cents per share for the 2014/2015 season given the current low milk price.

Council chairman Ian Brown said it was positive that Fonterra had maintained the forecast farmgate milk price at $4.70 per kilogram of milk solids given the volatility experienced throughout the season to date, however shareholders had expected the cooperative to deliver a higher dividend.

"Shareholders rightfully want to see the strategy provide a return on their investment, especially given the low milk price environment farmers are currently experiencing. A sound strategy is key to adding value long term and it is important that shareholders understand the factors that influence this," Brown said.

When asked why the dividend wasn't higher when the price of milk, an input cost, was low, Fonterra chief financial officer Lukas Paravicini said the expectation that there should have been more upside than downside didn't play out.

The company's China and Asian consumer food services businesses which source lower-priced New Zealand milk gained a significant benefit but they only contributed 15 percent to the overall business. In Australia and Latin America, where milk is sourced from other pools, there was a lag in terms of lower milk prices. "These have different impacts on the dividend," he said.

Fonterra also faced the challenge of generating profits on inventory from the previous financial year, when the cost of milk was higher, but was sold in the first quarter of the current year, when global dairy prices were falling.

The world's largest dairy exporter reported a 16 percent drop in first-half profit to $183 million in the six months to Jan. 31 reflected tough conditions in dairy. Sales declined 14 percent to $9.7 billion, with mixed results in its three key divisions. The debt-to-equity ratio rose to 50.7 percent as at Jan. 31, from 48.5 percent four years ago, mainly due to lower equity retentions last year and higher capital expenditure.

Fonterra chairman John Wilson said the first-half results were below farmers' expectations, in a period when the farmgate milk price is low. A partial offset was a benefit from the decline in the New Zealand dollar, which helped add about 30 cents/kgMS to the forecast farmgate milk price, as at Jan. 31, he said. Fonterra said the current threat of a 1080 contamination had had no impact on the forecast.

Wilson said farmers have already been cautious in their spending and would need to remain so.

"The decisions farmers will make in autumn on whether to feed supplements may be different to the decisions they have made over the last couple of seasons," he said.

Milk production was 2 percent down on last year although the impact of dry conditions was less than earlier expected due to rain around much of the country.

Rival dairy manufacturer Synlait Milk today increased its forecast market milk price upwards for the 2015 season to a level closer to Fonterra's - from $4.40 kg/MS to a range of $4.50 to $4.70 kg/MS following the market recovering faster than expected though chief executive John Penno said recent volatility had shown the outlook looks fragile.

Units in Fonterra Shareholders' Fund, which give holders access to the cooperative's dividend stream, dropped 4.2 percent to $5.74 when market trading opened on the NZX, and have declined 0.3 percent since the start of the year. Shares of Synlait were unchanged at $2.90 and have declined some 9.4 percent since the start of the year.

Oversupply from dairy producing regions around the world in the early months of the financial year saw the trade-weighted GlobalDairyTrade price index hit a five-year low in December. When supply outweighed demand buyers undervalued milk, which was reflected in prices that declined to unsustainable levels.

Fonterra chief executive Theo Spierings said while milk production had been abnormally higher, that was likely to correct given the current unsustainable milk prices. But he was more worried about the geopolitical environment in Russia, the Middle East, and West Africa which are all big importing markets, he said.

"We're in a worse situation than just after the Second World War" in terms of conflicts, he said. That had created lower demand and he didn't see either the geopolitical uncertainty or dairy market volatility ending any time soon.

Performance in the ingredients business was held back by a first-quarter negative impact of $182 million on powder products and under-performance in the Australian business causing a $84 million drop. Revenue was down 23 percent, reflecting 45 percent lower dairy commodity prices during the first half compared to the same period last year. Normalised earnings before interest and tax for the first half was $299 million, up 2 percent compared to the same period last year.

Volume across the consumer and food service businesses was up 27 percent to 840,000 metric tonnes in the first half, compared to the same period last year, while normalised Ebit rose 23 per cent to $116 million due to improved pricing and strong volume growth in China, a recovery in Sri Lanka and a strong performance from its food service business in Asia, which sources milk from New Zealand and benefited from lower milk prices.

International farming remains a key part of the China strategy and Fonterra now has two farming hubs and nine productive farms. Spierings said the China market was developing extremely well with $5.5 billion worth of sales last year. Milk production volumes increased to 67,000 MT for the first half because of new farms coming on stream. Normalised Ebit was down $29 million in the first half mainly due to the need for a $10 million livestock revaluation as the milk price dropped.

Fonterra didn't give a forecast for full-year earnings. Chief executive Theo Spierings said his management team was working on a business transformation programme that will require some tough decisions and included increasing sales volumes, reducing complexity and taking costs out to maximise returns, he said. Ways to drive performance included optimising New Zealand milk, building its consumer business, growing the Anlene brand, developing leading positions in maternal nutrition, selectively investing in milk pools, and better aligning the business and organisation.

The aspiration to 2025 is to boost the value add side of the business with consumer and food service currently providing 19 percent of revenue and the aim was to lift that to 30 percent by 2025, and reduce the ingredients side from 55 percent currently to 40 per cent. The aspiration includes 10 percent coming from partnerships such as the near 20 percent stake it has taken in Chinese manufacturer Beingmate for $755 million.

Spierings said Fonterra was confident about governance of the company by having two directors out of nine on the board, a strategic committee comprised of himself and the company's founding majority shareholder, and one of the directors sitting on each of the company's sub-committees,.

ANZ rural economist Con Williams said feedback from Fonterra's farmer shareholders showed they want a tougher approach.

"There's two key things in the outlook, an improvement in the operating environment, some of which is outside Fonterra's control, and speeding up the execution of reshaping the business. That reflects farmer shareholders having a harder edge with cash flow likely to be tight in 2015," he said.