New Zealand dairy giant Fonterra has forecast a near-50% drop in full year operating profit as its processing capabilities struggle to keep up with surging global demand for milk powder.

The company said it now expects fiscal 2014 EBIT to total NZ$500-600m, down from the NZ$1.02bn booked in fiscal 2013, which ended on 31 July. The group also lowered its dividend to NZ$0.10 a share, down from NZ$0.32 a share.

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Fonterra did maintain its record farm-gate milk price, which stands at NZ$8.30 a kilogram of milk solids. However, the group acknowledged that under its established pricing formula it should have raised the payout to $9 a share.

The company said 30% of its milk supply was being diverted into lower-value cheese production because of the limited nature of the cooperative’s milk powder processing facilities.

“This season, we have devoted the maximum possible volume of milk to whole milk powder and skim milk powder streams to maximise payments to our farmers. However, we have not been able to lift powder production above the current 70% level as we are limited by the nature of Fonterra’s existing production facilities in New Zealand,” CEO Theo Spierings said.

The company has therefore been unable to fully capitalise on surging global demand for milk powder products, which has been boosted by growing consumption from China, Africa and the rest of Asia.

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Fonterra emphasised it is investing in expanding its milk powder capacity and the board has approved $235m investment to develop a third powder drier at Fonterra’s Pahiatua production facility in the lower North Island.

“We need to continue investing in greater flexibility in our manufacturing assets so we can meet changes in global demand and commodity cycles,” Spierings said. “The new market realities mean new opportunities – and we must go after them now as we have in the past by driving forward with our volume and value strategy.”