Feb. 8 (Bloomberg) -- Fonterra Cooperative Group Ltd., the world's biggest exporter of dairy products, said drought cut New Zealand's milk production and may restrict new export orders.

Record dry weather in much of the country means season-to date output is falling below last year, Chairman Henry van der Heyden said in a statement e-mailed to Bloomberg News. The Auckland-based company had budgeted on a 3 percent rise in production to about 14.8 billion liters (3.9 billion gallons).

World dairy prices reached a record in November after doubling in two years as drought cut production in Australia and rising land and feed prices increased costs in Europe and the U.S. Fonterra is New Zealand's biggest export earner, with dairy accounting for about a fifth of the nation's overseas sales.

``Lower production at a time of strong international demand and elevated soft commodity prices risks raising the price of agricultural commodities further,'' TD Securities strategists Stephen Koukoulas and Joshua Williamson said in a Feb. 5 report. New Zealand economic growth, forecast at 2 percent in 2008, faces ``downside risk'' should the weather not improve, the pair said.

Fonterra accounts for about 40 percent of the international trade in butter, cheese and milk powders

Lack of rain in January has left much New Zealand's North Island with ``extreme'' soil moisture deficits, the National Climate Center said Jan. 31. Temperatures are likely to remain above average through April, while rainfall on the South Island may also be below normal.

Farmers Hurting

``The weather is key,'' Fonterra's van der Heyden said. ``Everyday without rain is hurting farmers.''

Fonterra's milk production rises to a sharp peak around October before steadily declining through late May. Some of the company's biggest producing regions are on the North Island.

On a daily basis, output in Waikato is down 27 percent, van der Heyden said. Bay of Plenty production is down 21 percent and in Taranaki by 9 percent, he said.

Prolonged drought could cut farm incomes by NZ$500 million ($395 million), Fonterra said today.

Fonterra had forecast it would pay the 10,900 New Zealand farmers who own and supply the business a record NZ$6.90 for each kilogram of milk solids supplied in the year ended May 31.

The company is now ``booked up'' for the season and the company is sticking to that forecast, Chief Executive Officer Andrew Ferrier said. Customers are being advised that new export orders may not be accepted, he said.

To contact the reporter on this story: Gavin Evans in Wellington at gavinevans@bloomberg.net

Last Updated: February 7, 2008 23:46 EST