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Home / Business / Companies

Price of milk on internet down 41 per cent

Owen Hembry
By Owen Hembry
Online Business Editor·NZ Herald·
5 Nov, 2008 03:00 PM3 mins to read

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KEY POINTS:

The price of whole milk powder in Fonterra's latest internet auction has dropped more than a third since July.

The co-operative is the world's biggest dairy exporter and launched its internet-based sales auction called globalDairyTrade in July to set a global reference point for dairy products and try
to keep up with volatile markets.

The average price in Fonterra's fifth trading event yesterday for whole milk powder across all products and contract periods was US$2586 a tonne - 11.4 per cent down on the previous auction a month ago and 41 per cent down on the first sale in July.

The ANZ Commodity Price Index for dairy products rose for 15 consecutive months to peak at 291.9 in November last year - more than double what it was in August 2006.

But since then the index has fallen. It dropped 9.9 per cent in October to be down 34.7 per cent compared to last year's peak. Historical trends suggest it could drop by 50 per cent in total.

Fonterra commercial director GlobalTrade Guy Roper said the credit crisis was prompting customers and consumers to hold off making major purchases of most commodity products, including dairy.

"The price decline is consistent with the limited demand we are seeing for a range of other dairy products, such as skim milk powder and casein, in the near-term out to three months," Roper said.

During the online sale, customers make volume bids for different specifications of product and delivery times and after a number of bidding rounds the price is adjusted to match demand.

"Buyers appear to have greater needs over the medium term and were prepared to secure supply at prices above the 3-month, or spot price, during the trading event."

The fall in the whole milk powder price mirrored the drop in other commodity markets with the Chicago Mercantile Exchange futures prices for corn and soybean oil down 50 per cent since July, Fonterra said.

The co-operative had revenue of $19.5 billion for the 14 months ending July 31 and expected to sell about $1 billion worth of milk powder in the first year of the internet-based sales system.

Information from internet sales helped Fonterra manage its contract book.

A negotiated contract system could not react as fast as the dramatic changes seen in the dairy market and Fonterra had not been able to take full advantage of the peak of the pricing.

However, a report by Rabobank said a growing world consumption of dairy products, combined with reducing growth in supply, was expected to underpin sustained higher but volatile prices into the future.

The medium to long-term outlook was robust, despite short-term challenges including the recent moderation in commodity prices.

"Rabobank remains convinced that the medium-term equilibrium price for dairy products has shifted upwards from its long-term average."

Global demand for dairy was likely to remain below trend level through the first half of next year, assuming continued weak economic conditions, Rabobank said.

However, a turnaround was expected later in 2009 because of eventual improvement in the global economy, increased consumer demand due to more competitive pricing and demographic and cultural trends favourable to dairy consumption.

DOWN BUT NOT OUT

* Dairy exports accounted for 27 per cent of national exports in the year to May.
* Fonterra's internet sales price for whole milk powder is down 41 per cent since July.
* ANZ Commodity Price Index for dairy products is down 34.7 per cent since peaking in November.

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