Owen Hembry: Signs of a bounce but maybe not a trend

World dairy prices have tumbled from the highs of the past few years that pumped billions of welcome extra dollars into the economy.

The price drop was not unexpected but the rate of descent was ear-poppingly fast and the question no one has been able to answer is how far they will fall.

Last week we saw the first solid sign of a bounce.

The dairy sector accounted for 27 per cent of all national exports for the year to last May, which means what happens to the world prices is hugely important to Fonterra, its farmer owners and eventually the rest of society.

The rule of thumb is that commodity cycles drop by about 50 per cent from a peak - but then the biggest global recession since the Great Depression shook the world and all bets were off.

The ANZ commodity price index for dairy products dropped 5.6 per cent in February and has fallen by 58 per cent since peaking in November 2007, but encouragingly stabilised during the second half of the month.

The slide may have been steep but 58 per cent would not be too far off the rule of thumb, if indeed this is the bottom.

Meanwhile, in Fonterra's latest online auction on Wednesday the average price for whole milk powder rose by a healthy 16.6 per cent, having previously dropped by 58 per cent since July.

Fonterra believes prices are bouncing around in the trough.

However, the height of the first bounce is somewhat unexpected and caution is the forecaster's best friend.

ANZ economist Steve Edwards says that despite the good result
"I don't think we should be jumping up and down with glee that things have turned around".

Likewise Kelvin Wickham, Fonterra's managing director of global trade, says the auction result is one indicator, it was consistent with others, but is not yet a trend.

In other words it's time to breathe a little easier but do not be surprised if next month's auction returns a price fall, which considering the size of this month's rise will need to also be measured against February's result.

Fonterra expects the market to be firmer during the second half of the year, although a significant price recovery is not likely until next year.

Wickham says any changes to European Union export subsidies reintroduced in January would affect prices, consumer demand may or may not return sooner than expected, and the New Zealand season is a little bit shaky at the end, running more than 1 per cent down on milk supply budget because of an overhang from last year's drought and not getting the milk expected in January and February.

Meanwhile, the dairy giant, which sells between 35,000 and 50,000 tonnes of product each week, is holding more stock than it would like but with peak loading around the first week of March stocks will now decline.

Wickham says: "In perspective if you hold another week it looks big in New Zealand terms but it's not big in terms of what we do and what the world is."

AUCTION CONCERNS

Fonterra's auction system has come in for criticism for potentially helping to drive down global dairy prices.

Fonterra expects to sell about 200,000 tonnes of whole milk powder through the auction during its first year - equivalent to 10 per cent of its total supply and about 3 per cent of global trade.

"The criticism has appeared to slow down and yes once prices turn and go up I suppose people will be happier," Wickham says.

"We are happier too, we believe world prices need to be higher than where they are to be sustainable for our farmers but we also understand that the world markets do overreact and we feel that the price of global DairyTrade was a fair reflection of where the world was at."

An auction merely reflects a market value based on what people are prepared to pay on a given day.

It could be argued Fonterra should have a good handle on the market value of its products through its sales network but an auction price does provide a cold, clean picture of how customers value a basic product.

Having launched an auction system Fonterra cannot switch it on and off to suit but rather must take the ups with the downs.

Had the auction been launched when prices were soaring then concerns would probably have been more muted but it was launched when prices were tumbling and helped reveal a painful reality, but visibility in business has value.

And much like the global recession itself, you can hide and pretend it is not happening or stare it in the face, get used to the idea and plan a way forward.

GO DAIRY

DairyNZ's Go Dairy campaign kicked off this month aiming to connect the economic powerhouse dairy sector with the general public.

Television commercials will look at dairy farming's contribution to the economy, employment, research and technology and the environment.

In the hard, fast-paced world of television advertising, where viewers are encouraged to grab their wallets and rush to the shops, it is harder to catch precisely what the easy-paced DairyNZ commercials are selling.

The answer it appears is the rather more ethereal product of public understanding, which for the dairy industry holds great value.

DairyNZ chief executive Tim Mackle says research shows some parts of society do not understand or even value dairying.

"Just as Team New Zealand needs the whole country behind them if they're ever going to win the America's Cup New Zealand dairy farming needs the country behind us if we are going to keep and continue to successfully compete internationally," Mackle says.

"How the public feel does matter to us and it influences decision-making in policy."

DairyNZ is playing a longer game with big stakes and considering the sector accounts for more than a quarter of all exports the public should care.

However Mackle rightly points out this does not mean the dairy industry expects to be able to do whatever it likes.

The roughly $1.3 million campaign will finish in May and feature six weeks of television adverts, billboards and key print publications.

The campaign is primarily about recruitment, Mackle says, with people able to register on a GoDairy.co.nz website, or text in, and use a service to help connect people with employment agencies and then farmers.

"But it's not just about recruitment it's about highlighting to New Zealand the significant contribution that dairy farming does make to our economy and also showing all of New Zealand it's a great industry to be a part of ... the science side of it, the technology side on the farms which often aren't recognised."