Dairy prices do a U-turn

The price spike came after Synlait had lowered its forecast payout.

Fonterra's farmer shareholders will be feeling slightly more optimistic about the size of their forthcoming milk payout after whole milk powder prices soared 19.2 per cent at yesterday's GlobalDairyTrade auction.

The auction price spike also flicked the NZ dollar up by US 2 cents. But although the cross rate was still around the US74 cents level (at the time this column was filed) it is still within the manageable zone.

What's notable this time round is that Fonterra has reduced the volume of product it is now supplying at auction.

Some key players in the dairy sector had quietly suggested late last year that the dairy co-operative should do this to try to force an increase (simply applying supply and demand principles) after the milk powder price went into free fall in 2014.

That would have been a risky move as it would have been seen as an attempt to game the market.

But the drought has done the job for Fonterra by reducing milk volumes from the farmer.

The price spike also came after Synlait lowered its forecast payout for the 2014-15 season from $5 kg/milk solids to $4.40 kg/milk solids, causing speculation over whether Fonterra's $4.70 forecast payment could be achieved.

The South Canterbury firm, unlike Fonterra, is directly listed on the NZX (rather than through the Shareholders' Fund that Fonterra operates).

Synlait conditioned the market " aka its investors - to expect "substantially lower" first-half results than last year's financial result, pointing to the impact of the global over-supply of milk on prices.

Fonterra and Synlait are at the forefront of the dairy industry in forecasting returns to their suppliers.

But when it comes to measuring the impact of last year's slump on the economy itself, it's best to turn to the bankers. ANZ estimates that as much as $7 billion could be lost to dairy sector incomes in this season.

Looking to the future, it was interesting to note that Synlait " which has substantial Chinese dairy sector investment " reckons that some commentators are calling it wrong with their belief that prices will rise again after the high inventory levels in China are worked through.

Synlait noted that there was also a strong uplift in local dairy production in China, which would have a dampening effect: "China year-on-year production growth is estimated as 15 per cent."

All this points to a very complex picture.

The picture on the international trading front is also complex.

The agricultural trade game has long evolved away from a simple focus on market access, quotas and tariff levels. These are still important.

But increasingly when it comes to international agribusiness, just how New Zealand businesses engage globally throughout value chains will have a huge effect on prosperity.

To that end, the decision by meat industry leader Sir Graeme Harrison to personally fund a professorial chair in global value chains and trade at Lincoln University is a great step forward.

Sir Graeme has been at the forefront of considering the role global value chains play.

He expects the professorial chair will play a key role in educating tomorrow's agribusiness leaders, as well as providing thought leadership for industry.

The role has a commercial aspect " capitalising on NZ's advantageous position as a world leader in high-quality primary products relative to increasing global demand from the growing number of middle-class consumers.

The move has been promoted as another building block for the "Lincoln hub" " a partnership between Lincoln University, DairyNZ, AgResearch, Plant & Food Research and Landcare Research to combine expertise and infrastructure to the benefit of the primary sector.