By LIAM DANN
Dairy commodity prices have soared past levels that are historically followed by dramatic slumps in global demand.
Fonterra chief executive Andrew Ferrier said it would be a concern for the industry if prices kept pushing up, but he remained confident they would not crash as they did in 2002
Like
crude oil, prices for dairy commodities such as powdered milk are at historic highs and show no immediate signs of slowing.
Last week's ANZ world commodity price index showed the dairy index had reached its highest level since 1996.
"We don't think it would be healthy for the price to move up much further," Ferrier said.
Strong prices looked as if they would carry into next year but it was hard to say how long they would last. "We're in sort of uncharted territory here."
The last dairy price spike in 2000 and 2001 burned off global demand and was followed by a dramatic crash in prices.
The slump saw dairy farmer payouts drop from $5.30 per kilogram of milk solids for the 2001 season to $3.60 for the 2002 season.
A similar drop would be disastrous for dairy farmers with the exchange rate at high levels.
It could also exacerbate a slowdown that is already predicted for the economy next year.
Ferrier said with that in mind Fonterra was taking a cautious approach to its pricing.
"We will strategically market to minimise some of the volatility and we think we have a good shot of preventing a hard fall," he said.
"We will be careful with our inventory and our product selection and I think our actions will help prevent any sharp drop-off."
Fonterra had forward sold much of its product for the next year at levels slightly below the present peak.
"'Generally markets crash because everybody is trying to beat everybody else to sell the extra pound, and we're not going to do that," Ferrier said.
"There isn't going to be any panic selling. We're comfortable at these levels."
The supply and demand equation which underpinned pricing still looked solid.
Increased consumption in China and Asia was keeping demand firm.
The supply side remains relatively tight with Australia making a slow recovery from drought and US and European production at historically low levels.
