Fonterra buy-up could be behind butter price fall

Prices being paid internationally for butter from Oceania -- mainly New Zealand and Australia -- fell 6 per cent last week, apparently because Fonterra has bought enough from other sources to cover its forward contracts.

"The decline in butter prices has been attributed to Fonterra finally purchasing sufficient coverage from other sources to meet its export commitments," said Massey University agribusiness professor, Bill Bailey.

Fonterra said in May that its domestic milkflows were 4 per cent below budget.

It now expected to make up a 75,000 tonnes shortfall in milk production by purchasing in other countries.

Oceania prices for skim milkpowder (SMP) moved up 2 per cent, and Professor Bailey said worldwide tightness in the skim milk powder market was keeping prices firm.

SMP prices in the United States continued to slowly strengthen and were up more than 6 per cent from early January levels.

US imports of both milk protein concentrates (MPC) and casein remained strong, with MPC imports into the US the first three months of the year at their highest level since 2000 -- and most of those imports were from New Zealand.

"This near record level of imports comes in the face of a much stronger kiwi dollar," he said.

The current exchange rate against the US currency was around US70c, compared with US46c in 2000.

A similar import situation existed for casein, where US imports were at their highest level in 10 years, Prof Bailey said.

"Strong New Zealand exports to the US underscore the high level of US demand for these products which have little or no domestic competition," he said.

Fonterra also owns half of the United States' only big processing plant producing MPC by ultra-filtration.

Despite continued indications of a good milk production season, European dairy product prices remained largely unchanged last week.

Prof Bailey said this appeared to be due to buyers waiting for some indications of market direction, sellers putting their products into European government inventory rather than reducing prices to encourage sales, and early assessments pointing toward a less than fully satisfactory production year in Eastern Europe.

"Eastern European production has, in the past, helped to keep a lid on European Union prices," he said.

In New Zealand, the Ministry of Agriculture and Forestry's situation and outlook update showed NZ dairy production is forecast in the year to May 2006 to increase 10 per cent, following the 4 per cent fall in 2004/05.

"Offshore dairy prices are projected to start falling early in the 2005/06 dairy season and MAF concur with Fonterra's early projection of $3.85/kg milksolids," he said.

- NZPA