Milk tumbles 15 per cent in web auction

The drop in whole milk powder prices at Fonterra's latest online auction was more abrupt than expected. Photo / Sarah Ivey

The drop in prices at Fonterra's latest online auction was expected, just not so fast, says Westpac chief economist Brendan O'Donovan.

"We'd been anticipating wholesale prices to come off 15 per cent over coming months, we'd didn't expect it to happen in one month," he said.

"But there's been a lot of uncertainty internationally, there's a lot more supply made available at that auction and Northern Hemisphere producers are responding quite quickly to the high prices."

Fonterra in May forecast a payout before retentions for the 2010/11 season of $6.90-$7.10 a kilogram of milksolids, but said if international dairy prices and foreign exchange rates held for most of the coming year it was possible it could be well over $8.

"I don't think anyone was banking on an $8 plus-payout. Lower commodity prices are one of the ways you don't get an $8 payout," O'Donovan said.

The drop in auction prices did not damage Fonterra's forecast, which incorporated lower commodity prices, he said.

Fonterra globalDairyTrade manager Paul Grave said the company had been warning that the road ahead was likely to be rocky at times.

"I think we're in a volatile patch where it might bounce back or it might go down further. Really that's going to be driven largely by the demand side as opposed to ... the supply side of the equation."

Some of the high prices this year had been underpinned by supply concerns, including drought in New Zealand, reduced production in Australia and a slower-than-expected start to production in Europe, Grave said.

"Fonterra's now selling its production for the new season and the European season's in full swing and I think the supply concerns have largely eased and so that really focuses the mind now on the demand," he said.

"On top of that I guess the economic news over the last month hasn't been great and we're hearing stories of double-dip recessions and questions about how robust the global economy is.

"Of course that makes buyers reluctant to commit beyond too far into the future."

ON THE BLOCK
* GlobalDairyTrade auction sold US$160 million of product to 111 different bidders.
* Average price for whole milk powder down 14.8 per cent to US$3224 a tonne.
* Trade weighted index covering a basket of products down 13.7 per cent.
* 550,000 tonnes expected to be sold through the online system during the next 12 months.