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Whole milk powder price down 7.1% in latest Fonterra internet auction (Update 2, corrected)
January 6th, 2010The average whole milk powder price at Fonterra’s latest monthly internet auction fell 7.1% to NZUS$3,309/tonne in January from December. (Update 2 includes second Fonterra statement on globalDairyTrade sales.)
The average price is still 81% above its low of NZUS$1,829/t in July last year and is up 64% from January 2009.
Update 2: On Friday, Fonterra released a statement saying sales on the globalDairyTrade platform had passed US$1 billion (NZ$1.6 billion) since the trading events began in July 2008. Fonterra said the the recent addition of Anhydrous Milk Fat, and Skim Milk Powder (in early 2010) to the sales platform will mean annual sales through the internet auction will exceed 400,000 tonnes of product, or 20% of its 2008/09 production.
Fonterra also said the NZX had confirmed globalDairyTrade Contract Period 1 will be the settlement price for its Whole Milk Powder futures contract, which will begin trading in the first half of this year.
The release is included below.
Here is the initial release from Fonterra:
The trading manager, CRA International, advised Fonterra that the average price achieved across all contracts and contract periods for Whole Milk Powder (WMP) was US$3,309 per tonne FAS. This was US$251 per tonne lower than the December event. Prices ranged from US$3,230 per tonne FAS to US$3,555 per tonne FAS.
Paul Grave, globalDairyTrade manager, said this represented a minor correction after five months of price rises totalling 95%.
“This is one signal that the markets are now more closely in balance. The result is within the range of price movements we would expect to see in the current market environment.”
“Consumer demand is returning and global supply remains tight,” Mr Grave said.
For Anhydrous Milk Fat (AMF), the average price achieved across all contracts and contract periods was US$4,539 per tonne FAS. This was US$190 per tonne, or 4%, higher than the December event.
Overall pricing decreased 5.5% across both AMF and WMP.
The next globalDairyTrade trading event will be held on February 2, 2010.
Here is the subsequent release:
Sales on Fonterra’s internet-based trading platform, globalDairyTrade, have reached $US1 billion over the 19 trading events since launch in July 2008.
The milestone reinforces globalDairyTrade’s establishment as the global market place that discovers a reliable and trusted market reference price for dairy products.
With the recent addition of Anhydrous Milk Fat, and Skim Milk Powder commencing early in 2010, Fonterra’s annual sales on the platform will exceed 400,000 tonnes of product, or around 20% of Fonterra’s 2008/2009 production.
Kelvin Wickham, Fonterra managing director, Global Trade, said the market-based pricing globalDairyTrade offers would facilitate the creation of a futures market for dairy products like those that exist for other commodities.
The NZX has confirmed globalDairyTrade Contract Period 1 will be the settlement price for its Whole Milk Powder futures contract, which will begin trading in the first half of this year.
globalDairyTrade manager Paul Grave said participation in the monthly trading events had exceeded expectations.
“We now have over 250 registered bidders from 56 countries and it is not uncommon to have over 100 bidders participating in an event. That may not sound like a lot for those familiar with, for example, the grain or sugar markets, but in the relatively small dairy market it is a good level of liquidity.”
Mr Grave said the criticism directed at globalDairyTrade a year ago had now largely disappeared. That criticism was due in large part to the fact the platform was launched just as the global financial crisis began.
“Some commentators credited globalDairyTrade with crashing the world’s dairy markets and it took them some time to realise that all markets were undergoing a sharp correction. We now know dairy markets fared no differently from other commodity markets.”
Mr Grave said globalDairyTrade was the only channel through which volumes on offer were sold and Fonterra entities were excluded from bidding in the monthly events. A forecast of volumes expected to be offered was published 12 months in advance.
Fonterra is open to other sellers participating on the trading platform.
“Having other sellers participating would give an added level of liquidity and therefore, credibility,” Mr Wickham said.
Tags: Fonterra, globalDairyTrade, internet auction, Paul Grave, Whole Milk Powder
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January 6th, 2010 at 9:44 am
Why is it not possible for Fonterra to provide information without a load of spin? Their press release forgets to mention the 7.1% drop in average WMP price.
The message from Fonterra has always been that demand was increasing.
Falling prices into the start of northern hemisphere production doesn’t gel well with increasing consumer demand.
The message from Fonterra seems to be getting confused. Mr Grave appears to be contradicting Sir Henry’s statement before Christmas regards demand.
January 6th, 2010 at 10:18 am
PeterR, I agree that Fonterra employ spin and what’s worse even when communicating directly with shareholders.
Without trying to justify spin ahead of clarity and honesty is the reported $255 decrease the 7.1% drop?
I was at a meeting where a Fonterra director said at $3000/t for wmp, it is economic tipping point for other suppliers to ramp up production (to name a few california parts of eastern europe from memory). This is also echoed by Rabobank analysts. Is it possible this is what is happening and causing the rebound on WMP prices?
January 6th, 2010 at 10:27 am
Hi guys, the first sentence from the Fonterra release is left out above because it didn’t say anything new.
Cheers
Alex
January 6th, 2010 at 12:08 pm
International Farmer,
Before commenting I checked that what Alex presented was Fonterra’s press release. To quote:
So Fonterra is cleared of not stating the percentage drop in WMP, and Alex might have learnt something but doesn’t appear to have from this:
I am not sure that Fonterra directors really have their heads around world supply and demand for dairy. If they do they are apparently not sharing the knowledge or applying it for the benefit of shareholders.
The fall in WMP flows from the bigger and leading drop in SMP prices before Christmas. The last few months high WMP prices will mean we see higher levels of production than otherwise, but I suspect that is more the result of farmers hanging on in hope than ramping up production.
More important I think is the effect of higher dairy commodity prices on demand. Push prices too high and demand falls. The trouble is that when prices fall again the demand is less than before. Consumers have found substitutes – a good way to destroy markets.
The next two days will see data out on November dairy commodity export prices and dairy spot prices to 07/01 from the USDA. I said a couple of weeks ago that I’d comment probably late on 08/01. That still holds.
January 6th, 2010 at 12:34 pm
Hi Peter, just curious to know what are the substitutes that consumers have discovered? I always thought that protein from dairy would have to be a winner in the long run. Especially protein from dairy from grass. Not sure what the input/output equation shows for protein from a cow in x years vs protein from a slaughtered beast in x years? Aquaculture I always found an interesting proposition, where often it is just (high quality/price) fish being fed fishmeal, and often at poor conversion rates. Open ocean fish stocks mostly seem to be boom bust. What other protein sources are there?
January 6th, 2010 at 12:54 pm
News from the USA
Nervous farmers everywhere. Looks like a classic over supply situation to me.
January 6th, 2010 at 1:19 pm
Hamish
I think Chicken and Pork lead the protein wars and with a healthy margin. Pork is now so low in fat that in many cases it is leaner than Chicken. Dairy looks to me to be in serious trouble,I hope I’m wrong but with only a month to go till northern Hemisphere production starts up, I think we will start to see downward pressure on prices and the oversupply problems really cause some headaches.
January 6th, 2010 at 1:35 pm
Some Info from English supermarkets
A price war has broken out among Britain’s leading supermarkets as Tesco and Asda launch their biggest discounts for 10 years.
* Asda:
Bananas were 98p, now 77p per kilo
Seedless white grapes were £4.47, now £1.77 per kilo
Hovis White Bread Mix was 74p, now 54p
Milk 4 pints was £1.53, now £1.23 (Nz $3.28 – $2.55 per 2.5 liters or about $1 a liter NZ)
* Sainsbury’s:
JS Butchers Choice large pork sausages were £1.99, now 99p
JS British honey roasted ham joint was £10.99, now £5.49
http://www.telegraph.co.uk/finance/personalfinance/6936242/Supermarkets-offer-biggest-discounts-for-a-decade.html
January 6th, 2010 at 1:56 pm
AndrewJ – dairy protein is far more adaptable and easier to refine and extract then proteins from meats.
January 6th, 2010 at 2:00 pm
Thanks Andrew. Chicken would still be just protein conversion mostly? I guess it’s the very short turnaround to a harvestable chicken unit that makes that a winner though.
Interesting pointer there on the food price wars. My first oe trip back to the UK in late 1995, I just missed out on the great baked beans war that my mates were laughing about over there.
January 6th, 2010 at 2:24 pm
Hamish,
You have a number of big questions rolled into your query. I will just make a few points as a complete answer is not possible in the time or space available.
In terms of animal proteins produced as meat, monogastric species (e.g. chicken, turkey, pigs) are more than twice as effecient converters of dry matter to protein than ruminants (cows, sheep etc.). This shows up in prices for chicken being half or less than for beef and lamb. This is reflected in the huge substitution over the last 50 years away from ruminant protein in favour of monogastric.
The main products NZ cows produce for export are milk powders, butter, cheese and casein. Whey is further down the list but would be the only product that is mostly protein and for human consumption. It is a by product of cheese.
I don’t know which ones but I am sure casein has other plastics as substitutes.
Butter has substitues in margarine – good enough that margarine now costs more than butter but still takes up more supermarket shelf space. With I suspect better margins for the margarine suppliers.
Milk powders account for more than half NZ milk. As part of infant formula WMP is a substitute for human breast milk, but an inferior product and more expensive. You don’t need to substiture, just go bad to the real deal and avoid some of the health issues associated with milk and especially its proteins.
In terms of manufacturing baked products I believe there are a range of products including vegetable oils that often substitute for milk powders.
In terms of efficiencies over time most NZ dairy farms have had replacement rates far too high to compare favourably on lifetime feed conversion efficiency for milk production.
If the world is short of protein, vegetable proteins are most of the answer. If you can afford it and still want animal proteins then those from monogastric species will have much lower cost.
Look around your supermarket and you will see multiple substitutes for milk proteins including a section on soy milk.
January 6th, 2010 at 2:26 pm
Try eating a griffins biscuit these days, dairy produce is long gone. In the place of butter is vegetable fat. Son bought Griffins chocolate chippies. They were like eating plastic, and I would not touch 1 again. Will Griffins go back to butter, unlikely short term. It is more likely they will go out of business as the real butter bikkies sell better. Then everything will go full circle as Griffins in desperation to compete will bake the Discerning Eaters cookie, WITH real butter! In the meantime volatility will rule for the farmer.
As an aside, the recievers seem to be pulling the Crafar farms out of the dark ages. From a distance things look better. Lord I hope they dont get put back in charge. A question, it was suggested to me if the payout stays high, they could be farmed out of recievership….. with the debts involved, I dont see this as likely. Any comment?
January 6th, 2010 at 2:27 pm
What are the views on if Fonterra will get the precribed level of capital from farmers on their upcoming share issue? My view is that they will find it hard, since most farmers will need to borrow the funds and the banks are trying to reduce their exposure to the already indebted NZ dairy sector. I am not sure where this leaves Fonterra, especially given the cash they have spent on their 2 recent acquistions.
January 6th, 2010 at 2:53 pm
Farmer Will,
1. If the payout stays high? I doubt that payout projections are going any higher, and I would be betting on lower or much lower if not his season then next.
2. Crafar farms ran a low cost system. I suspect the receivers are running a much higher cost one that will be losing even more money.
January 6th, 2010 at 2:54 pm
Thanks Peter.
January 6th, 2010 at 2:57 pm
From the sidelines Says
More in debt, and further out of their depth?
January 6th, 2010 at 3:05 pm
From the sidelines:
Fonterra should grow in part from greater retentions generated by superior business performance, just the same as dairy co-ops did for 100 years. Growth probably will not be stella, like the govt foolishly expects because of that inept DIRA, but what is the longevity of a highly leveraged corporate given governance and management challenges (Brian Gaynor in an article on the NZ Herald website on the 12th of Dec, on real estate vs sharemarket investing, pointed out that large NZ corporates have failed abysimally due in part to poor governance, leadership…his examples included Telecom, Carter Holt, Fletcher Challenge=(idependent Fonterra director..R.W!!!), Goodman fielder, Lion Nathan, yet he advocates the listing of Fonterra). The price wars in the UK mentioned above are interesting given supossed food shortages and high prices are year or so back.
The shares are been sold to Fonterra Shareholders with the assumption that the money will be invested in areas which will generate high returns, as well as strengthening the balance sheet. I think the return from buying dry shares is ‘predicted to be 7-10%. I don’t know how that compares to the sharemarket or property, but for a significant portion of shareholders it’s thought to be viable.
Interesting to learn pigs and poultry are more efficient feed convertors, however hypothetically speaking, if our milk is sourced from insitu haversting of pasture by the cow, would this align us to the aforementioned due to their grain based diets
January 6th, 2010 at 3:08 pm
Also thanks Peter, it’s great to have some alternative analysis and opinion on the dairy industry
January 6th, 2010 at 3:24 pm
International Farmer,
DIRA effectively guarantees the return on Fonterra shares by setting the milk price at a level that allows a good return on capital. The rate of return on capital Fonterra used in 2009 was 11.75%. Most years it is around 9%.
It doesn’t matter how badly Fonterra performs, the return on capital is always there. The losses (or gains) just end up being parked in the milk price. That is why the 2009 payout was only $5.20 rather than well over $6.00.
January 6th, 2010 at 4:16 pm
..and then “Milk powder”, another “good” industry with 96% protein, 110% profit and 15.5 tons of shit, faces NZ green, clean beaches rivers and lakes where Kiwis take a carefree swim – how idyllic.
How much does it cost to clean up NZ and who pays for that ?
Walter
January 6th, 2010 at 4:26 pm
Peter
You are exactly right – the Milk Price calculation provides that a guaranteed cost of capital return is earned on the capital required for the commodity business. This return is deducted from the Milk Price. Therefore, the value-add return should be at a minimum the 9%. If it is less than this (which consistently it is), then this means that the actual value add retun of Fonterra is negative. I don’t think many people understand this. If Fonterra was transparent about its value -add return (i.e. split out the guaranteed return of capital in the milk price, and the return on its various businesses), then I think that the discussion about capital structure would be very different. i.e. a robust discussion could be held around how much control of the Co-Op farmers need to retain. Caertainly, they need to maintain control of the stainless steel and wheels (i.e. milk collection and the factories), and potentially the commodity distribution network. However, why do they need to borrow money from the banks to purchase shares to maintain full control of dairy farms in China, under-performing brands in Asia or to subsidise milk processing in Australia, which make negative returns?
January 6th, 2010 at 4:44 pm
From the sidelines Says,
Well put. Unfortunately I don’t have time at the moment to extend your excellent comment.
I will be back to this site Friday.
January 6th, 2010 at 5:56 pm
From the sidelines
They also have a large dairy farms in Brazil,as a shareholder you must know this.
January 6th, 2010 at 6:52 pm
W.Kunz.
How much does it cost to clean up NZ and who pays for that ?
It has cost a group of farmers in the Lake Taupo catchment their farms. Admittedly they were reasonably compensated for them, but it was still a tough time as what they had worked hard to create over the last thirty years was mandated off them within the last five.
One of the farmers runs a model drystock farm, and has won an environmental excellence award before the powers that be woke up to the fact that his farm was in the Taupo catchment and was having a significant impact (in comparison to Taupo township and any new residential developments!!!!). He is operating his farm until June, the farm over the road has been retired from livestock and looks as rough as guts in comparison.
It is ironic that a high profile dairy farmer has subsequently purchased land in the catchment on which he grazes dairy cows, with the blessing of the Lake Taupo Protection Trust and Environment Waikato. The hypocracy stinks like….
January 6th, 2010 at 7:03 pm
International Farmer. HELL
Of course Landcorp sold our land and did a runner.
January 6th, 2010 at 7:39 pm
One word replaced by another into reality – and it will cost us Billions.
….but it was still a tough time as what they had worked hard to create over the last dirty years was mandated off them within the last five…..
–
Another good example of our (long term) economic mess.
Farming–vs – Environment/ Health – vs – Tourism – and it will l(c)ost us Billions.
Walter
January 7th, 2010 at 2:17 pm
As I understand it consumers moving to a more westernised diet firstly introduce dairy products into their diets – i.e., someone used to eating rice and vegies isn’t going to tuck into a meal of meat and three veg overnight – it’s all a gradual process – and dairy is an integral part of that transition. And it is these people who are the growth markets for dairy – it is these consumers who will shape New Zealand’s destiny.
A well healed Indian guy came over here and remarked to me that he wanted to make sure his kids were brought up on dairy products as to him they ensured good nutrition and health – something he didn’t have growing up – and something we all take for granted here – as we quibble over whether butter is better, eggs are good/bad etc…
It’s a crying shame we lost the butter battle. How natural is your food? How many degrees of separation is your food from its origins? You wouldn’t catch any of the top chefs cooking using margarine. And as someone said to me “you only drink that soy stuff once…”
January 7th, 2010 at 2:36 pm
Correct me if I’m wrong, but as I understand it…..
Monogastric animals need food which could otherwise be eaten by people and can’t live on grass alone – ruminants can.
Grass can be grown in places that feed crops can’t – high country etc.
So ruminants have a place as a means of producing food from land which could not otherwise feed people, which monogastric animals can’t – in that respect, the conversion efficiency is irrelevant…..
January 7th, 2010 at 2:47 pm
The trick Nik is to get your product out of NZ and beyond the IRD taxable fence before making the fatter profits. Pick off the overleveraged farms in NZ and export to your own Asian country, to your cousin’s import company, which just happens to pay barely enough, for your NZ meat export firm to make a profit. It’s so hard to get those high prices! Then by chance your cousin’s company makes a sale to the chain of fastfood outlets that are owned by your dear uncle. The fastfood chain bosses are all in the family too and are experts at milking….the till. Out comes the fat profits on the cheap meat long before the accounts are drawn up. Only a small profit is showing in the ‘books’ and after bribing the local tax official, almost no tax to pay. It’s called getting rich on a Kiwi play.