NZX Agrifax sees depressed outlook for dairy until 2010

NZX Agrifax sees depressed outlook for dairy until 2010
The NZX's rural information service Agrifax said it may be well into 2010 before there is any positive pricing news for dairy commodities given the weak global economic outlook and the imminent reintroduction of export subsidies by the EU and the United States. The day before Fonterra is expected to cut its payout forecast (on January 28), NZX Agrifax published a report investigating how much of a contribution Fonterra's globalDairy Trade (gDT) internet auctions played in the global fall in dairy prices. Fonterra uses the monthly internet auctions to sell 25% of its whole milk powder (WMP). Auction prices fell 54% to US$2,017 per tonne between July 2008 and the latest auction in early January 2009. The NZX Agrifax report focused on the transparency of the internet auctions and the fact that the average price was available immediately after the auction finishes. This price then becomes a market reference price for all whole milk powder sales, the report said. NZX Agrifax concluded the auction had not caused the fall and only reflected market forces at work. Farmer discontent over the auction process has been building in recent months. "This reference price and the availability of it, eliminates any short-term window to sell product at inflated prices to the final auction price," NZX Agrifax said. "The benefit of the auction system is the transparency it provides of where the WMP market is currently sitting. In a downwards moving market this is advantageous to the buyer and in an upwards market, assists the seller. This also provides buyers with an additional tool when negotiating purchases outside of the auction process." NZX Agrifax said the auctions acted as an indicator of what way the market was heading. "The decrease in demand was originally stimulated by resistance to the high dairy prices, but has been spectacularly fuelled by the global economic crisis," it said. "Increasing supply levels in particular from the EU and US have helped create a perfect storm and have made the recent fall in dairy commodity prices inevitable. The gDT auction price provides the market with an insight into how the dairy markets have been tracking and the direction they will take in the future." "To blame gDT for the fall in dairy commodity prices is to ignore the substantial and unprecedented global market factors affecting commodities worldwide."

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