With a fall in WMP prices at the latest auction and the recent rise in the currency, Fonterra appear to have been hit by a double whammy. In NZ$ terms the drop equates to nearly 20% and is a real blow to an early recovery for dairy prices. American dairy subsidies appear to have spooked the market, with Fonterra's latest monthly online auction showing a big drop in whole milk powder prices. Analysts said last month's decision by the US Government to re-introduce dairy subsidies along with fears of a European retaliation was the most likely reason for the fall reports The Dom Post. The average auction price across all products and contract periods for whole milk powder was US$1886 (NZ$2884) a tonne 12% lower than in the May auction. The longer contract periods were down the most with prices for product to be shipped between December and February dropping 14.2%, September to November down 12.4% and up until August down 7.7 %. Fonterra sells about 10% of its whole milk powder via the online auctions, with the prices achieved seen as a useful barometer for dairy prices across the board. The result reflected increased market uncertainty, Fonterra managing director global trade Kelvin Wickham said. "We need a sustained pick-up in customer and consumer demand to see any meaningful in recovery in prices and that is not occurring as fast as we would like," he said. "And there's increased uncertainty in the market because of the recent announcement of US subsidies and talk of European retaliation." Westpac economist Doug Steel said the fact that the longer contract periods had dropped the most was quite telling. Buyers might be hanging back to see by how much the US subsidies increased supply. "But I wonder if that's just the initial reaction and where prices level out is not as bad over the next couple of months." The price drop was particularly surprising given the recent weakness in the US dollar, Mr Steel said. "When the US dollar goes down it tends to increase the nominal value of commodities traded in US dollars. But it's not happening in dairy. That effect has been swamped by something else. My best guess is it's a knee jerk reaction to the US move."
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