Economist calls Fonterra claims heroic

Fonterra's claim that the bottom of the global dairy price cycle is near is a fairly heroic assumption, Westpac chief economist Brendan O'Donovan says in Stuff.Fonterra's latest Internet-based dairy auction finished early yesterday. The average price for whole milk powder was US$2017 (NZ$3378) a tonne, a 9.3% drop from December. Spot prices rose by 1.3% . Prices were falling due to a cyclical lag between supply and demand responses, though Fonterra director of global trade Kelvin Wickham said this had been accelerated by the drop in demand from the financial crisis and recession."Still, the spot price increase is encouraging and we hope this is a sign of things to come," he said. "Our own supply and demand analysis indicates that we are near the bottom of the price cycle." Mr O'Donovan said: "We've seen stabilisation of spot prices over the last couple of weeks. Part of the conundrum is how much brinkmanship has been going on with foreign buyers hanging off trying to force prices lower but eventually having to come in when stocks run down. Or is it evaporating demand? "The jury's out if it's the former then we could well be seeing the bottoming out of prices. But it's a fairly heroic assumption to make at present the situation is still very fluid," Mr O'Donovan said. Commonwealth Bank of Australia's New Zealand economist Chris Tennent-Brown said it was difficult to predict when prices would bottom out. "Right now it's pretty hard to make forecasts," he said. "Everything's pretty volatile."Federated Farmers called yesterday for an independent review of the system. But three economists BusinessDay spoke to said it was unlikely the auction system contributed to the lower prices.Mr O'Donovan said: "I find it unlikely that the auction system has been contributing to a drop in commodity prices. Commodity prices are falling across the board."