BusinessDesk: Prices of dairy products fall 4.5% in latest Fonterra auction, biggest drop in eight months

Prices of dairy products fell by the most in eight months on Fonterra Cooperative Group’s GlobalDairyTrade platform amid concern demand for commodities may be slowing with China’s growth outlook.

The GDT-TWI Price Index fell 4.5 percent compared to the last sale two weeks ago. The average winning price declined to US$3,396 a metric tonne, the lowest since August 2010.

The sale is the first on GlobalDairyTrade since Fonterra cut its 2011/12 forecast payout this month, citing the high New Zealand dollar, falling commodity prices and increased production from Northern Hemisphere rivals. The Thomson Reuters/Jefferies CRB Commodity Index fell 1.3 percent overnight.

The average winning price for while milk powder fell 2.6 percent to US$3,316 a metric tonne and skim milk powder fell 2 percent to US$3,125 a tonne.

Anhydrous milk fat dropped 9.5 percent to US$3,284 a tonne. Butter milk powder wasn’t offered at this week’s sale.

Cheddar fell 11.3 percent to US$3,114 a tonne and milk protein concentrate declined 15 percent to US4,345 a tonne. Rennet casein fell 12.9 percent to US$6,545 a tonne.

There were 123 winning bidders over 10 rounds, out of 145 participating bidders. The number of qualified bidders rose to 592 from 580.

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The results are proabably a little worse than indicated. MPC contracts 2 & 3, and casein contract 2 don't appear to have had enough volume bid to lift the price off the opening i.e. as auctions they effectively failed.

Where have all the buyers gone in agricultural commodities?
"Money flow out of agricultural commodities started on Monday as the major force behind this sell-off," Paul Georgy at broker Allendale said.
The liquidation continued on Tuesday, even in soybeans, the market leader in Chicago for most of 2012, which suffered a 1.6% decline for May delivery to close at $13.45 a bushel, their worst performance in seven weeks.

Local news reported that a part cause of the fall in price was due to increased production from Europe.
If that is true then whatch out NZ as we face increased competition from around the world. And we have all our eggs in one basket.

Were we not led to believe that a golden age of agriculture was upon us. Include Treasury PREFU forecasts for dairy exports.
We were experiencing a major step up in long term dairy commodity prices due in part to:

  • An insatiable demand for dairy protein from a rapidly increasing Asian middle class, plus the Middle East plus, plus, ...
  • Limited capacity to increase milk supply from high cost producers in Europe and the US
  • Other increases in international dairy production were to be absorbed by domestic markets 

Some explanations are becoming overdue. 

No trouble Colin...Makhlouf will blame the teachers of Treasury staff for the poor Treasury performance.

Agreed the world does not stand still, when the price goes up, production just rolls in - from every where:
(Some are ex Andrewj's reference from above):
1. Singapore-based cocoa-to-flour group Olam International in January unveiled plans to turn a Russian milk producer, Rusmolco, with a 3,600-strong dairy herd into one with 20,000 head by 2017.
2. Trigon Agri took a step towards realising its ambition of becoming Europe's top milk producer by buying the biggest dairy farm in Estonia, indeed, it progresses the group's plans to expand to 11,000, from 2,100, its milking cows over the next three-to-four years
3. Ekosem-Agrar unveiled a E50m bond issue to raise funds for doubling its Russian milking herd, and expanding its 160,000-hectare landbank, extending the wave of investment heading into the country's fast-growing dairy market. Funds raised will back expansion of the group's Russian landbank to 230,000 hectares, after 22% growth in the year to the end of September, and of the dairy herd to 21,000 herd by 2015 from the current level of 12,000 milking cows.
4. Manuka - Chile, read the Ashburton Guardian - jobs in Chile on offer.
5. Australia dairy is also wanting a free trade deal with China
6. Wahaha stakes $220m on WA dairy farms

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1:09pm (ET) 03/15/2012 ABIX
The list of Asian parties acquiring rural and food industry assets in Australia is growing rapidly. In the latest major proposal, the Western Australian (WA) Government has assisted Hangzhou Wahaha Group and its chair, Zong Qinghou, in preparing acquisitions worth as much as $A220m of dairy farming operations in the state. A decision is due in mid-2012, following a survey of the industry by the WA Agriculture & Food Department. The Federal Government has warned against protectionist and xenophobic reactions to increased Asian investment in Australia.
The number of milk cows in America's top 23 dairy states reached 8.5m head last month, up 93,000 head year on year and 13,000 month on month.
 Productivity has risen too, thanks to improved techniques and genetics, meaning the average cow produced 21,345 pounds of milk last year, 14.7% more than in 2002.
7. GDH epitomises the new breed of corporate dairy-farm owner. Backed by one of India's largest tea-plantation companies, the Apeejay Group, and managed by former executives of Rabobank, the Dutch-based agricultural bank, the company has an ambitious agenda to take over a large chunk of India's milk production, the largest in the world. The company's plan is to build 100 large-scale dairy farms of 3,000 cows each across India within 10–15 years.
and for some bedtime reading try this - it gives a summary and several local (sometimes anti-industry) views of the game we are playing in.
I'm just off for a my milk biscuit ....

Henry, its great to have someone other than Colin Riden point out how ridiculously over  exposed  to the world dairy trade NZ is, and just to top it we go and covert 80 new farms in Canterbury alone, if you are going to stuff up, you may as well do it in style I guess.

@Henry, its going to come back to the States, with a lower curency they will be wanting to increase exports as the local production has increased, Ive picked the worst from this article

While the U.S. economy finally appears to be on a sustainable path to recovery, fluid milk sales continue to lag behind last year (January’s U.S. sales were 2.7% lower; California’s was 5.8% lower) which means more of the national milk output must be converted to 

other products, some of which are already going exclusively to butter, powder, and cheese.  A milk production increase of 3% over last year would mean the volume of exports must increase by about 23% to avoid a rapid rise in stocks of butter, powder, and cheese.  A production increase of 1.8% for the year, which is the latest projection from USDA, would require an increase in exports of about 15%.


It may be telling that New Zealand’s exports of butter, milk powders, and cheese in January were up by more than 25% over January 2011, while U.S. exports of those products, aided by CWT’s assistance and a weak U.S. currency which makes U.S. products more affordable compared to New Zealand’s, decreased by 3%.

Make no mistake international trade is a full body contact sport.
I suggest we are a big part of, rather than over exposed to.
What it means is that Fonterra must be strong (be the coca cola bottler of milk), I think the last $ or two milk price is because of Fonterra being one, instead of international buyers playing small independent dairy companies off aganst each other.
Think of BHP/Rio and iron ore, having a spot or traded market is important. Our position is build on volume up to on production paying about $5.5 to 6.0 kg/ms at the farm gate. That position then lets off shore processing facilities be gathered. Then being in overseas local markets lets local market opportunities be exploited.
- Good Greek - a local market opportunity:
This layered approach has a better chance of working rather than a paddock to plate "niche" player. - Look at the returns the guys at Open Country are making. A problem small volume folk have is just one (or their main) big customers need say "We're paying 20% less over the next 2yrs" and they are cleaned up.
If we don't plan and drive our future, others will do it for us (and it wouldn't be for our benefit). And we would be sitting round asking "What just happened" like these guys

Muchos appreciations Henry_Tull for your input and link to the GRAIN webpage article on the state of small scale vs large scale milk production.
What are your thoughts on NZ dairy industry, in particular Fonterra continuing as a co-operative?
At the formation of Fonterra in 2001 it seems that the Government and I suspect farming leaders and directors at the time had a clear vision and agenda to corporatise dairy farming in NZ. This seems to be leading to conglomerisation of farms, driving high land prices and debt.
I'm trying to make sense of it and our position as a relatively small scale family owned and operated dairy farm. Fonterra seems to want to discard it's co-operative shackles and embrace a corporate philosophy and agenda of growth, I mean it already practically has, but keeps alluding to itself as a co-operative. The leaders in Fonterra are confident that the trends in mega corporate dairy are heralding a 'golden age' for us in the 'co-operative. With so much economic volatility and confusion as a result of flawed economic and financial practices, how can they be so sure? As a humble primary producer who relies on some control of processing revenue, the corporatisation of Fonterra, and negative prospects for smaller investor owned processors; feels like we are stuck between a rock and a hard place

Close to home, it might be worth researching how the quota management system in New Zealand has driven the fishing industry. It preceeds the Fonterra model by 15 years. From what I saw, the bigger players continue to become bigger players as they buy up small quota holdings. The bigger they get, the more leverage they have over controlling the price at landing. They're not too fussy on the price paid to buy up more quota as playing the long game. Similar scenario with the corporatisation of farming?

Thanks Hamish, good comment, but not an attractive prospect to be frank. Where to from here for the family farm?? Would have thought it would be in NZs and governments interests to keep farming in the family for socio economic and environmental sustainability.

Yes, how to see the world
I'm for the co-op structure.
The alternative here is Open Country and Synlait, both have major customers (Singapore and China) as shareholders (balance of power gone to customers).
Across in Australia most factories are corporate (MurraG excepted) and some owned by drinks companies as well. They have problems with supermarkets squeezing margins on fresh milk, and farmers in QLD and WA are doing it hard, as factories wouldn't stand up to the supers.
The case could probably be made for increasing Fonterra retentions.
Maybe the golden age is more in volume rather than price,

Thought provoking comments again Henry_Tull.
It makes sense what you say about the smaller investor owned 'independent' processors that have recently sprung up as a result of the formation of Fonterra and associated government regulation (DIRA). How is such a scenario going to benefit NZ dairy farmers and NZ as a whole, when commodity buyers are going to squeeze these small processors margins, and how can the government allow this to happen?
Does the formation of Fonterra reflect poorly on farmers (more so 'farming' directors), when if we kept two or three co-operative 'milk collectors going and colluded to punch above our weight on the world market (similar to what Fonterra and Nestle are doing in Latin America), we could have avoided the DIRA debacle. Has the 'competition' as a result of DIRA being worth the price (dilution of export market clout)?
Should politicians instrumental in development and implementation of DIRA and also employed by small investor processors, now be sent to jail? I suspect in China, such behaviour would result in facing the firing squad if melanime episode anything to go by.
Fonterras strategy is to secure volume offshore in competetion with large corporate companies as detailed in the report from Will 'firming up' the balance sheet through TAF (allowing a 'limited' amount of external investment) allow Fonterra to generate sufficient capital to execute such a strategy?

With DIRA one can understand Fonterra's attitude to "Virtual Processors", and we know Westland were able to increase their payout by maxing factory production using DIRA. But it does avoid competition/international trade law being used against us by "partners".
The other issues reflect more on the inflection point(s) between good goverance, self interest, ethics and the law.
Things in the middle kingdom can be very very different.
Running a business with assets in non OECD countries, sometimes a strategy of local financing can minimise the risk of appropriation, agressive local regulation etc. especially ag assets.
It can depend on how much investment is needed. Generally a set of multiple funding options is best, remembering not to max them out. Things change, large companies are raising good money in the US private placement market (long term loans from US pension funds) this year.
They could increase retentions, but with so much debt at the farm level, some we know of may feel unhappy.

Yes Henry_T. It's interesting that when it comes to an arm wrestle the major retail distributors (supermarkets) just smile and wave and give them the two-fingered salute.

Woollies have been one of the first best shares to own, known for their returns on equity and share dividend policy.
There are slides for the NZ business included

Aaaah, but the NZ geneology of it.
By the great sire "Sir Ron Brierley" out of the grand damm "Industrial Equity" ridden by jockey Rod Price. Only achieved its real potential when the receivers stepped in

“When I was in Israel looking at these large shed dairies, they are like European dairies, but instead of being fed with crops from natural rainfall, the crops in Israel are grown from water which has been pumped with electricity. Vast field crops of corn and wheat fed to dairy animals. And I said to the people there, ‘You know, in Australia the glass of milk we drink is about twenty percent oil. In Europe, it’s about fifty to sixty percent oil. In Israel, it’s about ninety percent oil!’” — David Holmgren, 2004

Wow just read that Grains link. Before I milk the cows tonight (16 hr so late) I'll head down the back of the farm and whip myself soundly. I thought we were the good guys.