Morning Equity Briefing |
Foods
Fonterra CEO says higher dairy product prices are the new normal
John O'Reilly
FACTS: Index up 3.9% in latest auction.
ANALYSIS: More interesting than the outcome of the latest auction are the reported comments of the CEO of Fonterra (which conducts it). Prior to the auction, Andrew Ferrier said that dairy commodity prices would likely remain above historical levels for the foreseeable future. He told Bloomberg News that the price can "probably move up from to-day's price way before we start burning off demand. He said that higher prices are the new normal". At the twice-monthly auction, the weighted average price rose by 3.9% on the previous event (February 1st). Price rises were strongest (+5.8%) on the immediate contract position (April 11th). That the forward contract price was weakest (+0.5% for the period August-October 2011) probably reflects the imminence of the seasonal upturn in milk output in the Northern hemisphere and the assumption that supply tightness may ease.
DAVY VIEW: The assessment of the dairy market by Fonterra, the largest milk processor and exporter in the world, always commands attention. Its CEO's observation that higher prices are not hitting demand yet is positive to note, though some European exporters are fearful on this score. The fact that the price of alternatives to milk ingredients (vegetable oils as regards butter and cereal proteins as regards milk protein) have escalated is probably limiting substitution.