Morning Equity Briefing
Foods
Big rebound in Fonterra auction prices
John O'Reilly
FACTS: Average price rises16.9% month-on-month (mom).
ANALYSIS: After four months of price declines (over which period the cumulative decline was 29%), the average or trade weighted index price of dairy product prices at Fonterra's auction rose by 16.9% mom. The auction, which will take place twice a month from here on, is a bellwether for the global dairy industry given New Zealand's 40% share of global trade in dairy products. Also, as New Zealand is the major exporter to Asia, the auction price provides some insight into demand from this region. The whole milk powder (WMP) price rose by 18.8%; skim milk powder (SMP) rose by 15.8%; while the winning bid for milk fat increased 9.5% mom. A record 151 bidders were involved.
DAVY VIEW: The monthly auction price has been volatile this year, but even before the latest auction and notwithstanding the price declines of recent months, prices are well ahead of their depressed levels a year ago. The September 1st auction price for WMP of $3,522/tonne is about double its level of a year ago. The latest result is a surprise given no apparent shortfall in global milk output in leading milk-producing regions, especially in New Zealand whose 2010-2011 milk production season has just begun. Fonterra's global dairy trade manager, in a comment to Radio New Zealand, said that the fires in Russia have caused a ripple effect in the dairy trade and tightened global supplies. Irish milk output is well past peak. From the point of view of Irish processors, the result is a positive to the extent that it has any un-contracted stock on hand. More generally, the auction result will sustain the renewed confidence of the sector here which was battered in 2009.
For buyers, who perceived that the auction results between May and July inclusive represented the beginning of a downward trend in prices, the latest result will be a shock.