Dairy price falls driven partly by new subsidies, says Fonterra

Fonterra says the latest fall in international prices for milk powder has been driven partly by new dairy export subsidies in the US and European Union.

The world's biggest dairy exporter, Fonterra said the group's average price for milk powder had declined 16 per cent over the past three weeks.

"There's increased uncertainty in the market because of the recent announcement of US subsidies and talk of European retaliation," said Kelvin Wickham, managing director of Fonterra's GlobalTrade unit.

EU export subsidies, reintroduced in January, were followed last month by the US giving its dairy farmers new subsidies under the Dairy Export Incentive Program.

US Agriculture Secretary Tom Vilsack said at the time that despite the move, President Barack Obama's administration remained strongly committed to the pledge by the leaders of the Group of 20 major economies to refrain from protectionist measures.

Average milkpowder prices slumped 12 per cent today in Fonterra's regular monthly internet auction, after last month slipping more than 4 per cent.

The average price today fell 12 per cent to US$1886/tonne ($2911/tonne).

The past two auctions have heavily eroded the only gains so far seen in milk prices at the past year's online sales, a 3.5 per cent lift in the average selling price for whole milkpowder to US$2235 a tonne, following a 16.6 per cent rise in early March.

Fonterra's auctions sell milkpowder on a range of contracts, including a one-month contract with delivery starting two months after the sale, and two three-month contracts with delivery starting three and six months later.

Prime Minister John Key said last week that the latest US move was at odds with Obama's position that the US opposed protectionism.

While the US and EU may be acting within their World Trade Organization commitments, their moves on dairy subsidies sent a negative signal to other WTO members.

Australian Trade Minister Simon Crean agreed that the step contradicted Obama's opposition on protectionism stated at the G-20 summit convened in London last month to address the global economic crisis.

Neither Australia nor New Zealand subsidise dairy produce.

"International dairy markets will remain weak until consumer demand improves," Wickham said.

Fonterra is the world's largest dairy exporter and the fifth-largest dairy company by sales, with annual revenues of $11 billion.

Our country's largest multinational business, it trades in 140 countries and accounts for more than 24 per cent of the country's total exports.

-NZPA/AP