Andrea Fox: Fonterra comfortable with auction system

Fonterra is unmoved by the criticism of the auction system. Photo / Northern Advocate

Opinion

A favourite question of critics of Fonterra's monthly global internet auction is "would you sell your house by auction in a recession?"

A few months ago, maybe not. But a quick look at Trade Me real estate today shows plenty of homes up for auction.

The critics - and there have been plenty since Fonterra started selling wholemilk powder on the internet last year - say the auction prices give buyers unwelcome ideas during a global recession.

As far as anyone knows the auction is the only one in the world, and the claim is that the prices it achieves - so far not flash at all - are becoming a reference point for global buyers.

The possibility makes our dairy farmers, facing a sharply-reduced milk payout because of the international slump, nervous.

Given wholemilk powder prices at this month's event came in 58 per cent below this time last year that's not surprising.

Now some of Fonterra's overseas competitors have gone public, saying the auction is making the global commodity price meltdown worse, while the EU and US have seized the recession opportunity to resume market protections and an Australian company has called for the auction to be suspended until the international dairy market is a gentler, kinder place again.

Who's to say it will ever be? And what about those home owners on Trade Me? Why are they opting for auctions? Could it be because when the market is a boar's nest of uncertainty, second guesses and rumour, they have decided it might be sensible to let the market decide the price?

After all, Fonterra's consistent public message has been that the auction was its response to customers' pleas for a greater degree of price-risk management in highly volatile times.

There had been an unprecedented rise in dairy prices from 2006 and all the market's experts agreed that volatility was here to stay.

Price transparency was what the doctor ordered, said Fonterra, and gave the world an online auction just as the volatility savagely turned south.

Unfortunate timing for Fonterra's prescription, but if auction prices today were reflecting an upward march of market demand it is impossible to imagine the auction getting the blame.

MAF points out, in a report strongly supportive of Fonterra's "initiative", that the data analysis simply does not support the criticism.

The ministry notes a report this year by NZX subsidiary Agrifax, an independent source of export trends and pricing, that found the guilty party is the dramatic decline in consumer demand for dairy products.

MAF analysis suggested prices achieved by Fonterra via the auction somewhat cushioned price falls.

Fonterra itself sounds entirely unmoved by the fresh fuss.

Give them time, is the message from its Auckland headquarters.

No one likes change, and with the clock ticking down to Europe's undertaking to end all farmer milk quotas by 2013, there's bound to be pain as the EU and its dairy players deal with big internal policy headaches on top of a global economic slump.