Andrea Fox: Milk auction fears won't go away

Fonterra's global online auction is fair game again after wholemilk powder prices on it leapt nearly 26 per cent last week, with Federated Farmers hunting the money and a specialist to put the sales method through an economics wringer.

An unfailing barometer of current market volatility, Fonterra's year-old world-first auction has been attacked at home and overseas for depressing world milk prices, slowing recovery and inspiring protectionism by Europe and the United States.

Government officials will wince on hearing that an arch-niggler plans to get serious over a hunch the auction isn't in Kiwi farmers' best interests.

Dairy farmers wing chairman Lachlan McKenzie says he "takes on board" the risk that each time he goes public with doubts about the workings of a company owned by 92 per cent of New Zealand dairy farmers, he becomes a show pony for our European dairy rivals.

Papers obtained by the Business Herald under the Official Information Act show the Ministries of Agriculture and Foreign Affairs have been closely watching the auction and international reaction to it, with MAF in February considering hiring an independent consultant to do a "warrant of fitness" check on the auction.

At the time the European Union was reinstating price protections for its farmers after last year's collapse of international prices, which unhappily for Fonterra almost coincided with the start of its auction.

New Zealand's biggest company sells only 10 per cent of its total production on the monthly auction. But in a world where just 7 per cent of all dairy product is exported, Fonterra is a big cheese, with around 40 per cent of market share. It is the world's largest exporter of wholemilk powder and between 25 and 31 per cent of it goes on the block each month for forward delivery.

MAF, according to the released papers, decided not to go ahead with the WOF because it would likely be "misinterpreted as a [government] review which risks unnerving the market" and because it "sets a precedent for a host of reviews on any number of issues relating to Fonterra's business strategy".

In late June MAF released a report strongly supporting the auction, saying it could be helpful in discovering a competitive market price. The report was based on MAF's own analysis and the favourable findings of a January report by independent analyst NZX Agrifax, and its release was timed to counter a McKenzie blast about the auction at a national Feds conference. There's no question the auction reflects market volatility - a 16 per cent price spike in March, followed by a plunge and then a flattening and last week a 25.8 per cent surge. But is it the cause?

Kiwi farmers, battered by a falling milk payout, a bank credit squeeze and difficult farming conditions after drought and a cold, hard winter, are in the mood to blame someone.

Commodity prices have plunged by more than 50 per cent since mid-2007.

McKenzie, who plans to meet Agriculture Minister David Carter soon to discuss the auction, concedes the Feds have no hard economic data to back their doubts - they just see the same rollercoaster line on the auction graph as everyone else.

He gives MAF "9 out of 10" for the quality of its recent report, but says the ministry didn't ask the right question.

"Is it maximising returns for our farmers?

"I know it [the auction] does a lot of good things for transparency. There's no doubt about that. But is it the best selling mechanism to maximise returns to farmers?"

McKenzie says Fonterra should be "marketing" New Zealand's dairy production - auctioning it is just "selling" it.

MAF says it has been okay with the auction concept since 2007, when Fonterra discussed it with officials during capital restructure proposal negotiations. (Fonterra, annual revenue $17 billion, is governed by the Dairy Restructuring Act 2001, which enabled its creation from a huge industry merger.)

The ministry says it would have had to employ an overseas consultant to give the suggested WOF international credibility and would have been prepared to pay top dollars for a top name. It says it may still commission a study but would prefer to wait a year for more sales results.

But McKenzie, pressured, he claims, by worried members - 60 per cent of New Zealand's 12,000 dairy farmers belong to the federation - can't wait that long.