Fonterra buoyed by auction price rise

A spike in Fonterra's online milk powder auction and stabilising prices on the ANZ commodity price index have raised hopes that the worst of the falls in world dairy prices have passed.

The average price for whole milk powder in Fonterra's auction yesterday jumped 16.6 per cent last month to US$2158 a tonne, having previously fallen by 58 per cent since July. Fonterra has said it expected the market to be firmer during the second half of the year, although it was likely a significant price recovery would not be seen until next year.

Kelvin Wickham, Fonterra's managing director of global trade, was quietly confident yesterday's auction backed that view.

"We believe we're bouncing around in the trough," Wickham said. "Overall, the decline has slowed and now we're seeing some indicators that it can start to turn, that's a good thing."

The dairy industry accounted for 27 per cent of national exports in the year to May, 2008, with Fonterra making up 25 per cent.

The ANZ index - a basket of all New Zealand's major export products - showed a drop of 4.6 per cent in February, with dairy products down 5.6 per cent but stabilising during the second half of the month.

When adjusted to factor in the exchange rate, the index actually rose 1.9 per cent, with dairy up 1.2 per cent as the currency eased against all major trading partners.

New Zealand's major commodities are traded in US dollars, so if the kiwi is lower the return to farmers in New Zealand dollars is higher.

ANZ economist Steve Edwards said the New Zealand dollar index was more important for exporters.

"It's all well and good talking about world prices but, at the end of the day, it's what it converts to in kiwi dollars that will fund the exporters here," Edwards said. "But there's two legs to it and we've only been insulated by the falling currency which saved our bacon to a certain degree."

The world price index for dairy products rose for 15 consecutive months to peak in November 2007. It has since fallen by 58.4 per cent.

Edwards said the fact the price stabilised during the second half of the month was encouraging and noted the price rise in Fonterra's auction.

Federated Farmers dairy chairman Lachlan McKenzie said the auction price rise was excellent news but it could not be interpreted that prices would not fall again.

"This could be an unforgiving correction but the indication from the market place is that other sale transactions outside the auction have also been trending up over the recent time," McKenzie said. "It's certainly giving us an indication that the fall is bottoming out."

Wickham said: "Fundamentally, we've seen supply come back, we've seen customers deciding that these prices are attractive and they need to go out and fill up their supply chains. What we haven't seen yet is lots of consumers coming back to supermarkets and buying dairy products in big quantities."

It was likely there would still be volatility in the market for some months yet.

"This is one indicator, it's consistent with other indicators we see in the market but it's not yet a trend," Wickham said. "We expect the prices still to move around in this transition period."

There had been uncertainty in January after the EU re-introduced export subsidies for butter, cheese, whole and skimmed milk powder.

"There was a rush on to sell product at lower prices because of the fear that the [EU subsidies would be a lot greater than what they have been."

Fonterra's stock levels were commercially sensitive, although the dairy exporter was holding more than it would like, Wickham said.

"From now on, our stock levels decline because we always have a peak stock loading around the first week of March."

MILK MOVES

* The price of milk powder in Fonterra's auction jumped 16.6 per cent yesterday. It had fallen 58 per cent since last July.

* The ANZ commodity price index for dairy products stabilised during the second half of February.

* Market indicators suggest the dairy price decline could be bottoming out but commentators are cautious.