Formula scare: Milk powder price drops at dairy auction

By BusinessDesk

APNZ·

6 Aug, 2013 10:00 PM3 mins to read

Prime Minister John Key says he is prepared to fly to China if he needs to in the wake of the Fonterra whey contamination scandal. Chinese food regulators will be visiting New Zealand following the recent meat registration problem and the infant formula contamination would also be discussed, Mr Key said. "There will be ongoing dialogue and discussion between myself at a prime ministerial level and regulators in China over time.''

International dairy prices fell at the first GlobalDairyTrade auction to be held in the aftermath of the Fonterra infant formula scare, the GDT Price Index dropping by what commentators said was a relatively modest 2.4 per cent.

Wholemilk powder prices fell by 3.0 per cent to US$5021 a tonne and skim milk powder prices dropped by 3.0 per cent to US$4,451 a tonne at the auction, held early this morning.

"With prices falling a relatively modest 2.4 per cent, investors were able to breathe a sigh of relief," BNZ strategist Mike Jones said.

"There was certainly no sign the general dairy market has been spooked," Jones said in a commentary. Prices overall remain extremely elevated and are still 71.5 per cent higher than a year ago, said Jones.

See more results from the auction here.

Fonterra said on Monday that it had received confirmation from the Ministry for Primary Industries (MPI) that China had temporarily suspended imports of its whey powder and dairy base powder.

Fonterra is the main seller on the GDT auction platform and wholemilk powder is the most important product for New Zealand farmers - accounting for 60 per cent of total dairy products sold by the co-operative.

"In light of the contamination scare, the auction result could have been much worse," Westpac economist Nathan Penny told APNZ. But he said the devil was in the detail.

In skim milk, Fonterra product prices fell while comparable product from Dairy America and the Scandinavian dairy company, Arla, gained ground.

In this part of the market, Fonterra had previously commanded a 20 per cent premium over Dairy America's, compared with just 14 per cent in the latest auction.

ASB chief economist Nick Tuffley said the fact that the auction took place so close to news of the contamination scare meant it was "not a wholly reliable" indication of the price impact.

" Nevertheless, that it held up so well is encouraging: a sharp fall would have raised some immediate question marks about whether any lingering impact had occurred," he said.

Fonterra is such a significant global player that it is hard for food manufacturers to readily substitute away from Fonterra as a source, Tuffley added.

The New Zealand dollar dipped on the news but quickly recovered. The kiwi rose to US78.98c cents at 8am in Wellington from US78.51c at the local close on Tuesday. At current levels, the currency has returned to where it was before the news of the contamination broke.

In total, 60,600 tonnes of product was sold at the auction, up substantially from the previous two auctions of about 38,000 tonnes.