KEY POINTS:
Fonterra is to start selling its goods online in a bid to keep up with volatile markets and set a global reference price for dairy products.
The world's largest dairy exporter plans to start an internet-based sales system in July with expected sales of about $1 billion
worth of milk powder during the first year.
Chief executive Andrew Ferrier said the new system would allow Fonterra and its customers to be more responsive to shifting global prices.
"The global dairy market is evolving due to changes in supply and demand, as well as in global stock levels," Ferrier said. "We expect more price volatility for the foreseeable future."
Fonterra managing director GlobalTrade Kelvin Wickham said currently most sales were negotiated directly with customers at intervals of up to a year.
The negotiated contract system had worked well but could not react as quickly as the dramatic changes in the dairy market.
"The issue is the markets have changed and fundamentally changed in terms of the supply [and] demand dynamics that are out there," Wickham said. "So last year we saw price peaks and price movements we've never seen before."
Fonterra had not been able to take full advantage of the peak of the pricing, with the magnitude of the price rise and the speed of change unprecedented in the past 20 years, he said.
"If the average price for whole milk powder in the world was US$2000 a tonne for 15 years before, it suddenly went from US$2500 to US$5000 in the space of a short number of months."
The online sales system, which would be run by an independent trading manager, aimed to get the market to set the reference price for base commodities, although a significant volume of sales would continue to be based on bilateral negotiations, Wickham said.
"We still want to have salespeople with our customers except instead of them negotiating the reference price they're just talking about the added value services and what else we can do."
Online volumes were expected to grow and other commodity groups would be added during the year, with up to 20 per cent of the co-operative's New Zealand-sourced commodities sold through the system.
Fonterra would announce in advance the volume available for online sales with the starting price based on a discounted result from the previous sales run.
Customers would make volume bids for different specifications of product and delivery times and after a number of bidding rounds the price would have been adjusted to match demand.
All customers would pay the final price.
"It's fair and transparent," Wickham said.
"There's no winner's curse here, you don't overbid or overpay."
It would take between two and three hours to complete the online bidding process, which would be run once a month.
"If this does work, it's a big change from how we've sold in the past and it will lead to, I think, more changes in the market," Wickham said.
"This is a first step in the direction of travel where potentially you could see a futures market developing."
Wickham would be comfortable with other companies using the platform in the future because it would make it more robust and transparent.
Fonterra had looked at setting up an online system about seven years ago but the timing had not been right.
"Our aspiration here is to take a lead," Wickham said.
"We are in a good position to do that because we have this big share of the global traded market."
The risk was whether customers would be interested and engaged by the prospect of buying online.
"We've done all we can in terms of the quality of the software and tools and the developers to try to mitigate that in terms of education [and] working with our customers to make that a success."
ONLINE TRADING
* Current sales are mostly contract negotiations which are reviewed periodically.
* Market demand and supply has fundamentally changed.
* Dairy price rises are unprecedented in the past 20 years.
* Online sales system aims to get closer to real market price.
