Surge in milk powder auction price shows dairy is volatile

Prices in Fonterra's online auction soared yesterday but the future looks volatile, the dairy giant says.

The latest monthly auction yesterday saw the average price for whole milk powder rise by 21 per cent to US$3969 a tonne.

Paul Grave, globalDairyTrade manager, said Fonterra did not know whether the jump in prices was a blip or a trend.

"We've been saying for some time that volatility was going to be a feature of the market going forward so this is probably quite a good demonstration of that," Grave said. "The key is this market is impossibly difficult to predict at the moment.

"So what this event means for prices over the coming months is very hard to tell."

The past few months had been steady and the price this month was a result of strengthening global demand and reduced supply as the Australasian production season drew to a close, Grave said.

The outlook remained positive, he said.

"We're seeing strengthening demand, globally the economy seems to be ticking up a notch and that's all positive for consumption by consumers."

The online auction sold more than US$100 million of products in 2.5 hours.

The average price for skimmed milk powder was up 25.5 per cent to US$3672 a tonne and anhydrous milk fat was up 21.9 per cent to US$4827 a tonne.

The ANZ Commodity Price Index for March released this week hit a record high, although the dairy product price fell 1.2 per cent.

Taking August 2006 as a starting point, the commodity price index for dairy products had see-sawed, rising 129 per cent by November 2007 as Australian drought restricted supply and developing countries helped fuel growing demand. However, the index fell back losing all it had gained and more by February 2009 as increased production from dairy exporting countries boosted supply and the global economic slowdown hit demand.

The ANZ said an improving lift in the global economy and renewed demand from China had seen prices rise again - currently up 53 per cent on August 2006.

China had overtaken the United States as the biggest market for dairy exports, valued last year at more than $1 billion.

SELLING ONLINE

* Fonterra online dairy sales started in July 2008.
* Sales worth about US$1.3 billion since launch.
* The service will sell about 20 per cent of Fonterra's domestic production during the next year.