Price falls linked to Fonterra auctions

Dairy juggernaut Fonterra is being blamed in Europe for contributing to the reintroduction of EU and US protectionist dairy measures.

One critic, Denmark's Arla Foods, is a joint-venture partner of Fonterra in the British market.

The criticism is over Fonterra's online monthly global wholemilk powder auction system, Global Dairy Trade. It was introduced 11 months ago as world dairy prices began a downward march. Almost every month since, the average auction price has fallen. This month wholemilk prices were at a five-year low and 58 per cent less than a year ago.

The critics say the auction price has become a buyer reference for future pricing, ensuring world prices for whole milk powder have fallen faster and harder than necessary - even allowing for world recession. They are particularly critical of each auction starting bids at 15 per cent below the closing price of the last auction.

Last week the European Commission proposed extending intervention buying of butter and skim-milk powder for storage until the end of February and, if required, until 2011.

The EU resumed subsidies and an intervention programme in January. Shortly after, Fonterra announced a third reduction in its milk payout forecast to farmers for the 2008-09 season, partly blaming the EU move. As the market feared, the US responded, saying it would also reintroduce subsidies.

Fonterra, New Zealand's biggest company and a farmer-owned co-operative, said the US announcement was "bad news for the market and bad news for our farmers".

Fonterra offers just 10 per cent of its wholemilk powder (wmp) exports on the internet auction, but critics say because the company is responsible for market sales of at least 60 per cent of globally traded wmp, it has a heavy influence on international prices.

Arla Foods head of commodity sales Thomas Carstensen said Fonterra's "hefty" criticism of EU policy had been noted.

"But I think if you sit down and look at the introduction of export refunds [subsidies] and compare them with the auction system, then it is a question of the hen and the egg - which is coming first?"

Big multinational French company Lactalis said Fonterra "has lost its way". Head of ingredients sales Philip Campion said Fonterra was using a "PlayStation" system to define commodity pricing for a small volume. "But it is determining the pricing for the rest ... it is absolutely crazy."

"In weak markets you need some stability, the last thing you revert to are internet auctions. It accelerates the drop and exaggerates the drop. And when it's introduced in a depressed market it works to bring prices down faster and lower than they should."

Australia's Murray Goulburn, claiming to be the world's second biggest dairy exporter behind Fonterra, said the auction should have been suspended when the EU interventions were announced.

"While subsidies are in play it is not a very safe mechanism, in fact I think it's dangerous," said a senior executive who declined to be named.

Fonterra rejects the claim it contributed to the resumption of protectionist measures. "I do not agree with that," said Nigel Kuzemko, director of portfolio optimisation, noting the critics were competitors.

The decision to start auctions 15 per cent down was made with the expert advice of auction provider CRA International.

Kuzemko said the auction, held in rounds and designed to help customers manage market volatility, was about volume, not price. The auction simply showed a transparent market price.

DAIRY WARS

* Arla Foods - Europe's number two company, $15 billion turnover, exports to 130 countries, represents 8000 farmers.

* Lactalis - private company, exports 450,000 tonnes of whole milk powder a year.

* Fonterra - turnover $19 billion (14 months), exports 650,000 tonnes wmp, earns 27 per cent of New Zealand's export returns.

* Murray Goulburn - co-op, turnover A$2.5 billion, represents 2500 farmers.