Milk powder rises for second month in Fonterra auction

By Paul McBeth

Thursday 2nd April 2009

The price of milk powder rose 3.6% in Fonterra Cooperative Group's online auction for a second straight month, in a sign that last year's slump in dairy prices may be near its end.

The average price of milk powder rose to US$2,235 per metric ton from US$2,158 last month. The world's largest exporter of dairy products cut the length of bidding rounds to seven minutes from 10 minutes, having resisted calls for a review of its GlobalDairyTrade system by dairy farmers.

Commodity prices "have started to stabilise," said Philip Borkin, economist at ANZ National Bank. "If the New Zealand dollar goes up, we're not able to benefit" from the gains, he said. The bank's commodity price index, a measure of raw materials produced in New Zealand, comes out later today.

Before last month's first increase on the system, prices had slumped 58% since the introduction of the auctions in July last year. Fonterra kept its milk payment forecast at $5.10 a kilogram in its half-year report, having slashed the estimated payment from last year's record $7.90 to reflect the fall in world prices.

The auction system has been criticized by independent dairy traders in Europe and New Zealand, who say it helped contribute to last year's slide in prices, a claim disputed by Fonterra.

"The auction is a reflection of the value of dairy products on the day it trades," said chief executive Andrew Ferrier. The dairy market is "huge, with as much as seven million tonnes openly traded and 100 million sold within borders. We sold 60-70,000 tonnes, so to say it is influencing prices is preposterous."

The dairy exporter increased its debt gearing to 61.5% at January 31 from 57.4% at July 31 due to increased stockpiling, the impact of the weak kiwi dollar on overseas debt and the timing of payments to farmers. The cooperative hopes to ease gearing back to "more normal levels" by the end of the year as it halts non-essential capital spending and needs less working capital, it said in its report. Total borrowings to $8.1 billion as at January 31, from $6 billion a year earlier.

Dairy exports fell 14.5% to $2.5 billion for the three months to Feb. 28, amounting to 24.2% of the nation's exports for the quarter. The Reserve Bank of New Zealand predicts the economy will extend its recession into a fifth consecutive quarter before reaching a trough in the middle of this year.

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