Fonterra bullish despite doomsayers

By Hugh Stringleman

Friday 5th March 2004

Dairy giant Fonterra has more than wishful thinking on which to base its prediction of good and stable dairy commodity prices for the rest of 2004.

The optimism is due in part to Fonterra's improved production and marketing strategies, chief operating officer Jay Waldvogel says.

Controlling 35%-plus of international cross-border dairy trade, Fonterra can have a huge influence on world prices.

The worst side of its behaviour was seen in the 2002-03 season, when it rushed to quit stocks on sharply falling world markets.

Now with much lower inventories, and this season's production all but sold, major world players (importers and exporters) know what to expect from Fonterra.

The dairy giant is also bringing into its sphere of influence more than 300,000 tonnes of non-New Zealand product, including sales from the shrinking US skim milk stockpile.

Price stability will be welcome news for dairy farmers struggling with predictions of drastic effects on milk payment in the next two seasons from the high value of the Kiwi dollar, Mr Waldvogel said.

It will also make the giant co-operative's task of forecasting the milk payout for next season easier, despite the large negative impact of a 68-70USc Kiwi dollar. The forecast is due out this month.

Dairy Farmers of New Zealand president Kevin Wooding was hoping for a small rise in the current season's price of 415c/kg milk solids, but he conceded that 370-380c may be the advance price for 2004-05.

Some commentators have predicted 350c would be nearer the mark for next season and below 300c for the following season.

This was because of the lag effect on payout created by Fonterra's hedging policy, which reaches out 15 months.

This year Fonterra was locking in its currency conversions (and having a big influence over the payout) for the beginning of the 2005/06 season on the basis of the high value kiwi.

But Fonterra chairman Henry van der Heyden had said the 2005/06 payout figure "won't have a two in front of it."

Mr Wooding said dairy farmers were having a lively debate about the wisdom of Fonterra buying forward cover when the kiwi is so high.

"But the company then says no one can guarantee that the dollar won't go to 80USc," he said.

Farmers were likely to "chase" extra production right through until the end of May, given good seasonal conditions and the expected milk payment drop from June 1.

Mr Waldvogel said economic factors in world markets, which were contributing to a "neutral to positive" demand profile, were high oil prices (good for butter sales), food service levels recovering in the US post-September 11, 2001, positive nutrition trends for milk products and growing economies in Asia and the US.

"We don't see any storm clouds for demand," he said.

Supply-side positives included a smaller US herd, heifer numbers below historical replacement needs, lower dairy product production in the US, inadequate supplies of the BST milk production boosting hormone, a shrinking skim milk powder stockpile, flat to declining production in Europe and 18 months more rebuilding for the Australian herd.

Skim milk powder sales were being made above the US intervention price and cheese demand had recovered in Japan, encouraging Fonterra to believe that cheese prices could be kept stable at about $2400/tonne.

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