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Fonterra is being “commercially rational” by reducing the volumes sold on the Global Dairy Trade (GDT) auction, says Fonterra managing director global ingredients, Kelvin Wickham.
“We have better options to sell milk as other products rather than basic whole milk powder (WMP). [The options include] cheese, protein, food service and consumer applications,” Wickham says.
“We have less milk coming in the next 12 months given the lower price. Therefore given the lower prices being discovered on GDT we are better to move the milk elsewhere.
“We will be moving it to other products, other applications and we expect less milk because of the $3.85/kgMS payout.”
Basic WMP is a generic specification; higher applications such as differentiated milk powders give better returns. Cheese, protein and even skim milk powder and butter are also getting higher returns at present, he says.
Fonterra said earlier this month it forecasts reducing quantities it will offer on GDT by 10% for the next 12 months, including a shift away from WMP.
About 30% of Fonterra’s product will be sold on GDT under that forecast, but Wickham says it could possibly go down further, to about 25%.
Wickham told Rural News the reduction was announced because with such a significant volume Fonterra wanted to ensure transparency to all the buyers and markets. But at the previous events the cooperative also withheld a significant volume, again just responding to market signals.
“Every two weeks we look at what volumes we forecast to sell, because it is a 12 month rolling forecast and we always make some minor adjustments here and there.”
Wickham says they are still “very comfortable and committed” to using GDT to discover the price and we are “very confident” it provides a good price discovery on the day.
He does not know whether other suppliers are reducing volumes, but he says Fonterra has always supported the platform and always provided product.
“A lot of the other sellers on GDT are seasonal or come and go according to what they may have available,” he says. US company Land O’Lakes pulled out of GDT this month, and had not been offering any product for some months.
Supply and demand the issue
The global supply and demand imbalance is the biggest issue, says Wickham.
“The milk is still coming in other parts of the world like Europe and the US and demand is still either sluggish in key importing regions or there is an inability to get into the likes of Russia,” he says.
“So we will adjust our sales portfolio. We will look for markets where we have better demand opportunities in different product as well.”
Supply will start to slow in Europe because the farmers are seeing lower prices as shown by the protests in the UK, France and Ireland.
“But still their bundled return in mainland Europe is much higher than the local prices because it has obviously got local consumer sales,” he says
“It is unlikely milk will come down there until the end of their season – when the cows go back into their barns. Let’s see that start to decline hopefully in September or October.
“In the US the milk production is still up. They are down in California because of the dry, drought conditions but up in the rest of the country. But fortunately a lot of the US product is being consumed domestically because of the better economic conditions. But there is some surplus product available. It will take time to collect.
“On the demand side there is global growth but most of our customer supply chains are relatively full.
“It will take some time to consume those inventories then things will improve
from a New Zealand perspective in terms of demand and less competition. That will take a number of months yet unfortunately.”
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