Why Fonterra accepted defeat in the dairy aisle
OPINION: Fonterra's sale of its consumer dairy business to Lactalis is a clear sign of the co-operative’s failure to compete in the branded consumer market.
The co-op’s managing director global ingredients, Kelvin Wickham, says suspending GDT will not resolve the supply/demand imbalance in the world market.
“GDT has not caused low prices. Low prices are a reflection of the market which is currently oversupplied with dairy product while dairy importing countries face political, social and economic challenges,” he told Rural News.
Calls to suspend the Global Dairy Trade (GDT) auction gained momentum on social media last week.
Federated Farmers Waikato president Chris Lewis called for an industry-wide discussion on whether GDT should be temporarily suspended until the market improved.
Lewis claimed GDT was a major contributor to the decline. “It’s been gamed by buyers and the price for that is being paid by [the] New Zealand farmer.”
Temporarily suspending the GDT was a “reasonable question” to ask, given the unprecedented and volatile times the industry faced.
He was backed by New Zealand First leader Winston Peters. “Auctions are great in bull markets like the Auckland property bubble, but it is a terrible way to sell when markets turn ugly, as the record low price for whole milk powder indicates,” Peters says.
Fonterra stopped selling milk protein concentrate (MPC70) through the auction in March 2014, Peter says. “So the co-op has form in doing what we suggest, albeit, with a small product line.”
The calls to exit GDT come after Fonterra slashed $1.40 from its forecast for the 2105-16 season to $3.85/kgMS, two days after dairy prices fell 9.3% in the latest auction. It was the 10th consecutive fall on the platform, dairy prices falling to levels not seen in 13 years.
But Wickham says everyone must remember GDT has not caused the low prices.
Nearly all the product offered in the last GDT event was sold to willing buyers, notes Wickham.
“There is a supply/demand imbalance and that’s what you’re seeing on GDT. Particularly, constraints on demand from big dairy importing countries (China slowdown and inventories, Russia import bans)… and milk supply continues to grow in Europe and US which is spilling over into soft global demand.
“We’re doing everything to move powder and other commodity products into higher value contracts and higher margin products.
“And to those calling for GDT to be suspended, that’s not going to solve the supply/demand imbalance.”
However, Fonterra may be looking at making changes to GDT. Chief executive Theo Spierings said during a television interview that drastic changes to GDT may be required to support dairy prices. The record low prices on GDT were “below the bottom” and “absolutely not sustainable.”
Fonterra is considering significant changes to GDT, given that prices were now below the government intervention levels seen in Europe, Spierings says.
“We have to look at some more drastic thinking on our GDT auction, because in Europe there’s a kind of a bottom created by governments, and we don’t have that, so we have to look at out-of-the-box solutions.”
