Wednesday, 16 March 2016 09:55

Tectonic shift erodes Fonterra’s global influence

Written by  Sudesh Kissun
Theo Spierings. Theo Spierings.

Fonterra doesn't believe it will take much to change the global dairy market, but it expects very little change this year.

And therein lies the problem confronting the co-op: the days are gone when it could announce a 4% drop in milk production that spooked the world and lifted dairy prices. The ability of Fonterra, the world's largest dairy exporter, to influence prices has been overshadowed by world economic issues, geopolitical crises and phenomenal milk production.

Last month, Rabobank analyst Thomas Bailey told the Federated Farmers Dairy council conference in Nelson that historically when NZ milk production dropped, prices shot up. But not this season: despite analysts' forecast 10% drop in milk production prices kept falling.

Bailey noted Rabobank was forecasting NZ milk production to be down at least 5%.

"But prices did not respond; they continued to drop... because [buyers] knew they could just go to Europe to get that milk now. NZ appears to have temporarily lost the advantage of influence on prices."

Bailey says NZ's inability to influence prices is one of five "tectonic shifts" happening in the dairy industry. Others are the growth in Europe's milk production, demand slowdown in China and Russia, low oil prices and growing appetite for value added dairy in the US.

Last week Fonterra dropped its milk forecast payout by another 25c/kgMS, blaming imbalance in global demand and supply.

Fonterra chief executive Theo Spierings alluded to his 'two buckets' theory. He says in one bucket are things Fonterra can control – shifting significant milk volumes into higher value added products, keeping costs down and focusing on capital spending and cashflow.

"All across the business there's a high focus on these things," he says.

The second bucket contains what Fonterra cannot control. On the supply side, milk production in Europe is still growing, with limited farmer reaction to lower prices.

Spierings points out that the EU tends to be on longer contracts than Fonterra's three-month GDT contracts.

"We can't really talk for European farmers; we have done some analysis and the longer contracts take more time for milk prices to go down. Potentially, every farmer will react to price signals and that will kick in in Europe as well."

There is some good news on the US dairy front: the US domestic market is doing well, resulting in more local consumption and less exports.

However, the demand scenario remains fuzzy: China is recovering but more more slowly than Fonterra expected, says Spierings.

"We see growth but not the historic double digit growth; it's not there, it is growing at 4-5%."

Russia still has a ban on dairy imports from western countries and demand there has also been hit by lower oil prices.

"In oil producing countries we are seeing stable or lower imports due to low oil prices," Spierings says.

Add to that the conflict in Syria and the recent lifting of sanctions on Iran, and the uncertainty continues.

So what does Fonterra expect to happen over the next nine months?

Spierings says whole milk powder, hovering around US$1900/tonne, will stay around those levels.

"The price is unsustainable so supply reaction will have to take place," he says.

"Our forecast is based on no significant changes to either supply or demand globally before the end of the year. However, a reduction in the supply available for export before then could mean prices recover earlier than currently expected," says Spierings.

Whatever happens over the next nine months in the global markets, only one thing is sure: it's out of Fonterra's hands.

More like this


DWN welcomes new partner

A new partnership between the Dairy Women’s Network (DWN) and New Zealand-owned milk replacer supplier AgriVantage is set to increase farmers’ knowledge around the importance of nutrition in the early stages of calf rearing.


'Far-reaching' reserves feared

Farmers in the Kaikoura and Conway flat regions claim more than 45,000ha of private land has been caught up in three mātaitai reserves declared in the region.

No tears for onions

New Zealand's 2021 export onion season is off to an early and positive start, according to the sector.


Covid minces meat prices

Farmgate red meat prices are taking a hit as Covid continues to disrupt dining out businesses around the world.

Hort sector denied!

MPI has turned down a request from the horticulture sector to declare the recent hail and rainstorms, that decimated many…

Machinery & Products

Good growth year for Claas

While many sectors of the agricultural machinery were hit by the ravages of Covid-19, the effects of the pandemic did…

Green machine frugal on fuel

According to the industry respected independent DLG PowerMix test, John Deere appears to be the best choice of tractor for…

App takes pressure off

TRS Tyre & Wheel, owned by Trelleborg Wheel Systems, has introduced the TLC Plus App to the New Zealand market.

New MF 5S series arrives

Just before Christmas, Massey Ferguson quietly released details of the successor to its popular MF 5700S range in the shape…

» The RNG Weather Report

» Latest Print Issues Online

The Hound

Poor snowflakes

This old mutt understands the country’s trendy, woke, vegan community (all four of them) is taking time out from being…

Any charges?

Your old mate wonders if the over-reaching do-gooder who set up a North Canterbury cow sanctuary “to save retired dairy…

» Connect with Rural News

» eNewsletter

Subscribe to our weekly newsletter