Dispelling dairy auction price myths

COMMENT: In recent weeks I have been asked the same question by a number of farmers, how are Fonterra Auctions Prices used to set the monthly Fonterra milk price.

Let’s first dispel a couple of myths.

  • Firstly, there is no such thing as the “Fonterra Auction”. Rather, there is what is known as the Global Dairy Trade Auction.
  • Secondly, Fonterra Co-operative does not set a monthly price, it has a yearly forecast price which is re-adjusted a handful of times during the year.

What is Global Dairy Trade?

Global Dairy Trade is a whole owned subsidiary of Fonterra Co-operative, New Zealand, and is operated separately from Fonterra. All auctions are run entirely by US based CRA International. There are six main dairy companies which are all farmer owned dairy co-operatives selling product on Global Dairy Trade. These are: Fonterra (New Zealand), DFA (US), Murray-Goulburn (Australia), Amul (India), Euroserum (France) and Arla (Denmark).

According to the Global Dairy Trade (GDT) website: “GlobalDairyTrade began operation in July 2008 to offer buyers and sellers of globally traded dairy products the opportunity to improve price transparency, discover forward prices, and better manage price risk separately from Fonterra, and all auctions are run entirely by CRA International, Inc.”

Global Dairy Trade auctions a variety of dairy powders and dairy products bi-monthly. The results of all these auctions are published on-line for each product and seller, for example Fonterra, Arla and so on.

Is there a case for Irish Dairy Companies to sell through Global Dairy Trade?

There are many factors to think about when weighing up this decision, but the following five points are worth considering;

  • >75 per cent of the product quantities sold on Global Dairy Trade are commodity Milk Powders (WMP & SMP). Presently two-thirds of the product sold on GDT is shipped during the peak milk months of the southern hemisphere. Perhaps there is an opportunity for Ireland as only 17 per cent of the sold product is shipped during our peak milk months of May, June and  July.
  • Selling through GDT could be used as one of the available tools to dairy companies to help manage risk. For example, just under half of all product sold is shipped within two months of sale. The remaining 51 per cent of products is evenly distributed within contracts sold 3, 4, 5 & >6 months prior to shipping.
  • It is hard to ignore the growth of Global Dairy Trade. Within five years it has gone from selling 180,000 tonnes of dairy products annually to close on 1,000,000 tonnes per annum today.
  • The number of qualified participating bidders utilising Global Dairy Trade has increased from 306 to 785 in the past two years, an increase of more than 250 per cent.
  • Almost three quarters of all bidders are located in the key dairy product growth markets of Asia, Africa and the Middle East. Only eight per cent of the bidders are from Europe.
  • Click here for Global Dairy Trade – Charts – October 2013

By Tom O’Callaghan

Tom O’Callaghan has 15 years of global experience in the agri-food sector, including dairy, meat, consumer package goods, bio-fuels and farming-owned co-operatives. He is currently focusing on emerging area of improving efficiency through agri-analytics and is advising on agri-food and farm efficiency expansion across Eastern Europe and former Soviet Union countries. He is also the former ceo of  ICOS.

Image Cows on grass. Photo O’Gorman Photography

 

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