Milk powder reflects fall in commodities

International whole milk powder prices on Fonterra's Internet-based auction system fell by more than 10 per cent during October as the global recession started to bite.

The fifth trading event for Fonterra's Internet-based sales platform, Global Dairy Trade, finished early Wednesday. The average price achieved across all products and contract periods for whole milk powder was US$2586 a tonne, 11.4 per cent lower than the previous trading event on October 1.

Westpac economist Doug Steel said the bank had been expecting a fall of around 14 per cent to 15 per cent. "So it somewhat beat expectations," he said.

Fonterra's commercial director for global trade, Guy Roper, said the worldwide credit crisis was prompting customers to hold off big purchases of most commodities, including dairy products.

"The price decline is consistent with the limited demand we are seeing for a range of other dairy products such as skim milk powder and casein in the near term out to three months," Mr Roper said.

Former Fonterra chief executive and current PGG Wrightson chairman Craig Norgate told BusinessDay recently that he thought world dairy prices would rebound next March or April.

However Goodman Fielder chief executive Peter Margin said he thought prices would stay subdued for the next couple of years.

About six months ago, the expectation was for powder prices to settle at around $3000 a tonne in two to three years time, Mr Steel said. "That view is under threat, especially so in the short term. World economic growth is getting downgraded as we speak. That's hurt demand quite significantly. Powder prices are already under $3000 a tonne and are heading south fast."

Westpac was expecting more declines because the current forecast for world economic growth next year was only 2 per cent.

"Anything under 3 per cent usually results in declining commodity prices. We would expect prices to continue to fall well into 2009."

The fall in milk powder prices mirrors declines in other commodity markets in recent months. Futures prices for corn and soybean oil have fallen 50 per cent since July, and wheat futures have fallen 40 per cent during the same period.

Fonterra's next online trading event will be on December 2.

- © Fairfax NZ News