Dairy auction toasts five years' success

MILK SALE: Global Dairy Trade director Paul Grave marks the online auction’s fifth year.
MILK SALE: Global Dairy Trade director Paul Grave marks the online auction’s fifth year.

Fonterra's Global Dairy Trade auction started with three people and a few spreadsheets; five years on, the fortnightly auction has become part of the landscape of the international dairy market.

It started in New Zealand with Fonterra selling one product - whole milk powder - monthly. The now-fortnightly auction comprises a basket of dairy products, six sellers and more than 800 qualified bidders.

Global Dairy Trade director Paul Grave said that when Fonterra launched the auction in 2008 in the midst of the global financial crisis, there were a lot of questions about the company's goal. The aim was to add transparency to the pricing of dairy commodities. Before the auction there was a lot of price volatility and poor price speculation, he said. The auction created a "price discovery tool", which set a reference point for those trading the commodity. "It's a reference price as opposed to a gospel price."

Grave, who was there on day one of Global Dairy Trade, likened the auction's reference dairy price to that of Brent crude pricing for oil, or the gold spot price.

"It doesn't stop volatility in the market," he said.

Exchange rates, weather patterns, demand patterns, economic growth, and government stocks and intervention still caused changes in the marketplace. However, the auction gave a window to show how those factors affected prices, Grave said.

The Global Dairy Trade sellers are some of the world's biggest dairy producers, including Fonterra, DairyAmerica, Amul from India, Murray Goulburn from Australia, and European companies Arla and Euroserum. Bidders are spread across 90 countries, with the bulk of buyers coming from Asia, the Middle East and North Africa.

While Fonterra owned Global Dairy Trade, it was not able to "screw the scrum" when it came to pricing, Grave said. The auctions are run by independent trading company Charles River Associates in Boston. Events are governed by market rules, and overseen by an advisory board of five sellers and five bidders representing different market players from around the world. The measures were necessary for Global Dairy Trade to get big players on board and make the auction a global event, Grave said.

Unique within the dairy market, the global auction was only possible due to the internet. The auction takes place every fortnight at 2am local time and lasts about three hours. At every event the price is set below market value in the first round of bidding. The price is increased in each subsequent round until bidders drop their demand to match the available quantity.

Tuesday night's auction lasted 12 rounds, with 38,890 tonnes sold at an average winning price of US$4643 (NZ$5998) per tonne.

On offer was a maximum supply of 39,577 tonnes of a basket of dairy commodity products, equating to about 2473 20-foot containers.

Grave said that while it was no longer necessary for Fonterra to own the platform, which was independent, the dairy giant had no immediate plans to sell it.

For now Global Dairy Trade was focusing on increasing the volume traded and the number of bidders, he said.



To date, Global Dairy Trade has sold 2.8 million tonnes of dairy products; laid end-to-end in 25-kilogram bags, this would reach 2 times around the world.

It will have sold US$10 billion worth of dairy products by July 16, and will mark its 100th trading event in September. Between US$100m and US$200m in dairy products is sold at each auction.

Fonterra sells about 30 per cent of its product through the platform; European and American firms sell about 5 per cent.

The rest of the world's dairy products are sold via private and bilateral trade deals. Fonterra partly bases its seasonal milk price, and subsequent payout to farmers, on the prices of whole milk powder, skim milk powder, anhydrous milkfat, butter, and butter milk powder set by the auctions.