One of the most basic of economic principles is that when you constrain supply, you can raise prices because the demand remains the same. But if you do not constrain product, then you generate mountains. Fonterra appear to be trying to prove that principle still applies.
On the 13th, Fonterra had this announcement
Fonterra Co-operative Group Ltd is significantly reducing its GlobalDairyTrade (GDT) offer quantity forecasts for the next 12 months. The Co-operative’s forecast offer volumes over the next 12 months for New Zealand products have been decreased by a further 56,045 metric tonnes with a 62,930 metric tonne decrease occurring over the next three months and 6,885 metric tonnes of planned volumes being added back later in the year in anticipation of changing market conditions.
Significantly, Fonterra also said
“In response to current conditions in the global dairy markets, we have further modified our product mix to shift volumes away from base Whole Milk Powder (WMP) and into our other products in our portfolio such as value-add ingredients, consumer and foodservice.
“In terms of our product mix, Fonterra is now selling approximately 70 per cent of its total product via channels other than GDT and as a result we do not expect a material impact on inventories,” said Mr Wickham.
I’d take the change in inventory levels with a grain of salt. You can’t shift large production chains rapidly. While they are expecting farmers to produce less over the coming year, it is only about 2%.
If you look back over the GDT notices, there are a few other suppliers dropping out from the small pool. I suspect that quite a few are just not offering.
This is reflected in the rather large drop in GDT supply (XLS) since last year. I haven’t bothered to calculate it or graph it (I have to head to work), but by eye, it looks to me like what is on offer at GDT is down compared to last year, and definiely down compared to 2013.
So this morning we wake up to the headline “Dairy prices rise sharply at latest GlobalDairyTrade auction“.
Wholemilk powder prices – which play a big part in the formation of Fonterra’s farmgate milk price – rallied by 19.1 per cent to US$1,856 a tonne at this morning’s GlobalDairyTrade (GDT) auction, raising hopes that prices may finally have turned after declining sharply since March.
Overall, the GDT price index gained by 14.8 per cent. The average winning price at the auction was US$1,974 a tonne, compared with US$1815 a tonne at the last sale on August
Whole milk powder prices have fallen sharply since March, when they reached US$3272 a tonne, but futures market pricing in recent days suggested an improvement was in store.
Further out along the price curve, whole milk prices for contract periods from November through to February 2016 all posted double-digit percentage price gains.
Of course they did. This is basic economics. Announce that you are constraining supply further in a public market, then you can expect the price to shift up. However if it moves too far the demand will shift from the market with constrained supply to talking directly to the companies with a large stockpile of already existing stored product. Fonterra for instance. This shows up in the statistics department stats that for years have shown a steady rise in dairy inventories (gotta get to work… could someone look them up).
Needless to say, the Media Moron (Mike Hosking), blathers on about “experts” promoting the views that help their interests. He appears to be rather adverse to exercising his brain. Who puts these ill-informed and rather stupid idiots up to talk about things that they have no understanding of. He also doesn’t appear to have any concept that parties with skin in the game have a strong tendency to promote views that suit their interests.
Rabobank, for instance, has been wrong in every prediction that I have seen them make in the last 3 years about where the dairy market is heading. They have consistently said that the market prices were about to rise even when the market has consistently gone down. I wonder if they have a strong investment in farmer mortgages?
Fonterra have an obvious interest and appear to have been in denial about the problems in their marketing that I and others have been pointing out for years. I think I started pointing out the downstream difficulties of the high milk prices for farmers in 2012.
Federated Farmers? Psssshhh… They are the epitome of self-interest in this matter.
Farming is going to be around for a long time. But they are badly served if they believe the bullshit that frequently comes from such self-interested industry experts. But most of the farmers I know are pretty smart, unlike our blathering media moron. Show them a spreadsheet and if needs be, help explain it. They’ll figure out what to do. They could have done with more of that kind of advice in recent years rather than self-interested bullshit that they did get.
For a laugh, go and watch the vast intellect of media moron Mike Hosking blathering on about how self-interested “experts” are always right. He calls these “Facts”. I don’t think that he would know what a fact is if he tripped over it. I rather suspect that he is too stupid to read a spreadsheet.