Milk price up again

The trade weighted index went up by 5.9% in this morning’s globalDairy Trade auction.

The price paid for anhydrous milk fat increased 1.1%; skim milk power went up 2.3% and the price of whole milk powder increased 9.6%.

This puts the TWI well above the long term average and is a little bit of good news for the New Zealand economy.

Welcome recovery in milk prices at acution

The first of Fonterra’s globalDairy Trade twice-monthly auctions resulted in a welcome recovery in price.

Anhydrous Milk Fat went up 9.5%, Butter Milk Powder was up 10.6%, the price for Skim Milk Powder increased 15.8%, Whole Milk Powder increased by 18.8% and all products on a trade-weighted basis went up 16.9%.

Although prices in the last three auctions were still above the long term average they had dropped which was concerning.

Fonterra’s recent decision to hold the forecast payout for the season at $6.90 to $7.10 was based on confidence prices would firm. This morning’s auction provides welcome confirmation of that.

Milk auction price down again

Prices for skim and whole milk powder and anhydrous milk fat all dropped at last night’s globalDairyTrade auction.

The gDT-TWI index was down 8.3%, skim milk powder dropped 8.9%, whole milk powder was down 7.7% and the price for  AMF fell 7.6%.

An email to shareholders from Fonterra chair Sir Henry Van der Heyden noted the relatively high value of the New Zealand dollar but said the current season’s forecast payout still remained in the $6.90 to $7.10 range.

World milk prices have been volatile, but there’s nothing new in that. Dr Jon Hauser at X-Cheque has graphed milk prices in Australia, France, the UK & USA since 1995 and it looks like coloured spaghetti. (New Zealand prices aren’t included but he says they’re similar to Australian ones).

For me the most interesting data is that of the USA. A regular cycle of volatility has persisted for 15 years.  The peaks are about 3 years apart with a fall to a roughly similar level in between.  There is no doubt that the supply / demand balance in the US is the principle driver of this cycle. In a perverse way the market behaviour is comforting. It is to some extent predictable and it would be more of a worry if there were prolonged periods at the low points.

Australia and New Zealand look like they are trending towards the US cycle. In the short term that will be a positive as it will mean a lift in the long term average price. In the longer term farmers will need to be very careful to avoid getting over excited about the periods of peak pricing. Their businesses need to be designed to withstand the troughs in price. The major risk in this regard is overpriced land and excessive debt.

Our bank is holding a series of meetings for clients at which they give a similar message.

There may be a glimmer of hope for New Zealand dairy farmers though, the price of grain in the UK is very high (close to £140/t). That will increase input prices for dairy farmers there which ought to make it easier for us to compete with them.

globalDairy Trade price up slightly

The average price for whole milk in Fonterra’s monthly globablDairy Trade auction increased .8% to $3,281 per tonne.

The anhydrous milk fat (AMF) price was down 5.4% to US$3,959 a tonne.

Skim milk powder (SMP), which was included for the first time, sold for $US2,927.

Fonterra chair Sir Henry Van der Heyden said adding SMP is in line with the company’s plans to offer a wider range of products on-line and provide a transparent reference price.

Oceania Dairy gets resource consent

Environment Canterbury and Waimate District Council have approved Oceania Dairy’s resource consent application for a dairy processing plant at Glenavy.

The plant plans to process approximately 220 million litres of milk and produce around 32,000 tonnes of milk powder a year. It is expected to be operational for the start of the 2011/2012 season.

It’s a $95 million development and the company is now concentrating on its $74.75-million capital raising.

Farmers have the option of being shareholders and suppliers or just suppliers. The company is also seeking investment from non-farmers.

Farmers who supply Fonterra have to own shares in the company. With Oceania farmers could supply the company without having to make a capital investment. That could be attractive to people starting in the industry or those already in dairying who want to lower their debt levels.

However, this is a new company and farmers will have to weigh up whether or not they can get a return from a company without a track record which would be close to or better than that from Fonterra.

Only suppliers can own Fonterra shares. Oceania offers an opportunity to invest in dairying for non-farmers but no investment is risk free and only time will tell if this company can succeed in export markets.

Most forecasters are expecting stability or a slight reduction in milk prices in the short to medium term. But most also recognise that the world is short of food and any company from New Zealand selling milk does so with the assistance of our reputation for high standards of food safety.

A wee drop in milk auction price

Average paid for Whole Milk Powder in last night’s globalDairy Trade auction was 1.6% lower than last month.

That’s the second fall in a row but is no cause for alarm.

The sharp rise in price towards the end of last year wasn’t seen as sustainable so this wee drop is just an expected correction.

Milk price corrects in auction

The average  price for whole milk powder (WMP) went down 7% to US$3,309 per tonne in Fonterra’s first globalDairy Trade auction for the year.

That wasn’t unexpected after sharp increases in the past few months. It’s still above the long term average and the decrease will be regarded as a correction rather than anything to worry about.

Fonterra chair Sir Henry Van der Heyden said in a newsletter to shareholders that the movements are in line with the market coming more into balance.

While the price for  WMP was  down  the average price for Anhydrous Milk Fat (AMF) was up 4% to US$4,539 per tonne.

Dairy beats tourism for export earnings

Dairy has overtaken tourism as New Zealand’s biggest export earner, contributing nearly $10 million to the economy, company chair Henry Van der Heyden said in a newsletter to suppliers.

He also passed on the good news that the price for Whole Milk Powder went up 13.7% in this morning’s globalDairyTrade auction, to US$3,437 per tonne.

The graph for WMP prices from 2004-2009 shows prices are above the long term average again, though still well below the 2007 bubble.

An 8.3% increase in dairy prices contributed to a 4. 6% gain the ANZ Commodity Index in October, the seventh month in a row to record an increase.

The gains in international prices have somewhat offset a soaring kiwi dollar, which is up more than 45% from its sub-50 U.S. cents low in March. The currency’s continued strength in October largely wiped out the increase, expressed in New Zealand dollars, with kiwi-denominated commodity index easing 0.4% last month.

Sawn timber rose 6.1% on a global price basis, and wood pulp prices advanced 4.2%. Wool prices increased 7.1% and the price of skins gained 3.5%. Beef prices slipped 3.9% and apples declined 1.7% over the period.

The increase in dairy prices has outpaced the rise in the value of the dollar which means there isn’t a risk to the forecast payout for the season – yet.

Phew – milk auction price up 25.8%

Last night’s globalDairyTrade auction resulted in a lift in the whole milk price to $US2301 per tonne – an increase of 25.8%

That’s a very welcome change to the downward trend since March but Fonterra chair Henry Van der Hayden isn’t breaking out the champagne yet.

In an email to farmers he says while it’s great to see the lift,  it’s difficult to know where the market’s going.

The dollar which is trading above 65 cents continues to cause concern and the US has increased its support price for skim milk by 15%.

The next globalDairyTrade auction is scheduled for September 1.

UPDATE: Bernard Hickey notes the improved price has taken the dollar over 67 US cents.

Sigh.

I know a weak currency isn’t necessarily a good thing but Hickey points out the rise in the value of the dollar will cancel out some of the gains from the better auction price.

NZX to launch milk powder futures’ market

NZX plans to offer a market for trading whole milk powder futures.

New Zealand supplies around 40 percent of the global whole milk powder market and market volatility had led to demand for a risk management tool similar to other commodity markets.

“It’s a natural fit for New Zealand to host the trading of milk derivative contracts, and to meet the global demand for risk management tools in the dairy industry,” NZX Head of Traded Products Fiona Mackenzie said in a statement.

Last month it was rural media, this month it’s rural produce.

It might be a good move for shareholders, I don’t think it will have any benefits for farmers and wonder if it’s another example of what Cactus Kate  calls: “making hay from a collection of other land-owners’ paddocks while the sun is still shining”.

Although, the sun isn’t shining on dairying at the moment.

GlobaldairyTrade price down 12%

Prices fell 12% in this morning’s globalDairyTrade auction.

That’s not surprsing in light of growing stock piles of milk powder and the subsidies which the USA reintroduced last week.

The rising value of the New Zealand dollar won’t help Fonterra’s returns either.

Fonterra to write-off Sanlu

Fonterra admitted at the company AGM that it has lost the $200 million it invested int he Chinese company San Lu.

The Fonterra board openly concedes that it has had a difficult time and that San-Lu will going to go down in history as a bad investment for them.

 

When Fonterra’s top brass fronted before the country’s dairy farmers there was not a lot of good news to deliver.

 

Firstly, Fonterra is now admitting it has lost all of the $200 million of investment in the San-Lu joint venture.

 

“For this reason it is increasingly likely that we will have to write off the remaining $62 million of value in our San-Lu investment,” stated Fonterra’s Chairman Henry Van Der Heyden.

 

Fonterra had a 40 percent stake in San-Lu, which collapsed due to the contaminated milk-powered controversy.

 

Fonterra’s management says it is reviewing what went so badly wrong and concedes it had limited control.

That lack of control was the problem. New Zealand leads the world in dairying and one of the reasons for its reputation is strict quality control in every link of the porduction chain.

That wasn’t possible in China which has been a very expensive lesson for Fonterra and its shareholders.

Just a year ago most people thought that the growing demand for milk in developing country would continue to result in high returns for dairy products. But demand is droppping everywhere and while Fonterra’s forecast payout of $6 a kilo is still above the long term average, the white gold rush is over at least in the short term and very possibly for longer.

Sanlu selling assets

Several plants affiliated to Sanlu, one of the companies affected by the poisoned milk scandal, are likely to be sold.

Through its investment in Sanlu, Fonterra Cooperative Group effectively took a share of more than 40 affiliated plants that are interconnected.

Fonterra holds 43 percent of the shares in Sanlu but has already written down $139 million worth of its investment’s book value.

At least four babies died, and another 53,000 were made ill by adulterated Chinese milk powders containing melamine.

The Beijing Review said today that Sanlu expects to have to pay compensation claims totalling 700 million yuan ($NZ188 million) to consumers whose infants became sick or died after drinking its tainted baby formula.

Beijing-based Sanyuan Group is reportedly set to acquire Sanlu’s seven key affiliate milk plants in Shijiazhuang, capital of Hebei Province.

The Wondersun Dairy Co Ltd, based in Heilongjiang Province in northeast China, is also expected to buy a plant in that province.

But details about the acquisitions and disposals of Sanlu’s other factories around the country remain unclear.

 . . . Men Haitao, a spokesman for Sanyuan, told the Beijing Review that the acquisition talks with Sanlu were not finished and declined to give further details.

The analysts said the Sanlu brand was almost certain to disappear from the market given the acute damage to it.

Anlene clean – Fonterra

Fonterra says independent tests  on its Anlene milk powder have found no traces of melamine.

Results today from the Health Sciences Authority in Singapore on samples from Bangladesh have come back negative,” said Fonterra’s director of group manufacturing, Gary Romano.

“There is no basis in fact for any speculation that Fonterra product sold under the Anlene brand is anything but the highest quality,” he said.

“We fully expect this to be confirmed by the Bangladesh government tests on our product which are expected to be released in the next few days.”

The Bangladesh Government is re-testing all major dairy brands in its market, after saying that a mix of negative and positive results from different laboratories on the same batches of infant formula had caused confusion.

Melamine fears in Bangladesh milk

Milk powder from eight companies, including Fonterra’s Anlene brand, has been seized from shops in Bangladesh after labratory tests found traces of melamine in samples.

Independent tests conducted by the Bangladesh Standards and Testing Institution and Plasma Plus had found its brands contained no traces of melamine, a Fonterra spokesman said.

But a third independent test by a Bangladesh agency found traces of melamine in all eight dairy brands.

As a result, samples of all eight brands have been sent to two further laboratories for independent testing.

“We are confident that none of our products in Bangladesh contain melamine,” said the Fonterra spokesman.

Both Fonterra and New Zealand’s Food Safety Authority have conducted a range of tests across eligible dairy products.

All had produced negative results, the company said.

White gold loses lustre

Dairy prices last season were at record highs, well above the long term average so a drop isn’ t unexpected.

However, it is concerning that international prices for butter, chedder, skim and whole milk are heading back to 2006 levels.

Cicero  found these charts from agridata.co.nz which show the drops in international dairy prices:

The fall in the value of the dollar will compensate for some of the fall in prices, but that’s a two edge sword because a lower dollar increases the prices of two of the biggest budget items – fuel and fertiliser.

The other concern for farmers is that while income will drop the costs of production never go down as far or as fast as product prices.

There is also a wider concern for the New Zealand economy. Dairy produce accounts for around quarter of our exports so a significant drop in returns for butter, milk and cheese has a significant impact on the national income and balance of payments.

Melamine-poisoned food kills 1500 dogs

Dog food poisoned by melamine has killed around 1500 dogs in China.

The raccoon dogs – a breed native to east Asia that is raised for its fur – were fed a product that contained melamine and developed kidney stones, Zhang Wenkui, a veterinary professor at Shenyang Agriculture University, said Monday. All of the dogs died on farms in just one village.

“First, we found melamine in the dogs’ feed, and second, I found that 25 per cent of the stones in the dogs’ kidneys were made up of melamine,” said Zhang, who determined that the animals died of kidney failure after performing a necropsy – an animal autopsy – on about a dozen dogs.

Tens of thousands of Chinese children have become ill and at least four have died after drinking milk contaminated by melamine.

Six people who either sold melamine or added it to the milk have been arrested.

Authorities say middlemen apparently added melamine to milk they collected from farmers to sell to large dairy companies. The suppliers are accused of watering down the milk and then adding the nitrogen-rich chemical to make the milk seem higher in protein when tested. Protein tests often simply measure nitrogen levels.

As of Wednesday, a total of 46,717 children had been treated and discharged from hospitals, the health ministry said. Milk powder contaminated with melamine has been blamed for the deaths of four infants.

There have not been any more reports of deaths, the ministry said, adding that all the deaths occurred between May to August, which was before the public knew milk products were tainted.

Macdoctor  points out that many chidlren will have permanent kidney damage because of the melamine poisoning.

That creates an enormous health burden for the future. Some of these children will eventually need kidney transplants, many will have regular kidney problems and many will require dialysis in 40 – 50 years time.

People behind the numbers

Behind the headlines and the numbers of the milk powder poisoned by melamine in China story are people.

Fonterra donates $8.4m to Chinese charity

Fonterra has donated $8.4m ($US 5m) to a Chinese charity to establish a health care programme for mothers and babies in poor rural areas.

“We want to do what we can in China to help, particularly in areas around infant health and maternal issues,” Fonterra chief executive Andrew Ferrier, told NZPA.

He today signed a memorandum of understanding in Beijing with China Soong Ching Ling Foundation secretary Li Ning to fund the programme over five years.

It will set up community centres in rural and underveloped areas, with tools and resources to support prenatal and postnatal care, and provide information to ensure healthy pregnancies and babies.

Babies in poor and rural areas were some of the first reported to be affected by melamine-contaminated infant milkpowders sold by Fonterra’s Chinese joint venture, Shijiazhuang Sanlu Group Co, in which it held a 43 percent stake.

For more than a week reports on the numbers of babies who had become ill had remained at four dead, 12,892 infants in hospital, 104 with serious illness, and close to 40,000 others affected but not needing major treatment.

But Reuters reported this week the number of affected children has risen to nearly 94,000, 46,000 of them in Hebei province, where Sanlu is based, and neighbouring Henan province.

But Mr Ferrier said the $US5m donation was a gesture which should stand on its own as a reflection of the tragedy: it was not trying to link it to the milk contamination.

“Being associated with healthy food to infants…in the environment of this huge tragedy that has happened across the country, we thought that this would be a small gesture that Fonterra could show the broader Chinese community that we really care about children and their health,” he said.

“If we can help Soong Ching Ling Foundation particularly help infant health in rural areas where there’s the most poverty, that’s a great place to be helping out.”

The foundation already has a successful project for the safety of mothers and infants.

The new programme will build maternal and infant community hubs in China’s rural and underdeveloped communities, and will include exchange and teaching programmes to help give local health workers, obstetrical and paediatric doctors, and nurses in rural areas new opportunities to learn best practices in healthcare.

Fonterra has been the biggest exporter of milkpowder to China for 20 years and Mr Ferrier said it was strongly committed: “We are part of Chinese society”.

Sanlu was one of 22 companies which had its milk poisoned by melamine and because it is seen as a Chinese problem, Fonterra’s reputation has not been affected. However, as a shareholder, I am pleased the company is making this donation to help the people and I hope that the best practices include the advice that breast milk is best for babies.

Melamine crisis fuels demand for Fonterra

Demand for Fonterra milk powder has increased in Aisia in the wake of the melamine poisoning scandal in China.

Fonterra Australia’s managing director Bruce Donnison said the company had had numerous enquires from Asian buyers seeking an alternative supply of milk powder.

Separate to its Sanlu investment, Fonterra has been the biggest foreign exporter of milkpowder to China for nearly 20 years.

It has recalled only one batch of its own branded products, some Anmum Materna milkpowder for pregnant women, which was made with Sanlu milk.

It’s fortunate that the melamine poisoning is seen as a Chinese problem and that Fonterra’s well deserved reputation for high quality standards means its produce is still in demand.