While milk production in New Zealand is lower this summer the global milk supply over the last year is strong with a 2.2% growth in Europe and 1.2% in the USA. This strong supply growth and the reduction in demand from China has led to downward pressure on prices.
New Zealand Federated Farmers Dairy chairman Andrew Hoggard said the disappointingly weak GDT result would put more pressure on Fonterra’s “poor” forecast payout of $4.60 a kilogram of milksolids.
“With another poor result I expect various people might try to jump on the bandwagon and try to the lay the blame somewhere, this is simply economics 101, supply is too high and demand is weak. … If we want to look at anything to blame, then the answer lies offshore with subsidised production in other countries hiding economic realities from farmers offshore who keep increasing production despite the market telling them the opposite.”
These prices are generated by the GlobalDairyTrade which is an auction platform for internationally traded commodity dairy products. How does it work?
GlobalDairyTrade trading events are conducted as ascending-price clock auctions run over several bidding rounds. In each auction a specified maximum quantity of each product is offered for sale at a pre-announced starting price. Bidders bid the quantity of each product that they wish to purchase at the announced price. If the price of a product increases between rounds, to ensure their desired quantity a bidder must bid their desired quantity at the new, higher price. Generally, as the price of a product increases, the quantity of bids received for that product decreases. The trading event runs over several rounds with the prices increasing round to round until the quantity of bids received for each product on offer matches the quantity on offer for the product (as shown in the diagram below). Each trading event typically lasts approximately 2 hours.
Bidders cannot join a trading event part way through: they must participate in round 1 and can only maintain or decrease their total bid quantities from that point. Products can be purchased over different delivery time periods, known as contract periods.
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