Tag Archives: Global Dairy Auction

Global Dairy Prices down but why does NZ have such high milk prices?

On the 21st August the GDT Price Index continued its decline and dipped 3.6pc, with an average selling price of $3,044 per tonne. Whole milk powder was down 2.1% at $2,883 – see graph below:

How does the GDT 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.

Why are prices so high in NZ?

Fonterra is responsible for 30% of the world’s dairy exports with revenue exceeding NZ$20 billion and is New Zealand’s largest company. With New Zealand being one of the biggest producers you would expect prices for New Zealand consumers to be lower than what they are – a litre of fresh milk in Germany was selling for the equivalent of $1.51, compared to $2.37 in New Zealand.

Milk being inelastic in demand and is an essential part of the typical family shopping basket. Up until 1976 the price of milk was set by the government and producers were subsidised the loss that they incurred by a set price. The subsidy was completely removed in 1985 and by 1993, milk could be sold at any price. In January 1994, two litres was selling for the modern equivalent of $3.95. Consumer NZ estimates that for every $3.56 bottle of milk (an average retail price at present), about $1.19 would go to the farmer, $1.91 to the processor and retailer and 46c to GST.

Who gets what?

Because Fonterra take over 80% of what farmers produce it is difficult for the market to decide what an appropriate price to pay farmers. Therefore they work out what they believe is the highest sustainable price it can pay its farmers. It looks at the global dairy trade auction price and operating costs and capital costs to determine the farm gate price.

GDT price – Operating Costs – Capital Costs = Farm Gate Price

So farmers in New Zealand are at the mercy of the global market not how much is demanded in NZ supermarkets.

NZ Supermarket Prices

Supermarkets buy their milk from local distributors, either direct from Fonterra or other processors such as Synlait, or from suppliers who had value along the way. They then add their own costs to give a final price to the consumer but New Zealand food retailing effectively is a duopoly. Milk in Germany is much lower in price because of the high levels of competition with multiple chains operating there. In New Zealand however the price consumers pay reflects the concentrated nature of the market. Domestic milk market is dominated by one big supplier, Fonterra (see graph below), and two big supermarket chains – Foodstuffs and Progressive Enterprises – which means there’s little competition for your dairy dollar.

Will there be a recovery in global dairy prices?

Dairy prices fell dramatically in 2014 and 2015, prompting the RBNZ to reverse 2014 OCR increases in 2015. Average prices on the GlobalDairyTrade auction fell by 38% in 2014/2015 and 20% in the 2015/2016 to mid-March.

Inconsistent Chinese demand and increased European/US dairy supply causing the perfect storm of plummeting whole milk powder prices. Thankfully, for dairy farmers and the NZ economy dairy prices recovered in late 2016 but can it be maintained into 2017? Here are some reasons why prices may recover:

  1. EU production is slowing down
  2. New Zealand production is also likely to fall
  3. Demand from China is likely to increase
  4. ASB rural economist Nathan Penny noted three things that would impact the price of milk. One as the fact that milk production was held back before the removal of annual quotas at the end of March 2015 as countries avoided paying penalties associated with producing above quota. Two, after the April removal of quotas, production surged in the EU with April production rising over 3% on a month-by-month basis. Three that post-quota surge has now passed, with production growth slowing, particularly since July, as farmers have struggled with low milk prices.

Once supply is more aligned to demand, global prices are expected to rise again. Europe collectively is the world’s largest dairy exporter, accounting for nearly a third of global export sales. EU exports increased by 6% in milk equivalent last year.

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 Sources: National Business Review and PWC