The Dairy Auction – On Its Last Legs?

Common Factors

Common Factors

The Business news on National Radio made mention of the latest global dairy trade auction. The newsworthy part for New Zealand was that the price achieved represented a 2.4% increase against the previous auction and was the first increase for a while. Given that Fonterra has been adjusting its projected farm gate payouts downwards with monotonous regularity in the last few months, the radio jocks were trying to turn this into a ‘good news’ story, come hell or high water.

Their interview partner was a Rabobank researcher who made two fascinating observations. Firstly, she felt that the volume traded was too low for anyone to misinterpret the price result into a general recovery of dairy prices. Secondly, she stated that the low volume was an indication that product was moving via other instruments as well, such as supply contracts and often to customised specification.

What a surprise! Doesn’t this sound familiar?

The same, of course, happens in the fresh produce industry, albeit that the public auction has been entirely replaced with wholesale trading floors. And similar to the produce industry, the dairy industry needs to ask itself this question:

What actually is the market price for goods?

As long as all supply meets the bundled demand in a particular place, competition for product at that time in that place will determine the price. But when product travels via various and separate channels to the consumer without congregating en masse somewhere during the journey, there will no longer be a price but lots of prices, all relevant to one particular transaction.

And if some of the product still congregates by way of auction, satisfying some demand, whilst the balance of product moves through contractual arrangements, then we need to give up the notion of being able to arrive at the price for milk powder and determine farmer payouts via that mechanism.

One of my colleagues in our office took the analysis a step further. Her view is that what the auction is really good for is to facilitate “small” volumes of whatever product reaching the next level in the supply chain. And if New Zealand is busy getting excited about percentage points at dairy auctions, it suggests that the rest of the world is moving past us, consolidating at a faster pace than us, eventually turning the country into a lifestyle block industry.

Let’s hope that the reality is not as pessimistic as her outlook  but given our reliance as a nation on the dairy trade, we ought to pay attention to what is going on here. And you never know, the fresh produce industry may well be able to learn a thing or two from the dairy industry.

On that note,
Merry Christmas & A Happy New Year

And thank you to all readers for the always constructive feedback and comments.