WELLINGTON, New Zealand-Fonterra Cooperative Group Ltd.'s
ability to charge premium prices for its dairy products has been
eroded by a tainted milk scare, as the outcome of the industry's
biggest auction signaled a shift in consumer sentiment toward rival
suppliers, including from the U.S.
New Zealand officials saw the overnight GlobalDairyTrade auction
as the first big test of the country's ability to weather
food-safety concerns after Fonterra warned days earlier that three
batches of one of its dairy products may contain harmful
bacteria.
Dairy accounts for around a quarter of New Zealand's exports and
Fonterra is the largest supplier. Lawmakers fear the third quality
issue with Fonterra products in recent years is hurting consumer
confidence, especially after countries like China and Russia banned
imports of some milk products.
Analysts noted that prices of Fonterra's products slipped more
than those of its competitors in the auction, with skim milk powder
particularly hit.
In one futures contract--for the delivery of skim milk powder in
October--Fonterra's premium over products of U.S.-based
DairyAmerica Inc. narrowed to 14% from 20% in the previous auction
two weeks ago.
Other participants in the GlobalDairyTrade auction included
Europe-based Arla Foods and Murray Goulburn Co-Operative of
Australia, India's Amul and Euroserum, a unit of Sodiaal.
"You can see Fonterra has given up a bit of the price to its
competitors," said Nathan Penny, an economist at Auckland-based
Westpac Bank.
Overall, however, dairy prices failed to fall sharply as many
analysts had predicted when Fonterra first reported the
contamination issue. Whole milk powder prices fell 1.6% while the
GDT Price Index, which covers a variety of products and contract
periods, fell 2.4% compared with the prior auction.
Also, dairy prices are still 71.5% higher than a year earlier
due to reduced supply following New Zealand's worst drought in
years.
Much will depend on how quickly China rolls back its ban on some
Fonterra products, and whether more of New Zealand's trading
partners move to restrict imports.
"The contamination issue still has the potential to become a
serious negative for the economy," Mr. Penny said. "We expect
continued volatility in markets over the coming weeks."
Con Williams, an economist with Australia & New Zealand
Banking Group, said the outcome of the auction showed the
food-safety scare did impact dairy prices. Even supply is very
tight, prices for near-term contracts for whole milk powder were
softer, he said. The September and October contracts fell 6.6% and
7.8%, respectively.
"For skim milk powder, where there is more competition, prices
were softer across the board for Fonterra product, whereas other
supplier prices were generally unchanged. This reduced some of the
premium that (Fonterra) has enjoyed," he said.
However, a record sale of more than 60,000 metric tons of milk
products, including milk powder and butter, suggests that sentiment
has held up overall despite the negative publicity for the dairy
industry.
In a sign that investors think the economic impact on New
Zealand's economy and dairy exports will be limited, the New
Zealand dollar edged higher against the greenback to US$0.7891
Wednesday.
-Write to Rebecca Howard at rebecca.howard@wsj.com
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