Dairy price won’t settle soon, says Fonterra

By staff reporter

- Last updated on GMT

Related tags: New zealand dairy, Milk

Volatile dairy prices are likely to continue in the mid term at least, New Zealand Fonterra has warned, signaling a need for on-going margin vigilance for food makers using dairy derivatives.

There may have been some comfort in the fall in price of milk powder on the international markets since last year, from around $5000 in late 2007 to around $2600 more recently, according to the New Zealand dairy giant.

But this should not be taken as a sign that the status quo is returning. Henry van der Heyden, chair of the Fonterra Co-operative Group, said that 2007/8 has “fundamentally changed market dynamics, and volatility is more likely to be the norm, rather than the exception, in the medium term”.

In the annual shareholder review, circulated this week, he said: “With global financial confidence tenuous at best and the inevitable lag between price signals guiding farmer decisions around production, there is every possibility of an imbalance between supply and demand affecting prices.”

In addition to the precarious financial markets, other challenges are in the form of drought in New Zealand, a major dairy producing region; and the on-going fall-out from the contamination of Chinese milk supplies with melamine – a crisis that has had repercussions all round the world due to globalised sourcing.

Risk management

The outlook on milk prices will sound bells for risk assessors at food firms, who track markets for indications of how commodity costs could impact profit margins.

There is already a strong industry in dairy replacements that can bring the same functionality as ingredients like milk powder, proteins and caseinates to formulas, but at a reduced cost; moreover, new technologies are functional systems are designed to minimize the impact on sensory properties.

From within the dairy segment, on the other hand, there is concern about the improving technical capabilities of dairy alternatives. If technologies in soy continue to increase apace, for example, soy-based ingredients could actually be regarded as more effective in some formulations, John Penno, head of milk producer the Synlait Group, said recently.

"As soy products are being developed to more and more resemble dairy products, there is a danger that it can become a substitute for most [goods in the segment],"​ he told delegates at the Horizons Livestock Sciences Conference.

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