The milk auction

Stuff reports:

NZ First leader Winston Peters is backing Waikato Federated Farmers’ call for a suspension of Fonterra’s online auction until sliding dairy prices stabilise.

On Sunday, Peters called on the dairy giant to temporarily suspend the twice monthly GlobalDairyTrade (GDT) auction which sets the benchmark price for whole milk powder.

Peters’ call comes after Fonterra slashed $1.40 from its forecast for the 2105/16 season to $3.85 per kg of milk solids on Friday, two days after dairy prices fell 9.3 per cent in the latest auction. It was the 10th consecutive fall on the platform, as dairy prices fell to levels not seen in 13 years.

“It is high time Fonterra’s board comes down from Mt Olympus to act in the best interests of its farmer-owners and not some economic theory,” Peter said in a statement.

Waikato Federated Farmers president, Chris Lewis, made the same call on Wednesday, suggesting the auctions should be suspended until prices stabilise.

“Auctions are great in bull markets like the Auckland property bubble, but it is a terrible way to sell when markets turn ugly, as the record low price for Whole Milk Powder indicates,” Peters said.

It’s true auctions favour sellers when demand is high and favour buyers when demand is low.

But auctions also guarantee you get to sell everything.

Fonterra could try and pull out of the global auction. They could set their own prices at which they are willing to sell dairy products. But if that price is higher than other companies are selling for, then Fonterra may end up with reduced sales.

But Waikato Rural Support Trust chairman and Ohinewai dairy farmer Neil Bateup didn’t agree.

“It’s very easy to say put reserves on GDT auctions, but in reality you have to keep moving product on the market,” Bateup said.

He was concerned Fonterra could be left with stockpiles of product it couldn’t sell if it introduced reserves.

“In theory it sounds OK, in practice everything has a shelf life and that depresses prices long term.”

Ultimately it is very hard to force buyers to pay more for a product than they wish to, or can elsewhere, unless you have a monopoly.