Agricultural Production Economics

Analysis: July 2010 - Under revision

A range of predominately NZ dairy industry price and volume information is provided here with regular updates and periodic analysis. Regardless, the NZ dairy industry remains informationally and analytically deprived.

A new section has been added reflecting on speculation by Fonterra of NZ dairy industry payouts in excess of $8.00 per Kg of milk solids in the approaching 2010-2011 season.

United States Department of Agriculture (USDA) data on international commodity prices are graphed and supported by market comment at the end of the analysis. This comment may be of particular importance:

Oceania traders and handlers of manufactured dairy products continue to analyze the impact of the sharply lower prices recorded at the July 6 gDT event might have on current and future prices. In most instances, prices did ease, but often not to the extent of the 10 - 15% declines recorded for the various dairy products traded. Some traders are indicating that they have heard that some offers for various products out of the Oceania region are at levels below the average auction values. Traders and handlers are also stating that buyer interest has slowed greatly with many buyers stepping back from the market until more stability is realized.

For those buyers that are still in the market, many are seeking product for short term or immediate needs with most stating what they will pay versus what suppliers are quoting. Traders are stating that it appears that China may be backing away from the marketplace as their milk production comes more in line with needs.

To go direct to any required subject click on the relevant index link below:

USDA spot price data are to the 2nd of September 2010. NZ dairy export statistics include data for June 2010. Global Dairy Trade auction prices are to the 3rd of August 2010.

1. Introduction
2. Dairy Price Volatility
3. Fonterra's GlobalDairyTrade Auctions
4. Fonterra and Market Power
5. The Impact of China
6. Conclusions
7. Projections for Fonterra's 2009-2010 Payout
8. Speculation of an $8.00 plus payout for the 2011 season is unhelpful to the dairy industry, and misleading
9. Dairy Commodity Spot Price Graphs (to the 3rd of September 2010)
   • Dairy commodity Spot Price Graphs in TWEXB corrected USD
   • Dairy commodity Spot Price Graphs in USD
   • Dairy commodity Spot Price Graphs in NZD
10. United States Department of Agriculture Dairy Market Overview

Introduction

Any milk producer will almost certainly have been heartened by the impressive gains made in dairy commodity spot prices seen from the beginning of August 2009 to May 2010. The gains have been led by whole milk powder and have flowed on to other dairy commodity products just as Fonterra said they would. The gains are such that they have largely dwarfed any impact of currency changes.

Price increases are faster than ever before, unusual in being coordinated across products, and appear to defy supply and demand logic. But milk production has hardly moved and demand curves are in all probability still moving left with lower disposable incomes across much of the world. In short, current dairy commodity spot prices are not the result of milk producer supply meeting the demand of final consumers, but of milk processor offered supply meeting the demand perceptions of supply system intermediaries. A good illustration of the artificial nature of the current situation (November 2009) from NZ is supermarket prices for retail packs of butter and cheese - including those produced by Fonterra - in many cases retailing below quoted Oceania spot prices for bulk supply.

While price volatility is being mentioned by most commentators, there are few economic reports being produced in NZ at the moment - including those from the RBNZ, that do not refer to rising dairy prices as grounds for significant optimism for the sector. The potential gains are being heralded as though they have already been achieved, and are in some cases encouraging a resumption of NZ dairy industry expansion.

For milk producer’s price volatility is destructive. The spectacular rise in dairy commodity spot prices is boosting industry confidence, but confidence not balanced by recognition of the price downside of volatility - something that could be severe.

Dairy Price Volatility

Volatility is undoubtedly the single largest threat to this industry.

The quote is an extract from the California based Milk Producers Council in reference to the U.S. dairy industry.

An Article Worth Another Read...
Friday, May 29, 2009
Cornell University Report Highlights the Continuing Threat of Milk Price Volatility
By Rob Vandenheuvel, MPC General Manager
This week, Cornell University’s Program on Dairy Markets and Policy released the full report on their analysis of the Growth Management Plan. Drs. Mark Stephenson and Chuck Nicholson included an expansive discussion of milk price volatility and how it has gotten dramatically worse with each boom/bust cycle. The readers of this newsletter have heard it before, but it bears repeating: volatility is undoubtedly the single largest threat to this industry.

This year is shaping up to be the worst year ever experienced by those currently in the dairy business. There’s no way to sugarcoat it – this year, dairy farmers will collective take billions of dollars in equity built up over the decades they’ve been in business, and convert it into bank loans.

There will be some producers that decide to get out of the industry – either by choice or by force. And while that is extremely unfortunate, the real question I’m asking today is aimed at those who are staying in: With the massive boom/bust cycles that have become common in this industry, how do you plan to build your equity back up? And with the banks feeling the pain in this wreck, are they going to be there for you the next time to get you through that wreck?

Sure, there will be profitable times once we come out of this wreck, and Cornell’s model predicts that as well. But are the good times going to be long enough to make up for the massive hemorrhaging of equity that is currently taking place? Are your pockets really deep enough to not only survive this wreck, but survive the next one as well?

The full article is here.

The article is supported by good analysis from Cornell on dairy price volatility. If equivalent analysis has been produced in NZ since the formation of Fonterra I am not aware of it.

The US situation is not directly comparable to New Zealand. In NZ price signals are annual, and ex poste. NZ co-operatives project the milk payment but the final payout is not known until 3 or more months after the season ends. Both final payout and projected prices include a fair degree of political posturing.

Medium cost pastoral dairy producers such as NZ have available to them a wide range of production levels depending on milk payout with profit maximising production ranging over a factor of two for marginal costs between $3.50 and $7.00 per Kg of milk solids. This flexibility is not well understood, encouraged or utilised.

While in NZ gross dairy production level decisions are made close to a year in advance of peak milk production, and 2 years before final payout is known, farmers also have the ability to respond to prices and demand especially early within a season. Such responses could modify supply and moderate volatility but the practice of paying a common price for all milk produced within the ten month normal season mitigates against this.

We come back to dairy price volatility and its impacts:

• For milk producers volatility is bad.
• For consumers volatility is normally bad, but not always.
• For markets and marketers both, volatility is required for them to shine and make money - though it can cause discomfort.

That can leave a milk processor/marketer conflicted between market opportunities and providing payout stability to its milk producers.

Fonterra's GlobalDairyTrade Auctions

A section on questions and answers was included on Fonterra's GlobalDairyTrade when their auctions were introduced. Three are quoted below:

Question 1.3 Why is Fonterra doing this?

Fonterra has developed globalDairyTrade as a first response to requests from many customers to provide a greater degree of price-risk management. The need for improved risk management tools became especially evident following the structural changes in the international dairy market that have led to the unprecedented rise in dairy prices since late 2006. Fonterra expects such volatility to continue for the foreseeable future.
Fonterra therefore has developed globalDairyTrade to offer itself, customers and supply partners the opportunity to improve price transparency, discover forward prices, and better manage price risk.

Question 1.5 Why would I want to participate?

Fonterra believes that customers will be attracted to participate in globalDairyTrade because it offers them:

• Greater control over their own exposure to commodity price risk;
• Greater control in securing supply;
• A level playing field in terms of pricing and securing supply;
• Greater transparency of price information;
• Greater certainty of when and how much product is being offered;
• A quick sales process lasting a matter of hours, not days;
• An independently operated sales channel.

Question 2.10 Will it be possible for Fonterra to influence prices by placing only a small volume on the trading platform?

Its not in Fonterra’s interest to do so. Fonterra’s interest is to allocate the available milk volume among product groups and between sales channels so as to best meet customer demand. Reducing the volume placed on globalDairyTrade simply means greater volume of other products would have to be sold through other means.
Fonterra’s interests are best served by ensuring the complete integrity of global DairyTrade as a sales channel. To achieve this we will be publishing every month an updated twelve month forward forecast of available volume so that customers are fully informed.

I firmly support the sentiments expressed.

"Providing a greater degree of price-risk management" comes close enough to reducing price volatility for me, even if it does so from a consumer perspective. The following analysis of GloabDairyTrade data suggests that purchasing whole milk powder through the auction system smoothed price fluctuations over time and appears to meet the stated objectives for a purchaser.

Data Source: GlobalDairyTrade, Analysis: agprodecon.org

Question 2.10 was removed from the GlobalDairyTrade website after the auction of 4th of August. The answers to questions 1.3 and 1.5 were diluted. If nothing else, the timing of the action was unfortunate following a sharp rise in auction prices.

The whole milk powder auctions are only one of several channels for Fonterra to move milk powder and are currently selling 20-25% of Fonterra's NZ production. At that volume, are the auctions setting the market price, following spot prices on other channels, or independent? To date Oceania spot prices and auction prices are closely aligned with the biggest gap perhaps being between auction prices for NZ and Australian sourced product.

The question as to who or what sets Oceania dairy spot prices, and the relativity of those prices relative to other channels remains open. Any answer will likely be complex and include markets, marketers and market power.

Fonterra and Market Power

A number of pluses and minuses were put forward for the formation of Fonterra but the overriding rationale was one of increased market power leading to higher milk payouts.

The degree of market power Fonterra possesses, what form that market power takes, how it has been used and whether there has been any gain from it are touched on in this section.

Understandably Fonterra does not provide analysis of these subjects but some information can be gleaned from NZ export statistics. While NZ dairy exports are not all from Fonterra it makes up greater than 90% of them. That is enough to infer that significant changes in the statistics in most cases relate to Fonterra.

It appears that post Fonterra (October 2001) there is greater monthly variability in milk powder export volumes from NZ. By about 25%:

The relationships between volume and price are interesting, but much clearer on a rolling 12 month basis:



The price volume correlation since 1988 is strong:



But differs markedly pre and post Fonterra. Pre Fonterra the correlation is weak:



Post Fonterra it is pronounced:



And it appears to be getting even stronger - over the last 3 years:



What would be really worrying is if NZ dairy commodity exports are losing ground against spot prices. Through the 1990's NZ export prices appear to have exceeded spot prices by a good margin - almost certainly indicating good marketing performance. Since the end of 2006 dairy export prices have missed making spot prices by a wide margin. This does not necessarily reflect poor marketing performance, but may:



Prices for NZ dairy exports have certainly not done well in NZD terms over the last 20 years:



September is the last month for which export statistics are currently available. In September NZD export prices for milk powders and on average were lower than they have been since 2004. They should be about to start increasing but that is unlikely to be at anything like the rate of increase in spot prices:



It may be useful to come back to GlobalDairyTrade prices and compare them to NZ average export prices. The period of particular interest here is January to July 2009 where there appears to be a significant gap between GDT average delivery prices and average export prices:



At which point it makes sense to consider the impact of China on NZ dairy exports.

The Impact of China

New Zealand's dairy exports to China have been increasing and now at times make up 20% of some product's monthly export value (no volume information is provided by Statistics NZ). This growth in exports appears to underpin both increased demand for dairy products and Fonterra's growth strategy.

Milk powders are the major export:



And again the rolling 12 month figures provide a better picture:



For milk powders the percentage value:average export price correlations are similar to those for milk powder price:volume i.e. increasingly negative over time. From 1988:



Post Fonterra:



And since 2006:



And for all NZ dairy products to China post Fonterra:

Conclusions

Enough data has hopefully been provided, or can be provided, for people to draw their own conclusions. The following conclusions rely on all the above analysis plus preliminary results of work still under way. They challenge core NZ dairy industry beliefs especially about Fonterra, and perhaps should not be taken in isolation or out of context.

The following rather empty statement is an extract from Fonterra's 2008-2009 annual report and is illustrative of its attitude, culture and understanding of demand:

Longer-term, the prospects for dairying and for Fonterra remain very positive. The demand for dairy products as a good source of protein and healthy nutrition will continue to grow in key markets around the world. Even as the global recession hit home over the past year, growth in world dairy consumption continued but simply slowed to about a half of its previous growth level. This had a disproportionate impact on international dairy trade which was down about 1 per cent on an annual basis.

SIR HENRY VAN DER HEYDEN
Chairman

It is apparent that there are multiple demand curves for dairy commodities across many markets. Fonterra appears to have little ability to shift these demand curves - which are quite elastic - in its favour.

Fonterra does have the power to control world spot prices for whole milk powder and by doing so to some extent drag up the prices of other dairy commodities.

Fonterra has little ability to change the world's similarly elastic but slower responding milk supply curves.

Fonterra has some ability to reduce or at least restrain growth in its own milk supply, but instead chooses to encourage higher milk production.

The result of Fonterra using its market power to increase spot prices for whole milk powder has been repeating cycles of accumulating supply until prices have to be reduced to move inventory. Dairy industry price volatility is accentuated rather than moderated.

Evidence that this use of its market power has benefited the average Fonterra shareholder, the NZ or any of the world's dairy industries is hard to find. The evidence is instead suggesting that Fonterra's combination of market power and increasing milk supply is resulting in lower NZ dairy export prices. Damning are comparisons of NZ dairy export price receipts to spot commodity prices before and after the arrival of Fonterra's market power.

Value is being added to payout relative to milk prices, but eroded from the same milk prices via lower dairy commodity export prices. September 2009, the last month for which NZ export statistics are available, had the lowest export prices for milk powder since January 2004. Despite this view of its performance in world markets from the same section of the 2008-2009 Fonterra annual report (August 2008 to July 2009) above:

During the second half, demand slowly recovered as it became apparent prices had bottomed out. In such a tough environment, the value of our business strategy came to the fore. Our relationships with the world’s major dairy ingredients customers held us in good stead and our global sales network helped us take every opportunity to make sales at the best achievable prices. A strong second half sales performance meant we recovered well from the slow first half, with New Zealand-sourced sales volumes for the year growing 5 per cent – broadly in line with the higher level of milk production.

In the lead up to Fonterra's expectations evolved that the merged co-operative would have efficiencies from scale, market power through control of a higher share of supply, develop new products and markets, and as a result double the value of primary production from dairying.

Fonterra's fixation on scale and efficiency has remained unchanged - it possibly has not even been seriously challenged - despite clear signs to those outside the institution that the strategy is not delivering on those expectations, or working for the NZ dairy industry. It is as if the crew of the mega tanker Fonterra have recklessly locked the wheel to a given course and are refusing to change it irrespective of what lies ahead.

That is unlikely to be the case. Fonterra's strategy will almost certainly be delivering benefits to somebody. As a co-operative, that is supposed to be its shareholder suppliers. But neither the average shareholder nor the NZ dairy industry as a whole appears to be benefiting. So who is?

Fonterra was formed with expectations other than those shareholders or simply increasing the value of industry primary production. Including:

• Government, banks, the Real Estate Industry and corporate farmers/investors for rising farm asset values i.e. a credit driven property bubble
• Research providers, farm suppliers and government for industry expansion and production intensification providing higher levy payments, GDP, GST and export receipts
• Fonterra's suppliers - everything other than milk for expanding business expenditures including consulting and executives

Somewhere in the above mix will be the initial reasons for Fonterra's growth strategy. Some of those expectations now seem perverse or counter productive, but enough remain to maintain the status quo - now effectively a corporate rather than co-operative culture - a little longer.

That is not to say Fonterra's marketing is in any way comparable to its predecessor in the Dairy Board. Fonterra's use of its market power to control prices while simultaneously encouraging increased milk supply is an inane marketing strategy.

These conclusions don't take into account all aspects of Fonterra's strategy and operations. That and updated financial analysis will follow later.

Projections for Fonterra's 2009-2010 Payout

Co-operative dairy processor final payouts are always a political decision made from within an acceptable range determined by a company's perfomance within the season's markets.

Accurately forecasting NZ dairy industry payouts makes a valuable contribution to the industry. Those with the best information to made those forecasts are the dairy processors.

Fonterra appears to have changed its policy regards advising shareholders of changes in forecast payout since this statement in their 2002-2003 annual report:

In line with our policy of transparency, we will continue to monitor market conditions daily and advise shareholders if this forecast payout rises, or falls, by increments of 10 cents.
Henry van der Heyden

Knowing payout - preferably well in advance - is central to farm management decisions and especially for setting the level of pastoral dairy production such that marginal cost = marginal revenue i.e. the profit maximising point. Uncertainty around payment suggests a risk management strategy with a preference for under producing.

The political nature of dairy payment projections leads some banks, analysts, commentators and farmers to produce their own forecasts, or even to disregard the projections of the processors.

It is possible to make reasonable payout projections without inside knowledge - processor performance exceptions and political influences excluded - as payout is closely related to world commodity prices. Trends can be established and patterns of payout against prices determined. Data sources for commodity prices include Oceania spot prices for the major dairy commodities from the USDA, and export volumes and values from statistics NZ. The former are in USD and reflect receipts 2-3 months forward. The latter are in NZD and report export receipts that are effectively 2 months in arrears.

The major area where processor payouts can under or out perform market prices is via management of exchange rate risks and rewards. The impact can be significant as illustrated by this extract from Fonterra's 2001-2002 annual report:

The $249 million additional debit foreign currency translation reserve arose as a result of the year end US dollar/NZ dollar translation rate for offshore assets denominated in US dollars being 47.5 cents compared to a forecast of 43.0 cents.

Neither the USD (the currency for trade in dairy products) nor the NZD (the currency export receipts are converted to) are particularly stable against the currencies of the rest of the world. Currency relationships explain much about variation in dairy industry payouts:

At this point it makes sense to look at weighted Oceania dairy commodity spot prices and their use to project payout by Fonterra.



Note that this approach relies on extrapolating historical relationships between payout and commodity spot prices. Analysis of Fonterra's financial performance (to be published when completed) and export data is suggesting that the traditional relationship between commodity prices and payout is being modified by:

• Significant increases in Fonterra's operating costs between 2007 and 2009
• Reductions in Fonterra's overhead costs
• Increasing payout against export receipts
• Increased revenue from products other than commodity exports
• Declines in average export receipts compared to commodity spot prices

Until those factors are better quantified, or assuming the combined result of the above for 2010 to be neutral, what do spot prices to date suggest as a likely payout for 2010?

The red line in the above graph represents rolling weighted commodity prices for the preceding 12 months. Circles on this line are the points where these prices best approximate Fonterra year end receipts (6-10 weeks prior). Triangles represent Fonterra payout projections for the 2010 season.

The payout projection using this method is the payout value of the red line in early June 2010. The green line (point weighted spot prices) and blue line (6 month rolling weighted spot prices) only assist in estimating the red line forward.

Using dairy commodity prices to date the current forecast payout remains under $5.00 per Kg of milk solids. A reasonable expectation is that the payout projection will rise towards $6.00 if commodity spot prices remain at current or higher levels.

On the same basis the 2009 season payout under performed to the tune of 40-60 cents per Kg of milk solids - probably due to the higher operating costs mentioned. Visual comparisons can be made to other year's payouts and their position on the rolling weighted commodity price line.

The difference between spot or auction prices and average export receipts can be marked:

Weighted NZD dairy export receipts provide the best, and possibly the only reasonably accurate, guide to the value of raw milk produced in New Zealand. It should be noted that since the end of 2006 New Zealand's weighted average dairy export prices have tended to be below or significantly below their spot prices.

Actual export prices provide more accurate data than spot prices, but in arrears. The following are projections of payout against rolling 12 month weighted export receipts. An assumption has been made that payout has gained 2.5% against export receipts from the formation of Fonterra - twice the rate assumed up to that point:

Using this method the payout projection is the payout value of the green line at July 2010 - 10 months from the last value already plotted which is for September 2009. The green line will continue to fall for 3-6 months as the high export receipts of late 2008 and early 2009 roll off and are replaced by low but rising values from October 2009 through into early 2010. Somewhere projected values will probably go below $5.00 before starting to increase.

At this point in the season both the spot and export commodity price approaches to forecasting payout still have room for payout to exceed $6.00 per Kg of milk solids - provided the weighted NZD value of world commodity prices rises a little from their early November 2009 value, and holds.

The use of actual export receipts appears to provide far more accurate predictive information than spot prices - particularly on what payout should have been. Using this approach it appears that some payouts for the 2009 season were the worst for many years.

Speculation of an $8.00 plus payout for the 2011 season is unhelpful to the dairy industry, and misleading

Why Fonterra's payout will not be in excess of $8.00 per Kg "if prices and the exchange rate stayed at today's level"

Chairman Henry van der Heyden said if prices and the exchange rate stayed at today's level, the pay-out could be in excess of $8.00 per kilogram.
NZX, BusinessWire, Wednesday, 2 Jun 2010

While it is possible that the payout from Fonterra for the 2011 season could be in excess of $8.00 per Kg, there is no evidence to support that with prices and the exchange rate staying at the levels Fonterra Chairman Henry van der Heyden was referring to. The evidence is to the contrary - that the payout will be short of $8.00 per kg even if "prices and the exchange rate stayed at today's level".

The following is a selection of public information available to all including Fonterra. In many cases the information is provided by the co-operative itself:

Fonterra's independent valuer, Grant Samuels, on the 15 May 2010 determined the 2011 season milk price as $5.11, stating:

Milk Price
Grant Samuel’s valuation of Fonterra was based on a Milk Price for the Season commencing 1 June 2010 of $5.11 per kilogram of milk solids. This price is materially below the current Milk Price for 2009/10 and the Fonterra forecast payout for 2010/11. The differential arises because the valuation is based on long run equilibrium prices for commodities rather than current market prices.

The Milk Price was determined utilising Fonterra’s Milk Price Manual. The calculation is very complex and involves a large number of inputs. Key assumptions in the assessment for the 2010/11 Season included:

• forecast Base Commodity Prices based on long run equilibrium prices that resulted in a volume weighted average price for the year of US$2,628 per metric tonne; and
• an average exchange rate for the year of NZ$1 = US$0.692.

Grant Samuel has made an assessment of the macro economic inputs including commodity prices, foreign exchange rates and inflation in estimating the Fair Value Range as at 1 June 2010. While the projected Milk Price would change with different macro economic inputs, Grant Samuel does not expect any foreseeable changes to materially alter our assessment of projected earnings and consequently to affect our determination of the Fair Value Range as at 1 June 2010.
Grant Samuels determination

Note that the independent milk price valuation is based on information provided by, and discussions with, Fonterrra. Information will include data on FX cover, contract sales and a Weighted Average Cost of Capital determined by Fonterra.

Fonterra has chosen to add $1.49 to the independent valuer's milk price, all but three cents of which is based on higher commodity milk prices.

All of which is in marked contrast to last season, when then independent valuer Duff and Phelps set a milk price of $5.16 for the 2009-2010 season.

Only to have Fonterra then reduce that by $1.06 to $4.10.

The milk price for 2009-2010 season is currently on track to be about $6.10 per Kg. With value add of 30-50 cents per Kg that will give a payout of between $6.40 and $6.60. So far, the better track record in correctly determining milk prices rests firmly with the independent valuers.

An official projection of Fonterra's milk pricing is a statutory document required under DIRA.
That forecast for the season ending 31st May 2011 as at the 1st of June 2010 is a little under $6.60 per Kg ($7.00 including value add). That milk price includes payments for winter and organic milk.

Fonterra has also forecast their payout for for Victorian and Tasmanian suppliers:

Fonterra has announced its opening 2010/11 milk prices in Victoria and Tasmania with a forecast average annual return of $4.36 per kilogram of milk solids.

At a NZD:AUD 0.80 cross $4.36 comes to NZD 5.45 per Kg of milk solids. At a 0.83 cross, NZD 5.25.

MAF is forecasting the milk price for year ending 31 May 2011 at $5.60 per kilogram of milk solids. MAF's Situation and Outlook for New Zealand Agriculture & Forestry (June 2010)

MAF forecasts the milk price for year ending 31 May 2011 at $5.60 per kilogram of milk solids. This price reflects a combination of falling export prices in US dollars. However, exchange rate assumptions are favourable beyond 2011 and, together with slowly rising export prices in US dollars, the milk price is projected to be $7.21 per kilogram of milk solids by the year ending 31 May 2014.

Fonterra is not providing any analytical support for its speculation on payouts in excess of $8.00 - only puffery from its leaders.

So, what about world dairy commodity prices?
(i) globalDairyTrade world dairy commodity price Index:
GlobalDairyTrade provides an index of internationally traded world dairy commodities (WMP, SMP, and AMF). It is derived from globalDairyTrade sales with earlier values from USDA Oceania spot prices for SMP and WMP and European butteroil spot prices representing AMF. The CPI adjustment uses US figures.

Rebasing the globalDairyTrade index to its 10 year average provides the following:

That provides an easy comparison of both real and nominal ratios to long term averages. The 2008 season ($7.90 payout before retentions) looks to have been the result of a sustained period of prices more than 1.80 times the 10 year average. Current prices appear to have briefly exceeded 1.4 times the 10 year average, and have a pattern that in no way replicates that of the 2008 season.

(ii) A better reflection of NZ dairy export prices may be the following combination of actual export values for milk powders, cheese and butter divided by their export volumes rolling over 12 or 14 months depending on Fonterra's reporting periods. This approach also stresses the differences between actual receipts and reported spot prices using the same commodity export volume combinations.

Now the same data on a monthly rather than rolling basis:

This season's actual export prices simply don't match up to those from the 2008 and 2009 seasons. Nor do spot prices.

(iii) A quick look at Agrifax's Export Price Trends show last week's dairy commodity prices significantly higher than those from 3 months ago, but still well short of average prices for the 2009 season. Butter is the one exception.

Those 2008-2009 season average prices look much better than the two sets of prices presented for the 2009-2010 season. Lets reflect for a moment. Wasn't 2009 a season when supposedly low dairy commodity prices collapsed Fonterra's (and other processors) projected payouts from $7.00 to $5.20?

Perhaps we should look at this seasons average export prices for the 9 months to date (the latest Statistics New Zealand export data is to april 2010) and compare them over the same periods from the 2008 and 2009 seasons. Why not also include the full season values where they are available.

(iv) NZD dairy export values, volumes and average prices for 2008, 2009, and 2010 - full season and for the 9 months to April 2008, 2009, and 2010:

Statistics NZ export values are provided in NZD converted from their foreign currency equivalent at the rates prevailing at the time of export. FX gains and losses do not show. When FX gains/losses are taken into account then NZ dairy industry payouts are very highly correlated to NZ export prices.

It appears the NZ dairy industry may have lost a staggering amount of money in the 2009 season - despite Fonterra's claims to have added 49 cents per Kg value on top of the milk price. On a similar basis this season's payout appears to include a very significant FX component.

Dairy export prices maintained a high average over the 2008-2009 season despite very low spot prices in the latter part of the season. MAF's latest forecasts also support this view.

MAF's Situation and Outlook for New Zealand Agriculture & Forestry (June 2010) states:

Total dairy export earnings are estimated to be down by 16 percent, to $9.94 billion, for the year ended 30 June 2010, largely from a sharp drop in export prices.

2009-2010 season dairy export prices do not provide support for $8.00+ payouts "if prices and the exchange rate stayed at today's level", nor for the 2009 season's $5.20 payout being the result of poor commodity prices.

A general expectation is that NZ milk production in 2009-2010 will be down on expectations and of similar volume to 2008-2009 season. That means lower than normal product volumes will be exported in the 3 months of the season to July 2010.

Milk powders exports are the major component of NZ dairy exports. The following graph visually supports the data in the above tables:

The higher volumes of milk powder exports in the 2009-2010 season are clear as are the lower export prices compared to the the 2008-2009 season (compare the red and pink series). That raises questions as to whether the current high Oceania dairy commodity prices are of great economic impact without reasonable volumes being available for export, and whether Oceania's current significant margin over European milk powder prices can be maintained as production volumes increase through the 2010-2011 season.


(v) A quick look at the individual commodity prices:

Monthly NZ export prices





Rolling 12 Month average export prices





Their Export Values





The value, volume and price relationships
Volume rather than price is driving most increases in export value, and the sharper price increases when they occur are in NZD rather than world terms (TWEXB adjusted USD).


(vi) There may also be an issue with both total and relative volumes particularly in consideration of adding value:





Are NZ dairy commodity exports moving up the value added pyramid?



NZ dairy commodity exports appear to be moving down the value added pyramid. On a monthly basis the above graph seems to indicate an increasing proportion of exports are now commodity milk powders. Value added milk powders? If so, I can't find any sign of this from within the more detailed export value stats.



The trend is clearer on a rolling 12 month basis.

We have heard much about increasing demand for dairy products, and NZ is exporting greater volumes, so where are those increased exports going? Mostly to China, and that is not necessarily a good sign.

That sort of expansion into a market doesn't look sustainable, or supportive of higher export prices. Are dairy exports to China taking market share because China pays more, or because it is the market of last resort? NZ clearly needs more markets for its increasing volume of dairy commodities, and markets that can pay prices to support high payouts. But can China or Russia pay the prices required to support $8.00+ payouts?

What sort of world economic context will provide demand for increasing volumes of dairy commodities at prices approaching USD 5,000 per tonne?
2008's very high dairy payouts came at the end of an eighty year credit expansion cycle that in its latter years included speculation in all asset classes including commodites.

The global financial crisis that followed resulted in large government stimulus programmes and massive expansion of sovereign debt. Those stimulus programmes were attempts to maintain demand and consumption. Their impact was felt, but is now declining - credit is contracting, demand is dropping, and commodity prices are falling.

New government stimulus programmes are possible, but the realisation is dawning that they are not sustainable. And while China has had remarkable growth, it has not been from rising incomes but from new infrastructure.

An economic context that consistently supports dairy commodity prices of USD 5,000 per tonne is some years in the future. In the interim current high ($6.00-$7.00 payout) prices may be maintained a little longer. How much longer may be clearer within weeks rather than months.

Why is inflating payout expectations unhelpful?
Inflating payout expectations is worse than unhelpful and often destructive, but that depends much on whether you are trying to enter or exit the dairy industry. There are aspects that apply irrespective:

• a) The value of payout is is the key detrminant of the correct level of production (marginal cost equals marginal revenue - MC=MR) for pastoral dairy production. Producing at a level in excess of where MC=MR is high risk and very damaging to profitability. Inducing this via inflated payout expectations borders on treason.
• b) Higher payout expectations leads to increased milk production in NZ and around the world. Encouraging this in a situation of surplus production capacity is stupid, increases price volatility and lowers world dairy commodity prices.
• c) Higher payout expectations leads to increases in dairy production operating and capital costs.

Why might Fonterra's leaders be inflating payout expectations?
That is certainly a question to which shareholders and government should be seeking answers.

Maybe spin is just so deeply engrained in Fonterra's culture that they don't know anything else. A good recent example
is a Fonterra news item heading regards the 2nd of June globalDairyTrade auction:

Prices Stable In globalDairyTrade Event

That despite the auction failing (insufficient volume bid to lift the opening price) for some SMP products, and prices falling significantly for longer dated WMP.

More likely is the expected positive pyschological impact ahead of this months vote on shareholders swapping debt for equity. This is the most significant change ever for the co-operative. If it proceeds Fonterra will still legally be a co-operative but no longer in principle. It is unclear whether shareholders fully realise the impact on their own financial positions from swapping what is effectively debt owed by Fonterra (their co-operative shares) for equity. It is though clear that redemption risk is not something that should be of concern to a successful co-operative

It is also possible that inflating payout expectations is simply part of ongoing efforts to maintain high commodity prices and farm asset values.

In Conclusion:
The interests of Fonterra shareholders, Fonterra as a co-operative and Fonterra's senior management are not one and the same.

Leadership not understanding the issues, and/or misleading their constituents is a step even further down the road to decline. That is not unique to the NZ agricultural industries.

We come back to where we started with the NZ dairy industry having deficits in fundamental information and comprehensive analysis. That state for instance allows inflated expectations of payout to hold sway without requiring any substantiation and to the detriment of producers. The dairy industry didn't get into that situation through good leadership, or even from mediocre leadership - it needed leadership deficits.

Dairy Commodity Spot Price Graphs

World dairy commodity prices to the 20th of August 2010:
USDA data is from January 2006 to the 2nd of September 2010. Updated fortnightly - next on the 17th of September 2010.
Conversion factors used for the last points in this series of graphs are: (NZD to USD = 0.7040 and USD TWEXB correction =103.356).

Dairy commodity Spot Price Graphs in TWEXB corrected USD

TWEXB Corrected USD adjusts USD prices in line with a broad index of US trading partners to better reflect world prices including those in Asian, European and other currencies.

Data Source: USDA

Data Source: USDA

Data Source: USDA

Dairy commodity Spot Price Graphs in USD

Data Source: USDA

Data Source: USDA

Data Source: USDA

Dairy Commodity Spot Price Graphs in NZD

Data Source: USDA

Data Source: USDA

Data Source: USDA

United States Department of Agriculture Dairy Market Overview

MD DA120 OCEANIA DAIRY MARKET OVERVIEW - MADISON, September 2, 2010 (REPORT 35)

OCEANIA OVERVIEW: Milk production increases are becoming more noticeable on the north island of New Zealand with the South Island and Australia still holding at seasonally low levels. Typically, the South Island of New Zealand lags the North Island by 2 - 3 weeks with Australian output about 3 - 4 weeks behind northern New Zealand.

Winter weather conditions have been favorable for much of the Oceania region. On the North Island of New Zealand, wet conditions are being reported which may be slowing seasonal increases, but for the most part, milk volumes are on target with projections. Australian producers and milk handlers are reporting that the current winter season is the first "typical" season in many years. Good winter moisture and favorable temperatures are contributing factors. Milk producers are very optimistic about the upcoming milk production season.

Although the 2009 - 2010 milk production season came to an abrupt end in New Zealand, decent cow conditioning, favorable winter conditions, and firm pay prices are all positive factors for a good start to the new season. Australian producers are likewise positive. Similar positive factors as their New Zealand counterparts along with a strong finish to the 2009 - 2010 season are contributing to positive outlook for the 2010 - 2011 season in Australia.

At the September 1 global/Dairy Trading (gDT) event, prices for all delivery period were higher to sharply higher. The average price for anhydrous milk fat was $4,681 per MT, 9.5% higher than the previous event average; buttermilk powder prices averaged $3,199, +10.6%; skim milk powder prices averaged $3,197, +15.8%; and whole milk powder prices averaged $3,522, +18.8%.

September is the first month that the gDT event will occur twice a month. The next event will be on Wednesday, September 15. Many traders and handlers felt that firmness could occur at the September 1 event, but this firmness caught many by surprise. Traders and handlers indicate that it is too early for them to respond to what impact the most recent auction sentiment may have on prices. Traders did say that some buyers were holding off with their purchases until the most recent event was held to see what auction trends might be doing as many feel that a price bottom to recent weakness might be near. Oceania traders and handlers are stating that order books are pretty full for the first half of the upcoming milk production season. Traders feel that once prices start to firm, buyers will quickly return to the marketplace seeking uncommitted volumes.

0930c

MD DA100 EUROPEAN DAIRY MARKET OVERVIEW - MADISON, WI. September 2, 2010 (REPORT 35)

WESTERN OVERVIEW: The milk production season in Europe continues to edge lower. Although the season got off to a slow start, milk deliveries quickly increased and, for many countries, output is running ahead of last year. Milk output is strong in Germany, France, the UK, and Ireland by as much as 3% over last year, while overall output for Europe is slightly below last year by 0.1% for the first half of the year. Manufacturing facilities remain quite busy processing the good volumes of milk available to them at this time of the season. Within the past few weeks, milk logistics are being redirected toward products of more need or better return. Casein production is one commodity that is feeling the squeeze.

Traders and handlers are stating the European holiday/summer vacation season is about over and buying interest is starting to resume. For the most part, this buying interest is internal with international sales still limited. Suppliers and handlers of manufactured dairy products indicate that stocks are available for immediate and future needs. Russian buyer interest continues but has slowed from previous weeks. Traders feel that the slow down in this demand is occurring due to prices often higher than buyers desire to pay, thus they are looking beyond European borders for potential stocks. Traders and handlers do feel that international buyer interest will increase soon as buyers are now assessing their upcoming winter needs.

On August 26, the Dairy Management Committee had their first meeting since late July and following the summer holiday period. No significant dairy issues were discussed or adjusted. Common refunds remained at zero and no tendered refunds were offered. Since March, the opening date of the current intervention year, no butter or skim milk powder has cleared to the program. Also no butter or skim milk powder was sold back to the trade from intervention inventories.

Traders and handlers are evaluating the midweek results of the recent global/Dairy Trading event in New Zealand which realized sharply higher prices. European traders continue to use this auction as a market indicator versus a market setter. Many traders felt that a bottom to recent weakness might be at hand and firmness would soon occur and this played out at the trading event. Overall prices for European stocks are mixed. The Euro has weakened against the U.S. dollar over the past few weeks, but pricing indices have often firmed. Traders state that often prices start to firm as the milk production season and manufacturing schedules decline.

EASTERN OVERVIEW: The Eastern European milk production season continues to wind down. Reports indicate that overall milk output in this region is trailing last year, although the decline is getting narrower. Manufacturers and handlers state that stocks are available for both internal and international buyer interest. Traders indicate that internal buyer interest is resuming and that international buyers will hopefully be returning to the marketplace in the near future to secure stocks for upcoming winter needs.

0930c steve Schneeberger (608)278-4154

MD DA120 OCEANIA DAIRY MARKET OVERVIEW - MADISON, August 19, 2010 (REPORT 33)

OCEANIA OVERVIEW: Milk production increases are starting to be reported out of New Zealand. Milk handlers are stating that the increases are not huge, but noticeable. In Australia, the beginning of the new milk production season is still a number of weeks away. Late winter weather conditions and temperatures continue to prevail. Grass growth remains dormant.

Final milk production figures out of Australia were recently released for the 2009 - 2010 milk production year (July - June). As has been the case for much of the second half of the production year, end of season milk output has been stronger than previous year comparables. For June, milk output was 4.6% heavier than June 2009, thus the cumulative output for the year was down 3.9% from the 2008 - 2009 year. Although the cumulative total still lagged the previous season, milk producers and handlers were pleased to see that the decline was much smaller than early season predictions.

The 2009 - 2010 season ended on a positive note. Australian farmers are optimistic about the upcoming milk production season as conditions are very good for a strong start to the season. Farmers and milk handlers are stating that the milking herd ended the previous season on a positive note and wintered well, thus a positive start is also expected due to these factors. Typical winter weather patterns, not seen in many years in Australia, provided much needed moisture to replenish depleted water levels and reserves. With many positive factors pointing to a good milk production season in Australia, milk handlers are questioning how farmers will handle the financial end. Many feel that farmers will be conservative and pay down debt incurred in recent years versus expanding their operations.

Following the August 3 global/Dairy Trading event, Oceania handlers and traders adjusted their prices somewhat, but often not to the average level of the various products traded. Traders and handlers continue to state that this is an auction which provides a market sentiment at that time, but is not setting ongoing price levels. Traders and handlers are speculating that recent price weakness at the trading event will stabilize and will probably start to increase in the near future. In September, trading will go to twice a month with the next event on September 7.

As milk production seasonally increases, manufacturers and handlers are deciding which direction to go with early milk volumes. Many traders and handlers state that good whole milk powder volumes are already in the sales books, thus initial milk volumes will probably be cleared in this direction. New buyer interest remains slow in developing as buyers are cautious with their purchases.

0930c

MD DA100 EUROPEAN DAIRY MARKET OVERVIEW - MADISON, WI. August 19, 2010 (REPORT 33)

WESTERN OVERVIEW: The European milk production season continues to decline. Milk volumes appear to be holding up quite well on the down side of the season with early reports indicating that June's production was 2% above the previous year. On a year to date basis, milk output is about par with last year. Within recent weeks, heat and humidity levels have been high in many regions and will probably accelerate the seasonal decline.

August is summer holiday time for many Europeans thus sales activity has been slow. Traders and handlers do indicate that Russian buyer interest continues, but often European prices are higher than desired, thus some buyers are looking beyond European borders for possibe stocks. Whole and skim milk powder, along with cheese are items of most interest. Traders also are stating that some new buyer interest is developing as buyers start to look to fill fall/winter needs. For the most part, outside of butterfat, stocks are available for immediate and future needs.

Early in the milk production season, milk volumes were being directed towards cheese output, but now other manufactured dairy products are realizing a better milk flow. The Dairy Management Committee will be
returning from summer holiday on August 26 for the first time since late July. Traders and handlers are wondering if the balance of intervention butter (about 1,500 MT) will be cleared. Butterfat continues to be a limited item and previous sales of intervention butter were a welcomed item by many. Some butter/anhydrous milk fat from the U.S. is potentially scheduled to arrive in Europe during the next six months.

EASTERN OVERVIEW: The milk production season continues to wind down in Eastern Europe. High heat and humidity levels of recent weeks are not helping the milk flow during the down side of the season. Milk
handlers are stating that milk receipts are declining gradually, but also state that milk volumes are sufficient to maintain steady manufacturing schedules. Stocks of milk powders are available for immediate and future needs. As with their Western counterparts, butterfat is limited in Eastern Europe. Sales activity out of
Eastern Europe is slow as the summer holiday period continues, although some traders are indicating that buyer interest is starting to develop for upcoming fall/winter needs.

0930c steve Schneeberger (608)278-4154

MD DA120 OCEANIA DAIRY MARKET OVERVIEW - MADISON, August 5, 2010 (REPORT 31)

OCEANIA OVERVIEW: Milk production in the Oceania region is on the eve of seasonal increases. New Zealand will be the first area to realize noticeable increases within the next 2 - 3 weeks while Australian output will be a few weeks later.

Winter conditions in both New Zealand and Australia have been quite typical and should be a positive factor for the seasonal startup. Moisture during the winter months has been plentiful with some milk producers and handlers stating that the season was wetter than usual. In Australia, good moisture fell during the winter which greatly enhanced depleted water levels. Milk producers are very optimistic about the upcoming season and are looking for a 3 - 4% increase in New Zealand with producers in Australia projecting steady to a 1 - 2% increase.

Announcements of favorable opening pay prices are also giving encouragement to dairy producers. Milk handlers are not quite sure on how farmers will respond to the favorable milk prices. They feel that some farmers will pay down debt, while others will probably increase their herd size.

At the August 3 global/Dairy Trading (g/DT) event, all contracting periods averaged lower prices by 7.6% to nearly 9%. Anhydrous milk fat averaged $4,302 per MT, down 7.6% from the previous event average; whole milk powder averaged $2,974 per MT, down 7.7%; skim milk powder averaged $2,770 per MT, down 8.9%; and butter milk powder, traded for the first time, averaging $2,905 per MT. Prior to the trading event, buyer interest was very quiet as buyers stepped away from the marketplace until further market developments occurred.

Most traders and handlers anticipated that auction prices would be lower and are still analyzing what impact realized prices will have on future offerings. As milk production remains at seasonally low levels, stocks are very limited for near term shipments but will be increasing over the next 6 - 8 weeks. Some traders and handlers are stating that they will be reaching into new production to finish 2009 - 2010 commitments.

0930c steve Schneeberger (608)278-4154

MD DA100 EUROPEAN DAIRY MARKET OVERVIEW - MADISON, WI. August 5, 2010 (REPORT 31)

WESTERN OVERVIEW: European milk production continues to trend seasonally lower. Most milk handlers are stating that for much of the season, milk volumes have been a little lighter than years past. The milk production season started slowly, but caught up quickly once better spring weather conditions prevailed. Although milk volumes often did not attain projected levels, milk production was strong enough to maintain good/steady manufacturing schedules at peak levels. Since the peak, milk volumes have trended lower at a normal pace. Recent hot temperatures did negatively impact milk production on the down side of the season, but volumes remain quite good for this time.

Manufacturing schedules remain active. Cheese production was strong early in the season, then eased somewhat, but now is gearing back up. Production of other manufactured dairy products is fully dependent on milk volumes and how plant managers are directing the milk flow. In most instances, stocks of manufactured dairy products are available for both internal and international buyer interest.

Most sales activity is centered around an internal market with international sales limited. Overall sales are light as this time of the summer is holiday/vacation time for much of Europe. Many international buyers are cautious with their purchases and stepping away from the marketplace at this time.

European traders and handlers were closely monitoring the most recent global/Dairy Trading event held on August 3 in the Oceania region. Once again, prices for most products declined. As has not happened after recent auctions, European prices were not impacted by the direction of the auction results, although traders and handlers state that the auction does provide a market tone or direction. For the most part, European prices are steady to higher.

There is no news out of the Dairy Management Committee at this time as the Commission is on break and will return on August 26. All but about 1,700 MT of intervention butter have been committed to food aid programs or sold back to the trade. No skim milk powder has been sold. Traders and handlers state that some intervention sellback butter is appearing in the marketplace which is helping ease a tight butterfat situation.

EASTERN OVERVIEW: Heat and dry conditions in Eastern Europe are having a negative impact on milk production on the down side of the season. Milk production is past the peak and declines are occurring at varying rates, depending on the region and weather patterns. Although overall milk volumes are lower, manufacturing schedules remain seasonally active. Stocks are available for immediate and future needs. Sales activity is slow as most internal buyers are on summer holiday.

0930c steve Schneeberger (608)278-4154

MD DA120 OCEANIA DAIRY MARKET OVERVIEW - MADISON, July 22, 2010 (REPORT 29)

OCEANIA OVERVIEW: Oceania traders and handlers of manufactured dairy products continue to analyze the impact of the sharply lower prices recorded at the July 6 gDT event might have on current and future prices. In most instances, prices did ease, but often not to the extent of the 10 - 15% declines recorded for the various dairy products traded. Some traders are indicating that they have heard that some offers for various products out of the Oceania region are at levels below the average auction values. Traders and handlers are also stating that buyer interest has slowed greatly with many buyers stepping back from the market until more stability is realized.

For those buyers that are still in the market, many are seeking product for short term or immediate needs with most stating what they will pay versus what suppliers are quoting. Traders are stating that it appears that China may be backing away from the marketplace as their milk production comes more in line with needs.

Milk production in the Oceania region is at seasonally low levels, although the beginning of the new production season is not far off. Early projections for milk production in New Zealand are 3 - 14% heavier than last year with Australians projecting milk growth to be in the 1 - 2% range. Although the end of the 2009-2010 season in New Zealand came to an abrupt end, farmers are very optimistic about the upcoming season.

In Australia, the end of the 2009 - 2010 season was strong with final quarter (April - June) milk volumes stronger than projected. Volumes through May were able to narrow a cumulative deficit from 6% to 4.5% in comparison to the 2008-2009 season. With one month left of the official production season (June), many milk processors and handlers feel that output will trail last season by about 4%. Milk volumes were heavier in the final quarter in Southern regions of the country and were up as much as 6% when compared to April - June 2009.

0930c steve Schneeberger (608)278-4154

MD DA100 EUROPEAN DAIRY MARKET OVERVIEW - MADISON, WI. July 22, 2010 (REPORT 29)

WESTERN OVERVIEW: Milk production in Europe continues to trend seasonally lower. Recent hot temperatures and dry conditions are accelerating this trend in many regions. Milk volumes are now tightening and manufacturers are trying to procure as much as they can and generate stock for future needs. In most instances, supplies of manufactured dairy products are available for immediate and future needs. Often these stocks are not as heavy as desired, although traders and handlers do indicate that buyer interest is not that aggressive anyway.

Traders state that buyers are cautious with their purchases. Some near term sales are being reported, although longer term or larger sales are not being reported. Prices for most all manufactured dairy products continue to increase. Butterfat remains tight and prices for butter and anhydrous milk fat reflect that situation. Although prices at the recent gDT event in the Oceania region earlier this month trended sharply lower, this trend did not flow through price structures in Europe, at least at this time. Most traders and handlers feel that European prices will be able to maintain themselves for the foreseeable future.

Intervention butter that has been sold back to the trade is now starting to become available on the commercial market and is helping ease the tight butterfat situation. At the Dairy Management Committee meeting on July 22, no major dairy issues were adjusted or discussed. There were no accepted bids for intervention butter or skim milk powder. Of the volume of intervention butter that was available for sale, all volumes have been sold with about 1,700MT left and no intervention skim milk powder has been sold at all.

EASTERN OVERVIEW: Milk production in Eastern Europe is also trending lower, accelerated by heat and dry conditions. Milk volumes for the season are basically in line with previous years with fluctuations higher and lower being reported. Eastern manufacturers and handlers are stating that stock is available for buyer interest. At this time, sales are slow and unaggressive which is typical for this time of the summer. Traders feel that buyers are stepping back from the
market at this time as prices in other regions of the international market are trending lower.

0930c steve Schneeberger (608)278-4154

MD DA120 OCEANIA DAIRY MARKET OVERVIEW - MADISON, WI. July 8, 2010 (REPORT 27)

OCEANIA OVERVIEW: The major topic of discussion in the Oceania region is the outcome of the recent global/Dairy Trading event held on July 6. Most traders and handlers of dairy products anticipated that prices would trend lower, but the sharp declines were a surprise to many.

The average price for all contracting periods for anhydrous milkfat declined 14.1% to $4,620 per MT, skim milk powder declined 11.8% to $3,067, and whole milk powder declined 14.8% to $3,224. It is still too early to realize what impact these auction prices will have on current pricing structures, but handlers and traders are stating that these prices send a market sentiment to current markets. Many state that this is an auction and depending on who is at the auction, the outcome is always uncertain.

International supplies of most dairy products have been limited in the last few months, but recently, supply tightness has eased as milk production is seasonally strong in the Northern hemisphere. Many state that lower auction prices are sending a message to potential buyers that product prices will be lower. Most Oceania traders and handlers will be adjusting their prices, but will probably not adjust to the extent of the sharp auction declines. As what occurred at the auction a few months ago when prices spiked sharply higher, commercial pricing did not adjust to those level and likewise in this situation, prices will probably not adjust to these much lower levels.

Traders and handlers feel that sharp swings one way or another are situations that can occur at an auction which are not indicative of current market trends. Many within the dairy industry are looking forward to the twice a month auctions which will begin in September, stating that this will hopefully ease volatility within the market.

Milk production in the Oceania region is at seasonally low levels. Many milk handlers and processors are stating that farmer optimism is favorable. Although New Zealand producers ended their most recent season quite suddenly, the outlook for the new season is positive. Various projections for milk production in New Zealand during the upcoming season are as much as 14% higher, with many projecting a 9 - 10% increase to be more probable.

In Australia, the 2009 - 2010 milk production year came to an end on June 30th. Early reports are that annual output will have trailed the 2008 - 2009 season by about 4%. Late season strength is what helped second half figures to be positive when compared to the previous year. Early 2010 - 2011 projections are that output in Australia will be 1% higher than last season, with some more optimistic and projecting a 2 - 3% increase.

Farmers in both New Zealand and Australia are looking to the new season with confidence. Many feel that farming margins will be better this season as grain and milk prices will be working together versus against each other as they have been in recent years. Milk processors are looking forward to a good production year and are hopeful that farmers will take the positive year as a recovery year and not over react with their operations.

0930c steve Schneeberger (608)278-4154

MD DA100 EUROPEAN DAIRY MARKET OVERVIEW - MADISON, WI. July 8, 2010 (REPORT 27)

WESTERN OVERVIEW: The European milk production season is now on the down side of the year. Milk processors and handlers are stating that although the season got off to a slow start, milk volumes quickly caught up with previous year levels and, for the most part, are at or slightly higher than last year at this time.

Cheese production was the product of most milk clearance through peak levels, but now cheese output has eased and other manufactured products are able to once again enhance their production schedules. Butterfat continues to be the product of most tightness.

At the July 8th Dairy Management Committee meeting, no significant dairy issues were adjusted or announced. Sales of intervention butter were reported with all skim milk powder bids again being rejected. The commission accepted bids for 210 MT of intervention butter at levels around 3,610 Eruos per MT ($4,548). This sale leaves about 1,734 MT of intervention butter left. There were some butter bids that were rejected. All 3,000 MT of skim milk powder bids at prices ranging 1,850 - 2,150 Euros per MT were rejected. Many traders and handlers were surprised at the volumes of skim powder bids, especially when European stocks are building.

Many European traders and handlers are questioning what impact the sharply lower prices realized at the July 6th global/Dairy Trading event may have on their prices. For the most part, they feel that these sharply lower prices will not have a significant effect, although the drop is sending a weaker market tone message to the marketplace. Many are also stating that this is an auction and that any auction activity is a function of the participants and that a sharp decline at this time could quickly reverse itself during the next event. Traders and handlers state that sales activity is slow, typical for this time of the year. At this time, the summer holiday season is beginning, which typically slows buyer interest. Stocks of product, outside of butterfat, are readily available for domestic and international buyer interest.

EASTERN OVERVIEW: Milk production in Eastern Europe is also at or slightly beyond peak levels. Milk volumes are reported to be in fairly good balance with need. Summer temperatures and humidity levels are starting to be reported in many Eastern European countries which could quickly reduce milk production trends. European producers and handlers state that stocks are available for both domestic and international buyer interest. Up to this point, sales activity has been fair at best.

0930c steve Schneeberger (608)278-4154

MD DA120 OCEANIA DAIRY MARKET OVERVIEW - MADISON, WI. June 24, 2010 (REPORT 25)

OCEANIA OVERVIEW: The milk production season in New Zealand has wound down with most plants shut down for winter maintenance. Most current milk receipts are being used for local fluid and consumer products as well as nutritional specialties. Current activity is centered on shipping stocks from inventory to customers and planning for the upcoming new milk production season. Whole milk powder and butter (fat) are particularly tight and will be the focus of early season production in order to meet commitments. Overall inventory levels are well below a year ago and spot supplies, particularly whole milk and butter, are limited.

In Australia, the weather has been conducive for a good end to the milk production season with the seasonal total overall below a year ago but the gap from last year continuing to narrow. Rain has been helping rebuild depleted reservoirs but much more is needed after recent years of drought. Some product is still being made into export products but the share of milk going into domestic market products continues to rise. In Australia, the announced season opening producer milk prices are well above the past season.

0930c George Koerner 608-278-4155

MD DA100 EUROPEAN DAIRY MARKET OVERVIEW - MADISON, WI. June 24, 2010 (REPORT 25)

WESTERN OVERVIEW: Milk production in Western Europe has passed the annual spring peak. A couple countries that started the calendar year lagging year ago levels, mainly Ireland and France, have since caught up. Cheese production is heavier in Europe, aided by improved internal EU cheese demand and solid exports, often to Russia. Other areas are trying to make more butter, often at the expense of casein, leading to possible tighter casein supplies and higher prices out of Europe.

The dairy industry was very interested in the outcome of the recent removal tenders of intervention stocks of butter and skim milk powder. All skim milk powder tenders (highest bid rejected at 2212 Euros per MT) were rejected as the Commission felt that the price was too low. International skim interest is generally quiet as buyers wait for additional price direction signals. Tenders offered at a minimum price of 3551 Euros per MT (nearly $2.00 per pound) were accepted for 11,935 MT of butter out of the 13,690 MT available from Intervention stocks. The butter market remains firm despite the influx from intervention butter purchases while skim customers continue to wait for market direction before making purchases.

The stronger cheese production has lead to an increase in whey though with skim milk purchases lagging for animal feed due to price, whey use remains solid as an ingredient. Some of the changes in reported prices can be attributed to the stronger Euro versus other currencies.

EASTERN OVERVIEW: Milk production in Eastern Europe has generally peaked. Depending on country, current receipts are often running below year ago levels. After a slow start to the season, production has responded to warmer temperatures.

0930c George Koerner 608-278-4155

MD DA120 OCEANIA DAIRY MARKET OVERVIEW - MADISON, WI. June 10, 2010 (REPORT 23)

OCEANIA OVERVIEW: The milk production year concluded in New Zealand at the end of May and early reports are indicating that annual production was even with last year on a volume basis and slightly higher (0.3%) on a milk solids basis. Milk producers and handlers are pleased with these figures, especially following a sharp decline in milk output late in the season due to limited rainfall. In recent weeks, rainfall has been occurring on a regular basis and, for the most part, moisture levels have once again been re-established and conditions are good going into the winter months.

In Australia, late season milk volumes continue to run heavier than previous year comparables. April production figures indicate that output was running 2.7% heavier than last April which is bringing year to date figures to -5.2% when compared to the same 10 months (July - April) last season. Australian producers and handlers continue to project that during the final two months of the season, milk volumes will surpass last year and cumulative, year to date, totals will be near -4% versus earlier projections of -6%.

In Australia, lack of moisture has plagued much of Northern Victoria for the past few years and water levels have been greatly reduced causing water allocations. In recent weeks, good volumes of rainfall have been occurring throughout the dairy region of Australia and water levels have once again been re-established. At this point, reports are indicating that water allocations for the coming year will once again be at 100%. Farmers are looking forward to the new milk production season with optimism, a situation that has not been in their favor for a number of years. Herd conditioning is also favorable going into the winter season.

At the June 1st global/Dairy Trading event, anhydrous milk fat prices were higher for all three contracting period, while generally lower in all three contracting periods for skim and whole milk powder. The average price for anhydrous milk fat was $5,324 per MT, 6.1% higher than the previous months' average. The average skim milk powder price eased 4.2% to $3,462 per MT while the whole milk powder price averaged $3,790, down 3.6%.

Traders and handlers are stating that the weak trend in milk powders is the direction these prices should be heading. These prices are getting more in line with other international prices. Milk fat is tight, thus the firm trend for anhydrous is deemed correct, although near term shipment prices seem out of line in comparison to current commercial prices and the prices for the second and third contracting period.

Fonterra recently announced that in September, a second online milk powder auction each month will be added. At the August 3 event, buttermilk powder will be added along with two new specifications of existing products, high heat/heat stable skim milk powder and anhydrous milk fat in 1,000 KG bulk packs.

Oceania traders and handlers are closely monitoring European intervention removals and what impact these may have on current and future prices. Most feel that the butter removals will have minimal, if any impact on markets, especially with butterfat tight in basically all international markets. Traders and handlers are stating that sales activity is minimal which is typical for this time of the year.

Suppliers continue to communicate with contractual buyers about supply avaialblity and with some tweaking of delivery
schedules, needs will be filled as contracted. Some suppliers do indicate that they will need to reach into new production
to fulfill 2009-2010 commitments.

0930c (608)278-4154 steve schneeberger

MD DA100 EUROPEAN DAIRY MARKET OVERVIEW - MADISON, WI. June 10, 2010 (REPORT 23)

WESTERN OVERVIEW: For the most part, Western European milk producers and handlers feel that milk production has peaked in most regions. The current season got off to a slower than usual start as cold temperatures and winter conditions carried further into early spring. Although the season got off to a slower than usual start, milk volumes quickly increased as warmer temperatures and spring weather patterns developed. The only problem with this situation is that manufacturers and handlers are more accustomed to a gradual build up versus a sharp increase. A slower increase allows manufacturers to accumulate and build inventories on a gradual pace, versus quickly and potentially not to desired levels.

The European dairy industry was very interested in the outcome of the recent removal tenders of intervention stocks of butter and skim milk powder. All tenders (1610 - 2100 Euros per MT) for skim milk powder were rejected as the Commission felt that the tenders were too low. Tenders of 3450 - 3850 Euros per metric ton were accepted for 11,515 MT of butter. This was about half of the available butter.

The next round of tenders is due on June 15 with 13,669 MT of butter and 9,531 MT of skim milk powder available for bids. Traders and handlers are stating that the release of the butter is having no negative impact on current markets or prices. Basically, the tendered prices were very close or within current commercial price levels and volumes were welcomed into the marketplace as butterfat is still tight throughout Europe. Traders and handlers felt that many skim milk powder bidders were "testing the water" to see how low skim milk powder might be able to be secured even though the need for skim is not as urgent as butter.

Europeans and other International traders and handlers were closely monitoring the outcome of the June 1st global/Dairy Trading (gDT) event in the Oceania region. Except for anhydrous milk fat, all prices were generally lower than the previous trading event. Although gDT prices are still higher than European prices, traders and handlers are comfortable with their quotes. Many felt that prices at the gDT were higher than they needed to be in recent months. The overall trend for dairy product prices is lower with much of this weakness occurring due to the decline of the Euro against the U.S. dollar. The Euro has now dipped below the 120 level which is the first time since March 2006 and nearing levels at which the Euro started in 1999. Traders and handlers state that stocks of milk powders are available with butter and butterfat still limited.

EASTERN OVERVIEW: Milk production in Eastern Europe continues to increase and will be near peak levels by the end of the month. Eastern milk production got off to a slow start as cold winter temperatures and conditions reached into early spring. As in Western Europe, once temperatures and weather patterns improved, steady increases developed. At this time, most current production is clearing to manufacturing with new stocks clearing to inventory. No significant sales are being reported out of this region. Eastern traders and handlers are also monitoring the intervention tenders for skim milk powder and butter. Butter is returning to the market place, while all skim milk tenders were rejected. The next round of
tenders are due on June 15.

0930c steve Schneeberger (608)278-4154

MD DA120 OCEANIA DAIRY MARKET OVERVIEW - MADISON, WI. May 27, 2010 (REPORT 21)

OCEANIA OVERVIEW: The Oceania milk production season has basically ended. In New Zealand, the drought, especially on the North Island, earlier in the fall, quickly diminished late season milk output. Farmers reduced their daily milkings to once a day much earlier than usually is the case. Herds were also completely dried off earlier than usual. With this situation occurring, early season projections of a 2 - 3% production increase over the previous season were quickly adjusted lower. With just a few days left of the 2009 - 2010 fiscal year season (June - May) milk handlers are now projecting that the current season's volumes will be very close to last year.

In the past week to 10 days, considerable rainfall has occurred in the parched regions of New Zealand and for the most part, milk handlers and manufacturers state that the drought is over. Water tables are once again being replenished and the outlook for the upcoming winter season is good. For a significant portion of milk producers in New Zealand, an earlier than usual announcement of a positive opening farm gate milk price for the upcoming season has been reported. This will add a degree of confidence for producers for the upcoming year.

In Australia, the milk production season still has another month to go before the official end to their season (July - June). At this point, late season milk volumes continue to run heavier that last year comparables. An early estimate of milk output in April is that milk volumes will be 2 1/2% above April 2009. As late season milk volumes are positive over last season, cumulative 2009 - 2010 milk production estimates are being pegged at 4% behind last year versus the 6 - 7% decline projection earlier in the season. Although milk volumes at this time of the season are low, positive gains against last season are what dairy producers and handlers were hoping for. It has been a number of years since the conclusion of the season has been positive. A positive end to a season typically enhances herd health and conditioning for the upcoming season.

Current market conditions are mixed. Traders and handlers report that there is no real direction to current markets at this time, although a weaker undertone appears to be developing. Financial unsettledness in many parts of the world is one factor leading to market uncertainty. Oceania traders and handlers will be closely monitoring what potential impact the release of intervention stocks of butter and skim milk powder in Europe might have on prices. Most feel that butter stocks are minimal enough that no significant impact will be realized, but are curious about the 200,000 plus metric tons of skim milk powder. The next round of the global/Dairy Trading event will be held early next week. Traders and handlers are projecting that the trends of the most recent event will continue.

0930c (608)278-4154 steve schneeberger

MD DA100 EUROPEAN DAIRY MARKET OVERVIEW - MADISON, WI. May 27, 2010 (REPORT 21)

WESTERN OVERVIEW: Milk production in Western Europe continues to increase with some areas being reported as at peak levels. The European milk production season got off to a slower start than usual due to a winter season that was colder and wetter which extended further into early spring. Milk production development at that time was very slow to increase, although for the most part, has now caught up and is basically on track with previous years at this time.
Although milk volumes are in line with projections, milk handlers state that they are more accustomed to a gradual build up versus the rapid increase this season.

The major topic of discussion with European markets, and internationally for that matter, is the release of butter and skim milk powder intervention stocks under a tendering system effective June 1. Sales of these volumes are above and beyond already committed volumes for the Deprived Persons Feeding program which will be clearing around 51,000 MT of butter and 65,000 MT of skim milk powder during the period of May - September. The first round of tenders is due by June 1 with the results probably known later in the week after the Dairy Management Committee meeting on June 3. Initially, skim milk powder entered into storage before May 1, 2009 (around 120,000 MT) and butter entered into storage before October 1, 2009 (over 80,000 MT) are eligible. This leaves about half of the available skim milk powder and 30,000 MT of butter for tendering (less the Deprived Persons Feeding Program commitments).

The volume of butter is considerably lighter than the skim milk powder possibilities, thus butter producers and handlers are feeling that butter releases from intervention will be more positive than negative. European butterfat volumes are limited, butter stocks are tight, and intervention volumes will be welcomed into the marketplace.

Opinions are mixed as to the impact skim milk powder releases will have on the market. Reports are indicating that some of the recent export milk powder tender for skim milk powder may have been cancelled. Thus these volumes committed to that tender are now available in the marketplace for other buyer interest. Along with these volumes are those stocks that were being held with confidence for firmer prices. Within the past two weeks, skim milk powder prices have eased, which now have some manufacturers and handlers questioning if they made the right move. Currency fluctuations, with many currencies declining against the U.S. dollar, are causing potential buyers to be hesitant with their purchases.

For the most part, sales activity is centered around internal or domestic needs with international sales reported as quiet. Traders and handlers state that stocks of most products are available for buyer interest.

Cheese production remains strong and continues to absorb a significant portion of available milk volumes. Whole milk powder output is getting the next share of milk with butter/skim milk powder and other milk derivatives garnering the balance, which is much lighter than desired for this time of the season.

EASTERN OVERVIEW: Milk production in Eastern Europe continues to increase, but remains behind their Western European counterparts by about 4 weeks. Typically, milk volumes peak out in Eastern Europe in later June and it appears that this will probably be the case again this year, even though Eastern producers also realized a slower than usual start to their production season. Heavy rainfall in some areas of Eastern Europe and subsequent flooding, especially in Poland, may be impacting dairy production, but no official accounting of these conditions are known at this time.

0930c steve Schneeberger (608)278-4154

MD DA120 OCEANIA DAIRY MARKET OVERVIEW - MADISON, WI. May 13, 2010 (REPORT 19)

OCEANIA OVERVIEW: The Oceania milk production season continues to wind down. In New Zealand, milk output on the North Island has dropped off sharply in recent weeks, although remaining favorable on the South Island. Lack of moisture on the North Island quickly deteriorated pasture growth and conditions. As a result, farmers have reduced daily milkings to one and many farmers are drying off their herds earlier than usual. On the South Island, even though not as much milk is generated in this region, milk volumes are reported to be running 8% ahead of last year. Combining both islands, annual milk production projections are being pegged at flat with last season. Milk producers and handlers state that the adverse moisture conditions late in the season quickly eroded any possible growth over last season.

In Australia, conditions are better than they have been in recent years for this time of the season. The second half of the milk production season is realizing a more gradual decline than has occurred in many years. Although overall milk volumes are trailing last season by 5.8% for nine months, milk processors and handlers remain optimistic that the final quarter of the year will provide additional volumes so that the annual 2009 - 2010 milk production season will realize a 4% decline when compared to the 2008 - 2009 season.

In New Zealand, manufactured dairy Product stocks are in very close balance to short of projected needs. The quick demise of the milk production season has greatly altered late season manufacturing schedules and product availability. Traders and handlers are working closely with customers to fulfill commitments.

At the May 4th global/Dairy Trade event, whole milk powder prices averaged $3,932 per MT, down 1.2% from the previous event. Near term (July, contract #1) prices declined 1.1% ($4,027), Aug - Oct (contract #2) prices declined 4.9% ($3,870), with Nov - Jan prices (contract #3) up 3.5% to $3,908 when compared to previous contract periods. Skim milk prices averaged $3,612 (-1.4%) with near term prices declining 4.1% ($3,682), contract #2 prices increased 1.8% ($3,996), and contract #3 prices declined 1.0% ($3,374). Anhydrous milk fat prices remained firm and averaged $5,020 (+4.4%). The near term, July, contract period #1 averaged $5,572 (+9.0%), contract period #2 averaged $5,040 (+4.3%), and contract period #3 averaged $4,784 (+2.2%). Many traders and handlers feel that the direction that each of these markets trended was in a correct direction, although most anticipate that the overall tone to the global/Dairy Trading event will remain firm.

0930c (608)278-4200 steve schneeberger

MD DA100 EUROPEAN DAIRY MARKET OVERVIEW - MADISON, WI. May 13, 2010 (REPORT 19)

WESTERN OVERVIEW: Milk production in Western Europe is increasing surprisingly well. Milk producers and handlers are stating that the European milking herd is making up for lost time earlier in the season. In many countries, milk volumes are running stronger than last year at this time as the spring flush nears. Some feel that this spring flush may top out a little later than usual this year, especially if weather conditions remain favorable. Thus far this spring, weather patterns and temperatures have been unfavorable, but in recent weeks more spring like conditions have prevailed. Manufacturers and handlers are stating that you will have a few nice, ideal, days which will quickly be replaced with adverse, cold/wet conditions. All in all, typical spring conditions are running 2 - 3 weeks behind usual.

At the May 6 Dairy Management Committee meeting, no significant dairy related changes were reported from the Commission. Some skim milk powder and butter volumes were seeking tender refunds, but these offers were rejected. No skim milk powder or butter have been offered to intervention since the start of the open season, March 1. Early in the month, the Commission released a portion of intervention skim milk powder and butter for the Deprived Persons Feeding Program. Over the period of May - September, about 65,000 MT of skim milk powder and 51,000 MT of butter will be released from intervention holdings. At this point, traders and handlers are not realizing any impact on current markets with this release. Traders and handlers are projecting that these two commodities will be traded or swapped for other food products which will then make these intervention skim milk powder and butter stocks available for other uses. Butter continues to slowly move to PSA with holding totaling 23,190 MT as of May 2.

Seasonally strong milk production is generating manufactured dairy products that are often clearing to inventory. Butterfat is tight, thus butter production is often lighter than desired. Cheese production is strong as demand remains active from Russian buyers. Milk powder production is seasonally active with supplies available for both internal and international buyer interest.

EASTERN OVERVIEW: Milk production is slowly increasing in Eastern Europe, about 4 weeks behind Western counterparts. A cold and wet winter which extended into spring is the main factor that milk producers and handlers are attributing to slower than usual milk
growth pattern. Poland producers might be realizing better than usual milk production trends while other Eastern European countries are lagging behind last year at this time. With the milk flow slower to develop than usual, new manufactured dairy product stocks are lighter than desired by many Eastern European manufacturers. Typically at this time, they are realizing a steady inventory growth pattern at a faster pace than is occurring this year.

0930CT steve Schneeberger (608)250-3204

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