Will the U.S. Reap a Benefit from Fonterra?

Published on: 14:07PM Aug 19, 2013

What the contamination scare means for the market, supply and demand, and your dairy.

Dairy newswires have been dominated by the discovery of bacteria in three batches of whey protein concentrate from New Zealand. The whey was used in the manufacture of sports drinks and baby formula.

China immediately halted imports of some products from New Zealand and Australia. Eventually Russia, Kazakhstan and Belarus got on the bandwagon, limiting or banning imports followed by Indonesia and Sri Lanka. Fonterra is refuting the ban from Sri Lanka, which halted advertising and sales of their products for 14 days, as none of the product-in-question to that country. One can say what they want, but countries and consumers will react to instances of possible or actual food contamination, and rightly so. A quality product must be offered to consumers or they will go elsewhere.

The reaction of dairy traders when the news broke was bullish on the idea that this could be positive for demand for U.S. product. However, it was a knee-jerk reaction. As more news was released, it was discovered that the product contamination was not widespread and was confined to three batches that were essentially recovered. This took milk futures back down, and they have been weak ever since. The addition of the other countries joining the ban of products did nothing to spark buying interest in dairy futures, and why not?

Instances like this can be looked at two ways. Countries will look for other sources to obtain supply if they need some. There have been more inquiries of product availability and price since this event, but it is unclear whether there have been increased deals finalized.

The other factor could be consumers backing away from some products in general, no matter where they come from, until they themselves feel ready to purchase. After all, the consumer is the one who is in charge, and prices will rise and fall according to demand. The difference in this case is that the affected product is not cheese or butter, which are the drivers of milk and butter futures. Obviously, there could be long-term impact as interest in other products may be generated. However, as in most things, steps will be taken and product again will be deemed safe and business will resume as usual.

Traders are not concerning themselves with "potential" or "projected" business but are concerned with current supply and demand. The industry currently feels there are ample supplies to meet demand. Time is running out for a third-quarter, demand-driven rally. Historically and seasonally, cash prices and futures prices reach a peak in September or October, but time is running out with markets void of a catalyst to rally the market.

Another hindrance to domestic demand is fluid milk consumption. Fluid milk sales in June lagged last year by 5.9% with year-to-date sales down 2.9%. Total organic sales increased 5.8% with year-to-date sale up 3.1%. Even though organic sales are positive, the volume of product is 1/22 of conventional products. This trend of lower consumption has been a concern for quite some time.

What this means is that we cannot base marketing decisions on perceptions but need to base them on each individual farming operation.

Upcoming reports:

- Global Dairy Trade auction on August 20
- September Federal Order Class I price
- July Livestock Slaughter report on August 22
- Agricultural prices report on August 30

Robin Schmahl is a commodity broker and owner of AgDairy LLC, a full-service commodity brokerage firm located in Elkhart Lake, Wisconsin. He can be reached at 877-256-3253 or through their website at www.agdairy.com.

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