Fonterra auction to blame for low dairy prices??

Apparently the Aussies are blaming Fonterra’s Global Dairytrade online auction platform for lowering the price of milk.

Interesting. If the auction is simply reflecting the true value of milk then the I feel no sympathy. This quote from the manager of the auction system sums up it’s purpose

Fonterra’s global trade managing director Kelvin Wickham said the auction was all about “the international market getting a transparent price” and all global dairytrade was doing was “making it more transparent more quickly”.

As an economist that is music to my ears. On the other hand here’s the quote from the Aussies

“Given things are bleak with the economic outlook, people are holding back on purchasing to see what happens with the auction,” Ms Bills said.

“Mostly, the price doesn’t recover. It is fine to want to have a transparent price system, but why not open at the closing price? If you put a price out there for something in an auction, people see it as a reserve.

“Buyers are waiting to see the price from the auction before they make their purchase.”

So basically they want the auction setup so that it props up the price of milk, can’t say I really have much sympathy for that view….

9 replies
  1. Matt Nolan
    Matt Nolan says:

    I would say the Aussies are muppets – no offense to any Aussies out there of course 😛

    The primary factor behind the collapse in prices are:

    1) Drop in demand from Asia after the poisoned milk scandals,
    2) A sharp pick up in export supply from the US

    The Aussies are forgetting that the demand curve slopes backwards – if the auction price is lower than the price they are currently trying to charge they will be left with excess stock. The Aussies should be praising Fonterra for working to reveal the real market price.

    Of course in their defense, I guess demand for milk is inelastic, and New Zealand and Australia are residual claimants (so just receive the market price) – as a result, the more flexible prices are on the downside the lower net profits will be in a case where the price needs to fall, something that would piss them off 🙂

    I love first year economics – it gives you all the tools you need to answer these questions 😀

  2. agnitio
    agnitio says:

    On the same note conusmer surplus will be increased if dairy prices fall and that is passed through to local consumers.

    That has a positive externlity for me in that my office manager will stop whinging about it being Fonterra’s fault that cheese is expensive!

  3. Matt Nolan
    Matt Nolan says:

    “On the same note conusmer surplus will be increased if dairy prices fall and that is passed through to local consumers.”

    I don’t think the Australian dairy producers will care too much 🙂

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