Dairy Auction Shows Fonterra’s Premium Over Rivals Narrowing After Latest Scare

Updated August 7, 2013, 3:52 a.m. ET

Dairy Auction Shows Fonterra’s Premium Over Rivals Narrowing After Latest Scare

Sale Was Seen as First Big Test After Dairy Giant’s Bacteria Warning

REBECCA HOWARD

WELLINGTON, New Zealand—The dairy industry’s biggest auction signaled thatFonterra Cooperative Group Ltd.’s FCG.NZ +1.14% tainted-milk scare has eroded its ability to charge premium prices and led to a shift in consumer sentiment toward rival suppliers. New Zealand officials saw the overnight GlobalDairyTrade auction as the first big test of the country’s ability to weather food-safety concerns after Fonterra warned days earlier that three batches of one of its dairy products may contain harmful bacteria. Dairy accounts for about a quarter of New Zealand’s exports and Fonterra is its largest supplier. Lawmakers feared the company’s latest quality issue is hurting consumer confidence, especially after countries such as China and Russia banned imports of some Fonterra products.Analysts said prices of Fonterra’s products slipped more than those of its competitors in the auction, with skim-milk powder particularly hard-hit.

In one futures contract—for the delivery of skim-milk powder in October—Fonterra’s premium over products of U.S.-based DairyAmerica Inc. narrowed to 14% from 20% in the previous auction two weeks ago.

Other participants in the GlobalDairyTrade auctions include Europe-based Arla Foods and Murray Goulburn Cooperative of Australia, India’s Amul and Euroserum, a unit of Sodiaal.

“You can see Fonterra has given up a bit of the price to its competitors,” said Nathan Penny, an economist at Auckland-based Westpac Bank.

Overall, however, dairy prices didn’t fall as sharply as many analysts had predicted when Fonterra first reported the contamination issue. Whole-milk powder prices fell 1.6% while the GDT Price Index, which covers a variety of products and contract periods, fell 2.4% compared with the prior auction.

Also, dairy prices are still 71.5% higher than a year earlier because of reduced supply following New Zealand’s worst drought in years.

Much will depend on whether and how quickly China rolls back its ban on some Fonterra products, and whether any more of New Zealand’s trading partners restrict imports.

“The contamination issue still has the potential to become a serious negative for the economy,” Mr. Penny said. “We expect continued volatility in markets over the coming weeks.”

Con Williams, an economist with Australia & New Zealand Banking Group, said the outcome of the auction showed the food-safety scare did affect dairy prices. Even though supply is very tight, prices for near-term contracts for whole-milk powder were softer, he said. The September and October contracts fell 6.6% and 7.8%, respectively.

“For skim-milk powder, where there is more competition, prices were softer across the board for Fonterra product, whereas other supplier prices were generally unchanged. This reduced some of the premium that [Fonterra] has enjoyed,” he said.

However, a record sale of more than 60,000 metric tons of milk products, including milk powder and butter, suggests that sentiment has held up overall despite the negative publicity for the dairy industry.

In a sign that investors think the impact on New Zealand’s economy and dairy exports will be limited, the New Zealand dollar edged higher against the greenback to US$0.7905 Wednesday.