Fonterra develops online trading for dairy commodities

Dairy prices have been extremely volatile recently, partly because of changes in supply and demand, as newly affluent consumers in emerging markets like India and China has adopted more Western eating habits.

Global stock levels have also been affected by climatic factors in dairy producing countries - such as floods in Argentina and drought in Australia..

In the past, Fonterra has operated by contracting prices with its customers, but this means there is a time lag before it can respond to changing prices.

Andrew Ferrier, chief executive of Fonterra, said that more price volatility is expected in the future and the new sales channel, called globalDairyTrade, will allow both the company and its customers to be more responsive to price changes.

"GlobalDairyTrade has been designed as a step along the way to help Fonterra and its customers manage price exposure in this sort of market, but will be equally as effective in any market conditions," said Ferrier.

The first trading session is scheduled for July, and it is starting with one single product group - milk powder - with a view to adding other groups throughout the year.

In the first year it expects to trade some NZ$1m (c €0.49m) of milk powder in this way, with volumes increasing in subsequent sessions.

Fittingly, in February Fonterra announced the construction of a new NZ$212m (c €113m) milk powder plant in New Zealand to capitalise on growth within the ingredients market.

The construction, which will be situated at the company's Edendale site in Southland, has been commissioned in preparation for an expected surge in milk production in the South Islands by 2012, Ferrier said.

It is expected that up to 20 per cent of Fonterra's dairy commodities from New Zealand will be sold through the new globalDairyTrade system.

Beyond the benefits for its customers and shareholders, however, the new system could, ultimately, have an effect on the global dairy sector at large.

Fonterra has said that key sales results will be made public, so that a "global benchmark" for prices starts to emerge - and any trends will be evident.

This will help both farmers and dairy buyers in their decision-makers.

Fonterra expects to open globalDairyTrade to its supply partners and maybe even its competitors.

This may herald the development of a international dairy futures or derivatives market, such as already exists for other commodities such as oil or sugar.

The channel will be run by an independent trading manager, and will be "open, fair, objective and simple," according to Fonterra.