Last week, the NZX Exchange abruptly halted dairy futures and options trading due to a blackmail plot against the New Zealand government over its use of Sodium monofluoroacetate (1080) poison. In November, Fonterra and Federate Farmers “received anonymous letters” that “protested the use of 1080 in pest control.” With the letters “were small packages of milk powder that tested positive for a concentrated form of 1080,” according to The Australian’s report. On Mar. 10, Fonterra acknowledged the criminal threat to contaminate New Zealand origin infant formula with “1080” unless the Government banned its use by the end of March 2015. 1080 is controversial, aerially applied, pest control used to curb populations of rodents, including stoats, rats, and opossums. The latter is a common carrier of bovine tuberculosis in New Zealand. Environmental groups oppose 1080 and, until now, have peacefully protested its use.
New Zealand’s Ministry of Primary Industries (MPI) and police have taken extraordinary measures to protect infant formula supplies. As of this writing over 40,000 samples of raw milk and dairy products have been tested with no trace of 1080 found. The MPI continues to emphasize that New Zealand milk powders are safe.
Given New Zealand’s strategic relationship with China many are left wondering what the reaction could be to this latest issue. In 2008, China suffered from a scandal where the milk supply was contaminated with melamine. At the time, the tainted milk made its way into the food supply, specifically infant formula, ultimately killing at least six infants and sickening thousands more. Chinese consumers had nerves rattled in late 2013 when Fonterra released news of a potential botulism contamination. In response, China immediately banned imports of all New Zealand milk powders in response to the matter. Tests later found the scare was a false alarm but not before several infant formula makers recalled products from shelves. Shortly following the events China resumed dairy product imports from New Zealand but not without causing market disruptions.
A swift and incident-free resolution is in the best interest of the entire industry. The likelihood of any single group acting on the threats has an extremely low probability – the ability to get the product into the food supply seems impossible in a country with food safety standards like New Zealand. Nevertheless, the specter of uncertainty is never good for dairy markets. Prior to this news, New Zealand whole milk powder (WMP) prices began to show signs of weakness suggesting markets were possibly headed lower. In turn, CME nonfat dry milk (NDM) spot and futures markets started to tumble. Since the end of February, the MAR NDM contract has lost 10¢ or 9% of its value. Price decay of futures spread through the SEP NDM contract.
Uncertainty could further increase volatility in an already erratic start to 2015 for milk powder prices. Between January 7, 2011 and March 10, 2015, annualized volatility exceeded 30% only 45 times. That said, 38% of those occurrences happened in 2015. In just over two months’ time, CME spot NDM prices dropped to a low of 95¢ and climbed just as quickly to its high at $1.20/lb. and has since fallen back to $1.025/lb. at the start of March. The likely cause was an announcement by Fonterra surrounding concerns of lower milk intake due to drought conditions in New Zealand. Since that time, rains have arrived in New Zealand, and milk intake was not as severely impacted as first thought. Typically, New Zealand has dry weather patterns towards the end of the season – moderate dryness is likely most years. That said, the market reaction to the news exceeded most analysts’ expectations. However, given the severity of that response many are waiting to see whether this latest news sends ripples through markets.
Over the past year, demand for dairy products has been strong in the face of historically high prices. However, reduced promotion and price increases ultimately did take their toll, but in the end 2014 was still a healthy year for dairy demand. In hindsight, stockpiling milk powders in China, anticipating of an infant formula bull run to immediately following the government’s announcement that eased the one-child policy, was an ill-fated endeavor. Since that time, brokers and companies alike have worked to whittle down stockpiles of milk powder – that according to some reports look far more normal in March 2015 than they did last summer. And again, as dairy product prices have abated, buyers, unable to afford last year’s high prices, have returned to the markets in order to restock coffers. Most of the run-up and down in markets since 2012 have fallen in the camp of supply issue. Those cycles tend to adjust more readily than declining demand. In recent history, the 2008 melamine scandal followed by the 2009 global economic downturn were occasions that impacted dairy demand adversely. Both events took a considerable amount of time for the industry to recover lost demand. A reason market participants are closely watching the latest scandal that is unfolding currently. How does China react? When does New Zealand resolve the issue? How do buyers respond to another food safety issue from New Zealand? All questions with answers that could send milk powder prices pitching higher and lower as 2015 pushes ahead.