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Skim milk price spike sparks GDT oversight investigation

Skim milk price spike sparks GDT oversight committee investigation

By Jonathan Underhill

March 9 (BusinessDesk) - Global Dairy Trade, the dairy products trading platform owned by Fonterra Cooperative Group, is looking into a price spike in ultra-high temperature skim milk powder at this week's auction, which on the surface looks to reflect strong demand from some buyers for immediate delivery.

The SMP Price Index Contract 1, which is skim milk powder for delivery in April, jumped 44.8 percent at the GDT auction compared to the previous sale. The only product available in that contract was Fonterra's UHT powder, which jumped to US$2,910 a tonne.

The price spike is out of step with contracts 2 through 5, with price movements ranging from a 0.3 percent drop to a 4.5 percent gain. Skim milk power has been on a downward trend from its highs in late 2013, with prices suffering because of increased supply from Europe. The benchmark SMP price was at US$5,142 a tonne in April 2013, compared with US$2,051 a tonne this week, which was itself a 5.5 percent rise from the auction a fortnight ago.

In a short statement on the GDT website, the auction platform said it "has initiated a review of the factors leading to price outcomes for Skim Milk Powder Ultra High Temperature (SMP UHT) product in contract periods 1, 2 and 3 in Trading Event 207."

"The review has been initiated in consultation with the GDT Events Oversight Board and will investigate the observed differences in winning prices for the SMP UHT product, relative to the SMP Medium Heat product in the relevant contract periods. To provide assurance to market participants, a summary of findings will be published" before the next auction on March 20.

Nigel Brunel, a director at OMF and a member of the Oversight Board, said the move was unusual but not unheard of. "It appears, from observation, that a few buyers needed UHT for instant delivery." While the GDT platform had performed as it should, there had been "market chatter" in the wake of the auction on whether it had been a mistake, or what traders call a "fat finger".

The Oversight Board is saying that to create an orderly market, "let's just have a closer look at that and confirm what went on. Let's throw a little bit more sunlight on it."

OMF is the most active trader in the NZX dairy futures market, accounting for about 60 percent of trading. Brunel says as an experienced market participant, "my suspicion would be that someone needed that product now and they paid up for it."

He said dairy products are one of the most volatile markets in the world although more recently prices have been relatively stable.

The Oversight Board has been established for about two years and Brunel says it has two meetings a year and members are in regular contact. The unusual price movement this week had prompted "half a dozen emails" between board members.

He said GDT is completely independent of Fonterra and he was confident the review would show nothing wrong with the system.



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