GDT cements place in dairy world

Paul Grave

SYSTEM WORKS: There is no denying the efficiency of the selling method, GDT director Paul Grave says.

The contentious trading platform GlobalDairyTrade (GDT) has turned five years old and director Paul Grave believes it is firmly cemented in the world dairying framework.

GDT has traded US$10 billion of products since inception and will stage its 100th auction on September 17. It has six sellers of dairy commodities and 800 registered buyers in 90 countries worldwide.

Launched by Fonterra in July 2008 as world dairy prices plummeted after the commodity price boom, GDT had many detractors because it was new and unique.

Farmers couldn’t understand why Fonterra wanted to put a major portion of its production of dairy commodities into auction, with the perceived risk of low numbers of bidders and distress prices.

For generations New Zealand had sold its dairy exports by private treaty and contracts, which were not very transparent.

The co-operative with a near-monopoly on NZ milk processing, its farmers, competitors and regulators needed a “true price discovery” process for benchmarking, market making, share value setting and third-party raw milk sales, Fonterra argued at the time.

Speaking as a former export sales representative, Grave said before GDT not much time was spent on face-to-face selling but a huge amount on trying to forecast dairy prices, usually resulting in wrong guesses.

GDT was not launched to save money and make salespeople redundant, but to make reference prices for the benefit of all market participants.

Up to 40,000 tonnes of product were sold at every GDT event, equivalent to 2500 shipping containers and worth perhaps US$200 million, so there was no denying the efficiency of the selling method, Grave said.

Nor was it expected to stop the relatively recent considerably increased volatility of world dairy prices, which have bounced around by 10-20% after the 2007 price boom and the end of European Union stockpiling.

“We cannot really imagine world dairy trade without GDT now, which is a good-news story for Fonterra and the dairy industry.”

Paul Grave


“The previous period of price stability no longer applies and regular GDT events now help to assure buyers and sellers of competitive pricing,” Grave said.

It remained unique in commodity trading platforms, the intellectual property was securely held and there were no fears of imitators or interlopers, he said.

About one-third of Fonterra’s annual production is sold through GDT and Fonterra has the lion’s share of total GDT offerings but the platform is open to allcomers.

Other sellers might want to use GDT to establish reference prices, use a new route to global markets or take control of their sales process rather than using agents, he said.

DairyAmerica, Arla Foods, Murray Goulburn, and Amul India will be joined by Euroserum on November 5.

Up to nine products across six contract periods are sold simultaneously during each two-hour GDT event, conducted electronically by independent trading manager Charles River Associates (CRA) of Boston.

Sellers nominate a starting price low enough to attract all buyers in the market for that product at the nominated delivery times, which in aggregate might be three or four times the volume being offered.

The GDT system logarithmically increases the price in second and subsequent rounds of bidding, so that bidders drop out, until equilibrium is reached and the buyers’ volume matches the offered quantity at an agreed price.

Those prices are then compared with the previous event, product by product, and combined in a GDT index, which sends signals to the world dairy market.

“We cannot really imagine world dairy trade without GDT now, which is a good-news story for Fonterra and the dairy industry,” Grave said.

“I must emphasise that not all world trade is conducted at GDT prices, which are reference points, but actual trades vary according to quality, location, reputation, shelf life and other factors.”

Fonterra reports publicly on the average premium its sales staff members achieve above GDT reference points.

GDT is run independently of Fonterra’s sales force, with an advisory board of sellers and buyers and formal market rules, as well as the supervising market manager CRA.