Here's my summary of the key news overnight in 90 seconds at 9 am, including news of a slump in dairy prices in the overnight auction.
Overall, prices fell -8.9% in US dollars, down 8.7% in NZ dollars. The GlobalDairyTrade index has fallen below the 1000 mark for the first time since January 2013, and is -35% below its recent February peak. Actually, its -40% below in NZ dollars. These are substantial falls in only 23 weeks.
Leading the race down was wholemilk powder with an 11% drop since the last auction two weeks ago. Skim milk powder was down -7%, but butter and cheese were only down less than -2% each.
Excellent international grain crop harvest forecasts, and the recent fall in grain prices, may be behind the sudden dairy price changes. Payout forecasts of some observers are likely to be lowered later today.
The slump was noticed by the currency markets and the NZ dollar fell -0.5%. More on that later.
But there were other issues that had the focus of currency markets.
US retail sales grew less than expected and business inventories rose more than expected in data released overnight.
At the same time Janet Yellen was giving testimony to the US Congress and she embellished her dovish credentials. She said American labour markets are far from healthy and signaled the Fed will keep monetary policy loose. She said she won't conclude the economy has recovered until wages start rising and discouraged workers return to the labour force.
In China, new credit granted in June topped analysts’ estimates, supporting the view that policy makers there are more concerned about supporting economic growth that reining in their shadow banking sector.
In Australia there has been a backtrack of the earlier warning about a coming major El Nino event. It's no longer due now says their official weather gurus as the tropical Pacific is actually cooling.
And the initial report from the Murray Inquiry into the Australian financial systems was a pretty lame affair.
Our swap rates are higher today and in New York, yields on benchmark UST 10 yr bonds are unchanged at 2.54%. The recent oil price drop has continued at the US oil price is now under US$100 and about US$106 for the Brent benchmark. Gold has dropped sharply again and is now under US$1,300/oz today.
And we start today with the NZ dollar lower this morning against the US dollar and the Yen on the dairy price slump but the change is pretty minor. We are now at 87.6 USc, at 93.6 AUc. The TWI is just under 81.6.
If you want to catch up with all the changes yesterday we have an update here.
The easiest place to stay up with today's event risk is by following our Economic Calendar here »
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35 Comments
Don't worry Landcorp have your back
http://www.stuff.co.nz/business/farming/dairy/10267167/Landcorps-huge-d…
This is getting serious.
1. 12% less volume than the auction earlier this month.
2. 40 less qualified participants
3. Less participants than any time since October 2013
4. Contract 2 WMP down to USD 3,005
5. SMP averages to some extent being held up by US, EU and Indian
product that has not fallen as fast as Fonterra's prices
Where next?
Andrew - I need your help to refresh a very rusty memory.
The year - 1972. We bought a 'modern' house-with-a-stunning-view for $14500. A very recent insurance valuation to rebuild everything including the huge retaining walls = $950,000
The year - 1972. My dairy farmer friend sitting in my lounge complaining about his payout of $4.00 per kg.
The house details are 100% correct. Surely - including inflation my memory of my friends complaints - must be wrong.
My friend milked 48 cows!
No, you are right, in 1985 my cattle margins are the same as they are now. Then costs were %35 of my gross sales now thay are going to over %85. Looks like dairy returns could get back to 1972 levels. The dollar could drop but we are so dependent on imports it wouldn't be a win/win.
A cattle truck today needs to earn $3 a km to break even.
Keep your housing job, speculation and leverage is the only way to go.
My house figures suggest a dollar debasement ratio - between 1972 and 2014 - of 66
Applying the same dollar dabasement ratio to the 2015 suggested $6.00 payout for milk - in 1972 terms this milk is worth $0.09 per KG. Absolutely marvellous.
What other industry in human history has become a "Rockstar" by increasing its manufacturing units (cows) from 48 to 3000? In real terms this industry is going backwards. The 1972 to 2014 export dollar gains have all been achieved by taking more from the land than can ever be put back - using only product volume - not product value.
Not to mention the huge farm Conversion Bank Loans, vet fees, water take, irrigation and chemical costs. None of which my 1972 friend needed to consider.
Come in PDK.
Greater brains than ours, in both banking and Landcorp were apparently leading the way to a bigger, brighter future. One where we can continue to make the payments on our loans for inflated housing.
I'd love to know what Fonterra borrowed to make last years payout.
China has been storing milk products for the last 7 months .
California milk producers;
Although data out of China is murky at best, there is a growing consensus that China stockpiled much of the huge volumes of milk powder it has imported over the past seven months. Indeed, some importers are reportedly reselling previously contracted milk powder shipments to buyers elsewhere rather than allowing them to reach China, where they are not needed. http://www.agrimoney.com/news/dairy-prices-hit-17-month-low-amid-china-…NZ debt is climbing faster than GDP. 11 billion dollars of new housing debt in the last year almost all of it in Auckland.
Question, who's going to pay the interest? Because it doesn't look like its going to be the dairy industry and it sure as hell isn't going to be Beef, Lamb and Wool.
Aj... Thats the nature of "creditism".... The GFC was full of lessons for wise leaders to learn from... sadly NZ didn't learn anything...
NZ is still going down the garden path..... that path is where it takes more and more debt to generate a certain % of GDP growth....
NZs' growth is still on the back of "credit growth"..... and always will be... until we hit the wall..
Not just housing debt.... I read that Auck City is now paying $1 million a day in interest payments..
- Booming Auckland house prices
- increased equity in existing mortgages
- Record NZ new and used car sales
What am I missing?
Pop!
http://english.caixin.com/2014-04-22/100669023.html
The Long Goodbye.
It's alright Fonterra locked in a % of suppliers at $7, they must know what they're doing aye.
Mind you if the payout is $6 the above loss will be on the shareholder not the milk price due to the milk price manual, that does still exist right.
Reality is the dollar will fall but it's going to take a while to come from such heights with interest rates rising.
But hey, no El Niño, that's good news.
The "backtrack" was about it being an El Niño, it was about the severity, to quote from the article linked to "The ENSO Tracker is updated at the end of each month. It is currently at El Niño ALERT stage." and "While the majority of climate models suggest El Niño remains likely for the spring of 2014, most have eased their predicted strength. If an El Niño were to occur, it is increasingly unlikely to be a strong event."
There is also some more specific Australian stuff about the effect of what is going on in the Indian Ocean (which affects Australia more than us) and has been a strong moderating affect on that part of the world.
Unlike NZ - it seems that in the USA they collect data on houses bought with folding notes (cash)
Some blame must be attributed to the government's inability to discern the need for timing when it believes it is on to a white gold rush winner.
Your second link provides an interesting definition of a 'robust' balance sheet:
Fourth, Heer says corporate farms typically focus on building a robust balance sheet. The goal is to ensure there's enough to deal with, say, a drought year.
I wonder what they would call a balance sheet that could handle dairy commodity prices returning to long run normals.
Colin, equity what the cost?
The other day we looked to that link implying that farm/ag debt needed to be trebbled from $50bn to $150bn - tic.
But thinking of the equity, to build a balance sheet, thats from retained profits & showing a run of profits in order to raise further cash equity,
Thinking of the Group farms (where the investor obtains no lifestyle/view/tree lined drive address benefits) at what price would equity be?
Un geared text books imply
risk free rate (going up) say 5% (high long term risk free interest rates make equity expensive)
equity market risk, say 6%, + company size and private 3% = 9%
farming as a business beta .85 ? (could be 1.2) - (which to use?)
equity cost = 5% + 7.65% = 12.65% (not adjusted for investing in a geared business). [this rate being where some big private funds look for 10% to 14% farm investing return].
production wise would one, rather than day to day mskg price, use the bank lending mark of ? $6.00 to $6.25 (including div), or thumb print of $6.50 or more?. (why use one mskg price for debt and a different one for equity?)
Operations cost and production level, would you use an average of the last three years, or a steady state to match the $6ish figure above.
The way we see it is that the cost of equity comes down to 5% - 7% range when deadset/comewhat may approx. 5 - 7% year on year growth in retained profit/free cash flow is tabled.
We seeing this being done thru cost reduction (and > capex detracts), so its growth, more from less [tuff] or development profits [converts], otherwise the starting "equity" value gets ratched down....
as before looks like the way to build a Group's balance sheet is to sell off assets, how would you be...
Hi Henry.
Equity comes with higher cost than debt because it is the first to take losses. Its cost is dependent on risk/return dynamics. I suspect those dynamics for dairying are about to be significantly re-assessed (and negatively).
The risk of debt for dairying has increased and its cost is therefore also going to rise.
But where in your analysis are the economic concepts of:
- a) diminishing returns
- b) maximising profit by producing to the point where marginal revenue equals marginal cost?
Why not step back a bit and look at the key vested interests benefitting from increased agricultural production. They would be government, finance, and processors (Fonterra as an example in dairy) - possibly in that order. Are profitable farmers with strong balance sheets central to that?
Nope!
Does higher national milk production lower farm cost structures?
Nope!
Does higher national milk production benefit NZ dairy farmers through higher milk solids payout?
Nope!
Yes Henry, it looks like the way to strengthen a Group's balance sheet would be to reduce production through selling off assets (shares and cows at least) whose marginal costs are higher than their marginal revenue.
However, bank economists have cut their forecast returns sharply.
ANZ chief economist Cameron Bagrie said the bank had already "slashed and burned" its forecast payout to $6.25 after the previous auction.
"We just didn't like the price action," he said.
While the bank had expected softer prices overnight, Bagrie said it had been surprised by the extent of the fall, and would probably cut the forecast further.
ASB slashed its forecast from $7 to $6.20, and Westpac went even further, cutting its expected return to just $6
http://www.stuff.co.nz/business/farming/dairy/10271879/Dairy-price-spirals-down-8-9-per-cent
All we note the comments of bank economists and an opposition party shadow spokesman.
Where are the thoughts of the bank lenders or on desk FXtraders, or gDT traders and buyers (even agents in HK would do) folk in the flows rather than excel =Trend() driven..
for example:
The difficulty of obtaining accurate information on China's dairy sector makes it difficult to foresee how the market will pan out, Mr Lancaster added.
http://www.agrimoney.com/news/dairy-prices-hit-21-month-low-as-china-buying-ebbs--7270.html
Why aren't dairy farmers more angry? You have been mislead into expanding milk production to the point where oversupply is crashing prices.
The little information we have on the problem is coming from overseas sources. How come Fonterra, DairyNZ, MPI, Treasury and MFAT collectively couldn't identify a developing situation that Andrewj managed to in his spare time? Or maybe they did but militant ignorance ruled - central to government economic policy is expanding and intensifying agricultural production.
And the banks support that - their answer is for agriculture to triple debt to $150 billion.
I don't know that 'misled' is the correct term Colin. Many of those who became 'corporate farmers', I believe, knew exactly what the real situation is.
DIRA also has a part to play in the ever expanding dairy industry - under that Fonterra basically can't refuse to accept supply, so anyone who wants to farm, can.
One saving grace for the current situation maybe the rules coming to every farm, around nutrient loads/limits. I do not believe that BAU will continue in the future.
I had a quick look for a video I watched recently of Tim? the go to man of Rabobank for anything dairy. Its probably been pulled off the rabo website. The world according to Tim was that white gold was on a forward trajectory, no one had the capablility to ramp up growth, and all would be well for the worlds dairy farmers for many years to come.
This is why the shit has hit the fan. Dudes like him talk rubbish and people listen.
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