Bernard - very timely. Do you happen to know how much a $5 payout removes from the rural economy as compared to a $7.60 payout in absolute terms? I would estimate in total that would be several billion NZ$ less into the rural economy in 2009 as opposed to last year? (barring an almighty resurrection)

I am betting that there is not a single dairy farmer in NZ who will have budgeted on recieving anything remotely as low as $5/kg in the next payout (or 30% less than in the previous year). I wonder what is going through the typical Rural loans managers head at the moment, particularly as land values have stalled and farm sales volume has plunged. Another hat tip to Andrewj on this developing story.

This from a contact in Australia

Dear Folk,

Keeping you informed.

Yesterday the major Milk Companies 'Murray Goulburn' and 'Fonterra'
announced amended Milk Prices effective as of 1st Jan '09, ie. 40-60% cuts.

Some Dairy Farmer clients have faxed in the newly amended Cash Flows, and
milk price has dropped from earlier forecasted prices of 40-50 c/L down to
27-28 c/L for Jan/Feb '09, climbing back to 30-34 c/L for March-June '09.

Market prices for Dairy Cows has reportedly dropped overnight.

In my view Milk Companies will need to close marginal factories and reduce
operating costs, and not place all of the financial pressure on Dairy
Farmers.
And, unless Milk Prices can be clawed back up, there would not be a Dairy
Farmer in Australia that could currently operate viably at these amended
Milk Prices.

Ho Hum!!!

Cheers for now,

Leon A. Martin BAgSc(Hons) MD Grosvenor Range Pty Ltd
International Agronomy, Research, Agricultural, Environmental And Livestock
Consultancy

Long term average prices are $4.70 we are going way below this!
Andrew
A friend purchased a dairy farm in Aust this year at$6k an acre their dairy farm debt is minimal, we are in deep trouble. Our debt level wont work at these returns. Its all about debt and we have too much to put it nicely.

Land corp. can assist with management.

Steve I take it you are Joking?

Im laughing.

Steve L

Landcorp's dairy investment must be looking pretty sick. I dont see any need for a govt corporation to become involved in this problem, the market will fix it ,debt needs to be repudiated. New farmers are waiting for the chance to purchase land, Landcorp is just as guilty as any dairy farmer for the crazy prices paid for land. Landcorp will nationalise NZ. National has admitted that it intends to sell Landcorp pity it wasn't done sooner.The only money Landcorp makes is Capital gain ,its farm management is excellent but at a board and corporate level its appalling, a place political favor's end up.
Why should the Govt own by default, its not the taxpayers responsibility to stand behind shoddy lending practices by the likes of W-PGG and National. The banks have already had a handout in the form of a taxpayer deposit guarantee you are talking way beyond this.
Dairy debt at $22 a milk fat solid means many large scale indebted farms are history. Debt is going to be a major. You are talking of a 500 cow herd losing 250k a year, this before debt servicing?

Steve
You are wrong about deposit guarantee its a straight govt guarantee of deposits( for what its worth) In accepted institutions.
this from the market ticker.

Yesterday we closed at a historic low, and early indications today are even worse, at 21.20 The IRX, or yield on the 13 week T-Bill, is essentially zero.

One cannot argue one simple fact - Bernanke hasn't yet started buying the long end of the curve to any material degree. But he's been threatening, and today the FOMC statement made explicit what had been whispered before.

The mouth-breathers were all over CNBC and elsewhere yesterday and today claiming that this would "stabilize" the credit markets and make credit (and the economy) better, with the most outrageous displays of stupidity being put forth by Cramer and McCulley of PIM(p)CO.

Yeah, right.

Now let's take a more cynical, but realistic, view.

Remember last year. Oil went from $60 to $150 in the space of a few months. Why? Because it was no longer profitable to buy CDOs and RMBS, as they were imploding. The money has to go somewhere, and so traders bet in front of what they believed Bernanke would do - crank down interest rates at an insanely-accelerated rate, which would spike prices in commodities, as the economic slowdown had not yet occurred - and wouldn't for several months.

They were right. Bernanke did it, oil shot the moon and Goldman (and a few others) made a whole bunch of money.

Who paid?

You did, by paying $4/gallon for gasoline.

Now let's back up a bit. 2003, to be exact. What happened? Greenspan (and Bernanke) played the same sort of game and house prices went ballistic. A handful of people made fortunes securitizing various mortgage and other "assets" into complex (and opaque!) securities, foisting them off on the world.

Who paid?

You did, by overpaying by 20%, 50%, 100% or more for a house.

Ok, so the housing bubble collapsed, then the commodity bubble collapsed.

Now we've got people who for the last month who are once again front-running Bernanke's playbook, which he was convenient enough to publish in advance as his doctoral thesis. They are buying the long end of the Treasury curve not because they think that a 2.35% yield for ten years is a reasonable rate of return over inflation, but rather because they expect The Fed and Government to drive prices higher than when they bought the securities.

That is, they're after capital gains, not yield or "coupon", and are specifically gaming the government and Fed.

Who's going to get the bill this time?

You are!

How? Simple. Treasury seems to think they can issue essentially limitless debt to bail out banks and others, having committed nearly $7 trillion thus far. Most of that has been issued through various short-term paper which has a near-zero (or actually zero!) interest rate - that is, up until now that debt issue has been essentially free!

What happens when this bubble bursts?

You think it won't? Like hell it won't. And when it does - that is, when Mr. Market calls the bet and forces Bernanke to actually make good by starting to unload all these "accumulated" Treasuries into his gaping maw, we will see "shock and awe" of another sort.

See, if the selling starts rates go up. To stop that Ben has to take up the supply. This causes him to print more money (expand his balance sheet) which means that the full faith and credit he relies on is further damaged. That in turn causes more people to get the idea that they better sell now which in turn causes him to buy more which.....

Remember the waterfall in September and October in stocks?

The same thing can happen in the Treasury market, and if it does it will force a political decision to be taken - risk the destruction of the dollar and our government or remove - by immediate statutory change (and force if that is resisted) The Fed's authority.

The argument keeps being made that "we had to do this" to save the system. But what's not being talked about is what the real problem was, and who we're trying to save.

The political class keeps trying to tell us that "we have to do this for mainstreet" and "we have to help homeowners."

Oh really?

Let's look at a few facts, shall we?

First, total mortgage debt outstanding. Its about $14 trillion dollars.

With the $7 trillion dollars we have committed we could have literally given every homeowner with a mortgage a fifty percent reduction in the principal outstanding.

This would have instantaneously stopped all of the foreclosures by putting all (essentially) homes into positive equity - overnight!

So why wasn't this done?

Because the goal was never saving homeowners or Main Street.

In point of fact the problem that the government is "trying to solve" is instead the unregulated bets that were made in the OTC CDS space which were backed by exactly nothing; there was no capital behind any of these bets!

There is no fix for this problem; your leverage is effectively infinite if you have no capital behind your positions. You are limited only by your testosterone level and there's been far too much of that on Wall Street over the last decade.

This was not an accident; in fact Henry Paulson himself lobbied for the removal of the previous leverage limits as I have noted when he was Chairman of Goldman Sachs. Between that and the complete refusal to regulate anything or anyone by the SEC, OTS, OCC, The Fed or anyone else we have built what amounts to a pyramid scheme based on nothing other than debt.

What Bernanke and Paulson are in fact trying to do - and what they have been trying to do since this crisis began - is paper over the bad bets that companies like Citibank, Lehman, Bear Stearns and AIG made with zero (or nearly so) capital behind them.

That is why we have committed $7 trillion dollars, it is why Paulson keeps changing how the "TARP" is going to work and what it is going to do, it is why AIG has gotten bolus of money after bolus as its bets have deteriorated further and in fact it is why The Fed took the arguably-illegal step of buying the assets against which AIG wrote the bets (so it could null them out; you own both sides of a bet there is no bet at all - but the loss on the underlying is now yours!)

The problem with this strategy is that it hasn't changed a damn thing, because with the exception of Lehman (which was allowed to blow up) these contracts were never extinguished; a loss is a loss and when you own both sides you're guaranteed to be the sucker who eats the grenade. All we have done is change where the leverage lies; we have taken the 30 or 50:1 leverage from the investment and commercial banks and moved it onto the balance sheet of The Federal Reserve!

This explains why The Fed is "resisting" Bloomberg's FOIA and has forced Bloomberg to file a lawsuit; laying bare the "assets" being held would allow independent evaluation of their value. This is extraordinarily dangerous to The Fed because if "we the people" (or worse, foreigners who have loaned us those trillions of dollars) were to get a look inside these "assets" and found that they were in fact so-called "AAA" mortgage bundles that have forty percent default rates embedded in them (as was found in one particular WaMu securitization I and Mish Shedlock were writing about earlier in the year) fair-minded people might conclude that The Federal Reserve is in fact broke and lying about their own solvency!

What other possible explanation is there folks?

Why keep something secret unless disclosing it would be embarrassing - or worse?

The Fed is not an independent, private entity. They are literally charged with maintaining the currency that represents the future output of every American. That is, their "stock in trade" is actually your willingness to get up, go to work, earn money and thus pay the taxes that underpin our currency and monetary system.

No taxes, no Treasury, no Government and no dollar.

Now tell me again why you're willing to get up and go to work when the organization that is effectively taxing you through these policies won't tell you how much you're going to be paying and the truth about why?

Here's yet another problem on the "unintended consequences" side, beyond the fact that the market can (and will) call Bernanke's bluff to buy "everything and anything" - its that there is no longer any reason whatsoever for you, or anyone else, to keep money in a bank account or Treasuries when the rate of return is in fact negative.

That's right - as of today there are money market accounts that have negative yields, and yet those funds are critical to the commercial paper markets.

What's Ben going to do about that little problem?

He can't force people to keep their money in an "investment" that has a negative return! And yet that is precisely what Bernanke did today - he guaranteed that virtually every single money market account across America will be decimated with withdrawal requests in the coming days and weeks.

And why not? Why would you be so stupid as to keep your money in an account that is guaranteed to lose not just value but actual principal?

We all "tolerate" inflation's cost on our funds - mostly because the vast majority of Americans don't understand it.

But everyone understands seeing their brokerage statement with a so-called "money market" that is actually going down in value every month!

That's going to last all of about one day beyond when the first statements go out that contain these losses, and will cause an instantaneous run on money market accounts across the United States. Those firms that decide to "eat" management fees to avoid this still will find themselves with a zero return which leads one to start wondering why they're giving someone use of their money for nothing and how long those firms can operate cash-flow negative before they blow up.

And that leads us to the next question - how many more Madoff's are out there? The "bezzle", as it is called, is the underlying embezzlement that is always present in an economy.

Bluntly, someone is always stealing - its part of human nature.

In good times this theft is just thought of as "shrinkage" and people tend to ignore it, because while it does count the total amount of money lost is small compared to the total profits. It can be hidden and often is - nobody is the wiser (other than the thief, of course, who is doing quite well.)

But in bad times these losses compound upon economic losses, and suddenly "the bezzle" becomes evident to everyone. The thieves try to maintain the patina of normalcy but to do so they must steal a greater and greater percentage of the principal that remains until finally the books are laid bare and there is literally nothing left.

That's what happened with Madoff and yet the SEC and other regulators were told as far back as 1999 that it was going on.

They ignored it because, well, times were good and exposing this scam would have been "embarassing."

Is your broker a Madoff?

How do you know? Is your 401k safe? Your IRA Trustee? Your online brokerage account? Is there any reason to believe it is, and any way to know it is, when a $50 billion apparent swindle goes unchecked and unstopped for ten years despite multiple written warnings sent to regulators?

Confidence? What's that? How can I reasonably know that any investment house - no matter who they are - is clean?

I can't, and that's a problem that can't be accounted for with classical "bankers theories" or "a doctoral thesis." Confidence, once destroyed, is rarely ever fully recovered.

Ben thinks he has this economy and market problem all figured out.

Unfortunately his thesis failed to account for all the unintended consequences thus far, and will continue to do so, because Ben suffers from the same sort of bloated-head syndrome that is endemic among academics - they believe they can say something and make it so as a consequence of their "degree."

The real world laughs at such hubris and severely punishes the fools who persist in their beliefs despite being proved wrong - especially when it happens more than once.

We are now in the end game; Treasuries are the last bubble, and when it bursts, we will find ourselves in a Depression that will make the 1930s look like a Cakewalk.

Bernanke has gone "all in", and he holds 2-7 offsuit.

He needs 7-7-2 on the board or he's dead.

You run the odds, then figure out what you need to do.

I am no longer looking at a 1930s scenario as my base case; that has shifted to the panic of 1873, which was far worse than the 1930s and included widespread civil unrest. Go do some reading - and make sure you're sitting down. The parallels in the foundation of how that panic occurred - industrial shifts (US >> China) and insanely-loose mortgage credit (European in particular) are stunning - and troubling.

If Bernanke won't cut this crap out Congress needs to do so, and do it now. A replay of the 1873 Depression in today's society will be catastrophic, with unemployment reaching 30% or more and leaving essentially everyone - corporate or otherwise - carrying any form of debt wiped out. Deficit spending will become instantly impossible; go figure out what that does to the Federal Budget.

We are running out of time to stop that outcome and if effective action is not taken before the Treasury Bubble pops it will, quite simply, be too late. That Genie is not the friendly sort, and once he pops out there is no stuffing him back into the bottle.

There will be more on this in the Year In Review And Look Ahead Ticker, due out in a couple of weeks.

Here's hoping the bluff doesn't get called before then.

The RBNZ released the December bulletin yesterday

http://www.rbnz.govt.nz/news/2008/3514594.html

Discusses the difficulty NZ banks are having in getting their hands on international dosh

The NZ government has to make some decisions about which industries it wants to keep afloat through this global crisis - just as the US has made decisions about its financial institutions and now its motor vehicle manufacturers. What do you guys think of agricultural production subsidies? Presently, the Government's plan is to subsidise the construction industry through bringing forward infrastructure spend on urban roading and broadband - whereas Fed Farmers has suggested targeting that infrastructure spend on water storage initiatives.

What do you think of providing relief to productive rural landowners by way of local authority rates rebates (the more productive by some equation the greater the rebate - in other words a means to discourage stock decline).

Where the government intends to subsidise insulation retro-fit of urban dwellings - how about it similarly subsidise productive rural landowners into micro-hydro, wind and other energy generation infrastructure projects.

Another idea would be to put in place a certification programme which directly subsidises animals on per head basis where farm businesses have made a binding committment to an agreed nitrogen budget, as well as a waterway planting/fencing plan and hill country erosion mitgation plan.

I just think this National government hasn't realised that NZ's future is in it's environment. They seem to want to direct spending on environmental degradation as opposed to restoration. I'd really like to see farmers take up the idea of getting subsidised to clean up the countryside in a way that sustains their industry as well.

AndrewJ

It would be 'better' to put a link in rather than cut and paste, you could be accused of plagiarism, Denninger wasn't it?.

Neven

Neven911
I couldn't get the link to work as the article was 4 days old and it always came back to his latest, so I had to paste. I mentioned twice where it came from. Not much more I can do than that

Just like housing - most debt will lie with the minority. A good portion of Farms are passed down and built on from generation to generation. My old's and their siblings all own multiple farms with bugger all debt. They are all part of the empire started by my great grandfather. They would own well over 10,000 acres between them now

Fonterra payout to be $5.

I would say that is a best case scenario

The small Westland Dairy Co apparently has just announced a projected payout of between $4.20 and $4.60, and Westlands payout to its farmers is generally higher than Fonterra's payout.

Some banks were lending on a $6 payout so there is some fallout to come there.

This reduced payout will have massive effects on the NZ economy. There is not one area of the economy that is doing well and the news just keeps getting worse.

I guess the good news is dropping fuel prices and lower interest rates.

Seems to be taking a long time for these lower costs to start being reflected in lower food costs at the supermarket. Butter is still about $3.70 for 500g
in the shops and prices have dropped by more than 60%. that is just one example. Someone is making a lot of money at the consumers expense.

Its cyclical .......banks will need to grow a set of balls not collapse anything and ride it out.
Funny how only a few months ago there wasnt enough food to feed the world and Oil was heading to $200 a barrel.

sam.p - farmers already pay tax, family trusts pay tax as well. They have had to pay tax for decades now.

If they were to sell their farms then they would pay tax on any depreciation recovered. Any gains over and above the original cost of the asset is non taxable. GST is payable where a farm is not sold as a going concern.

If they transfer the farm to another entity then those assets are transferred at the original cost and tax is paid on depreciation recovered.

Peter - many thanks for that, some fascinating comments 'from the frontline'. It is clear that there won't be a dairy farmer in the country who has budgetted on payouts for 2009 of say $5/kg, so the implications are clear.

Nick, Ian, Andy,

The speed of change is very fast, but the trend in what is happening was predictable and inevitable. Treasury and MAF were aware of the possibility of the current scenario from 2006, but chose to deny that there was a bubble in agriculture. Perhaps they couldn't accept the idea because they were part of the bubble.

Farmers can't turn production on a dime, but with an understanding that bubbles are cyclical and usually symmetrical they could have adapted to lower risk strategies. Some will have, but most will probably be caught to some extent.

This is where the lack of guidance or direction provided by industry leaders and government agencies is a disgrace. Andrewj has been calling these events months ahead of them occuring, but the full time specialists didn't even warn of their possibility.

Apparently Fonterra has a stockpile of over a million tonnes of milk powder. Are they sitting on it waiting for the price to rise, brave move in a falling market.

In the meantime what does that do for their cashflow, or is that what the $300 million they are looking to raise is for, so they can afford to pay their farmers

They would be better off doing away with the hair brained auction system they use where the latest auction price starts 15% below the previous sale price. Great if the market is rising as then the price has to climb 15% to better the previous sale price.

But I think we are seeing what happens in a falling market, the 15% drop is already built in to the next sale price.

Talk about Madoff. Fonterra has "Made off" with the farmers money

Allen,

Can you provide some support for Fonterra having a stockpile of a million tons of milk powder? That would represent about half NZ's annual dairy production. At USD 2,000 per tonne, about NZD 3.5 billion worth.

They are not building one but looking to rent.

http://www.nzherald.co.nz/property/news/article.cfm?c_id=8&objectid=1054...

I think 60 cents on the USD/NZD assumption forgets that these guys probably hedged at a higher rate some time back. it'll be interesting to see how much they are out of the money and what the final payout is.

Its somewhat surprising that commentators and the media generally have not to date made any assessment of the "bubble values" that are currently evaporating globally. I have attempted to provide a "sketch" of this within the Open Lettter to Bernard Hickey on Global Deleveraging" (access article in left column above). At best - this cold only be described as a "sketch".

Then asking the question - what realistically can Reserves / Treasuries / Governments do to arrest these major readjustments? Its very clear to me that there is not much they can do in this regard - and that throwing money at these issues in attempting to bail out everything in sight will only worsen / prolong the problems.

We certainly do not want to be repeating the current policy mistakes of the Americans. In any event - we do not have the capacity to do so.

It is to be hoped that the Key Coalition Government here in New Zealand will recognise this - and keep its focus on the real structural issues, to ensure that New Zealand deals effectively with the real issues and is in a stronger competitive position going forward. Our internal cost structures and costs of government are clearly excessive.

Hugh Pavletich
Performance Urban Planning
www.performanceurbanplanning.org
Christchurch
New Zealand

Bernard,
you got your millions and billions abit mixed up! NZ cow cockies are set to produce around 1.25 billion kg milksolids this season - ouch! Need to move your decimal point over a few places!

I didn't do much better quoting 2m milking cows in NZ, reality is double that to 4m cows.

End result is much, much, much worse. say $20 - 40b out of the NZ economy.

http://www.fencepost.co.nz/news/detail.jhtml?ElementId=/news/repository/...

P.S. I just love the way that realestate agents/commentators say that a drop in interest rates will fix all of the above, come on!

Fonterra start to prepare the ground for a slashed payout:

http://www.nzx.com/news/economy/4806083

Does anyone know what, if any, liability Fonterra still have to the victims of the Sanlu debacle? I know they had a minority shareholding, which they have now written off (at a cost of $200m?), but last week Sanlu declared bankruptcy, citing the fact they had had to borrow money to pay medical costs to the most badly affected (which has sent them over the edge). Now there are claims that something like 300,000 children were affected - I appreciate China is not the US litigation-wise, but what happens if costs, however minimal (say $1000/head) are awarded to these children? Does Fonterra have any exposure? Would they feel morally obliged to stump up cash if compensation claims are advanced? Clearly Sanlu can no longer pay anything else as they are broke.....

Can someone please tell me, am I going mad or was there an article about unemployment numbers posted on this blog this morning(30-12) prior to me leaving for work at 7.30am. I had posted comment in reply, but now the article is no longer. What is up with that ?

Cheers Andy,
Makes me feel only partly mad.

Andy
New Zealand needs to return to a 'land of opportunity' The prices paid for dairy land and just about any other land, have been so high that there has been no opportunity for sensible investment. If we remove some of the regulation, drop the cost of doing business, farming returns to accepting the cycles of nature, land gets cheaper,then we could be on the cusp of a wave of new opportunity and development, with new ideas and increased profits in NZ.
The trouble is getting there is going to involve some serious change and some serious debt repudiation. Banks wont be keen on the losses that are involved. Id go for the long drawn out slow death over many years, as the most likely outcome.

Thanks Peter