90 seconds at 9 am: Dairy prices jump

WMP up +13.7%, volumes lower; German sentiment up; Greeks offended; China house prices drop; commodities rise; UST 10yr yield 2.09%; NZ$1 = 75.2 USc, TWI = 78.4

18th Feb 15, 7:29am by David Chaston

Here's my summary of the key issues from overnight that affect New Zealand, with news of more substantial dairy price increases.

The Globaldairytrade index jumped +10.1% this morning, building on the +9.4% rise two weeks ago. Another rise of this magnitude will be required if Fonterra is to maintain its current $4.70/kgMS payout level.

The rises in NZ$ were less because of the run up in the exchange rate recently. In NZ$ prices were up only +6.8%.

Also less was the volume offered and sold. Just under 23,000 tonnes were sold today continuing a trend of lower product offerings. This is about 10,000 tonnes less than for the same week a year ago.

Today's auction saw whole milk powder prices jump +13.7%, cheddar cheese up +16.8% and skim milk powder up +6.7%. Whole milk powder prices have now risen by +43% so far in 2015, although they have still recovered only about one-third of ground lost during last year's rout.

In Germany, investor sentiment rose to a 12-month high in February, boosted by action by the ECB and better-than-expected growth.

The EU-Greek talks are in stalemate with the Greeks offended that the EU won't roll over. Threats and brinkmanship is the order of the day.

In China, the average price of new homes in 70 major cities fell -0.4% in January from a month ago, marking the ninth consecutive decline.

Going the other way, Shanghai rebar steel futures rose to a one-month high yesterday and iron ore in hit its highest in more than three weeks, spurred by hopes that China would take measures to stimulate a slowing economy.

The UST 10yr yield has risen today again to 2.09%, in a growing string of rises. Yesterday local swap rates were unchanged.

The oil price fell back marginally to US$52/barrel with Brent crude up at US$61/barrel.

The gold price slumped a lot to US$1,205oz.

We start today with the New Zealand dollar up against the US dollar at 75.2 USc, to 96.2 AUc, and the TWI is at 78.4.

If you want to catch up with all the changes yesterday we have an update here.

The easiest place to stay up with event risk is by following our Economic Calendar here »

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19 Comments

by The Bear | 18th Feb 15, 8:51am 1424202675

No surprises that you get a price rise when you reduce volume by c20%. Interesting that the media focus exclusively on the price metric when reality is that it is only a result of volumes cratering. You can download all the historic data at the Global Auction website and it is quite stark when you compare recent auction volumes with prior months and years. Farmers will still be hurting as prices rebound because they will be selling only half the product they used to.

by Boatman | 18th Feb 15, 8:55am 1424202931

@the bear , I dont understand , are you saying suppliers are restricting supply to the market ?

Surely not .

by Henry_Tull | 18th Feb 15, 9:05am 1424203554

there are markets and markets, read the rules of the market, summary here

https://www.globaldairytrade.info/en/about-gdt/common-questions/

eg 16

and its a bit dry down here now

by cowboy | 18th Feb 15, 11:11am 1424211103

https://www.globaldairytrade.info/assets/Uploads/resources/GDT-Market-R…

C2.9 - C2.13

Although that is declaration of available supply.

So the Seller can decide to structure themselves and their suppliers to supply less in that period.

by Boatman | 18th Feb 15, 8:51am 1424202705

Greeks offended LOL , they really are a dramatic bunch aren't they?

They got themsleves into this mess .

They should get on and do someting about rampant tax avoidance , and spending borrowed money like drunken sailors .

Instead of retiring at on a subsidized pension at age 55 they should , retire at 67 like the Germans , and those who are working age must actually do some work instead of doing nothing in sheltered employment on the Greek Govt payroll .

That said , I actually think that they can never get out of this mess , and should simply default and exit the Euro common currency but stay in the club

by steven | 18th Feb 15, 10:18am 1424207880

If you actually looked the Greeks have done a great deal and it has not done them much good.

http://krugman.blogs.nytimes.com/2015/02/17/comparative-austerity/?modu…

and have dne a lot more than say irelend,

http://www.irisheconomy.ie/index.php/2015/02/16/17443/

They probably can get out of the mess but it will be an awful slog, made worse by the un-realistic demands placed on them.

"They got themsleves into this mess" I agree the voter it seems wants no pain until it is foced upon them in spades. Sounds like just about everywhere else doesnt it.

Personally I think they probably should do a grexit, longer term they will be better off I suspect. Such an event would probably trigger a global financial panic and severe recession, hard to envision NZ being lucky twice.

by cowboy | 18th Feb 15, 11:34am 1424212459

Their austerity was heavily in the private and civil areas and not in the banks and government and government projects where most of the damage was bing done.

by frazz | 18th Feb 15, 9:38am 1424205539

You might want to check your facts Boatman...there is more too the general assumptions thrown around by the Germans

While the deal was referred to as a bailout, in practice it wasn't really. As the Greek finance minister said recently: "The bailout was not a bailout of Greece, it was a bailout of German and French banks. The German public was misled into thinking that this was money going to the Greeks; the Greek public was misled into thinking that this was our salvation."

Source http://www.nzherald.co.nz/fisher-funds/news/article.cfm?c_id=1503733&ob…

by Boatman | 18th Feb 15, 10:18am 1424207902

I understand Frazz , and I have said before the Greeks should simply default like Iceland did at the start of the GFC .

The Greeks should not be impoverished at the expense of German Banks who lent recklessly

That said , the Greeks got themsleves into this mess and for them to be offended as David Chaston puts it , is funny in a perverse way .

The Greeks should give them the finger and start rebuilding their gutted economy

by steven | 18th Feb 15, 10:56am 1424210160

You are still rabbiting on about Icealnd despite the points that the two are not comparible? wow, just wow.

It doesnt look like a simple default by any means of the imagination. With iceland 3? private banks were allowed to go to the wall, not the Govn. With Greece its firstly Govn debt, but if they Grexit the Greek banks will not survive it as they are kept alive by the EU central bank guarantee I believe, which would probably disappear.

Just how a modern country with in effect no banking system survives is a big Q, back to the dark agaes I guess. I cant see that being a pretty 6~12months, unless maybe its 'pretty ugly".

Then there is the effect on us, I cannot see that being minor. Think many pensions wont be effected? inter-bank lending? the global economy?

For the life of me, I cant see how you think this would be a simple affair.

by Boatman | 18th Feb 15, 11:20am 1424211642

Many Governments have defaulted recently and many have been in debt crisises that resulted in huge losses to invesotr banks ......and these spring to mind

Russia

Mexico

Argentina

Algeria

Cameroon

Angola

Zimbabwe

Brazil (1990)

Iran

iraq

Jordan

Kuwait

Sri Lanka

South Africa (1985 , 1989, and in 1993 )

The Phillipines

Jordan

Myanmar

Paraguy

Venezuela

Zambia

And you know what ?...........we are still here , the sun rises , the world economy has not collapsed ...........

by frazz | 18th Feb 15, 11:56am 1424213789

Agree with you 100 per cent Boatman, get it over with and re build greece including the rounding up the Tax dodgers.

by Stephen Hulme | 18th Feb 15, 9:56am 1424206579

The gold price slumped a lot to US$1,205oz.

Every arbitrage has a consequence.

Two months ago we showed, and explained in great detail, how in the new normal the role of gold is nothing more than a funding "currency" to allow the BOJ to sell Yen against it (on a borrowed basis, which is also why the LBMA halted reporting its GOFO data as of the end of February (sic, should be January), as it would not be pleasant for the central bank cartel to demonstrate just how much institutional gold shortfall there developed following major BOJ interventions). So for all those who are curious what it looks like when the BOJ "enters the house", here it is... Read more

by scarfie | 18th Feb 15, 10:43am 1424209402

A cut and paste from a Richard Duncan email this morning. Is there a counter party? Is this an example of what I have said in the past, that GDP is correlated to the consumption of resources and if the private sector won't do it then government can. Is debt cancellation just a way that governments (bloated?) can continue to operate when expenditure exceeds income?

When a central bank prints money and buys a government bond, it is the same thing as cancelling that bond (so long as the central bank does not sell the bond back to the public). That means governments have far less debt than is generally understood. It also has very important policy implications.

The new Macro Watch video, QE Is Debt Cancellation, explains in detail how the US central bank earns vast profits on its bond portfolio – and then hands those profits over to the US government, thereby reducing the government’s budget deficit every year. Last year, the Fed gave the government $99 billion. It has given the government $500 billion since 2008.

We also look at what this means for other countries.

The Bank of England owns 26% of all UK government debt. That means the ratio of government debt to GDP is not 84% as it is reported to be. It is actually 58%. This reality completely undermines the case for growth-retarding austerity in the UK.

The Bank of Japan owns Japanese government bonds equivalent to 22% of Japan’s GDP. When it is understood that QE is debt cancellation, the BOJ’s very aggressive Quantitative Easing program makes sense. It may be the only way to prevent a fiscal crisis in Japan.

The European Central Bank’s plans to create €1.1 trillion over the next 20 months will effectively cancel the combined budget deficits of the Eurozone national governments in both 2015 and 2016, with a considerable amount left over.

Quantitative Easing has only been possible because it has occurred at a time when Globalization is driving down the price of labor and industrial goods. The combination of fiat money and Globalization creates a unique moment in history where the governments of the developed economies can print money on an aggressive scale without causing inflation.

They should take advantage of this once-in-history opportunity to borrow more in order to invest in new industries and technologies, to restructure their economies and to retrain and educate their workforce at the post-graduate level. If they do, they could not only end the global economic crisis, but also ensure that the standard of living in the developed world continues to improve, rather than sinking down to third world levels.

by Stephen Hulme | 18th Feb 15, 11:15am 1424211322

When a central bank prints money and buys a government bond, it is the same thing as cancelling that bond (so long as the central bank does not sell the bond back to the public).

No it's not - the tax paying public still has to empower the government of the day to pay the coupon payments to the central bank that bought said bonds from the market place. And those CB central bank profits get squandered by the government just the same, if not more so. It would be a small mercy if the QE purchased bonds were redeemed and extinguished.

by cowboy | 18th Feb 15, 11:45am 1424213139

The governments can't. That is the path to Greek type failure. Government such spending still has to paid for eventually. Governments don't create money from thin air, they do it by borrowing on contract terms with repayment clauses.

Don't be fooled by the sleight of hand, the people supplying those bonds and loans still want their investment profit.

If the government consumes the resources instead of the private sector then only those the government targets will see wealth - in Greece this is government employees and infrastructure providers, then there is very little Velocity of Money before the money ends back up in government hands, and very little economic stimulation (ie, from introducing such funds you _should_ be seeing inflation from the extra economic activity, which is good because the inflation lets the debts be paid back. But when you don't because of lack of stimulus - or worse repeated stimulus to make it look like inflation (but isn't it's just currency dilution) then you know you're in trouble.

I would add a caveat to your QE-labour point, that the two are connected. The GFC crashed the global prices, making qualified demand scarce, thus QE or stimulus was needed - but the low demand also creashed the labour force

by scarfie | 18th Feb 15, 11:58am 1424213898

My comments in the past have been more about government printing money directly, or public credit as Ian Parker would call it. The money could be used for infrustructure rather than consumption. Not saying I agree with this, I am just painting it as a possible scenario for employing the crushed labour force. The weakness is that it cuts finance out of the loop and I can't see that happening just yet. So QE is just a proxy, and I agree it won't be effective. As Stephen I think highlights, the taxpayer continues to be crushed. At best it kicks the can.

by Boatman | 18th Feb 15, 11:51am 1424213497

Greece should default and get out before things get much worse ..

The ECB plans to QE about Euros 1,1,000,000,000,000,000 ,000

Thats right Euro 1,1 TRILLION , thats with 12 Zeros .

Its incomprehensible

Now if that does not debase the Euro , then nothing will , but I am willing to predict that :-

THIS WILL NOT END WELL

by cowboy | 18th Feb 15, 12:46pm 1424216798

I wonder how much of that will end up in the hands of the 99.999%