Here's my summary of the key events overnight that affect New Zealand, with news of a better than expected jump in dairy prices at this mornings GDT auction.
Overall, prices were up +14.8% from the previous auction. But that just emphasises how low they had gotten.
Today's prices just bring us back to what prices were a month ago and those were not flash at all. Average prices are still -34% below where they were a year ago; in fact SMP is -47% lower.
But a rise - and one that beat market expectations - will be welcome. Today's is the first rise in the past eleven auctions.
36,900 tonnes were sold, lower than the previous auction, but otherwise higher than any other event this year.
One rise won't relieve the payout pressure but if it is followed up by more in two weeks - and that is what the futures market indicates - then commentators might start talking about a 'bottom'. But far too early to do that now.
Elsewhere, US housing starts impressed markets. July data came in +10% above the same month a year ago, +12% higher for single family houses. These levels are near an eight year high.
But yesterday, the Shanghai stock market slumped again, down -6%, and shares in about 1,000 companies fell by the 10% daily limit. Investors are worried that no more stimulus is coming, that all their Government is doing is the very modest -5% currency devaluation of the past week. They think this is nowhere near enough to halt the slide in Chinese growth.
Uncertainties in China are having a disastrous impact in emerging markets. Capital outflows are surging, in fact at twice the rate we saw in the GFC. This is hurting countries from Asia to South America in a significant way.
And the EU-Greek bailout deal is not quite done yet. Among the EU parliaments that must approve it is Germany and there are signs of trouble. Chancellor Angela Merkel faces a rebellion in a vote shaping up as her last chance to keep Athens in the euro zone. Holding things up are German fears that the IMF will require significant creditor haircuts if it is to come back in to support the deal. A couple of other smaller countries fear that as well.
In New York, the UST 10yr yield benchmark is unchanged today at 2.18%.
The oil price is up $1 and now just under US$43/barrel, with Brent crude still just under US$49/barrel.
The gold price is also hardly changed, now at US$1,117/oz.
The New Zealand dollar starts today no different to where it was at this time yesterday, despite the dairy price jump. It is at 65.8 US¢, at 89.7 AU¢, and at 59.7 euro cents. The TWI-5 is at 70.6.
If you want to catch up with all the local changes yesterday, we have an update here.
The easiest place to stay up with event risk today is by following our Economic Calendar here »
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37 Comments
It awaits mandatory production volume cuts to reinforce the price recovery process. I guess if it were left to the "invisible hand" that would have happened by now, but not when state inspired “kick the can down the road” solutions rule. Corporate socialism at it's worst.
ANZ has raised its forecast for the Fonterra 2015/16 milk payout to NZ$3.75-$4 per kg milk solids
Supply squeeze
Sentiment has been boosted by the news that Fonterra will lower the volumes of milk powder it makes available at its Global Dairy Trade auctions over the next year.
For the August 18 GDT Fonterra will offer 18,000 tonnes of whole milk powder instead of the originally planned 27,500 tonnes.
Fonterra has cut by 56,045 tonnes the net-volume of milk powder it will make available over the next year, with a reduction of 63,000 tonne due in the next three months, squeezing short term supply.
http://www.agrimoney.com/news/milk-prices-finally-rally-thanks-to-suppl…?
Exactly - it's an MBA style perception management exercise totally unrelated to the volume contract fixing price, which will remain hidden from view. Mind you that could be in doubt given global importer liquidity issues.
The US Federal Reserve serves up the same fluff.
...the FOMC is simply trying to scare a recovery into existence.
It has led to this very strange almost duality, where the recovery in idea gets preserved even more as the recovery in fact dies away. Read more
Fonterra never said it is not selling the withdrawn volumes, only that they won't be sold via the GDT platform. It will no doubt sell that product 'direct' to clients rather than on the auction platform. The auction platform is important in setting private deal price indications.
In addition, WMP (and SMP) have long shelf lives when held in modern barrier packaging, so holding in storage is a viable (physical) option. It is an option they have used in past years. Warehousing capacity can become an issue however (but landlords love it).
They better be quick, competition is on the plane.
http://www.telegraph.co.uk/news/earth/agriculture/farming/11808592/Brit…
Angela Merkel does not face a rebellion. 56 of 310 MPs annoucing to vote No to her scandalous and treasonous 3rd Greece hand-out hardly constitute a rebellion. And in any way all the so-called opposition parties also vote with Merkel. She must feel like back in Communist East Germany's "parliament" in which the regime always got well above 90% of votes.
I thought this report was richly ironic:
http://www.nbr.co.nz/article/low-risk-nz-covered-bonds-auckland-propert…
'New Zealand's major banks' covered bonds, which stand at about $14 billion, are at low risk from any correction in the Auckland property market because they're backed by a 'cover' pool of mortgages with a relatively low loan-to-value ratio (LVR), Fitch Ratings says.'
'Covered bonds are secured by a pool of mortgage loans to which the investors have a preferential claim in the event of default, which means they typically attract an AAA credit rating - above the banks' own ratings - making them cheaper to fund.'
Phew. Well that's OK then. At least we know that in the event of a NZ banking run (and OBR enactment) the good old covered bond holders will do fine. Meanwhile the bank depositors will just have to suck up their OBR losses and be happy that the banks best assets were pledged away elsewhere....
Yes - evidently 150,000 low LVR mortgages in covered bond pools are guaranteed to overseas lenders to the NZ banks and these covered bonds are not subject to OBR. And, the pool of mortgages is regularly managed to remove any mortgage in arrears from the pool.
The consequence is a much much bigger risk for NZ depositors to the banks and a larger loss when OBR is enacted.
Ironic isn't exactly the word I'd use to describe this situation. Tragic comes closer to the mark.
36,900 tonnes were sold, lower than the previous auction, but otherwise higher than any other event this year.
For the second gDT auctions in August:
2013: 56,176 tonnes sold at an average of USD 4,941
2014: 46,387 tonnes sold at an average of USD 3,000
2015: 36,904 tonnes sold at an average of USD 1,974
This auction's average price was up from the prior one at USD 1,815 (+8.8%).
http://www.fao.org/economic/est/est-commodities/dairy/en/
Everything is pointing to 'the new norm' -- Yes, the Chinese demand for dairy products is still there but milk supply are catching up with the abrupt demand from 2008 very quickly.
EU milk production is no longer bounded by quota. Plus, they need to displace unwanted products from Russia to elsewhere in the world. US milk production is growing quickly with low animal feed costs, and their supportive policies and subsidies. AUS has just signed a FTA with China with more favourable terms than NZ-China FTA.
And, time and time again, Fonterra ignores the need to differentiate (therefore add values to) its products by using NZ's green image. With at most 3% of world milk production, Fonterra cannot afford to play the commodity game in long term!
Real prices for agricultural commodities steadily declined for a 100 years till about 2007. The favoured (magical thinking) interpretation of the against trend increase in prices that followed is that they were structural.
Bank economists and government both appear desperate to describe the low prices we are seeing now as a cyclical downturn.
It is more likely part of a return to the long term commodity price trend.
I am not 100% sure what you are saying here but if you think commodities are going to continue down, well I beg to differ as per Jeremy Grantham https://www.gmo.com/
The think is many commodities need energy to produce, ergo the price can but rise as energy's price rises. Now the fly in the ointment is people's ability and wish to pay.
As an example I think many gold mines need $1000+ an ounce to dig the gold out, if we are only willing or able to pay $900 no more gold will be dug and the mines will close.
Sure milk prices will recover but if they do so will have oil so the inputs will be far greater.
It is an interesting and complex issue you can mentally get caught up in trying to iterate the outcome of.
I agree with Xingmowang - in somewhat more detail here yesterday
http://www.interest.co.nz/business/77128/asb-economists-fairly-upbeat-a…
He is correct in his differentiation
This conversation needs a thorough understanding of the difference between products and commodities and the process of IF, and, how and, when a product becomes a commodity
BTW what is ROW?
in case anyone is in any doubt
Fonterra is desperate for high value organic milk because it is 5 times more valuable
http://www.stuff.co.nz/business/farming/dairy/71254726/fonterra-despera…
Over the last few years my source or raw organic milk has had to register the cash payments (and put GST on the price) when it passed $1000 per week and become too significant to hide. They say they will do alright because their organic milk will get a payout this season of $5.70 if my memory serves me correctly.
Fonterra turned their nose up at organic products and the government halted the organic advisory board in 2009. Surprise surprise, the greens were right all along about the value of niche markets for organic products.
The stupidity of National amazes me. How are they in power?
I dont know how the GDT "actually" works - however
There are currently 7 sellers on the GDT platform - there were 8 - one has pulled out - that suggests NZ milk products are being sold as a bulk commodity along with Australia and 5 Northen Hemisphere suppliers - in other words it is non-differentiated
Does a GDT buyer have the option of specifying who their supplier will be? or is it pot-luck?
Chinese consumers knowing from experience just how bad domestic produce can be with regards to safety regard NZ produce as "safe". Now sure it may well be other foreign produce is as good so we have competition. In terms of "green" yes sure in order to get the output we have or are in the process of throwing away our differentiator but then we are thinking in terms of a commodity product and not a premium product. Then that is so NZ.
David, can we please have an in depth report on Winston Peters allegations that the proceeds of the partial asset sales is being sent offshore to an Asian bank for infrastructure investment in asia instead of the promised infrastructure (hospitals, schools and education, roads) in NZ? Most of the media seem to be burying the story, if reported at all. Thank you.
While we wait - Radio NZ has an audio transcript.
Winston is referring to the Asian Infrastructure Investment Bank that China is setting up - http://www.interest.co.nz/news/75977/nz-be-founding-member-china-led-as…
Do not trust China's platitudes.
Q : What does an elephant do when its in the room ?
A: Anything it wants
China will do anything it sees fit to protect its self interest .
Right now China's devaluation is not good for our commodity exports , and they may well devalue again if it suits them , notwithstanding their statements to the contrary .
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