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13 Responses to “High NZ$ wipes out most export price gains in October; Dairy price rise outstrips currency rise (Update 2)”

1. Andrew S Says:
   November 3rd, 2009 at 4:51 pm

   I’d love to see this tracked against the strength of the USD. The USD weakened so oil went up, as is widely recognised. Why not other commodities too? Perhaps this isn’t strength in commodities, merely the fluctuations of the USD – as a result it made little difference to us as the real value of the stuff we sell hasn’t actually changed.

2. AndrewJ Says:
   November 3rd, 2009 at 5:09 pm

   What is really killing dairy is the compounding debts. The debt is going up at 10 billion a year and 1 billion more of debt needs to be borrowed to pay the banks. There is a rumor that fonterra is about to lift the payout to $5.40 but it wont help as farmers are sunk under a mountain of debt, which like housing cannot be paid back because income is insufficient.

3. Mark Hubbard Says:
   November 3rd, 2009 at 5:23 pm

   but it wont help as farmers are sunk under a mountain of debt

   Some are, but by no means all. In fact, by no means the majority. I am pleasantly surprised about how resilient the milk price is proving to be and hope it continues.

   Okay, there’s no calamity to be seen here, move along folks.

4. AndrewJ Says:
   November 3rd, 2009 at 6:01 pm

   Mark,if the carry trade unwinds which is looking more likely by the day then as Roubini said;

   [O]ne day this bubble will burst, leading to the biggest co-ordinated asset bust ever: if factors lead the dollar to reverse and suddenly appreciate – as was seen in previous reversals, such as the yen-funded carry trade – the leveraged carry trade will have to be suddenly closed as investors cover their dollar shorts. A stampede will occur as closing long leveraged risky asset positions across all asset classes funded by dollar shorts triggers a co-ordinated collapse of all those risky assets – equities, commodities, emerging market asset classes and credit instruments.

   Commodity prices are by no means stable and appreciation should not be taken for granted because one day soon the carry trade will end;

   Why will these carry trades unravel? First, the dollar cannot fall to zero and at some point it will stabilise; when that happens the cost of borrowing in dollars will suddenly become zero, rather than highly negative, and the riskiness of a reversal of dollar movements would induce many to cover their shorts. Second, the Fed cannot suppress volatility forever – its $1,800bn purchase plan will be over by next spring. Third, if US growth surprises on the upside in the third and fourth quarters, markets may start to expect a Fed tightening to come sooner, not later. Fourth, there could be a flight from risk prompted by fear of a double dip recession or geopolitical risks, such as a military confrontation between the US/Israel and Iran. As in 2008, when such a rise in risk aversion was associated with a sharp appreciation of the dollar, as investors sought the safety of US Treasuries, this renewed risk aversion would trigger a dollar rally at a time when huge short dollar positions will have to be closed.

5. Trev Says:
   November 3rd, 2009 at 7:44 pm

   Mark – can you explain why our dairy returns are improving when those in Europe, the UK and the USA are all getting worse? And the rhetoric out of those regions is of worse to come.

   AndewJ – do you know what is happening to dairying returns in South America?

   Perhaps the rumoured $5.40 payout is a transposition.

6. AndrewJ Says:
   November 3rd, 2009 at 7:58 pm

   Trev
   i can find out. Its very odd, I see USA production is up 1% which is meant to be bad news but prices are up. I think my posting above by Roubini hints at the cause;

   A stampede will occur as closing long leveraged risky asset positions across all asset classes funded by dollar shorts triggers a co-ordinated collapse of all those risky assets – equities, commodities, emerging market asset classes and credit instruments.

   Is milk one of theose risky classes,i suspect so.

7. AndrewJ Says:
   November 3rd, 2009 at 8:06 pm

   Trev, Prices are not all bad in the States’

   BUTTER MARKET COMMENTS: The market for butter continues to show signs of strength and optimism.In addition to steady retail sales, there is the expectation that butter production will continue to decrease as the milk supply dwindles, cream for usages other than for churning is increasing seasonally, and international brokers continue to inquire about obtaining possible supplies. The international interest is mainly from Western European brokers and their customers because DMN’s latest report shows butter prices f.o.b. docks in Europe to be at about $2.06 per lb but only $1.27 per lb in New Zealand. European buyers don’t necessarily want any butter, they want cheap butter, but New Zealand’s cheap butter seems to be fully committed. U.S. buyers are selling off stored butter and are said to be replenishing supplies now in anticipation of higher prices ahead. After
   holding steady with little activity through Wednesday, prices on the CME moved up $.06 per lb this week ($.05
   on Friday). A fine finish for the week.
   POWDER MARKET COMMENTS: DMN describes the U.S. markets for nonfat dry milk, whole milk powder, and buttermilk powder as either firm or strong, or both. Production for all three is generally trending lower and there is more demand for spot loads than availability. The NASS average price for nfdm was slightly
   affected by the sale of three truck loads to the CCC at $.92 per lb, for the purpose oftesting a new type of bag. The California average for last week moved to within 4.2 cents of the national price. The amount of manufacturer stocks of nfdm at the end of August was 54 million lbs lower than two months earlier, and next week’s report for September is expected to show further decreases. DMN reports that lack of product for “spot” sales is causing some buyers to use condensed products, which gives them product sooner and is often less expensive than buying and storing powder.
   CHICAGO MERCANTILE EXCHANGE
   Blocks +$.0100 $1.5100
   Barrels -$.0050 $1.4875
   CHICAGO AA BUTTER
   Weekly Change +$.0600 $1.4100
   Weekly Average +$.0575 $1.3640
   NON-FAT DRY MILK
   Week Ending 10/23 & 10/24
   Calif. Plants $ .9928 11,298,553
   NASS Plants $1.0345 10,900,605
   DRY WHEY
   WEST MSTLY AVG w/e 10/29/09 $.3500
   NASS w/e 10/24/09 $.3264
   Weekly Average
   Blocks + $ .0540 $1.5030
   Barrels +$.0455 $1.4915

8. Mark Hubbard Says:
   November 3rd, 2009 at 8:11 pm

   Trev, I’m no expert on these differences, but in the UK and Europe, their dairy industries are far more moribund by regulation and all sorts of insane Government interventions, than we are here, and the US has one of the most protected, and therefore regulated, farming sectors outside of Japan, all of which means their cost structures are higher, a lot higher, than ours. [And there are many warnings in NZ from this.]

   Plus we have natural advantages, such as the ability to feed herds on year round grass, whereas the countries you cite have high cost input systems based on supplementary feeds. In my opinion, the major mistake made by our dairy industry over the last five years is the move to higher stocking rates and hence supplimentary feed based systems.

   I’d be interested in qualified input into the differences between our farming systems. One of the most interesting stories over the last month is the news of Eric Watson’s move into dairy in the US: he obviously feels he can slash their cost structure through adopting a grass fed NZ system – but this begs the question of why dairy farmers there have not already done this (I’m assuming they’re not stupid).

   Andrewj’s last post has some interesting stats.

9. steven Says:
   November 3rd, 2009 at 8:15 pm

   @AndrweJ: Some farmers are indeed in a bad way, but this seems to be a minority…the price of milk could tumble though if the USA starts dumping on the global market which seems fairly likely….plus of course all the bad news possibilities from Roubini. I dont know if say lossing 10% of dairying is a bad thing….if it was done on an un-realistic price expectation….they paid too much for the land….simple.

10. The Bank Manager Says:
    November 3rd, 2009 at 9:38 pm

    1,000,000 handsfree kits at average of say $100 will cause a major import surge in Oct/Nov – $120,000,000 worth – good one Steven Joyce!

11. Eva Says:
    November 3rd, 2009 at 9:41 pm

    Mark Hubbard and Steven : don’t underestimate what AndrewJ is talking about please. He is right. If NZ only has a problem with indebted diary farmers /minority/… But there is also minority of household debts, minority of unemployed people, minority of closed small businesses etc. Small pieces of one big bread.

12. AndrewJ Says:
    November 3rd, 2009 at 10:10 pm

    Thanks Eva, If you look at farm debt as a percentage of agriculture’s gross income its frightening. The same applies to house debt.

13. Trev Says:
    November 3rd, 2009 at 10:45 pm

    Thanks Andrew et al. I obviously did not dig deeply enough.

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