90 seconds at 9 am: Dairy drop

Dairy prices fall -6.3%; world factory output grows; RBA unchanged; US car sales strong; Wall Street higher; NZ$1 = US$0.87.5, TWI = 81.1

2nd Jul 14, 7:34am by David Chaston

Here's my summary of the key news overnight in 90 seconds at 9 am, including news of another large fall in dairy prices.

This morning's global dairy trade auction saw the return of big price declines with the overall index down -4.9% in US dollars and down -6.3% in NZ dollars.

These are large declines and it takes the overall index back to levels last seen in January 2013 and signals the end of the 18 month price bubble. It is a drop of more than a third since early February. Prices in NZ dollars are now 31% below the same time last year. The biggest falls were for butter and cheese, but wholemilk powder also fell sharply.

Elsewhere, there was a huge release of worldwide manufacturing PMIs overnight revealing the state of factories in more than two dozen economies. Overall the 'world' PMI rose to a four month high with all components expanding. The strongest data was from the US which not only has the strongest expansion, it is expanding at its fastest pace in over four years.

Japan returned to growth in June, just, the Eurozone manufacturing recovery slowed as the French downturn deepens, the Chinese pickup was confirmed, but Australian factories contracted slightly faster now with eight consecutive months of decline. In contrast, India, Indonesia and Vietnam all are experiencing strong output expansions. The New Zealand data is not due until July 10.

In case you missed it yesterday, the RBA held its official cash rate; it also toned down its wording on worries about the high Aussie dollar as it clearly isn't able to do anything about it. Hong Kong on the other hand is trying. It doesn't have a freely floating currency. Like the Chinese it has a managed peg, and overnight it moved to try and restrain the rise of the Hong Kong dollar.

The news that US car sales are likely to have been very strong in June, surprising analysts, and the good factory data, has seen the Wall Street equity markets move higher into new record territory and approaching some key benchmarks.

UST 10yr bond yields were up today and are now at 2.56%. The oil price is down again slipping more on the Brent benchmark than the US one although it slipped briefly below US$105/barrel overnight. Gold is holding at US$1,327/oz.

We start today with the NZ dollar slightly higher ~~lower~~ at 87.8 USc, 92.4 AUc. The TWI is now at 81.2. So far, there has been no currency market reaction to the sharp dairy price falls.

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

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

Daily exchange rates

Select chart tabs

Source: RBNZ

Source: CoinDesk

We welcome your comments below. If you are not already registered, please register to comment

Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.

6 Comments

by James007 | 2nd Jul 14, 10:03am 1404252180

Apparently 30% of new and 50% of used auto purchases in the US are debt funded.

I suppose it will all end in a big bang, just the way the universe started, and we will all fall into a black hole of debt and disappear..........

by dobrydan | 2nd Jul 14, 11:19am 1404256781

http://www.3news.co.nz/Best-June-ever-for-new-car-sales/tabid/421/artic…

I also wonder how many new and used car purchases in NZ are debt funded?

It also reports the sale of luxury vehicles which apparently reflects growth in the economy?!

You can even book a holiday and flights abroad with "interest free" terms for 12 months.

As the economy steadily gains, so does the reams of credit being thrown around.

I certainly hope those folk taking "instant finance" and low rate credit card transfers have a stable job and steady income....

You can't forever borrow money until the cows come home.

by Henry_Tull | 2nd Jul 14, 10:08am 1404252523

end of the 18 month price bubble, but is it/was it

if wmp is the main item and China is pretty much the only buyer wouldn't some on the ground there comment be of interest? eg was Rabo's Sandy on to something re their side, or is it that ss still being snapped up?

its not like a many buyers/many sellers market

any thoughts as to why the dollar is looking the other way?

by cowboy | 2nd Jul 14, 10:39am 1404254360

good US poerformance points to strong and safe path, traditionally this means good time to borrow in the US (banks are flush and need short term borrowers). Nothing bad has occured so NZ fundamentals are still good. Good signs for stable NZD:USD, Chinese markets still favourable to paying up, trade with Aussi is still good, Fonterra still having to buy NZD to pay for WMP.

Those factors, and strong US information, good time to stretch and risk. US interest rates aren't likely to leap, NZ interest rates are still very high and wanting more foreign cash.

All good reasons for USD:NZD to be higher and safely carry higher.

by Henry_Tull | 6th Jul 14, 12:50pm 1404607816

"I think we are seeing some real issues in China, with demand falling off," she says. "China has started to sell powder that it bought at a high price into the world market for a lower price."

http://www.agweb.com/livestock/dairy/article/global_focus_is_the_new_normal_for_dairy_NAA_Fran_Howard/

Milo Minderbinder-wise China has both demand and supply, who is on first?

by cowboy | 7th Jul 14, 6:21pm 1404714073

I've started reading the article you linked to. It always worries me when people say you cann't have NZ butter at $1.41 and US butter at $2.40.

That's actually very common. First up if ALL the NZ butter has sold, then the remaining consumers pay the US price, and the US would be covering more of their big costs (or swinging a bigger margin.) Eg if NZ is making 0.07 c per unit (0.07/(1.41-0.07) = 5.2%) and the US is making 35c per unit, ( 0.35/(2.40-0.35) = 17%) then the US only has to move a third of the product, to make the same profit AND covers their costs of their fancier, more expensive esystems&investment.

On top of that the US (and China & Germany & UK) all protect their industries to make sure if there's a war or some other problem (eg biosecurity) then they still have some industry to cover emergencies. Therefore their government pays them to to meet certain criteria.

That means the profit margin isn't the most important thing to them because they have extra funds coming from the taxpayers to ensure the governments demands are met, and that keeps the industry at home functioning, funded and up to date. The side effect of this is that unlike NZ farmers, they don't have to make top profit on every kgMS, so what little if any profit the US does make goes much futher on farm (and therefore in wages and spending). This effect is actually so pronounced that because the taxpayers are footing the bill to preserve the industry and keep it current, it doesn't matter if they sell lots or a little, as long as the margin is good ... in fact selling less is easier because the logistics and overheads are easier to deal with, and the larger margin gives better offsets against the budget figures used by government and consultants - it doesn't matter if the full profit is lower (eg 1B for a high priced product vs 2B for 10 times the volume) as the extra margin only actually gets used, government wise, as a offset to the actual bill for the industry... ie that's 1B offset from sales off the 2.5B industry operation which looks good on paper. If they compete on price, they would have to find _a_lot_ more government budget money to support their expensive industry, AND they'd have to actually compete for market volume (which fits their own revenue margin)