90 seconds at 9 am: Deja vu all over again

Euro-zone banking trouble resurfaces; AU jobless rises; China exports grow; US jobless claims fall; Fonterra in more China dairy hub investment; NZ$1 = US$0.88.2, TWI = 81.9

11th Jul 14, 7:31am by David Chaston

Here's my summary of the key news overnight in 90 seconds at 9 am, including news equity markets have been buffeted overnight.

There is trouble in the euro-zone again, and specifically with a major Portuguese bank, the Italian banking system, and Greece's sovereign debt. The Portuguese banking worries center on Espírito Santo International, which yesterday missed payments on some of its debt. The firm is the parent of Portugal’s second-largest lender.

There are also concerns in Italy, and in Greece a sovereign debt issue failed, throwing up doubts about their recovery transition. The word 'contagion' resurfaced overnight.

In Britain, the Bank of England held its 0.5% official rate in their overnight review, but has not started any effort to pull back on its QE program.

And in case you missed it in our 4pm update late yesterday, Australia’s jobless rate returned to match the highest in a decade as employers there cut full-time payrolls and more people sought work in June, underscoring the likelihood the RBA will keep their interest rates at a record low.

It's not all bad news however. Chinese exports grew in June on strengthening American consumer demand, in what is being seen as a positive sign for China's factory sector and for the global economic outlook.

And, the number of Americans filing new claims for jobless benefits fell last week to one of its lowest levels since before the 2007-09 recession and was much better than expected, and a sign of increasing health in the US labour market. There are now 2.5 mln people claiming unemployment benefits in the country, compared with 4.5 mln in the comparable week a year ago.

And close to home, overnight Fonterra announced a strategic partnership with drug firm Abbott Labs. They are to jointly develop another dairy farm hub in China. The agreement still needs Chinese regulatory approval however. The trusted dairy brand based on NZ farms is taking the company a long way.

Yields on benchmark UST 10 yr bonds fell today on the euro-zone concerns and are now at 2.52%. The oil price rose on the US labour market news but is still below US$103/barrel. The Brent price rose much less and is only marginally over $108/barrel. The gold price jumped on the euro news, and is now at US$1,338/oz.

And we start today with the NZ dollar in record territory again after making predictable gains against the Aussie and the Euro. We are at 88.2 USc, at 93.9 AUc. The TWI is now a tad under 82 extending the run of daily all-time highs.

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

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

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27 Comments

by MortgageBelt | 11th Jul 14, 8:47am 1405025257

In the light of such global conditions, it is increasingly obvious the NZ must hike its interest rates.

BoE. .5% is pathetic, NZ can reach 5.0. Plus our inflation is rocketing away at 1.5% & this is alarming, we must brake sharply.

by steven | 11th Jul 14, 9:22am 1405027335

Ive got to the stage that,

a) I think this is just churn with ppl talking things up/down just to make money on the short term changes. Nothing of value is produced, ie no "good" hence I think that the entire financial industry is parasitic and damaging to main street.

b) I consider this a confidence/trickster/greed/fear game ie human driven and not fundimentals.

c) I think there are ppl out there so greedy and disconnected with reality that they are perfectly happy to damage/destroy our economy in order to make even more money they simply dont need.

I dont think short term you can predict what is going to happen, but once it does (or a trigger occurs) I cant see it being a small event.

regards

by Colin | 11th Jul 14, 10:47am 1405032443

Steven you are right about the finance sector having become a parasite on economies.

Interest rates have been repressed for so long now that the finance sector has now grown by some estimates to around 50% of the world’s GP. Many banks so called value exceeds the GP of entire medium sized counties. Hence central banks are terrified (trapped) of any significant collapse of the finance sector however when this occurs as you say is impossible to predict.

by Henry_Tull | 11th Jul 14, 2:07pm 1405044431

but Colin its all good, have you not heard, the answer to our $50bn + ag debt is to treble it..

ASB general manager for rural banking Mark Heer says ....... says about $200 billion of fresh capital is needed to double New Zealand's agricultural output. "Half the money [ $100,000,000,000 ] will come from debt, half will come from equity (cash or asset revaluations?) . We think local investors have the appetite for most of the money, but our estimates are will be around $15 to $20 billion short and that will need to come from elsewhere".

http://www.nzherald.co.nz/rural-business-agriculture-farming/news/article.cfm?c_id=16&objectid=11289699

Now if it is something from nothing you look for [assets and plant operations are so yesterday]. Then these folk in 'Stralia are selling agri' supply chain links into that the market at 19.0 x's [Offer Price/Pro Forma FY2015 Earnings per Share (times)]

This ratio is commonly referred to as a forward price to earnings ratio, or forward PE, ratio. A forward PE ratio is a company’s share price divided by its forecast annual earnings per share.

http://bellamysorganic.com.au/ipo_prospectus/

and doing it by:

Production (a full outsourcing model)

Bellamy’s have developed varying production pathways to improve operational efficiency:

• Full service – Bellamy’s provides artwork and specifications, develops and maintains all key

ingredient supplier relationships resulting in Bellamy’s products delivered to Bellamy’s

as completed goods

• Toll Manufacturing – Bellamy’s provides ingredients, raw materials, packaging to toll

manufacturing facilities

• Contract manufacturing service.

Production Arrangements

Bellamy’s has various agreements with manufacturers and suppliers of its product range.

The most important manufacturing arrangement is the production of all the Company’s baby formula product by TMI which is forecast to generate 85% of sales in FY2014. There is no formal agreement in place between Bellamy’s and TMI. The parties have been working together since 2006 and Bellamy’s is a significant customer of TMI. The parties have been in discussion regarding a formal contract for some time.

or if you take a more professional [fee driven] approach to rent seeking [ asset management]:

Macquarie has generated at least $19.6 million in fees from the fund in the last two years, despite it reporting combined losses of $69 million over the same period, due low cattle prices, drought and falling land values. Macquarie did not return calls on Tuesday.

Ms O'Leary will have less than 12 months to convince clients they should not wind up the Macquarie Pastoral Fund or remove the investment bank from its lucrative role as manager.

http://www.farmweekly.com.au/news/agriculture/agribusiness/general-news/mac-group-looks-for-ag-fund-fix/2704591.aspx

there seems room for all.

by Andrewj | 11th Jul 14, 2:23pm 1405045395

http://davidstockmanscontracorner.com/time-for-regime-change-at-the-ecc…

by Colin | 11th Jul 14, 10:45am 1405032347

by dtcarter | 11th Jul 14, 9:20am 1405027201

What is a "dairy farm hub"? I that like a bar in a small town that all the farmers meet at on Sat night to have a chat and gossip? And what's it got to do with a drug company?

"If approved, Fonterra and Abbott will form a joint venture to invest a combined US$300 million (NZ$342 million or 1.8 billion RMB) into the farm hub, which will contain up to five dairy farms and more than 16,000 dairy milking cattle in production, producing up to 160 million litres of milk annually. The herd for this hub will comprise animals either imported, or sourced from Fonterra’s existing farm hubs. All dairy cattle will have genetics traceable to New Zealand, Australia, USA or Europe."

Ok so it turns out a "farm hub" is just a fancy way of saying "big farm". So why is a drug company getting into owning and running cow farms?

by steven | 11th Jul 14, 9:24am 1405027481

Would you have the milking shed in a single point and have the 5 farms link up at this? that way you could milk 5 farms with one set of kit?

Otherwise, yes its in effect one huge farm...

regards

by Casual Observer | 11th Jul 14, 11:57am 1405036628

No steven it is not one huge farm. In this case it will be up to five farms in close proximity. You obviously know very little about dairy farming if you think you could milk up to 16,000 cows 3 times a day, in one set of 'kit'. Better stick to commenting on what you actually know, mate. ;-)

by steven | 11th Jul 14, 12:32pm 1405038729

I actually asked Qs ie ? Dont you know what a ? is?

Is the milking shed on a single farm in constant use from say 6am to 6pm? From my village the farmer started at 6am and was finished by 9am and then started again in late afternoon. So between 9am and say 3pm the shed was empty and un-utilised hence an opportunity for use and a better return on the investment. In effect the potential for shift work.

hence why I asked Qs, I was curious if that is practical.

Also curious about how the capital allocation works...

regards

by Casual Observer | 11th Jul 14, 3:59pm 1405051187

The farms in China are a 24/7 operation, steven. Milking is done over 3 eight hour shifts. Each farm has a total of approx 5000 cows. Calving is throughout the year so not all cows are in milk at the same time. So say approx 4000 cows at any one time, each milked three times a day. Say approx 80cows every 9 or so mins, then there is shed cleanup and set up, so there wouldn't be much down time in an 8 hour shift. This is an example there may be some variation between calving patterns and types of sheds but in China, the 8 hours would be fairly well utilised for milking and its sundry requirements.

So to milk 16,000+ cows they are splitting them over five farms.

I can't answer how they do capital allocation - it's Fonterra, so who would know? ;-)

by cowboy | 11th Jul 14, 5:25pm 1405056327

In your village the animals were fed by hand or by pasture.

In the milk production factories, the animals are in huge barns and all the food is carted to them.

Milk machinery is operated at maximum number of hours per day, and serviced by shifts. this gives highest productivity for any given milking point, just like any other Asia large factory. Any problems are quickly detected, as milking one cow per machine, 9mins ea, 23.5 hours, equals 156 cows per milking point. that means it's worth a lot of profit to make sure that milking equipment is all the bells and whistles. At that rate it is also worth just swapping out for faults, rather than fix in place.

Having that kind of speed means there is a bottleneck in the cow delivery rate, so it is desireable to make sure that mathematically engineered systems are in place to get at least 150 cows PER SET continuously. That means having large numbers of cows nearby, and your limit is how fast you can get each mob through the line. the same kind of engineering for Malls, subways, trainstations, sportsgrounds and Supermarkets.

If you have 33 SETs of milking point (aka cups) that's 4950 cows, to feed and move in the vicinity. then it's just a matter of plumbing, and who knows about plumbing for large populations?

plumb the feed going in.

plumb the effluent going out.

trucks running continuously to support it - and the effluent can be delivered to whereever you want it, even spread direct from truck, but that is properly less efficient in the long run.

Each step in the system can be optimised for efficiency and redundancy.

The sheer maximised volume can offset the capital cost, and since the land is State owned and rented for the good of the people, that keeps costs to a minimum.

That keeps production costs low, and with low production costs and low capital overhead (per production unit) there is plenty of gross profit to pay lots of staff to baby the animals and methods..

There are several glaring weak points in the system but I won't describe them, as I regard them as commercially sensitive IP for NZ farmers. (I also regard companies that give that IP away to the competition countries as hostile and treasonous for that activity - as I do with LIC giving away a priceless 50 year head start in cattle genetics!)

by Casual Observer | 11th Jul 14, 11:59am 1405036791

You are getting confused between sheep and dairy farmers dtcarter, sheep farmers frequent pubs on a saturday night, dairy are more likely to be found tucked up in bed. Thoose 3-4am starts are killers for ones social life. ;-)

by Andrewj | 11th Jul 14, 12:49pm 1405039760

come on CO, we know all the real work is being done by Filippinoes, in fact I hear there are even Nepalese around here and down the road it's two Sri lankan families

by Casual Observer | 11th Jul 14, 4:30pm 1405053021

We were all immigrants to NZ once, Aj. ;-) Migrant children are changing the face of a lot of rural schools. http://www.stuff.co.nz/southland-times/news/10234775/School-celebrates-…

Ah, us dairy folks can't win. On the farming show today an ex All Black was lamenting the changing face of parts of Canterbury. Because of dairy, rugby clubs now struggle to get players due to rosters (6 on 3 off, 8 on 2 off etc), and the fact the young folk have to be home to milk in the afternoon etc.

by Andrewj | 11th Jul 14, 4:57pm 1405054668

They say in the States, %50 of farm workers are undocumented illegal immigrants.

by cowboy | 11th Jul 14, 5:08pm 1405055339

"We were all immigrants to NZ once"

Not my generation.

not my parents either.

ex-All Black has short memory then, because todays milking and labour is shorter than days of yore. hence the Ministry of Blundering Incompetant Employees needs to make sure modern time rules are followed.

Fuel costs, and Internet are the real rugby killers. That and warm houses and offices.

ex-AB should note the fall in outside workers corresponds to fall in rugby and other physcial outdoor contact sports.

by Andrewj | 11th Jul 14, 11:04am 1405033496

How did millions of Chinese "buyers" manage to get tens of billions of yuan or dollars out of the mainland - a country which as is well-known has strict capital controls when it comes to individual and corporate offshore outflows? Under Chinese law, citizens are allowed take only the equivalent of US$50,000 out of the country each year: hardly enough to buy a storage closet in any of New York City's Central Park West duplexes.

Today we learn the answer and it has to do with officially sanctioned "money laundering" services by not one but two of China's largest banks: Bank of China and also Citic.

http://www.zerohedge.com/news/2014-07-10/did-china-just-crush-us-housin…

by iconoclast | 11th Jul 14, 12:17pm 1405037872

Have to laugh. While the SEC and DOJ have been busy going after and fining European banks $10 billion a time for money laundering, meantime the boat has sprung holes elsewhere. Be interesting to see what the US authorities (as first movers) will do about this. If it's state sanctioned not much they can do.

by cowboy | 11th Jul 14, 7:27pm 1405063653

Reading article... Why is Fonterra boosting the Chinese economy?? This NZ supplier/shareholder would like to see those jobs back in NZ thank you very much...

by cowboy | 11th Jul 14, 7:31pm 1405063899

"ASB general manager for rural banking Mark Heer says ....... says about $200 billion of fresh capital is needed to double New Zealand's agricultural output. "Half the money [$100,000,000,000 ] will come from debt, half will come from equity"

none from Retained Earnings/profits....hmmm (Apparantly the ASB general manager for rural banking, doesn't realise you can't spend equity.)

by Andrewj | 12th Jul 14, 10:27am 1405117665

http://www.stuff.co.nz/business/farming/dairy/10258565/Milk-made-in-lab…

by Gummy Bear Hero | 12th Jul 14, 11:44am 1405122248

www.muufri.com

by Henry_Tull | 12th Jul 14, 12:44pm 1405125875

whatever it is, it is not milk nor dairy.

http://www.independent.ie/business/osullivan-backs-new-company-developing-labgrown-milk-30409168.html

we are not convinced by the google/whatsapps approach to food and that re-coding cell DNA so that cells perform actions they otherwise would not is all okie dokie.

at this stage it just seems to be genitically modified yeast producing an artifical milk-like product.

As an aside the PR they are wrong in saying US mega dairy cows have no quality of life.

by Gummy Bear Hero | 12th Jul 14, 1:49pm 1405129744

I was contemplating that all those Kiwi dairy farmers , with their average $NZ 4 million debt , might havta resort to driving a taxi .... to stave off the bank manager ...

... and then along came these guys http://www.uber.com

Curses Joseph Schumpeter ... you and your " creative destruction " ... and there was I planning to open a taxi chain with my buddy the Tull man : Hail-A-Henry's ..... HAH !!!!!!!!

by Henry_Tull | 12th Jul 14, 4:15pm 1405138546

yep, you are thinking of what Harry has done

http://www.harryscafedewheels.com.au/

nothing wrong with a pie cart but there should also be hawaiian burgers and a whitebait sandwich..

by Gummy Bear Hero | 12th Jul 14, 4:38pm 1405139909

If you live in San Francisco , there's a particular app which you can download to your phone , you then take two pics of your chest , and send them off to ThirdLove , who can customise a soft foamy bra to fit you perfectly , and it arrives at your door lickety-splick ...

.... you'll hafta shave that bear mat off your boobies first , Henry !