90 seconds at 9 am: Dairy prices slump

WMP falls -9.6%, payout threat; US housing starts falter; inflation eludes Japan; Germans optimistic; Greece defies creditors; NZD falls; NZ$1 = 73.1 USc, TWI = 78.6

18th Mar 15, 7:26am by David Chaston

Here's my summary of the key issues from overnight that affect New Zealand, with news of a poor dairy auction overnight.

This latest auction has come in with prices -8.8% lower that the last one two weeks ago. This is despite the volumes offered and sold being at their lowest since May 2013.

In New Zealand dollar terms the price fall is not quite so sharp but down -5.5% all the same.

The key WMP products fell -9.6% however in US dollar terms and that is not a good sign and probably means that this season's payout will need to be revised down from its current NZ$4.70/kgMS level. There is now no time for any recovery to impact the payout levels with the season winding down quickly now.

In the US, housing starts in February came in surprisingly weaker than expected, -14% below market expectations. Some of that may be weather-induced as building permits held up and were in fact +7.7% above the same month a year ago.

In Japan, their central bank governor acknowledged overnight that his aggressive campaign to create inflation, seen as crucial to rekindling growth, has stalled, handcuffed by much lower energy prices. They can only now wait for that to flow though.

In Germany, their economic recovery is set to accelerate this year and next, driven by strong domestic demand and private consumption, the government said in its draft 2016 budget.

In Greece, they have decided to turn its privatisation agency into a wealth fund that will use proceeds to finance social welfare policies instead of reducing its public debt. That could quickly turn into a case of selling assets to pay ongoing expenses. How they plan to pay down their debt is still unclear and is unlikely to impress their creditors.

In Australia, their whole controversial payday lender 'industry' has been put on notice by the corporate regulator to lift standards quickly, or else.

The UST 10yr yields are pretty much unchanged today at 2.06%.

The crude oil price is holding its very low levels at US$43/barrel which is the lowest it has been in more than six years, while the Brent crude price is down to US$53/barrel.

The gold price fell again to US$1,148/oz.

The New Zealand dollar starts today very much lower after the weak dairy auction and is now at 73.1 US¢ a full 1¢ down from this time yesterday, it is at 96.0 AU¢, and the TWI is at 78.6.

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

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26 Comments

by Andrewj | 18th Mar 15, 8:11am 1426619460

Lets join some dots

Billions of euros and thousands of jobs will flow from the historic deregulation of Europe’s dairy sector, a string of Irish ministers promised at the opening this week of a vast new plant to make dried milk for developing markets.

But Ireland’s Agriculture Minister Simon Coveney said virtually all of the extra production would go to international markets, as he attended the opening of an €185 million plant by Irish dairy firm Glanbia Ingredients Ireland that can pump out almost 300 tonnes of dried milk each day.

http://theglobaldairy.com/noticias/european-farmers-fear-instability-as…

France Has a Formula for China's Baby-Milk Needs

Plant Under Construction in Brittany Fills Supply Gap While Bolstering Farms

CARHAIX, France—Mayor Christian Troadec is trying a new formula to revive his sleepy town in central Brittany: quenching Chinese thirst for baby milk.

On a recent damp morning at exactly 08:08—a lucky number in Chinese culture—workers broke ground on a 37-acre tract the municipality sold to Synutra International Inc., one of China's top 10 baby-formula makers, to build a milk plant.

http://www.wsj.com/articles/SB10001424052702303369904579420591913631968

FALLON, Nev. — The dairy plant with its tangle of stainless steel pipes rises out of the parched landscape here like a beckoning oasis.

Perched on the outskirts of this desert town dotted with small churches and roadside casinos, the factory represents a potential lifeline for nearly two dozen nearby dairy farmers.

In a few weeks, every drop of milk collected from the surrounding farms will be brought to the plant and converted into fine powder inside a towering heating chamber specially made for the $85-million facility.

But instead of being delivered to U.S. stores, the milk powder will be trucked nearly five hours away to the Port of Oakland and then loaded onto ships to China in bags emblazoned with the American flag.

http://articles.latimes.com/2014/mar/15/business/la-fi-feeding-china-da…

China’s demand for milk powder becomes a white gold rush on Aussie dairy farms

http://www.theaustralian.com.au/life/weekend-australian-magazine/chinas…

I could go on an on, Fonterra will no longer be the dominant world Dairy exporter, are we ready for the consequences?

The Daily Dairy Report noted last week that the contraction “could signal that New Zealand’s milk output might not be falling to the extent previously indicated, or perhaps demand is not as robust.” New Zealand’s WMP exports to China in January were down 69% from December and 10% from the prior year. Since then, New Zealand’s export woes have only increased. The police and Ministry for Primary Industries released details about an anonymous threat to poison infant formula with 1080 pesticide in protest of its use. Although officials have stepped up security and inspections all along the supply chain, the threat is likely to weigh on demand for milk powder from New Zealand, particularly in China.

by Casual Observer | 18th Mar 15, 9:44am 1426625093

Aj, I heard last year that Ireland is looking to increase their milk powder exports 50%. I was told that it would increase from 50,000 ton to 75000 ton. If that is correct 25000 ton is but a drop in the ocean compared to totals traded internationally.

It is the actual increase in total traded powder that matters.

To me it is more interesting that Fonterra's senior man in Asia is returning to Danone.

by Andrewj | 18th Mar 15, 10:13am 1426626797

Its the USA that worries me as far as Beef, with Dairy I'd list the problem as the EU, USA and South America in that order. I don't know enough about India but it's already got a sizable export market.

Its going to be about cost of production and we are losing that battle.

Hope you get a kind autumn and have enough grass for winter.

by Andrewj | 18th Mar 15, 8:24am 1426620287

Meanwhile we bet the house,Literally

http://www.stuff.co.nz/business/farming/agribusiness/10574421/Irrigatio…

by skudiv | 18th Mar 15, 8:35am 1426620917

Whats new? It's pretty tragic for those who have paid 50-60k/ha for dairyland. Though farming in general has a very poor ROC, which is nuts when you consider the risks.

NOBODY saw this comming, 100% of analysts expected prices to firm.

by Kate | 18th Mar 15, 10:29am 1426627776

Bet the house - yep, but not "we" in the democratic sense - as to get that one off the ground they had to fire the elected council and put in a hand-picked administration. It's the result of a purely authoritarian regime.

by Andrewj | 18th Mar 15, 10:39am 1426628359

They were Luddites, standing in the way of progress and bright new world.

by Kate | 18th Mar 15, 10:02pm 1426669371

And still, according to our elected leaders, restoring democracy "carries too many risks";

http://www.stuff.co.nz/the-press/news/67438119/Democratic-ECan-carries-…

by Andrewj | 19th Mar 15, 4:22am 1426692130

You need to find the backers of the irrigation schemes to understand whats at risk now the milk price can no longer sustain them.

Also the fact that no other farm system can afford the schemes either, means the worst case senario is a very bad one indeed.

by Andrewj | 18th Mar 15, 8:51am 1426621885

Our disaster recovery plan

http://dilbert.com/strip/2000-08-15

by Pureant | 18th Mar 15, 9:39am 1426624788

KPMG Predicted this about 5-7 years ago.

by denpal | 18th Mar 15, 9:56am 1426625767

AndrewJ very interesting info, I wonder why the NZ media is so silent on these global developments that are so relevant for our dairy sector.

We need to have a point of difference and that is probably quality grass-fed cows. But we are developing the habit of feeding our cows all sorts of rubbish to maximise milk production, just like other countries. Sadly the organic or even bio-dynamic way is not achievable on a wide scale as it is considered to be too much hard work plus the current state of play won't allow for higher input costs.

We're lucky the French stopped nuclear testing as in the '60's and 70's our milk had so much Strontium-90 in it that it would be unsaleable today on world markets. This has now disappeared from the food chain luckily, at least as evidenced by its non-appearance in milk. The Cesium levels in milk have only just reached limit of detection levels after all this time.

by Mike B | 18th Mar 15, 11:04am 1426629884

denpal - i dont think that a point of difference such as quality grass fed cows makes a difference. As we have seen with many things the customer will allways go for cost.

Many people do not like caged hens but still buy the eggs because they are cheaper.

I am not critisising you just putting another perspective on it.

by skudiv | 18th Mar 15, 3:16pm 1426644973

Don't worry, DDT is still showing up in milk :)

by Mike B | 18th Mar 15, 11:06am 1426629982

The American government debt is at 16 trillion dollars and just over 100% of GDP.

by OnwardsUpwards | 18th Mar 15, 12:17pm 1426634231

and what number is written on the other side of their balance sheet?

by David Chaston | 18th Mar 15, 12:46pm 1426635960

Not quite. Yes it is large but 'only' US$13 bln is owed to 'the public', the rest is inter-govt debt.

http://www.treasurydirect.gov/govt/reports/pd/mspd/2015/opds022015.pdf

It may not seem like a big difference between your assumption and the actual number, but that difference is 34 times more than the whole NZ Govt gross debt.

by Stephen Hulme | 18th Mar 15, 2:12pm 1426641128

Long term the US faces an increase in damaging comments relating to it's enormous fiscal exposure.

Britain might be too polite to tell the US straight up– “Look, you have $18.1 trillion in official debt, you have $42 trillion in unfunded liabilities, and you’re kind of a dick. I’m dumping you.” Read more

by skudiv | 18th Mar 15, 3:19pm 1426645187

So, when the defence ministry borrows from social security department that money isn't owed to the public? I wonder whom it is owed to?

by Stephen L | 18th Mar 15, 4:38pm 1426649885

It is generally between the Fed and Treasury, I believe. A result of printing money- there is a pretence that it will be paid back, but that is not likely in my and probably your lifetime.

by Colin | 18th Mar 15, 11:07am 1426630066

The dairy story in NZ was always going to end in tears for many the barriers to entry by other international players are low and the propensity of farmers to immediately capitalise any additinal profiablity into land prices was a recipe for disaster.

by Andrewj | 18th Mar 15, 3:22pm 1426645354

The financialisation of the industry is tragedy for many families.It never should have happened.

http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=113…

by Andrewj | 18th Mar 15, 3:29pm 1426645796

Dairy to China is a good example. Milk product exports to China have, by and large, simply dried up, at least in the volume needed to support farmers in exporting countries. There is too much supply that is not managed in today's world. When combined with a Chinese drive for greater self-sufficiency in dairy products (they are already 80% of the way there), and China's reduction in milk powder imports from 160,000 metric tons in January 2014 to about 26,000 in September, disaster was visited upon those farmers, especially those from New Zealand (NZ), dependent on this trade.

http://www.huffingtonpost.ca/bruce-muirhead/supply-management-must-no_b…

by offcut2 | 18th Mar 15, 5:17pm 1426652275

What a blight dairying has become on our environment and our economy.

Talk of sustainability is just hot air!

Water; pollution of the commons; we shouldnt be giving thsi resource to people with no respect for it. Around here all the trees are disappearing and huge pivot irrigators are scarring the landscape and throwing water to the four winds, Farmers (accountants deeming economies of obscene scale?!!) should learn about the role of wind and shelter in EVAPOTRANSPIRATION.

Financial: Long gone are the days of our low-input grass-fed low-cost advantage. You've been globalised via all that hype and Bank delivered vaseline aka debt.

Fertilisers; Talk to Nauru residents about how well the NZ farming sectors sustainabilit yworked for them. Don't even look at what the Chatham rise has been lined up for...

Pollution (not of the water variety): the govt can change the definition of contamination, but it cant wish away all that cadmium bubbling in the Waikato, and soon to a farm near you!

Product; have a good hard look at what dairy delivers to the countries that adopt it as a dietary staple-the western malaise of heart disease, osteoporosis, etc etc. Go mediterranean!!

The ongoing backing of the dairy industry via legislation and cronyism is a one trick pony. It may be midstream, but we gotta change horses- this one has pulled up lame!

by offcut2 | 18th Mar 15, 5:19pm 1426652378

What a blight dairying has become on our environment and our economy.

Talk of sustainability is just hot air!

Water; pollution of the commons; we shouldnt be giving this resource to people with no respect for it. Around here all the trees are disappearing and huge pivot irrigators are scarring the landscape and throwing water to the four winds, Farmers (accountants deeming economies of obscene scale?!!) should learn about the role of wind and shelter in EVAPOTRANSPIRATION.

Financial; Long gone are the days of our low-input grass-fed low-cost advantage. You've been globalised via all that hype and Bank delivered vaseline aka debt.

Fertilisers; Talk to Nauru residents about how well the NZ farming sectors sustainabilit yworked for them. Don't even look at what the Chatham rise has been lined up for...

Pollution (not of the water variety); the govt can change the definition of contamination, but it cant wish away all that cadmium bubbling in the Waikato, and soon to a farm near you!

Product; have a good hard look at what dairy delivers to the countries that adopt it as a dietary staple-the western malaise of heart disease, osteoporosis, etc etc. Go mediterranean!!

The ongoing backing of the dairy industry via legislation and cronyism is a one trick pony. It may be midstream, but we gotta change horses- this one has pulled up lame!

by offcut2 | 18th Mar 15, 5:52pm 1426654371

Psst; youre not alone...

The distance between today’s industrial systems and truly sustainable industrial systems — systems that do not spend down stored natural capital but instead integrate into current energy and material flows — is not one of degree, but one of kind. What’s needed is not just better accounting but a new global industrial system, a new way of providing for human wellbeing, and fast. That means a revolution.

http://grist.org/business-technology/none-of-the-worlds-top-industries-…