90 seconds at 9 am: Dairy prices fall -3.5%

US trade deficit blowout; dairy prices hit 6yr low; RBA cut confuses markets; Indonesia growth slows; EU growth picks up; UST 10yr yields rise again NZ$1 = 75.7 US¢, TWI-5 = 79.2

6th May 15, 7:29am by David Chaston

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

But first, there was a big increase in the US trade deficit in March, its largest monthly trade deficit in seven years and fueling concerns that their economy may have contracted in the first three months of the year. The politically sensitive goods and services deficit rose to US$51 bln in March, up +40% from February. Exports rose less than 1% while imports grew almost +8% and helped keep China going.

Back home, the overnight dairy auction was pretty much a non-event as far as markets are concerned this morning. Prices are down -3.5% in US dollars, down -3.1% in NZ currency. But the important whole milk powder price was down 'only' -1.8% and giving the suggestion that this recent run of declines may now be nearing its end.

However, we are now at a point where the GDT index is at its lowest point in almost six years; although in New Zealand currency it is only a 2015 low. The currency markets ignored the data.

Currency markets don't always react in the ways you might expect.

Late yesterday, the RBA cut its official cash rate to 2%, an all-time low. Mortgage lenders there mostly signaled they would pass on the cut (and do that by reducing term deposit offers). (One major only passed on part of the cut, but at the same time raised its deposit rate offer.) Somewhat surprisingly the Australian dollar rose on the news especially against the Kiwi dollar, which fell almost 1c on the cross rate. That is despite an expanded yield premium the Kiwi now 'enjoys'. Perhaps one reason was the schizophrenic nature of the RBA assessment - their commentary pointed out all the "improved trends" made and the recent "moderate growth", but they cut anyway. Odd. Even more odd when they noted that the US Fed will be raising rates "later this year". Glenn Stevens is always a puzzle.

One big influence on Australia is Indonesia, and yesterday they reported slowing growth, under what markets were expecting. It is a stumble that will affect many other countries in the region and is being driven by sagging China demand. Analysts are now not expecting any improvement soon.

Going the other way, the EU said overnight that their growth prospects are brightening.

In New York, the UST 10yr benchmark yield added to its run of steady rises and is now at 2.18%.

The US oil price also rose and is now at US$60/barrel, while Brent crude was higher too at US$68/barrel in todays trading.

The gold price is seeing gains as well and is now at US$1,195/oz.

The New Zealand dollar starts today marginally higher at 75.7 US¢,almost 1c lower against the Aussie at 95.2 AU¢, and 67.6 euro cents. The TWI-5 is virtually unchanged at 79.2.

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 »

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.

17 Comments

by Stephen Hulme | 6th May 15, 8:03am 1430856237

In New York, the UST 10yr benchmark yield added to its run of steady rises and is now at 2.18%.

Hmmm- are some testing the liquidity of the exit strategy? - and as you all know those that sell first sell best. View graphics

by Andrewj | 6th May 15, 8:09am 1430856544

Last nights auction wasn't that great

Key Results
> AMF index down 6.3%, average price US$3,505/MT
> Butter index down 0.8%, average price US$3,005/MT
> BMP index down 14.0%, average price US$1,748/MT
> Ched index up 9.1%, average price US$3,012/MT
> LAC index not available, average price not available
> RenCas index down 11.0%, average price US$6,094/MT
> SMP index down 7.5%, average price US$2,048/MT
> SWP not offered
> WMP index down 1.8%, average price US$2,386/MT

The Cheese market rebound could be short term

Unless demand grows as quickly as supply,
the cheese market may also become
exhausted. The fact that spot Cheddar prices
stand at four month highs suggests that there
is not a lot of cheese looking for a buyer.
But is this due to rising consumption or
increased storage? It’s likely a combination
of the two, with an emphasis on the latter.
Although manufacturers are able to avoid
flooding the market with cheese they destine
for aging programs, they are merely
delaying the inevitable. Eventually, thischeese will need to be sold.
The cheese and butter markets are likely to
come under added pressure from foreignmarkets. In the last seven weeks, butter prices have fallen €400/metric ton (MT) in the Netherlands and €350/MTin Germany. The spread between CME spot and European butter has widened from about a dime in mid-March to38ȼ today after adjusting for currency and butterfat differences. Last fall, both the cheese and butter marketsdemonstrated their ability to ignore declining prices overseas when domestic supplies were scarce. But in themidst of a formidable spring flush, weakness in Europe and Oceania might prove to be more contagious.

by steven | 6th May 15, 9:54am 1430862860

The EU had its butter mountains and milk lakes to hold up prices. Eventually the surplus was sold off cheap to Eastern Europe(?) rather than sell it inside the EU so EU tax payers got to shoulder the losses, great outcome, not. I can but hope if its being stored it is all at private enterprise risk and not the tax payer.

NB, So much for a free market, the sellers can store it at considerable cost expecting someone else to pay for it rather than sell it at a clearing price, so really NZ consumers are being done over, yet again.

by dtcarter | 6th May 15, 10:25am 1430864738

How can one sell things to eastern europe and at the same time not be selling it inside the EU? Do you mean Ukraine?

by speckles | 6th May 15, 8:26am 1430857576

Thanks for the comments, interesting

by don'tgetmegoing | 6th May 15, 8:51am 1430859069

Clearly there is no need to allowi Lochinver Station to be converted to dairying is there? Any more conversions are only going to push prices down further.

by steven | 6th May 15, 9:59am 1430863140

but, but that is the free market operating, you know it makes sense!!!! ie every fool rush into a profitable endeavour, flood the market, collapse the price and lots of ppl get burned (especially mom and pops), rinse and repeat. We are doing it over and over again, apartments, condos, housing, oil etc etc. However regulating the market is obviously bad, bad! I tell you!! yeah right.

by cowboy | 6th May 15, 10:54am 1430866486

Talking to a farmer and a rural real estate agent today (2 different people). The RE guy does Australia too.

They had 2 or 3 Asian gents looking for 100 dairy farms. They're just looking for anywhere that will sell, and they'll take the farm and often any nearby industry areas for warehousing and factories.
In NZ they're looking for smaller places, but in Aussi they're after the bigger units.

I don't know what the OIO thinks that will add to NZ.

But the One Big Question... just how does New Zealand think it's going to get that land back once it's sold?

by skudiv | 6th May 15, 12:54pm 1430873650

Well, if they. are paying top dollar, they will soon be broke and we'll get it back at the receivership auction

by cowboy | 6th May 15, 12:57pm 1430873850

they are just buying them like a rich kid at the candy store. They have no financial pressure to make the businesses work, it's not leveraged money.

by dobrydan | 6th May 15, 9:27pm 1430904435

Capital gain, even with the low payout, dairy farms are still, on average increasing by 10% p.a.
I introduced Time Series graphs to my students today and pulled up the Payout history from 1977/78 $0.90 kgms to 2006/07 $4.50. I wonder how dairy farmers felt in 2007 when it reached this payout, was it as good as gets?
The media coverage of every dairy auction seems to draw on the comparison of 2013/14 but in reality the $8.40 payout was exceptional and not the norm.
The only concern I have is for those first-time dairy farmers/sharemilkers who have built up their farm from scratch as the banks lent money based on a $7 payout.

by dtcarter | 6th May 15, 10:21am 1430864502

How much does dairy production contribute to GDP as a %? It seems to take up an awful lot of news space here.

by Andrewj | 6th May 15, 10:28am 1430864927

http://www.rbnz.govt.nz/research_and_publications/speeches/2014/5721595…

by LOL | 6th May 15, 10:29am 1430864984

How much? Not much. The NZ economy is almost entirely based on selling houses to itself at ever increasing prices.

Some figures posted on this site by another member ages ago were (from memory):

NZ Agriculture = NZ$15bn p/a, employing 100,000.

IBM = US$100bn p/a, employing 300,000.

As you can see, a single US company (not even the biggest of them) earns almost 10 x as much as NZ's entire agricultural sector. NZ invests about NZ$2.50 in research and development and technology, but then NZ has always been vehemently anti-education and anything intellectual. It's why we're the economic powerhouse of the world.

Oh wait...

LOL

by cowboy | 6th May 15, 11:11am 1430867480

do try to read to the end.

Many of us would like to see more research and development, and definitely more technology...but it's just too expensive.
An "Arduino compatible" in New Zealand is about $50 NZD a board (just the basic model) that's 3.33 hours @ minimum wage... which is about what the majority of on farm staff receive (and more than sharemilkers and early farm buyers get in retained earnings).
Compare that with what a friend of mine in Asia pays: $2.50 US, for either a legitimate Ardiuno or an exact clone).

My friend receives tax incentives and has many investors and well of friends who want to help him build his products, and many nearby businesses that will help or supply him.

In NZ there is no government or industry support for such initiatives and very few organisations (eg 4farms in the US) who help people which such work. and good luck getting any money to invest in it, because so many NZ businesses are just importers (i've tried taking some stuff to a few of them, they not interested they just drop-ship foreign stuff, many barely even know their whole (offshore) product range!)

So with heavy taxes and costs directed at people (when I had a student loan, my payment to government was over 85 cents in every dollar of my gross income)... so just how much of that remaining 15c (also deduct food, power, phone, rent, insurance) am I supposed to invest in education or technology?

And even when you do find educated kiwis they normally educated in how to comply, not how to improve or do the job right.
When the "experts" at Fonterra decided sanitiser levels were too high... they said "we will help farmers fix it". But they couldn't even tell us what the readings were! So we had to just guess whether or not we were doing somethign effective....
...What's more, and this sums up my opinion of your "educated experts": they had NEVER run a _control_sample_. They didn't even know which agricultural products were affecting their tests and couldn't even tell us which chemical !! so we couldn't even ask the suppliers about the product.
It took _ME_, yes this poorly educated NZ cowboy, to run a control sample. And point out that a major contributor to the "sanitiser" problem was actually the surfectant used in a couple of leading teat spray products (supplied by RD1, a wholy Fonterra owned organisation). so with "experts" like that, we need more cowboys.

by LOL | 6th May 15, 1:19pm 1430875145

"It's just too expensive!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!1111"

The catch-cry of the Kiwi.

Do it the half-arsed way every time. Cut corners, cut costs, use the cheap material and bang it together with a bent nail, she'll be right.

We can't afford to do things properly, that'll cost money I could be "investing" in a new car or a speedboat, or peeing into the pub urinal.

Our children don't need a real education... So long as they can sign their name and get a trade what more do they want or need? These over-educated kids think they're worth more than minimum wage, and the disloyal little brats bugger off overseas to get a decent job so they can pay for their education, when they should be here in their own country where they can be a bookkeeper, or build houses like a practical person should.

Anything else is just too expensive.

LOL

by cowboy | 6th May 15, 11:18am 1430867930

As NZ's prime export and biggest industry (including major sponsorship for several of NZ's Universities).
Around 30% of all GDP. It would be larger but Fonterra makes it's money selling at the cheapest end of the commodity market to move product. So it's staff get paid well but the flow on industry effects require farmers to subsidise the industry from their own equity holdings (who else would settle for a 0.3% to 1.5% per annum yield on a multimillion dollar investment portfolio).

But take out dairy. take out property (particular residental). There's not much left of New Zealand.
Trades? Multinational chain stores? Government sector?