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Dairy prices down especially WMP; US data very upbeat; Europe waits for Greek vote; China needs work says World Bank; US UST 10yr yield 2.41%; NZ$1 = 67.5 US¢, TWI-5 = 71.6

Dairy prices down especially WMP; US data very upbeat; Europe waits for Greek vote; China needs work says World Bank; US UST 10yr yield 2.41%; NZ$1 = 67.5 US¢, TWI-5 = 71.6

Here's my summary of the key issues from overnight that affect New Zealand, with news of a big fall in dairy prices at the overnight auction.

There was a major fall in the price of whole milk powder which was down -10.8% in the GDT index from the previous event in US dollars. Overall, prices were down -5.9% in that weighted index. You will hear a lot today from economists and other commentators - including me - about how this will cast a pall over the local economy, and how it likely makes the recent Fonterra 2015/16 payout forecast unsustainable at $5.25/kgMS.

In the table below we have set out the average price/MT comparatives, and they speak for themselves. (Note those details below are not the weighted index prices which others will report, they are the average prices for each item class auctioned.)

The New Zealand dollar fell against the greenback, but not because of the weak dairy auction; it is more to do with the flight to the 'safer' US dollar. Currency markets have been distracted by Greece and China. However, thank heaven for the floating currency which has acted as a shock absorber during this commodity correction. It could have been a lot worse.

In the US, private employers hired the most workers in six months in June and even factory activity expanded at a faster pace, providing fresh evidence their economy was gathering solid momentum after contracting at the start of the year. Today's data is more positive that what we reported yesterday and that is important because today we are reporting June data; yesterday it was April data that was released. June car sales were especially bright. May construction data was also out today and that was better than expected.

In Europe, all eyes are on the Greek vote now, and apart from Greece bleeding badly, policy decisions are on hold until that result is known. There are few positives in the region at present. And signals coming from the Athens government were very contradictory.

In China, factory data for June is still weak, but the services sector data is surprisingly resilient. Japan turned in good car sales numbers.

The World Bank has reviewed China's prospects and has reported major concerns. It is calling for a 'fundamental reconfiguration of the role of the state' for the country to get out of its new funk.

Also Australian factory data was not good, with that sector contracting at a faster rate.

Back in New York, the UST 10yr benchmark yield has risen today and is now at 2.41%.

US oil markets are a lot lower however with the US benchmark price now just under US$57/barrel, and Brent crude just under US$62/barrel.

The gold price has fallen and is back at US$1,169/oz.

The Kiwi dollar starts today a little lower against the US dollar, but unchanged against most others. It is currently at 67.5 US¢, at 88.2 AU¢ which represents a recovery of all of yesterday's loss, and 61.1 euro cents. The TWI-5 is now at 71.6.

weighted average $/MT   1-Jul-15 16-Jun-15 change 1-Jul-14 change
    today previous % year ago %
Whole milk powder US$ 2,054 2,357 -12.9 3,459 -40.6
NZ$ 3,043 3,378 -9.9 3,945 -22.9
Skim milk powder US$ 1,875 1,978 -5.2 3,810 -50.8
NZ$ 2,778 2,835 -2.0 4,345 -36.1
Butter US$ 2,694 2,707 -0.4 3,181 -15.3
NZ$ 3,991 3,879 +2.9 3,628 +10.0
Cheddar cheese US$ 3,060 3,128 -2.2 4,226 -27.6
NZ$ 4,533 4,483 +1.1 4,820 -5.6
    ------- ------- ------ ------ ------
All products US$ 2,276 2,409 -5.5 3,595 -36.7
NZ$ 3,372 3,452 -2.3 4,100 -17.8

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 »

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46 Comments

More interest rate cuts coming in NZ.

And the underlying reason behind those cuts is bad news.

Very bad indeed, with ramifications throughout the economy.

there is inflation on the way, with the dollar at 67 and still dropping all imported goods will rise in price especially fuel, and NZ is high import county. how are the reserve bank doing to deal with this if it goes above the 2 % and the economy is slowing.

I won't be inflationary as we won't be earning enough to buy the stuff.

by doing what, we gave away our manufacturing to cheap imports, a huge huge percentage of our export income is form primary production, and apart from sheep its all down, milk & timber especially.
we have been heading for recession for awhile due to an unbalanced economy

14
up

Relax!

We don't need to base our economy around production (how old fashioned!), we can all prosper instead through the magic of the never-ending Auckland housing bubble. Problem solved!

The normal way: respond to increased prices from lower dollar / imported goods by increasing interest rates - thus paralysing the NZ economy, doubling expenses for households and increased costs for small business & farms.

so they cant, same as if the dollar gets to low imagine if you will it hits the 50;s they should raise to get back up but that would be counterproductive so again no can do
also fixed mortgage money comes from offshore are the banks going to absorb the currency loss, and when they exchange back to pay the interest on it. all this will squeeze margins

Expect petrol prices to rise momentarily, because oil comprises a significant proportion of imports into the country and the oil trade is denominated in American dollars. Energy, underpins every other economic activity in our economy, transport of people and goods, construction, mining, agriculture, forestry, and manufacturing. If the price of oil and its derivatives go up, so will the price of most everything else.

World oil prices can go either way with current nuclear negotiations are underway, which will determine whether the embargo on Iranian oil exports will be lifted. It can go either way, my prediction is that we'll see a US/European instigated, false flag operation somewhere in the Middle East, perhaps another Gas Attack in Syria or Iraq, which will be blamed on the Iranians, and give the US the pretext to abandon negotiations and continue the embargo. The US can't afford for oil prices to fall further, because their current economic performance depends upon the foundation of the oil and gas industries. Texas is already struggling, they can't afford North Dakota and other oil producing regions to follow suit.

The recent 4 interest rate hikes in NZ look increasingly like they were unnecessary and certainly lacking any global economic environmental analysis and forecasting.

but at least unlike other countries we have room to cut or interest rates

But the people who lent the 60 billion to farmers in NZ could be getting cold feet. Have a think about that.
Then all that debt against housing was relying on the same income. There will be the deficit from hell, then our creditors might want some answers.

http://www.un.org/apps/news/story.asp?NewsId=51313

And all that capital expenditure in the pipeline, 3 more of these to go

http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=1147...

I certainly lost faith in the Australian dominated model of farm business funding protocols. Moved the dosh mid June to a reserve currency status trading partner bank.

My prediction is that market interest rates will spike, because the falls in the Kiwi dollar, which reflect a loss of confidence in our economy respective to the likes of Australia and the United States, will spook the carry traders who will up sails and flee like Viking raiders of a bygone era. This won't necessarily mean a collapse in Auckland house prices, because I expect capital flows will take an alternative path and we will see a further deluge of acquisitions by our creditors who wish to take a more direct stake in our assets, rather than investing by proxy, which was the typical pattern before now. If anything prices will only go higher

15
up

Cutting interest rates won't work. Do we think we are special?
The credit won't go to productive investments, it will go to speculative markets, like everywhere else, so forget about inflation, the only we will get is more bubbles.

We're in a deflationary spiral where the system is loosing faith in central banks.

The first nation backing its currency to gold could win the economic hegemony, and China is taking big steps towards it. http://rt.com/business/251657-china-secret-gold-triples/

In a lack of growth based on productivity, growing debt cannot be repaid without inflation, inflation won't come and debt will be more encouraged. We're down the road without brakes.

..yet instead promoting growth based on productivity, productive investment, and transforming the industry we remain obsessed trying to export more milk and more logs...
Thankfully we still think we are richer because house prices keep growing. Dark clouds ahead indeed..

Hahaha you gold bugs always make me laugh. Always say the exact opposite to reality.

I'm betting that the smiles will be wiped off the faces of naive people "laughing"... the European leaders are not laughing.

They're a bunch of charlatans. Funny how these guys are willing to exchange their precious gold for supposedly worthless fiat money.

Oh Joy...

‘The leaked text shows nothing has been done to rein them in. There is no code of conduct, no appeals, no accountability of the private individuals who pass judgement on crucial matters of public policy, and no effective exceptions to protect the right of the government to regulate in the national interest’.

http://www.scoop.co.nz/stories/PO1503/S00313/new-tppa-investment-leak-co...

TPPA = Toxic PPA

It just gets worse by the minute.

US negotiators in Trans-Pacific Partnership (TPP) talks fought on behalf of big drug-making companies, championing intellectual property laws that would protect their profits from competition by generic medications, leaked documents have revealed. Read more

At least somebody is trying to do something about it, Maori to the rescue - maybe. http://mananews.co.nz/wp/?p=6175

The Maori did their piece when it came to the electrical generation selloff. The government just used our money to pay them off.

This is basically the intent of the both political parties approach to the Treaty of Waitangi and its method of dealing with the expectations of Maori and has been a central focus of the neoliberal project since the 1980s.
The recent judgement of the Court of Appeal on the SOE case was not an
attempt to list and analyse all the principles of the Treaty of Waitangi. Instead, it
only focused on those principles relevant to the particular case. However, there
was general agreement that the concept of partnership is central to an understanding
of the Treaty and that, arising from this concept, is an obligation on both
parties to act in good faith...A third form of partnership exists in the area of general revenue-sharing. This is taken to mean the allocation of tax-payer funds to tribal and other Maori
groups to enable them to pursue particular programmes of special interest to their
people...However, this does not mean that there is not a good case, in terms of the
Treaty, for the Government making funds available to tribal and other groups for particular programmes provided adequate accountability mechanisms that recognise the purpose and origin of the funds are put into place... A crucial part of this response would
involve building up Maori expertise in the packaging and managing of projects
while ensuring full exposure to the disciplines of market interest rates. The Maori
Development Corporation could play a spear-heading role in this process. It is
definitely not suggested that Maori economic units should endeavour to maximise
THE TREATY OF WAITANGI 343
profits in a way that may not suit their needs or preferences. Achieving a
satisfactory lifestyle is far more important for individual and group fulfilmenr
than pursuing any particular set of material goals. However, there does seem to
be significant scope for improving the rate of return on Maori enterprises if a
greater degree of economic independence were regarded as a desirable element of a satisfactory lifestyle. If some trust boards receive significant transfers of assets or cash payments as a result of successful land claims or a more general policy of building up tribal assets it will become even more important that they possess or have access to suitable business skills and expertise in order to take the best advantage of the increase in communal wealth."
http://www.treasury.govt.nz/publications/briefings/1987i/big87i-8.pdf

The situation in Greece, whilst serious and concerning, is distracting us from far bigger and mounting problems elsewhere. The China A-shares market for example has seen around US$2trn wiped off its market capitalisation in a matter of weeks, and whilst the climb was equally dramatic, the excessive use of leverage always means the ride down is more painful.
http://www.zerohedge.com/news/2015-07-01/losing-money-inevitable-year-so...

hows this for a conspiracy theroy, a money trader gets him self in charge of a country has all the sheeple
fooled smiles and waves all is well it is a Rock star economy , the dollar shoots up againt the USD he moves his funds offshore, suddenly people start to reliaze its not rock star and heading south dollar plumments he moves his funds back makes a huge profit, annouces his retirement becomes a Sir and heads off to a be ambassador some where as thanks

If only it were that simple! It's far more likely that John Key ran up against his personal tolerance of "what's right?" when he was in the markets. He called it quits 15 years ago at $50 million and tried to atone for previous practice by doing good, and representing his fellow Kiwis as a politician. An understandable reaction. But had he stayed longer, as some of his contemporaries did;and had his tolerance for pushing the boundaries been higher, he'd be sitting on a pile 10, 20 or 50 times bigger today, but possibly be facing an investigation by 'the authorities' into, say, LIBOR rigging charges or the like ( those who know will recognise names from the attached link). As I say, I doubt today John Key is motivated to profit at his countrymen's expense, as he may have left that part of his persona behind ( NB: I am not a National Party voter, by the way!)
http://www.afr.com/opinion/columns/behind-the-bt-wealth-machine-20130921...

Bad case of rose coloured glassitis. People don't change, they just become moreso..

Sounds like you are a National Party Leader by the way

Yes, I've been saying this a few times now on this site.
The drama (pun intended) being played in Europe about Greece, is not about the repaying of funds.
It's about making sure no other country will want to go through the same scenario (Merkel is on record of having said something along those lines). It's about imposing a neo-liberal ideology on a country, as an example.
Tsipars and varoufakis offered to raise the tax on the wealthy - this was rejected by the IMF. No, what Greece needs to do, is lower the pensions, lower the minimum wage, and prohibit collective bargaining.
Make the poor pay, not the rich.
.
You can't tell me the IMF, EU and ECB are seriously only trying to get their money back with an attitude like that.
.
Only about 11% of all money lent to Greece in the past 8 years, has gone into the economy. The rest has all been spent on propping up Banks and paying back loans.
.
I told you: the Greeks are fighting the fight of the 99%. Let's hope the country which gave us the concept of democracy, survives this brutal attack on its sovereignty.
Not sure if anyone read the article where the Germans are now saying that even if Greece votes 'Yes", they won't make a deal with Varoufakis or Tsipras?
Who are they to decide who governs a country?
Dangerous arrogance
Anyone would be a fool to think what's happening in Greece will have no impact on them.

Yes, I hope they walk away from that debt.

They have assets to sell - I see no reason to sell them to repay debt that can never be repaid anyway. Their economy, like all others, cannot grow under current global conditions. Better for them to proactively manage the carnage of what will surely be a global recessionary period as a sovereign entity, beholden only to their own people.

I hope they take their future back.

Yes, I, too, hope they give the two fingered salute to their 'creditors'.

The U.S. Is Producing a Record Amount of Milk and Dumping the Leftovers

www.bloomberg.com/news/articles/2015-07-01/milk-spilled-into-manure-pits...

Another dairy project in Russia on the books. "China’s Zhongding Dairy Farming and Russia’s Severny Bur are participating in the project. Feed for the cattle will be grown on 100,000 hectares of land in China and Russia.

Earlier this month, China’s Huae Sinban Company inked an agreement to lease 115,000 hectares of land in Russia’s Transbaikal region for agriculture. The company is expected to invest some $450 million into the project over the next 50 years. The deal has caused much discussion in Russia over its legacy and necessity. Huae Sinban plans to lease up to 200,000 hectares in Russia should the first stage of the project in 2015-2018 prove to be a success. "

http://rt.com/business/270463-china-russia-milk-farm/?utm_content=175219...

Russia was talking about interest free loans and price supports to give their dairy industry a boast. I haven't heard much since but would imagine they have gone ahead with the plan, as it worked so well in the Chicken and Pork industry and they want to become a major exporter.

http://www.wattagnet.com/Russia_poised_to_upset_international_meat_marke...

I was talking to a US dairy engineer the other day who said they are busiest with Russian projects at the moment. When you see what the government farmer loans achieved in the the Cerrado in the space of 15 odd years could be disruptive alright.

From the article:

"The world needs less milk".

Can someone tell that to our grand plan to 'double-our-primary-sector-output-by-2025' government.

I clearly remember MBIE _INSISTING_ that the world can take all we (and others can produce) , that China are ramping up consumption over the next ten years and that we need to pretty much double NZ's dairy output. Despite every time there wasn't a political or climate disaster the milk price dropped from over supply! As it did whenever the price went over $6.50 and it became economic for the US to produce more milk for export.

Those people are experts. The have degrees and fancy job titles and big paychecks.
Are you daring to say they're wrong?
Do they admit it??

No environmental problems/objections to dumping that amount of milk..............Mmm...the 'perfume' of it all....

Fonterra made the right call going for milk powder - looks like they learnt their lesson about mass butter storage. IF they can hold on long enough and run a trim ( ;) ) ship they may make it through difficult times yet...

The only winner out of this coming global recession is the environment.

Days to the General Election: 22
See Party Policies here. Party Lists here.