90 seconds at 9 am: Dairy in the dumps

Price of WMP plummets in GDT auction; BP reports record loss & job cuts; US new car sales weather storms; Hong Kong property sales dive; UST 10yr yield 1.88%; oil dips below US$30/bbl, gold stable; NZ$1 = 65.0 US¢, TWI-5 = 70.5

3rd Feb 16, 7:57am by Jenée Tibshraeny

Here's my summary of the key events overnight that affect New Zealand, with news GlobalDairyTrade auction prices have fallen 7.4%.

The slump was led by an even sharper fall in the price of our main export - Whole Milk Powder - which was down 10.4%. Today's drop has left prices 24% below this time last year when they were on the rise, and has taken prices back to levels last seen in September.

The recent revisions down in the payout levels from most dairy companies may not have been steep enough. These new dairy prices levels will test and stress the patience of both farmers and bankers.

As for our currency, the auction result sparked the New Zealand dollar to flutter briefly, before recovering to pre-auction levels.

BP has announced it suffered its largest ever annual loss of US$6.5 billion last year. With its net income around a quarter the size of analysts' expectations, the loss is bigger than that suffered in 2010, when it took a US$17.2 billion hit from the explosion in the Gulf of Mexico.

BP says it plans to cut 7,000 jobs, or nearly 9% of its workforce by the end of next year.

The price of US crude oil slipped below US$30 a barrel overnight, as hopes of a deal between Russia and OPEC to cut output faded. The oil price is currently just over a US$1 lower than this time yesterday, at US$30.40 a barrel. Meanwhile Brent crude is down to US$33.30 a barrel.

Low fuel prices have contributed towards fairly strong car sales - an indicator of manufacturing activity - in the US last month. While blizzards saw the sale of new vehicles fall 2% from January last year, sales are poised to remain buoyant throughout the year.

Over to Hong Kong, property sales are taking a major dive. Sales plunged to 3,123 in January, the lowest figure for the month since government records started in 1991. The number of transactions made fell 41% month-on-month and 62% year-on-year. Developers are slowing down on new launches in the wake of bearish sentiment and ahead of the Chinese New Year holidays.

In New York, the benchmark UST 10yr yield has been knocked back further from yesterday, to 1.88%.

The gold price remains unchanged at US$1,125/oz.

The Kiwi dollar has had a strong start to the day, despite weak GlobalDairyTrade auction results. It's at 65.0 US¢, 92.0 AU¢, and 59.6 euro cents. The TWI-5 is at 70.5.

If you want to catch up with all the local changes from 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.

31 Comments

by MortgageBelt | 3rd Feb 16, 8:11am 1454440301

The Dairy slump is going to have quite a effect on reducing Government income.
Which is going to cause a tighter Govt spending budget for 2017/18, on top of their current tight budget.

by skudiv | 3rd Feb 16, 8:19am 1454440785

Not just govt income, many, many people need dairy farmers to spend, spend, spend. Dairy farm working expenses are high, and remember one persons expenses are another persons income, and expenses are being slashed across the sector. Not just expenses though, all the discretionary spending is cancelled as well.

by Andrewj | 3rd Feb 16, 8:27am 1454441237

The sheep industry is face some very serious headwinds and it's not looking good for farmers.
Beef is better but have a look at this and tell me where it's heading. You may need to click on the M top left.

http://finviz.com/futures_charts.ashx?t=LC&p=m1

by skudiv | 3rd Feb 16, 8:43am 1454442206

Yeah I looked at beef, and I'm hearing the same stories that we used to hear about dairy. Protien demand and all that good stuff. It's pretty concerning, but capital costs for beef are substantially lower, as are op-ex. Same for sheep I'd expect. All the risk went into dairy, as everyone jumped on the bandwagon. How many new conversions happening in Canterbury this year I wonder? That used to be a great gig for everyone invoved.

by Andrewj | 3rd Feb 16, 8:54am 1454442848

http://www.attenbabler.com/u-s-beef-cow-inventory-blog-jan-16/

When you can buy lambs art under $50 there must be pain we don't have the cost structure of the 70's but we damm near have the prices.
http://www.interest.co.nz/rural/sheep/lamb-store

by murray86 | 3rd Feb 16, 11:04am 1454450662

Well said Skud; a lot of support industries have had it too good for too long off the back of dairy without having to consider productivity. While dairy farmers have blithely over stretched without considering the down side, so have many others who have supplied the farmers.

As commented before on other reports, it is past due time that the country looks to diversification away from excessive reliance on agriculture. the current global slow down is seen by many commentators here as likely to last for quite some time, possibly years. The country cannot afford lots on the dole, so must look to find other jobs. We also need to be manufacturing for export somehow to provide alternative incomes from agriculture, but TPPA is likely to torpedo any hope of that.

by KH | 3rd Feb 16, 1:12pm 1454458359

Nobody has said no to diversification Murray. It's just that we make agriculture work, with the occasional crisis, and haven't found a bonanza in anything else. We would if we could.

by bigblue | 3rd Feb 16, 9:01am 1454443279

Mortgagebelt - How long till mortgage interest rates dive well below 4%

by skudiv | 3rd Feb 16, 8:14am 1454440497

Oil has been a leading indicator for milk prices, or at least there is a casual relationship that still stands.

A 10% fall in Hong Kong house prices. Another property bubble pops, it's all unwinding in slo-mo. Auckland should be fine though, beacause it's not Hong Kong, doesn't attract mainly speculative investment, and is not reliant on Chinese.

by Simon | 3rd Feb 16, 9:05am 1454443553

Same with sydney and london some other past chinese favourites - both seeing price falls. Real concerns for big falls in HK, even though severe housing shortage and people cramped as is - doesnt matter when prices get too far ahead and speculation has been involved as once the speculators are removed the prices always come back down

by Roger Witherspoon | 3rd Feb 16, 10:42am 1454449335

Hong Kong:
Sales of homes fell to 2,025, down 50 per cent month-on-month and 68 per cent year-on-year, according to Land Registry.

As you say, Auckland is not Hong Kong. Auckland is not a major international port or a major financial centre. Auckland is pretty unimportant really. What could possibly go wrong?

by notaneconomist | 3rd Feb 16, 8:40am 1454442053

So the EU Subsidies are causing serious issues for NZ dairy farmers and few in our media seem to want to discuss this issue.
http://afnewsagency.org/quick-facts-dairy-subsidies/

Baltic Dry Index took a bit of a tumble as well.

by Andrewj | 3rd Feb 16, 8:58am 1454443102

They pay subsidies to farmers but not as far as I am aware for production. In Cornwall, on the sea, it was sensitive land and they got about 100£ an acre. But nothing on the livestock, so the low sheep, beef, and dairy prices had them scratching their heads. Also the EU will be starting to hold product in store which must be a good thing?
It's their huge local market same as USA that causes us our problem.

by iconoclast | 3rd Feb 16, 9:09am 1454443753

AJ: an article you linked to a couple of weeks back said EU governments were undertaking interventions in the market and stockpiling - no disincentive to maintaining EU production

by Andrewj | 3rd Feb 16, 9:11am 1454443916

The intervention price will have been triggered again, so product will be going into store not into the market.
But oh lookey here
http://www.attenbabler.com/new-zealand-dairy-exports-update-jan-16/
Overall, New Zealand finished 2015 with a 39% market share of Chinese dairy imports, down from a 49% market share in 2014. The decline in the New Zealand market share of Chinese dairy imports was almost exclusively captured by the EU-28, which finished 2015 with a 34% market share, up from 26% in 2014.

by Henry_Tull | 3rd Feb 16, 10:24am 1454448297

now you're on to something...

http://www.stuff.co.nz/national/politics/9847806/Chinese-leader-to-visi…

The meeting also saw the formal approval of a new target to raise two-way trade between New Zealand and China to $30 billion by 2020, although the release announcing the target was accidentally distributed to the media almost an hour before the meeting took place.

"I think that's eminently achievable," Key said after the dinner.

"But as President Xi said when we were having the discussion, that just means China's got to drink a lot more milk, and they're up for that."

Other matters:
Q: Forecast - for whom?

by Casual Observer | 3rd Feb 16, 10:49am 1454449795

EU & UK are paying subsidies now AJ and in The Netherlands they are paying an incentive to reduce production.

http://www.dairyglobal.net/Articles/General/2015/11/UK-farmers-start-to…

http://www.dairyglobal.net/Articles/General/2016/1/Dutch-dairy-co-op-pa…

by Andrewj | 3rd Feb 16, 11:10am 1454451046

Why they got rid of them
>>>
Why remove them now?
Milk quotas were originally introduced for 5 years, but the expiry date has been put back several times. The final date was decided in the 2003 CAP reform, and reconfirmed in 2008 with concrete steps to provide a "soft landing" by the end of March 2015. The primary reasons for deciding to end milk quotas was that there has been a considerable increase in consumption of dairy products in recent years, especially on the world market – projected to continue in future – while the quota regime is preventing EU producers from responding to this growing demand. For example, EU exports of dairy products to Korea have more than doubled between 2010 and 2014 from €99mn to €235mn. This corresponds to an increase in the EU's share of Korean dairy imports from 28% to 37% over the same period. With close to €55bn, the dairy sector represents 15% of the total EU agricultural output. Milk is produced in every single EU Member State without exception in around 650 000 dairy farms. On top of that, there are about 5 400 dairy processing companies in the EU employing 300 000 people. They should be given the possibility to fully benefit from the growing global consumer demand, particularly in Asian markets.
Because the end of milk quotas represent opportunities but also concerns, successive reforms have found other, more targeted ways of helping to support more vulnerable areas, where there are strong social and economic reasons for trying to maintain dairy farming.
Will this mean that consumer prices get cheaper?
Past experience shows that there is not always a correlation between what the farmer gets paid and what the consumer pays. For example, the significant increase in the farm gate price during the first half of 2014 (+13% for the EU) was generally transmitted to consumer prices for both milk and cheese, but with significant differences between Member States - Germany +8.4%, France +0.8%. By contrast, the generalised decrease in producer prices in the second half of 2014 did not prevent a further increase in consumer prices in most Member States, although to a small extent.
http://europa.eu/rapid/press-release_MEMO-15-4697_en.htm

by bigblue | 3rd Feb 16, 9:02am 1454443363

The provincial farm support towns and cities will be feeling some pain soon

by ex agent | 3rd Feb 16, 9:22am 1454444566

They already are bigblue. It is just going to get worse which is hard to believe.

by bigblue | 3rd Feb 16, 9:07am 1454443668

Signs of an American recovery or looming recession:

Recent store closings by larger retailers reveals plans for a shrinking market:

-Wal-Mart is closing 269 stores, including 154 inside the United States.
-K-Mart is closing down more than two dozen stores over the next several months.
-J.C. Penney will be permanently shutting down 47 more stores after closing a total of 40 stores in 2015.
-Macy’s has decided that it needs to shutter 36 stores and lay off approximately 2,500 employees.
-The Gap is in the process of closing 175 stores in North America.
-Aeropostale is in the process of closing 84 stores all across America.
-Finish Line has announced that 150 stores will be shutting down over the next few years.
-Sears has shut down about 600 stores over the past year or so, but sales at the stores that remain open continue to fall.

by iconoclast | 3rd Feb 16, 9:15am 1454444116

USA TV shopping channels and online shopping - big box stores no longer needed

All your retail-therapy needs met and satisfied from the comfort of your living room

Invest in shares in snack-food companies

by Chris-M | 3rd Feb 16, 9:29am 1454444961

You would not want any money tied up in retail property. The internet will seriously decimate it.

by Andrewj | 3rd Feb 16, 9:17am 1454444269

Nick Tapp from NZ Dairy to UK Dairy Structural Changes Needed

https://www.youtube.com/watch?v=jzFX0HpoBxc

by KH | 3rd Feb 16, 1:23pm 1454459032

Bernie Sanders is one to watch. A couple of months ago he was nowhere. Now in Iowa he has given Hillary a real fright. He's running on a line of 'ending the rigged economy'. That would resonate here, and it certainly has there. After Mr Keys revealed his vast lack of awareness this morning, Bernies line should be something that could catch him out too.
http://www.interest.co.nz/news/79826/pm-says-15-dairy-price-fall-year-l…

by Sheep Shagger | 3rd Feb 16, 5:59pm 1454475565

As an aside, I wonder how the afore linked my farm are getting on? As seems inevitable that there is a rush for the exits investors might find themselves locked in some pretty illiquid assets. I know of many sheep farmers that have leveraged themselves to "diversify" into dairy syndicates. I wonder how many are now suffering under a double whammy and risk getting dragged under?

by Andrewj | 3rd Feb 16, 6:07pm 1454476037

Shaggers, I have a few relations wishing they had never heard of ' equity partnerships'.
Bet the management fees keep flowing.

by Belle | 3rd Feb 16, 8:06pm 1454483164

Include all the local business people when it comes to equity partnerships. Vets, stock agents, lawyers, REagents, accountants, car dealers, dentists and doctors. At least the misery will be well spread.

by Sheep Shagger | 3rd Feb 16, 8:31pm 1454484712

True Belle, although I guess my point was around how many sheep and beef guys on moderate debt levels were tempted to leverage up to "diversify" only to find both sectors pooing themselves at once. At least the above mentioned professions are mostly ticket clippers who can pass on their costs. We primary producers have nowhere to go except slash expenditure and ride it out. I sense that the seriousness of this situation is not widely understood (at least by the PM judging by his comments) and is a major structural risk to the economy.

by Belle | 3rd Feb 16, 9:36pm 1454488577

I am sure he is well advised. The banks would understand how precarious many positions are. No apologist for Mr Key but he does have to stay positive and not scare the horses. Before you know it the msm would whip up a frenzy of headlines. He really cant win.
Sad to hear sheep farmers caught up in this. The dairy grazing situation will be another consequence. The saleyards seem a lot busier. Farms struggling to fill their grazing quotas going back to their own stock. Finding finance for that at least is cheap. The stock arent. Weaners making well over $4/kg. Interesting times sheep shagger.

by O.Farr-Kinnell | 3rd Feb 16, 9:37pm 1454488647

He's a fairly glib sort of a guy. Wouldn't let him drive my boat.(The P.M)