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Dairy prices lower, below payout forecast; Fed official calls for bank breakups; S&P warns on China; Thorburn warns Australia; UST 10yr yield 1.78%; oil down, gold up; NZ$1 = 65.6 US¢, TWI-5 = 70.3

17th Feb 16, 7:30am by David Chaston

Here's my summary of the key events overnight that affect New Zealand, with news of reform challenges in the US, China and Australia.

But first, dairy prices fell much less this morning than many market observers had feared. Some were expecting another -10% fall, but in the end it was just a -2.8% reduction from the last auction two weeks ago (-3.8% in NZD). Still, that takes prices back to where they were near the low point in August last year; and prior to that they were last at this level in August 2009. Last night, the key WMP component was down -3.7%. You should also note that prices are now below Fonterra's last payout forecast.

In the US, the Federal Reserve's newest policymaker, who is a former Treasury official and prior to that a Goldman Sachs executive, called on lawmakers to consider "bold, transformational" rules including the breaking up of the country's largest banks to ensure taxpayers are no longer on the hook should they fail.

Meanwhile, Standard & Poors is warning that systemic risks in China, and the possibility of sudden policy shifts, are combining to fuel a borrowing spree by their corporates which is likely to bring some rapid ratings downgrades, including those of the country as a whole. Even their Premier acknowledged "great challenges and new uncertainties". And that may be understating it.

In Australia, NAB boss Andrew Thorburn has told the locals that they can probably no longer afford what their citizens expect, and the pressure will get tighter unless they make some hard reform choices and how they make policy changes happen. And probably infuriating them further, he says Australia should adopt how New Zealand is achieving its changes.

In New York the benchmark UST 10yr yield is higher at 1.78%.

The US oil price is down to US$29/barrel while Brent is just on US$32/barrel. Both Russia, Venezuela and Saudi Arabia said they had agreed to freeze output - if everyone else does too. But price optimism quickly cooled on that idea because Iran is unlikely to follow. China also announced it is not adjusting its retail price of petrol down to reflect the low crude prices, helping to keep a lid on demand.

The gold price is a little higher today at US$1,213/oz.

The NZ dollar fell yesterday by about -1c after the weaker-than-expected survey results for inflation expectations. But after today's dairy auction, it has not moved any further. It is now at 65.6 US¢, at 92.4 AU¢, and at 58.9 euro cents. The TWI-5 will start today at 70.3.

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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24 Comments

by sharetrader | 17th Feb 16, 8:09am 1455649777

have to agree with WP here both main parties are using immigration to support GDP growth but ignoring the infrastructure costs, interesting aussie has approx 5 times our population but only lets in about 3 times as much as us, so overall a lot less as per population.
I saw the other day wellington is looking to attract 20000 international students even though the city struggles to house the out of town students they have.
that's the problem no long term planning from up top to make sure we are equipped to handle the growth

http://www.nzherald.co.nz/nz/news/article.cfm?c_id=1&objectid=11590653

by antonymouse | 17th Feb 16, 8:28am 1455650888

I came across these 2 articles on a Dutch website. Although mainly regarding TTIP, it does explain doubt about the fairness of the ISDS regulations and the type of justice therein.
These apply to our TPPA just the same.

Taxes on trial - How trade deals threaten tax justice
https://www.tni.org/en/publication/taxes-on-trial

How ISDS threatens tax justice

• Under the current system, states can and have been sued for changing tax laws, revoking tax breaks, and increasing corporate, income and other taxes
• A tax ‘carve-out’ written into a trade or investment treaty doesn’t necessarily prevent taxes being challenged – it can just give the lawyers and arbitrators working on these cases more to argue about
• States must have the ability to reconsider and change previously set and unfair tax ‘incentives’ granted to corporations, and to be flexible in choosing which industries to subsidise with tax breaks
• The threat of an expensive ISDS case can be as powerful as actually filing one – an unknown number of disputes are resolved before a case is ever formally filed. With states unclear about what might trigger successful claims, the safest course of action is to never threaten a multinational corporation’s profits – a dangerous prospect for tax justice and public interest laws
• There is no comparable mechanism for states to hold foreign investors to account for their actions. ISDS is a one-way system, where states are always on the defence. If a multinational behaves badly, a state cannot launch an ISDS claim.

Socialising Losses, Privatising Gains
https://www.tni.org/en/DutchBITs

It examines the flaws in the ISDS system and the adverse impacts of the broad set-up of Dutch BITs. It also looks at the shortcomings of recent proposals for reforming the ISDS system that have emanated from the European Commission and have been embraced by the Dutch foreign trade and development minister. The paper concludes with concrete recommendations for a more sustainable and inclusive investment policy.

Download:
Socialising Losses, Privatising Gains(pdf, 545.63 KB)

by David Chaston | 17th Feb 16, 8:55am 1455652557

Kind of pointless referring to Dutch analysis of something else, to suggest that relates to the TPPA. Irrelevantly convoluted.

You would be better reading the TPPA treaty section that deals with ISDS processes; it is directly relevant. Comments on that appreciated.

The whole TPPA text is here.

Chapter 28, Dispute Resolution is here. (21 pages)

The official NZ analysis is here. (4 pages).

We are looking for comment based on the actual Agreement. Don't really need links to 'analysis' by people who haven't actually read what they are commenting on.

by Boatman | 17th Feb 16, 10:13am 1455657195

David , do you hold a view on the TPP , for or against ?

Or , are you pragmatic knowing that there are advantages and disadvantages in every Trade deal , and recognise the need to adjust early to what could be a "new normal" ?

by Andrewj | 17th Feb 16, 8:30am 1455651013

I have a friend who tells me, "Value in USD of product sold only 30% of the same
sale 2 years a go."

by David Chaston | 17th Feb 16, 9:04am 1455653046

Actually, your 'friend' is wrong, but it is interesting all the same.

Today, the GDT average price is US$2,235/MT. On 18-Feb-14 it was US$5,016/MT.

That means today's average price is 45% of the Feb-14 level (and not 30%).

But, what is unusual is the 18-Feb-14 price. That was the record high. Never higher before, never higher since.

by Andrewj | 17th Feb 16, 9:09am 1455653376

Thanks David.

Additional Report Details
Dairy product prices fell within the Global Dairy Trade (GDT) for the fourth consecutive auction as the GDT Price Index declined 2.6% in the auction held February 16th. The GDT Price Index declined by 46.8% in total over the ten auctions spanning Mar ’15 – Aug ’15 but had gained back nearly three quarters of the decline from Aug ’15 to Oct ’15. The most recent decline resulted in the GDT Price Index falling back to a 12 auction low. The GDT Price Index represents a weighted-average of the percentage changes in prices between trading events for all products offered. The GDT Price Index finished 33.2% below the previous year figures and 45.5% below the three year average price for the second auction of February.
http://www.attenbabler.com/global-dairy-trade-results-update-21616/

by Henry_Tull | 17th Feb 16, 9:45am 1455655508

made the big news..

http://www.bloomberg.com/news/articles/2016-02-16/new-zealand-banks-are…

National Australia Bank today said it had included a small number of New Zealand dairy exposures valued at A$420 million ($301 million) as impaired assets in the three months ended Dec. 31. The exposures were defined as “impaired but no loss expected,” the bank said in a filing.
The Reserve Bank of New Zealand has done stress testing of the banking system to see what happens in the event of plunging dairy prices and payouts, English said.
“The advice I’ve had is that even under some extreme scenarios there’s a small number of manageable losses” in the industry, he said. “This is a sector with a pretty strong balance sheet and a good long-term future so, while the pressure seems to be growing for now, we’re confident that between the banks and the farmers they can get through it.”

where is the case for increased lending margins

by notaneconomist | 17th Feb 16, 10:05am 1455656712

What a play.......milk price slumps (or any other slump of that matter) makes those with equity borrow against it to keep going......and the real beneficiary of such actions will be bank shareholders!

The RBNZ might like to consider that stress testing the banks is the wrong end of the stick. But never mind you always have the OBR to implement.....it is like a feeding frenzy off of the people.

by offcut2 | 17th Feb 16, 10:46am 1455659213

"Fraud is a fragile mistress that likes to be pampered. She does best with the trendy urbane who imagine that to the clever, reward comes without work and that pushing paper between desks, or electrons through the ether, is the same as growing potatoes or pounding nails. She avoids being seen around reality-based communities, preferring to find dark embrace where the fog of deception is thick and judgments are clouded by greed."

Trouble is huh, those with the electrons are finding that they still need real businesses to create the '1's or they end up with just '0's.

by kiwichas | 17th Feb 16, 12:28pm 1455665287

One of the great ironies of life, those who work the hardest at unappealing jobs get nothing(but arthritis), while those that do nothing get paid the most....

by Stephen Hulme | 17th Feb 16, 10:07am 1455656854

Then, why panic about the need for tiny official interest rate moves that are regularly seen as volatility in recent US T10 year yield trading ranges?

by notaneconomist | 17th Feb 16, 10:43am 1455659032

It is probably more a reflection of which side of the fence one's mind is sitting. At this stage I would personally be better off with higher interest rates......however I don't see that as being overly good for the rest of the economy.

by Cowpat | 17th Feb 16, 10:16am 1455657374

Henry_Tull , this one is for you. I appreciate you have an in depth knowledge of the OIO decision Crafer farms both the declined and accepted applications. I suggest you search for Changming He under his Bloomberg business profile.I will fill the gaps

by Andrewj | 17th Feb 16, 12:58pm 1455667112

http://www.bloomberg.com/research/stocks/people/person.asp?personId=828…

by Cowpat | 17th Feb 16, 1:49pm 1455670178

Andrewj ,To fill in the gaps, recalling that Natural Dairys application for the Crafer farms was turned down primarily due to character assessment. Shanghai Pengxin Group was specifically asked by the OIO if there was any relationship between itself,,Natural Dairy and UBNZ entities, a question also raised by the CFIG given what appeared to be a lack of due diligence. Changming He who at one stage was in control of the massive Jiangxi Corporation .In 2007 he was Chairman of Linfair which became Jin Hui Mining which became Natural Dairy resigning due to old age in May 2009 remaining a shareholder of Natural Dairy whilst it was under investigation. Having overcome old age in April 2010 , just prior to Shanghai Pengxins application he became Chairman of Shanghai Synica , the controlling shareholder of this company was Shanghai Pengxin Group . In july 2013 Shanghai Synica became Pengxin International Mining having absorbed Shanghai Pengxins copper interest. SPGL remains the controlling shareholder. On August 24 2015 two days prior to Pengxin International Mining being suspended from the SSE /HKSE Changming He resigned from Pengxin International Mining due to old age/ill health. Wang Bing , Lei Jiang , Weimao Zhao are directors of importance in the Crafer farms application , at the time of the application all were directors of Shanghai Synica all related to Changming He and remain directors of Pengxin International Mining. Changming He not only was the chairman but a shareholder of Natural Dairy. The company Pengxin International Mining remains suspended, SPGL remains the controlling shareholder, and on December 2 2015 Pengxin International Mining was charged by the Shanghai Regulatory authority with financial fraud, false accounting insider trading and failure to disclose information as required and is currently undergoing asset restructuring and auditing .Li Fuping who replaced Changming He as Chairman was replaced and is currently undergoing investigation for serious disciplinary action. Why would Gary Romano resign in such a obscure manner. The OIO simply failed in its assessment and the SPGL application was tailored

by Henry_Tull | 17th Feb 16, 8:56pm 1455695802

Point well made. Often the detail is hidden in full view.

by Cowpat | 17th Feb 16, 9:45am 1455655534

4 February was the record high 5042MT. In terms of volume traded and USD the percentages are around 26% of todays levels

by KH | 17th Feb 16, 10:49am 1455659364

"45% of the Feb-14 level " is still dramatic.

by Andrewj | 17th Feb 16, 12:21pm 1455664879

Hi David, my friend tells me you could be wrong,

"Volume in auction 2
years ago was 34,568 versus today 22,021."

by Colin Riden | 17th Feb 16, 5:39pm 1455683994

Not sure where your numbers are coming from David but mine have the two auctions prior to the 18th February 2014 with higher average prices.

And if you multiply price by volume to get value then today's auction (22,021 tonnes) was worth USD 51.2 million versus 18th February 2014's (34,568 tonnes) USD 173.4 million. Or a little under 30% of the value.

by notaneconomist | 17th Feb 16, 9:50am 1455655826

There have been others around the world who have also made calls that the banks need breaking up. The only way to have financial stability and transparency is to break them up......break them into services.

by offcut2 | 17th Feb 16, 10:05am 1455656749

Are we there yet...?

“You can only go so far with financial engineering before you actually have to have a business with real growth,” Chris Bouffard, chief investment officer who oversees $9 billion at Mutual Fund Store in Overland Park, Kansas, said by phone on Oct. 2. “Companies have done about all that they can in terms of maximizing the ability to do those buybacks.”

http://www.bloomberg.com/news/articles/2014-10-06/s-p-500-companies-spe…
Reply

by Boatman | 17th Feb 16, 10:08am 1455656928

My guess , looking at commodity prices , is we are in the early stages of what could become a DEFLATIONARY SPIRAL .

The currency -wars have contributed to some extent with emerging economies forcing down their currencies, but there appears to be surplus capacity in manufacturing in many industries, and the (often borrowed) capital tied up in manufacturing plants means they cannot either cut back to below breakeven , or shut down easily .

So they keep producing and drop prices , and hope the Central Bank does whatever it can to keep the currency "competitive " so they can stay in business

The fall in commodity prices is getting all the attention , but there is a general level of price reductions everywhere that people are trying desperately to mask with creative marketing , discounts, sales , etc .

For example , motor manufacturers , furniture stores , electronics Companies all don't want the prices of the vehicles or TV's to drop , so they are offering ZERO % finance .

Someone has to "finance " this transaction, and its the manufacturer . It is tantamount to a price reduction ( and quite a significant one give that interest rates were over 10% not that long ago )

The NZ building boom is the outlier , but building materials across the ditch are going down , and Aussie wage rates in some trades are falling ( albeit very slightly )