Global factories see tiny growth; HSBC makes Q4 loss; iron ore price rises on China demand; UST 10yr yield 1.76%; oil up, gold down; NZ$1 = 67.2 US¢, TWI-5 = 71.8

Global factories see tiny growth; HSBC makes Q4 loss; iron ore price rises on China demand; UST 10yr yield 1.76%; oil up, gold down; NZ$1 = 67.2 US¢, TWI-5 = 71.8

Here's my summary of the key events overnight that affect New Zealand, with news commodity prices are rising today.

But first, February data highlighted a setback for the American factory sector, with growth rates slipping back again after the slight rise seen at the start of 2016. The latest survey pointed to the weakest overall improvement in business conditions for just over three years. In Europe, the story was similar, but with notable price falls. In Japan, it is similar again, with only marginal growth occurring. Prices are more stable there.

If you don't like banks who make increasingly big profits, then you are likely to love today's HSBC results which report a slide in profitability and a loss in their 4Q. This is a globally important bank with less than US$200 bln in capital, but liabilities of some US$2.2 tln, meaning that if the value of their loans to customers and other investments falls only -8%, their shareholders are wiped out. Still, that is not too different to the big Aussie banks. Without big profits, confidence leaks. Without confidence, they are toast. Bank leverage is a tough, tough mistress.

In Australia, the price of iron ore, the icon weak point of commodities last year as world supply overwhelmed demand, has clawed its way back above $US50 a metric ton. The rise which was unexpected, not only looks like it will hold, but is now above what the Australian Federal government assumed in its last budget update, so it will surprise on the upside for them with their tax revenues. Behind this price rise is higher volume demand from China.

In New York the benchmark UST 10yr yield is marginally higher by +2 bps to 1.76%. Yesterday, local swap rates rose even less, up just +1 bp across the curve.

The oil price is higher today to US$31.50/barrel in the US while Brent is just on US$34.50/barrel aided by the release of a major report. Globally, growth in the oil supply has 'plunged' as an extended period of low prices takes its toll; so says the International Energy Agency in its annual Medium-Term Oil Market Report. But while American light, tight oil output is falling steeply for now, the market will begin rebalancing in 2017 they say – and by 2021 the United States and Iran are seen leading production gains among non-OPEC and OPEC countries, respectively.

The gold price is US$12 lower today at US$1,212/oz.

The NZ dollar is up 1c this morning. The US is falling, the euro even more. The Kiwi dollar is now at 67.2 US¢, at 92.8 AU¢, and at 61 euro cents. The TWI-5 will start today at 71.8. Most cross rates are now back to where they were at the beginning of January.

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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62 Comments

one of the big issues in the next aussie election is NEG gearing, public opinion is behind the opposition, but the party in power is out to protect it and have admitted it would drive investors out of the market
That poll showed Labor's proposed negative gearing changes have won a significant slice of public backing at 47 per cent, compared to 31 per cent opposed to the move.
http://www.smh.com.au/federal-politics/political-news/tax-wars-turnbull-...

14
up

The comments re HSBC put a lot into perspective. Makes it clear why they (the banks) haven't encouraged farmers to consider the down side when borrowing - they don't do it themselves. The level of risk is huge. What concerns me is that Governments fall prey to their lobbying, which means that entire economies balance on the fine edge of their shady business practices. Makes me even more convinced that Governments should look at the rules that enable banks to claim depositors funds as their own, and depositors as unsecured creditors. This needs to change!

It is far easier, cheaper and more time efficient to buy a good quality safe than trying to get satisfaction from a politician or bureaucracy.

aw come on! We can hope can't we?

Hope doth butter no parsnip ;-))

Where were you on Burns night..

As dairy price commentators sharply dial down their optimism on recovery timing, farmers are asking how could so many market experts, including Fonterra, have got it so wrong for so long?http://i.stuff.co.nz/business/farming/opinion/76951736/Milk-price-foreca...

Thing is not everyone has bought into the forever upward.
One Chch farm accountant has for 3 years been offering sermon saying when Europe blows she's really going to blow.
Some regional bankers to their credit have offered sound advice (keep away we have already lent them more than the productive valuation) - let these offshore folk take it.
Sandy Chen, he toured the country foreshadowing events china buyer wise
Then there is the interweb same as OIO use for background checks..
At any one time up to 10% of the population will be well/fully stretched.

P.S.
Commodity price cycles
Exporting is a full body contact sport
Some products are transacted in commodity style fashion.

Policy needs standards

<. /rant over.>

Henry if all builders build shoddy leaky houses then it makes sense that all dairy farmers borrowed to the hilt ;-)......the thought or thinking might be someone's reality but that don't make it the truth.

The real market experts will be those doing the producing not those taking a clip.....Fonterra has much in common with the likes of real estate agents.....

From Friday...
Is it time to call for Nurse Ratched ?
We are talking documented belief systems

Craig and Helen work on the principle that making a profit allows them to borrow more from the bank and increase their asset base. Craig said they were advised at an early stage to borrow everything from the bank they could, because it was better to milk 800 cows with a 50% debt than 400 cows without debt. The bank manager is the most important person they know and in anything that they do, ‘cash must fall out of the bottom.’
http://www.nuffieldinternational.org/rep_pdf/1223389466Gregson,_Sara.pdf
page 24

then
http://werewolf.co.nz/2011/06/the-case-for-corporate-reform/
“You load up with debt, you go hell for leather to pay that off, you don’t pay much tax along the way….but the problem is, easy money comes along, as it did before the global crisis and dairy farmers increased their debt fourfold in then years, to $43 billion dollars. And all that did was drive up the price of land. So not only then can you really struggle to keep your head above water – just to make that work economically, but you’re entirely dependent on somebody to come along to pay more, to take it off yur hands.

Enter the Chinese, with an entirely different business model. They’ve got much lower capital than us, Oram says. “Some Chinese companies are selling infant formula directly to the consumer in China. Therefore if the New Zealand operations actually don’t make money at all, they couldn’t care less. Because they have a captive supply of infant formula which they can sell for a profit in China. And the corporate tax rate in China is 25% – compared to 30 % here.”

Therefore, any such theoretical Chinese operative might well want to minimize their profits here…and maximize them in China. “By dint of that completely different business model, the Chinese investor can afford to pay more for the land than a New Zealand farmer ever could.” And wear any losses, or only marginal levels of profit from their operations here. Hardly an ideal springboard for growing and maximizing the profit potential of the New Zealand end of the operation.

and from almost 3 yrs ago...
http://www.interest.co.nz/news/59514/next-5-10-years-make-or-break-nz-ec...

and a mention for AJ
https://www.youtube.com/watch?v=9JL6ZLQaf2E

Thanks Henry, paying off the farm has always been a bit of a mission, something often best left to the next generation.
Which gets to the bit where he say's ;

“You load up with debt, you go hell for leather to pay that off, you don’t pay much tax along the way"

My experience has been the opposite, I purchased a farm and borrowed 600k, we decided to pay it off over 6 years at 100K a year plus interest, thats when I got heavily involved with the IRD, I kept getting these massive tax bills so it took 10 years and some fiscal discipline. I had a decent farm and it was a big deal, all that tax on the capital I needed to pay down debt.
Anyway a few years later at a party with my friend, he mentions his 4mill + debt and how he wasn't too worried, however when I said you forgot the 2 mill in tax that you need to add to it as it's capital and it has to be tax paid not like the interest which is deductible, and that he actually needed to earn 6 million to pay it back, there was a decidedly cold chill that entered the room and things have never been quiet the some since.

I noticed exactly the same thing, probably because I also have some experience with paying off debt.

I'm hearing what you're saying Henry. My husband and I went through the 1980's where the lessons were ruthless, harsh and gruesome for anyone in farming. But what happens is a new generation soon follows and they never had those experiences and think that it will never happen again as it is different this time etc.....some of these new players have had the guidance of previous generations but if you have a young accountant and bank manager who have not much experience then you could well of thought the world of dairying is a one way ticket up.

Some people will exit the industry and that cannot be helped it is just where they are in the cycle. The only light I can see is China's 2 child policy.

Flogged this comment .

To put this into context, European milk volumes have increased by 2.7 bill litres in the last year contrasted with NZ total production of 2.1 bill litres.

I wonder how much of that extra volume can get through to China.....it's a dim light.

There was an article in this weeks farmer about a young couple struggling with $2.04 in debt servicing costs a kg. Then it got interesting

She said, quote; "We consider our bank a business partner in our farming operation and when in business with anyone it's helpful if all parties bring something constructive to the table when it isn't going well".

The partnership thing with the local ANZ rural manager might have got a bit out of hand.

Agree. That is interesting. Anyone who thinks a bank is a 'business partner' is delusional. They will always only be a lender, and act like a lender. They will want their loan to be paid back, and if that looks shaky you can hardly expect them to turn a blind eye.

It is a sign of delusional business decision-making to get into a situation where you have over $2/kgMS to service debt.

but it is what it is for some.

one almost needs bare witness at the kitchen table to see how the relationship is portrayed (established and first function)..
there is a core group that still think in terms of a brighter higher place (if I can get the bank to back me.....) and this falls in line with sales and marketing pitches (may be not be legal docs).

I wonder what constructive thing the bank brings to the table now it's not going well. Boltcutters for the farmers toes perhaps ?

It's all in the advertising
As a BNZ Partners customer, you get a core dedicated Partner who can provide tailored banking advice on how to build and grow your business — and put you in touch with finance and industry specialists.
For medium to large businesses with a turnover over $1 million.

Let’s talk: 0800 273 916

Big Aussie bank had a crisis type meeting today to discuss it's dairy book. It called in its top rural staff from all over NZ to attend.

New Zealand banks in name only.
Management demonstrated to be else where.

The banks are proud to peddle the claim that they understand business, that they are knowledgeable business partners for their farming customers. If their security was in the business – in the farming operation – this would need to be true. They would need to be knowledgeable. They would, in effect, be like shareholders in any business. But their security is not in the business; it’s in the assets, primarily the land.

The patter is that they believe in the particular farmer, the farming operation and its future. It’s why they’re happy to lend - to put their knowledge and commitment on the table to enable the next step, help expansion, fund development, capital expenditure, and the rest. The implicit claim is that they know as much or more about business – managing the financial side of the business – than the farming customer. And thus they win respect – and a respect curiously greater than given to most other equally fallible business entities, all of whom would love to be accepted as your partner in this or that. That's marketing nirvana.

The actuality is that their investment is less in the business than in its physical assets. Revenue covers a part. If the business fails, they trust their risk will be covered. If they’re all piling into the same assets – land values – the picture looks even better to them, the reward looks secure. This is the essence of speculation – the belief that there’s sufficient support somewhere, somehow, among unknown but consistent buyers, for asset prices to rise. This is idiocy in any sector. It's a kind of madness among banks.

So the focus of the banks on land valuations (a focus shared by many farmers in capital gains), has fed an extreme distortion of values, to the point where they have little or no relation to revenue and profitability – which are the fundamentals of business. At this point, it is surely clear that the bank’s focus is not on the business of farming, but in asset values.

When the tide goes out, and revenue stalls, the banks may hang in there for a while. But if asset prices fizzle out, the supposed business partnership goes with them. It vanishes like the idea it always was, the work of marketing teams, brand managers, corporate communications professionals, public relations experts.

When the tide goes out, and revenue stalls, the banks may hang in there for a while. But if asset prices fizzle out, the supposed business partnership goes with them.

Better call OBR - anything to get the reduced asset value matched by a haircut imposed upon the liability ledger (depositor's savings). Or will it amount to a depositor's beheading given banks' skinny regulatory capital requirements?

When John Key stands up and says the banks are safe, thats the time to panic. Though I do think that if you are keeping large sums of money in the bank, you are taking a big risk. Not just because of the complete absence of honesty within the banking system, but also because asset nearly guarantees you will lose.

you are not wrong,
talking to one of our town based ppl, they mentioned in a couple of instances it was like a seeing "grieving process" - in the sense of a lost relationship. These bankers had been treated as part of the family and now the borrowers were showing the symptoms of loss and relationship breakdown...

Remember the banking advertising - they wanted their customers to see them as business partners, not a lender. And thus they actively encouraged the current mess.

I have no pity for them, they thought they were so smart taking on so much debt, suck it! What is any business partner going to say, if your interest costs are 45% of total revenue? The most constructive thing I would say is "you ###### up, it's costing everyone money, sell up now!" IF you can't pay the interest on your current debts, how is more debt going to help? Nothing wrong with admitting you made mistake
Instead, what I seem to be hearing, is that everyone keeps saying, "things are about to improve" so everyones hoping for a miracle, and the debt levels go up and up.

possibly didn't start at $2.
but your point is a good one, and goes to the accuracy of farm gate forecasts

Also 'cash' buyers can still make more in interest at the bank even with these rates, if there were bargains out there farms would be selling.
So whats the new bank lending policy and the new valuations?

I'm sure nearly every dairy farm is making an EBIT loss this year, so even if you got a farm for free you would still lose money. Though I'm sure cash buyers would have been better of leaving their money in the bank for at least the last 10 years, except for the minor detail of capital gains, on both the land and the cows. I once heard it said that 'Dairy Holdings' was actually just making money off of the capital gains, and that was the business model they used. It has indeed worked up until now, the question is, 'how much negative cash-flow can you offset with prior capital gains?'
Only one dairy mortgagee-sale currently on trademe, which is just incredible! Banks are swallowing the losses for now, and I assume they will try and wait for milk prices to recover before they start to foreclose.

Dairy Holdings
Yesterday, Companies Office documents showed that existing shareholder and former South Canterbury potato farmer Alan Pye had increased his shareholding from 20.8 to 25 per cent, Tauranga dairy farmers Colin and Dale Armer now own 60.74 per cent, up from 33.2 per cent, and new shareholders JD and RD Wallace now own 14.26 per cent.

Mr Armer was pleased the dairy group had stayed in New Zealand ownership. He and his wife had been able to finance their increased shareholdings through "substantial farming businesses in the North Island which had funds available".

"We are just hunkering down and making sure our costs of production are in order," he says.
http://www.stuff.co.nz/business/farming/dairy/70297932/Dairy-Holdings-si...

http://www.nbr.co.nz/article/rich-lister-turley-puts-farm-market-ch-p-18...

There must be a stocking rate that reduces inputs by such an amount that there is a positive cashflow, if not then 'Huston we have a problem'. It's just at these reduced stocking and production levels there is no room for debt and over zealous councils.

Yes indeed there is, but reducing stocking rate skews all the metrics that matter in the wrong direction. Such as Kgms/ha, and the above mentioned debt servicing per kgms. Once you mess with the kgms/ha, you reduce the value of your farm, which is the exact opposite of what people need right now. I agree, you can't do it if you have much debt, or a polluting farm (and there are still a few around).
I looked at it back in '09-10 and at the time it was about 1,200kgms/ha if you were producing less, you'd be better off wintering on. Even then you could sell a good farm in Canterbury for up to $50k/ha.

Reducing stocking rate doesn't necessarily reduce kgms/ha skudiv. In fact talking to accountants some of their farmers are more profitable last season with a lower stocking rate than they were before.

Farms haven't been sold on the kg/ms/ha basis for the last few years. They are sold on a $per/ha e.g. $40,000/ha. So a 200ha farm doing say 200,000kgs and another one doing 170,000kgms have been selling for a similar price.

I have always found it odd that farm prices have been disconnected from it's productive ability. It will be interesting to see if the pendulum swings back to $/kgms produced.

Dairy Holdings have always run on a low cost system. They haven't got caught up with the high input system. I also heard that they are pretty pragamatic about cutting costs. Owning their own winter grazing blocks could be paying dividends in these low payout years. This year graziers up our way are still charging $28-32/cow/wk. No drop of price from last year. I hear there is cheaper grazing up in Canterbury? (Happy to have someone more familiar with Canterbury comment.)

Wrong. Banks are making certain clients sell but there is no mention of the mortgagee being involved. Banks do not like the negative publicity they get from mortgagee sales so in certain situations they give their clients the chanc to sell. Of course if the farm does not sell then the mortgagee sale process will begin.

I disagree, people were not buying based on milk prices, in the same way people are not buying Auckland houses based on rental values. It's all about the capital gain. I am not kidding. Maybe people have forgotten that little detail, but I remember.

When the fog clears there better be a positive cash flow.

Try explaining that to a crowd in an Aukland auction room.

Dung flung fan

for 8 years now....it is a ponzi scheme IMHO with greed as the drug of choice supplied by a banker.

To be fair, all the economic power in the world is being used to motivate people/business to borrow/spend and to discourage saving. Only a few crazy people (such as yourself) think this is a bad idea.

The USA wants it's currency down, the strong dollar is starting to hurt, how far can they push?

Oil prices cannot rise to 'pre-crisis' levels because such a rise would cripple global economic activity. Current prices do not support the long-term activities of oil companies or the budgets of numerous nations.

Largely unnoticed because it is not immediately about money but is about severe disruption of climate systems, massive sea level rise, demolition of the global economic system and whether we will even have a planet to live on a few decades from now, the Arctic sea ice cover continues to decline:

http://nsidc.org/arcticseaicenews/charctic-interactive-sea-ice-graph/

We will know in a few months just how bad the predicament is.

Don't be too pessimistic Afew, there's been very little ice on the North-pole before.
In case you haven't seen them, check out these photos from 1958 and 1987 of US submarines surfacing at the North-pole.
The world did not end then either.

http://wattsupwiththat.com/2009/04/26/ice-at-the-north-pole-in-1958-not-...

a) well maybe because it seems that picture is a lie. Here is the actual description "Skate (SSN-578),taken in summer, perhaps in August 1958." not even saying where it is, exactly.

http://www.navsource.org/archives/08/0857806.jpg

b) thin spots in summer is not the same as ice extends.

b) the subs would have been looking for thin spots to break through, which is consistent with,

c) maybe check another photo, http://www.navsource.org/archives/08/0857815.jpg

d) or this where the archive actually says at the north pole "On 17 March 1959, Skate (SSN-578) surfaced at the North Pole to commit the ashes of the famed explorer Sir Hubert Wilkins to the Arctic waste. " http://navsource.org/archives/08/575/0857824.jpg

e) the second picture at whatsupwiththat just says "an Arctic surfacing in 1959" yet from above it was clearly at the pole.

so multiple lies and mis-information.

From some economists comments every time oil / energy costs get to around 6% of GDP for the US economy a recession results. $148US was the last one, ergo the maximum we can expect oil to go to today is more like $110~120USD as the economy is weaker. In fact when you look at a) servicing debt and what that extracts from teh economy/GDP and b) mail street v wall street ie real economy v make believe it maybe that the real economy cant even stand $100.

Steven: you should qualify your statement, when OIL reached USD $148 pb it was the futures derivative that hit $148, not the physical, and it only touched $148 for a few seconds on a couple of trades

yes and the time lag of the price into the economy also has to be considered and acceleration. So while it may have only been $148 for some minutes the fact that it was over $130 (say) for some weeks (say) was what did the damage. Therefore that exact price peak didnt matter too much.

PS that doesnt then alter the message much, ie that a high price probably lower than that peak will tip us again. In hindsight we might look back and say $148USD in July 2008 was it, ppl thinking $200~$600 was on the cards look to be very wrong the global economy collapses first.

The front month contract reached $148 steven. That's for delivery the month after the contracts close on the 20th of each month. That's why there is the most price volitility a few days before the 20th. Contracts are traded as far as 20 years out but not big volumes. .

And as the Speights advert goes "Good on ya mate".

http://www.stuff.co.nz/business/77162988/sir-bob-jones-mocks-gareth-morg...

It is interesting here in Southland at the moment. Rabobank are now photographing all our assets & running them past a valuer to check our asset to debit ratio,they say that it is their standard practice to do so every 3 years - Took photos of farm,livestock,plant ,houses-where only interested in assets they had a mortgage over.

Same here, Rabo paid me a visit as I have a stock overdraft facility, two bankers, nice people, went for a drive, had a poke around and left. So it's not just dairy farmers.

Jeepers Joe. Fair enough of the bank taking photos but crikey it is suggestive of a change....major change in modus operandi.

Things are fine with them at the moment,to be fair they are a very conservative bank to deal with -they will only lend on sound propositions -security & cashflow have to stack up. Do you like the all in one account Aj?

I am just swapping over at present, it's nice they are moving away from the interest only loans they had.

It's the smaller new banks on the block I'm more worried about.

The farm visits sounds like the sniff test to me.... looking for bullshit. There must be an ever increasing number of sheep and beef farms losing their cashflow of dairy grazers. A good number of these will be heavily indebted, thus the grazing.

so long as you have plenty of time to read
http://www.theguardian.com/books/1998/nov/07/fiction.tomwolfe
This book will be a good friend to you.

Chapter 2: The Saddlebags
Charlie goes to PlannersBanc for a meeting with the workout team of which Harry Zale is the primary workout artiste. Zale dogs Charlie about the huge debts that he owes the bank from his building projects. Using techniques like wearing suspenders with skulls and crossbones and giving the unidigital salute, he gives Charlie “saddlebags,” referring to the mammoth amounts of sweat from Charlie’s armpits that meet in the middle of his chest.

The stage has been lovingly set. Croker is seated facing the unbearable glare of the early sun, with a paper mug of coffee smelling of 'incinerated PVC cables' and a 'huge, cold, sticky, cheesy, cowpie-like cinnamon-Cheddar coffee bun that struck terror in the heart of every man in the room who had ever read an article about arterial plaque or free radicals'.
For the 'orientation' of the workout team is now 'post-goodwill'; and Croker, once so eagerly wined and dined has descended to the status of 'shithead': 'Shithead was the actual term used at the bank and throughout the industry. Bank officers said 'shithead' in the same matter-of-fact way they said 'mortgagee', 'co-signer', or 'debtor', which was the polite form of 'shithead', since no borrower was referred to as a debtor until he defaulted.'
As the grilling continues ('This here's the morning after, bro'), we approach the moment devoutly anticipated by the whole team. This comes when the two patches of sweat from the shithead's armpits finally converge on his sternum, and his breasts look like saddlebags.

http://www.businessinsider.com/bottling-fresh-air-selling-it-to-china-20...

The World is mad..

Now this product is almost as good as printing UK money made out of Fresh Air..
.
A creationists delight.?

Free fresh air turned into a must have...115$ smog beater....to counteract the pollution factor, created by incorporating UK and USA factories in....where else...Smoggy China.

Now that is weird is it not.......now I know the best way to sell a product is to create a problem, then solve it...but this is ridiculous.

They will be bottling Water...next.??!!.

LOL, I hope they send a copy of the video on how they make it with each bottle