Dairy prices fall -3.2%; US retail strong; HSBC has big profit fall; China says 'will respond' to US import tax; EU blocks more MNC tax dodges; UST 10yr yield at 2.42%; oil up, gold unchanged; NZ$1 = 71.7 US¢, TWI-5 = 77.2

Dairy prices fall -3.2%; US retail strong; HSBC has big profit fall; China says 'will respond' to US import tax; EU blocks more MNC tax dodges; UST 10yr yield at 2.42%; oil up, gold unchanged; NZ$1 = 71.7 US¢, TWI-5 = 77.2

Here's my summary of the key events overnight that affect New Zealand, with news the US seems to be getting serious about its 'border adjustment tax'.

But first, the overnight dairy auction went off pretty much as signaled by the dairy derivatives market. Prices fell -3.2% in US dollars, led by a -3.7% and -3.8% fall in WMP and SMP. Cheese fell more, down -5.3% since the previous auction. This is not a great result, obviously, and takes overall prices back to levels we last saw in November last year, although to be fair, the gains since then have been meagre. About the only saving grace is that in NZ dollars today's fall was only -1.2%. It is fair to say that prices have essentially been stuck at this level now for four months.

On Wall Street there were a series of strong earnings reports from some major retailers and that helps underscore the view that the American economy is basically healthy. Wall Street has hit new record levels on that basis.

However, the early readings on both the US factory and services sectors are showing a cooling, although to be fair, from pretty healthy levels. The factory PMI dipped to 54.3 and the services index to 53.9, both two month lows.

In London, global bank HSBC's full-year profit slumped more than -60% and fell far short of forecasts as the bank took hefty write-downs from restructuring and flagged near-term issues on revenue growth.

A key analyst says global car sales should rise +1.5% in 2017 to 93.5 mln vehicles, but it claims the industry faces its most risky period since the GFC.

And one of those risks is the US border adjustment tax. China today said it 'would respond' if the US imposes it. Interestingly, some major US exporters are lining up to support the tax on imports. Of anyone, they must know they will get blow-back from other countries, surely.

And in China, a new report is urging the country to allow farmers access to mortgage debt. It claims the change would see a wave of innovation, productivity and significant output rises in China's agricultural sector.

In Europe, EU finance ministers agreed to more measures to stop international corporations from cutting their tax bills. The rules would deal with several legal loopholes that allow multinationals to avoid taxation, such as devices to shift profits and move debt to countries outside the EU where there are more generous interest deductions.

In New York, the UST 10yr yield is currently unchanged at 2.42% although it did attempt to rise above 2.46% earlier in the trading session.

Oil prices are higher again today, now just over US$54 for the US benchmark, while the Brent benchmark is just under US$57 a barrel.

The gold price is still unchanged at US$1,237/oz.

And the New Zealand dollar will also start today essentially unchanged at 71.7 USc. On the cross rates we are at 93.4 AU¢, and against the euro at 67.9 euro cents. The NZ TWI-5 index is still at 77.2.

If you want to catch up with all the changes on Friday, we have an update here.

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24 Comments

Another interesting commentary form Ms Stewart -
"Nothing since that day has changed my mind. Indeed, I remain more convinced than ever that the latter will be taken care of by the former. That is, milk and meat production is slap bang in the middle of its dying days".

http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=1180...

Interesting argument. I can see her logic and wasn't aware of the level of lactose intolerance (is 75% accurate?).

Another aspect to support her case if the milk we get from the supermarket these days. It used to be that milk kept in a dark cool place would last for two or so weeks. It would begin to coagulate and smell. These days it doesn't last a week, many times not even until the best before date, and then it goes solid. Doesn't smell, but is still unusable.

I think it is because it is all reconstituted powder. But no amount of mixing will return it to its liquid form, so I'm not sure I,m right about the reconstitution part. As i am a big milk drinker this is really annoying and I think we are getting cheated.

I find organic milk keeps far longer, so it might cost a bit more but you throw less of it away so for me anyway its cost effective I think.

Adult humans, I think, by and large, are supposed to be lactose intolerant, all mammals are designed to be weaned off their mothers milk. You and many like you have not been, so have maintained the ability to digest straight milk. There does seem to be some difference with the consumption of cheese and yoghurt. I used to drink a lot of milk but stopped a long time ago, now find that if I do consume milk as milk that I do not digest it easily. It is something to do with enzymes.

I suspect she has issues with perspectives and numbers. Muufri doesn't produce much more volume than one small dairy farm. Expecting that tecnology to take over the world any time soon seems pie-in-the-sky to me. And there seems to be issues with unit costs. Ms Stewart declares she is a meat and dairy eater. Only upper middle class consumers will make the transition to non-animal based alternatives if prices are higher. It is somewhat presumptious to just assume 'everyone' will follow her based on a high-income/consumption world view.

What people say they want, and what they actually do in the supermarket are two vastly different things. People say they don't want others make ['wrong'] choices ['for the good of everyone'], but stridently resist restraints on themselves when it comes to choice.

She may be right in terms of the big-picture climate issues. But her impractical knee-jerk solutions just prove how difficult it will be to bring the change she advocates. A not-well-thought-through argument, I thought.

I found this article a much more coherent argument. http://pureadvantage.org/news/2016/11/29/lament-nz-farm/

That's a heck of a rant - not sure what her point is - she doesn't care what she puts in her mouth - advocates synthetics

In her own words she asks "what's Coca cola? I'm pretty sure it ain't "the real thing." Millions love it, and while I choose not to drink such gloop pure, I look the other way when it goes into my bourbon

Replacement milks (soy, nut-based etc) are already becoming big business though whether the economics/environmentals support a full replacement of cow-based stuff is debatable.

Much like self-driving cars, synthetic meat has been "coming real soon now" for quite a long time. Also like the SDC it will undoubtedly hit the market eventually (just not as soon as a lot of people think). Of course, it's not really "synthetic" - the meat is real, it's just grown without the need for an animal beyond the initial cells. http://www.nextbigfuture.com/2017/02/lab-grown-meat-prices-have-dropped....

Presumably that's why Ms Stewart refers to the industry in the middle of its dying days rather than being dead already.

Laboratory Grown Meat

No thanks, I prefer free range walking around lying down in the grass meat

You will never be told what chemicals will be used in the petri-dish

People who buy McD's chicken nuggets however dont.

PS What about sprays and chemicals "hidden" in the grass? excessive fertilization? growth hormones we dont get told about right now? palm kernels imported from rain forest destruction?

great link - thanks.

Not hard to improve on the "generic" processed industrial rubbish we get fed today.

However there will always be a market for "natural" and "whole" foods.

19
up

We borrowed 60 billion against inflated asset prices as speculation went mad. Instead we should have borrowed against our innovative and creative skills. We should have 20 new Villa Maria's, 15 Kapiti cheese companies, 30 small meat companies suppling herb fattened lambs to specialist ,markets in Europe and so on.
What we have is a lot of indebted farmers trying to push more and more product into shrinking commodity markets where other countries have significant cost advantages.

Instead we have asset bubbles and high costs that are going to hamper creative solutions to our problems.

It's as if kiwis don't want to create companies that provide jobs and value. Instead buy a bunch of houses that are only there to collect rent.

totally agree AJ. However it's accepted that faming is all about the capital gain on the land. It is in everyone's best interest... farmer...bank manager.. bank...reserve bank to keep asset prices up there, as opposed to looking at taking risk, diversifying, creating new product lines, and breaking into new markets etc,.

That's just not the done thing.

LOL, agree.

yep Aj, we could have had "20 new Villa Maria's, 15 Kapiti cheese companies, 30 small meat companies suppling herb fattened lambs to specialist ,markets in Europe and so on." And probably somebody started some versions of those off.
But what happens is that some overseas outfit buys up the fledgings, and that pretty much stops them in their tracks. Those outfits being willing to accept very low returns and lowered quality and innovation such involvement produces. And ninnies like Stephen Joyce will explain in a condescending way that it's the way of the world.
What can you do about it ? Not much without becoming an command economy. But there are some things. One way is to legislate that only New Zealanders can own New Zealand land. Which enables some foreign input but ensures New Zealanders will always have to be involved.
Or you could say that for a company to operate here it has to have local shareholding.
What important is that local enterprises are locally owned, and you have to ensure some protections for them from the wolves to get that.

The entry level in to any land based industry is prohibitive. Many corporates use regulation as a tool to stop competitors. Councils regulatory bodies work against new enterprise. Have we gone too far to turn the ship? I just had a friends son to stay, given up on trying to buy a house here, gone to Europe purchased a 25 ft sailboat for 500 dollars in the Netherlands, taking his girlfriend and going to re fit the boat and spend summer sailing around Norway and Sweden. Asked me if he's doing the right thing, I looked at his girlfriend both under 20 and said 'go for it'. Lets face it we are not young forever.
It's impossible here for the young to get on the ladder when the big farmer along side can borrow and pay whatever for the neighbour as he's on to a tax free capital winner.

It's even more tragic for people in town who end up spending the best part of their life paying rent or interest to some foreign bank. What a tragic waste of young enthusiastic minds, the best and brightest of our youth going into finance or real estate instead of business.

Andrewj - resources are stuffed - there is no ladder to get onto. The human population is way in overshoot ... resources & energy per capita is on the slide now ... this is why going into business (apart from "developing" increasingly finite resources to more humans) is no longer viable.

Anyone who we consider wealthy (currently) owns a lot of embedded energy (eg buildings etc) which requires ongoing energy input, land and DEBT in some form (eg stocks, pension funds, insurance funds) ... the wealth exists only as long as the ability (for someone) to service this debt exists ... And the wealth of the masses is in trouble

On Wall Street there were a series of strong earnings reports from some major retailers and that helps underscore the view that the American economy is basically healthy. Wall Street has hit new record levels on that basis.

Hmmmm....

However, the SocGen strategist warns that if one scratches below the surface of these headline numbers and all is not as it seems.

First example: out of the 1,650 MSCI World stocks only 246 have hit a new all-time high this year.

.Second, and more troubling, example: the average stock is still 26% down from their all-time highs or down 20% when measured on a median basis. But given that it is the heavily weighted stocks (think Apple, Amazon, Facebook, JP Morgan and Alphabet) hitting all time highs, the index headline is concealing a considerably higher number of laggards. Read more

I guessed something was holding the UST 10 yield down, other than rate locking.

If we are to relate share prices to fundamentals, it would be as an outlook into some undetermined future distance. In other words, record stock prices would be consistent with some good level of probability that the economy and therefore earnings will eventually move up in accordance; that prices are now correct and earnings will at some not-to-distant point grow into them. This is the mainstream view of stocks as seen by economists and policymakers adhering to the views of efficient markets and rational expectations, the discounting mechanism of information that leads the FOMC to at times fixate on the S&P 500 (and they know it). Read more

Oil prices are higher again today, now just over US$54 for the US benchmark, while the Brent benchmark is just under US$57 a barrel.

Distillates not so much in demand.

US gasoline demand plunged to just 8.2 million barrels per day in January, and sales were down 4 percent from a year earlier. It was also the lowest level in four years. Weak demand is raising some red flags for the market. Read more

"And in China, a new report is urging the country to allow farmers access to mortgage debt. It claims the change would see a wave of innovation, productivity and significant output rises in China's agricultural sector."
Hope this doesn't eventuate as there will be an oversupply of milk products yet again if it does.

A couple of years ago I was in Northern China and I looked out of the window of the bus in disbelief. There was a man spraying fields with a backpack sprayer that would be suitable for a small domestic garden. Many large farms in China are undercapitalised and poorly equipped. If they really do finance their farms not only would there be more productivity with industrialised farming but it would trigger more urbanisation.

yes - its the last great hope in the search for ever cheaper products ... ply the chinese farmers with massive debt load.