Breaking news: Fonterra raises milk price forecast range by 30c, to possibly as much as $7.55. More soon.

Inflation rising; US trade deficit larger; world trade to grow again; air travel strong; EU growth up; Brazil in deep recession; Aussies short of natural gas; UST 10yr yield at 2.51%; oil unchanged, gold down; NZ$1 = 69.8 US¢, TWI-5 = 75.5

Inflation rising; US trade deficit larger; world trade to grow again; air travel strong; EU growth up; Brazil in deep recession; Aussies short of natural gas; UST 10yr yield at 2.51%; oil unchanged, gold down; NZ$1 = 69.8 US¢, TWI-5 = 75.5

Here's my summary of the key events overnight that affect New Zealand, with news of more energy issues bedeviling Australia.

Firstly, dairy prices are down -6.3% in today's auction with WMP down a startling -12.4%.

The OECD is reporting that inflation in the group of 35 nations rose to +2.3% in January. That is up from +1.8% in December and the highest rise since April 2012. Rising oil prices are said to be behind the shift up.

The American trade deficit jumped to US$48.5 bln, a near five-year high in January as cell phones and rising oil prices helped to push up the import bill, suggesting trade would again weigh on economic growth in the first quarter. January exports were US$192.1 bln, US$1.1 bln more than December exports. January imports were US$240.6 bln, US$5.3 bln more than December imports. When Americans import more, that powers world trade. Their trade deficit is now running at about a bit less than -2.9% of GDP. By way of comparison, New Zealand ran a trade surplus for both goods and services in the year to 2016 of NZ$3.6 bln.

The OECD is begrudgingly acknowledging that world trade is in good shape. Global economic growth is expected to pick up modestly next year to rise by around +3.6 % from a projected +3.3% in 2017. But they are highlighting the risks of rising protectionism, financial vulnerabilities, potential volatility from divergent interest rate paths that hang over the trade outlook.

Meanwhile, air passenger travel is off to a strong start in 2017 with demand at levels not seen since 2011. Airlines claim this is supported by "the upturn in the global economic cycle", as evidenced by their rising freight volumes.

Even in the EU, growth is picking up - even if this news is overshadowed by European political squabbling. It is interesting to note the detail which shows it is Eastern Europe posting the fastest improvements. New Zealand and the EU have agreed overnight to 'joint scoping' for their proposed Free Trade Agreement, a necessary step to a process that is actually moving quite fast now.

It is not great everywhere of course. Brazil’s worst recession on record extended for a second- consecutive year, dealing a blow to living standards and raising doubts about the pace of recovery for the once-dynamic emerging economy. Brazil’s GDP shrank -3.6% in 2016, following a contraction of -3.8% in 2015. They are in a tough spot.

And as a followup today to yesterday's note on the stunning hikes in electricity prices in Australia, more stress is on the way from a shortage of natural gas supplies. Producers are exporting it all and there is a looming domestic shortage.

In New York, the UST 10yr yield is unchanged at 2.51%. Although there has been little movement in New Zealand wholesale rates, yesterday's small shift pushed the 2-10 curve to its steepest in over three years.

Oil prices are unchanged today, at just on US$53 for the US benchmark, while the Brent benchmark is just on US$56 a barrel.

The gold price is down however, by -US$8, to US$1,218/oz.

And the New Zealand dollar has fallen to 69.8 USc. On the cross rates we are down at 91.8 AU¢, and against the euro at just under 66 euro cents. The NZ TWI-5 index is down to 75.5 and that is a five month low.

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

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Premium narrows

The fall in skim milk powder helped prices for the commodity In New Zealand give back some of their "inexplicable premium" to US prices, said John Spainhour, broker at Rice Dairy.

"I would say that the GlobalDairyTrade skimmed price has held up a very big premium to the US and European price for a very long time," Mr Spainhour, told Agrimoney.

"That's really been a point of confusion over here; why is the GlobalDairyTrade so strong relative to the US and European market.
Still some real estate to give up'

But that premium has now narrowed sharply, as an increase in the amount of milk being made available at the auctions "the broke the back" of the market, Mr Spainhour said.

"Last week we saw volumes on this auction increased by a very large amount, especially on skim," said Mr Spainhour.

"Those increases in volume are what lead to the decreases in skim and whole milk, particularly skim."

And Mr Spainhour warned that even now, "New Zealand has some real estate to give up, because even after today's declines there's still at a significant premium to the US and European markets".

"Dairy markets are, in any case, about to get some ground truthing."

Thanks for you reg updates Andrewj. It's like the news is not news anymore because we can pick these things from your prior links. and it looks like more bad news to bad can it get i wonder? Milk prices and Auck ppty going down the toilet at the same time is going to hurt.

t's all about production efficiencies, except the high price of NZ dairy product V rest of world, thats about China. I don't know why they pay more for our milk.

China is pushing for big growth in fresh milk production and with 235 mill tonnes of corn in stock, has spare animal feed. To put that in perspective Brazils total corn crop is 66 million tonnes.

As BAML points out, the grain commodity farmers of the U.S. are locked in a vicious cycle, the result of which is a perpetually oversupplied market. To summarize the key takeaways, farmers continue to plant so long as cash profits are positive (because depreciation isn't a real cost and who cares about returns on capital anyway...silly finance people) while yield growth continues to outpace demand growth which leaves markets perpetually oversupplied and commodity prices well below what would be required to provide a normalized profit level for farmers. Meanwhile, since farmers seem to be incapable of unilaterally reducing supply, an external supply shock (e.g. a weather-related event) seems to be the only hope of the industry ever normalizing again.

The economics of the think big irigation schemes and the long term outllok must be getting worse by the day.


I reckon Rastus. The banks must be crapping themselves. I had a chat to a vet. When he got into dairy farming his bank would have lent him over $7.00/ kg ms. He went with a bit over $6. A dairy consultant from a big maori block told me they needed $6.50 to 'survive'. What the they was I wasnt sure. A general statement of the farms under his guidence? Or just the maori block which was close to 6000 acres. Or was it property of his own. A dairy commentater on Interest has just been bankrupted. I wondered if that was an equity partnership thing gone bad....I have no idea. But there will be thousands of professional people out there caught in a bind now. Sink more money in their dairy pit. Or submit to a sale and probably lose all. I think it will snowball now. Our district is overrun with farms 'testing' the market. Will the banks hold out and dig deep for the industry? Facebook talked of banks telling farmers to break their maize contracts. Force the grower to take a loss...spread the losses from dairy to cropping.

That's the sort of talk that starts a bank run. You know what they say? "Loose lips sink ships"

Always remember the procedure for a bank run. Go to the ATM and take out the maximum amount for the day. Cash is King when bank accounts are frozen.

A shame that a commenter here has gone bankrupt.

One thing I want to point out with the bank saying to break the contract is that this is a typical tactic for a debt collector. If a farm mortgage is in this condition the banks will be riding the farmers really hard to keep the mortgage from going into default. I hope that the financial problems don't spread as this will hurt all of us.

My thoughts too, I don't know who they are but I hope they get back on their feet, there is life after farming, often very good farmers go down due to events out of their control.

Very much the nature of farming.

Commentator. The guy that writes the article. Not the likes of us....we know alls ;-)

I always thought that Landcorp could be bankrupted by their exposure to the dairy industry.

It only seems like yesterday that fonterra paid a ceo 40 million to set the industry up as a high debt production focused model.

If the dollar doesn't fall it's going to be very hard especially when no tradable inflation is still an a ripper. My accountant just added 2 k to his account, my rates up 13%, everything is cost plus in the service sector which is 70% of our economy. producers need a break.

Thats probably why they have become real estate moguls. 9 farms for sale currently. Someone who I thought was in the know at the time said it was to keep them in the black. While they leased land to make the figures stack up. That could be fake news. Ahem

It seems a bit odd to sell these farms. The comment that they are up for sale as there arent many farms of that quality for sale at the moment seems a little weak. You dont go selling farms because there arent many farms for sale. Unless of course you are a real estate mogul. Not a farmer.

$40 milby!!

Rastus, there are plenty of Dairy farms both low and high debt that still made profit at the historic low prices of the 2016 production season. I think you will find the farms coming up for sale are the Dairy farms that are on less desirable land i.e. hilly/low rainfall and hard to fertilize this increases the cost of production. Grass is the cheapest feed and those large irrigation farms are very efficient to operate. I would be worried though if the cost of the water inputs went up or there was a tightening on volume of water available. Cant go wrong with a low input dairy farm in a good area with suitable soils. Even at $3.90

If you have no debt. Not something us kiwis generally do. Of course overseas buyers...

They will also mostly be conservative smaller family farms

Both small family dairy farms and Larger owner operators. Economies of scale kick in on the larger dairy farms. Farmers with multiple smaller farms and high debt with contract milkers didn't fare so well though.

economy of scale is a bit of an illusion re farming. Once you get past the family farms, it gets a bit out of hand.

No its not an illusion. There are many fixed costs that don't change with an increase in farm. Also majority of the variable costs don't increase proportionate to the increase in farm size.

Economies of scale on the larger farms can be great. However some of these farms are poorly staffed. Poorly managed. Top heavy in the number of people feeding off them who add nothing to the operation. As do many rural people I live amongst a lot of corporate farms. You see the good and the bad. The family farms around here are tight ships well managed. Some of the corporates...well not so much. As an example, an airstrip that was put in crop on a whim. Next month they were flying in 3 days worth of fert from a strip 1000feet closer to sea level. Ouch.

Very true. I am skeptical of those corporate farms, this is why i believe Lancorp performs so poorly. There is little to no accountability. Contract milkers want to maximise outputs and wouldn't care too much for looking after the property/equipment. The managers/consultants of the corporates can just blame the low milk price for poor performance.

Economy of scale isn't working so well for Landcorp. They have 55,000 cows up from what? 1800 in yr 2000. Costs are so high in NZ that once you start paying someone it's hard to justify it, maybe low cost Filipino workers make a difference to the big guys. I am always surprised at the cost structures of bigger farmers if they let the purse string loose for a second, it costs. I do know a few very low cost large lamb finishing operations run as family farms that would have an advantage. I also know some corporates who are scratching their heads at present.

Lancorp are a government organization. I haven't seen one government organization that operates efficiently. They should at least partially privatize its portfolio but that's beside the point. True some of those large corporate s are not being run efficiently as well but that is nothing to do with the economies of scale that can be achieved. Thats poor performance/competence.. Also those corporate farms would not represent a majoriy on NZ dairy sector.

When i was attending AgITO classes last year some of the stories that came out of the immigrant workers on dairy farms was pretty disgusting. One Indian guy had worked a 13-1 Roster since the start of the season (contract said 12-2), the owners had just bought their third farm, this one was steep country in South Waikato, this same guy had been hanging out to head home to India for a holiday, booked cheap tickets months out only for the 2IC to break his arm less than two weeks out and the farm owner said 'sorry but your leave is cancelled.' No refund, no reimbursement, back to work thanks mate.

Another Indonesian guy who's English was a bit sketchy so couldn't get all the details is on a large, 1000+ cow farm through two small sheds, with the low payout they dropped a labour unit from the milking team, his day used to start 3am, now he's going out at 1am for the cows and spends his 'morning' cupping. The guy would come to class having already worked 8 hours and be nodding off after lunch.

You might not be too far from me Canon. The local Indonesian workers do some terrible hours in awful sheds. They cant get NZers to work in them. In saying that most of those sheds are gone with rotaries to replace them. But a 54 rotary and twice the number of cows is still a shit of a job. And when the 4 hr milking is done there are weeds to do. The hours add up quick.

I thought they had stopped this behaviour. What happens if they keep a record of hours workd and go to the employment court?
I stopped and talked to a new worker at a corporate dairy about 10 years ago could even be longer, he was offered a job in NZ and flew in from Tasmania. Got here to be told he had to supply his own motor bike and the 40 hour week turned into 70, he left a week later, but told me some horror stories about treatment of staff and abuse by NZ workers of immigrant workers, even in some cases physical abuse. I thought authorities had tightened up.

Look at this. I cant believe my eyes

It's all about China as far as I can tell. The EU is desperate to increase exports to Asia and so is the USA.

The banks have got it well wrong again. They have been telling everyone supply out of the EU would be well down.

EU production is down but not that far and above 2015

Maybe things have changed in the last couple of years. I doubt it though. If these workers arent backed by their employer they can find themselves heading home.

From what I could gather they all fill out timesheets, whether they put their genuine hours down is another thing. When telling the guys they have a case against their employer from this carryon they go quiet. I think it's the fear of biting the hand that feeds you / provides you with a house.

I had a run in with my employer along the similar lines. AgITO was encouraged when i first started, got through calving after 6 weeks without a day off. Second session in my employer told me not to write down the 5 hours a fortnight at class on my timesheet. His reasoning was it would push my hours up and put me under the minimum wage. We never did agree but I still put it down.

And they wonder why young people don't want to go dairy farming

What you say bigballz is true. When seeing it on an excel cashflow programme. When you see it in real time. Mmm not so good. P houses having to be stripped out. Calves all knocked on the head cos ...well just cos u can. Cows not milked cos the staff cant be bothered bringing them in. Machinery broken and unfixed. Water leaks left. Big mobs of service bulls not sold in a timely matter. Left to go hungry, fight, then just wait a little more til the schedule drops. The things you see...when no one is paid on production.

Is this a one off situation or common place in your area? That to me seems extreme and poor. I think you will find the more competent successful farmers will constantly review their cashflow performance against budget and scrutinize any variances.

Well we all do strange stuff in business. I know for myself some things get by me or I let something go to concentrate on something else, so criticizing someone elses operation can be very unfair. However and in saying that, as an agricultural contractor there is a very noticeable difference in family run farms to corporate farms. Where explanations are hard to find. Other than when you are not paid on production, production suffers. Yet I can also think of two farms in our larger area family owned which should be shut down due to animal welfare issues. (Both farms under mpi or spca watch) Its not all one way traffic with corporates/family farms.

Debt is good the level of debt you should have depends on your risk appetite and competence. As long as you have measures in place to adapt to the volatility of the market you should be fine. This applies to any business. Of course there may be some sort of external event that affects your business and causes financial strain or ruin but if everyone did nothing because of the possibility of that we wouldn't make progress.

January imports were US$240.6 bln, US$5.3 bln more than December imports. When Americans import more, that powers world trade.

Yes indeed.

How much did US citizens borrow to pay foreign exporter's wages? Too much I guess given the general level of accumulated US wide indebtedness.

“You know what, Americans have choices. And they’ve got to make a choice... maybe, rather than getting that new iPhone that they just love and they want to spend hundreds of dollars on, maybe they should invest in their own healthcare." Read more

Who is manipulating commodity prices , they drop dramatically and then sky-rocket all over the place ?

Oil , Milk , Iron Ore , Aluminium , Coal . and there seems to be no rationality behind the movements . how did oil ever get to US$100 pbl in the first place ?

Who is manipulating commodity prices...

Rehypothecated product funding outfits? Pledge repo is a type of mechanism operating in China.

Suppliers/distributors attempt to manipulate prices by restricting supply. Price is low they hold back, as soon as price goes up to what is deemed an acceptable price, they all attempt to dump their stockpiles at the same time. This over supply, then drives the price right back down.

This is what happens when your commodity is sold by auction, as a seller the only way you can be a price setter is by restricting supply. But you then have to rely on other sellers also restricting supply.

I've said if before. China is fighting a very slow and calculated financial war. NZ is part of a China strategy. Firstly get homeowners into debt by pumping our housing market, secondly, pump up dairy prices and then pull out and indebt our farmers. We fell into it hook line and sinker. The housing market is tanking as will our farms. Soon we will be ripe for the plucking. Time to get that condo in Hawaii.

There are a lot of farming folk in Canterbury and the wider regions who absolutely believe this to be the case. Yet the NZ government will happily encourage the sell off of as much of New Zealand as they can.

If only it was as simple as changing the govt. Unfortunately Clarkes policy wasnt much different to Key and English. Sell sell sell. We cant trust those in charge. It makes for an embittered population. Look at the 1080 thing. Even the SPCA and Forest and Bird back it. Who would have thought torturing large numbers of animals to death was a policy they would laud. Most of our top management is filled with the bottom smoochers of society. And they arent fit for purpose. One sees it regularly in the corporate Ag management. Those that can, do it for themselves. Those that cant bottom smooch their way to management. Which is why corporate Ag is such a mess. Looking forward to seeing it come undone. There are the underpaid overworked milkers. The lazy manager. The full of himself consultant. The equity partner who is gaining a healthy tax rebate. The very expensive accountant that plays with companies and trusts like we have hot dinners. And so it goes. All sucking off a bunch of old biddies teats. As they stand there and piss urine into the ground at a rate of knots. Either now or soon to be owned by some other overseas corporate shmuck who couldnt give a rats about clean flowing rivers and bobby calves that get treated like shite. Ah such is life.

I'm just so relieved National have been clear that foreign buyers are not a factor in the NZ market.

One thing I have been pondering is, where exactly is all our banks offshore funding is coming from?

The Chinese may not even need to swoop in. All the property could just be gifted to them as a security when one of the banks fail.

No, it is mainly from the big-4 Australian banks, which in turn are controlled by the American banks.

I see where you're coming from Rastus, but your view does remind me of the common view of the 'frightful efficiency' of the German army in WW1 and WW2, which Heath Robinson loved to make gentle fun of with his cartoons.

I think that China is nowhere near as coherent in its global strategy as we think it is. They have large internal debt problems themselves, constant investment bubbles, are concerned about social stability, the political class spend a LOT of energy on political infighting and elbowing, and, based on my own experience working and living there, are not nearly as efficient at organising things as made out to be, notwithstanding shiny new airports and freeways.

The majority of our debt problems are of our own making: lifestyle expectations, ingrained growth models, failing to plan and allow for downturns, the role of banks in our society, record low interest rates, etc. Of course, China may benefit from fallout, and some Chinese may be pleased to see it for the "buy the dip" opportunities it represents, but I very much doubt that it is the *direct* result of a Chinese strategic play. Remember that a large proportion of China's economy still relies on old-fashioned export of hard products, which requires overseas consumers to buy to maintain a balance of trade.

We opened NZ economically to the world, and have reaped the benefits and the disadvantages of doing so. With China, we had no real expectation of reciprocation (i.e. many sectors are off-limits to FDI), so it's probably time to start asking what needs to be changed, and how it can be changed, and taking responsibility for our part in our national problems.

I'm pretty sure this was covered in one of the Asterix comics. Can't remember which one. Has Asterix been translated to Chinese?

I think you are wrong though I get the tendency to think that way - in fact, the evidence is very clear that monetary stimulus, unparallelled in human history, by the Fed, BOE, ECB & BOJ et al. has pushed the price of financial assets skyward (e.g. Australia, NZ, Canada, UK house prices). For perspective, Interest rates have being suppressed at 5,000 year lows for 10 years & NZ still doesn't tax capital gains - it is a recipe for inequality that has been growing for a long time.

In terms of asset allocation decisions, it has to be said that NZ dairy farming is a poor place to park investment based on cash returns at present, however on a long term view it is unparalleled if the expected inflation does take hold. At $25K acre, purchasing land is ludicrous and myopic professional advisers who don't head the world financial climate have a lot to answer for.

In terms of the Chinese resource acquisition blitz, that is entirely a decision for the OIO and as long as NZ has an open door policy, the best assets will be owned by those with the deepest pockets, which generally means those with access to the biggest populations.

However, where is the criticism of the RBNZ? SO FAR BEHIND THE CURVE ON MACROPRUDENTIAL...

Not so joyous outcome from QE related ECB stagnant deposit creation. I guess the apparatchiks never realised printed money has to remain on the liability ledger offsetting the ECB purchased asset ledger.

Banks in the euro zone, flush with new deposits, have turned few of them into loans to companies and consumers. Instead they’ve parked most of the money at the European Central Bank, where they’re paying billions of euros for the privilege of keeping it there. Read more


The government got together with the banks and decided to pick winners, and they backed the dairy industry into a growth/production orientated, high debt high cost model, with failure baked in to the system. It's a tragedy for rural NZ.

I dont quite get it , power prices ( such as electricity ) and gas shortages would indicate high demand , which is a sign the economy is either doing well or expanding .

If there is an electricity shortfall its time to invest in renewables and there is a lot of gas in Oz which can be extracted

Yet we are seeing some negative news about the Aussie economy coming through especially in the resources sector and jobs in that sector .

What is really going on across the ditch ?


Basically the economy is owned by foreigners who are claiming more than a pound of flesh, because they can. And the likes of Malcolm Turnbull are there to enforce as much. Citizens are the collateral damage.

The mineral sector cut backs left a lot of people scrambling for any job contracts that were going. Some in oil taking huge pay cuts. Kind of sucks if your income drops by 80% but not so much when that still leaves people in the top tax bracket.

The property markets are looking a little unstable and look in worse shape that Auckland. Yet they are still carrying on, so there's no panic.

Gas shortages? Where do you get that from? Usage has dropped off significantly in the last few years. If anything we have excess.

@noncents , you should have read my entire post , not the first line , I acknowledge there is a lost of gas to be extracted

I did, I have worked extensively in the NZ gas industry.

As far as I am aware we definitely do not have a shortage at this point in time. i.e. high prices are not due to supply, but other factors.

I have just moved back from Australia and was working in the Oil & Gas sector.

Many states in Australia now have moratoriums on unconventional gas exploration / drilling. Gas that has been developed is generally contracted for LNG export so there is a squeeze on domestic gas supply. There is plenty of gas that can be developed if the political will is there.

Australian manufacturers would love to be able to buy gas for $3-4/GJ like the good old days but resources that can be developed profitably at that level don't exist these days (or very little anyway).

Aussie power suppliers should be careful they don't overdo it .

Some countries have something called a " National Energy Regulator ' which a a statutory body tasked with oversight of electricity , oil , gas and energy supplies ( and the prices thereof ) to ensure strategic supply .

America has such a regulator and even South Africa has this , called NERSA see