Monday's Top 10 at 10: Don't take rising dairy payouts for granted; Irish may default on bank debt; John Key's Youtube skit; London's Burning; Anarchy in the UK; Dilberts

Here's my Top 10 links from around the Internet at 10 to 12 pm in association with NZ Mint.

I welcome your additions in the comments below or via email to bernard.hickey@interest.co.nz.

I'll pop the extras into the comment stream. See all previous Top 10s here.

1. Food prices are actually falling - Here's a fascinating chart  below showing US food prices over the very long term and how they have largely fallen in real terms, with the odd hiccup, including one at the moment.

Stuart Staniland writes at Peak Oil about why rising prices in the short term will generate extra production that drives prices down.

Are dairy farmers and their bankers in New Zealand ready for this?

Fonterra CEO Andrew Ferrier rightly pointed out last week that American dairy producers can pretty quickly ramp production up on their feed lots (and with some applied use of needles tho he didn't say that) to increase milk output.

Anyone assuming an NZ$8/kg payout out into infinity should be very careful before borrowing money (or lending it) on that assumption. HT Steven in Friday's Top 10.

Here's Staniland:

1. Food crops have been getting gradually cheaper for many years.  With a couple of major excursions due to world events (price drops in the depression, and rises in the second world war and 1970s commodity price shocks), the basic trend has been for food to get cheaper and cheaper. This indicates that despite the growth in world population, improvements in agricultural productivity have tended to outpace increases in demand.
2. In particular, any possible effect of climate change on agriculture in the future needs to be evaluated in this context: is it likely to be large enough to overcome the historical primacy of technological innovation as the control on prices?
3. Note that the fact that prices have been low and dropping for decades means that there will be many possible investments to raise production that will not have been made, because prices were too low to justify them (for example, in the northeastern US, large amounts of perfectly usable cropland have actually fallen out of use because it was not economically competitive with better cropland elsewhere).  Therefore, there is likely to be significant scope to increase production in response to any factor that causes a sustained rise in prices.

2. Cutting funding costs - Bloomberg reports the move by the banks to start selling covered bonds from Australia could cut their funding costs by as much as 30%.

The Australian government recently relented to a bank campaign to allow them, effectively over-ruling its own regulator, APRA, which had previously banned them because they shunt depositers down the priority queue in the event of any disaster.  The government is allowing up to 8% of net assets to be issued as covered bonds.

Westpac, Commonwealth Bank of Australia (CBA), National Australia Bank Ltd. (NAB) andAustralia & New Zealand Banking Group Ltd. (ANZ) had combined domestic assets of A$1.81 trillion as of January, according to data from the banking regulator. An 8 percent threshold means about A$145 billion of assets could be used to back covered securities.

The extra yield European investors demand to hold the bonds instead of similar-maturity government debt has fallen 28 basis points to 155 basis points, or 1.55 percentage points, this year, according to Bank of America Merrill Lynch’s EMU Covered Bonds index. That’s 46 basis points less than the spread on financial debt sold in the region without collateral, another index shows.

Australian lenders have been barred from selling the securities, which are backed by assets that stay on their balance sheet and can be sold in a default, because they conflict with local laws favoring depositors over creditors.

3. Shaunie meets Johnno - Here's John Key doing his bit to promote Napier as the Art Deco capital of the world with 'Shaun Wayne.' You've got to admire the Prime Minister's ad-libbing skills... 

He's a true pro. Another reason why it will be so hard for whoever is leading Labour to dislodge him on November 26.

Key even makes fun of his decision to buy the BMWs. The chutzpah of the guy is something else. More here at Stuff. HT Alex.
 

4. 'Raise rates AND print more' - US Federal Reserve dove and former FOMC member James Bullard spoke over the weekend about how the Fed should begin raising interest rates, but should also print more (quantitatively ease). Here's the Reuters report on what Bullard said. Here's the presentation he gave on reducing Deflationary Risk in the United States.

God help us all.

The Americans are determined to print their way out from under their debt mountain by inflating it away.

How long before the bond holders revolt? PIMCO has already abandoned US Treasuries. The Chinese are grumpy but can't find anywhere else to dump all their excess US dollars.

How long before the US bond market blows up? And what will be the trigger?

Maybe the first hike the Fed funds rate? Perhaps that is what Bullard is anticipating. To avoid a blowup the Fed will simply buy everything being issued by the government.

Here's what Bullard said.

"The conventional wisdom policy response to a negative shock is to promise a longer 'extended period'," St. Louis Federal Reserve President James Bullard said, according to slides he was due to present in Marseille, France on Saturday.

"This may work -- but it may also encourage a liquidity trap outcome," he added in the slides, part of a presentation entitled 'Reducing Deflationary Risk in the U.S.'.

"A better policy response to a negative shock is to expand the QE program," he added, referring to the quantitative easing, which he said have been successful in the United States and Britain.

5. Here we go - Reuters reports the Irish are thinking the unthinkable and may yet impose haircuts on the holders of Irish bank bonds. This will freak that hell out of the German and French banks that hold all this Irish bank dreck. It's a sign the Irish are considering revolt.

Hold on to your hats if they actually do it. It could easily trigger round 33 in the European debt crisis, which in turn destabilises global credit markets and makes it more difficult and expensive for the New Zealand government and our banks to roll over the NZ$90 billion of debt that needs to rolled over every 90 day sor so.

The next event to watch is the release of stress test results on the Irish banks on Thursday night.

Here's the details.

Ireland's government wants to impose losses on some senior bondholders in Irish lenders to reduce the burden on taxpayers from a prolonged banking crisis, a senior minister said on Sunday.

Dublin wants to impose losses on banks' senior unsecured bonds not covered by a state guarantee, which currently amount to over 16 billion euros, as part of a new deal with the European Union, the European Central Bank (ECB) and the International Monetary Fund (IMF).

"A sustainable and comprehensive solution for Irish banking that involves recapitalization but also involves an element of burden-sharing ... That is certainly the outcome that the government is looking for," Simon Coveney, minister for agriculture, told state broadcaster RTE.

Under an EU-IMF bailout agreed late last year Ireland can impose losses on banks' junior debt, but the ECB is opposed to treating senior bondholders, which are ranked on a par with depositors, in the same fashion for fear of a contagion risk.

6. Monstered by supermarkets - Adele Ferguson at The Age has some more interesting background on the supermarket wars going on in Australia. It raises some interesting questions about the future of food production and how (short term management driven) capitalism works at the moment. This sort of beggar-thy-supplier slash-now-and-ask-questions later behaviour can't be sustainable for anyone.

Here's the detail.   

The brutal reality for Coles is it has an earnings before interest and tax (EBIT) to sales margin of 4.1 per cent, compared to more than 7 per cent for Woolworths. With Woolworths now responding to Coles' price attack on certain products, it is starting to get ugly. Woolworths can afford it; Coles, less so.

This may not be an issue for the current management of Coles, many of whom came from Britain on short-term bonus incentives and who won't be around for the longer term havoc they have wreaked on the dairy, eggs or other industries. Coles' supermarket boss Ian McLeod stands to reap a bonus of around $38 million if he hits target through to 2013.

In the case of milk, the heavy discounting is having a disastrous impact on farmers, milk distributors and smaller milk retailers.

When the Senate inquiry met earlier this month, domestic processors outlined the nuts and bolts of the milk business, with National Foods revealing that it was struggling to break even on private label contracts and that the overall branded and private label margins on white milk - before Coles started the price war - was expected to be around 2 per cent.  

7. Affordability crisis - These two words appeared in a headline for an Age article in Australia. This shows the issue is getting through into the mainstream there. Auction clearance rates are well down...

At the end of last year, only three of every 10 lots for sale in new housing estates across Australia were accessible to average-income first home buyers, a study by Monash University population expert Bob Birrell and VicUrban market research director Colin Keane has found.

Until recently, city fringe subdivisions provided first home buyers with highly prized house and land deals at prices most could afford.

Two years ago, 90 per cent of housing offered in Melbourne's new suburbs fell beneath the industry-accepted affordable land price ceiling of $200,000 per lot, Mr Keane said. At the end of last year, this figure was only 26 per cent.

But the study comes as the Melbourne property market looks set for a tough run during the lead-up to Easter, with near-record numbers of properties on the market expected to mean a lower proportion of sales - known as the clearance rate. At the weekend, the reported 827 auctions had a clearance rate of 61 per cent, which is likely to be downgraded below 60 per cent when the results of the 94 remaining auctions are reported. This time last year, the clearance rate from 1073 auctions was 85 per cent.

8. Totally Air New Zealand safety video - Air New Zealand have excelled themselves again with their latest safety video. First there was the naked hosties. Then the slightly sleazy Rico (bit of a dud that one). Then Richie and the All Blacks flying the plane.

And now the latest one is done by fluffy headed exercise maven Richard Simmons, some lycra clad hosties and a bunch of celebs, including Phil Keoghan and Paul Henry. You've got to hand it to the marketeers there at Air NZ..

Here's a big free advertising kick to them. HT Chris Keall at NBR via twitter.

9. Totally London's Burning video from the Clash. All very topical after the weekend's action on the streets there. Only lasts 2 minutes

10. Totally Anarchy in the UK from the Sex Pistols. Topical again. Johnny Rotten's laugh is the best bit. One of my favourite songs.