ANZ says 'poor' dairy auction highlights material change to economy's risk profile as financial conditions tighten materially

ANZ says 'poor' dairy auction highlights material change to economy's risk profile as financial conditions tighten materially

Fonterra's $7 per kilogramme of milk solids opening payout forecast for the 2014-15 dairy season now looks very dated, and its own $6.25 forecast, made just two weeks ago, is now also looking optimistic, ANZ says. Meanwhile, Westpac has cut its 2014-15 payout forecast by 40 cents to $6, and ASB has slashed its by 80c to $6.20.

ANZ's economists describe last night's dairy auction as "poor," and say ultimately the coming dairy season payout from Fonterra could be below $6, with financial conditions tightening in a "material fashion."

In the latest auction prices overall fell 8.9% in US dollar terms, or 8.7% in NZ dollars. The GlobalDairyTrade index has now sunk below the 1,000 mark for the first time since January 2013, and is 35% below its February peak is US dollar terms, and 40% down in NZ dollars.

"Two weeks ago we took the knife to our milk price forecast for the coming season (cutting it from $7); citing falling dairy prices, the high NZ dollar and what we considered to be bearish price action for milk powders on the GlobalDairyTrade auctions. We were thus expecting further price falls, but the magnitude of the fall in prices at last night’s auction even surprised us. The ink is barely dry on our $6.25 forecast, and already has downside risk in the current environment," ANZ says.

"Last night’s auction was poor. Commodity prices can be volatile and especially dairy, so it pays to look at broad trends as opposed to discrete events. But by the same token, we are mindful that the 8.9% fall in weighted average price last night masks much larger declines in Whole Milk Powder (WMP), down 10.9%, and continued falls in later delivery-period prices. Contrary to our expectations, reduced volumes for the year ahead did not see prices stabilise, and in fact prices for delivery in the second to sixth forward periods were all down by a greater amount, between 6.5% and 9.9%, than prices for immediate delivery down only 1.3%," says ANZ.

This means Fonterra’s May opening milk price forecast of $7.00/kg MS is looking "very dated."

"When we downgraded our forecast to $6.25/kg MS a fortnight ago, we flagged that this represented an approximate $3 billion fall in dairy incomes from the record 2013/14 season. It is still early in the season and much depends on what happens to US dollar pricing and the NZ dollar, but current spot prices are more consistent with a sub $6 milk price," ANZ says.

A $5.75 payout, for example, would represent a fall of about $4 billion in dairy incomes from the record 2013/14 season where Fonterra's forecasting an $8.50 payout including a 10 cents dividend.

"As we flagged, a fortnight ago, rising interest rates, high exposure to them and on-farm costs has the potential to quickly evaporate discretionary spending. Dairy prices are now tracking 10% lower and the NZ dollar higher than the RBNZ assumed in the June Monetary Policy Statement. Financial conditions are tightening in material fashion."

'Material change to the economy's risk profile'

Moreover price falls of this scale, and a stubbornly high NZ dollar, represent a material change to the economy's risk profile, ANZ adds.

"Dairy is NZ Inc.’s biggest product line, so what happens in this sector is crucial. What makes recent developments even more concerning are developments in other commodity markets, with forestry and grain international prices also down. NZ is not a major grain exporter, but lower grain prices impact meat and dairy profitability elsewhere, and are food substitutes," ANZ says.

The bank's economists also argue the NZ dollar can't remain divorced from such commodity price developments.

"We are rapidly approaching a juncture where economic development warrant a change to the markets assessment of monetary policy; for now the market is locked and loaded for a July (OCR) hike the RBNZ’s forward guidance can hardly be stepped away from and another before year end. The former is favoured, though not as clear cut as market pricing implies in our view, while the latter we disagree with. The NZ dollar is looking vulnerable to a correction over the coming months," ANZ says.

Westpac, ASB lower their forecast payouts

Westpac senior economist Anne Boniface said she was reducing her forecast Fonterra payout for 2014-15, to $6 from $6.40.

"The size of last night’s drop has compelled us to make a further downward revision to this payout forecast. We’re now forecasting a milk price payout of $6. Even this forecast remains sensitive to auction results over the coming weeks," Boniface said.

And ASB economists Nick Tuffley and Nathan Penny said they had lowered their forecast by 80c to $6.20.

"It's worth pointing out that our forecast assumes that dairy prices first stabilise and then recover over the remainder of 2014. This is the view we have maintained over much of the year, but that view is clearly now under threat," Tuffley and Penny said.

The ASB economists also noted Fonterra's $7 forecast, and said the dairy co-operative was likely to revise its view at or before its August board meeting.

'NZ too reliant on dairy'

Labour Party finance spokesman David Parker took the opportunity to criticise the government, and talk up his party's economic policies ahead of the September 20 election.

"The 35% fall in milk prices since February shows New Zealand needs an economic upgrade to limit its over reliance on the dairy industry," Parker says.

“New Zealand is too reliant on one industry, (and) recent falls in the milk price shows our vulnerability."

“With many other countries increasing milk production, Bloomberg is warning of a ‘global milk glut’ lasting for five years. This further emphasises the risk the current Government is taking in allowing our export base to narrow. New Zealand needs a more diverse economy with dynamic industries such as ICT, wood processing and manufacturing contributing to growth alongside dairy," says Parker.

Labour's "economic upgrade" will focus on investment, innovation and industry to grow and diversify the economy and create better jobs that pay higher wages, he maintains.

“We will boost our investment pool through universal KiwiSaver, direct that money to productive businesses and industries through our capital gains tax, increase innovation through research and development tax credits and tax deferrals, and provide targeted support to industries,” Parker says.

We welcome your comments below. If you are not already registered, please register to comment.

Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.


if it wasnt for the chinese buying up all the property the rbnz would be able to of eased off by now.
Farmers, do you really like Nationals management of the economy? not so much anymore eh?

Wheeler's mandate includes financial stability, take a look at what a house price bubble does for financial stability (on the way down, not up).

yep, and it's often a large employer that gets crushed, which creates the undesirable employment pressure differental that drives people to want to sell their properties into a poor market.

Many of us _don't_ like Nationals management, the only problem is we can't vote a party Out of Government, we can only vote one in, and there are no reasonable contenders.

Of course the Kiwi$ is vulnerable to correction , especially at these rididculous levels .
We cant export at these levels , we are an horrendously expensive tourst destination , and our milk is too costly to be sustainable  
Our economic  fundamentals have not changed since 2009/10 , we are still overindebted as individuals , too reliant on housing as an investment , the economy is not sufficnetly diversified , to name just a few

I could add my 2 bits worth but that would offend David's view of the world and (based on past experience) might result in my comment being deleted and replaced with personal insult (editor's perorgative). 

Good article on Bloomberg , Gareth ... so the EU still have " production quotas " ...
...  the Europeans really do live in George Orwell's " 1984 " , don't they !

Production quota's in the EU are an interesting abnormally. The consensus has always been that when quotas end production would fall. I talked to a UK Foreign office  official for hours on the subject. We both believe that the opposite will happen, EU exports will increase massively. 

 Its mainly because since the Ag caps came in, technology has moved a lot of farmers into very efficient systems, and countries like NZ have let costs rise and decreased their competitiveness. Thats why China is building huge milk powder driers in France, when they could be doing so in Brazil or NZ.

 Its why a friend of mine is investing heavily in the Wine industry in Spain, he looked at NZ and Australia, considered Sth America, but felt the best profits would be found in Spain.

 The EU could be a threat to our Agriculture exports, look how our Sheepmeat exports to Europe have gone in the last few years. In 2013 Value exported was back %13, The China market was up %120. The EU takes 1.4 billion of sheep meat , China takes 600 million, but China is the major market for offal and low value cuts and the growth market.



GBH, as a journalism student on a visit to Brussels in the mid 90s I put it to a senior EU official that their common agricultural policy was a failure because of the waste of their food mountains and distortions of their subsidies. His response was that that actually the food mountains demonstrated it had worked too well...

was he wrong?....
Your EU chap was dead set on the welfare of his people. Feeding people in Europe, through food in shops and food aid for less well off. As a secondary issue, welfare of EU producers, in order to achieve the first.
Policy wise free trade/fairness were lesser and producers from outside of Europe not in the loop. However as mentioned feeding poor in Spain, Portugal an Italy were prority and memories of food shortages/war in Europe were driving policy.

Yes, I accepted his point of view from the perspective of setting the policy up after World War 2 when there were lots of hungry people in Europe. But by the time they got to the point of butter mountains etc, something was wrong somewhere.

FYI, I have updated this story to add in lowered forecast Fonterra payouts from Westpac and ASB economists.

Well, there will be not a few break-even and monte-carlo simulations being run on a pricing spread, out there in Ag-land, won't there.

I also imagine there will be a few income projections being rerun in Treasury on changed input data, and a lot of interest from the Beehive on if the effects will be felt before the election.

"Hong Kong has had enough of mainland mothers emptying the region's shelves of imported baby formula. The government there will fine people up to US$64,000 and potentially throw them in jail for up to two years if they're caught carrying too much powder over the border into Shenzhen.
China is fed up with it too and wants mainlanders to start buying domestic dairy brands again after five years of scandals in the industry – some of them deadly.
That's why Beijing will offer five major dairy companies loans, subsidies and tax preferences worth nearly US$5 billion in support of consolidation throughout the sector. The government hopes the funds, which will come over a number of years, will help wean mainland parents off of foreign producers.
However, bigger, more powerful Chinese dairy enterprises won't necessarily produce safer milk. The fortunate recipients of this bout of government charity will need to do more than simply acquire market share if they want to win back consumers. That lofty goal will take time.
And the winners are...
The two largest companies expected to walk away with massive state subsidies are the very same ones that cast a huge shadow over China's dairy industry."
"Feihe International, Heilongjiang Wondersun Dairy and Treasure of Plateau, all of which have felt Chinese consumers' distrust ripple through revenues, will receive funds alongside the two industry leaders. Notably left off the list were New York-listed Synutra International and Zhejiang Beingmate. Both are major industry players but have been overlooked due to the level of foreign investment in the firms, according to insiders.
Foreign cows
International dairy brands have been on the offensive in China as of late.
After the National Development and Reform Commission, the country’s main price-setting body, accused France's Danone and Switzerland's Nestle of price fixing earlier this year, both brands agreed to slash prices. That will actually lead to lower prices and could hurt the competitiveness of domestic firms further. The intense scrutiny of multinationals hasn't stopped there."