A seventh consecutive fall in dairy prices increases the chance of another chop to interest rates next month

A seventh consecutive fall in dairy prices increases the chance of another chop to interest rates next month

By David Hargreaves

A seventh consecutive fall in global dairy prices overnight, this one by 1.3%, has increased the chance of the Reserve Bank following up last week's interest rate cut with another next month.

The latest overall price fall stemmed mainly from just one product category, anhydrous milkfat, but there was still no sign of the overall hoped-for recovery emerging.

The massive slump in dairy prices in recent months has seen New Zealand's terms of trade deteriorate rapidly from what had been historic highs. The RBNZ has become increasingly concerned.

Governor Graeme Wheeler said in announcing last week's rates decision that the fall in export commodity prices that began in mid-2014 "is proving more pronounced".

"The weaker prospects for dairy prices and the recent rises in petrol prices will slow income and demand growth and increase the risk that the return of inflation to the mid-point [of the 1-3% target] would be delayed." Hence the move on rates.

The RBNZ has pencilled into its forecasts the possibility of another cut in the next 12 months. But the continued weakness of dairy prices would suggest that in all probability the central bank's hand will be forced again when it makes its next call on rates on July 23.

There are, however, two more GlobalDairyTrade auctions before the next Official Cash Rate review. But economists - while still picking a gradual recovery in prices - have been putting back the time at when this recovery might start.

AgriHQ dairy analyst Susan Kilsby said that NZ dairy giant Fonterra offered just 10,000 tonne of whole milk powder (WMP) at the June 16 auction, which was the least this year. But the quantity available is expected to rise as new season product starts to be forward-sold from next month on.

“It will become harder for prices to recover as the volume of milk powder on offer increases as the new dairy season progresses,” she said.

ANZ rural economist Con Williams said the latest dairy auction "leaves farmers still waiting for the milk price rebound needed to meet current season forecasts, as contracts for future delivery of WMP continued to decline".

This, he said would keep pressure on the New Zealand dollar.

The dollar fell after the RBNZ cut rates last week, but had little reaction overnight to the dairy auction results. A short time ago the Kiwi was worth around US68.8c and was just holding above 90 Australian cents.

Williams said there "two main interesting snippets" from the overnight auction. One was that there was some improvement for milkfat products such as cheese and butter.

"This looks to be largely on an outright value basis versus other competing sources. However, the improvement didn’t completely unwind the decline from the previous auction."

The other interesting aspect, he said, was WMP saw better prices for near-term delivery, while later delivery prices declined relative to the previous event. This flattened prices across all contract periods.

"There are a number of potential interpretations. The near-term price support perhaps suggests the bottom of the cycle is close. However, it was also the seasonal low for auction supply, so maybe a few buyers’ immediate needs supported these results. Later delivery product prices saw declines of 2.1-3.7%. While volumes are still small this is a bit of a concern given these contract periods are during New Zealand’s seasonal peak period.

"Softness at the last two auctions for fourth quarter delivery suggests China’s own domestic production and inventory could be adequate to get them through their seasonal lull period. So watch this space as more volume is added to GDT over coming auctions and a more informed assessment on the 2015/16 milk prices will be able to be made."

In its latest Financial Stability Report last month, the RBNZ warned that financial stress in the dairy sector "could rise markedly" if prices remain at low levels in the 2015-16 season. The RBNZ says that despite many farms being in a position to manage down working expenses, around one-quarter of dairy farms are believed to have had negative cash flow for the 2014-15 season.

Last week dairy giant Fonterra announced it was likely to shed "hundreds" of jobs from its head office and support functions.

Fonterra's official milk price forecast for the new season stands at a price of $5.25 per kilogram of milk solids, with $4.40 for the just-ended season - which compares with $8.40 a year ago.

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Lets be frank, at these levels its not about price.

Chinese buyers have been paying a premium for domestically produced milk, in an attempt to support reliable local supply. This dynamic has helped keep Chinese powder inventories high.

there need be Sandy like types on the phone......
thoughts of inward looking analysts will only get us so far.

It is about food security and control, not price, and unless we deal with it on that basis, then we stand to lose

LOL - The unaddressed and unintended consequence of extend and pretend policy initiatives.

Prices haven't been helped by the news last week that New Zealand, the world's largest dairy exporter, had slashed interest rates, pushing its currency to a five-year low against the greenback.

A lower New Zealand currency means that farmers can endure lower global dairy prices before they have to cut herd numbers or reduce feeding, keeping milk supply ample.

In your previous life you will have experienced the sensation of watching prices fall against you, you find all the reasons to justify holding on, and as they fall further you begin to pray, and the more you pray the more they fall, you end up with sore knees

hahahaha - we had very well defined, predetermined exit strategies in all the wholesale dealing rooms I worked in. Too dangerous not to, for the reasons you note.

you mean like these plans...
Landcorp is continuing with its large scale conversion of forestry to farming at Wairakei Estate despite the slump in dairy prices and calls for a moratorium on dairy conversions by the Green Party.

The 25,000 hectare land holding north of Taupo consists of nine dairy farms with 12,500 cows over 5000 hectares. On completion of the project in 2021 Landcorp hoped to have 39 dairy farms and 42,000 cows.


no fish tails in the car park. Please.

Carden said they tried to avoid the swings in milk prices leading to a "fish tailing" in their strategy. Landcorp's farm systems were multi-year and could not be changed from year to year.

"We're committed to that strategy and building a sustainable strategy, regardless of what the payout is." Carden expected a $6-$7 milk price over the long term and Wairakei Pastoral was a long term development.

nothing wrong with a plug number, unless its the wrong number.....

now compare thinking to another project with scale..

The Neuarpurr purchase is the first piece in the puzzle of an ambitious project that will eventually see CDI buy five more properties of equivalent size with plans to milk 38,000 cows at any one time in what is believed will be Australia's largest dairy farm aggregation once it is at full production.


China is the major destination, accounting for 60% of production, but Mr McDonald said exports would also be heading to the Middle East and America. "You don't want to focus on just the one market," he said.

He said CDI already had long-term arrangements in place with international buyers, with some 20-year deals already in place. "It makes it easier for us to know our cost structures, it helps us when we go to make purchases," he said.

He said there would be a processing plant onsite at Neuarpurr, which would allow the business to partially dry the milk before freighting it. "We can get rid of some of the water from the milk and cut freight costs and also recycle that water for use on the farm," he said.

The price of land is also a cost-saving. "Rather than pay $6000 an acre in the Western District, we can pay $2000-2500 in other areas," Mr McDonald said.


not so much a plan, more a set of beliefs (wrong, sorry, target operating model)...

Since 2003, the banks have trebled their dairy loan book to $34 billion. Just in the last 12 months, their dairy loans grew by 6 per cent, twice the rate of bank lending overall. ANZ estimates dairy farmers will need to borrow another $1.85b to get through the season just starting.

The banks are happy to lend because they believe the dairy payout will recover in the next couple of years to around $6 to $6.50 per kg of milk solids.


what does the borrower believe.

Actually I think you'll find that product producers have woken up to the fact that on unlimited open auction, WMP / SMP components are _unlimited_soft_. and that they can therefore make huge profit margin on processing without overly affecting shelf price.

So where does New Zealand stand? Income? Falling in exported dollar terms. Answer? Lower the currency to steady the converted currency income recipients. But...that raises the cost of non-locally produced items ( pretty much the 75% of our economy that doesn't produce hard goods, just services them!). Result? A lower standard of living compounded by more foreign sourced debt. Secondary answer? Lower the price of local debt to offset falling living standards. This can only go so far until all answers are exhausted. And New Zealand isn't on it's own in trying to 'export and devalue' it's way out of this mess. Ultimate result? Living standards fall further than many can imagine; debt overwhelms the local economy and what we haven't already sold off, we will have to. Let me think? Where do I see that happening already today? Yannis? Do you know?

the current problem with lower the rate to protect local income, is that the doors are still open for foreign buyers and "cash" investors, so while it protects the "face value" of the local income (which is valuable paying wages and bank loans), it heavily makes the problem worse for property and real asset values

Cashed-up foreign buyers have long been part of the New Zealand landscape. I was one myself, several waves back! And, yes, that has compounded the problem and allowed New Zealand to live on borrowed time ( literally!)_ for 4 decades now. The current crop of buyers may just be replacing the last lot? Who knows. But what is different this time is the debt-stress that is on the indigenous population; no matter when they came. Debt has never been so crushing on our economy than it is today, and in a World all looking to 'devalue' our way out of trouble, there is no scope for the magical 'inflate the debt away' genie to work their magic, again - wages won't rise in a stagnant global economy. What increases do ooze though will be consumed by living costs of all manner. Maybe with household debt at 30% of income - the 70's - yes. 60% - the 80's? Yes, even 90% in the 90's, maybe. But at 150% and rising, it's pretty much all over bar the shouting....or should that be screaming?!.

The RBNZ has pencilled into its forecasts the possibility of another cut in the next 12 months. But the continued weakness of dairy prices would suggest that in all probability the central bank's hand will be forced again when it makes its next call on rates on July 23.

If easing were the object of monetary policy, there would be so much success by now there wouldn’t be any room to put it all. Read more

Furthermore, Mr Williams, easy on the exaggerated observations - NZD/USD closed ~0.7040 on 5 June and ~0.6980 on 12 June. Drawing attention to an altruistic motive on behalf of ANZ 's persistence when it came to public rate cut barracking hardly draws a veil over the real intent and actual expedient reality of NIM expansion.

I have amended the story to make clear that the current dollar pricing information was from me rather than Con Williams.

Wouldn't a strikeout and reinstatement policy be fairer to all concerned?

"The dollar fell after the RBNZ cut rates last week, but had little reaction overnight to the dairy auction results"

That would be because the global dairy auction results have no effect on the New Zealand dollar. Seriously, do an interval-on-interval regression- there is no relationship. Interest Rates, Yes. Immigration, Yes. Diary Prices, No.

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