Tuesday, July 21, 2015

Frank Newman: Dairy prices, Greece, and Ruakaka

The prospects of an early revival in dairy prices have taken another hit. The Global Dairy Trade index was down 10.7% at last week’s auction, and the all-important whole milk powder price (which is responsible for about 75% of Fonterra's farmgate milk price) was down 13.1% to US$1,848, the largest fall in 12 months.

The whole milk powder price is now at its lowest level in six years, down 65% from its peak of US$5,245 in April 2013, and a long way from Fonterra's forecast price of US$3,500 a tonne.

The ANZ Bank has revised down its Fonterra farmgate milk price to $3.75 to $4.00 a kg of milk solids from its previous forecast of $4.50 a kg. Most farmers will lose money at that price and have to deplete savings or take on new debt.

While it may be comforting to say farmers are a resilient bunch and that prices will recover, market prices are determined by supply and demand; hope does not pay the bills due on the 20th of next month. According to Westpac, the immediate prospect is for the supply to increase over coming months as New Zealand’s new season’s production comes on stream, but demand, particularly from China, was weak. As a result, farmers are facing at least two consecutive seasons of extremely low milk prices.

Unfortunately some farmers will not be in a position to ride out the market cycles. Given the importance of the farming sector to the NZ economy, I would not be surprised if central government puts in a scheme to become the lender of last resort to farmers. That's not a decision that needs to be made now, but it may be increasingly talked about as the effects of the dairy price fall become a reality. Fonterra is reviewing its payout on 7 August.

The farming sector is a risk that has been well recognised by the Reserve Bank. It is now almost certain that it will lower the Overnight Cash Rate from 3.25% at the next review on the 24th of July, and likely that it will continue to do so for the remainder of the year. Westpac is forecasting the OCR to be 2% by December. In my view 2.5% is more likely, which is the previous record low.

That means mortgage rates are likely to go lower, which is good new for property investors and home owners with floating or short-term fixed rate loans.

Still with things international, Greece has received a funding life-line from the European Union that will enable its banks to reopen and it to remain within the EU. Interestingly, the International Monetary Fund is not contributing to this latest bail out and has said Greece's debt level is unsustainable. It says "generous" debt relief is required, but that is not a reality that Europe's political leaders are prepared to admit to their voters, yet.

Greece is politically unstable and support for the Prime Minister, even within his own party, is diminishing. It seems fanciful to me to expect Greece to remain committed to an unpopular austerity programme in the long-term given the short-term nature of its politics. I suspect it will not be too long before Greece and its money lenders again find themselves at the negotiation table, this time talking about debt write-offs as the IMF has alluded to.

Now to things on a much more local scale. There will be few winners from the collapse of the Marsden City development project. The Northern Advocate reports the ambitious 83ha project has been put up for sale after companies behind the scheme were put into receivership.

This is a project that was built on high hopes and hype from those with a vested interest in its success, including some local body politicians.

Complicating matters is the fact that Whangarei ratepayers will have to pick up a $5.4 million bill to repair infrastructure subsidence at the site, which the WDC blames on the acidic soil. The infrastructure was built and paid for by the developer, signed off by the WDC, then handed to the WDC on completion. It is therefore the WDC as the owner that is left with the repair bill.

There is a lot of finger pointing going on and the WDC is looking at legal remedies to recovery that cost. No doubt the argument will go on for quite some time and high priced lawyers will be the only winners.

1 comment:

Peter van der Stam, Napier said...

Hello Frank,

What is new?
The primary producer is ALWAYS the looser.
I am just back from Europa (France) where the milk in the shop cost about
EU 1.15 on average. At the farmgate I paid EU 0.60

The Whangarei debacle!
Of course the lawyers are the winners.
First of all: in case they make a mistake, the customer has to pay for the mistake.
Even if the council comes up with a brilliant lawyer, he is also laughing to the bank.
They don't have any responsibility and never have to pay back for their mistakes.

Peter van der Stam