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Good morning all.
Milk powder prices fell 4.6% to US$2,694/tonne overnight in Globaldairytrade's fortnightly auction, which was weaker than expected and indicated the likely recovery in prices to break-even levels for farmers over US$3,000/tonne may be delayed from later this year to early next year despite sharply falling production here.
This was the first fall in five auctions and softens the rebound since August 4 to 69.4%. The overall GDT Index fell 3.1% to US$2,735/tonne.
Butter prices fell 11.1% to US$2,850/tonne, while skim milk powder prices fell 4.5% to US$2,178/tonne. In combination with the rise in the New Zealand dollar over the last month from 62.4 USc to as high as 68.9 USc last week, the lower dairy price may dampen some of the confidence that returned to the dairy sector through late September and early October. The New Zealand dollar fell overnight to 67.5 USc as a result.
AgriHQ cut its farmgate milk price estimate for 2015/16 by 13c to NZ$5.26/kg, which is still above Fonterra's current forecast of NZ$4.60/kg. AgriHQ's Susan Kilsby said the NZX Dairy Derivatives prices still showed prices trending up, but the rate of growth had eased.
"A fortnight ago whole milk powder was expected to reach US$3000/tonne by the end of 2015, but this price is now not expected to be achieved until May 2016," Kilsby said.
"The slow down in the recovery of the dairy markets will be disappointing for dairy farmers whose cashflows have been squeezed by two seasons of low milk prices," she said, adding the results overnight were a surprise given futures prices had suggested a rise, particularly given Fonterra's announcement on Friday that milk collection in the month of September was 9% below September a year ago and collection in the season to date was 5% below year-ago levels.
"The news of the sharp fall in milk supply should have supported a lift in GDT prices, however that was not the case."
Westpac's Michael Gordon held his forecast at NZ$5.30/kg.
"In contrast to the drop in New Zealand's milk production so far this season, Northern Hemisphere milk supply has yet to show any pull-back in response to low prices," he said. "And there is no reason at this point to believe that global demand for dairy has strengthened."
ANZ's Mark Smith said prices remained consistent with Fonterra's current NZ$4.60/kg forecast, "but if predictions of an El-Nino event come into fruition, prices could move up sharply in the New Zealand summer months."
MPI warned farmers this week that this summer's El Nino could rank among the 4 strongest El Nino events recorded. NIWA said in its seasonal climate outlook on October 1 that El Nino was 99% certain to happen over the next three months.
"By many measures, the current event is tracking close to the 1997/98 El Niño (the strongest since 1950), and is expected to intensify further over the next 3 months," NIWA said.
RBNZ notes surge in small landlord activity
Small and highly leveraged investors have driven the recent surge in the housing market, the Reserve Bank noted just over a week before it imposes its second round of LVR restrictions targeted at Auckland landlords. It said the changes could have a "significant dampening" effect on Auckland house price activity and inflation.
The Reserve Bank issued an analytical note yesterday by Hayden Skilling titled: A deeper look at recent housing market trends: Insights from unit-record data. It found that "increased housing market activity in recent months has been driven by strong investor demand, both within and outside of Auckland, as reflected in increased investor purchases and significant growth in investor-related mortgage credit."
Skilled pointed to an increased share of house purchases going to landlords.
"The primary driver of their increased market share has been a rising incidence of small investors (that are heavily reliant on credit) in the market, as opposed to greater activity among larger investors," he said.
"This suggests that the incoming changes to the LVR restrictions could have a significant dampening effect on Auckland housing market activity and house price inflation."
The Reserve Bank had also found that investors were disproportionately represented at both ends of the price spectrum, contrary to popular opinion that investors predominantly bought relatively cheap properties for use as rentals.
He said the evidence pointed to increased investor leverage relative to other buyers market participants, "consistent with the strong growth in investor related mortgage commitments in recent months."
In other economic and financial news...
The Auditor General released a report into Governance and Accountability of Council Controlled Organisations (CCOs) that found that found they work best when run at arm's length from the councils that own them.
Paula Bennett and Michael Woodhouse announced a plan to set up a Joint Working Group between employers and employees to recommend principles for dealing with pay equity claims in the wake of Kristine Bartlett's successful court challenge arguing aged care workers were systematically underpaid because they were mostly women.
In a linked move, Jonathan Coleman announced the Government would enter negotiations with unions and DHBs over pay rates for care and support workers. He said the negotiations will cover around 50,000 workers in aged and disability residential care, and aged and disability home and community services. They would include the CTU, E Tu, the PSA, NZ Nurses Organisation, NZ Aged Care Association, NZ Disability Support Network, Business NZ, DHB representatives and the Ministry of Health.
Statistics NZ is scheduled to publish visitor arrivals and net migration figures for September at 10.45 am today, with monthly net migration of 5,000 and near-record annual net migration of 60,000 widely expected.
The Productivity Commission is scheduled to release its final report on Using land for housing at midday today.
Bill English will travel to Sydney later today to meet with new Australian Treasurer Scott Morrison and is due to present a keynote address at the Citi Australian and New Zealand Investment Conference on Thursday. Morrison was once an adviser to then National Sports Minister Murray McCully in the early 1990s.
Tweet of the day:
Perfect Mike Hosking:
Because New Zealand is 12 hours ahead of London, Auckland house prices have increased by even more than I think they have.
Twitpic of the day:
Have a great day