GDT #195

The chart from CIP below tells the story of the last 6 auctions – an extended period of low volatility.

Readers will recall, however, that the last 2 auctions have disappointed with slightly negative outcomes, despite robust markets leading into the auction and expectations of a 3%+ price rise in GDT.

This week that trend remains in place, with futures markets continuing to suggest well supported markets across WMP (+3%), butter (+2.5%), and AMF (+2.5%) and SMP (+1.5%).

The MKP contract has weakened 2c to $6.78 /kgMS (from $6.80/kgMS). AgriHQ’s season forecast is now aligned with Fonterra at $6.75/kgMS and their calculator (using latest spot prices) generates a price of $6.80/kgMS. The MyFarm model (using futures curves) generates a price of $6.95/kgMS so all would seem relatively well aligned.
 

Part of the reason for the (false) confidence leading into the last 2 auctions was an expectation that Chinese participation would be robust as Chinese buyers sought to buy for delivery into the “quota window” in the New Year. Mike McIntyre from FNZC has written eloquently on the importance of the C2 contract from an export and delivery perspective. However, he has also noted that chinese activity has been “significant but not as frenetic as in previous years”. The bottom line is that the Chinese appear to be doing a good job securing their volumes (see the second chart below from CIP) without bumping up the price.

To further examine the behaviour, you will recall that I also suggested in an earlier note that Chinese purchases in the July – October period in recent years had been anemic. In that sense, July (as detailed by Rice Dairies) did not disappoint and while a drop off to 15,000 - 20,000 tonnes would be expected in August and September, recent auction numbers would suggest that the China import numbers will pick up again in October.

China buying (as reported by Rice Dairies) extended beyond WMP to infant formula – again consistent with ATM and SML reporting.

Overall, Chinese import numbers have shown a significant rebound but, as noted above, the buying has been done in a more elegant manner than perhaps we have seen in the past (the GDT and NZX market transparency can take some credit for this).

The Rice Dairies publication last week also included an update (again to end July) on production (supply). This showed continued US growth in supply, an anticipated rebound in Eurpean production (although still below what was expected 12 months ago), low season NZ production and an Australian market still struggling to match output from 2 years ago. While some reports suggested EU intervention in SMP, other reports suggested very low butter stocks in Europe. While there are unders and overs in some products by region, there is sufficient tension in most markets to keep pricing within the range, notwithstanding the manageable increases being recorded in global production.

Price Summary:
Past behaviour would have suggested a seasonal lift in prices in the last 2 auctions and the forthcoming auctions #195 and #196. If this doesn’t occur and the China bid backs off in October, we may have to deal with some market weakness. It is not very sophisticated but the reality is that if prices don’t go up this month, they will probably go down next month!

Other Variables to review:
There are a few things not going quite to script this year:

  • NZ election polls would be one (much closer than anticipated)
  • The USD index has weakened 11% and retraced 38% (a Fibonnacci # for those technical analysts) of its up move from 2009
  • US bond rates which many (myself included) expected to go close to 3% by year end are currently languishing at around 2.15%

Exchange Rate influences:
Ordinarily a 10.7% fall in the USD index (DXY) shown in the first chart below, would have seen a sharp rise in the NZD/USD. Indeed the AUD/USD that started the year at US72 cents, is now US79.5c (+10.5%) but the NZD has risen only about 3% to US71.5c as illustrated in the 2nd chart below. The weak USD has assisted robust USD commodity pricing and the changing NZ election outlook over the last month appears to have seen a risk discount priced into the NZD.

Meanwhile, NZ exporters have benefited on the non-dollar crosses with the NZ Trade Weighted Index weakening about 3% since the beginning of the year.

Interest Rate Influences:
I mentioned above that the path of US interest rates has confounded a few analysts this year. After breaking out of a 10 year down trend a move higher looked likely but as shown below, rates have tracked sideways to down and are now about 50 bps below their January highs. At the risk of making excuses, the chart below is not an uncommon technical formation and I would still expect US rates to track higher over the next 12 months.

In the meantime, however, US rates have been a significant influence on NZ interest rates and, like the US, NZ 5 year swap rates have also retraced 55bps from their Xmas – new Year highs!

So in summary, over the last month there has perhaps been some disappointment in the failure of dairy commodity prices to move higher but for the NZ dairy farmer, currency moves have been favourable and interest rate moves have also been supportive to farm incomes for the current season.

Corporate News:
We have just completed reporting season in Australia and New Zealand.

For details I would refer you to CIP and FNZC as they publish at length on the respective companies but I would make a couple of obsevations and include a couple of charts from my data base.

The first is price performance of the listed companies over the last 3 months. The 2 stand out performers are two small companies listed in Australia who have both done capital raisings. The “top line” is “Bubs Australia” and the second is “Wattle Health”. Both infant food (including formula) producers. Bubs focuses on organic production. To be clear they are both micro cap (<$100m)!
 

In order not to confuse the situation, and in order to provide a clearer picture, I attach the same indexed chart less the micro caps.

This chart illustrates the resurrection of Bellamy’s, the continued stella performance of A2 Milk (which recorded the highest upwards earnings revisions by ASX analysts of the season) and the continued steady upward move of Synlait. I would note that this price action has occurred despite there being no updates on CNCA licenses.

The laggard remains Murray Goulburn. However, the AFR reported late last week and again this morning that Deutsche Bank is beginning management meetings later this week for “potential suitors” with reported expressions of interest in the company by as early as 15 September. It is reported that there a range of options on the table from joint ventures to a takeover.

Names mentioned in the press as having interest in the business or assets of MG include Parmalat, Saputo, Bega and Fonterra. Whatever the outcome, it would seem that there will be a change in the competitive landscape in the Australian dairy market.

Market update:
The next Fonterra Board meeting is on or about 22 September. This meeting usually sees the final FGMP and dividend for the previous season confirmed. It also provides Fonterra with an opportunity to update the current season payout expectation. I am not expecting any surprises.

North Korea (a footnote):
North Korea is an ongoing concern but one to which markets have not yet over-reacted. The US has, however, started talking about trade bans with those not deemed to be doing enough to put pressure on North Korea. This rhetoric is clearly aimed at China. It is not clear that “allies” would follow any US lead but disruption in China trade would clearly be very impactful to Australia and New Zealand. While on the trade theme, the White House is also upping the rhetoric around NAFTA and threatening to withdraw.

It gets increasingly hard to take the POTUS (and the US administration) seriously but “predictably unpredictable” reactions of the White House where policy appears to be communicated via Twitter leave us in a world where geopolitical risks are dominating economic risks.