Farmers are expected to defer debt repayments, cut back on operating expenses such as fertiliser, and curtail plans for capital expenditure, impacting on the wider rural sector.
Fonterra’s announcement that it has revised down its forecast payout by more than 10 percent is the latest blow for the New Zealand economy already dealing with the aftermath of devastating floods, a reduced tax take and a slowdown in retail spending.
The dairy co-op, which last year accounted for around one third of all merchandise exports and 3 percent of gross domestic product, has lowered its forecast payout from $8/kg to $7/kg for the current season.
That instantly wiped an estimated $5 billion off the country’s GDP. The decision will result in many dairy farmers making losses for the year, expected to average around $80,000 per farm.
READ MORE: * Dairy land being lost at 1 percent a year – Fonterra * Milking it: Retailers increase their margins on soaring food prices
While the announcement will result in a $1 billion hit to farmers earnings, the hit to the wider economy could be five times that, given the multiplier effects for a sector that is the bedrock of the New Zealand economy, particularly in the regions.
Fonterra’s reduced forecast comes in the wake of a succession of poor results in recent global dairy trade auctions and weaker than expected demand from China, our largest trading partner.
Since August last year, the price of whole milk powder has slumped by more than 25 percent.
Fonterra chief executive Miles Hurrell admitted the revised forecast Farmgate Milk Price had come about due to demand from China falling well short of expectations.
“When we announced our opening 2023/24 season forecast Farmgate Milk Price in May, we noted it reflected an expectation that China’s import demand for whole milk powder would lift over the medium-term.
“Since then, overall global dairy trade whole milk powder prices have fallen by 12 percent, and China’s share of whole milk powder volumes on global dairy trade events has tracked below average levels. This reflects a current surplus of fresh milk in China, resulting in elevated levels of local production of whole milk powder, and reducing near-term whole milk powder import requirements.”
As a result farmers are expected to defer debt repayments, cut back on operating expenses such as fertiliser, and curtail plans for capital expenditure which will have ramifications for the wider rural sector. Some may even struggle to stay in business with modelling suggesting farmers require a payout above $8/kg just to break even – given higher input costs.
Coming at a time when oil prices are already beginning to climb and the kiwi dollar continues to weaken, the negative impact on the country’s terms of trade and a reduced tax take will also be an unwelcome development for the government just nine weeks out from the election.
Markets lose ground as bond yields rise
For a second week the NZ sharemarket remained directionless with the NZX50 ending the week just a few points below where it started as local investors await the commencement of earnings season next week.
Top 10 companies including Contact Energy, Spark and Fletcher Building will report their full-year results to the end of June providing investors with a timely insight into how the wider economy is tracking.
A strong increase in the size of the local labour force also provided some welcome news for long suffering employers, with the working age population increasing by 91,000. The spike coincides with a surge of over 72,000 migrants over the last year leading to a further lift in labour force participation. However, wage pressures remain elevated and risk causing wage inflation to remain higher for longer.
Bond yields continued to push higher despite central banks both here and in the US indicating they are now on hold for the foreseeable future, keeping investors on edge. In the US the closely watched 10-year Treasury yield touched some of its highest levels in almost 5 years at 4.18 percent, while the NZ 10-year Government Bond yield jumped from 4.68 to 4.83 percent last week, closing in on last year’s high of 4.88 percent.
Rising bond yields particularly impact the cashflows of interest rate sensitive stocks.
The NZ dollar also continued to weaken against the US dollar closing at 60.98 US cents.
In the US, both the benchmark the S&P500 and the tech-heavy Nasdaq Composite indices slumped on Friday for a fourth straight session, and notched their worst weeks since March, as traders seemed to book profits following the latest corporate earnings releases and latest jobs data.
The S&P500 fell 2.3 percent for the week, with the Nasdaq slumping 2.9 percent despite a better than expected result from online retail giant Amazon. Its shares jumped 8.3 percent to their highest level in nearly a year after eclipsing expectations on profit and offering positive guidance as consumers continue to spend at record levels. Shares in Apple fell almost 5 percent after the company reported lower revenue for the same quarter a year-ago.
US investors also received more clues into the state of the labour market on Friday following the release of the monthly non-farm payrolls report which showed 187,000 jobs were added in July, less than the 200,000 expected by economists. The unemployment rate also ticked lower to 3.5 percent from 3.6 percent.
Despite the cooler headline numbers, average hourly wages pointed toward more inflation and came in ahead of expectations, rising 0.4 percent for the month, and 4.4 percent on an annualised basis, slightly above expectations. However, almost 90 percent of traders polled by CME expect the US Federal Reserve to hold rates steady at its next meeting in September, though this week’s consumer price report for July is expected to have an even greater impact on rate expectations.
Adding to market jitters, ratings agency Fitch downgraded US debt one notch to double A plus from triple A, only the second time US sovereign debt has been downgraded following a similar move by Standard & Poor’s in 2011. Fitch cited increasing debt levels, weakening governance, and an "expected fiscal deterioration over the next three years” as the primary reasons for the downgrade.
Famed US investor Warren Buffett brushed off the shock downgrade telling CNBC "there are some things people shouldn't worry about, and this is one of them."
The 92 year old Berkshire Hathaway CEO noted that his conglomerate bought US$10 billion of US Treasuries last week, the same amount the week before and his only question was whether Berkshire would buy US$10 billion of 3-month or 6-month Treasuries this week.
Berkshire ranks among the world's biggest corporate holders of US government debt. The company reported US$104 billion of short-term investments in US Treasuries at the end of March.
NZ vehicle sales slump in July after record June
Registrations of new vehicles slumped in July to less than half of the typical monthly average following a record month for new car sales in June.
Motor Industry Association data showed that just 6202 new vehicles were sold last month, 50 percent lower than the average for the first five months of the year.
The drop in registrations was widely expected, as June saw people flocking to dealerships in droves to secure deals before the new clean car discount policy changes took effect at the start of July.
A total of 10,844 cars were registered for the first time last month, the lowest monthly total since the Covid-19 level 4 lockdown in April 2020. Before then, the previous lowest monthly total was recorded in April 2011.
Adjusting for seasonal effects, total car registrations were down 69 percent from June’s bumper month, and around 42 percent below the average of the first five months of 2023.
Petrol vehicles saw the largest reduction in registrations, slumping 54 percent below the average of the first five months of 2023, while diesels were down 38 percent.
Economic consultancy Infometrics said it expects vehicle registrations to be weaker over the next 6-9 months.
‘Don’t criticise the economy,’ China’s authorities tell economists
Chinese authorities are clamping down on negative economic commentary in a bid to prevent consumers becoming unduly swayed about the true state of China’s economy.
Pressure is being applied to local economists to avoid discussing negative trends such as deflation publicly, as concerns mount about Beijing’s ability to boost a flagging recovery in the world’s second-biggest economy.
Multiple local brokerage analysts and researchers at leading universities as well as state-run think-tanks said they had been instructed by regulators, their employers and even domestic media outlets to avoid speaking negatively about topics ranging from fears of capital flight to softening prices.
The China Securities and Regulatory Commission, the country’s stock regulator, has accused brokerage analysts of playing up risks facing the economy, which is suffering from weak consumer demand, declining exports and an ailing property sector.
“The regulator doesn’t want to hear negative comments about the economy in public,” one adviser to the central bank told the Financial Times. “They want us to interpret bad news in a positive light.”
Analysts said growing self-censorship among economic research professionals, on whom investors often rely in a market where reliable data is difficult to come by underscored Beijing’s efforts to deliberately control the flow of information.
The clampdown on economic commentary follows a drumbeat of disappointing data that has undermined investor confidence and hindered Beijing’s efforts to spur a robust post-Covid rebound. Gross domestic product expanded just 0.8 per cent in the second quarter against the previous three months.
Last month, the Communist party’s politburo admitted the recovery was making “tortuous progress”.
