19 Aug 2015
GDT bounce should be discounted, RBNZ to cut - DB
FXStreet (Guatemala) - Robin Winkler, currency strategist at Deutsche Bank explained that the bounce in dairy prices at yesterday’s GDT auction should be discounted.
Key Quotes:
"Higher prices at the expense of lower volumes offer little respite to farmers. Market dynamics do promise a more meaningful price recovery, but not before Q4.
Dairy prices are a derivative of grain prices. Simply put, as the ratio of milk to grain (i.e. feed) prices falls, milk production becomes unprofitable or, for farmers with a choice, less lucrative than just selling grain. In the past, ratios below 0.9 have triggered deep supply cuts leading milk price recoveries by a few weeks. In recent weeks the ratio has hovered above that threshold, but it may soon break through it.
Pork price inflation in China is a main catalyst. Rising hog production should fuel demand for soybean meal, the same source of protein fed to dairy cows. China may thus trigger a positive supply shock to global dairy prices even without accelerating demand or inventory depletion. Land-rich kiwi farmers would benefit from a grain price shock in relative terms, being able to operate at lower milk-feed price ratios than competitors in more feed-intensive regions, particularly Europe."
"Even if the critical ratio were reached soon, however, the supply response would take weeks to feed into higher prices. In the meantime, kiwi farmers’ cash flows depend on Fonterra pay-outs, rather than fortnightly auction prices.
Having lowered its forecast only recently, Fonterra is unlikely to raise its pay-outs in light of a price recovery engineered by itself. Farmers thus face pay-outs far below break-evens for the foreseeable future, and conditions remain dire at these levels. Interest-free loans offered by Fonterra merely transfer the default risk of the worst- hit farmers from banks to the less cash-strapped members of the cooperative."
The bounce does not therefore alter our view that the RBNZ will cut the OCR again in September and signal a fourth cut to 2.5% for October. As positioning in NZD is lightening up, we reiterate our strategic targets of 0.64/USD and AUD/1.15."
Key Quotes:
"Higher prices at the expense of lower volumes offer little respite to farmers. Market dynamics do promise a more meaningful price recovery, but not before Q4.
Dairy prices are a derivative of grain prices. Simply put, as the ratio of milk to grain (i.e. feed) prices falls, milk production becomes unprofitable or, for farmers with a choice, less lucrative than just selling grain. In the past, ratios below 0.9 have triggered deep supply cuts leading milk price recoveries by a few weeks. In recent weeks the ratio has hovered above that threshold, but it may soon break through it.
Pork price inflation in China is a main catalyst. Rising hog production should fuel demand for soybean meal, the same source of protein fed to dairy cows. China may thus trigger a positive supply shock to global dairy prices even without accelerating demand or inventory depletion. Land-rich kiwi farmers would benefit from a grain price shock in relative terms, being able to operate at lower milk-feed price ratios than competitors in more feed-intensive regions, particularly Europe."
"Even if the critical ratio were reached soon, however, the supply response would take weeks to feed into higher prices. In the meantime, kiwi farmers’ cash flows depend on Fonterra pay-outs, rather than fortnightly auction prices.
Having lowered its forecast only recently, Fonterra is unlikely to raise its pay-outs in light of a price recovery engineered by itself. Farmers thus face pay-outs far below break-evens for the foreseeable future, and conditions remain dire at these levels. Interest-free loans offered by Fonterra merely transfer the default risk of the worst- hit farmers from banks to the less cash-strapped members of the cooperative."
The bounce does not therefore alter our view that the RBNZ will cut the OCR again in September and signal a fourth cut to 2.5% for October. As positioning in NZD is lightening up, we reiterate our strategic targets of 0.64/USD and AUD/1.15."