Talk Money with Tony Field – August 3, 2015

Fonterra is expected to make a big cut to this season's forecast payout to its farmers (file)
Fonterra is expected to make a big cut to this season's forecast payout to its farmers (file)

This week is shaping up as a very grim one for the dairy sector and the New Zealand economy.

Fonterra is expected to make a big cut to this season's forecast payout to its farmers. The current forecast of $5.25 is widely expected to be cut by more than a dollar. Some analysts think the forecast payout should have a three in front of it.

The cooperative is also due to finalise the payout for the 2014/2015 season. It's currently $4.40 (with a dividend of between 20 and 30 cents).

$5.25 is below break-even point for the majority of farmers, and there are signs the weak global dairy prices are starting to have an impact on farms prices and sales.

Rural Value's national manager David Paterson says "there is a reasonable expectation that the drop in dairy farm incomes will lead to a reduction in the sale price of dairy farms".

"We are noticing a definite change in sentiment following the latest Fonterra GDT auction and over the past few months we've witnessed a significant decline in the number of farm sales recorded.

"Prior to the last two or three GDT auctions, the market had been operating on the basis that the current commodity prices are a short term aberration and that the market would pick up through the season.

"However the latest auction, which resulted in yet another reduction, has prompted serious doubt in the market."

Farmers now face the prospect of two bad seasons in a row.

David Paterson says: "The projected payout is now below the cost of production for most operators and there is now anecdotal evidence of pressure on some farmers to sell before their financial situation deteriorates further.

"Purchasers are also holding off on making investment decisions until there is a clearer picture of what is happening in the global dairy market and are waiting for distressed sales to occur to see what happens in the rural property market as a result."

If the forecast payout is cut by more than expected, the New Zealand dollar is likely to fall.

It's trading at 65.95 US cents. It has fallen by 15 percent so far this year and is down by more than 25 percent from where it was 12 months ago.

The Kiwi is trading at 90.10 Australian cents. It's 42.19 pence and 60 Euro cents.

Here is my chat with Paul Henry about the week ahead for dairy.

BNZ economist Stephen Topliss says: "The wheels haven't yet fallen off the New Zealand economy but it is running out of fuel."

He believes the likelihood of growth forecasts being lowered is increasing by the day.

As well as the weak dairy prices, Stephen Topliss is concerned about the soft building permit figures and a "less-than-bullish" business opinion survey that was released by ANZ on Friday. The survey showed that aside from retail every sector expected a dropoff in activity.

Topliss is particularly worried about the drop off in construction. He says it is "way more than we would have expected this early in the cycle. Alongside this, expectations for residential construction fell to below average levels and portend very weak permit growth from here on in. Non-residential construction expectations actually went backwards.

"These figures are a very strong indication that the pace of increase in activity in Christchurch is slowing rapidly such that the region will soon become a headwind to national GDP growth rather than the strong tailwind that has prevailed over the last few years."

Employment expectations are also in decline.

Topliss says: "There is still the intention to hire more staff, but we believe the pace of hiring is already slowing below the pace of (largely migration-led) labour force growth. Accordingly, we think the unemployment rate is now trending higher. This should be confirmed in Wednesday's labour market report."

He predicts there will be two more cuts to the official cash rate this year, taking the OCR from 3 percent to 2.5 percent.

Musician and songwriter David Byrne is calling for more transparency about how the revenue from music streaming services is split between artists and music companies.

He has written an opinion piece for The New York Times titled 'Open the Music Industry's Black Box'.

Byrne, who found fame with the Talking Heads, is concerned that it is almost impossible to know how the subscription payments are divided.

"Even as the musical audience has grown, ways have been found to siphon off a greater percentage than ever of the money that customers and music fans pay for recorded music. Many streaming services are at the mercy of the record labels (especially the big three: Sony, Universal and Warner), and nondisclosure agreements keep all parties from being more transparent."

Byrne has done his best to find out where the money is going, and even though he now runs his own label he still is not sure.

He uses the example of Spotify, which Byrne says to its credit has at least tried to "illuminate the opaque payment system".

Byrne estimates that 70 percent of the money a listener pays to Spotify goes to the rights holders, usually the labels.

"The labels then pay artists a percentage (often 15 percent or so) of their share. This might make sense if streaming music included manufacturing, breakage and other physical costs for the label to recoup, but it does not. When compared with vinyl and CD production, streaming gives the labels incredibly high margins, but the labels act as though nothing has changed."

He had less luck finding out how Apple pays artists.

"I asked Apple Music to explain the calculation of royalties for the trial period. They said they disclosed that only to copyright owners (that is, the labels). I have my own label and own the copyright on some of my albums, but when I turned to my distributor, the response was, 'You can't see the deal, but you could have your lawyer call our lawyer and we might answer some questions.'"

Here is a link to David Byrne's full opinion piece.

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