Terrible dairy auction

<p>Kia ora,</p><p>Welcome to Wednesday’s Economy Watch where we follow the economic events and trends that affect Aotearoa/New Zealand.</p><p>I'm David Chaston and this is the international edition from Interest.co.nz.</p><p>And today we lead with news the economic clouds are darkening for New Zealand.</p><p>First up today, <a href="https://www.globaldairytrade.info/en/product-results/" target="_blank"><strong>the overnight dairy auction was a terrible one</strong></a>. Prices fell -7.4% in USD terms and -4.8% in NZD terms, principally on an almost -11% dive in the dominant WMP price (-8.5% in NZD terms). Remember these falls are from the prior auction two weeks ago which was also quite weak, so the declines are compounding. And these retreats are far worse than expected, and getting worse quickly. The WMP price is down -8.2% from just last week at the GDP Pulse event. Everyone expected a fall but no-one saw a crash as hard as this one.</p><p>The WMP price is back to levels we last had in August 2016. And dairy farmers will be sweating because since then we have had +20% overall inflation.</p><p>It's not all grim news; the cheddar cheese price rose +5.8% at this auction. SMP was down 'only' -5.2%, butter down 'only' -3.0%. But WMP dominates the volumes sold and is a serious pall on this market. Recent farmgate milk payout forecasts have clearly not been trimmed hard enough. Why the collapse? NZX dairy analysts remind us that China has produced +25% more WMP domestically over the last 12 months while their domestic consumption of the commodity has fallen almost -9%. That does not suggest there will be a bounceback any time soon.</p><p>Elsewhere, things are not so grim. US <a href="https://www.census.gov/retail/marts/www/marts_current.pdf" target="_blank"><strong>retail sales</strong></a> topped forecasts to be up +3.2% in July above year-ago levels and the best result in five months. And it came even though car sales dipped slightly. (And remember, US CPI inflation is 3.2% for the same period, so that is a real ga