[achiever]

Significant changes in milk payouts to NZ dairy farmer affect cash flows. Sharp cuts to forecasted milk payouts create a gap in budgeted farm revenues and consequently, farms are bridging that gap through taking out more credit much earlier in the season than usual. Leverage in New Zealand’s agricultural sector remains high with bank lending to this sector doubling in value between 2003 and 2008. Loans to agriculture currently account for 15% of total bank lending in NZ and rising debt in the agricultural sector has led to an increase in farmers’
debt-servicing ratios.

Australia’s terms of trade falling as expected
Australia's terms of trade worsened sharply in Q2 as export prices for coking coal and iron ore were negotiated sharply lower. Export prices fell 20.6% q/q and Import prices fell 6.4%. Terms of trade fell 14.3%q/q, which was the largest
on record. However, the RBA is well prepared for this development. Australian resource producers have accepted lower prices for the year ahead, and the RBA expects the terms of trade to continue falling into the end of 2009 of about 25%
from the peak but still 40% above the long term average.

Chinese growth has passed the trough
Australia’s export destination is heavily geared toward Asia (China and Korea account for more than 20% of the value of Australian merchandise exports, and Japan accounts for another 20%). Chinese Q2 and June monthly data released last week showed further improvement in economic conditions as the impact of policy stimulus builds. Chinese Q2 GDP growth strengthened from 6.1% to 7.9%y/y, confirming that China has passed the trough in activity, with growth likely to strengthen further in the next few quarters. This supports the increasing market confidence in the recovery in the global economy, China and US in particular.