Terms of trade near 40-year high

Driven by booming dairy prices, New Zealand's terms of trade raced up almost 5 per cent in the June quarter as export prices rose at the same time as import prices dipped.

It was the largest quarterly rise in the terms of trade in two years, as dairy prices rose 14 per cent in the June quarter.

The terms of trade measures the purchasing power of exports, and a rise means New Zealand can buy more imports for the same amount of exports.

It was the second quarterly rise in a row for the terms of trade, and they remain just 2.5 per cent below the 37-year high reached two years ago.

Economists said firmer commodity prices meant the terms of trade were on track to soon reach their highest levels since the early 1970s.

ANZ senior economist Mark Smith said that would be a "major support factor" for the economy.

But he warned that with most of the heavy lifting being done by the dairy sector, the situation remained vulnerable to a fall in the sector's fortunes.

But so far, dairy prices have held up despite slowing economic growth in the key export market of China and the botulism scare.

With more of the recent surge in dairy prices to show through in trade figures, Westpac expected the terms of trade to hit a 40-year high in the September quarter and stay high next year.

Fonterra recently lifted its forecast milk price payout to $7.80 a kg, from the previous $7.50, which would boost on-farm incomes by $450 million.

But yesterday's trade figures also showed dairy production was severely hit by the summer drought, with seasonally adjusted dairy export volumes down 18 per cent, while milk powder volumes alone slumped 23 per cent.

The summer drought was also the reason for the spike in prices as production dried up. But since then, prices had remained high, with strong demand from key markets such as China and weak world supply, Westpac economist Nathan Penny said.

The drought also saw meat export volumes down 7 per cent in the June quarter, after volumes rose in the March quarter as farmers sent stock off to the works early for a lack of feed. Shipments of meat were also held up at Chinese ports in May.

But the drop in export volumes would be short-lived and overall export revenues were expected to hold up "very favourably" for the rest of the year, Penny said.

"What's more, dairy prices remain high and are set to stay high for longer than we initially expected a few months ago," he said.

Farm production and exports were expected to rebound fast, with a 5 per cent rebound in dairy production volumes expected this season.

The terms of trade boom had another two to three years to run, eventually pulled back as production rises from the United States and Europe, Penny said.

"That said, we think food and export prices have moved structurally to a higher level."

Export prices for goods rose 3.4 per cent in the three months to the end of June, dominated by higher dairy prices.

Imports for goods fell 1.5 per cent.

Half of that reflected a rising New Zealand dollar, but underlying world prices also remain subdued, Infometrics said.

Contact James Weir
Business editor
Email: james.weir@dompost.co.nz

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