Falling dairy price to hit terms of trade

JAMES WEIR
Last updated 05:00 04/06/2014

Relevant offers

A key bright spot of the stronger economy, the best terms of trade in 40 years, is set to lose some of its glow, as export prices turn down, especially for dairy products.

Figures out yesterday show the merchandise terms of trade hit its highest level since 1973, rising again in the March quarter, as export prices rose and import prices fell.

The terms of trade index was up 1.8 per cent in the March quarter, Statistics NZ said, and within 2 per cent of its all time peak.

The results from the latest global dairy auction, due out this morning, will give another steer on export prices after slumping 22 per cent since February.

The tumbling dairy prices from recent peaks could see the terms of trade fall 5 per cent in the next quarter and perhaps 10 per cent in the coming year.

But even then terms of trade would still be above its decade-long average, Infometrics economists said.

Dairy and meat prices rose in the March quarter, while prices for imported oil fell in the three months. The high New Zealand dollar is also keeping import prices down, but global inflation also remains low. Despite that, bank economists still expect the Reserve Bank to lift official interest rates again on June 12.

Dairy prices (up 2.3 per cent) were the top contributor to total export prices in the March quarter.

Seasonally adjusted dairy volumes fell 4.3 per cent, following a 24 per cent rise in the previous quarter.

While export dairy prices were up in the quarter based on merchandise trade figures, global dairy auction prices have fallen sharply since early this year, down 22 per cent since February.

That is expected to show up in trade figures in coming months. Prices have also been weaker for timber exports.

So bank economists are not expecting the June quarter terms of trade to hit a new record high, even though the index is so close to the record high.

"The big fall in dairy prices since February virtually guarantees a fall in the terms of trade measure for (the June quarter) in the order of a 5 per cent drop, we reckon," BNZ economists said.

Infometrics said it was safe to say the terms of trade would tumble over the second half of the year, but it was unlikely to fall far in the June quarter.

Most of the big falls in global dairy auction prices in recent months would not show up in contracted prices till the September quarter. And buoyant markets for other farm, forestry and horticultural products would hold up export prices in the June quarter.

In the March quarter, meat prices rose 2.1 per cent and volumes rose 6.6 per cent, leading the rise in export values. Forestry prices were up 1.6 per cent.

Ad Feedback

The export boom in recent years has been driven by strong demand for dairy, meat and forestry products in China.

Some analysts believe that rising wealth in China will continue to drive demand for New Zealand dairy products for years to come.

Meanwhile, prices for imported goods fell 1 per cent in the March 2014 quarter, following a 2.7 per cent fall in the previous quarter.

For the past year, import prices were down almost 4 per cent, taking prices to their lowest levels since 2005.

In the past year the steepest drops have been for electrical machinery and goods, down 12 per cent.

TRADE STANDING

Terms of trade measures the purchasing power of New Zealand's exports overseas. An increase in the terms of trade means NZ can buy more imports for the same amount of exports.

March quarter: up 1.8 per cent (up 17.3 per cent for March year)

Export prices: up 0.8 per cent (up 12.8 per cent)

Import prices: down 0.9 per cent (down 3.9 per cent)

Source: Statistics NZ

- Stuff

Special offers
Opinion poll

How should the council plug its financial black hole?

Increase rates

Ask the Government for more money

Cut spending on roads

Cut spending on community facilities eg pools

Cut spending on capital projects eg cycleways

Sell, or partially sell, assets

All of the above

None of the above

Vote Result

Related story: Council coffers fall short for rebuild funding

Featured Promotions

Sponsored Content