Prices for New Zealand's export commodities are likely to remain high for some time, the Reserve Bank says.
In a paper on the outlook for commodity prices and the implications for monetary policy the bank says some falls in prices are likely as the impact of abnormal weather on global grain production abates.
However it sees the high prices commodity exporters have been enjoying as marking a structural shift, underpinned by urbanisation and industrialisation in Asia which have a long way yet to run.
"Underlying price growth slightly in excess of inflation seems likely over the next five to 10 years as demand growth continues to outstrip any potential supply response in that time. Over a longer horizon, the ability of countries like India and China to increase productivity and production will undoubtedly lead to greater supply, reducing the likelihood of large real price increases continuing unabated," it says.
It expects the terms of trade - a measure of the relative prices of exports and imports - will persist around current levels for the foreseeable future.
"However, this is only returning the terms of trade to the levels seen in the 1960s and 1970s. Indeed, rather than current levels being viewed as high, it is more likely that the terms of trade during the 1980s and 1990s were very low."
The supply side of the food equation is being constrained by diminishing gains in agricultural productivity, competition for land from urbanisation and industrialisation, greater use of biofuels, global warming and increasing water scarcity.
It quotes Fonterra as saying that globally dairy farming will not be able to grow much faster than 2 to 3 per cent a year over the long term and that demand is likely to outstrip that.
On the demand side it points to population increase and rising incomes with the associated growth in demand for the foods of affluence. It cites Taiwan as indicative of how mainland Chinese dietary preferences might evolve.
Between 1975 and 1995 per capita consumption of meat trebled and milk quadrupled.
For an inflation-targeting central bank this positive story poses risks, however. One is that it leads to a rise in inflation expectations, which the bank might need to lean against.
A related risk is that it encourages households and firms to bring forward spending to the point that the economy becomes overheated.
The Reserve Bank notes that its counterparts in Australia and Canada see a flexible exchange rate as the best mechanism for coping with a structural shift in the terms of trade.
The Reserve Bank of Australia argues that the high exchange rate driven by that country's terms of trade - which have climbed much more rapidly than New Zealand's - delivers the benefits of the resource boom to the community at large through cheaper imports and rising wealth.
Bank of Canada governor Mark Carney has said that when the upward pressure on the exchange rate from improved terms of trade is limited in some way, wages and other prices bear the brunt of the adjustment instead, with adverse effects on employment, financial stability and competitiveness.