Good dairy prices improve terms of trade

Photo / APN

New Zealand's terms of trade, which measures the amount of imports the country can buy with a set amount of exports, improved in the second quarter as dairy products drove a gain in export prices while petroleum and cars led a fall in import prices.

The terms of trade rose 4.9 per cent in the second quarter from three months earlier, according to Statistics New Zealand.

That beat the 4.1 per cent forecast in a Reuters survey as import prices fell 1.5 per cent, three times as much as estimated, and export prices rose 3.4 per cent, less than the 4 per cent expected.

Prices of dairy products climbed 14 per cent in the latest quarter, even as volumes fell. Milk powder had the greatest impact, with prices up 15 per cent and volumes down a seasonally adjusted 23 per cent, the government statistician said. It attributed the decline to drought early in 2013, which curtailed milk production in the North Island.

"The booming dairy prices dominated the release, though import prices fell for the fourth consecutive release, providing an additional boost to the terms of trade," said Westpac Bank economist Nathan Penny. "With more of the recent dairy price surge to come through, we expect the terms of trade to hit a 40-year high in the September quarter, and then to remain high into 2014."

Prices of forest product exports gained 4.2 per cent, led by a 4.4 per cent gain for wood prices, while fruit and vegetable prices dropped 11 per cent, reflecting lower prices for kiwifruit.

Petroleum product import prices fell 3 per cent in the latest three months to reach similar levels to 2011, led by a 4.2 per cent decline for crude oil. Transport equipment prices fell 2.2 per cent to a five-year low, driven by new and used cars.

The services terms of trade fell 1 per cent in the second quarter as a 0.1 per cent gain in services exports was outpaced by a 1.2 per cent gain in services imports. Transportation export services, such as New Zealand air and sea transport used by foreigners, rose 1.6 per cent and was offset by a 0.5 per cent decline in travel services, such as holiday packages and meals.

Services imports were driven higher by a 1.2 per cent gain in 'other' services such as engineering, a 1.4 per cent gain in travel, such as overseas accommodation, and a 0.9 per cent increase in transportation, led by sea freight.

The trade-weighted index rose 0.7 per cent in the second quarter.

Christina Leung, an ASB economist, said higher dairy export prices largely reflected the effects of the summer drought, as supply concerns drove a surge in prices over March and April.

"Although improved weather conditions have seen an easing in supply concerns and in turn global dairy prices more recently, prices remain very high," she said.

"Meanwhile, the effects of the recent Fonterra contamination scare on global dairy demand and prices appear limited."

Leung said the medium-term outlook for export growth was mildly positive as global demand continues to grow.

"In particular, China's expanding middle class is likely to underpin increased demand for our meat and dairy exports. Meanwhile, stronger domestic demand is likely to drive a continued recovery in imports."