Terms of trade run hot

By Brian Fallow

Dairy prices push levels to a 40-year high but country still running a $1.6 billion deficit.

Brett Phibbs
Brett Phibbs

Surging dairy prices have pushed the terms of trade to a 40-year high.

The terms of trade measures changes in prices for the kinds of thing the country exports as against the kinds of thing it imports; an increase means New Zealand can buy more imports for the same amount of exports.

It rose 7.5 per cent in the September quarter, as an 8.9 per cent rise in export prices dwarfed a 1.2 per cent rise in import prices.

The market had expected a rise of around only 2.9 per cent.

It was the steepest quarterly increase in the terms of trade for 40 years, and took it to a level last seen in December 1973. The 1973 spike proved short-lived when the first oil shock drove up import prices while on the export side meat prices, which had risen sharply, fell.

Buoyant terms of trade boosts national income but the downside is a high exchange rate.

Since at least 2007 export prices statistically explain the lion's share of the exchange rate's strength - in terms of its deviation from the long-term average - according to the Reserve Bank.

Two-thirds of the latest increase in the terms of trade was due to a steep 24 per cent rise in dairy export prices, to a level 46 per cent up on September last year.

But even if dairy prices had remained unchanged the terms of trade would still have moved in New Zealand's favour by 2.5 per cent in the September quarter.

Forest product prices rose 7.9 per cent to be 14 per cent ahead of a year ago.

And after declining over the previous two years, meat prices rose 6.8 per cent in the September quarter to be 1.6 per cent up on a year ago.

Import prices rose 1.2 per cent, aided by a weaker exchange rate.

The biggest upward contribution was 3.1 per cent rise in oil prices, Statistics New Zealand said.

However, even with the most favourable terms of trade in 40 years New Zealand still ran a $1.6 billion trade deficit in the year ended September. Part of the reason is that while export prices were generally higher, export volumes were down 2.1 per cent in the latest quarter, following a 16 per cent decline in the June quarter in which the main effects of the summer's drought were felt.

Dairy products were 2.7 per cent lower in volume terms in the September quarter.

"The Fonterra whey contamination scare had reduced dairy exports in August, but the monthly trade data indicate the effects on demand for dairy exports have been short-lived, with a recovery in export volumes since then," ASB economist Christina Leung said.

"Strong milk production in recent months, along with high volumes sold in recent GlobalDairyTrade auctions, suggest dairy export volumes will recover over the remainder of 2013."

Forestry export volumes were up 6.7 per cent.

Deutsche Bank chief economist Darren Gibbs said given the prevailing level of spot commodity prices he expected domestic export prices to lift further in the December quarter.

1973: The last time terms were this good

* Norman Kirk was Prime Minister.
* The first oil shock had just happened.
* Britain had just joined the European Common Market.
* Shona Laing was New Zealand artist of the year.
* Car of the year was the Leyland P76.
* Colin Meads' last game of first-class rugby.
* Registered unemployed 2300.
* CPI annual inflation of 10.2%.

- NZ Herald

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