Terms of trade down again but view upbeat

By Brian Fallow

Prices at Fonterra's fortnightly GlobalDairyTrade auctions, a more timely indicator. Photo / Supplied
Prices at Fonterra's fortnightly GlobalDairyTrade auctions, a more timely indicator. Photo / Supplied

The terms of trade fell for the fifth straight quarter in September, to be nearly 10 per cent off the peak in mid-2011, but economists believe the decline has now run its course.

The terms of trade measures the changing volume of imports which can be funded by a fixed quantity of New Zealand's exports.

It declined 3.2 per cent in the September quarter as a 6.3 per cent fall in export prices outstripped a 3.3 per cent fall in import prices.

Dairy prices fell 13 per cent to be 25 per cent off their peak in the middle of last year.

The terms of trade data reflect contract prices declared to Customs for shipments crossing New Zealand wharves.

By contrast, prices at Fonterra's fortnightly GlobalDairyTrade auctions, a more timely indicator, have been rising since July, as drought in the United States pushed up feed prices.

"Export commodity prices, particularly dairy, have turned higher since mid-year," Westpac economist Nathan Penny said.

"And with Chinese growth improving and import prices remaining weak we expect the terms of trade to improve from the December quarter on."

The September quarter's 13 per cent drop in dairy prices was more than offset by a 32 per cent jump in the volumes of dairy products exported, as last season's exceptionally strong late production was shipped. The net effect on the value of dairy exports was a 16 per cent increase on June, in seasonally adjusted terms.

Meat prices fell 5.9 per cent to be 13 per cent off their mid-2011 peak, but volumes were 14.5 per cent higher, so that export receipts from the sector were up 8.9 per cent on June, seasonally adjusted.

Aluminium prices continued their decline, falling a further 6.2 per cent in the September quarter to be 19 per cent off their peak in March 2011.

Prices for non-food manufactured exports overall fell 3.7 per cent to their lowest level since December 2009.

Exports of machinery and transport equipment fell 7.2 per cent in volume terms, which ASB economist Jane Turner said was likely to reflect slowing activity in Australia and the United States, the key markets for manufactured exports.

"We expect momentum in Australia will recover over 2013, aided by rate cuts and renewed momentum from China.

"Meanwhile demand from the US should recover once some of the fiscal uncertainty is resolved."

Infometrics economist Benjamin Patterson said that with spot prices for many of New Zealand's key export commodities showing sustained signs of improvement and international inflationary pressures remaining weak, the terms of trade were expected to stabilise through 2013.

- NZ Herald

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