Rising wholesale power prices squeeze NZ producer margins

Sunrise over power lines in West Auckland. Photo / Dean Purcell

New Zealand producers had their margins squeezed by rising electricity and gas prices in the June quarter as increasing prices for beef, lamb and dairy products weren't enough to offset more expensive power.

The output producers price index, which shows the prices producers receive for their goods and services, rose 1.3 per cent in the June quarter, a smaller increase than the 1.4 per cent increase in the inputs PPI, which shows how much they pay to produce things, Statistics New Zealand said. The outputs measure was led higher by an 8.8 per cent gain in prices received by sheep, beef cattle and grain farmers and a 6.9 per cent increase in meat and meat product manufacturing prices. However, the price producers paid for electricity and gas supply rose 8.5 per cent, seeing an overall narrowing of margins in the quarter.

"These increases were influenced by higher prices for electricity generation, partly arising from a dry winter," business prices manager Sarah Williams said in a statement. "Higher output prices for electricity lead to higher input costs for other industries."

Wholesale electricity prices have spiked higher in recent months as low hydro-lake levels coincided with heavy winter demand for power.

Still, the data show annual margins improved with the output PPI rising 5.2 per cent from a year earlier, outpacing a 4.7 per cent increase in input prices. The recovery in global dairy prices drove the annual movement, with prices received by dairy cattle farmers jumping 53 per cent in the June quarter from a year earlier, and dairy product manufacturers' output prices rising 35 per cent. The annual increase in input prices was led by dairy product manufacturers whose costs were up 42 per cent.

"In the June year, prices received by dairy cattle farmers were up 53 per cent due to a rise in farmgate milk prices, from $4.25 to $6.50 per kilo of milk solids," Stats NZ's Williams said. "This was still lower than the March 2014 quarter peak, when forecast milk prices were $8.65."

The construction sector has been facing increased margin pressures as competition for skilled labour drives up costs. Input costs for construction producers rose 0.8 per cent in the June quarter for a 2.9 per cent annual increase, while quarterly output prices gained 1.3 per cent and were 4.3 per cent higher than a year earlier.

Prices paid by farmers rose 0.7 per cent in the quarter for a 1.1 per cent annual increase, while capital goods prices were up 0.9 per cent in the three months ended June 30 and 3.2 per cent on an annual basis.