Dairy leads surge in commodity prices

Led by dairy products, world prices for a basket of New Zealand's export commodities soared 6.8 per cent last month, its steepest rise in 22 years, but the higher Kiwi dollar swallowed two-thirds of the increase.

The latest jump in ANZ's commodity price index leaves it 20 per cent above its low last February in world price terms.

The improvement was broad-based, with eight of the 13 commodities in the index posting gains, but strongest in dairy products, which make up 40 per cent of the trade-weighted basket.

Dairy prices jumped 17 per cent and in the 24-year history of the index have only been higher than this between January 2007 and November last year.

The ANZ index uses US Department of Agriculture data for dairy prices, which have tended to lag behind those achieved in Fonterra's online auctions.

"Logic would suggest that after such a sharp movement higher in global dairy prices [there] could be a pull-back this month," the bank said.

But it noted that local stocks of dairy products had been run down aggressively, which made it more likely increases in export would have to be met from production. There are biological constraints on how quickly dairy production can increase.

"This implies some underlying support to prices."

On the other hand, ANZ economist Steve Edwards said, higher prices would reduce demand, and the exchange rates of commodity exporting countries had been pushed up strongly this year.

In New Zealand dollar terms the ANZ commodity index rose 2.4 per cent last month, and that was off a cyclical low.

Dairy prices have been higher than they are now in New Zealand dollar terms for four of the past 10 years.

Nevertheless, the recent sharp increases had resulted in a lift in Fonterra's forecast for the 2009/10 payout and would go a long way to easing cash-flow pressures in the industry, ANZ said.

However it expects much of the increase in dairy incomes to be used to pay down debt rather than for discretionary spending which would flow through the rest of the economy.

The latest monthly data from the Reserve Bank show the level of borrowing by the agriculture sector as a whole at the end of August was 13.1 per cent high than a year earlier.

That is the weakest annual increase since May 2007 but contrasts with business and consumer debt, both of which were lower than a year earlier.

Of the other commodities to rise in price, the second largest increase, skins' 8.3 per cent, was off an all-time low, Edwards said.

Sawn timber recorded a 7.2 per cent rise on the previous month but logs were down 3 per cent despite strong demand from China. Pulp prices were up 3.1 per cent.

Overall, forest products are off their mid-year lows but still at historically weak levels.

Lamb prices were up 2.3 per cent, beef up 2.2 per cent and wool up 5.3 per cent. Aluminium prices dropped 4 per cent, but are still at their second highest level for the past year.

Apple prices continued to fall from last year's 14-year highs, down 5.7 per cent last month, but kiwifruit managed a 0.4 per cent rise.