KEY POINTS:
The international purchasing power of New Zealand's export dollar has strengthened further, to the most favourable level in 34 years, though economists warn it may be near its peak.
The terms of trade reflect changes in the relative prices of the kinds of thing the country exports compared
with the kinds of things it imports.
Rising terms of trade represent an increase in national income.
They rose 2.9 per cent in the December quarter as a 5.4 per cent rise in export prices outstripped a 2.5 per cent rise in import prices.
Dairy prices climbed 12.8 per cent to be 40.5 per cent up on a year earlier.
"We think there is a bit more to come," said Westpac economist Sharon Zollner.
Although spot prices for dairy products, as reflected in ANZ's commodity price index, have been falling since November, Statistics New Zealand's overseas trade indices reflect the contract prices Fonterra receives which follow spot prices with a lag.
Meat prices rose 2.5 per cent, but are still slightly lower than they were a year ago.
"We expect global meat prices to take a leg up over the next couple of years," Zollner said.
That view is based on rising incomes in Asia and increasing competition from the bio-ethanol industry pushing up feed costs for grain-based producers.
"The terms of trade are likely to weaken over 2008 but will stay at historically healthy levels for a long time thanks to [export] commodity prices," she said.
Aluminium prices fell 12.7 per last year, giving up nearly half of the previous year's gain.
On the import side oil prices (up 6 per cent in the quarter and 20 per cent over the year) was the main upward contributor. Prices for consumer goods rose 1 per cent in quarter, following four quarterly falls in a row, but prices for capital goods continued to fall, by 0.5 per cent in the latest quarter.
As with prices the dairy sector was the star performer on the volumes side as well.
Dairy exports rose 27.4 per cent in volume terms, to a new high, after falling by 13.9 per cent in the September quarter.
Oil exports also surged reflecting production from the Tui field, but forestry exports were down and meat exports flat.
Imports of capital goods jumped by nearly a third during the quarter, to a new high, but they were boosted by three aircraft and an oil rig.
"But even excluding them, imports of capital goods were still strong, so someone's investing, and imports of consumer goods rose 3.7 per cent on top of a 6.6 per increase in the September quarter," Zollner said.
ANZ National Bank economist Khoon Goh said another modest increase in the terms of trade was likely in the March quarter.
But because of the lagged effect of past commodity price increases, the peak was near.
STRONG GROWTH
* The terms of trade _ what we can get for a standard basket of New Zealand's exports _ are the best they have been since 1974.
* They strengthened further in the December quarter as export prices (especially dairy) rose faster than import prices (especially oil).
* Export volumes were also strong, rising 10.7 per cent in the quarter, twice as fast as imports.