KEY POINTS:
Soaring dairy prices have pushed the international buying power of a basket of New Zealand's exports to the highest it has been since 1974.
The terms of trade improved 2 per cent in the March quarter, Statistics NZ said yesterday, which means that 2 per cent more imports could be funded by a fixed quantity of exports than in the December quarter.
The exchange rate rose against the currencies of all our major trading partners during the March quarter, including a 4.1 per cent appreciation against the United States dollar.
"The high terms of trade are driving the New Zealand dollar higher, meaning that it is consumers rather than exporters who are benefiting most," said Westpac chief economist Brendan O'Donovan.
But the Reserve Bank singled out the high terms of trade as a major reason behind last week's official cash rate increase.
The March quarter's 2 per cent increase puts us well on the way towards the 5.4 per cent increase the bank is now forecasting for the year to March 2008.
"It will give the bank no comfort and does nothing to change our expectation of another rate hike to come," O'Donovan said.
The higher dollar tends to push import and export prices lower. But world prices for dairy products almost completely offset the currency effect on export prices overall.
Export prices fell 0.2 per cent while import prices fell 2.1 per cent.
Dairy product prices rose 2.8 per cent in the quarter, led by milk powder.
Forest products were also higher, by 2.9 per cent, the fifth consecutive quarter in which they have risen.
But if dairy farmers are doing well, their sheep farmer neighbours face falling prices, down 6.9 per cent for the quarter.
The other main driver of the fall in export prices was manufactured exports.
On the imports side, oil was cheaper by 3.6 per cent (compared with a 20.7 per cent fall in the December quarter) and machinery recorded a similar decline.
ANZ National Bank calculates effective exchange rates for different export sectors which adjust for the impact of commodity prices and inflation. The results give an indication of how much world prices have or have not insulated different sectors against the higher dollar.
For the dairy sector the effective exchange rate is approaching the levels last seen in 2000/01 when the kiwi dollar was below US45c.
But for meat producers the commodity-price-adjusted exchange rate is more adverse than ever.
The effective exchange rate is also deteriorating for manufacturers, services like tourism, horticulture and seafood. For forestry it is still restrictive, but less so than it has been.
Overall export receipts, adjusted for seasonal effects, rose 2.7 per cent or $222 million to $8.38 billion in the March quarter. A $208 million increase in dairy exports to $1.7 billion accounted for almost all of the increase.
It reflected not only higher prices but a 10.2 per cent increase in dairy export volumes.
Exports of non-food manufactures also increased, despite the exchange rate, by 5.5 per cent in the quarter, more than reversing a 4.5 per cent decline in December. But meat exports fell 5.3 per cent in volume terms.
Overall, export volumes were 2.4 per cent higher than in the December quarter, while imports increased 2.2 per cent
Imports of consumer goods rose, especially durables, but car imports fell. Imports of plant and machinery rose, apart from transport equipment.
ANZ National bank chief economist Cameron Bagrie said dairy prices in April and May would see the terms of trade post another strong increase in the June quarter.
Higher terms of trade would support a higher currency on average and ANZ's latest fair value estimate put the kiwi around the US65c mark. The historic average is around US60c.
