Terms of trade picked to fall further

Bucking the trend of falling export prices were beef and wool.

Falling dairy prices have begun to undermine one of the foundations of the economic upswing, rising national income from the most favourable terms of trade for more than 40 years.

The terms of trade fell 4.4 per cent in the September quarter as a 4.5 per cent drop in export prices swamped the benefit from a 0.1 per cent fall in import prices.

It was the first decline in the terms of trade - a measure of the quantity of imports which can be funded by a fixed quantity of exports - since December 2012. It took the terms of trade back to its level a year ago, though that was a 40-year high then.

Economists see the latest decline as just the beginning, however.

Four-fifths of the September quarter's fall in export prices is explained by an 11 per cent drop in dairy prices.

But less than a third of the slump recorded by Fonterra's global dairy auctions since February has flowed through to the terms of trade data so far. The terms of trade data use the contract prices agreed before goods are shipped in or out of the country.

Forest product prices fell 3.9 per cent, making a 12 per cent decline for the year.

Bucking the trend of falling export prices were beef (up 9.3 per cent in the quarter to a 12-year high) and wool (up 3.3 per cent, a two-year high).

Aluminium prices also rose, 7.8 per cent to a two-year high, but Infometrics economist Benjamin Patterson said weakness could return as a result of Japan falling back into recession and the yen tumbling.

Excluding dairy products the fall in export prices would have been 0.9 per cent, Statistics New Zealand said.

The fall in import prices would have been greater, and the deterioration in the terms of trade smaller, were it not for a 2.7 per cent rise in oil prices.

There is a lag of about three months between changes in international oil prices and the contract prices used the terms of trade data.

Global prices for crude have hit four-year lows and have fallen more than 25 per cent in kiwi dollar terms over the past five months.

But falling oil prices provide only a partial offset for the slump in international dairy prices. The value of dairy exports is about twice the cost of imported oil and oil products, and the decline in dairy prices so far has been about twice the fall in oil prices.

Bank of New Zealand economist Craig Ebert said most forecasters including the Reserve Bank had long forecast a decline of around 10 per cent in the terms of trade by 2015.

"This still looks to be in the ballpark, even with the surprisingly big hit from dairy prices we've since come to know about." Export volumes fell 0.1 per cent. The weakness was focused in forest product exports, down 5.2 per cent on top of a 7.1 per cent drop in the June quarter.

Meat volumes also fell, by 1.9 per cent seasonally adjusted on top of a 8.1 per cent drop in the June quarter.

Import volumes rose 2.7 per cent but that included a Dreamliner plane.