By BRIAN FALLOW
Export commodity prices plunged 4 per cent last month, reflecting slowing world growth and European dumping of subsidised dairy products.
As in October, when the ANZ Bank's commodity price index fell 2.4 per cent, the falls were widespread. This time, 11 of the 17 commodities the bank monitors fell and only three (aluminium, casein and lamb) rose.
Dairy prices, which make up 31 per cent of the index, fell 10.3 per cent after the European Union's decision to increase export subsidies on milk powders and butter.
"Dairy markets were already quiet and this has had the effect of driving prices down," ANZ chief economist David Drage said.
"The United States has also acted in response to a build-up of skimmed milk powder stocks over the past 18 months."
Getting agreement to phase out export subsidies is a key objective for agricultural exporting countries in the Doha trade round, launched last month.
Beef prices fell in the crucial US market, as consumers cut back on eating out, and US exports to Japan suffered from the outbreak of mad cow disease there.
The fall in world commodity prices was amplified by a slight rise in the New Zealand dollar last month. In New Zealand dollar terms the ANZ index fell 4.8 per cent and is now 4.2 per cent below its level a year ago.
Forecasters expect slower volume growth and lower prices to reduce the contribution agricultural exports make to economic growth in the coming year.
The Reserve Bank's monetary policy statement last month forecast a 10 to 12 per cent drop in export prices over the coming year.
WestpacTrust said that although farm incomes were expected to be lower than last season, they would still be good compared with the 1990s.
The Institute of Economic Research said good spring rain this year was welcome relief for many farmers, particularly those on the east coast of the South Island, who had faced the prospect of drought this summer.
The institute expects agricultural production and export volumes to rise in the year to March 2003, but more slowly than in the past two years.
It expects meat exports, for example, to grow 1.3 per cent, compared with 5.8 per cent last year.
The National Bank in its December Rural Report said history suggested a 10 to 15 per cent fall in world prices for export commodities next year and perhaps into 2003 as the slowdown in New Zealand's trading partners bites. The National Bank forecasts a 3 per cent increase in dairy production and for the farm gate payout to hold steady for this season, before falling next season to witin the $4.10 to $4.60 per kilogram of milksolids range.
But it said weaker commodity prices were not wholly bad for returns: though they would reduce revenues, they would increase the margin on value-added products, which were squeezed last season.
On the outlook for beef the National Bank is "nervous".
The number of market-ready cattle in the United States was increasing to near record levels, it said.
The amount of manufacturing beef produced here is likely to exceed New Zealand's beef quota into the US next year and is not keenly sought after in other markets.
This implied more volatility in cattle prices but tending lower, the National Bank said.
By contrast, the outlook for lamb is positive. The British and European markets remain disrupted by the foot and mouth disease factors, though exports to Europe from some of the British flock are expected to resume soon.
The reduction in the tariff on lamb imports to the United States would help, and on the supply side New Zealand sheep numbers continue their slow and steady decline.
Dumping, slow growth force prices down 4pc
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