Export returns bring trading terms back on track

Even though dairy prices rose 6.8 per cent, they are still 22 per cent off their highs of two years ago. Photo / APN

It got a little easier for New Zealand to earn its living as a trading nation over the first three months of the year, with the terms of trade rising 4.1 per cent as export prices rose and import prices fell.

The terms of trade measure the purchasing power of exported goods; the latest increase means 4.1 per cent more imports could be funded by a fixed quantity of exports than in the December 2012 quarter.

It follows six quarters in which the terms of trade fell, but that was from a 37-year high in June 2011. The terms of trade are now back to within 7 per cent of that high.

Export prices rose 1.9 per cent, despite a higher dollar.

Dairy prices, which rose 6.8 per cent, were the biggest contributor, but they are still 22 per cent off their highs of two years ago.

"We expect further increases over the coming year given the surge in global dairy prices over March and April," ASB economist Christina Leung said.

Dairy export volumes rose 2.2 per cent but that followed a 13 per cent fall in the previous quarter.

It was the opposite story for meat. Volumes shipped rose 5.3 per cent, seasonally adjusted, but prices were 3.1 per cent lower.

"This largely reflected New Zealand farmers bringing forward livestock slaughter in the face of increasingly dry weather conditions," Leung said.

Forest product prices rose 2.4 per cent, a break from four consecutive quarters of decline, amplifying a 0.5 per cent increase in volumes.

Import prices fell 2.1 per cent.

"The decline was broad-based and significantly influenced by the higher exchange rate [up 2.3 per cent]," said Deutsche Bank chief economist Darren Gibbs. "We expect to see a further solid increase in the terms of trade over the next two quarters, followed by a period of weakness as dairy product prices recede a little further from recent supply-constrained highs."

The Treasury, in its Budget forecasts, expects the terms of trade to surpass their June 2011 peak by late 2013. It expects strengthening global demand for New Zealand's commodity exports to support prices at or near historical highs, while import prices also rise, but more slowly than export prices.