Exporters face win-win situation

A weakening New Zealand dollar is set to take over from climbing world prices as the main driver of higher incomes for commodity exporters, ANZ Bank has said.

The bank's world commodity price index rose another 1 per cent last month, to be 14 per cent up on a year ago.

But three-quarters of the gain in world prices over the past year have been swallowed up by a higher exchange rate. In New Zealand dollar terms, the index is up 3.6 per cent on March last year.

World prices for lamb are at 19-year highs, dairy products at nine-year highs and aluminium at 10-year highs.

The bank's chief economist, John McDermott, said some of the recent strength in commodity prices represented a structural shift. For a century, agricultural prices had declined in value relative to manufactured goods but, during the past 10 years, that trend had been arrested.

Manufactured goods were the new commodities, reflecting overcapacity and the rise of China, while rising living standards lifted demand for the foods of affluence.
But, McDermott said, some of the recent strength in commodity prices was cyclical and could not last forever. "One would have to be cautious about where they go from here."

For the time being, however, the fundamentals of supply and demand looked favourable for most commodities, so world prices could remain high for some time.

"Asia has got a bit of a second wind and the United States seems to have got out of its soft patch."

But even when world prices fall, the ANZ expects commodity prices to keep rising in NZ dollar terms because of a weaker exchange rate.

The dollar has dropped nearly US4c from its peak in mid-March. ANZ believes the currency has peaked for this cycle and could fall another US10c, or 14 per cent, by the end of the year.

Its recent decline reflects the market taking on board the fact that the difference between New Zealand and world interest rates and economic growth is narrowing.

In addition, McDermott said, the state of the country's external accounts was now on investors' radar screens.

Overall, eight commodities rose last month, four recorded no change and only one, pelts, fell.

Dairy prices were unchanged but are still 20.9 per cent up on a year ago and at the highest level since January 1996. ANZ said a tight supply/demand balance favoured exporters and there was little in the way of stocks overhanging the market.

Lamb prices gained another 0.5 per cent last month to a new record in the 19-year history of the index.

For the second month in a row, beef prices rose.

Log prices were up 5.2 per cent, sawn timber 1.2 per cent and pulp 0.9 per cent. But the sector is still suffering from the strong dollar and high shipping rates and, despite gains over the past three months, prices remain below their levels a year ago.

Aluminium prices rose 5.1 per cent last month to be nearly 20 per cent up on a year ago.