KEY POINTS:
The prospect of lower food prices has been raised after the price of corn, soybeans and wheat plunged in the wake of Wall St turmoil yesterday.
The fall of investment bank Lehman Brothers and fears over the collapse of US insurance company American International Group saw a sell-off
in commodities.
Corn for December fell 5.29 per cent to US$5.3225 a bushel while November soybeans dropped 4.66 per cent to US$11.24 a bushel.
December wheat was down 5.09 per cent to US$6.90 a bushel on the Chicago Board of Trade.
Analysts said the heavy selling pressure on crude oil had spilled over into grain, pulling prices down.
A stronger US dollar also encouraged selling from investors who bought commodities to hedge against inflation and weakness in the US currency.
Overnight Tuesday, crude oil dropped to US$90.51, its lowest since February 8, down from a record high of US$147.27 on July 11.
But by late yesterday it had bounced back up to US$94.65 on the news that the US Federal Reserve had agreed to provide an US$85 billion emergency loan to AIG.
Westpac senior economist Doug Steel said the drop in commodities prices could provide some pockets of relief for New Zealand consumers but the US credit crunch was overall likely to have a negative impact.
"Everything we import will become more expensive. We might be given cheaper petrol on one hand, but on net I don't think it's a good news story."
Steel said demand for commodities had been driven by strong growth in Asia and the emerging economies of Brazil, Russia, India and China.
But an economic downturn in the US was fuelling fears of a slowdown in the emerging markets which would probably lessen the demand for commodities.
Steel said dairy was a case in point - the high price has meant supply has increased from countries that were producing less. More supply to meet demand has seen prices fall off.
"We have certainly seen dairy prices have come well off their highs now. For the farmers at home, I think that's where the New Zealand dollar macroeconomic set-up comes into its own.
"We have a flexible dollar which acts as a shock absorber both on the way up and the way down."
Steel said the price across dairy commodities was down 27 per cent since its peak in November last year.
On its own that would normally mean a reduction in the price paid to farmers per kilo of milk solids. But the fall in the New Zealand dollar has largely off-set the commodity price fall.
"That has also been mirrored in the case of petrol," Steel said.
But overall the fall in food commodity prices was unlikely to be a gain for New Zealand.
"We are a food exporter so with world food prices falling that is unequivocally bad for the country."
- Additional reporting: agencies
