KEY POINTS:
Earnings from New Zealand's main export products have had their biggest drop in 20 years because of the world economic crisis.
The ANZ Commodity Price Index shows the price of our commodities - except for apples - fell a combined 7.4 per cent in December.
It is the fifth successive monthly fall, and the index is now down 27 per cent from its peak in July last year.
The latest fall is the biggest monthly drop since the index began in 1986.
Dairy and wool prices fell more than 12 per cent in December, aluminium prices dropped 20 per cent to a five-year low and log prices were down 4.4 per cent.
ANZ economist Steve Edwards said the fall was broad-based and "a reflection of how the global environment has deteriorated".
The dairy industry accounted for 27 per cent of national exports in the year to May - 25 per cent was from the giant farmers' co-operative Fonterra - and distributed $9.1 billion to farmers last season.
The prices of other agricultural commodities have fallen by similar amounts.
Barley, maize, soybean meal and wheat have fallen between 35 per cent and 55 per cent since peaking six months ago.
Former Federated Farmers chairman Charlie Pedersen last night said he was gritting his teeth at the prospect of falling commodity earnings.
He told the Herald that although primary producers would be first to be hit by falling prices, the effects would soon be felt in town as farmers cut back on their spending.
"When farmers stop spending, it has an incredibly negative effect on the economy, and will flow right through."
Every dollar a farmer spent would create up to $7 by the time it had gone through the economy, he said.
Mr Pedersen said that when people expected the worst from the economy, it became a "self-fulfilling prophecy".
"When I, as a farmer, stop buying fertiliser and fencing supplies, I immediately affect someone else's livelihood."
Fonterra chairman Henry van der Heyden last month warned that the continuing fall in commodity prices, fluctuations in the New Zealand dollar, and the worsening effects of the global financial crisis meant a cut in the co-operative's forecast payout to farmers of $6 a kilo of milksolids was increasingly likely.
Federated Farmers Dairy spokesman Lachlan McKenzie said the auction system was adding to uncertainty, and an independent review was needed.
"Farmers look at the near vertical drop in [whole milk powder] prices since July with the new auction system," he said.
"They then have to brace themselves for an almost certain cut in the forecast milksolids payout this month."
Mr Edwards said that although the dairy price had fallen a long way, it was still quite high relative to the last 15-or-so years.
"And that's also effective for the commodity price in general."
GOING DOWN
Dairy -12%
Wool -12%
Aluminium -20%
Logs -4.4%
Seafood -2.4%
Lamb -2.4%
Venison -1.4%
Beef -1.4%
TOTAL -7.4%
