Surging export returns offer hope

Wool prices have doubled in the past year. Photo / Paul Estcourt

Export commodity prices hit new highs last month, raising the prospect of a substantial boost to the wider economy when farmers feel confident enough to put their chequebooks in their pockets and go to town.

The ANZ Commodity Price Index jumped 4.7 per cent in world price terms, to be 29.6 per cent up on a year ago.

The increase was broad-based. For the first time in 17 years, none of the 17 commodities the index tracked fell, said ANZ economist Steve Edwards.

A softer exchange rate amplified the gains, with the index climbing 8.1 per cent from February in NZ dollar terms, to be 24.2 per cent higher than a year ago and 37.7 per cent up on the most recent low in February 2009.

Wool prices have doubled in the past year with 12 per cent of the increase occurring in March.

Beef prices rose 3 per cent. The meat, skins and wool sub-index is at a record high, 46 per cent higher than a year ago.

Despite an 8 per cent decline in prices at Fonterra's March 15 auction, the ANZ index recorded a 12 per cent rise in whole milk powder prices for the whole month, and a 7 per cent rise for skim milk powder.

The dairy sub-index is at its highest since early 2008 and has only ever been exceeded in the second half of 2007.

Edwards said increased rural incomes would inevitably filter through the economy.

So far a focus on reducing farm debt had curtailed the benefit to the broader economy.

"This will not continue indefinitely. It is only a matter of time before this rejuvenation spills over into other pockets of the economy," he said.

But the Treasury warned yesterday that it was uncertain how long the run-up in export commodity prices would continue. Periods of sharply rising prices are typically followed by sharp falls.

"In the dairy market there are signs that prices may be close to their peak."

The volatility in commodity markets in the weeks following the earthquake and tsunami in Japan may have been a factor in the decline in prices at Fonterra's March 15 auction; the fall may also have been signalling that a rebalancing in the dairy market was under way, the Treasury said.

"Supply is increasing in the United States and Europe and dairy futures prices in the NZX market have fallen."

Fonterra itself has warned of some sort of correction.

"Still, there's no denying the overall strength in New Zealand's commodity export prices," BNZ economist Craig Ebert said.

"All up, it's a massive amount of income, much of which, in combination with a recovery in production after the late-2010 drought, is yet to really show up in the economy cash-wise let alone spending-wise."

Ebert pointed to the rural component of last week's National Bank business confidence survey. The agricultural sector's profit outlook was the strongest since the late 1990s - a time of very strong economic growth.

The terms of trade, which reflects the changing quantity of imports that can be funded by a fixed quantity of the country's exports, is at its highest level for 37 years.

As a net oil importer, higher oil prices arising from upheavals in the Middle East might be expected to reduce the terms of trade.

But the Treasury said higher oil prices would lead to higher food prices as oil and related products such as fertiliser were used in agricultural production.

"Higher oil prices might also lead to increased demand for grains for ethanol production, raising agricultural commodity prices generally.

"Depending on the relative price changes, this effect could be positive for New Zealand as the increase in agricultural commodity prices could outweigh the rise in oil prices in our terms of trade."