Terms of trade index hits 37 year high

Overall, export prices rose 0.4 per cent. Photo / File photo

It got easier for New Zealand to earn its living as a trading nation in the December 2010 quarter, as the terms of trade rose to a 37-year high.

The terms of trade reflect shifts in export and import prices and measure the changing volume of imports that can be funded from a fixed volume of exports.

The index rose 0.6 per cent in the quarter, the weakest increase for a year but enough to push it to its highest since March 1974 and 12.2 per cent above where it was a year earlier.

Export meat prices rose 5.1 per cent in the quarter, or 14.2 per cent for the year.

Wool prices jumped 23 per cent in the quarter, or 34 per cent for the year, pushing them to a nine-year high.

Dairy prices, however, fell 8.8 per cent though they were still 37 per cent up on a year earlier.

Overall, export prices rose 0.4 per cent despite a 1.4 per cent rise in the trade-weighted exchange rate.

Import prices fell 0.4 per cent overall, even with a 4.7 per cent rise in oil prices.

The news was also generally good on the volumes front.

Export volumes rose 4.5 per cent from the September quarter in seasonally adjusted terms, to be at their highest since comparable statistics began 20 years ago.

The December quarter's dip in dairy prices was offset by a 9 per cent rise in volumes to the second-highest level on record. Export volumes for meat and forest products also rose, by 15 and 11 per cent respectively, from September levels.

But manufactured exports fell 3.6 per cent in the quarter.

Westpac economist Anne Boniface said many exporting manufacturers were doing it tough, battling a high exchange rate with the US dollar without the benefit of increasing world prices.

On the import side, imports of non-transport capital goods held on to most of the rebound which occurred in the September quarter after a two-year slump.

Goldman Sachs economist Philip Borkin said at this stage the high terms of trade were not having the same positive impact as in the past or now in Australia.

The direct beneficiaries, farmers, were applying their improved incomes to retire, and service, debt.

Boniface said while that focus on debt reduction had limited the extent of the "trickle down" from farm incomes to the wider economy, that effect could only remain dominant for so long and farmer spending was expected to rise this year.

COMMODITY PRICES SOAR
Export commodity prices continued to climb last month, reaching record highs even when converted into New Zealand dollars.

ANZ's commodity price index rose 2.7 per cent in world price terms to be 26 per cent higher than it was a year ago.

The increase was broad-based, with 13 of the 17 commodities in the index rising and only two (beef and logs) falling 1 per cent.

In New Zealand dollar terms the index is up 2.9 per cent on January and 15 per cent on a year ago.

Skins recorded the strongest rise last month, surging 13 per cent to a new high.

Milk powder, sawn timber and venison all lifted 5 per cent, sheepmeat 4 per cent and aluminium and butter 3 per cent.

Rising food prices siphoned money out of consumers' pockets, ANZ economist Steve Edwards said.

"However, in aggregate the economy is still better off and it is simply a question of time before the income boost from higher commodity prices diffuses into the broader economy. Recent seismic events reinforce the importance of strong commodity prices as a crutch of support to the economy."