Friday, July 8, 2022

Dip in commodity prices hit economy

Two sets of statistics released as the new year approached showed the impact of lower commodity prices earlier in 2012 – most notably, lower dairy prices – on the country’s economy.

At the Treasury in Wellington, at much the same time, analysts were expecting the economy generally to have recovered slightly in the December quarter and to be on course for a further pick-up this year, although they said the economic outlook remained weak.

Higher commodity prices were among their considerations.

The dip in commodity prices last year was reflected in a $423 million fall in the value of exported goods to $3.5 billion in October, compared with October 2011. Almost half that decline resulted from the falling value of dairy exports, despite an increase in dairy quantities.

The country’s terms of trade were the second set of data affected by lower commodity prices, recording their fifth consecutive decline – down 3.2% this time – in the September quarter. A 13% decline in dairy prices was a major contributor.

But what dairying was losing on the value swing, it was gaining on the volume roundabout.

Export volumes surged 9.7% during the quarter, driven largely by a 32.3% increase in dairy volumes, along with double-digit increases for meat and wool. The surge was helped by the clearing of stocks that had built up during the bumper 2011/12 dairy season.

Westpac economists were among those who were optimistic about dairy incomes, pointing out that export commodity prices, particularly dairy prices, had lifted since mid-year. With Chinese growth improving and import prices remaining weak, they expected the terms of trade to have improved from the December quarter onward.

The lag in producing terms of trade statistics means what actually happened in the final quarter of 2012 won’t be clear until March 1, when the next set of data is published.


ANZ economists shared Westpac’s optimism when they published their latest ANZ Commodity Price Index early in December.

“The increase in NZD commodity prices is an encouraging development, and if sustained looks set to contribute to a lift in the goods terms of trade over 2013,” they said.

The index was up 1% in November, its fourth consecutive monthly rise, to a level 6% above its July low.

The price of whole milk powder (WMP) posted its fifth successive monthly rise to reach an eight-month high. Cheese prices also touched an eight-month high.

WMP prices lifted 2% and cheese and casein prices rose less than 1%. Skim milk powder (SMP) recorded a decline and the price of butter was unchanged during the month.

But the world price index for dairy products was 6% below its level in November the previous year, and the corrosive impact of the exchange rate dragged the NZ price index 11.5% lower than 2011. The ANZ NZD commodity price index is 5% higher than the recent trough three months ago, but remains 22% below the all-time peak recorded in March 2011.

Economists keen to see if their optimism was justified were keeping a close eye on the early-December GlobalDairyTrade (GDT) auction for further signs of improvement. Those expecting a further rise were disappointed.

Dairy prices “took a breather”, Westpac’s economists said after the price fell 2% on a trade-weighted basis. But that was the first fall since the October 2 auction and overall dairy prices were 27% higher than in May.

October merchandise statistics, to translate milk prices into export revenue, available in early December showed the trade balance for that month was a deficit of $718m (21% of exports), substantially greater than the $226m deficit (5.8% of exports) in October 2011. Merchandise exports were valued at $3.5b, down $423m (11%) from October 2011.


Milk powder, butter, and cheese values had the largest decrease among the commodity groups, down $205m (20%), although quantities were up 5.9%. WMP receipts were down $140m (31%) and butter was down $59m (27%).

Milk powder, butter, and cheese collectively were 6% lower than their recent high of November 2011, but 6.1% above their most recent low point of April 2012.  The fresh set of terms of trade data showed export prices for goods fell 6.3% in the September quarter, while import prices fell 3.3%. This meant 3.2% fewer merchandise imports could be funded by a fixed quantity of merchandise exports than in the June quarter.

The terms of trade have fallen 9.7% from a recent high in the June 2011 quarter to their lowest level since the December 2009 quarter. Dairy prices (down 13%) made the most significant downward contribution to the change in export prices in the September 2012 quarter. This was the fifth consecutive quarterly fall for dairy prices, influenced by a 14% decline in milk powder prices and a 17% decline in butter prices.

In the year to September, dairy prices decreased 21%, compared with a 4.2% decrease in the year to the September 2011 quarter.

Again, volumes told a different story. Seasonally adjusted export volumes rose 9.7% in the September quarter and the trend for export volumes was at high levels. Dairy products, up 32%, led the increase.

Milk powder volumes were up 54% but cheese, which is not seasonally adjusted, fell 8.3%.

The trend for dairy products nevertheless reached a new high, a heartening 49% higher than the most recent low point in the June 2010 quarter.

The terms of trade figures hadn’t reached the Treasury when it was preparing its monthly analysis of November economic statistics. Nor had the early-December GDT result. But officials had plenty of evidence of a general fallback in economic growth in the September quarter, although they regarded this as temporary, because activity indicators had bounced back in October and November.

Among the reasons were rebounding commodity prices and a ramp-up in Canterbury rebuild activity.

The Treasury said there was a continued rise in the ANZ commodity price index, with dairy prices leading the way, and the GDT index was up 2.4% in November.

“These results point to a rise in export prices, which will boost the terms of trade from the March 2013 quarter and raise farm incomes over 2013,” the Treasury said.

Internationally, officials took comfort from the continuing build-up of momentum in China’s economy. The first part of China’s leadership transition that took place during in November was not expected to greatly change the country’s economic policy in the near term, but the way might be open for further economic and social reforms in the medium term, they said.

More sobering was the Organisation for Economic Co-operation and Development’s latest World Economic Outlook, which cut its world growth forecast for 2012 from 3.4% to 2.9% and 2013 forecast from 4.2% to 3.4%. The most notable cuts forecast for the year ahead, from New Zealand’s exporting perspective, were for the United States (2% growth, down from 2.6%) and China (down from 9.3% to 8.5%).  

The Treasury report was published about the same time as ANZ economists were releasing a report on the modernisation of China’s food industry and the opportunities this was opening for NZ’s agriculture industry.

The ANZ team said China’s food and beverage sector was now estimated to be the largest in the world, having recently surpassed the US, and increased market sophistication was being added. China was self-sufficient in a number of strategic food sources, providing the country with food security and social stability.

“Where we now see the gap in the debate and analysis is on the end consumer, channels to market and specific food categories,” ANZ chief economist Cameron Bagrie said. 


“Such analysis is critical to boost understanding and to ensure we target specific consumers, food categories, and the corresponding consumer channel that offers the highest margins and least risk.”

The trends adding increased market sophistication across China included rising disposable incomes, urbanisation, brand exposure, consumer affluence, food safety concerns, health consciousness, demand for convenience, improved infrastructure, and development of the retail industry.

NZ’s slice of the pie was in accessing the wealthiest 30% of urban households.

“Their incomes have reached such a level that overall consumption intake has stabilised, but they spend as much as five times more than those in the lowest-income brackets on NZ-oriented products, such as dairy, seafood and meat,” Bagrie said.

While much of the spending reflected higher per-unit spending in the search for quality because of food safety concerns, processed and packaged products were increasingly being bought.

The Americans have their eyes on China – and other NZ markets – too. Dermot Carey, vice-president of the ingredients division at Seattle-based Darigold, addressing the annual meeting of the Washington State Dairy Products Commission in November, said the US export market had expanded to 11-12% of global dairy trade, taking market share away from NZ and Europe, and it had to keep doing that to continue growing.

South-east Asia, China, the Middle East and northern Africa would remain growth areas, but US exporters would have to cater for what the country’s processors wanted, he said. For example, China preferred to make its own yogurt and cheese but needed and wanted US powdered milk, while Southeast Asia was building new dairy plants but there was not enough local milk to keep production going.

The US overproduces powdered milk by 50% but increased exports reduces the industry’s dependence on sales to the US government.

Scottish food and drink chiefs have an eye on China too. They met large Chinese importers in November to discuss possible exports of Scottish dairy products to the growing economy. The trade mission focussed on items such as UHT milk, cheese and butter. They are also aware of the huge and growing market for imported baby formula.

Scottish dairy goods are not sold in China but its food and drink exports there increased 44% in 2011.

More articles on this topic