Costs up, prices received down as NZ producers face squeeze at both ends

Tuesday 16th February 2010

New Zealand producers faced a double squeeze in the fourth quarter of last year as input prices rose while what they received fell, a sign that there is little room to pass on cost increases in a weak economy.

Statistics New Zealand released its Producers Price Index for the December 2009 quarter, tracking the prices paid and received by farms, factories and other producers for their businesses. Overall, compared to the third quarter to September 2009 the PPI outputs index fell 0.4%, while its inputs component rose 0.3%. The index mirrors economic recession financial figures being reported by the productive sector.

“Overall, the PPI results are always fairly difficult to link directly to inflationary prospects and, hence, monetary policy,” said UBS New Zealand senior economist Robin Clements. “However, to the extent that the overall PPI increases were subdued, and indicative of margin pressures, the Reserve Bank would be comfortable that there aren’t any immediate widespread inflationary concerns in the pipeline.”

Clements said there is nothing in the PPI that would alter the Reserve Bank’s expectation to begin raising its official cash rate around mid-year.

Across the 2009 year, the outputs index fell 3.8%, the largest annual fall since the series began in December 1977. In 2008 and 2007 the outputs price index rose 9.9% and 4.0% respectively. Output prices are now at about the same level as they were in the June 2008 quarter.

The input price index increase of 0.3% in the December quarter follows a 1.1% fall in the September 2009 quarter, with no change in the June quarter.

The most notable drop was in the meat and meat products manufacturing sector which had an 8.5% fall in output prices. For the full year to December, the drop in prices received was 12.5%, the largest annual fall since the index series begun in June 1994. This output fall compares to increases of 18.7% and 3.9% in the December 2008 and December 2007 years respectively.

Meat and meat products input prices fell 11.1% to the December quarter, driven mainly by lower prices for sheep and cattle livestock.

Dairying’s figures were both positive within the index however. Output prices for dairy cattle farming (milk manufacturing) increased 17.8%, while its input prices increased 15.2% driven by higher farm-gate milk prices.

Another significant contribution to the rise in the inputs index was from a 6.7% rise in the electricity generation and supply index, the price paid by power companies. This followed an 8.2% fall in the September 2009 quarter and a 10.4% rise in the June quarter. Market conditions contributed to the rise, with higher prices for natural gas electricity generation also cited.

Businesswire.co.nz

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