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NZ terms of trade soar to 40-year high in 3Q as diary prices rocket

Monday 2nd December 2013

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New Zealand's terms of trade, which measure the quantity of imports the country can buy with a set amount of exports, climbed to its highest level since December 1973 as dairy prices surged in the quarter, while cheaper electrical machinery kept a lid on increases in import prices.

The terms of trade rose 7.5 percent in the three months ended Sept. 30 from the June quarter, the biggest increase in four decades, according to Statistics New Zealand. That was more than twice the 3.1 percent forecast in a Reuters survey of economists.

Export prices rose 8.9 percent in the quarter, the biggest quarterly increase in three years, led by a 24 percent jump in dairy prices with gains in milk powder and butter. Forestry prices climbed 7.9 percent in the quarter, and meat prices gained 6.8 percent.

Import prices snapped four quarters of decline, increasing 1.2 percent, with the main upward contribution coming from a 3.1 percent lift in petrol prices. Imports of electrical machinery, such as televisions, cell phones and DVDs, fell 4.4 percent.

"While the terms of trade may edge a little higher yet, we expect increased global supply to weigh on key commodity prices next year, with softer export prices to lead the terms of trade lower in 2014," Westpac Banking Corp senior economist Anne Boniface said in a note.

Export prices advanced in the quarter, volumes shrank 2.1 percent, with fewer cheese and butter exports driving a 2.7 percent decline in the volume of dairy exports. A 6.7 percent lift in the volume of forestry exports offset the drop. Economists were expecting 1.2 percent growth in export volumes.

Import volumes rose 5.6 percent in the quarter, led by capital goods, which jumped by a third.

Westpac's Boniface said the drought earlier this year weighed on the data, with smaller export volumes, though "an impressive rebound in dairy production this season ... means this weakness will only be temporary."

The service terms of trade rose 1.7 percent as services exports rose 1 percent, while services imports fell 0.7 percent. The gain in services exports was led by transportation and travel services, reflecting high prices for air travel, while the fall in services exports was led by cheaper sea freight.

The New Zealand dollar fell 1.5 percent on a trade-weighted basis in the September quarter, increasing the value of exports while making imports more expensive. The TWI was recently at 76.71, while the New Zealand dollar increased to 81.63 US cents from 81.48 cents immediately before the release.

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