Terms of trade fall 4.4% in third quarter, retreating from 40-year high

New Zealand's merchandise terms of trade fell in the third quarter, retreating from a 40-year high as prices of exported dairy and forest products fell faster than import prices.

The terms of trade, which measure the quantity of imports the country can buy with a set amount of exports, fell 4.4 percent in the three months ended Sept. 30, having edged up 0.1 percent in the second quarter to the highest since September 1973, according to Statistics New Zealand. Prices of exported goods fell 4.5 percent, while imports slipped 0.1 percent. (See graph below)

Dairy products chalked up the biggest decline, falling 11 percent and making the biggest overall contribution to the weakening terms of trade. Excluding dairy, exports prices fell 0.9 percent. Dairy prices are now 15 percent below their peak in the first quarter and 19 percent below the all-time high in the December 2008 quarter. Economists are expecting Fonterra Cooperative Group to respond to the slide by cutting its milk payout forecast at its board meeting this month.

Prices of forest product exports fell 3.9 percent in the third quarter, which the government statistician said reflected lower prices for pine logs as international demand decreased and stocks built up in China. In the first quarter of 2014, the wood price index was the highest in a decade.

Meat export prices rose 4.3 percent in the latest quarter, driven by a 9.3 percent increase for beef to the highest level since the first quarter of 2002. Lamb prices rose 1.1 percent to be within 15 percent of their all-time high in the final quarter of 2011.

The decline in imported goods prices was driven by a 5.4 percent fall for electrical machinery such as cell phones, television sets, and digital cameras, while petrol and petroleum product rose 2.7 percent, reflecting higher crude oil prices. Excluding fuels, import prices were down 0.6 percent.

The services terms of trade rose 0.5 percent in the third quarter, as services exports rose 0.6 percent and services imports rose 0.1 percent.

Third quarter adjusted export volumes fell 0.1 percent, while import volumes rose 2.7 percent on the same basis, led by capital goods such as aircraft.

(BusinessDesk)