Data Flash (New Zealand) ANZ Commodity Price Index - April 2002
Comment
This month's decline in NZD denominated commodity export prices was in line with our expectations. Going forward,
although we think that world prices for New Zealand's exports are close to bottoming, the recent appreciation of the
NZD, combined with our forecast of further appreciation over the year ahead, means that we look for a slightly deeper
dip in NZD denominated export prices than forecast by the RBNZ in its March Monetary Policy Statement. Moreover there is
some risk that some commodities whose prices have so far remained firm - in particular meat - begin to fall over coming
months as supply conditions ease.
Strong growth in farm commodity prices has played a key role in underpinning growth in domestic demand in the last 12
months, despite a difficult global environment. This week's announcement by Fonterra Cooperative Group that it has cut
its forecast payout for the 2002/03 season to $4.00 per kilo of milk solids compared with $5.30 this season will remove
around $1.3bn of income from the farm sector. Thus, not only will the farm sector not make a strongly positive
contribution to growth in domestic demand over the next year or so - there is a good chance that farm sector makes a
negative contribution to growth. As argued in the past, we think that the size of reduction is likely to come as a
surprise to farmers. Fortunately, we expect the gap to be filled by strengthening demand elsewhere, especially in the
construction sector, driven in part by strong migrant flows. For this reason, we support a gradual reduction in monetary
stimulus. However, at this stage, we think that a more aggressive tightening would be unwise. We continue to expect that
the RBNZ will raise the OCR by 25bps to 5.50% at its next OCR review on 15 May.
Key Points
The average foreign currency price of New Zealand's commodity exports rose by 0.2% mom in April. The average price was
8.8% below last year's level.
In foreign currency terms, dairy product prices fell by a further 1.9% mom to be 28.2% lower than a year earlier. A
12.6% mom rise in the timber prices and a 1.6% mom rise beef prices helped to offset this fall.
Reflecting the appreciation of the NZD during April, the NZD price index fell 2.0% mom to be 16.6% weaker than a year
earlier.
Darren Gibbs, Senior Economist, New Zealand