The ANZ Commodity Price Index rose 7.4% in March, led by whole milk powder, pelt, butter and skim milk powder prices, in its third strongest monthly rise ever.
ANZ economist Steve Edwards said the index, at 296.1, was now just 6% below its all time high, which was recorded in April 2011.
The only two months when the index has risen by more are November 2009 and April 1986 when it posted 11.13% and 8.84% increases, respectively.
"Underpinning the latest lift was a strong jump in dairy and pelt prices," says Edwards.
"Ten of the 17 commodities that we include in the ANZ Commodity Price Index increased in the month of March, five commodity prices were unchanged from a month earlier and two commodity prices eased from February."
Four commodities posted double-digit price increases in March. These were whole milk powder prices, which rose 23% month-on-month, pelt prices, which rose 16%, butter prices, which rose 15%, and skim milk powder prices, which rose 11%.
Elsewhere cheese prices increased 5%, wool prices gained 3%, log prices rose 2%, and lumber, casein and beef prices all rose 1%.
In contrast to the increases, aluminium prices fell 7% and lamb prices dropped 1%. The price of seafood, wood pulp, kiwifruit, apples and venison were all unchanged in March.
"The New Zealand dollar eased in value against the United States and Australian dollars, but appreciated against other bilateral NZ dollar Trade Weighted Index pairs. The net effect was a small drop in the NZ dollar trade-weighted exchange rate, with the ANZ NZ Dollar Commodity Price Index rising 8.7% in March. Despite this, the level of the NZ dollar index is 16% below its March 2011 peak," Edwards says.
The main index is measured in US dollars. The main index was up 3.9% year-on-year, with the NZ dollar index, at 193.4 in March, up 2.4%.
Westpac economist Nathan Penny notes the local drought, combined with strong Chinese demand, pushed up world dairy prices during March.
"We expect further price gains in world terms over the first half of 2013, as drought continues to squeeze New Zealand's dairy supply and Chinese demand for food, and dairy products in particular, remains strong. However, a high NZ dollar over the remainder of 2013 is expected to temper some of these gains," says Penny.
"Last week we estimated that the total hit to the economy from the drought, including the flow-on effects, would be worth around 0.6% of annual GDP. However, the latest report from Fonterra suggests the risks are leaning towards a smaller hit. In its half-year update, Fonterra revised up its total payout forecast for the 2012/13 season by 30 cents to NZ$6.25-6.30/kg, including retentions (the milk price component was revised from $5.50/kg to $5.80)," adds Penny.
"World dairy prices have shot higher in the last couple of months, as the drought has squeezed milk production in New Zealand. Fonterra also estimates that full-season production will be unchanged from last season, where it was 6% ahead up until January."
(Update adds chart, comments from Westpac economist Nathan Penny).