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Commodity prices up for 9th straight month led by kiwifruit, but NZ dollar strength takes toll

Commodity prices up for 9th straight month led by kiwifruit, but NZ dollar strength takes toll

Commodity prices rose for the ninth straight month in May with the new season kiwifruit crop leading the way the ANZ says, but when translated into New Zealand dollars the bank's commodity price index actually fell.

ANZ said May's 0.3% overall rise in US dollar terms was the slowest increase recorded since last September. Nine commodities recorded a rise in export prices, six commodities recorded a fall and two were unchanged.

"The new season kiwifruit crop recorded the largest increase, with the traditional start of season seeing prices 27% above last year’s season end price," ANZ economist Steve Edwards said. "Compared with the price a year ago kiwifruit prices are 19% higher."

Skin prices rose 4% and skim milk powder, lumber, cheese and sheep meat prices all increased 2%. Log and venison prices increased 1% and seafood prices were up by just a quarter of a percent.

Heading down were apple prices, dropping 7%, beef down 5%, whole milk powder fell 4% , aluminium 3%, and butter 1%. Wool prices recorded their first price fall of the year, slipping a quarter of a percent.

Wood pulp and casein prices were unchanged.

Edwards noted the New Zealand dollar had risen to its highest level (US82.5 cents) against the greenback since floating in 1985 during the month. When averaged month-over-month, he said the value of the NZD-USD exchange rate was 1.3% higher. Although when measured against our largest trading partner, Australia, the value of he NZ dollar only rose 0.1%.

"(However) when translated into NZ dollar prices, the aggregate NZD Commodity Price Index slipped 0.8%, but remains at an elevated level and 12% higher than where it stood a year ago," said Edwards.

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Gareth, can you find out how ANZ weights their commodity index. I am struggling to reconcile the rise in that index with the NZD values for dairy, forestry, horticulture, aluminium etc in your graphs. Meat is way up, but all the others don't look that good.

Colin, does this (from the attached full report) help you?

Commodity Price Index weights are based on contributions to merchandise exports.
Weights for the 2011 year are: Wool 3.3%; Beef 8.8%; Lamb 12.4%; Venison 0.9%;
Skins 2.0%; Dairy 41.6%; Apples 1.5%; Kiwifruit 4.5%; Logs 6.1%; Sawn Timber
4.7%; Wood Pulp 2.8%; Seafood 5.9%; Aluminium 5.5%

Thanks Gareth.

It is a start but I am not sure I know how to decode the statement. My questions:

  • 1. Are the weights fixed on an annual basis as implied? If so when does the 2011 year start/end?
  • 2. Can you confirm the "contributions to merchandise exports" are NZD value based?
  • 3. The index was previously based on spot prices rather than export receipts. Is the index now based on export statistics?
  • 4. What is missing? Where has for instance has wine gone to?
  • 5. Dairy appears to be a very coarse categorisation. Is it supported by detail we can't see? E.g. there is $5 billion NZD worth of WMP alone which really ought to have its own weighting.
  • I will ask them these questions and let you know what they say. Cheers.

    Thanks Gareth.

    I am definitely interested in their response.

    Colin, here are ANZ's answers to your questions:

    1. Yes, they are calendar years
    2. Yes
    3. No
    4. Wine was never there. If we could track down a timeseries for wine prices we would include it.
    5. No, but it is calculated in the background.

    And guess who's making a killing out of commodities? This from The Wall Street Journal:

    "Wall Street is tapping a real gusher in 2011, as heightened volatility and higher prices of oil and other raw materials boost banks' profits.

    A group of 10 large banks—including Goldman Sachs Group Inc., Morgan Stanley, J.P. Morgan Chase & Co., Citigroup Inc., Bank of America Corp. and Barclays PLC—saw their commodities revenues increase by 55% in the first quarter, according to Coalition, a firm that analyzes the performance of investment banks. After a disappointing 2010, commodities was the fastest-growing segment in banks' fixed-income businesses in the first three months of this year..."

    I have come under pressure from those I sometimes provide with analysis of dairy prices to correct misleading information about Fonterra's prices in today's auction. While that risks stirring up this site's trolls the issue does have relevance to my questioning of the accuracy of ANZ's commodity price index.

    This morning Bernard ran a headline that included the statement: "Fonterra auction price up 4.5%". That is factually incorrect.

    Fonterra's own data shows a weighted average price for all products of USD 4,306 per tonne, down from the previous auction at USD 4,443 per tonne.

    There was an all products gDT-TWI that was up 4.5% but it is an index. Why does just about everyone believe dairy commodity prices rose 4.5% today when they actually fell? How did the index rise 4.5% when Fonterra's published weighted average price fell approx 3%?

    To answer that you need to understand what is behind the index. Fonterra's index, while much cleaner than the ANZ's in that its methodology is open and prices are based on real sales and not spot prices, still needs to be treated with caution.

    Fonterra's all products index is based on three products: WMP, SMP and AMF currently weighted 52:40:8. That represents the ratio of world trade for the three products.

    Todays auction sold product in a ratio likely to be 72:9:19 – we can't tell exactly because Fonterra has a three month delay in releasing the precise volumes sold. Volumes on offer today were down from the last auction for SMP and AMF but up for WMP. It is surprising any volume offered was down as at this time of the year we are talking delivery times mostly across peak milk production.

    The volume of WMP offered today is in line with last year's volume – 12,000-12,500 tonnes versus 20,250-21,500 last June (then monthly rather than bimonthly auctions). The USD price today is identical to that 12 months ago, but down USD 840 per tonne from March 1st (contracts 1 and 2 are down 24%, and contract 3 is down 14%). All contracts appear to be converging around USD 3,750 per tonne. NZD:USD at June 2010 was though approx 0.70 compared to 0.80 today so in NZD terms there is an additional 12.5% fall in value from changes in the exchange rate.

    The quantity of WMP offered today was approx 1.2% of NZ's WMP exports over the past 12 months. Across all WMP contracts the price is down 3% from the last auction (contracts 1 and 2 are down approx 6%, contract 3 is nearly flat).

    SMP is however where it gets interesting. Today's average price across all SMP contracts is up 12.9% from the last auction, but against a volume of between 1,450 and 1,750 tonnes compared to June 2010 where volume offered was 9,700-10,000 tonnes. Taking bimonthly auctions into account, today's auction offered less than a third of the volume at the same period last year. Tday's volume offered is less than 0.5% of NZ's SMP exports for the last 12 months. The price though is USD 4,372 compared to 3,067 last June when SMP auction prices were in something of a hole. Today's price is also up USD 900 per tonne from March 1st.

    Todays SMP price reflects a very restricted volume on offer (only making 9% of todays WMP+SMP+AMF volume) but it still made up 40% of the gDT-TWI index. AMF prices were up 6.2% on decreased volume, but those AMF prices were under represented in the gDT-TWI index. WMP made up 72% of today's auction volume but only made up 52% of the index.

    WMP is what matters most (exports for the last 12 months have been 1.068 billion Kg) but WMP prices have suffered a hit that has not been compensated by higher SMP prices because annual SMP export volumes are less than a third of those for WMP, and currently on globalDairyTrade are at less than half of that ratio.

    Beware both indexes and averages, and particularly of press releases spinning either.

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