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Terms of trade improve strongly in Q2 2011 to 37 year high

Terms of trade improve strongly in Q2 2011 to 37 year high

By David Chaston and Bernard Hickey

Dairy export prices helped lift the terms of trade to a 37-year high in the June 2011 quarter, Statistics New Zealand said today.

But economists said the best terms of trade since 1974 had yet to flow through to improved economic growth because farmers were deleveraging. Also, commodity prices had fallen since the end of the June quarter by around 12% in New Zealand dollar terms. See more here in ANZ Commodity Price index article.

The terms of trade rose 2.3%, meaning 2.3% more imported goods could be funded by a fixed quantity of exported goods than in the March 2011 quarter.

The latest rise was due to export prices rising and import prices falling.

In the June 2011 quarter, prices for exported goods rose 1.8%, reflecting price increases for:

- dairy (up 4.5%)
- petroleum and petroleum products (up 12.8%)
- meat (up 2.9%)
- wool (up 12.2%).

In the year to the June 2011 quarter, wool prices increased 58.3% to reach their highest level since the December 1989 quarter. The latest annual increase is the largest since the December 1976 quarter.

Prices for imported goods fell 0.5% in the June 2011 quarter. The most significant downward contributions came from mechanical machinery, electrical machinery, transport equipment, and food and beverages.

Excluding petroleum and petroleum products, import prices fell 1.4% in the June 2011 quarter.

Seasonally adjusted export volumes rose 0.5% in the June 2011 quarter, and are at their highest level since the series began in the June 1990 quarter. Total export volumes have remained at a high level over the last three quarters. Non-food manufactures were the major contributor to the overall rise in export volumes, while dairy had the largest offsetting contribution.

Seasonally adjusted import volumes fell 2.4% in the June 2011 quarter, the first fall since the June 2009 quarter. Capital goods and motor spirit were the main contributors to the decrease in total imports in the June 2011 quarter. A rise in intermediate goods partly offset these falls.

The price and volume indexes for exports and imports are compiled mainly from overseas merchandise trade data.


ASB Economist Jane Turner said the strength in export prices showed much of the export-led recovery over the past year had largely been in prices and incomes rather than increased production.

"However, ongoing caution in the rural sector has seen much of the increased revenue saved, rather spent, muting the stimulatory impact of higher export prices on the rest of New Zealand," Turner said.

Helen Kevans from JP Morgan said "We expect that the resulting boost to national income will give a further lift to growth throughout 2H11, but the multiplier effects from the income boost likely will still be limited to some extent."

"Some farmers continue to use the windfall from the higher terms of trade to reduce debt, which has so far delayed the full pass-through of higher farm incomes to broader economic activity."

"We believe, though, that the focus on balance sheet repair will soon abate, particularly given recent signs of stabilization in the rural property market. Indeed, the sheer size of the income boost, and its positive impact on farm revenues and cash flows, should mean that more of the income injection starts to filter through to the broader economy."

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Helen Kevans is a bit confused.  It's our current account (not our terms of trade) that tells us whether or not our national income is "being boosted" and in that regard we've pretty much got a structural deficit predicted to get worse in the coming years.

In saying Helen is confused, your assessment is very kind.

What??? We’re doing better? Impossible. Why so many of the learned members who post comments to this site have told us repeatably that we stand on the very edge of the event horizon inexorably drawn into the inescapable abyss of pitiless and endless doom.

How can this be?

How can this be?

It isn't - except in the delusions of bank economists and politicians.

Agricultural debt is still growing despite farming having had the best season in generations (thanks partly to the commodities bubble). Horticulture is a big employer, but the Kiwifruit industry is in dire straits and apples and grapes are being pulled out because costs are too high for them to be profitable.

Then add in China cutting back imports of milk powders. Never mind, Algeria - long the export destination of last resort - is picking up the slack.

A lot has changed since the period April to June.

If the NZ$ rose while other things remained equal, prices of imports would fall and values of exports would also fall. But we have a large current account deficit, i.e., we import more than we export, so we should be better off on balance.

ie suppose we export $5b and import $10b. The dollar rises 10%. Now our imports cost only $9b and our exports fetch $4.5b so we are $0.5b better off... is that right?

To say any more you'd need to know the relative elasticities of imports and exports but no commentator gets into that. 


Do you plan on paying back the $4.5b at anytime? If so then what with?

Unfortunately some of the exporters who just lost $.5m now have to close up shop as they are making a loss so we aren't better off, we've just lost businesses and jobs.  The importers are very happy with all their cheap chinese products though!

Yay!!!!!! we are richerrrrrrrr.....

ah, eh, what's that? "what about relative to domestic and global inflation?"

oh sh*%$#@$$$@@it




About 6 months ago I attended a beakfast with ANZ's Cameron Bagrie the speaker. Pretty much what he stated is playing out.  The global scene is a mess, outside of Asia, but NZ's trade is good with the Asian desire for our agricultural exports, timber etc. He commented that farmers will start gettting their cheque books out in 2012 as there are some fundamental things that never change, such as farmer's not liking the tax bills they will get and the need to balance that with business expenses.  And as the money from eartquake reinsurers gets progresively put back into the community in 2012, and (here's the hope) the feel-good factor from a sucessful RWC, plus interest rates staying historically low , NZ is going to be in a good space

"However, like all housing bubbles it was only a matter of time before the debt-fuelled party turned into one giant hangover. And with the national economy taking a turn for the worse (it was ) destined to follow in its wake. After all, it is a tourist-based economy whereby around employed in leisure and hospitaliy." Now that's Las Vegas in the article, where the real property prices have fallen to levels not seen since the....early 70's ! But there are a few parallels in their for us. 

NZ mortgage holders have still got jobs to pay their mortgages.

The property price falls will not happen until int rates or unemployment goes up.

In the meantime the vendors will stubbingly hold out for ridiculous prices for their crappy houses or just sit thinking all will be ok.

NA, you still trotting out your mantra, agree with Muzza that things are going along ok in this neck of the woods and Suffed is right in some respects to indicate there is no reason why the house prices will collapse