Soft prices, reliance on China

Milk Powder being bagged at Te Rapa 3 2

NO CONTEST: New Zealand milk powder exports to China as a single category are $1 billion larger than the numbers two and three categories, crude oil to Australia and logs to China.

Record soft world commodity prices have been highlighted in the latest ANZ Bank monthly report, along with the growing dominance of China as an export customer.

In the year to September China took 24% of primary sector exports, with more than 90% of its New Zealand imports coming from the primary sector.

The largest export category for a single country was milk powder to China, worth $2.6 billion, one third of the $7.7b of primary merchandise it imported from NZ.

Four of 10 containers of milk powder that leave our shores are bound for China, as well as 70% of export logs.

China took another $500 million of NZ dairy products, giving that country 25% of NZ’s dairy exports.

China also bought 15% of NZ’s export meat, including 23% of sheep meat.

It is the destination of half of NZ’s wool exports and just less than half of raw hides.

NZ's dependence on the primary sector for export earnings shows no signs of diminishing while world prices are so good.

Total merchandise exports in the year to September were worth $46b, of which the primary sector accounted for 68%.

ANZ economist Steve Edwards said the proportion had dropped to 61% during the commodities boom in 2007-08 but had risen again recently.

In the trade statistics there are 13 categories with export earnings of more than $1b annually, led by milk powder with $7b.

Ten of the 13 are primary sector – milk powder, sheep meat, logs, beef, butter, crude oil, cheese, wine, casein, and sawn timber.

But no one suggests how Fonterra and other dairy companies might steer away from China, especially when buying is done through the GlobalTradeDairy auction platform.

The only secondary manufactured goods in the billion-dollar category are non-agricultural machinery and electronic components.

The 13th category is curiously named “confidential”.

Edwards said that probably included coal, because State Energy wanted to be coy about its export destinations.

Not yet in the $1b club are several important agricultural categories, including pet food, kiwifruit, fish, wool, whey, apples, and fresh vegetables (all from $500m-$1b) and venison, tanned hides, seeds, honey, and tallow (all $150m-200m).

Edwards said total exports to China grew by $554m in the September quarter from the same quarter last year.

Milk powder trade growth was almost half of the whole but logs also grew by $230m and wool by $28m.

Milk powder to China as a single category is $1b larger than the numbers two and three categories, crude oil to Australia and logs to China.

Prices for milk powder are more than US$5000 a tonne and the demand from China has some economic commentators worried NZ is over-reliant on one market and one commodity.

But no one suggests how Fonterra and other dairy companies might steer away from China, especially when buying is done through the GlobalTradeDairy auction platform.

ANZ said the price of wool rose 10% in October, helping the world commodity price index to increase 1.3%.

It is now at its third-highest level, only 1.8% lower than the record reached in April.

The world index is at 327.6, 23% higher than a year ago and 75 points higher than its peak during the 2007-08 commodities price boom.

The dairy sub-index which was its peak earlier this year and in late 2007, is near 400.

The world prices of beef, aluminium, butter, pelts, and wood pulp all rose 3% in October, whereas whole milk powder prices rose 2% and logs and sheep meat were up 1%.

In NZ dollar terms the commodity price index fell 0.6% because of exchange rate movement, but the NZ index is at its seventh-highest level, 7% below its record in March 2011.

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