Commodity Price and Exchange Rate Movements
Our primary producers are price takers on international markets.
New Zealand’s primary sector producers are generally price takers on international markets. There is a general long-term trend of declining commodity prices in inflation-adjusted terms,[4] though there are short-term variations that impact on the performance of the different parts of the primary sector. Volatility in commodity prices is something the primary sector has to cope with and which it has little influence over.
Figures 1 and 2 below show the movements in key world commodity prices since 1986.[5] Commodity prices have generally moved through a five year cycle, with peaks in the late 1980s, mid-1990s, early 2000s and the mid-2000s, though it is not clear yet if the current cycle has peaked.
- Figure 1 – ANZ Commodity Price Index (World Prices) Part A
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- Figure 2 – ANZ Commodity Price Index (World Prices) Part B
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- Source: ANZ Commodity Price Index – Historical Series and Component Indices[6]
The prices that our exporters receive in New Zealand dollars are also influenced by changes in the exchange rate. As can be seen from Figure 3 below, the value of the New Zealand dollar has been volatile since it was floated in 1985, which is another source of uncertainty for our exporters. Generally speaking though, the exchange rate has tended to move in the same direction as overall commodity prices, smoothing the impact on the New Zealand dollar prices that our exporters receive.
Our primary producers have to deal with volatility in commodity prices and exchange rates.
- Figure 3 – Commodity Price and Exchange Rate Movements
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- Source: Reserve Bank of New Zealand Historical Exchange Rate Series; ANZ Commodity Price Index – Historical Series and Component Indices
Notes
- [4]This is not a clear-cut trend; it is clouded, for instance, by the extent to which commodity products can compete on non-price features. It also differs from commodity to commodity and depends on the deflator used to derive an inflation-adjusted price. That said, factors cited as drivers of commodity price decline include low barriers to entry, development of man-made substitutes (e.g. for wool and wood) and changing preferences leading to a lower proportion of consumer spending on commodity products. The challenge for commodity producers is to improve productivity to maintain profitability. See Winsley (2004) for a useful discussion of features and trends of commodity products.
- [5]Figures 1 and 2 use the ANZ Commodity Price Index series as a data source. The Index uses the appropriate exchange rate index for each commodity to reflect its mix of markets.
