Economic Weekly: A rising tide

Commodity prices have surged over the first half of 2021. As of this week, the ASB Commodity Index (a weighted index of major commodities based on their share of NZ exports) has reached an eighteen-month high in NZD terms. Price gains have been sustained for quite some time. In fact, our NZD index reached its highest monthly average ever during March and May.

Gains are proving impressively broad-based. While COVID-19 impacted different commodities unevenly, the bulk of NZ’s major exported commodities are being buoyed by the rising tide. Dairy prices have surged to eight-year highs, forestry prices are at a record high and fruit prices hit record levels at the end of last season. Meat prices aren’t quite as frothy given their pandemic tumble, but our meat index has risen 15% since the beginning of March.

 A range of demand and supply side factors are underpinning the gains. Most obviously, consumption is picking up around the world as economies tentatively lift pandemic restrictions. Forecasts for global growth over 2021 and 2022 have been revised up, which usually accompanies strengthening demand for key commodities. New Zealand’s exposure to China has proven a particular boon on that front. Ongoing shipping disruption and global logistics woes are adding to the mix, prompting a sizable premium to be paid secure supply.

Analysts overseas are heralding the dawn of a new commodity price ‘supercycle’ – a decades long period of above-trend price growth. Past supercycles followed the industrialisation of the US in the 19^th century, the post-WW2 economic recovery in Europe, and China’s integration into the global economy during the early 2000s.

We’re a bit sceptical the post-pandemic era will herald a similar boom. At least some of the factors underpinning recent gains are likely to prove temporary. The timing for a return to normality is highly uncertain, but shipping woes should be resolved in time. Similarly, supply responses will take some of the heat out of higher prices for some commodities, notably dairy. We suspect the next supercycle won’t begin until the Indian economy further liberalises.

Nevertheless, we expect commodity prices to remain elevated over 2021, and there’s a good chance our index exceeds its record high in the coming weeks. It’s all supportive of our bullish Term of Trade view, our favourable NZD outlook and our belief inflationary pressures could prove a bit more sustained than the RBNZ expects. To stay up to date with all the latest developments, make sure to subscribe to our Commodities Weekly here.