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 19th 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.

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Jane Turner

Senior Economist

Originally hailing from sunny Nelson, Jane moved to Auckland to join the ASB team in 2008.  As Senior Economist, Jane's main focus is co-ordinating the team’s macro-economic forecasts.  In this key role, Jane was thrilled by the team’s twice consecutive win of the Consensus Economics Forecast Accuracy award.   

During her decade-long career in economic forecasting, Jane has gained a thorough knowledge of the New Zealand economy.  Her current focus is on New Zealand GDP growth, including both manufacturing and the construction sectors.  She has spent time forecasting most sectors of the economy, including inflation, trade, housing, labour and financial markets.

Prior to joining ASB, Jane honed her macro-economic forecasting skills at the Reserve Bank of New Zealand.  Jane is a qualified scarfie, attending Otago University and graduating with a Bachelor of Commerce in Economics with 1st class honours.  In 2014, she took a career break from ASB to travel the world and learn to snowboard.

Mark Smith

Senior Economist

Mark joined ASB in 2017, with over 20 years of public and private sector experience working as an economist in New Zealand and the UK.

His resume includes lengthy stints at ANZ and the Reserve Bank of New Zealand, and he has also worked at the Bank of England, HM Treasury and the New Zealand Transport Agency. Mark's areas of specialisation include interest rate strategy, macro-economic analysis and urban economics.

Born and bred in the Waikato, Mark studied at Waikato University where he graduated with a Master of Social Sciences, majoring in Economics.

Mark's key strengths are the ability to use his extensive experience, inquisitive nature, analytical ability, creativity and pragmatism to dig a little deeper and to deliver common sense solutions to tackle complex problems.

When not at work Mark likes to travel, keep fit and spend time with his friends and family.

Mike Jones

Senior Economist

Mike joined ASB in 2019 armed with almost 15 years of experience in applied macroeconomic and financial markets analysis.

Mike's career has been all about distilling the risks and opportunities of economic and financial market trends for business. Basically asking the "what does it all mean" question. Mike's enthusiasm and skill for drawing out practical, commercial insights from the murky world of economics has been honed over a relatively broad base of experience.

After spending the early part of his career on the tools at the Reserve Banks of both NZ and Australia, Mike had a lengthy stint at BNZ where he was NZ’s top-ranked currency strategist. His regular and topical macro research also saw him pick up several FX forecast accuracy gongs from Bloomberg.

Drawn in by the prospect of putting strategy into practice, Mike moved from Wellington to Auckland in 2013 to join Fonterra as GM Treasury Risk Management. In this role, Mike lead Fonterra’s macroeconomic research output, and was responsible for the strategy and execution of Fonterra’s foreign exchange, debt, and interest rate hedging programmes.