Trade deficit continuing to widen

Dairy exports lifted strongly in November but that was not enough to stop a further deterioration in New Zealand's merchandise trade figures.

Statistics New Zealand figures showed the November trade deficit was $700 million from a revised $666 million in October. In seasonally adjusted terms, the monthly trade deficit widened from $201 million to $282 million. The annual trade balance jumped to a deficit of nearly $1.5 billion from $1.4 billion in October.

Westpac economist Nathan Penny said the boost to the trade data from last season's bumper agricultural production appeared to have cleared. The deficit had averaged around $200 million since August last year.

''Over the next 18 months, we expect that increasing Canterbury earthquake-related imports - construction machinery and equipment - will dominate improving export prices. As a result, the trade deficit will widen over this period.''

Weather patterns had returned to normal over summer after an encouraging start to the agricultural season, he said. Dairy production was expected to be around 2% to 3% higher this season compared with last.

Mr Penny expected dairy prices to rise and export values to trend up, but not enough to offset growing imports.

However, the ASB commodities weekly released yesterday showed that Oceania dairy prices for the start of this year were mostly below those experienced at the beginning of 2012.

Quoting the US Department of Agriculture, guest ASB dairy commentator William Bailey said the report also showed European butter prices followed a similar pattern, although powder prices started 2013 well above those seen at the start of last year.

The most recent results of the Fonterra auction showed the average winning price for the first auction of 2013 was 8% below the start of last year. Skim milk powder prices started the year at their highest average since July 2011.

Some analysts expected prices to remain firm, with more potential for price increases than decreases, Prof Bailey, from the Western Illinois University, said.

The analysis focused on a ''very slight'' increase in available world dairy supplies over the next 12 months, with continued strong demand from a broad range of countries, led by China.

India, the largest producer of milk in the world, was expected to produce more than 133 million tonnes of milk for the 2012-13 season. That was a nearly 4% increase from last year and put that country on track to meet the reported goal of seeing production of 191 million tonnes by 2020.

Most US government farm programmes, including some dairy programmes, were extended until September 30 this year during the final session of the US Congress for 2012, Prof Bailey said.

With a new Congress now in place, the whole legislative process would need to be repeated for a new farm Bill to be voted on.

''What is different this time is the greatly increased attention to areas where government spending might be reduced. Farm programmes are at the top, or very near the top, of many policy watchers' lists of programmes that could be eliminated,'' he said.

ASB senior economist Jane Turner said that for the week to January 4, New Zealand dollar commodity prices edged lower as a result of an appreciation in the New Zealand dollar. At the same time, global commodity prices actually increased, driven by higher meat and forestry prices.

The NZX Pasture Growth Index showed a decline in pasture growth potential in light of the hotter and drier conditions.

While heavy rain across the South Island more recently improved soil moisture levels in the region, milk supply was disrupted as milk tankers were unable to reach some dairy farms, she said.

The reduced forestry supply from Russia and Canada had supported Chinese demand for New Zealand log exports. Those supply constraints had underpinned an increase in log prices. The recovery in the US housing market was also expected to provide support for global log prices in the coming year, Ms Turner said.