You are not permitted to download, save or email this image. Visit image gallery to purchase the image.
Bucking market expectation of a 3.5% fall, the terms-of-trade index rose 0.3% in the June quarter.
That was the lowest of six consecutive quarterly rises and was driven by falling import prices. It was now 1.3% below its all-time high in the June 1973 quarter. However, export prices have started dropping and were expected to fall steeply over the second half of the year.
The price of exported goods fell 2%, with dairy prices falling 4.3% and forestry product prices down 6.5%, influenced by a large fall in log prices.
Export volumes recorded their largest fall since the March 2008 quarter, due to falls from high levels in key primary products.
Seasonally adjusted meat export volumes and forestry volumes both fell 8.3%, while dairy volumes fell 2%. Prices for imported goods fell 2.3%, while seasonally adjusted import volumes rose 3.6%, with capital goods leading the rise.
Westpac senior economist Michael Gordon said the fall in dairy export prices over the quarter seemed mild, given that world prices in the fortnightly GlobalDairyTrade auctions had fallen by about 40% since February.
However, the average time lag from pricing to shipment of dairy exports was around three months, which meant the fall in prices did not show up in the trade figures until late in the June quarter.
The bulk of the fall in dairy prices would be captured in the September and December quarter instalments of the terms of trade, Mr Gordon said.
Westpac expected the terms of trade to fall by about 10% over the next year, though it saw the recent softening in export prices as a temporary factor as Chinese buyers worked through a build-up of inventories.
The recent weakness in dairy prices was the result of a surge in global milk production colliding with a softening in Chinese demand.
Prices were expected to stabilise and start recovering by the end of this year, he said.
In Westpac's weekly commentary, economists said they would eventually expect to see falling international dairy prices put downward pressure on prices of dairy products locally.