Friday, March 29, 2024

NZ exporters’ price-setting power recognised in study

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New Zealand exporters are setting their own prices in different markets to a far greater extent than might be expected, given the country’s dependence on agricultural commodities that have traditionally been thought to be dictated by prices set at a global level. A Reserve Bank study of exporters’ pricing behaviour says “primary producers do price to market, in stark contrast to what is commonly believed”.
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Pricing to market means setting a price based on a particular market's ability to pay that price rather than by benchmarking to prices set on global trading platforms, such as the GlobalDairyTrade auction system that is used as a barometer for export returns from dairy products.

“The commonly held view on primary exports is that such products are homogenous and that the price is determined by the balance of international demand and supply, and hence the same across countries," the study said.

“The responses analysed here do not support this view. NZ primary exporters not only price to market, but are more likely to do so than firms in all other sectors, even taking into account other firm characteristics.

“The striking finding is that three-quarters of firms in the primary sector differentiate prices.”

The study suggests this greater ability to set prices for commodities market by market may reflect the fact that NZ’s commodity exports are generally food and fibre, rather than so-called “hard” commodities such as oil or metals.

“Agricultural products have greater potential for product differentiation (such as by taste, appearance, safety of consumption, or being free range) than other primary products such as metals,” the new study said.

“Primary sector firms are more likely than firms in other sectors to cite ‘customer characteristics’ as being ‘very important’ for determining price across markets.

“NZ exporters also account for a large market share in the exports of certain primary products, including milk, sheep meat and kiwifruit. This high market share may well provide some pricing power.”

The study also found that primary products were more frequently invoiced in so-called “vehicle currencies”, most notably the United States dollar, than some other exports.

“In terms of currency of invoice, around half of exporters primarily invoice in NZ dollars, around 30% invoice in the currency of the destination, with the remaining firms invoicing in a third-party currency, principally the US dollar,” the study found.

“There are significant differences across sectors, with manufacturers more likely to invoice in the currency of the destination, retailers and wholesalers in NZ dollars, and primary sector exporters predominantly invoicing in US dollars.”

Service industries were similar to manufacturers in their currency invoicing choices.

The survey used the price-setting module from Statistics NZ’s 2010 Business Operations Survey, covering 5369 firms, of which 1250 identified themselves as exporters.

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