if this extra income is spent and / or invested by farmers it will add to this domestic demand pressure. it may be that a large portion of this extra income is saved or used to repay debt. but to the extent that some of it is spent, it may make it harder to achieve our medium - term inflation target. this effect could be compounded even further if these higher incomes become reflected in higher rural land prices. a reacceleration in land prices risks adding to domestic demand pressures through wealth effects and equity withdrawal. these two strong influences on inflation will be partly offset to some extent by the strong exchange rate. the high new zealand dollar will dampen medium - term inflation pressures by suppressing activity in those exporting sectors not lucky enough to be receiving high commodity returns. we should not lose sight of the fundamental message : the trend we are seeing in commodity prices is very good news for the new zealand economy. assuming they are appropriately conservative in their spending, dairy farmers have a real chance to contribute to our growth.

the prospects for emerging exporters such as argentina and the ukraine, along with the ability of china to increase production to meet its own demand. it is certainly possible that we could be heading into a “ new era ” for dairy prices. developments in other soft commodities dairy prices look set to be the star performer amongst new zealand ’ s export commodities over the next few years. but that is not to say the outlook for other commodities is bleak. in fact, the global backdrop seems likely to turn increasingly favourable for prices for meat and forestry, new zealand ’ s second and third largest commodity exports respectively. forestry prices have been increasing since 2005 on the back of strong asian ( particularly chinese and korean ) demand for logs. pulp prices have also joined the fray lately due to the increased bio - fuel demand already mentioned. and looking ahead, prices could press even higher. russia is set to increase its tax on log exports in large incremental steps over the next three years, with the first increase starting in july. this should provide support for log prices given russia ’ s strong presence in international log markets. figure 8 : real commodity prices : total and ex - dairy beef and lamb prices have come under pressure in recent months as drought conditions overseas have induced higher than normal rates of slaughter. prices, particularly for lamb, have fallen as this “ wall of meat ” has hit world markets. but, of course, higher slaughter now means lower slaughter later. as meat producers in drought stricken regions rebuild their herds, global prices for both meat and beef should recover. there is also potential for prices to remain permanently higher if increased feed costs ( bio - fuels again ) prevent some of this herd re - stocking. all of this means that, even if dairy prices were to correct downwards, buoyant prices for some of our other key export commodities may well provide some offset, limiting the downside to our commodity export returns overall. other effects internationally surging prices for dairy products, as other well as for other soft commodities such as wheat, corn, and oats, have sparked international fears over food price inflation. there is growing concern within the food industry that the present upswing in prices is structural rather than temporary and, indeed, food companies overseas have already begun passing these price increases onto consumers. development agencies providing protein supplements to vulnerable third world countries are being particularly affected. this partly explains the accelerating rates of food price inflation in other parts of the world. us food prices have risen by 6. 7 percent since