Australia | Apr 19 2007
By Greg Peel
Remember how we spent most of the past nine months or so fretting over the price of bananas, and its impact on the CPI? Well get ready for more food-led inflation.
Prime Minister Howard warned today that Murray-Darling basin irrigators would not be allocated any water at all in the next financial year if it doesn’t rain soon, and rain heavily, Fairfax press reports.
The Irrigation Association of Australia’s Jolyon Burnett thus warned that food would start to become increasingly scarce and price increases could take effect almost immediately. While she didn’t expect increases to be in the same significant order of last year’s banana price leap, they will certainly be enough to hurt the average punter.
The Murray-Darling basin accounts for 75% of Australia’s irrigated crops and pastures and 34% of Australia’s gross agricultural production by value. If water is not allocated, annual crops will not be planted. If there continues to be no water, perennial crops (such as fruit trees) will “face extinction”, suggested Burnett. Some trees will take five years to reach maturity if they need to be replanted. Farmers are already being forced to let some trees die.
There were two elements to the great banana price leap: (1) it was a one-off incident (hopefully) that caused a temporary price hike until new crops came to fruition, (2) Australians were asked to support the industry by not allowing for imported replacements.
While some in the industry have questioned whether exorbitant prices were really necessary, the fact remains we all stopped eating bananas for a while and their effect on the CPI was largely dismissed.
This latest, more enduring, crisis may have a more fundamental effect. We may be forced to become like Britain where virtually everything is imported and nothing has any taste. Imported fruit & veg prices will be higher than what we’re used to. The price increases will be across a whole range of daily staple fruit & veg and other products – not just one beloved food source.
Such a more widespread shift in food prices will have a more lasting effect on the headline CPI. Core CPI (which the RBA is more interested in) does not count food, as prices tend to fluctuate from season to season. But petrol is not included either, until the flow through effects of higher fuel prices actually reach the core measure.
If the Murray-Darling basin fails, and it doesn’t rain…and rain, and rain, and rain…then we may see a more secular shift in food prices which will manifestly impact the cost of living. This can not bode well for interest rates. Or consumer spending. Or both.
We might be moving out of El Nino and into an El Nina phase again, according to meteorologists. Let’s hope so, and hope it can actually bring some rain. Or are all those global warming warnings beginning to ring true?