Australia | Jul 11 2012
– CBA notes global food price inflation appears to be picking up
– Increases imply additional downside risks for growth
– Australia better placed than some given role as major exporter
– Domestic economy unlikely to avoid some impact
By Chris Shaw
Global food price inflation was a major theme in the first half of 2011 but an improvement in supply conditions and the emergence of other issues saw the problem fade from the headlines in the second half of last year.
But as Commonwealth Bank notes, the inflationary pressures that emerged last year saw policy tightening in a number of economies and this impacted on economic activity levels. Given this impact, the bank's chief economist, Michael Blythe, suggests the recent lift in key food prices is a concern.
Prices for both grains and oilseeds spiked higher in June and have moved even higher in July given some weather-induced supply issues. Drought is the main issue in most key exporting regions, with growing risks to US crop production a particular concern in the view of Blythe.
For major crops most of the demand growth is coming from China and other emerging and developing economies, which Blythe points out means they will bear the brunt of any sustained lift in prices for staple products.
Any shortage of corn and soybeans could impact on global trade flows, while Blythe notes input cost pressures would likely rise for livestock producers and food and beverage manufacturers would face some margin pressures under such a scenario. Consumption patterns would also change on the back of relative price shifts.
Europe remains the main point of focus for policymakers around the world and Blythe suggests central banks tend to look through supply-driven price spikes when setting policy. But given the importance of food in CPIs around the world, Blythe cautions there may be limited scope for monetary stimulus if required. This means higher food prices would offer some downside risk to global economic growth.
There are other impacts from higher food prices, as Blythe notes spikes in prices are often followed by periods of above average civil conflict. Such instability is likely to further weigh on already depressed financial market sentiment in the view of Blythe.
The Australian economy would not be immune, as any restraints on Asian economic activity would be a negative for Australia's growth outlook. As well, any global financial market impact would be reflected in the Australian market.
But Blythe sees some key differences as well, stemming in part from the fact Australia is a major agricultural producer. This means domestic supply should remain solid, so limiting the inflation impact of any global production shortfalls.
Higher food prices would also benefit Australia as a major exporter, though Blythe notes the impact would be much less than for higher resources prices. As an example, Blythe estimates a repeat of the 20% per annum rise in food prices in 2010/11 would be worth around $6 billion in additional export income annually.
On the negative side, Blythe suggests higher food prices would likely lift consumer inflation expectations. Cost of living remains a major issue for households, so higher fuel prices could also weigh on sentiment and spending appetite.
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