According to the Nine Network, the Irrigation Association of Australia has warned that cutting irrigation supplies will lead to massive food price rises. Scaremongering or fact? We don't know, we'll have to wait and see. But if we look at it from a pure supply and demand basis it makes sense.
We only have to look at the parallels in the crude oil market. Disruptions to supply and shortage of supply led to a trebling of the crude oil price in about two years. But even if there are massive food price rises chances are the RBA will just ignore it, just like it ignored the oil price rise.
The RBA and most financial markets commentators are quick to make sure they discount those troublesome volatile items of "food and fuel." So, as the price of agricultural commodities rises, will the RBA continue to keep its head in the sand or will it have finally faced up to the reality of the situation?
Professor Fariborz Moshirian of the University of New South Wales said the RBA "will simply be looking at the price index determined by the basket of goods" and that rises in food prices "might exacerbate the likelihood of further rises of interest rates."
Despite this Professor Moshirian said that "the drought is not going to slow down the overall direction of the economy."
Matthew Johnson at Forecast Australia summed it up perfectly when he told the Nine Network, "The question the Reserve Bank asks is whether this is the sort of thing that's going to lead to a change in the rate of price increases." He went on to say that if the rising prices "are caused by the drought that's a temporary factor and that's the kind of thing that the RBA is going to look through."
If only the CPI just included goods that fell in price it would make things so much easier for the RBA.
Kris Sayce
The Daily Reckoning Australia
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About the Author
Kris Sayce began his financial career in the City of London as a broker specializing in small cap stocks listed on London's Alternative Investment Market (AIM). At one of Australia's leading wealth management firms, Kris was a fully accredited adviser in Shares, Options and Warrants, and Foreign Exchange. Kris was instrumental in helping to establish the Australian version of the Daily Reckoning e-newsletter in 2005. In late 2006, he joined the Melbourne team of the leading CFD provider in Australia.
