Australian Economics Update

Submitted by Jim Thesiger on 21 May, 2008 - 16:03

Australian Economics Update provided by Australian stockmarket analyst Macquarie Research Equities.

Australian Economics – Is there a Global Food Crisis Cooking?

When you hear people taking about spiking commodities prices most people think of gold and crude oil. However, the problem extends well beyond the price resurgence of these two resources and encompasses the agricultural sector, more specifically the ‘soft commodities’ space. A defining factor of the current economic climate is the skyrocketing food prices. This inflationary pressure stems from the rapid growth in emerging economies and the reduction in world energy supplies. Macquarie Research Equities (MRE) predicates that gradual monetary tightening, exchange rate appreciation and a reduction in trade barriers are seemingly the more sustainable option. So what is the real extent of this burdening issue?

In 2008, the majority of food and feedstuffs have experienced dramatic price increases – all part of the global commodity boom. So not only has oil and gold been caught up in this global commodity issue but so too has food. It is interesting to note that the poorest quartile of consumer’s spends close to 75% of income on food. This comes on the back of a 40% increase in the price of staple foods since mid-2007.

The concern, therefore, for governments is the way in which they implement policy to nullify these effects. MRE feel that government policy must be directed at assisting the poor whilst mitigating big wage increases. Trade and fiscal policy would also have to be conducive to the state of the economy. A recent example of this is in the UK where the government announced a surprise ₤2.7bn tax cut, with benefits targeted at low and average income earners to counter purchasing power parity.

The sheer diversity of this debate goes well beyond the parameters of just four paragraphs, however it is important to recognise the severity of this food issue. MRE seem to be concerned with those governments looking to implement quick-fix solutions such as export restrictions and large subsidies and feel that such initiatives could undermine price stability and slow economic growth. They close by proclaiming those countries poised to handle the food crisis best are the ones who implement gradual monetary tightening and actually scale back trade restrictions.

MQ Gateway currently offers exposure to the Agriculture space, click on the link below to see the details of the June Offer:

www.macquarie.com.au/mqgateway

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