Thursday, February 21, 2008

Climate change & macroeconomics

The RBA published today the best brief assessment of recent trends in Australia's agricultural sector I have seen in a while. It is interesting how climate change issues are impacting on macroeconomic assessments of how well the Australian economy is going. They don't actually mention climate change explicitly but the implications of it run throughout this brief report including implications for inflation. I found it a most interesting read.
The 2000s have been an especially challenging period for the farm sector. In the decade to date the agricultural regions of Australia have experienced historically dry conditions, while average temperatures have been the highest on record. Flows into the Murray-Darling Basin have been historically low, and, despite continued improvements in farm management, farm output remains below the level seen in 1999. More recently, however, the development of a La NiƱa weather system, and flooding rains in New South Wales and Queensland, have seen the outlook for the year ahead improve significantly – although a strong rebound in farm output will most likely require further significant follow-up rains over the winter months.

While the farm sector in Australia has had a particularly difficult period, poor harvests have also occurred in several other large food-producing countries over recent years. Together with strong underlying demand, this has seen global food prices increase significantly. With demand likely to continue to be underpinned by rapid economic growth in developing economies and the trend toward biofuel production, real food prices may remain higher than seen over recent decades for some time.

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