Did you see the first line of the minutes from the RBA’s June 3rd meeting? In case you missed it, here it is: “The Board’s discussion of the world economy commenced with a briefing on the outlook for Australia’s trading partners.”
Why would a meeting on Australian interest rates begin with a discussion of foreign trading partners? Could it be that foreign demand for Aussie resources threatens higher inflation even more than Aussies hitting the shops with a credit card? Hold that thought.
The Reserve Bank may have some help in cooling demand with high oil prices. Higher energy prices may cool industrial production from Australia’s trading partners. If the Asian countries eating up Aussie resources cool down a bit, then the flow of cash coming back to Australia from exports would slow down a bit too. Maybe, just maybe, the pressure on higher wages and business investment would relax.
But who knows? We’ve said before that the Reserve Bank is helpless to dent the demand for Aussie resources. It’s that demand-long-term and enormous-we contend, that fuels inflation in Australia.
All that money flowing back into the economy turns into business, personal, or government spending. You can choke off domestic demand with higher rates. But the most favourable terms of trade in 50 years contribute to back-door inflation that’s hard to contain with monetary policy.
Our friend Mike Graham in New Zealand has offered his services as a correspondent. We know Mike from our days in London watching European markets. He sends this report.
“Someone forgot to tell the New Zealand rural property market there’s a slump on. While residential prices dropped or treaded water, rural property across the ditch actually reached a new record in May. The national farm median price hit $NZ1.86 million, surpassing April’s $NZ1.81m figure. The price of a dairy farm has risen 50% in a year! H. L. Mencken said ‘No one hates his job so heartily as a farmer’. Kiwi gumboot-wearers like Kerry Logue would beg to differ.
“Kerry’s been getting up at an unspeakable hour to head off to the milking sheds for 35 years. But he’s now looking forward to a retirement that would make many lawyers envious. His 113ha farm at Tomarata, north of Auckland, is on the market for $NZ2.8m, a price he’ll most likely get. With money in the bank, a hobby ‘do-up’ villa near Wellsford and a home at Huia, you could say the 62-year-old is creaming it. “Thirty-five years milking is a long enough stint for anyone. My kids thought the old man was crazy still working seven days a week.”
“Not as crazy as all that, it would seem. Of course, it’s not just good old-fashioned hard-graft that means Kerry’s golden years will be just that. He owes a billion people 6,700 miles a beer at his local pub.
“The best way to get rich in 2008 is hardly a secret. You find something that the Chinese want. You produce it. And you sell it to them. In Australia, you buy a mine. In New Zealand, you buy a farm.
“Chinese Premier Wen Jiabao made a confession to New Zealand Prime Minister Helen Clark at recent trade negotiations. His dream is not about a future in which every Chinese will own his own car, receive a world-class education or own his own house. It’s a future where every Chinese child will be able to drink two glasses of milk a day.
“An odd aspiration, but Helen is hardly complaining. Thanks to soaring Chinese demand for dairy products New Zealand dairy co-operative Fonterra (NZX: FCGHA) announced in May it would pay farmers a record $NZ7.90 per kilogram for milk solids. ASB chief economist Nick Tuffley estimated the total cash injection would be $NZ9.6 billion this year. That’s equivalent to about 6% of GDP, and up from $4 billion on last season.
“Ordinary consumers – already feeling the pinch of expensive oil, falling property prices and tightening credit – are hardly ecstatic. Thanks to China’s new taste for strawberry milkshakes, dairy is now off the menu for many Kiwis. Fresh milk now costs 22% more than it did a year ago. Cheese, 60% more. But it seems that the good old New Zealand farmer could be milking it for some time to come.
Markets and Money