Australian floods could send food prices soaring

MELBOURNE (Reuters) - The worst flooding in the Australian state of Queensland in 50 years could push up the nation’s fruit and vegetable prices by as much as 20 to 30 percent, lifting inflation and potentially dampening retail spending.

Economists and the country’s top supermarket chains said new, torrential flooding and rains across farmlands in southeastern Queensland in the past day had damaged crops and cut roads, preventing moving goods to market.

Unlike some previous natural disasters, which affected a smaller geographic area and a narrow range of foods, many vegetables are likely to be affected. In 2006, Cyclone Larry caused a spike in banana prices and this alone helped to lift the overall inflation rate.

“I think this will actually dampen discretionary spending during this period,” said ANZ Bank head of Australian economics Katie Dean, referring to spending across the entire economy.

“In the case of the bananas (in 2006), we just stopped buying bananas. But this is a very broad range of fruit and veggies that will be affected, the grocery bill will inevitably rise as the substitution ability is less,” Dean said.

Australian retailers have already endured a tough few months as cautious consumers spend less and save more.

Retail sales in November rose a moderate 0.3 percent and were up just 1.3 percent from a year earlier, compared with historic growth of about 6 percent per year, while the national savings rate has topped 10 percent.

Queensland accounts for 28 percent of the country’s fruit and vegetable production by value, according to Commonwealth Bank economists, and much of the state is under water.

The state’s floods have at times affected an area the size of France and Germany combined, and at least 12 people have been killed.

Coles supermarkets, the country’s second-largest chain owned by Wesfarmers, said supply shortages would push up the prices of many salad vegetables including tomatoes, capsicum, lettuce, as well as beans, corns and broccoli.

“Up until today, we were pretty confident we would be able to maintain price stability and supply into our stores nationally,” spokesman Jim Cooper told Reuters.

“But the new rains in southeast Queensland has meant we are going to see far heavier impacts now in terms of availability and price rises on a lot of lines,” he said. He said the wholesale price of broccoli has jumped to A$10 a kilo from A$6.

Analysts at National Australia Bank said fresh produce prices could rise by as much as 30 percent, which would add about 0.75 percentage points to the consumer price index (CPI) in the March quarter.

That could see the overall CPI jump by perhaps 1.6 percent between the December and March quarters, matching the banana-driven spike seen in 2006. That would likely lift the annual pace of consumer inflation well above the top of the Reserve Bank of Australia’s long-term target band of 2 to 3 percent.

The latest reading for CPI put inflation at 2.8 percent for the third quarter of 2010.

However, the impact is likely to be a lot less on the central bank’s preferred measures of underlying inflation which strip out the most volatile price moves in any one quarter.

The central bank lifted interest rates in November as a pre-emptive strike against inflation and has since signaled it was on hold for some months to come.

Indeed, investors are currently betting the economic drag from the floods makes it less likely the central bank will lift interest rates again anytime soon.

The market is pricing in just 17 basis points of tightening for the next 12 months, down from 35 basis points on Monday.

Still, not everyone sees a dramatic, short-term impact on grocery bills, though the effect could linger.

Woolworths, the country’s largest supermarket chain, said many fruit and vegetable crops in Queensland had already been harvested, and the harvest season had moved to more southern states.

“There is very little coming out of Queensland at the moment, so there should not be much impact except for some isolated lines like pawpaw and lychee,” a spokeswoman for Woolworths said.

“The issue will be in autumn and winter when Queensland will need to replant,” she added.

Editing by Wayne Cole and Mark Bendeich