Why a Flooded Australia Will Probably Boost Soaring Energy and Food Prices

With each new incident of record monsoon floods, fires and earthquakes, more tremors shake the global economy.

The latest disaster is unfolding in Australia, where the northeastern state of Queensland has been inundated after a month of rain, and is proving every bit the catalyst for rising commodity prices as the 2010 floods in Pakistan and the wildfires in Russia were. Flooding in Australia has roiled Asia-Pacific markets for coal, cotton, wheat and sugar.

If weather events are increasingly disastrous in the world's bread baskets, global warming could result in a familiar and worsening pattern: periodic collisions between Asia's seemingly limitless demand for goods and the world's supply of basic agricultural and energy commodities. That could send average commodity prices significantly higher, limiting economic growth and, perhaps, affecting the appetite for burning coal.

IHS Global Insight predicted yesterday that the floods would trim at least two-tenths of a percent off of Australia's projected 2011 gross domestic product. Queensland is the largest exporter of coal for making steel. Nearly all of the mines are closed, and seaborne coal prices are approaching record highs.

The biggest jolt to world commodity prices probably hasn't hit yet, said IHS economist Bree Neff.

"They've pushed out most of the stockpiles," she said, referring to coal, grain and sugar stored at the coastal ports. The rest is trapped inland, where the floods have held up rail deliveries. "In the next few weeks, we'll see a lot more disruptions to prices."

China is Australia's biggest export market. With the U.S. economy gradually recovering and China's economy still burning red hot, economists expected Australia's economy to get a lift in 2011.

"The floods, for lack of a better term, washed that out," Neff said.

The heavy rains have left an indelible mark on the nation's wheat industry, the world's fourth-largest exporter of that crop.

A 1.5 million-ton wheat shortfall

The U.S. Agriculture Department estimated yesterday that water-logged fields have given rise to lower-grade wheat, tamping down that country's exports by an estimated 1.5 million tons. Much of that number is expected to translate into more wheat being used for animal feed.

There are still sufficient supplies of global wheat, but things are "tight," said Maximo Torero, director of the markets, trade and institutions division at the International Food Policy Research Institute. "If there is another natural disaster somewhere else, that will put more pressure on the remaining crops and that could be a problem," he said.

Overall, USDA is expecting a 0.5 million-ton drop in Australia's production from last month, placing the country's final output figure at 13.5 million tons.

Wheat crops have struggled through the past year. When wildfires tore through Russia in August and destroyed many wheat fields, the Kremlin banned exports of the crop, fueling global price spikes. Overnight, that country's export contribution dropped from about 11 percent of the world wheat supply to 0 percent. Pakistan, too, was devastated by flooding in 2010 which sent shock waves to the global wheat market.

Australia is not another Russia, however. Only part of the country's supply has been hit, and much of the affected croplands have not been wiped out completely.

Still, investors are worried, and their fears are playing out in future prices. Wheat prices increased yesterday morning at the Chicago Board of Trade, surpassing $7.78 a bushel, a five-week high.

"It's just not good for [wheat] to get harvested when it's soaking wet," said Gerald Bange, chairman of USDA's World Agricultural Outlook Board. "If you take seeds and soak them in water they begin to sprout. So what happens is you get some sprouting in the mud and that reduces the quality of the grain," he said.

Global food prices already at record highs

While the United Nations' top food agency said earlier this month that global food prices, on average, have hit record highs, agricultural experts played down concerns about this most recent round of flooding sparking food riots like those that erupted across the developing world in 2007-2008.