Despite predictions of stagflation, Australia’s rural industries don’t need to panic – yet

“I can’t find workers. That tank of diesel just cost me $150. How much higher can fertiliser prices go?” These are a few laments you hear from farmers in the local pub right now. After the leap in consumer prices and an increase in interest rates by the Reserve Bank, we can add a further chip on the shoulder of our producers over increased borrowing costs.

Normally, rising consumer prices are fuelled by excessive economic growth and strong demand. However, the inflationary pressures that are forcing the hand of the Reserve Bank to act are mostly being driven by supply chain factors.

Disruptions to the agricultural supply chain began during Covid-19 lockdowns. Then came the Russian invasion of Ukraine which has seen energy and fuel prices surge, adding to the supply shock impacting the agriculture sector in Australia.

As a pig farm owner, it’s already difficult enough to secure workers in normal, pre-Covid times. Paying above the award provides no guarantee to finding suitable workers and with so many alternative jobs available, people just don’t fancy toiling among pig poo.

The cost of fertiliser has nearly tripled in the past year, further complicating the picture. That has flowed through into higher prices for food and fibre.

The current situation of supply shock-fuelled inflation is arguably the worst seen since the 1970s, when global oil prices surged to record levels leading to higher fuel bills and increased food prices.

The food system in the 1970s was heavily reliant on fossil fuels, not unlike today. Vast amounts of oil and gas are crucial inputs for the production of fertiliser, chemicals and fuels.

Eventually a series of interest rate hikes were implemented, which led to stagflation – characterised by stagnant economic growth, high unemployment and high inflation.

We are starting to see predictions of stagflation as inflationary pressures and slowing economic growth forecasts begin to emerge for key global economies like the UK, Germany and the USA.

Relax. We don’t need to run around in a panic like Henny Penny from the fear of stagflation. Yet.

At present we are just facing a supply-driven inflationary spiral, and we are yet to see employment levels and economic growth impacted negatively.

Furthermore, the agricultural sector can take some comfort in knowing that commodities they produce are an asset class that usually perform well during inflationary times that can act as a hedge, or insurance, against rising prices.

But farm values have also been surging in Australia, encouraged by record-low borrowing levels. The median price of agricultural land across Australia lifted 20% during 2021 to rest a fraction above $7,000 a hectare.

Farmers who have borrowed aggressively and spent big on land purchases could face a series of interest rate hikes in the coming months.

General consensus in financial markets is that the cash rate could push to 3% into 2023, which would place the borrowing rate closer to 5% to 6%, depending on how well you know your bank manager.

There are big three questions for 2022 for rural industries. Will higher interest rates impact upon the Australian economy? Will rising interest rates push the US into recession? And will the adherence to a zero-Covid policy in China result in widespread, ongoing and strict lockdowns, causing stagnating growth for Australia’s biggest export customer?

The USA has been a growth market for Aussie lamb exports in 2021. As the American economy recovered from their own Covid lockdowns, more consumers returned to fancy restaurants. Traditionally, Americans eat lamb when fine dining, so a recession there could see demand for Aussie lamb exports dwindle.

In Shanghai, the spread of the Omicron variant has seen a harsh lockdown regime imposed. If China is unable to contain the virus over the long term, will they adjust to a more tolerant strategy or continue along the path of zero Covid?

China is a key consumer of Australian beef, lamb and mutton. A Chinese consumer that is feeling less wealthy is less likely to go and dine out on some Australian red meat – that’s if they are allowed to leave their home at all.

Additionally, more than 80% of Aussie wool is processed in China, so ongoing supply chain disruptions and an economic slowdown in China – and across the rest of the world – could dampen demand for a discretionary spend on wool apparel.

Under a worst-case scenario, Australia could be facing the prospect of increasing interest rates, inflationary pressures unable to be brought under control, a US economy teetering on the brink of a recession and Chinese demand for Aussie exports under pressure.

But on the bright side, did I mention how agriculture is a good inflation hedge?