The Reserve Bank is fearful that a strong rise expected later this year in Australia’s terms of trade will delivery another inflationary surge of cash into the economy. That’s exactly the picture that was painted today by the Federal Government’s key adviser on commodities, the Australian Bureau of Agricultural and Resource Economics.

In its first look at 2008-09 returns for our commodity exports, ABARE, forecast a massive 30% jump to a record $189 billion, from the $145 billion expected in the current year which ends 30 June.

The growth in export earnings forecast for 2008-09 mainly reflects increased shipments and prices of iron ore, coal, gold, LNG, grains and oilseeds in response to strong demand in overseas markets.

World commodity prices surged overnight as big investment funds and other financial investors chased the likes of gold, oil, sugar, copper, nickel, wheat higher in Europe and the US. All rose strongly, with gold hitting a new intra-day high of $US992 an ounce and oil a high of $US103.95 a barrel.

The Australian dollar climbed over 94 US cents as the US dollar again weakened against the euro and the Yen.

Commodity traders say two new large unnamed funds entered the commodity markets overnight, adding to the tens of billions of dollars in buying that has been going on since late January as big investors look for the sort of profits they once made in shares, bonds and credit markets.

The weakening US dollar has made it cheaper for big European funds to chase commodities because most, if not all, are priced in US dollars and paying for the deals in stronger euros gives them more buying power than American rivals can get from the greenback.

Grains, oilseeds and sugar prices are booming on world markets at the moment because of the impact of the drought in Australia, low stocks and rising demand from China for food and especially for protein.

The exact level of returns for the bush will depend on the season in 2008-09 and there are signs that the winter grain plantings on the East Coast and in WA will be up substantially on the last two years which were hurt by drought. But the real surge will come in returns for minerals: especially iron ore, coal and oil and gas.

It’s against this backdrop that the Reserve Bank met today to consider interest rates: many of the price rises on world markets will end up in Australia in higher food and energy costs or more export returns.

Peter Fray

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