Queensland floods: The economic impact

The floods in Queensland and the rest of Australia have besieged an area larger than France and Germany combined. The floods will have a significant impact on the Australian economy, in addition to world commodity and agriculture prices.

No longer the poor cousin of the more prosperous southern states, Queensland accounts for approximately 20% of the Australian economy, 60% of global coking coal exports and 28% of Australia’s fruit and vegetable production. As a result of the floods, IBISWorld has downgraded its GDP forecast for 2010-11 from 2.9% to 2.6%.

The floods are expected to have a negative short-term effect on economic growth. IBISWorld estimates that the floods will subtract 0.6 percentage points from our previous GDP forecast for the third quarter of 2010-11 (which ends March 31).

Agriculture will be hit hard, with an estimated $1.6 billion worth of crops having been destroyed. Sugarcane, cotton, some vegetables and grains have also suffered major losses. This is expected to flow on to a short-term price spike for food, with prices expected to rise by up to 200%.

The lost wheat production is expected to exacerbate existing global wheat shortages, caused by poor production worldwide, particularly in the US and Russia. This is likely to cause a further increase in global wheat prices.

Agriculture, however, is expected to benefit in the long run from increased soil moisture.

All levels of government have pledged support for the recovery. The Federal Government has begun distributing emergency assistance grants of up to $1,000 per person, which should begin to have an immediate stimulatory effect. The Federal Government is responsible for funding 75% of repairs and rebuilding. However, the Federal Government has maintained its pledge to return the budget to surplus by 2012-13, which means that other budget savings must be found. Queensland Government will be responsible for 25% of rebuilding. This will place pressure on the state’s budget, as revenue decreases through March, due to lost production.

The floods are also likely to result in upward pressure on inflation and interest rates. Rising food prices are forecast to add up to 0.8 percentage points to the Consumer Price Index, which would fuel inflation higher than the 2% to 3% target range in the short term. However, the Reserve Bank of Australia is unlikely to increase interest rates on this basis unless higher food prices are sustained.

Agriculture

The recent heavy rainfall and flooding in Queensland will devastate the Australian agriculture sector this year, causing losses of up to $1.6 billion.  The recent deluge has caused widespread damage across many agriculture industries including food, crops and livestock.

Major problems for these sectors include crop loss, rain damage, waterlogging, quality downgrades, delays or disruptions to harvests, and transport problems due to flooded fields, roads and damaged infrastructure.

Fruit and vegetables

The Queensland horticulture industry is a crucial link in Australia’s food chain. Queensland supplies 28% of Australia’s fruit and vegetables, making it the leading producer of fresh produce in the country.

The recent flooding threatens to reduce Australia’s supply of fresh fruit and vegetables, given that 14% of the nation’s produce is sourced from many flood affected areas.

It is believed that the flooding and consistent rainfall across Queensland’s food-producing regions has resulted in widespread loss, damage and disrupted harvests for fruit and vegetables like pumpkins, tomatoes, capsicum, celery, avocados, lettuce, zucchini, broccoli, certain types of potatoes, mangos bananas, melons, tropical fruit, grapes and seedless watermelon. All these factors combined suggest that industry revenue for Australia’s fruit and vegetable growers is likely to decline by 10% overall for 2010-
11, representing a combined loss of approximately $561 million.

Sugar

Australia is a leading exporter of sugar on the global market, and Queensland sugarcane growers produce 95% of the country’s annual sugar crop. This is one of the worst affected agriculture industries, and IBISWorld expects a 27% decline in revenue for sugarcane farmers. Sugarcane fields are now waterlogged in some areas, thereby preventing this year’s sugarcane harvest for many growers.

As a result of these declines, leading exporter Queensland Sugar Limited has already started purchasing sugar from Brazil and Thailand to supplement the fall in Australian production. This also means that many Australian growers have not been able to capitalise on rising sugar prices that recently hit a 30-year high. Looking ahead, it is likely that rain damage to many fields will also destroy a considerable portion of Australia’s crop in 2011-12.

Grains

IBISWorld research indicates that the impact of the Queensland floods is likely to reach $400 million for the grain industry. This will have a limited effect on industry revenue as a whole, given that the Queensland grain crop accounts for only 10% of national grain production in Australia. 

Agricultural body AgForce, the recent deluge has hit all of Queensland’s broad acre crop-growing areas with some parts of southern Queensland virtually written off before harvest. Analysts are expecting grain losses of up to 500,000 tonnes, including wheat, barley and sorghum.

The biggest problem for grain agriculture exporters has been shipment delays due to the closure of critical ports, such as those in Brisbane, due to flood risk and damage. This means grain farmers fortunate enough to complete their harvest before the worst of the recent deluge are currently unable to capitalise on the current spike in global grain prices. On the bright side, there is a possibility that farmers may be able to re-plant crops if weather conditions improve, thus recouping some of their current losses.

Livestock

IBISWorld expects a mixed impact on the meat and livestock sector, with some farmers managing to move livestock from flood-affected areas before flooding. However, the true extent of the effect is yet to be felt, with farmers likely to return to farms over the next week. Moreover, news reports do confirm some livestock being washed away and some being isolated as a result of the floods.

Finally, transporting livestock to slaughter houses seems to be the most imminent problem for farmers, given flooded roads and damage to transport infrastructure. IBISWorld expects that this will put further strain on the supply.