NATIONS:

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.

"This [flooding] will increase the volatility of wheat prices, but not necessarily end in a significant increase in prices over time," said Torero. "Wheat prices are just one component of the ingredients that go into bread."

"We may still have a good production year in 2011, and we may see prices decline as we get further into the spring," said Dan Gustafson, director of the U.N. Food and Agriculture Organization's Washington, D.C., office. But he cautioned, "If a number of things go wrong, particularly in major exporting countries, then we could see prices going up even higher this year and that could lead to political unrest, as we saw in 2008."

Per Pinstrup-Andersen, a professor of food policy and economics at Cornell University, said one critical issue is the volatility of food prices in the past eight years.

"That is going to stay with us until we get a handle on climate change -- if we ever do," Pinstrup-Andersen said. "We have to somehow change our policies to deal with the risks involved in these dramatic fluctuations in food prices."

Food prices are influenced by climate change and amplified by speculative commodity trading, he said. They are affected by "irrational expectations on the part of investors and by government policy that is focused on protecting the citizens of a particular country at the expense of the international market," he said.

Cotton prices have also been rising. Cotton reached a record $1.59 a pound in late December and settled yesterday at $1.47 during afternoon trading on the ICE Futures Exchange in New York.

For coal exports, the disaster in Australia could change pricing dynamics significantly. Asia's coal buyers have had the upper hand in recent years because of soaring demand. But with supplies constrained, said Neff, the economist at IHS Global Insight, coal companies could put pressure on buyers to accept higher prices.

"Coal companies will have more pricing power," she said.

Mining multinationals BHP Billiton, Rio Tinto, Xstrata and Peabody Energy, alongside a number of mid-sized domestic producers, dominate the growing Asia-Pacific export market for coal to fuel power plants and steel mills.

"The idea is that emerging Asia is going to continuously demand those resources," said Neff. "At the same time, you can only build a mine so fast, so prices may hold."

Nature's way to raise coal prices

For advocates of public policies designed to increase the cost of burning coal, higher commodity prices could be just as effective. Whether brought upon by high Asian demand or natural disasters, some say pricier coal exports could help cut carbon dioxide emissions entering the atmosphere.

In a Dec. 30, 2010, opinion piece published in the United Kingdom's Guardian, two Stanford University researchers, Frank Wolak and Richard Morse, argued that driving up world coal prices by increasing coal exports to China would force other fast-growing countries to look for cheaper and cleaner alternatives.

The current La Niña affecting Australia is not particularly strong, but it's notable in another way, said Ben Kirtman, a climate modeler at the University of Miami who studies the weather pattern and its counterpart, El Niño.

La Niña's signature is colder than normal temperatures in the central and eastern tropical Pacific Ocean, in contrast with El Niño, which brings warmer than normal temperatures to the same region.

This year's La Niña is unusual in that "it extends for a great distance across the equatorial Pacific basin," with cold water stretching west almost to Indonesia, Kirtman said. "What that does is pushes or shifts where the rainfall distribution is, so it rains even harder than it normally would over Australia."

According to the Australian Bureau of Meteorology, last month marked the wettest December on record for Queensland and for eastern Australia as a whole.

"La Niña doesn't necessarily predict flooding," said Michelle L'Heureux, a meteorologist at the U.S. National Oceanic and Atmospheric Administration's Climate Prediction Center in Maryland. "What we're seeing there is exceptional."

La Niña on steroids

But Kirtman said scientists aren't sure how climate change is affecting El Niño and La Niña, which comprise a naturally occurring weather cycle known as the El Niño-Southern Oscillation (ENSO). What is clear is that the Earth is warming, and a warmer atmosphere can hold more moisture, which means rainfall events are predicted to intensify, on a general basis, as the planet heats up.

Kevin Trenberth, a climate scientist at the National Center for Atmospheric Research in Boulder, Colo., told Reuters that waters off northern Australia are more than 1.5 degrees Celsius warmer than they were before 1970 -- and a third of that warming can be attributed to climate change.

"The extra water vapor fuels the monsoon and thus alters the winds and the monsoon itself and so this likely increases the rainfall further," he said.

Kirtman said there is also ongoing discussion about whether climate change is changing the behavior of the El Niño Southern Oscillation.

The Intergovernmental Panel on Climate Change said in 2007 that computer model projections did not indicate the weather cycle's strength or frequency would alter during the 21st century. But some scientists, Kirtman among them, now suggest that ENSO may shift as climate change intensifies.

"One theory out there is that we're going to El Niños and La Niñas that are centered further out toward the western Pacific," he said. "What that means, if it turns out to be true, is that Australia will get a stronger response with El Niños and La Niñas than it has gotten in the past."

Kirtman said there are "hints" the shift is occurring, and the current La Niña "would be consistent with this notion that things are shifting towards the west," but major questions remain.

"One is whether it's a real thing -- do we have enough [historical weather] data to detect it?" he said.

"The second is, even if there are these spatial changes ... how confident are we in the evidence that this is changing with the climate? It's clearly a hot topic, with no consensus at the moment."