Russia’s Ukraine war and the looming global food crisis
Welcome to Talking Business, a podcast produced in Melbourne Australia. The podcast is available on the Acast app, the Apple Podcast store or wherever you go to get your podcasts. Or you can get it at the Business Acumen website at www.businessacumen.biz.
I am Leon Gettler. My job is to review and monitor the week’s news in business, finance and economics. I bring it all to you, every week.
This is episode number 8 in our series for 2022 and today’s date is Friday March 25.
First, I’ll be talking to Brendan Doggett, Country Manager for Sharesies AU, on how investors are now responding to market upheaval.
And I’ll be talking to Indeed economist Callam Pickering about the latest jobs figures.
But now, let’s talk to Brendan Doggett.
As prices of basic foodstuffs and fertilisers continue to surge, economists are increasingly concerned that Russia’s invasion of Ukraine could spark a vicious wage-price spiral that will force central banks into more aggressive interest rate rises. The conflict has plunged the global food market into disarray, as Russia and Ukraine are key exporters of foodstuffs such as wheat, corn, barley and sunflower oil. Over the past five years, the two countries together have accounted for nearly 30% of the exports of the world’s wheat, 17% of corn, 32% of barley (a crucial source of animal feed), and 75% of sunflower seed oil, an important cooking oil in some parts of the world. Prices for key agricultural commodities have jumped sharply since the invasion as Russia has blockaded the Black Sea, cutting off Ukrainian crop exports, 85% of which are transported by sea. With ports closed, Ukraine has shifted to less efficient, and more costly, rail transport. Meanwhile, Russian food exports have been hard hit by Western sanctions that have cut the country off financially. Russia has hit back by halting exports of ammonium nitrate, a key fertiliser for which Russia accounts for two-thirds of the global market. The war in Ukraine has compounded the existing disruptions in global food markets, which have been caused by the coronavirus pandemic, shipping delays and rising freight costs, as well as droughts and floods in major food producers. The combination of these factors has pushed up wheat prices by 40% so far this year to fresh record highs, while corn prices have risen by more than 27%. There are also growing fears that this food inflation will persist, as the ongoing war in the Ukraine makes it unlikely that more than one-third of Ukraine’s cropland will be planted this year, given the country’s farmers face shortages of fuel, fertiliser and even labour, as farm workers quit to join the Ukrainian defence forces or to leave the country. Because grain is used for animal feed, surging prices are also pushing up the price of meat and milk. Food inflation is also being stoked by the surging price of oil, which is crucial for food packaging and transportation. Even before Russia’s invasion of Ukraine, the global supply of milk was already under pressure, as bad weather in New Zealand, Australia and the United States had reduced output, while the surge in oil prices lifted transportation costs. Another longer-term shock to the food markets is the growing shortage, and rising cost, of fertiliser. Russia is the world’s largest fertiliser exporter, providing about 15% of global supply. And Russia’s ally, Belarus, a leading producer of potash-based fertiliser, has also been hit with sanctions.
Consumer confidence plunged 4.8% last week, according to ANZ and Roy Morgan, falling to its lowest level since early September 2020 when Victoria was suffering its second wave of COVID-19. Weekly inflation expectations rose 0.4 percentage points to 6% as petrol prices continued to surge, taking the four-week moving average to 5.5%.. Current financial conditions’ decreased by 5.4% and ‘future financial conditions’ fell 4.6%. Both indices were at their lowest levels since July and April 2020 respectively. Increasing petrol prices have had a sharp impact on households’ confidence for both ‘current’ and ‘future financial conditions’ with the two sub-indices dropping 10.3% and 8.4% respectively over the last two weeks
Treasurer Josh Frydenberg on Monday released a new consultation paper on the cryptocurrency industry, seeking feedback on digital asset regulation, including input on a licensing and custody regimen, and the classification of digital tokens, to provide more certainty to crypto providers, consumers and regulators. More than 800,000 Australian taxpayers have used some form of cryptocurrency in the past three years, up 63% in the last year alone, while some Australians have lost tens of thousands of dollars worth of crypto with the collapse of local unlicensed exchanges.
Next week’s federal budget will contain measures to deal directly with high petrol prices – either through a temporary reduction in the fuel excise or a freeze on its indexed increases. Prime Minister Scott Morrison all but confirmed on Tuesday that help was on the way regarding prices at the bowser, not just because of their direct impact on household budgets but also because of the flow-on costs to businesses. The fuel excise relief will be part of a cost-of-living package in the budget, which will also include modest one-off cash payments to low and middle-income earners and possibly welfare recipients. It is understood the excise cut will be temporary. Three months would be too short and regarded cynically as something just to get the government past the election in May. On the other hand, 12 months would be too long in terms of lost revenue, In the run-up to the 2001 election, John Howard froze the indexation of the petrol excise. Although it had no immediate impact on prices, which had just broken the $1 per litre barrier, it sent voters a message that the government was listening.
One-third of Australian companies expect to miss their 2050 net zero carbon emissions, according to research released on Tuesday by Microsoft and the University of London. Six hundred and eighty-six Australian business leaders and thousands of employees took part in the survey which found that despite a high number setting a 2050 net zero target, only 34% thought they would achieve it. The survey found a “delivery deficit” in 68% of the organisations, which is the gap between intent and the ability to execute. Speaking from Seattle, Microsoft’s chief environmental officer Lucas Joppa describes the number as worrying. The survey finds that Aussie companies were strong adopters of renewable energy and sustainable supply chains, but lagged in tech innovation, decarbonisation, funding, skills and natural capital accounting.
Australia, the world’s biggest exporter of alumina, announced a ban on shipments to Russia in a move that will add further pressure on aluminum giant United Co. Rusal International PJSC. Australia accounts for nearly 20% of Russia’s supply of alumina, the government said on Sunday. Alumina is the key ingredient for producing aluminum, and it is in turn produced from bauxite ore. Exports to Russia of alumina and aluminum ores, including bauxite, have been banned immediately. While aluminum has not been targeted by sanctions, Rusal — which needs bauxite and alumina to feed its plants — is facing disruption to its supply chains as companies pull back from doing business with Russia. Rio Tinto Group planned to stop supplying bauxite to, and buying alumina from, a Rusal plant in Ireland. In Australia, Rio operates the Queensland Alumina Ltd. joint venture with Rusal, which holds a 20% stake. The London-based company has said previously it was evaluating its options regarding the partnership with Rusal and had the “appropriate structures” in place to ensure Queensland Alumina’s operations would not be disrupted.
The strength of the post-pandemic economic recovery will bring a $30 billion improvement to the budget bottom line this year, but whoever wins the federal election in May will face 15 years of deficits and the need to find savings of $40 billion a year in the next few years. The surge in global commodity prices including iron ore, coal and gas will add about $45 billion in additional revenue, supporting an $87.6 billion improvement over the four-year forward estimates. The budget will still contain cumulative deficits of more than $250 billion and spending at a historically high 26% of GDP, according to Deloitte budget economist Chris Richardson, and that is before likely new spending on defence, aged care and the National Disability Insurance Scheme. Mr Richardson said savings of $40 billion a year by 2026 could easily be achieved without weighing too much on economic growth, in part because it could offset the need for interest rate rises in the future. Analysis by PwC Australia chief economist Jeremy Thorpe puts the upcoming budget improvement at just $20 billion in 2021-22, but he forecasts cash deficits for at least another 15 years out to 2036-37. Russia’s invasion of Ukraine, while driving up the cost of oil and hitting households at the petrol pump, has forced the price for key Australian exports including coal and gas higher, while iron ore is also elevated. The prices for thermal and metallurgical coal are more than 50% and 60% higher than previous records, while iron ore north of $US130 ($A175) a tonne is well above the budget forecast of $US67.50.
Scammers have become more sophisticated in duping an increasing number of Australians who lost more than $38 million last month after falling victim to fraudulent schemes ranging from investments to romance. The latest available figures from the Australian Competition and Consumer Commission’s Scamwatch site showed it received more than 18,300 reports in February, with people racking up losses of $38,106,474. The most prevalent scam involves investments through which more than $27,700,000 has been lost. Australians lost a total of $323 million in 2021. The consumer watchdog on Friday launched unprecedented legal action against Facebook owner Meta for publishing scam cryptocurrency ads featuring well-known Australians including former NSW premier Mike Baird, businessman Dick Smith, TV presenter David Koch and mining magnate Andrew Forrest. Describing the Federal Court action as “world-leading”, Australian Competition and Consumer Commission chairman Rod Sims said he expected the case, alleging Facebook had engaged in false, misleading or deceptive conduct by publishing scam advertisements. The ACCC said it knew of one consumer who lost more than $650,000 on a fake investment opportunity that was advertised on Facebook. Mr Sims said an increasing focus on celebrities and crypto scams “has risen very quickly and is a major problem and must be dealt with by the platforms”. There had also been an increase in finance scams more generally.
Hotly contested federal electorates were showered with millions of dollars more than safe seats received from a controversial urban congestion fund, an analysis shows. And Victoria has been consistently short-changed when it comes to federal transport initiatives, which favoured Queensland and NSW “where federal elections tend to be won and lost”. The analysis of “pork-barrelling” – promising public funds to particular seats for political gain – by think tank the Grattan Institute shows the average marginal urban seat has received $83m from a $4.9bn Urban Congestion Fund. The average safe Coalition seat received $64m, while safe Labor seats got $34m. The analysis takes broader aim at transport promises at elections, with only one of 71 coalition major projects worth more than $100m promised at the most recent federal poll having a business case approved by advisory body Infrastructure Australia. Labor was little better, with just two business cases out of 61 mega projects promised – and its transport spending promises were worth more.
Thousands of workers are set to have their pay rises jump to 5% or more this year because of CPI-linked agreements that could shake up years of stagnant wage growth. About 30 blue-collar enterprise agreements approved in the past six months are underpinned by inflation guarantees, including for major logistics companies such as Global Express and Australia Post’s StarTrack, as well as employers in manufacturing, food, maintenance, construction materials and energy sectors. Most of the pay deals will automatically pass on the CPI rate recorded for this June quarter, which is forecast to spike at 5% or more due to rising commodity prices following Russia’s invasion of Ukraine. The expected pay surge contrasts to the flat wage growth in most private-sector agreements for the past two years, with the latest data showing pay rises continued to stagnate at 2.7% as of the end of last year. CPI-linked pay rises, once popular in the 1980s, are still relatively uncommon, but they experienced a revival during industry bargaining for the parcel delivery sector in the second half of last year. Transport Workers Union national secretary Michael Kaine said thousands of delivery drivers achieved CPI safety nets in their agreements after taking industrial action, including Toll, Linfox, FedEx, Global Express and StarTrack. While some CPI-linked pay rises are capped at a certain amount, others are not.
The costs of replacing a damaged home in the flooded areas of south-east Queensland and northern NSW could rise at least 20% by the time work starts, as the shortage of skilled labour and materials escalates, experts say. The price tag could climb even higher, particularly for areas located farther from the major centres such as in northern NSW, warned Matthew Walker, CoreLogic’s head of insurance solutions. Experts estimate the number of flood-affected homes had risen to 30,000 so far and about 5000 homes needed to be replaced. This is on top of the 22241 homes built each year on average in south-east Queensland and northern NSW according to the Housing Industry Association.
Finfluencers have been warned that they must comply with financial services laws or risk “substantial penalties”, and they should think carefully about their content. ASIC has issued an information sheet, setting out its expectations for social media influencers discussing financial products and services, A survey the regulator conducted last year found that 33% of 18 to 21 year-olds follow at least one financial influencer on social media and 64% reported changing at least one of their financial behaviours as a result of following a finfluencer. The information sheet (INFO 269) says information presented in a way that conveys a recommendation would be considered financial product advice, in which case the finfluencer would need a, Australian financial services licence. A social media post saying something like “I’m going to share with you five long-term stocks that will do well and which you should buy and hold” would likely be considered financial product advice. Any misleading content would be a breach of the law. In this context a misleading statement is one that cannot be substantiated.
Energy Minister Angus Taylor will accelerate seven fossil fuel projects despite the UN chief describing such a move as madness while naming and shaming our measly climate action. Taylor says skyrocketing gas prices in Europe (up 300% at the moment as Russia supplies about a third of its needs) prompted him to fast-track grants to the local gas projects in Queensland, NSW, and Victoria, saying Europe was a “warning” for us. It’s part of a $50 million funding boost for the industry. It comes as the UN secretary-general Antonio Guterres slammed Australia at a London climate summit, saying “a growing number of G20 developed economies have announced meaningful emissions reductions by 2030 — with a handful of holdouts, such as Australia”. Ouch. The Climate Council said it’s “very unusual” to see Guterres call out a country by name. The UN chief continued that it would be “mutually assured destruction” if countries turned to fossil fuels like coal or gas to patch up the gap caused by Russia’s invasion,
And that’s it for this week.
And next week, I’ll be talking to Andy Thiss, head of Anaplan ANZ. Anaplan is a planning software company used by leading ANZ enterprises across CPG, retail, finance and healthcare to help these companies better plan for the future. And I’ll be talking to Rabobank economist Michael Every about the impact of the Russian invasion of Ukraine on the global economy.
In the meantime you can catch me on Facebook, Twitter Instagram and LinkedIn. And if you want leave a comment.
Wishing you all a safe and healthy week. And looking forward to bringing you Talking Business next week.