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Australian weather may help food, hurt miners

September was wettest month on record for the nation, and rainfall continued into the next month to make October the third-wettest on record, strategists at Bank of America’s Merrill Lynch unit wrote in a recent note.

Thanks to the rain, a 10-year drought in the state of New South Wales is now over and crop production volume is expected to rise 16% in fiscal 2011, they wrote.

That should lead to a 0.1-0.2 percentage-point addition to 2011 gross domestic product, on top of an expected non-farm GDP growth of at least 3.25%, the strategists said.

“Farm output is only 3% of real GDP, but fluctuations can be so large that they can impact overall growth,” the strategists noted.

So far this year, food inflation registered in the Australian consumer price index has averaged 1.3% year-on-year, the strategists wrote, well below a decade average of 4.3%.

The strong Australian dollar has weighed on commodities traded on world markets, reducing the “tradables” component of food CPI, the strategists said.

Global food prices have surged since June amid production setbacks in other countries. Fires destroyed a large part of the Russian wheat crop mid-year, sending wheat futures to multi-month highs of near $8 a bushel in August. Prices have since pulled back a touch but remain not far off peaks.

On the other hand, miners could see production drop off, the strategists said.

Along with heavy rainfall over the past two months, around 20 to 22 cyclones are expected in the cyclone season starting this month, which the Merrill Lynch strategists said is much higher than the long-term average of 12.

“Wet weather and cyclones have in the past significantly disrupted production and exports of Australian mineral exports, reducing volumes shipped but thus sustaining higher prices,” they said.