Just as the Reserve Bank and Federal Government are grappling with controlling inflation by lifting interest rates and cutting Federal Government spending, along comes news that would normally be seen as good, but in the current context, a bit mixed.
Rural Australia is starting to bounce back from years of miserable drought. The heavy and persistent rain across much of the East Coast and Top End during the past two months has had an impact.
Forecasts for economic growth this year are now factoring in positive gains for rural exports and gains in rural output from the depressed levels of the past two years.
The wheat harvest is bigger than last, though still drought affected. World wheat prices have hit a succession of new highs in recent months, touching $US10.50, and even higher over night to $US10.63 a bushel in Chicago this week.
And Australian Agricultural Co, the country's biggest cattle owner saw earnings fall 64% in the latest period because of the drought and a decision to hold back cattle for a depressed market.
The rising price of wheat and other grains is good news, but its hard to convince many in rural parts.
Our export performance will improve from the higher level of rural exports, coming at a time when our terms of trade are likely to be boosted (after a small fall in the back half of 2007) from higher coal, iron ore and oil prices.
There will be higher demand for resources, consumption, loans and finance and supplies from rural businesses wanting to either re-stock or to start rebuilding activity.
But that will run into the central problem confronting Australia at the moment: a shortage of resources, capacity and labour.
It was the first mentioned in Tuesday's statement from reserve Bank Governor, Glenn Stevens explaining the rate rise:
"Recent information points to significant inflation pressures.
"CPI inflation on a year ended basis picked up to 3 per cent in the December quarter, with underlying measures around 3½ per cent.
"This was a little higher than was expected a few months ago. Indicators of demand remained strong through the second half of 2007, and reports of high capacity usage and shortages of suitable labour persist.
"In the short term, inflation is likely to remain relatively high and will probably rise further in year ended terms, though the Bank expects it to moderate somewhat next year."
But the latest survey on agribusiness confidence from the National Australia Bank was a bit mixed on the strength of any recovery right now.
In fact the December quarter saw a loss of confidence in key areas of agribusiness, even though the NAB survey highlighted that agribusiness conditions (post-farm gate production and processing) improved in the December quarter 2007.
"Stronger demand, profitability gains and stable employment resulted in an improved business environment for agribusiness," the bank said.
"The improvement in conditions was reported across most sub-sectors within agribusiness, with the largest recovery experienced in transport and manufacturing.
"The most difficult conditions continue to be reported in agribusiness related retailing and wholesaling.
"Property, business and financial services continue to report the strongest conditions both in agribusiness and economy-wide."
The bank said the results of its survey revealed that "the impact of drought on production and suppliers to agriculture, agribusiness confidence in major commodities and suppliers moderated in the December quarter (albeit, higher product prices underpinned confidence)".
But this didn't translate to improve confidence: in fact it was the opposite.
"Overall, agribusiness confidence (in aggregate) dropped 3 points to an index of zero.
"In terms of commodities, confidence in wheat declined (down 13 points to an index of -2) as a lack of spring rainfall significantly cut crop production.
"The poor seasonal conditions also affected confidence in beef (down 20 points to -4) and cotton (down 29 points to -13).
"Confidence in dairy increased (up 3 points to 7) reflecting higher milk prices and improved seasonal conditions in key dairy producing regions. Confidence in sugar remained weak (up 1 point to an index of -10) as prices remain pressured by high global production.
"In terms of suppliers, the downward adjustment to farm production flowed into confidence in farm equipment (down 5 points to 0).
"Encouragingly, agribusiness' own confidence rose to 10 index points in the month of December – probably boosted by recent rains as well as a lower A$.
"Agribusiness respondents' outlook for the next 12 months remains relatively optimistic, despite a slight downward revision in the December quarter.
"Respondents remain concerned with drought and the relatively high exchange rate, with 19 per cent and 16 per cent of respondents citing these factors as a drag on profitability.
"Nevertheless, demand continues to be reported as the major concern for agribusiness, with 27 per cent of respondents expecting a lack of demand to be a constraint to profitability over the next 12 months, while 9 per cent expressed concern about sourcing suitable labour. In addition, 7 per cent of respondents cited the interest rate outlook as a key constraint to the profitability outlook.
"To help mitigate currency risk, around 52 per cent of agribusiness exporters utilised hedging tools in the December quarter for an average term of 6 months. Of these, 33 per cent reported a favourable position (down from 45 per cent in the previous survey), while 0 per cent reported an unfavourable position, compared with 27 per cent in the previous survey."
The bank said "business conditions in agribusi
