Why commodity currencies like the AUD and NZD get weak in real terms even as commodity prices soar...

MAYBE THE MINUTES from the Reserve Bank of Australia's June 3rd meeting passed you by, writes Dan Denning in Melbourne for The Daily Reckoning.

   If so, then listen up. Because "the Board's discussion of the world economy commenced with a briefing on the outlook for Australia's trading partners."

   Now why would a meeting on Australian interest rates begin with a discussion of foreign trading partners? Could it be that foreign demand for Aussie resources in fact threatens higher inflation...even more so than Aussie consumers hitting the shops with a credit card?

   Hold that thought.

   The Reserve Bank may have some help in cooling domestic demand from higher oil prices. Rising energy prices might cool industrial production amongst Australia's trading partners, too. And if the Asian countries eating up Aussie resources cool down a bit, then the flow of cash coming back to Australia from exports would slow down a bit too.

   Maybe, just maybe, the pressure on higher wages and business investment would relax as a result. Who knows?

   But as we've said before, the Reserve Bank is powerless to dent the demand for Aussie resources from foreign manufacturers and construction firms. It's that demand – long-term and enormous – that's fueling inflation in Australia, we believe.

   How can that be? After all, "raw materials including Gold account for about 60% of Australia's exports," as Bloomberg notes today. Across the water in New Zealand, "sales of commodities such as lumber make up 70% of New Zealand's overseas shipments."

   Yet consumer-price inflation here in Australia has jumped to 4.2% per year, its worst level since 2001. For anyone earning and spending Kiwi Dollars, the cost of food is rising above 5.1% per year. Why? Because all that money flowing back into the economy turns into business, personal, or government spending. The extra demand-pull pressure from China and other Asian buyers only adds to the rate of price inflation, too.

   You can choke off domestic demand with higher interest rates, as both New Zealand and Australia have tried. But the most favorable terms of trade in 50 years contribute to back-door inflation that's hard to contain with monetary policy.

   From New Zealand, where interest rates are now at 8.25% – the highest in any triple-A rated economy – our friend Mike Graham sends this note:

   "Someone forgot to tell the New Zealand rural property market there's a global slump on. While residential prices dropped or treaded water, rural property across the ditch actually reached a new record in May. The national farm median price hit $NZ1.86 million, surpassing April's $NZ1.81m figure. The price of a dairy farm has risen 50% in a year!

   "H. L. Mencken said 'No one hates his job so heartily as a farmer'. But Kiwi gumboot-wearers like Kerry Logue would beg to differ. Kerry's been getting up at an unspeakable hour to head off to the milking sheds for 35 years. Now he's now looking forward to a retirement that would make many lawyers envious.

   "His 113 hectare farm at Tomarata, north of Auckland, is on the market for $NZ2.8m, a price he'll most likely get. With money in the bank, a hobby 'do-up' villa near Wellsford and a home at Huia, you could say the 62-year-old is creaming it.

   "Thirty-five years milking is a long enough stint for anyone. My kids thought the old man was crazy still working seven days a week."

   "Not as crazy as all that, it would seem. Of course, it's not just good old-fashioned hard-graft that means Kerry's golden years will be just that. He should a beer at his local pub for those billion people 6,700 miles away who just made him rich."

   The best way to get rich in 2008 is hardly a secret. You find something that the Chinese want. You produce it. And you sell it to them. In Australia, you buy a mine. In New Zealand, you buy a farm.

   "Chinese Premier Wen Jiabao made a confession to New Zealand Prime Minister Helen Clark at recent trade negotiations," Mike goes on. "His dream is not about a future in which every Chinese will own his own car, receive a world-class education or own his own house. It's a future where every Chinese child will be able to drink two glasses of milk a day.

   "An odd aspiration, but Helen is hardly complaining. Thanks to soaring Chinese demand for dairy products New Zealand dairy co-operative Fonterra (NZX: FCGHA) announced in May it would pay farmers a record $NZ7.90 per kilogram for milk solids. ASB chief economist Nick Tuffley estimated the total cash injection would be $NZ9.6 billion this year. That's equivalent to about 6% of GDP, and up from $4 billion on last season.

   "Ordinary consumers – already feeling the pinch of expensive oil, falling property prices and tightening credit – are hardly ecstatic. Thanks to China's new taste for strawberry milkshakes, dairy is now off the menu for many Kiwis. Fresh milk now costs 22% more than it did a year ago. Cheese, 60% more.

   "But it seems that the good old New Zealand farmer could be milking it for some time to come..."