A high Australian dollar means a healthy economy and a resources boom but it signals tough times ahead for farmers. From The Australian special agribusiness report 6 October 2005.
BIS Shrapnel senior economist Matthew Hassan says that the high dollar is bad for most exporters outside of resources. Most Australian businesses would be competitive at exchange rates of 65-66 US cents rather than the high 70s, he says. The problem is that the high currency is being sustained for a long period of time.
He says: “The rural guys have seen some pretty good commodity price rises. But it’s just been swamped by the currency rise.”
Every rise in the Australian dollar means a cut in farm profits from the commodity sales and increased input costs from, for example, machinery, fertiliser and fuel.
The Australian Bureau of Agricultural and Resource Economics (ABARE) forecasts the total value of farm exports to fall by almost 2 per cent from $27.7bn to $27.2 billion in 2005-06. Specifically barley, canola, sugar, beef and wool exports will fall while earnings from wheat, cotton, wine, live sheep and dairy will increase.
To put it into perspective, rural exports were worth nearly $31bn in 2004-05, 19 per cent of all goods and services exports.
Beef is the largest single export after minerals. It represents about 15 per cent of total farm exports and peaked at A$4.49bn in 2001 when the Australian dollar was at its nadir. But a rising dollar meant exports fell until mad cow disease curbed US beef exports and, in Asia, demand shifted from chicken to beef because of avian flu.
Peter Weeks, manager of market information and analysis at Meat and Livestock Australia (MLA), says that for the first time, a major change in the exchange rate hasn’t damaged export returns because of increased demand.
Weeks says: “Normally we’d see for every 10 per cent rise in the dollar we’d see about a 6 per cent fall in cattle prices in Australia and a similar decline in land prices. It’s not happening. It’s being offset by other things in recent years.
“We are in a temporary aberration for sure. And the full impact of the rise in the dollar is going to be felt once the international [meat] markets return to some sort of normal trading pattern.”
That will start in 2006 with US beef returning to Korea and Japan but it could be offset if the dollar was to settle at 70 cents in 2006.
A rising dollar should hit wheat exports. But a drought on the east coast has dampened supply while locally demand increased.
Dan Mangels, chairman of the Grain Growers Association, says that there is a high correlation between the exchange rate, grain prices and farm gate returns. He says: “A rule of thumb in the grain industry is that every cent the exchange rate moves in the upward direction we generally see a $5 downward revision in the price of wheat.” Because of demand anomalies, however, the world indicator price for wheat is expected to average US$158 a tonne in 2005-06, compared with an average price of US$154 a tonne in 2004-05.
A glut notwithstanding, oranges are a small but profitable export for Australian farmers worth some $60m a year. Riversun in SA exports most of that fruit. Chairman Peter Walker says that there is an optimum exchange rate because shipping costs are paid in US dollars while exports sales have to be exchanged into Australian dollars: “If when you want to convert back to Aussie dollars it’s a 50 cent dollar it’s a bloody great market. If it’s a 78 dollar its marginal.”
For every 5 per cent rise in the exchange rate there is a $1 rise in the price of a box of navels, which averaged between $24.29 and $30.83 between 2004 and 2002.
Walker says that an Australian dollar trading at 68 or 69 cents is the best balance. He says: “The high 60 dollar would be an absolute advantage to growers. You spend more money on your farm as you make more money. As the dollar gets higher there is a reluctance to finance or fine tune your crop, which you have to do. But if you haven’t got the dollar you can’t do it.”