With Western Australia’s economy being so heavily export oriented, sandgropers well understand that our influence on global markets is relatively minor. Just because we produce it, doesn’t mean we can sell it for the value that we wish. The rolling scrum of global economic variables are constantly pushing and pulling not only at the price for our commodities, but also at Australia’s Foreign Exchange (FX) Rate, and WA farmers have to take the prices they can get.
The FX rate impact on prices for exported goods can be substantial. If the Australian dollar rose from 70c to 75c compared to the US dollar, then a $USD300 tonne of wheat would fall in Australian dollar value from $428pt to $400pt (assuming everything else stayed the same), which could mean the difference between a relaxing holiday in January or having to have an awkward conversation with the bank manager.
What is frustrating for farmers is that the major drivers of FX rates have relatively little correlation to farming. The Australian Dollar (AUD) is often referred to as the commodity currency. When commodities are in high demand, the AUD heads north. But when the term "commodity" is used, we are mainly talking about one commodity - iron ore. The reason is size. The costs to mine iron ore are largely paid in AUD so, although the iron ore is sold in USD, it needs to be converted to AUD to pay royalties, wages, dividends, contractors, freight and so on. With the value of iron ore sold every year amounting to well over $100 billion, this creates substantial demand for AUD, and Economics 101 says that when demand rises and supply is fixed, up goes the price. But with the clouds of economic uncertainty gathering over our largest iron ore importer, China (the biggest by a loooong way), the pressure is weighing on the Aussie currency.
The other aspect impacting the AUD is the earning value of money in its own right. If you have a stack of cash, you are likely to keep it in a financial institution where it will earn interest. However, if the Australian interest rates are lower than US interest rates, you might be inclined to switch your AUD for USD and park it in a USD bank account and earn higher rates. Again, buying one currency at the expense of another currency changes the supply and demand dynamic, and down goes the AUD. Because of inflation rates ripping up across the globe, central banks are outdoing each other by lifting official interest rates and, although the RBA is lifting Australian rates too, it is not as much relative to other main currencies. So again, the AUD is yielding to this downward spiral.
So, is this bad news? Agricultural exporters are in the situation where a falling Aussie dollar is typically a good thing. The more it falls compared to global prices, the more money farmers earn in Australian dollars (let’s just ignore the cost of importing farm inputs for the moment). But things aren’t as straightforward this year.
There is a caveat when looking at the AUD to the USD relationship in that the USD is not as special as the nightly news makes out. The US is third in our national trading partners by currency and has only a quarter of the weighting of China. This is displayed in the Trade Weighted Index (TWI). So, if the agricultural product you are exporting is heading to Japan, the AUD/USD relationship is not so important. Whereas the AUD/USD value has dropped nearly 15% in the past year, the TWI has only fallen 2%.
We are currently in the situation where the fall in the AUD has not benefited export trade significantly but has dented the WA farmer’s spending power for any favoured US kit (such as green gear). A lose-lose!
Nonetheless, as FX rates are inherently difficult to predict, where we will be next year is anyone’s guess.
