Let's dispel dollar myths

Not all of our input costs are derived from imported inputs or linked to currency exchange rates.

I HAVE previously suggested that the Australian dollar is valued too high and needs to come down significantly to improve the international competitiveness of Australian industries including agriculture.

I am often surprised by the reactions that my commentary invoke, but perhaps the most obtuse is the aggressive assertion that Australian farmers would in fact be better off with a higher Australian dollar. I am unsure if this view is widespread. I am also unsure if it is just an objection for objection’s sake or, more terrifyingly, a considered opinion. I am sure, however, that it is wrong.

Most Australian agricultural products are affected by global agricultural markets. We generally receive a commodity price that reflects either import or export parity. A basic explanation of these terms would be that export parity is the international price minus the freight differential and associated insurance handling and tariff charges to the destination port, while import parity is the international price plus the freight differential, handling and tariff charges to your nearest port.

I acknowledge there is a distortion that occurs in pricing to producers in Australia where excessive market power exists in sectors of the supply chain that control access to the market. Typically, this price distortion occurs when there is little or no effective competition in a given region. The structures that can control market access either on a regional or even national basis in fresh produce would be supermarkets, in meat would be processors and in grains it would be the bulk handling port operators.

Notwithstanding the influence of actual price to farmers be these potential monopolistic structures, our commodities are generally priced with a reasonably strong link to the international market.

International trade is based on a common international currency which for many years has been the US dollar. In turn the amount of Australian dollars we are paid for our commodities is affected by the exchange rate.

For the purpose of the argument I will use a wheat analogy. So, if a tonne of wheat is worth US$270 per tonne and the Aussie dollar is worth 94 US cents then a tonne of wheat is worth A$287. If the exchange rate rose and was worth 110 US cents again then we would only get A$245 per tonne. If the exchange rate fell so that an Aussie dollar was only worth 80 US cents then our tonne of wheat would be worth A$337.

Now the Chicken Littles are saying that I am being simplistic because when the dollar goes down the cost of our imported inputs goes up and we will pay more for fertiliser and tractors and fuel. Some assert that it won’t make any difference to our income because the rise in imported inputs offsets the Australian dollar rise in commodity prices with a falling dollar. Some even assert that we will be worse off if our dollar goes down because of these rising costs.

Well for all the Chicken Littles out there I have some terrific news. Not all of our input costs are derived from imported inputs or linked to currency exchange rates.

A great example of this is labour cost. Labour awards are not linked to exchange rates and so the labour unit cost does not increase as the dollar comes down. We certainly did not see labour awards decrease as the dollar rose and generally employment contracts are negotiated in Australian dollars.

I acknowledge that different sectors have different exposure to the labour market and intensive industries incur greater direct labour costs, but the relief in the relative labour costs is realised in indirect labour costs also. This means the cost of labour for all of the businesses that supply goods and services to us is relatively lower also.

For example, if a mechanic is charging say $90 per hour and wheat is worth $287/t and the Aussie dollar is worth 94 US cents, an hour of the mechanic’s time is worth a little over 300kg of wheat per hour today. If the Australian dollar fell in value to 80 US cents then the mechanic would be worth a little under 270kg of wheat per hour. If the dollar rose in value back to 110 US cents then an hour of the mechanic’s time would cost a little under 340kg of wheat.

In relation to the notion that you may be worse off because imported input prices rise with a declining dollar, let us consider fuel. For the sake of the argument we will assume that the price of fuel does change proportionally with changes in exchange rate. The current average retail diesel price in Australia is around A$1.60 per litre.

No two farms or enterprise mixes are the same, but let’s assume we use 50,000 litres of diesel per annum and we produce 2500 tonnes of wheat per annum. These numbers will not change based on changes in the exchange rate.

If the Aussie dollar is worth 94 US cents then we spend $80,000 on fuel relative to a gross income of $717,500. If the Aussie dollar is worth 80 US cents then fuel costs $1.88/L and we spend $94 000 dollars on fuel relative to a gross income of $843 000. If the Aussie dollar rises to 110 US cents then fuel costs $1.37/L and we spend $68,364 on fuel relative to a gross income of $613,136.

So if the dollar goes to 80 US cents our operating margin on fuel costs improves by $111,500 and if the dollar rises to 110 US cents our operating margin falls by $92,728.

In the interests of time I won’t try to demonstrate every comparative impact of lowering the value of the dollar for Australian agriculture, save to say that the only situation where lowering the dollar can result in a reduction in the real income of an Australian farmer is when the product they produce has no international price linkage and the Australian dollar price of their produce does not rise as the dollar falls.

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FarmOnline
Pete Mailler

Pete Mailler

is a farmer on the Qld/NSW border and a co-founder of the Country Party of Australia
Date: Newest first | Oldest first

READER COMMENTS

Deregul8
29/07/2014 8:10:30 PM

Looks like it is me and you Pete. Doesn't seem to be an issue you could stir up an agrarian socialist storm. Better to stick to single desks and dreams of yester year if you want a life in agripolitics. keep it real simple fella!
wtf
5/08/2014 7:28:44 AM

Seems to me the reserve bank is a big reason for our high dollar, why not get rid of it. We survived without it for a long time. D8, you have indicated the negative effects upon our economy from the Res Bank, why don't u be constructive and respond to what Pete is saying, from where I'm standing it looks like your in agreement with him?
Deregul8
5/08/2014 8:35:43 AM

I don't have much faith in any side of politics. All I know is less government is better than more of it. The biggest distortion in currency markets is the peg of the yuan to the dollar ... oh, besides the fact central banks can print money out of thin air and push any currency anywhere in the world any direction they like. The Reserve Bank provides the finishing touches with 'monetary policy'.
wtf
5/08/2014 10:06:49 AM

so if aussies could realise that our low interest rates and res bank meddling are tricking people into thinking debt is wealth, misrepresenting inflation and causing devaluation of savings, how would we exist in the current global economy D8? would our higher interest rates (which would control credit expansion and remove the boom bust cycle) be attractive to overseas money and we have the same problem us as exporters are facing now? surely the rest of the world would not pursue the same monetary policy as described above, they are too busy watching 3D tvs and comparing coffee
Deregul8
7/08/2014 8:28:06 AM

The goal has to be to deal with current bad debt, not creating more of it. Adding to it just kicks the can down the road and ensures the likely mother of all depressions will be created and it will be global. Of course this is where the nanny state can enlarge herself as socialism rears its ugly head world over. The free market ain't perfect, but this is where the alternative of 'regulation' will end. In the goolags my firend, in the goolags.
Burrs under my saddlePete Mailler is a farmer on the Queensland/NSW border. His perspective and opinions are borne from seeing more than one side of many problems in his various farm leadership roles and in wanting to ensure a future for his children in agriculture.

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