Dollar's drop fertile for farm exports

30 Jan, 2015 01:00 AM
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Heartening news for farmers bruised by three years of exchange rates above parity with the US

THE deflating dollar looks set to continue making farm exports more attractive to overseas buyers for the next two years, after dipping to new five-and-a-half year lows early this week.

In the short term, also, imports of key farm inputs such as fertiliser and chemical could be relatively immune to significant price rises thanks to generally weaker global commodity prices, notably for grain, dairy products, and particularly oil and gas.

The Australian exchange rate against the US dollar slipped to US78.7 cents on Monday before recovering above US79c - roughly the sort of territory the National Australia Bank (NAB) tips the currency will average for the next nine months.

By year's end NAB expects it to average US78c, dropping further to US75c throughout 2016.

The trend is mostly heartening news for farmers bruised by three years of exchange rates above parity with the US greenback until 12 months ago.

But NAB currency strategist Gavin Friend warned our dollar's slide also reflected a generally weak and uneasy global economy, with potentially uncertain or volatile demand for farm products.

Resources and energy values had slipped as much as 50 per cent (for oil and gas) since July, undermining Australian hard commodity earnings and thus the local currency.

Continuing money market expectations of an interest rate cut by March are also pushing the Aussie dollar lower.

While the 16 per cent fall in the exchange rate in the past six months had also been prompted by a significant strengthening US currency (up 18pc against most major currencies in the past six months), Australia's farm sector export competitors, including New Zealand, Canada and the European Union, had also seen their currencies sinking in tandem with the Aussie dollar.

This was likely to help the price attractiveness of their export, too, while on the other hand import costs for many food consumer economies, such as Japan, were also rising.

Mr Friend said although lower global oil and gas prices should stimulate economic activity, including demand for agricultural products, "people outside the US seem to be still worrying about the economic outlook".

Fertiliser price drop hard to predict

In theory, cheaper gas and oil costs should also keep fertiliser import prices in check, particularly for urea, much of which is sourced from the Middle East or the gas-rich US, but it was too difficult to anticipate if energy prices would stay low for long enough to make a longer-term impact on fertiliser markets.

Fertiliser Industry Federation of Australia executive manager, Nick Drew, said the major price driver for fertiliser was more likely to be triggered by demand for farm crops and pastures.

Fertiliser production, demand and exports appeared "fairly benign at the moment" reflecting subdued grain prices and the generally depressed resources market.

US inventories of ammonium phosphate had also been above five-year averages for the past year.

"Nitrogen could benefit from cheaper gas, but most importers costs are based on longer-term production contracts and won't immediately reflect recent energy price cuts in some regions," Mr Drew said.

Melbourne-based Impact Fertilisers chief executive officer Jim Mole felt falling energy prices would "probably help" counter the higher cost of nutrient imports, but the market for the coming cropping season was too hard to predict.

"Importers who don't have a lot of stock on hand will have to start paying for fresh orders with a currency that has devalued about 13pc or 14pc in the past few months," he said.

"Marketers will absorb costs for a while as they weigh-up demand, but producers can't expect that to go on for long, especially if overseas demand starts moving.

"You actually lose money for a lot of months of the year in the fertiliser business, so you have to recoup it at some point.

"Thankfully, however the lower currency is generally more of an positive for farmers when it comes to selling their production."

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FarmOnline
Andrew Marshall

Andrew Marshall

is the national agribusiness writer for Fairfax Agricultural Media
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READER COMMENTS

Bushfire Blonde
30/01/2015 6:46:15 AM

When are the RBA and the Australian Banks going to stop propping the Au$ up by having the Australia Interest rates 2% to 3% higher than the rest of the Developed World namely America ( the world's largest economy), Japan, Europe and England? Australian Businesses that have borrowed and that export are getting three hits to their bottom line - inflated operating costs, inflated Interest costs and deflated income from their sales that are exported. Australian exports 72% of the beef produced so no wonder Australian Cattlemen are struggling.
Percy
30/01/2015 6:49:28 AM

With so little now produced in Australia then farm inputs will quickly rise in price because all imports will cost more.
James
30/01/2015 12:11:19 PM

BB when RBA official cash rate is 2.5% currently not sure its 2-3% higher than rest of world... closer to 1%, and likely to be dropping at Feb.
Bushie Bill
30/01/2015 9:02:54 PM

You should never be surprised at Bushie Blonde's escape into self-serving fantasy and outrageous hyperbole, James. A lot of ignorance goes a long way, eh Bushie girl?

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