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Market Morsel: A$ gives a helping hand

Article courtesy of MARKET MORSEL | BY ANDREW WHITELAW , TEM

Market Morsel

Australia is an export dominated nation, especially our agriculture. The majority of our commodities are exported. The export market is generally traded in US dollars, so changes in exchange rate impact the industry.

To keep it simple, a  lower A$ makes our exports more attractive. Conversely, a higher A$ makes our imports more attractive. It is a balancing act, but generally, a lower A$ is better for farmers.

The Australian dollar has dropped to 0.7163. This is due to China’s continuing slowdown in demand as they battle covid (yet again). This has reduced demand for industrial commodities like iron ore and coal.

The Australian dollar tends to devalue when the market takes a risk-off approach but is also strongly linked with the commodity trade with China. Our biggest export commodity iron ore has a strong link with the strength of the dollar.

What difference does it really make?

The table below shows Chicago wheat futures at different pricing levels in US¢/bu (600 to 1100), and the A$ at different rates (0.75 to 0.65).

At the moment, December wheat futures are valued at A$546 using the current rate of 0.7163. If the rate was 0.75, then the futures would be at A$521, and conversely, A$602 if at 0.65. Early in the last decade, we were trading at parity, which would have caused an issue with futures being priced significantly lower at A$391.

At current CBOT pricing levels, every 1¢ move is worth around A$8/mt. The A$ is one of the three factors that influence the grain price in Australia, the others being futures and basis.

The current direction of the A$ will assist Australian grain growers and exporters of other products (meat/fibres, etc). Conversely, it will make imports of fertilizer and other inputs more expensive.

Thomas Elder Markets (TEM) is an independent, data-driven market analysis service that provides premium agricultural market insights and reports. Our online reports are provided completely free of charge, with no strings attached. Sign up to the TEM newsletter now.