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Soaring Aussie dollar takes edge off world price boom

9 August 2007

BOOMING world agricultural commodity prices are easing the pain of an inflated Aussie dollar on Australia’s export-reliant farm sector.

The Westpac-NFF Commodity Index – released today – records continuing strong international prices over July, averaging 15.6% higher than year-ago levels in Australian dollar terms.

National Farmers’ Federation (NFF) Vice-President Charles Burke said the record high dollar means Australian farmers are frustratingly unable to reap the full benefits of the buoyant commodity market, as they watch the rising dollar erode farm-gate returns.

“The NFF estimates that every 1% increase in the Aussie dollar cuts around $190 million from Australian farm incomes,” Mr Burke said. “This equates to the soaring dollar stripping almost $3 billion dollars from the value of Australian produce over the past 12 months.

“There is no doubt that continued strong world commodity prices are great news for our farmers – especially those who have successfully managed drought conditions and are looking to emerge bigger and stronger over 2007-08. Those prices show no sign of shortening any time soon.

“At the same time, the high Aussie dollar does take a sizeable chunk out of farm incomes during this vital drought rebuilding stage. Farm debt levels have grown to well over 100% of annual income levels, with our farmers needing a run of good seasons to take the pressure off their debt burden.

“Now more than ever, just like the rest of the community, Australian farmers are anxious about rising interest rates – bracing themselves for the double whammy of increasing farm debt and an inflated dollar.”

Justin Smirk, Senior Agribusiness Economist with Westpac Banking Corporation, said: “We caution that the recent fall in the Australian dollar below US86¢ should not be taken as a firm sign that the worst of the appreciation in the currency is behind us.”

“A very robust global growth profile suggests commodity prices should remain firm through to at least the end of 2008.

“When you add to this the risk of further rate rises as the Reserve Bank of Australia tries to cap inflationary pressures emerging from the strength in domestic demand and low unemployment, and the outlook that the markets will still be looking for a rate cut from the US Federal Reserve, we see the Australian dollar moving higher, again, once we are clear of the current bout of market risk aversion.”

Analysis from individual agricultural commodities indicates the appreciation is having a negative impact across sectors. The following estimates of the farm-gate impacts have been collated from industry...

  • Cotton: Australia’s cotton growers estimate that a 1¢ appreciation against the US dollar, equates to a $7 per bale (AUD) reduction at farm-gate. With 3.1 million bales are produced in a normal year, this equates to a loss of over $20 million.
  • Sugar: The sugar industry estimates that a 1¢ appreciation reduces the farm-gate sugar price by $3.00/tonne and the farm-gate cane price by 27¢/tonne – a 1.1% drop in value.
  • Grains: A 1¢ appreciation for grain growers is estimated to shave $3.00 per tonne off farm-gate prices – equating to approximately $110 million off a normal season harvest.
  • Beef and Sheep Meat: Producers estimate that a 10% appreciation of the Australian dollar, reduces farm-gate prices by 6-7%. With a Gross Value of Agricultural Production of around $10 billion dollars annually, this 10% appreciation equates to approximately $650 million less for Australian farmers.
  • Dairy: A 1¢ appreciation of the Aussie dollar equates to around 0.5¢/litre (or 1.5%) off the farm-gate price of dairy. On 2005/06 values, this equates to approximately $50 million off farm-gate prices for every 1¢ appreciation.
  • Wool: A 10% appreciation against the US dollar, cuts the farm-gate wool price by between 5-7%.

Compared with June 2007 levels, global prices in July increased for Cotton (10.5%), Barley (0.8%), Canola (1.3%), Wheat (3.6%), Sugar (6.0%), and Dairy (5.9%). Decreases in global prices were experienced for Wool (-5.5%), while and Beef held steady (0.0%). The overall weighted index increased by 1.6% during July, taking it to 15.6% above year ago levels.

[ENDS]

The Westpac-NFF Commodity Index is weighted according to the value of Australian agricultural exports and includes only rural commodities – unlike other price indices that are overshadowed by oil, mineral and energy prices. It provides daily movements based on prices of Australia’s eight key farm exports – barley, beef, canola, cotton, dairy, sugar, wheat and wool – in both $US and $A.

Media Enquiries: Brett Heffernan on (02) 6273 3855 or 0408 448 250

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