Currency – beef’s friend and foe

A range of factors contribute to Australia’s competitiveness on the global marketplace – such as the cost of cattle, market access or competitor pricing – however movements in the A$ can be an exporter’s friend or foe. Given Australia exports about 70% of beef production around the world, currency movements can have a significant impact on farm gate prices.

The dollar has crept higher in recent weeks – from 72US¢ on 29 December to 77US¢ on 20 February – but it remains markedly below where it tracked during the mining boom years of 2011 and 2012. While Australian cattle prices have broken records over the past year, the A$ has played a somewhat mitigating role in this cost being passed onto the global consumer. In US$ terms, so far in February, saleyard heavy steers have averaged 426US¢/kg cwt across Australia; if the A$ was still at 109US¢ (as was the case in April 2011), the same indicator would have averaged 601US¢/kg cwt. Such currency movements are, in-part, sheltering the growing competition of US supplies entering Japan and South Korea.

On the flip side, an A$ tracking above parity put a ceiling on cattle prices during the last herd rebuild period (2011-2012).

Nevertheless, short term currency movements of late have not been favourable. US imported lean grinding beef prices have improved so far in 2017, on the back of reduced slaughter in Australia and New Zealand and tight spot supplies on the US market. As of last week, the imported 90CL beef indicator averaged 206US¢/lb CIF (Steiner Consulting Group), up 14% in local currency terms from where it opened in January but up just 8% when converted to A$.

While the A$ has increased about 6% against the greenback since the start of the year, as have the currencies of other major beef (or buffalo meat) exporters; the Brazilian Real has increased 5%, while the Indian Rupee has gained 1%. However, both the aforementioned global suppliers work off a much cheaper production cost base and shifts in market access (China and Saudi Arabia in the case of Brazil, and Indonesia in the case of Indian buffalo) are having a much more significant impact than currency movements.

Looking ahead, two of the major banks have the A$ forecast to finish 2017 lower than the current rate (forecasts range from 70-74US¢ for December 2017). Any downward movement would be welcome news but the A$ resisted most forecasts to move lower throughout 2016. Given the global political landscape has shifted significantly over the past year, there is potential for greater volatility in currency markets throughout 2017, and swings could be large and in either direction.