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Aussie dollar sinks to 22-year lows with export and domestic impacts

Jon Condon January 15, 2025

The majority of Australian beef and sheep meat sold into global markets is traded in US$, meaning markets like Japan, Korea and China are also impacted by the exchange rate movement, as well as red meat customers in the US itself.

This morning, the Aussie dollar was trading at US61.8c, having fallen as low as 61.3c yesterday. Apart from a brief COVID-related glitch that saw the A$ sink as low as US57c for a few weeks, the local currency has not been this low since April, 2003.

The major factor behind the fall in the A$ has been a spike in the value of the US dollar.

The A$ is not alone in its decline in value relative to the US$, with many other large currencies also losing ground against the greenback in recent times.

Since its recent high-point at +US69c back in October, the A$ has dropped consistently over the last three months, losing about 12pc of its value in 14 weeks.

The greenback hit a fresh-two year high this week, after much stronger-than-expected US employment data was released. Some analysts are forecasting the A$ to fall further in coming months, possibly into the mid-US50s. Australian interest rates are now expected to fall sooner than previously forecast, creating a further source of pressure on the exchange rate.

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“Uncertainty around the incoming Trump administration’s plans on fiscal and tariff policy as inauguration day draws nearer suggests that more volatility may lie ahead,” a US currency analyst said yesterday.

The outlook for China will be another crucial factor for the A$, as the A$ is viewed by traders as a proxy for China’s economic fortunes.

The decline in the currency value comes at a time that demand for Aussie beef in North America approaches historic highs, and by nature of declining red meat exports out of the US, in other countries as well.

Importers seek to re-cut the pie

A leading Australian red meat trader told Beef Central this morning that while lower currency value was overwhelmingly in Australian exporters’ favour, history had shown that overseas customers inevitably wanted to ‘cut better deals’ with their suppliers to reflect such impact.

“It happens all the time,” he said. “But who wins in that, depends on which party has the stronger negotiating position.”

While that was probably Australian exporters at present, given world supply and demand patterns, it could change rapidly if Australian exporters became “a bit under-sold.”

“Australian exporters this week are in a nice position, and we can be pretty firm on our prices, while we don’t have a lot of production coming through this early in the season. We can probably afford to be a ‘bit cute,’ but that can change rapidly, once production ramps up again,” the trader warned.

“We could easily get to that April-May high production period and maybe the tables could turn.”

It might not be until week commencing 3 February (after Australia Day) that full Australian processing activity returns, when the real supply-demand effects are seen, he said.

Forward contracts mask some currency impact

Another factor in the recent currency impact on red meat is the fact that substantial quantities of some products – beef trimmings used for manufacturing/grinding beef, for example – are sold on a forward contract basis.

For example, there were contracts written with large end-users like burger fast food chains back in December for delivery February-March this year, that will not reflect the latest currency changes. But equally, forward contracts written in coming weeks for March-April-May delivery will factor in today’s US61c currency.

How much impact current forward contracts have on beef prices (and ultimately, cattle prices) will vary from processor to processor. Some move to cover the currency trend when the sale is made, while others operate differently, waiting until the money comes into their account, before buying the Fx on the day.

Currency impact on livestock

But nobody should dismiss the impact that currency movement can have across the entire Australian beef supply chain, the trader said.

“If the Aussie dollar drops or rises a hundred points (effectively, US1c) in value overnight – which it has done plenty of times in the past – the results can be seen the very next day in livestock prices in the yards or on the grid,” he said.

“Depending on market conditions (supply/demand), if the A$ falls a cent, straight away the cattle are worth more, and the exporter can afford to pay more,” he said. Obviously that might be less apparent during times of heavy livestock supply.

Another factor was that with an A$ approaching US60c in value, it made Australian processing costs – converting live animals into boxed red meat – that much more competitive in the world market. That’s an important factor, at a time when Australian fabrication costs are already miles higher than either the US or Brazil.

Domestic market impact

Nor are flow-on effects from currency limited to beef trade into export markets.

The Australian domestic beef market is impacted, if only in a more indirect sense.

With the currency in decline relative to the US$, the domestic market tends to get what the export market (give or take, 70-75pc of all Australian beef production) does not want.

In essence, the domestic market has to pay competitive prices (effectively, export price minus shipping cost) to retain the product in Australia.

“Where that creates problems is when our friends at Woolworths and Coles are putting their red meat trimmings back into their mince, sausages and other items. Suddenly, they have to price that as if it was going to America, under a US61c currency environment,” the trader said.

“It’s the same for other domestic operators like ALDI, buying 85CL trimmings from various processors, who are telling them: the currency was US65c but is now US61c, so you have to pay more to maintain parity with export.”

“It’s unwise to assume that currency is not a factor in the value of beef on the Australian domestic market,” the trader said.

 

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Comments

  1. Peter Small, January 15, 2025

    Beware borrowers. The RBA also has a responsibility to protect the currency. It’s only tool is again interest rates. Unless the AUD strengthens, expect an interest rate rise to protect the currency. It will be dressed up as an inflation measure, but the issue is the currency.

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