Exchange Rates Impact on the Australian Agriculture

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Table of Contents

Executive Summary
Introduction
Appreciation of the Australian Dollar
Effects of Exchange Rate on Australian Agriculture
Government Policy and Exchange Rate Risk Management
Recommendations
Conclusion
References

Executive Summary

This research-based report provides an exploration of the impact of exchange rates on the Australian agricultural business. The random trend in the foreign exchange market is a macroeconomic issue that has significant implications on the export market prices and the appreciation of the Australian dollar. The report provides a brief explanation of the reasons for the ever-appreciating value of the Australian dollar, which is pegged on the United States dollar.

Most importantly, it contains the various issues that emerge from the volatile foreign exchange rates encountered in the export markets. The report also highlights the Australian government policy and some international regulations that control the rate of currency exchange. Lastly, the report presents recommendations that the Australian government should put into consideration to balance between the exchange rate, Australian dollar appreciation, and improvement of the agricultural business.

Introduction

The exchange rate is an important macroeconomic aspect that drives the inclination of agriculture, which is a major generator of revenue in Australia. Australian agricultural business is prominent in the international market arena for its two-third contribution of domestic products. The country’s geographic location creates a favourable climate for agricultural activities. Australia’s geographic location has privileged the country a competitive agricultural product competency in the international market. Because of this advantage, Australia has always witnessed an increased demand for food and animal products in export markets, especially the Asian markets.

However, the exchange rate between the Australian dollar and the currencies of other countries has had significant effects on Australian agricultural trade. The exchange rates between different countries determine the monetary value for export and import products. Issues such as the strength of the Australian dollar and exchange rate volatility have challenged researchers and policymakers to rethink about the reducing competitiveness of Australian agricultural products. This report explores the impact of exchange rates as a major macroeconomic issue affecting Australian agricultural business.

Appreciation of the Australian Dollar

The power of the Australian dollar has raised the eyebrows of many economic researchers and policymakers between the last five to ten years. Contemporary factors that influence the strength of the Australian dollar are dependent on demand and supply of export products, especially from the agricultural sector (Stokes 2012). The major cause of the appreciation of the Australian dollar is the booming price of Australian economic resources and export markets, especially the wider Asia, China, and Japan (Siriwardana 2008).

Australia is rich in agricultural resources, mineral products, and other economic commodities. Increased demand for Australian export commodities has also contributed to the appreciation of the dollar value (Swift 2004). The high demand for Australian agricultural exports increases the export prices dramatically. Consequently, the heightened prices improve the value of the dollar. Lastly, Australia is a country that attracts many foreign investors due to its strategic geographical location (Yap 2012).

These investors contribute to increased demand for the Australian dollar. Hence, they attract high exchange rates of dollar conversion. Stokes (2012) reveals that Australia has attracted the interest of many investors who benefit from the growth of China, which is one of the booming markets for Australian agricultural products. The emergence of foreign investors in Australia has considerably appreciated the dollar due to increased financial flow into the country. The appreciation of the Australian dollar has led to dramatic price fluctuations in the export markets (Makin 2012).

Effects of Exchange Rate on Australian Agriculture

Despite the benefits that Australia reaped from the strength of its currency for the last decade, exchange rates between the Australian economy and other world economies have had significant effects on agricultural trade in the country (Crecană 2012). One of the major effects of exchange rates is volatility of export prices for farm outputs. Due to its high value, the Australian dollar does not favour business transactions with most foreign currencies.

This fact leads to price fluctuations that place the county’s agricultural sector to operate in a risky international market. Agriculturalists attempt to satisfy production demands in an export market that experiences price uncertainties. According to Kriesler and Nevile (2013), price volatility has lately led to the changing demand for agricultural products. Between 2003 and 2008, the Australian dollar remained competitive in export markets as compared to other currencies such as the US dollar and the Canadian dollar.

Makin and Rohde (2012) reveal that the price of agricultural exports remained relatively high during this period. The vitality of agricultural products has sustained Australia’s benefit of exporting products at high compensation rates and obtaining cheap imports due to the prevailing exchange rates in most of the foreign markets. In particular, the agricultural sector has benefited from the availability of cheap farm inputs such as machinery and fertilisers.

However, the volatility of the exchange rates has led to decreased value of the Australian dollar. Kriesler and Nevile (2013) reveal that the Australian dollar had fallen by approximately fifteen-percent in 2013. The fall has led to raised prices of farm inputs such as fertilisers and oil. Imported agricultural machinery has also exhibited a similar trend of increased cost. This situation has led to falling profits in the country’s agricultural sector.

Bernanke, Olekalns, and Frank (2008) suggest that the continued volatility of exchange rates can reach a point of ever-unpredictable market prices. This phenomenon happens when a production sector experiences sequential and sharp booms and falloffs in both export and import prices. The consequence of booms and falloffs of export prices has led to short-lived and elevated interest rates in Australian banks. This phenomenon causes destabilisation of the banks’ stock returns.

The volatility of the exchange rate has led to two key areas of research in Australian agricultural production. Firstly, agriculturalists are very keen on the price variability trends in the export market. Watson (2013) reveals that the compensation prices received by farmers are quite variable, regardless of the constant prices paid by the farmers. Secondly, since price variability affects the production levels, agriculturalists have also shown profound concern on production variability trends. The production variability is not only caused by the changing climatic conditions but also the price of imported farm inputs (Dvornak, Kohler, & Menzies 2005)

Government Policy and Exchange Rate Risk Management

The management of exchange rate uncertainties that face the Australian agricultural sector is critical for its future weight in the international market. Phillips, Ahmadi, and Fredoun (2012) reveal that the appreciating value of the Australian dollar greatly influences the terms of trade in the international arena. The authors attest that the continued appreciation of the Australian dollar places the agricultural sector at great risk in case the currency values of other economies such as the United States fall.

According to the authors, some sources have indicated that the present instability of exchange rate has subjected the US dollar to a forced reduction of value in the export markets. This situation has led to further appreciation of the Australian dollar. Research has indicated that continued appreciation can lead to the redefinition of controlled exchange rates (Wan & Chee 2009).

Ahmadi and Fredoun (2012) unveil that Australia will continue to operate under a floating exchange rate policy. The Australian government formulated a foreign exchange risk management policy in 2002 that comprised the GGS Commonwealth Authorities and Companies Act 1997 (CAC Act) and the Financial Management and Accountability Act 1997 (FMA Act). The General Government Sector (GGS) manages the foreign uncertainties within the Australian government policy on foreign exchange risk, as outlined in the FMA Act of 1997.

Kramer (2013) reveals that the GGS does not directly control risk management since such a move might result in hedging, which equals to violation of the Australian Government policy. The author exposes that the Australian government directly insures itself against foreign exchange risks. This strategy is very critical for managing its local and foreign agricultural possessions, liabilities, revenue, and expenses (Jain, Narayan, & Thomson 2011).

Recommendations

The Australian government should allow further development of the agricultural sector through amendment of its exchange rate policies. Kramer (2013) asserts that a change of Australian government’s direct policy on the control of the floating currency will improve the foreign rate exchange in the export markets. The Australian government should allow the GGS to assume the role of hedging transactions in view of reducing the exchange rate risk.

The author stresses that the government should participate majorly in providing favourable conditions for expansion of its agricultural economic base whilst maintaining health international interrelationships to widen the market for its products. Wan and Chee (2009) affirm that the existence of a robust government that plays the major economic roles such as seeking markets, market regulation, provision of information, and industrial support will create a controlled macroeconomic climate for the agriculture, especially in the exchange rate and dollar appreciation.

Furthermore, the US dollar exchange rate changes randomly depending on the predictability of other factors (not in the scope of this report) that control the value of the US currency. A research conducted by Crecană (2012) indicated that the expansion of Australia’s agricultural base could stabilise the Australian dollar, thus maintaining predictable parity between its dollar and the US dollar.

Conclusion

The aim of this report was to explore the impact of exchange rates as a major macroeconomic issue that is affecting the Australian agriculture. The exchange rate is one of the major global issues that affect the profit margins of diverse export products. Fluctuating profit margins in the export market affect the farmers’ revenue. The individual production countries such as Australia have minimal powers over the control of the exchange rates.

However, sound government participation in both local and export market intervention and regulation, provision of information, and industrial support can form a suitable framework for stabilising the Australian currency. Most researchers and policymakers claim that such a strategy might reduce the risks posed by fluctuating exchange rates in the export market. In the future, the government should exercise its major roles whilst ensuring full delegation of authority to the GGS to monitor, evaluate, and seek ways to maintain the Australian currency appreciation rates that will in turn reduce the risk of foreign exchange rate. The inferences of these findings will play a vital role in determining the best policies for the Australian agricultural macroeconomic environment.

References

Bernanke, S, Olekalns, N & Frank, H 2008, Principles of Macroeconomics, McGraw-Hill Australia, Sydney.

Crecană, D 2012, ‘Economic Indicators Used in the Holistic Management of Ecological Agricultural Entities’, Review of International Comparative Management/Revista de Management Comparat International, vol. 13 no. 5, pp. 811-822.

Dvornak, N, Kohler, M & Menzies, G 2005, ‘Australia’s Medium-Run Exchange Rate: A Macroeconomic Balance Approach’, Economic Record, vol. 81 no. 253, pp. 101-112.

Jain, A, Narayan, K & Thomson, D 2011, ‘The relationship between exchange rates, interest rates and Australian bank returns’, Applied Economics Letters, vol. 18 no. 10, pp. 967-972.

Kramer, T 2013, ‘The Resources Boom and the Australian Dollar’, Ecodate, vol. 27 no. 4, pp. 5-8.

Kriesler, P & Nevile, J W 2013, ‘Exchange rates and the macroeconomy in an era of global financial crises, with special reference to Australia’, Economic and Labour Relations Review, vol. 24 no. 1, pp. 51-63.

Makin, J & Rohde, N 2012, ‘Has Australia’s floating exchange rate regime been optimal?’, In Economic Modelling, vol. 29 no. 4, pp. 1338-1343.

Makin, J 2012, ‘Commodity prices and the macroeconomy: An extended dependent economy approach’, In Journal of Asian Economics, vol. 24 no. 2, pp. 80-88.

Phillips, S, Ahmadi, E & Fredoun, Z 2012, ‘Inbound Cross-border Mergers and Acquisitions in Australian Agrifood Manufacturing: Macro and Industry Determinants’, Economic Papers, vol. 31 no. 3, pp. 337-345.

Siriwardana, M 2008, ‘The Sensitivity of Agricultural Trade in the Proposed FTA Between Australia and Japan: A Quantitative Assessment’, ICFAI Journal of Agricultural Economics, vol. 5 no. 4, pp. 35-53.

Stokes, A 2012, ‘Fluctuations in the value of the Australian dollar and structural change in the Australian economy’, Ecodate, vol. 26 no. 1, pp. 2-5.

Swift, R 2004, ‘The pass-through of exchange rate changes to the prices of Australian exports of dairy and livestock products’, Australian Journal of Agricultural & Resource Economics, vol. 48 no. 1, pp. 159-185.

Wan, F & Chee, L 2009, ‘Macroeconomic considerations in regional reserve pooling’, Applied Financial Economics, vol. 19 no. 14, pp. 1143-1157.

Watson, K 2013, Agricultural Issues and Policies, eBook, New York, NY: Nova Pub.

Yap, G 2012, ‘An Examination of the Effects of Exchange Rates on Australia’s Inbound Tourism Growth: A Multivariate Conditional Volatility Approach’, International Journal of Business Studies, vol. 19 no. 2, pp. 111-132.

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