AS THE current season draws to a close, many farmers in southern Australia will be turning their thoughts toward the 2011/12 season and the opening price announcement.
The international market has been relatively stable for much of the past year and remains tightly balanced. While expectations of increased supply may see commodity prices soften slightly in coming months, strong demand is likely to absorb projected increases in export availability.
So the outlook is pretty positive – right?
The other key driver of farmgate price in southern Australia is the exchange rate, and it seems capable of spoiling the party. The dollar hit US$1.10 early this month – a record high for our currency.
This latest jump has been widely reported in the media, with overseas travellers rejoicing and exporters lamenting. However, it's important to understand what is prompting this unprecedented rise in the Aussie dollar.
In fact, this latest peak has little to do with the Australian dollar's strength and much more to do with the general weakness of the US economy and currency. The latest hike in the Australian exchange rate is more or less in line with most other major currencies - including the Euro. The currency of our major market in Japan has also strengthened.
This is important as currency movements are part of the story behind the historically high US dollar dairy commodity prices we are currently seeing. With the currencies of all supplier countries rising, exporters will be seeking stronger US prices to maintain returns in their local currency. At the same time, importers have a greater capacity to pay for imported goods at a given US dollar price.
While the high Australian dollar does impact the final farmgate price negatively, the current situation is preferable to one in which our currency is much stronger than our competitors or customers. With a reasonably stable international market, the weak US dollar will serve to hold up international dairy commodity prices.
Looking forward, the current uncertainty surrounding the US economy, and currency markets in particular, may require a more cautious approach to early season prices.
Company hedging strategies will be important in minimizing the impact of further rises. If the interest rate rises foreshadowed for later in the year come about, this could increase the attractiveness of the Australian dollar relative to other currencies – and put us out of step with other dairy exporters and importing countries.
This would have an effect on Australia's competitiveness and be of greater concern.
While we will continue to monitor currency movements, the current situation highlights the need to understand what is driving these movements and how others in the international market are being affected.
While a lower Aussie dollar would give us all more comfort heading into next season, a stable international market outlook should still provide good returns – as long as our currency doesn't get too far ahead of the pack.
Joanne Bills is Dairy Australia's Manager - Strategy and Knowledge.