Market Morsel: Ironing out the A$
In agriculture, Australia is an export economy. Our population is too small to consume the amount of produce we create on an annual basis – even during a drought.
There are two big things that impact our competitiveness – exchange rate and freight. Our products are generally sold into the international market, which is based on USD.
When we have a lower dollar, our competitiveness increases in the global market. If you are exporting goods, it goes on a plane or a boat. The cost of freight has a huge impact on our markets, and those of our competitors. Luckily we are close to many of our customers.
There is one commodity that has a major impact upon both the strength of the A$ and the freight market – iron ore.
The first chart below shows the relationship between iron ore and A$. Over time there has been a relationship between the two. As iron ore prices fall, the A$ falls.
The second chart shows the relationship between the baltic dry index and Iron ore. The BDI is an indicator of freight rates (and a lead economic indicator). There is a reasonably close trend between the two.
The third chart below shows the SGX iron ore futures. Iron ore was on a massive rally since November last year. This has lost some steam but still remains at levels above the normal range.
If we see continued falling iron ore levels, will this place additional pressure on the A$ and bulk freight.