Most Australian exporters are currently feeling the impact of an Aussie dollar that has strengthened through the early months of 2016. This is certainly the case for Australian Meat and Livestock exporters.
Conversations with our clients have revealed three key factors are top of mind for Meat exporters.
1. Supply shortages
Due to the cyclical nature of the Australian meat industry, we’re beginning to come
out of a drought period which saw a higher percentage of heifers being slaughtered
than in the past. Now that we are entering a period of increased demand and higher
rain fall, especially in North Queensland and the Northern Territory, the issue facing
exporters is a lack of supply. This will result in increased pricing, making it tougher for
Australian businesses to compete with international suppliers.
2. Increasing competition
Competition from Brazil has already seen a number of Australian exporters seek new
markets as regular customers in Asia, and in particular China, have chosen to go with
the cheaper product’s from the world’s largest beef producer. In an industry where
margins are already wafer thin, many of our clients are beginning to feel the pressure
as they are finding it harder to compete with other beef producing nations.
All of this has created a perfect storm that is putting significant pressure on the
margins of meat exporters across the board. Internationally there have been issues
with demand in general with Gulf Foods, the pre-eminent Arab Gulf food wholesale
convention, reporting a markedly lower attendance this year. Invoice consolidation
has also been a common issue in this region.
3. Strengthening of the Aussie dollar
The industry enjoyed rates below 70c at the beginning of the year, but the recent
strengthening in the AUDUSD rate that began at the end of February is making it
difficult for a lot of meat exporters to sell at a competitive international price. The
‘target-rate’ seems to be approximately 0.7200 or lower. This has heightened the
importance of employing hedging solutions that help maintain demand.
Where to next?
Will the RBA respond to the strong AUD?
Even though the recent RBA minutes commented negatively on the strong Aussie dollar, given that unemployment remains low, recently hitting a 2.5-year low of 5.7%, there is little motivation for the RBA to act. Unless there are some significant changes to employment or inflation, it’s doubtful they will cut rates directly in response to the Aussie dollar.
Will the U.S. election have a significant impact on the USD?
Donald Trump’s hard rhetoric on increasing protectionism would, in reality if elected, possibly strengthen the USD. This is because in a riskier global economy, the USD ironically is still seen as a safe asset to hold. Additionally, his stance on anti-money printing would provide further strength.
Hillary Clinton is however currently running at a $1.33 presidential favourite (Trump next best at $5.00) and if she is put in charge, it will be ‘business as usual.’ Thus the policy of quantitative easing, and printing money to service USD federal debt would be expected to continue, along with further weakening to the USD.