THE United States (US) election may be behind us for another four years, but the fallout continues to influence world markets. President-elect Donald Trump has plans of lowering income tax and increasing spending on infrastructure and the military and that has the US Federal Reserve concerned about two things; inflation and the debt required to fund Trump’s expansionary policies.
Arguably, one of the biggest data releases this week will be US Federal Open Market Committee (FOMC) minutes that will be are published on Wednesday US time. It now seems more likely that US interest rates will be increased, before the end of the year in a pre-emptive move to keep inflation in check ahead of President-elect Trumps’ arrival at the White House. The minutes will give us an insight into the FOMC thoughts on the health of the US economy and the timing of such a rise.
If US interest rates do increase global investors will most likely sell off the Australian Dollar (AUD) in favour of the United States Dollar (USD). The sell-off of the AUD over the past week suggests that market sentiment is favouring an increase sooner rather than later.
One of the biggest beneficiaries of a lower AUD relative to the USD are domestic commodities destined for export. As a major exporter of grain the lower AUD improves the competiveness of Australian grain in the world market place as the USD is the base currency used when negotiating and transacting commodity sales globally.
This in itself is not bullish domestic grain prices. Rather it means that Australia is able to reduce its offers to international consumers and compete with alternate origins, that until now, have been more competitive into consumers and markets across Asia that have been traditional destinations for Australian wheat and barley.
The key point to remember here is that Australia needs to generate export demand. The Australian grain grower is in the process of harvesting this season’s winter crop and it is expected to see new records set for both wheat and barley production.
If Australia manages to export 20 million metric tonnes (MMT) of wheat before next year’s harvest, any production over 28MMT this year will still add to the carry out into next season. That is a huge export program for Australia and that is before finding stem, elevation and logistics capacity for other commodities such as barley, canola, sorghum and pulses. If exports for these commodities add up to another 10MMT this season (which will be required to avoid drastically increased carry outs) then Australia has a 30MMT export program in the year ahead. That equates to 600,000 metric tonnes (MT) or 15 handymax size vessels (40,000MT) leaving Australian ports each week.
In the unlikely event that such an export program is achieved it will be a record, but more importantly it will undoubtedly place a huge strain on the grain export pathways across the country. After years of neglect and Government buck passing, Australia no longer has a rail system that efficiently services the agricultural industry, especially in years of record production.
The good news for now is Australian grain exporters are seeing, and catching, increased export demand and the lower Australian dollar has certainly played a significant role in improving our competitiveness in recent weeks.
Source: Nidera Australia Weekly Market Report: Peter McMeekin is Nidera Australia’s origination manager.