A$ falls to three-month low, but will export processors share the love?

Jon Condon, 28/11/2013


Banks often cop criticism from their borrowers when they are slow to pass-on the benefit after an official Reserve Bank interest rate adjustment, and export beef processors are currently coming under similar scrutiny, given the recent performance of the Australian dollar.   

As can be seen on Beef Central’s home-page ‘industry dashboard’ graphs, the A$ dipped to a fresh three-month low overnight, falling into the US90’s for the first time since August.

The finance sector says the drivers are falling commodity prices and the prospect of an interest rate cut in the New Year, which is keeping the currency under pressure.

This morning the A$ was trading at US90.7c, down another half-cent from US91.26c yesterday. A month ago, the currency was still at US97.07c, representing a fall of 6.6 percent since then. This time a year ago, the A$ was worth well above US104c.

Yet looking at this week’s meatworks grid price offers relating the southeast Queensland – easily the heaviest concentration of export processing in the country – there has been little-to-no evidence of price adjustment that could be linked to latest currency relief.

Beef Central’s weekly kill report yesterday quoted a 5c/kg rise from one large exporter on cow and steer grids, while others remained unchanged. The company that did adjust its rates said the move was primarily driven by the impact of recent patchy rain starting to shorten cattle supply, not by other factors like currency.

Grid quotes sourced by Beef Central have showed little real change over the past month. One grid this week was up 5c on ox and cow prices, with highest rates of 360c/kg for grassfed 0-2 teeth steer, 355c/kg on a four tooth, 375-390c/kg for MSA grassfed steer, 390c EU steer, and pasturefed heavy cow, 320c.

That’s the best cow money since early this year, before the big slide started as drought pressures gained momentum.

A processing contact from a company with multi-state processing interests told Beef Central yesterday that there was not necessarily much direct relationship between livestock grid prices set by processors and currency movements.

“Supply issues this year have pretty much overwhelmed any currency component,” he said.

“Buyers are obviously well aware of what’s going on in supply. While there has been a drop in the dollar which has been beneficial to processors – there’s no question about that – the big kills that have been witnessed over the past nine months have overwhelmed that.”

“And overseas buyers, seeing those high rates of kill this year, inevitably seek to purchase at a lower price level, simply because of the abundance of product available out of Australia.”

Another factor often raised by staff on the export meat sales desks is the tendency for importers, monitoring the currency movement, to seek to share in that trend, by trying to negotiate a lower price in US$ terms in recognition of the currency effect.

“A lowering in the dollar does not necessarily go straight into the exporter’s pocket. Often it is shared – sometimes substantially, depending on beef supply and demand – with the importer, in the form of a lower price, in US dollar terms,” our contact said.

“But now, we’re coming into a period where supply will be limited, and processors who are keen to pick-up supply, are likely to have to pay a bit more for it.”

Another factor sometimes raised by export processors is the lag effect between cattle purchase and when that beef is sold onto the world stage – sometimes at a currency price that has changed substantially since the cattle were procured. International meat sales being made today in some cases reflect livestock purchases made in late October or early November.

“Unlike a trader, the export processing company is simply selling the product and covering the exchange rate as they sell forward. A trader, on the other hand, might be looking to gain a margin from the currency, but that’s not the case for processor-exporters, because they are not speculators,” our contact said.

As a general comment, the processor said there was no question that the movements in the currency this year had improved returns for export processors.

“They will make no apologies for that, because for the previous two years, the reverse applied, with some very big losses recorded. Producers would like us to share the love when things are going their way, but are not interested when profitability circumstances weigh heavily against the processor,” he said.

“All of us across the industry would love to have a circumstance where we didn’t have these highs and lows, but unfortunately the nature of the business means that they are never likely to go away. There will always be periods when supply outstrips requirements due to drought, which is much to the detriment of producers. Processors are understandably able to take advantage of that, when supply overwhelms capacity to kill.”

“But equally, it can turn the other way. Even when the numbers of slaughter cattle aren’t so great, processors still need to maintain a certain level of throughput to remain efficient, and circumstances start working the other way, having to pay more for cattle than what they are really worth.”

“It’s a cycle, and it’s difficult to see that ever changing.”



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