Brexit may be good for Australian farmers

Australia has a long-established and productive trade relationships with the UK. Wine, for example, is an important export for our industry and inbound capital flows from the UK are important for our current and future growth. A depreciating pound does us no favours on either front.

Australian farmers are looking for a weaker Australian dollar. The recent rise against the US dollar to 76c has more to do with interest rates and global economics than commodity prices, which would have naturally pushed the Australian dollar lower.

With that in mind, it's logical to expect, in a climate of instability, a shift to the relative havens of the US dollar and Yen. This would be good news for our farmers and exporters.

Decreasing domestic interest rates in an attempt to sustain spending and investment would also have the effect of driving down the Australian dollar against the platform trade currency of the US dollar. It would be welcomed by farmers as it means lower debt servicing costs and higher commodity prices.

Wheat prices are historically low but a look at the Chicago Board of Trade wheat futures shows the March 2017 price is around US50c higher than July 2016. With crops looking promising, farmers might look at calculated hedging opportunities to lock-in profit margin.

Britain’s exit from the EU will cause significant uncertainty over the status of the UK under current free trade deals and there is confusion as to whether the UK will abide by those agreements or, indeed, if the EU will allow them to.

The outcome could be either maintenance of the status quo or the EU and UK implementing new quotas and tariffs as a ramification of leaving the EU.

Another factor to consider is the impact on farmer subsidies under the EU’s Common Agriculture Policy, with the Brexit creating a reason to review farmer subsidies in the UK.

OPPORTUNITY OR RISK

The inherent instability and volatility resulting from last week’s event creates the landscape for opportunistic trading but it’s not without risk – especially given it is early days when it comes to the political manoeuvring in Europe and among major global players following the Brexit decision.

In short, there’s no precedent from which to paint a path of expectation for Australia’s commodities sector. Nonetheless, the current situation might create a window of opportunity. The EU currently accounts for 62 per cent of UK exports and 70 per cent of UK imports of agri-food products.

However, the EU is far less reliant on the UK than the UK is on the EU, taking only 8 per cent of EU agricultural exports.  It means the Brexit may have a far greater impact on the UK than it would on the EU.

As the landscape becomes clearer in terms of trade agreements between the UK and EU, Australian governments have an opportunity to leverage our close relationship with the UK to fill the gap which may be left by reducing EU food supply into the UK.

Furthermore, as Australia is currently negotiating an FTA with the EU, it’s unlikely the UK will continue in that negotiating bloc, creating a potential opportunity for us to kick-off our own negotiations once the dust has settled.

CLARITY KEY

At a time when Australian farmers have to work hard at mitigating the effects of a range of variables - from volatility in commodity prices, to weather, to input costs – the instability coming from major political events such as Brexit adds a layer of complexity our commodities sector can do without.

As Britain and Europe work through the process of separation, the calls for a swift (and, hopefully, relatively painless) transition are growing louder by the day. 

The sooner this happens, the sooner Australian farmers can operate in the context of a predictable global environment, helping consumer confidence and allowing commodity markets to work to the true forces of demand and supply (rather than fear and speculation).

Ultimately, it’s about Australia’s commodities sector being able to plan and adjust accordingly. That time can’t come quickly enough.

Mark Bennett is Head of Agribusiness, Australia at ANZ