By Andrew Woods | Source: MLA, RBA, ICS.
In line with recent articles on the relationship between wool and lamb prices with the exchange rate, this article takes a look at the relationship of beef price with the Australian to US dollar exchange rate.
The relationship between the change in the EYCI and change in the exchange rate over a 1 month period, during the past 18 years is shown in Figure 1. It displays the distribution of the correlation, from plus one (1) where the two series move in lockstep to minus one (-1) where the two series move in perfect opposition (if one goes up the other goes down by a similar amount).
If the series had a strong negative correlation then we should see the bars in Figure 1 skewed to the right-hand side. As it is there is a faint skew to the right, which in practical terms for a farmer selling cattle is insignificant. There are plenty of monthly periods where the correlation is either positive or non-existent (around zero).
Figure 2 extends the comparison period out from one month to one year and shows the rolling correlation between the EYCI and the exchange rate from 2000 through to this month. The relationship is shown to swing between strongly negative and strongly positive, with some extended periods spent with positive correlation and negative correlations. The key message of Figure 2 though is that the influence of the exchange rate on the domestic Australian EYCI price is highly variable hence highly uncertain, an imponderable.
The beef market is a combination of smaller interrelated markets (much like the greasy wool market and the grains market) so what holds for the EYCI does not necessarily hold for other parts of the beef market. Analysis of the Queensland medium cow price one-month correlation with the exchange rate shows a similar distribution to the EYCI. However, when the timeframe is extended to a year the correlation skews to strongly negative.
Figure 3 shows the distribution of the rolling one-year correlation between the Queensland medium cow price and the Australian-US dollar exchange rate. The distribution is actually split between little to no correlation and being strongly negatively correlated. Figure 4 shows the rolling one-year correlation between the cow price and exchange rate for the past 18 years. While there are periods when the correlation swings to being positively correlated, the relationship spends a lot of time being negatively correlated. For Queensland cow price, the exchange rate is an important factor influencing price levels.
Key points
* The exchange rate has a highly variable relationship with young cattle prices in eastern Australia.
* As such the exchange rate is an imponderable in regards to the EYCI price level.
* For the Queensland cow price, the relationship to the exchange rate is skewed to a negative correlation.
What does this mean?
The exchange rate can be a distraction when it comes to discussing Australian agricultural commodity prices. For young cattle prices in eastern Australia, the relationship to the exchange rate varies so often it is of no use when considering price levels. In stark contrast, the Queensland cow price relationship to the exchange rate is strongly skewed to a negative correlation to the exchange rate, when viewed over the medium term. There are periods when this relationship breaks down but as a general rule, the cow price conforms to the commonly held view about commodity prices and the exchange rate.
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