The U.S. is the largest hay exporter in the world. Roughly, the U.S. exports 3-4 million tons of hay, Australia exports one million tons, Spain exports one million tons, Canada exports a half million tons and the rest of the world ships another half a million to one million tons. That makes U.S.-grown hay, half of the global hay trade. Spain primarily exports alfalfa (lucerne). We will cover Spain in another report. Australian exports are almost exclusively oaten (oat) hay. This oaten hay competes with warm (bermuda, klein, sudan) and cool season (Timothy) grasses grown in the U.S.
A weak Australian dollar makes oaten hay exports more competitive relative to products grown in the U.S. Regardless of which trade partner we are talking about, a weaker Australian dollar (AUD) is a competitive advantage. Several factors are driving the value of the AUD to the U.S. Dollar (USD) to multi-year lows.
At the October meeting of the Reserve Bank of Australia (RBA), the RBA raised interest rates by 25 basis points (0.25%). The Federal Reserve has a dual mandate, 2% inflation and maximum employment. The RBA has a threefold mandate: 2-3% inflation, maximum employment and the value of the currency relative to the USD. Higher interest rates support investment in the country and favor foreign investment. Before foreign investors can invest, they must buy AUD. Demand for a currency raises the value. Following the announcement, the AUD strengthened from around $0.63 USD per AUD to $0.65 USD per AUD. This small change is a little over a 3% increase. National monetary policy matters for the AUD. However, commodity markets matter more.
The Australian dollar has a strong correlation with commodity prices, making it highly dependent on the performance of commodity markets. Australia is a significant global exporter of various commodities, including iron ore, coal, natural gas, and agricultural products (like hay). As a result, the value of the AUD is closely tied to the demand and prices of these commodities in international markets.
When commodity prices rise, it often leads to an increase in Australia's export revenues. This, in turn, boosts the country's trade balance and contributes to a stronger Australian dollar. For example, when the price of iron ore, one of Australia's major exports, surges in global markets, it has a direct positive impact on the nation's economy and its currency. Investors and traders closely monitor these commodity price movements as they assess the potential impact on the AUD's value.
Conversely, when commodity prices decline, the Australian dollar can weaken. Lower prices for key exports reduce Australia's export earnings and can negatively affect its trade balance. This can lead to a decrease in demand for the Australian dollar in the foreign exchange market. Therefore, the AUD tends to exhibit a degree of sensitivity to fluctuations in commodity prices, and it is often referred to as a "commodity currency."
In summary, the Australian dollar's dependence on commodity prices reflects the country's role as a major commodity exporter. Movements in commodity markets, especially for resources like iron ore and coal, have a substantial influence on Australia's economic performance and, consequently, on the value of its currency in global foreign exchange markets. Investors, policymakers, and traders pay close attention to these relationships when analyzing and predicting movements in the Australian dollar.
As long as the AUD remains weak, U.S. grass hay exports will continue to face headwinds. Asian buyers will carefully weigh the nutritional characteristics of various feed stuffs and the associated costs. For now, Oaten hay has the advantage.