It’s a staggering and perhaps even slightly concerning fact that over 90% of the agricultural equipment used ‘down under’ is manufactured overseas. However, the purpose of this brief article is not to talk about the status of our manufacturing industries but rather more to deal with the occasional misconceptions about how Dollar exchange rates affect the cost of new agricultural machinery.
Strong currency-reducing prices/ Weak currency-rising prices
For a long time, the assumption was quite simple. If our Dollar was low, then the price of agricultural machinery went up. Conversely, if it was relatively strong, then prices fell. That sounds intuitively right and to some extent there is some mathematical basis for it but things just aren’t as simple as that.
Here are a few things to consider as to why you can’t always draw a direct line
between currency rates and the price of your agricultural machinery:
1. Currencies can fluctuate a lot over relatively short periods of time. If there were a direct responsive link, the prices at retail outlets would be constantly going up and down like a yo-yo.
2. Currency fluctuations are a nightmare for major businesses including those associated with the manufacture and supply of agricultural equipment. Their accounting and profit forecast calculations start to become of horrific complexity, so they take steps to reduce their vulnerability to change in response to currency variances through things such as forward ‘fixed rate’ currency exchange contracts.
3. The items you see for sale in the warehouses and outlets today were in fact purchased based upon commercial agreements made a long time ago when currency rates may have been very different. That’s necessary because it can take several months for manufactured equipment to get through a production line overseas and be shipped to us.
What does this mean for purchasers?
The bottom line really is that there is no need to hit the panic button and rush out to start buying your agricultural machinery and related equipment the moment you see a deterioration in the strength of our Dollar versus a bucket of other global currencies.
By and large, these variations in pricing have been smoothed out by some of the various strategies touched on above.
Now there is one exception to this and that arises from the prospect of a long-term systematic change in the strength of one currency versus another. In those situations, the ongoing effects start to push economics notably in one given direction and that can have a very significant effect on prices, one way or another, over the medium to long-term. So, for example, if we saw a long-lasting and steady decline in the value of our Dollar then you might expect that to feed through into higher prices for our agricultural equipment – plus everything else we import of course. It’s worth bearing in mind though that the reverse could also be true. Some cynics and critics of the capitalist system point out that it doesn’t matter which way currencies move against each other, the result is always higher prices and bigger profit margins for the companies concerned! Whether you believe that must of course be a matter of personal choice but for the majority of ordinary farmers, short-term currency fluctuations in the marketplace should not have a significant effect on the pricing of agricultural machinery.