Commentary in the US media at present about the state of the US agriculture sector paints a very rosy picture of the situation, with persistently high prices and resulting high levels of farm income. The picture from an Australian perspective is a bit different, with the high Australian dollar deflating prices, and prospects of interest rate rises and a Chinese recovery leading to suggestions that the $A will go even higher, further reducing agricultural export prices.

For several years now, the USDA and other US media have been observing very impressive results for US agriculture, with record high farm incomes recorded over recent years. While the latest USDA forecasts released this week indicate an anticipated reduction in 2012 from the record high farm income levels of 2011, the forecast is still well above long term averages. This is leading to record high crop plantings, as a combination of ever-increasing feed demand from China and high biofuel demand driven by a persistently high oil price (biofuels now account for more than 40% of the annual US corn crop).

The picture from an Australian perspective is, however, a little less rosy - especially for those involved in selling into export markets. The following graph highlights this for wheat prices. During the 1990s decade the $A was valued at an average of $US0.72, and wheat prices in Australia were considerably higher in $A than $US prices received by US farmers. Since the 2007 commodity price spike, however, the $A has been a parity or above the $US value for much of the time, deflating the $A price received for export wheat. The same situation applies for other farm exports. 

The double whammy for Australian farmers is that the relatively high current prices are stimulating extra grain production internationally, which is likely to increase stocks and keep a lid on grain prices in the future. While the high $A has made machinery, fertilisers and fuel cheaper in $A terms, Australian farmers still have to be profitable to afford these. 

If the $A was currently at $US0.72, wheat prices in $A terms would be above $350 per tonne, instead of their current $230-$250 dollar range.  Just think of that next time someone tells you the mining boom is benefiting all Australians!