While many suggest that the Russian rouble crash and sliding oil price could threaten equity markets and risk currencies such as the Australian dollar, Australian farmers and agribusiness should be preparing themselves to take advantage of opportunities arising from falling oil prices and a lower exchange rate.
As we see the effects of low prices for oil producers around the world, the one economy Australian farmers are closely watching is Russia.
OPEC has allowed the oil price to fall, pushing the price down with supply, openly stating that it would not slow production into 2015. The price of oil is driven by a number of factors, notwithstanding a major influence from speculative investors and government policy. The oil market and foreign policy power play is in full swing, with OPEC taking out the most valuable player.
As Russia’s oil revenue plummets, the rouble has halved and Russia’s central bank this month raised its key interest rate to 17 per cent to try halt the collapse of the rouble. But instead of stabilising the market, it has created panic within Russian investment markets.
Russia may also pull back on soft commodity exports, in particular wheat, to address food price inflation. A full export ban is a possibility. Russia’s wheat export ban in 2010 saw global supplies fall and prices rise dramatically, but price rises this time may be more conservative. If the Kremlin was to ban the export of wheat and flour, Australian wheat producers would have far less supply competition in key markets including the Middle East and broader Europe.
With a low Australian dollar, which seems set to continue to fall according to the Reserve Bank, Australian soft commodities become more competitive. Coupled with lower cost of production and better terms of trade in target markets, the agricultural sector should be able to take better advantage of recent trade deals with key trading partners China, Japan and South Korea.
The sliding oil price could be a boon for Australian agriculture as a rare combination of ensuing events presents an opportunity for farmers and agribusinesses to benefit from improved soft commodity prices, decreasing energy prices, improved competitiveness and potential investment.
In the Gulf Cooperation Council, comprising Saudi Arabia, Kuwait, the United Arab Emirates, Qatar, Bahrain and Oman, hydrocarbon revenues account for about 75 per cent of total exports and 46 per cent of nominal GDP.
On the back of oil price falls, revenue is expected to fall $US300bn ($369bn) in 2015 at current prices, with further potential for oil price downside.
While this is a large fall in revenue, real impacts can be assessed in light of the relatively low cost of production of oil in the region and the ability of GCC nations to weather the storm. Large capital reserves allow GCC countries to withstand oil price pressure better than most. For example, the Saudi Arabian Monetary Agency reserves are estimated at $US734.7bn and the Abu Dhabi Investment Authority is believed to be valued at $US800bn without taking into account any other central banks or sovereign wealth funds in the GCC.
Following the oil price crash in 2008, the GCC switched course and put some of their cash reserves to use in diversifying revenue streams away from oil dependency. The United Arab Emirates is currently at the forefront with over 60 per cent of GDP derived from non-oil sectors, whereas Saudi Arabia and Kuwait remain almost 90 per cent reliant on oil revenue. Food and agribusiness were popular avenues for investment diversification from 2008, with Qatar investing significant capital in Australian agriculture.
Charlie Blomfield is the managing director of the Agricultural Management Company