Currency capers change the game for grapes

CURRENCY parity is a topic normally confined to discussions about whether (or when) the Australian dollar will achieve equality with its US cousin – and how much damage that will do to mining, and other export-focused industries.

Why not broaden the subject and question what happens if/when we achieve parity with the British pound and/or the euro?

“Don’t be silly”, is the reaction from most people who have watched currency markets for the past few years. Their view is that Australia is far too insignificant to ever have its dollar, once known as the South Pacific Peso, overtake the mighty pound, or the theoretically mightier euro.

That may have been correct a few years ago, but it’s a view fast becoming outdated thanks to the aftershocks of the global financial crisis; and before you think this week’s column has nothing to do with life in Western Australia, think again. It has everything to do with local events, as Bystander discovered in the South West last week.

Before the real-life examples, consider some numbers. A few years ago our dollar was trading at around 33 pence ($A3 for one British pound). Today it is closer to 60p to the dollar (less than $2 to the pound).

The euro has not crumbled as far, but would have if Germany had not put some backbone into a currency union debilitated by badly run economies in Greece, Spain, Italy and Portugal.

The question everyone in business ought to be asking is, what next?

Having watched the pound crash and burn, and the euro slide, what is there to stop the rot, given that low-cost China is putting intolerable pressure on countries with rival manufacturing industries while Australia serves as a quarry and a farm to feed the dragon.

The answer is that not a lot will stop Britain and Europe sliding further, unless they undertake dramatic change, including an end to an overly generous social welfare system, subsidised agriculture, tax policies that encourage workers to retire early, and zero population growth.

In the case of Britain, far too much faith was placed in a single industry – financial services – while European leaders actually believe they are running a country rather than a group of states that have been at war for about 1,000 years, and continue to dislike each other.

To see what global currency adjustments mean for Australia you can consider the views of economists, or see it for yourself in the South West of WA where two industries, wine and tourism, are starting to feel the pinch.

A three-act tragedy

IT was while visiting the South West that Bystander saw the first effects of our dollar at 60 British pence.

Back in the 1980s, when wine was a boom industry, Britain was a favoured export market, partly because we sold cheap and cheerful plonk, partly because a major Southern Hemisphere wine rival, South Africa, was shut out of world markets, but also because the pound was strong and British drinkers got tremendous value for money courtesy of the 33p exchange rate.

Back then was a time when Margaret River vineyards such as Leeuwin, Cape Mentelle and Vasse Felix were exporting a steadily increasing volume of product to the Northern Hemisphere.

At 60p the game is completely different, adding to a deep-seated gloom hanging over the wine industry, which is also suffering from a spectacular production glut.

Not only is the local market flooded with excess local product, but we have become a prime market for foreign wine producers chasing the fat profits available to them by selling into our high-currency market – just as export markets dry up.

Boiled down, the local wine industry is a three-act tragedy – excess production, cheap imports, and high-cost exports. Ouch.

But wait, there’s more to make a visitor to the South West feel gloomy. Where are the foreign tourists?

‘Missing in action’ is one way of describing the situation in another demonstration of what a strong currency does to export industries. British tourists will be missing in their droves this year. The Europeans will also be thinking twice about travelling south, just as it becomes cheaper for Australians to fly north.

In business terms the South West now has two of its major industries, wine and tourism, under pressure. The saving factor is that it remains a fabulous place to visit, even if it is a tough place to make a profit.

SW property pressure

IT’S not possible to visit the South West without forming a view on the property market, which local real estate agents argue is improving, but not by much.

The best way to test any market is to measure the number of buyers and sellers, an application of the advice given by the late Robert Holmes a Court when he replied to a stock exchange query about a sharp rise in the price of Bell Group shares: “Perhaps there are more buyers than sellers”, he told the corporate cops in what remains a classic financial markets one-liner.

Since it is impossible to know the number of buyers in a property market, the measuring device becomes ‘for sale’ signs, and there are still plenty of them in the stretch from Busselton to Dunsborough and further south to Margaret River.

Bystander’s favourite testing strip is the run along Caves Road, which has houses facing Geographe Bay. A year ago the sign count was around 30 for sale. Last week there were about 20, with the bonus of some having sold stickers on them, and some houses undergoing renovation, a positive sign that the worst of the crash is over.

However, whether it is 30 for sale signs, or 20, that still means a lot of people are publicly trying to exit the market, with no way of knowing how many properties are quietly available.

Given that both the wine and tourism markets are in trouble it would not be a surprise to see the property market remain under pressure for some time with lifestyle hunters and retirees the only active buyers.

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“Few rich men own their own property. The property owns them.”

Robert Ingersoll