The role of local production and the world price in setting local wheat, wool, and beef prices

The Australian dollar is considered primarily a commodity-based currency. The high level of commodity-based exports in Australia’s trade balance is given as an explanation. Accordingly changes in world commodity prices should bring commensurate changes in the value of the Australian dollar, such that changes in world commodity prices are only partially transmitted to the Australian economy and local farm-gate prices. If this relationship holds, then local farm-gate prices should be significantly less volatile than their respective world price. Variances in local prices would be due to local factors (e.g. variances in local production) rather than variances in the world price and international factors. This paper examines the farm-gate prices of Australia’s three largest agricultural commodities, wheat, beef, and wool; seeks to establish if the variances in these prices are more closely related to movements in their respective world price or local production factors and, if movements in the Australian dollar decrease local farm-gate variance as expected.