Why prices are sticky despite the falling Aussie dollar

Those who enjoy a glass of Australian wine have been served a little better by the currency's downturn. Australian wines retailing above $40 a bottle have fallen between 4 per cent and 7 per cent over the past year, with wines above $80 enjoying the
Those who enjoy a glass of Australian wine have been served a little better by the currency's downturn. Australian wines retailing above $40 a bottle have fallen between 4 per cent and 7 per cent over the past year, with wines above $80 enjoying the largest of these discounts.ST PHOTO: NEO XIAOBIN

While currency levels play a part in pricing of imported goods, other factors also figure

The Aussie dollar has been falling so steadily in recent months that it seems parity with the Singapore currency is only a matter of time, but don't count on landing too many bargains from Down Under just yet.

While currency levels play a part in the prices of imported goods, there are several other factors in play as well that can offset any gains for buyers here.

Labour costs and weather issues Down Under and shipping costs are just some of the forces that can affect prices even as the currency dives, and dive it has.

The Australian dollar is now around 1.016 to the Singdollar. It has fallen around 6 per cent since the start of the year and around 12.7 per cent over the past 12 months.

A walk through FairPrice, Sheng Siong and Prime Supermarket, however, shows that Australian product prices have not changed much.

  • Dip may hit S'pore exports

  • The fall in the Australian dollar is making life a bit more complicated for Singapore firms doing business there.

    Goods such as electronics make up around 70 per cent of exports from here, while services account for 30 per cent, according to Mr Daniel Wilson, ANZ Bank's economist for the Asia-Pacific region.

    About 60 per cent of the goods exported are refined petroleum products, which are relatively insensitive to price fluctuations, he said.

    However, demand for other key exports - such as electronics, medical and edible products - could drop over the medium term as they are becoming relatively more expensive because of the fall in the Australian dollar.

    Professional services for accountancy, law and transport are also big export earners for Singapore firms operating Down Under, but these will become less competitive as well, said Phillip Futures forex dealer Bryan Lum.

    The weakening currency has not spurred interest among local businesses in acquiring Australian firms, said Mr Girish Sahajwalla, PwC's managing director for corporate finance.

    "While the weakening of the Australian dollar helps in improving the outlook for acquisitions, firms are looking for a more stable currency position before making any acquisition or long-term investment decision," he noted.

    Jeremy Koh

Prices are impacted not just by exchange rates; other factors such as seasonal supply, labour costs and demand also figure, spokesmen for the firms said.

Ban Choon Fruit, which supplies major supermarkets, said prices of Australian produce have been relatively constant over the past year.

While the Australian dollar has weakened, increasing farm labour costs, costlier raw materials like water and seeds, and increased demand from China have prevented fruit prices from falling, a company spokesman said.

She added that it was increasingly difficult to hire farm labour in Australia and the 2014 summer had been hot, limiting water supply and raising water costs.

A FairPrice spokesman noted that the supermarket had reduced prices for Australian broccoli, but this was due to a bumper harvest.

Mr Nicholas Tan, executive director at Peter's Butchery, said the exchange rate was one of many determinants of prices for the fish and meat he sells.

Around 75 per cent of the cost of beef is paid in Australian dollars, the rest in Singdollars. The Singdollar amount includes the company's costs such as labour, which have been rising, Mr Tan noted.

As a result of rising wages, the firm's savings from the weakened Australian dollar did not fully translate into lower prices, he added.

The firm, however, still has managed to reduce the wholesale prices of Australian meat, Mr Tan said. The firm sells 80 per cent of its meat on a wholesale basis to restaurants and hawker centres.

Its wholesale prices of Australian beef have fallen by around 16 per cent while lamb is down 3.8 per cent over the past year. While the retail prices of these products have not fallen, customers are now given free items like cooler bags if they purchase a certain amount.

"You never know, (if we lowered the price,) months later the Aussie dollar might go up and we (will have) to increase the price again," said Mr Tan.

Wholesale customers were given lower prices as they bought frequently and in bulk, he said.

He also noted that retail prices of Australian beef and lamb had not fallen in Singapore over the last year. The company hoped to make use of some cost savings that arose from the lower exchange rate to meet increasing labour costs and upgrade its machinery and vehicles.

Those who enjoy a glass of Aussie wine have been served a little better by the currency downturn.

Australian wines retailing above $40 a bottle have fallen between 4 per cent and 7 per cent over the past year, with wines above $80 enjoying the largest of these discounts. The prices of cheaper wines have remained relatively constant, said Mr Kenny Wong, director of Wines Online.

"Where the cost price of a bottle of wine is low, the impact of a weakened Australian dollar is negligible. The foreign exchange savings on the price are too small, compared to the fixed alcohol duty we pay, and are further offset by the higher United States dollar-denominated freight charges. For such wines, their selling prices have not seen downward adjustments," he added.

"For more expensive wines, the impact of a weakened Australian dollar is more pronounced, as the cost price forms a bigger part of the whole basket of costs."

Mr Daniel Wilson, economist for Asia-Pacific at ANZ, said prices usually take a longer time to adjust, if at all, for weakening foreign-currency exchange rates.

"Over the short term, there are impediments to price changes, such as previous (cost) hedges or internal budgeting forecasts. It makes sense for prices to adjust over a longer period of time.

"However, prices are sticky to the high side. Stores are able to make additional profits with the decline in import costs, so there is less incentive to lower prices."

While the picture is complex for importers, plenty of people are eager to buy in Australian dollars to capitalise on the weakened currency. Money changers told The Straits Times that Singapore companies and individuals have bought more Australian dollars in the past week.

An operations manager at a money changer, who wanted to be known only as Mr Ko, told The Straits Times that the amount of Singapore dollars traded for Australian dollars has increased by 10 to 20 per cent over the past week or so.

A 55-year-old retiree, who wanted to be known only as Mr Chan, said he buys Australian dollars for his annual holiday Down Under whenever the currency weakens.

"For the last couple of weeks, the Australian dollar has been going down so I've been buying (and) buying," he said.

Travel agency Chan Brotherssaid "demand for travel to Australia during the June holidays increased by 5 to 10 per cent year on year from 2014 to 2015".

Mr Peter Thng, executive director at Reapfield Property Consultants, said the weakening Australian dollar was one of two factors that have prompted more Singaporeans to express interest in buying property in Melbourne over the past three months.

He added that Singaporeans have recently been less interested in property in other Australian cities.

There were 130 inquiries in the second quarter, up from 100 in the same quarter a year ago, he said.

Singaporeans with children studying in Australia also welcomed the weaker dollar.

Mrs Jeanie Toong, who has daughters studying in Australia, said she and her husband will probably make more trips to visit them if the currency stays weak.

A version of this article appeared in the print edition of The Straits Times on July 20, 2015, with the headline 'Why prices are sticky despite the falling A$'. Print Edition | Subscribe