The correlation between the strength of the U.S. dollar and commodity prices is as powerful as any, capable of producing an ag depression or a commodity price boom depending on the strength or weakness of our currency.
The dollar index now trading near 88, set a high of 164.72 in February 1985 which was at the depth of the ag depression. Imagine trying to sell soybeans worth $10.30 in dollars as they are priced today for over $15 bushel priced in 1985 currency adjusted values in the export market?
Is it any wonder that U.S. exports fizzled and we had an ag depression?
As a side benefit to the financial crisis, the dollar fell sharply to levels where during the past few years, it contributed to a boom in U.S. ag exports. That boom is likely to fade as the dollar rises. The dollar index has come up off lows in 2014 showing strength as the default currency given weakness in the European Union, Japanese and other economies relative to the U.S.
The European Central Bank is going to lower interest rates while the Fed may increase rates. That becomes an attractant for foreign capital as the money flow moves from other currencies into dollars. A strong dollar is likely to continue to be a headwind for U.S. ag exports next year. When a commodity price increases in dollars as meat prices have done, strength in the dollar compounds that price inflation in export markets.
So in terms of Japanese yen, Japanese consumers are hit by both higher meat prices and a worsening currency exchange compounding the price strength. In order to sustain ag exports it often requires that prices be discounted in order to keep them attractive to foreign buyers as the dollar strengthens.
The impact of the dollar on trade varies from commodity to commodity. It is one advantage that China still controls how much the yuan can float to the dollar. China prefers to do soybean business with the U.S. but Argentina and Brazil can be competitive with weaker currencies. Pork, cotton and wheat where much U.S. production goes to export markets exposing them to currency risk, it makes them more vulnerable than commodities that are mostly consumed domestically.
The most weakness in foreign currencies against the dollar tends to be with our strongest ag competitors such as Russia, Ukraine, and Brazil. Not only does a strong dollar make U.S. commodities more high priced to U.S. export customers, but it also gives U.S. ag export market competitors an advantage selling against us.
The U.S. becomes the most expensive place to buy corn and wheat. For example, after the Russian currency devaluation Russian wheat priced in rubles are still about the same price as a year ago. Brazilian soybean producers are seeing a similar price advantage when soybeans are priced in Real. To Brazilian soybean producers, the price of soybeans has not fallen in their currency as far as they have to U.S. producers in dollars. The problem is that low prices are supposed to be the cure for low prices by sorting out and shutting off the low cost producer. Currency advantages distort the market process. Russian wheat producers have the advantage in wheat, Ukraine farmers in corn and Brazilian farmers in soybeans only because their weak currencies inflate the value of their crops compared to U.S. prices. U.S. farmers may be the most productive but the playing field is not level and it is tilting further in our competitor’s advantage. It is keeping them producing.
Another advantage they have is in cost of production. The U.S. seed industry avoids price competition. I don’t know that they meet in a dark room somewhere to collude on seed pricing but you don’t see independents use price to undercut the majors to compete for market share.
I assume that is because they are dependent on those majors for current or future licensing of traits so avoid poking the bear. They can make great money with current seed prices so go along to get along. The result is that U.S. seed corn prices have not fallen for next season despite the price of corn and the revenue outlook having dropped sharply.
It is not that way in South America. Corn farmers there have seen seed corn prices decline by 25 percent in Brazil and a third in Argentina as seed companies compete for market share of smaller crop acreage. That includes DuPont and Monsanto who have lowered seed corn prices in South America while essentially maintaining them here. Corn and soybean prices have not fallen as far in pesos and real as they have in dollars. The South American producers are enjoying reductions in seed costs that U.S. farmers are not experiencing. Farmers in South America have lower land costs than U.S. farmers but quite frankly that advantage is offset by the lack of supporting infrastructure. It costs them more to ship than it does in the U.S. when the railroads are not moving oil and have a few trains available to move farmer’s grain.
In my opinion with experience in both hemispheres, U.S. farmers have the infrastructure cost advantage despite higher cost land. Corn and soybean carryovers are increasing and production needs to be reduced. U.S. farmers think that foreign producers will blink first but they are not under the same price pressure in their currencies that U.S. farmers are experiencing and they are seeing costs come down faster than we are seeing here in the U.S. I don’t like how the competition is shaping up.
David Kruse is president of CommStock Investments Inc., author and producer of The CommStock Report, an ag commentary and market analysis available daily by radio and by subscription on DTN/FarmDayta and the Internet.
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