Macro factors reflected in exchange rates have a huge impact on our ability to compete in world markets.
Factoring in the likelihood of key macro factors during the next few years can keep you a step ahead of the competition, both on marketing and how to time investments on everything from land to equipment. Never before has the outlook for interest rates, exchange rates, government policy and global GDP growth been more important to your bottom line, experts say.
"Macro factors reflected in exchange rates have a huge impact on our ability to compete in world markets," says Frayne Olson, ag economist at North Dakota State University. Assuming the typical value of the U.S. dollar versus other currencies is 100, today it’s trading at 80. "We’re at a discount," Olson says. "That’s really good for exports."
"The macro economy is incredibly important to producers," adds Pat Westhoff, director, Food and Agricultural Policy Research Institute (FAPRI). "If the dollar becomes very strong it means weaker export demand."
Exchange rates moving forward are an even bigger deal because grain supplies are being rebuilt with stronger global production, and that spells trouble for prices. "The demand base for ethanol is flattening, and we’ll see only slow increases in feed demand from livestock," Olson says.
With this year’s better-than-expected harvest, export growth is the one area producers can look to for any hope of higher prices. "Surprise on the demand side will have to come from exports," he says. "Exchange rates are a big part of that."
"I see a stable to steadily rising U.S. dollar during the next 12 months," Olson predicts, noting that the driver will be stronger U.S. economic growth. "It’s open to debate how fast the U.S. economy recovers."
The U.S. economy will grow between 2% and 3% during the next four to five years, up from 2% right now, says Jim Hilker, ag economist at Michigan State University. "However, we’re not going to see 3.5% growth."
Hilker sees a 3 to 4 percentage point increase in Federal Reserve Board interest rates, meaning farm interest rates of 7% to 9%. "I don’t see that until the end of 2015," he says.
While higher rates can lead to a stronger dollar, Brian Schouvieller, CHS senior vice president, Ag Business-North America, is bullish on U.S. exports. "We expect higher interest rates, but in the short run, we don’t see it having a major impact on exports," he says. "USDA’s export projections for 2013/14 are too conservative."
Schouvieller sees 1.3 billion to 1.5 billion bushels of corn exports in 2014. Part of Scouveiller’s optimism is linked to his forecast for another macro factor, growing global demand. In particular, he sees growth in the Pacific region.
"The world economy will grow at about 2% to 3% during the next few years, maybe even a little stronger," Hilker predicts. Olson notes that global GDP growth will be softened by European economic troubles, at the same time Asia is experiencing rapid growth. "You can’t just look at the U.S. dollar in a vacuum," he says. What’s most important is the value of the dollar measured against the currencies of major competitors and major customers, Olson explains.
Longer term, producers could face interest rate headwinds. Rates can influence the dollar’s value, but other factors play into the mix, too, Westhoff says. He expects interest rates to remain low for the next two years, but a sharp spike after that. "Higher interest rates are likely to put downward pressure on farmland values as well as increase the cost of operating loans." As a result, Westhoff advises producers to pay attention to interest rates. If you believe that rates might spike later on, making major planned investments sooner rather than later might make sense, he adds.
One important macro factor that’s increasing in importance is the growth of ag production elsewhere, particularly South America and the Black Sea region. Both have taken away corn export sales from the U.S., which are down from 40% to 50% market share at their peak to 30% today (up from 20% last year). "The Black Sea has become a major new player in grain markets," Westhoff says.
He sees an increase in global competition in the years ahead, a macro factor he urges producers to watch and make sure they stay competitive. Keep your eyes on other potential players, too, he says. "In 10 to 20 years, Africa could emerge as a competitor."
Schouvieller has a somewhat different view of the competition. "Corn at $4 per bu. will force a cutback in corn acreage by our new competition—particularly Brazil and Ukraine—more than in the U.S.," he believes. The result will be a gain in export market share by the U.S., Schouvieller predicts. "You can’t have $7 corn and expect the U.S. to dominate markets."
One huge macro wildcard has been in full evidence of late: government policy. The government shutdown cut U.S. economic growth in the fourth quarter by as much as a half percentage point and the deal struck by Washington is only until January. How and even whether a budget deal can be reached then impacts the outlook for not only the U.S. but the world economy, Olson notes.
"Despite what has happened, I believe cooler heads will prevail," he says. Even so, making macro predictions about government policies worldwide, so important to farmers, is about like trying to pick the peak of commodity markets.