Market Strategy

07:08AM Sep 05, 2008
( )

Has the Dollar Bottomed?


In Spring of 2004 ("The Best Is Yet to Come") and November 2006 ("The Perfect Storm"), I outlined the case for higher grain prices. The U.S. dollar's value in relationship to our customers and competitors was a prime factor, and has been a major reason for our good exports (see "Keeping Faith" ).

One can blame the deficit, debt, the war in Iraq, our credit problems or whatever, but the mood was to sell the U.S. and buy anything else. As a result, the dollar got cheaper and it took less foreign currency to buy what we produce.

Charts indicate that came to an abrupt halt last month, with a breakout to eight-month highs and a classic monthly buy signal. (See chart at Web Extra.)

The dollar's relationship with the Brazilian real has been credited for slowing expansion of soybean acres in Brazil. A bushel of soybeans is worth less than half what it was when Brazil was expanding at its peak. Twelve-dollar U.S. soybeans are not exciting to the Brazilian producer! A stronger dollar against the real may boost soybean acres in Brazil.

Facing issues. The U.S., although imperfect, is dealing with the subprime, financial, energy and perceived inflation problems.

Europe is just now coming to grips with its own set of issues. It has been more concerned with inflation than supporting its economy. China, other Asian countries, South America and India lack the experience and economic infrastructure to quickly and effectively deal with similar problems.

The global economy, which has remained resilient despite U.S. weakness, is now slowing significantly, with Europe admitting its economy grew a meager 0.2% last quarter (0.8% yearly). Japan announced it contracted 2.4% (annual rate) last quarter, the largest drop in seven years. Developing countries (India, China, other Asia, South America) are expanding at slower rates.

Weaker growth translates into less demand for energy, grains and other commodities. The good news is that inflation could be held in check, with "deflation" now a concern. There is a fine line between prosperity and contraction, and when psychology changes, it can affect markets for two to three years.

What does all this mean to us?

• Our commodities will get more expensive; exports could suffer.
• There will be a foreign economic incentive to "grow it at home."
• Fuel costs (crude) should drop further.
• A desire to own U.S. currency and sell anything or anyone else will evolve.
• In an uncertain world, those with money will want to park it in a safe haven, likely within a country that has the best chance for emerging from a downturn—the USA!
What to expect. Demand for energy peaked below $100/barrel of crude, and feed grains met resistance at $6. My concerns are that we are beginning a period of adjustment to redefine economic value in a time of global economic contraction. Will China continue its unabated demand for soybeans and products, consuming over 40% of global trade? Will Brazil boost acres? Both countries have a huge impact on the global economy, and their reaction to global change will have implications on our bottom line.

I suspect that we will now witness successive reductions in demand, with increasing to stable supplies. Price is a great fertilizer, instilling more production everywhere. We will need to be more defensive in our outlook and less prone to believe that we are merely pausing before the next round of record-high prices.

This month's USDA supply/demand will go a long way to reveal whether we dodged a production bullet, but I will be just as interested in the demand side of the equation. Barring an early frost, will we have reduced production more than global demand weakened? Food is said to be recession-proof, but make no mistake: The record grain/food/energy prices seen in 2008 have changed the way we will produce, eat, and drive.

It is uncertain how soon or how quickly all this will unfold. Our current ag-positive environment didn't happen overnight. Hopefully, any changes will evolve slowly as well, giving us time to react.

Read the Web Extra bonus content.

Jerry Gulke farms in northern Illinois and North Dakota, and has a consulting office at the Chicago Board of Trade. Contact Jerry at [email protected] or (312) 896-2080.

Top Producer, September 2008