Ailing Greenback Takes a Toll

December 4, 2009 07:51 AM

You probably already know that the weak dollar boosts U.S. exports at the same time it makes imports like fuel and fertilizer more costly. However, the weak dollar's negative effects can hit farmers in other countries even harder.

"A weak dollar is negative for Brazilian farmers. Even those of us who tie dollar-based inputs to dollar-based commodity sales have some inputs like fuel and labor that are difficult to hedge," says John Carroll, an American whose family farms 26,000 acres in Bahia, Brazil.

He cites a gritty real-life example of the economic tug-of-war between the Brazilian real and U.S. dollar: "In December 2008, we had a 2.5:1 exchange rate. Currently, we have a 1.7:1 rate. Let's assume beans are $9/bu. An employee making 30,000 reals/year last December was making $12,000, or 1,333 bu. of soybeans. To pay the same employee 30,000 reals at the 1.7:1 rate, it costs us $17,650, or 1,960 bu. of soybeans. We need rising commodity prices just to keep pace with the weakening dollar."

"Brazil is better off with $7 beans and currency at a ratio of 4:1 rather than the ratio it now has," says market adviser and Top Producer columnist Jerry Gulke. "It puts a real strain on growers to cash-flow stuff. Their incremental cost per bushel of soybeans to open up new land is very expensive. It will take $12 to $13 soybeans to make that pay."
Competitive Disadvantage. David Kruse, whose family farms more than 22,000 acres in Bahia, adds: "When soybean prices rise in the U.S. and the dollar falls, it's tougher for Brazil to compete.

"In essence, Brazil is being penalized for its success in terms of its currency. Brazil has come through the global recession better than most countries. It has been attracting investment money, which has been inflating its currency," Kruse says. "That has now become a negative factor.

"Profit margins in Brazil are still relatively narrow. Basis levels are terrible down there and their cost structure is not that different from the U.S. Corn Belt," he says.

Brazil's currency situation is unique, says Phil Abbott, a Purdue University economist specializing in international trade and ag development. "Over the past few years, Brazil's currency has been more volatile than the Euro. When the dollar was weakening, the real appreciated faster than the Euro. Cycles in Brazil are more pronounced," he says.

Euro. Nonetheless, with a weak dollar, European farmers might find themselves at a a bit of a marketing disadvantage, says Mike Boehlje, Purdue University ag economist. "U.S. wheat, for one example, might now be more competitive with European wheat in world markets.

"And Eastern European farmers in countries transitioning to the Euro eventually will have the same kinds of currency issues that French and German farmers have with the Euro," Boehlje says.

Canada. Canadians also struggle with the weak dollar, which hurts their ag balance sheet.

"Recent volatility of the dollar is a huge issue," says Ben Currelly, a grain trader and founder of NorAg Resources in Port Hope, Ontario. "Canada is principally an ag exporter. We use only about 20% of what we grow. So a strong Canadian dollar is not a good thing for Canadian agriculture—it makes our products more expensive to the U.S., an important buyer.

"In the end, strong currency means lower basis to farmers and higher interest rates, cutting into margins in two ways," Currelly says.

China. China ties its currency to the dollar, so a weak dollar means a weak Chinese yuan. In China's economic world, that's good.

"Chinese currency has been dead constant since 2008," Abbott says. "The Chinese have seen some variations in prices externally but have used mostly domestic border measures to keep some out."

Apart from soybeans and cotton, U.S. grains are not competitive in China. "About 10 years ago, China made the strategic decision to import soybeans and protect domestic grains," says Fred Gale, a USDA–Economic Research Service economist who follows Asia. "If the Chinese currency appreciated against the dollar, U.S. crops would be more competitive and push down domestic Chinese prices.

"Even now, there's a lot of discomfort within China, with people saying soybean imports are unfair to Chinese farmers," he adds. "I don't think Chinese officials want to import corn and other things like pork and wheat.

"If they appreciated their currency against the dollar, they would also lose their competitiveness in exports," Gale points out.

"The weak dollar makes Chinese exports even more competitive in places like Europe and Brazil, where currencies are strengthening against the dollar and therefore against the Chinese currency," Gale says.

Top Producer, December 2009

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