A decade ago, I gave a commodity seminar to farmers in Argentina. Afterward, I thought about how sheltered—perhaps even naïve—we had become about the real market risks my Argentinean friends faced. They included freight costs, government intervention, taxes and currency fluctuations.
Now many of those items directly or indirectly affect our bottom line. The factor that has received the most press recently is the value of our currency as compared to a basket of currencies called The U.S. Dollar Index. It could very well become a major factor in price discovery.
Lessons From History. To understand why, look to the past. The eight-year Clinton Administration, held in check by a Republican Congress, is credited with the longest uninterrupted economic uptrend in history. The U.S. dollar topped with a monthly key reversal in July 2001, six weeks before Sept. 11.
The dollar fell compared to other currencies from 2001 to 2008, nearly as fast as it went up, to make 16-year lows. It bottomed out after another administration change. From 2001 to 2008, the lower dollar combined with the first corn-ethanol mandate to improve demand for U.S. products during a competitive time.
The past six years are best described as a grand experiment. The sideways U.S. index market determines if factors including stimulus programs, quantitative easing and government-mandated health care will work. History will be the judge, but for now, there is good news and bad.
Implications For Agriculture. The good news is while our economic system isn’t perfect, it is better than the competition. The dollar will remain the reserve currency. To date, commodity prices remain unaffected by dollar gains. The not-so-good news is a strong dollar makes ag exports more expensive.
In early 2015, look for a major market decision about currency relationships that will portend the direction of our domestic ag economy. The worst of all worlds would be for our currency to head in the direction of the 2001 highs, just as the American farmer relentlessly overproduces grain and livestock. Our competitors have learned to mitigate price risk caused by currency fluctuation. It seems we are destined to learn to do so as well.
Over 25 years, The U.S. Dollar Index has fluctuated considerably. The past six years represent a grand experiment of stimulus programs and more.