A stronger dollar takes a toll on U.S. exports—so keep watch on the fluctuations
The U.S. dollar has made an about-face in recent years and is gaining strength. Oftentimes, stronger is better. For farmers, though, a robust dollar can be a drag on export sales and eventually farm income.
“A more costly U.S. dollar makes U.S. commodities more costly on the export market,” says David Widmar, ag economist at Purdue University. “Given the current market situation with building inventories, a slowdown in export activity will be seen as bearish market news. Another key factor will be how the U.S. dollar holds up to currencies of other major exporters.”
As of mid-April, the U.S. dollar index was 98.40. According to a USDA outlook report, the dollar is expected to climb by more than 6% this year compared to 2014—the fastest appreciation since 1997.
“The U.S. dollar index tells us the value of our currency versus the currency of our major trading partners,” says Kurt Lensing, AgStar grain industry specialist. For example, since January 2015, the dollar has appreciated 13% against the euro, 14% against the Brazilian real and 5% compared with the Canadian dollar.
The single biggest reason for the sharp rise in the U.S. dollar index since May 2014 is the equally sharp plunge in the euro, says Brain Grete, Pro Farmer editor. “Since the euro makes up 57.6% of the dollar index, the dollar trades at an inverse to the European currency. Anticipation and then the onset of quantitative easing [QE] by the European Central Bank [ECB] as the euro zone economy weakened put pressure on the euro, which pushed the dollar higher,” he explains.
At the same time, the U.S. economy was strengthening, and investors speculated when the Fed would end its QE and start raising interest rates, which supported the greenback.
Japan also came into play as its economy briefly slipped into recession, Grete adds. “The yen accounts for the second most weighting—13.6%—of the U.S. dollar index,” he notes.
As the U.S. dollar has strengthened, it has made U.S. grain relatively more expensive—and U.S. producers are feeling the impact. For corn, the U.S. relative price in December 2014 was 85.3, or 85.3%, of the price in January. However, the Japanese yen adjusted corn price in December was 98.1, or 98.1%, of the price in January, and the Mexican peso adjusted corn price was 93.75. In both cases, while the price of the commodities in the U.S. was considerably less in December, the major export partners have seen only a slight decline in prices. Soybean prices have fallen enough that, in spite of the strengthening dollar, foreign prices are substantially lower than those at the beginning of 2014.
Now that the euro value is slashed and the dollar is pumped up, the bulk of the currency redistribution is complete. As a result, both currencies are more likely to fluctuate day-to-day on individual news events, such as Fed and ECB meetings and economic data, rather than the broad sweeping moves of the past 11 months, Grete says.
While various factors sway exports, the value of the U.S. dollar certainly pushes its weight. In fiscal year 2015, exports are expected to take an $11 billion nosedive compared with fiscal year 2014. Imports, on the other hand, are forecast up $3 billion from fiscal year 2014.
In comparison, when the agricultural trade-weighted dollar depreciated more than 20% between 2002 and 2011, it supported record ag export growth between 2010 and 2013.
Based on the most recent USDA WASDE projection, U.S. corn exports account for 12.9% of usage; soybeans, 48.3%; wheat, 43.8%; and cotton, 70%. On the livestock side, 26% of pork and 14% of beef is exported.
“Since the demand for soybeans is heavily dependent on exports, currency fluctuation affects the pricing of this commodity more directly than a commodity primarily consumed or used domestically, such as corn,” Lensing says. “Aside from an expected record or near-record South American soybean crop, prices have been negatively affected by the strong dollar.”
For example, new crop soybean futures are around $9.50 per bushel, and the U.S. dollar has appreciated 17% since February 2014.
“If I’m a foreign buyer of soybeans, I’d shop from the U.S. or a South American country. After a quick currency calculation, though, I’d need to add $1.62 per bushel to last year’s currency ($9.50 x 117%= $11.12) to determine the U.S. price. This is part of the reason why we are seeing a switch from U.S. soybeans to South American origins,” Lensing explains.
When a country prices a U.S. commodity, the exchange rate also comes into play. “The exchange rate is how much it would cost the grain buyer to purchase the U.S. dollars he needs to buy the corn,” Widmar says. “This gets tricky; not only are they buying corn but they are also buying U.S. dollars.”
Like commodities, currencies trade on exchange markets. The prices fluctuate based on the global supply and demand of various currencies.
Although currency is only part of the many reasons for lower exports and prices, it will be an important factor to watch going forward.