Jerry Gulke: Are We Seeing Grain Demand Destruction?
The major debate this year has been one of perceived tight stocks versus how high prices have or will impact global demand for U.S. agricultural commodities.
A lot of attention has been placed on the unprecedented increase in interest rates, which in turn has been blamed as part of the explosion in the U.S. dollar index. In the current political environment, we must note the value of the dollar are likely not a sign of any political party, but inferences can be gleaned.
The U.S. Dollar Index contains six component currencies:
- Euro
- Japanese Yen
- British Pound
- Canadian Dollar
- Swedish Krona
- Swiss Franc
Conventional wisdom suggests a strong dollar makes our exports more expensive and less competitive, at least to the countries listed in the index. Generally, a strong U.S. dollar index implies it is strong against those not in the index (Brazil, Argentina and China) who can be competitors or buyers of our agricultural exports.
Given the explosive dollar referenced in the chart, it might be a big factor in whether global demand will merely be reduced or undergo significant destruction.
USDA’s numbers at the February Outlook Forum showed exports at 2.35 billion bushels for corn and 2.15 billion bushels for soybeans. In May, USDA increased corn exports to 2.4 billion bushels and soybeans to 2.2 billion bushels, which turned out to be the highest estimate for 2022/23 in both commodities.
That increase also coincided with the U.S. dollar accelerating higher.
In October, USDA dropped corn exports to 2.15 billion bushels and soybean exports to 2.05 billion bushels. Exports decreased as the U.S. dollar increased even further into October. USDA has reacted to currency pressure on competitiveness in global agricultural markets.
ANY GOOD NEWS?
In mid-October, the U.S. dollar posted a major daily reversal lower, as the stock market, wheat prices and even energies jumped higher, signaling the U.S. dollar had peaked. If so, it might mean U.S. agriculture becomes more competitive.
Conventional wisdom suggests the currency relationship has a direct influence on demand. However, when food supplies are tight, the cost is inelastic — obtaining the product is more important than cost.
When grain and food is in surplus, currency relationships are indeed important, and the buyer asks who will sell it the cheapest. A garage sale and lower prices are then needed to clear inventory. That cycle might lie ahead in the longer term.
In the short term, demand for food might be more inelastic (less price sensitive) than the market expects, keeping markets supportive, nervous and volatile.
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