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Does Strength of the U.S. Dollar Impact Exports?

Spoiler alert…yes, it does, though it’s more complex than one would expect.

It’s fairly common to hear of dollar strength/weakness and the resulting negative/positive impact on agricultural export activity. Logically, it makes sense. Since goods are generally priced in U.S. dollars, a more expensive currency raises prices for foreign buyers which chills demand. Conversely a less expensive currency incentivizes buyers to purchase from the U.S. rather than competitors.

While the preceding makes complete logical sense, the actual relationships can be more nuanced, causing them to run counter to what one may expect. In this vein, CoBank recently completed an excellent, commodity specific, analysis looking at recent currency moves and resultant export demand. I encourage you to read their work, as it’s more far-reaching than will be summarized here.

Level setting the measurement of dollar “strength” and “weakness”

Relating to exports, strength is generally measured using:

  1. The U.S. Dollar Index which benchmarks the dollar by comparing it to a selection of foreign currencies from important trading partners.
  2. The trade-weighted dollar which narrows the focus by benchmarking the dollar to a group of commodity specific trading partners.

Both methods provide a general sense of dollar strength in the export marketplace, though each have limitations that will be discussed shortly. In truth, while these measures are often cited in forecasting trade activity, it’s the one to one (country to country) relationship that ultimately drives trade.

For purposes of this summary, the focus will be on grain and dairy.  The referenced CoBank report maps out strength in both the U.S. Dollar Index and the trade-weighted dollar, providing a solid foundation to assess recent export activity.  As grain is a fairly broad classification, it stands to reason that there will be varying impacts across more specific commodities, as the graph illustrates.

The broad U.S. Dollar Index suggests a very strong competitive position for all U.S. grain, as the dollar is generally weak in relation to major trading partners. Narrowing the focus to trading partners for each commodity, however, yields quite different results. In this frame, the dollar is significantly stronger compared to corn and soybean specific trading partners, generally making U.S. product less competitive.

As the CoBank graph suggests, U.S. corn and soybeans are more expensive for major trading partners.  Logically, one would anticipate a pullback in both corn and soybean prices toward a more competitive position.  But, as we all know, this is not what happened.  In fact, export volumes and prices rose significantly in the latter half of 2020.  Why?

Remember this passage from earlier: “…it’s the one to one (country to country) relationship that ultimately drives trade.” The one to one relationship with China has largely driven U.S. corn and soybean export and price movement since mid-2020. The Chinese effort to rebuild their swine herd, after the devastating effects of African Swine Fever, has led to strong activity in procuring corn and soybeans from the export market. This, coupled with the favorable currency position of the yuan in relation to the dollar, has driven strength in the corn and soybean market, despite the less competitive U.S. position suggested by the indices.


Dairy is a different story

While the one to one relationship with China has driven corn and soybean prices higher, activity within the dairy space have been more consistent with that shown by the indices.  The 2021 forecast largely assumes that the dollar continues to weaken against the currencies of major trade partners.  This is bullish for U.S. dairy export activity, which would likely result in favorable milk prices for producers.

Dairy trade is significantly more fractured than grain, in that the U.S. is one of several producers competing in the export markets, with the European Union (EU) and New Zealand as strong competitors.  The favorable 2021 outlook for U.S. dairy competitiveness largely drives off the CoBank expectation around strength in both the New Zealand Dollar and the Euro.  Strength in these currencies will improve U.S. producer position globally, especially with an expected weakening of the U.S. Dollar.

While the dairy and grain graphs are very different, they're both experiencing a period of solid overall returns to producers. Without digging further than the graphs, one would expect the opposite environment for grain producers. This illustrates the need to maintain a critical eye when reading through various forecasts as underlying assumptions and generalizations matter.

Measured against a broader range of currencies, the U.S. may indeed be less competitive, however, the individual one to one country dynamic with China resulted in a grain marketplace that differs from the expected. This is not to discount the benefits of examining the index results -- far from it. The idea is to take them further and compare what is expected to happen with what is actually happening. In the case of grain, it is the influence of China that is largely propelling grain prices higher. So, should China step back from the market, U.S. grain is largely less competitive (right now) with other countries. Should China reduce import activity, one could reasonably expect U.S. corn & soybeans prices to come under pressure.

Why is this important to producers?

On a daily basis, farmers produce commodities that feed both the domestic and international markets. Currency fluctuations, geopolitical relations, weather, shifts in demand, and global production, among others, all play a role in determining the end price that our producers receive for their goods.

Understanding and monitoring the interplay within the market helps us forecast developing trends and provide support/advise to clients. As we've seen, the current forecast is favorable for clients producing commodities in the largest industries that Compeer serves. Understanding the impact that a shift in the dynamic with China can have, allows our team to be more proactive in assessing changes to the portfolio and to our clients.


Brian
Kapsner

Principal Portfolio Analyst
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