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Guest Opinions

Livestock Impacted by Currency Markets Globally

Written by Len Steiner and Steve Meyer

Currency markets reacted violently to the surprising British vote to leave the European Union. Now that the dust has settled somewhat and lawyers have taken over – ain’t that the case with anything – it appears that things are not exactly black and white. If anything, it appears this issue could drag out for a while with plenty of room for maneuvering and negotiation on both sides. The British pound has yet to recover, but the U.S. dollar index is on its way down, and other emerging market currencies have recovered somewhat.

The reason this is an important issue for livestock markets is obvious to those that have been tracking this industry for a while – a big chunk of our customers are outside of U.S. borders. And when the dollar becomes stronger, suddenly the price of U.S. products goes up, making our beef, pork or chicken less competitive relative to other exporting nations. When the U.S. dollar goes up, the U.S. market also becomes more attractive to ship to. The result is a shift in the relative flow of products into the U.S., ultimately impacting returns of U.S. livestock and poultry producers.

Much has changed in the last 12 months on the currency front and generally for the better for the U.S. meat industry. The top chart to the right shows the performance of the U.S. dollar relative to the currency of nations with which we trade significant volumes of beef,
pork and chicken. We often hear about the dollar getting stronger or
weaker, but the reality is that there is no such thing. The value of the U.S.
dollar is always measured relative to specific currencies, or in currency pairs. Even the so-called U.S. dollar index only reflects the value of the U.S. dollar relative to a very small basked of currencies, dominated by the euro.

Currently is takes about 102.5 Japaneseyen to buy one dollar of U.S. beef. Last year, it took about 125 yen to purchase the same amount. In other words, the purchasing power of
the Japanese yen has increased, and a Japanese importer now can afford
to buy more U.S. product without having to spend more. Suddenly for
that Japanese buyer U.S. beef is on sale with an 18 percent off sticker, just due
to the currency shift alone. Add on top of this, the decline in cattle prices in the U.S. and higher product availability, one can understand why
the U.S. market has once again become very a reactive if you are a beef
buyer in Japan.

Last year, U.S. beef exports struggled in the third and
fourth quarter, which in turn contributed to the dramatic decline in fed
cattle values in the fall. Feedlot supplies got backed up, for a variety of reasons last fall, and the lack of a vibrant export market made a bad situation worse.

This year, however, it appears that exports should
benefit from the fact that the U.S. dollar is heading lower. The Brexit vote
had the potential to once again push the U.S. dollar up, hence all the attention from livestock futures participants in recent days.

USDA currently projects steady gains in U.S. beef, pork and chicken exports in 2016-17. The increase in exports reflects the fact that U.S. production for all proteins is expected to increase in the short to medium term. Lower feed grain prices and positive margins have fueled expansion and exports should help soak up some of the additional supply.

Trade appears to be a focus of the presidential campaigns this fall, and we have no interest in wading in politics in this report. However, the reality is that the U.S. is a large net exporter of agricultural products. It is also a large net exporter of meat products. In 2015, exports accounted for 21.3 percent of all pork production, 17.3 percent of all chicken production and 10 percent of beef production, fueling much of the growth in U.S. livestock industry in the last 20 years.