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CME Group: Devaluation of the dollar impacts international meat competitiveness

While a number of factors have implications in the overall demand of U.S. meat products, as well as the price effects on quantity, CME Group notes that a particular factor – the value of the U.S. currency – deserves special attention.

“In the past, the devaluation of the dollar has helped offset some of the negative inflationary effect of record high feed costs,” says CME Group in their Daily Livestock Report. “Indeed, even as U.S. beef and pork prices hit record highs in some years, world buyers did not feel the full impact of such increases due to the effect of a weaker U.S. dollar.”

Recent changes

However, the U.S. dollar has swung in the other direction, resulting in the depreciation of the Japanese currency as compared to U.S. currencies.

“Japan is our most important meat trading partner, purchasing a little over $3 billion worth of beef and pork in 2012,” they add. “In the case of pork, Japan dominates U.S. pork trade, accounting for about a third, or approximately $2 billion, of all U.S. pork export receipts in 2012. Japan also accounted for almost 19 percent of the value of beef and veal shipments.”

Since November, the value of Japanese currency as compared to the U.S. dollar has dropped almost 18 percent.

“The change in the value of the Yen is not an accident that will be quickly rectified,” CME Group notes. “It reflects a dramatic change in the stance of the Japanese Central Bank and the Japanese Government.”

Political changes

CME Group continues that Japan is expected to become more activist with its monetary policies, printing more Yen and utilizing “easy money” policies, similar to those in the U.S., Europe and Britain.

“Some have argued that the change implies direct political interference in the affiars of what is an independent body,” they comment. “However, the Japanese Central Bank has missed its inflation target for the past decade, and sooner or later it was bound to come under increased pressure to deliver on its mission.”

U.S. meat markets

The implication for the U.S. meat market, however, depends on the reaction of other countries to the changes.

“Developed economies have embarked on a struggle to generate growth via easy money,” they explain. “Countries like Brazil, Canada, Australia, New Zealand will either stay put and see their exports and GDP decline, or they will also try to lower the value of their currencies via easy money and/or lower rates.”

Brazil has already begun reducing interest rates from 10.5 percent in March 2012 to 7.5 percent in January, thus lowering the value of their currency and bolstering Brazilian beef exports. 

At the same time, the U.S. dollar is also gaining as compared to Canadian and Australian currency. The development, says CME Group, further hurts exports and encourages imports.

“Domestic demand has struggled from weak income growth and the stronger dollar will further erode the profitability of US meat producers,” CME Group concludes.

Saige Albert, managing editor of the Wyoming Livestock Roundup, compiled this article from CME Group’s Daily Livestock Report.