Value of the American dollar holds important implications for agricultureWritten by Saige Albert
“The stronger American dollar hurts exports,” says UW Extension Economist John Ritten.
Ritten looks at the various ways the strength of the dollar impacts agriculture, noting that global recovery is important to ensuring the future growth of the industry.
Valuing the dollar
The U.S. dollar is valued relative to other countries’ currencies.
CME Group noted in a Jan. 29 release that the Intercontinental Exchange’s (ICE) Dollar Index tracks the value of the dollar against six other world currencies – the euro, Japanese yen, British pound, Canadian dollar, Swedish krona and Swiss franc.
For the week of Feb. 9, the index showed a value of 94.44.
“That futures contract traded above 95 for the first time since 2002 in January,” said CME Group. “Virtually every Dollar Index rally from 2008 through 2013 was associated with financial crises somewhere in the world – primarily the European Union – and the resulting ‘flight to safety’ in the U.S. dollar.”
The rally of the dollar recently has big impacts for agriculture across the board.
“A strong dollar makes our goods more expensive overseas, which can hurt livestock prices in the long-run,” Ritten said. “If people can afford to buy less of our product, it makes it harder for us to compete.”
Exports provide a large portion of the profits that producers are able to capture from beef.
“We are an exporter of high-quality beef,” Ritten says. “It is expensive to begin with, so there is limited demand.”
“As U.S. beef gets more expensive, people will start to choose cheaper substitutes,” he continues.
Ritten also notes that some people believe the U.S. should begin to target the current market by selling ground beef and other products.
“A lot of folks think maybe we don’t need to have a high-dollar product,” he explains. “In the long run, we want to have a high-quality product. Anyone can produce cheap beef. Not everyone can produce high-quality beef.”
“I’d rather that we continue producing the Rolls Royce of beef than trying to compete with Kia and Hyundai,” he says.
Sheep industry impacts
Larry Prager of Center of the Nation Wool notes that fiscal policy and the dollar dramatically impact the sheep industry, as well.
“I’m a little less optimistic today than I was in November about the sheep industry because of the currency impact of the U.S. dollar compared to the Australian dollar,” Prager says. “I don’t know where the bottom is when we are looking at the exchange rates.”
U.S. fiscal policy dramatically impacts what currencies are doing around the world, he continues.
“Up to this point, adjustments in the interest rates with economic stimulus plans have caused the strength in the U.S. dollar, and that is a key factor today,” Prager adds.
The Australian wool market is selling large volumes of wool at 90 percent of what U.S. wool is selling for, plus a clearance.
“Wool is in no real surplus anywhere in the world,” Prager continues. “The biggest factor for the U.S. is the strength of the dollar relative to a year ago – or even to a few months ago.”
While U.S. exports are more expensive around the world, a stronger dollar makes oil cheaper, meaning the agriculture industry will see reduced input costs.
Speaking about the correlation between the dollar and oil prices, CME Group mentioned, “The United States’ position as the largest importer of oil in the world has, historically, contributed to a strong negative correlation between the price of oil and the value of the U.S. dollar, as dollars flowed outward to pay for all of that oil.”
“The recent drop in oil prices and the very real prospect of the U.S. becoming a net exporter of oil has changed that dynamic and, we think, set the stage for a stronger dollar,” the organization continued. “But for how long?”
They note that the rally is likely to stay around longer than others since 2008, but predicting the duration of a strong dollar is difficult.
“From a production ag system, we have cheaper energy inputs, so cost of production should go down,” Ritten adds. “It depends on what wins in the long run.”
Regardless of the immediate impacts, Ritten notes that global recovery is the overall goal.
“We are hoping for global recovery,” he says. “Everyone wants the dollar to be strong, but in our market, a cheaper dollar helps global sales.”
In looking at global recovery, the impact of Greece’s decisions regarding the European Union and Russia’s action toward Ukraine are of the utmost importance.
Over the last year, Greece’s economic standing has been in limbo, and more recently, there has been talk that Greece would leave the European Union (EU), an action called, “Grexit,” by many.
“If Greece exits the EU, it would have widespread repercussions across the globe,” Ritten says. “The other major factor is the issue between Russia and the Ukraine.”
“Russia would like to import some agriculture products, but given our sanctions, they haven’t,” he continues. “Also, if Russia invades Ukraine, and Europe takes action, they will have a lot of money tied up that they won’t be spending on our agriculture exports.”
While many worldwide are worried about the impact of the terrorist group ISIS, Ritten says, “ISIS will have a far lesser impact on domestic producers.”
“The big immediate issue is making sure the European Union doesn’t fall apart. Greece disrupting the Euro-zone would have major negative repercussion for our market,” he says, “and a NATO-Russia conflict would have major impacts, as well.”
At this point, he notes that the long-term impacts to agriculture aren’t clear.
“If the U.S. dollar stays strong for an extended period, we will feel it in the bottom line and at the sale barn as a result of depressed prices,” says Ritten.