Since June, the value of the U.S. greenback has dropped 10 % relative to other major world currencies and nearly half of that decline has occurred over the past three months. Why that matters to Ontario grain growers is twofold: first, the commodity futures markets which establish values for corn, soybeans, and wheat are all measured in U.S. dollars, and secondly because the export markets for North American grain primarily trade in American dollars.
While we measure the loonie relative to the American dollar, the U.S. currency is valued in comparison to a bundle of world currencies in what is known as the U.S. dollar index. Back in June the U.S. dollar index was trading at 100, but by the end of the year it had slipped as low as 88.
Although it might be fun to blame the issue on the current state of political discourse in the United States, their currency woes are more likely the result of the COVID-19 pandemic and the economic consequences that the public health emergency has caused to American businesses.
Canadian soybean growers are pretty good at calculating the change in basis values for beans as the Canadian dollar moves up and down in value in comparison to the American dollar. But this year we’re looking at adjustments in futures prices as the U.S. dollar slides relative to other world currencies.
One of the key market drivers this past fall and winter has been the exceptionally strong export demand for North American grains and oilseeds. A weaker U.S. dollar is actually a benefit in maintaining strong demand for American commodities. One of the biggest risks to any market is when prices rise so fast that consumers gets frustrated and start looking for alternatives.
Certainly we’ve seen an epic rise in soybean values over the past three months. North American soybeans loaded on a vessel in the Great Lakes were worth about $390 U.S./mt at the start of November, and on Jan. 20 were in the $520 U.S./mt range, but that $130 U.S. price rise in the price of soybeans is only 91 Euro, 21 Chinese Yuan, or 130 Yen, because all three of those currencies increased in value relative to the U.S. dollar, and all three of those markets consume North American soybeans. The price increase in our sales markets is not as big as it appears to be for sellers here.
To be clear, the biggest driver behind the price rally in grain and oilseeds is the drought in major South American growing regions, and global interest in sourcing stocks from alternative production regions in order to assure supply. So far, we’ve seen a $3.70 rally in old crop soybeans futures which is roughly $3 worth of drought anxiety and $0.70 worth of American currency adjustment. Why it’s important for Canadian farmers to monitor the situation is because the two market drivers are in no way connected, and we could see the U.S. dollar index self-correct regardless of what happens with growing conditions in Brazil and Argentina.
Normally Canadian farmers watch for fluctuations in the Canadian dollar, and find opportunities to grab higher basis values when the loonie is weak relative to the U.S. dollar. The current situation is almost the opposite.
Although we’ve seen a consistent rise in the value of the Canadian dollar in recent months, it’s not a reflection of a strong domestic economy but rather because we measure the value of a Canadian dollar in American currency and the U.S. greenback has been slipping faster than the loonie. So, instead of seeing higher Canadian basis levels due to a low Canadian dollar, we’re seeing higher U.S. futures levels due to a weaker American dollar.
Regardless of how we construct the price, a lower U.S. dollar makes American grain export prices more attractive in the global markets, and that’s beneficial to all of us as tightening ending stocks push grain prices higher in the entire North American marketplace.
A recovery in the U.S. dollar index will most likely come as a result of the economic recovery as America gets the COVID-19 pandemic under control and business activities return to “normal.” Some political stability would certainly help build confidence in the U.S. dollar, but a robust economic growth will take much longer. Signs that the American economy is moving in the right direction would be enough to attract investors back to the security of the U.S. dollar.
So, your market watch list that includes South American weather and Chinese demand should now include the U.S. dollar.
Steve Kell operates a crop farm in Simcoe County and is a former grain merchant for Parrish and Heimbecker Ltd.