The latest round of monthly U.S. Department of Agriculture data failed to produce any significant market reaction. It was a dud. The agency kicked the can down the road by only making small adjustments to both domestic and global fundamentals. With minimal fresh news to excite the trade, anticipation is building for the June 28 reports. We hope it produces a bit more excitement than the latest round of reports. It should and typically does — one direction or the other. In the meantime, however, commodity markets are left to the whims of outside market action. U.S. inflation data and the Federal Reserve meeting were major headlines that have influenced price action across the broad market this past week. Including grains, thanks to the volatile U.S. dollar.
With the Fed keeping rates unchanged for the seventh consecutive month, the dollar has been strong. Higher for longer remains the theme which will give underlying support to the U.S. dollar until the Fed’s strategy changes. Most recently, it has pushed the U.S. Dollar Index above 105 and may be on pace to test highs from April/May 2024. Since the start of the year, trading in this area has been short lived. Why? Updated economic data shifts the market sentiment with softening inflation or unemployment numbers, which result in a weaker U.S. dollar. It is a revolving cycle that has yet to break. This past week was no different. While this supports a short lived rally for the currency, it is not guaranteed. The only thing guaranteed in the current market environment is volatility.
Interestingly, the U.S. dollar isn’t the only currency experiencing violent moves. Currencies are globally traded, which makes them highly susceptible to geopolitical headlines — something the world is not short of, especially on a global election year. Global inflation remains a major concern for many countries that are trying to combat the domestic issue. Unfortunately, for a few important grain trading countries, new reforms have caused significant currency depreciation. This may be adding some of the strength to the U.S. dollar as investors look to hedge against these depreciating currencies.
For grain markets, the change in currency values can have varying impacts by commodity and country, along with implications for production, trade flows and investment. While the U.S. dollar is appreciating in value recently, the opposite has occurred for a few agricultural competitors including the Brazilian real and Mexican peso. With that, there could be commodity market ramifications, especially as the cost of doing business around the world shifts. In general, as the U.S. dollar rises, U.S. goods become more expensive to global importers and vice versa. The same is also true for other global suppliers and their currencies, which can certainly impact global demand.
Courtesy / Google
The depreciation of the Brazilian real began in 2023 but has gained momentum in recent months. Like any country that relies heavily upon its export programs, the exchange rate can greatly impact the country’s agricultural exports, especially as Brazil’s commodities are priced in U.S. dollars. Depreciation of Brazil’s currency allows Brazil’s producers to sell at higher prices in their domestic currency to match the given world market price which is posted in U.S. dollars. As you may have guessed, it accelerates the depreciation of the real but also allows for expansion of the country’s agricultural sector. With this action happening on each economic slowdown in Brazil, it has allowed the country to take over as the world’s largest corn and soybean exporter, with particular benefit to China. For other global exporters, on the other hand, it pressures futures prices lower.
Courtesy / Google
Like the Brazilian real, the devaluation of the Mexican peso can also have an impact on futures prices and global demand. This past week, the peso weakened to its lowest level against the U.S. dollar in over a year. Mexico’s recent elections and upcoming constitutional reforms are major factors behind the move, which could keep the trend in place over the coming months. That could certainly impact grain export business between the U.S. and Mexico moving forward as U.S. sources become more expensive. While this could slow export business to some degree, Mexico is also dealing with severe drought, which may force import business regardless. Time will tell.
Currency values playing into global supply and demand fundamentals isn’t a new concept. However, the current market environment is sparking the need to be more aware and less complacent. It’s simple economics at work. For producers and others involved in the agricultural industry, currency values do affect your bottom line. It’s important to understand that relationship and manage the risk accordingly. Eventually, the current trend will change and agricultural market prices will respond accordingly. Unfortunately, this is only one factor in the grand scheme of “price discovery.”
Over the past several years, the competitiveness of U.S. agricultural commodities have had to face three major obstacles: conflict, weather and currency values. While conflicts are still adding a degree of volatility to grain futures, grain markets seem to have become comfortable trading in this “new normal” environment. However, the movement of other currencies can have an impact beyond agricultural commodities. Recent moves in the Russian ruble, Chinese yuan, Japanese yen and the euro certainly highlight the impact of geopolitical moves and sanctions on currency markets. As a result, other commodities, including energies and metals, could certainly be affected.
In the near term, this leaves grain futures susceptible to the growing season ahead — not only to weather here in the U.S. but also its impact on production around the world. Currency values, on the other hand, will be adding volatility in the background, which could have longer term impacts to futures prices. In the end, the U.S. dollar is not the “end all, be all” for U.S. grain demand, but it certainly matters. It’s just another topic impacting grain price movement in an already volatile time period.
Allison Thompson is a market analyst with The Money Farm in Ada, Minnesota. She previously has worked as a Farm Business Management instructor and is active on her family’s Mahnomen, Minnesota, grain farm.
Allison Thompson is a market analyst with The Money Farm located in Ada, Minnesota. She previously has worked as a Farm Business Management instructor and is active on her family’s Mahnomen, Minnesota, grain farm. She recently purchased The Money Farm and has turned her experiences in the fields and classroom into a career where she is able to help producers facing the challenges of today’s markets.
