When a farmer steps outside to shake his fist at the sky and lament the persistent downward trend in grain prices, it’s most satisfying to pick just one target on which to focus the frustration. Sure, there are many influences on price — bearish production prospects, a lack of investor enthusiasm, questions about global commodity demand growth — but rather than sensibly weighing these many antagonizing forces, it may feel more fulfilling to have one singular nemesis.
And there is one which can be isolated, the only one to have such a reliably inverted relationship with grain prices. That one influence is the U.S. Dollar Index.
As measured by this index, American currency has been hitting fresh four-year highs during each of the past three trading sessions and is now within 7% of a decade high. Expressed as a number, Tuesday’s high of 86.21 doesn’t mean much. The index itself doesn’t have units; it doesn’t represent a certain amount of euros or ringgits or gold coins.
Rather, it’s a mathematical calculation that includes a whole basket of other non-U.S. currencies. As those currencies fall, or as American spending power improves relative to those economies, the U.S. Dollar Index rises — and our exported commodities become relatively more expensive to our customers.
To offset that effect, commodity price tags typically move down when the dollar moves up. That pattern has been especially clear in the past five months for a whole range of commodities. In precisely the same timeframe that the U.S. Dollar Index has been rising 9% above its two-year low of 78.91 on May 8, 2014, the Bloomberg Commodity Index has dropped over 12%. The grain markets in particular have experienced massive downward pressure — corn futures prices have dropped 38% since May.
Obviously corn prices (and soybean prices and wheat prices) would have dropped even if the U.S. Dollar Index had stayed completely static. But I wanted to know just how much I should blame on the dollar, how many more cents per bushel we might have been seeing if the world’s investors hadn’t suddenly decided the United States’ safety and stability and perfectly reasonable plan to increase interest rates someday needed to be priced into our currency.
After this particularly unhealthy bit of wishful thinking, it turns out that corn may be missing about 24 cents of what its price could have been if the dollar hadn’t been rising through the summer. Rather than seeing December corn futures at $3.20 per bushel, maybe they would now have been about $3.44 per bushel. That was simply concluded by normalizing the daily futures values based on the May 8 U.S. Dollar Index value (rescaling the entire series based on each day’s U.S. Dollar Index performance).
But nobody buys grain with mythical dollar index tokens. They buy it with Japanese yen, Mexican pesos, Chinese yuan, South Korean won, Nigerian naira, Egyptian pounds, Turkish lira, and even some euros. In the usual nature of foreign exchange markets, most of these currencies have been falling while the U.S. dollar has been rising, and normalizing corn prices based on any of these currencies since the beginning of May gives us roughly the same conclusion — U.S. corn prices may have lost 10 to 25 cents based on global currency volatility.
Japan is consistently a Top Five buyer of U.S. wheat, corn, and soybeans. Normalizing corn futures since May 8, 2014 using the yen-to-dollar conversion rate, there was a $0.24 per bushel difference between the actual futures price at the end of September and the normalized price. Normalizing corn prices using the currency from Mexico, our biggest corn buyer, shows a price difference now of $0.13 from what it could have been.
Those differences don’t translate into U.S. farmers receiving more theoretical cents per bushel, but rather imply how much cheaper those foreign consumers could have theoretically experienced these markets if their own currencies hadn’t been falling while the U.S. dollar had been skyrocketing. It’s worth considering because cheaper prices for buyers are generally supportive of greater consumption. However, it’s not likely that prices at today’s levels are presently curbing demand.
I could have normalized the data based on any arbitrary date, and picking the May 8 low was the most extreme example. It is certainly possible for economists to argue that the dollar has been kept artificially low by Quantitative Easing, and that it would be more reasonable to use a less extreme date or perhaps the 10-year average value for the U.S. Dollar Index. That exercise shows benchmark corn futures prices are about 18 cents lower today than they might have been if the U.S. Dollar Index had been stable at its 10-year average (81.26). So any way we slice it, the strong dollar is depressing grain prices right now, even once we look past the short-term volatility.
Unfortunately, it’s not very practical for U.S. farmers to hedge their currency risk, and it’s not very likely that they can change the dollar’s path. However, as they wait for the grain markets to establish a bottom price range and someday — someday! — change direction, this is a good demonstration of how closely they should be watching the dollar alongside seasonal production news.
It may not be the biggest or the only influence on grain prices, but if, in coming days, investors decide the dollar’s rally has gone too far and might turn back toward consolidation, that relief may very well be a trigger for something to change in grains, as well.