US deflation?

Farm Forum

01/27/15 — An interesting phenomenon seems to be developing with a strong U.S. dollar and weak other currencies, especially the Euro as Europe struggles to keep their economies strong. First Switzerland stopped pegging their currency to the Euro, and then the European Central Bank announced some quantitative easing (QE) of their own that will further deflate their currency. That will make European goods cheaper to import into the U.S., and with the U.S. currency rallying sharply recently it is making U.S. goods more expensive to the rest of the world to import. In this case, it’s wheat that suffers the most in price because Europe is a strong exporter of wheat, and a strong competitor to the U.S. in exporting wheat. Now that Greece has elected a leader that is against the austerity measures proposed by the EEC, it is likely the Euro could decline even more.

With grains being U.S. products heavily exported, that makes the prospects for U.S. exports less optimistic in the future. Specifically, the U.S. dollar index has gained from 80 in July 2014 to an index high of near 95 today, a rally of 19% in just 6 short months! That makes exports of U.S. products to the world almost 20% more expensive – even though they might be the same price as they were just 6 months ago. It is the currency value that balances trade between countries, and the U.S. currency is rallying sharply against other currencies as the U.S. economy is stronger than the rest of the world’s.

It is noteworthy to also point out that crude oil has declined during that same period by more than half the price it was last July at $105 crude oil to now be trading at around $45. It may not be just a coincidence that crude oil prices dropped sharply while the dollar rallied. But of course there are other fundamental reasons that crude oil prices crumbled lower (like the Saudi’s insistence at keeping production levels up to drive the price of oil lower and force other countries to cut their production). But there is no question that the stronger dollar is having an impact as well.

The strong dollar seems to be having the effect of deflating prices of U.S. products as we struggle to maintain our exports. We are starting to see the impact of this deflation in the grains, as the charts have all turned lower in grains after rallying from October to January. However, the wheat and corn charts turned lower before the Jan. 12 final production report, and soybeans turned lower after trading below the bottom channel line of the channel they had been trading in for the past few months.

These are not good signs for grains, as we could see the deflation in grains that we have seen in crude oil the past 7 months, as the strong U.S. currency slowly works its magic to slow U.S. exports as they remain more expensive to the rest of the world via our currency.

Deflation is never a positive sign to export dependent markets like grains, but unfortunately it appears we are going to experience some of that deflation in the grains as we move forward this winter. Of particular concern is the wheat exports, with U.S. wheat having to compete with European wheat for exports. Soybeans may suffer the least, but then it is also soybeans that are expected to garner another 4 million acres of U.S. plantings next spring, stealing many of these acres away from corn. That would be a bad sign, especially if South American weather improves from what is currently putting some stress on Argentine crops late in the production season. The current 14 day forecast on Jan. 27 calls for warm and dry weather there the next 14 days, all this occurring during the pod filling development stage for Argentine soybeans. This of course is somewhat supportive to soybean prices, which have been stronger than the other grains so far this week.

But sellers beware, deflation might be having an influence on prices this winter as the U.S. dollar’s strength erodes the value of U.S. products.