Foreign Exchange Wars: A New Horizon for Agriculture

Foreign Exchange WarsIt is the night before the October USDA report with almost everybody poised for market position.  I find myself wonderfully positioned in a combine today and for the next few days as sunny weather has broke across southwestern Ontario.  It seems for the last few days SW Ontario has been caught within a swirl from an eastern storm, which put clouds and showers over my farm with blue skies only a few miles to the west.  So when the October report is announced on Friday, your loyal scribe will have his head deep within his combine. I will have two leave it up to my DTN colleagues to light up Twitter with their expert analysis.

Some of you might be laughing because thinking of my analysis, as a resident expert is almost hysterical.  I often think as producers the sexy thing to think about is futures prices when the real market boils down to the cash market in our local area.  With Canadian producers getting used to a monetary environment where the loonie is fluttering close to par our cash markets are even more important.  Gone are the days when positive basis values danced in our heads.

Of course there are many Canadian analysts predicting the loonie to go to $1.15 US.  I have a hard time with that but there is hardly an argument against it right now.  Our American friends are committed to continuing their policy of 0% interest rates effectively taking the bottom out of the greenback letting it fall to levels I don’t even want to imagine.  There is no particular theory behind this other than the fact that the American economy is still doing badly and any interest rate hike would certainly add to deflationary fears.  So as long as they maintain their zero interest rate policy there is a lot of clear air under the greenback.   That’s putting the value of the US dollar continually at risk and we all know a lower US dollar is good for commodities.

That has been the added testosterone behind any bold moves in grains in tomorrow’s report.  Of course I don’t know what will be in the report and in fact I think we do have more corn than what some analysts say.  Despite that, if there is some bullish surprise it will only be compounded by a weak US dollar.

What I find interesting is the constant buzz in financial circles regarding foreign exchange rates and currency fluctuations.  It’s much different than we as Canadians are used to.  For instance in the last month the Bank of Japan intervened twice to weaken the yen and US lawmakers have actually backed a measure that could lead to import tariffs in response to China’s undervalued Yuan.  The reason there is so much angst regarding this is the moribund global economy.  Some countries are deliberately manipulating their currency to give them the best advantage for their exports.  China is the obvious example but Japan is too.  Of course some argue that with the zero interest rate policy of the Federal Reserve in the United States it amounts to the same thing.  Simply put, foreign exchange values and currency fluctuations are becoming the new economic levers in an economic war among friends.  How our agricultural commodity prices adjust to that new reality maybe the question of 2011.

U.S. Treasury Sec. Timothy Geithner said recently that the efforts by emerging powers like China to hold down their currency values are a ” damaging dynamic” that threatens the global recovery.  What he would like is China to increase the value of the currency and consume more within the country.  Of course most Western countries feel the same way.  Finding themselves with large budget deficits only makes the need more acute that China increased the value of its currency.  For instance if the Chinese currency could buy more American goods simply because it was valued higher that’s a positive for American jobs.  Ditto for North American agricultural commodities.

So if a country like China, which seems to have an insatiable appetite for soybeans at an undervalued currency, what would it be with a more valuable currency?  It simply would give them the ability to buy more soybeans or any agricultural commodity spurring demand and raising cash prices to producers in places like North America.  It would simply change the dynamic of everything based solely on foreign exchange.

So if the market blows apart Friday, it blows apart.  Keep in mind as we move forward the implications for our cash prices based solely on foreign exchange and not necessarily the Canada US rate.  There are many other currencies in this world currently being manipulated for domestic purposes.  It’s having a huge effect on agricultural demand and depending on what happens it could even grow further.  As of now, it’s a cauldron of intrigue.  North American farmers are set to benefit.