Record Low US Greenback Is The Underlying Testosterone Within USDA Numbers

On Friday we’ll get the USDA’s latest guesstimate on how much grain is in our world.  I’ve been schooled by DTN’s grain analysts not to take these reports too seriously, instead focusing a little bit more on the underlying fundamentals.  However, these USDA reports are like football scouting reports for Saturday night.  USDA reports are like the sizzle before eating the steak.  How many of us can look back on these reports and lament about could-a, would-a, should-a when it came to pulling the trigger on our marketing decisions.

Keep in mind before you react to the November 9th USDA World Agriculture Supply and Demand Estimates one of the sole marketing truths within this current market.  No, I’m not talking about corn, soybeans, beef, pigs, futures, commercial carry etc.  I’m talking about the American greenback.  We’ve all been focused on our loonie, but the American greenback has almost been more of a story.  At the present time it is now at near record lows against all the world’s major currencies.

What’s that mean?  Well, when you think of the price of oil, you think of $95/barrel.  However, that means $95 US, which is approximately $88 Canadian.  Ditto for grain prices.  That’s a big reason we’ve seen a run up in soybean and corn prices despite the bearish short-term fundamentals.  Everything American is cheaper and with the world’s grain markets being priced in Chicago it’s been a boon to futures prices.

It doesn’t stop there.  As Canadian farmers we are constantly focused on our loonie.  Our American friends farming the very same commodities don’t much think about the value of the US greenback.  However, they may be starting to consider it.  How can they not?  It would seem the whole world is questioning the American greenback as the world’s default currency.  Just this past week, currency markets were twittered when a Chinese official mused about dumping part of their foreign reserves of US dollars and replacing it with something else.  That briefly sent out loonie to over $1.10 US.

In many ways you could see this coming.  No, not the loonie at these lofty levels.  I don’t think anybody had that in their business plan.  However, we’ve known for a very long time about the “Wal-martization” of the American economy.  China this year replaced Canada as the US’s biggest trading partner.  The American current account deficit was growing too large and eventually their Asian suitors would call their bluff.  When the sub-par mortgage fiasco came along sending their economy wonky it might have been the start of a US economy retreating from its preeminent position in the world economy.

How does this new reality within the global economy affect the grain and livestock complex?  The reality is if you are a Canadian farmer it’s real bad news.  Cash prices for all Canadian agricultural commodities have comparatively dropped like we’ve seen over the last few months.  However, for our American friends in some ways at least in the short term it couldn’t be better.  American cash prices are healthier and American agricultural exports are much cheaper.  In fact it’s the best trade inducement they could ever hope for.  American agriculture will surely expand under the present scenario.

Back in Canada its like we’re all trying to constrict back into the agricultural toothpaste tube after getting very comfortable farming with a sub par loonie.  Case in point is next week’s anticipated opening of the US border to Canadian cattle over the age of 30 months.  The dollar has risen about 40% since BSE was first found in Fairview Alberta and the US border was slammed shut.  In fact the loonie has appreciated 23% this year.  So if the USDA beats out any more last minute R-Calf challenges, Canadian cattle are set to flow south.  However, will they in this current environment, which is so very different from May 2003 when BSE was first found.  I don’t think so.

It’s serious stuff for Canadian farmers and our country as whole.  This past week, Premier McGuinty of Ontario and Premier Charest of Quebec have both called on the Prime Minister to do something about our loonie.  Bank of Canada governor David Dodge has said the loonie is overvalued.  In my opinion they are all right.  However, our problems with the loonie on Canadian farms may truly lie in an American greenback, which the world is abandoning.  Ben Bernake, the chairman of the US Federal Reserve chimed in Thursday saying the US economy is set for a slowdown based on higher oil prices and the sub-par mortgage crash.  Hmmmmmmm.

So think again when the USDA releases their numbers on Friday November 8th.  Will they reduce 2007 corn production below the October number of 13.054 billion bushels?  Will they send the soybean market reeling with a number lower than 2.598 billion bushels?  I say maybe to both.  However, keep in mind whatever happens, there is some hidden testosterone in those numbers solely based on a US greenback which is at record lows.  For the American farmer that’s almost better than those direct payments in the US farm bill.  However, on this side of the line, we’d better circle our wagons.