Low US Dollar May Put a Floor On Grain Prices

If you’ve been watching the markets over the last few weeks, we’ve seen a bit of a commodity meltdown.  Even oil can’t get any wind under its sails settling at $129.29/barrel, the lowest in over a month.  What’s the world coming to?

However, looking even closer we’ve still got corn futures over $6.30, soybean futures over $15 and oil over $100.  So the sky isn’t falling, even though at times when writing, speaking and thinking about commodities, it feels that way.

In Canada, we’ve got our Alberta boom and we’ve got our own Saskaboom, so we know about commodities.  Even with their free fall over the last couple of weeks, I think they are still hot.  With volatility being redefined almost daily, that shouldn’t deter you from holding that steady trigger finger.  We’ve been through so much over the last two years; it’s not time to get scared now.

I read with interest Darin Newsom’s column, “My Time In the Big Apple”, where he describes his sojourn at the “Commodities Trader by Trade Tech” convention in New York City.  In this column Darin discusses the many theories presented on the “commodity bubble” at the conference and what “those experts” think will happen next.

Who knows, with commodities being so wild, maybe the speakers were flipping coins behind curtains on what to say.  Of course not being there myself, I wondered what was said at the conference about the US dollar.

In my mind much of the “commodity boom” has had to do with the declining value of the US dollar.  If you take a look at the US dollar index, which is a measurement of the value of the US dollar against a basket of the world’s major currencies, its like a toboggan ride down a mountain.  At the present time the value is about 72.3.  In 2002 it topped out at approximately 120, while in 1986 it was approximately 125.

With the US dollar being in such a funk, the world’s commodities priced in US dollars just got cheaper.  Sure there were supply shocks like in wheat and demand shocks like in corn and soybeans, but at the end of the day, the declining US greenback exaggerated the effect of rising prices.   You can bet if the US greenback was skyrocketing, much of the agricultural commodity boom would be muted.

In other words for Canadian farmers producing agricultural commodities, “not everything is as it seems.”  Much of that has to do with an American financial system that has been severely compromised through bad mortgages and financial paper looking for a home.  The US Federal Reserve has several times thrown a lifeline to those drowning in the forms of interest rate cuts.  However, the “end of the day” isn’t near, the financial crisis continues and the US Greenback is very weak.  With its status as the world’s default currency, commodity prices boomed albeit priced in a historically weak currency.

Take the price of corn for instance.  A couple weeks ago the price of old crop corn was about $6.50 bushel.  We’ve dropped $1 since then.  However, in 1996 corn prices in Ontario topped out at about $7.35/bushel.   In other words Canadian cash prices were much higher in 1996 than this year, but wasn’t this year the year when commodity prices went crazy?  Hasn’t it spawned a “food crisis?”  I think you know what I mean.  It all had to do with the value of the loonie then and now but also the value of the US greenback.

As Canadian farmers we’re hard wired to the Canadian dollar.  It’s always been a no-brainer in Canada, “futures plus basis”.  However, for the most part we’ve never had to think of the value of the US greenback and how that affects things.  For instance I was in a seminar last year when an analysis friend of mine put up a chart on the Canadian dollar and then a chart of the price of oil.  He said the loonie followed oil.  I was a bit taken aback because the value of the loonie was almost an inverse of the US greenback and the price of oil was priced in US dollars.  When I questioned him, he admitted I had a point, but like most Canadians, we don’t think of that first.

I believe clues to our commodity price future still lie with the value of the US greenback.  For sure, futures values in most of our commodities retreated significantly over the last two weeks.  However, with the US dollar still at historical low levels, will this continue?  Or will the default stimulus created by the low US dollar create a “floor” not only for grains, but for oil and natural gas too?  I for one cannot see us returning to lower price levels at present demand levels with the US greenback so low.  It simply doesn’t make sense.

Of course the flip side is “what happens if the US Federal Reserve chairman Ben Bernanke and new President McCain or Obama get it right and the US greenback catches fire?  That would curtail demand for commodities in a world, which has “geared up” to produce more of them.  The resultant burgeoning supply might put us back on the farm rally circuit and nobody really wants to go there again.

So it is what it is.  Maybe the sky is clear above the US greenback, maybe not.  However, its value is a litmus test for all of us in Canadian agriculture.  Admitting that is one of the first steps in helping us manage our future.