Kub's Den

Dollar Volatility Affects Grain Prices

Elaine Kub
By  Elaine Kub , Contributing Analyst
A list of selected sources of geopolitical instability in late October 2019 includes several hot spots that may influence grain futures trade. (Graphic by Elaine Kub)

In 2019, we've become habituated to wild international headlines. So, to say, "Boy, there's a lot of geopolitical instability right now!" seems a bit pointless. How does that make today different to any other day in recent memory?

Actually, a few of the current sources of uncertainty may be influential to U.S. grain futures prices, and that's why I think it's worthwhile to take stock of what's going on around the world. The countries and currencies listed below present a mix of implications for the grain markets, but are mostly bullish to dollar-denominated commodity prices. Remember that when the U.S. dollar goes down in value, international buyers are more motivated to buy U.S. grains and the dollar-based domestic price tag usually goes up. Dollar down equals grains up. Also remember that one way to see the dollar move lower is to have foreign currencies appreciate in value. Stronger foreign currencies mean it takes relatively more dollars to equal their value. So, foreign currency up equals dollar down equals grains up (generally speaking).

Some currencies are more influential than others. One metric for our U.S. currency is the U.S. dollar index traded at the Intercontinental Exchange (ICE), which is a weighted basket of other major reference currencies, including the euro, the Japanese yen, the Great British pound sterling, the Canadian dollar, the Swedish krona and the Swiss franc. Big movements in any of these six currencies will trigger stronger signals to grain traders than movements in other random currencies. And, as you will see below, there have been some big ones lately.

CANADIAN DOLLAR (Canadian election bearish for U.S. dollar -- bullish for U.S. grains.)

In addition to frustrating harvest weather, farmers in the Canadian prairies now also have a frustrating federal election result to deal with. Some 70% of Alberta and Saskatchewan residents favored ousting Justin Trudeau, but election results on Tuesday show that won't be happening. In the 10 days leading up to the results, the Canadian dollar experienced a volatile 2% upward movement (now $0.76 USD per 1 CAD). Given its important value to U.S. trade, and its inclusion in the U.S. dollar index calculations, that's been a major contributor to the recent downward slide in our U.S. currency.

GREAT BRITISH POUND STERLING (Brexit bearish for dollar -- bullish for grains.)

Since Oct. 10, the value of the Great British pound (GBP) has skyrocketed 6.7% in dollar terms, as the country hurtles toward a chaotic break with the European Union. Oct. 31 has long been the date scheduled for Brexit to happen, with or without a "deal" with the European Union to lighten the inconveniences of trading cross-border goods and services. At the time of this writing, Parliament in London is currently voting on some deal or extension (but who can keep track anymore). In any case, the pound sterling (currently $1.29 USD per 1 GBP) makes up 11.9% of the basket of currencies in the U.S. dollar index and is a major alternative currency for global trading and wealth-storage, so the upward volatility here has a dramatic downward effect on the U.S. dollar -- bullish to dollar-denominated grain futures.

ARGENTINE PESO (Inflation, insolvency, election -- bearish for U.S. grains.)

The U.S. doesn't ordinarily conduct large amounts of soybean trade with Argentina but is instead a competitor. A cheap Argentine peso makes Argentinean soybeans cheap to international buyers, pressuring U.S. soybean prices. A cheap peso also encourages enthusiastic planting of exportable crops, which is what's happening this month in Argentina in between mostly favorable rain showers -- and cheap it is! The peso collapsed in mid-August and has lingered near those lows ever since, currently valued at 1.7 U.S. cent per 1 Argentine peso. The peso's prospects look grim in the immediate future: failed economic reformer Mauricio Macri is expected to lose Argentina's election this weekend, and the likely new administration (featuring Cristina Fernandez de Kirchner as vice president) will get to deal with an economic recession, bond payment negotiations with the IMF and inflation currently at 55% per year.

BRAZILIAN REAL (Lingering pension reform doubts -- bearish for U.S. grains.)

The problems aren't quite of the same scale as Argentina's, but the mechanisms for motivating international soybean trade are the same. Last week, the Brazilian real's chart attempted to re-test its 2018 lows, and it's currently priced at $0.24 USD for 1 real. On the other hand, Brazil has had a dry start to its planting season, and even their old-crop soybean supplies may be starting to merit a bullish outlook.

Read DTN Lead Analyst Todd Hultman's Soybean Supplier of Last Resort: https://www.dtnpf.com/…

But from a currency perspective alone, a bearish Brazilian real tends to put bearish pressure on U.S. grain prices, all other things being equal. Also, add Australia ($0.68 USD for 1 AUD) and Russia ($0.02 USD for 1 ruble) to this list of grain-exporting competitors with relatively cheap currencies right now.

CHINESE YUAN RENMINBI (Bearish for U.S. grains.)

This currency is carefully managed and generally strengthened by the Chinese government, but during the ongoing trade war, the yuan has fallen to levels not seen since 2008 (currently $0.14 USD for 1 CNY). Protests demanding stronger democratic rights in Hong Kong don't directly affect the mainland Chinese currency (Hong Kong has its own dollar), but it's yet another source of instability that certainly isn't helping.

TURKISH LIRA: (Bearish for U.S. grains.)

When you see headlines about the conflict in Turkey and Syria, and the threats of economic measures from the U.S. against Turkey, just keep in mind that Turkey has actually been one of the top five destinations for U.S. exports of dried distillers grains (DDGs) in recent years. The Turkish lira has remained impressively stable through the past week, currently priced at $0.17 USD for 1 lira.

FINAL THOUGHT:

The list is two "bullish" influences and four "bearish" influences, but given the relative importance of the first two, and the potential supply-and-demand bullishness in South America that could outweigh any currency argument, I think it may be best to call this all a tie. However, it's like watching a tug-of-war. The two teams may appear evenly matched one moment, and in the next moment, it's all flailing limbs and bodies in the mud. Be prepared.

Elaine Kub is the author of "Mastering the Grain Markets: How Profits Are Really Made" and can be reached at elaine@masteringthegrainmarkets.com or on Twitter @elainekub.

(BE/BAS)

Elaine Kub