Fundamentally Speaking

Relation Between U.S. Dollar & CME grain markets

Joel Karlin
By  Joel Karlin , DTN Contributing Analyst

With the surge in foreign exchange value of the dollar based off Friday's impressive jobs figures, the U.S. Dollar index has now moved to 12 year highs and has decisively broken past the long-term downtrend line drawn off the 1982 and 2000 highs.

Most commodities around the world are traded in dollars and a higher valued greenback is inherently bearish to commodities.

While the paradigm shift higher in grain and oilseed prices starting in the fall of 2006 has been linked to the renewable fuels boom and increased meat and dairy consumption in the developing world necessitating increased usage of feed grains and high protein meals, the protracted depreciation of the dollar's value was also a key factor. 

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To test the impact of dollar movements on certain agricultural commodities we ran the correlation coefficients of the U.S. dollar index vs. a number of markets for a period of three months and six months along with one year, five, ten and fifteen year intervals.

Note that two markets that have a strong positive correlation, that is when one increases in value the other market does so at the same percent has a figure of 1.00, whereas two markets that are completely inversely correlated where a movement of one is offset by an equal move in the opposite direction has a reading of -1.00.

Two markets that are uncorrelated where movements in one have no influence on the other have a reading of zero or close to that.

A correlation greater than 0.8 is generally described as strong, whereas a correlation less than 0.5 is generally described as weak.

A look at the data shows with the exception of the six month period for corn and soybeans, all the correlation coefficients for these two markets along with soybean oil, soybean meal and wheat are inversely correlated.

There appears to be a fairly strong correlation with most of the markets, particularly wheat as the large numbers of importers and exporters make that the most global of commodities.

Suffice to say that even with the strong dollar depressing almost all commodities, the impact on the grain and oilseeds is even more acute as foreign supplies are more than ample and the rallying dollar making our prices even less competitive in the world markets.

(KA)

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Freeport IL
3/12/2015 | 1:33 PM CDT
We came up with this simple model to illustrate the strong dollar yielding weaker commodity prices. It has three members: US, export and importer. Let's say at year one all three countries had their different currencies worth par with each other; 1 dollar bought one unit of exporter or importers currency and vice versa. So $4.00 per bushel corn would be bought with 4 units of importer's or 4 units of exporter's currency. Year two catches all three countries equally in a worldwide mess. Because the three countries were hurt equally their currency values between themselves did not change. Year three finds the US with an improving economy because of their earlier actions. This makes the rest of the World want to invest in the US. They invest in the US economy (buy dollars) to get the most return on their investments in the strong economy. So they move investment from the import and/or export country to the US; selling imports and exports currency to buy US dollar. There is so much buying and selling going on that the relationship of the currencies change. In our simple example let's now say it takes 2 units of imports or 2 units of exports currency to buy $1.00. The corn price is based in US dollars. Assuming the price in dollars didn't change, a $4.00 bushel would require 8 units of imports currency to buy one bushel of corn and export could sell a bushel of for 8 units of their currency. The relationship between importer's and exporter's currency has not changed; it is still one unit for one unit relationship between importer and exporter. But the cost to the importer has doubled from 4 units to 8 units whether he trades with the exporter at one to one exchange ration and pay exporters price of 8 units or buys US corn at $4.00 per bushel and uses two units of his currency to buy one dollar. The price change in the importer's local currency because of the stronger dollar results in the importer buying less and the export producing more. So supply goes up as a new production year is completed because of the exporter is producing for the higher local price. "Extra" demand drops with the currency change because the cost to the importer in his local currency went up. There is still a strong base demand for commodities. Basic demand does not and/or cannot change all that much in the shorter run. Now let's add China as an importer. Let's say their currency is fixed with the dollar; so 1 China currency buys one dollar or 2 exporter currency as in year three above. The price to China did not change from year one as it did with the importer. Now in year three, because of the one to one relation with the dollar, it cost China 4 units to buy from the US or 8 units to buy from the export. But because 1 China currency buys 2 exporter units the cost is still 4 units. In general, correlation of dollar versus level of exports is hard for us to find. If the World needs what we have and no one else has the quantities and/or quality that are needed, we get a chance to export. Countries that do not have the initial quality and/or capacity to store their commodities will undercut US price, -whether strong dollar or not- to move their products. Transportation cost will maintain our exports to nearby markets regardless of currency value as well as limit distant markets. As others increase storage capacity - increasing carry outs- a strong dollar may/will be more of a factor. The general premise seems to be a strong dollar should/could drive down prices. But when China "ties" their currency to the dollar their demand should not drop and price declines should be less than when China was not a major importer. Freeport, IL