Fundamentally Speaking

Dollar Rally Making US Beans Uncompetitive

Joel Karlin
By  Joel Karlin , DTN Contributing Analyst

The U.S. soybean and meal export pace so far this marketing year has been robust with our offers quite competitive vis-à-vis those of our competitors at least through January.

Beyond that both Argentina and Brazil should garner the lion's share of business for the rest of 2015 into early 2016 if forecasts of record soybean production from each come to fruition.

The USDA is pegging Brazilian and Argentine output at 94.0 and 55.0 million metric tons, new highs above last year's record respectively. 

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So far weather in each country has been about perfect with a timely mix of rain and sun and if this continues these all-time high crop estimates could move even higher.

Another consideration is the unrelenting strength of the U.S. dollar in the foreign exchange markets with the U.S. dollar index having pushed to five year highs.

The Argentine peso and Brazilian real have lost 54% and 32% of its value vs. the greenback respectively since January 2010 making their soybeans much cheaper to foreign buyers when those peso and reals are converted to dollars.

The chart on the prior page shows fob soybean values and now Argentine and Brazilian prices are so much cheaper though farmers in each country are hanging onto their beans as their falling currencies provide incentive to retainpossession for as long as possible.

This has been upsetting to the Argentine government as they are desperate for hard currency and the hoarding of the soybean crop by their farmers is limiting the amount of export taxes taken in.

Taken together, the prospect of a third straight year of record South American soybean production along with the foreign exchange considerations suggest U.S. overseas sales of both soybeans and meal could rally tail off significantly after the first of the year.

(KA)

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Freeport IL
1/26/2015 | 11:49 PM CST
A weird frame of reference is sometimes required to understand currency relationships. The point of reference is similar to one needed when trying to understand Einstein's theory of relativity. When looking at the world's soybean and corn price relations, two basic assumptions are needed: Prices are based on CME price levels and China's currency is tied to the dollar (the Yuan and Dollar do have small changes but ignored in this discussion). So the price China pays should be very similar in all countries with price adjustments due to different basis levels. Using the above assumptions the board price of soybeans in local currencies dropped 18.4% in Brazil this last twelve months and 17.0% in Argentina. Prices dropped 24.3% on the CME during that period. The price to China, without country basis adjustment, should be down around that 24.3% in all countries: US, Brazil and Argentina. The competitive advantage for the South American countries comes from their declining currency versus the US Dollar and Chinese Yuan. Argentina's currency drop more than Brazil's when compared to the dollar giving it the smallest price decline. So the advantage Brazil and Argentina has over the US when export to China is not a lower price to China in Yuan but a relatively higher local price to cover cost. Their lower currency increases the local cost of imported goods possibly increasing cost of production. A stronger Argentine peso and/or Brazilian Real against the dollar might give a nice surprise to US agriculture. Freeport, IL
Freeport IL
12/17/2014 | 11:32 AM CST
There is a thought that the excess liquidity from the US quantitative easing (QE) found a home in the developing economies which tend to be commodity driven. When QE ended, the developing economies started to contract. The contraction is visible in their declining currencies. The US agricultural economy may feel the pain of this currency decline once evaluations stabilize. During foreign currency declines, there seems to be tendency to hold commodities, which generally are US dollar denominated, as a strategy to counter the declining purchase power. Once foreign currencies stabilize, the focus should /could /might change from holding commodities to increasing commodity production to meet the demand of their currency driven low prices. Things may become challenging for US commodity producers in a strong dollar large supply environment. These challenges may be a year out but might be around for sometime in the future. Freeport, IL