Weak dollar not so hidden a factor in rising food ingredient prices

by Josh Sosland
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For many U.S. food processing companies, the day-to-day fluctuations in the value of the U.S. dollar do not hit the radar screen as a matter of concern. But the extreme and persistent weakness in the value of the U.S. dollar has begun to have a marked impact on the food industry, said economists interviewed by Food Business News.

After trading nearly at parity with the euro as recently as January 2003, the U.S. dollar has declined 28% in value. On Dec. 19, the euro cost $1.44. The weak dollar has been a boost to food companies with large operations outside the United States, bolstering the dollar value of sales and profits earned in foreign currencies.

For domestic food manufacturers, the effects of the weak dollar are less direct and are part of a collection of factors affecting ingredient prices, said Bill Lapp, principal, Advanced Economic Solutions, Omaha. While the weak dollar’s impact on many imported ingredients has been clear, putting upward pressure on prices, the effect on the cost of domestic ingredients, accounting for the vast majority of inputs in U.S. food, has been less direct.

"We have seen with the advent of strong global economic growth a large U.S. budget deficit and relatively low interest rates, all contributing to a sharp decline in the value of the dollar," Mr. Lapp said. "On a trade-weighted basis, the value of the dollar is at its lowest point since the mid-1960s. This has resulted in strong export demand and, importantly, has made goods and services more expensive to bring in. Because our commodities are discounted worldwide, what ends up happening is that prices rise in the United States."

In many respects, the timing of this confluence of developments could not be worse, Mr. Lapp said.

"This weakness in the dollar is happening at the same time as energy prices have tripled and we’ve started to use our food to produce fuel," he said. "You suddenly have an environment in which, similar to the 1970s, a weak dollar contributes to the surge in commodity prices, which in my view are now finding a new plateau."

While the dollar has edged upward from its early December lows beneath €0.67, David Hightower, an economist with the Hightower Report, said U.S. agricultural product prices remain attractive worldwide.

"We’re down 10% in the dollar this year, and I think our agricultural exports were up some fantastic amount in November," Mr. Hightower stated. "A yearend rally in the value of the dollar would need to be massive to shut off demand."

Mr. Hightower is skeptical about prospects for a strong rally in the dollar.

"There are many things, including the Dubai and other governments, to keep the dollar from bouncing any longer than temporarily," he said. "Anyone who produces oil is anxious to do anything to delink their currency from the dollar. The more entities that do that, sell their dollars on rallies, the more the value of the dollar will be driven down. Saudi Arabia will probably not stop using the dollar as the peg, but other countries would like to make the change."


Other factors weighing against any strengthening in the dollar include concerns about the weaker American economy, Mr. Hightower said.

"We’re primarily dealing with the subprime debacle, so interest rates are going down and aren’t going to stop," he said. "Longer-term, countries will still diversify. Pegs to dollar might be changed. Our administration wants the Chinese currency to keep appreciating. Guess what? That means the dollar needs to depreciate."

Still, Mr. Lapp is not among economists who believe the deficits, the slowing economy and depressed interest rates will result in significant further declines in the dollar.

"I’m not sure I agree that it will go down much further," he said. "The strength in their currencies ultimately will be to their detriment in Europe, slowing their economic growth and lowering their interest rates over time. They don’t appear weak right now, but I think they may over time, which would add strength to the U.S. dollar. Nearer term, I would expect to see further declines, but I think the downside risk is limited.

"For food processing companies, the impact is that input costs have increased. If you’re able to pass those costs along to your customers and to the consumer, you probably haven’t had much of a problem. Where translating the higher input costs into higher prices margins is more difficult, there has been a margin squeeze."

Mr. Lapp said certain scenarios are possible that would result in higher U.S. interest rates in 2008, primarily in the event of an inflationary surge. If economic growth is sustained and the housing/credit crisis doesn’t worsen, inflation could increase, thus leading to a reversal in which interest rates move higher.

"I don’t think there’s a high probability, but it’s possible," he said.

Among the more prominent ways the food industry could feel the effects of the weakening U.S. dollar is in the equipment installed in plants, a significant percentage of which is imported.

The impact of dollar weakness certainly is not lost on companies that make or import this equipment. When asked about the effects of the weaker dollar, Brian R. Williams, marketing manager, Buhler North America, Minneapolis, first responded with a heavy sigh. At the same time, he said that for Buhler, the value of the dollar is secondary as a business influence, significantly beneath the underlying strength of the industries Buhler serves. In particular, Buhler supplies U.S. flour milling companies, baking companies and chocolate manufacturers.

"It is not easy for European manufacturers in particular but any foreign manufacturer bringing equipment to the United States," he said. "It makes it more expensive to bring equipment into this country. But we see that the milling industry is doing better than in the past, so business conditions are not that bad. We hedge the inter-currency risk. The net result is that there are price increases that we have to pass along, but the increases are not as bad as they could be. And the hedging can only take you so far."

For U.S. equipment manufacturers, the weaker dollar generally has had a positive effect, but many companies also sell imported equipment, meaning that the impact is less clear cut.

"The weakening U.S. dollar is helping our exports," said Tim Cook, vice-president of sales and marketing for AMF Bakery Systems, Richmond, Va. "In the case of AMF it’s also hurting us since we do half of our manufacturing in Canada, which means our can expenses have gone up by 25% over just about the last year. That’s had a terrible effect on us, but we have benefited from our international sales rising this year."

While the dollar has been weaker than expected, the same may not be said about Buhler’s business or its prospects for 2008, Mr. Williams said.

"We are optimistic, first of all because 2007 turned out better than we expected," he said. "In milling, there are projects that began in 2007 that are carrying into 2008. We have a backlog of work and the pipeline is pretty good. The chocolate industry has been our ‘bread and butter’ the last few years. For luxury items such as chocolate, consumption has been rising. The growth is moderate, in line with population growth, but we’ve had good years in chocolate. I don’t think there has been a measurable impact on our sales from the weak dollar. Instead, business is driven by conditions within the industries we serve and the strength of our brand. The dollar will not make or break us."

Looking at commodity price prospects, Mr. Lapp agreed about the importance of factors other than the value of the U.S. dollar.

"Weather vagaries are the final wild card that could have a far larger impact than any swings in the dollar," he said.

This article can also be found in the digital edition of Food Business News, December 25, 2007, starting on Page 32. Click here to search that archive.

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