Exports as key to domestic market gains
June 26, 2012
While traders and other participants in international markets in wheat and other grains have always paid close attention to moves in the value of the dollar in relation to other currencies, it is only in the several years that this one factor has exerted enough force that it merits the attention of domestic grain-based foods. In effect, wheat and the value of the dollar have almost an opposite relationship. When the value of the dollar declines, wheat strengthens and vice versa. In the past, this relationship was directly tied to the way that the value of the dollar affected foreign demand. A cheaper dollar was viewed as providing incentives to foreign buyers; a stronger one had a dampening effect.
Attention to foreign exchange has been accentuated not just for its role in moving wheat markets. In some ways, wheat was duplicating how foreign exchange prompts opposite moves in oil. The effect of exchange rates on oil has been diminished in recent months as evidenced by the prolonged period that had both the dollar and oil rising. What happened to oil, mainly increasing unease about politics and security in the Middle East, put a lid on the power of exchange rate moves in oil in much the same way as would a serious drought or crop setback in a major producing region affect the relationship of wheat.
Hardly anything could block this foreign exchange effect more directly than improvement in America’s balance of payments. Any hope for reducing the current deficit from a rate near 3 per cent of gross domestic product depends on maintaining the export pace of wheat and other grains and agricultural products and reducing the nation’s dependence on foreign oil imports. Foreign oil accounted for a peak 65 per cent of domestic consumption in 2007-08. It has subsequently fallen to near 60 per cent, but it’s a long way to return to the 30 per cent share foreign oil had in the 1980s.
Even as hopes are voiced that expanding domestic oil and gas production, through hydraulic fracturing will result in reduced foreign purchases of oil, optimism rules about export opportunities in a world where meeting growing food demand has become a security issue of great importance. America may have some satisfaction that, thanks to both good demand and sharply higher prices, the value of agricultural exports set a new record of $136.3 billion in 2011, up $20.5 billion from the previous peak in 2010. Grains, including wheat and corn, were the principal contributors to reaching this mark, with grain shipments in 2011 valued at $37.5 billion, up $9.2 billion from the preceding year. If these trends continue in grain and other agricultural exports and if the oil situation changes as dramatically as some have forecast, it does not seem totally unreal to look to a time when America’s foreign trade will produce a positive surplus. The last time that happened, wheat had a significant role and there’s no reason it will not occur again. After all, it was only two decades ago, in the early 1990s, that the United States enjoyed a current account trade surplus.
Eliminating the deficit would go a long way toward overriding the negative relationship between wheat prices and the dollar’s value. Instead of matching wheat prices moves to the opposite of what occurs in the movement of the value of the dollar, the dollar’s strength should stand as a signal of global demand for American wheat and American manufactured products. Not to be overlooked in this analysis is the way that a strengthening in the dollar will provide a great positive for the domestic economy as well as for consumer prices. Even when grain-based foods is tempted to worry that expanding export demand may cause upturns in domestic costs and prices, it should remember that greater exports are often hugely positive for the domestic economy.