Strong U.S. Dollar Leads to Bearish Markets

By: Miranda Reiman & Jill J. Dunkel

If you don’t believe the global factors affecting the U.S. cattle market are numerous and complicated, you probably haven’t heard Dan Basse, president of Ag Resource Company, give an economic outlook. His vision of the global marketplace offered an interesting – and bearish perspective – for agriculture. Basse spoke to attendees at the Feeding Quality Forum in August.

He said that a U.S. Dollar rally is making waves in agriculture markets around the world.

“The Dollar has rallied some 23% since last October. It’s had a tremendous impact on global agriculture,” he said.

The big reason is that as we see production expanding around the world, the U.S. becomes less competitive and needs to cut back production. World demand for grain and livestock is not growing at nearly the same level it’s been in the last ten years.

Basse said there is no shortage of grain in the world, so U.S. users don’t have much to worry about as far as supply. U.S. grain producers, however, need to concentrate on making margin.

Despite being down 9%, U.S. gross farm income is going to be the fourth largest on record this year, Basse said, but net farm income will see the biggest drop since 1932.

“Everything went higher as you made more money,” he said. “The problem is now that the cycle has changed, they are slow to take their hands out of your pocket. Our balance sheets can’t keep imploding at this rate without some readjustment in the cost side.”

Land, labor, nitrogen and seed have all risen dramatically.

“These are the four factors that have to see readjustment if we are going to see $3 corn prices translate back to profitability for the American farmer,” Basse said.

The strength of the U.S. dollar does not bode well for exports.

“We are only at the beginning of year one-and-a-half of this dollar rally,” the analyst said, noting the dollar typically rises in 6-year cycles. “That means we are fighting against others to export our goods into the world marketplace.”

Argentina, Russia and Brazil have seen poor currency exchange rates by comparison.

“This is really important because never before has the world seen where the United States wasn’t a predominant exporter of grains and meat,” he said.

In 2000 the Black Sea region only exported 4% of all wheat and corn combined. Today that’s 34% of the world’s wheat alone. “They are the world’s largest wheat exporter by a long shot. They determine the world’s wheat prices,” Basse said.

Although cattle markets stabilized after taking a tumble in early fall, Basse sees bearish trends on the horizon, especially considering how the World market fits in to play.

“What I’m troubled by when I look at U.S. beef, pork and poultry exports as a percent of the world total, everything is starting to turn down,” he said, again blaming the dollar.

Mature economies like Europe, Japan and Russia see meat consumption decline in tandem with their population decreases. By 2040, he expects those three to drop by a combined nearly 100 million people.

For years, economists have pointed to countries like Pakistan, Bangladesh, Nigeria and India to help provide population growth, and growing markets for ag commodities, but Basse said it may take several more years for their economies to generate enough income to become leading buyers.

In the near-term, Ag Resource predicts “one final rally in the cattle market,” sometime in the fall. Based on modeling historical first quarter cattle prices, Basse sees prices settling closer to $134/cwt. in the first quarter of 2016.

Basse said the idea is to manage risk and margin.

“Commodities are cyclical. I’m talking bearish today in agriculture, but it’s just part of the landscape we all live in,” Basse said. “You’ve got to make sure you’re around for when the good times are rolling again.”

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