The relative strength of the U.S. dollar is curtailing export demand for Iowa’s prime commodities — corn, soybeans, pork and beef — and has worsened the commodity price slump responsible for reduced farm incomes in 2015, economists said last week. And the recent move by the Federal Reserve to raise U.S. interest rates will provide even more support for the dollar and add to export woes, they said.
"The dollar’s strength is becoming a much bigger issue for farmers than we’ve seen for a while," said Chad Hart, Iowa State University (ISU) Extension grain market analyst. "It’s really having an impact this year."
The strong dollar, which in the past 18 months has risen about 25 percent against a basket of major currencies, makes U.S. farm products more expensive and less competitive in global markets, said Dave Miller, director of research and commodity services for the Iowa Farm Bureau Federation (IFBF). At the same time, he said, it has helped farmers in other big ag-exporting countries, he said.
"It’s been a double-whammy for U.S. farmers," Miller said. "We’re seeing the demand side weakening, while the competition is strengthening."
The strong dollar has become such a factor for farmers that the nationally circulated Pro Farmer newsletter recently named it the top agriculture story of 2015, beating out avian flu, the El Nino weather pattern and shipping delays on West Coast ports.
"The rise of the U.S. dollar had a broad impact across the agricultural sector over the past year," wrote Pro Farmer editor Brian Grete. "Everyone from grain farmers to livestock producers to exporters were affected in one way or another by the dollar’s surge."
Exports throttling back
For fiscal 2016, the value of U.S. agricultural exports is projected to decline $8.2 billion to $131.5 billion, the lowest level since fiscal 2010.
Global investors have bid up the value of the U.S. dollar because the U.S. economy, despite its sluggish recovery, appears to be on more solid footing than economies in most other regions of the world, Miller said.
"As some people would say, the U.S. dollar is like the best house in a bad neighborhood. Our economy doesn’t look that great, but it’s doing better than most other countries," he said.
The move last month by the Federal Reserve to inch up interest rates is likely to further boost the dollar’s value, said ISU’s Hart. "The higher interest rates will make the dollar more attractive to investors, which will likely make it stronger," he said.
A strong dollar makes U.S. crops and meats more expensive for importing countries, Miller said. "They are paying for their cargoes in dollars, and it takes more of their currency to purchase the dollars they need," he said. "That has weakened overall demand."
At the same time, the strong dollar is increasing competitive pressure faced by U.S. exporters, said Erin Borror, an economist with the U.S. Meat Export Federation (USMEF). "As the currency weakens for our competitors, like New Zealand, Australia and Brazil, they are able to undercut us in key markets, especially in Asia," she said.
The strong U.S dollar, Borror said, has also contributed to complex global market scenarios that have slowed the momentum of U.S. meat export growth. A good example is the surge of European pork exports to Asia, she said.
Europe found itself with ample pork supplies because of sluggish domestic demand and international trade sanctions levied against Russia for its involvement in Ukraine, Borror said. The strong dollar helped Europe undercut the United States and move that additional pork to Asia, she said.
"The strong dollar is certainly one of the factors that has played into that scenario," Borror said.
The strong dollar is also sending signals to farmers outside the United States to increase production even though global prices have declined, according to Miller and Hart.
Not feeling the pinch
While the strong dollar has pressured commodity prices worldwide, farmers in other countries are not feeling the pinch like their American counterparts, Miller said. Farmers in other big exporting countries, such as Brazil, Argentina and Ukraine, are finding that U.S. dollars they earn in world markets translate into more money in their domestic currencies, he said.
"Brazilian farmers, for example, are basically feeling like they have a $13 to $15 dollar per bushel soybean market, compared to the $8 per bushel price here," Miller said. "So they are not cutting back on production at all; they have every incentive to continue to produce."
ISU’s Hart agreed. "The strong dollar is making countries like Brazil and Argentina, which were already very competitive, even more competitive," he said. "The signal to cutback is not there."
Looking ahead to 2016, the economists expect the dollar to stay fairly strong, especially if the Federal Reserve carries through with its intentions to raise interest rates another two or three times in the coming year to 18 months.
The U.S. dollar, Miller said, is likely to stay relatively strong until the economies of other countries begin to strengthen and their currencies start to attract more investors. The last major dollar-strengthening cycle lasted six years, 1995 through 2001.
"This is a phase of the business cycle that just has to play out," he said. "That doesn’t make it easier because farmers are feeling the hardships, but currencies do correct over time." The current dollar-strengthening cycle began in 2011 but accelerated in mid-2014 and has continued through 2015.