The U.S. dollar has been rallying in the build-up to the Federal Reserve (Fed) raising interest rates with the greenback getting additional support from investors seeking safe haven assets amid the financial turmoil from Russia’s invasion of Ukraine. The Fed commenced its march toward a more neutral policy on March 16 with a quarter-point hike that might be the first of several this year. Simultaneously, the Fed provided forward guidance that balance sheet shrinkage might start in May.
By contrast, the European Central Bank (ECB) is still purchasing assets and is not ready to lift short-term euro interest rates out of negative territory. And the Bank of Japan (BoJ) is not only maintaining its near-zero short-term rates, but also holding to its yield curve control policy that anchors the yield on its 10-year government bond at levels not far above zero.
The U.S. dollar’s value against the Japanese yen was at the highest level in about seven years, and 22-month high against a basket of currencies that include the euro, yen, British pound and the Canadian dollar. One outlier in this narrative has been the Chinese yuan, which after strengthening in 2021, has been quite stable in the 6.35 – 6.40 Chinese yuan to the U.S. dollar range.
Any increase in the value of the dollar, as the currency of the choice in the global commodities trade, tends to have a negative impact on grain and oilseed exports by the U.S. as the cost of purchases increases in the importing country’s local currency, all else being equal. Adding to this headwind for importing nations over the past few weeks has been the strong rally in grain and oilseed prices due to drought conditions in parts of South America and Russia’s invasion of Ukraine. Both Ukraine and Russia are key exporters of commodities, such as wheat and corn. (Our article on the challenges facing spring planting here).
In this article we will assess if the higher value of the U.S. dollar, the surge in commodity prices, and the prevailing economic and inflationary conditions in importing nations have had any impact on their purchases from the U.S., which ranks among the world’s top exporters of corn, wheat and soybeans.
I. U.S. Grain Exports to China
In Asia, the largest market for US. agriculture is China, and as noted earlier, China has had a relatively strong currency, unlike most other importers of U.S. agricultural products. China purchased about 30% of all U.S. corn exports in the 2020/21 marketing year ended Aug. 31, amounting to 21.4 million metric tons, according to data from the U.S. Department of Agriculture’s Foreign Agricultural Service, bouncing back from imports of a mere 145,000 metric tons during the height of the pandemic a year earlier when the Chinese economy contracted sharply. There have been renewed concerns over China’s demand for corn in the current season amid an increase in Covid cases, the largest since the outbreak two years ago, leading to lockdowns of places of business and entertainment, with millions of Chinese being subjected to travel restrictions under its Covid Zero policy. Shanghai, China’s most populous city and financial hub with 26 million people, was in a two-stage lockdown due to the virus.
In addition, there are concerns about China’s economy, the world’s second largest after the United States. China’s economy rebounded strongly as the country emerged from its early 2020 lockdowns but slowed to 4.0% by Q4 2021 – its slowest pace in decades excepting the early 2020 lockdowns.
So, how have corn shipments to China been lately? U.S. companies had shipped 6.36 million metric tons of corn to China since the start of the 2021/22 marketing year that began in September – the crop that was harvested last fall, according to data from the USDA data as of March 17. The shipments, the largest among all export destinations, however, lagged last year’s pace of 8.18 million metric tons.
The slowdown in purchases could be attributed to a rise in corn prices, which hit multi-year highs amid supply concerns from the Black Sea region before easing off. Importing nations tend to lock in purchases when prices are competitive, but they also need to have sufficient supplies in the pipeline to meet the demands of the local livestock and poultry industries. A measure used by importers to avoid storing costs is to keep a steady stream of supply coming in that can be transported directly to end-users.
There are two major grain shipping points in the United States, namely, the U.S. Gulf Coast and the Pacific Northwest. The Gulf handles a larger proportion of the grains and oilseeds exports from the U.S., with barges transporting the goods down the Mississippi River and tributaries from the Midwest growing region to the Gulf of Mexico. The route from the Pacific Northwest is the shorter of the two to Asia, but the products have to be dispatched mostly by rail to the ports on the Pacific Northwest, and rail costs can be much higher than shipments by barges.
Exports shipments of U.S. soybeans to China was also lagging the pace of the previous season. In the seven months of the current marketing year ending in August, U.S. exporters have shipped 2.57 million metric tons as of March 3, well behind the 3.47 million exported in the same period of a year ago.
II. Japan’s Imports Strong Despite Weaker Yen
Despite the yen’s depreciation in value against the U.S. dollar, Japan is not showing any signs of backing off from purchasing corn from the U.S. Japan was estimated to import 8% of total global corn exports, ranking third among the top global markets behind China and Mexico. Until March 17, U.S. exporters had shipped 5.29 million metric tons of corn to Japan, up from 4.97 million a year ago.
As for Japan, the second largest market for U.S. corn, its currency has fallen to the lowest level against the U.S. dollar in about seven years, with investors expecting the third largest economy in the world to keep its interest rate levels steady despite rising inflation. The BoJ’s dovish position, even as other major countries have moved or are moving toward tightening monetary policy, could be attributed to wanting to avoid any economic risk that higher rates might bring. Even in the United States, there is concern over whether the Fed can deliver a “soft landing” of the economy where the pace of growth and level of employment can be maintained without the arrival of recession.
Shipments of U.S. soybeans to Japan were, like corn, exceeding the year-ago pace. U.S. shippers sent 1.39 million metric tons of soybeans to Japan, up from 1.24 million a year ago as of March 17.
III. U.S. Exports to the European Union
The euro was trading at a 20-month low against the U.S. dollar, the most widely traded currency pair. Investors are expecting the ECB to raise interest rates by mid-2022. Until recently the ECB had planned to keep monetary policy unchanged, but that stance changed following a sharp rise in inflation, which surged to a record high 5.9% across the 19-member eurozone in February.
The EU is not a significant buyer of U.S. corn, but the bloc does import a substantial amount of soybeans from the U.S. The pace of purchases was lagging the year-ago level. U.S. soybean shipments to the EU were lagging the year-ago pace at 3.85 million metric tons against 4.22 million. The EU, which buys the bulk of its corn from Ukraine, was importing a little more than usual from the U.S. but the amounts were negligible, 97,300 metric tons through March 3, compared with 200 metric tons the previous season.
The spring corn planting season in Ukraine is widely expected to be hampered by the nearly month-long war, which could lead the European Union to seek alternative sources for the feed grain. The EU accounts for about 26% of the world’s soybean meal imports, amounting for 16.5 million metric tons, a significant portion of which is likely to be sourced from Brazil or Argentina.
IV. Dollar’s Impact on Competition
The appreciation of the U.S. dollar against a range of currencies could stiffen competition for exports in the global market, where importers are price sensitive as margins can be thin. On this front, the value of the Russian ruble has depreciated from an average 58.3 to the U.S. dollar in 2017 to 73.6 in 2021, a decline of about 20%. The daily exchange rate has since tumbled even further, to 108 ruble to the dollar at the time of this writing.
Russia is the world’s top exporter of wheat, accounting for about 20% of the global trade in the grain, which is an integral part of the global diet and is used to make noodles, all kinds of breads, pizza, scones, pasta, biscuits, breakfast cereals and so much more. Among Russia’s main wheat markets are North African countries such as Egypt, which increasingly turned toward Russia over the past decade after being a competitive market for the U.S. Middle Eastern countries such as Iraq, Iran and Saudi Arabia; and China and Southeast Asian nations such as Indonesia, Thailand and Vietnam. It is uncertain how financial sanctions imposed on Russia could impact the country’s wheat exports over the long term.
Argentina accounts for more than 20% of the global trade in corn and to a much smaller extent in global soybean exports, but is the predominant supplier of soybean meal, a form of processed soybean used as fodder, to the world, accounting for about 40% of total exports. It’s peso currency has weakened against the U.S. dollar over the past five years. The peso’s average value has declined from 16.5 to the dollar in 2017 to 95.1 in 2021. It was currently trading at 109 to the greenback. This should, technically, help with exports but the country is also battling high inflation, which offsets much of the impact of a weaker currency, and rising domestic food prices.
The appreciation of the U.S. dollar against a range of currencies coupled with the rise in prices for commodities could play into the dynamic of food costs for importing nations at a time when inflation is on the rise as a result of supply chain-related challenges around the world.
- As U.S. farmers begin to seed their spring crops, the amount of land they dedicate to these crops could have a significant impact on prices, barring any interruptions from the La Niña weather phenomenon that has already cut into crop production in parts of South America with intense heat during the growing season.
- We are also entering a new phase in global monetary policy following the Fed’s first rate hike in about four years that could open the door to tighter monetary policy by central banks that have yet to raise rates.
- There could be a new alignment in foreign exchange rates that could in turn impact the decision-making process in purchasing grains and oilseeds.
- For many nations, food security is a primary objective in ensuring national security, and towards this end, maintaining food imports will play a big role.
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All examples in this report are hypothetical interpretations of situations and are used for explanation purposes only. The views in this report reflect solely those of the author and not necessarily those of CME Group or its affiliated institutions. This report and the information herein should not be considered investment advice or the results of actual market experience.