Will Recent Dollar Trends
Impact Future Commodity Prices?

Planting season has begun in earnest in America’s heartland, and forecasts of future commodity prices assume that the Dollar will continue its generally weak course for the remainder of the year.  Long-term Dollar forecasts prepared at the beginning of the year presumed a gradual world economic recovery, accompanied by a weak dollar that will also keep oil (energy) prices strong.  Strong oil prices will support ethanol prices and the increased use of corn and soybean oil for ethanol and bio-diesel production, respectively.  A weak Dollar equates to higher demand for U.S. exports.

Economic recoveries take time, but the basic assumption is that the rest of the world will recover ahead of the United States, which tends to be more consumer driven, thereby keeping the Dollar behind or weak as interest rates rise abroad.  As current and past events have demonstrated, forecasts of the movement of the U.S. Dollar rely on both technical analysis and a healthy acknowledgment of the influence of basic fundamentals.  Concerns that the economic collapse of Greece may spread beyond its borders are raising tension levels across the globe with predictable results.  There is a flight of capital to gold, and commodities are down, coupled with a strengthening of the Dollar.  The revised logic portends a weakening demand for imports from all of Europe.

If a weak Dollar is a necessary component of original projections, then forex traders may want to recalibrate their own future forecasts.  The Dollar has strengthened versus the Euro of late after a casual review of forex charts online, but of more concern is the gradual up tick in futures contracts for Dollar index funds.  The markets are already suggesting that the financial crisis in Greece is not an isolated event.  Similar issues are developing in Spain and Portugal, and, for the first time since its creation, the Euro and its supporting infrastructure are about to be severely tested.

The advent of the Euro in 1999 was the latest installment in the continuing story of attempts to move towards economic and monetary integration in Western Europe.  Political moves towards monetary cooperation in Western Europe began at the end of the Second World War.  Initially there was the Bretton Woods “adjustable peg” system, followed by the “Snake”, which was replaced by the European Monetary System, EMS.  The EMS collapsed in 1992.  Each attempt failed due to unstable membership rules and the lack of a central authority to dictate corrective economic action.

The difference with the Euro this time was that a coordinating infrastructure was put in place, and to prevent a return to old ways, the European Commission disbanded all national currencies for its members.  The goal was to gain parity with the Dollar, but the Euro swiftly accumulated a 15% premium post conversion.  U.S. deficit and import issues further deteriorated the Dollar to the “1.40” level, although current events have shaved 10% off that figure.  The European Commission must now move quickly to respond to its crisis and bolster the Euro to previous levels.  The test will be whether they have the power to institute austere economic measures on a respective member state.  Riots in the streets of Athens would seem to suggest otherwise.

For farmers, the issue is whether this preliminary “spike” in Dollar strength is a mere blip on the radar screen or the harbinger of things to come.  Long-term forecasts predicted a strengthening Euro for the entire year, thus bolstering Europe’s demand for U.S. food crops.  Doubts are spreading, commodity price supports are slipping in the futures markets, and financial pundits are having a field day debating the issues on the airways.  However, it is still too early to know with any certainty how this scenario will play itself out over the months to come.   

Lower demand for feed from the cattle, hog and poultry sector will also put added pressure on growers.  However, interestingly enough, the “Green Revolution” is actually being attributed with holding up prices in corn and soybean markets if one believes the recent prognostications made by experts in our food commodity industry.  Many biofuel refineries that were shut down over the past five years may soon be open for business once again.  The EPA is also expected to raise its ethanol blend limit from 10% to 12% this summer, another positive demand component for corn growers.

Current events in Europe are raising doubts as to whether a weak Dollar will continue for the balance of 2010, thereby encouraging demand for U.S. exports.  Unfortunately, the jury is still out.  The ultimate verdict will surely depend on the strength and resolve of the European Commission to deal with the first real test of its Euro based system.  Although we may have to observe this game from the sidelines, it is just one more example of how interdependent our markets have become in these days of globalization.

Return to the top.