Does The Value Of The Dollar Really Impact Grain Exports?

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Let’s imagine that you have awakened today to discover that the economic law of supply and demand was no longer valid as of midnight. Or maybe the newspaper is carrying a headline that Newton’s Law of Physics expired yesterday and your state government could not afford to renew it. Or maybe high noon signals a change that all teenagers are now in charge of family budgets and assigning chores. While those may be a bit outlandish, a seemingly reasonable economic theory that has worked in the past seems to have been failing regularly, without a rational cause.

Your coffee shop talk of the past may have touched upon the strong exports being enjoyed by US agriculture, helped by the weakening US dollar. After all, foreign currencies can go farther and buy more when they can acquire more dollars with less outlay. Grain importers tend to buy from the nation where they can get “two for the price of one” compared to past years. In recent months the US economy has seen a declining dollar attract buyers of grain in record amounts. Or has it, rhetorically asks University of Tennessee economist Daryll Ray in his series of weekly newsletters about corn, wheat, and soybean exports, as they relate to the strength or weakness of the US dollar.

On April 9, Ray began looking at the corn market as it relates to exchange rates and exports. Clearly depicted was a chart that indicates the rise and all of exchange rates, and the level of corn exports. When the exchange rate fell, the corn export volume increased; and vice versa. That is, until after 1992. Ray says, “…the exchange rate was strongly and significantly correlated with corn exports during the 1970-1991 period while during the 1992-2009 period the two are not statistically correlated in any significant way.” He rhetorically asks, “But are exchange rates as much of a driving force as they were a couple decades ago? The data suggest that they may not be (again focusing on corn in this case).” He says an explanation for the change is the “64 thousand dollar question.”

On April 16, University of Tennessee economist Daryll Ray focused on the wheat export market, which he says has accounted for a larger portion of US exports than has the corn market over the prior 40 years. He says for the period of 1970 to 1979, the value of the dollar and the volume of wheat exports created the expected mirror image of each other. For the following decade, the value of the dollar and the volume of wheat exports only correspond with each other 38% of the time. And in the decade of the 1990’s the two appear to follow each other, instead of move in opposite directions, and the exchange rate only explains wheat exports 18% of the time. And in the latest 10 year period, there is no correlation between the two. Ray says the explanation needs to include market access, and not just the value of the dollar. But he says some of the reasoning may also be, “a few of which include: the spread of agricultural technology around the world, the availability of additional crop acreage in other countries (particularly our export competitors), and the inclination of leaders of other countries to view food production as a matter of national security.”

On April 23, Daryll Ray addressed himself to the relationship between soybean exports and the value of the dollar. He says the 1970 to 1979 decade shows a strong correlation that when the value of the dollar declines, the rate of soybean exports climbs. But he says in the following 20 years the relationship is hard to identify, and there seems to be a lack of significance in the relationship of the two. However, the relationship returns in 2000 through 2009. But he reports that during the past 10 years, when China’s purchases of US soybeans grew from 19% to 56%, it also came during the time that China was allowing its currency to grow stronger versus the dollar. Ray said he expects the US to pressure China over the next few years to allow its currency to gain additional strength to help rebalance trade and he feels that China would be the one country most likely to dominate the relationship between agricultural exports and the value of the US dollar.

While conventional wisdom would say that as the value of the dollar declines against the value of other currencies, those nations have learned their currency can buy more US agricultural commodities and our export volume increases. However that is not necessarily true across all commodities and across all years. While there are some periods when the relationship is direct, there are some years when the relationship is non-existent. Those can be explained by issues of market access, agricultural technology, and national policies about food security.

Source: Stu Ellis, University of Illinois

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