SHOULD U.S. FARMERS WORRY ABOUT THE ROUT IN EM CURRENCIES?


Argentina has slipped into a financial crisis, again. The Argentine peso has fallen 23% against the U.S. dollar this year. The central bank has raised interest rates to 40% to combat capital flight.


The currencies of other major agricultural exporters are also suffering. The Brazilian real is down 15% since 23 January, while the Russian rouble has declined 10% over the same period. The Ukrainian hryvnia has held its own but could suffer a devaluation at any moment. Yet, so far, the prices of corn, soy and wheat have reacted with a yawn. Should American farmers be nervous?


On a day-to-day basis, the prices of major cash crops such as corn, soy and wheat show almost no correlation to day-to-day movements in the values of currencies of agriculture-producing countries versus the U.S. dollar. For example, since 2011, day-to-day changes in the Brazilian real correlated at 0.12 with movements in corn prices. The Russian rouble’s day-to-day moves correlated at just 0.05 with day-to-day movements in hard red winter wheat. Does this mean that there is nothing for American farmers to be concerned about should the value of these currencies continue to fall?


Not necessarily. While the day-to-day correlation between changes in the values of these currencies and changes in the prices of agricultural goods is weak, there is a strong relationship between the overall levels of agricultural goods prices and the general level of the currencies of major agricultural exporters. This is apparent in the relationship between the price of wheat and the level of the rouble, and the price of corn and soy and the level of the real (Figures 1, 2 and 3).


While currency moves have little apparent short-term influence on the prices of agricultural goods, they do impact the cost of production over longer periods of time, meaning over months and years. A decline in a country’s currency immediately lowers its relative cost of labour. It also reduces the cost of property taxes, loans and other items denominated in the local currency. While a currency devaluation does not insulate farmers from global factors that determine (or at least influence) prices such as the cost of farm equipment, fertilizer and energy, costs that are determined purely at the local level probably account for about half of the cost of running a farm. As such, a fall in the local currency increases competitiveness of domestic farmers.


During commodity bear markets, prices often fall to the level of the cost of production. This is the market’s way of shaking out inefficient, costly producers, reducing the level of inventory and bringing markets back into equilibrium – an extremely painful process for producers, to be sure. The impact that weaker emerging market currencies may have over the long run, is to lower the threshold (or floor) to which agricultural goods prices can fall in a bearish market. Farmers in places like Argentina, Brazil and Russia, whose currencies are weakening, will be partially or mostly insulated from these negative effects. Producers in places like the United States, whose currency is being lifted by the aggressive rate rises by the U.S. Federal Reserve, will not. The good news for American farmers is that inflation in Argentina, Brazil and Russia is much higher than in the U.S. and this could generate some upward wage pressure in those markets which could offset some of the farm benefits of a weaker currency. Nevertheless, watch the movements in these currencies closely for an indication on how much further agricultural prices might decline.


THE BRAZILIAN REAL IS DOWN 15% SINCE 23 JANUARY, WHILE THE RUSSIAN ROUBLE HAS DECLINED 10% OVER THE SAME PERIOD.


Erik Norland E: erik.norland@cmegroup.com


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 authors 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.


32 | ADMISI - The Ghost In The Machine | May/June 2018


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