The ongoing strengthening of the U.S. dollar versus the currencies of major competitors will deflate the value of U.S. food and agriculture assets. However, different commodities will be impacted differently and a change will likely occur in the flow of capital.

According to a new report from Rabobank’s Food and Agribusiness Research and Advisory Group, for U.S. commodity producers, the appreciating dollar will create an environment for declining commodity prices, demanding greater production efficiencies.

Declining commodity prices demand greater production efficiencies, according to Rabobank report

For end users or buyers of commodities, declining commodity prices will help ease the margin pressure seen over the past several years as well as create an extremely competitive price environment.

The U.S. dollar has been weak over the past eight years. Much of this weakness has been due to monetary policy, record-low interest rates and quantitative easing.

“The changes in currency values have varying impacts—by commodity, by country, along with implications for production, trade flows and investment,” notes report author and senior analyst Steve Nicholson. “While the U.S. dollar has appreciated in value, the opposite has occurred with the currencies of the country’s major agricultural competitors—the Argentine peso, Brazilian real, Ukrainian hryvnia and the Russian ruble.”

Since the beginning of 2014, the peso, real and ruble have depreciated 29.2%, 30.6% and 49.7%, respectively, against the U.S. dollar.

Decreasing exports
Conventional wisdom says that U.S. exports will decrease as they will be higher-priced than those of their competitors. Nicholson says while this statement is generally true, it is an oversimplification of the issue. “Agricultural commodities are traded globally in U.S. dollars; therefore technically, no one should have advantage over another,” he says.

While commodities are globally priced in U.S. dollars, producers often collect payment in local currency. Consequently, as the U.S. dollar appreciates, producers in other countries see their revenue increase as their local currencies depreciate against the U.S. dollar.

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Nicholson says the best example of this is in Brazil and soybean production. The declining value of the Brazilian real has been positive for Brazilian farmers. CBOT Soybean futures increased by about 7.5% since the harvest lows in fall 2014, while in Brazilian real terms, they increased by more than 50%.

“Therefore, despite soybean future prices being below those of the previous years, Brazilian farmers are responding by continuing to expand planted area,” Nicholson says. Those increased supplies are also pressuring global prices.

While Brazil’s producers are seeing advantages of a declining currency, the experience of the Argentine farmer is closer to that of the U.S. farmer where the combination of low exchange rates, low international price and export tax is severely squeezing the farmer’s profitability.

From August 2014 to August 2015, the Russian ruble, as well as the Ukranian hryvnia, both depreciated by more than 80% compared to the U.S. dollar. This led to much higher grain exports and domestic grain prices, which resulted in export-restrictive policies in both countries.

The depreciation of non-U.S. currencies has different effects among the major agricultural producing countries including encouraging growth of planted area and overproduction which pressures prices. It also encourages reduced crop input usage which in turn reduces yields. Farmers in these regions also switch to cheaper crops to produce, such as from corn to soybean production. And overall, it squeezes grain production margins.

Opportunities and challenges
Rabobank projects that the appreciating U.S. dollar will have minimal impact on the U.S. corn market. Unlike wheat, which is expected to put continued downward pressure on U.S. wheat exports and competitiveness, corn has little correlation between the volume of U.S. corn exported and the U.S. Dollar Index.

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Changes in the value of the U.S. dollar had limited impact on the U.S. corn market due to strong domestic demand and the U.S.’s dominant position as a corn producer. But as U.S. corn ethanol production stagnates, future growth of U.S. crop output will have to compete on the international market. A strong U.S. dollar and subsequently correlated lower export competitiveness will also pressure U.S. farmer margins.

Lower Brazilian cash prices will make it increasingly difficult for U.S.-origin soybeans to compete in the export market. Solid domestic demand will keep U.S. cash prices from declining as rapidly. If China soybean demand drops, Brazil would have the upper hand and the U.S. likely would lose market share.

Nicholson also expects outside investment to flow into countries with depreciated currencies. This is already being seen with significant merger and acquisition activity in the global food and agriculture sector such as Bunge acquiring a 51% stake in the Canadian Wheat Board and acquiring Mexico-based Grupo Altex wheat milling business. ADM has agreed to sell a 50% stake in its export terminal in Brazil.

“There is strong competition for global grains and oilseeds assets from a growing group of strong global players,” notes the report. “As asset values continue to rise, depreciating currencies will offset some of it.”