After I addressed a corn and soybean conference in Madison, Wis., this spring, a good friend, Sam Miller of the Bank of Montréal, made an interesting comment. Sam knows how to cut to the chase, and he stated that after listening to me speak that morning, he had concluded that the number one risk facing agriculture is international trade, because many facets of the agriculture industry are internationally interconnected. Let’s examine Sam’s comment in-depth.
The great commodity super cycle that lasted for a decade, from 2002 to 2012, elevated the importance of global trade risk. Emerging nations including the BRICS and KIMT nations of Brazil, Russia, India, China, and South Africa as well as South Korea, Indonesia, Mexico, and Turkey had high demand for food, fiber and fuel. Now the slowdown of these emerging economies is in full gear, and the results are being observed in the re-entrenchment of prices for commodities such as grains, oil, steel and copper. The slowdown is targeted toward the flyover states, i.e. the agricultural and rural regions in the U.S. Beyond U.S. borders, commodity producers in Canada, New Zealand, Australia, Brazil and Argentina are observing commodity price reductions across the board, as well. Of course, political and military trade risk is an ongoing variable. The sanctions on Russia, unrest in the Middle East, and social and political reform in Europe and China all have an impact on the pocketbooks and the balance sheets of American farmers and ranchers.
Lately, central bank strategy in the U.S. and abroad has heightened currency risk. Could the strong dollar be a factor similar to the double-digit interest rates of the 1980s, which were a precursor to the farm crisis? The U.S. central bank’s policy of low interest rates and easy money is in the rearview mirror. As the Federal Reserve tightens money supply with possible increases in rates, the dollar will strengthen, suppressing exports. The central bank of Europe has embarked on their version of monetary stimulus. For the next 21 months, over $60 billion a month will be pumped into the economy. While not as large a package as the U.S. stimulus, this increases the probability of a strong dollar to euro ratio, inhibiting export ability in the U.S. Yes, Sam is an astute banker with a keen observation.
Next time I will discuss what producers can do to minimize the impact of global trade risk.