Blog: The impact of the strengthening dollar on U.S. agricultural exports and imports
Michael Swanson, Wells Fargo Chief Agricultural Economist
Just as the interest rate markets try to anticipate the future, so do the exchange rates. These two markets, while not about agriculture, have a huge impact on the U.S. agricultural markets. Many analysts have noted the strengthening U.S. dollar as a hurdle to exports. But, it helps to get specific when you start talking about exchange rates and agriculture. Three countries — China/Hong Kong, Canada, and Mexico — constitute the “Big Three” for the U.S. agricultural producer, and account for 45% of U.S. agricultural exports. Looking at these three countries separately enables us to see the impact of commodity dollar strength.
The U.S. dollar has strengthened by 13% versus the Canadian dollar from a year ago, and 24% from two years ago. Canada, by itself, accounts for 16% of U.S. agricultural exports and 20% of U.S. agricultural imports. One in five dollars in the agricultural trade sector flows north/south with our neighbor to the north.
What about our neighbor to the south? Mexico enjoys an excellent trade pattern, since its climate is well-suited to growing and sending fresh fruits and vegetables north. Mexico also intensively consumes U.S. grains and proteins. Mexico imports 13% of U.S. agricultural exports, and provides the U.S. with 17% of our agricultural imports. These numbers understate the concentration risk in some key categories. The USDA analysis shows a three average weight for beef exports to Mexico at 26%, ahead of Canada’s second place weighting of 21%. Just like with the Canadian dollar, the Mexican peso has weakened considerably against the U.S. dollar over the last couple of years. The U.S. dollar has gained 11% versus a year ago, and 13% versus two years ago against the Mexican peso. Imagine the impact on the Mexican consumer getting hit by record U.S. beef prices inflated by a 13% stronger dollar.
The above two reference points explain why the U.S. net trade balance in agriculture excluding China/Hong Kong fell to a negative $4.3 billion, as opposed to remaining essentially neutral for the previous two years. The U.S. is expected to grow economically at a faster pace than most of its trade partners. This growth differential drives the expected change in the exchange rates. Most market changes resemble water seeping, rather than easy-to-follow streams. For sure, some foreign consumers will stick with U.S. agricultural products, even with large price and exchange rate changes. However, bit by bit, some of the marginal buyers will reduce consumption, and U.S. importers will start to see advantages in substituting foreign-based agriculture into some U.S. markets, therefore displacing U.S.-produced foods. This shifting will hurt marginal demand just as the U.S. was anticipating stronger export growth.
Yet, there is an exception to this story. Like most times, China seems to operate on its own. In 2014, the U.S. enjoyed a $22 billion trade surplus in agricultural products with China. This is down slightly from $22.7 billion in 2013, but this misses a crucial shift throughout the year. Through the first half of 2014, the trade surplus was ahead of the 2013 record, but continued erosion began in July and we ended slightly behind 2013. Unlike currency exchange rates with Mexico and Canada, the Chinese yuan compared to the U.S. dollar has strengthened by 3% from a year ago.
Every story has its noise, like port strikes and government policies around non-approved corn varieties, but the dollars exceed those issues. This raises the key question of whether we can count on continued Chinese demand growth in the short-term. Over the last seven years of the commodity boom, Chinese demand growth has been a given. It appears that the monthly trade statistics will become a key market maker as we move forward.