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The Impact of the US Dollar on Grain Markets

Posted by Scott Anderson on Jan 5, 2015 7:43:50 PM


Will Soybeans break out of the trading range?:

What a great day for the soybean bulls in grain markets! Will we be able to break $10.50 and reach new ground from here???

Grain Market Soybean Futures 10 Year Chart

This screenshot shows beans trading in a tight range from just below $10 to $10.50. The major cause of the sharp increase in beans was the poor weather in South America and the big sale of 233,000 mt to China today.  Another important factor was that the Dow was down 331 points and oil broke the $50 level.  There is a lot of cash in the energy market and stock market and as they become less and less attractive, depressed assets such as agricultural commodities become more attractive from an investing standpoint.  

Soybeans are one of the most depressed asset classes this year being down 35% from the highs set this spring. Savvy investors look for depressed assets to park their money in until those depressed assets regain their value and become expensive, then the position is closed and moved to other depressed assets.  From a depressed asset standpoint soybeans are looking pretty attractive.

Other factors that may push soybeans higher in the near term are:

  • Demand from China
  • Further improving exports
  • Poor weather in South America in particular Brazil
  • USDA downward revision of soybean stocks
  • Poor alternative asset classes
  • Weakening US dollar, making US soybeans cheaper for other currencies

Currency Market US Dollar Index 10 year chart

Above is a 10 year monthly screenshot of the US dollar index, $DXY. It's important to understand the fact that all commodities are traded in US dollars and as the dollar goes up in value commodities generally become more expensive to export for Americans.  This has not been the case for both corn and soybeans but it has been the case for oil.  

We are at levels of strength in the dollar not seen since the end of 2005 back when G.W. Bush was Commander in Chief. Looking back on events in early 2006, I'm pretty sure the Steelers winning the Super Bowl was the primary cause of the collapse of the US Dollar shortly after, who would want the greenback after a Steeler victory? Except my brother and two uncles of course, 3 out of 300,000,000.

Lets look at the 10 year monthly soybean chart below from back then...

Grain Market Soybean Futures 10 year chart

 

Back at the end of 2005 we were floating between $5.50 and $6.00 beans.  The charts are nearly pollar opposites with the exception of the drought in 2012.  What does history tell you???

Just for fun, lets look at oil and corn over the same time period, 10 year monthly...

Commodity Market Oil Futures 10 year chart

Grain Market Corn Futures 10 year chart

 

They say a picture is worth a thousand words...  If there are any more bears in the room I'll upload just one more photo

Chuck Norris Dominates The Grain Market

 

Yes, that's right. Chuck Norris duel wielding Uzis.  

But in all seriousness, we are looking at an extremely strong US dollar which naturally depresses highly exported products such as commodities, the root of every product. If there isn't corn or soybeans in that product there will be oil or iron ore.

Now back to supply and demand for agricultural commodities. If there is another epic harvest next year that will definitely break the bulls legs especially if it is worldwide. Too much of a good thing makes it cheap.



To summarize:

The grain market world has many important factors that impact it, such as:

  • Currencies - US Dollar strength or weakness
  • Oil - major energy commodities
  • Supply - drought or bumper crop and/or war that interrupts supply (Russia and Ukraine Shenanigans)
  • Demand - impacted by currencies and GDP growth of buying country
  • Alternative Assets - from an investment standpoint (quality cheap goods are attractive)

Thanks for reading through this macro economic lesson of the grain markets. I hope the charts are helpful in determining your long-term viewpoint on where your products are going.

Thanks again for reading!

Scott Anderson


 Top 3 Trending Reads:

  1. Marketing Specialist Craig Haugaard's Market Chatter for 01/05/2015
  2. Seeking Alpha's Grain Outlook for 2015
  3. Using Futures Options to Hedge Crops

 

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