No predictable course from dollar weakness
No predictable course from dollar weakness, December 15, 2009
by Morton Sosland

It is likely that headlines about weakness in the value of the U.S. dollar and other aspects of gyrating foreign exchange rates receive scant attention from executives in grain-based foods, except for those directly concerned with export business. Flour millers and bakers selling their products domestically might even wonder why they should even try to be aware of such an arcane and complex subject. Yet, disregarding currency markets is wrong, not just because the volatility of foreign exchange provides guidance to the course of the domestic economy, but also because fluctuations may exert a dramatic effect on the well-being of flour millers and bakers completely unaware or dismissive of these fluctuations.

Close to home, the flow of wheat, of wheat flour and of finished grain-based foods between the United States and its north and south neighbors, Canada and Mexico, are in all likelihood hugely affected by foreign exchange. That more than half of U.S. flour exports are destined for the two neighboring countries, and that this share has increased in recent times, reflects the recent weakness in the U.S. dollar, and strength especially in the Canadian dollar. Similarly, the movement of U.S. milled products to Mexico as well as that country’s substantial market for other grain-based products stems from the relative declines of the Mexican peso to the less weak U.S. dollar. Especially striking in dealing with these relationships is the way that several large Mexican food companies were caught up in efforts to hedge these fluctuations, causing financial losses that for a time threatened the underpinning of large businesses.

The direct role foreign exchange fluctuations may have in the well-being of grain-based foods has dramatically played out recently in relations between flour millers in Northern Ireland, the British territory using the pound sterling as its currency, and the Republic of Ireland, which has embraced the euro as a member of the European Union. Because of recent weakness in the English pound and pronounced strength in the euro, flour milled by Northern Ireland mills moved across the border at prices that were profitable to the shippers and, yet, were cheap enough to cause the closure of Irish milling capacity. This is not the first time that foreign exchange movements have caused such a disruption, but it provides an example of how currency movements have effects extending far beyond these tumultuous markets.

How recent weakness in the U.S. dollar will affect grain-based foods is as difficult to predict as resolving the argument about whether this situation is good or bad for the American economy. Those who call dollar weakness good rely on its positives for export sales, not just in wheat flour, but in the whole range of exports. The latter, of course, includes financial products like stocks and U.S. government obligations that foreign governments and investors buy, attracted by weakness in the dollar as well as belief in the underlying strength of the American economy. The other side of this argument reflects the assertion that dollar weakness is nothing more than a hidden tax similar in many ways to the negative impact of inflation because it raises the cost of imported goods.

Dollar weakness ought to provide a stimulus to export business, if not in wheat flour, in wheat. Thus, dollar weakness frequently has prompted strength in wheat. Yet, with the dollar near a two-year low, exports of wheat in 2009-10 are projected to be less than in either of the two preceding seasons. Pronounced dollar weakness and similar setbacks for wheat are unusual, underscoring the force of low U.S. interest rates in weighing down on dollar values. As long as the Federal Reserve is committed to maintaining low interest rates for a lengthy period, dollar weakness will continue, and for grain-based foods, the uncertain impact of the past will be accentuated. If anything, foreign currency markets do not move in a single direction for very long.