Macroeconomics now huge force

by Morton Sosland
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Discussed on this page several months ago was a report by the Economic Research Service analyzing the forces behind the potential for expanding grain demand by emerging nations. It now is appropriate to examine another study by the same agency pointing to the prospect for a continuing slowdown in foreign demand that puts bearish pressure on prices for wheat and corn. The new E.R.S. study seeks to make the case that macroeconomic factors have a pronounced effect on export demand for U.S. agricultural products and that it is two main bulk commodities, wheat and corn, that are most sensitive to these forces.

Two macroeconomic variables are cited as being of prime importance in assessing the future of demand and prices for these grains. These are the future value of the dollar and the outlook for income growth in developing countries. In citing these factors, the E.R.S. makes the case that its 2016 outlook of demand for U.S. agricultural exports is much less bullish than a year earlier and that the change in prospects may be attributed to a deterioration of both factors. This sort of analysis is important for the way it directly relates to the performance of domestic prices for wheat and other agricultural exports, thus obviously impacting an industry like grain-based foods not in itself especially involved with foreign demand.

Noting that a year ago the E.R.S. had looked forward to a period of relative stability in the trade-weighted dollar, the agency points out that developments affecting that forecast radically changed so that the dollar in 2015 ended up nearly 13%. Even more startling is the E.R.S. projection that this rising trend will continue through both 2016 and 2017. It is only after the latter year that a gradual moderation may occur. Driving the dollar’s strength is how U.S. economic growth exceeds that of other nations, especially where they compete in grain marketing. U.S. monetary policy also is expected to continue different from that of other countries wanting to weaken their currencies. Along the same line is the bullish dollar impact caused by Federal Reserve plans to raise interest rates.

After showing from past experience the “significant inverse relationship” of moves between the dollar exchange rate and global food prices, the E.R.S. points to positives from income growth in developing countries. It also cites the negative effects now evident from slowing growth. The report says, “Developing and emerging markets averaged higher rates of real per capita GDP growth and accounted for all of the volume growth in U.S. exports of bulk and intermediate agricultural products and most of the growth in U.S. exports of consumer-oriented products during 2000-2015.” Currently, economic growth has turned negative in important developed markets like Japan, as well as in U.S. neighbors, Mexico and Canada.

The study underscores negative consequences for a period like the present with a strong dollar and a bullish outlook for the next several years. Many foreign exporting nations are seeing their currencies fall against the dollar, and the entire global economic environment is beginning to weaken. In such periods, the decrease in U.S. crop exports often exceeds the fall being registered in global trade volume, meaning America is increasing its non-competitiveness while losing export share.

In emphasizing the importance of macroeconomic factors like the market for the dollar and the level of Gross Domestic Product in remote parts of the world, the E.R.S. is helping the food industry appreciate a new set of influences on the ultimate cost of ingredients. Relating price moves in the dollar to the cost of wheat flour or soybean oil or sweeteners might be a new experience for many in the food industry. It also puts the industry’s involvement with globalization front and center when seeking to understand that it may be just as important to be aware of trends in these global markets as it is to know what consumers want in America.

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