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Important Outside Market Influencers for 2012
Looking at the effects of
globalization over the past ten years, the jury is still out on whether “it’s a
small world after all” is such a good idea. Producers I talk to often struggle
with the correlation between the politics in Europe and the price of corn in
the Midwest, or how conflict in a Middle East oil field can affect the price of
Regardless of your feelings on
globalization, the point is that it’s not going away, and countries must work
together now more than ever to create an accord for the years ahead.
In this article, I would like to
focus on two of the many outside market factors that will affect the price of
your grain next year. Being aware of them now will help you follow them in the
months to come, which will help you do your scenario planning for price moves
in any direction.
Chinese economic growth as no
surprise has risen by leaps and bounds over the past ten years. And it’s no
wonder: Many companies continue to outsource portions of production to China in
favor of cheaper labor and less stringent environmental rules. With all of the
outsourcing, the Chinese economy has boomed and a middle class has been
With the boom has come a fear that
the country has grown too fast. Over the past year, Chinese officials have been
trying to tame growth in efforts to avert an economic bust down the road.
China is facing a unique situation:
They want growth to slow, but they want it to slow at
deemed rate. You see,
at a minimum
in order to
keep the wheels turning. (The U.S. is currently growing
However China does not want to grow too much faster beyond
that 8%, as that would fuel inflationary fears. Anything less than the 8%
growth target would allow for high unemployment rates, which would result in
hungry people who might turn to revolt and protest. China wants political,
economic and social stability.
Always liking to be in control, China tells
their banks to whom to loan money and when. As such, when the ball is in their
court, they are happy. Now, segue to Europe… With the European economy in turmoil,
Europeans are not buying excess goods or trinkets at the stores. If distributors
are not receiving many orders for goods and trinkets they do not order as many products
directly from China, which means Chinese factories slow production, which means
China does not “control the ball” in terms of their own growth.
A constant fear is that China might
in the future slip under that vital 8% growth, which could spark an economic
firestorm. If China is not growing, they are not buying commodities at the rate
in which we all hope they do, helping keep up our export demand.
Speaking of exports, another major
factor which determines the pace of U.S. grains being exported is the value of
the U.S. dollar. When the dollar is low, with currency conversion, it makes our
grain (and other U.S. goods) cheaper to import into other countries. When our dollar is high, after the currency
conversion, it makes our products more expensive to import into other
As of this writing, the U.S. dollar
is at 77.15. Historically, that is on the low end of the scale. To help put
things into perspective of what is considered “low” and “high” for the dollar,
let’s take a look at history:
- 2011-2005 The U.S. dollar was in a range of
70.85 to 90.00
- 2004-2001 The U.S. dollar was in a range of
80.00 to 120.00
- 2000-1995 The U.S. dollar was in a range of
80.00 to 115.00
- 1994-1990 The U.S. dollar was in a range of
80.00 to 95.00
- 1989-1985 The U.S. dollar was in a range of
85.00 to 125.00
As you can see, the U.S. dollar is
currently at a very low value, relatively speaking, which is why the grain export
market is hot, hot, hot! In the years
when the dollar was relatively high, U.S. grain exports slowed way down. If
exports are down, then that means there is more product on hand here in the
U.S., which means ending stocks are higher. If it is perceived that ending
stocks are higher, then grain prices go down.
With all of the economic turmoil in
the world right now, the U.S. is seen as the lesser of all evils (even with all
of our own economic troubles). Therefore, investors are putting their faith in
the good old USA. They believe that even though you-know-what is hitting the
fan here, it doesn’t smell as bad as everyone else’s.
So, if investors are buying the U.S.
dollar, then obviously it will go higher. And here is one factor from left
field that might come into play and suddenly rally the dollar higher: Right now
there is between 1.2 and 1.5 trillion dollars of U.S. corporate profits sitting
overseas in foreign bank accounts waiting to come home. U.S. corporations are
trying to negotiate with Uncle Sam for a “holiday tax”. This means that rather
than pay the roughly 30% tax rate that exists for these corporate profits,
corporations are asking for a one time “holiday tax” of 5 percent.
The point is this: When this
overseas money comes home (regardless of whether it is at a 30% tax or a 5%
tax) and corporations convert those foreign dollars into U.S. dollars for
deposit into U.S. bank accounts, there will be more demand for the U.S. dollar.
And it is estimated that at a 5 percent tax, that conversion process will raise
the U.S. dollar by 7 percent. So, remember that the U.S. dollar is currently at
77.15. If you raise it by 7%, that would make it worth 82.55. That doesn’t
sound like a huge deal in and of itself, but it might be the beginning of
With all the outside market
influences that exist, I suggest that you watch them, monitor them, and be
aware how global policies can affect the price of corn at home. But rather than
try to outguess what one country might do, or how the dollar might swing, plan
for multiple price scenarios and be ready for any situation that might happen.
Be ready for a $1.00 swing higher in corn, or lower. And know how that price
move would affect your overall value of your crop. If you’re planning ahead for
the drama, you won’t be floored if and when the drama occurs.
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