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U.S. dollar impacts grain prices

02/26/2014 @ 10:18am

Thirty years ago, you could trade corn, wheat, and beans here in Chicago and do fairly well with a pretty good understanding of technical trading and fundamental analysis. 

While those tools are still something you need to keep in your toolbox, it has become increasingly more difficult to trade these products with only a view of the U.S. and its supply/demand situation. With the advent of electronic trading, we have opened up our products to the world. The world has become a village, and now we must take into consideration what is happening elsewhere while we formulate our marketing plans. 

I got lucky and was thrust into the international trading scene as a wet-behind-the-ears young buck out of college. The international flow of money and the fluctuating strength of the dollar are things that everyone with exposure to commodities should plan for. 

The detailed explanation can be cumbersome, but it simply comes down to interest rates and the places where the international community wants to park its cash. The higher your internal interest rates, the more international money you will attract. The money that you attract will make more in interest than elsewhere, but there is a downside: The stronger the dollar (i.e., the higher the interest rate), the less competitive your goods and services are abroad. So the risks of a high valuation (strong dollar) are a very slow export business that could hurt the economy and some high borrowing costs internally. 

The inverse has good and bad points as well. 

A cheap dollar (with a low internal interest rate) obviously makes our goods and services abroad much cheaper and gives a big boost to exports. The lower interest rate, internally, can also help borrowers and spur on investment. Housing, research and development, and corporate spending all begin to really pick up. The risk is that this causes inflation and begins to eat away at your daily paycheck. Prices rise because of the demand and accessibility of cheap money grows a lot faster than the average paycheck. Simply put, inflation will eat away at cash and boost the prices of hard assets. 

So, how does this affect our trading of corn, wheat, and beans? Well, the first obvious answer is exports. A cheaper dollar makes us more competitive in the international community. That will boost our sales abroad.  We have to make sure things don’t get out of hand and let demand (because of a cheap dollar) push up prices here. Inflation of those prices at home will eat into the paychecks of Americans and have a destructive influence. This is where the balancing act takes place. Then the interest rates will have to be raised to slow down demand and the rising prices, so the inflation rate doesn't get out of hand. 

The downside is that exporters get hurt, and our goods and services abroad become less competitive. Our products here at the CME are affected every day as the movement of those rates, however so slightly, and the ensuing perceived movement of those rates have a material impact on the price of corn, wheat, and beans. A down day can be rescued by a cheaper dollar. An up day can be ruined by a strengthening dollar. A small rally can catch on fire as the dollar goes lower, and vice versa. These are things we need to take into consideration as our customers become more international and as the traders and speculators do, as well. 

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