Current events may be a topic for school children, but currency events is a topic that anyone with an interest in international markets and trade should watch.
Whether it’s live hogs coming from Canada or U.S. pork products headed elsewhere, international trade is a vital part of the U.S. pork industry. Anytime goods are traded across borders, currency values come into play.
The U.S. dollar has been declining. While that’s not positive for the nation’s overall economy, it is positive for U.S. exports. Other countries can get more bang for their “buck”, which has increased pork exports. That, in turn has added strength to U.S. live-hog markets,” says Martin Rice, the Canadian Pork Council’s executive director.
A weaker U.S. dollar makes importing goods, such as live hogs from Canada, less attractive as well. “There are fewer dollars going to Canadian pork producers than during the last two years when the U.S. dollar was stronger,” says Rice.
Favorable conversion rates were a factor in driving the influx of Canadian weaned pigs to the United States. Now that the currency conversion does not favor the Canadians, there are some questions as to the future flow of pigs.
“By now, pigs from Canada are part of U.S. producers’ systems, so I don’t see that changing anytime soon,” says Brian Buhr, University of Minnesota agricultural economist. “Some of those arrangements are under contract, so the currency changes wouldn’t stop those shipments.”
Some additional hogs will likely be finished in Canada, but Rice points out that the weakening U.S. dollar has hurt both Canadian producers and processors. Packer margins tighten as the U.S. dollar weakens, but they still have to bid competitively against U.S. packers for hogs.
Building finishing barns also is a long-term commitment and making that decision based on a currency shift that can change is risky.
“The growth of Canada’s breeding herd is slowing,” says Rice. “A few years ago the breeding herd was growing about 8 percent a year; now it’s growing 1 percent to 2 percent.”
Strength of the U.S. dollar is affected by the same laws of supply and demand that affect hog prices. The more U.S. dollars there are in the world economy, the lower the demand for them and the lower their value.
The trade deficit and monetary policy also affect the U.S. dollar’s strength. The trade deficit has occurred in part because U.S. consumers have developed a taste for products made elsewhere. China dominates in terms of supplying items Americans purchase daily. As the dollar weakens, U.S. consumers may start buying less. If other countries can get a good deal on U.S. goods, they may buy more, which would reduce the U.S. trade deficit.
As for the monetary policy, the Bush Administration has not held the dollar up as much as in the past, and may not want it to be as strong against other currencies as it has been.
“Right now we’re in an extreme low, with energy prices very high,” says Buhr. “In the long-run, policy makers don’t want the U.S. dollar as high as it was in 2000 and 2001.”
There’s no need for alarm, currencies can fluctuate quite a bit, as long as there isn’t a currency crisis. A currency crisis would involve other countries avoiding the U.S. dollar, which cripples your exporting power. The United States is nowhere near that level, in fact before its current drop, the U.S. dollar had been well above historic levels, says Buhr.
“Nobody’s expecting major changes in the U.S. dollar’s strength,” says Rice. “But, the U.S. deficit won’t disappear overnight. Right now, I don’t think the U.S. dollar is undervalued or overvalued.”
The weakened U.S. dollar could add to U.S. pork exports, which improves your bottomline. Also, it may slow the influx of Canadian weaned pigs, if it helps slow the Canadian breeding herd’s growth. Whether that’s positive or negative depends on your particular view.
“Traditionally, a weak U.S. dollar has been good for U.S. agriculture because it is one of the big exporting industries,” says Buhr.