Strong dollar challenging U.S. agricultural industry
By Brad Flodin
*Originally Published in the Captial Press on August 25, 2016
Agriculture is a risky business. From the time our ancestors first began cultivating crops, farmers have faced the possibility of losing their harvests to extreme weather events.
Whether it’s a hailstorm that destroys a grain or fruit crop, a flood that washes out a newly planted cornfield or a drought that turns grazing lands into a barren desert, uncooperative weather can upend the best-laid plans.
For example, if the end of this growing season happens to be extremely wet in some areas of the country, many commodities could be ruined, affecting processing, packaging, transportation and other sectors as well as producers.
Or if natural disasters strike in other countries, that could put pressure on U.S. supplies. Or, longer term, if the drought continues in California, the state’s agricultural sector could see a significant shift in the coming years as farmers attempt to adapt by changing crops.
And as if these traditional risks weren’t enough, farmers also have to deal with the effects of currency fluctuation on international trade.
Globalism and the terms of international trade have recently come under heavy criticism from both sides of the political aisle, but there’s no arguing that international trade is critical to farmers’ ability to feed the planet’s more than 7 billion inhabitants. Even countries that are capable of producing enough food to feed their own populations import many foodstuffs because people like variety in their diets.
But although most nations want access to global markets, the world economy is complex, with many variables affecting a nation’s competitiveness. One of these variables is the exchange rate. The continued strength of the U.S. dollar against most major currencies is one of American farmers’ top concerns at the moment, as it makes U.S. agricultural exports more expensive.
In its most recent forecast for fiscal year 2016, the USDA Economic Research Service projected that U.S. agricultural exports would decrease $15.2 billion from 2015, to $124.5 billion, while imports would increase to a record $114.8 billion.
These figures still represent an agricultural trade surplus of $9.7 billion, but it’s down from $25.7 billion in 2015 — and the lowest surplus since 2006. The productivity of the U.S. agricultural industry has long outpaced domestic demand, creating a trade surplus every year since 1960.
As a result of the decrease in exports, national net farm income and net cash income are both projected to drop this year.
Economists attribute the decline in exports to slower world economic growth, decreasing prices for bulk commodities (world grain stocks are currently high) and a strong U.S. dollar.
This creates a complicated situation for U.S. producers. At the same time prices are dropping and demand is slowing due to weak economies in many countries around the world, the position of U.S. farmers’ competitors — producers in Canada, Australia and South America, for example — are being strengthened by the exchange rate.
This puts significant pressure on American agriculture. U.S. commodities are more than 30 percent costlier than their Canadian counterparts. Some purchasers are willing to pay a premium for top-quality products, such as U.S. wheat, but not all products can be clearly differentiated. After all, sales of commodities are, by definition, driven primarily by price. Not all farmers are affected in the same way, as different products have different export markets with different currencies.
The strong dollar cuts both ways, of course, also making imports cheaper. So farmers who use imported inputs such as fertilizer or feed will have lower costs, which does help the bottom line but, depending on the crop, usually doesn’t fully compensate for the lower sale price of the final product.
Many producers utilize commodity contracts, options, or guidance from brokers to hedge against some of these risks, but there are costs associated with these approaches, so many producers simply opt to ride out the cycles.
If you’re a farmer, a conversation with your banker should be part of your strategic planning process as you look toward next season. In the next few weeks, you’ll likely receive a great deal of information about your harvest and crop yields and will then have a very short window for making future plans.
Talk to your banker about the market for your specific commodities and ask him or her for comparisons of financials so you can better understand how your farm stacks up with others in the industry.
Also request your banker’s assessment of your borrowing capacity, and ask what steps you should take to increase it — before you need a loan. Regular communication allows you to strengthen your relationship with your banker and builds trust on both sides, increasing the probability that you’ll get the resources you need when challenges or opportunities arise.
Brad Flodin is a vice president of Washington Trust Bank. He earned his finance degree at the University of Idaho and is a graduate of Western Agricultural Credit School at Washington State University.
Washington Trust Bank