The Impact of Value of the United States Dollar on US Agriculture and the Farmland Asset Class. A Research Note

Transcription

1 The Impact of Value of the United States Dollar on US Agriculture and the Farmland Asset Class A Research Note William J. Kiernan Senior Research and Investment Analyst October 15, 2009

2 DISCLAIMERS AND NOTE ON FORWARD LOOKING STATEMENTS Hancock Agricultural Investment Group is a division of Hancock Natural Resource Group, Inc., headquartered in Boston, MA, a registered investment adviser and wholly-owned, indirect subsidiary of Manulife Financial Corporation of Toronto, Canada. The information provided herein is not an offer to sell, or a solicitation of an offer to buy any security, investment product or service. This document may contain forward-looking statements and information. Forward-looking statements are related to possible or expected future, and not past, events. These statements may be identified by words such as expects, looks forward to, anticipates, intends, plans, believes, seeks, estimates, will, project or words of similar meaning. Such statements are based on our current expectations exclusively as of the date of this document and certain assumptions, and are, therefore, subject to certain risks and uncertainties. A variety of factors, many of which are beyond Hancock Agricultural Investment Group s control, may affect performance and results, and could cause the actual performance and results of investments to be materially different from any future performance or results that may be expressed or implied by such forward-looking statements. Hancock Agricultural Investment Group, an operating division of Hancock Natural Resource Group, Inc., hereby disclaims all liability for any loss or damage suffered due to the use of any information or statements contained herein. This document may not be reproduced or transferred in any form written or electronic without the express written consent of the Hancock Natural Resource Group, Inc. 2

3 This paper examines recent history of the value of the US Dollar, concerns over its possible future weakening and the possible impact on Agriculture and the Farmland Asset Class. What is happening to the value of the US dollar? Since 2002, the US dollar has experienced a gradual weakening relative to the world s major currencies. Between 2002 and 2008, the US dollar lost nearly 40% of its value. This trend abruptly changed in 2008 during the height of the global financial crisis when investors viewed the dollar as a safe port, in a stormy global financial sea. Between April of 2008 and March of 2009, the value of the US dollar increased by 22%. Since its peak in March of 2009, the dollar has again reversed course and has declined by 15% since then. (From the dollars spring 2009 peak, it has declined by 11% against the Yen, 16% against the Euro, 21% against the Canadian dollar, 30% against the Australian dollar, and 30% against the Brazilian real. Historically, major currencies do not move more than 20% from their long-term averages, and the US dollar is closing in on a decline of 20% from its long-term average. Conventional wisdom would suggest that the dollar may be poised for a rebound, yet some economists warn of the potential for material additional weakening of the US dollar 1. What forces in the current economy are putting downward pressure on the value of the US dollar and fueling these bearish predictions? Some of these include: The Federal Reserve lowering interest rates to stimulate the US economy has led to downward pressure on the dollar. Foreign investors borrow dollars cheaply and then sell them to buy currencies of other countries that offer better returns in their financial markets. Continued US trade deficits and government spending for economic and social programs, much of it funded by borrowing nearly $12 trillion from the rest of the world has led to concerns over mounting US debt. Will the US need to devalue its currency to make its foreign debt load more affordable? (A weakening dollar could be self-correcting as it works to reduce the trade deficit, the key is financial markets not panicking and causing a run-away dollar collapse.) A reduction in the percentage of the world s aggregate currency reserves held in US dollars, as other countries diversify their reserve holdings into other currencies such as the Euro have reduced demand for the US dollar. The current administration purports to support a strong dollar, but their inaction in supporting the value of the dollar says something different. 1 Coy 3

4 What does a weak dollar mean to the US economy as a whole? On the positive side, a weak dollar increases the rest of the world s purchasing power relative to US goods and services. This can stimulate US exports, and may increase US revenue from foreign tourism. Increased exports would help to reduce the trade deficit and lessen downward pressure on the dollar. US export industries, such as agriculture, generally thrive in a weak dollar environment. On the negative side, a weak dollar tends to fuel inflation by increasing the cost of imported products to the US consumer. Concern over rising US debt levels may induce foreign creditors to restrict credit to US debt markets. Foreign countries may have a difficult time exporting to the US restricting their economic growth. There may be the potential for trade wars if the US does not take steps to strengthen its currency. What is the importance of exports to US agriculture? Agricultural exports from the United States to the rest of the world totaled $115.3 billion during 2008, an all time record. For 2009, exports are estimated to be down slightly to $97.5 billion 2. The US is the largest agricultural exporter in the world followed by Brazil, the European Union and Canada, respectively. U.S. Agricultural Export Trade (billions), F $ $100 $75 $50 Higher-valued Product $25 Bulk Commdities $ F 2015F Annually, export of US agricultural products contributes 25% to US net farm income, and not surprisingly, US net farm income and nominal US farm exports are strongly correlated. US agriculture tends to be twice as dependent upon overseas markets as the rest of the US economy 3. To illustrate see the chart at right: 80% 70% 60% 50% 40% 30% 20% 10% Select US Commodities: Five-Year Average Proportion of Total Production (by Volume) Sold as Export Annually Source: USDA FAS 18% 22% 31% 37% 49% 53% 57% 67% 73% 73% 0% Corn Apples Pears Soybeans Wheat Walnuts Pistachios Cherries Almonds Cotton 2 USDA ERS 3 ibid 4

5 What factors impact levels of agricultural exports? Historically US agricultural exports have tended to fluctuate materially and cyclically. The following factors impact US Agricultural trade: Growth in demand for US agricultural exports is strongly correlated with growth in trade partner real income and real GDP. This was illustrated as US agricultural exports declined as a result of the Asian financial crisis of the late 1990 s and increased with the emergence of China and India as economic powers in the first decade of this century. Agricultural policies of other countries which restrict imports to encourage domestic production. This is particularly true of European Union agricultural policies. Changes in US and other countries farm and trade policies. Changes in the global supply/demand balance caused by fluctuating production. Political relations among nations (For example the Grain Embargo the US imposed upon Russia in the late 1970 s). Changes in global exchange rates. So what is the likely impact of a weakening dollar on US agriculture and the farmland asset class? Generally, a weak US dollar correlates with increased exports of agricultural goods, since US farm products are made more affordable to the rest of the world. Changes in the nominal exchange rates of the United States and trade partners (importers) of US agricultural products tend to impact levels of US exports. A stronger dollar relative to the currency of an importer correlates with decreased imports of agricultural commodities by that country. The correlation between the value of the US dollar and US agricultural exports, illustrated in the graph 4 at right is Trade Weigted Exchange Index (1973 = 100) Nov-75 Nov-78 Value of the US Dollar vs. US Agricultural Exports Nov-81 Nov-84 Nov-87 Nov-90 Nov-93 Nov-96 Nov-99 Nov-02 Dollar Index Value of Ag Exports ($) Nov-05 Nov-08 $12,000,000,000 $10,000,000,000 $8,000,000,000 $6,000,000,000 $4,000,000,000 $2,000,000,000 Additionally, analysis by Andino, et al, has shown a strong correlation with changes in exchange rates between the USD and the currencies of competitor agricultural producing nations impact US exports. Changes in the relative value of the US dollar compared to its competitors will decrease or increase US agricultural exports. For example, the decision by Brazil to devalue the real in 1997 and Argentina s decision to devalue its peso have adversely impacted US soybean exports. A weak US dollar also tends to make US agricultural products more competitive here at home, since foreign substitutes become more expensive to the US consumer 5. These factors tend to correlate with increased farm incomes, which correlate with increased farmland values. $0 Value of Agricultural Exports ($) 4 Data is from USDA FAS and the Board of Governors, United States Federal Reserve 5 Akers, et al 5

6 A weak US dollar increases the cost of fossil fuel derived inputs (fuel, oil, fertilizer, packaging, etc.) and other foreign sourced agricultural inputs for US agriculture since oil is priced in US dollars globally. This may reduce net farm income. Historically, the US farm economy and the farmland asset class have done well in weak dollar environments, and performance has moderated in strong dollar environments. HAIG anticipates that the continued weakening of the US dollar will provide a boost to the farmland asset class in the coming year. SOURCES Andino, Jose, et al, The Impact of Brazil and Argentina s Currency Devaluation on US Soybean Trade A paper presented at the American Agricultural Economics Association Annual Meeting, July, Shane, Matthew, et al, Exchange Rates, Foreign Income, and US Agricultural Exports Agriculture and Resource Economics Review, October Coy, Peter What Happens if the Dollar Crashes Businessweek October 26, 2009 Akers, Maria, et al, Can Rising Exports Sustain the Farm Boom? The Main Street Economist, Regional and Rural Analysis, 2008 Vol. III, Issue II. Federal Reserve Bank of Kansas City United States Department of Agriculture Economic Research Service and Foreign Agricultural Service. Outlook for US Agricultural Trade August 31, Board of Governors, United States Federal Reserve United States Department of Agriculture Foreign Agricultural Service ( USDA/FAS ) United Nations Food and Agriculture Statistics ( FAOSTAT ) 6