This Week in the Markets — Dollar Shifts, Interest Rates and COOL


soybeans_closeup 2Grain prices have swayed back and forth this week thanks to some aggressive reactions to the U.S. Federal Reserve’s interest rate increase on Wednesday, as well as a little short-covering, and (barely) bullish weather concerns out of Brazil. Most of the complex ended the week lower though than it started, with oats being the biggest lower, but soybeans were the contrarian, gaining over 2.5% in Chicago on the week. While it’s suggested that around 10% of Mato Grosso’s soybean acres were reseeded due to dry/hot weather, the fact remains that the timing of these markets means a record crop of beans went into Brazil’s soil, meaning the country will still produce a big crop.

The “Fed” went out and raised rates to 0.25% on Wednesday, the first time the U.S. central banking authority has done so since 2006. They further provided guidance that U.S. interest rates will creep up to 1.75% by the end of 2016. The good news is that we’re still a far cry from the 1980s. The bad news is that it further strengthens the value of the U.S. dollar and since all commodities are priced in U.S. dollars, the futures board is feeling some pain.

Is raising rates the right move?

Other than Mexico & Chile, everyone else has lowered their interest rates (including the Bank of Canada, which has suggested it’s not opposed to negative interest rates). From a data standpoint, the U.S. isn’t necessarily outdoing itself – the Fed suggests that their economy is in its strongest expansionary cycle in the post-World War II era. Yet, a number of statistics suggest otherwise. The labour participation rate (the percentage of Americans employed and/or looking for work is its lowest since the late 1970s), for instance, and the industrial production & factory activity are all trending lower. And, history proves that raising interest rates in lower commodity price environments can lead to deflationary periods.

The Canadian Loonie has fallen almost 16% in the past year to now below 0.72 USD. This is mostly to do with the U.S. interest rate hike, but that decline is more than I expected because I did not anticipate the interest rate announcement to coincide with U.S. Congress removing their U.S. oil export ban, suggesting more oil will hit the market (great for oil trading companies, bad for major net exporters’ currencies, like Canada’s).

Where you should really watch what this interest rate move does is in the cash markets (yes, there is a difference between cash and futures grain prices). Basis levels have remained relatively stagnant, except in soybeans because of this week’s rally. Conversely, the decline of the Canadian Loonie has helped Canadian basis levels improve a bit. This in mind, it’s important to be cognizant of where basis levels were when the Loonie traded this low (specifically speaking about Dec 2008/Jan 2009 and pre-2005). Does the Loonie have more downside here? The question I’m asking is whether the market is already pricing in U.S. interest rates going to 1.75% by the end of 2016 and whether or not the Bank of Canada is going to start defending the Canada’s golden coin or not with their own monetary policy moves.

cow cattle winter grazing stubbleStaying up with the cross-49th parallel relations, U.S. Congress is set to repeal their Country of Origin Labelling (COOL) before the holidays, instead of paying $1 Billion to Canada and a couple hundred million to Mexico. The question now surrounds whether or not U.S. meat buyers will go back to their pre-COOL demand levels (one would hope so, given the purchasing power of their dollar over the Loonie).

Update: COOL Repealed

Where the rate hike will have less of an effect is in Argentina, whose own central bank decided on Thursday to let their currency float, which resulted in the Argentine peso trading at about 13.5 to 1 US dollar by the end of trading (a loss of about 30% of its value in 1 day). Repeat: the Argentine peso lost 30% of its value in 1 day. Between this currency drop and the removal of wheat, corn, and beef export taxes, plus the reduction of soybean taxes, the agricultural industry in Argentina is more primed to export than anytime in the last 15 years. Keeping those aforementioned futures markets rallies in check will be the fact that Argentinian farmers are sitting on almost 13M tonnes of soybeans that will be sold before the start of harvest in late March, early April.

With oil prices falling, the Russian ruble has also pulled back, whereas the Eurodollar has strengthened, making E.U. wheat less competitive again, compared to wheat coming out of the Black Sea (the Ukraine Ag Ministry recently increased their grain export forecast to 36.8 million tonnes, a new record and up 6.4% over 2014/15). Staying in Europe, MARS, the EU’s crop-monitoring body, says that there are a number of regions in Eastern & Northern Europe where crops are more exposed to coming winter elements because of slow hardening/development.

Russian winter crop conditions going into dormancy are close to their long-term averages while the French winter wheat crop is seen heading into the dormancy phase in its best condition ever (a 3rd consecutive record wheat crop could be brewing there). However, with the milder winter experienced thus far in North America, concerns and questions abound as to whether or not Mother Nature is timing things up for a drier year here.

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