January 22, 2015

By Marc Davis

As the U.S. dollar soared in 2014 to more than 12 percent against a selection of major foreign currencies, — its highest value since September, 2003 — analysts expected a corresponding decline in the prices of agricultural commodities.

Historically, when the U.S. dollar gains strength, commodity prices fall, and vice versa.

Commodity prices are quoted in U.S. dollars. If the value of the dollar is low, then more of them are required for purchasing commodity staples such as wheat, soybeans, and corn, among the most widely used of agricultural commodities.

A stronger U.S. dollar can be a double edged sword, according to Jeff Reeves, author of The Frugal Investor’s Guide to Finding Great Stocks, and editor of InvestorPlace.com, a consumer website offering investment and finance insight.

“The [agricultural commodities] sector has been hurt with depressed prices and obviously so has big oil,” he said. “At the same time although fuel prices have also dropped for farmers, it may not make up for their lower commodity prices. But airline profits have taken off, pardon the pun, because of cheaper fuel, and [also] certain manufacturing.”

Lower gas prices will put more disposable dollars in consumers’ pockets, say some analysts, further stimulating the U.S. economy, which grew at a vigorous 5 percent in the third quarter of 2014 over the previous quarter.

With the dollar now at an 11-year high, demand for U.S. commodities prices could drop further, but there’s no guarantee.  Too many other factors influence the price of wheat, for example. Weather, wars, labor troubles, shipping slow downs, economic problems, government actions and other unforeseen disruptions can have an impact on supply, demand and prices.

Meanwhile, despite a strong dollar, the U.S. stock market recently took a major hit with the Dow Jones Industrial Average falling 331.34 points (1.9 percent) as the price of oil continued its lengthy incremental price decline and European and Asian economies lost momentum.

Nevertheless, the currently robust U.S. economy should continue its run for the foreseeable future, said Reeves.  “U.S. GDP is up, unemployment is down, so it’s difficult to imagine another economy overwhelming the U.S. economy this year or in 2016.”

Investors looking to capitalize on the strong U.S. dollar and its side effects, according to Reeves, should consider companies that use grains and other now-cheaper commodities, petroleum products and gas included, which could increase their profit margins.

Investors are now asking: If agricultural commodities decline in price, will farmland valuations decline correspondingly?

“The direction of farmland valuations is a tough question,” said Jeff Geider, Director of the Institute of Ranch Management at Texas Christian University, Fort Worth.

“Many variables determine price,” he said. “Interest rates will also be a factor.”

If the U.S. economy continues its healthy uptrend, an increase in interest rates may be inevitable, and that would also effect farmland valuations and sales.

One way to forecast farmland values and returns on investment is to use the USDA baseline projection of prices, variable costs and yield projections, growth and population trends. The USDA baseline projection is available online, but should only be used as a point of departure for forecasting future land valuations and the other factors that affect prices.

Because the baseline projection assumes normal weather, normal yields per acre, normal supply, consumption and other pertinent factors, farmland valuations may still run contrary to projections – either higher or lower – depending on circumstances, which often diverge from the norm. Market conditions, always in flux, will finally determine farmland valuations.

“If it weren’t for the decline in energy prices I would’ve said the dollar could continue strong for a while,” said Geider.

“But oil prices are a wild card and adds to the unpredictability of the economy.  Obviously right now some manufacturing and the airline industry are beneficiaries of lower fuel prices, as well as the U.S. consumer.”

One immediate result of lower fuel prices is the increased sales of gas-guzzling SUVs  recently reported by the auto industry,  boosting its prospects for a fatter bottom line.

Meanwhile, smaller oil producers, some oil equipment manufacturers, mass transportation, and some farmers, among others, have not been the beneficiaries of the currently muscular U.S. buck.

For example, for the past 18 months and until recently, the U.S. has been a net exporter of beef, because of the weak dollar during that period, Geider points out. “But now beef exports have lost about 7 percent market share,” he said.  Similar problems could impact other agricultural commodities.

“All that could change if the dollar weakens again, unemployment inches up, and oil prices increase,” said Geider.

So, while some economists, referring to a growing U.S. economy, are fond of saying “a rising tide lifts all boats,” it may be true for boats but it’s not true of the economy.