The dollar’s influence on agribusiness and how to prevent damage
Commodities are traded in dollars. So when the currency fluctuates, product prices are instantly affected. What can be done to prevent possible damage?
Even when we don’t deal with it directly, the dollar influences every transaction we carry out on a daily basis. Whether buying a loaf of bread, paying bank fees, or using transport that requires fuel, day-to-day exchanges are always impacted by the price of the currency at some point.
For example, if you buy bread at the bakery closest to your home, made by your local baker, the wheat used could be imported—Brazil imports 60% of the wheat it consumes. And even if it isn’t, this international competition impacts the domestic price. On the other hand, maybe the inputs for wheat production come from abroad.
As agribusiness is the largest business sector in the country, imagine how many financial transactions take place throughout the entire agribusiness chain, right down to the food that arrives on your plate. Probably all of them have been influenced by the US currency, and since they happened at different times, have used different quotations.
Thus, commodity prices can vary as much as the dollar exchange rate, even on Brazilian soil.
Why is the dollar the reference currency for agriculture?
In fact, it’s not just for agribusiness. The US dollar has been the world’s reference currency since the post-World War Two period, when the US became the holder of the largest commercial transactions, as the other countries considered to be powers at that time were devastated, both in terms of territory and finances, while the US grew.
The floating exchange rate policy was adopted in 1973. Since then, the law of supply and demand has defined the currency’s value. And because it’s considered a safe currency, it’s highly sought after and tends to go up in times of crisis. The opposite happens when the economy experiences stable periods.
That’s why it affects all markets and indexes, and of course, commodity values. The exchange rate is one of the most important aspects that determines the prices of all items in the commodities chain, since international negotiations are essential in the routine of companies that participate in each stage.
The prices paid by those who produce commodities impact their final prices. If the dollar is the currency that serves as a reference for international transactions, sellers always need to adjust their prices in proportion to what they’ve paid.
How’s the price of a commodity decided?
The name commodity is given to primary non-industrialized products extracted from the earth, produced on a large scale, and which don’t differ regardless of who produced them. Such as soy, corn, coffee, beef, and petroleum.
Another characteristic of commodities is that their price is determined by international supply and demand–even when distribution is on national soil. This is because demand generates competition both between the countries that produce and those that consume them.
For example, Brazil is currently the major soybean producer in the world. However, its main competitor is the US, which is currently experiencing a drought which is causing difficulties in production and river transport (see link to Mississippi River post).
Thus, the supply of North American soybeans has dropped while the price has risen a lot, so Brazil has been tabbed to fill this shortage in the world market, especially the demand from China, the largest soybean consumer in the world.
That is, the costs of inputs, transport, storage, port tariffs, and others also influence the availability of a product in the market—and once again, these impact the final price.
However, depending on demand, it may be necessary to lower or raise the amount charged, regardless of costs, which increases or decreases the producer’s profit margin. Thus, the rise or fall of the dollar will not always be necessarily bad or good. It all depends on the larger, more unpredictable context.
How does the dollar impact commodity markets?
The main aspect to understand how strong the impact of the dollar on the agro market is: Check the comparison between the exchange rate for the purchase of inputs and the producer’s other costs with the quotation at the moment they make the sale.
If the dollar is down, and the producer decides to buy inputs for the next production cycle to take advantage of timing, the producer needs to be aware of a possible fall that could be prolonged, and then at the time of sale, the value will be even lower.
The opposite can also happen. The producer has the need to invest in the next crop and the dollar could be at a high. But when the harvest arrives, the price will be below what was paid, generating losses.
The ideal world for every producer is to invest low and sell high. But we all know that in this type of Market, it’s not possible to count on your luck: you need to know and always get the inside scoop in order to make the right bets.
Even those who sell their commodities only domestically need to be aware, as their costs may be influenced by the dollar, and, knowing that their competition exports, the currency will end up having an impact on the price. That’s because most negotiations for the purchase and sale of agricultural products are made through the Chicago Board of Trade in the US.
How can you protect yourself from exchange rate variations working with commodities?
Given the strong influence of the dollar variation which directly affects commodity markets, it’s essential to have a plan that provides more predictability and security for your business’s future.
Using a hedging strategy is a great solution available to prevent unpleasant surprises in the financial planning of those working with the commodity chain.
A hEDGEpoint specialty, this mechanism operates like insurance against market price variations, reducing transaction risks.
hEDGEpoint combines the knowledge of specialists, who know the field and its numerous variables well, with risk management solutions through technology and customized consulting, to always offer the best experience in future operations.
We’re present globally, and always ready to serve, anytime and anywhere. Contact a consultant to learn more about how to use this hedging instrument for your business.
Talk with a hEDGEpoint specialist.
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