CME: How Dollar Movements After Brexit Vote Affect US Meat Trade

US - Currency markets reacted violently to the surprising British vote to leave the European Union, write Steve Meyer and Len Steiner.
calendar icon 1 July 2016
clock icon 4 minute read

Now that the dust has settled somewhat and lawyers have taken over (ain’t that the case with anything), it appears that things are not exactly black and white. If anything, it appears this issue could drag out for a while with plenty of room for manoeuvring and negotiation on both sides.

The British pound has yet to recover but the US dollar index is on its way down and other emerging market currencies have recovered somewhat.

The reason this is an important issue for livestock markets is obvious to those that have been tracking this industry for a while - a big chuck of our customers are outside of US borders. And when the dollar becomes stronger suddenly the price of US products goes up, making our beef, pork or chicken less competitive relative to other exporting nations.

When the US dollar goes up the US market also becomes more attractive to ship to.

The result is a shift in the relative flow of products into the US, ultimately impacting returns of US livestock and poultry producers.

Much has changed in the last 12 months on the currency front and generally for the better for the US meat industry. The top chart shows the performance of the US dollar relative to the currency of nations with which we trade significant volumes of beef, pork and chicken.

We often hear about the dollar getting stronger or weaker but the reality is that there is no such thing.

The value of the US dollar is always measured relative to specific currencies, or in currency pairs. Even the so called US dollar index only reflects the value of the US dollar relative to a very small basket of currencies, dominated by the Euro.

So how to read the chart? Take for example the value of the US dollar vs. the Japanese Yen. Currently is takes about 102.5 Japanese Yen to buy $1 of US beef.

Last year, it took about 125 Yen to purchase the same amount. In other words, the purchasing power of the Japanese Yen has increased and a Japanese importer now can afford to buy more US product without having to spend more.

Suddenly for that Japanese buyer US beef is on sale with an 18 per cent off sticker, just due to the currency shift alone.

Add on top of this the decline in cattle prices in the US and higher product availability and one can understand why the US market has once again become very attractive if you are a beef buyer in Japan.

Last year US beef exports struggled in the third and fourth quarter, which in turn contributed to the dramatic decline in fed cattle values in the fall. Feedlot supplies got backed up (for a variety of reasons) last fall and the lack of a vibrant export market made a bad situation worse.

This year, however, it appears that exports should benefit from the fact that the US dollar is heading lower.

The Brexit vote had the potential to once again push the US dollar up, hence all the attention from livestock futures participants in recent days.

USDA currently projects steady gains in US beef, pork and chicken exports in 2016 and 2017. The increase in exports reflects the fact that US production for all proteins is expected to increase in the short to medium term.

Lower feed grain prices and positive margins have fuelled expansion and exports should help soak up some of the additional supply.

Trade appears to be a focus of the presidential campaigns this fall and we have no interest in wading in politics in this report. However, the reality is that the US is a large net exporter of agricultural products.

It is also a large net exporter of meat products. In 2015, exports accounted for 21.3 per cent of all pork production, 17.3 per cent of all chicken production and 10 per cent of beef production, fuelling much of the growth in US livestock industry in the last 20 years.

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