This winter, I toured Brazil to visit with beef and soybean producers, and then spent several weeks in Canada visiting with Canadian beef producers. Upon entering both countries, I was quickly reminded of the exchange rate of U.S. dollars for local currency. My U.S. dollar purchased 1.47 Canadian dollars and 3.4 Brazilian reals.
U.S. tourists like such favorable exchange rates. What isn't immediately evident, however, is the impact these “favorable” exchange rates have on prices for Canadian beef and Brazilian soybeans.
Canadian beef and Brazilian soybean prices have little to do with supply and demand or trade policies. The key factor driving these prices is the exchange rate between the domestic currencies and the U.S. dollar. In fact, the prices for both are priced directly off U.S. market prices adjusted for the value of their own individual domestic currencies.
As Brazil and Canada's domestic currency values fall in relation to the U.S. dollar, their local commodity prices go up. Thus, producers in these countries respond by expanding production, which triggers an increase in world supply of those commodities.
Conversely, as the value of their domestic currency goes up, local commodity prices go down. Local producers typically respond by cutting production and worldwide supplies of those commodities fall.
Brazilian Soybean Prices
Brazil began growing soybeans in the early 1970s and has expanded that production ever since. Most recently, that expansion has come in its two frontier states of Motto Grosso and Motto Grosso De Sul.
Brazil exports most of its soybeans — 68% go to Europe and 16% to Asia. Because the soybeans are priced off the U.S. Chicago Board of Trade minus a basis, Brazilian soybean prices are heavily dependent on the Brazilian currency value.
As the Brazilian currency value falls relative to the U.S. dollar, the farm price of Brazilian soybeans goes up. Figure 1 shows the real's falling value for the last two years, depreciating from 46¢ in April 2001 to about 25¢ in October 2002. That's a 46% total drop in value over 19 months and a 2.4% drop/month.
Yet, this currency devaluation generated a 46% increase in Brazilian soybean prices. Couple that with the Brazilian government's 25% domestic devaluation last year, which lowered production costs, and you can see why Brazil's farmers are going to give U.S. soybean farmers a real run for their money.
Canadian Beef Prices
Meanwhile, Canadian slaughter cattle prices are quoted as U.S. price minus a basis (primarily trucking costs) adjusted for the value of the Canadian dollar. Looking at Alberta's price for June 2003 slaughter steers (Figure 2), the U.S. June '03 Futures price ($69.82) is divided by the value of the Canadian dollar ($0.6802) minus the $9.64 five-year average basis. That amounts to a suggested price of $93.01 Canadian. It's obvious the Canadian beef price is quite sensitive to the value of the Canadian dollar.
Figure 3 tracks the Canadian dollar during the first six years of the 1990s. From its peak value in late 1991 to its low in January 1995, the Canadian dollar fell 19%. That resulted in increasing beef prices for Canadian producers.
Meanwhile, Figure 4 illustrates what happened to North Dakota's fall calf prices during the 1990s. Prices peaked in 1991 at $92/cwt. and bottomed in 1996 at $64/cwt. — a 26% decrease. But, the weakening Canadian dollar offset for Canadian producers much of the price decrease experienced by U.S. ranchers.
As the Canadian dollar's relative value to the U.S. dollar decreased in the 1990s, the Canadian price of beef rose relative to the U.S. price. When I talk to Canadian audiences about the “tough times” of the 1994-1996 cattle cycle price lows, Canadian producers can't quite relate. After all, the trauma that the 1990s' calf price downturn exerted on U.S. ranchers wasn't nearly as traumatic for Canadian ranchers.
Figure 5 depicts the growth patterns for all-cattle numbers (beef and dairy) from 1970 to present for both Canada and the U.S. (The Canadian scale is on the left, the U.S. scale is on the right.) With a 7:1 ratio of U.S. cattle to Canadian cattle, the U.S. beef industry clearly dominates the North American beef market, and the market prices are determined by U.S. supply and demand.
During the 1970s and 1980s, Canadian and U.S. dollar values paralleled and the growth patterns of cattle numbers for both countries also tended to parallel. Then, the value of the Canadian dollar started falling relative to the U.S. dollar in the late 1980s, and beef prices started to also digress between the two countries.
Note the growth in Canada's cattle numbers since 1988. More favorable beef prices in Canada, certainly compared to sagging grain prices, spurred Canadian ranchers to increase cattle numbers.
Meanwhile, U.S. beef producers saw relative low prices and responded by reducing cattle numbers in the 1990s. Figure 5 also shows the U.S. reduction during the cattle cycles of the 1980s and the 1990s. The different growth patterns between the two countries were primarily triggered by the decreasing value of the Canadian dollar.
The implication of all of this relates to the cattle industry's attempt to offset the economic force of changing exchange rates with import legislation. The projected weakening of the U.S. dollar over the next few years may well do far more to boost U.S. agriculture than new import regulations.
Harlan Hughes is a North Dakota State University professor emeritus. He lives in Laramie, WY. Reach him at 701/238-9607 or [email protected].