U.S. Gross Domestic Product (GDP) fell an astonishing 32.9 percent in the second quarter, making it the worst quarterly retreat in history. While that reading was not as bad as analysts feared, it was still a sharp reminder that the economic impacts of COVID-19 are severe and that even massive government stimulus payments did little to stem the tide.
With the U.S. seeing new heights in COVID-19 cases and a second wave of Fed bailouts in question, the economic future is looking more in doubt.
In recent weeks, there has been some hints of how this could upend the positive economic paradigm of recent years. For starters, the U.S. Dollar Index (USD) has fallen by about 6 percent in the past few weeks. This index, which is a broad measure of U.S. dollar strength versus foreign currencies, is a forward-looking measure of how the global economy views the U.S. When the U.S. dollar is strong, this is generally a sign that foreign investors are actively engaged in buying U.S. assets, but conversely, it also makes U.S. exports more expensive to foreign buyers.
For U.S. agriculture, which is heavily reliant on trade, a strong U.S. dollar in recent years has been a significant headwind to U.S. commodity prices. So if the recent weakness is a trend that continues, this could be a positive development for U.S. grain prices.
Indeed, the effect of exchange rates on grain prices is generally most pronounced as we get past summer and into the crop export season of the fall and early winter. The chart above illustrates the correlation of the USD with specific Gulf grain prices by month. The higher the correlation, the more grain prices are impacted by the USD at that time of the year. Grain prices in the summer are generally less impacted by the USD (although it still matters) than say post-harvest.
For a U.S. economy that could see a prolonged recovery into Q3 and Q4, this could spell more downside moves on the USD and, in turn, would be supportive for grain prices. We are starting to see some of the benefits on U.S. price competitiveness as a result. Brazil was roughly 50 cents a bushel cheaper on corn into South Korea just a few weeks ago; but as U.S. prices have slipped and the USD has weakened, this has helped make U.S. corn prices into South Korea a dime cheaper than Brazil.
Look for more weakness on the USD and a supporting lift for U.S. grain prices. Fall and winter could see more downgrade in the U.S. dollar, and this timing could have sizable benefits for U.S. grain prices when exports come into focus.
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