Dollar's weakness a topsy-turvy development

by Morton Sosland
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Hardly any force promises greater change in the global grain and milling industry, as well as among the companies that supply equipment and services to that industry, than the weakness of the U.S. dollar. For five years up to the start of 2002, the U.S. dollar had exhibited amazing strength, rising sharply against all the major currencies to the point that a strong dollar had become nearly a certainty in the development by many companies of both domestic and export marketing policies and strategies. Most economists interpret the sudden sharp fall in the dollar’s value this year as signaling a definite turn from prior strength. If that’s the case, then the grain and milling businesses throughout the world urgently need to rethink what lies ahead in a foreign exchange world starkly different from the immediate past.

While many developments, including growth in crop production and freeing of markets, account for the rapid rise of eastern Europe as a significant competitor in global wheat trade, there is little question that the strength in the dollar had helped this area’s competitiveness in gaining market share. Almost more than any of America’s other competitors in pursuit of global grain business, eastern Europe benefited from currency relationships that allowed its grain to be offered at very competitive levels, while still realizing good returns for domestic farmers. Whether the sudden dollar reversal this year will slow or even halt the growth in export volumes from these nations is undecided at this moment, but the likelihood of such an outcome presents a new reality to understanding future patterns of global grain trade.

Essential to appreciating how these extraordinary currency moves may impact trade is knowledge of what has caused the dollar to plunge by an amazing 10% in the first quarter of this year. Most students of exchange markets credit the weakness in the U.S. stock market, exacerbated by a rising loss of confidence in corporate governance and accounting, as the primary force in undermining the previous strength. As U.S. equity prices have plunged, foreign investors have cut back significantly on purchases of American stocks and bonds, and it is this development that has accentuated concerns about the current-account deficit. The latter, which refers to payments due from the U.S. principally to foreign owners of debt obligations, is particularly worrying because of the way it also affects governments in their economic policies. The leaders of both the eurozone and Japan have expressed concern over this development.

From the viewpoint of American industry, dramatic weakness in the dollar means increasing difficulties in attracting foreign capital for investment in the U.S. At the same time, U.S. companies — manufacturers of equipment as well as grain merchants — may find it easier to develop export business, in contrast to the restraints on foreign sales imposed in previous years by exceptional dollar strength. Similarly, foreign manufacturers, particularly those without bases in America, may find the development of business with U.S. companies to be an increasing challenge. Currency fluctuations also traditionally have an important influence on levels of profitability and thus on the willingness of companies to invest in new technology and processes. Weakness in the dollar may increase profit margins for American companies, stimulating a new willingness to invest in order to increase efficiency, and not just to grow capacity, which has been a traditional cause of problems for industries like American flour milling.

That the dollar’s new weakness coincides with the start of global trade negotiations is particularly telling for grain and food and agricultural policies. To some commentators, the dollar’s strength overshadowed many of the trade-liberalizing steps undertaken in the wake of the last negotiating round, providing, for example, unfair benefits to farmers in both western and eastern Europe. Now that the dollar has turned downward, dislocations will still be felt, but they will be of a different nature, once again underscoring the certainty of change when it comes to the factors at work affecting world business in grain and grain products.

Morton I. Sosland