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CME: US Dollar the Currency of Choice

by 5m Editor
10 October 2008, at 11:18p.m.

US - CME's Daily Livestock Report for 9 October 2008.

The crash of global equity markets this October has again made the US dollar the currency of choice. With no safe harbors in sight, global investors appear to have concluded that the US has a better chance than most to weather the financial panic that is consuming markets. Demand for US denominated assets has skyrocketed. As a recent article in The Economist put it: “Worried savers may still find that they still sleep a little easier with dollars under the mattress, rather than euros.”

The sudden rise in the value of the US dollar has significant implications for the US livestock and poultry industry. In a recent edition of the DLR we pointed out that US pork, poultry, and to a lesser extent beef producers, have become increasingly dependent on exports to move a portion of annual output. Even when demand was sagging in the domestic market, US producers were able to pad margins as global commodity demand heated up and a weak dollar yielded some great returns, often on items that have only marginal value in the US.

Mexico is the top US meat export market when looking at combined beef, pork and poultry exports. In 2007, combined US exports of beef, pork, chicken and turkey meat to Mexico were 1.873 billion pounds (carcass wt. basis). On specific items, such as hams, Mexico is by far the largest export market. Indeed, part of the reason for the spike in ham prices (and consequently pork cutout) prices this summer was strong demand for hams out of Mexico. The value of the dollar against the peso has spiked in recent days and this does not bode well for US pork exports in general, and especially those ham exports to Mexico. It is a big part of the reason why the outlook for pork in Q4 has suddenly become much darker. With smaller export outlets, pork packers will likely find it increasingly difficult to stay ahead of the expected record slaughter levels.

But the shift in currencies does not only affect the outlook for US beef, pork and poultry exports. The US is a large beef importer and we suspect that US beef imports will begin moving higher in the coming months if recent currency trends are sustained. US beef imports last spring and summer were sharply lower due to the decline in the value of the dollar and strong demand from other markets, particularly Russia. But Russian buyers suddenly have disappeared, not just from the US but also from South American and Australian markets. With world beef demand slowing and a strong US dollar, it is only a matter of time when US beef imports begin to trend higher.



5m Editor