February 9, 2023
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Exchange rate fluctuations to blame for drop in net farm income


Changes in dollar strength and exchange rates have been a major factor in the drop in net farm income, even as agriculture revenue has doubled, said Michael Swanson, senior economist for Wells Fargo.

“We often get buried in a micro view of our world … and then we get blind-sided by some other trend that we weren’t anticipating,” Swanson said at the 2016 Annual Agriculture Forum in Oxnard on March 22. “There’s pressure in the market right now.”

Gross domestic product growth in the U.S. is strong compared to other markets like Japan, the United Kingdom, Russia and Brazil but China, as the center of many export markets, is skewing returns for growers.

American agriculture is poorly distributed throughout the export market, he said. In the tri-counties in particular, more than 70 percent of exports go to the top five or six markets with a very strong distributional focus in Canada and Asian countries.

Imports are even worse. The concentration of agricultural imports from South American countries make the industry particularly vulnerable to changes in currencies.

“It’s not about agriculture,” Swanson said. “It’s about all those giant macroeconomic, global economic phenomena that are going on.”

Comparing the value of the dollar between commodities is another way for growers to anticipate trends, he said, highlighting the difference between the soybean dollar, which is exported to China, and the pork dollar, which goes primarily to Japan and Canada.

“The dollar doesn’t get strong and stay strong, it doesn’t get weak and stay weak. It cycles because there’s a feedback loop between all these currencies,” Swanson said.

Agriculture should keep a closer eye on these factors as well as potential opportunities they present, he said.

Recent years have shown a swing back to a net trade deficit in agriculture and “it’s going to get bigger,” Swanson said.

“As the U.S. economy grows better and faster than some of our competitors and the dollar gets stronger, this deficit is going to get bigger … I don’t know if that’s bad news or not but it is a reality we have to deal with.”

Wages drive inflation

The payroll expansion rate has been far outstripping population growth and labor participation, which should indicate a rise in inflation but hasn’t.

Part of an “unexamined feedback loop” between wages and capital, the ultra-low interest rates have distorted land values and property values instead of spurring businesses to make investments as intended, Swanson said.

“If we want payroll to be expanded at 1.5 percent per year, we have to get this labor force number to grow at 1.5 percent as well,” he said. “Wages have to change. Wages are the single biggest driver of inflation. That’s why the dollar has shown a lot more dynamics than almost all of its competitor currencies.”

Capital improvements have also mainly increased automation as agriculture changes from a labor-intensive industry to an input-intensive one.

“When you look at this business, the future of agriculture is about intermediate factors you purchase from high-tech companies to make your existing facilities more productive,” Swanson said. “Labor is not the future of agriculture.”

Protecting against loss

Other presenters advised growers on how to protect their companies from losses like spoilage and contamination.

James Rogers from Apeel Sciences advised growers on where they’re losing product to spoilage and the future needs of the global economy for food while resources like water get increasingly scarce.

Detection of contamination is also a high priority for growers, said David Murray, a partner at A&W Sales Co., which recently handled a large salmonella outbreak traced back to its cucumbers.

“What was good enough 10 years ago, 20 years ago, five years ago, is no longer good enough,” Murray said.

As consumer expectations have changed, detection capabilities, transparency and metrics have all undergone transformations, making the standard more about a culture of safety than simple regulatory compliance, he said.

Following that, Mark LeBlanc, vice president of crisis management at Crum and Forster, advised attendees about contamination insurance to cover costs of testing, notification, facility downtime, rehabilitation and consulting.

Imports and exports can still be a blind spot in these situations, he said, as governments and international companies respond differently and adhere to different regulations.

“We’re seeing companies scared of the fact that they are selling products to governments and companies and they can’t quite predict how the government regulators are going to react,” LeBlanc said.

• Contact Marissa Nall at mnall@pacbiztimes.com.