Brexit threat to ag prices not over yet

25.07.2016

Crop markets have yet to feel the full force of Brexit's knock-on effects, a leading agricultural economist warned, unveiling a survey showing the UK's vote to quit the EU had already set back the US rural economy.

Ernie Goss, economics professor at Creighton University, who has been for six years undertaken a monthly survey of the health of the US rural economy, said that the UK's vote in June to leave the European Union had fuelled a strong decline in confidence in US farming areas.

A confidence index Mr Goss compiles from a survey of bank chief executive in 10 major US agricultural states - including Iowa, the top ranking corn and soybean producer, and Kansas, the biggest wheat grower – "plummeted" to 32.3 this month, from 42.8 in June, and straying even further from the neutral 50.0 level.

"While bankers already had a downbeat assessment of the rural economy, the British vote to leave the EU (Brexit) softened the outlook even more," Professor Goss said.

Long process

And there were further shockwaves to come from as the UK's decision is enacted, with uncertainties thrown up by the process likely to encourage flight to the dollar, viewed as a safe haven currency.

A stronger dollar in turn depresses the value of dollar-denominated exports, such as many agricultural commodities, making them less competitive.

"Like bankers, I expect Brexit, once begun, to increase the value of the US dollar with a resulting decline in agriculture commodity prices," Professor Goss said.

The comments suggest that Brexit could for some time present a challenge for agriculture markets, given that Theresa May, the new UK prime minister, has said the country will not until next year trigger so-called Article 50 which kicks off a process on EU exit negotiations, with a deadline of two years.

Sterling vs dollar contracts

Already, the swings in foreign exchange markets fuelled by Brexit have prompted vast disparities in ag commodity price performances – in local currency terms.

Sterling-denominated cocoa futures, for instance, as traded in London have risen by 5.2% since the vote to stand at £2,383 a tonne in afternoon deals on Friday, supported by depreciation in the pound.

New York's dollar-denominated equivalent, meanwhile, has tumbled by 9.3% to $2,888 a tonne.

On the grain markets, London feed wheat futures for November have risen by 6.9% to £123.10 a tonne, earlier on Friday hitting a five-month high of £125.50 a tonne.

Chicago soft red winter wheat futures, the world benchmark, have dropped by 11.4% to stand at $4.12 Ѕ a bushel for September delivery, not far above their contract low, with pressure also being provided by a bumper US crop, besides ideas of ample world stocks.

At UK grain trader Gleadell, David Sheppard said that "in general producers have sold little and, given the oversupply of feed grains, it remains difficult to find a reason why grain markets should rally significantly".

In the UK itself, business had been "lacklustre, to say the least".

Impact of ag price falls

Professor Goss flagged the importance of agricultural commodity prices in the rural US economy, for signs of recovery had evaporated this month, with an overall sector index falling to 39.8, from 43.9 in June.

"Over the past 12 months, farm prices have fallen by 9%, and livestock prices are off by 16%," he said.

"These weak agriculture commodity prices are pushing the overall rural mainstreet economy lower."

An index covering the farm equipment sector fell to 10.7, from 12.8 in June.

"Weakness in farm income and low agriculture commodity prices continue to restrain the sale of agriculture equipment across the region," Professor Goss said.


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