How the Dependence on the USD is Affecting the Global Agriculture Industry

The significance of the USD in agricultural trade cannot be overstated, as the currency remains dominant in global commodity markets. Since international shipments are quoted in USD, suppliers receive and convert their payments to the local currency, while buyers purchase USD to make payments. As a result, any fluctuations in the exchange rate significantly affect profit margins on either side. In 2023, certain currencies, such as the South African Rand (ZAR), experienced bearish trends, while others, such as the Mexican Peso (MXN), witnessed gains against the USD.

In the case of Mexico, the MXN has been strengthening in recent months, reaching 17.8 against the USD on May 19, a 10.7% gain compared to 19.9 the previous year. As a result, the MXN has been one of the strongest currencies against the USD for the past two years. So far, the main bullish driver of the MXN has been its high reference interest rates, currently at 11.3%, implemented in response to a hike in US reference rates.

Source: Tridge, US Bureau of Labor Statistics

Many Mexican producers import inputs, such as fertilizers, which are quoted in USD. A strong MXN favors them as they can now purchase more of those inputs with the same amount of pesos. However, when exporting their agricultural products, Mexican producers receiving the same amount of USD convert them to fewer pesos, which is unfavorable as it gives them less MXN to settle production costs and wages. Some producers who bought their inputs months ago with a higher exchange rate to the USD are now selling their output at a lower exchange rate, experiencing a significantly lower rate of return. According to Tridge, this has been the case for some tomato farmers in Sinaloa. The farmers that bought their raw materials in May through September of 2022, when the USD was trading for MXN 20-21 are now selling their produce in USD, currently trading at around 18 pesos.

The ZAR has opposed the bullish trend of the MXN. The agricultural sector in South Africa, which is the largest agriculture trader in Africa, can be described as a USD-based industry, as the value of the ZAR against the USD affects everything from inputs to genetics and output prices. On May 19, the ZAR dropped to 19.5 against the USD, the lowest in history and the last significant drop since April 2020 when the ZAR fell to 19. From May 2022 to date, the ZAR has depreciated by 22.7% against the USD. The main inflation drivers are investor concerns following reports of SA providing arms to Russia and the crippling impact of the prolonged power crisis in the country. The weakening of the ZAR is a double-edged sword for the country's agricultural sector as it increases ZAR-based prices of export commodities. It will also affect most input costs as the majority of agriculture inputs in the country are imported. 

Source: Tridge, US Bureau of Labor Statistics

Some countries are calling for a shift away from the USD to remedy the impact of exchange rate fluctuations of their local currencies against the USD. China, the world's second-largest economy, is one of the most active players pushing for this shift, followed by other key industry players such as Brazil, Russia, and the EU. Additionally, at the ASEAN finance ministers and central banks meeting in Indonesia in March 2023, the idea of limiting the reliance on USD in favor of settling contracts in local currencies was tabled. In April, the Indian Ministry of External Affairs (MEA) also announced that India and Malaysia would begin settling their trade contracts in the Indian rupee. In Q1 2023, Brazil and Argentina started preparations for a common currency, creating the world's second-largest currency bloc.

Despite these efforts, it is unlikely that the USD will be replaced as the leading currency in global agricultural trade in the next three years, owing to the large amount of reserves needed for this to occur. According to the International Monetary Fund , over 58% of global reserves are held in USD, more than double the share of the EUR, the second most-held global currency.

Source: Tridge, IMF

The ZAR is expected to remain on a bearish trend for the coming month as the power crisis in South Africa is set to continue. Meanwhile, if the MXN continues to strengthen, Mexican producers could increase their prices in USD to maintain their margins in MXN.

For further reading, follow the links below:

1. Webinar Recap: Currency Risks and Strategies in Agricultural Trade Amid Uncertainty

2. Webinar Recap: How Currency Volatility Impacts the Agriculture Industry