What a Strong Dollar Really Means

If you've been following the economic news, you may have heard about a letter the Republican congressional leadership sent to Federal Reserve Chairman Ben Bernanke on Monday, urging him to avoid any action that could further weaken the dollar. I'll leave it to my colleague Morgan Housel to debate whether a strong or weak dollar is good for the economy as a whole. But one thing I can tell you is that a strong dollar is not good for certain parts of the economy -- namely agriculture.

Strength in weakness
Since the beginning of September, markets have become increasingly worried about Europe, with speculation ranging from a Greek default to a full-blown banking crisis. During this time, the dollar has strengthened considerably, as investors fled uncertain Europe into slightly-more-certain America, boosting the dollar 5% against the euro. But not many have discussed that at the same time, investors were also fleeing certain emerging markets, notably those in South America. So far this month, the dollar is up 5% against the Mexican peso, 6% against the Chilean peso, and 12% against the Brazilian real.

As the dollar strengthens, it has the effect of raising the price of exports from the United States. That's great if you export something that can't be found elsewhere, but if you're a farmer in the United States trying to sell things like corn or soy, you're competing with Brazilian farmers who sell the exact same product. China is expected to import 2.5 million tons of corn this year, but it doesn't care where it gets it. If a strong dollar raises the price of U.S. corn, China will get what it can from Brazil and Mexico. Farmers in the United States know this, so to stay competitive, they must lower the dollar-denominated price of their goods.

This situation helps to explain why the price of corn has been falling over the last few weeks, despite increasingly dire news about this year's crop and global supplies. It also helps to explain why fertilizer companies, which are highly sensitive to ag prices, have been dropping across the board. Mosaic (NYS: MOS) and Terra Nitrogen (NYS: TNH) are down considerably, while the Teucrium Corn Fund (NYS: CORN) , an ETF that tracks the price of corn, has suffered similar losses.

The flip side
On the other hand, there are some commodities that just aren't available here. The only coffee grown in the United States is Hawaii's Kona coffee. Kona has a unique flavor and is considered something of a delicacy, and it fetches a premium price the way sparkling wine from the Champagne region of France does. This reality insulates it somewhat against fluctuations in the Arabica coffee market. But Kona production is a drop in the bucket compared with coffee production in Brazil or Mexico, so pretty much all the coffee Americans drink has to be imported.

In this case, a strong dollar is good, because companies such as Starbucks (NAS: SBUX) and Green Mountain Coffee Roasters (NAS: GMCR) can import coffee more cheaply. It's no real coincidence that the price of coffee has been falling all month as the dollar continues to strengthen.

The Foolish bottom line
Prices of agricultural commodities have fallen all across the board lately. Part of this trend is simply risk reduction, as traders sell anything they can to bolster cash in uncertain times. But a big part of it is that although the United States is one of the largest producers of many agricultural commodities, it is not the world's sole supplier. When the dollar strengthens, it becomes cheaper to import goods from other countries, which is great if you can't get them domestically. But for millions of farmers, the price of domestic items stays largely the same, while their income drops lower and lower to stay competitive on the world market.

At the time thisarticle was published Fool contributorJacob Rocheholds no position in any of the other stocks mentioned. Check out his Motley Fool CAPSprofileor follow his articles usingTwitterorRSS. The Motley Fool owns shares of Starbucks.Motley Fool newsletter serviceshave recommended buying shares of Green Mountain Coffee Roasters and Starbucks and creating a lurking gator position in Green Mountain Coffee Roasters. Try any of our Foolish newsletter servicesfree for 30 days. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

Copyright © 1995 - 2011 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.