Currency ghost is haunting the farm again

The potato market has collapsed. Pig prices have plummeted in recent weeks, and dairy prices are also trending downward this summer. While each market has its own dynamics and causes, there's a common denominator that's contributing to the price decline: the rapid rise of the euro. The currency specter on the farm is back.

Farmers and analysts often focus on grain yields, slaughter numbers, and milk volumes, but the currency market is just as important a factor in sentiment. Exporters have been discussing this for some time, and it's becoming increasingly clear: the rapid rise of the euro is starting to weigh on them. This is particularly unfortunate this year, especially now that Europe is being plagued by French fry surpluses and overflowing granaries. Milk powder stocks have also been so substantial for some time that overseas export demand is essential to revitalize the market.

Flights in euros
The euro-dollar exchange rate recently climbed above $1,17, its highest level in three years. A 15% increase in just a few months is also unprecedentedly fast for currency pairs. In recent years, the exchange rate has fluctuated well below its long-term average, but it is now well above that. This is not so much due to a strong euro, but rather to the dollar's weakness.

(Institutional) investors have less confidence in the US, partly due to President Donald Trump's protectionist policies. As a result, they're seeking refuge in the euro. This, incidentally, breaks with the tradition of holding extra dollars during times of geopolitical unrest. Deep down, Trump favors a strong currency, but a weak dollar suits him better at the moment. So you won't hear him complaining. 

Headwind for agricultural exports
The strong euro is increasingly creating headwinds in the agricultural sector. FrieslandCampina It almost stopped short of issuing a profit warning, but during last week's annual figures presentation, it made it clear that the second half is unlikely to be nearly as good as the first. The strong euro was specifically cited. Grain exporters, potato processors, and slaughterhouses that also have to serve the global market are in the same boat. Hedging risks can often only partially mitigate the damage, especially if the current situation persists for a while. 

A stronger euro also has advantages, of course. Feed companies, for example, can obtain raw materials more cheaply, which translates into lower feed prices. Especially now that there's an abundance of grain in Europe, a further decline is expected. The same applies to fertilizers and packaging materials. Booking shipping containers is also generally done in dollars, making them cheaper for European companies. A strong currency is therefore beneficial for combating the still-high inflation in the eurozone. 

Forgotten risk
Yet, the strong euro is more of a curse than a blessing, given the agricultural trade surpluses we experience. This is especially true for the Netherlands, the second-largest exporter of agricultural goods in the world. In recent years, the euro has been relatively weak, partly due to financial problems in Southern European countries. This has benefited the continent's northern countries. While some in the agricultural sector long for the guilder, this would be a disruptive factor in terms of exports. Economists believe that the guilder would likely be stronger than the euro is today, due to the country's relatively strong and stable economic position. 

Currency risk is sometimes called the "forgotten risk" for farmers, but it's currently making a comeback. The problem is that it's extremely difficult to manage, especially because the effects on the farm are usually delayed and unclear. Currency fluctuations aren't a natural phenomenon, but monetary policy. And that's something farmers and their supply chain have to deal with. 

Wouter Job

Wouter Baan is editor-in-chief of Boerenbusiness and Food Business. He also closely follows the raw materials markets and focuses on animal proteins such as dairy and meat. He regularly interviews leaders from the agricultural sector and the food world.

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