Dollar Weakness : Think Grains | Blog

A weaker Dollar has historically been supportive for US grain prices. Investors expecting further US Dollar weakness might consider investing in grain commodities.

The dollar/grain commodity relationship is relatively straightforward. Globally, commodities are often priced in dollars. A weakening US dollar means that US exports become more competitive. For example, if the US Dollar depreciates against the EURO, then it will take fewer EURO’s to purchase the same amount of goods priced in dollars. All else being equal, the increase in demand for US goods due to dollar weakness theoretically would support US commodity prices. Looking at the Dollar Index (DXY) one can see that the Dollar has been under pressure recently. If the Dollar continues to weaken there may be the opportunity to watch this relationship play out in real time.

The fundamental case for continued Dollar weakness is largely tied to the everlasting economic principle of supply and demand.

Since the commencement of the Covid-19 crisis, US Dollar supply has rocketed higher. The Federal Reserve has pledged trillions of dollars to prop up the US economy as multiple States issued “Stay at Home” orders. Presumably, the Fed has opted to err on the side of creating too much money.

That is, too much money relative to dollar demand. The Government may try to print money infinitum, but is there an economic demand for that money? Are businesses looking for loans to expand? Are entrepreneurs raising funds for new ventures? Are homebuilders borrowing for new developments? These are some examples of productive economic demand for Dollars. If this demand is absent, then the Fed runs the risk of having too much money in the system relative to demand.  

It is likely that at some point the Fed will need to remove “excess liquidity” (i.e. take dollars out of circulation) to balance supply and demand, keeping a lid on inflation expectations. Consider though that the “inflation genie” may already be out of the bottle and it might be impossible to get him back in.

Against this backdrop, commodity investors with whom we have spoken have taken an interest in gold; and for good reason. Like grains, the price of gold stands to benefit from a weaker dollar. What is more, gold has been perceived as money since 500 BC. It is very unlikely that perception will change. Consider however, that humans have been trading grain commodities since 11,500 BC. Consider too that gold’s value is mostly based on perception versus utility. Grains are valuable first and foremost because they are food. As such the factors contributing to the supply and demand of gold and grains are vastly different. 

These differences provide interesting opportunities for investors looking to diversify a portfolio. Over the last 20 years wheat, corn and soybean prices have all exhibited lower correlations with the S&P 500 when compared to gold. What is more, the Standard and Poor’s grains index has outperformed equities in 9 of the last 10 bear markets (see details of our analysis on pages 3 & 4 of our Grains in Your Portfolio Presentation found here: https://teucrium.com/news-insights/157

Both grains and gold potentially stand to benefit from a weaker dollar. Those looking to diversify their portfolios while hedging dollar weakness may wish to consider grains.