The strong dollar has food prices on the run

Talking about shifting planting patterns and China’s hunger for corn is all well and good, but in an environment where the U.S. dollar is riding high, just about all major commodity markets are feeling the pressure. Food is not immune.

Image courtesy dtcreations: http://morguefile.com/creative/dtcreationsGrain is the foundation of the global food chain and is quoted almost universally in dollar terms. This means that as the buying power of the dollar increases, the effective price of corn, wheat and other agricultural commodities naturally declines — at least, as far as U.S. consumers are concerned.

Year to date, the DXY dollar index, which reflects the performance of the greenback against a basket of other currencies, is up a scant 0.4%, but as usual the end-to-end chart doesn’t tell the whole story.

Since the start of May, the renewal of crisis mentality in the euro zone has pushed the DXY up 2.3% to a fresh 2012 high, wreaking havoc in already-fragile commodity markets.

The DB Agricultural Commodity fund (DBA, quote), for example, is down 3.9% over the last two weeks as the retreat that began back in early March accelerates.

Corn (CORN, quote), wheat (WEAT, quote) and soybeans (SOYB, quote) tell a similar story.

While pressure on the grain and seed markets has been partially a fundamental story of unexpectedly rich supply and flat demand, it’s worth noting that metal prices (DBB, quote) have also been on the run as the dollar regains its safe haven allure.

At some point, of course, the grain futures and ETFs may get ahead of themselves on the downside and will be a viable buying opportunity again.

But for now, with nothing but resistance on the charts, only SOYB looks like it can successfully fight the dollar in the here and now.

And as for the real impact of all this in terms of emerging markets inflation, don’t applaud yet.

For people living in grain-importing countries where the local currency is deteriorating in dollar terms, there isn’t much comfort — the Egyptian (EGPT, quote) pound, for example, is weakening faster than wheat prices, which means that paradoxically the real price of bread is increasing in the increasingly fractious cities of North Africa.

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