Hay exports from the U.S. to Japan have been exceptionally weak. Japan represents 29% of U.S. hay exports. Comparing January through August of 2023 to the same period a year earlier, exports are down 38% or 351,000 metric tons. Exports can be further split out into alfalfa and grass exports. Alfalfa exports to Japan are down 42% or 166,000 metric tons in the first eight months of the year. Likewise, grass exports are down 35% or 185,000 metric tons in the same period. Many market factors are driving slower exports but the largest factor is exchange rates.
Source: U.S. Census Bureau
Exchange rates are the rates at which one currency can be exchanged for another. They fluctuate due to various factors such as inflation, interest rates, and political stability. Trade involves the exchange of goods and services across borders. Exchange rates affect trade by influencing the prices of exports and imports. A strong currency makes imports cheaper but can hurt exports by making them more expensive for foreign buyers. Conversely, a weak currency can boost exports but make imports expensive. In this case, the strong U.S. dollar is making hay more expensive for Japanese buyers. As an example, timothy with a delivered price of $450 per metric ton and an exchange rate of ¥110 per dollar would equate to ¥49,500 per ton. In October 2023 the yen traded fractionally below ¥150 per dollar. This is the most expensive the dollar has been for our Japanese customers since May of 1990. The same delivered price of $450 per ton at ¥150 per dollar would cost the Japanese customer ¥67,500, or 36% more. This is the same as the price of the hay increasing to $614 per ton delivered at ¥110 per ton. The stronger dollar (or weak yen) has the exact same effect as a $164 per ton increase in the price of the hay to the end user.
Factors affecting the Japanese Yen (JPY) to U.S. Dollar (USD) exchange rate include:
- Interest Rates: Higher interest rates in the U.S. attract foreign capital, strengthening the USD against the JPY.
- Inflation: Lower inflation rates in Japan can strengthen the JPY against the USD.
- Economic Indicators: GDP growth, employment data, and trade balances can influence the exchange rate.
- Political Stability: Stability and governance quality can attract or deter foreign investment, affecting currency value. (Think government shutdowns)
- Market Sentiment: Investor perception of economic prospects can impact currency demand.
- Trade Relations: Trade imbalances between Japan and the U.S. can put pressure on exchange rates.
- Central Bank Actions: Monetary policy decisions, like quantitative easing, can influence currency value. The U.S. Federal Reserve and Bank of Japan play critical roles in setting monetary and interest rate policy.
- Global Events: Natural disasters, geopolitical tensions, and other events can create short-term volatility.
- Speculative Activities: Currency trading and market speculation can drive short-term changes in the exchange rate.
- Currency Reserves: The level of foreign currency reserves held by each country's central bank can also be a factor.
Understanding these elements can provide insights into the fluctuating JPY/USD exchange rate and by extension, demand for export hay. Until there is a change in the exchange rate, demand for hay from Japan will be muted.