Modern economies are complex. Consider how news from the last week will affect the Minnesota economy.
One development is that the U.S. dollar continues to rise in value compared to the euro. Another is the rise in world wheat prices, because of adverse weather in the Northern Hemisphere. Then there is the continued slowing of the Chinese economy. Finally, ocean shipping rates continue to be low, and increasing numbers of ship owners are going bankrupt.
Effects of the more expensive dollar are pretty straightforward, at least taken by themselves. The basic rule is that a “stronger” currency is good for consumers, because it puts downward pressure on prices. However, it is bad for producers, employment and national output because a more expensive or “stronger” currency makes a nation’s exports more expensive and its imports cheaper. That not only hurts exporters, but also any firm that competes, even potentially, with imports.
The dollar now buys about 23 percent more euros than it did at its low in 2008. So automobiles, like Volkswagens, that are produced in the eurozone, have a much better competitive advantage. Minnesota soybeans, corn and wheat are correspondingly more expensive for potential European buyers, so farmers here take a hit. Ditto for manufacturers of heart valves, pacemakers and myriad other high-tech products.
Of course, some of the larger med-tech companies have manufacturing operations in Europe, so their costs don’t increase. But when repatriated to their home offices, every euro of their profits now brings fewer dollars than in recent years.
However, while a pricier dollar hurts farmers, “all other things being equal,” as economists are wont to say, rising ag commodity prices may offset this. And Europe is a much less important ag importer than it was even 20 years ago, so a weaker euro is not as important.
The slowing Chinese economy also is reducing that nation’s imports. This is forcing particularly sharp drops in iron ore and coal prices and shipments. Our country’s exports of these products to China are small compared with Australia’s or, in the case of iron ore, with Brazil’s.
But markets for such internationally traded commodities are highly efficient, and slackening demand from China lowers prices nearly everywhere. Even though little, if any, Minnesota ore goes to East Asia, spot ore prices are dropping, and that is negative for mine employment, investment in new equipment and profits.
Weaker Chinese demand is particularly marked in coal, where some Chinese buyers have been defaulting on purchases already contracted. We don’t produce any coal in our state, but in recent years a lot of low-sulfur coal from the Powder River Basin has been shipped from Duluth-Superior. Hauling that coal has been a good business for the BNSF, which still employs a lot of Minnesotans in big railroad towns like Minneapolis or smaller ones like Staples. So falling global coal prices do have effects here, even if we don’t mine it.
However, they do benefit anyone buying coal. Yes, much coal for Minnesota power plants is procured on long-term contracts so costs don’t vary with short-run price variations. But economists always focus on the margin and when the spot price of coal falls, there are benefits to some coal consumers. Moreover, current price trends are always a factor in contract renewals.
Slowing of Chinese growth and subsequent falling commodities imports have hammered dry (non-petroleum) ocean shipping rates. (Some of this drop, however, is because of the cyclical overbuilding of ships in recent years in response to the high prices that prevailed for much of the past decade.)
But shipping is like intensive hog production. Many of the costs are fixed costs, such as the ships themselves or hog barns, that don’t vary with output. High fixed costs relative to variable costs like fuel for ships or feed for hogs means that producers don’t cut back production very much when prices slacken. This means prices fall a great deal, some 90 percent right now for certain classes of ships.
Shipping costs have nearly the same economic effect as tariffs on trade. They are a wedge between the money paid by the importer and that received by the exporter. Falling freight rates are like a tariff cut.
So, to the extent that shipping makes up a big fraction of the total cost of Minnesota exports, falling freight rates partially offset the effects of a more expensive U.S. dollar and of falling non-ag commodity prices. This fraction is very large for iron and coal, still important for farm products, but nearly zero for a pacemaker or for some high-tech plastic film product.