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Ups, Downs of Trade Benefit Farmers by Cookson Beecher, Associated Press Capital Press, August 22, 2008

Ag exporters to enjoy good ride for years to come, say USDA researchers

Like a bouncing ball, the value of U.S. ag exports and the value of the U.S. dollar follow each other up and down - but in a reverse pattern, according to USDA statistics.

As ag exporters know full well, the weaker the dollar, the more competitive U.S. goods are with those of other countries and the more overseas sales U.S. farmers enjoy.

In contrast, the higher the value of the U.S. dollar, the lower the amount of U.S. ag exports.

Those basic economic realities have been shaping the U.S. ag economy for decades. And it's why "for the first time in a long time, the trade deficit has gone down," said Matt Shane, senior economist for macroeconomics for USDA's Economic Research Service.

It's also why agriculture is enjoying a record income of about $90 billion.

"There's no better time for agriculture than right now," Shane said in an Aug. 18 interview with Capital Press. "The energy problem and the real estate crisis -they're all boons for agriculture."

And while farmers may be complaining about high energy, fuel and fertilizer costs, Shane said that those cost increases are generally outweighed by the higher prices farmers receive for commodities.

He cited wheat as an example - rising from $3 per bushel not long ago to $8 per bushel.

"Commodity prices are gone up far more than costs," he said.

Farmers also benefit from the demand for more energy, Shane said, pointing out that energy sources such as oil, biofuels, and even wind almost all come from farmland.

"A lot of this revenue goes to farmers," he said, referring to oil exploration, biofuel crops, and wind farms.

When the U.S. went off the gold standard, the U.S. dollar became the world's reserve currency. For countries across the globe, it was the safest "investment" bet around.

"Its value as the world's reserve currency was what was propping up the dollar's value," Shane said. "We've been exporting dollars instead of goods. People around the world have been subsidizing our standard of living."

But when U.S. banks started packaging high-risk mortgages as mortgage-backed bonds, the banks were free of any obligations - and had no incentives - to service them.

That "sub-prime" fiasco, which triggered a host of economic woes in the United States, precipitated the decline of the U.S. dollar. And as the euro's value began to rise, it became competitive with the U.S. dollar as a reserve currency.

"We're in the beginning of a "rebalancing" of currency reserves," Shane said.

China has also begun rebalancing its investment portfolio with euros and even yuans, which has put extra demand on those two currencies and thus helped boost their value.

Shane predicts that this rebalancing of currencies will keep the dollar weak in the coming years, even though just recently the dollar did see a small, but temporary, upward bounce.

Shortly after that small bounce, though, the euro rose to $1.4697 on Aug. 18, compared with the previous Friday's value of $1.4680.

The dollar also slipped to $110.17 Japanese yen from 110.56 yen.

Another boost to U.S. exports is that major U.S. ag competitors - the European Union, Australia and Canada - have seen their currencies appreciate against the U.S. dollar.

"Economic fundamentals are driving the value of the dollar down," Shane said. "We see a long-term pattern of depreciation."

Shane also predicted that even though the current situation of booming ag exports will probably level out in the coming years, the picture looks bright.

"For the next several years, we'll continue to see good times for agriculture," he said.

According to a recent USDA Economic Research Service report focusing on macroeonomic assumptions from 2008 to 2017, the world's economic growth, overall, is projected to increase at a 3.5 percent average rate between 2008 and 2017 -up from averaging below 3 percent annually between 2001 and 2007.

According to the same report, the U.S. dollar will continue to depreciate through 2011, with moderate strengthening over the rest of the projection period.

That, combined with strong global economic growth, particularly in developing countries, is expected to result in strong growth in the demand for U.S. farm exports.

In the case of U.S. ag exports, bulk commodities and horticultural products tend to be the most sensitive to swings in the U.S. dollar's value because they face more global trade competition.