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How a ‘strong dollar’ causes low ag prices and how to fix it

How a ‘strong dollar’ causes low ag prices and how to fix it

Michael Stumo

High Plains/Midwest Ag Journal, August 20, 2018

In recent months, President Donald Trump has imposed much-needed tariffs to address China’s 24-year trade war and commercial espionage campaign targeting America. Instead of changing course, China has imposed tariffs on fairly traded goods from the United States. While President Trump’s moves are aimed at helping U.S. manufacturers, we need additional strategies to help farmers and ranchers.

America’s manufacturers and farmers happen to share a major export problem—an overvalued U.S. dollar that make their goods more expensive overseas. If Congress and the administration can buckle down to pass legislation addressing this “strong dollar,” we could see corn, soybean and beef prices increase by 25 percent or more.

In 1994, China devalued their currency by 40 percent, and has maintained that undervaluation for two decades in order to grow production, exports and their overall economy. At the same time, the U.S. has struggled with an overvalued dollar that has caused persistent trade deficits. According to a study by the Coalition for a Prosperous America, the U.S. dollar was overvalued by roughly 25 percent last year. This serves as a 25 percent tax on U.S. agricultural exports and a 25 percent subsidy for imports.

In an April report, the U.S. Treasury Department noted the dollar’s exchange rate is not adjusting as it should. Why? Because foreign investors are continuing to buy massive amounts of U.S. securities and financial assets. And all of this incoming capital has the unfortunate side effect of driving up the value of the dollar. Consequently, U.S. goods and services exports become less competitive in global markets.

There is a long history of currency problems directly reducing prices received by U.S. farmers and livestock producers. In 1949, currency devaluations by America’s major trading partners left the U.S. dollar overvalued. This led to an extended period of low prices and hardship for U.S. agriculture. The solution was a government-supported program of land retirement. Some 60 million acres of land were taken out of production over the next two decades.

In the 1970s, President Richard Nixon took a series of actions to lower the value of the dollar. As a result, farm incomes took a sharp upward turn in a boom that extended through the end of the decade.

A rising dollar again hit the nation’s farmers hard in the early 1980s causing a farm crisis. Land values collapsed, farm income shrunk, and thousands of farmers faced foreclosure. It was only when the Reagan administration took action with the 1985 Plaza Accord—which forced down the value of the dollar—that U.S. agricultural industry began to recover.

Recent research by three agricultural economists from Purdue University documents the strong connection between the prices of corn and soybeans with the value of the U.S. dollar. They found that a one percent drop in the value of the dollar would stimulate a roughly 2.53 percent increase in the price of US corn.

To win the ongoing trade conflict, President Trump should implement a policy to lower the dollar exchange rate to a competitive price that would balance trade and increase agricultural commodity prices.

Thankfully, Washington is becoming aware of the dollar issue. Some in Congress are considering legislation that would require the Federal Reserve to impose a modest “market access” fee on excessive incoming foreign capital. That would help to gently lower the dollar price to a competitive level, allowing US farmers to export more. Such legislation could work particularly well if it also contained measures to respond when countries deliberately weaken their own currencies in order to boost their economies at America’s expense.

It’s time to add exchange rate management to America’s policy arsenal to make our agricultural products more cost-competitive globally and to offset any harm from foreign tariff retaliation. And so, as trade policy makes headlines in Washington, agricultural producers should press for action to help rebuild rural America.

—Michael Stumo is CEO of the Coalition for a Prosperous America, a nonprofit organization representing the interests of 4.1 million households through agricultural, manufacturing and labor members.