Weak currencies could boost agricultural export markets

WEST LAFAYETTE, Ind. — Exporting nations like the United States are finding that weaker currency spells stronger trade opportunities. That is, if their monetary moves don’t first lead to a trade war, said two Purdue University agricultural economist.

At least three major exporting countries — the United States, China and Japan — have made direct or indirect moves to depreciate their currencies, which might make their exported goods less expensive in foreign markets. Brazil could soon follow suit.

The U.S. likely will see record agricultural exports in the year ahead, said Philip Abbott and Chris Hurt. For the year to date, the U.S. is running a $600 billion trade deficit.

Concern

Some nations view weak exchange rates as a way to stimulate export activity and, thus, their general economies, the economists said. It could backfire, however, if more countries jump on the currency devaluation bandwagon, they added.

“Once everybody does it, it doesn’t work and it becomes costly,” Abbott said. “You get the effect of prices of goods going up and higher inflation without the benefits of greater economic output and job generation. In the long run, everything becomes more expensive and you lose the gains from trade.”

Hurt said, “There’s the danger of getting into trade wars. Now that countries are trying to get a competitive advantage by manipulating their currencies, it could result in retaliation from other countries. We must not go in the direction of trade wars, which could reduce economic activity for the entire world.”

Rules

The World Trade Organization does not specifically prohibit currency manipulation, although some trade experts consider it a form of export subsidy, which is forbidden by the WTO, Abbott said. The U.S. dollar has lost 40 percent of its value since 2002.

In just the past three weeks alone — and more significant, Abbott said — the European euro gained about 16 cents in value to the dollar. One euro is now worth about $1.40.

“This will tend to increase U.S. exports to the Euro zone,” Hurt said.

Loose monetary policy by the Federal Reserve has pushed down the dollar’s value, Abbott said. The Fed has taken action to keep interest rates near historic lows to get the economy moving, he said. Japan attempted to weaken its yen to bolster its exports and overall economy.

Tactics

The Japanese cut short-term interest rates to zero percent and long-term rates to 1 percent. The island nation also sold yen and purchased U.S. dollars on the open market. China has used a weak yuan for years as an economic development strategy, Abbott said.

Beijing purchases U.S. Treasury bills with its export surplus as an investment instrument, in part because it lacks investment alternatives within China’s domestic economy, he said. European nations now face a strong euro and could begin taking steps to weaken that currency.

Should multiple nations employ that strategy simultaneously, it could lead to an environment conducive to trade-killing tariffs, Abbott said. “What scares everybody is that this is reminiscent of the Great Depression,” he said.

“The United States imposed the Smoot-Hawley tariffs in 1930 and then other countries retaliated with tariffs of their own. Many economists believe it made the Great Depression more severe and last longer.

“One way you could bring about a double-dip recession is by adopting tariffs, which is what some people are talking about right now.” The devalued U.S. dollar will be good for the agricultural sector, Hurt said.

“A weak dollar has a tendency to increase agricultural exports and, thus, increase farm commodity prices,” Hurt said. “It means a favorable time for large exporting sectors like agriculture. There are good margins for the cropping sector right now.

Recommendation

Producers should consider pricing the 2010 crop now and perhaps look at starting to price some of the 2011 crop, as well.

“They also should keep in mind that the last time we had a major escalation in crop prices was 2007-08, when we also saw a major escalation in prices of inputs. Fertilizer, in particular, is one input that most producers might like to get prices locked in for 2011 and 2012, as a weak dollar also tends to increase fertilizer and fuel prices.”