438 ■ ANGUSJournal ■ March 2007

Between February 2002 and May 2006, the U.S. dollar depreciated almost 18%

against foreign currencies. While thisdepreciation has helped boost U.S. exports toan all-time high, the positive effect has notreached its full potential. Even though thedollar has depreciated against the currenciesof some U.S. trading partners, it has beenroughly fixed against the currencies of otherkey trade partners, thereby mitigating gainsin export sales. Trade policies and imperfectmarket conditions in developing countrieshave further cut into the gains realized fromthe depreciation of the dollar.

The dollar has depreciated about 30%since 2002 against major developed-countrycurrencies, such as the Canadian dollar, theeuro and the Korean won. But against otherAsian currencies, it has been a different story.

Since 2002, the dollar has depreciated1.9% against the Malaysian ringgit and4.7% against the Singapore dollar; itappreciated 5.2% against the Japanese yen.In real terms, the Chinese yuan hasappreciated less than 1% against the dollarover the same period.

These modest changes partly reflectpolicies of major Asian countries that keeptheir currencies undervalued relative to thedollar and thus do not permit a correction totrade imbalances.

Stimulating export demandSince 1970, several substantial periods of

persistent appreciation or depreciation ofthe dollar have mirrored correspondingfluctuations in U.S. agricultural exports.When the dollar appreciates against foreign

currencies, U.S. exports cost more in foreignlocal currencies and thus demand for themdeclines (see “Exchange rates defined”).

Conversely, a depreciation of the dollarincreases U.S. agricultural competitiveness bylowering prices of U.S. products in foreignmarkets. For example, the period 1970 to1980, a time of high growth in U.S.agricultural exports, was accompanied by along period of depreciation of the U.S. dollar.

Effect can be blunted The decline in the U.S. exchange rate

since 2000 has helped boost U.S. agriculturalexports to an all-time high of close to $70billion per year. However, almost all of thedepreciation is accounted for byappreciation of currencies in developedcountries such as the European Union (EU),

@Above: The depreciating U.S. dollar combined with strong economic growth in developing countries has increased the competitive advantage of U.S.agriculture and stimulated export demand for U.S. agricultural products.

Weaker DollarStrengthens

U.S. AgricultureThe depreciation of the dollar

has helped lift U.S. agricultural exports to record-high levels, despite the gains

falling short of their full potential.

by Mathew Shane and William Liefert

Dollar Demands 03.07:Feature 2/10/07 4:29 PM Page 0438

March 2007 ■ ANGUSJournal ■ 439

Australia, Canada and South Korea. Mostdeveloping countries have followed policiesof depreciating their currencies in real termsagainst the dollar.

Developing countries’ commodities andgoods have thus become particularlycompetitive in the U.S. market, while U.S.agricultural exports have become moredifficult to market in those countries. As aresult, these countries (mostly in Asia) havegenerated substantial trade surplusesmirrored by trade deficits for the U.S. Anunderlying reason for the large U.S. tradedeficits is the systematic undervaluation ofdeveloping-country currencies and thefunneling of those trade surpluses intodollar-denominated financial and real assets.China has pursued such a policy mostpersistently.

In 1978, when China began liberalizing itseconomy, it followed the model of Japan andKorea and pursued an export-led

development strategy. Between 1980 and1995, China devalued the yuan against thedollar in both nominal and real terms. Theyuan fell from 1.5 to the dollar in 1980 to8.35 to the dollar in 1995, resulting in a realdepreciation of two-thirds.

Between 1995 and 2005, Chinamaintained a fixed yuan-to-dollar exchangerate of approximately 8.3-to-1. Only afteraccumulating nearly $1 trillion in dollarreserves and with great political pressurefrom the U.S. and the EU did China agree tolet its currency appreciate. However, whilethe nominal value of the yuan hasappreciated to around 7.9to the dollar, thedownward move has yet tohave any noticeable effecton Chinese export levels.

It is anticipated Chinawill allow some realappreciation of itscurrency during thecoming years, although at a slow andmeasured pace.

An appreciation of the Chinese yuan iseven more critical to boosting U.S. exports toAsia because most of the other Asiandeveloping countries, including Taiwan,Thailand, Malaysia, Indonesia and thePhilippines, will allow an appreciation of theircurrencies only if the yuan appreciates. Thispolicy was most likely shaped by the effects ofthe Asian financial crisis of 1997-1998.

Developing-country marketsImperfect markets in developing market

countries can also mitigate increases in U.S.agricultural exports resulting from thedepreciation of the dollar. Exchange ratesaffect trade to the extent that they can

influence countries’ domestic prices forproducts, at both the producer andconsumer level, and thereby change thevolume of goods produced, consumed andtraded. For example, if the U.S. dollardepreciates against other currencies,consumers in other countries will be able topay lower prices for U.S. imports and willthen buy more U.S. goods.

To remain competitive with the imports,producers within these countries will have tolower their prices, which, in turn, will leadthem to produce less.

The degree to which changes in exchangerates affect prices withincountries is called pass-through or transmission. If anexchange rate change has astrong effect on domesticprices for products, thetransmission is said to behigh; if the price effect is

weak, the transmission is low.Weak (or low) transmission can be a

problem because it blunts the relationshipbetween exchange rates and countries’domestic prices. In the case of a depreciationof the dollar, low transmission would weakenthe price signals for foreign consumers toincrease their demand for U.S. imports, andU.S. exports would decrease. Weaktransmission, therefore, works to cutcountries off from foreign economicinteraction and world markets. As a result,those countries do not maximize theirpotential gains from trade.

A number of factors can cause weakexchange rate transmission for agriculturalproducts. Governments often adopt policiesthat reduce transmission. During the postwar

CONTINUED ON PAGE 440

Fig. 1: Exchange rates and U.S. agricultural exports fluctuate together

140

120

100

80

60

40

20

01970 1975 1980 1985 1990 1995 2000 2005

Index value (2000=100)

Real U.S. agricultural exchange rate index

Real U.S. agricultural export rate index

Source: USDA. Economic Research Service. Exchange Rate Data Set and ERS estimates.

Trade policies and

imperfect markets can

also reduce the effects

of depreciation, further

diminishing gains.

Dollar Demands 03.07:Feature 2/10/07 4:29 PM Page 0439

period, many countries, including the U.S.and the EU, have pursued managed-pricepolicies for many agricultural products. Thecommon feature of these policies is thatgovernments set domestic prices for products,so changes in trade prices or exchange rateshave little or no effect on those prices.

Import quotas can also hurt transmission.If a product is subject to an import quota, adrop in the trade price or exchange rate willnot increase the quantity of the goodimported, which means the price or exchangerate change will not affect domestic prices.During the last 15 years, however, underpressure from the Uruguay RoundAgreement on Agriculture of 1994, the U.S.,the EU, and other countries have significantlyreduced policies that either prevent orweaken price and exchange rate transmission.

Low exchange rate transmission alsoresults from the weak market infrastructurethat often characterizes the broader food andfiber systems in developing and transitioneconomies. Physical infrastructure, such astransportation and storage, may beinadequate in developing countries, andthese countries also tend to lack marketinformation, rural credit and commerciallaw adequate to enforce contracts andprotect property. Underdevelopedinfrastructure isolates regional marketswithin countries from each other and cuts

them off from the world market, thusweakening the transmission of exchange ratesignals to domestic prices.

Empirical research indicates price andexchange rate transmission for agriculturalproducts is low in many developing andtransition economies, whether they are inAsia, Africa, Latin America, or countries ofthe former Soviet bloc.

One study that analyzed 56 developingcountries during a 30-year period found thatabout one-third (18) experienced almost notransmission of changes in agricultural tradeprices to domestic prices, even after allowingfor an adjustment time of five to seven years.

This group includes such important foreignmarkets as India, Bangladesh, Tunisia, Zaireand Colombia.

In the other countries, after five years, nomore than half of the change in trade priceswas transmitted to domestic prices. Thisgroup includes Pakistan, Indonesia, Egyptand Venezuela. According to EconomicResearch Service (ERS) analysis of Russia’stransition from a planned to a marketeconomy during the 1990s, trade price andexchange rate transmission for mostagricultural products in that country wasbetween 25% and 50%. (A 100%

440 ■ ANGUSJournal ■ March 2007

Weaker Dollar Strenghtens U.S. Agriculture CONTINUED FROM PAGE 439

908070605040302010

01976 1981 1986 1991 1996 2001 2006

Bill

ions

of d

olla

rs

Fig. 2: Nominal U.S. agricultural exports responded to the depreciation asexpected

Source: Foreign Agricultural Trade of the United States and USDA projections.

A nominal exchange rate is the amount of one currency that canbe traded for another. Thus, the euro-to-dollar exchange rate is theamount of euros required to purchase one dollar. For currencies withflexible exchange rates, this amount can fluctuate daily or even onan hourly basis. This exchange rate is called nominal because noattempt is made to adjust for inflation in the two economies.

A real exchange rate is a nominal exchange rate adjusted toreflect changes in relative inflation in the two economies. Thus,each nominal currency is divided by some common price index,usually the consumer price index (CPI). The base year is arbitrarilychosen, and the real and nominal exchange rates are set equal forthis year. For the exchange rates referred to in this article, the baseyear is 2000. For economic analysis, real exchange rates arepreferred and, therefore, used more often than nominal rates.

Trade-weighted or effective exchange rate indices are averageexchange rate indices across a group of countries. Trade weightsare derived by taking trade for a particular commodity orcommodity group and converting it to shares by dividing individualtrade weights for a particular country by the total across countries,so the weights add up to one.

The trade weights most often used are total merchandise exportsand total agricultural exports. Other weights can also be used, suchas country exports to the world or imports. The exchange rate indexis derived by multiplying each country exchange rate index by itsrelevant trade weight and summing them.

An appreciation of a currency occurs when the ratio of a givencurrency declines relative to the reference currency. In this article,the U.S. dollar is the reference currency. Accordingly, the euro issaid to appreciate against the dollar if fewer euros are required topurchase one dollar, that is, if the euro exchange rate goes from 1-to-1 to 0.8-to-1. A depreciation of the currency occurs when theratio of a given currency increases relative to the referencecurrency, that is, the opposite of an appreciation.

A real appreciation (depreciation) of a currency occurs when theinflation-adjusted ratio of a currency declines (increases) relativeto a reference currency. A revaluation (devaluation) is a situation inwhich the appreciation (depreciation) occurs because of specificaction taken by a country. A real appreciation (depreciation) canoccur even if nominal exchange rates do not change. This would becaused by differential rates of inflation between a foreign countryand the United States. For example, if inflation is greater in aforeign country than in the United States, this would lead to a realappreciation of the foreign currency even when the nominal ratesare fixed.

In instances where high rates of inflation are occurring in aforeign country, and where the nominal exchange rate is not beingdepreciated at the difference in the rates of inflation, the nominalexchange rates and real exchange rates move in oppositedirections. Such a situation occurred in Russia and Ukrainebetween 1990 and 1992.

Exchange rates defined

CONTINUED ON PAGE 442

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Weaker Dollar Strenghtens U.S. Agriculture CONTINUED FROM PAGE 440

442 ■ ANGUSJournal ■ March 2007

transmission is perfect, meaning that all ofthe change in the trade price or exchange rateis transmitted to domestic prices.)

Although policies within the developingand transition economies certainly accountfor some of the weak transmission, poormarket infrastructure is also a major factor.While there is evidence of some improvementin market infrastructure, suggesting that pricetransmission might be improving, the processof full market integration is one that takes along time to accomplish.

Other factors maintain demandThe depreciation of the U.S. dollar since

2002 has helped improve U.S. agriculturalexport performance, and this effect will likelycontinue for some years to come. The rise inU.S. exports, however, has fallen short of itspotential due to fixed exchange rate policiespursued by China and other key tradingpartners and weak transmission of changesin exchange rates to domestic prices indeveloping-country markets. China, inparticular, has only recently allowed its

currency to appreciate. Imperfect markets, onthe other hand, would need many years tocorrect, even if a determined effort weremade to overcome them.

As a result, the conditions that are reducingthe benefits to U.S. agriculture from adepreciating currency might be slow tochange. Yet, other longer-term factors canhelp boost U.S. agricultural exports. High-income growth in developing countries is themost important. However, pursuing andmaintaining high rates of productivity growth

Dollar Demands 03.07:Feature 2/10/07 3:42 PM Page 0442

in U.S. agriculture is equally important. Thesetwo factors combine to create a strongpotential for the future growth in U.S.agricultural exports, regardless of how theexchange rate fluctuates in the short tomedium term.

Editor’s Note: Reprinted with permission, thisarticle is adapted from the article “Weaker DollarStrengthens U.S. Agriculture” first appearing inAmber Waves, published online and in print bythe ERS.

March 2007 ■ ANGUSJournal ■ 443

Fig. 3: Developing countries have a long-term pattern of currency depreciation

160

140

120

100

80

60

40

20

01970 1975 1980 1985 1990 1995 2000 2005

Inde

x va

lue

(200

0=10

0)

China

Sub-SaharanAfrica

Latin America Southeast Asia

Source: USDA. Economic Research Service. Exchange Rate Data Set.

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