Oversight Hearing on "The Treasury Department's Report to Congress
on International Economic and Exchange Rate Policy."

Mr. Chairman, members of the Committee, I am Bob Stallman, President of the American Farm Bureau Federation and a rice and cattle producer from Columbus, Texas. AFBF represents more than 5.1 million member families in all 50 states and Puerto Rico. Our members produce nearly every type of farm commodity grown in America and depend on access to foreign markets for our economic viability.

We appreciate the opportunity to testify on the importance of the exchange rate to U.S. agriculture. Overvaluation of the dollar is one of the most pressing international economic problems facing America's agriculture and manufacturing sectors. U.S. farmers and ranchers have been losing export sales for the past three years because the dollar is pricing our products out of the market -- both at home and abroad. In addition, the higher exchange rate of the U.S. dollar has resulted in rising agricultural imports due to increased purchasing power. The purchasing power of the dollar grew 21 percent from 1995 to 2000 in comparison to the exchange rate value of those nations that supply food to our country.

Agriculture is one of the most trade dependent sectors of our economy. Our sector has maintained a trade surplus for over two decades, but that surplus is shrinking. One of the primary factors affecting our declining trade balance is the strong value of the dollar.

In addition, the value of the dollar has significantly impacted agricultural employment. According to a recent USDA study, agricultural employment lost 87,000 jobs between fiscal years 1997 and 2000, a period in which the real agricultural exchange rate was rising rapidly and U.S. agricultural exports were stagnant.

The sharp rise of the dollar since 1995 has reduced our ability to compete in foreign markets. In 1996, U.S. agricultural exports reached a record $60 billion, but declined sharply to a low of $49 billion in 1999. This decline came as the U.S. dollar strengthened. USDA estimates that 14,300 jobs are lost for every $1 billion decline in agricultural exports. The short-term outlook for agricultural exports is not expected to improve significantly. Slow U.S. and global economic growth in 2001-2002 and a strong U.S. dollar will result in weak prices for the agricultural sector, according to USDA. The continued strength of the U.S. dollar will be a primary constraint on agricultural export growth.

We are also deeply concerned about countries that engage in currency devaluations in order to gain an export advantage for their producers. The real trade-weighted exchange rates for agricultural exports from all of the major competitor countries, including Canada, Australia, Argentina, China and Malaysia, have exhibited a long-term trend of depreciation against the dollar, contrary to market fundamentals. This trend has persisted over several decades, leaving it hard to conclude that this is not a deliberate monetary policy of these and other governments.

U.S. agriculture relies on exports for one-quarter of its income. In addition, about 25 percent of agricultural production in the United States is destined for a foreign market. A number of our commodities are highly dependent on trade for a sizeable portion of their production. For some crops, like walnuts and wheat, about one out of two acres is exported. Exports now account for nearly one-quarter of our apple, beef and corn production and more than one-third of grapefruit and soybean production.

As productivity growth of U.S. farms and ranches continues to exceed the growth in U.S. population, our dependence on trade will increase. Only four percent of the world’s consumers live in the United States. It is estimated that 99 percent of the growth in the global demand for food over the next 25 years will be in foreign markets.

Our country is also a major importer of food and fiber. The aggregate import share of U.S. food consumption has been rising steadily, along with the strength of the U.S. dollar. For nearly 20 years, imports accounted for 7.5 percent of total U.S. food consumption. The share of imports climbed to 8.6 percent in 1996 and 9.3 percent in 1999. These jumps in import share coincided with the strong value of the dollar and U.S. economic growth.

With a strong dollar, we have the double challenge of our products being less competitive in other markets while products from other countries are more competitive in U.S. markets.

In addition, there is a strong relationship between the value of the dollar and the domestic price of our commodities. As the value of the dollar rises, foreign buyers must spend more of their currency to purchase our exports. This causes foreign buyers to decrease their consumption of U.S. commodities or buy from our competitors instead. The resulting drop in consumption drives U.S. commodity prices down even further.

Net farm income is not directly tied to the rise and fall of the U.S. exchange rate; rather it is the exchange rate that affects the price competitiveness of our exports. The resulting change in the volume of trade – increased exports when exchange rates are low and decreased exports when exchange rates are high – directly impacts farm income. As you know, U.S. agricultural commodity prices are the lowest they have been in over two decades. Further price depressions stemming from the strong value of the dollar are exacerbating an already dire situation.

The exchange rate is the single most important determinant of the competitiveness of our exports. Other important determinants of U.S. agricultural export values include income growth rates in developing countries, the growth and productivity of the foreign agricultural sectors against which we compete, export subsidies use by our competitors and weather conditions.

USDA’s Economic Research Service estimates that movements in exchange rates have historically accounted for 25 percent of the change in U.S. agricultural exports. The elasticity of export demand for all agricultural products with respect to the value of the dollar is 1.38. This means that a one percent increase in the value of the dollar is associated with a 1.38 percent reduction in the value of U.S. agricultural exports.

The elasticity of export demand for individual agricultural commodities is 1.77, thus resulting in a 1.77 percent decline in the export value of specific commodities when the U.S. dollar appreciates 1 percent. The export dependency of U.S. agriculture, combined with the highly elastic response of U.S. agricultural export values to changes in the exchange rate underscore the need to maintain a stable exchange rate policy without overstating the value of the dollar.

The increasing strength of the dollar, and steady depreciation of the currencies of our major export competitors, has had a profound impact on our ability to export. In fact, the rising appreciation of the dollar is one of the primary reasons why the agricultural economy did not experience the economic prosperity that most other sectors of the U.S. economy enjoyed between 1995 and 1999. The dollar’s increased purchasing power, and rising U.S. disposable income encouraged Americans to buy more imported products, while high prices of U.S. food and agricultural exports, in foreign currency terms, discouraged demand for our goods. As a result of the rapidly appreciating dollar, our competitors gained an advantage in third-country markets over our exports without even adjusting their sales price.

It is abundantly clear that the strong dollar is severely handicapping our ability to compete. Agricultural analysts note that macroeconomic fundamentals point to continued weak export performance in the near future.

For some commodities, the rising value of the dollar has directly contributed to the export competitiveness of our foreign rivals. Sharply depreciating currencies such as the Canadian and Australian dollars, the European euro, the Brazilian real and the Korean won have enabled our competitors to out-compete us in a number of third-country markets.

The strong dollar is enabling our competitors to expand their production and gain market share at our expense. Recent USDA estimates note that U.S. corn export sales have fallen 3 percent and wheat shipments 10.5 percent as a result of the appreciation of the dollar.

Since 1995, the dollar has appreciated 42 percent against the currencies of beef producing countries. The rise in red meat imports from 6.4 percent in 1996 to 8.9 percent in 2000 is explained in part by the strength of the dollar. In addition, the recent announcement by McDonald’s to buy imported beef was largely driven by the price advantage it faced vis-à-vis its competitors, other U.S. fast food chains that have historically used imported beef trimmings. Imported trimmings are cheaper than U.S. trimmings due to the strong U.S. dollar.

During the period 1995-2000, U.S. imports of fruits and nuts jumped 33 percent, largely due to the dollar’s 18 percent gain with respect to the currencies of foreign suppliers of these commodities to the United States. The dollar rose only 3 percent against currencies of foreign vegetable importers to the United States. The appreciation of the Mexican peso in price adjusted terms helped to mitigate the strength of the dollar against the currency of Mexico, the country that supplies the majority of U.S. vegetable imports.

A Farm Bureau-commissioned study documented the impact of the exchange rate on corn, wheat, soybeans and melons.

U.S. corn prices in Japan have been affected by adverse exchange rate movements. The U.S. landed corn price decreased from $3.64/bu in 1995 to $3.31/bu in 1998. The U.S. dollar appreciated 39 percent relative to the Japanese yen, from ¥94.23/$ to ¥130.81/$. The yen price of U.S. corn increased from ¥343/bu to ¥433/bu, an increase of 26 percent even though the U.S. dollar price had declined 9.1 percent. U.S. exports of corn to Japan fell 11.3 percent, from 16 mmt to 14.2 mmt.

Exchange rates had similar impacts on the Mexican wheat market. Between 1995 and 1999, the price of U.S. wheat delivered to Mexico declined from $3.95/bu to $3.20/bu. The U.S. dollar appreciated 48 percent relative to the Mexican peso (NP) during this period from NP6.45/$ to NP9.58/$. This appreciation led to a 20 percent increase in the peso price of U.S. wheat from NP25.46/bu to NP30.64/bu, though the U.S. dollar price of wheat declined 19 percent. However, even with higher prices in peso terms, the volume of U.S. wheat exports to Mexico rose significantly during this time, from 791,000 mt to 1.8 mmt (130 percent). This contrasts with the Japanese results for two main reasons. First, Japan is a mature market with an established demand, extremely sensitive to price and geographically distant from major grain suppliers. Second, the growth of the Mexican market, coupled with its proximity to U.S. suppliers, has more than compensated for the increase in peso wheat prices.

Between 1996 and 1998 the U.S. average annual farm price for soybeans declined from $7.27/bushel (bu) to $5.93/bu, an 18.5 percent drop. Over the same period, the U.S. dollar appreciated 20 percent relative to the Japanese yen, going from ¥108.81/$ to ¥130.82/$. When the yen price of U.S. soybeans landed in Japan is compared over this period of time it is important to note that the price of U.S. soybeans in dollars fell from $9.09/bu to $8.16/bu, but in yen the landed price actually increased from ¥989/bu to ¥1,068/bu, an increase of eight percent. The cost of U.S. soybeans to Japanese buyers increased primarily due to the appreciation of the U.S. dollar even though U.S. prices had fallen significantly. The result was higher priced U.S. soybeans in Japan when compared to soybeans from Brazil, which fell from ¥986/bu to ¥958/bu, allowing Brazilian soybeans to be sold on Japan for about $1.00/bu less than U.S. soybeans. U.S. soybean exports to Japan declined during this period from 3.9 million metric tons (mmt) to 3.7 mmt (200,000 mt, or 5 percent), while exports from Brazil increased from 379,000 mt to 524,000 mt (145,000 mt, or 38 percent).

Recent empirical evidence supports the strong relationship between exchange rates and agricultural trade. Kapombe and Colyer found that a 1 percent increase in the Japanese yen-U.S. dollar exchange rate led to a .96 reduction in Japanese demand for U.S. broilers. In addition, they also found that a 1 percent increase in the Hong Kong-U.S. exchange rate resulted in a .56 percent decline in Hong Kong demand for U.S. broilers, while a similar change in the Mexican peso-U.S. dollar exchange rate led to a .58 drop in Mexican demand.

Other empirical studies have also documented the importance of the Mexican peso-U.S. dollar exchange rate in influencing U.S. imports of melons (Espinosa-Arellano, Fuller, and Malaga). Their results suggest that the 1994-95 Mexican peso devaluation increased U.S. imports of watermelon, honeydew, and cantaloupe by 36, 18 and 4 percent, respectively in the short run. In fact, a survey of historical empirical literature since the early 1970s has revealed that in 32 separate studies of the role of exchange rates on U.S. agricultural trade, the exchange rate was found to be an important explanatory variable in 24 of the studies (Kristinek).

American farmers are the most productive in the world. However, the comparative advantages that our producers generally enjoy, abundant, fertile natural resources, access to high quality inputs and technology, for example, are mitigated by the rising appreciation of the dollar. The strong value of the dollar has, in many instances, shut our exports out of foreign markets and increased import competition in the U.S. market.

In short, U.S. agriculture is part of a worldwide food production system. We do not advocate isolation as a means to shield our sector from the economic forces that shape world trade. However, we cannot effectively plan our farming and ranching enterprises in a world where exchange rates suddenly depreciate by 50 percent, as happened with the Mexican peso in late 1994, or shift more slowly, such as the 50 percent decline in the Brazilian real from 1995 to 2000.

Exchange rate issues are certain to increase in importance as U.S. agriculture produces more for export markets and U.S. food and fiber markets become more open to imports. If these issues are not resolved by macro economic policies, there will be continued pressure to find solutions in traditional farm policies.

Effective long-range financial planning at the farm and ranch level and the overall economic health of U.S. agriculture depends on more stable exchange rates that do not overvalue the U.S. dollar against our competitors’ currencies.

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