Weakened dollar could cause farm problems
Oct 27, 2009 11:12 AM, By Jim Langcuster, Auburn University
The mighty American greenback has fallen on hard times — so hard, in fact, that countries throughout the world are clamoring for its replacement as the world's reserve currency.
How would farming be affected by the change?
One of the effects of the dollar's replacement by another currency would almost inevitably be a vastly cheaper greenback.
If history serves as any measure of the potential effect on agriculture, shouldn't farmers be dancing for joy? After all, in historical terms, haven't U.S. farmers traditionally favored cheap money and free trade?
"In terms of farming, economic theory says that devaluation would make our goods cheaper internationally and help us export more," says James Novak, an Alabama Cooperative Extension System economist and Auburn University professor of agricultural economics.
But as he is the first to point out, the dollar's loss of reserve status carries with it far more implications than the simple price of farm products. There is also the potentially wider, if not far-reaching effect on the entire U.S. economy to consider, he says.
"The bright side is that we currently import a lot, but imports would become more expensive and that could potentially stimulate U.S. industry. The dark side is that a potential currency (devaluation) race to the bottom could result from other countries attempts to maintain market share."
For decades, the greenback's unrivalled status as the currency of preference has provided the United States with a comparatively cheap line of credit — money that has been used to finance the nation's rapidly expanding public debt. Loss of this status would make borrowing money more expensive and likewise could undermine federal and state investments in public services, such as education and infrastructure, Novak says.
Loss of reserve status, and the steep devaluation that inevitably follows, could bring other dire consequences, according to another economist.
"For the farming sector, a cheap dollar is not an especially serious problem, except for the fact that the United States as a whole is a net importer," says Robert Goodman, an Extension economist and Auburn associate professor of agricultural economics.
"As the dollar gets cheaper and it gets harder for us to buy these imports, our exports are worth less and less too," he says.
But what about the longstanding argument that currency imbalances are inherently self-correcting and that, over time, the dollar's plummeting value will entice foreign investors to reinvest in U.S. markets?
There is truth to this argument, Goodman says, but only to a point.
"It will balance alright, but the end result will be more economic activity overseas and less activity here," he says.
"The United States will be poorer than it was while the other countries will be richer than they were. How much richer and how much poorer? That's anyone's guess at this point," Goodman says.
But even these sad tidings could bring some advantages to some sectors of the U.S. economy, including farming, Goodman says.
Until now, the stark differences in living standards between developed and under-developed countries made it economically feasible for many consumer goods to be produced in developing countries. But if these differences narrow following a steep decline of the dollar, Goodman says it may be feasible once again for many of those goods to be produced domestically.
Farm products may be among them.
For now, Goodman says Americans in general and the dollar in particular have one economic factor working in their favor: economic conditions in many countries are far worse than those in the United States.
"The U.S. economy has been hurt in this recession, but perhaps some other countries have been hurt even worse," he says. "That could be one factor helping to prop up the dollar to some extent."
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