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Monetary exchange rates will have a growing impact on America's farmers and ranchers as agricultural trade increases in coming years, according to an economic study sponsored by the American Farm Bureau Federation (AFBF). Conducted by researchers at Texas A&M University, the study shows how exchange rates influence the sale, purchase and competitiveness of U.S. agricultural products worldwide.

According to the study, "Exchange Rate Impacts on U.S. Agriculture and the Potential Role of Dollarization," exchange rates are already important "to U.S. agriculture, where exports account for 25 percent of gross cash farm income and relatively large shares of production. Agricultural trade will likely continue to grow over the next 10 years, making exchange rates more important to producers of major agricultural commodities."

The study reaffirms the concern AFBF has expressed to U.S. government officials regarding the relative strength of the dollar in recent years and the impact on U.S. agricultural exports.

"Overvaluation of the dollar is one of the most pressing international economic problems facing America's agriculture and manufacturing sectors," said AFBF President Bob Stallman. "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."

Results of the study show that in the last five years the dollar has gained in value relative to the currencies of most U.S. trading partners. In addition, "the emergence of a large, well integrated global capital market has resulted in the circulation of $480 billion in U.S. dollar currency worldwide. Of this total, 55 to 70 percent, or $300 billion, is held by foreigners. Global turnover in foreign exchange markets is nearly $1.5 trillion each day. International trade, trade finance, investment, exchange rate changes, and even U.S. interest rates are increasingly influenced by forces beyond U.S. borders."

Framed in the context of the new farm policy debate under way in Congress, the study acknowledges that "the role of exchange rates and their impacts on commodity prices and exports have been important considerations." However, no clear answers can be determined in light of the fact that "although short-term impacts from exchange rate management may be positive for U.S. agricultural exports, attempts to manage the exchange value of the U.S. dollar over the long term may partially or totally mask the forces of comparative advantage."

Another factor to consider is "dollarization," which occurs when a nation adopts the U.S. dollar as its official currency. Used properly, the study finds that dollarization offers some positives for countries choosing this option. However, it "should not be viewed as a panacea or institutional 'quick fix' for serious underlying structural problems." The study further cautions that for countries undergoing dollarization "price stability will only persist so long as government follows sound fiscal management policies."

"The study highlights that there is no silver bullet to solve this issue, but what is best for agriculture is stable exchange rates," said AFBF Senior Economist John Skorburg. "We need to work toward economic policies that will provide that stability."

The study was conducted for AFBF by the Center for North American Studies, Department of Agricultural Economics at Texas A&M University.

The study can be found in its entirety on the AFBF web site at: http://www.fb.org/issues/analysis/Exchange_Rate_Index.html