Economists study complicated web of trade, cash flows
By MATEUSZ PERKOWSKI
Contrary to conventional wisdom, a weakening of the euro against the dollar may not spell calamity for U.S. agricultural exports.
The ongoing sovereign debt crisis in several European countries has cast doubt on the future strength of the euro, but a USDA report indicates the devaluation of that currency may have benefits for U.S. farmers.
The direct effects of a weaker euro would not seem favorable for U.S. agriculture at first blush.
If the euro were to fall in value against the dollar, it would effectively make U.S. farm products more expensive within Europe, diminishing demand.
A devalued euro would also make European farm products cheaper -- and more competitive with U.S. goods -- around the globe.
However, new USDA economic models indicate that financial turbulence in Europe may have an indirect but substantially positive impact on overall demand for U.S. crops, said David Kelch, an economist with the agency.
That's because investors will forgo buying more stocks, bonds and other assets in Europe, preferring to channel their money into countries like China, India and Brazil, he said.
"Money looking to go somewhere will go to emerging markets, where there is a good return," Kelch said.
The corresponding increase in wealth in those countries will generally drive up consumption of farm goods, boosting overall demand for crops and helping U.S. farmers in the process, he said.
"We get a bigger portion because the pie is bigger," said Kelch. In other words, the rising demand for crops will outweigh negative effects from a weaker euro, such as the increased market share of European farmers.
The primary beneficiaries would be U.S. meat and grain producers, but horticultural products -- particularly fruits -- would stand to gain as well, he said.
"Some will win more than others, but I don't think there will really be any losers," Kelch said.
The effect on soybeans is less clear due to stiff competition from Argentina and Brazil, he said. Increased soybean production in those countries would hinder U.S. farmers, but their improved economic activity may spur domestic consumption of the crop.
"It's a difficult call. It's very dynamic," Kelch said.
Dave Kohl, professor emeritus of economics at Virginia Tech, said he would tone down the USDA's analysis of what would happen if the euro significantly weakened.
Economic growth in China, India and Brazil has slowed recently, which also affects the equation, Kohl said. It's not possible to isolate the European situation from everything else in the world.
"It's usually a convergence of events," he said.
In times of economic distress, investors look for safe havens, he said. That means they may decide to buy dollars, strengthening the U.S. currency, rather than investing in emerging markets.
Of course, the U.S. has its own debt problems, which encumbers investor enthusiasm for the dollar, Kohl said. "There's confidence in the economy of the U.S., but not in the political system."
The fluctuating value of the dollar versus the euro will depend on debt reduction, economists say, but there isn't much agreement as to whether political leaders in Europe or the U.S. can handle the problem.
Kelch said the U.S. is in a better position to reduce debt because it has only one government with a single fiscal policy, while it's difficult for European countries to reach a consensus.
"It's not the United States of Europe," he said.
Thorsten Egelkraut, an economist at Oregon State University, said it's true the U.S. has more flexibility in solving its debt problem, but Europe has demonstrated more commitment to actually getting it done.
Even so, Egelkraut said he doesn't foresee strength in either the euro or the dollar.
"I think both areas have big problems and will devalue their currency against other currencies," he said.
That would seem to be encouraging for agricultural exports, but the health of emerging countries is linked to the consumption of their products in the U.S. and Europe, Egelkraut said.
If the euro and the dollar are devalued, it will make products from such emerging countries more expensive, he said. "Unless they can find other markets, it will limit their growth."
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