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CARD: Center for Agricultural and Rural Development

Fall 2007, Vol. 13 No. 4

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Exchange Rates and Agricultural Commodity Prices

Figure 1

Recent increases in retail food prices have consumer groups looking for culprits. One contributor is the cost of raw agricultural commodities. Figure 1 shows a time series of nominal price indexes (1997 = 100) for corn, soybeans, hogs, cattle, and milk dating back to 1996. As shown, the prices of all commodities except hogs are currently up about 40 percent with almost all of the growth occurring in the last year. A variety of reasons have been offered for this increase, including increased ethanol production, income-led increases in food demand in Asia, supply disruptions in Europe and Australia, and a weak dollar.

There are two separate mechanisms by which a weak dollar leads to higher U.S. prices. First, when the currencies of buyers of U.S. exports appreciate relative to the dollar, then buyers find that the price they have to pay for U.S. goods has fallen when prices are expressed in their now stronger domestic currencies. Lower foreign-denominated prices boost demand for U.S. products and result in higher dollar-denominated prices. This is the usual explanation for why U.S. prices rise with a weak dollar.

But, there is an additional mechanism that comes into play that involves the value of the dollar relative to the currencies of U.S competitors in export markets. If the currency of a major export competitor strengthens relative to the dollar, then the demand for U.S. exports rises even if the currency of the buyer does not change relative to the dollar.

Figure 2

To measure the influence of the dollar’s value on commodity prices requires a measurement of the value of the dollar relative to the currencies of both buyers of U.S. exports and competitors. Figure 2 presents inflation-adjusted currency indexes compiled by USDA’s Economic Research Service. From its peak value in 2001 and 2002, the dollar value has fallen substantially. But most of the decrease happened before the run-up in agricultural commodity prices. Either there is a long lag in the response of U.S. prices to a change in the value of the dollar or recent commodity price increases are caused primarily by other factors.