WASHINGTON, Jan. 21, 2015 – With the EU Central Bank now following in the footsteps of the Federal Reserve with its own version of quantitative easing, U.S. agricultural producers will find it more difficult to compete with European producers as the value of the euro erodes further and the dollar strengthens. At the same time, consumers could have more buying power, particularly if the Fed once again delays raising interest rates, although some think the bank may start raising short-term rates later this year.
In October 2014, the European Central Bank (ECB) began buying covered bonds -- debt secured by a pool of loans. In November the bank started purchasing asset-backed securities. While the ECB has stopped short of true quantitative easing (buying government bonds), it is now considering the prospect.
“The dollar has been on a real tear for the past six months. The dollar and the euro are headed toward parity,” says Ernie Goss, economist at Creighton University. “If your business competes with a European business, that is going to be a problem.”
The value of the euro continued its fall against the U.S. currency last week, dropping to its lowest level since 2003 after the Swiss National Bank decided to abolish an exchange rate policy. The euro on Friday hit about $1.15, down from around $1.40 less than a year ago.
As the euro is pressured lower in an effort by the ECB to prevent deflation, the lower relative value of EU products will drag on U.S. prices at a time when the United States is trying to boost its inflation rate. If the Federal Reserve raises interest rates in the first half of 2015 as it has suggested, the dollar would be pushed even higher yet as other currency values are pressured lower.
“The strengthening dollar could cause the Federal Reserve to hold off on raising interest rates,” says Goss.
Robert Johansson, acting chief economist at USDA, expects the convergence of the euro and the dollar to negatively impact U.S. agricultural exports. “It will make our exports more expensive for European consumers and their products imported into the United States more easily affordable for U.S. consumers,” says Johansson.
USDA’s latest trade projections for 2015, developed in November, call for U.S. exports to the European Union to drop 1.6 percent to $12.5 billion from 2014’s estimated $12.7 billion, but downward revisions are expected.
“We have seen additional appreciation of the dollar against the euro and substantial decreases in the value of a barrel of crude oil (which also strengthens the dollar) since that projection was made, so exports to the EU will likely be revised lower in February,” says Johansson. U.S. ag exports to China could also be revised lower, he says, due to both a slowdown in Chinese buying and competition from the European Union.
Currently, the European Union is the United States’ fifth largest trading partner for ag products behind China, Canada, Mexico, and Japan. Fruits and vegetables as well as processed food, including dairy, meat, and packaged products, are the main U.S. agricultural products shipped to the European Union.
At the same time USDA lowers exports to Europe, projected imports from the European Union will be revised higher. November’s projection for 2015 calls for $20.3 billion in agricultural products to be imported into the United States from the European Union, up more than 8.5 percent from 2014’s estimated $18.7 billion. That number will likely increase as well, says Johansson.
The United States is currently the largest market for EU agricultural products, accounting for 13 percent of the total, according to a mid-2014 European Commission report. EU agricultural product sales to the United States have been growing steadily since 2009 and consist primarily of beer and wine, cooking oils, baked goods, cheeses, and chocolate.
Less expensive imports from the European Union—and perhaps other countries—coupled with an increase in disposable income that results from falling oil and gas prices, however, will help offset the impact that declining exports will have on the overall U.S. economy, notes Goss.
And while a stronger U.S. dollar will mean U.S. exports will be harder to move, Johansson notes that the European Union’s quantitative easing policy is better than the alternative—a major recession in one of the world’s largest markets, which could have significant spillover effects into other countries.
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