The Impact of Exchange Rates on the U.S. Cotton Industry

The U.S. cotton industry is perhaps uniquely vulnerable to the effects of an appreciating dollar through its impact on imports of cotton textile and apparel products.

Published: September 10, 2001
Updated: September 10, 2001

Strong Dollar Hurts U.S. Agriculture

Since the 1970s exchange rates have been recognized as arguably the single most important factor in determining the global competitiveness of U.S. agricultural exports. A strengthening dollar raises the effective price of U.S. commodities in foreign currencies. According to USDA-ERS, the U.S. real cotton trade-weighted exchange rate for the first half of calendar 2001 has appreciated by 25% since 1995. Furthermore, the U.S. dollar has appreciated by 44% relative to the currencies of our primary competitors in the cotton export market, placing U.S. cotton producers at a severe competitive disadvantage. The U.S. is also the largest importer of cotton textiles and apparel. Since 1995, the U.S. dollar has appreciated 54% relative to the currencies of Asian cotton textile exporters.

From 1986 to 1995, the U.S. exported an average of 7 million bales annually, accounting for approximately 47% of its annual production. It should be noted that the dollar was steadily depreciating over this period. Since 1996, however, U.S. raw cotton exports have averaged less than 6.5 million bales, accounting for only 37% of its annual production, as the strong dollar has impeded the competitiveness of U.S. raw cotton in international markets. Without the presence of U.S. cotton’s Step 2 program to offset some of the impact of a strong dollar, U.S. raw cotton exports would likely have experienced a far larger decline.

In addition, the U.S. cotton industry is perhaps uniquely vulnerable to the effects of an appreciating dollar through its impact on imports of cotton textile and apparel products. The strong appreciation of the dollar has significantly lowered the price of foreign produced textiles and apparel in the U.S. market, increasing the competitive advantage of foreign firms at the expense of U.S. based enterprises. For example, at current prices and exchange rates the FOB price of Pakistani yarn in U.S. dollars is less than 80 cents per pound. In 1995, this same Pakistani yarn would have cost about $1.42 per pound. Not surprisingly, between 1996 and 2000, imports of cotton products from Pakistan have almost doubled now reaching 1.24 million bale equivalents.

Likewise, imports of cotton textile and apparel products from all sources have soared over the past few years. Annual net imports of cotton textiles and apparel averaged 5.6 million bale equivalents from 1993 to 1996. In 2000, U.S. net imports of cotton textiles and apparel totaled 10.6 million bale equivalents and the pace of imports continues to grow in 2001. This surge in imported cotton products has decimated U.S. textile mills – the best customer of U.S. cotton producers. In 1997 U.S. mill use of cotton was 11.4 million bales; by 2000 it had declined to only 9.5 million bales. U.S. mill use has continued to plummet with recent Department of Commerce estimates of cotton mill use falling below 8.0 million bales.

U.S. agricultural, industrial and trade policies should recognize the impacts of macroeconomic conditions and policies of the U.S. and the international economic community. Business cycles or temporal dislocations can render permanent damage to relatively healthy sectors of the U.S. economy. Current agricultural programs possess the mechanisms that can be adjusted to provide protection or additional benefits to reflect the adverse impacts of exchange rate movements.

Helping Agriculture Cope with U.S. Monetary Policy

Over the last 50 years, economic cycles across U.S. agriculture mirror the strength of the U.S. dollar. When U.S. monetary policy supports a strong U.S. dollar, U.S. agriculture suffers – losing markets, demand and competitiveness.

For the last 5 years, the U.S. dollar has escalated compared to other currencies, and U.S. agriculture has suffered – just as it did in the mid-80’s. Without any sign of a change in overall U.S. monetary policy, the Congress must act to help protect farmers from the devastating impact on their business caused by a strong U.S. dollar.

The approach taken by the House Agriculture Committee only begins to offset the detrimental impact of the strong U.S. dollar. A strong U.S. dollar has a corresponding measure in the weakness of foreign currencies. USDA maintains an estimated real trade-weighted agricultural exchange index. This index measures the strength of the dollar in affecting U.S. agricultural trade. Thus, it also expresses the relative weakness of foreign currencies in purchasing U.S. agricultural commodities. Comparing the cash receipts of the seven program crops plus soybeans against the relative purchasing strength of foreign currencies shows that a lagged relationship has an extraordinarily high correlation. Means must be found to address the impact of this phenomenon. Correlation in the early 1980’s would likely be considerably higher but PIK reduced U.S. crop production.