As the U.S. and world economies prospects for growth improve for the fourth quarter of 2009 and into 2010, a logical question is what will happen to agricultural trade in 2010 and further into the next decade. A just released analysis from the Economic Research Service of USDA titled “What the 2008/2009 World Economic Crisis Means for Global Agricultural Trade” provides some scenarios that are hopeful about U.S. agricultural exports, but uncertainty remains high.
Overall trade has clearly taken a hit in 2009 with exports and imports for most developed countries and middle income developing countries declining by 20-30 percent in value for the first quarter of 2009 as volumes and per unit values declined. For the first six months of 2009 U.S. agricultural exports were down in value by 21.1 percent compared to the first six months of 2008. Bulk commodities have taken the biggest reduction at 32.5 percent, with intermediate products down 18.7 percent and consumer oriented products down only 7.0 percent.
The authors of the study believe that the effects of the economic crisis will be most felt in real (adjusted for inflation) currency exchange rates and changes in real incomes as measured by GDP. They explain, “GDP determines the amount a country has to spend while exchange rates determine how much it costs to exchange exported goods for imported ones.” Imbalances in merchandise trade and financial flows existing before the crisis will also impact trade flows. Between July 2008 and March of 2009 the U.S. dollar appreciated 15 percent compared to the average of currencies for major trading partners. That has favored agricultural products from countries like Brazil and Australia in international markets.
A reference scenario was developed based on USDA’s 2008 long-term projections and the December 2008 long-run macroeconomic global forecast from Oxford Economics with assumptions that the world and U.S. economies would be recovering by late 2009. Other assumptions included an increase in the U.S. domestic savings rate, a further appreciation of the dollar by 19 percent over 10 years, average U.S. economic growth of 2.5 percent per year beginning in 2010 and economic growth in the rest of the world at 4.0 percent per year.
A high-dollar alternative scenario based on China continuing to run a substantial trade surplus with the U.S. and other developed countries and investing excess savings in the U.S. was analyzed. This would continue the imbalances that have occurred in recent years. Interest rates in the U.S. would stay low and economic growth would be stronger. The dollar would be 40 percent above the reference case and 20 percent higher than its last peak in 1991. A low dollar scenario assumed that some of the recent financial imbalances would be permanently reversed. Less inflow of savings to the U.S. from developed countries would result in higher U.S. domestic savings, lower investments, slower economic growth and a lower value of the dollar. A dynamic global agricultural trade model called Dynamic PEATSim was used to estimate impacts on regions and individual countries.
Under the reference scenario, consumption of most agricultural commodities did not decline in the short run because the demand for food is relatively inelastic in major consuming nations. The rate of growth in consumption did slow down before recovering as incomes improve in 2010, and that slowdown was greater outside the U.S. Growth in consumption of most commodities recovered to pre-crisis levels by 2015-17. The authors note, “Based on these results, it does not appear that the economic crisis will alter the ongoing changes in diet and food consumption in developing and emerging countries.” Commodity prices are lower for a few years before returning to trend in 2012. Commodity production is also lower until improving in 2011 as the general economy improves. Trade also slows down in 2009 and 2010 and begins to recover in 2011. The stronger dollar in 2009-2011 causes U.S. exports to lag behind the growth for other countries. That slower growth also continues in 2012 and beyond due to the relatively strong dollar.
The high dollar scenario leads to stronger long-term growth in the U.S. and lower economic growth in the rest of the world. That slower growth outside the U.S. results in lower demand for agricultural commodities and lower market prices. Non-U.S. imports of meat are particularly affected by lower incomes and the higher value of the dollar. U.S. exports are mostly lower than in the reference case.
Under the low dollar scenario, the U.S. economy does better than the reference case until 2013 when it slows down due to lower investment in the U.S. Non-U.S. economic growth eventually stabilizes just below the reference scenario. Real world agricultural prices are generally higher, but prices in individual countries vary by the amount of domestic economic growth and its impact on demand. Exports of U.S. agricultural products are generally higher throughout the 2010-2017 period due to the lower value of the dollar.
It is hard to imagine that the high-dollar scenario would be the most likely economic path for the next few years. China is not likely to continue to encourage economic growth in the U.S. rather than in its economy. U.S. consumers’ renewed interest in saving money may replace savings from other countries. The Federal Reserve’s policy of continued low interest rates for an extended period of time also argues against a higher dollar. The reference scenario includes the dollar exchange rate increasing by 19 percent over the next ten years. That is too high.
The most important point is that the reference scenario results in continued growth in demand for agricultural products outside the U.S. similar to the trend that occurred before the economic crisis. If that could be achieved, it would be good news for consumers around the world and producers in both the U.S. and the rest of the world. While it is easy for U.S. exporters to argue for a cheap dollar to make U.S. products more competitive, the authors noted at the beginning that demand is a function of relative exchange rates and consumer incomes. Policies that do not encourage strong economic growth in developed and developing economies are not good for U.S. agriculture regardless of what happens to dollar exchange rates.