Agriculture and International Trade Chapter 8+

Discussion Topics • • • • • •

The importance of agricultural trade The balance of payments Growth and instability in agricultural trade Exchange rates and the foreign exchange market Exchange rate determination Exchange rates and U.S. agricultural trade

Importance of Ag. Trade • Crop agriculture in U.S. has become export dependent

• 40% or more of annual of production is • •

exported of some crops Livestock agriculture less dependent on foreign sales Greater dependence on imports as well

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Ag. Product Trade 1990 - 2009

Ag. Product Trade 1990 - 2009

U.S. Ag. Exports

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Ag. Fruits and Vegetables Crop Asparagus Bell Peppers Tomatoes Cucumbers Artichokes Lettuce, Sweetcorn, Celery All

Percent Imported 86 49 44 54 76 2-3 21.6

http://www.choicesmagazine.org/magazine/article.php?article=169

2009 Agricultural Export Related Employment U.S. agricultural exports generate jobs in both the farm and nonfarm sectors…

World Trade Organization • Creation of WTO to implement trade provisions, settle disputes, and review policy

• Liberalize trade – Reduce tariffs – Reduce export subsidies – Lower domestic subsidies

• Use accepted international standards for food safety and plant health regulations, harmonize standards and establish disease free zones

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Balance of Trade The balance of trade is a measure of overall trade performance.

Trade surplus = Exports > Imports Trade deficit = Imports > Exports A trade surplus provides capital since the nation is selling more than it is buying. A trade deficit, on the other hand, can reduce a nation’s capital reserves over time, forcing it to either limit imports or borrow capital. U.S. agriculture has recorded trade surpluses since at least the 1960s

U.S. Trade 1960 - 2014

http://www.census.gov/foreign-trade/statistics/historical/

U.S. Agricultural Trade 1967-2014

http://www.fas.usda.gov/gats/default.aspx

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Ag. Trading Regions - 2008 Region Asia North America CA / SA / Carrib. Europe Middle East Africa Former Soviet Union Oceania Total

Exports Imports 44,209,381 14,698,797 32,278,631 28,908,223 12,031,753 13,655,921 10,619,399 16,436,608 6,649,678 764,856 5,813,086 1,739,515 2,303,570 82,045 1,189,068 4,376,239 $115,277,563 $80,662,204

Net Exports 29,510,584 3,370,408 -1,624,168 -5,817,209 5,884,822 4,073,571 2,221,525 -3,187,171 $34,615,359

Top Five Trading Partners 2008 Imports Millions of Dollars

Exports Millions of Dollars

Canada

17,991,758

Canada

16,253,364

Mexico

10,916,465

Mexico

16,025,184

China

3,448,383

Japan

13,223,118

Italy

3,263,633

China

12,114,772

Indonesia

2,820,797

South Korea

5,561,389

Varies by year see http://www.ers.usda.gov/Data/FATUS/DATA/McyTOP15.xls

Top Five Trading Partners 2008 Examples of Products – Imports

Examples of Products - Exports

Canada

consumer oriented goods (snack foods #1), forest products, live animals, seafood

Canada

consumer oriented goods – vegetables, fruit, processed (snack), soybeans, feed

Mexico

consumer oriented goods – vegetables, fruits, wine and beer

Mexico

Coarse grains, soybeans, wheat, consumer oriented goods (red meats, dairy), forest products.

China

forest products, consumer oriented goods (processed fruit and vegetables and juices), seafood

Japan

Coarse grains, soybeans, wheat, feeds, consumer oriented goods (red meats, fruits and vegetables)

Italy

Wines and beers, oils, other consumer oriented goods

China

Soybeans, cotton, red meats, poultry, tree nuts, hides and skins

Indonesia

Bulk goods (rubber, coffee, cocoa beans) Seafood, forest, tropical oils

South Korea

Coarse grains, soybeans, wheat, cotton, consumer oriented goods (red meats, fruits and vegetables), hides and skins

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Ag. Trade 2009 Jan. – Sept. 2008 and 2009 Year

Exports

Imports

Net Exports

2009

$68,505,602

$53,594,415

$14,911,187

2008

$87,150,974

$60,664,343

$26,486,631

Change

-$18,645,372

-$7,069,928

-$11,575,444

Percent

-21.4%

-11.6%

-43.7%

Texas Exports Top 5 agriculture exports, estimates, FY 2011 1. Cotton 2. Other Products 3. Beef and Veal 4. Hides and Skins 5. Wheat Overall rank

Rank among states 1 2 1 1 12 4

Value million $ 2,404.1 1,647.4 960.6 471.7 325.7 7,552.6

http://www.ers.usda.gov/StateFacts/TX.htm#TCEC

Texas Exports Top 5 agriculture exports, estimates, FY 2013 1. Cotton and linters 2. Beef and veal 3. Other plant products 4. Poultry products 5. Hides and skins Overall rank

Rank among states 1 2 8 6 3 6

Value million $ 1,638.6 905.6 861.3 398.1 350.8 5748.2

http://www.ers.usda.gov/StateFacts/TX.htm#TCEC

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Top Five Exporting States 2008 State

Top three exports

California Iowa Illinois Texas Nebraska

Tree nuts, fruits, other Soybeans, feed grains, live animals and meat Feed grains, soybeans, live animals and meat Cotton, feed grains, live animals and meat Feed grains, soybeans, live animals and meat

Total value million $ 11,638.6 7,859.5 7,540.8 6,006.8 5,944.6

http://www.ers.usda.gov/StateFacts/

Top Five Exporting States 2011 State

Top three exports

California Iowa Illinois Texas

Nebraska

Tree nuts, fruits, other Soybeans, feed grains, live animals and meat Feed grains, soybeans, live animals and meat Cotton, feed grains, live animals and meat Feed grains, soybeans, live animals and meat

Total value million $ 17,844.4 10,576.6 8,238.3 7,552.6

6,930.0

http://www.ers.usda.gov/StateFacts/

Top Five Exporting States 2013 State California

Top three exports Tree nuts, fruits, other

Iowa

Soybeans, feed grains, live animals and meat Minnesota Feed grains, soybeans, corn, and pork Illinois Feed grains, soybeans, live animals and meat Nebraska Feed grains, soybeans, live animals and meat http://www.ers.usda.gov/StateFacts/

Total value million $ 19,500 10,200 8,000 7,900 6,600

Texas sixth at 5,700

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Exchange Rates The exchange rate is the number of units of a foreign currency required to obtain one unit of a domestic currency The reciprocal of this rate expresses the number of units of a domestic currency required to obtain one unit of a foreign currency These rates can be thought of as the value of the domestic currency relative to a foreign currency (i.e., the value of the $ relative to the different currency)

IMF & World Bank International Monetary Fund and World Bank System to allow for flow of trade and investments Goals Foster global monetary cooperation and stability Help settlement of balance of payments Loans to countries Stabilize / monitor exchange rates

Exchange Rate Regimes Number of Coiuntries

120 105

104

103

100 Independent Float 80

Managed Float Pegged

60

48

47

40

40

36

35

44

20 0

2003

2004

2008

Year http://www.imf.org/external/np/mfd/er/2008/eng/0408.htm http://www.imf.org/external/np/mfd/er/2004/eng/0604.htm http://www.imf.org/external/np/mfd/er/2003/eng/0603.htm

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Various Exchange Rates Country

Currency

2009-01- 2009-1102 06 6.8225 6.8266

China

Yuan

Mexico

13.7815

Japan

New Pesos Yen

U.K.

Pound C dollar

1.2101

Canada

4/17/15 6.20

13.3754

15.32

91.12

89.86

119.02

0.6029

0.6887

0.67

1.0717

1.22

The line Canadian dollar of 1.2101 means that takes C$1.2101 to exchange for one U.S. dollar. Likewise 0.6029 British Pounds are worth $1.00 in U.S. currency.

Cross Rate • Exchange rate between two countries as calculated from the value of a third country • How many Mexico pesos / British pound? – 13.3754 Mexico pesos / U.S. dollar – 0.6887 British pound / U.S. dollar 13.3754 pesos 1 x 0.6887 pounds US $1

US $1

Reciprocal – gives dollars per pound

13.3754 pesos US $1.4520  x US $1 1 Pound  19.4212 pesos / pound

Appreciation / Depreciation Country China

Currency

2009-01-02

2009-11-06

Yuan

6.8225

6.8266

New Pesos

13.7815

13.3754

Yen

91.12

89.86

U.K.

Pound

0.6029

0.6887

Canada

C dollar

1.2101

1.0717

Mexico Japan

When the value of the dollar appreciates in value, the exchange rate increases.

A depreciation of the value of a dollar causes the exchange rate to decline.

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Exchange Rates and Prices

Exchange rate increase

$4.00

1.400 / 1

Canadian price $ / bu C$4.84 = 4* 1.210 C$5.60

U.S. price increase

$4.63

1.210 / 1

C$5.60

Initial Conditions

U.S. Corn Price $ / bu $4.00

C$ / U.S. $ 1.210 / 1

An increase in the exchange rate is similar to an increase in the U.S. price in terms of the price paid in Canadian dollars. Either change would decrease exports of corn. WHY?

Exchange Rates and Prices

Initial Conditions

U.S. Corn Price $ / bu $4.00

C$ / U.S. $ 1.210 = 1

Canadian price $ / bu C$4.84

Exchange rate decrease

$4.00

1.100 = 1

C$4.40

U.S. price increase

$3.64

1.210 = 1

C$4.40

A decrease in the exchange rate is similar to a decrease in the U.S. price in terms of the price paid in Canadian dollars. Either change would increase exports of corn. WHY?

When the dollar rises, exports fall, and when the dollar declines, exports rise.

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Exchange rates in foreign currency / $US 1/4/1971 to 4/17/2015

Exchange rates in foreign currency / $US 1/2/1981 to 4/17/2015

Exchange rates in foreign currency / $US 1/4/1971 to 4/17/2015

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Exchange rate Euros / dollar

Exchange Rate Determination Supply of dollars Rates are determined by forces affecting the supply and demand for currencies on the foreign exchange market.

E*

Demand for dollars

Q* Quantity of dollars traded Per day

Exchange Rates and Interest Rates Exchange rate Euros / dollar

D2 D1

Supply of dollars

E2 E*

Demand for dollars after rise in U.S. interest rates

Q* Q2 Quantity of dollars traded An increase in the demand for dollars as U.S. interest rates rise, Per day indicating here that it takes E Euros 2

to buy a dollar rather than E* Euros.

Exchange rate Euros / dollar

Exchange Rates and Trade Deficit D1

Supply of dollars Supply of dollars resulting from U.S. trade deficit

E* E2

Q* Q2 Quantity of dollars traded Per day

A trade deficit causes an increase in the supply of dollars on currency markets, weakening the dollar and lowering the exchange rate from E* euros per dollar to E2 euros

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Balance of Payments • Accounting record of all foreign transactions by U.S. public and private entities • Usually measured on a yearly basis • Includes – Trade in good and services – U.S. purchases of foreign assets – Foreign purchases of U.S. assets

• Net international position of a nation relative to its trading partners and foreign investors

Balance of Payments

http://www.imf.org/external/datamapper/index.php?db=BOP

Balance of Payments

http://www.imf.org/external/datamapper/index.php?db=BOP

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Balance of Payments – Select Countries

http://www.imf.org/external/datamapper/index.php?db=BOP

Balance of Payments – Select Countries

http://www.imf.org/external/datamapper/index.php?db=BOP

Summary • Exchange rates have an impact on U.S. agricultural trade • The value of foreign currencies is determined in the foreign exchange market.

• The international monetary system is called a managed float, •

• • •

where rates fluctuate within limits controlled by the International Monetary Fund or IMF. Trade distortions have prompted nations to seek general agreements on tariffs and trade (GATT). U.S. agriculture becoming increasingly dependent on export sales. Imports supplying a growing share of domestic food and fiber consumption. U.S. agriculture generates a trade surplus each year, partially offsetting the trade deficit in other merchandise.

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