Developing Countries' Economies Key to U.S. Agriculture
Issue
Exports have accounted for 20-30 percent of U.S. farm output for the
last 30 years. Growth and stability of global markets therefore greatly
affect the health of the U.S. farm sector. Domestic use, while larger
than exports, is relatively stable and shows little growth. Exports
are volatile but show more potential for long-term growth, chiefly
from developing and transition countries.
Developing countries account for a large share of world trade in
major farm commodities and most of the projected growth in agricultural
imports. Developing country demand for farm goods is generally more
sensitive to changes in income and prices than demand from developed
countries, because lower income consumers must allocate a larger
share of their budget to food and make larger adjustments to changes
in income and prices. Thus, except when border policies or financial
constraints intervene, developing country agricultural imports are
responsive to changes that affect consumer budgets and food prices.
Developing countries are also important farm exporters, and exports
respond to changes in local demand or producer incentives.
Economic shocks during 1998-2000 in developing countries in Asia,
Latin America, and the former Soviet Union (FSU) featured large
depreciations of local currencies, hikes in local real prices, and
drops in incomes that triggered significant changes in global farm
trade and prices. These events underscored the importance of assumptions
on economic activity in the developing and transition regions for
making projections of variables such as agricultural trade and prices.
Scenarios
For this analysis, we contrasted alternative income growth and
exchange rate scenarios against the current USDA baseline projections
(the base scenario). The USDA baseline macroeconomic assumptions
are consistent with many independent forecasts that call for robust
economic growth in developing regions, including Asia, Latin America,
North Africa, and the Middle East. Prospects for the transition
economies of Central and Eastern Europe (CEE) and the FSU are more
cautious, but forecasts anticipate a gradual recovery to modest,
positive rates of growth.
The alternate scenarios are designed to reveal the impact of gradual
and sustained changes in income or exchange rates on trade and prices,
not the potential impact of relatively large or short-term shocks.
The alternate scenarios are defined as:
- The "slower income growth" scenario: the baseline income growth
rate (measured by real gross domestic product) for each country
in a region is reduced by 1 percentage point for each year (1999-2009).
- The "greater depreciation vs. dollar" scenario: the baseline
rate of change in the real exchange rate with the U.S. dollar
for each country in a region is reduced by 1 percentage point
each year.
Both Scenarios Were Analyzed for Their Effects On:
- Developing Asia (includes China and excludes Japan);
- Africa and the Middle East;
- Latin America (includes Mexico);
- Transition economies (FSU and CEE); and
- Developed countries (Australia, Canada, Japan, New Zealand,
and Western Europe; excludes U.S.).
Model
The analysis used the country-linked system (CLS) of models developed
at USDA's ERS. The CLS contains 42 foreign country and regional models,
and the food and agricultural policy simulator (FAPSIM) model of U.S.
agriculture. The foreign country models account for policies and
institutional behavior such as tariffs, subsidies, and trade restrictions.
In general, production, consumption, imports, and exports in the models
depend on world prices (endogenous), on macroeconomic assumptions
(exogenous), and on domestic and trade policies (both endogenous and
exogenous).
FAPSIM, the U.S. model, is an annual econometric model of U.S.
agriculture whose structure reflects economic theory and institutional
knowledge of the sector. The model contains over 700 equations that
describe supply, use, prices, and policies such as commodity loan
rates and marketing loans.
The CLS reaches simultaneous equilibrium in prices and quantities
for 22 world commodity markets. Commodity coverage includes coarse
grains (including corn, sorghum, and barley); food grains (wheat
and rice); oilseeds (including soybeans, rapeseed, and sunseed)
and their corresponding meals and oils; cotton; and animal products
(beef and veal, pork, and poultry).
Total U.S. farm exports are most affected by:
- income growth in developing Asia,
- exchange rates in developing Asia, and
- exchange rates in Latin America.
Impacts on U.S. net farm income are similar to impacts on U.S. exports:
developing Asia and Latin America have the largest impacts. Lower
incomes in developed countries also affect U.S. net farm income
by shrinking global demand for meats and feeds.
Income and exchange rate impacts are significant, but small relative to the region's share of world trade.
- Reduced incomes generally reduce global demand for meats and
feeds. For wheat, they reduce domestic demand and increase exports
from Australia, Canada, and the EU.
- Currency depreciation shifts some meat production to Australia
and Canada and boosts world trade as these countries become more
competitive. Coarse grain trade expands, and soybean and meal
trade declines, largely due to shifts in EU feed rations.
- Depreciation of EU, Australian, and Canadian currencies reduces
world wheat prices and increases wheat trade.
This region now accounts for a small share of world trade, but scenario
impacts are still significant, particularly for wheat, feed grains,
and meats.
- Both scenarios push down world grain prices, both by reducing
these countries' imports and boosting their exports.
- The large impacts on meat reflect the region's now large role
in meat trade, as well as high income and price elasticities of
demand for meat.
Impacts reflect this region's role as major producer and exporter of soybeans and products, corn, wheat, and meats.
- Exports are particularly responsive to exchange rates, with
currency depreciation leading to lower world prices and increased
trade volume for soybean products and meats.
- Lower incomes also increase exports of soybean products, pushing
down world prices and increasing world trade volume.
- Lower incomes reduce world trade and prices for wheat, corn,
and meats as reduced demand in some countries offsets export gains
in others.
Impacts are generally small, even though the region accounts for
large shares of wheat and coarse grains trade.
- Global wheat trade impacts are moderated by high levels of
use that are relatively insensitive to income or price changes
and by policies that regulate trade in some markets.
- For corn, responses are muted by trade restrictions and a preference
for feeding barley.
- Small impacts of exchange rates on global trade in wheat and
coarse grains also stem from limited capacity of the region's
rainfed production systems to respond to price signals.
Relatively large global impacts partly reflect this region's important
share of global trade volume for these commodities, particularly
soybean oil and meats.
- Large impacts are also driven by the relative openness to imports
of some goods by at least some importers, including soybeans and
meal (China and much of Southeast Asia), corn and wheat (much
of East and Southeast Asia), and soybean oil (China, India, Pakistan).
- Impacts would likely have been greater if the region's large
economies (China, India, and Indonesia) were more open to trade.
Conclusions
- Both income and exchange rate reductions in developing and
transition regions have large global impacts. If the "slower income
growth" scenario occurred in all four developing and transition
regions, real U.S. net farm income would fall about 4.5 percent,
or $1.8 billion, by 2009. If the "greater depreciation vs. dollar"
scenario occurred in all four developing and transition regions,
real U.S. net farm income would fall about 7 percent, or $2.8
billion, by 2009.
- For developed countries, declines in growth and, especially,
exchange rates have significant global impacts, but those impacts
are small relative to these countries' major share of world trade.
- Developing Asia appears to have the most potential to affect
global and U.S. commodity markets.
- Reliable projections of real exchange rates are just as important
as reliable projections of income growth. Since real exchange
rates exhibit more variability and are more difficult to project
than incomes, they can be a greater source of projection error.
- The analysis does not include some potentially offsetting and
beneficial impacts on U.S. agriculture, such as lower U.S. interest
rates associated with larger capital inflows and lower farm input
prices, both of which were seen during the recent Asian financial
crisis.
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