Dr. Mathew D. Shane of the U.S. Department of Agriculture explains how the economy is affecting global trade.
The global crisis which began in 2007 and has continued into 2009 is having profound impacts on U.S. and global agriculture. The most pronounced feature of the crisis is the dramatic declines in the value of trade with both total and agricultural trade declining by near 20 percent between 2008 and 2009. The consequences of this declining trade has been declining prices for agricultural commodities, declining farm incomes, downward pressure on farm land values, and reduced agricultural related employment.
The crisis has not impacted on all countries equally (see Table 1). The EU27, New Zealand and Indonesia have seen the agricultural exports fall more than the average. Countries such as Brazil, China, Australia, Mexico, Chile and Turkey have seen their exports decline less than the average. The dramatic difference that the crisis made can be seen by looking at the difference between what happened from 2007 to 2008 and from 2008 to 2009. Between 2007 and 2008, most major exporters had very large increases in the value of their agricultural exports averaging more than 25 percent. Critical to the adjustments that are taking place because of the crisis, some countries such as Japan and Germany which are very trade dependent have seen more serious declines in both their total merchandise trade and GDP. The crisis is also leading to a realignment of exchange rates to reduce the magnitudes of global trade imbalances. The ultimate results of the crisis will depend on the adjustments in the exchange value of the U.S. dollar.
The economic crisis will affect international agriculture trade primarily through the realignment of real exchange rates and its effect on real incomes. The economic crisis has resulted in major recessions in most of the major countries of the world (Table 2), with world GDP expected to decline in 2009 by more than 2 percent. The slowing of the growth in demand for agricultural commodities world wide resulting from the fall in global income will also lead to a slowing of the growth in the volume of agricultural commodities traded.
In addition, the large global imbalances in financial and merchandise trade that existed before the crisis will likely lead to substantial changes in exchange rates. Already the current crisis has led to the appreciation of the U.S. dollar against the currencies of those countries most affected by the crisis as investors seeking safe returns increased their purchases of U.S. Treasury bonds. This movement of funds led to a 15 percent appreciation of the dollar relative to its major trading partners between July, 2008 and March, 2009 (ERS Exchange Rate Data Set, 2009). The appreciation of the U.S. dollar creates a competitive advantage in global markets for other major agricultural exporters, such as the EU, Australia, Canada, and Brazil. As U.S. products become relatively higher priced when the dollar increases in value, world demand increases for imports from countries whose currencies have declined in value relative to the dollar. However, beginning in March of 2009, the real trade-weighted dollar began to depreciate once again. It now looks like the long term pattern is likely to lead to a continuing depreciation of the dollar.
More important perhaps than the immediate effects of the economic crisis on world agricultural markets is the effect the economic crisis will have on trade and world consumption in the longer term. Exchange rates and changes in economic growth and income can have a major impact on total agricultural commodity and merchandise trade. Consequently, how exchange rates and economic growth evolve as the world economy recovers also will have a major impact on the volume of international agricultural commodity trade and the outlook for U.S. agriculture into the foreseeable future. One major part of the adjustment to the economic crisis has been an increase in savings and a relative decline in consumption in the United States. At the same time, countries with excess savings such as China and Russia have seen their savings rates decline and consumption rate increase. The export lead growth model which has dominated the growth strategies of the high growing Asian countries may need to be modified to focus more on domestic consumption. This already is happening and is likely to continue into the future particularly if U.S. consumption continues to be restrained as the long-term adjustment unfolds.
Dr. Mathew D. Shane is the Senior Economist for Macroeconomics at the U.S. Department of Agriculture’s Economic Research Service. The views presented here do not necessarily represent those of the Economic Research Service or the U.S. Department of Agriculture.
The material for this article was drawn from: Peters, May, Mathew Shane, and David Torgerson. What the 2008/2009 World Economic Crisis Means for Global Agricultural, ERS Report No. WRSO905, U.S. Dept. of Agriculture, Washington, DC, August 2009.