Extension Communications
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9/20/99
PLAIN ECONOMIC SENSE
For release Sept. 20, 1999
Column 381
The Importance of and Prospects for Agricultural Trade
By Mark A. Edelman
Extension Public Policy Economist
Iowa State University Extension to Communities
The changing world trade picture is one of the critical factors in the current debate over the future of U.S. farm policy. Why is trade so important and what prospects are developing?
Why is trade so important? The story of U.S. agriculture during the 20th century has been one of making two blades of grass grow where one grew before. The productivity growth in U.S. agriculture as averaged 1.8 percent per year for the past 50 years. This means that with the same inputs, on average we produce about 2 percent more agricultural output per year. As a result, every dollar of export sales generates 40 cents of U.S. net farm income.
Domestic population growth is roughly growing at 1 percent per year. Population growth is the most important factor in the growth of domestic food demand. If the average person eats the same amount of food over time, then domestic demand for food grows by about 1 percent per year. The bottom line is that if farm output is to continue to grow by 2 percent per year, then either new uses and new markets are needed or prices inevitably fall.
It is also important to recognize that most of the developed nations around the world have mature population growth rates similar to ours. So their domestic food demand is growing at about 1 percent per year, too. Only in the emerging nations is the potential for population and income growth rates higher-- averaging 2 percent growth or more in some cases. As their incomes grow, their demand for food tends to shift from food grains to meat and value-added products. This is why the greatest longer-term opportunities for expanding markets of U.S. agricultural exports have rested with developing nations.
Will wishing it to happen make it so? No. At a recent Symposium on the Future of American Agriculture, trade expert Bruce Gardner pointed out that the three periods referred to as the "golden years" for American Agriculture were all associated with export expansion: the "1910-14 Golden Era of Agriculture," the World War II and Marshall Plan era, and the "Go-Go Period of the 1970s. It can also be said that the two worst periods in American Agriculture are associated with the loss of exports. High interest rates and high exchange value of the dollar curtailed exports in the 1980s. The recovery of European food production and protectionist trade barriers erected during the 1920s contributed to the Great Depression.
Developing nations have political environments that often are less stable than those found in the developed nations. Indonesia has been a growing market for U.S. agriculture. It has the world's fourth largest population. It also continues to be unstable politically. Gardner pointed out that China's recent agricultural census shows more crop production capacity than previously thought. As a result, China may continue to be a net exporter of food for a longer period than previously predicted.
It is not clear how price responsive Brazil will be in converting rain forests to expanded crop acreage. Brazil might continue to convert rain forests to soybean acreage irregardless of what the U.S. does in terms of acreage reduction and grain reserve programs.
On the positive side, the Asian economy is now recovering from its Asian economic "flu" and the exchange value of the dollar has declined relative to other currencies even though the Federal Reserve has been increasing domestic interest rates. A 5 percent decline in the value of the dollar makes U.S. agricultural exports 5 percent cheaper for foreign consumers.
These factors may provide some boost to offset some of the potential negative trade factors during the coming year. Even so, it is unlikely that exports can be expanded into perpetuity so as to fill the market gap created by American Agriculture's continued increase in productivity growth. At the same time, our advances in technology become more readily available around the world more quickly than in the past.
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