External Events and the Recovery of US Agricultural Exports

Since 1981, United States agricultural exports have fallen from an all-time high of $44 billion to a low of just over $26 billion in fiscal year 1986. At the same time, the U.S. market share for all agricultural commodities has fallen from 19 to 15 percent—and declines are even sharper on a commodity-by-commodity basis. The market share of wheat has declined from 46 to 33 percent; of feed grains, from 72 to 55 percent; and of soybeans, from 71 to 50 percent. What are the external reasons for these declines? More important, what are the prospects that, under the 1985 farm legislation, U.S. agricultural exports and market share will improve dramatically?

The decline in U.S. exports and market share since 1981 is attributable principally to the turnaround in the global macro-economic environment. In 1979, responding to the second OPEC oil shock and rampant inflation, the United States initiated an effort to control inflation with a contractionary monetary policy. That policy, coupled with the 1981 tax cut and an expansive fiscal policy which has seen the federal budget deficit rise from $34.5 billion in 1980 to $139 billion in 1985, led to historically high real interest rates in the United States and a massive inflow of capital. Other developed countries were forced to follow the U.S. lead and keep their interest rates high or risk even greater capital outflows. Over the next few years these policies led to a worldwide recession, which saw growth rates in developed countries fall from an annual average of 3.2 percent between 1976 and 1980 to an annual average of 3ess than half a percent between 1981 and 1984. Developing countries' growth rates fell from an annual average of 5.6 percent between 1976 and 1980 to an annual average of 1.4 percent between 1981 and 1984.

Low growth rates in the less developed countries (LDCs) were in large part a result of their debt problems. When their loans were rescheduled, many developing countries were required to adhere to austerity plans which called for restrictive macroeconomic policies, sharp devaluation of exchange rates, restrictions on imports, and export enhancement. The debt burden and accompanying adjustment policies combined to reduce LDC demand for U.S. products and to encourage LDC exports. For example, the overall U.S. merchandise trade balance with six of the high-debt Latin American countries (Argentina, Brazil, Chile, Mexico, Peru, and Venezuela) fell from $4.3 billion in 1981 to a negative $16.2 billion in 1984.

Developing countries are critical to U.S. exports. While the European Community (EC) and Canada purchase about 25 percent of all U.S. agricultural exports, LDCs were the fastest-growing market for the United States during the boom years from 1975 to 1980, when the share of U.S. agricultural sales to them grew from 30 to 35 percent. The recession and the concurrent debt problems surfacing in late 1981 halted that expansion. According to a USDA study, eighteen countries which are major markets for the United States hold more than 60 percent of the problem debt.

If the recession was important in agricultural trade, the increase in the value of the dollar was more important. For example, in 1975 the French franc was worth 23 cents; by 1984, its value had fallen to 11 cents, making U.S. products twice as expensive for French purchasers. On a trade-weighted basis, the value of the dollar increased 44 percent between 1973 and its peak in the first quarter of 1985; U.S. agricultural products thus became almost twice as expensive for American trading partners.

Agricultural policies of other countries also played a role in the decline of U.S. exports and the loss in market share. One major competitor, the European Community, was able to expand its exports quite cheaply under its Common Agricultural Policy when the dollar exchange rate and U.S. agricultural prices were high. From 1979 to 1984, EC grain exports rose from 13 to 22 million metric tons—an increase of almost 50 percent. Yet during the same period, EC expenditures on export refunds fell from $1.6 billion to $0.7 billion, a fall of more than 50 percent.

The Soviet Union, a major U.S. customer in the 1970s, has become more price responsive in recent years. Given high U.S. agricultural prices from 1981 to 1985, it has purchased commodities from such other sources as Argentina and Australia. Furthermore, the U.S. embargo of 1980 led the Soviets to find substitutes for feed grains; a recent report by the Economic Research Service (ERS) shows that the USSR now relies less on grain because of a 27 percent increase in nongrain feedstuff imports between 1979 and 1985.

China, another big buyer, also changed its import and domestic agricultural policies. A drive to conserve foreign exchange and to increase domestic production reduced China's purchases from the United States from $2.2 billion to $0.7 billion between 1981 and 1984.

While other developing countries did not, by and large, enact particular agricultural policies which increased exports, exchange rate devaluation boosted their agricultural exports by making them cheaper on international markets. Yet devaluation also hurt them by ending implicit subsidies on machinery and other imported capital goods. In addition, many were forced to enact austerity measures (such as ending subsidies on fertilizer and gasoline), which undermined support for their agricultural sectors.

Market forces and U.S. policies (especially high, guaranteed U.S. prices), not their own policies, enabled these countries to expand production and exports virtually risk free. Some of that increased production entered export markets to compete with U.S. products. For example, U.S. wheat exports fell 9.3 million metric tons between 1981 and 1984, while our competitors' exports increased by 10.5 million metric tons. Half of those exports came from other developed countries, and half from Argentina. The production of U.S. competitors was aided as well by technological change, as in India, where the green revolution permitted the export of wheat for the first time in twenty years, and in Brazil, where the adaptation of sea beans to the climate and soil fostered soybean exports.

Those competitors who are less capital- and energy-intensive than the United States were able to underprice the United States because they were less affected by the Increase in interest rates and oil prices. In 1984, for example, total cash expenses per metric ton of wheat in the United States averaged $105, whereas the total cash expenses were $60 and $62 per metric ton in Argentina and Australia, respectively.

Domestic policies contributed to the U.S. agricultural trade problem by maintaining U.S. prices above world market levels and choking off U.S. exports. The 1985 farm legislation was designed to regain export markets and increase market share by lowering loan rates on all commodities and adopting marketing loans (or export subsidies) on some. The question is whether external economic factors will allow this legislation to be effective.

Macroeconomic outlook

The importance of the macroeconomic climate for agricultural trade cannot be overstated. One study indicates that from 1981 through 1983, the overvalued U.S. exchange rate alone was responsible for the loss of 25 million metric tons of coarse grain exports, Third-World indebtedness being responsible for another 10 million-metric-ton loss. Recent research in this field has yielded striking results. As part of an Economic Research Service study, Embargoes, Surplus Disposal, and U.S. Agriculture, the effect that a continuation of the macroeconomic environment of the late 1970s would have had on U.S. agriculture in the early 1980s was simulated. Results show that had the macroenvironment of 1979—when interest rates and the value of the dollar were low and inflation levels were high—prevailed through 1984, commodity prices and export volumes would have been 15 to 20 percent higher than they actually were (corn export volume alone would have been 35 percent higher), commodity stocks would not have accumulated, the 1983 PIK Program would not have been necessary, and prices would have been high enough to trigger release of the Farmer Owned Reserve and Commodity Credit Corporation stocks.

Unfortunately, the actual experience of the early 1980s was very different, and the macroeconomic outlook is not bright. Since 1985, worldwide economic growth has been sluggish, the U.S. economy has been growing at less than 3 percent annually (too slowly to generate growth abroad), Japan and Germany have refused U.S. promptings to inflate their economies to generate stronger growth, and the LDCs are still burdened by heavy debts and repayment schedules and have little prospect of generating sufficient export earnings to repay those debts. Predictions made by Wharton Econometrics indicate that growth rates should pick up from the levels of the early 1980s, but will not reach the levels of the late 1970s. Developing countries are expected to grow at an average rate of 3.8 percent between 1986 and 1989, compared with an average of 6.3 percent during the 1970s. Both West European and the centrally planned economies of the Eastern bloc are expected to grow somewhat more slowly in the next four years than they did in the 1970s.

The upshot is that there is likely to be little income growth to generate substantial increases in demand for U.S. agricultural exports—and certainly not enough to return U.S. exports and market share to the halcyon days of the 1970s. As Keynes said, "You can't push on a string—if people have no money to buy your product, it doesn't matter how cheaply it is priced."

Over time, the drop in the value of the dollar since its peak in February 1985 will help bring the U.S. balance of trade into alignment. But it is not clear how much the drop will help agriculture. The dollar has not fallen as far, or as fast, as most suppose against those countries that matter for U.S. agricultural exports. When measured against other developed economies, the dollar has fallen by 25 percent; but when measured against a broader group of currencies the dollar's value has declined less than 5 percent.

The fall in the dollar's value has been most striking against European and Japanese currencies. But the markets of these countries are the most heavily protected against United States competition. Their consumers are isolated from both foreign exchange rates and prices when it comes to agricultural trade. Many LDC buyers of U.S. goods peg their currencies to the dollar, which is to say that the dollar has not become cheaper in relation to those currencies. Some U.S. competitors who do not peg currencies to the dollar have undertaken competitive devaluations to keep the dollar from falling against their currencies, thus also keeping their own products inexpensive compared to U.S. products.

It is unlikely that the EC or Japan, two major U.S. markets, will make substantial changes in their domestic agricultural policies in the next few years. And even if it is agreed in multilateral trade negotiations to reform domestic agricultural policies, changes will not be made overnight, so the United States can expect continued trade restrictions in those markets.

LDCs, on the other hand, are likely to make changes in their agricultural policies. Increasingly, developing countries are realizing (with and without help from the IMF, the World Bank, and AID) that "getting the prices right" is critical to their economic success, and they are beginning to provide price incentives to their farmers. World prices may be forced lower by American and others' policies, but farmers in developing countries will be receiving higher domestic prices for their production than in the past.

U.S. competitors—especially the EC, Argentina, Australia, and Canada—will continue to change their export policies and prices in response to changes in U.S. policies and prices. RFF interviews with key officials in competitor countries reveal that those nations will jealously guard their export market volumes (if not market shares), thus matching U.S. prices as long as possible. It is not likely, then, that buyers or competitors in either developed or developing countries will enact policy changes to make room for U.S. exports. In fact, some policy changes may increase the competition from other sources.

Going into 1987, worldwide agricultural production exceeds consumption by historically high levels. U.S. stocks alone would take care of thirty-two months of U.S. export supply. And policy reforms in LDCs and policy stability in developed countries are likely to encourage greater agricultural production, some of which will move into export markets and compete with U.S. products, some of which will substitute for U.S. exports in domestic economies.

Higher returns to agriculture in both developed and developing countries will also encourage farmers around the globe to adapt new technologies more rapidly than they might otherwise. In previous technological revolutions the United States was able to adapt new methods more quickly than its competitors, whereas in the current revolution technologies are likely to be more easily transmitted across international boundaries and more quickly adopted by farmers everywhere.

Domestic outlook and international context

A closer look at the effect of potential productivity increases in the United States alone is sobering. According to recent information from the ERS, between 1951 and 1985 compound annual productivity growth averaged 1.76 percent. During that thirty-five year period, the fastest rate of increase (excluding two years of drought and one of bumper harvest) was 2.4 percent during the 1950s, when farmers widely adopted hybrid corn varieties. The lowest rate of productivity growth was 1.25 percent in the late 1960s and early 1970s (excluding one year of corn blight). Past productivity growth arose from technologies that affected only a few crops. A recent study by the Office of Technology Assessment suggests that new bio- and information technology will cover a broader range of commodities and have wider applications. The probability is therefore high that the rate of productivity growth in the United States alone will be at least 2.4 percent annually.

Population and income growth in the United States are expected to increase demand for food by about 1.0 to 1.2 percent annually—half the potential increase in productivity. Without substantial acreage reduction or increase in export demand, productivity growth will overwhelm domestic demand.

Income and population growth in the other developed countries is likely to parallel that in the United States. In many LDCs, where people tend to use a high proportion of every additional dollar of income on food, per capita incomes are likely to fall without sharp declines in birth rates or sharp increases in development investment.

When set in a context of low population growth rates in developed countries and low income growth rates in LDCs, supply will continue to outpace demand in the coming decade. Historically, the United States, as the residual supplier, fares better in tight markets than in glut markets. The chances of continuing problems for U.S. agriculture is therefore great.

The fall in oil prices and interest rates have cut U.S. costs of production by approximately $10 to $15 billion during the past year, and these cost savings will certainly help lower overall costs of production. However, oil prices and interest rates have also fallen for competitor nations, which will also be able to lower their overall production costs.

While policy-provoked low prices may discourage production, many changes in this new technological revolution are cost-saving and generally equally adaptable to labor- and capital-intensive farming systems. As a result, low-cost, labor-intensive competitors (such as Argentina and possibly China) will be able to reap substantial cost savings from new technologies.

It is unlikely that the United States will be able to gain much of a cost advantage over its competitors in the next decade. So the problem remains: if the 1985 farm legislation, designed to enhance exports and bring back market share, cannot alone solve the agricultural trade problem, what will?

Fresh policy approaches

The first rule of policy analysis is to be sure that the problem is properly defined. Agricultural trade is only part of the challenge facing U.S. agriculture in 1987. Equally important are the policies of other exporting countries, farm financial stress, and an uneven—some would say inequitable—distribution of income and access to government program support.

The current legislation addresses only one aspect of the trade problem—high and uncompetitive prices. In the face of large stocks and global excess capacity, lower prices will not, in and of themselves, increase exports or export markets. The demand side of the equation is equally important. It is essential that the global economy get back on a growth track. This means that the United States must keep its economy healthy and growing and must convince other developed economies to do the same, since OECD growth is a prerequisite to economic recovery by the less developed countries.

But economic growth alone is not sufficient if the developing countries are still saddled with debt and have nowhere to sell their products and few ways of generating income. This means that solutions to the continuing debt problem must be sought, that U.S. markets must be kept open to LDC trade, and that the World Bank and other agencies must invest in development.

While higher economic growth will help increase exports by expanding the size of the export market, solutions to the immediate excess supply and longer term excess capacity problems must be sought among the major exporting countries. The upcoming round of multilateral trade negotiations provides the major exporters a chance to confront these problems and find coordinated solutions. Optimally, member countries of GATT could agree on ways to reform their domestic agricultural policies so that they do not distort international trade flows.

Low prices and high deficiency payments do not address farm financial stress or the uneven distribution of income. Data generated by the ERS, which indicate that only 38 percent of highly indebted farmers received commodity program benefits, suggest that traditional commodity programs are an inefficient way to alleviate farm financial stress. Financial restructuring and adjustment assistance programs targeted to those farmers in deep distress would be better tools.

News reports notwithstanding, net cash farm income has been higher in nominal terms than ever before, yet that income is received by a minority of large farmers: just over 14 percent of all farmers receive almost 75 percent of cash receipts and 66 percent of government payments. If society deems it appropriate to support small and medium-sized farms, then traditional commodity-based programs are inefficient. Better tools would be programs that divorce program benefits from production and base them instead on some notion of income maintenance.

External factors will act as a major constraint on the ability of domestic farm policymakers to address the farm problem through traditional commodity price-support programs like those embodied in the 1985 farm legislation. Macroeconomic growth and development must be encouraged, exporting countries must agree together to reform their domestic policy sets, and domestic problems must be solved with policies and programs tailored to fit the real, underlying problems of financial stress and uneven income distribution.