US Farmers and Latin American Debt

For better or worse, the U.S. agricultural sector and the economies of Latin American nations are mutually dependent. The United States has the capacity to produce roughly twice what it consumes domestically. If either massive set-asides or large government inventories are to be avoided, exports must at least be maintained, and ideally expanded. Latin America, with a combined population of almost 436 million, could play a critical part in finding a solution to the U.S. overproduction problem. It ranks third in the list of top U.S. regional markets, trailing Asia and Western Europe.

Though Latin America possesses the potential to become an even bigger customer for U.S. farm goods, it does not, however, possess the means. As G. Edward Schuh, dean of the Humphrey Institute of Public Affairs at the University of Minnesota, aptly phrased it during his 1989 testimony before the Joint Economic Committee of the U.S. Congress, "markets are based on income, not hungry bellies." Latin America must shed its debt burden and increase its purchasing power before it can be in a position to increase its volume of agricultural imports from the United States.

Over the past year, the Latin American debt problem appears to have worsened rather than gotten better. According to the 1989 World Bank annual report, the pace at which developing countries transferred money back to the richer nations accelerated dramatically in 1988, hitting a record $50.1 billion, up almost $12 billion from 1987. (This figure is the net negative transfer, representing payments of interest and principal that are greater than new lending.)

Particular cause for concern is that the most heavily indebted nations described in the World Bank report are also currently the best Latin American customers for U.S. agricultural goods. Mexico, which has been the largest Latin American export market for U.S. agriculture every year since 1970, was at the top of the list of indebted nations. During 1988, it had negative net resource transfers of $9.4 billion, a massive increase from its negative net transfers of $2.9 billion in 1987. Brazil, which is number two among Latin American U.S. export markets, held the unenviable number two position for level of indebtedness.

Somewhat ironically, Latin American nations and U.S. farmers found themselves in the same uncomfortable set of circumstances earlier this decade. Both had taken up the option of using readily available funds to attempt to enhance their economic position, and both had become victims of suddenly tightened purse strings.

By comparison with Latin America, the U.S. agricultural sector has emerged from that extremely difficult period essentially intact. The adjustments required have been made, painful though they have been to the farmers who suffered financial stress. To help ease the adjustment, the U.S. Congress passed bailout legislation for the farm credit system. In addition, government deficit spending expanded demand for goods and services elsewhere in the economy, thereby helping to create new employment opportunities that eased the transition of some out of agriculture. In the eyes of some analysts, the U.S. agricultural sector has come out in a stronger competitive position.

Not so, however, for Latin America. No bailout legislation has been passed. The debt crisis continues. To facilitate the repayment of debts, the region has been encouraged to reduce imports and stimulate exports. To alleviate the foreign exchange shortage, there has been an increase in the volume of trade among countries within the region.

Debatable gains

The volume of agricultural goods leaving U.S. borders and entering Latin America each year remains considerable despite the debt drain, but the halcyon days are over. U.S. agricultural exports to Latin America peaked in 1981 at $6.4 billion, dropping to $3.6 billion in 1986 before beginning to recover. During fiscal year 1988, U.S. agricultural exports to Latin America moved up to $4.4 billion.

Some agricultural trade experts suggest that the export gains to U.S. farmers from an end to the debt crisis could total as much as $3 billion per year. But in the view of others, the magnitude of the direct gain to the agricultural sector should not be exaggerated. They suggest that in Latin America, and especially in Argentina and Brazil, development is just as often accompanied by expanded production of meat and animal feed. Instead of importing more as they develop, such countries will probably continue to export more agricultural products, at times in competition with U.S. farm exports. While Brazil does remain a significant importer of wheat and coarse grains, of late a larger share of these imports has come not from the United States but from Argentina. Moreover, the bulk of future increased imports would more likely be nonfood items.

Argentina and Brazil clearly are competitors, producing soybeans for export in greater volume and at lower cost than anyone else. While their combined production and exports were negligible during the 1960s, their percentage of world soybean product exports had increased to 15 percent by 1979 and rose to 26 percent in 1988. In 1988, these two countries alone supplied 56 percent of world soybean meal exports and 78 percent of world soybean oil exports.

The effect on U.S. agricultural exports of alleviating regional debt problems likely would lie somewhere between a $3 billion gain and substantial losses resulting from stiffer competition and failure to export more U.S. farm goods. Admittedly, a stronger Latin America could mean a stronger competitor in some commodity sectors. Argentina will continue to be a strong presence in international markets in wheat, corn, and soybeans. Brazil will continue to corner a significant share of the soybean market. Both countries have the resource base to continue that competition, even increase it, quite apart from the debt issue.

Overall, the threat of Latin American competition with U.S. agriculture is mitigated on two counts. First, U.S. agriculture specializes in temperate-zone commodities, while the main Latin American production zone specializes in tropical agricultural commodities. In addition, and more important, broadly based economic development and rising per-capita incomes will lead to greater demand for U.S. feed grains as consumers increase demand for animal proteins in their diets.

Policymakers in both the United States and Latin America can begin now to take steps to alleviate Latin American foreign debt. If efforts were undertaken by both parties to reform current domestic and trade policies, conditions would be created that would enable Latin America to better help itself to a stronger economic position. For instance, U.S. sugar producer prices (and coincidentally corn sweetener prices) are supported by a stringent and tightening sugar import quota. Liberalization of the U.S. sugar program would open the U.S. market to more imported sugar, including that from Latin America, thus increasing the region's foreign exchange earnings as a result of larger export volumes and strengthened world prices.

International trade policies in some cases have had a negative effect on market opportunities for Latin America. Agricultural exporters like Argentina and Brazil have been hurt badly by the subsidy war between the European Community (EC) and the United States. Protectionist policies have tended to reduce international market prices and reroute agricultural trade flows. This is only one of the issues of importance in the agricultural negotiations currently taking place under the General Agreement on Tariffs and Trade. And not only Latin America is losing out under these policies. A recent study by the International Agricultural Trade Research Consortium estimates that fully two-thirds of the cost of U.S. farm support in 1986 went to offsetting the effects of farm support by other countries. In the EC the proportion was one-third, and in Canada it was well over half. This alone is a compelling case for trade liberalization.