U.S. Agriculture Relies on Trade, Exporting a Third of Its Production
Published: Friday, February 16, 2018
The following is from David Oppedahl of the Federal Reserve Bank of Chicago. This article is the first of two on the topic of "Midwest Agriculture's Ties to the Global Economy."
Over a number of decades, agricultural exports have become increasingly important to the bottom line of farmers in the Midwest and other parts of the nation. Moreover, imports of food products from around the world have helped increase business activity here and enhanced the lives of U.S. consumers. On Nov. 28, the Federal Reserve Bank of Chicago held a conference to explore issues surrounding agricultural trade, particularly those pertinent to the Midwest economy.
According to data from the U.S. Census Bureau, 8.9 percent of U.S. exports in 2016 were food and agricultural products, with 12.7 percent of those exports coming from the five states of the Seventh Federal Reserve District. Clearly, many farms and food manufacturers across the Midwest and elsewhere in the country have benefited from global trade; its benefits have also extended to Main Street businesses, such as grocery stores and restaurants, given that agricultural imports have tended to boost their sales.
At the conference, experts from academia, industry, policy institutions and government discussed trends in agricultural trade—including changes in global demand for certain farm products—and their impact on the nation and the district. The key goals of the conference were to better understand the relationship between agricultural exports and farm income; assess the primary drivers of agricultural trade; examine policies that affect agricultural trade; and discuss the impacts of agricultural trade on the Midwestern economy.
David Oppedahl of the Federal Reserve Bank of Chicago set the stage for the day's discussions by highlighting the extensive media attention paid to agricultural trade in 2017. New foreign sources of demand (China in particular) for agricultural products helped sustain a rise in U.S. farm exports since around 2000, he stated. Furthermore, the World Bank projected global economic growth to have improved to 2.7 percent in 2017 from 2.4 percent in 2016, and forecasted annual growth of around 3 percent in 2018 and 2019.
According to Oppedahl, stronger world growth should boost trade—and Midwestern agricultural exports. He emphasized that being able to better project farm exports' impact on farm income in the next generation would help rural communities decide which new facilities and public infrastructure projects to invest in. Farm exports and imports generate jobs and spur growth, so sound trade policies are vital to the future of agriculture and the rural Midwest, said Oppedahl.
C. Parr Rosson of Texas A&M University stressed the importance of trade to U.S. agriculture, as a third of production (on average) entered export channels during 2011–13, according to U.S. Department of Agriculture data. The range of export shares for U.S. farm output over that span was wide—from 77 percent for cotton to 10 percent for beef; soybeans and corn—two key products for the Midwest—had export shares of 40 percent and 15 percent, respectively.
When export markets soften, Rosson explained, stocks of commodities tend to accumulate and dampen prices for those commodities.
Increasing competition among corn exporters has eaten away at the market share for the U.S., which fell from 60 percent in 2000 to 40 percent in 2016. For soybeans, the U.S. maintained 40 percent of the world export market between 2000 and 2016, even as Brazil's share grew to 43 percent in 2016. Moreover, the main competitors for exports of corn and soybeans—Brazil and Argentina—increased their productivity at a steady rate, as did the U.S. However, Brazil expanded its harvested area by 60 percent during the past decade or so, whereas Argentina and the U.S. only increased their harvested area by 20 percent each. So, output of soybeans rose 85 percent in Brazil over the period 2008–17, while it rose 49 percent in the U.S. and 44 percent in Argentina.
Brazil's increased use of land for agriculture put pressure on its infrastructure for storing and shipping farm goods. Rosson contended that Brazil has the potential to expand its harvested area even more, subject to resolving its storage and transportation issues. According to Rosson, the U.S. has infrastructure problems of its own (most notably in Texas), which must be addressed for the nation's farmers to remain globally competitive.
Rosson also touched on how exchange rates can hurt U.S. farm exports—for instance, as the Brazilian real weakened relative to the U.S. dollar in the past decade, prices for Brazil's products became more favorable in world markets.
To close, Rosson illustrated the potential for U.S. food exports in Latin America with the example of Cuba, whose farm imports have trended upward since 2001 (with a setback in 2009 due to the global recession). Food imports from the U.S. to Cuba peaked in 2008; they have since fallen, mainly because of competition from the European Union and Brazil.
Katherine Baylis of the University of Illinois at Urbana–Champaign started her talk with an assessment of the growth in food demand, especially in Asia. She said that populations, average incomes and urbanization have all been increasing in many countries—notably in India and China (the two most populous nations). In conjunction with the growth in incomes, there has been a shift in diets from cereals, such as rice, to meats and other more expensive foods. Also, urbanization has shifted consumption toward more processed and prepared foods.
These nutritional transitions are still in the early stages for many nations, so there remains room for further shifts in food demand, explained Baylis. These trends have been key drivers of investments in local agriculture. However, even with improved production from domestic farm investments, there will continue to be a role for trade to fill in the gaps between food supply and demand around the world, especially in Asia and Africa.
Baylis commented on the rapid growth of U.S. agricultural exports in the past two decades, with exports of consumer-oriented products generally growing faster than exports of bulk commodities. Yet, underneath the raw numbers, Baylis showed that implicit bulk exports were actually much higher given that a significant portion of livestock feed was converted into meat for export. For example, in 2015, 13 percent of the corn crop was exported in bulk; however, that share would have about doubled if corn feed for exports of beef, pork and broilers had been counted, according to Baylis' calculations.
She concluded by emphasizing the importance of trade agreements in boosting agricultural exports. For instance, the U.S. agreement with South Korea (which went into effect in 2012) increased the share of U.S. goods entering South Korea duty-free to 80 percent from 13 percent while lowering tariffs on other key products and expanding market access for dairy products. New agreements like this could stimulate future growth for U.S. food exports, she indicated.
In his keynote address, Tom Vilsack of the U.S. Dairy Export Council argued that the U.S. needs to make a stronger case for other nations to import more of our agricultural products. Given that domestic consumption of dairy products hasn't kept up with output, the incredible productivity of dairies in the U.S. has underscored the need for more exports.
Without trade, the U.S. dairy industry would be in trouble: Vilsack attributed $1.25 per hundredweight (i.e., 100 pounds) of the price of milk ($18.10 per hundredweight in November 2017, according to the USDA) to a boost from exports.
The trade channels afforded by the North American Free Trade Agreement (NAFTA) remain important for dairy exports, he noted, as Mexico has been the largest importer of U.S. dairy products and Canadian markets are seen as a potential source of growth. In addition, Vilsack commented that Asian markets offer tremendous opportunities for increased U.S. dairy exports, as the middle class there blossoms and Asian diets include more dairy products.
The U.S. Dairy Export Council's plan to lift dairy exports from 15 percent of production to 20 percent involves developing new products and forging more foreign partnerships, in order to showcase U.S. dairy to the world.
Vilsack noted that there are challenges to achieving the "next 5 percent" goal, including the relatively strong value of the U.S. dollar, competition from other producers, and concerns about trade policy changes. Even so, Vilsack said there is a bright future ahead for the dairy industry, as long as producers here can respond quickly and effectively to new sources of demand from abroad.
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