Look to NAFTA's Future, Not Past
Published: Friday, February 16, 2018
The following is from David Oppedahl of the Federal Reserve Bank of Chicago. This article is the second of two on the topic of "Midwest Agriculture's Ties to the Global Economy."
Joseph Glauber of the International Food Policy Research Institute began his talk on NAFTA by stating that world agricultural trade has risen dramatically since 2000. NAFTA has greatly assisted in the takeoff in global farm trade, he said, as seen in the strong growth of agricultural exports and imports between the U.S. and both Canada and Mexico since the agreement took effect in 1994.
Glauber shared his analysis of the bilateral trade flows between the U.S. and its two NAFTA partners for 2014–16, noting that consumer-oriented products were traded much more than products in other categories. Although the top U.S. farm exports to Mexico were corn and soybeans, these bulk products were overshadowed by consumer-oriented products in the aggregate.
Imports of fresh fruit and vegetables, Mexico's top (consumer-oriented) farm exports to the U.S., demonstrated how well the North American value chain for farm products operates today. Most of these imports occurred during the winter months of the U.S. (or involved fruits and vegetables not produced here). The seasonality of these imports illustrates how trade can be beneficial to U.S. consumers, who would have otherwise faced fewer choices and/or higher prices for such goods during certain times of the year. There are also nutritional gains from this trade, as Americans consumed larger quantities of fresh vegetables per capita with the assistance of imports under NAFTA.
Glauber mentioned the livestock industry as another example of how well the North American value chain can work (livestock enter the U.S. and leave as meat for Canadian and Mexican consumption). NAFTA lowered tariff barriers and enabled more efficient supply chains for food producers, which created value for consumers. Glauber viewed NAFTA renegotiations as potentially helpful with regard to modernizing some of the agreement's provisions, but said there was a risk that other parts of the process could harm agricultural trade. He argued that the agricultural lobby played a major role in preventing the U.S. from withdrawing from NAFTA in 2017.
Glauber said gains in market access were unlikely through NAFTA renegotiations. He expressed concerns that these renegotiations would become mired in redressing trade imbalances of the past when instead, all parties might benefit from seeking new opportunities to boost agricultural trade even further in the future.
Philip Levy of the Chicago Council on Global Affairs contended that a satisfactory agreement for all parties to the NAFTA renegotiations was the least likely outcome. No matter the outcome, agricultural trade remained at risk. Counterbalancing this risk would be an anticipated depreciation in the U.S. dollar. James Hansen of the USDA Economic Research Service noted that the U.S. dollar is predicted by the USDA to depreciate slightly over the next 10 years, which would make U.S. commodities more competitive in world markets.
Hansen went on to discuss some of the changes in global demand for food that are expected to boost future consumption of fruits, vegetables, vegetable oils, processed cereal products, meats and dairy products at the expense of staple grains, roots and tubers. USDA forecasts through 2026 (made under the assumption of no changes to NAFTA and other trade agreements) showed continued growth in agricultural trade and increased U.S. exports, particularly for products originating in the Midwest.
Hansen reasoned that Midwestern farms will remain competitive producers of corn, soybeans and wheat, although the U.S. market share of exports worldwide would likely drift down for each, as other nations, particularly Brazil and Argentina, ramp up their farm exports over the next decade or so.
Steven Elmore of DowDuPont emphasized the importance of these three products for the Midwest, given that they were the nation's top farm commodity exports by U.S. dollar value in the period 2007–16. Elmore illustrated that the value of agricultural exports as a share of farm receipts has been at a higher level in the past decade than in previous decades. This share increase was sustained despite the growth in biofuel production for domestic use in 2007–16 and the above-trend global yields for grains and oilseeds (and consequently lower commodity prices) in 2013–17.
Farmers will plant what works financially, and Elmore viewed exports as even more critical for U.S. farmers in the future. Elmore also mentioned the importance of updating and expanding the U.S. infrastructure for exports, as other countries have gained market share at least in part through their own infrastructure improvements.
As the U.S. competes with other nations to supply grains and oilseeds to the world, a falling U.S. share of global farm exports will exert pressure on both rural areas and Main Streets of the Midwest.
Ernest Goss of Creighton University addressed this repercussion of shifting trade patterns. Goss reported on the results of a monthly survey conducted among CEOs of banks located in small towns (average population of 1,300) across 10 states, including Illinois and Iowa. Creighton's Rural Mainstreet survey results indicated that rural areas have been struggling during the recent downturn in agriculture—represented by four consecutive years of declining net farm income. The slowdown in farm cash receipts was linked to softness in the value of agricultural exports in 2015–16.
Though exports may be under performing lately, Goss said agricultural trade remains vital to many Midwestern states (especially to Iowa, Kansas, Nebraska and South Dakota—each with over a third of its exports from agriculture). Despite the disappointing recent results for the farm sector, Goss said he was hopeful because manufacturing has surged in the U.S. over the past year, providing opportunities for hiring in the rural Midwest.
Conclusion
Increased agricultural trade has connected more food producers with more consumers across the globe, with benefits accruing to both. As the world's population continues to grow, incomes move higher, and urbanization expands, farm exports are expected to rise further. The Midwest's share of U.S. agricultural exports has been relatively large, especially for products such as corn and soybeans, and has helped boost the incomes of farmers in the region. Farm trade has also generated food sector jobs and Main Street business activity, which contribute to the prosperity of rural communities and cities of the Midwest. Regardless of the risks posed by renegotiated trade agreements and depreciating infrastructure, agricultural trade will remain vital to the Midwest economy.
Return to Top of Page