REGION/TITLE: INTERNATIONAL AGRICULTURE AND TRADE -- SUMMARY March 2000, ERS-WRS-99-3 March 7, 2000 Approved by the World Agricultural Outlook Board --------------------------------------------------------------------------- This SUMMARY is published by the Economic Research Service, U.S. Department of Agriculture, Washington, DC 20036-5831. The complete text of International Financial Crises and Agriculture: INTERNATIONAL AGRICULTURE & TRADE will be available electronically about 2 weeks following this summary release. --------------------------------------------------------------------------- March 7, 2000 International Financial Crises Had Moderate Impact on U.S. Agricultural Trade The international financial upheaval that began in Thailand in July 1997 and subsequently spread to other countries set back economic growth and trade worldwide. World economic growth slipped from 3.2 percent in 1997 to 1.6 percent in 1998. The international financial crises led to depreciated currencies, reduced growth, and higher interest rates in Indonesia, Thailand, South Korea, Russia, Brazil, and other Latin American countries. The macroeconomic shocks affected agricultural prices, production, consumption, and trade. Currency depreciation helped agricultural producers, but hurt consumers in the crisis countries. The lower currency values that enhanced primary agricultural production and reduced imports improved the agricultural trade balance of these countries. Non-crisis countries, including the United States, China, Japan, and Taiwan were affected as well. Capital flight from the crisis countries helped keep U.S. interest rates low, stimulating investment and boosting growth. In addition, the financial turmoil and depressed global commodity prices reduced U.S. agricultural exports and lowered costs for imports, keeping inflation in check but narrowing the agricultural trade surplus. During the 1997-99 financial turmoil, currencies in the crisis countries depreciated 35-75 percent, growth contracted 2-14 percent, and interest rates rose 6-47 percent. The crises slowed Asian growth for at least a few years. While the value of Asian currencies stabilized in 1998, Asian economies continued to contract through the end of the year. After 2 years of setbacks, some crisis economies turned the corner to growth in 1999. Leading the way to recovery are South Korea and Thailand. The ERS analysis of the international financial crises of 1997-99 suggests that: o Weaknesses in financial and banking systems, high dependence on short-term foreign currency debt, and insufficient financial oversight increased the vulnerability of the crisis countries. The weaknesses in the banking and financial sectors combined with investor panic to create a situation akin to a bank run, triggering capital flight, causing stock prices to plunge, and significantly depreciating the value of currencies. o The financial upheaval affected the crisis countries through shocks in exchange rates (prices), income, and interest rates. The effects depended on the magnitude of the shocks, existing economic conditions, policies, and the financial and banking framework in those countries prior to the crisis. The effects also depended on the responsiveness of production, consumption, and trade with respect to price and income shocks. o The effects of exchange rate changes on consumer and producer prices varied by commodity and country. The greater the exchange rate effects on prices, the greater the responsiveness of consumers and producers of the commodity. Primary tradable commodities that had a lower share of imported inputs tended to benefit from the depreciated domestic currency relative to high value-added products that depended heavily on imported inputs and borrowed capital. Consumption effects were more severe in the original crisis countries due to a significant decline in income and higher domestic prices. For non-crisis countries, the economic effects of the crises were not as severe. o The financial crises had a modest impact on U.S. agricultural trade. The crises and depressed global commodity prices adversely affected U.S. agricultural exports and other trade-dependent sectors in 1997-99. The decline in value of U.S. agricultural exports--23 percent (in real terms) from fiscal 1997 to fiscal 1999--was much less than the nearly 50-percent drop in the first half of the 1980's, when the dollar was strong and U.S. farm policy moved commodities into public stocks rather than onto the market and into export channels. o The 1997-99 decline in U.S. agricultural export value was mostly a price phenomenon due to oversupplies in major exporting countries and weakened demand from crisis-affected countries and other countries such as China. The downturn of commodity prices, reinforced by weakened demand from the crisis countries, led to lower farm income for U.S. producers. o Lower U.S. exports and higher imports widened the overall U.S. trade deficit and narrowed the agricultural trade surplus. U.S. market share in most commodities, in volume terms, in major markets such as Japan was essentially stable. U.S. agricultural exports are now expected to stabilize at $49.5 billion in fiscal 2000. o Changes in the structure of U.S. agricultural trade from recent macroeconomic realignments have been subtle, with greater reliance on NAFTA as a market and as a supplier of imports, and less on Asia. Lower export receipts for farmers were partly offset by cheaper capital and inputs and a more robust domestic market. o Compared with the developing country debt crisis of the 1980's, the international financial crises of 1997-99 affected the U.S. agricultural sector much less severely. The nonmetro United States did not experience a significant hit from the 1990's financial crises, although nonmetro employment growth dipped in 1997-98. This is in sharp contrast to the 1980's, when the impact of the debt crisis in nonmetro areas was severe and lingering. Printed copies of International Financial Crises and Agriculture will be available in about 5 weeks. For more information, contact Suchada Langley (202) 694-5227. The full report will also be available electronically via the ERS web site at www.ers.usda.gov. END_OF_FILE