View original document

The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.

Federal Reserve Bank of Cleveland

February 15, 1987
ISSN 042R·1276

ECONOMIC
COMMENTARY
Agriculture has always been a showpiece of American technology, efficiency, and productivity growth.' Less
than 3 percent of U.S. workers are
engaged in farming, yet our farms produce enough to feed our population, to
add to domestic surpluses, and to
export enormous quantities. Agricultural exports have made major contributions to our merchandise trade balance, accounting for about one-fifth of
total U.S. exports in the last 25 years.
The most recent developments in
agricultural exports, though, are in
sharp contrast to the strength agricultural trade has demonstrated over the
years. After peaking at $44 billion in
1981, agricultural exports fell rapidly to
only $26 billion in 1986 (table 1). As a
share of total U.S. exports, agricultural
exports fell from 19 percent to 13 percent over the same period (see chart).
This unexpected, rapid export
decline has attracted great attention
and concern, especially because it compounds the difficulties plaguing the
domestic farm sector and exacerbates
the already large deficit in our merchandise trade balance.
The decline in agricultural exports is
complex. It is more than just simple
participation in the general decline that
U.S. exports have experienced in the
1980s. From 1981 to 1986, agricultural
exports shrank by 40 percent, while
nonagricultural exports declined by
less than 5 percent (table 1). The agricultural decline sterns from a combination of U.S. farm policy, sharp appreci-

Gerald H. Anderson is an economic advisor at the
Federal Reserve Bank of Cleveland. The author
would like to thank Katherine Barnum and Susan
Black for their research assistance.

CHART 1

The Decline in U.S.
Agricultural Exports
by Gerald H. Anderson

Ratio of Agricultural to Total Exports

percent

25

1..--

-c

:« ,

..;

-,

,

1- \
I

\

11

\

20

\

\ ••• _ •.•..,

1

\
\

\

-, - •... \

\.--.

/
./

\
\

15

.

10
1960

,,

I

I

I

I

I

1965

1970

1975

1980

1985

SOURCE: USDA, Agricultural Outlook Year Book Issue, October 1986, p. 37.
USDA, Foreign Agricultural Trade of the United States, November/December
1986, p.6.

at ion of the dollar, the international
debt problem, and increased foreign
agricultural output.
Recent changes in U.S. farm policy
and the dollar depreciation that began
early in 1985 will no doubt stimulate
agricultural exports. However, it is
unlikely that agricultural exports will
return quickly to the level of 1981
because a substantial surplus in world
agricultural capacity probably will con-

The views stated herein are those of the author
and not necessarily those of the Federal Reserve
Bank of Cleveland or of the Board of Governors of
the Federal Reserve System.

tinue to restrain U.S. farm exports for
many years.
The Decline in Exports
The decline in exports has been concentrated in feed grains (mostly corn),
wheat, oilseeds (mostly soybeans), rice,
and cotton. Together, these products
account for about two-thirds of U.S.
agricultural exports. Annual exports of
these commodities fell by $16.5 billion

1. For example, in the last 25 years, real farm
output per hour of farm work has almost quadrupled. See Economic Report of the President, February 1986, p. 361.

between 1981 and 1986, accounting for
94 percent of the decline in total agricultural exports (table 2). Exports of
most other agricultural products also
fell, with the notable exception of
animals and animal products.
The export revenue decline resulted
both from reduction in export volumes
and falling export prices. The physical
volume of exports of major crops fell
sharply between 1981 and 1986, with
declines ranging from 8 percen t to 60
percent (table 2). In addition to hurting
the farm sector, these declines in physical volume caused losses of business for
the firms involved in transporting agricultural products. Prices of agricultural
exports declined by amounts ranging
from 24 percent to 44 percent (table 2).
U.S. agricultural exports have declined to almost every important customer country or region. From 1981 to
1986, exports to the industrialized
nations of Canada, Japan, and Western
Europe fell 33 percent, exports to Latin
America fell 48 percent, and exports to
the rest of the world fell 46 percent.
Within these groupings there were
wide divergences; for example, exports
to China fell 95 percent, exports to
Japan fell 24 percent, while exports to
Taiwan were unchanged.
Reasons for the Decline
in Agricultural
Exports
Exports declined in the 1980s because
foreign agricultural production accelerated, many customer and competitor nations experienced financial difficulties,
and a combination of dollar appreciation and the effects of government farm
programs made American products less
competitive in world markets.
Most of our export decline is in cereals
-primarily corn, wheat, and rice. A
major cause of this decline is the fact
that foreign production of cereals accelerated while population growth slowed.
Per capita production of cereals outside
the United States increased only 0.6

2. World Bank, World Development Report 1986,
pp. 104·106; and Economic Report of the President,
January 1987, pp. 167·8.

percent annually from 1975 to 1981,
but accelerated to a 1.4 percent annual
growth rate in the 1981-1985 period.
More rapid growth of cereals production abroad relative to population has
hurt U.S. exports in two ways. First,
importing nations have less need to
import grains to supplement their
domestic production. Second, our foreign competitors have greater surpluses to export to other markets,
where they compete with U.S. grains.
These developments can be seen by
comparing consumption and export
data averaged for 1981 and 1982 with
data averaged for 1985 and 1986. Using
two-year averages reduces any distortions from unusual years.
First, although world consumption of
grains increased 8.5 percent over the
period, consuming nations became
more self-sufficient and world imports
fell 5.4 percent (table 3). Thus, the
market for total grain exports shrank
significantly. Second, increased production by competitors enabled them not
only to capture larger shares of the
shrinking world market, but to actually
increase their sales. From 1981-82 to
1985-86, world grain imports fell 11.4
million metric tons, but other countries
increased their grain exports by 20.6
million tons, while U.S. exports fell by
32 million tons. This pattern of absolute U.S. export losses and absolute
competitor export gains in the face of a
shrinking total export market existed
for each major grain, that is, for wheat,
rice, and feed grains (table 3).
U.S. grain exports were also hurt
because the U.S. is more specialized in
feed-grain exports than in wheat, in
terms of both absolute tonnage and
market share (table 3). The world
market for feed-grain exports shrank
much more sharply than the market
for wheat, with feed grains shrinking 9
million tons (8.7 percent) and wheat

3. World Bank, ibid., p. 89.

Table 1 U.S. Agricultural
Exports
1960-1986 (fiscal years)
(billions of dollars)

Year

Agricultural
Exports

Nonagricultural
Exports

1960
1965

4.5
6.1

14.6
20.2

1970
1975

7.0
21.8

34.3
83.2

1980
1981

40.5
43.8

169.8
185.4

1982
1983

39.1
34.8

176.3
159.4

1984
1985
1986

38.0
31.2
26.3

170.0
179.3
176.6

SOURCE: USDA, Agricultural Outlook Yearbook
Issue, October 1986, p. 37.
USDA, Foreign Agricultural Trade of the United
States, November/December 1986, p.B.

shrinking 2 million tons (1.7 percent).
Our major competitors-Argentina,
Australia, and Canada-have fared
much better than the United States in
the 1980s. From 1981-82 to 1985-86,
their combined grain export tonnage
increased 15 percent, including a slight
decline in exports from Canada. Canada's decline, 4 percent, is far less than
the U.S. decline of 28 percent.
Cereals output accelerated for reasons that vary from country to country,
but in general it was not because of an
increase in acres harvested. Cereals
acreage harvested in the world, excluding the United States, increased only
0.5 percent between 1980and 1985,
while yield per acre rose almost 15 percent. Output per acre can increase
either because more fertilizer or pesticides are used to aid production,
improved varieties of seeds are intro-

duced, irrigation is improved, farming
techniques are improved, weather is
more favorable than usual, or because
improved economic incentives result in
more careful attention to crops by
workers. Improvements in transportation and storage facilities can also
increase the percentage of a harvest
that safely reaches the final consumer.
Weather in the major grain-growing
regions outside the United States has
apparently not been any more favorable
in the 1980s than in the 1970s, so
weather probably is not among the reasons for the recent acceleration in foreign cereals production.
Agricultural output in China expanded by about one-third between 1980 and
1985, making China the world's largest
wheat producer. This expansion was
achieved with almost no increase in
acres planted or in the use of fertilizer
or improved seed varieties; improved
economic incentives to farm workers
caused most of the output gain." In contrast, food output in India has increased
because of " ...a combination of large
investments in irrigation, introduction
of high-yielding grain varieties, and
increases in farm prices."! Regardless
of the reasons for the output gains, the
result has been sharp declines in U.S.
exports to China and India.
The partial embargo on U.S. grain
sales to Russia from January 1980 to
April 1981 encouraged grain production
in other countries. In response to the
Soviet invasion of Afghanistan, the
United States limited grain sales to the
Soviet Union to the minimum required
by the U.S.-U.S.S.R. grain sales agreement. When Russia turned elsewhere
to meet its import needs, producers in
other countries had an incentive to
increase their output to serve the
Soviet market.' In fiscal 1986, the
Soviet Union did not purchase even the
minimum amount of grain required by
the Soviet-American long-term grain.
sales agreement and, according to preliminary data, U.S. exports to the
U.S.S.R. fell to about 30 percent below
their 19811eve1.5

Table 2

U.S. Agricultural

Exports

by Component

(fiscal years)
Value1
Product

Feed grains
Wheat
Oilseeds
and products
Rice
Cotton ex linters

Product

Feed grains
Wheat
Oilseeds
and products
Rice
Cotton ex linters

Volume-

Price3

1981

1986

1981

1986

1981

1986

10.4
7.7

3.7
3.3

69.0
42.4

36.0
25.5

150.73
182.43

103.95
127.85

9.3
1.5
2.2

6.3
0.6
0.7

29.8
3.2
1.2

27.6
2.4
0.5

312.23
484.70
1,843.55

227.39
271.80
1,406.49

81-86

81-86
Change

% Change

81-86
Change

% Change

81-86

81-86
Change

% Change

81-86

-6.7
-4.4

-64.4
-57.1

-32.9
-16.8

-47.7
-39.7

-46.78
-54.58

-31.0
-29.9

-3.0
-0.9
-1.5

-32.3
-60.0
-68.2

-2.2
-0.8
-0.7

-7.5
-24.9
-60.2

-84.84
-212.90
-437.06

-27.2
-43.9
-23.7

1. Billions of dollars.
2. Million metric tons.
3. Dollars per metric ton.
SOURCES: USDA, U.S. Foreign Agricultural Trade Statistical Report, Fiscal Year 1981, April 1982,
Table 15; and USDA, Foreign Agricultural Trade of the United States, November/December 1986, Table
5; and USDA, Foreign Agricultural Trade of the United States Fiscal Year 1985 Supplement, March 1986,
Table 4.

The debt problem affecting many developing nations also appears to have
contributed to the fall-off in U.S. agricultural exports. In 1982, it became apparent that, because of high real interest rates and other problems, many
developing nations were having difficulty servicing their foreign indebtedness.
Difficulty servicing debt would cause
a reduction in U.S. agricultural exports
in several ways. Debtor countries could
restrict agricultural imports to conserve foreign exchange. Austerity programs required by the International

Monetary Fund (IMF) and creditor
banks as a condition for restructuring
existing loans, or making new loans,
could cause debtor-nation income to fall
and thus reduce the demand for all
goods, including U.S. agricultural
exports. Creditor banks could lend less
additional money to heavily-indebted
nations for use in financing agricultural imports. Debtor nations that subsidize food consumption could reduce
those subsidies, thereby reducing effective demand for food. Debtor nations
could encourage domestic agricultural
production to reduce the need for imports. Debtor nations such as Argentina,

4. See Embargoes, Surplus Disposal, and U.S.
Agriculture, Economic Research Service, U.S.
Department of Agriculture, Staff Report
#AGES860910, November 1986, especially pages
10-4 and 10·5.

5. Some analysts argue that the United States
defaulted on the U.S.·U.S.S.R. agreement by not
offering to sell grain to the U.S.S.R. at the world
market price.

between 1981 and 1986, accounting for
94 percent of the decline in total agricultural exports (table 2). Exports of
most other agricultural products also
fell, with the notable exception of
animals and animal products.
The export revenue decline resulted
both from reduction in export volumes
and falling export prices. The physical
volume of exports of major crops fell
sharply between 1981 and 1986, with
declines ranging from 8 percen t to 60
percent (table 2). In addition to hurting
the farm sector, these declines in physical volume caused losses of business for
the firms involved in transporting agricultural products. Prices of agricultural
exports declined by amounts ranging
from 24 percent to 44 percent (table 2).
U.S. agricultural exports have declined to almost every important customer country or region. From 1981 to
1986, exports to the industrialized
nations of Canada, Japan, and Western
Europe fell 33 percent, exports to Latin
America fell 48 percent, and exports to
the rest of the world fell 46 percent.
Within these groupings there were
wide divergences; for example, exports
to China fell 95 percent, exports to
Japan fell 24 percent, while exports to
Taiwan were unchanged.
Reasons for the Decline
in Agricultural
Exports
Exports declined in the 1980s because
foreign agricultural production accelerated, many customer and competitor nations experienced financial difficulties,
and a combination of dollar appreciation and the effects of government farm
programs made American products less
competitive in world markets.
Most of our export decline is in cereals
-primarily corn, wheat, and rice. A
major cause of this decline is the fact
that foreign production of cereals accelerated while population growth slowed.
Per capita production of cereals outside
the United States increased only 0.6

2. World Bank, World Development Report 1986,
pp. 104·106; and Economic Report of the President,
January 1987, pp. 167·8.

percent annually from 1975 to 1981,
but accelerated to a 1.4 percent annual
growth rate in the 1981-1985 period.
More rapid growth of cereals production abroad relative to population has
hurt U.S. exports in two ways. First,
importing nations have less need to
import grains to supplement their
domestic production. Second, our foreign competitors have greater surpluses to export to other markets,
where they compete with U.S. grains.
These developments can be seen by
comparing consumption and export
data averaged for 1981 and 1982 with
data averaged for 1985 and 1986. Using
two-year averages reduces any distortions from unusual years.
First, although world consumption of
grains increased 8.5 percent over the
period, consuming nations became
more self-sufficient and world imports
fell 5.4 percent (table 3). Thus, the
market for total grain exports shrank
significantly. Second, increased production by competitors enabled them not
only to capture larger shares of the
shrinking world market, but to actually
increase their sales. From 1981-82 to
1985-86, world grain imports fell 11.4
million metric tons, but other countries
increased their grain exports by 20.6
million tons, while U.S. exports fell by
32 million tons. This pattern of absolute U.S. export losses and absolute
competitor export gains in the face of a
shrinking total export market existed
for each major grain, that is, for wheat,
rice, and feed grains (table 3).
U.S. grain exports were also hurt
because the U.S. is more specialized in
feed-grain exports than in wheat, in
terms of both absolute tonnage and
market share (table 3). The world
market for feed-grain exports shrank
much more sharply than the market
for wheat, with feed grains shrinking 9
million tons (8.7 percent) and wheat

3. World Bank, ibid., p. 89.

Table 1 U.S. Agricultural
Exports
1960-1986 (fiscal years)
(billions of dollars)

Year

Agricultural
Exports

Nonagricultural
Exports

1960
1965

4.5
6.1

14.6
20.2

1970
1975

7.0
21.8

34.3
83.2

1980
1981

40.5
43.8

169.8
185.4

1982
1983

39.1
34.8

176.3
159.4

1984
1985
1986

38.0
31.2
26.3

170.0
179.3
176.6

SOURCE: USDA, Agricultural Outlook Yearbook
Issue, October 1986, p. 37.
USDA, Foreign Agricultural Trade of the United
States, November/December 1986, p.B.

shrinking 2 million tons (1.7 percent).
Our major competitors-Argentina,
Australia, and Canada-have fared
much better than the United States in
the 1980s. From 1981-82 to 1985-86,
their combined grain export tonnage
increased 15 percent, including a slight
decline in exports from Canada. Canada's decline, 4 percent, is far less than
the U.S. decline of 28 percent.
Cereals output accelerated for reasons that vary from country to country,
but in general it was not because of an
increase in acres harvested. Cereals
acreage harvested in the world, excluding the United States, increased only
0.5 percent between 1980and 1985,
while yield per acre rose almost 15 percent. Output per acre can increase
either because more fertilizer or pesticides are used to aid production,
improved varieties of seeds are intro-

duced, irrigation is improved, farming
techniques are improved, weather is
more favorable than usual, or because
improved economic incentives result in
more careful attention to crops by
workers. Improvements in transportation and storage facilities can also
increase the percentage of a harvest
that safely reaches the final consumer.
Weather in the major grain-growing
regions outside the United States has
apparently not been any more favorable
in the 1980s than in the 1970s, so
weather probably is not among the reasons for the recent acceleration in foreign cereals production.
Agricultural output in China expanded by about one-third between 1980 and
1985, making China the world's largest
wheat producer. This expansion was
achieved with almost no increase in
acres planted or in the use of fertilizer
or improved seed varieties; improved
economic incentives to farm workers
caused most of the output gain." In contrast, food output in India has increased
because of " ...a combination of large
investments in irrigation, introduction
of high-yielding grain varieties, and
increases in farm prices."! Regardless
of the reasons for the output gains, the
result has been sharp declines in U.S.
exports to China and India.
The partial embargo on U.S. grain
sales to Russia from January 1980 to
April 1981 encouraged grain production
in other countries. In response to the
Soviet invasion of Afghanistan, the
United States limited grain sales to the
Soviet Union to the minimum required
by the U.S.-U.S.S.R. grain sales agreement. When Russia turned elsewhere
to meet its import needs, producers in
other countries had an incentive to
increase their output to serve the
Soviet market.' In fiscal 1986, the
Soviet Union did not purchase even the
minimum amount of grain required by
the Soviet-American long-term grain.
sales agreement and, according to preliminary data, U.S. exports to the
U.S.S.R. fell to about 30 percent below
their 19811eve1.5

Table 2

U.S. Agricultural

Exports

by Component

(fiscal years)
Value1
Product

Feed grains
Wheat
Oilseeds
and products
Rice
Cotton ex linters

Product

Feed grains
Wheat
Oilseeds
and products
Rice
Cotton ex linters

Volume-

Price3

1981

1986

1981

1986

1981

1986

10.4
7.7

3.7
3.3

69.0
42.4

36.0
25.5

150.73
182.43

103.95
127.85

9.3
1.5
2.2

6.3
0.6
0.7

29.8
3.2
1.2

27.6
2.4
0.5

312.23
484.70
1,843.55

227.39
271.80
1,406.49

81-86

81-86
Change

% Change

81-86
Change

% Change

81-86

81-86
Change

% Change

81-86

-6.7
-4.4

-64.4
-57.1

-32.9
-16.8

-47.7
-39.7

-46.78
-54.58

-31.0
-29.9

-3.0
-0.9
-1.5

-32.3
-60.0
-68.2

-2.2
-0.8
-0.7

-7.5
-24.9
-60.2

-84.84
-212.90
-437.06

-27.2
-43.9
-23.7

1. Billions of dollars.
2. Million metric tons.
3. Dollars per metric ton.
SOURCES: USDA, U.S. Foreign Agricultural Trade Statistical Report, Fiscal Year 1981, April 1982,
Table 15; and USDA, Foreign Agricultural Trade of the United States, November/December 1986, Table
5; and USDA, Foreign Agricultural Trade of the United States Fiscal Year 1985 Supplement, March 1986,
Table 4.

The debt problem affecting many developing nations also appears to have
contributed to the fall-off in U.S. agricultural exports. In 1982, it became apparent that, because of high real interest rates and other problems, many
developing nations were having difficulty servicing their foreign indebtedness.
Difficulty servicing debt would cause
a reduction in U.S. agricultural exports
in several ways. Debtor countries could
restrict agricultural imports to conserve foreign exchange. Austerity programs required by the International

Monetary Fund (IMF) and creditor
banks as a condition for restructuring
existing loans, or making new loans,
could cause debtor-nation income to fall
and thus reduce the demand for all
goods, including U.S. agricultural
exports. Creditor banks could lend less
additional money to heavily-indebted
nations for use in financing agricultural imports. Debtor nations that subsidize food consumption could reduce
those subsidies, thereby reducing effective demand for food. Debtor nations
could encourage domestic agricultural
production to reduce the need for imports. Debtor nations such as Argentina,

4. See Embargoes, Surplus Disposal, and U.S.
Agriculture, Economic Research Service, U.S.
Department of Agriculture, Staff Report
#AGES860910, November 1986, especially pages
10-4 and 10·5.

5. Some analysts argue that the United States
defaulted on the U.S.·U.S.S.R. agreement by not
offering to sell grain to the U.S.S.R. at the world
market price.

which export agricultural products
that compete with U.S. products, could
encourage greater agricultural exporting in order to increase their earnings
of foreign exchange. And debtor nations
could devalue their currencies in real
terms relative to the U.S. dollar, making food imports more expensive and
food exports more competitive.
There is apparently no econometric
study that attempts to quantify the
relationship between the foreign debt
problem and U.S. agricultural exports.
However, agricultural imports of a
group of 10 major debtor nations
declined 24 percent between 1981 and
1984. Moreover, U.S. agricultural
exports to Latin America, which
includes most of the large, heavily
indebted nations, fell by nearly one-half
between 1981 and 1986. U.S. exports to
Mexico, where debt difficulties have
been severe, fell almost 60 percent.
Dollar appreciation in the 1980s also
contributed to the decline in U.S. agricultural exports. One popular measure,
the Federal Reserve Board's tradeweighted average index for the dollar,
rose by 83 percent between the third
quarter of 1980 and the first quarter of
1985. If it were adjusted for inflation,
the index would have risen 74 percent.
Dollar appreciation makes U.S. exports
more expensive in foreign currencies,
decreasing foreign demand and encouraging foreign supply. The exchange
rate elasticity of U.S. agricultural
exports was found to be -0.71 over a
recent 13-year period," That means
that a 1 percent real appreciation of the
dollar would cause a 0.71 percent
decline in U.S. agricultural exports,
assuming nothing else was affecting
the exports. Assuming that relationship was valid in the 1980s, the 74 percent real dollar appreciation would
have tended to cause a 53 percent
decline in U.S. agricultural exports by

6. The relationship was estimated for the period
first quarter 1971 to first quarter 1984, using a
Cf'Linflation-adjusted version of the Federal
Reserve Board's trade-weighted index for the dol-

mid-1986. In fact, exports fell from
$43.8 billion in 1981 to $26.3 billion in
fiscal 1986, a 40 percent decline.
Domestic farm policies also have
hurt U.S. agricultural exports. There
are, of course, a wide range of farm policies and programs. Some have encouraged research into better farming
methods, led to development of
improved animals, seeds, pesticides,
and fertilizer, improved irrigation and
soil conservation, facilitated the dissemination of technical information,
and provided financial incentives to
increase production. These have all
helped to increase farm output, making
products available for export if buyers
could be found. However, policies
designed to support farm incomes have
raised prices of farm products, making
it more difficult to sell those commodities in the international market.
The Agricultural Adjustment Act of
1933 established the Commodity Credit
Corporation (CCC) to help support farm
incomes. In one important program, the
CCC establishes loan rates for crops
such as corn, wheat, and soybeans. For
example, in the 1985-86 crop marketing
year, the loan rate for corn was $2.55
per bushel. An eligible farmer could use
his corn harvest as collateral for a loan
from the CCC, borrowing $2.55 for
each bushel of corn offered as collateral. If the market price of corn subsequently went high enough, a farmer
could repay his loan, with interest, and
sell his corn in the market. However,
the CCC loan is a nonrecourse loan,
which means that if the farmer chooses
to let the CCC keep the corn, his obligation to repay the loan and pay the
interest is forgiven. Obviously, that is
what a farmer will do if the market
price of corn is below the loan rate,
plus interest. In effect then, the CCC

loan program puts a floor under the
price of corn produced by farmers eligible for CCC loans. If the loan rate is higher than the market price, eligible farmers will, in effect, sell their corn to the
CCC instead of in domestic or export markets. The law prevents the CCC from reselling the commodities at prices below
the loan rate. Usually, enough farmers
will enter the program to keep the market price at or above the loan rate.
To be eligible for the loan program, a
farmer usually must keep a certain
percentage of his land out of production. In 1985, for example, a farmer had
to idle 10 percent of his land to be eligible for CCC loans on corn. Some
farmers produce corn on all of their
land, foregoing CCC program eligibility. A farmer who foregoes program
eligibility is in essence betting that the
profit from corn produced on 100 percent of his land and sold at market
price will exceed the profit from producing corn on 90 percent of his land
and selling it to the CCC at the loan
rate, plus collecting any associated
"deficiency payments."
For many crops, including corn, eligible farmers may also receive direct
payments from the CCC based on a
target price for their crop. These deficiency payments equal the difference
between the target price and the
greater of either the loan rate or the
market price, times the number of
bushels produced. Thus, in choosing
whether to become eligible for the program, a farmer considers the target
price instead of the loan rate.
In the early 1970s, loan rates were
low relative to market prices determined by supply and demand, so the
loan rates did not affect market prices.
In the mid-1970s, loan rates were raised
rather sharply and became in some
years a support to the market prices.
U.S. exports were able to continue

lar. The effect of the real exchange rate change
on agricultural exports was found to occur duro
ing the following five quarters. See Batten, Dallas S. and Michael T. Belongia, "The Recent

Decline in Agricultural Exports: Is the Exchange
Rate the Culprit?" Economic Review, Federal
Reserve Bank of St. Louis, October 1984, vol. 66,
no 8, pp. 12·13.

growing, however, because the dollar
was rather weak in foreign exchange
markets. But after 1981, as the dollar
continued to appreciate, high loan rates
prevented U.S. market prices from falling in response to dollar appreciation,
and U.S. exports suffered major losses
of market share.

Table 3

World Exports, U.S Exports' Share of World Exports
and Exports as Share of World Consumption a
(million metric tons and percent)
Two- Year
Average
1981-82b

Two- Year
Average
1985-86c

97.7
44.7
45.8%
443.7

96.0
31.8
33.1%
497.3

-1.7
-1.7%
-12.9
-28.9%
-12.7 percentage points
53.6
11.2%

22.0%

19.3%

-2.7 percentage points

12.5
3.9
31.2%
276.9

11.7
2.7
23.1%
313.8

-6.4%
-0.8
-1.2
-30.8%
-8.1 percentage points
36.9
13.3%

4.5%

3.7%

-0.8 percentage points

102.3
65.2
63.7%
742.4

93.4
47.3
50.6%
776.2

-8.7%
-8.9
-27.5%
-17.9
-13.1 percentage points
33.8
4.6%

13.8%

12.0%

-1.8 percentage points

212.5
113.8
53.6%
1462.4

201.1
81.8
40.7%
1587.2

-5.4%
-11.4
-28.1%
-32.0
-12.9 percentage points
124.8
8.5%

14.5%

12.7%

-1.8 percentage points

Change

% Change

Wheat

Outlook for Agricultural Exports
It is quite likely that U.S. agricultural
exports have bottomed and are now
improving. However, a quick return to
the high level of exports of five years
ago seems unlikely.
A major favorable development for
agricultural exports was enactment in
December 1985 of the Food Security Act.
This new farm law is lowering the loan
rates for grains and soybeans to allow
these products to become more competitive in world markets. For example, the
loan rate for wheat fell from $3.30 per
bushel in the wheat marketing year
that ended on May 31, 1986 to $2.40 for
1986-87 and $2.28 for 1987-88. As the
reductions in prices take hold, the
volume of U.S. agricultural exports
should rise. Of course, export earnings
will not rise proportionately, and might
even fall initially, because of the lower
prices that will be received,"
The Food Security Act also provides a
new marketing loan program for producers of rice and cotton. Under the
program, CCC loans on rice and cotton
can be paid off at the market rate for
the product, even if that is below the
loan rate. Thus, producers are encouraged to export at the world price rather
than transfer ownership of the commodity to the CCC. The program went into
effect in April 1986 for rice and in
August 1986 for cotton; it is already
boosting exports. Export volumes for
rice and cotton are forecast to increase
9 percent and 171 percent, respectively
in fiscal 1987 from fiscal 1986. However, export prices for rice and cotton

7. The conclusion that a decline in export prices
will increase export earnings assumes that foreign demand for U.S. agricultural exports is price
elastic, that is, a one percent decline in export
price will lead to an increase in export volume
exceeding one percent. However, the price elasticity of agricultural exports is still a matter of
debate among agricultural economists. See

Total world exports
U.S. exports
U.S. share world exports
Total world consumption
World exports as share
of world consumption
Rice

Total world exports
U.S. exports
U.S. share world exports
Total world consumption
World exports as share
of world consumption

in August 1986 were 30 percent and 54
percent below their year-earlier levels,
respectively, which will restrain the
change in export earnings. Moreover,
because rice and cotton together have
accounted for less than 9 percent of
agricultural exports in recent years,
this program is likely to contribute a
relatively small improvement to total
agricultural exports.
In another new program authorized by
the Food Security Act, the CCC began
in January 1986 to issue generic commodity certificates in lieu of a portion
of the cash payments due to producers
participating in CCC grain and cotton
programs. These certificates can be used
to repay CCC crop loans, but the loan
collateral is redeemed at market price instead of at the loan rate. In effect, the'
certificates convert a portion of crop
loans to marketing loans similar to those
available for rice and cotton. Thus the
certificates program tends to make U.S.
crops more competitive in world mar-

kets. The certificates are generic in
that they can be used in connection
with any crop held by the CCC, but
most have been used to obtain corn.
The depreciation of the dollar since
early 1985 holds the promise of a substantial increase in agricultural exports. The Federal Reserve Board's
trade-weighted average index for the
dollar, if adjusted for inflation, fell 31
percent from first quarter 1985 to fourth
quarter 1986. If the relationship reported above holds for this period, agricultural export revenues should increase by
22 percent in response to that exchange
rate change. Unfortunately, some of
that benefit will have already been felt
so only a portion of it lies ahead. Also,
one should be cautious about forecasting
the improvement to exports from dollar
depreciation because the Federal Reserve Board's dollar index excludes the
currencies of many important customer

8. The U.S. Department of Agriculture (USDA)
publishes an inflation-adjusted trade-weighted
dollar index with weights based on each nation's
purchases of U.S. agricultural exports, but exchange rates for competitor countries' currencies
are not included. It is not appropriate to use that
index in this calculation because that is not the

index used in the Batten-Belongia study cited
above. For the USDA index see USDA, Agricultural Outlook, January-February 1987, table 27.

and competitor nations. Therefore, the
relationship between that index and exports, estimated for the past, might not
hold for the future."
Overall, the combined effects of the
Food Security Act and dollar depreciation are likely to be favorable for U.S.
agricultural trade. But the increased production capacity abroad will remain, and
there is likely to be excess capacity in
world agriculture for many years." Because of this excess capacity, any decline in U.S. export prices will encourage price declines abroad, thus hampering U.S. efforts to regain market share.
The excess worldwide capacity in
agriculture has been partially offset in
recent years by reductions in U.S.
exports. While price reductions can
increase the quantity of agricultural
products demanded in the world, it is
unlikely that prices will fall enough to
eliminate the excess world capacity or
to raise U.S. exports in the next few
years to their levels of five years ago.

Feed grains

Total world exports
U.S. exports
U.S. share world exports
Total world consumption
World exports as share
of world consumption

9. Referring to world capacity, D. Gale Johnson
asserts "We have created substantial excess production capacity in agriculture that will haunt us
for most of the rest of this century. Even if
appropriate policies started tomorrow, it would

take the EC and the United States nearly a
decade to eliminate this excess capacity ...." See
his "Commentary on Exhancing Competitiveness: International Economic Policies," Competing in the World Marketplace: The Challenge for
American Agriculture, A Symposium sponsored
by the Federal Reserve Bank of Kansas City,
October 31·November 1, 1985, p. 109.

Total grains

Total world exports
U.S. exports
U.S. share world exports
Total world consumption
World exports as share
of world consumption

a. World exports exclude intra-Ef trade.
b. Crop market years 1980·81 and 1981·82.
c. Crop market years 1984·85 and 1985·86.
SOURCE: USDA, Agricultural Outlook Yearbook Issue, October 1986, tables 16 and 21.

"Challenge to the Economics Profession: World
Agricultural Trade in a New Environment,"
remarks delivered by Robert L. Thompson,
Assistant Secretary of Agriculture for Economics,
at the International Banquet, American Agricultural Economics Association, Reno, Nevada, July
28, 1986, p. 12. Some researchers expect export
revenues to/all initially, declining by about 7

percent in 1986·87, because they estimate the
short-run price elasticity to be about 0.5. See The
Food Security Act 0/1985: A Ten- Year Perspective, Food and Agricultural Policy Research Institute, Iowa State University, July 1986, pp. 21·22.
The U.S. Department of Agriculture expects
export earnings to be the same in 1986·87 as in
1985·86. See USDA, Outlook/or U.S. Agricultural
Exports, December 2, 1986, p. 1.

Federal Reserve Bank of Cleveland
Research Department
P.O. Box 6387
Cleveland, OH 44101

Material may be reprinted provided that the
source is credited. Please send copies of reprinted
materials to the editor.

BULK RATE
U.S. Postage Paid
Cleveland, OH
Permit No. 385

Address Correction Requested: Please send
corrected mailing label to the Federal Reserve
Bank of Cleveland, Research Department,
P.O. Box 6387. Cleveland, OH 44101.

growing, however, because the dollar
was rather weak in foreign exchange
markets. But after 1981, as the dollar
continued to appreciate, high loan rates
prevented U.S. market prices from falling in response to dollar appreciation,
and U.S. exports suffered major losses
of market share.

Table 3

World Exports, U.S Exports' Share of World Exports
and Exports as Share of World Consumption a
(million metric tons and percent)
Two- Year
Average
1981-82b

Two- Year
Average
1985-86c

97.7
44.7
45.8%
443.7

96.0
31.8
33.1%
497.3

-1.7
-1.7%
-12.9
-28.9%
-12.7 percentage points
53.6
11.2%

22.0%

19.3%

-2.7 percentage points

12.5
3.9
31.2%
276.9

11.7
2.7
23.1%
313.8

-6.4%
-0.8
-1.2
-30.8%
-8.1 percentage points
36.9
13.3%

4.5%

3.7%

-0.8 percentage points

102.3
65.2
63.7%
742.4

93.4
47.3
50.6%
776.2

-8.7%
-8.9
-27.5%
-17.9
-13.1 percentage points
33.8
4.6%

13.8%

12.0%

-1.8 percentage points

212.5
113.8
53.6%
1462.4

201.1
81.8
40.7%
1587.2

-5.4%
-11.4
-28.1%
-32.0
-12.9 percentage points
124.8
8.5%

14.5%

12.7%

-1.8 percentage points

Change

% Change

Wheat

Outlook for Agricultural Exports
It is quite likely that U.S. agricultural
exports have bottomed and are now
improving. However, a quick return to
the high level of exports of five years
ago seems unlikely.
A major favorable development for
agricultural exports was enactment in
December 1985 of the Food Security Act.
This new farm law is lowering the loan
rates for grains and soybeans to allow
these products to become more competitive in world markets. For example, the
loan rate for wheat fell from $3.30 per
bushel in the wheat marketing year
that ended on May 31, 1986 to $2.40 for
1986-87 and $2.28 for 1987-88. As the
reductions in prices take hold, the
volume of U.S. agricultural exports
should rise. Of course, export earnings
will not rise proportionately, and might
even fall initially, because of the lower
prices that will be received,"
The Food Security Act also provides a
new marketing loan program for producers of rice and cotton. Under the
program, CCC loans on rice and cotton
can be paid off at the market rate for
the product, even if that is below the
loan rate. Thus, producers are encouraged to export at the world price rather
than transfer ownership of the commodity to the CCC. The program went into
effect in April 1986 for rice and in
August 1986 for cotton; it is already
boosting exports. Export volumes for
rice and cotton are forecast to increase
9 percent and 171 percent, respectively
in fiscal 1987 from fiscal 1986. However, export prices for rice and cotton

7. The conclusion that a decline in export prices
will increase export earnings assumes that foreign demand for U.S. agricultural exports is price
elastic, that is, a one percent decline in export
price will lead to an increase in export volume
exceeding one percent. However, the price elasticity of agricultural exports is still a matter of
debate among agricultural economists. See

Total world exports
U.S. exports
U.S. share world exports
Total world consumption
World exports as share
of world consumption
Rice

Total world exports
U.S. exports
U.S. share world exports
Total world consumption
World exports as share
of world consumption

in August 1986 were 30 percent and 54
percent below their year-earlier levels,
respectively, which will restrain the
change in export earnings. Moreover,
because rice and cotton together have
accounted for less than 9 percent of
agricultural exports in recent years,
this program is likely to contribute a
relatively small improvement to total
agricultural exports.
In another new program authorized by
the Food Security Act, the CCC began
in January 1986 to issue generic commodity certificates in lieu of a portion
of the cash payments due to producers
participating in CCC grain and cotton
programs. These certificates can be used
to repay CCC crop loans, but the loan
collateral is redeemed at market price instead of at the loan rate. In effect, the'
certificates convert a portion of crop
loans to marketing loans similar to those
available for rice and cotton. Thus the
certificates program tends to make U.S.
crops more competitive in world mar-

kets. The certificates are generic in
that they can be used in connection
with any crop held by the CCC, but
most have been used to obtain corn.
The depreciation of the dollar since
early 1985 holds the promise of a substantial increase in agricultural exports. The Federal Reserve Board's
trade-weighted average index for the
dollar, if adjusted for inflation, fell 31
percent from first quarter 1985 to fourth
quarter 1986. If the relationship reported above holds for this period, agricultural export revenues should increase by
22 percent in response to that exchange
rate change. Unfortunately, some of
that benefit will have already been felt
so only a portion of it lies ahead. Also,
one should be cautious about forecasting
the improvement to exports from dollar
depreciation because the Federal Reserve Board's dollar index excludes the
currencies of many important customer

8. The U.S. Department of Agriculture (USDA)
publishes an inflation-adjusted trade-weighted
dollar index with weights based on each nation's
purchases of U.S. agricultural exports, but exchange rates for competitor countries' currencies
are not included. It is not appropriate to use that
index in this calculation because that is not the

index used in the Batten-Belongia study cited
above. For the USDA index see USDA, Agricultural Outlook, January-February 1987, table 27.

and competitor nations. Therefore, the
relationship between that index and exports, estimated for the past, might not
hold for the future."
Overall, the combined effects of the
Food Security Act and dollar depreciation are likely to be favorable for U.S.
agricultural trade. But the increased production capacity abroad will remain, and
there is likely to be excess capacity in
world agriculture for many years." Because of this excess capacity, any decline in U.S. export prices will encourage price declines abroad, thus hampering U.S. efforts to regain market share.
The excess worldwide capacity in
agriculture has been partially offset in
recent years by reductions in U.S.
exports. While price reductions can
increase the quantity of agricultural
products demanded in the world, it is
unlikely that prices will fall enough to
eliminate the excess world capacity or
to raise U.S. exports in the next few
years to their levels of five years ago.

Feed grains

Total world exports
U.S. exports
U.S. share world exports
Total world consumption
World exports as share
of world consumption

9. Referring to world capacity, D. Gale Johnson
asserts "We have created substantial excess production capacity in agriculture that will haunt us
for most of the rest of this century. Even if
appropriate policies started tomorrow, it would

take the EC and the United States nearly a
decade to eliminate this excess capacity ...." See
his "Commentary on Exhancing Competitiveness: International Economic Policies," Competing in the World Marketplace: The Challenge for
American Agriculture, A Symposium sponsored
by the Federal Reserve Bank of Kansas City,
October 31·November 1, 1985, p. 109.

Total grains

Total world exports
U.S. exports
U.S. share world exports
Total world consumption
World exports as share
of world consumption

a. World exports exclude intra-Ef trade.
b. Crop market years 1980·81 and 1981·82.
c. Crop market years 1984·85 and 1985·86.
SOURCE: USDA, Agricultural Outlook Yearbook Issue, October 1986, tables 16 and 21.

"Challenge to the Economics Profession: World
Agricultural Trade in a New Environment,"
remarks delivered by Robert L. Thompson,
Assistant Secretary of Agriculture for Economics,
at the International Banquet, American Agricultural Economics Association, Reno, Nevada, July
28, 1986, p. 12. Some researchers expect export
revenues to/all initially, declining by about 7

percent in 1986·87, because they estimate the
short-run price elasticity to be about 0.5. See The
Food Security Act 0/1985: A Ten- Year Perspective, Food and Agricultural Policy Research Institute, Iowa State University, July 1986, pp. 21·22.
The U.S. Department of Agriculture expects
export earnings to be the same in 1986·87 as in
1985·86. See USDA, Outlook/or U.S. Agricultural
Exports, December 2, 1986, p. 1.

Federal Reserve Bank of Cleveland
Research Department
P.O. Box 6387
Cleveland, OH 44101

Material may be reprinted provided that the
source is credited. Please send copies of reprinted
materials to the editor.

BULK RATE
U.S. Postage Paid
Cleveland, OH
Permit No. 385

Address Correction Requested: Please send
corrected mailing label to the Federal Reserve
Bank of Cleveland, Research Department,
P.O. Box 6387. Cleveland, OH 44101.