Research Accomplishment Reports 2008

Effects of Policy and Product Changes on the International Demand for US Agricultural Products

M.R. Reed
Department of Agricultural Economics

 

Non-Technical Summary

Many countries are changing their agricultural trade policies through the WTO and other forums. The effects of these changes must be estimated to help agricultural producers and agribusinesses adapt to a changing world economic environment. This project estimates how changing agricultural trade policies and macroeconomic conditions will influence U.S. agricultural exports.

Project Description

Bamba, et al. show how the macroeconomic price overshooting model can be applied to perennial crops. The results indicate a change in U.S. monetary policy can impact world coffee and cocoa prices and transmit disturbances toward developing countries that export coffee and cocoa. These prices are highly flexible in the short run (even more flexible than the exchange rate), but the long-run impacts of monetary policy are small. These short run impacts can be detrimental to less developed countries. Zhang investigated the effectiveness of simultaneously hedging commodity price, foreign exchange, and ocean freight risks. The results show that hedging two of the three risks is more effective than hedging commodity price risk alone and it is more effective than attempting to hedge all three risks. He also found that major importers of US soybeans are more sensitive to exchange rate risk and price risk than are major importers of Brazilian soybeans. No importers appear sensitive to ocean shipping cost risk. PARTICIPANTS: Nothing significant to report during this reporting period.

Impact

The results of the research on commodity price overshooting are important because they point to the need for farmers and nations to understand price volatility and develop strategies that will combat such problems. The breakdown of the international coffee and cocoa agreements has been detrimental to producers in the short-run, but long-run prices have not been as volatile. The research on hedging soybeans shows that exporters are able to effectively shed some of their risks through futures markets, but some adjustments in their hedging ratios can improve their profitability. The futures markets for soybeans and foreign currency have allowed exporters to continue to ship large volumes of soybeans despite high price volatility.

Publications

Bamba, Ibrahim, Michael Reed, and Sayed Saghaian. Monetary Policy Impacts on Coffee and Cocoa Prices. Journal of International Agricultural Trade and Economic Development. 4 No. 2 (2008): 275-91.

Liao, Dongsheng and Michael Reed. An Analysis of the Effects of Guangxis Economic Growth on Foreign Trade. Academic Forum (China) No. 7 2008: 1-4.

Zhang, Qiang. Three Essays on Risk and Commodity Exports. 2008. Ph.D. dissertation 2008.