Economic Crisis and Agricultural Trade: Impacts of Price Instability and Exchange Rates

Bruno Larue Titulaire de la Chaire de Recherche du Canada en Commerce International Agroalimentaire et directeur du CRÉA

Colloquium “Agricultural Trade in the Americas” CEI/CRÉA, Québec ,May 16, 2009.

The decline of housing prices triggered the current economic crisisthe current economic crisis

The S&P Case-Shiller index (20 US cities )

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The DJIA index dropped…. but some in the food business are OK (06/2006-05/2009)the food business are OK (06/2006-05/2009)

Commodity Prices Exploded!Commodity Prices Exploded!

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Commodity prices

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Farm Input Prices Peaked After Commodity PricesFarm Input Prices Peaked After Commodity Prices

Canadian Food Retail Prices Were Slow to React (January 1999-March 2009)(January 1999-March 2009)

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Why Did Commodity Prices Explode?Why Did Commodity Prices Explode?

-Economic development : when per capita income increases, demand for meat increases in low-income countries.

-Ethanolt a o

-Climate shocks and the inelastic nature of crops and livestock supply curves in the short runlivestock supply curves in the short run.

Ethanol was booming…Ethanol was booming…

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Some Say That the Price of Crude Oil is NOW Driving the Price of Corn…is NOW Driving the Price of Corn…

We found evidence of multiple cointegration regimes p g gbetween the two series.

We identified structural breaks in June of 2004 andWe identified structural breaks in June of 2004 and September 2006.

Pl i l h h b h i h l i hiPlainly put, there has been changes in the relationship between these prices, but they have been linked prior to 2006.

Inelastic Supply in the Short Term and Demand Shocksand Demand Shocks

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Which currencies are most undervalued?

Mexico -35Mexico 35Chili -29Peru -28A ti 7Argentina -7Canada -5Brazil -2

Source: The Economist’s Bic Mac index

What are we to make of all this?

Are we in a new era in terms of commodity pricing?

What are we to make of all this?

Do we have sufficiently potent market and policy instruments to deal with price volatility?st u e ts to dea w t p ce vo at ty?

-Ethanol industry-Quebec’s ASRA program public vs private pricing of risk-public vs private pricing of risk

What are the consequences for production and trade?

Market Size and the Importance of Agricultural Exports and Imports in Total Imports and Exports

Country Population GNP/cap Ag Exp Ag Imp

Exports and Imports in Total Imports and Exports

Country Population GNP/cap Ag. Exp Ag.Imp(millions) (ppp US$)

Argentina 39.7 14406 51.5% 5%Brazil 191 9 10325 30% 6%Brazil 191.9 10325 30% 6%Canada 33.4 38834 11.6% 7.2%Chili 16.8 14486 20% 7.3%Mexico 108 7 13720 5 7% 7 8%Mexico 108.7 13720 5.7% 7.8%Peru 29.1 8453 15% 12.2%USA 303.9 46946 9.8% 5.4%

To What Extent Are Countries in the Americas Trading with One Another?Americas Trading with One Another?

Country Exp.Dest. Ag Imp.SourcesArgentina Brazil 17.4% EU Brazil 31.7%g

China 9.6% China USA 14.4%USA 7.8% BZ China 8.7%

Brazil USA 15.6% EU USA 15.5%Argen. 9% China China 12.5%Chi 6 7% USA A 8 6%China 6.7% USA Argen.8.6%

CanadaUSA 79.9% USA USA 59.8%UK 2.9% JP China 10.4%China 2.1% EU Mexico 4.7%

To What Extent Are Countries in the Americas Trading with One Another?

Country Exp.Dest. Ag Imp.SourcesChili China 14.7% EU USA 15.5%

Americas Trading with One Another?

USA 12.4% USA China10.4%Japan 10.5% Mex Brazil 9.5%

Mexico USA 82.1% USA USA 49.6%Canada 2.4% Can S.Korea 10.5%Spain 1 5% EU China 5 8%Spain 1.5% EU China 5.8%

Peru USA 18.5% EU USA 21.7%China 11.5% USA China 11.5%Canada 6.8% Can Brazil 10.4%

Other Evidence About Trade PotentialOther Evidence About Trade Potential

Brazilian border effects: Failly, Perracar and Terra (2008): NB=13, IB=75Daumal and Zignago (2008): NB=13.7, IB=290

Probability to trade/Extensive margin analysis:Ghazalian, Larue and Gervais (2009): Ecuador and Peru have more to gain from Columbianand Peru have more to gain from Columbian tariff reductions on livestock than Brazil and Argentina. Distance matters!

Thank you for you ATTENTION!Thank you for you ATTENTION!