Agriculture - West ; Federal Reserve District, 12th ; International trade

Frederick T. Furlong

Randall J. Pozdena

English

Research Papers in Economics

FRBSF WEEKLY LETTER
May 24,1985
Western Agriculture and the Trade Balance
The appreciation ofthe dollarduringthe past
several years has cut into the competitiveedge of
u.s. agriculture in the world market. This, in turn,
has exacerbated the financial problems ofthe
domestic farming industry already hurtbythe
combination ofthe recent sharp drop in inflation
and current high real, or inflation-adjusted, inter-
est rates. The deterioration ofthe U.S. trade posi-
tion has, however, hurtsome farmers much more
than others.
In this Letterwe argue thatthe differential impacts
ofthe decline in the trade balance for farm pro-
ducts constitute one reason that agriculture has
tended to fare better in the West than in the Mid-
west overthe past several years. In particular, the
West's mixofagricultural products has been the
key to the relative vitalityoffarming in the region.
The states within the Twelfth Federal Reserve Dis-
trict simplytend to have a smaller portion of
agricultural production devoted to the crops that
have borne the bruntofdevelopments in inter-
national trade.
The strong dollar
Overthe past several years, the dollar has appre-
ciated considerably. In March ofthis year, the
value ofthe dollar, compared to a weighted aver-
age ofthe currencies ofthe United States' major
tradingpartners, was morethan 50 percenthigher
than in mid-1980. Since March, the valueofthe
dollarhas declinedon balance, butitremains high
comparedto its level atthebeginningofthe1980s
when itbegan its rapid climb.
The impactofthestrongdollarhas varied substan-
tially across sectors ofthe U.S. economy. It has
had the greatest effect on those industries that
produce goods forexportand those that compete
with imports. The manufactured goods sector in
the U.S.,forexample, has suffered significantly. Its
share ofemployment in the U.S. fell from 21.6 to
20.7 percentofall wage and salary employment
between January 1982 and January 1985. In con-
trast, the domestic U.S. services sector has been
less adverselyaffected bythestrengthofthedollar
because most services, e.g., medical care and
retail services, cannot easily be purchased from
foreign producers.
Agricultural commodities, like manufactured
goods, generally face competition in world mar-
kets from foreign producers. The USDA reports
that net farm exports (exports minus imports)
totaled $18.5 billion in 1984, or 30 percent lower
than the peak level reached in 1981. Abouttwo-
thirds ofthis decline in the agricultural trade
balance was dueto the drop in exports.
Within the agricultural sector, however, some
commoditiesface moreeffectiveforeign competi-
tionthan others. Farm productssuch as grainsand
soybeans, forexample, can be transported long
distances and are widely produced elsewhere in
the world. Since a large fraction ofthe U.5. pro-
duction ofthese crops typically is exported, these
crops have absorbed a correspondingly large por-
tion ofthe dollar's shockto agriculture. Together,
grains, oil seeds, and oil seed products accounted
for well overone-halfofthedecline in net farm
exports since 1981, and four-fifths ofthe drop-off
in gross exports.
Cotton is another productthat is particularly
exposed tothe adverseconsequencesofthestrong
dollar, withcottonexports representing around 50
percent ofdomestic production since 1981. Ac-
cording to the USDA, cotton exports contracted
sharply in 1982 and 1983. In 1984, netexports of
cotton recovered slightlybutwerestill well below
the level reached in 1980. Moreover, domestic
cotton producers have been affected bythe
surge-35 percent increase in 1984-intextile
imports.
It is more difficuItto substitute foreign production
forsome othercrops. Exportsoftreecrops,such as
apples, forexample, have notsuffered as seriously
as exports offood grains and otherfield crops.
Similarly, productsthatare pr,imarilyconsumed in
the United States, such as fresh and perishable
fruits and vegetables, have fared betterthan other
crops duringthe dollar's rise.
Agricultural prices
In recent years, the movement in the prices of
some farm products relative to those ofotherfarm
products appears to reflect the differential vulner-
abilityofcertain crops to the vagaries ofinter-FRBSF
national trade. Chart 1 shows thatthe average of
the price index for all farm products from 1981
through 1984 was a Iittle morethan 2 percent
higherthan in 1980. In contrast, the averages for
the "dollar-sensitive" crops-food grains and
cotton-fell by 8% to 9 percent. Although the
difference is less dramatic, the prices foroi1-
bearing crops also were weakerthan forfarm
products in general.
All ofthe differences in price performance among
farm products, ofcourse, would notbe related to
the differential impactofthe dollar. For example,
the price index for fruits was sharply higher in
1984 because of inclement weather, one ofthe
few problems notbeing blamed on the strong
dollar.
Regional exposure
The greater sensitivity ofsome crops to exchange
rate movements combined with the regional con-
centration oftheir cultivation has meantthat
farmers in some parts ofthe country are more
exposed to the adverse effects ofthe strong dollar
than farmers elsewhere. Chart 2 shows that the
crop categories-grains and oil-bearingcrops-
affected most bythe decline in thetrade balance
accountfor a very large share oftotal agricuItural
production in the Midwest. Judging from the
relative importanceofthese crops in theWest, the
exposure ofthe states in the Twelfth District,
excluding California, is about halfthatofthe
midwestern states on average. For California, the
exposure would be halfagain as much as for the
otherstates in theTwelfth Districttaken asawhole.
The inclusionofcotton production, which is more
importantto agriculture in the West than in the
Midwest, changes the assessment ofexposure
somewhat. In California, for example, cotton pro-
duction accounted for about8% percent offarm
receipts in 1983, almost twice its national share.
Overall, agricuIture intheWeststiII is less suscep-
tibletoexchange rate movementsthan agriculture
elsewhere. In fact, historic figures On crop shares
in the West mayoverstate the degree ofexposure.
This is especiallytrueforCalifornia'sfarmers, who
havegreaterflexibilityin choosingwhichcropsto
grow. Forexample, some Central Valley fields
formerly in cotton production have been planted
in other crops, while some otherCalifornia farm
land has been converted to nonagricultural use.
land values
Some perspective on the relative severity ofthe
farm problem among the various regions can be
gleaned from the behaviorofagricultural land
values. Movements in land values are particularly
useful guides in this regard since they reflect the
market's evaluation ofthe deterioration in the
earnings outlookfor agriculture. Using data from
the USDA, Chart 3 plots the indexes for agricul-
turalland values forthe continental U.S. and
selected regions.
The chart shows thatthe market assessment ofthe
outlookforagriculture has changed sharply. In the
period from April 1982 to April 1984, the USDA
estimates suggest thatthere was a decline in the
average value offarm land in mostofthe states in
theTwelfth District. In California,which accounts
forabout60percentofthe agricuItural production
in the Twelfth District, the USDAdata showthat
farm land values did notchange much between
the spring of1982 and the spring of1984. (Alter-
native information on California land values from
a large West Coast bank indicates a drop in the
average value ofan acre offarm land duringthe
same period.) This performance contrasts starkly
with the rapid appreciation in agricultural real
estate values inthe 1970s. Amongthe states in the
Twelfth District, farm land prices appearto have
held up best in Washington.
On the issue ofregional differences, the USDA
data supportthe view thatthrough the springof
last year, the agricultural problems in the West
were notas severe as those experienced by
farmers in the Midwest. Since the springof last
year, the average value ofan acre offarm land in
California and otherwestern states probably has
dropped. However, it is highlydoubtful thatthe
declineintheWest matched thedropin farm land
values in the Midwestoverthe past year. The
Federal Reserve Bank of Kansas City, for example,
reports that farm land value in its districtdeclined
an average ofabout20 percent last year.
The data On the overall agricultural performance
ofany region, ofcourse, mask the greatvariation
in the experiences of individual farmers. This is
certainly true forthe West. For example, in Cali-
fornia, prices for almonds and grapes have been
severely depressed bythe increases in supply
associated with orchard and vineyard plantings
undertaken in the 1970s. Since it is more costly toconvertorchards and vineyards to alternative uses,
the value ofthe land with "permanent" plantings
has been extremelydepressed. As an example, the
average per-acre priceof land planted in raisin
grapes in the Central Valley has fallen over40
percentsince 1982. The average priceperacrefor
almond orchards also has declined sharply since
1982.
Conclusion
Alongwith high real interest rates, the strong
dollarhas been amajorcauseoffinancial stress in
agriculture, as evidenced bythe deterioration in
the trade balance for farm products. Western
agriculture's more diversified "portfolio" ofcrops
has tended todampen the adverse consequences
ofthe strong dollar and allowed farming in the
region to fare better than in the Midwestoverthe
past several years. However, bythe same token,
any appreciable weakeningofthe dollarcould be
expected, with some lag, to do moreto improve
the outlookfor midwestern grain farmers than for
vegetable producers in California.
Frederick T. Furlong and Randall J. Pozdena
Chart 1
Percent Difference in the Average
of the Price Indexes for 1981·1984
Pe'cenl Compared to 1980
5.0
2.5 2.2%
0.0
·2.5
·5.0
·7.5
-10.0 ~__J.-__-'-__"'!-__...L- _
All Farm Food Oil Bearing Colton
Products Grains Crops
Source: Based on USDA data.
Chart 2
Grains and Oil Bearing Crops
Pe,cen' As A Percent ofTotal Farm Production
~ "98~
Index
240
Chart 3
Indexes of the Average Value
Per Acre of Farm Land and Buildings
50
220 .-.--
/ California
Source: Based on USDA data.
1977 1978 1979 1980 1981 1982 1983 1984
12th District
excluding
HI, AK, and CA
..........-............_---_..-..
.......··..········· :.~.. ~.~~.t.~.~
Midwest
80 L-_'----'C---'_---'_-..l._-'-_-'-_-'
100
180
160
140
120
200
California 12th District Midwest United
w/o CA States
Source: Based on USDA data.
Opinions expressed in this newsletterdonotnecessarily reflect the views ofthe managementofthe Federal Reserve Bank ofSan
Francisco, orofthe Board ofGovernorsofthe Federal Reserve System.
Editorialcommentsmaybe addressed totheeditor(GregoryTong) ortotheauthor•••.Free copiesofFederal Reserve publications
can be obtained from the Public Information Department, Federal Reserve BankofSan Francisco, P.O. Box 7702, San Francisco
94120. Phone (415) 974-2246.uo~6U!450m 40~n U060JO 0POA0U
040PI !!omoH O!UJoJ!l0) ouozPtJ 01150ltJ
O)SI)UOJ:::I UOS
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BANKING DATA-TWELFTH FEDERAL RESERVE DISTRICT
(Dollar amounts in millions)
Selected Assets and Liabilities
Large Commercial Banks
Amount
Outstanding
05/08/85
Change
from
05/01/85
Change from 05/09/84
Dollar Percent?
Loans, Leases and Investmentsl 2 190,265 - 473 10,638 5.9
Loans and Leases1 6 172,134 - 486 11,944 7.4
Commercial and Industrial 52,069 - 101 2,842 5.7
Real estate 62,863 40 2,868 4.7
Loans to Individuals 33,924 - 1 6,207 22.3
Leases 5,375 12 362 7.2
U.S. Treasury and Agency Securities2 11,186 5 - 918 - 7.5
Other Securities2 6,945 8 - 388 - 5.2
Total Deposits 193,460 -2,616 8,119 4.3
Demand Deposits 44,819 -3,273 1,766 4.1
Demand Deposits Adjusted3 30,021 124 848 2.9
OtherTransaction Balances4 13,375 168 1,075 8.7
Total Non-Transaction Balances6 135,265 487 5,277 4.0
MoneyMarket Deposit
Accounts-Total 43,037 171 3,667 09.3
Time Deposits in Amounts of
$100,000 or more 38,459 213 - 276 - 0.7
Other Liabilities for Borrowed MoneyS 21,386 -1,997 - 1,040 - 4.6
Two Week Averages
of Dailv Fi2ures
Reserve Position, All Reporting Banks
Excess Reserves (+)/Deficiency (- )
Borrowings
Netfree reserves (+}/Netborrowed(- )
Period ended
05/06/85
6
49
42
Period ended
04/22/85
88
24
64
1 Includes loss reserves, unearned income, excludes interbank loans
2 Excludes trading account securities
3 Excludes U.S. governmentand depository institution deposits and cash items
4 ATS, NOW, Super NOWand savings accounts with telephonetransfers
S Includes borrowingvia FRB, TI&L notes, Fed Funds, RPs and other sources
6 Includes items notshown separately
7 Annualized percentchange

Western agriculture and the trade balance

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Western agriculture and the trade balance

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