The International Food Market

Kohls and Uhl: Chapter 7

Introductory Remarks Compared to 2% in the 1950’s, some

15% of the world’s food supply now moves across international boundaries.

The U.S. is the world’s largest exporter of agricultural commodities along with being a major importer. In 1990, 24% of U.S farm output was

exported accounting for about 14% of world food exports.

Consequences of Imports and Exports Exports represent a source of market

expansion for U.S. farmers. Participation in world markets provides

incentives for increasing the productivity and output of U.S. agriculture, i.e., increased production efficiency.

Influences the volume, price and variety of the food supply for American consumers.

Consequences of Imports and Exports Cont. Trade related commerce can

contribute to the economic development of low-income countries by providing them with needed imports and with purchasing power in world markets.

Trade plays a role in diplomacy and foreign relations.

Consequences of Imports and Exports Cont. Agricultural exports make an

important contribution to the balance of trade.

Increased trade in agricultural commodities has made the nations of the world more interdependent. This implies American farm prices have

become more variable and subject to climate, economic, political, and social changes throughout the world.

Why Nations Trade

The profit incentive for countries to specialize in producing certain commodities and to trade these to countries specializing in other commodities.

The fundamental bases for food trade are that productive resources are unevenly distributed throughout the world.

Why Nations Trade Cont. Besides giving consumers more

freedom of choice and a varying diet, trade allows consumers to indicate the appropriate products to be produced in each country.

Principle of Comparative Advantage An economic principle that holds that

economic gains are to be had, in the form of reduced costs of production and/or increased standard of living, if, under free trade conditions, each nation will specialize in and export those products it can produce relatively most efficiently, by virtue of its resource endowment, and import commodities for which it has a comparative disadvantage.

Principle of Comparative Advantage Cont. Trading comparative advantage

products for comparative disadvantage products is a form of indirect production.

The principle of comparative advantage goes counter to the common-sense notion that self-sufficiency is best. This also suggests that trade is not just a

one-for-one exchange between countries.

Remarks on Comparative Advantage Every country will have some

comparative advantages and disadvantages. This is true even if a country has an

absolute advantage in all goods. When a country can produce all goods

more efficiently over another country.

An Example

Suppose the U.S. can produce 4 bushels of wheat or 2 bushels of corn an hour.

Suppose the EEC can produce 2 bushels of wheat or 3 bushels of corn an hour.

The U.S. would find it in its best interest to produce wheat when allocated with only one hour of labor.

Another Example

Suppose the U.S. can produce 4 bushels of wheat or 2 bushels of corn an hour.

Suppose the EEC can produce 3 bushels of wheat or 1 bushels of corn an hour.

The U.S. would find it in its best interest to produce corn when allocated with only one hour of labor.

Costs of Trade

Transportation of goods from country to country.

The frequent resource adjustment imposed by competitive world markets and changing comparative advantages.

Loss of self-sufficiency and increased dependency on others.

Costs of Trade Cont.

The incentive for nations to create artificial comparative advantages through subsidies or government policies that distort costs and prices.

U.S. Farm Product Exports

There has been large fluctuations over the years because of changes in world economic conditions. American trade policies War and peace Changing worldwide demand for food

A Few Statistics

In 1981, $44 billion dollars worth of Agricultural commodities were exported accounting for 38% of world agricultural trade tonnage.

From 1981-1987 U.S. tonnage and world share dropped due to an increase in global food production and intensified competition.

A Few More Statistics In the 1990’s, grain and oilseeds have

accounted for 48% of the value of U.S. farm product exports.

In 1992, more than one-third of U.S. wheat, rice, tobacco, cotton and soybean crops were exported.

Illinois, Iowa, Texas, California, Kansas, Nebraska, Indiana and Minnesota accounted for more than 50 % of farm product exports.

U.S. Food Imports U.S. is the world’s largest importer of

farm products. About 10% of U.S. food supply is imported.

Canada and Mexico are the largest exporters to America accounting for 15% of U.S. farm product imports.

In 1993, the U.S. purchased 52% of its agricultural imports from developing countries.

Implications of Food Imports They contribute to a more varied

and lower-cost diet for Americans. They provide other countries with

the purchasing power to buy American products.

Farmers frequently complain that food imports adversely affect their prices and income.

Different Types of Imports Complementary or noncompetitive

imports include bananas, cocoa beans, tea, coffee, and spices. These products can indirectly compete

with domestically produced substitutes. Supplementary or competitive

imports include meat products, sugar, fruits and vegetables, wool, dairy products, and oilseed products.

A Few Comments

Recently, the U.S. has been attempting to increase its exports of high value-added products in order to increase export sales and create more jobs in the food sector.

In 1992, value-added export products exceeded bulk farm export products.

Multinational Firms These firms facilitate rapid transfer of

technology, management skills, and marketing strategies around the world.

They must answer the following questions: Whether to sell abroad? Which markets to enter? How to enter new markets? What production and marketing strategies to

use in foreign markets?

Protectionism vs. Free Trade Trade policies range from the two

extremes of protection from trade for domestic industry to free trade.

Free trade rests on the belief that unrestricted trade among all nations will result in more efficient use of the world’s resources and a higher standard of living for all.

Currency Exchange Rates It is the value of the dollar in relationship to

other currencies. U.S. farm product exports and imports are

significantly influenced by the value of the dollar.

Fluctuating currency exchange rates alter the costs and prices of a country’s imports and exports and can change the competitive position of an exporting country.