The Consequences of a Floating Exchange Rate for the U.S. Wheat Market

Abstract

With the introduction of flexible exchange rates in 1971, fluctuations in the value of the dollar have been pronounced. Both the magnitude and frequency of the fluctuations have been much higher than policy makers anticipated. Between 1980 and 1984, the real U.S. exchange rate rose over 40% against its major trading partners' currencies. This rise was accompanied by unprecedented increases in real U.S. interest rates against those in other major trading countries, and sharp declines in U.S. agricultural prices and export volume. U.S. wheat exports fell from 49 million metric tons (mmt) to 38 mmt, even though world trade volume increased over this period. At the same time, production and exports rose in major competing countries. The export shares of Canada, Australia, Argentina, and the European Community (EC) each rose by an average of two to three percentage points between 1981 and 1984, while the U.S. share fell from 48% to 36%. In 1984, Canadian exports constituted about 20% of world wheat trade; Australia, 13%; Argentina, 7%, and the EC, 21% including intra-EC trade. There have been several recent analyses which consider why U.S. wheat exports and prices have declined (e.g., Rausser, Frankel 1984). These tend to focus on how exchange rates and other macroeconomic variables influence agricultural prices and trade. In general, these studies are limited to only the U.S. agricultural sector. They do not incorporate the trade responses of competing countries to changes in the exchange rate and macroeconomic environment. The analyses also tend to assume that the world market is essentially competitive. However, several authors have suggested that the world wheat market is characterized by noncompetitive trade behavior, e.g., McCalla; Alaouze, Watson, and Sturgess; Paarlberg and Abbott; Wilson. These authors have noted that world wheat trade is highly concentrated, with the U.S. and Canada alone accounting for about 50% to 70% of world exports since the 1960s. Traders with market power can directly affect market shares and prices by regulating their export volume. If large wheat exporters can affect price as these authors suggest, then the effects of exchange rate changes might well differ 'from those which would occur in a competitive market.