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University of California AIC Issues Brief No. 9, May 1999.

UNIVERSITY OF CALIFORNIA AGRICULTURAL ISSUES CENTER


AIC I SSUES BRIEF
Number Nine May 1999
Agricultural Impacts of the Asian Economic Turmoil: A California Focus

By Daniel A. Sumner and JooHo Song*

        This AIC Issues Brief examines the still unfolding Asian economic situation and its recent and continuing impacts on California agriculture. We consider:
  • Mechanisms through which the economic situation in Asia affects agriculture in California and the rest of the United States.
  • The role of Asia in the market for California and U.S. agricultural products.
  • Dimensions of the Asian economic crisis.
  • Recent impacts on U.S. agricultural exports.
  • Prospects for future exports to Asia, particularly from California.
In the fall of 1997, while agricultural production was buffeted by El Nino and its aftermath, the market for agricultural exports from the United States, and particularly California, was also hit by declines in the Asian economy. Beginning with the devaluation of the Thailand baht, a financial and economic slump spread across Asia and affected all the developing countries of east Asia outside of China. Even before the financial crisis hit, the value of the Japanese yen had declined and the rate of growth of the Japanese economy had slowed. Most East Asia economies have faced serious difficulties and residents in a number of countries have experienced real hardship. These events have had significant impacts on the United States’ economy and agriculture.

The Asian Economy’s Influence on U.S. Agriculture

The economic changes in Asia affected the U.S. and California’s agricultural economies through several mechanisms:
  • Changes in exchange rates of currencies relative to the U.S. dollar made U.S. agricultural products more expensive compared to those produced in Asia and in many (but not all) other nations.
  • Dramatically slower income growth or actual drops in income lowered the purchasing power of Asian consumers and reduced their demand for imported food and other consumer goods.
  • Precipitous economic reversals in Asia created a short-run credit crunch that reduced financing available for imports as well as a longer-term lack of investor confidence in Asian markets.
  • The international financial bailouts of some Asian countries required changes in trade policies, some of which encouraged more trade liberalization and further opening of restricted markets.
  • In some countries, gradual movement toward more capital-intensive agriculture was delayed due to the increased cost of capital available to investors and government. For example, in Korea the gradual conversion of rice paddy land to horticultural crops was slowed because government assistance was muted and because farmers found financing difficult. A related adjustment was a return to more labor-intensive farming methods, as off-farm employment became less available.
  • Internal economic stress in Asia and the urge to increase net trade balances of Asian countries increased political pressures to limit imports in order to reduce dislocation of inefficient domestic producers, and to reduce the foreign exchange needed to finance agricultural imports.
  • Economic problems in Asia are a drag on economic growth elsewhere. This affects demand for farm goods in all markets, not just in Asia.
All seven factors may be important, at least for some commodities and for some countries over certain periods of time. Here we focus especially on the first two factors.

The Asian Economic Situation

We highlight two dimensions of the serious Asian economic decline of 1997 and 1998 - depreciating currencies and shrinking income - because they are clearly important across Asia and have lasting impacts on markets.
     As shown in Table 1, there were large drops in the value of domestic currencies relative to the dollar in all of East Asia except China and Hong Kong. The gradual decline in the value of the Japanese yen began earlier but continued into the second half of 1997 and through the first half of 1998. Both the yen and the Taiwanese dollar had lost about 20% of their value by June, 1998. Most other major currencies had lost about 40%. But in June, 1998, the Indonesian rupia, was worth less than 20% of its value 15 months earlier.

Table 1: Nominal Exchange Rate Depreciation Index (June 1997 = 1.0)
Yr./Mo.Japan
Yen
Korea
Won
Taiwan
Dollar
Philippine
Lux
Indonesia
Rupia
Thailand
Baht
Malaysia
Ringgit
97.061.001.001.001.001.001.001.00
97.090.950.970.970.770.750.690.78
97.120.880.520.850.660.450.530.65
98.030.860.640.850.700.280.630.69
980.60.810.650.810.640.170.590.61
98.090.840.640.810.600.220.630.66
98.121.000.740.860.680.300.670.67

Source: International Financial Statistics, International Monetary Fund


     This currency depreciation meant that in 1998 all goods from the United States were much more expensive in the region relative to early 1997. Further, since the Australian dollar, among others, had also fallen, U.S. goods were expensive relative to those from other exporters. (That did not apply to exports from Europe, where currencies had maintained or even gained relative to the U.S. dollar.)
     By the end of 1998 the exchange rates in the region seem generally to have stabilized. Indeed, the Japanese yen, Korean won, and the Thai baht all firmed significantly from lows at the end of 1997 or early 1998. The Japanese yen has also rebounded since the fall of 1998. China and Hong Kong are not listed in Table 1 because their currency values have remained fixed.
     The second crucial dimension of the economic crisis in Asia is loss of income or slower income growth. Table 2 shows the robust growth rates that occurred in all these east Asian countries through 1996. This had been the pattern for decades. On an annual basis, even 1997 was a pretty good year for most countries. However, in 1998, all countries except China and Taiwan reported growth rates near zero or worse.
     The case of Korea is typical. After decades of very rapid GDP growth of between 6 and 10% per year, Korean growth slipped to 5.5% in 1997 and in 1998 was estimated as minus 5.7%. Table 2 shows a small positive predicted growth rate for Korea in 1999. Relative to the pre-crisis growth rate of about 7% per year, the growth was 1.5% below trend in 1997, about 12% below trend in 1998, and another 5% below trend in 1999. Thus, by 1999, Korea will have lost about 18.5% of GDP from what might reasonably have been predicted in the spring of 1997.

Table 2: Real GDP Changes (Percent change)
YearJapanKoreaTaiwanChinaPhilippineIndonesiaThailandMalaysia
1995
1996
1997
1998
1999 (p)
1.4
4.1
0.8
-2.8
-0.3
8.7
7.1
5.5
-5.7
2.2
6.0
5.7
6.9
5.0
4.4
10.5
9.6
8.8
7.4
7.6
4.8
5.7
5.1
-0.1
-1.3
8.2
7.6
4.9
-14.7
-6.9
9.2
5.5
-0.4
-8.0
0.5
9.5
8.6
7.8
-6.6
-0.6

Sources: Agricultural Outlook. January-February 1999. Economic Research Service /United States Dept. of Agriculture (p = predicted)


The Importance of the Asian Market for California Agriculture

In response to the economic situation in Asia, there are two effects in the United States. First, quantities shipped to Asia decline. Second, the dollar prices of agricultural commodities are lower than they would have been in all markets, not just in Asia.
     Data developed recently by the Agricultural Issues Center provides a good accounting of the importance of direct exports from California to Asia. (For a summary see the AIC Quarterly, Vol. 12, No.3. Also posted on the Internet at https://aic.ucdavis.edu). Out of a California export total of about $5.7 billion for the top 50 export commodities, almost half goes to Asia. For these 50 major California commodities, an average of about 20% of production is exported. Therefore, the Asian share of total sales for these commodities averages about 10%.
     These aggregate percentages conceal considerable variation among the commodities for which Asia is most important as a market, and among the countries within Asia that are most important as destinations. Space constraints limit detail, but a few facts must be stressed. First, Japan is key. For California and for the United States as whole, shipments to Japan of a large variety of commodities comprise almost half of all agricultural exports to Asia. Other Asian markets with imports of more than $100 million from California are, in order of the export value of shipments: Korea, Hong Kong, Taiwan, China, and Indonesia. Thailand, the Philippines, and Malaysia are also significant destinations for some commodities, both for California and for the United States as a whole.

Table 3: 1999 U.S. Agricultural Exports Valued in 1998 Compared with 1997
Export markets% changeCommodity% change

World Total
Japan
Canada
Mexico
Korea
Taiwan
Netherlands
Hong Kong
China
Germany
United Kingdom
Philippine
Indonesia
Thailand
Malaysia
-9.5
-13.7
3.3
18.9
-22.1
-31.2
-19.8
-12.8
-16.5
-9.9
-4.2
-17.9
-41.1
-23.4
-41.4
Agriculture Total
Wheat
Rice
Coarse Grains
Feeds & fodder
Soybeans
Red meats (fresh/frozen)
Dairy products
Cotton
Fresh fruits
Fresh vegetables
Tree nuts
Nursery & cut flowers
Processed fruits & vegetables
Wine & beer
-9.5
-9.6
29.6
-16.5
-13.7
-34.5
-4.7
-2.0
-5.4
-12.5
0.8
-3.9
8.1
+0.4
7.2

Source: Foreign Agricultural Service /United States Dept. of Agriculture, BICO Export Data
(The tBICOu Report provides U.S. agricultural export data on Bulk commodities, and high-value Intermediate and Consumer-Oriented foods and beverages.)


Initial Impacts in California and U.S. Agriculture

We can learn about the impact of the Asian economic mess by considering the decline in U.S. agricultural exports in 1998. As shown in Table 3, exports to Canada and Mexico actually increased over this period so total export losses have been moderate. However, in Asian markets we see the dramatic impacts of income losses and exchange rate declines. Exports to Japan are down 14%, to Hong Kong 13%, to Korea 22%, and to Taiwan 31% (in part because of a unique disaster in the Taiwan hog industry). Overall, U.S. agricultural exports to southeast Asia are off about 30%.
     Much of the loss in U.S. exports is comprised of feed grains and oilseeds, but there are also losses for commodities particularly important to California. Cotton exports in 1998 were down 5% from 1997, while fresh fruit exports were down 13%. Tellingly, tree-nut exports, which go primarily to Europe, were up 18% until August (they are now down by 4% mainly due to poor 1998 production (see Figure 1).

Figure 1. California Crop Production in 1998 Compared to 1997

Prospects for the Future of Exports to Asia: Impacts in California

When the value of the dollar rises, overseas customers pay more in their own currency, although the U.S. seller sees no more dollars in return. In general, the products most vulnerable to price increases are those for which the consumer has relatively close substitutes. For some U.S. export products, domestic or regional substitutes clearly are available at a reasonable price. For example, United States beef sales to Korea or southeast Asia suffer relative to domestic beef, Australian beef, and cheaper domestic pork or poultry. The same applies to U.S. fresh fruit exports.
     Cotton exports to Asia differ from other farm commodities because cotton is an industrial raw material that is largely re-exported after processing. Thus, income and price factors apply differently to cotton. Consider cotton exports to Korea:
  • Korea grows no cotton so there is no local substitute.
  • Because the textile processing industry is capital-intensive and factory owners lose when their plant is not operating, there is a tendency for raw material inputs to be less price-sensitive.
  • As the price of imported cotton goes up (measured in won) so does the price of cotton textile products shipped to the U.S. and Europe.
  • Since much of the cotton textile production is not destined for the local market, lower incomes in Korea have a relatively small effect on the Korean demand for cotton.
In general, short-term credit problems were perhaps more important for Asian cotton importers than price and income effects. The U.S. government allocated $1,500 million of USDA credit guarantees to Korea in FY1998, which included $320 million for cotton. U.S. exports of cotton to Korea actually increased from $210 million in the first eleven months of 1997 to $245 million in the same period of 1998. For the rest of 1998 and 1999, the extremely poor 1998 cotton crop may be more important to the California industry than the Asian situation.
     The economic problems in Japan have not resulted in the kind of severe contraction experienced by Korea or the nations of southeast Asia. Nonetheless, for California the situation in Japan is perhaps more important than anywhere else.

Four key points on the Japanese situation:
  • Japan is by far the largest and most diverse export market for California agriculture.
  • The Japanese economy has been stagnant for several years. If forecasts prove true, growth from 1995 to 1999 will have averaged only about .06% per year, with almost all of that occurring in 1996. This lack of growth in Japan, coupled with massive declines in asset values, means that Japan is likely to remain a depressed market, possibly for some years.
  • Rice has been an exception because an expaning import quota for rice was part of the Uruguay Round GATT Trade Agreement.
  • A positive outcome of the current economic turmoil in Japan could develop if consumer and voter dissatisfaction cause trade policy changes that allow imports to compete more directly in the Japanese market.

Final Considerations

Overall, it looks as if the Asian demand for U.S. and California agriculture will remain depressed through 1999. This outcome is based on a very slow or even negative growth persisting for 1999 in key markets.
     In the longer term, the Asian market will rebound. It is therefore important that U.S. and California agriculture be ready for the opportunities of new growth when they arrive.


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