Exchange Rates and Agricultural Commodity Prices

Transcription

1 Exchange Rates and Agricultural Commodity Prices Philip Abbott, Exchange Rates, Prices, and Agricultural Trade: What Have We Learned? IATRC sponsored International Track session, AAEA Annual Meeting Denver, CO July 27, 2010

2 Exchange Rates and Ag Trade Stylized (possible)facts Weak dollar has meant strong agricultural exports Exchange rate depreciation and inflation raise commodity prices Macroeconomic policy dominates agricultural policy In determining trade, prices and so farm income Exchange rate the strongest ag-macro linkage Exchange rate a key determinant of agricultural outlook (and of recent food crisis price increases) WASDE reports highlight macro conditions, exchange rates Financial crisis impacts worked through macro variables

3 Trade - $ Billions 120 U.S. Agricultural Trade and the USDA Real Exchange Rate (RER) Ag Exports Grains, Feeds & Oilseeds Ag Imports Ag Trade Balance RER

4 Controversy on Causes of Recent High Commodity Prices Some argued exchange rate unimportant recently Keith Collins using USDA ag index Daryl Ray trade flows after 1990 unaffected Others (including me)have asserted important role, at least for macro forces in food crisis Abbott, Hurt, Tyner Some reviews non-committal (its complicated!) Trostle USDA Subsequent time series econometric evidence is contradictory, inconclusive

5 Theory and Empirical Evidence Strong theoretical foundations Schuh Law of One Price (LOP) in partial equilibrium General equilibrium real exchange rates Monetary policy and nominal exchange rates Recent linkages between agriculture and energy Inconclusive, mixed empirical evidence History Partial equilibrium econometric modeling 1980s GE models: real only, long run, neoclassical closure Marrying macro and commodity models 1990s Overshooting applied to ag commodities Time series econometrics 1980s-90s VARs on monetary policy Late 2000s - Food crisis explanations Minimal economic assumptions let data speak

6 Estimation Issues Exchange rate change not ceteris paribus Real exchange rate = P tradeables/ P home goods Cross price effects matter and are difficult to estimate Substitution means larger commodity elasticities than aggregate ag elasticities aggregation matters to cross- prices used Exchange rates and prices are endogenous Macroeconomic variables also endogenous, including inflation US a large country in agricultural markets Endogeneity, market power, diminished trade impacts Bilateral exchange rates move independently Some currencies pegged to dollar Aggregate variables may be driven by multiple mechanisms!! Quantitative impacts vary mechanisms matter to differing degrees depending on economic conditions structural changes

7 Bilateral Exchange rates US $ Exchange Rates, Euro Chinese Yuan Brazilian Real IMF NEER USDA Ag Index Japanese Yen

8 Research Questions Exchange rate effects on commodity prices Exchange rate effects on trade Depends on price linkage, net trade elasticties What determines exchange rates? Trade balance Current account = capital account Interest rates and capital flows Safe haven, Petro dollars, Chinese reserves, Sovereign debt, Commodities as speculative assets Monetary policy and inflation Will focus here on commodity price impacts: the easiest, and essential

9 Commodity Price and $ exchange rate correlation Longer History Crude Oil Gold Corn IMF Commodity Index IMF NEER $/Euro

10 Mechanisms for Commodity Price determination by exchange rate Trade/ LOP Pd = e Pw Inflationary overshooting Macro linkage Asset prices, commodity prices flexible Manufacturing and services prices sticky downward Inflationary expectations, speculation and commodities as assets Energy linkages Ethanol ties corn to crude oil after 2005 Capacity, RFS minimum, blending wall constraints matter

11 Trade/LOP Linkage Pd = e Pw (Schuh model) Ԑ Pd-e = ln Pd / ln e = 1 if LOP holds Trade impacts depend on net export demand elasticity versus domestic elasticties Smaller impact in large country case Low price transmission due to endogenous policy or poor market integration could reduce impact Imperfect exchange rate pass-through Low stocks make domestic market less elastic Exchange rate impact greater when stocks are low Will also affect apparent price impact when Pw is endogenous

12 Pd e Pw Domestic Supply Demand Equilibrium World Market Equilibrium 8 Demand 7 6 Supply Net import demand after depreciation Net export supply = supply - demand e Pw Net import demand by ROW (foreigners) Qs, Qd, E M E Small Country case LOP ==> Ԑe = Pd/ e e/pd = 1

13 Pd e Pw Domestic Supply Demand Equilibrium World Market Equilibrium 8 Demand 7 6 Supply Net import demand after depreciation Net export supply = supply - demand e Pw Net import demand by ROW (foreigners) Qs, Qd, E M E Large Country case LOP ==> Ԑe = Pd/ e e/pd < 1

14 Pd e Pw Domestic Supply Demand Equilibrium World Market Equilibrium Demand Supply Net import demand after depreciation Net export supply = supply - demand e Pw Net import demand by ROW (foreigners) Qs, Qd, E Inelastic stocks demand M E

15 Corn price index Corn euro price index Corn Price versus Stocks to use in $ versus $ Corn price index against U.S. stocks-to-use, September 1990 to December 2008 Corn price index against U.S. stocks-touse, September 1990 to December 2008 Jun-08 Apr-08 Jul-08 Jul-96 Mar-08 May-96 Jun-96 Apr-96 Aug-96 May-08 Aug Feb-08 Jan-08,Sep Oct 08 Dec-07 Nov 08Nov-07 Sep-07 Oct-07 Dec 08 Jun-08 May-96 Apr-08 Jul-08 May-08 Jul-96 Jun-96 Aug-96 Apr-96 Mar-08 Feb-08 Aug-08 Jan-08 Dec-07 Sep-07 Nov-07 Oct-07 y = x R² = y = x R² = U.S. stocks-to-use U.S. stocks-to-use

16 Stocks t-stat Ԑ Pd-e t-stat Low Abundant on difference Crude oil ** Corn ** ** Soybeans ** ** Wheat ** ** Rice ** ** * significant at 10% ** significant at 1% + Price data begin in 1990, except for rice, which begins in 2000

17 Macro Linkage Inflationary Overshooting Overshooting hypothesis Commodity price impacts exceed exchange rate change in short run since manufacturing prices are sticky Recessions prices sticky downward Loose monetary policy commodity prices exhibit inflationary expectations first (Frankel) Commodity boom inflationary expectations and speculation Commodity prices other than agriculture began increasing in about 2003, hedge fund investments begin then

18 Interest (Fed funds) rate and Recessions

19 Business cycle t-stat Monetary policy t-stat Commodity boom t-stat Boom Recession on difference Tight Loose on difference 90-02, on difference Crude oil ** * * Corn ** * ** Soybeans ** ** ** Wheat ** ** Rice ** ** ** * significant at 10% ** significant at 1% + Price data begin in 1990, except for rice, which begins in 2000

20 Energy Linkage Since 2005 U.S. energy legislation ethanol has become a substitute for gasoline, capacity built in response Crude oil also subject to LOP/Trade and Macro linkage effects from exchange rate Ethanol link passes ex-impacts on crude oil to corn Energy linkage didn t matter until plant capacity built RFS minimum, capacity constraints and blending wall all limit/ break linkage Crude oil price changes go to rents when constraints bind

21 Linking Corn and Crude Oil Prices 10 9 RFS - Minimum ethanol production Corn price determined by gasoline/ crude oil price Ethanol plant capacity constraining Stocks demand (carry-out) Ethanol demand for corn Food demand Feed Higher oil price Total domestic demand

22 Jan-06 Mar-06 May-06 Jul-06 Sep-06 Nov-06 Jan-07 Mar-07 May-07 Jul-07 Sep-07 Nov-07 Jan-08 Mar-08 May-08 Jul-08 Sep-08 Nov-08 $/bbl Crude, Gasoline, and Ethanol Price Ratios to Corn crude/corn gas/corn ethanol/corn RFS binds Gold rush Capacity Constraints 0.00

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24 Ethanol era t-stat Ԑ Pd t-stat on difference Crude oil ** ** Corn ** ** Soybeans ** ** Wheat ** ** Rice ** ** * significant at 10% ** significant at 1% + Price data begin in 1990, except for rice, which begins in 2000

25 Conclusions Significant, strong linkages between exchange rates and agricultural commodity prices observed Larger than predicted by law of one price Correlations of endogeous variables Variations in quantitative magnitude of effect according to economic conditions Low stocks and recession both bring much larger effects Macro and energy links relevant to food crisis impacts Overlapping events not sorted Overshooting seems evident but downward sticky prices (for manufacturing & services) seem to matter more than inflationary expectations (or loose monetary policy) Trade effects will depend on poorly measured net trade elasticities