The risk of a trade disruption for American Agriculture

Risk remains one of the salient features of commodity agriculture. We usually discuss weather or market price risk, but we also need to be mindful of policy risk. Macro-economic policy in the 1980s and more recently the Renewable Fuel Policy of 2007 are examples of policy decisions that shocked commodity prices. When I teach risk management, I tell students that risk = probability of a bad event x the severity of the event. Much of what challenges us in risk management is how to deal with the low probability but severe negative event.

Current discussion regarding NAFTA, recent withdrawal from the Trans-Pacific Partnership, and other looming threats make trade disruption increasingly probable events. However, if there is a sudden trade disruption in our crop sector, what happens to U.S. producers? Most economist suggest the price of our agricultural commodities could fall, perhaps dramatically. Trade disruptions may occur for a variety of reasons such as disease outbreaks, a trading partner’s economic turmoil, or war.
So here is the question. To what extent would our current farm safety net mitigate a sudden shock to crop prices due to a trade disruption?

Crop Insurance – Based on planted acres, crop insurance would protect against a price shock only if it occurred during the growing season. Since price guarantees are reset with the futures markets every year, a new lower equilibrium futures price in the following year would be used to value insurance losses. Thus, the economic adjustments to lower price levels would be unprotected by this program.
Agricultural Risk Coverage – To the extent base acres match planted acres, ARC would mitigate the decline in price, but would only cover a 10% band of crop value. ARC would provide some protection over the next few years, but the Olympic average used in ARC would gradually adjust over a 5 year period.

Price Loss Coverage – uses base acres as does ARC and protects against prices below a legislatively set reference price. If a medium term price shift occurred (3-5 years), these programs would provide a significant protection but at a high budgetary cost.

Ultimately, our farm safety net is not designed for such a shock. Maintaining trade flows and reducing barriers to trade has a strong economic justification. There are clear benefits to consumers and agricultural producers.

Russia Bans U.S. Imports of Multiple Commodities: Implications for Beef and Pork

Reuters recently reported that Russia has placed a ban on numerous food products from the U.S., the European Union, Canada, Australia and non-EU member Norway. Cattle (live and feeder) and lean hog futures are sharply lower, most likely a result of the move by Russia. The geopolitical unrest in the region has been looming over markets since it became front page news, but this move directly impacts the agricultural sector.

First, U.S. beef exports are small in comparison to the amount of U.S. beef that is consumed domestically. Approximately 10% of beef produced in the U.S. is exported. Of the beef exports, Russia is in the tail of our major trading partners. More specifically, of the eight major beef export markets that the U.S. ships to on a regular basis, Russia ranked #7 in 2008, #8 in 2009, #8 in 2010, #6 in 2011, #6 in 2012, and #8 in 2013. The percentage of all beef exports sent to Russia from 2008 to 2013, respectively, was 2.4%, 0.7%, 3.5%, 5.2% (the high water mark for U.S. beef exports to Russia), and 0.01%.  So, while any market is important, beef exports to Russia should be kept in perspective and for 2013 and 2014 (through May) Russian exports have been minor.

Where the impact will be felt the most in the livestock sector is with the pork market. In 2013 Russia banned U.S. pork from entering the country and that had a sizable impact on hog and pork prices. Russia is a much larger player in the pork export market for the U.S. From 2008 to 2013 the percentage of total pork exports sent to Russia were, respectively, 9.2%, 6.9%, 3.6%, 3.7%, 5.1%, and 0.3% (much of 2013 was under the ban). The high water mark was in the mid-1990’s, with 1995 pork exports to Russia accounting for 19.4% of the total. Russia consistently ranks as the U.S.’s 5th, 6th, or 7th largest pork trading partner.

U.S. livestock markets are reacting in a negative way to Russia’s trade ban on food products. This is not surprising. The larger impact on the hog/pork market is trickling into the cattle/beef market. Both on are edge given that prices remain at record levels, with even the slightest hint of sour demand news providing the fuel for a pull back.

U.S. Beef Exports to Russia


U.S. Pork Exports to Russia

Reuters story:

Russia’s policy (untranslated):