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Western agriculture and the trade balance

  • Agricultural Science
  • Economics


FRBSF WEEKLY LETTER May 24,1985 Western Agriculture and the Trade Balance The appreciation of the dollar during the past several years has cut into the competitive edge of u.s. agriculture in the world market. This, in turn, has exacerbated the financial problems of the domestic farming industry already hurt by the combination of the recent sharp drop in inflation and current high real, or inflation-adjusted, inter- est rates. The deterioration of the U.S. trade posi- tion has, however, hurt some farmers much more than others. In this Letter we argue that the differential impacts of the decline in the trade balance for farm pro- ducts constitute one reason that agriculture has tended to fare better in the West than in the Mid- west over the past several years. In particular, the West's mix of agricultural products has been the key to the relative vitality of farming in the region. The states within the Twelfth Federal Reserve Dis- trict simply tend to have a smaller portion of agricultural production devoted to the crops that have borne the brunt of developments in inter- national trade. The strong dollar Over the past several years, the dollar has appre- ciated considerably. In March of this year, the value of the dollar, compared to a weighted aver- age of the currencies of the United States' major trading partners, was more than 50 percent higher than in mid-1980. Since March, the value of the dollar has declined on balance, but it remains high compared to its level atthebeginningofthe 1980s when it began its rapid climb. The impact of the strong dollar has varied substan- tially across sectors of the U.S. economy. It has had the greatest effect on those industries that produce goods for export and those that compete with imports. The manufactured goods sector in the U.S., for example, has suffered significantly. Its share of employment in the U.S. fell from 21.6 to 20.7 percent of all wage and salary employment between January 1982 and January 1985. In con- trast, the domestic U.S. s

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