Exploring the transmission of international and domestic economic shocks to United States agriculture

In the wake of recent concerns about the vulnerability of United States (U.S.) agriculture to shocks from abroad, this study quantifies the extent to which exogenous economic shocks affect the U.S. agricultural sector. If price volatility is the manifestation of economic shocks, we first question the widely held view that agricultural commodity markets are volatile, by redefining commodity price uncertainty with the conditional standard deviation. We also measure the extent to which volatility in international agricultural markets and exchange rate volatility are transmitted to U.S. agricultural prices and price volatility using Granger causality. Finally, we compute U.S. agricultural supply response to international economic shocks, taking into account the response of other sectors in the economy with which the agricultural sector must compete for economy-wide resources.Our results show that agricultural commodity markets are less volatile than commonly assumed. Volatility is transmitted across countries and markets, but U.S. volatility is rather immune to volatility from foreign commodity markets, although volatility may affect competitiveness. When the role of exchange rates as a source of volatility is examined, we find, little evidence for the exchange rate as an initiator of price volatility. The exceptions in the U.S. are two commodities, namely wheat and beef. We conclude that the welfare effects of price volatility are small.We also specify a stylized model of the U.S. economy and derive an empirically testable equation that relates the U.S. agricultural sector to the domestic economy and the international economy. After estimating the elasticities of the international economy, we find that the indirect effects of economic shocks on agricultural supply and factor returns are larger than the direct effects, but overall the magnitude of the effect is small.In concluding, while we began this study with the hypothesis that the U.S. agricultural sector is vulnerable to domestic and international shocks, we find that the effects of volatility are small and that the effects of foreign economic shocks on U.S. agriculture are small, with the indirect effects dominating the direct effects.