Exports and the impact of the value of the US dollar on the beef trade
The latest monthly livestock and meat trade data from the Economic Research Service (ERS) was released on October 7 and included August 2019 as the most recent data available.
The purpose of this article is not only to discuss the export data for this report, but also to discuss an important but complex factor that impacts trade: the value of the US dollar.
For the ERS report first: Beef exports were lower in August 2019 compared to July 2019 and also August 2018. For January-August, beef exports were 3.8% lower than in the same period from 2018. Exports to Japan, the largest country in the United States. destination of beef exports, fell 8.6% during this period. Exports to South Korea increased by 8%. Together, these two countries accounted for 50.5% of U.S. beef exports according to data available for 2019. The USDA’s October World Agricultural Demand and Supply Estimates (WASDE) report lowered the 2019 projection for beef exports to 3.126 billion pounds, which would be about a 1% decline from 2018.
Now, let’s focus on the value of the US dollar. For many of us, we might first think of inflation or the thought “a dollar isn’t worth what it was before”. This is of course true, but it is not exactly the type of value to consider when considering things in the context of trade with other countries. Specifically, we are looking at exchange rates or the value of the US dollar in another country. When customers from other countries wish to purchase US beef, an exchange of their currency for US dollars must take place at some point. The value of the US dollar against the foreign currency is the exchange rate, and fluctuations in that rate can make beef more (or less) expensive for the importer. Exchange rates fluctuate frequently between foreign currencies and are actively traded in the foreign exchange (or Forex) markets.
Consider a simplified example of American beef exported to Japan for illustration. Suppose the exchange rate for one US dollar is 100 Japanese yen. Suppose also that a customer in Japan wants to import 1,000 pounds of American beef, and the price for that beef is US $ 5 (USD) per pound. At the current exchange rate, the customer in Japan would pay 500,000 yen for this transaction (1,000 pounds x 5 USD x 100 yen). Now suppose that a month later the exchange rate for one US dollar is 102 Japanese yen. This would be considered a stronger US dollar against the yen because it costs more to buy the same dollar. Even though the price of beef in US dollars is still $ 5 per pound, the Japanese customer would now pay 510,000 yen for this transaction (1,000 pounds x $ 5 x 102 yen).
So, the example of an exchange rate increase of 2% (from 100 to 102) led to a 2% increase in cost to the customer in Japan. This is why a strong US dollar can sometimes be described as a barrier to US beef exports. The flip side is that a stronger dollar makes goods imported into the United States relatively cheaper.
Foreign exchange markets and their impact on trade are very complex, to say the least. The above example does not consider that the exchange rates between other beef exporting countries (eg Australia) and major beef importers (eg Japan) are also constantly changing. Fluctuating exchange rates could make it cheaper for the Japanese customer to import American beef one month and Australian beef the following month, even if the price of beef in those countries does not change. We know that prices change frequently within countries, that countries face different tariff structures, and that exchange rates are constantly changing – and that doesn’t even take into account the cost of transporting the beef. Simply put, there are a lot of moving parts.
The US dollar is relatively strong at the moment, and this is probably one of the factors that contributed to the slight decline in exports shown in the ERS report. Compared to the Australian dollar, the US dollar was on average about 8% stronger between January and September 2019 than during the same period of 2018. It was also stronger than 2018 levels for comparisons against the Australian dollar. Canadian dollar, euro and Mexican peso. Unlike the example used above, the US dollar has been about the same or slightly weaker against the Japanese yen compared to a year ago, which would imply that US beef is slightly cheaper for Japanese customers if everything else remained constant. But not everything has remained constant, and the exchange rates between Japan and other beef exporting countries have also changed. While exchange rates are only one factor in the beef trading complex, they can have important implications for the flow of beef around the world.
–This originally appeared in the In the cattle markets Bulletin, October 21, 2019
- Assistant Professor and Extension Economist
- Department of Agricultural Economics
- Mississippi State University