Shock waves from the Asian economic crisis will ripple through Wisconsin”s farm economy, with corn and soybean producers feeling the worst effects during 1998 and 1999, according to a University of Wisconsin-Madison economist. Wisconsin”s dairy industry won”t be hit nearly as hard as grain and livestock producers, according to William Dobson, an agricultural economist at UW-Madison”s College of Agricultural and Life Sciences.
Economic crisis and currency depreciation have made the U.S. dollar much stronger against Asian currencies, reducing Asians” ability to buy U.S. exports. For example, the Indonesian rupiah recently was worth one-quarter of what it was before the crisis, and most of Indonesia”s 200 million consumers are now priced out of the market for U.S. agricultural products. Most other Asian currencies have also declined, though not as severely as Indonesia”s.
Corn and soybean prices are strongly influenced by export markets. Currently, U.S. producers are feeding a huge hog population, but prices are still lower than they”d be with healthy Asian markets. Once most of those hogs are shipped, the grain markets will be exposed even more to export weakness. Dobson expects this to happen sometime in late 1998 and early 1999. El Ni?o will muddy the grain picture a bit, because it has caused drought in pockets of Australia, New Zealand and Indonesia, he notes.
In 1996, Japan accounted for 19 percent of U.S. agricultural exports, and more than half of U.S. beef and pork exports. Any drop in Japanese imports will hit markets throughout the United States, Dobson says.
Dairy exports to Asia will drop somewhat; primarily cheese, lactose and dried whey products. For example, U.S. cheese exporters, who had acquired about one-third of South Korea”s cheese market, are going to have trouble holding that market, according to Dobson. But dairy products will take a minor hit relative to grain markets, because most dairy products produced in the United States are sold domestically.
“Most Asian markets will be depressed for a substantial period – probably longer than when Mexico had troubles starting in late 1994,” Dobson says. The United States helped Mexico by taking exports, but Japan has troubles of its own and probably can”t help the rest of Asia in the same way.
How long Asian markets stay depressed is the big question, according to Dobson. For example, Nestle (the Swiss agribusiness giant) has recently concentrated on expanding dairy and other food sales in the “growth markets of Asia,” rather than the flat and highly competitive U.S. and European markets. Nestle won”t change its Asian marketing plan for a one-year recession, but might change it for a several-year recession. That would probably put U.S. and European markets more fully in Nestle”s sights, Dobson points out. Likewise for the New Zealand Dairy Board, which in the last decade has emphasized expanding its dairy sales in Asia and reducing sales in North America.
Dobson doesn”t think the crisis in Asia will produce a “lost decade” like Latin America had in the 1980s, but he”s not expecting a quick turnaround like Mexico”s, either.
“It will be two or three years, most likely, before you see something that growls like a tiger again in Asia,” he says.
Dobson has constructed three scenarios for the U.S. economy following the Asian crisis.
In scenario 1, which Dobson thinks is most likely, Asian problems stay in Asia, and don”t spill to Latin America, Eastern Europe and Russia. We”ll see no dramatic effect on a healthy U.S. economy. The stock market may show sporadic strength, but will move sideways for much of the year. Major corrections will be avoided.
In scenario 2, some economic problems move to Brazil, Eastern Europe and Russia. This could produce a 15- to 20-percent decline in U.S. stock markets, according to Dobson.
Scenario 3 is grim. Big problems similar to those in Asia hit Russia, Eastern Europe and Latin America. Deflation and recession hit the United States, stock prices and farmland prices decline, and trade restrictions are advocated to stem losses of sales to imports from Asia and other countries with depressed currency values. Scenario 3 is not impossible, but it”s pretty unlikely, Dobson says, since the Federal Reserve Board and Administration would intervene to short-circuit the recession and accompanying trade restrictions.
Dobson spent five weeks in Singapore, Indonesia and the Philippines in mid-1997, conducting agricultural trade and policy studies.
For a copy of Dobson”s report, “The Outlook for the U.S. Economy – Implications of the Asian Crisis and Related Developments for U.S. Agriculture,” call (608) 262-8965 and ask for Marketing and Policy Briefing Paper number 59.