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October 19, 2001
War on Terrorism
What are the potential
impacts on agriculture?
By Terry Francl
Senior Economist
Economic Analysts Team
American Farm Bureau Federation
As the nation and the world prepare to embark on a war against terrorism, there are concerns and speculation on how the different sectors of the economy will be affected, including agriculture. There is very little precedent for judging the impact of a war on terrorism of the magnitude indicated by President Bush in his Sept. 20 address to Congress and the nation. In all likelihood, overt military action will be focused and relatively brief. However, covert activities could be extensive and long standing, perhaps many years. These covert activities also could alter political partnerships and the trading patterns for food and fiber.
Impacts on Agricultural Exports—The areas most likely to be affected are parts of Asia, the Middle East and Northern Africa. Wheat is the primary commodity sold in the area and Egypt is the primary buyer or recipient of wheat and flour products. Egypt is often the world's largest importer of wheat—about 250 million bushels—and the United States has had from half to two-thirds of that market in recent years. Egypt also imports from 100 to 150 million bushels of corn from the United States each year.
The United States also exports wheat to Pakistan, up to 125 million bushels in some years. Much of the wheat that goes to Pakistan involves PL-480, Section 416 and Commodity Credit Corporation (CCC) credits. President Bush has noted that in the past the United States has been the largest provider of food assistance to Afghanistan. The United States will ship almost 200,000 metric tons of wheat to Afghanistan in 2001. Pakistan also imports cotton but in good production years will also export cotton, rice and even wheat on occasion.
The Middle East also imports rice, anywhere from 3 million metric tons (MMT) to 4.3 MMT in recent years. Afghanistan also imports some rice. Likewise, countries in the Middle East also import from 1 to 1.3 MMT of soybean oil.
Approximately 40 percent of U.S. agricultural exports go to Asian countries, which includes a small portion to Afghanistan and Pakistan. The next largest block is our NAFTA neighbors, Canada and Mexico, which account for about 30 percent of U.S. annual agricultural exports.
The other important thing to remember is there are a number of the countries in the Middle East subject to various forms of U.S. sanctions, either trade embargoes or restricted credit. They include Iraq, Iran, Libya, Syria and Sudan. So there is relatively little downside risk of loss of sales to these countries. There is a possibility that food aide could be extended to some countries not presently getting food from the United States and that current sanctions could either be lifted or modified.
The potential impact from the war on terrorism to agricultural exports appears fairly minimal at this point. There may be some concerns that expanded terrorism activities could cause some transportation dislocations. However, in the past, terrorist activities have been more focused on the disruption of people's lives than physical destruction—with the notable exception of the attack on the New York Trade Towers.
The Energy Issue—Since the United States imports over 60 percent of its crude oil, there is concern about the potential impact on fuel supplies. While OPEC is still a force in this area, its power to dictate supplies and effect prices is much less than 20 years ago. Likewise, the Middle Eastern countries account for a smaller share of OPEC crude oil production. Currently, a little less than 25 percent of the oil imported into the United States comes from the Middle East while about 50 percent comes from South and North American countries. And even some of the most important Middle Eastern oil-producing members, like Saudi Arabia and Kuwait, are strong allies of the United States.
Crude oil futures prices did spike up approximately $3 per barrel to $30 per barrel when trading resumed after the Sept. 11 attack. However, the market has since refocused on the slowing U.S. and world economy with prices returning the mid-$20 level. Nevertheless, crude oil has the potential to be one of the products most affected by the war on terrorism.
U.S. farmers have experienced a significant increase in fuel prices and costs the past two years. Farmer expenditures for fuel and oil are estimated to be over 40 percent higher in 2001 than two years ago. Totaled expenditures in the energy sensitive manufactured goods category are estimated to be $31.6 billion in 2001, up $4.5 billion over 1999. These higher costs have reduced farm income by a like amount and is one reason Congress passed legislation for emergency aide to the farm sector this year. So, should crude oil and fuel costs spike again, it will certainly have a negative impact on farm income.
Impact on Commodity Prices—Since the Sept. 11 terrorist attack the crop commodity prices have been under some downward price pressure. However, the adjustment to date is pretty much in line with the experience of past terrorist attacks and/or response.
In general, events like this cause uncertainty in markets and exacerbate whatever price trends are in effect prior to the event. That would seem to be the case with both the agricultural commodities and the stock market. Furthermore, for crops there was an USDA Crop Production and Supply and Demand Report issued just three days after the terrorist attack that was decidedly bearish for the major crops. In addition, U.S. farmers are entering the main harvest season for corn, cotton, rice and soybeans. Consequently, it appears that the price reaction in recent days is not out of line with existing supply and demand conditions and seasonal price trends.
The same may apply for livestock although a portion of the sharp drops in cattle prices in recent days can probably be attributed to the flagging economy. With travel, tourism and lodging declining precipitously the week following the attack, it appears to have reduced the demand for beef. About half the beef in the United States is consumed via the restaurant trade. So, in the case of cattle, it appears to have been a combination of large supplies and the reduced demand ultimately caused by the terrorist attack that has had such a negative impact on prices.
Food Supplies are Not in Danger—At this juncture there is nothing to suggest that the food supply, either the U.S. supply or that exported to our trading partners, is threatened in any manner. The underlying cost of ingredients, the prices that farmers receive, is expected to remain steady if not slightly lower due to supply and demand conditions. Very little, if any, food is imported into the United States from the countries that harbor and abet terrorists. So, both domestic and foreign supplies of food and fiber appear to be secure and will remain available at reasonable prices for now and the foreseeable future.
What to Do?—The only way the terrorists who attacked this country Sept.11 can succeed is if they force the people of the United States to change our way of life.
Certainly there will be some sacrifices with respect to security in a number of different ways. Changes to make our lives more secure from the terrorist threat will undoubtedly be more costly and somewhat inconvenient, especially to travelers. But, in a broader sense, it is important that we carry on our lives with respect to both economic and social issues largely as we did prior to the attack.
There are some areas where we should strive to make ourselves less vulnerable, and energy supplies would be one.
Passing legislation that would encourage the domestic production of crude oil and various fuels would be a powerful message in this regard. There was legislation under consideration in conjunction with the farm bill prior to the attack that would encourage the development and use of biomass fuels that would both boost supplies of energy and be environmentally friendly. Likewise, President Bush's energy program to drill and produce in the Arctic Natural Wildlife Reserve (ANWR) and via offshore drilling should also be given a top priority.
These are small steps that should be addressed at the earliest opportunity. But even small steps in the right direction send a powerful message about the determination of the people of this country to meet and defeat terrorism.
