Most of what you read in this column would fall under the umbrella of microeconomics. That branch of the dismal science encompasses consumer economics (utility, consumer behavior, demand, etc.), theory of the firm (production economics, logistics, etc.) and price theory, which deals with how prices are determined and discovered. It focuses on only one or a few products and the markets that determine the levels of output and usage and the prices of those goods.
The “Great Recession” has focused considerably more attention on macroeconomic issues over the past three years. Gross domestic product (the total value of all of the goods and services produced within a country), interest rates, employment and unemployment are just four of the metrics that are used to describe the health of the economy. But economies of individual countries are now far more interdependent than they once were.
There are three ways that macroeconomics impacts our market. The classic impact, of course, is on demand. Figure 1 shows a slightly modified version of the national income accounts that measure the impacts of various forms of spending on national income and output. Consumption, government expenditures (net of taxes), investment and net exports all contribute positively to gross domestic product, which represents both the value of output and, when considered along with the savings rate, total expenditures in the economy.
I have added a few blocks to the diagram for illustrative purposes. Spending and the output it drives impact production parameters such as employment and manufacturing capacity utilization. These, in turn, have a direct impact on the amount of money that consumers and businesses have available for spending, but actual expenditures are not completely determined by income.
Expenditures are also heavily influenced by the attitudes of consumers and businesses. Those attitudes are usually expressed in terms of confidence indexes, which have been improving steadily. Only when consumer and businesses have money and are confident about the future do they actually spend money, thus stimulating the economy.
The second impact of macroeconomics is through trade. While not a Johnny-come-lately item, it has become a force for most countries and industries only since World War II. Trade has become critical for agricultural markets since the completion of the Tokyo Round of trade negotiations in the 1960s. Obviously, lower tariffs and freer access to export markets have allowed goods to flow more freely among nations.
But an even more recent impact of trade is the feedback loop created by liquid markets for currencies (Figure 1). As Iowa State University economist Dermot Hayes says, an exchange rate places relative values on the labor and infrastructure of the two countries in question. If one country’s currency loses value, the market is assigning a lower value to the labor and capital in that country, making its goods less expensive in world markets and encouraging exports. The opposite is also true.
Figure 2 and 3 shows exchange rates between the U.S. dollar and the currencies of our major competitors in world pork markets and our major pork export customers. A downward sloping line in these charts means that it takes fewer units of the other currencies to purchase one U.S. dollar – i.e. more value per unit of the other currency, less value per U.S. dollar.
Stronger competitors’ currencies are making their pork products more expensive. But note that the Euro has not been losing value relative to the dollar in the same manner as have Brazil’s Real and Canada’s dollar. Recurring sovereign debt crises among Euro area countries have caused recurring concerns about the currency and, in turn, recurring devaluations of the Euro or, perhaps more accurately, recurring increases in the value of the U.S. dollar relative to the Euro, which is commonly referred to as “flight to safety.” In fact, the Euro is about 15% less valuable relative to the dollar than it was in mid-1980.
Strong customers’ currencies make U.S. pork less expensive. It is clear to see that U.S. pork is cheap, from a historical perspective, in Japan. It is less expensive in Mexico and Korea than it was at the beginning of 2009. It is somewhat less expensive in China, but it would very likely be far less expensive if China allowed the value of the Renmimbi to float completely. They are allowing it to rise a bit again, but the change is obviously far smaller than for currencies whose values are determined by market forces.
Finally, the newest impact of macroeconomics is on costs. It is not that macroeconomics has not had an impact in the past. They have. But the impact and feedback loops are now smaller and faster-acting because of the linkage of grain prices to oil prices. Higher oil prices once had to work through their impacts on industrial output and demand. They now hit livestock operations much more quickly because they drag corn, soybeans and other feed ingredient prices upward almost immediately. Livestock feeders do not have to wait and see what impact higher oil and gasoline prices might have on meat and poultry demand. They see the impact on input prices and costs far more quickly now.
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Steve R. Meyer, Ph.D.
Paragon Economics, Inc.