Monday, October 18, 2004

One of the few export bright spots for the United States is agriculture. Every year since 1962 the US has run an agricultural trade surplus. In order to pay for all those chemicals, clothing, lumber, electronics, oil, natural gas, furniture, steel, toys and cars (just a sample of the categories in which the US runs huge trade deficits), we export a hell of a lot of wheat, corn, soybeans, beef and chicken. So far this year the US has exported $39.4bn in agricultural commodities, over 7% of total US goods exports.

In the early 1970s ag exports became official US policy in an attempt to fight off the growing US current account deficit. From 1971 to to 1973 the US ag trade surplus grew 350% in real terms, and ever since, agricultural commodities have played an important role in trying to keep the current account deficit dyke from bursting.

True to form, however, even this bright spot is fading fast. August 2004 was the second time in the last three months that the US ran an agricultural trade deficit. Since late last year, US ag exports have been on a serious decline. $6.3bn in November (NSA) turned into $5.8bn in March which has shrunk to $4.2bn in August, the lowest monthly total in almost two years.

At the same time, ag imports are surging. Every month since October 2003 has seen ag imports of over $4bn. As a result, the ag trade surplus is dwindling. In 2003 it ran at $12.2bn, while through the first two-thirds of 2004 it is just $9.2bn and shrinking. At the pace it's on, the US is setting up for the smallest agricultural trade surplus in real terms since 1986. To get any lower is to go back to the pre-1973 era.

Of course, back in the mid-1980s the US current account deficit was "only" 3.4% of GDP. Now it is 5.7%. The elimination of yet another US export advantage can only spell greater and greater danger for the dollar, for US interest rates, and for a very hard landing in the future.

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