Thursday, May 12, 2005

Kash at Angry Bear thinks
clearly the US still does have a substantial comparative advantage in the production of agricultural products
The evidence seems to be the fact that the US export/import ratio for agricultural products is well above the country's X/M ratio overall (for 2005:I, 0.90 vs. 0.55 respectively). This broad-brush comment could seriously use a closer look.

First of all, the US export/import ratio for agricultural products is declining, so if the US does indeed have a comparative advantage, it is dropping markedly.

Second, the high ratio for agricultural products is really a hodge-podge of radically different ratios, some of which are quite favorable and others which show the US agricultural advantage to be about as good for consumer goods.

The US Foreign Agricultural Service through its BICO system breaks down US agricultural exports and imports into three main categories: bulk, intermediate and consumer-oriented products (hence the name BICO). It also collects and reports trade data on two other related categories: forest products, and fish & seafood. For these five categories, the US shows a comparative advantage per Kash's methodology in only two groups -- and these are hardly the most economically lucrative ones.

Over the last six months (October 2004 to March 2005), in bulk agricultural commodities (e.g. grains) the US X/M ratio is a heady 3.9; in intermediate products (e.g. oils) a less heady but still export-surplus-indicating 1.3. When it comes to the high value-added category of consumer-oriented agricultural products, however, the comparative advantage melts away, to an X/M ratio of a mere 0.65. Categories like red meat, dairy, fresh fruit, fresh vegetables and wine/beer are particularly weak -- but who eats any of that when there's all that sorghum to munch down!

And don't look to trees or the seas for any help. Forest products come in at a weak 0.25, and fish/seafood a similar 0.31.

So when it comes to growing wheat and grinding it up into flour, the US can do it like nobody's business. When it comes to turning it all into ChexMix, however, capital is turning elsewhere.

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