Exchange rate effects on inputs and outputs in Canadian agriculture.
Carter C.A. | Gray R.S. | Furtan W.H.
In a seminal piece of work, Schuh demonstrates, using a single market partial equilibrium model, that exchange rates have a large impact on the price received for farm products. He argued that the overvalued U.S. dollar reduced export demand and the domestic price of U.S. grains. Since then, much of the work on estimating the impact of exchange rate changes on agriculture has implicitly assumed that inputs to the agricultural sector come from the nontraded sector. We argue this assumption can result in an error in the estimation of the effects of exchange rates. In an examination of the pass-through of changes in the $US/CDN exchange rate, we find the data from 1975 to 1989 are consistent with the hypothesis of a complete pass-through of exchange rates for many important variable inputs to Canadian agricultural production. This analysis indicates that, while exchange rates may have had significant impacts on the return to fixed factors and farm income, they have had little effect on grain production. In the case of livestock feeding in Canada, exchange rate devaluations may actually reduce production and reduce the return to fixed factors because inputs (especially grain) are more tradeable than outputs. Finally, we examine the potential welfare impact on nontradeables (such as land) from changes in the exchange rate.
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