Emerging Markets / July 28, 2016

Food & Agriculture within World Trade

Trade is an essential part of the world economy, allowing humans and regions to specialize in what they do best. In the 21st century, international trade represents a multi-trillion dollar economic activity that defines the modern world. Both as consumer goods and as commodities, the food & agriculture (F&A) industry represents a major element of world trade. The assessment of global trade presented here highlights the importance of understanding commercial dynamics as part of a global economic strategy.

The Status of World Trade

As a central part of the world’s economy, international trade was severely affected by the 2008 financial crisis. However, over the last couple of years trade has recovered and enjoyed a steady growth of approximately 2.5% yearly. Today, worldwide merchandise trade accounts for approximately $16.5 trillion dollars. Whereas, trade in commercial services accounts for some $4.5 trillion dollars. Unsurprisingly, amongst the world’s major traders are the United States, China, Russia, Mexico, and the European Union. Within this trade, F&A products account for approximately $2 trillion dollars every year. Furthermore, the F&A sector includes five of the ten most traded commodities: coffee, wheat, cotton, corn, and sugar. F&A trade in commodities is coordinated through several international markets, including the New York Board of Trade, the Kansai Commodities Exchange in Japan, the Singapore Commodities Exchange, and Euronext Exchange in London. (Read more about Agricultural versus Mineral Commodities)

Historically, developing nations have been commodity providers and developed nations have manufactured the added value to finalize consumer goods. Today, however, 52% of merchandise exports from developing economies are traded with other developing economies. This number is ten percentage points higher than it was a decade ago, when most merchandise exports from developing economies went to developed economies. This so-called South-South trade has gained enormous traction and importance during the 21st century. South-South trade attests to the economic dynamism driven by Asian manufacture and to the creation of a new middle class worldwide. (Read more on the Expanding Middle Class)

Macroeconomic Conditions

Over the last couple of years, the most affected sector of world trade has been energy, given the substantial drop of over 40% in fossil fuel prices. Likewise, another factor that has played a major role in international trade over the last year has been the strengthening of the US dollar and the recent drop of the British Pound. During the Federal Open Market Committee press conference this past June, Chair Janet Yellen stated that inflation in the United States has been particularly low the past year because of the strong dollar and the low fuel prices. In fact, the two most volatile sectors of the Consumer Price Index, energy and food, have been trending in opposite directions the last few years. The F&A industry is experiencing higher costs and prices, whereas the energy industry is dealing with very low prices. (Read more on the F&A sector within the Consumer Price Index)

The F&A industry is only one of the several sectors that makeup world trade. However, F&A is a dynamic, central, and indispensable component of the world markets. Businesses and investors would be wise to consider the macroeconomic conditions surrounding the F&A industry and look for ways to participate within its supply chain.