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How ‘Brexit’ Might Affect U.S. Agriculture

June 28, 2016

Britain’s departure from the European Union would have little direct effect on U.S. agricultural trade but could slow Indiana’s economic growth tied to manufacturing, Purdue University agricultural economists say.

Their greatest concerns are whether the current shakeup in the financial markets from Britain’s vote last week to leave the EU is short-term or longer, whether an already-strong U.S. dollar would continue to rise in value and how access to global markets might be affected.

“The indirect effects will matter the most,” said Philip Abbott, a professor of agricultural economics who researches international trade and agriculture. “The effects on agricultural trade will be through the exchange rate mechanism and through any negative business cycle effects involving global demand. How big those are depend on whether this is a temporary or longer-term situation and how long the very recent changes in exchange rates and interest rates persist.”

He pointed out that a strong dollar makes U.S. exports more expensive to the rest of the world and that a widely held belief in the agricultural industry is that trade and a weak dollar are good for U.S. agriculture.

Still, agricultural exports to the United Kingdom amount to a very small portion of U.S exports worldwide, Abbott said. In 2015, the United States exported $8.3 billion in corn globally but only $62,000 of the crop to Britain. Of the $18.9 billion worth of soybeans the United States exported worldwide, $76 million of that went to Britain.

Of the $133 billion in overall U.S. agricultural exports, $1.8 billion went to the U.K. Exports of what the U.S. Department of Agriculture calls “consumer-oriented products,” including wine, nuts, fruits and vegetables, meat and dairy products, amounted to $62 billion worldwide, $1.1 billion of it to the U.K. Wine led in that category with U.S. exports of $282 million to Britain.

The Britains’ vote of June 23 drew more attention to the issue of globalization versus nationalization – essentially open or closed markets – said Mike Boehlje, distinguished professor of agricultural economics. Supporters of the referendum to withdraw contend that the influence and sovereignty of Britain has suffered under the EU’s trade and economic regulations and its policies on immigration and the free movement of people within the 28 European countries in the bloc. Similar issues have come up in the current U.S. presidential election campaigns.

“Generally, agriculture is much more dependent on international trade than other parts of the economy,” Boehlje said. “Globalization is important to U.S. agriculture to keep markets open to access.”

Boehlje said openness also is important to agriculture for immigrant labor it needs and for sharing of innovations that promote growth.

“These are probably the more important longer-term issues,” he said. “We don’t know what the answers are yet.”

One effect of Britain leaving the EU likely would be that Indiana’s economy would “take a hit,” said Larry DeBoer, whose area of expertise includes economic development. “It would shave a little bit off our growth.”

DeBoer noted that Indiana is one of the most manufacturing-intensive states in the country, largely on the strength of its manufacture of primary metals – steel and automobiles.

He explained that uncertainty in the markets, in part by the turmoil involving the EU, tends to lead investors to shift their money to “safe assets” such as Treasury bonds. That appreciates the dollar, thereby making Indiana exports more expensive to foreign buyers.

“That means Indiana would be facing a less favorable trade environment,” he said. “When the value of the dollar rises, Indiana manufacturing and employment growth stall.”

The economists agree that economic ramifications of a European Union without Britain need time to play out.

“At any rate, we are certainly in for months of uncertainty,” DeBoer said.