Tuesday Talks With Dr. Patterson

August 12, 2014

PUTIN SAYS NYET TO U.S. CHICKEN
On August 6, 2014, Russian President Vladimir Putin signed a decree banning imports of beef, pork, poultry, fruits, vegetables, fish, seafood, cheese, milk, and other meat and cheese products from the United States, European Union, Canada, Australia, and Norway. The ban is to be imposed for a period of one year. This action is a retaliatory measure for the economic sanctions imposed by the United States and its allies on Russia for its intervention in the conflict in the Ukraine.

This action is reminiscent of U.S. trade relations with the former Soviet Union, notably actions in 1980. In that year, U.S. President Jimmy Carter imposed an embargo on U.S. agricultural exports to the USSR in retaliation for the Soviet invasion of Afghanistan. (You will remember too that the USSR hosted the Summer Olympic games in that same year, which the U.S. boycotted. Recall, Russia just hosted the Winter Olympics.) Following the embargo, some U.S. politicians argued that it hurt U.S. export earnings and was a contributing factor to the U.S. farm crisis in the mid-1980s. A USDA Economic Research Service study later showed that the embargo alone had little impact on U.S. export earnings or the farm crisis. Rather, global macroeconomic conditions produced these outcomes. Furthermore, the study showed that U.S. agricultural exports were sustained during the embargo, as U.S. exporters found alternative foreign customers.

So how will the current import ban affect the United States and its allies? Preliminary assessment suggests that this action will probably hurt Russians more than the United States or its allies. Russia imports a large amount of its food needs, while U.S. and allied nation exports are spread across many markets. Russia is the fifth largest agricultural importer in the world, behind the EU, China, United States, and Japan. However, Russia is only the 20th largest export market for all U.S. agricultural products with shipments valued at $1.3 billion in 2013. This amounts to less than one percent of U.S. agricultural exports. About 10 percent of EU agricultural exports are destined for Russia.

The import ban will certainly raise concern in some sectors, notably the poultry sector. In 2013, U.S. poultry meat exports to Russia summed to $310 million, making it the fourth largest market for the United States, accounting for six percent of U.S. poultry meat exports. Among import suppliers, the United States controlled about one-half of Russian poultry meat imports, followed by Brazil. Alabama shipped $57 million to Russia in 2013, accounting for 18% of all U.S. poultry exports to Russia. U.S. exports of poultry meat to Russia have been higher, however. In 2008, U.S. poultry meat exports to Russia were valued at $800 million, accounting for 18 percent of U.S. poultry exports. In 2008 and 2009, Alabama shipped $138 million and $287 million worth of poultry, respectively, to Russia. Trade restrictions and growth of the Russian poultry sector reduced U.S. and Alabama shipments to this market. Even before the Russian import ban, Russian officials used alleged food safety concerns to limit imports from certain trade partners. The current trade ban may limit U.S. poultry shipments in the short term. During the first six months of 2014, poultry shipments to Russia were valued at $129 million, compared to $155 million during the same period a year ago. However, like the Soviet embargo of 1980, U.S. poultry exporters will likely find alternative markets for their products.

Russia will need to seek alternative food and agricultural suppliers during the ban. There are already reports of Brazil increasing its export capacity in poultry and beef to serve the Russian market. This additional export capacity in Brazil could have long term implications in global markets for the United States. As Russia seeks out these new suppliers, there will be opportunities for suppliers to enjoy some increased negotiating power, resulting in higher prices for Russian consumers. Trade theory too suggests that Russian consumers should expect higher prices as a result of Putin’s trade ban.

The trade ban and the allied economic sanctions (mainly in the areas of financial services, energy, and arms trade) will raise prices for Russian consumers and likely slow economic growth. It is unfortunate that Russian foreign policy initiatives are ultimately hurting Russian consumers. It will be interesting to see how these economic outcomes will affect President Putin’s popularity in Russia, where he continues to garner great support. He might just be playing chicken with his own people.

 

Dr. Paul Patterson is associate dean for instruction for the College of Agriculture and Professor of Agricultural Economics.