Exchange Rate Variability and Foreign Demand for United States Soybeans
Since the abandonment of a fixed exchange rate regime short-run exchange rates have exhibited increased variability. The effect of this variability on the quarterly demand for U.S. soybeans is examined. Using an expected utility framework an importer chooses the optimal level of the imported input, soybeans, required in the domestic production of two final goods, soybean meal and soybean oil. A two-period framework is assumed; orders are placed in the first period and payment must be rendered in the supplier's currency in the subsequent period. Uncertainty affects the firm's import decision since the actual cost of importation is not known at the time import orders are placed. The model is amended to allow risk management using either a forward market for foreign exchange or the international capital market. Hypotheses concerning the effect of variability on short-term soybean trade are empirically tested for four major U.S. soybean importers: Japan, Spain, West Germany and France. The results indicate that exchange rate variability has had a deleterious impact on the demand for U.S. soybeans for France and Spain but not in Japan or West Germany. This differential effect across countries is attributable to the degree of concentration in the domestic soybean processing industry, the existence of active forward foreign exchange markets, and the sustained reliance on the U.S. as a major soybean supplier.
University of Illinois - Urbana-Champaign
Networked Digital Library of Theses and Dissertations
University of Illinois at Urbana-Champaign