To What Extent Do Exchange Rates and their Volatility Affect Trade?

Specificities in agriculture 
Many theoretical studies have attributed the impact of exchange rate volatility on 
trade to the degree of firms’ risk aversion. It is probable therefore that some of the main 
characteristics of different sectors – price volatility, trade barriers, homogeneity of goods, 
and the size and reach of firms, for instance – will imply differentiated effects on trade of 
the exchange rate and its volatility.
5
Price volatility is probably one of the main sources of risk in agricultural trade.
6
Many 
production decisions are taken well in advance of product sales, and there generally exists 
a certain amount of uncertainty about the price that will be received for final products 
(OECD, 2009a). Exchange rate variability can further affect the transmission of world 
prices to domestic prices. Some authors (Carter and Pick (1989), for instance) indicate 
that most of the world’s grain trade is denominated in US dollars, which may introduce 
an additional transaction cost if both exporter and importer are located outside the 
United States but the goods are denominated in US dollars. 
Carter and Pick (1989) underline the importance of transaction lags in the relationship 
between exchange rates and the trade balance. This is a particularly important issue in 
agriculture because delivery lags tend to be long.
5. 
The policy relevance of linkages among macroeconomic policy, the exchange rate and US 
agriculture was first described by Schuh (1974, 1976). 
6. 
This is perhaps best illustrated by a small country which exports a large proportion of its 
agricultural production like New Zealand. “In New Zealand, with agriculture being one of the 
most export-oriented in the world, price risks largely originate in world markets, and include 
fluctuations of international commodity prices, exchange rates, international transportation costs, 
or changes in border measures imposed by importers”(Melyukhina, 2011 ). 

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