Impact of Exchange Rate on Agricultural Exports

In an era of floating exchange rates and increasingly synchronized global shocks, exchange rate volatility has evolved from a narrow financial variable into a central macroeconomic determinant of trade performance, particularly within the agricultural sectors of developing economies. Agriculture, which often accounts for 20–30 percent of gross domestic product and employs more than 60 percent of the labor force in regions such as Sub-Saharan Africa and South Asia, is structurally more exposed to currency fluctuations than most other sectors (OECD, 2025).

This vulnerability is inherently dual in nature. On the revenue side, export earnings are highly sensitive to shifts in international price competitiveness, with even modest currency appreciations capable of eroding margins in tightly priced global markets. On the cost side, modern agriculture is deeply dependent on imported intermediate inputs i.e. fertilizers, agrochemicals, improved seeds, fuel, and machinery whose domestic prices rise immediately with currency depreciation, compressing farm profitability and discouraging investment.

The macroeconomic relevance of this channel is increasingly evident. In Nigeria, where agriculture contributes roughly 22 percent to GDP, persistent naira volatility has been empirically linked to weakened export performance, lower output growth, and heightened income instability among smallholders (Onuoha, 2025). In Pakistan, where agriculture accounts for nearly one-fifth of GDP and more than 60 percent of merchandise export earnings, rupee instability has directly affected the competitiveness of rice, cotton, and horticultural exports, while simultaneously raising the domestic cost of imported fertilizers and pesticides (Iqbal & Khan, 2024). These pressures are magnified during periods of global turbulence. The COVID-19 pandemic triggered capital flight, reserve depletion, and abrupt depreciations across many emerging markets, disrupting agricultural supply chains and undermining the capacity of exporters to honor contracts and finance working capital (Steinbach, 2021).

Consequently, exchange rate volatility is not merely a market signal but a structural force shaping rural incomes, food security, and macroeconomic stability. Its effects propagate through production decisions, investment behavior, and export diversification, with long-term implications for poverty reduction and growth. A rigorous understanding of these transmission channels is therefore indispensable for designing coherent trade, monetary, and agricultural policies capable of stabilizing farm incomes and safeguarding export competitiveness in an increasingly uncertain global economy.

Theoretical Foundations of Exchange Rate Volatility and Agricultural Trade

The theoretical relationship between exchange rates and trade performance is deeply rooted in classical international economics, yet it has progressively evolved to incorporate behavioral and institutional realities. In its traditional form, this relationship is framed by the Heckscher–Ohlin model and the Marshall–Lerner condition, which together predict that a currency depreciation should improve the trade balance by stimulating exports and discouraging imports. For agriculture, however, this mechanism is inherently constrained. Biological production cycles, climatic dependence, and fixed land use severely limit the short-run price elasticity of supply. Farmers cannot rapidly expand output in response to favorable exchange rate movements, implying that depreciation may raise export revenues in value terms without generating a proportionate increase in export volumes.

Contemporary theory moves beyond these static assumptions by embedding risk, uncertainty, and firm behavior into the analysis. Exchange rate volatility increases the variance of expected export revenues, raising the risk premium associated with international transactions. In this framework, risk-averse farmers and agribusiness firms may reduce export participation, delay investment, or shift toward domestic markets when volatility rises. This risk channel is particularly salient in developing economies, where access to credit, insurance, and hedging instruments is limited, and even short-lived currency swings can jeopardize liquidity and solvency.

At the same time, modern trade theory introduces countervailing mechanisms. Hysteresis and sunk cost models emphasize that entry into export markets involves irreversible investments in marketing networks, quality certification, and logistics. Once these costs are incurred, exporters may tolerate higher exchange rate volatility to preserve market presence and avoid forfeiting long-term rents. This explains why established exporters often display greater resilience to volatility than new entrants.

Finally, the distinction between nominal and real exchange rates is central to long-run competitiveness. While nominal movements capture short-term financial shocks, real exchange rates, adjusted for inflation differentials under Purchasing Power Parity, better reflect sustained changes in relative prices. Collectively, these theoretical perspectives demonstrate that the impact of exchange rate volatility is not mechanical but mediated by market structure, institutional depth, risk preferences, and policy frameworks.

Empirical Evidence on Exchange Rate Volatility and Agricultural Exports

The empirical literature on exchange rate volatility (ERV) and agricultural trade presents a wide spectrum of findings, underscoring the context-specific and commodity-specific nature of this relationship. A substantial body of evidence documents a negative and statistically significant impact of ERV on agricultural exports in developing economies. Using advanced time-series techniques such as GARCH, ARDL, and VAR models, studies from Nigeria and Pakistan consistently report that heightened volatility depresses export volumes and weakens sectoral output growth (Onuoha, 2025; Ali & Hussain, 2021). Similar conclusions emerge from South Africa, where recent estimates show that rand volatility undermines the competitiveness of key agricultural commodities, contradicting the conventional expectation that depreciation is uniformly beneficial (Choga & Mashao, 2025). These adverse effects operate through two dominant channels: first, uncertainty discourages long-term investment in export-oriented production; second, currency depreciation raises the domestic cost of imported fertilizers, chemicals, and machinery, compressing profit margins and offsetting price competitiveness gains.

However, the empirical record is far from uniform. A second strand of studies reports mixed, weak, or statistically insignificant effects. Research on Indian and Nigerian agricultural exports often finds that ERV does not exert a robust influence on aggregate trade flows (Zhang et al., 2024). These results are frequently attributed to aggregation bias, whereby offsetting effects across commodities cancel out at the macro level, or to the presence of private hedging strategies among larger exporters that partially insulate revenues from currency risk.

More recent work adopts nonlinear and asymmetric frameworks that reveal deeper complexity. Nonlinear ARDL (NARDL) models applied to Pakistan demonstrate that depreciation and appreciation have asymmetric effects: depreciation may stimulate certain exports, while appreciation does not proportionately reduce them, and volatility affects commodities unevenly (Iqbal & Khan, 2024; Khan & Ali, 2022). Threshold regression analyses further suggest that ERV influences exports only after volatility surpasses critical levels, beyond which uncertainty dominates price incentives. Collectively, these findings imply that the impact of ERV is conditional, nonlinear, and highly sensitive to institutional depth, commodity structure, and market integration.

Transmission Mechanisms Linking Exchange Rate Volatility to Export Competitiveness

Exchange rate volatility (ERV) influences agricultural export performance through multiple, interrelated transmission channels that operate simultaneously along the price, cost, and investment margins. The first and most immediate channel is price competitiveness, mediated by the degree of exchange rate pass-through (ERPT) to export and farm-gate prices. In many agricultural markets, pass-through is incomplete and asymmetrical. For standardized commodities such as rice, wheat, or cotton, international contracts are often denominated in U.S. dollars and negotiated by state trading enterprises or large exporters. As a result, short-run exchange rate movements may not fully translate into producer prices, insulating farmers from temporary depreciations but also preventing them from capturing potential windfall gains (Tran & Vo, 2023). Over time, however, persistent volatility erodes price signals, complicating production planning and contract negotiation.

A second critical channel operates through supply chains and input cost shocks. Modern agriculture in developing economies is increasingly dependent on imported fertilizers, pesticides, improved seeds, fuel, and machinery. Currency depreciation directly raises the domestic price of these inputs, increasing marginal production costs. When input price inflation outpaces export price gains, the net effect of depreciation becomes negative for profitability and output expansion (Novatia Consulting, 2024). This cost channel is particularly damaging for smallholders operating with thin margins and limited access to credit, for whom input-price volatility translates quickly into reduced input use, lower yields, and declining exportable surpluses.

The third channel concerns investment behavior and market entry dynamics. High ERV raises revenue uncertainty and increases the real option value of waiting, discouraging irreversible investments in export-oriented production, processing, and certification. Firm-level evidence indicates that volatility affects the extensive margin of trade more strongly than the intensive margin: it reduces the number of firms that enter or remain in export markets, while established exporters adjust volumes more gradually (Millbank FX, 2024). Small and medium-sized enterprises are particularly vulnerable because they lack access to formal hedging instruments and face higher financing constraints.

Commodity and Regional Heterogeneity in the Impact of Exchange Rate Volatility

The effects of exchange rate volatility (ERV) on agricultural exports are highly heterogeneous across commodities and regions, reflecting differences in market structure, perishability, policy regimes, and financial depth. Staple cereals such as wheat and rice, which are often traded in thin and regulated global markets, tend to exhibit muted short-run responses to currency movements. Demand for these staples is relatively price inelastic, and in many developing countries government procurement, export quotas, and administered prices buffer producers from exchange rate signals. As a result, volatility may be absorbed by state agencies or traders rather than transmitted directly to farmers, limiting immediate export responses but also distorting longer-term incentives.

In contrast, high-value and perishable commodities such as fruits, vegetables, flowers, and seafood are far more sensitive to ERV. Their competitiveness depends not only on relative prices but on tight delivery schedules, cold-chain logistics, and contract reliability. Exchange rate instability increases the risk of contract renegotiation, shipment delays, and payment uncertainty, which can quickly shift buyers to more stable suppliers. For these products, even modest volatility can translate into lost market share, higher rejection rates, and greater revenue variability, with disproportionate effects on export-oriented horticulture clusters.

Regional heterogeneity further amplifies these differences. Developing economies are structurally more exposed because of shallow financial markets, limited access to hedging instruments, and heavy dependence on imported inputs and intermediate goods. Post-COVID-19 evidence confirms that emerging and low-income countries experienced sharper depreciations, higher volatility, and slower recovery of agricultural export volumes than advanced economies (Steinbach, 2021). Weak reserve buffers, procyclical capital flows, and constrained policy space magnify these shocks.

These patterns have clear policy implications. Macroeconomic stabilization remains the first line of defense, as credible fiscal and monetary frameworks reduce the amplitude of volatility at its source. Financial market development is equally critical: expanding affordable forward contracts, warehouse receipt systems, and digital hedging platforms can extend risk management beyond large exporters. Sector-specific measures such as input price stabilization, export diversification, and investment in climate-resilient and import-substituting technologies can further dampen vulnerability.

Future research must move beyond aggregate models toward micro-level analyses that capture firm and farm behavior under volatility, examine the interaction of ERV with climate and health shocks, and rigorously evaluate the effectiveness of emerging financial and policy instruments in protecting smallholders and sustaining export competitiveness.

Conclusion

Exchange rate volatility has become a central structural determinant of agricultural export competitiveness in the post-pandemic global economy. Far from operating as a neutral price signal, volatility permeates production decisions, input use, investment behavior, and market participation, with particularly severe consequences for developing economies where agriculture remains the backbone of employment, export earnings, and rural livelihoods. The evidence reviewed shows that the impact of volatility is neither uniform nor mechanical. It is shaped by commodity characteristics, institutional depth, access to finance, and the capacity of firms and farmers to manage risk. For staple crops, policy buffers and inelastic demand may mute short-run effects, while for high-value perishables even modest instability can rapidly erode market share.

The pandemic has further exposed how external shocks, capital flow reversals, and reserve constraints magnify these vulnerabilities and delay recovery. This underscores that stabilizing agricultural exports cannot rely on exchange rate movements alone. Credible macroeconomic frameworks, deeper financial markets, and targeted sectoral support are indispensable complements to trade policy.

Future research must prioritize micro-level evidence, nonlinear dynamics, and the interaction of currency risk with climate and health shocks. Only through such integrated analysis can policymakers design coherent strategies that stabilize farm incomes, encourage export diversification, and safeguard agricultural competitiveness in an increasingly uncertain global environment.

References: Ali & Hussain; Choga & Mashao; Iqbal & Khan; Khan & Ali; Millbank; Nguyen & Bui; Novatia Consulting; OECD; Onuoha; Steinbach; Tran & Vo; Zhang & Chen.

Please note that the views expressed in this article are of the author and do not necessarily reflect the views or policies of any organization.

The writer is affiliated with the Institute of Agricultural & Resource Economics, University of Agriculture, Faisalabad, Pakistan and can be reached at alinasafdar4545@gmail.com

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