AGRICULTURAL OUTLOOK                                        May 21, 1999
June/July 1999, ERS-AO-262
               Approved by the World Agricultural Outlook Board
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BRIEFS
Field Crops:  Price Pressure for Major Field Crops to Continue in 1999/2000 
Livestock, Dairy, & Poultry: Meat & Poultry Production To Remain Strong in
2000 Livestock, Dairy, & Poultry: Milk Production Overtakes Demand and
Prices Drop Specialty Crops: Stone Fruit Supplies Likely To Increase
Slightly in 1999

COMMODITY SPOT
U.S.-Canada Wheat Trade: Geography & Economics    
     
WORLD AG & TRADE
Russia's Economic Crisis: Effects on Agriculture  

Imports Rise in Middle East and North Africa With Changing Supply & Demand
Factors

RESOURCES & ENVIRONMENT
Conservation Reserve Program Approaches Acreage Limit
     
SPECIAL ARTICLE
State Trading and Management of Grain Marketing in China    

IN THIS ISSUE...

Reprise of Large Supplies For U.S. Agriculture
     
Large supplies of major U.S. field crops are expected to persist in
1999/2000, with season-average farm prices stabilizing or declining.  Wheat
is the exception, with production expected to decline and average price to
rise moderately.  Linwood Hoffman (202) 694-5298; lhoffman@econ.ag.gov
     
Red meat and poultry production in 2000 is forecast about the same as
expected record production in 1999.  Increased poultry production,
bolstered by continued profitability and low corn and soybean meal prices,
will offset modest declines in beef and pork output.  Broiler prices in
2000 will continue to decline from record levels reached in 1998, while
cattle and hog prices will continue to recover some from 1998's extreme
lows.  Leland Southard (202) 694-5187; southard@econ.ag.gov

U.S.-Canada Wheat Trade: Geography & Economics 

A dramatic increase in U.S. imports of Canadian wheat resulted from a
series of events in the early 1990's.  Trade liberalization agreements
expanded the potential for trade with Canada, while U.S. export subsidies
and elimination of internal Canadian transport subsidies for exported grain
increased the economic incentive for Canada to export to the U.S. rather
than to other foreign markets.  At the same time, bad weather generated
unusually large trade in feed wheat.  Nevertheless, geography and market
economics are the fundamental determinants of current U.S.-Canada wheat
trade; most Canadian wheat production is far enough north and west from
most centers of U.S. production and use to limit any economic advantages of
U.S. imports from Canada under normal circumstances.  The early 1990's
runup in imports appears to have been an isolated occurrence that has run
its course.  Gene Hasha (202) 694-5193; ghasha@econ.ag.gov

Russia's Economic Crisis: Effects on Agriculture

The economic crisis in Russia that began in August 1998--triggered by
devaluation of the ruble and the government's default on domestic 
debt--has reduced demand for food and lowered food consumption, because
substantial depreciation of the ruble has significantly raised domestic
prices for foodstuffs and lowered consumer wealth and income.  Russian
imports of agricultural and food products have dropped by about
three-fourths, causing U.S. agricultural exports to Russia-- 2 percent of
total U.S. agricultural exports before the crisis--to plunge by near 80
percent.  Agricultural production in Russia should be stimulated, since
major depreciation of the ruble against foreign currencies substantially
improves the price competitiveness of domestic output compared with
imports.  William Liefert (202) 694-5156; wliefert@econ.ag.gov

Imports Rise in Middle East and North Africa 
     
The Middle East and North Africa (MENA) region is a major global market for
agricultural and food products, including wheat, barley, oil meals, and
vegetable oils.  The combination of increasing demand for food--caused by
rapidly growing populations, rising real incomes, and diets changing with
urbanization--and decreasing resources for agriculture--seen in declining
farm populations and land in farms, and in increasing competition for
water--has overwhelmed the region's capacity to meet its consumption needs. 

     
The U.S. is a major supplier of agricultural commodities to the region,
with shipments averaging $4.1 billion per year during 1996-98, a 29-percent
increase over 1990-92 and 4 percent above the 1993-95 average.  The April
1999 lifting of U.S. trade sanctions on food could add to increased U.S.
exports to the region in the long term.  Michael Kurtzig (202) 694-5152;
mkurtzig@econ.ag.gov            
                                                           
Conservation Reserve Program Approaches Acreage Limits
     
USDA's Conservation Reserve Program (CRP), after accepting 5 million acres
in its 18th signup in March 1999, stands just 5 million acres shy of its
statutory limit of 36.4 million acres, with relatively little acreage due
to expire in the next 3 years.  In order to provide for joint Federal-State
conservation reserve initiatives, and to reserve 4 million acres for the
Administration's Clean Water Action Plan, future signups will not be able
to enroll such large acreages. Should legislation raise the statutory cap
on enrollment, analysis shows that new enrollment would likely have less
erosion- reduction benefits compared with other environmental benefits
included in the CRP Environmental Benefits Index scoring system.  However,
with greater acreage placed in conserving uses, total erosion benefits
would still increase.  Assuming all potential bidders would indeed bid, no
radical shifts in the geographic distribution of acreage would be expected. 
Mark Smith (202) 694-5490; mesmith@econ.ag.gov

State Trading and Management of Grain Marketing in China 
     
The role of state trading enterprises in the People's Republic of China is
a key agricultural issue as China seeks membership in the World Trade
Organization.  Despite more than 15 years of economic reform, government
state trading enterprises continue to provide China with enormous power to
manage the level and direction of trade flows of several major agricultural
commodities, including wheat, rice, and corn.  Examining the entire chain
of governmental organizations engaged in domestic and international grain
marketing is necessary to understand the role of state trading in China
because policies and institutions are intertwined, and any attempt to
successfully reform state trading practices will have to go beyond the
traditional concept of simply disciplining individual enterprises. 
Frederick W. Crook (202) 694-5217; fwcrook@econ.ag.gov

BRIEF

Field Crops

Price Pressure for Major Field Crops To Continue in 1999/2000 

Large supplies of the major U.S. field crops are expected to persist in
1999/2000, with season-average farm prices stabilizing or declining,
according to USDA's first forecast of production and prices. Wheat is an
exception, however, with production expected to decline and the
season-average farm price to rise slightly. While domestic consumption of
soybeans and many grains is projected to remain strong because of low
prices, the export situation will vary by crop. Export growth is expected
for soybeans, wheat, and cotton, but for feed grains and rice, growth will
be limited or nonexistent because of large supplies in some competing
countries and small import demand growth in other areas.  

U.S. soybean supplies for 1999/2000 are expected to be record large,
exceeding 3 billion bushels for the first time. Production is also 
expected to set a record, partly because the soybean loan rate supports
higher expected returns this year relative to alternative crops. With large
U.S. and foreign supplies expected, the U.S. farm price is projected down,
at $3.95-4.75 per bushel. The midpoint, $4.35 per bushel, has not been this
low since 1972/73. 

Large supplies and low prices will encourage soybean use in 1999/2000. A
modest gain is projected for domestic crush, based on improved crush
earnings. USDA projects record U.S. soybean exports following this year's
decline. Foreign demand for U.S. soybeans and soybean meal is expected to
rebound as world import prospects improve and export competition declines,
although resumption of Asian palm oil production will constrain export
demand for soybean oil. Larger carry-in stocks and record output will
outweigh increases in domestic and foreign demand, boosting projected
ending soybean stocks to a record. 

U.S. corn supplies are expected to increase by about 1 percent in
1999/2000, as an increase in carry-in stocks more than offsets a projected
drop in production. Producers, responding to lower prices, are expected to
reduce acres to 78.2 million, down 2 percent from a year earlier. With the
increase in supply nearly offset by rising consumption, the U.S. farm price
forecast, at $1.80-$2.20 per bushel, has the same midpoint as the 1998/99
forecast. 

Despite an expected drop in production from a year earlier, the 1999 U.S.
corn crop is forecast to be the fourth largest ever. Ending stocks are
expected to build slightly with production slightly above total use. Slow
growth in domestic use reflects stable feed and residual use and a
3-percent increase in food, seed, and industrial use. U.S. corn exports are
expected to increase only slightly, due to continued strong competition
from China and Argentina.

U.S. wheat producers are reducing total area in 1999 largely due to low
prices. Despite a smaller wheat crop expected for 1999, large carry-in
stocks are expected to result in the second-largest supply in the 1990's.
U.S. wheat prices for 1999/2000 are expected to rise to $2.60-$3.10 per
bushel, compared with a forecast $2.65 in 1998/99. 

Domestic consumption is expected to fall slightly as the decline in feed
and residual use more than offsets the gain in food use. Feed use drops
because of higher wheat prices and continued weakness in corn prices, while
food use is expected to resume its growth after a 1-year pause. Wheat
exports are projected to be higher in 1999/2000 as world imports rise
because of low production in some key importing countries. However, the
U.S. will face continued strong export competition from Australia,
Argentina, Canada, and the European Union (EU). The EU is the only major
competitor whose production will decline. 

U.S. rice production is expected to be a record 207 million cwt in
1999/2000 (up 10 percent), resulting in record rice supplies. Producers are
expected to plant 3.58 million acres, the second-highest area on record and
the largest since 1981. With total use expected to increase only
marginally, ending stocks are projected to reach the highest level since
1986/87. Record supplies and modest growth in total use will push down the
season-average farm price to $6-$7 per cwt., compared with $8.55-$8.75 in
1998/99.

Domestic rice consumption is projected to expand nearly 3 percent. Food
use, accounting for all of the expansion, is driven primarily by greater
ingredient use. In contrast, exports are projected to drop slightly as
rough (unmilled) exports decline as a result of weaker shipments to Latin
America, more than offsetting an increase in milled shipments.  

Cotton production in 1999/2000 is projected to be 18 million bales, 29
percent above last year. Despite 3 years of declining prices, producers are
expected to plant 13.9 million acres, similar to 1997/98 but up 4 percent
from last season, as competing crops are less attractive. Intended 1999
cotton acreage is up in all regions except the West.  

Domestic mill use is projected up only slightly to 10.6 million bales, as
rising textile imports are expected to nearly offset growth in retail
cotton consumption. With larger supplies and decreased foreign competition,
U.S. cotton exports are expected to increase to 5.5 million bales. Expected
U.S. share of world trade is 22 percent, up from 17 percent last year. U.S.
ending stocks are expected to jump 50 percent, contributing to a hefty
increase in the stocks-to-use ratio as supplies grow faster than
consumption. Linwood Hoffman (202) 694-5298,lhoffman@econ.ag.gov

For further information, contact: 
Mack Leath, domestic wheat; Ed Allen, world wheat and feed grains; Allen
Baker, domestic feed grains; Nathan Childs, rice; Mark Ash, oilseeds; Steve
MacDonald, world cotton; Les Meyer, domestic cotton. All are at (202)
694-5300.

FIELD CROPS BOX

Planted area for field crops, excluding winter wheat, is based on USDA's
Prospective Plantings report for 1999, released on March 31.  Harvested
area is based on historical averages for harvested-to-planted ratios. 
Yields are derived from historical trends or averages, except for winter
wheat where survey results are used.  Since planting is still underway and
harvest is several months away for most crops, final production levels will
depend on growing conditions.  U.S. crop prices will be influenced not only
by weather in the U.S. and other countries, but also by changing U.S. and
global demand conditions.  

BRIEFS

Livestock, Dairy, & Poultry

Meat & Poultry Production To Remain Strong in 2000

Red meat and poultry production in 2000 is forecast at nearly 80 billion
pounds, virtually unchanged from expected record production in 1999.
Increased poultry production, bolstered by continued profitability and low
corn and soybean meal prices, will about offset modest declines in beef and
pork output. Due to poor returns in the cattle and hog sectors, producers
have reduced the number of animals kept for breeding. 

Large red meat and poultry supplies, combined with a lackluster export
market, will continue to pressure prices in 2000. Broiler prices will
continue to decline from record levels reached in 1998. Cattle and hog
prices will continue to recover some from extreme lows reached in 1998. Red
meat and poultry exports are expected to remain sluggish, a trend that
began with the economic problems in Asia that hammered exports in
second-half 1998. 

Beef production is likely to decline 5-6 percent in 2000 as producers
retain more heifers for breeding stock and place fewer on feed for
slaughter. Also, steer and cow slaughter will continue to decline,
reflecting reduced cattle inventories.

Current herd liquidation reduces future supplies, but adds to beef supplies
in the short run as female stock--cows and heifers--is slaughtered.
Although cow slaughter has been declining, too few heifers have been
retained to stabilize cow numbers, much less to begin expansion (AO May
1999). Heifer slaughter is relatively large in 1999, and many of the
heifers that might have been bred this spring and summer to begin an
expansion during 2000 have already been placed on feed. These additional
heifers on feed are adding to this year's beef supplies, and production is
now likely to be less than 1 percent below the 1998 high. As the beef cow
herd decline continues, the 1999 calf crop is expected to be the smallest
since the late 1980's and early 1990's, and the 2000 calf crop is likely to
drop even further, possibly to the lowest level since the early 1960's.
Cattle inventories have been declining since 1996. 

Large supplies of competing meats at relatively lower prices are likely to
hold down cattle price increases in 2000. This will result in only a modest
increase in heifer retention from this year's calf crop, but will pull down
an already much-reduced feeder cattle supply. Feeder cattle supplies
outside feedlots on April 1 were down 4 percent from a year earlier. Even
larger declines are likely over the next couple of years, until herd
expansion begins. 

Fed-cattle prices may rise to the lower $70's in 2000, up from the
mid-$60's this year and $61.48 in 1998. Prices are not expected to rise to
the upper $60's until late this year, and then only if female retention
increases. Similarly, prices for heavier yearling feeder cattle will remain
under pressure until fed-cattle prices rise and supplies decline further.
Feeder cattle prices may average in the lower $80's next year, the highest
since 1993.  

Pork production in 2000 is forecast to be about 2 percent lower than the
18.8 billion pounds expected this year. The reduction is due to cutbacks
producers made to the breeding herd starting in late 1998 and continuing in
1999.  The March Hogs and Pigs report indicates that the number of animals
kept for breeding was down 6 percent from the same period a year ago. Also,
producers indicate they intend to have 7 percent fewer sows farrow during
March-August than a year earlier. The pigs farrowed during this period
should reach slaughter weight in late 1999 and early 2000. The percentage
decline in the pig crop is expected to be slightly less than farrowings due
to an expected rise in pigs per litter.

Hog prices have rebounded from the extreme lows in late 1998, reaching the
mid- to high $30's per cwt--about the break-even point for many hog
producers. The turnaround in prices occurred once federally inspected
slaughter dropped from more than 2 million head in the nonholiday weeks in
late 1998 and early 1999 to 1.85 million in late April and early May. The
improvement in producers' returns should begin to stabilize or increase
breeding herd numbers. With continued low feed costs and with hog prices
expected to average near $40 per cwt in second-half 1999, producers are
expected to retain more gilts for breeding. Thus, pork production is
expected to rise modestly in late 2000. 

Hog prices are expected to average in the low $40's per cwt in 2000 due to
the modest production cutbacks and lower beef supplies. However, the
lackluster pork export market and rising broiler production will dampen hog
price increases. 

Retail pork prices have not exhibited the volatility of hog prices. The
retail pork price index (Bureau of Labor Statistics) declined only 5
percent in 1998 while hog prices dropped 36 percent. In 1999, retail prices
may drop another 1-2 percent due to larger pork production in first-half
1999, and because of the lag of retail price changes relative to farm price
changes. In 2000, retail prices are expected to rise about 3-4 percent as
pork production is reduced. Poultry output is expected to remain strong in
2000, with production increases forecast for broilers, turkeys, and eggs.
Net returns for processors in all three sectors were relatively attractive
in 1998 and are expected to continue so during 1999. Continuation of the
downward trend in feed costs for 1999 will offset some of the impact on
producers of lower prices for broilers and eggs.

Broiler returns (excluding interest and overhead costs) at the whole-bird
level, are expected to remain in double digits in 1999 after setting a
record high at 14 cents per pound in 1998. As a result, production is
expected to continue increasing in 2000 at 5-6 percent. Larger gains might
be realized if exports strengthen over the next 12 months. Expected
economic improvement in Asia will encourage U.S. poultry exports, but
increased shipments to Russia, the largest U.S. market, likely will come
very slowly. 

Turkey production is expected to rise about 2 percent in 2000. Negative net
returns from 1996 through mid-1998 discouraged production growth during the
last 3 years. In late 1998, returns turned positive and are likely to
continue into 2000, due in part to strength in the export market.

Egg returns, which have been at double-digit levels for the last 3 years,
are expected to continue strong in 1999, and egg production is expected to
continue increasing in 2000 at 2-3 percent. Weaker exports of egg products
have slowed output growth in the egg-breaking sector to below 5 percent in
1999; 3-percent growth is expected in 2000. Increased strength of domestic
shell egg sales in 1998 led to a rise in per capita shell egg consumption
as rapid as the upturn in egg product consumption for the first time since
1978. Increasing domestic consumption for both sectors of the egg market
are expected to continue in 2000.  

For further information, contact:  Leland Southard, coordinator; Ron
Gustafson, cattle; Leland Southard, hogs; Mildred Haley, world pork; Jim
Miller, domestic dairy; Richard Stillman, world dairy; Milton Madison,
domestic poultry and eggs; David Harvey, poultry and egg trade,
aquaculture. All are at (202) 694-5180.

Livestock, Dairy, & Poultry

Milk Production Overtakes Demand and Prices Drop

The dairy industry has undergone a major downward price adjustment since
last fall as large gains in milk production finally overtook very strong
demand for dairy products. With expansion momentum already established, the
availability of inexpensive feed is likely to result in large milk output
gains through out 1999. Although dairy demand is expected to continue to
reflect the strength of the general economy, commercial use is not likely
to absorb additional supplies except at prices far below the 1998 records.

The demand strength that made 1998 such an extraordinary year persisted
into 1999. Sales of all dairy products in first-quarter 1999 rose 2 percent
from a year earlier on a skim-solids basis and almost 2 percent on a
milkfat basis, very dramatic gains in light of higher prices. Retail prices
averaged 9 percent higher, while wholesale buyers faced prices ranging from
nearly unchanged to sharply higher depending on the product.

But early-1999 sales varied by product. Commercial use of cheese rose
sharply for American as well as other varieties. Fluid milk sales were
generally lackluster but held steady compared with fractional declines
typical of most months in 1998. Use of skim milk and cream directly in
processed foods appears to be higher, but butter sales are substantially
lower, reflecting the delayed effects of last year's high prices. Use of
nonfat dry milk and other forms of separated skim solids--the one weakness
in 1997-98 dairy demand--has risen, and relatively low and stable prices
for these products over the last few years may have generated a lasting
sales recovery.

Demand during the rest of 1999 is projected to stay fairly brisk. Economic
growth is likely to continue and consumers are expected to remain willing
to spend. At this point, there is no evidence of a major consumer reaction
to the higher prices of late 1998-early 1999. Milk output in first-quarter
1999 rose more than 3 percent from a year earlier, as relatively favorable
1996-98 returns slowed declines in milk cow numbers, down 0.4 percent from
a year earlier and only slightly below third-quarter 1998. Strong producers
have begun to accelerate expansion plans after a period of devoting
improved returns to buttressing their financial position. These expansions
have put substantial pressure on prices of replacement heifers, with very
high prices reported across the country.

Very favorable weather and record milk-feed price ratios triggered a surge
in milk per cow, despite still-tight supplies of dairy-quality forage. The
almost 4-percent jump over first-quarter a year ago brought milk per cow
close to the longrun trend for the first time in about 4 years.
January-March production illustrates the probable pattern of milk
production during the rest of 1999 and into 2000.

Returns over concentrate cost as well as the milk-feed price ratio will
trail the 1998 records but will generally stay above levels in 1997 and the
early 1990's. These milk-feed relationships likely will sustain the
expansion begun last autumn. Milk output is projected to increase about 3
percent this year, with large rises persisting until yearend 1999. Milk cow
numbers for the remainder of the year are expected to stay near early-1999
levels as growth in new and expanding herds offsets a still-substantial
exit of milk producers.

On April 1, commercial stocks of butter and nonfat dry milk were large and
perhaps more than needed in the coming months. Cheese stocks were fairly
close to levels of recent years at this time of year, and probably near the
level desired by manufacturers and wholesalers. Although cheese production
has increased in recent months, brisk sales have reinforced the need to
maintain stocks.

In early March, dry milk contracts for exports subsidized under USDA's
Dairy Export Incentive Program (DEIP) reached the limit established in the
Uruguay Round Agreement on Agriculture. Heavy production of nonfat dry milk
and restricted DEIP opportunities resulted in government price support
purchases of about 70 million pounds between March 1 and mid-May. USDA
recently announced that 20,000 tons of DEIP allocations not used in
previous years would be made available during May-June. Even so, sizeable
support purchases are expected to continue this spring and summer.

The increases in milk production may leave late spring cheese prices
somewhat below mid-May levels, but price decreases are projected to be
small if demand remains as brisk as expected. Meanwhile, milkfat markets
will tighten as milkfat production is low during the summer months and use
for ice cream production picks up. Butter prices may be unsettled. Nonfat
dry milk prices will likely stray little from the support purchase price at
least until autumn.

The Basic Formula Price (BFP)--the value of milk for manufacturing--is
expected to slip below $11 per cwt in late spring-early summer, a decline
of more than a third from the December record. However, the strongest
effect of the surge in milk production may be the limiting of usual
seasonal rises in the BFP during the second half of 1999, when the average
BFP is projected to be the lowest since the early 1990's. For the year, the
BFP is expected to average below $12 per cwt, down sharply from 1998's
$14.20. The decline in the average price of all milk will not be as sharp,
because of high prices of milk for fluid use in early 1999. Even so, the
average milk price is projected to fall almost $2 per cwt this year from an
average $15.42 in 1998.

This year's first-quarter 9-percent increase in retail prices of dairy
products over first-quarter 1998 reflects the carryover effects of high
farm and wholesale prices in late 1998. The current high retail prices are
projected to decline as 1999 progresses, so the overall increase for the
year is projected to be 4 to 5 percent. The farm-retail price spread, after
declining significantly in 1998, will widen sharply in 1999.  
James J. Miller (202) 694-5184,jjmiller@econ.ag.gov

Specialty Crops

Stone Fruit Supplies Likely To Increase Slightly in 1999

Unfavorable weather in mid-April tempered earlier expectations of a strong
crop of California stone fruits (peaches, nectarines, and plums) in 1999.
Weather problems caused the California Tree Fruit Agreement--a grower
funded organization that promotes fresh-market stone fruits--to revise
packout estimates downward 17 percent. An early morning frost severely
affected some California orchards, while spotty hailstorms also damaged
some orchards. Prior to that, weather had been generally favorable for crop
development--blooms came in strong and fruit set appeared heavy. Although
cold weather had slowed the bloom stage, warmer weather late in the winter
helped the buds to swell. Most varieties of nectarines and plums and some
of the freestone peaches were past full bloom around the third week of
March. Because of what appeared to be a heavy fruit set, some growers were
already actively thinning the early stone fruit varieties and others were
pruning branches in late March-early April. USDA's initial forecast for
1999 puts California peach production at 1.79 billion pounds, up 2 percent
from last year, but 5 percent below 1997. The December hard freeze that
caused serious damage to California's 1998/99 citrus crop helped provide
above-average chill hours to the State's tree fruit orchards this winter.
Data from the California Tree Fruit Agreement indicate that the state's
tree fruit orchards have not had the chill hours required for full dormancy
since 1994. Trees that are able to go through a full dormant stage usually
produce strong fruit--less susceptible to pest and diseases, less prone to
bruising, and capable of a longer shelf-life. This winter, by receiving
about 1,331 chill hours compared with an average 1,100 chill hours,
the quality of California-grown peaches, nectarines, and plums could be
much improved from previous years.

Because California produces a major proportion of U.S. stone fruits--over
70 percent of domestic-grown peaches and over 90 percent of U.S. plums and
nectarines--supply conditions there significantly impact overall stone 
fruit prices. Last year, heavy winter rains and spring hailstorms reduced
California's stone fruit production 11 percent below 1997, and raised U.S.
grower prices. Plums and nectarines were hit hardest by the bad weather and
their prices were up sharply.

Peaches account for over 80 percent of combined U.S. production of the
three stone fruits. South Carolina and Georgia follow California's
70-percent share of peach production at a far distance, averaging about 6
and 5 percent of the U.S. total over the last 5 years. In 1998, drought
conditions reduced peach production in the two states to a total of 210
million pounds, down 34 percent from 1997. South Carolina and Georgia
typically market their peaches from May through August while California's
season usually runs May through September.

Orchards in the Southeast received inadequate chill hours this winter and
low soil moisture conditions were a concern. However, rains in late April
provided relief to peach orchards in Georgia where 61 percent of the crop
is reported to be in good-to-excellent condition. But South Carolina's
peach crop has suffered some damage from hail. 

According to the Bureau of Labor Statistics, 1998 retail prices for peaches
averaged well above any of the previous 5 years. (Retail prices are not
reported for plums and nectarines.) During 1999, prices for fresh-market
fruit likely will be about average, given increased supplies and good
quality from this year's California harvest. Because of delayed fruit
development from the early April cool weather, expected harvest time in
California is about 5 days later than last year's delayed crop and likely
will put upward pressure on early season prices. 
  
Although U.S. stone fruit exports in 1998 were limited somewhat by smaller
domestic crops and higher prices, the competitiveness of U.S. stone fruits
in the global market should improve in 1999 because of adequate supplies,
moderate prices, and good quality. However, export opportunities could be
narrowed by continued weakness in Asian economies and by new pesticide
tolerance standards effective in June 1999 in Taiwan, a large and growing
market for U.S. stone fruits.

In 1998, fresh peach/nectarine exports fell 24 percent from the previous
year, and shipments to all major markets--Canada, Taiwan, and Mexico--were
lower. About half the volume of U.S. peach/nectarine exports go to Canada,
but during the 1990's, Taiwan's share has increased from just 3 percent of
total exports in 1990 to nearly 23 percent in 1998. U.S. fresh plum exports
fell 25 percent in 1998, declining sharply to large markets such as Canada,
Taiwan, and Hong Kong, but exports to Mexico, another large market,
remained strong. These four markets accounted for over 85 percent of total
U.S. plum exports in 1998.

Chile is the United States' largest foreign supplier of peaches,
nectarines, and plums, accounting for 99 percent of annual total import
volume during the 1990's. More than half of Chile's peach and nectarine
exports and over one-third of their plum exports are bound for the United
States, influenced mainly by proximity of the market (since stone fruits
generally have a relatively short shelf-life) and the counter-seasonal
nature of Northern Hemisphere and Southern Hemisphere fruit production.

Over 90 percent of the total volume of U.S. peach/nectarine imports and
plum imports enter the U.S. market in December-March. From December 1998
through February 1999, peach/nectarine imports were up 35 percent from the
same period a year earlier, while plum imports were up 16 percent.
Relatively good weather conditions in Chile during most of the growing
period, compared with the previous two years, contributed to a larger and
higher quality stone fruit harvest in 1998/99.  
Agnes C. Perez (202) 694-5255;acperez@econ.ag.gov 

COMMODITY SPOTLIGHT

U.S.-Canada Wheat Trade: Geography & Economics 

The U.S. is among the world's largest wheat producers and is the world's
largest wheat exporter. Production includes wheat of all classes, and the
quality and characteristics generally reflect requirements of U.S. millers.
Despite virtual self-sufficiency in wheat types and quantities, the U.S.
imports some wheat, all from Canada, and some wheat products. The geography
of wheat production and use in North America and basic economics indicate
that some Canadian wheat production is well placed to supply U.S. use
centers. 

The current low market prices for U.S. wheat have once again raised
questions about the rationale for U.S. imports and concerns about their
impacts, and about the role of U.S. and Canadian policies and institutions.
Trade liberalization has made some trade inevitable. However, most Canadian
wheat production is far enough north and west from the bulk of U.S.
production and use centers to limit economic advantages of significant U.S.
imports from Canada under normal circumstances. 

A convergence of events in the early 1990's led to a dramatic runup in U.S.
wheat imports. Trade liberalization agreements expanded the potential for
trade, U.S. export subsidies and elimination of internal Canadian transport
subsidies for exported grain increased the economic incentive for Canadian
exports to the U.S. rather than to other foreign markets, and bad weather
generated unusually large trade in feed wheat. The early 1990's runup in
U.S. wheat imports appears to have been an isolated occurrence that has run
its course.

U.S. total imports of wheat and products increased almost fivefold after
1989, peaking at nearly 3 million tons in 1993/94; the increase was
predominantly hard red spring (HRS) for breadmaking and durum for pasta.
(In 1993/94 and 1994/95, significant quantities of wheat were graded as
feed in Canada and exported to the U.S.) This rapid import growth coincided
with implementation of trade agreements beginning with the Canada-U.S.
Trade Agreement in 1989 and followed by the North American Free Trade
Agreement (NAFTA) in 1993 and the Uruguay Round Agreement (URA) of the
General Agreement on Tariffs and Trade (GATT) in 1995. A tariff of $7.70
per metric ton on grain imported into the U.S. and other quantitative
restrictions were finally eliminated in 1998. The trade liberalization
process paused temporarily from September 1994 to September 1995 with the
imposition of a U.S. tariff-rate quota (TRQ) on wheat, although it is not
clear that the TRQ significantly affected trade. 

U.S. exports to Canada also have increased dramatically in percentage terms
but remain relatively small. Nonetheless, U.S.-Canadian trade in wheat
remains less than fully liberalized; requirements for end-use certificates
in both directions, for example, remain an issue. 

Extraordinary weather events and crop conditions also significantly boosted
imports from 1992/93 to 1994/95, particularly during the spike in 1993/94.
This prompted concerns that imports would continue to rise. But since
1996/97, total U.S. wheat and product imports have stabilized at roughly
2.5 million tons and are forecast near 3 million in USDA's long-term
projections. 

U.S.-Canada wheat trade has been affected by government institutions and
policies. Most important have been the U.S. Export Enhancement Program
(EEP) which provided subsidies to exporters, and the Canadian Western Grain
Transportation Act (WGTA) which provided transport subsidies for Canadian
grain delivered to Thunder Bay or the west coast, a disincentive to export
to the U.S. The WGTA subsidy was eliminated in August 1995. The Canadian
Wheat Board (CWB), its pooling system determining grower returns, and
differences in Canadian regulatory policies that affect varietal licensing,
marketing services, and transportation costs continue to influence Canadian
wheat marketing and exports (AO June 1997). The consistency of CWB actions
with free trade principles has been questioned by U.S. producers, while
Canadians have attributed significant trade impacts to the EEP.
Nonetheless, geography and market economics, not governments, are the most
fundamental determinants of current U.S.-Canada wheat trade.

Geography of the North American Hard Wheat Sector

Production. Wheat is grown in the U.S. from the southeastern coast to the
Pacific Northwest (PNW). Hard wheats of high quality are grown on the Great
Plains of North America on a remarkable scale, accounting for two-thirds of
U.S. production and the bulk of Canadian production. Hard red winter (HRW)
wheat is produced in the southern Great Plains, centered on Kansas but
extending into Nebraska, Colorado, central and western Oklahoma, and the
Texas panhandle. HRS and durum wheats, the classes accounting for most of
the growth in U.S. wheat imports, are produced in the northern Great
Plains, centered in North Dakota but extending into South Dakota,
Minnesota, and along the Montana-Canadian border. Canadian HRS and durum
wheat production extends northwest from the Red River Valley to the
mountains of western Alberta. 

Milling, processing, and exports. In the U.S. and Canada, wheat is milled
and processed primarily near large population centers. Major milling
centers and markets also are located on the eastern edge of Great Plains
production regions. Kansas City for HRW wheat and Minneapolis for HRS and
durum wheat are key markets and distribution centers. Almost half of all
U.S. wheat (including products) is exported, including more than half of
HRS. U.S. durum exports account for half of production in some years,
although imports also have been important, estimated at roughly one-third
of domestic use. Texas Gulf Coast ports account for more than 70 percent of
U.S. HRW exports, while the PNW accounts for the rest and for over half of
U.S. HRS exports. The remainder of HRS exports are shipped through the
Great Lakes or down the Mississippi River. 

Three-quarters of Canada's HRS exports are shipped from the West Coast
(Vancouver or Prince Rupert). The rest is shipped via the Great Lakes or,
in recent years, to Minneapolis. The vast majority of U.S. and Canadian
durum exports are shipped through the Great Lakes or New Orleans, because
the foreign buyers are principally in North Africa, South America, and
Europe.

Major marketing zones. For U.S. HRW and HRS wheats, the marketing system is
a virtual tug-of-war between export demand at port terminals and domestic
demand  t interior use centers. U.S. HRW supplies flow in three principal
directions, creating three principal marketing zones-- the PNW, the Texas
Gulf, and Kansas City and U.S. domestic use centers to the east. 

U.S. and Canadian HRS wheat supplies flow basically in two directions,
creating two principal marketing zones--west to the PNW or east to North
American use centers and for export through the Great Lakes or via the
Mississippi River. Minneapolis is the dominant U.S. internal market for HRS
wheat, with significant supplies flowing through or near Minneapolis bound
for export or eastern use centers. Essentially all durum wheat flows
eastward, with some supplies diverted down the Mississippi for export.
Almost all U.S. durum passes through Minneapolis because of its
well-developed market. 

Marketing Is Private in U.S., More Regulated in Canada

Wheat marketing systems in the U.S. and Canada have not evolved in the same
way. Both countries have numerous regulations, policies, and programs that
affect the sector. In the U.S. there is a greater focus on private markets,
while in Canada there is a greater focus on regulations related to quality
assurance and the grain handling and marketing system. Each have their
advocates and opponents in both countries.

The U.S. wheat marketing system, including transport services, is a private
commercial process with government intervention limited to the
establishment of standards and provision of inspection services. With a
view to maximizing profits, local elevator operators and traders make the
decisions that allocate U.S. production to various domestic use and export
centers, although prices available in major markets leave many local
elevator operators with only one practical choice. Wheat is sold to the
destination providing the greatest net return, given all costs of movement.
Decisions, therefore, depend not only on prices in alternative major
markets but also on costs of movement, which are significant given the
large distances in North America. Distance alone, however, is not
necessarily an effective indicator of movement costs because transport
rates and terminal charges may vary by direction and destination. 

Central to the marketing process is the relationship among prices for wheat
of a particular class, grade, or other characteristic in the major use and
export centers--Minneapolis, Kansas City, the PNW, and the Gulf Coast. Any
array of prices among those major markets results in a geographical pattern
of catchment basins, i.e., production regions predominantly supplying
specific marketing zones. As each major use center attempts to attract
supplies adequate to meet demand at its geographic location, the market
establishes an array of prices that attract the quantities consistent with
demand in the various locations. Where catchment basins meet, local traders
can achieve nearly equivalent net returns from sale to more than one
location. For example, two U.S. HRS wheat catchment basins meet in central
North Dakota, one supplying the PNW marketing zone to the west and the
other supplying the marketing zone to the east. At this point, the
incentive to transport wheat is the same for either direction.

Changes in the array of prices in major markets cause catchment basins to
shrink or enlarge as the net return calculation changes for some traders,
shifting sale of some supplies from one destination to another. The
relationship among major market prices shifts continuously, fueled by
changing information and expectations of supply, demand, and marketing
costs. The array of prices among major markets, and the catchment basins
that supply each market, may vary dramatically from year to year,
reflecting changes in domestic production or in demand for exports.

The change in price relationships between markets required to generate any
shift in marketing supplies depends upon transportation costs and density
of supplies at the edges of catchment basins. For example, given the
density of HRS production in central North Dakota, where east and west
catchment basins commonly meet, a distance of 50 miles represents about 36
million bushels or 1 million tons of wheat, roughly equivalent to the
largest-ever annual change in U.S. imports. Because the density is so great
in central North Dakota, the associated change in PNW-Minneapolis price
differential that could reverse the flow of 1 million tons of wheat would
be 4 to 14 cents per bushel, with roughly 7 cents per bushel being typical.
The large range in price impacts reflects the considerable variation in
U.S. transport rates over time and across regions.

The Canadian government has policies and programs that more directly affect
wheat marketing in Canada. The CWB is a state trading agency that has
single-desk selling authority (a monopoly position) for wheat exports and
domestic sales for food. It makes most of the marketing decisions left to
private traders in the U.S. Terminal and other marketing costs are set by
the industry but tend to be subject to less competitive pressures than in
the U.S. (In addition, western Canadian rail rates for grain and products
moving to non U.S. export points are regulated.) The CWB bases prices for
domestic use on Minneapolis prices in order for Canadian wheat to remain
competitive across an open border. The CWB's mission is to maximize
producer returns on sales. For commercial reasons, the CWB, like private
grain traders, does not reveal grain sales data. Maximization of producer
returns by the CWB would result in marketing behavior very similar to that
of private traders. 

Unlike private wheat traders in the U.S., the CWB competes for sales
without having committed financially to the full acquisition price (only an
initial price). This lack of risk exposure does afford some advantage over
competitors on individual sales, but the advantage probably is small or
negligible in the highly competitive commercial world wheat markets in the
longer term. The CWB does not have any control over Canadian production
other than the incentive provided by net CWB returns. If the CWB were to
repeatedly secure sales by offering wheat at below market prices, returns
to Canadian farmers and longer-term production incentives would be reduced.
Reduced Canadian production would tend to boost world prices, benefitting
U.S. producers.

Farmer-owned co-operatives and those recently transformed into public
companies operate most country elevators in Canada and are the major
handlers of CWB wheat and barley. The CWB operates through a system of
accredited agents in most markets, including the U.S. The growing
integration of the North American wheat market has been marked by the
emergence of U.S. and other international grain firms as key players in the
Canadian marketing, handling, and processing system, owning elevators and
acting as CWB agents for sales into the U.S. and other world markets. 

Geography & Economics Limit U.S. Imports

Underlying the U.S.-Canadian wheat trade is a geographic reality--the great
bulk of Canadian wheat production is relatively far from U.S. demand
centers. Based on Economic Research Service estimates of mill, feed, and
seed use by state, total demand of the Minneapolis marketing zone for HRS
wheat averaged roughly 325 million bushels annually during 1993-97. That
amount of HRS wheat is available from U.S. supplies within roughly 500
miles of Minneapolis, although the qualities required by U.S. millers may
require a larger catchment basin in some years. Within the same distance
from Minneapolis, Canadian HRS wheat production is still relatively limited
and largely dedicated to meeting domestic needs in eastern Canada. Almost
80 percent of Canadian HRS production is more than 700 miles from
Minneapolis. U.S. HRW wheat supplies provide another alternative (although
generally lower in protein), with production density at least as high as
Canadian supplies at 400 miles or more. 

Analysis by Agriculture and Agri-Food Canada (AAFC), USDA's counterpart,
has provided more complete estimates of CWB incentives for HRS export to
Minneapolis, given various price relationships between Minneapolis and
Canadian PNW (Vancouver) or Great Lakes markets. These estimates look
beyond geography, incorporating transport, terminal, and other movement
costs.

Given marketing costs (which are reasonably well known in Canada), a
Minneapolis price that is US$0.25 per bushel below Vancouver's would not
justify any shipments into Minneapolis because additional transport costs
to Vancouver compared with Minneapolis would be less than US$0.25 per
bushel. A Minneapolis price equal to the Vancouver price would justify
exports to Minneapolis from a distance of roughly 700 miles, providing
about 73 million bushels (2 million tons) of Nos. 1 & 2 Canadian HRS wheat.
To access the very large Canadian HRS supplies in central Saskatchewan
beginning about 850 miles from Minneapolis would require a Minneapolis
price US$0.10 above Vancouver's. Before elimination of WGTA transport
subsidies in 1995/96, Minneapolis was even less attractive to the CWB
regardless of the price differential. 

How consistent are these results with observed trade and prices? Like
private firms, the CWB does not make sale prices public. Consequently, U.S.
prices at PNW (Portland) and Minneapolis are the only available proxies for
estimating CWB receipts. During 1993-97, commonly quoted Minneapolis HRS
prices were below U.S. PNW (Portland) prices by about US$0.35 per bushel on
average for all protein levels. Since 1980, equality between PNW and
Minneapolis prices has occurred only in 1993 and only for wheat of
15-percent protein. This analysis by AAFC reinforces summary indications
provided by geographic observations--the incentive, and thus the potential,
for U.S. HRS imports from Canada is very limited or nonexistent. 

Observed trade and prices in recent years require the existence of factors
that cause CWB unit receipts at Vancouver to be lower than and at
Minneapolis to be higher than posted prices. Obvious among the factors
affecting CWB exports were EEP subsidies to U.S. exporters. Because the CWB
must match effective market prices in order to be competitive in third
country sales, the effective price at Vancouver for sales into EEP markets
was less than the Portland price by roughly the amount of the EEP bonus
(the Portland price excludes any EEP bonus). EEP bonuses for wheat averaged
more than 80 cents per bushel from 1986 until they were last used in July
1995. From 1991 through 1993, EEP bonuses were US$1 or more per bushel,
implying very significant discounts at Vancouver compared with quoted
prices at Portland, more than enough to make Minneapolis more attractive
than EEP markets. U.S. commitments under the Uruguay Round Agreement limit
future use of EEP subsidies for wheat exports. 

In addition, commonly quoted Minneapolis prices may understate prices
obtainable by the CWB in Minneapolis for wheats that have certain
attributes required by U.S. millers. Millers blend numerous wheats together
to obtain the types of flour specified by bakers. Although Canadian HRS
wheat is not necessarily of higher quality than U.S. HRS wheat, it is
widely believed in commercial circles that CWB control over Canadian wheat
marketing, along with strict control over planted varieties and quality
enforced by the Canadian Grain Commission, enables the CWB to guarantee
more precisely quality and other special characteristics of individual
shipments. Special wheat characteristics are not reflected in commonly
quoted prices, and a guarantee of specification justifies a perhaps
significantly higher price (price premium) at Minneapolis for individual
shipments. Marginal exports from Vancouver on the other hand, particularly
to subsidized markets (generally less quality conscious) during the first
half of the 1990's, would rarely command any price premium for "Canadian
quality." 

Wheat Characteristics Affect Markets & Trade

The significance of special wheat characteristics in marketing and prices
may be far greater than can be demonstrated with available data. Wheat is
far from a homogeneous commodity. Five major classes are grown in the
U.S.--hard red winter, hard red spring, soft red winter, durum, and white
(both hard and soft varieties). While each class has a different
predominant end use, the classes are also substitutes for each other in
many products. 

Commonly quoted prices are by grade, class, and protein percentage. Grade
reflects a variety of conditions affecting milling yields and costs of
processing. While class indicates a range of wheat characteristics, special
characteristics important to millers, which can command large price
premiums, are lost in averages of published market prices. A good example
is Canadian Western Extra Strong comprised mainly of the variety Glenlea (a
HRS wheat). U.S. millers are importing 200,000-300,000 tons of this type of
wheat for blending because its high gluten strength allows for a flour
blend with stronger dough properties, especially important in the rapidly
growing frozen dough market Wheats with a varying protein content or
special characteristic may command differing relative prices among markets,
so catchment basins for each wheat will be different. Some traders,
particularly near the edges of catchment basins, may send some grades and
types of wheat in one direction and other grades and types in another. 

In recent years, some U.S. processors have maintained that adequate
supplies of sufficient quality durum require imports from Canada in some
years. According to U.S. Wheat Associates quality estimates, U.S.
production of Nos. 1 and 2 durum wheat fell dramatically in 1993 to less
than half of U.S. durum used for food, and supplies of higher grade U.S.
durum remained below food use requirements through 1997/98. 

The largest annual increases in U.S. wheat imports resulted from wheat
quality issues. In 1992/93, when Canadian HRS wheat quality was among the
worst on record, with 39 percent graded as feed due to early frost, roughly
1 million tons of feed wheat was exported to the U.S. where the feed market
was relatively strong. In the following year, the Canadian hard spring
wheat crop was attacked by fusarium fungus which was brought on by
extremely wet conditions throughout the growing season, causing another 1
million tons of high-protein spring wheat was graded as feed because
Canadian regulations allowed only 0.25 per cent of fusarium-damaged kernels
for Nos. 2 or 3 (above feed quality). Because this feed wheat would fetch a
lower price in the domestic market, much of it was exported to the U.S. and
may have been converted to food use after cleaning and blending not allowed
under Canadian regulations at the time. Canadian tolerances for fusarium
were subsequently raised, and blending is now allowed.

World Trade Conditions Overshadow Imports

Changes in U.S. production and in world trade have presented significant
shocks to the U.S. wheat sector. A rough indicator of shocks to U.S.
production is the deviation of actual from average yields (using harvested
areas). During 1993-97, yield fluctuations accounted for a production swing
of almost 2.8 million metric tons (mmt) below average in 1995/96 (4.4
percent) and almost 3.5 mmt above average in 1997/98 (5.4 percent). In
1998/99, production was more than 9 mmt (15 percent) above the 1993-97
average. 

The largest shocks to the U.S. wheat sector by far have occurred in world
trade. Year-to-year changes in world trade volume have averaged nearly 8
mmt since 1980. In three of those years, trade volume varied by more than
20 mmt. 

Although changes in U.S. production and world trade refer to total wheat,
the changes in U.S. wheat imports (mostly HRS and durum) have been much
smaller than those changes. Increases in U.S. wheat imports were relatively
large during 2 years--800,000 metric tons in 1992/93 and more than 1
million in 1993/94. However, the volume of U.S. wheat imports or the change
in volume significantly overstates associated shocks to U.S. markets,
because Canadian wheat shipped to the U.S. is no longer available to third
countries. As third countries seek alternative sources, demand for U.S.
exports increases, partially offsetting the impact of imports. 

Since 1993/94, U.S. wheat and wheat product imports have stabilized at
around 2.5 million metric tons, and USDA forecasts indicate very limited
increases in the future. With the U.S. exporting half of its production and
Canada exporting nearly 80 percent, world trade will continue to be the
major source of shocks to the North American wheat sector, and North
American wheat prices will continue to depend chiefly on world supply and
demand. Special grain characteristics necessary to produce a growing
variety of wheat products will continue to affect purchase decisions of
millers and traders, including the sourcing of wheat supplies.  
Gene Hasha (202) 694-5193 ghasha@econ.ag.gov

WORLD AG & TRADE

Russia's Economic Crisis: Effects on Agriculture

The economic crisis in Russia that began in August 1998 triggered by
devaluation of the ruble and the government's default on domestic debt has
strongly affected the country's agriculture and food economy. Food
consumption has fallen, the result of a crisis-induced drop in consumer
income and rising food prices from ruble depreciation. Nevertheless,
agricultural production should be stimulated as major depreciation of the
ruble against foreign currencies substantially improves the price
competitiveness of domestic output compared with imports.  Russian imports
of agricultural and food products have dropped by about three-fourths,
causing U.S. agricultural exports to Russia 2 percent ($1.36 billion in
1997) of total U.S. agricultural exports before the crisis to plunge by 80
percent.

Russian gross domestic product (GDP) is projected to fall about 5 percent
in 1999, much the same as in 1998, and could drop in 2000 as well, further
decreasing consumer demand. More important for agricultural trade is that
crisis-induced capital flight and lack of confidence in the ruble are
likely to result in further depreciation of the ruble, keeping agricultural
imports depressed.

Devaluation Makes Russia's Agriculture More Competitive

The public debt default and currency devaluation that triggered Russia's
economic crisis resulted primarily from three events: 1) the drop in world
prices for Russia's main exports (energy and metals), which put pressure on
the ruble and reduced export tax revenue; 2) a large rise in the
government's budget deficit (from about 4 percent of GDP in 1997 to 7
percent in 1998) as a result of increased expenditures; and 3) the Asian
economic crisis, which created a spillover effect that eroded investor
confidence in Russia.

The crisis has generated large-scale capital flight, continuing
depreciation of the ruble against the U.S. dollar (about 75 percent since
August 1998),dramatic inflation (100 percent since August), and a falling
GDP. The effects on the agriculture and food economy, particularly the
stimulus to output, have not yet fully played out; nor are they likely to
be quickly reversed. With domestic capital flight expected to continue and
foreign investment likely to remain depressed, Russia's 1999 GDP is
projected to decrease to $120 billion at the current exchange rate, and
debt repayment obligations to the West will total $17 billion, about 14
percent of GDP.

The crisis has reduced demand for food and lowered food consumption,
because substantial depreciation of the ruble significantly raises domestic
prices for foodstuffs. Russia is now mostly a free-trading country in
agriculture and food--i.e., the government does not overly restrict
movement of products into or out of the country--so world market prices
largely determine domestic prices faced by both consumers and producers in
Russia (at least for traded goods). Even with stable world prices,
ruble-denominated prices rise as the ruble weakens.

Reduced consumer wealth and income have also contributed to declining
consumer demand for food. The government's debt default has led to a chain
of events (including collapse of the banking system) that have wiped out
most of the value of ruble-denominated financial assets in Russia--bank
accounts, bonds, and corporate stock. In addition, the fall in GDP has hurt
incomes by increasing unemployment, and high inflation has reduced consumer
purchasing power by substantially lowering real income.

Nevertheless, ruble depreciation has improved the price competitiveness of
all trade-competing sectors of the Russian economy, one of the few benefits
the country has experienced from its current economic problems. The crisis
should therefore help, rather than hurt, Russian agriculture. Depreciation
of the ruble has substantially improved the price competitiveness of
Russian output relative to imports, and at the same time agriculture's
terms of trade have improved, i.e., prices received for traded agricultural
goods have increased more than prices paid for inputs. Although official
statistical information is not yet available, evidence from Russian
sources, including newspaper reports and discussions with agricultural
specialists in Russia, indicates that Russian producers, particularly of
livestock goods, are responding to ruble depreciation by expanding output.
The effect of ruble depreciation alone should be an increase in production,
but Russian agriculture continues to face many difficulties that could
result in output of major commodities falling in 1999.

Russian agricultural imports are taking a double hit from the
income-induced drop in consumer demand and from the depreciation-induced
rise in import prices. In fourth-quarter 1998, the total value of
agricultural and food imports was only about one-fourth the value of a year
earlier. Russia's imports of foodstuffs consist mainly of meat and other
high-value products (HVP's) such as fruit, processed foods, beverages, and
confectionary products. Consumer demand for these goods is more sensitive
to changes in income than demand for more staple foods. Since destruction
of ruble-denominated financial assets during the crisis has hurt mainly the
more affluent population--those who have been the driving force behind the
growth of HVP imports--the crisis-generated drop in wealth and income is
hitting these imports particularly hard. Total consumer demand for meat and
other HVP's over the next couple years should continue to fall.

Crisis Has Slashed Russian Meat Imports

According to official Russian trade statistics, agricultural imports in
1996 and 1997 totaled $9.2 and $10.3 billion, and 1998 pre-crisis import
flows were about the same as in 1997. Meat (beef, pork, and poultry) is
Russia's main agricultural import--accounting for almost 30 percent of
imports--with the U.S. the dominant supplier of poultry and Europe the main
provider of beef and pork. The Russian crisis has reduced Western meat
exports to Russia by about three-quarters.

Poultry is the primary U.S. agricultural export to Russia, accounting in
recent years for about two-thirds of the total value of U.S. agricultural
and food exports to the country and about half of total U.S. poultry
exports. Russians prefer poultry dark meat, complementing U.S. consumers'
preference for white meat. In the past 2 years, imports from the U.S.
accounted for about 55 percent of Russia's total poultry consumption. Since
August, U.S. poultry exports to Russia have dropped to 20-25 percent of the
previous volume, and no major rebound is expected in the near future. The
drop in exports has affected U.S. poultry prices; the U.S. price for
chicken leg quarters (which largely determines the world price) has fallen
50 percent since the crisis began.

Russia is also the EU's main export market for beef and pork, and EU sales
of these products to Russia have declined about 75 percent since the crisis
hit. The drop in beef and pork imports by Russia has hurt the reforming
countries of Central and Eastern Europe (CEE) as well. These countries now
trade with Russia using currency rather than government-negotiated barter,
so trade is strongly affected by movements in exchange rates. Russian
purchases account for 30 percent of Poland's total agricultural exports and
10-15 percent of exports from Hungary and the Czech Republic. Pork is their
dominant export, and Hungary reports that pork exports to Russia have
virtually stopped. Because of the lower quality of their output, CEE
countries probably face more difficulty than Western Europe in finding
alternative markets.

Russia's Newly Independent States (NIS) neighbors have also been net
agricultural exporters to Russia, and they too have experienced a
crisis-induced disruption of trade. Particularly hard hit by ruble
devaluation are Kazakstan's traditional exports of grain and meat to
Russia. Russia's NIS trading partners have responded to the crisis by
expanding barter trade with Russia, already strong before the crisis,
taking agricultural goods in return for energy and metals. Russia's crisis
has hurt other NIS economies, not only through the trade effect, but also
through capital flight contagion. In 1998, GDP in these countries fell a
total of about 3 percent.

Food Security Concerns  Spur Food Aid

The economic crisis has raised concerns about possible food shortages in
Russia. Extremely bad weather in 1998 made it a poor year for Russian
agriculture, especially the grain sector. The USDA estimate for Russia's
1998 total grain output is 48 million metric tons (mmt), compared with an
unusually high 88 mmt in 1997 and a 5-year average of 80 mmt per year.

Despite last year's poor harvest, domestic agricultural supplies appear
adequate to prevent widespread food shortages. Russia consumes about 20 mmt
of food grain a year. Food grain production in 1998 fell below that level,
but the quality was high, and drawing on sufficient carryover stocks from
the 1997 bumper crop, Russia was able to meet overall domestic needs.

The drop in Russia's food imports is not a threat to the country's overall
food security. Contrary to a commonly held misconception that Russia
imports over half its total food, USDA's Economic Research Service
estimates that during the past couple of years imports have accounted for
only about one-fifth of Russia's total food consumption. The only major
foodstuff for which imports provide over half of domestic consumption is
poultry. However, imported foods do account for over half of food
consumption in major cities such as Moscow and St. Petersburg. 

Even with adequate food production, the economic crisis has negatively
affected the distribution of food to segments of the population and regions
of the country.  As poverty increases because of rising unemployment and
inflation, food is less affordable to a growing share of the population. In
addition, many agricultural surplus-producing regions within Russia, in 
order to protect their own consumers, are restricting the outflow of
foodstuffs. This can prevent food-deficit regions, particularly in the
north and far east, from obtaining needed supplies even if they are willing
to pay higher prices.

Both the U.S. and EU have responded to these food security concerns with
food aid packages, including provisions for targeting some of the food to
needy population groups and regions. The U.S. package includes donations
worth about $589 million ($409 million for 1.9 mmt of commodities and $180
million for transportation) plus a $520 million trade credit for Russia to
purchase 1.3 mmt of commodities such as corn, soybeans, and meat under
P.L.-480 Title I. 

The donated U.S. commodities include 1.7 mmt of wheat from the Commodity
Credit Corporation and 0.2 mmt of various commodities from the U.S. Food
for Progress Program. The EU package provides 1.8 mmt of agricultural
products (including 1 mmt of wheat) worth $470 million. Most of the U.S.
and EU food aid shipments are to be sold on the market at existing prices,
with the revenue to go to the state pension fund. However, part of the Food
for Progress donation is to be distributed by private voluntary
organizations to the poor and elderly, while the remainder is to be sold,
with the revenue supporting seed research institutes and credit facilities.

Russian Ag Policies Are Slow to Change

The main effect of the crisis on Russian agricultural policy has been a
dramatic drop in federal subsidies to the sector--about 80 percent in real
terms compared with 1997--though subsidies from regional budgets fell less.
The declining subsidies reflect the crisis-induced need to reduce spending
rather than major rethinking about the general desirability of government
support for agriculture.

Agricultural reform in Russia has succeeded in making farms and other
enterprises responsive to market price signals and competitive pressures
(particularly from imports). However, there has been little reform in
farms' internal operations. The former state and collective farms, although
officially reorganized mainly as joint-stock companies, have done little to
change their actual organization, system of management, and work
incentives. Private farms, not to be confused with household private plots
on large farms, account for only about 2 percent of total agricultural
output.

The current dominant issue involving agriculture is the status of the land
code proposed by the Russian legislature (Duma). Currently, most land is
owned and controlled by large former state and collective farms. The
conservative Duma's draft code does not allow purchase and sale of land for
agricultural use, but rather allows the buying and selling of small plots
of land only for purposes that are economically insignificant, such as
building a dacha (country cottage). The more reformist government of
President Yeltsin has been resisting passage of such a restrictive code.

Elections for the Duma will be held in December 1999, and for President in
June 2000. A new legislature and president could bring policy changes,
particularly if economic fallout from the crisis continues to be high.
Major policy changes are more likely to be made economy-wide rather than
initiated at the sector level, but any significant changes involving
spending, taxes, and prices likely would affect the agriculture and food
economy. William Liefert (202) 694-5156 and Olga Liefert (202) 694-5155
wliefert@econ.ag.gov oliefert@econ.ag.gov

WORLD AG & TRADE BOX

Estimating the Share of Imports in Russia's Food Consumption

USDA's Economic Research Service (ERS) calculates the share of imports in
Russia's food consumption by adjusting Russian data on both trade and
consumer expenditures. The first step is to estimate the value of Russian
food imports in a given year. Russian statistical sources concede that the
country's official trade data (in Customs Statistics of the Foreign Trade
of the Russian Federation) understate imports by 20 to 30 percent. The
understatement occurs mainly because the data exclude barter trade between
entities below the level of the national government, and they also exclude
"shuttle trade" conducted by small-level traders among the Newly
Independent States.

ERS values food imports at the retail level by multiplying quantities of
goods imported by their Russian ruble retail price, thus adding the costs
of processing, internal transportation, and retail sale. Then ERS corrects
for the omitted trade by adding 30 percent to this value of food imports.

The next step is to estimate the value of total Russian food consumption.
ERS derives the value of food consumption, measured in retail prices, from
data on total consumer expenditures (in Russian Statistical Yearbook, 1997)
and adjusts to include agricultural products consumed on the farm as well
as foodstuffs distributed by the state to entities such as the military,
hospitals, and orphanages.

The calculation indicates that imported foodstuffs accounted for about 20
percent of Russia's total food consumption in 1997. 

Imports Rise in Middle East and North Africa With Changing Supply & Demand
Factors

The Middle East and North Africa (MENA) region is a major global market for
agricultural and food products. As a region, it is one of the largest
producers and importers of food and feed grains in the world the region
includes Egypt, the largest wheat importer in the world, and Turkey, one of
the largest wheat producers. The region's share of total world grain
imports during 1996-98 is estimated at 22 percent, its share of wheat
imports at 25 percent and barley at 41 percent. The region is also a major
importer of oil meals and vegetable oils; its share of world oil meal
imports is 8 percent and of vegetable oils about 11 percent, both of which
continue to grow.

The MENA region--encompassing Algeria, Egypt, Libya, Morocco, Tunisia,
Bahrain, Cyprus, Iran, Iraq, Israel, Jordan, Kuwait, Lebanon, Oman, Qatar,
Saudi Arabia, Syria, Turkey, United Arab Emirates, and Yemen--is
characterized by rapidly growing populations, rising real incomes, and
changing diets as consumers reduce their intake of grains and add more
livestock products. While the overall population is growing, the region is
experiencing declining farm populations and declining land in farms, and
increasing urbanization has reduced the availability of water for
agriculture. 

The combination of increasing demand for food and decreasing resources for
agriculture has overwhelmed the region's capacity to meet its consumption
needs. Reduced but still considerable government intervention and rising
competition from continuing trade liberalization have added to the
difficulties the region's producers face in meeting the demand for more and
different foods. As a result, food and agricultural imports have grown from
an estimated $26.7 billion in 1990 to $34.5 billion in 1997, rising an
average 3.6 percent per year. 

Imports are led by food and feed grains, oilseeds and products, cotton,
tobacco, livestock and livestock products, and dairy and dairy products. On
average, food imports represented 15-20 percent of total imports over the
past two decades. However, they represent a much higher proportion in the
Persian Gulf countries, where some nations are totally dependent on imports
to meet their food needs. Kuwait, for example, imports 100 percent of its
food, and food imports made up 30 percent of average total imports for
Egypt. Iran, Turkey, and Algeria are also very large importers of
agricultural products.

The region is also an exporter of food and feed grains; fruits, nuts and
vegetables; cotton; and tobacco. Exports totaled over $13.1 billion in 1997
and have increased at a rate of about 6 percent per year since the early
1990's. With the exception of some fruits and vegetables, few exports are
destined for other countries within the region; most go outside the region,
chiefly to the European Union (EU).

Population, Income Drive Demand

Population growth is a primary factor driving increases in demand for food
and agricultural products, and although growth rates have declined in
recent years, even small percentage increases in a population approaching
400 million have major impacts on demand. Average population growth rate
during 1976-97 was 3.3 percent for the region as a whole, compared with
under 1 percent in the U.S. More than half the region's population is under
25 years of age, and MENA populations will continue to increase
substantially even if more effective efforts are undertaken to restrain
population growth. 

A second factor driving food demand has been income. From the 1960's
through the first half of the 1970's, the region experienced strong and
accelerating economic growth as higher oil prices generated higher export
revenues and increased investment. Between 1965 and 1980, the region led
all other developing regions except East Asia in annual per capita income
growth, estimated at over 3 percent. Governments sought to distribute
new-found revenues through high price supports for farmers and high food
subsidies for consumers, which led to increased demand for cereals and
related products and for fruits and vegetables. Rising incomes have
increased demand for red meat and poultry, which had previously been low
compared with high-income countries like the U.S. To meet increasing demand
for meat, governments in the region have supported expanding domestic meat
production rather than increasing meat imports, leading to significantly
higher requirements for feed grains and protein meals, supplied largely
through rising imports. 

Gains in food demand have withstood the financial stresses of a series of
sharp oil price declines in the early 1980's. Despite a dramatic collapse
in income growth--the oil export revenues of 11 MENA states plummeted from
a record $240 billion in 1980 to around $110 billion in 1985--the impact on
the region's food consumption and food import capacity was marginal. 

By the second half of that decade, GDP growth throughout the MENA region
barely kept pace with population growth. Non-oil economies like Jordan and
Turkey experienced spillover effects as labor demand subsided within the
region and in Europe, which was experiencing a recession. Returns from
investments made abroad in preceding decades were also declining rapidly as
governments drew on those assets to supplement declining revenues. This
left many of these economies with growing external indebtedness and
financial imbalances. 

Imports actually continued to increase, although at a slower pace than
during the boom years. Among the region's high-income, oil exporting
countries--Saudi Arabia, Libya and Kuwait--agricultural imports were not
greatly affected. Because the value of petroleum exports far exceeds the
cost of agricultural imports, even during the 1980's, governments were able
to maintain or even increase agricultural imports by reducing expenditures
in other categories.  A third factor increasing the region's food demand
has been growing urbanization. Urbanization may actually be the most
influential determinant of food imports because of its effect on type of
diet, food preferences, and standard of living in the region. The
attraction of urban life, with better education and health facilities, a
more reliable food chain, and often more stable and plentiful employment
opportunities, is changing the region's demographics. 

Population movements to urban areas have shifted food preferences toward
increased consumption of fresh fruits and vegetables, processed cereal
products--e.g., pastas, cookies--and certain livestock, dairy, and poultry
products. In Turkey, increased consumption of poultry and reduced
consumption of mutton and lamb has been a result of rural-to-urban
migration. Rural villagers tend to slaughter and consume their own
animals--normally sheep. Poultry is processed mostly in slaughterhouses
which employ modern marketing and handling techniques to serve the
preferences of increasingly health conscious urban dwellers for reduced fat
products, as well as for ease of preparation and relatively low prices. 

The price of beef relative to poultry--generally triple that of
poultry--has accelerated growth in poultry's share of meat consumption and
led to higher poultry production and imports. In Saudi Arabia, per capita
consumption of poultry rose from 25 kilos in 1980 to 33 kilos by 1995. At
the same time, consumption of beef and veal decreased from 6.4 kilos per
capita to 3.9 kilos because of their relatively high prices. 

The rapid expansion of fast-food outlets in Saudi Arabia and other
countries has also accelerated growth in consumption of poultry, as have
efforts to raise the protein content of local diets at relatively low cost.
In Egypt and Turkey, increased poultry consumption comes primarily from a
rise in per capita consumption, although still low by western standards. In
Israel, however, increased poultry demand is primarily the result of
population increases, particularly immigration from Russia.

Poor Growing Conditions Constrain Production 

The agricultural industry in the MENA region faces a difficult growing
environment and consequent variability of production, which hampers the
industry's ability to respond to increased demand in the region. A very
large proportion of the land, about 70 percent, is unusable for agriculture
and presents difficulties for improvement as rangeland, and a large share
of arable land has shallow, erodible soils with low organic content.
Rainfall is low and erratic and occurs most often during winter, when cold
temperatures inhibit growth. Summers are hot, increasing the amount of
irrigation necessary for crop growth, but frequent droughts, particularly
in North Africa, as well as competition with urban and industrial water
demands limit the availability of water for irrigation. The high salt
content of much available water further complicates efforts to irrigate. 

Finally, farms in the region tend to be small and fragmented. In Turkey,
for example, two-thirds of the 4 million farm holdings cultivate less than
5 hectares (1 hectare=2.471 acres) each, often distributed in several
noncontiguous parcels. A problem common throughout the region, such
dispersed farming has for decades prevented economies of scale in
production, inputs, and marketing, raising the cost of production and
keeping agriculture relatively inefficient. 

Irrigation, despite its limitations in the region, has been a critical
factor in raising productivity. Over the two decades ending in 1995, while
total agricultural area increased 12 percent, irrigated area increased an
estimated 54 percent--from 15.9 million hectares to 24.5 million hectares.
But the extent of irrigation use varies among countries in the region. All
agriculture in Egypt is irrigated, as is most in Saudi Arabia, while in
Algeria less than 10 percent of agricultural land is irrigated and in
Turkey only 15-20 percent. Irrigated land is devoted largely to intensive
agriculture, and its increased use parallels a rise in exports since 1975
of higher valued agricultural commodities such as fruits and vegetables.

The potential for substantial additional development of irrigated
agriculture in the region is limited. With 7 percent of the world's
population, the region has less than 0.5 percent of the world's fresh water
resources. Its per capita renewable fresh water resources are only
one-tenth the world average, and the agricultural sector already accounts
for more than 80 percent of total water consumption. As municipal and
industrial water demand increases and water availability per capita
declines with population growth, the agricultural sector faces growing
competition for freshwater resources, particularly given the substantially
higher economic returns from municipal and industrial water use and the
consequent greater willingness of municipal and industrial sectors
to pay for additional water.

Estimates for Israel, Syria, Jordan, the West Bank, and Gaza suggest these
areas currently use virtually all replenishable water sources. In dry
years, annual use frequently exceeds annual replenishable sources and some
uses must be restricted. For example, in 1998/99 consumption for
agricultural uses in these areas was cut by 40 percent. In many countries
in the regions, projections of water requirements predict significant water
deficits as early as the year 2000.  

Implications for U.S. Trade

What does the MENA region's food demand and supply situation mean for U.S.
agricultural exports? The U.S. is a major supplier of agricultural
commodities to the region, with shipments averaging $4.1 billion per year
during 1996-98, a 29-percent increase over 1990-92 and 4 percent above the
1993-95 average. Values for 1998 show some decrease, primarily because of
lower prices. Grains and oilseeds continue to dominate U.S. sales to the
region, as production in the region cannot expand sufficiently to meeting
rising demand. 

During the same period, strong gains by volume were also made in U.S.
shipments of meat and meat products (68 percent), fruits and preparations
(81 percent), nuts and preparations (85 percent), vegetable oils (97
percent), soybeans (122 percent), and tobacco (307 percent). Expansion of
poultry production in Turkey, Egypt, and Israel accounts for the steep rise
in soybean exports. Simultaneously, U.S. sales of protein meals (mainly
soybean meal) reached 1.1 million tons in 1998, continuing an upward trend
that began in the early 1990's. The rise in meat and meat products and in
fruits and nuts is due to the increasing diversification of diets in the
region, as incomes rise and consumers become more health conscious.
Increased U.S. tobacco exports to the region are the result of the
development of the Turkish cigarette industry. 

Changes in technology are also altering the composition of some U.S.
exports to the region. For example, U.S. flour exports to the region,
mainly to Egypt, averaged over 500,000 tons in the mid-1990's, but are
currently below 10,000 tons and unlikely to recover. The expansion of new,
modern milling capacity by the private sector in Egypt has made the price
of imported flour sufficiently higher than the cost of local flour to make
the imported product uncompetitive. That has not been the case in other
countries--regional flour imports have remained at 2 million tons in recent
years, with Libya, Iraq, Yemen, the UAE the largest importers. However, the
EU, because of its substantial restitution payments to exporters, remains
the principal supplier.

The opening of a new soybean crushing plant in Egypt likely will reduce the
region's imports of U.S. soybean meal, while increasing imports of U.S.
soybeans. At full capacity, Egypt may even export some meal in competition
with U.S. meal exports to the region. On the other hand, Egypt's demand for
corn will rise as its livestock and poultry sector expands with limited
resources for expanding feed output. Since Egyptian importers, feed
manufacturers, and other users generally prefer U.S. corn, which they
consider reliable, the best quality, and consistent in meeting product
specifications, U.S. corn exports should capture a large part of this
increase.

Until April 1999, the U.S. had in place embargoes and sanctions against
Iran and Libya. The U.S. continues to be a party to multilateral sanctions
against Iraq. The combined agricultural imports of these three nations have
averaged $1.6 billion annually in the last 10 years. The only U.S. product
included so far in the resumption of limited agricultural and food imports
by Iraq under the United Nations oil-for-food program has been wheat.
However, Iraq is a major importer of agricultural products and was a major
market for U.S. grains and oilseeds until late 1990. In the long-term, Iraq
will again be a major importer of agricultural products, and the U.S. will
be in a position to supply that market. U.S. sanctions against Libya have
precluded U.S. exports to that market, and even with the recent lifting of
sanctions, the Libyan market for U.S. exports will be slow to resume.

U.S. agricultural exports to Iran were halted by presidential decree in
1995. In April 1999, the U.S. dropped its embargo of food and medicine,
opening a $3 billion agricultural market to the U.S. Before the 1980
hostage crisis, the U.S. held a large market share, and after the release 
of hostages, U.S. sales resumed to $281 million in 1981 and averaged $112
million during 1993-95. During 1995, the last year before the ban, the U.S.
shipped $136 million worth of corn, rice, sunflower oil, and poultry
products to Iran.  

In 1999/2000, Iran is expected to import 5.5 million tons of wheat, an 83
percent increase over 1998/99, and 1.1 million tons of corn, up 10 percent.
Imports of vegetable oil, oilcakes and meal, and rice are also likely to
rise as a result of Iran's worst drought in 30 years. The U.S. has good
prospects in the wheat and corn market and in sales of oilcake and meal.
The barley market, another area of substantial likely imports, will be
difficult for the U.S. to penetrate because of continued extremely low-cost
Turkish and EU supplies. 

For the region as a whole, U.S. market shares of MENA countries' imports
will continue to be determined by price, credit, market size, and political
considerations. The region will remain an important market for agricultural
products in general, and especially for U.S. grains and oilseeds,
particularly wheat, corn and oil meals, as well as for U.S. livestock and
livestock products, nuts and preparations, fruits and preparations, and
tobacco. On the whole, Egypt will remain a large wheat importer, as will
Iran and most of the region. Saudi Arabia is likely to resume wheat imports
as lower export earnings and tight budgets force reductions in agricultural
subsidies and supports in an uncertain oil price environment.  
Michael Kurtzig (202) 694-5152 mkurtzig@econ.ag.gov


RESOURCES & ENVIRONMENT

Conservation Reserve Program Approaches Acreage Limit

USDA's Conservation Reserve Program, after accepting 5 million acres in its
18th signup in March 1999, stands just 5 million acres shy of its statutory
limit of 36.4 million acres. With relatively little acreage due to expire
in the next 3 years, the need to provide for joint Federal-State
conservation reserve initiatives, and reserving 4 million acres for
purposes associated with the Administration's Clean Water Action Plan,
USDA's Farm Services Agency (FSA) noted in announcing the 18th signup
results that future signups might not be able to enroll such large
acreages.  

Indeed, even before announcement of the 18th signup results, legislation
was introduced that would raise the statutory cap on CRP enrollment to 45
million acres. Additional legislation was introduced following the signup
that would permit the statutory cap to be exceeded if Congress appropriated
sufficient funds to support an expansion. In light of these possibilities,
analysis was conducted at USDA's Economic Research Service (ERS) of some
likely changes in the program if the enrollment cap were increased.

The CRP is a voluntary, long-term cropland retirement program. Under the
program, land owners and operators may bid to enroll environmentally
sensitive land for 10-15 years and receive an annual rent plus half the
cost of establishing a permanent land cover on accepted acreage. First
authorized in the 1985 Farm Act, the program was intended primarily to
reduce soil erosion on highly erodible cropland. Secondary goals included
protecting the nation's long-term capability to produce food and fiber,
reducing sedimentation, improving water quality, fostering wildlife
habitat, curbing production of surplus commodities, and providing income
support to farmers. The 1990 Farm Act continued the CRP's emphasis on soil
conservation as a program objective, but turned increased attention to
improving water quality and addressing other environmental concerns and
away from earlier commodity and income goals. The program's enrollment was
capped at 36.4 million acres by the 1996 Farm Act, down significantly from
the original statutory limit of 40-45 million acres.

For the most part, land owners and operators must bid competitively to
enroll their land. Bids for participation in the regular CRP are accepted
during fixed signup periods, then ranked according to established criteria.
The top offers by rank are accepted and enrolled in the program, within the
limits of the program's acreage cap. Beginning with signup 15 in 1997,
acceptance criteria placed relatively high emphasis on three
factors--benefits to wildlife habitat, water quality, and erosion reduction
and incorporated lower weights for three others--practices that result in
enduring benefits or improve air quality and bids located in conservation
priority areas. The emphasis placed on the cost to taxpayers (from rental
rates and cost-sharing asked by producers to enroll acreage) has varied
over signups. These seven factors--the first six environmental and the last
cost-related comprise the Environmental Benefits Index (EBI), which has
been instrumental in ranking land offers in order to obtain the most
efficient program performance.

In addition to the regular, periodic CRP signups, USDA conducts a
continuous signup of acreage dedicated to specific conservation practices,
such as filter strips, riparian buffers, grassed waterways, field
windbreaks, shelterbelts, living snow fences, salt-tolerant vegetation,
shallow water areas for wildlife, and wellhead protection areas. These
practices involve relatively small parcels of land, usually portions of
fields, but are expected to provide disproportionately large environmental
benefits. Land owners and operators may enroll eligible acres under the
continuous signup at any time without using the competitive EBI process if
they are willing to accept a set payment rate from USDA. As of March 1999,
about 841,000 acres were enrolled under the continuous signup program. 

An additional continuous signup option related to the CRP is the
Conservation Reserve Enhancement Program (CREP), a joint program of USDA
and the states to address nationally significant but more state-specific
environmental concerns related to agricultural use. Using resources of the
CRP as well as those of participating states, the CREP provides financial
incentives to encourage farmers and ranchers to enroll in long-term
contracts to remove lands from agricultural production. About 22,000 acres
have been enrolled in the CREP using the continuous CRP signup. As of May,
CREP agreements have been signed with Illinois, Maryland, Minnesota, New
York, North Carolina, Oregon, and Washington.
 
Recent Enrollments Yield High Environmental Scores

On March 4, the Secretary of Agriculture announced acceptance of
approximately 5 million acres of the 7.1 million offered by land owners and
operators for CRP enrollment during the 18th signup. USDA used the EBI to
determine the amount of acreage to be accepted. Components of the EBI sum
to a maximum of 560 points, though it is highly unlikely that any bid would
achieve that score. USDA established a cutoff of at least 245 points on the
EBI scale for accepted acres, reserving room within the program's overall
acreage cap for acceptance of high-scoring bids which could be expected to
be offered in subsequent signups. 

When contracts for accepted bids from 18th signup go into effect on October
1, 1999, approximately 31.3 million acres out of a possible 36.4 million
acres will be enrolled in the CRP, not counting additional enrollments
under the continuous signup. The greatest amount of acreage enrolled will
be in Texas, Montana, and North Dakota, each accounting for more than 10
percent of total enrollment, which continues the enrollment distribution
prevalent before the 18th signup. 

The EBI criteria and relative weights assigned to each factor have evolved
since 1997 (signup 15), which complicates any comparison of accepted acres
among signups. However, by applying the 18th signup EBI scoring procedure
to data from earlier contracts, a comparison can be made for enrolled
acreage across signups since 1997. The latest EBI scoring procedure cannot
be applied to data from signups before 1997, however, precluding
comparisons with earlier years. Results of the comparisons of signups 15
through 18 indicate that land enrolled in signup 18 had the highest average
EBI and the highest score for an aggregate of just the environmental
components of the EBI (leaving out the cost factor).

While some of the increase is due to adjustment made since signup 15 to the
manner in which air quality and enduring benfits points are awarded under
the EBI, some of the increase in the enduring benefits term is attributable
to increased shrub and wildlife habitat plantings, and to increased
enrollment of restored wetlands. In particular, about 5 percent of acres
enrolled during the 15th and 16th signups were restored wetlands, compared
with 9 percent of acres in the 18th signup. In addition, scores for
wildlife habitat benefits have also risen significantly since the 15th
signup, primarily a reflection of producers' efforts to enhance the
probability of bid acceptance by improving cover planted to benefit
wildlife.

At the same time, however, another factor has partially counteracted this
trend toward greater environmental benefits. The mean score for erosion
reduction benefits has fallen for the last three signups. This is not
surprising as the amount of highly erodible acreage offered by producers
has declined over the successive signups. The percentage of highly erodible
acres enrolled in the program has declined in successive signups while the
acreage of modestly erodible land with other environmental benefits has
increased. Fields with an erodibility index of 8 or greater (defined as
highly erodible for this article) comprised about 85 percent of acres
enrolled during the 15th signup, but only about 66 percent of enrollment in
the 18th signup. The percentages of highly erodible acres enrolled
approximate the amount of highly erodible acreage offered. Much of the
shift in land enrollment has been towards acreage eligible under wildlife
criteria.

Also working against the high average EBI score earned by the greater
quality of environmental benefits offered in the 18th signup has been a
cost score lower than other recent signups. Producers have asked for higher
rental rates--average rates for the 18th signup are the highest 
since the 13th signup in 1995, despite the decreased likelihood of
acceptance. The higher per-acre costs reflects a shift in acreage
enrollment toward the Midwest.

Remaining signups through the end of the program's current authorization in
2002 will likely not be as large as the 18th, since the program is now near
the cap and relatively few currently enrolled acres are scheduled to expire
before then. Only about 2.3 million acres will reach the end of their
contracts over the next 3 years. Added to the 5.1 million acres remaining
below the statutory acreage limit, that leaves room for enrollment or
reenrollment of only about 7.4 million acres between now and 2002, unless
the cap is raised. Given that the Clinton Administration's Clean Water
Action Plan has reserved 4 million acres for the continuous signup, and the
continuing need to provide for CREP agreements with the states,
opportunities to enroll land through the regular signup process are much
more limited than in the past. 

How much expiring land USDA will reenroll if it is offered in future
signups is uncertain. Of expiring land offered for reenrollment in the 18th
signup, more than two-thirds was accepted. If high acceptance rates for
currently enrolled land continue, then bidders with new land may face an
even smaller probability of success in future signups. However, with the
current EBI, a producer can increase the probability of acceptance by
offering bids that provide substantial environmental benefits (such as
better wildlife cover) or lowering rental payment requests. 

What Might an Expanded CRP Look Like?

When Congress first authorized the CRP in 1985, it set an acreage cap of
40-45 million. Later legislation lowered the cap to its current level, but
recent legislative efforts suggest renewed interest in raising the cap. If
the acreage limit were increased, might the characteristics of acres
enrolled in the program change?

An estimate of the distribution of enrolled acres in a 45-million-acre CRP
may be made by combining information available from the NRCS's National
Resources Inventory (NRI) with other information on the amount, location,
and characteristics of acres that might be offered for enrollment, and
assumptions about crop prices, production costs, management practices being
employed, and rents and cost-shares bidders might ask. The NRI shows land
characteristics,land cover, land use, and other physical variables.

The resulting simulation showed a lower mean EBI score for CRP acreage
which would be expected since the EBI cutoff score would be lowered.
Assuming eligibility criteria does not change, the average erosion
reduction factor of the EBI would decline most with increased acreage
enrollment, consistent with recent experience of reduced offerings and
enrollment of highly erodible acres. All other environmental factors of the
EBI would remain relatively constant, so if the CRP were expanded, new
enrollment would likely have less erosion reduction benefits compared to
other environmental benefits included in the EBI. However, with greater
acreage placed in conserving uses, total erosion benefits would still
increase. 

Under a program expanded to 45 million acres, allowing cropland with lower
EBI scores into the program increases enrollment in all regions. Assuming
potential bidders would indeed bid, model results indicate that no radical
shifts in the geographic distribution of acreage would occur, though
relatively more acreage would be enrolled in some regions compared with
others. Under the simulated scenario, the relative share would increase
only slightly in the Heartland and to an even lesser extent in the Northern
Crescent. The Prairie Gateway, and, less so, the Northern Great Plains and
Fruitful Rim, would in turn lose a slight share of acreage, even though
total CRP acreage would still rise in those regions. The share of other
regions would remain constant. 

In summary, limited opportunities now remain for new acreage to be enrolled
in the CRP, with relatively little program acreage expiring through 2002, a
desire to hold enrollment capacity in reserve for the continuous signup and
the CREP, and a 36.4-million-acre enrollment cap. Unless legislative
efforts to raise the acreage cap are successful, landowners who waited to
enroll land through the regular CRP signups may now have waited too long.
With relatively few opportunities for enrolling land under the CRP,
eligible landowners who are interested in placing land in conserving uses
may need to focus greater attention on the continuous signup and the CREP. 
Mark Smith (202) 694-5490 mesmith@econ.ag.gov

SPECIAL ARTICLE

State Trading and Management of Grain Marketing in China 

The role of state trading enterprises in the People's Republic of China is
a key agricultural issue as China seeks membership in the World Trade
Organization (WTO). Despite more than 15 years of economic reform,
government state trading enterprises (STE's) continue to provide China with
enormous power to manage the level and direction of the trade flows of
several major agricultural commodities, including wheat, rice, and corn. 

This control reflects multiple goals that include securing food supplies,
protecting domestic production from foreign competition, stabilizing
domestic grain prices, and controlling grain trade and the flow of foreign
currency. However, WTO members are concerned that the lack of transparency
in China's STE activities enables organizations to engage in trading
practices that would place competitors at an unfair disadvantage.  

China's state trading enterprises are key participants in international
grain trade. From 1992 to 1997, China's state trading regime managed an
annual average 16.1 million tons of wheat, rice, and corn (imports of 8.2
million and exports of 7.9 million). The U.S. share of these imports
averaged 31 percent during the period (ranging from 45 percent in 1994 to
21 percent in 1997) and accounted for 35 percent of U.S. agricultural
exports to China. 

Wheat dominates China's state grain imports, with annual average imports
valued at about $1.3 billion during 1992-97. China's annual wheat imports
amounted to nearly 8 million metric tons or more than 7 percent of world
wheat imports during that period. China exports corn and rice through STE's
and captured nearly 9 and 5 percent of world corn and rice exports during
1992-97. Annual average export revenues were $703 million and $230 million. 

Unlike some other STE's which are single national entities responsible for
exporting a crop to maximize producer revenue (e.g., the Canadian and
Australian Wheat Boards), state trading in China involves the entire chain
of marketing organizations at the central and provincial levels engaged in
domestic and international marketing. Examining each area is necessary to
understanding the role of state trading in China because the policies and
institutions of both are intertwined, and any attempt to successfully
reform state trading practices will have to go beyond the traditional
concept of just disciplining single enterprises. 

Domestic Grain Policy Returns To Intervention . . .

Before 1980, government central planning dominated domestic grain
marketing. The government's Grain Bureau purchased, transported, stored,
milled, and retailed all grain leaving the farm. Then in the 1980's and
early 1990's, open markets became increasingly important as the government
was no longer the sole purchaser and many provinces began phasing out a
ration system that allowed urban consumers to purchase grain at low fixed
prices (AO March 1997). But current grain policy, initiated in 1998, led to
a reversal of the use of open markets for domestic distribution and an
increase in government intervention in grain production and marketing. This
relatively recent return to intervention in the domestic market has led to
higher grain output and reduced demand for imports.

China's government and party leaders focus greater attention on domestic
production and marketing policies for wheat, rice, and corn because these
crops typically account for 88 percent of total grain output (based on the
government's definition, which also includes other coarse grains, soybeans,
potatoes, and pulses). Leaders have paid less attention to the production
and marketing of other grains such as oats, sorghum, millet, barley, dry
peas, and beans. State trading is not used for international marketing of
these or most other crops, but is used for vegetable oil, wool, tobacco,
and cotton.

As was the case prior to the 1980's, central and provincial governments
exert considerable control over all aspects of China's food grain sector.
Government-owned and managed Grain Bureaus located at province, prefecture,
and county levels draw up grain supply-and-use tables to determine grain
availability and needs for each administrative unit. Geographic units are
classified as surplus if grain output exceeds local consumption
requirements, self-sufficient if output equals local requirements, or
deficit if output is less than requirements. 

Central and provincial governments determine the quantities of grain they
need to purchase, and set purchase prices for wheat, rice, and corn
procurement quotas. Farmers who have been assigned quotas must deliver the
specified grains to local Grain Bureaus, which provincial and local
governments use to manage the purchase and sale of key grains. Grain
Bureaus also purchase above-quota grains at local market or support prices.
Grain Bureaus are responsible for distributing major grains to military
units, wholesale markets, feed mills, grain storage facilities, and grain
and food processors, and part of the supply for urban residents in large
cities.

Governors from surplus and deficit provinces jointly work out the major
movement of grains across provincial borders. The movement of grain within
provinces is managed jointly by provincial and local government leaders.
For example, even though Liaoning Province is grain-deficit, grain from
surplus counties in the province would be transferred internally before
grain is brought in from other provinces. The national grain supply-and-use
balance sheets enable national government leaders to assess grain export
opportunities and import requirements.

. . . While STE's Continue to Manage Foreign Grain Trade

Current grain trade policy dates back to 1949 when China's leaders
established a Customs Bureau, set up tariff schedules, organized a system
to issue import and export quotas and licenses, and constructed an exchange
control system. Along with its government-controlled economic planning
system, China established foreign trade corporations to manage the import
and export of grains, edible oils, and foodstuffs. 

China's imports and exports of grains (wheat, rice, and corn) are
determined by the central government in an annual plan formulated by the
State Planning and Development Commission (SPDC), in consultation with the
State Council (China's highest administrative body) and the Ministry of
Foreign Trade and Economic Cooperation (MOFTEC). Related government
departments, including the Ministries of Agriculture, Internal Trade
(Commerce), and Foreign Trade, and the State Administration of Grain
Reserves (SAGR) are consulted during the planning process. While China's
National Cereals Oils and Foodstuffs Import and Export Corporation (COFCO)
is highly visible in the world arena, its role is mainly as an agent. Upon
approval by the State Council, the plan targets are transmitted to MOFTEC,
which delegates the actual trading process to COFCO. COFCO receives a fee
for its services. 

For grain imports, MOFTEC orders COFCO to purchase specified quantities and
to transfer them to Grain Bureaus at "Government Fixed Imported Grain
Transfer Prices" (GFIGTP's). The GFIGTP's are generally based on average
procurement prices for the same type of grain purchased in nine cities:
Dalian, Qinghuangdao, Tianjin, Qingdao, Lianyungang, Shanghai, Xiamen,
Zhanjiang, and Guangzhou. The GFIGTP's are independent of import prices.

When COFCO makes a purchase on the world market and the import price is
higher than the average procurement price, the Ministry of Finance
subsidizes COFCO for the loss. USDA analysts estimate that from 1985 to
1998 China's central government allocated nearly 39 billion RenMinBi
(RMB)--more than US$8 billion- -in an effort to insulate its domestic wheat
market from international price fluctuations. When the import price is
below the average procurement price, the government pockets the difference.

Procedures for importing grains, like decisions on import quantity, are
hierarchical in nature. For example, if a provincial Grain Bureau cannot
find wheat in the domestic market to meet its requirements, the governor
can send a request to the SAGR in Beijing to obtain imported wheat. SAGR
evaluates the request, along with requests from other provinces, and
forwards a plan to import wheat to SPDC, MOFTEC, and the State Council. 

If the State Council approves the application, MOFTEC directs COFCO to
purchase a given quantity of wheat to be delivered to certain ports. The
provincial Grain Bureau obtains bank loans and contacts COFCO to negotiate
the contract with a foreign wheat supplier. COFCO arranges for the
shipment, delivers the cargo to the designated port, and clears it through
Customs, the China Commodity Inspection Bureau, and health and quarantine
inspections. SAGR and the local Grain Bureaus then transport the wheat to
storage and flour mills. Imported wheat is mostly for consumption in urban
areas.

In the case of grain exports, MOFTEC is responsible for selling the
quantity of grain prescribed in the annual plan. The quantities of grain to
be exported are acquired by the provincial Grain Bureaus based on the
"Government Fixed Exported Grain Transfer Prices" (GFEGTP's). These prices
are calculated as the sum of the fixed procurement price in the province
where the export grain originates, plus a price differential that reflects
quality variations and additional grain processing costs for meeting export
standards and contract requirements. 

The procedure for exporting grains is similar to that for imports. Upon
approval from the State Council, SAGR decides how to allocate the export
quotas to various provincial Grain Bureaus. The provincial Grain Bureaus
then determine how much grain would come from various prefecture/county
Grain Bureaus. The approval for exports is transmitted to MOFTEC, which
directs COFCO to negotiate prices with foreign buyers. The provincial Grain
Bureau and its local Bureaus that receive export quotas would then deliver
grains to ports for COFCO's delivery to foreign destinations. 

Prior to 1989, China's COFCO had domestic monopoly power to import or
export grain for the central government. COFCO had many branches in various
provinces carrying out marketing functions for the central COFCO. Beginning
in 1989, many provincial COFCO branches were transferred to provincial
governments and given authority to trade specified commodities. Central
COFCO, however, remained the central government's agent for wheat, rice,
and corn trade. 

WTO Membership Under Consideration

Although the volume of foreign trade has expanded dramatically since 1980
while government  control over foreign trade has lessened in general, China
continues to exercise considerable control over the import and export of
wheat, rice, and corn. On the domestic front, current grain policy
initiated in 1998 has increased government intervention in grain marketing
and led to reversal of the use of open markets. With the holding of large
grain stocks, strong controls over domestic marketing, and the tools to
manage grain imports and exports, China is in a powerful position to
determine the level and direction of foreign grain trade.  

On the whole, China has met its objectives to maintain control over foreign
trade and to secure food supplies for its people, but this has been
accomplished at a considerable cost. The collective result of domestic
policies and actions by STE's can restrict access to domestic markets or
push excess commodities into world markets, which is a source of concern
for WTO members. Negotiations for China's WTO membership are ongoing, and
the final accession commitments are unknown until an agreement is signed.
Nevertheless, the broad outlines of China's most recent commitment offer,
as reported in the U.S. press, suggests that agreement will have a
significant impact on the role and behavior of China's STE's.

China offered in April to bind all tariffs against future increase at their
current level and to reduce tariff levels for a large number of
agricultural products beginning in the year 2000, continuing through 2004.
China would establish tariff-rate quotas (TRQ's) for several bulk
agricultural commodities (major grains, in particular). For these products,
a specified quantity of imports would be allowed at a low duty, and any
additional imports would be assessed a high duty. (Current quota duties are
generally more than 100 percent.) TRQ quantities would increase annually
through the year 2004 and be subject to specific disciplines to put import
decisions on a commercial rather than an administrative basis. These
disciplines are designed to ensure a transparent and consistent system for
allocating shares of the TRQ to end-users and ensure that quota-holders are
not impeded in utilizing their quotas.

In addition, a specific share of each quota would be reserved for state
trading enterprises (such as COFCO), and a specific share reserved for any
other entity that has a license to trade. Finally, any quota reserved for a
state trader not utilized by a predetermined date would automatically
become available to be imported directly by any entity with a right to
trade.

The potential for policy reform in China's agriculture is immense and the
international community is currently engaged in discussions to move China
toward a system that is more trade friendly. The ability to assess the
effects of these  reform attempts will depend, in part, on an understanding
of China's complex agricultural system, including the changes it is
undergoing and the implications for world food and farm trade.  
Frederick W. Crook (202) 694-5217, Suchada Langley (202) 694-5227, Francis
C.Tuan (202) 694-5238, and Hunter Colby (202) 694-5215
fwcrook@econ.ag.gov
slangley@econ.ag.gov
ftuan@econ.ag.gov
whcolby@econ.ag.gov

NOTE:
For more information and discussion of state trading enterprises, go to
http://www.econ.ag.gov/briefing/wto/state.htm

SPECIAL ARTICLE BOX
The Institutional Players in China's Grain Sector

The State Council (SC) is China's highest administrative organ.  The
primary policy making body, the SC decides the quantities of grains to be
purchased by the state, the level of procurement prices, stock building and
stock use, and the level and direction of grain trade (imports vs.
exports).

The State Planning and Development Commission (SPDC) is a high-level
advisory body that makes economic policy recommendations to the State
Council leadership.  It recommends action to build or release grain stocks
to achieve political and economic objectives, and it recommends the level
of grain imports and exports.

The State Administration for Grain Reserves (SAGR) draws up grain balance
sheets for the entire country and manages the central government's
strategic grain reserves.  SAGR became part of the State Planning and
Development Commission in the 1998 government reorganization.

The Ministry of Foreign Trade and Economic Cooperation (MOFTEC) employs
experts on international trade policy and trade conditions.  It exercises a
supervisory role over China's foreign trade corporations and it allocates
trade quotas and issues import and export licenses.

The China National Cereals Oils and Foodstuff Import and Export Corporation
(COFCO) negotiates prices and signs trade contracts, arranges shipping, and
ensures that shipments pass border inspections.  COFCO reports to MOFTEC. 

The Grain Bureau manages domestic marketing of grains at provincial,
prefecture, and county levels.  In 1982 it was reduced from a ministry to a
bureau within the Ministry of Commerce (Ministry of Internal Trade).  In
the 1998 government reorganization, SAGR took over Grain Bureau functions
at the national level.  The system determines the fixed grain quotas that
farmers must deliver to local grain stations. 

END_OF_FILE