AGRICULTURAL OUTLOOK                                      November 22, 1999
December 1999, ERS-AO-267
               Approved by the World Agricultural Outlook Board
---------------------------------------------------------------------------
AGRICULTURAL OUTLOOK is published ten times a year by the Economic Research
Service, U.S. Department of Agriculture, Washington, DC 20036-5831.  Please
note that this release contains only the text of AGRICULTURAL OUTLOOK --
tables and graphics are not included. 

Subscriptions to the printed version of this report are available from 
the ERS-NASS order desk.  Call toll-free, 1-800-999-6779 and ask for stock 
# SUB-AGO 4001, $65/year.  ERS-NASS accepts MasterCard and Visa.
---------------------------------------------------------------------------
CONTENTS

AGRICULTURAL ECONOMY
The Ag Sector: Yearend Wrap-Up

BRIEFS
Specialty Crops: Larger Citrus Crop Expected in 1999/2000
Livestock, Dairy, & Poultry: Rising Milk Production Restrains Prices

COMMODITY SPOTLIGHT
Abundant World Rice Supplies Pull Down Prices

WORLD AGRICULTURE & TRADE
The Long-Term Boom In China's Feed Manufacturing Industry

RISK MANAGEMENT
Demand for Yield and Revenue Insurance Products

SPECIAL ARTICLE
Agriculture in Poland & Hungary: Preparing for EU Accession


IN THIS ISSUE

The Ag Sector: Yearend Wrap-Up

The U.S. farm sector saw cash receipts slide in 1999 as supplies rose and
farm prices fell overall.  But record government payments are expected to
pull up net cash income to just below the 1997 record.   With national
average crop yields high and export demand stagnant over the last 3 years,
stocks are mounting for key commodities, including wheat, corn, soybeans,
cotton, and rice.  Field crop prices have fallen from record or near-record
levels in the mid-1990's to the lowest in many years.  Although total meat
production is forecast record large in 1999, some livestock prices,
particularly cattle, are showing signs of recovery.  Farm financial
conditions on average remain strong, but regional fortunes vary
significantly, depending on the mix of production and local weather. 
Frederic Surls (202) 694-5202; fsurls@econ.ag.gov

The Long-Term Boom in China's Feed Manufacturing Industry China's feed
manufacturing sector is expanding rapidly as livestock production
shifts from a sideline--feeding farm byproducts to very few animals--into 
a full-time occupation--feeding purchased feedstuffs to a relatively large
number of animals.  China may continue to resist importing complete feeds
as it emphasizes self-sufficiency in grain production, although imports of
nongrain feed ingredients will likely expand.  For U.S. exporters of
oilseeds, oilseed meals, and feed additives, medium- and long-term
prospects remain positive as China's livestock and feed sectors prepare to
respond to growing consumer demand.  Frederick W. Crook (202) 694-5217;
fwcrook@econ.ag.gov

Rising Milk Production Restrains Prices

Milk production gains likely will exceed demand growth during the remainder
of 1999 and into early 2000, leaving farm-level milk prices somewhat weak
in first-half 2000 and pulling down the projected annual average by 8 to 12
percent from 1999.  Prices are forecast to recover in second-half 2000 as
increases in milk production start to abate and demand growth remains firm. 
James Miller (202) 694-5184; jjmiller@econ.ag.gov

Larger Citrus Crop Expected in 1999/2000

The 1999/2000 citrus crop is expected up 20 percent from last year as
better weather conditions so far in California and Florida promise
substantially larger orange, lemon, and tangerine crops.  In contrast,
grapefruit production is expected to rise just 5 percent as Florida growers
reduce acreage in response to several years of low returns.  Oranges for
fresh use should be in ample supply this winter, and both growers and
consumers will likely see lower prices than last year.  Susan Pollack (202)
694-5251; pollack@econ.ag.gov

Abundant World Rice Supplies Pull Down Prices

International rice prices have declined sharply this year in the face of
large supplies in nearly all exporting countries and weaker global demand
stemming from a production rebound in major importing countries.  World
rice trade is projected to fall 11 percent in 1999 from last year's record
27.3 million metric tons (milled basis).  Indonesia, Bangladesh, the
Philippines, and Brazil--the four largest rice importing countries--are
responsible for the bulk of the 3-million-ton drop.  Global trade is
projected to drop in 2000 as well.  With a record 1999 U.S. crop and lower
export demand, the U.S. season-average 1999/2000 farm price is projected to
drop about a third to $5.50-$6 per cwt, with the lowest midpoint since
1986/87.  Nathan Childs (202) 694-5292; nchilds@econ.ag.gov

Profiling Crop Insurance Purchasers

Demand for crop insurance has increased recently as commodity program
changes followed passage of the 1996 Farm Act, Federal insurance premium
subsidies rose, and several new revenue insurance products were introduced. 
USDA's Economic Research Service has examined three factors that affect
demand for insurance--farmers' risk characteristics, farm income level, and
cost of insurance--based on data from Iowa corn and soybean producers who
purchased yield and revenue insurance in 1997.  Study results suggest that
by considering risk and other characteristics associated with farmers who
buy different types of contracts, it may be possible to structure insurance
rates to more closely reflect farmers' risk profiles and may lead to a more
self-sustaining agricultural insurance industry.  Shiva S. Makki (202)
694-5316; smakki@econ.ag.gov

Agriculture in Poland & Hungary: Preparing for EU Accession

Several Central and East European countries (CEE's), including Poland,
Hungary, and the Czech Republic, are likely to join the European Union (EU)
sometime in the next decade.  CEE economies will benefit from the inflow of
structural funds (e.g., for developing institutions and infrastructure),
and CEE farmers will benefit from price and income supports enjoyed by
EU-15 farmers.  But many CEE producers, especially in Poland, are
increasingly dubious about their ability to compete with high-quality EU
products in a single market, particularly when costs of adopting EU
regulations raise farmers' production costs.  USDA's Economic Research
Service recently analyzed the effects of enlargement on farm production and
trade.  Among the conclusions is that enlargement could lead to EU
surpluses of rye, beef, and pork, and that as a result the EU could have
difficulty meeting its commitments on limiting export subsidies for beef
and pork.  Nancy J. Cochrane (202) 694-5143; cochrane@econ.ag.gov

AGRICULTURAL ECONOMY

The Ag Sector: Yearend Wrap-Up

The U..S. farm sector saw cash receipts slide in 1999 as supplies rose and
farm prices fell overall. But record government payments are forecast to
pull up net cash income to just under the 1997 record.

With national average crop yields high and export demand stagnant over the
last 3 years, stocks of key commodities--including wheat, corn, soybeans,
cotton, and rice--are mounting. Total meat production is also forecast
record large in 1999. Although farm financial conditions on average remain
strong, regional fortunes differ significantly, depending on the mix of
production and local weather. Income prospects were threatened in areas
that suffered from drought in late summer, particularly eastern portions of
the country. Also, earnings from farm marketings have varied with marketing
strategies and timing of sales--some farmers have done extremely well,
while others have sold at very low prices. 

Season-average prices for major field crops have fallen from record or
near-record levels in 1995/96 and 1996/97 to the lowest in many years, with
steep price drops in 1998 for major field crops and for hogs. While some
livestock prices, particularly cattle, are showing signs of recovery,
prices of many commodities have dropped further in 1999.

For some commodities, improvement in receipts is likely in 2000. However,
significant improvement in overall sector performance may be at least
another year away.

Near-Record Farm Income 
Despite Low Prices

Total cash receipts for 1999 are forecast to drop 3 percent from last year
to $192 billion, down 8 percent from the 1997 peak. Extremely low prices
for field crops are the major reason for the decline cash receipts for
these commodities are falling 13 percent from last year and 24 percent from
the 1997 record. Wheat, corn, and soybean prices for the 1999/2000
marketing year are expected to be the lowest in more than a decade. 

Cash receipts for the livestock sector are forecast up nearly 2 percent in
1999 to the second-highest level of the 1990's, driven by larger receipts
for cattle and calves and broilers. Dairy receipts remain strong despite
somewhat lower prices. But with large hog supplies continuing,
year-over-year prices are down 7 percent from 1998 and are 40 percent off
the 1997 average. As a result, cash receipts to hog producers have fallen
from $13 billion in 1997 to $9 billion in 1999.

Grower receipts from specialty crops are higher in 1999, with a strong
domestic economy continuing to fuel sales of greenhouse and nursery
products. The grower price index for fruit and nuts has remained above
year-earlier levels, largely reflecting significantly lower citrus supplies
during 1998/99 and smaller apple and pear crops in 1999. On the other hand,
vegetable growers have been harvesting large crops in 1999--particularly
tomatoes, lettuce, and broccoli--and fresh-market prices have been
relatively low for much of the year. 

For the U.S. farm sector, net cash income this year is expected to total
$57.9 billion, up nearly $3 billion from 1998 and just $600 million less
than the 1997 record. Income would have been significantly lower without a
large cash infusion from government payments, almost double the 1998 level
and a forecast record-high $22.5 billion. Government payments this year
will equal 12 percent of cash receipts and 39 percent of net cash income. 

Direct government payments for major field crops in calendar 1999 include:
production flexibility contract payments ($5.1 billion) under the 1996 Farm
Act; emergency assistance under separate legislative packages signed by the
President in October 1998 (about $2.8 billion of a nearly $6-billion
package) and October 1999 (about $5.9 billion of a $8.4-billion package);
and loan deficiency payments--LDP's--($6.6 billion). These payments should
reduce cash-flow problems for many farm businesses in 1999.

The largest impacts of increased payments are concentrated in regions with
the highest proportion of producers who signed a production flexibility
contract, which has also served as the delivery mechanism for much of the
emergency assistance the past 2 years. Average net cash income is now
forecast down only 1 percent in 1999 in the Heartland, compared with the
11-percent drop expected prior to the October 1999 legislation. Average net
cash income in the Northern Great Plains and in the Prairie Gateway will
rise 19 percent and 17 percent in 1999, compared with earlier forecasts of
2 percent or less. Income prospects remain poor in the Southern Seaboard;
adverse weather along with low prices for tobacco and hogs (commodities not
covered by production flexibility contract payments nor market loss
assistance payments) will result in a 10-percent decline in average net
cash income. (See AO June-July 1999 for resource region map at
www.econ.ag.gov/epubs/pdf/agout/june99/.)

Very low inflation has kept farm expenses from rising significantly in
1999.  For most farm businesses, stronger cash flow positions in 1999
should reduce debt repayment problems. Nationwide, only 11 percent of farm
businesses are expected to experience severe debt repayment problems, down
from 14 percent in 1998. In the Northern Great Plains and Prairie Gateway,
which has had persistent problems with debt repayment, the proportion of
farm businesses with severe debt repayment problems, while still high
(about 15 percent), is not expected to increase.

Mounting Supplies 
Hold Down Prices

Despite this year's local and regional weather problems, national yields
have not been severely affected--nor have weather problems pulled down
yields since 1995. Large crops and stagnant export demand over the last 3
years have caused stocks to rise steadily, driving down crop prices. By the
end of 1999/2000, U.S. stocks will be more than double 1995/96 levels for
wheat, coarse grains, and soybeans. Stocks of rice and cotton are also
forecast up sharply from 1995/96. 

Good weather has not been limited to the U.S. Crops outside the U.S. have
also been large since 1995/96, when poor harvests and tight supplies sent
prices to extremely high levels. Following the high prices of the
mid-1990's, U.S. and foreign crop acreage expanded swiftly, and large
output--in both exporting and importing countries--has limited U.S.
exports. Prices began to decline, but world plantings have been slow to
adjust, although world acreage is down in 1999/2000 for wheat and coarse
grains.

Producers in the Southern Hemisphere, notably Argentina but also Brazil,
have continued to step up production, particularly of soybeans. In
Argentina, soybean area is up about 25 percent since 1995/96, and USDA is
forecasting an 18.5-million-ton crop in 1999/2000, 45 percent above
1995/96. Brazil's soybean area is also up nearly 15 percent in this period,
and the current forecast is for a crop that is 26 percent over 1995/96,
because Brazil's yields, like Argentina's, are sharply higher. In both
countries, new soybean varieties, infrastructure investment, and policy
reform have been the driving forces behind production expansion (AO March
1998 and May 1998).

China made a significant policy shift in the mid-1990's toward greater
self-sufficiency in basic foodstuffs, exerting a strong impact on global
demand. Grain output has risen sharply in recent years, while growth in
domestic consumption has slowed. The world's largest importer of wheat in
1995/96, China is now importing only small amounts. Over the same time
period, the country has shifted from net importer to net exporter of corn 
and rice. China's imports of soybeans, however, are up sharply. The country
remains a leading importer of soybean oil and other vegetable oils, and a
key market for soybean meal. The strength of the Chinese market for
soybeans and products helps explain relatively strong soybean prices in
recent years. 

The global financial crisis and its impacts on Asia, Russia, and Brazil
also play a role in market weakness. The crisis and associated appreciation
of the U.S. dollar in 1998 reduced overall demand for imports in the
affected countries. But this year, many of these economies have begun to
recover, and the U.S. dollar has depreciated against currencies of major
importers. Overall, the crisis has been less of a shock to U.S.
agricultural exports than initially feared. 

The volume of U.S. agricultural exports in fiscal 1999 (October
1998-September 1999) rose by more than 10 percent as foreign competition
declined, although shipments were well below levels of the mid-1990's. U.S.
export value, however, was down again in 1999 as export prices declined
further. USDA expects a further increase in export volume in fiscal 2000,
with export value near last year's level.

U.S. beef, poultry, and dairy producers are faring better than their field
crop counterparts, as low crop prices translate into reduced feed costs.
After several years of losses for beef cattle producers, particularly
cow-calf operators, beef cattle numbers are declining and price prospects
are turning up. Price gains are limited by lackluster U.S. meat and poultry
exports, which have leveled off after growing at double-digit rates during
much of the 1990's. Decline in the Russian economy, together with the
ruble's sharp drop in value last year, has severely cut into U.S. livestock
product exports to Russia, once a fast-growing market for U.S. pork and
poultry. 

When Will the Price Slump End?

USDA forecasts season-average farm prices will rise modestly for hogs and
cattle in 1999/2000 and will be lower for many other commodities. Across
most of the field crop-livestock complex, prices remain low, suggesting
only modest improvement, if any, in cash receipts during 2000. Improvements
in market returns for producers will therefore depend on the price effects
of developments in a number of areas.

As always, weather next year will be critical. At some point, the stretch
of good weather will end, crop output should drop, and prices rise.
However, large U.S. stocks of field crops will weaken the response of
prices to reduced production.

Planted acreage of field crops around the world has dropped somewhat over
the last several years, and further declines are likely next year after
another year of low prices, both inside and outside the U.S. Supply
adjustments in the U.S. livestock sector, which have already started, will
mean smaller supplies and higher prices for both beef and pork next year.

The continued recovery of crisis-affected countries will also have an
impact on export prospects and prices. Recovery has been faster than
initially expected in countries like South Korea and Thailand. But
difficult issues of structural reform remain, and the future strength of
recovery in some countries remains in question. The economies in Russia and
other countries of the former Soviet Union continue to slide backward, with
no fundamental turnaround in sight. 

Continued strong macroeconomic performance in developed countries remains
indirectly critical to U.S. agricultural exports, prices, and farm income.
While demand for farm commodities in developed countries is generally
unresponsive to income changes, many developing countries depend on healthy
markets in developed countries to support their economic growth. This
growth, in turn, builds demand for agricultural products in developing
countries, the most important growth markets for U.S. agricultural exports. 

Frederic Surls (202) 694-5202 and Dennis A. Shields (202) 694-5331
fsurls@econ.ag.gov dshields@econ.ag.gov

BOX - Agricultural Economy

Marketing Loan Benefits Supplement Market Revenues

Low levels of market prices for many field crops have triggered the
availability of marketing loan benefits to farmers. Total government
marketing loan benefits for 1998 crops have reached $3.8 billion and could
exceed $5 billion for 1999 crops.

Farmers can receive marketing loan benefits in two ways:  through loan
deficiency payments and through marketing loan gains. Generally, whenever
the market price for an eligible field crop drops below its applicable
commodity loan rate, a farmer may opt for revenue-boosting loan deficiency
payment (LDP) in lieu of securing a commodity loan. (Commodity loans
provide interim financing to producers of eligible commodities, regardless
of market price levels; farmers pledge crops as collateral and receive
loans at a specified rate--the loan rate--per unit of the commodity.) The
loan deficiency payment rate equals the difference between the applicable
commodity loan rate and the posted county price for wheat, feed grains, and
oilseeds and the adjusted world price for upland cotton and rice (AO
October 1998). Alternatively, eligible farmers realize a marketing loan
gain by repaying outstanding commodity loans at a per-unit rate--the posted
county price or adjusted world price--that is below the loan rate. 

LDP's and marketing loan gains augment market receipts for eligible field
crops and result in national average per-unit revenues that exceed
season-average prices and commodity loan rates. 

Marketing loan benefits for the 1998 soybean crop illustrate how this
works. Through mid-November 1999, about 89 percent of the 1998 soybean crop
had received a marketing loan benefit--nearly 78 percent had received an
LDP, with an average payment rate of $0.41 a bushel; and more than 11
percent had received a marketing loan gain averaging $1.06 a bushel. The
rest of the 1998 soybean crop did not receive a marketing loan benefit,
although some 1998 soybean commodity loans were still outstanding. Average
benefit rates differ for the two options because a large portion of
1998-crop soybean marketing loan gains was taken in the spring and summer
of 1999 when soybean prices were lower than in the fall of 1998, when most
LDP's were received.

Accounting for LDP's, marketing loan gains, and the portion of the crop
with no marketing loan benefit, the weighted-average marketing loan benefit
for the 1998 soybean crop was about $0.44 a bushel. This benefit augmented
the season-average price of $5 per bushel, raising the average per-unit
revenue for soybeans to $5.44 a bushel, $0.18 above the 1998 national
soybean loan rate of $5.26 per bushel. 

Similar benefits went to other field crops with marketing loan provisions--
wheat, corn, grain sorghum, barley, oats, rice, upland cotton, and several
minor oilseeds. For all of these crops, marketing loan benefits
supplemented market receipts, resulting in average per-unit total revenues
exceeding the respective national loan rates. As with soybeans, marketing
loan benefits for grain sorghum and oats raised the average per-unit
revenue above the loan rate from a season-average price that was below the
loan rate.

Paul Westcott (202) 694-5335 westcott@econ.ag.gov

For more information about marketing loan benefits, see Online Reports,
Price Support Division, Farm Service Agency/USDA at
http://www.fsa.usda.gov/dafp/psd. 

BRIEFS

Specialty Crops
Larger Citrus Crop Expected in 1999/2000

The 1999/2000 citrus crop, buoyed by better weather conditions so far in
both California and Florida, is expected to be 20 percent larger than last
year. Orange and lemon crops are each expected to be up 24 percent, while
tangerine production is forecast to increase 27 percent. In contrast,
grapefruit production is expected to rise just 5 percent as growers reduce
acreage in Florida in response to several years of low returns. Despite the
large gains expected this year for most U.S. citrus crops, orange
production will remain below the 1997/98 record, and the tangerine crop
alone is forecast to reach a record level. 

Freezing temperatures hit California's San Joaquin Valley late last
December, reducing the state's 1998/99 navel crop to less than half the
size of the previous year and cutting the Valencia crop by over a third.
The state's lemon and grapefruit crops, generally grown farther south, were
largely unaffected by the freeze.

Although the period still lies ahead when freezing temperatures are likely
to affect production, the 1999/2000 California orange crop is expected to
be 76 percent larger than last year. This would still be smaller than the
1997/98 crop because navel orange production has not fully recovered. If
the forecast is realized, the supply of oranges should be ample for fresh
use this winter and through mid-2000. Grower prices will likely drop
somewhat from last year but still exceed 1997/98. Consumers should also see
lower prices than last year at the retail level, especially with fresh
California oranges in plentiful supply through next summer. 

California's Citrus Acreage report for 1998--the state's first acreage
report since 1992--shows that acreage has been increasing for most major
citrus crops. Total navel orange acreage increased 13 percent since 1992,
and Valencia orange acreage increased 5 percent. Navels and Valencias are
grown mostly in the San Joaquin Valley, with 52 percent of the state's
navel acreage and 38 percent of Valencia acreage in Tulare County alone. 
Lemon acreage--mostly in Ventura County--increased 12 percent in 1992-98.
Nonbearing acreage of both navel and Valencia oranges accounted for about 6
percent of total 1998 acreage planted--compared with about 12 percent of
the state's lemon acreage.

Florida's orange crop, which is expected to account for 75 percent of U.S.
orange production in 1999/2000, is forecast 14 percent larger than last
year, when the crop was small in both number and size of fruit because of
poor weather conditions during the bloom and growing seasons. Better
growing conditions have improved the outlook for this year's crop. However,
a relatively warm, dry winter and spring in 1999, with only sporadic rain,
led to a longer bloom period from January through May in some parts of
Florida. With an extended bloom period and labor availability already a
problem, growers may have difficulty finding pickers for the late-blooming
fruit. Low quantities of fruit ready for harvest at a given time, and wide
dispersion within a grove, may make it unattractive for pickers to remain,
especially if the delayed harvest overlaps with peak-season harvest of
other fruit or vegetables in the area. 

Most of Florida's orange crop is used to make juice. However, a growing
proportion of the crop is going into making the increasingly popular
chilled, not-from-concentrate (NFC) orange juice, and less into frozen
concentrate. Juice production in 1999/2000 should continue to follow this
trend. Juice production is expected to increase about 12 percent over last
year, but total supply could be about 2 percent below last year, with
beginning stocks at a 5-year low coming into this year's juice production
season. 

Juice processors try to maintain a certain quantity of juice in stock
(reserves for some number of days, based on market movement), so the amount
of juice available for consumption could be even lower, putting upward
pressure on retail prices. Prices may also move higher as processors offer
fewer price-lowering marketing promotions to consumers in an effort to keep
a steady supply of NFC orange juice available throughout the year. However,
promotions could appear even with a relatively short supply as competition
continues between NFC and frozen concentrate, as well as among the three
major brand names.

Florida's grapefruit crop is projected to reach 2.5 million short tons,
down 2 percent from last year. Colored seedless grapefruit should comprise
about 47 percent of the state's grapefruit, with white seedless comprising
much of the remainder and seeded grapefruit grown to a much lesser extent.
Hurricane Irene, which hit Florida's east coast in October, increased
droppage and reduced the overall size of this year's grapefruit crop.

Florida growers have removed acreage from grapefruit production over the
past few years--a response to low prices for both fresh and processing
uses. Grapefruit groves had a larger proportion of late-blooming trees this
year than is the norm, which will necessitate an extended harvest period in
the spring. 

Florida's grapefruit production is expected to be 100-percent utilized for
juice or fresh fruit this year, as it was last year but unlike the previous
2 years. Low juice inventories at the beginning of this season (December
1999) and increased demand for not-from-concentrate grapefruit juice should
drive demand to use all the grapefruit produced in the state this year and
increase grower prices.

A special 1999 Florida grapefruit and tree survey--usually scheduled for
every second year--was conducted by the Florida Agricultural Statistics
Service earlier this year and showed that grapefruit acreage had declined
11,559 acres (9 percent) since the 1998 survey (AO November 1998). White
seedless grapefruit acreage declined the most. Losses were due to several
factors, including grove abandonment for economic reasons, unhealthy groves
being pushed (cleared) and replanted, or sick trees being removed from
healthy groves and not replanted. Acreage loss was greatest in the three
largest grapefruit-producing counties in Florida, which reduced their
grapefruit acreage by 8 percent, accounting for 62 percent of total
grapefruit acreage loss in the state. No Florida county reported an
increase in the number of acres or trees.
Susan Pollack (202) 694-5251
pollack@econ.ag.gov

BRIEFS

Livestock, Dairy, & Poultry
Rising Milk Production Restrains Prices

Gains in milk production appear to be overtaking strong demand for dairy
products as prices slid in recent months. Farm-level milk prices in 1999
are projected to fall an average 7 percent from 1998's record, a very
moderate decline given the large rise in production. Mid-November cheese
prices had plunged almost 45 percent from the late-August record. However,
this drop, like the preceding price peak, may be an overreaction, and
cheese prices may recover slightly. 

July-September milk cow numbers interrupted a fairly constant trend by
posting an unusual increase from a year earlier, even if the rise was only
fractional. Relatively strong returns to milk production over the last 3-4
years have encouraged financially stronger producers to expand and have
modestly slowed the exit of weaker farmers. The most dramatic effect has
been in the West, where recent strong returns, ample supplies of alfalfa
hay, and lower priced concentrate feeds have supported a substantial
increase in milk cow numbers.  
Summer milk production rose more than 3 percent from a year earlier. Milk
per cow was boosted 3 percent by very favorable milk-feed price ratios,
although the gains came from a relatively weak quarter of 1998. Producers
had ample incentive to push milk per cow with additional feeding of grains
and other concentrates. Mediocre-quality alfalfa hay was plentiful and much
cheaper than in recent years, and significant weather stress was relatively
uncommon. 

Milk output expansion is expected to continue through 2000. Ample feed and
the returns of recent years may sustain the growth, although lower milk
prices and uncertainties related to government program changes are
projected to slow production increases slightly. Milk production is
expected to grow 2 percent in 2000, following a 3-percent rise this year. 

Sales of dairy products, particularly cheese, continue to grow briskly
despite sharply higher prices since mid-1998. Most of this demand strength
can be attributed to brisk growth in the general economy and in consumer
incomes. However, recent demand growth may have another catalyst. Dairy
demand in 1996 and 1997 did not meet expectations generated by overall
economic growth, and demand during the last 2 years may be catching up with
economic growth that spans a longer period. 

Dairy demand should stay strong so long as the economy continues to grow
and consumer spending is brisk. During the rest of 1999 and in 2000,
commercial use of dairy products is expected to grow substantially at
prices above most of those in the 1990's. Restaurant use, sales of premium
products using dairy ingredients, and sales for entertaining (such as
cheeses and dips) may be particularly strong. 

Nonfat dry milk contracts under the Dairy Export Incentive Program (DEIP)
were heavy this spring and summer. Essentially all of the reallocated
tonnage from earlier years has been filled, plus more than half the
allocations for the July 1999-June 2000 year. Many recent bids have been
for smaller bonuses (subsidies) than earlier in the year, even though
domestic and international prices have changed little. Some buyers who
prefer buying from the U.S. may have wanted to ensure getting their share
of this year's rapidly dwindling DEIP allocations. 

Brisk DEIP exports were not enough to clear the surplus of nonfat dry milk,
and sales to USDA under the price support program continue. During the
marketing year that ended in September, net government purchases totaled
172 million pounds. Total net removals for price support, including DEIP
removals, amounted to about 450 million pounds. The price-support purchase
program, once scheduled to end with 1999, was recently extended for 1 more
year. The nonfat dry milk surplus in 2000 probably will be similar to this
year's with sizable removals of nonfat dry milk but very little removals of
cheese or butter. 

In the wake of substantial growth in both milk production and demand, large
swings in milk and milk product prices have been triggered this year by
relatively minor adjustments in pipeline stocks and price expectations.
Cheese prices shot from about $1.20 per pound (40-pound blocks of Cheddar
on the Chicago Mercantile Exchange) in mid-May to $1.97 in late August,
mostly because of rising cheese sales and concerns about inadequate
pipeline stocks to meet second-half needs, augmented by fears of low
warehouse stocks. Memories of 1998 experiences with short supplies and high 

prices may have prompted some buyers to be particularly aggressive about
ensuring full supplies in advance. Once the concerns started to ease,
cheese prices dropped to mid-November's $1.12. 

Dairy production gains likely will exceed demand growth during the
remainder of 1999 and into early 2000, generating farm milk prices much
below those of a year earlier or last summer. However, prices may remain
volatile. The price decrease in 2000 probably will be larger than 1999's,
with prices possibly dipping 8 to 12 percent. First-half prices in 2000
will be somewhat weak. During the second half of 2000, prices are forecast
to recover as increases in milk production start to abate and demand growth
remains firm.  
James Miller (202) 694-5184
jjmiller@econ.ag.gov

BRIEFS

Ag Industry Snapshot
Geographic Concentration of U.S. Dairy Industry

[Map included in pdf and printed version]

The West has seen a fairly steady increase in milk cow numbers during the
last 20 years, unlike the U.S. overall, which has registered a decline.  A
warm, dry climate and large, dependable supplies of high-quality forage
allow many parts of the West to enjoy a cost advantage in milk production.  

But perhaps more importantly, the region pioneered operations with very
large milk cow herds and with tasks divided into highly specialized jobs,
resulting in substantial production efficiencies.  The approach is being
successfully imitated, with some modification, in the northern U.S. 
Nevertheless, small northern farms continue to leave the industry as
farmers find it difficult to earn acceptable family incomes.  Farms in the
South have had problems competing because of the stress of a humid, hot
climate and declining relative costs of transporting milk from the North.

COMMODITY SPOTLIGHT

Abundant World Rice Supplies Pull Down Prices

International rice prices have declined sharply this year in the face of
large supplies in nearly all exporting countries and weaker global demand.
Price dropped as major exporting countries produced record or near-record
crops and as production rebounded in major importing countries in Southeast
Asia and Latin America--two regions severely impacted by the 1997/98 El
Nino. Weak Asian currencies, Brazil's 1999 currency devaluation, and
historically low prices for other grains have also tilted trading prices
downward.

After spiking to a record 27.3 million metric tons (milled basis) in 1998,
world rice trade is projected to fall 11 percent this year and to contract
nearly 5 percent in 2000. While global rice trade in 2000 would be more
than 4 million tons below the 1998 record, it would still be well above
pre-1998 levels.

Because the international rice market is "thin"--i.e., only a small share
of production is traded  annually--small changes in trade can cause large
price fluctuations. Only about 6 percent of global rice production is
traded annually, well below the traded share of soybeans (25 percent),
wheat (nearly 20 percent), and coarse grains (around 12 percent).
Segmentation of rice trade by type and quality magnifies this "thinness."

For the U.S. rice sector, international market events have a strong impact,
as exports comprise more than 40 percent of U.S. production. The U.S. is
typically the third- or fourth-largest exporter of rice--behind Thailand
and Vietnam--accounting for 12-13 percent of global trade.

International Rice Prices
Drop Sharply

When Thailand, the world's largest exporter, devalued its currency in the
summer of 1997, international rice prices--quoted in U.S. dollars--dropped
sharply. The economic crisis rapidly spread across much of Asia, pushing
prices lower. By that fall, other Asian exporters lowered prices to remain
competitive, and U.S. prices fell slightly. International prices dropped
steadily until the end of 1997, when Indonesia and the Philippines began
importing massive amounts of rice, supporting international prices through
the summer of 1998.

In January, 1999, with massive El Nino-driven sales to Indonesia and the
Philippines over, international prices for milled rice--measured by Thai
100-percent grade B--had dropped from $330 per ton last fall to about $300.
By late August, weaker world trade had pushed prices down further to less
than $250. A month later, prices had dropped to $218 per ton on
expectations of bumper harvests in Asia, a near-halt to purchases by
Indonesia--the world's largest importer--and a weaker Thai baht. In early
September, Indonesia announced a new policy temporarily limiting private
imports to higher quality rices, effectively halting new private purchases.

Prices rose slightly in October and early November--to $229 per ton--as the
baht strengthened, but global supply and demand fundamentals remain
bearish. Prices are still the lowest since summer 1994. With global ending
stocks projected at nearly 60 million tons--the largest on record--there is
little expectation of price strength for the remainder of 1999/2000.

Top-quality U.S. southern long grain milled rice is currently quoted at
about $300 per ton, down from $386 in January and the lowest since spring
1995. Several large food aid purchases late in the 1998/99 marketing year
have slowed the fall in U.S. prices in the face of weaker world trade and
falling international prices. U.S. rice typically sells at a small premium
to Thai rice. While the difference between Thai and U.S. rice prices--about
$70 per ton--has contracted since the spring and summer, it is still large
enough to make U.S. rice uncompetitive in price-sensitive high-quality
markets such as South Africa and the Middle East.

Asian, Latin American Imports Drop 
As Production Rebounds...

Indonesia, Bangladesh, the Philippines, and Brazil--the four largest rice
importing countries--are responsible for the bulk of the 3-million-ton drop
in projected global rice imports in 1999. In 2000, their imports--except
for Brazil's--are projected to drop further. These four countries had
imported record amounts of rice in 1998, almost exclusively indica, which
has borne the brunt of this year's weaker trade. El Nino's impact on
1997/98 crops drove record-high imports in Indonesia, the Philippines, and
Brazil, while severe flooding in summer 1998 spurred record imports in
Bangladesh. 

In 1998/99, production in both Southeast Asia and Latin America rebounded
more strongly than expected from El Nino. The large crop expansion in
Southeast Asia was due primarily to higher yields, while in Latin America,
higher domestic prices encouraged greater plantings, and extremely
favorable weather promoted substantial yield recoveries.

Indonesia's 1998/99 rice crop (harvested in 1999), rose more than 3
percent, pulling projected imports down 2.2 million tons from 1998's 6.1
million--the largest amount of rice ever imported in a year by a single
country. In the Philippines, production rose nearly 3 percent, pulling 1999
imports down 45 percent to 1.2 million tons. In South Asia, Bangladesh's
1998/99 crop--up 1 percent from a year earlier--was record high, resulting
in a 700,000--ton drop in imports to 1.8 million. Record imports in 1998
had resulted in larger carryover stocks, a major factor in the 1999 drop in
imports.

For 1999/2000, record or near-record crops are projected for these three
countries. As a result, Indonesia's imports are projected to drop 23
percent to 3 million tons, the Philippines' to fall 25 percent to 900,000
tons, and Bangladesh's to drop 800,000 tons to 1 million tons.

Overall, Asian rice imports are projected to drop 26 percent in calendar
1999 to 9.8 million tons, declining 18 percent in 2000 to 8.1 million tons.
South and Southeast Asia account for nearly all of the decline. Partially
offsetting the big drop in South and Southeast Asia are larger purchases by
Japan and South Korea, which are required to increase imports annually as
part of their WTO commitments. Both countries import mostly japonica rice.

In Latin America (including Mexico), total rice production in 1998/99
rebounded 26 percent to a record 14.8 million tons. Brazil surpasses all
other non-Asian nations in rice production, consumption, and imports.
Brazil's 1999 crop (harvested in March and April) jumped 34 percent, making
it the country's largest in over a decade and leading Brazil to cut 1999
imports by 42 percent to a projected 850,000 tons. Larger crops are also
responsible for lower imports by Colombia, Ecuador, and Peru.

For 1999/2000, production in Latin America is projected to drop 7 percent
as yields return to more normal levels and lower prices induce a drop in
area planted. The smaller crop explains a projected 9-percent increase in
Latin American imports to 3 million tons in 2000, the second-highest on
record. Brazil's  imports, rising 250,000 tons to 1.1 million tons, account
for the bulk of the projected increase. Mexico and Cuba are also projected
to import more rice. 

...While Export Supplies Are
Abundant Worldwide

Coinciding with this year's substantial reduction in global import demand
are abundant supplies of rice worldwide. A situation of record or
near-record crops in nearly all exporting countries virtually guarantees
adequate supplies for the level of global imports expected, as well as
adequate buffer stocks in the event of unexpected production shortfalls in
some areas. 

Asia--with five of the top six exporting countries--typically accounts for
more than 70 percent of global rice exports and supplies nearly all indica
rice imports in the continent. All produced abundant rice crops in 1998/99.
India, Vietnam, and Pakistan harvested record or near-record crops.
Although the rice crop in Thailand--the world's largest exporter of
rice--declined slightly, it was just 3 percent below the previous year's
record high. Despite severe flooding in 1998, China's 1998/99 crop
(harvested in 1998), was still its second highest to date. For 1999/2000,
record or near-record crops are projected again for all five countries. The
result will be more-than-adequate export supplies.

Asia's total 1999 rice exports are projected to drop 13 percent from 1998's
record 21 million tons, with India and China accounting for most of the
reduction. India, having exported a record 4.5 million tons in 1998, is
projected to sell only 2.75 million this year, due mostly to a large drop
in Bangladesh's imports, not to lack of supplies. China's 1999 exports are
projected to drop 1.2 million tons from last year's abnormally high level
to a more typical 2.5 million tons. Thailand is projected to export 6.1
million tons in 1999, down 7 percent from 1998's record but still among the
largest on record. Vietnam's exports are projected to rise 11 percent to a
record 4.2 million tons, a result of a bumper crop and aggressive sales
outside Southeast Asia. Pakistan is projected to export a record 2 million
tons in 1999, up 11 percent from 1998. 

For 2000, Asia's rice exports are projected to drop 7 percent to 16.8
million tons, still the third highest on record, with weaker exports from
India accounting for most of the decrease. India's exports are projected to
drop 1.25 million tons to 1.5 million, again a result of weaker imports by
Bangladesh.

Exportable supplies held by non-Asian major rice exporters are abundant as
well. Argentina and Uruguay produced record crops in 1998/99 (harvested in
1999), a result of greater area and record yields. Record plantings and a
very high yield drove Australia's 1998/99 crop (harvested in 1999) to a
record as well. The 1998/99 U.S. crop (harvested in 1998) was also one of
the biggest to date.

In 1999, Argentina's exports are projected at 525,000 tons, down 11 percent
from its 1998 record, due solely to weaker Brazilian imports. The U.S. is
projected to export 2.75 million tons of rice in 1999, down 13 percent from
a year earlier, also due mainly to much lower shipments to Brazil. However,
exports are increasing for some countries. Uruguay is projected to export a
record 725,000 tons in 1999 and Australia a record 700,000 tons.

For 1999/2000, area contractions and a return to normal yields underlie
projections of lower production in Argentina and Uruguay. Despite
significantly smaller crops, both countries are projected to export only
slightly less rice in 2000. Australia's crop is projected to drop 4
percent, but exports next year are projected to remain at this year's
record level. For the U.S., a record crop and lower prices are behind
expectations of higher exports in 2000.

Imports Expected Higher for
Middle East, Sub-Saharan Africa

In contrast to weaker imports in Asia and Latin America, imports by the
Middle East and Sub-Saharan Africa are expected to rise in 1999 and 2000. A
severe drought this year in the Middle East is responsible for expanding
imports by Iran.

Iran's imports are projected to reach 650,000 tons in 1999--up 150,000 from
a year earlier--and to rise to 900,000 tons in 2000. Iran--the world's
largest consistent importer of high-quality long grain rice--was a top
market for U.S. long grain rice before the 1995 trade embargo. In April
1999, the U.S. lifted the embargo but kept some restrictions on sales,
allowing exports on a case-by-case basis with an export license but
prohibiting U.S. government assistance of sales through credit guarantees.
Iran, has not purchased any U.S. rice since lifting of the embargo.

Turkey, whose 1999/2000 crop is forecast down slightly from a year earlier,
is projected to import 350,000 tons of rice in 2000, up 40 percent from
1999. Turkey consumes primarily japonica rice, and on average more than
half of Turkey's rice consumption is imported. The U.S. is the largest
supplier of rice to Turkey; Australia, Egypt, and the European Union are
also major suppliers.

West Africa and the Republic of South Africa account for the bulk of
Sub-Saharan Africa's rising imports, projected to expand nearly 9 percent
in 1999 to a record 4.3 million tons (including food donations), due
largely to lower international prices and smaller production. Lower prices
not only increase rice demand in commercial markets, they also increase the
volume of rice that can be purchased and shipped as food aid for a given
dollar amount of government program funding. In 2000, Sub-Saharan Africa's
imports are projected to drop slightly as production posts a 7-percent
increase.

Except for shipments to the Republic of South Africa, nearly all U.S.
exports to Sub-Saharan Africa are shipped under food aid programs which
typically purchase lower quality rices. The Republic of South Africa was
once a top market for U.S. rice, but India has captured a growing share of
this expanding market in recent years.

Weaker global trade, lower international prices, and near-record U.S.
plantings contributed to the sharp drop in U.S. farm prices since spring,
especially for long grain rice, the dominant type grown in the U.S. By late
summer, the onset of a record 1999 U.S. rice harvest had weakened prices as
well.

Last March, long grain farm prices in the Delta were quoted around $7.75
per cwt. By September, prices had dropped to about $5.50 and are currently
about the same or slightly lower. For 1999/2000, the U.S. season-average
farm price is projected to drop about a third to $5.50-$6, with the lowest
midpoint since 1986/87.

In 1997/98 and 1998/99, U.S. farm prices were supported largely by record
exports of rough (unmilled) rice, mostly long grain shipments to Latin
America (the U.S. is the only major exporter of rough , or unmilled, rice).
Strong crop recoveries in Latin America, especially in Brazil, have
significantly reduced U.S. exports to the region.

Total U.S. rice exports are projected to drop 2 percent in 1999/2000, with
a decrease in rough rice exports offsetting an increase in milled rice
exports. Rough rice exports--which have expanded in the 1990's--are
projected to drop 38 percent to 0.52 million tons (milled basis).
Projections of a 14-percent increase in milled rice exports to 2.16 million
tons are based on expected lower prices. More competitive U.S. prices will
generate additional demand for U.S. rice in world markets, and the lower
prices will increase the quantity of rice shipped as food aid.  
Nathan Childs (202) 694-5292
nchilds@econ.ag.gov 

BOX - Commodity Spotlight

Rice Marketing Years Vary by Country

Cropping patterns vary by country and are largely determined by climatic
conditions. Areas in or near the tropics are often able to grow two or
three rice crops in a 12-month period.

To report and forecast production of rice worldwide, USDA's Foreign
Agricultural Service designates 12-month marketing years for individual
countries based on when the bulk of the annual harvest impacts U.S.
exports. Supply and use is then aggregated across countries, with the
international marketing year spanning up to 18 months the time between the
first month and the last month of the various individual marketing years.

For a single country, harvest in marketing-year 1998/99 may occur in
calendar-year 1998, 1999, or in parts of both years. For example, China
harvested three rice crops--early, intermediate, and late--in calendar-year
1998, which is the 1998/99 marketing year for China. The U.S. 1998/99
marketing year began in August 1998, just prior to the bulk of the harvest.

With marketing years varying by country, world rice trade is typically
reported and analyzed on a calendar-year basis.

BOX - Commodity Spotlight

An International Rice Medley

Many types of rice are traded globally. Indica rice accounts for more than
75 percent of total trade. Indica is grown in tropical or warm climates and
cooks fluffy and dry. Japonica rice, grown in temperate climates, accounts
for 10-12 percent of trade. Japonica cooks moist and clingy. In the U.S.,
southern long grain is indica rice, California medium grain is japonica.
Basmati and jasmine are aromatic rices, together accounting for almost 9
percent of trade. Finally, glutinous rice, primarily produced in Southeast
Asia, accounts for less than 1 percent of trade. When cooked, glutinous
rice loses its shape and becomes very sticky.

[Pdf and printed versions contain table indicating leading exporters' share
of world trade, primary rice type they trade, and primary destinations.]

BOX - Commodity Spotlight

Rice Yearbook
Full report available in December
Summary available now at
usda.mannlib.cornell.edu/reports/erssor/field/rcs-bby/


WORLD AGRICULTURE & TRADE

The Long-Term Boom in China's Feed Manufacturing Industry

China's rapidly expanding feed manufacturing sector is now second only to
the U.S. industry. After growing at an average annual rate of 15 percent
since 1990, output of manufactured feed reached 66 million tons in 1998.
Feed mills are becoming bigger and more efficient as new, higher capacity
mills replace old, small, inefficient ones. New mills often use technology
and management skills acquired from foreigners in joint ventures and
adapted to local needs. 

China's feed manufacturing industry has developed as the needs of its
animal producers have evolved. Livestock production, still largely a
sideline, with household members feeding mainly farm byproducts to a few
animals, is gradually shifting to a full-time occupation, using purchased
feedstuffs for a relatively large number of animals. Producer adoption of
manufactured feeds allows transition to a larger scale of operation, and
also facilitates production of higher-quality meat desired by consumers
with rising incomes.   

China has emphasized self-sufficiency in grain production. It may continue
to resist importing complete feeds, although it is likely to expand imports
of nongrain feed ingredients, such as protein meals and feed additives.
From 1992 to 1998, soy meal, fishmeal, feed grade lysine, and methionine
were among the largest import items for the feed industry. 

Feed Industry Development 
Reflects Policy Shifts

China did not have a modern, mechanized feed industry when the Communist
Party took control of the mainland in 1949. Shortly after feed
manufacturing did begin, its development was arrested by a series of
disastrous economic policies. 

In the mid-1950's, after consolidating their power, the country's Communist
leaders collectivized agriculture. Central authorities planned grain
production, and Grain Bureaus were established to purchase, mill, and
retail grain and grain products, primarily for urban and military use.
Large rice mills were constructed in urban areas, increasing the
availability of rice bran for feed use. Simple hammer mills to crush feed
grains were erected in Guangdong, the province next to Hong Kong on China's
southern coast. 

But from 1958 through 1975, China endured a period of radical political
campaigns that severely disrupted economic growth and development. In the
Great Leap Forward (1958-62), communal farms were consolidated into huge
entities and cultivated by labor gangs, under the direction of local
officials who often knew little about farming. A large portion of the
harvest was procured by the government for use in urban areas. This system
destroyed farmers' incentives to work and lowered production so much that
an estimated 20 to 30 million people died of starvation. Largely because of
the paucity of feed, livestock product output plummeted. When animal
production revived after the Great Leap Forward, traditional feeding
methods and technologies still predominated. Recurrent political upheavals,
particularly the Cultural Revolution (1965-75), continued to disrupt
agriculture and stifle the feed industry. 

Over the decade of 1976 to 1985, China's leaders shifted their basic policy
from heavy reliance on central planning, limited involvement with foreign
trade, and an emphasis on self-sufficiency, turning instead to greater
reliance on markets, more involvement in world trade, and a willingness to
adopt ideas, technology, institutions, and equipment from the rest of the
world. The resultant changes in rural institutions and in the general
economy supported rapid growth of livestock raising, which quickly expanded
the demand for manufactured feed.

People's Communes, which had previously exerted rigid control over all
aspects of rural life, were disbanded and replaced by township governments
and village economic cooperatives. Instead of being made to work in labor
gangs on communal fields, farmers were allocated plots of land on long-term 
lease, granted much greater flexibility in their economic decision-making,
and encouraged to maximize their income. These changes at the farm level,
besides privatizing crop production, enabled rural families to earn and
retain profits from raising livestock. 

Marketing systems also changed. Previously, the state was responsible for
purchasing most agricultural products. With the reforms, rural and urban
markets reopened, giving farmers a source for purchases of feed and an
outlet for marketing animal products. After prices were decontrolled as a
part of the reforms, producers were motivated to create and sell higher
quality products at a premium. 

Moreover, changes in the general economic system supported both a growing
demand for animal products and a growing supply of manufactured feed. Rural
incomes grew at a moderate rate and urban incomes increased rapidly.
Consumers used their higher earnings to purchase more animal products,
stimulating demand for processed feed. Meanwhile, removal of trade and
travel barriers permitted feed manufacturers to import key ingredients,
technology, and equipment. In the more relaxed atmosphere of reform,
technicians from China were allowed to travel abroad to become familiar
with current feed milling technology, and foreign firms were invited to set
up modern feed mills in partnership with Chinese entities. 

China's feed industry, practically nonexistent in 1975, grew within two
decades to one of the world's largest producers. The central government
placed development of the feed industry high on its agenda, with twin goals
of augmenting rural incomes and improving the nutrition of China's
citizens. The government played an active role, by formulating annual and
long-range plans for the feed sector, building and operating thousands of
its own feed mills, granting tax breaks and investment funds to other
mills, and encouraging foreign firms to invest in joint ventures.
Manufactured feed output increased from near zero in 1975 to over 66
million tons in 1998, expanding parallel with rapid increases in pork and
poultry output. 

Private Ownership of 
Feed Mills Expands

Government mills are the most direct form of the state's role in China's
feed industry. At the end of the 1980's, an impressive array of government
agencies operated over 60 percent of all feed mills. In 1997, despite a
rapidly rising proportion of private mills, government agencies still ran
37 percent of China's feed mills, according to China's Ministry of
Agriculture. (Unfortunately, almost no information is available on output
shares by type of mill ownership.) 

Within the Ministry of Agriculture, mills are operated primarily by the
Departments of State Farms (to supply state farms), Aquaculture (to supply
fish farms), and Animal Husbandry. The Ministry of Commerce, specializing
in the production of compound feeds, operated about as many mills as the
Ministry of Agriculture through the 1980's, but has since fallen behind.
Smaller numbers of feed mills are run by the Ministry of Chemicals and the
Bureau of Pharmaceuticals (to produce feed additives) and by the Ministry
of Mechanization, often in partnership with other entities, to gain
practical experience in manufacturing feed milling equipment. The Ministry
of Foreign Trade has cooperated with foreign firms in establishing joint
venture feed mills, particularly in the 1990's. Military units commonly
operate farms and livestock feeding operations to provide food for their
own personnel. The number of military feed mills expanded from 2 in 1991 to
a peak of 50 in 1996. Cooperative feed mills were formed in the early
1980's as communes disappeared. These mills in townships and villages,
often called Township-Village-Enterprises (TVE's), are collectively owned
by local farmers. The cooperatives are nominally supervised by officials
from the Ministry of Agriculture. But in practice, local officials oversee
their operations. Many small, inefficiently run TVE mills succumbed to
competitive pressures in the 1980's. The survivors had managers who were
adept at organizing efficient, productive units. In 1997, 3,770 TVE and
non-TVE cooperative mills comprised 34 percent of China's feed mills. 

Privately owned and joint-venture mills are increasing as well. Relatively
few mills, perhaps 5 percent, were privately owned and managed at the end
of the 1980's. By 1997, privately owned mills and public/private joint
ventures accounted for 29 percent of all mills. The 3,316 mills in this
category included 221 domestic private mills and 275 joint ventures between
private foreign companies and China's government agencies. 

Joint venture and foreign-owned firms--mainly from Thailand, the U.S.,
Japan, Great Britain, and the regions of Hong Kong and Taiwan--have
significantly influenced state and cooperative feed mills by introducing
new feed formulas, milling techniques, management methods, and marketing
practices. By sharpening competition within the feed sector, foreign firms
and joint ventures created an environment in which both government and
cooperative mills had strong incentives to become more efficient. 

Since China's government intervenes in both domestic and international
grain and soybean trade, some joint venture and foreign-owned feed mills
have had difficulty finding reliable supplies of raw materials. Because of
these uncertainties, and also to earn higher profits by using their
specialized knowledge, many foreign-owned and joint-venture feed mills have
focused on manufacturing premixed additives. They sell these expensive,
high-tech ingredients to local feed mills and large-scale farms, to be
blended with  ilseed meals and grains. 

Feed Mills Specialize 
By Livestock Sectors

China is the world's largest swine producer. Pork is by far the most
popular form of meat and constitutes 67 percent of the country's meat
production. In the early 1980's, almost all manufactured feed went to hogs.
As poultry and aquaculture production expanded, the share of compound feed
mixed for hogs fell to 56 percent in 1990 and 42 percent in 1998. However,
the tonnage of hog feed produced is still increasing. In 1998, compound
feeds manufactured for hogs reached a record 23.4 million tons. Feed mills
typically are situated in animal producing areas because China's
transportation and related infrastructure are poor. Hog feed manufacturing,
for instance, is concentrated in the Yangtze River basin. 

China's poultry industry expanded rapidly in the late 1980's and 1990's. In
response, mills stepped up production of compound feed for egg layers and
for broilers. Total feed manufacturing for poultry increased from 10.5
million tons in 1990 to 26.6 million tons in 1998, and from a 40-percent
share of compound feed in 1990 to a 48-percent share in 1998. Mills making
feed for layers are concentrated in China's northern plains, while those
specializing in broiler feed production are concentrated in coastal areas. 

China has the world's largest freshwater aquaculture industry, which
absorbed 6.6 percent of the country's total compound feed output in 1998.
Fish feed production was 3.7 million tons in 1998, having grown at an
average annual rate of 18 percent since 1990. Fish feed manufacture and (to
a lesser extent) aquaculture are concentrated in the Yangtze River Delta. 

Small quantities of compound feed go to ruminant animals. Dairy cows
consume around 3 percent of China's compound feed. Beef cattle, sheep, and
goats mostly graze, and consume very little manufactured feed. 

Feed is marketed primarily through local stores, although some mills also
sell directly to large livestock operations. Differences in ingredient
composition across brands are minor, and feed stores carry multiple brands.
Although feed manufacturers do not own retail outlets, some large feed
mills conduct training seminars for farmers, pointing out the benefits of
feeding a balanced, nutritious diet. The staff of local feed stores,
supplemented by people running mill seminars, have largely replaced
government farm extension agents in explaining feeding technology. 

Many mills use sales representatives to broker sales contracts with local
feed stores, and sometimes with major livestock producers, offering a
comprehensive service plan with credit terms. Because of recent, steep
declines in prices for animal products, collecting feed payments is a
growing problem. Since most local feed stores and most farmers lack access
to bank credit, customers facing financial difficulties are often allowed
an extended payment period. 

The two leading nationally distributed feed brands are CP (a joint venture
with a Thai feed manufacturer) and the Hope Group (a domestic company
owning many mills). The combined market share of these two feed companies,
however, is still small probably less than 15 percent in 1998. 

Joint-venture and foreign-owned companies have complained about pirated or
falsified labels. Shoddy counterfeits damage mills' reputations as well as
sales. A set of Feed and Feed Additives Regulations that went into effect
on June 22, 1999 should help the industry weed out substandard products and
falsified labels. 

China to Import More
Coarse Grains & Oilseeds

In 1998 and 1999, repercussions of the Asian financial crisis reduced
demand for China's exports abroad. Meanwhile, cutbacks in the government
bureaucracy and ongoing privatization of the still predominantly state-run 
manufacturing sector worsened underemployment and unemployment at home.
Consumer uncer tainty contributed further to a drop in domestic demand, and
prices fell for many products. In particular, meat prices fell--especially
for pork, which cost about half as much in April 1999 as a year earlier.
Over the first 6 months of 1999, China's total output of compound feed was
an estimated 10-percent lower than in the first half of 1998, due almost
entirely to a sharp decline in hog feed production. 

Despite these short-term setbacks, the medium- and long-term outlooks for
China's feed manufacturing sector remain bright, as do prospects for
greater U.S. exports of feed ingredients. Several factors underlie this
optimism. 

*  China's economy, hard hit by the Asian economic crisis, now appears to
be in the early stages of recovery. 

*  China's low per capita consumption of animal products, even compared to
countries with similar average income levels, leaves ample room for growth
in demand, and for a parallel expansion of its feed sector. 

*  China's feed manufacturers are sophisticated. Alone or in joint ventures
with foreign firms, government and private mills already produce a wide
variety of feed types and feed ingredients. 

*  The newly implemented Feed and Feed Additives Regulations, which
emphasize labeling, grades and standards, and orderly marketing, will help
smooth the industry's expansion by weeding out substandard products and
falsified labels. 

*  The feed industry has the potential to expand rapidly, because China
manufactures--and even exports--feed milling machinery.

For U.S. exporters of oilseeds, oilseed meals, and feed additives, medium-
and long-term prospects remain positive as China's livestock and feed
sectors prepare to respond to growing consumer demand. Expansion of its
feed manufacturing sector will require China to import more oilseed meals
and more oilseeds for crushing. China's meal production from domestically
grown soybeans is currently about 6 million tons, far short of the
country's estimated demand for 20 to 30 million tons of oilseed meals
annually over the next decade. China also produces about 1.7 million tons
of meal from rapeseed and cottonseed, but toxic components naturally
present in these products limit their use for feeding animals. 

China may become more willing to import coarse grains too, despite its
continuing reluctance to import bagged feed. The country is now eliminating
price supports for low-quality grains, having discovered the enormous cost
of storing surpluses. China's recent exports of feed-quality grain
represent the disposal of old, deteriorating grain originally purchased for
China's food security stockpiles, rather than feed grain production in
excess of domestic demand.  

Frederick W. Crook (202) 694-5217, Hsin-Hui Hsu (202) 694-5224, and Michael
Lopez (202) 694-5197fwcrook@econ.ag.govhhsu@econ.ag.govmlopez@econ.ag.gov

BOX - World Agriculture & Trade

A nutritionally complete feed includes three components:  energy sources
(typically coarse grains), protein sources (typically oilseed meals), and
additives (vitamins, minerals, and drugs). As classified in China's
statistical publications, compound feed is a nutritionally complete blend
of all components, concentrate feed contains protein sources and premixed
additives, and premix consists of additives combined with an edible binder
to make them easier to blend uniformly. 

Shares of these feed types changed over the 1990's. Initially, China's feed
mills produced compound feeds and little else. In 1998, compound feed
production reached a record 55.7 million tons, although its growth rate had
slowed. Little concentrate feed was manufactured in the early 1980's, but
by 1990 China's feed mills were producing more than half a million tons.
Output continued to expand rapidly, reaching 8.9 million tons in 1998. 

China began to develop a premix industry in the 1980's. At first it grew
very slowly, while the country continued to import many additives that it
could not manufacture at a reasonable cost. As manufacturers gained
experience and skills, premix output reached 200,000 tons in 1990 and about
1.4 million tons in 1998. 

RISK MANAGEMENT

Demand for Yield & Revenue Insurance Products

[This article is based on a forthcoming ERS report and completes
Agricultural Outlook's 1999 series on risk management.]

Rapid expansion has occurred in the number of federally backed insurance
products offered to farmers since the 1996 farm legislation. Although
federally subsidized insurance has been a part of the government's farm
program for over a half century--yield-based insurance was available as
early as 1938 for selected crops in selected locations--crop insurance was
not widely accepted by farmers until recently. Prior to 1996, commodity
programs shielded agriculture from some of the risks stemming from weather
and markets, lessening the need for crop insurance. Some researchers also
cite the frequent use of Federal ad hoc disaster assistance payments as a
disincentive to purchasing crop insurance (AO August 1999). 

However, the demand for crop insurance increased in the last few years due
to higher Federal insurance premium subsidies, as well as the introduction
of several new revenue insurance products that increase farmers' choices
and that some operators find  more attractive than crop-yield insurance
alone. The array of insurance products currently available to producers is
growing, and their use as a risk management tool is widening. 

In Iowa, for example, three revenue insurance products--Crop Revenue
Coverage (CRC), Income Protection (IP), and Revenue Assurance (RA)--were
first offered in 1996-97. Also available were to the more traditional
yield-based products Multiple Peril Crop Insurance (MPCI), which includes a
minimum catastrophic coverage (CAT), and the Group Risk Plan (GRP). (See
page 18 for descriptions of insurance products.)

After just 3 years, acreage covered under the revenue insurance products
accounts for more than half of insured acres for corn and soybeans in Iowa.
In 1999, revenue insurance choices continue to expand with the introduction
of two new products. Group Risk Income Protection (GRIP) adds a revenue
component to GRP area-yield insurance, and Adjusted Gross Revenue (AGR)
offers coverage on a whole-farm rather than on a crop-by-crop basis (AO May
1999).

At issue with regard to farmers' participation in insurance markets are a
number of questions. What factors are driving farmers toward these new risk
management tools?  How do farmers decide among different insurance
products? Can the increase in farmers' demand for insurance, especially for
the new revenue insurance products, be sustained? Addressing such questions
can be a key step in anticipating the demand for yield and revenue
insurance products and the potential for growth in a more market-oriented
policy environment.

USDA's Economic Research Service (ERS) has examined the demand for yield
and revenue insurance products among corn and soybean producers who
purchased insurance in Iowa, where a range of insurance products was
offered to farmers in 1997. Using 1997 data collected by USDA's Risk
Management Agency (RMA), the study analyzed the role of farmers' risk
characteristics, farm income level, and the cost of insurance in making
decisions on insurance purchases. This is the first attempt to analyze
farmers' demand for crop and revenue insurance in the post-1996 Farm Act
policy environment, in which farmers are offered multiple insurance
products. 

The Risk Management Agency maintains records of all individual farmers who
buy federally backed crop yield or revenue insurance from private insurance
companies. About 80,000 insurance records contain 10 years of yield history
and information on coverage under four insurance plans: MPCI, RA, and CRC
at coverage levels of 50 through 75 percent, and GRP at up to 90 percent.
IP was not included in the analysis for lack of sufficient data; only 50 IP
corn and soybeans policies were sold in Iowa in 1997. GRIP and AGR did not
exist in 1997.

To analyze demand for crop insurance, ERS developed a model based on three
explanatory factors that influence a farm operator's decision to buy an
insurance contract, (type of product and extent of coverage):

*  Risk level measures the producer's level of yield or revenue risk. Yield
risk--based on 10 years of yield records--is calculated as the probability
of yield falling below the insurance product's guaranteed level. Similarly,
revenue risk--based on 10 years of yield records and corresponding average
marketing-year prices--is calculated as the probability of revenue falling
below the guaranteed level. The probability measure is based on both the
mean and variance of yield or revenue--an indicator of volatility for an
individual farm.

*  Level of income or size of operation is an indication of the amount of
revenue at risk, along with the operator's ability to pay for insurance or
toself-insure against loss. Level of income is defined as the cumulative
sum of savings over the past 10 years, using gross revenue and an assumed
savings rate of 10 percent. This variable is directly proportional to the
size of operation.

*  Cost of insurance, captured by premium per dollar of liability (maximum
potential indemnity or value of the insurance contract if the producer
loses an entire crop), is total premium (including subsidy) divided by
total liability.

These three factors are categorized into three ranges--low, medium, and
high. The model then determines how these factors influence the choice of
alternative yield and revenue insurance products.

The results reveal a strong relationship between risk level and choice of
insurance contract. Farm operators with a higher risk of yield or revenue
falling below the guaranteed level are more likely than low-risk farmers to
have chosen higher coverage contracts. High-risk farmers, compared with
low-risk farmers, are more likely to prefer revenue insurance (CRC and RA)
over yield insurance (MPCI). If given a choice between only GRP and MPCI,
high-risk farmers are more likely to prefer MPCI, which is based on
individual yield history rather than county average yield.

Another way to see how risk and other factors relate to product choice is
to calculate odds ratios--the odds of choosing one insurance product versus
another. Comparing the odds of choosing CRC, RA, and GRP relative to MPCI
for farmers with different risk levels indicates that high-risk farmers are
nearly twice as likely as low-risk farmers to choose CRC or RA over MPCI.
In general, analysis of the odds ratios indicates that high-risk farmers
prefer revenue insurance while low-risk farmers prefer yield insurance.

The link between risk level and choice of insurance product was also
explored by calculating the probability of choosing a specific insurance
product given the farmers' risk level. The computed probabilities further
strengthen the findings that high-risk farmers are more likely to choose
revenue insurance contracts (CRC or RA), while low-risk farmers are more
likely to choose yield contracts (GRP, MPCI, or CAT). High-risk farmers,
who have a greater expectation of collecting indemnities, select contracts
that would provide greater indemnities in the event of loss and are
apparently willing to pay a higher premium to obtain those contracts.

Level of income also influences the type of insurance product a farmer
purchases, as well as the level of coverage. The results imply that, within
the same risk class, high-income farmers are more likely to prefer revenue
insurance over yield insurance. For example, the odds of choosing CRC over
MPCI by high-income farmers relative to low-income farmers is 1.5,
indicating that, within the same risk category, high-income farmers are 1.5
times as likely as low-income farmers to choose CRC over MPCI. Higher 
income farmers showed a preference for greater coverage, while lower income
farmers showed a preference for lower coverage levels, contrary to the
initial hypothesis that high-income farmers who could afford to self-insure
against some risk loss would purchase less insurance. 

Results also indicate that cost of insurance affects the decision to buy
and the choice of insurance contract (regardless of risk class or income
level), which underscores the importance of premium subsidies. Under the
current insurance program, nearly 40 percent of producer premiums on
"buy-up" coverage are subsidized. Since the subsidy is a large part of the
premium, changes in Federal subsidies are likely to significantly affect
the extent of farmers' use of crop insurance.
                
Study results suggest that by incorporating risk and other characteristics
associated with farmers who buy different contracts, it may be possible to
structure insurance rates to more closely reflect farmers' risk profiles.
Even though the analysis is limited to Iowa corn and soybean producers, the
findings provide useful insights into preferences of farmers at various
risk levels in choosing among alternative insurance contracts, and the
substitutability among contracts, and may facilitate making the
agricultural insurance industry more self-sustaining.  

Shiva S. Makki (202) 694-5316 and Agapi Somwaru (202) 694-5295
smakki@econ.ag.gov
agapi@econ.ag.gov

BOX - Risk Management

About the Demand Model

A Generalized Polytomous Logit (GPL) model is specified and estimated to
accommodate the demand for crop insurance where the choice of an insurance
product is discrete--i.e., farmers make a choice of one distinct product
from among several alternative products available to them. The GPL model
specification was designed so that all choices for the various insurance
products are treated equally without assigning ranks. Further, the model
estimation accommodates all choices to be estimated simultaneously,
allowing every combination of the explanatory variables to be taken into
consideration concurrently.
 
BOX - Risk Management

Insurance, in Short

Insurance contracts can be categorized into two types of insurance
products: standard yield-based crop insurance and revenue insurance
products (AO April 1999). Yield insurance products available in 1997
include Multiple Peril Crop Insurance (MPCI) and Group Risk Plan (GRP),
while revenue insurance products include Income Protection (IP), Revenue
Assurance (RA), and Crop Revenue Coverage (CRC).

MPCI pays indemnities if yield falls below a guaranteed level--determined
by a farmer's average historical yield--but offers no price protection.
MPCI provides minimum catastrophic coverage (CAT), with premiums fully
subsidized by the government, and optional higher (or "buy-up") levels of
coverage with partially subsidized premiums.

GRP is tied to county yield rather than to individual farm yield. GRP
policies pay indemnities when the county average yield drops below a
threshold or guaranteed level, regardless of yield of the individual
farmer. GRP buyers can insure up to 90 percent of the expected county yield
at up to 150 percent of the expected price.

IP, RA, and CRC protect against lost revenue caused by low yields, low
prices, or a combination of both. IP and RA protect farmers against
reductions in gross income when either prices or yields decrease during the
crop year from early-season expectations. Indemnity amounts are determined
by individual farm yields and harvest-time futures prices. IP offers a
single insurance contract per commodity enterprise for the farm per
county--e.g., within a county, IP coverage combines all corn fields which a
farmer owns or from which at least a share of corn crop earnings is due.
RA--available only in selected counties and for selected crops around the
nation--allows both basic and an optional field-specific coverage (multiple
insurance contracts based on ownership, farming practices, and section of
the farm's acreage).

CRC with replacement-coverage protection (RCP) provides partial protection
against both yield and price shortfalls, paying an indemnity if a
producer's gross revenue falls below a predetermined guarantee level. Since
CRC uses the higher of the planting-time price for the harvest futures
contract or the actual futures contract quote at harvest in setting the
guarantee, the producer's revenue guarantee may actually increase over the
season because CRC with RCP allows producers to purchase "replacement"
bushels if yields are low and prices increase during the season. Recently,
farmers in Iowa were offered RA contracts with a harvest price option that
is very similar to CRC except that it imposes no limits on price increases
at harvest-time.  

SPECIAL ARTICLE

Agriculture in Poland & Hungary: Preparing for EU Accession

Almost from the day the Berlin Wall fell, serious discussion has ensued
about eventual enlargement of the European Union (EU) to include at least
some of the Central and East European countries (CEE's). Prospects for EU
enlargement drew closer to reality in 1997, when the EU Commission agreed
to open formal negotiations with five of the CEE's--Poland, Hungary, the
Czech Republic, Slovenia, and Estonia. In the Commission's view, these five
had made the most progress toward meeting the requirements of membership.

Formal negotiations between the EU and the five first-tier CEE's began in
March 1998. Official statements by both sides continue to identify 2002 as
the target date for accession. Unofficial communications, however, suggest
that enlargement is not likely to occur before 2006, and discussions of a
transition period have surfaced. Nevertheless, the question is still when,
not whether, these countries will join.

In October 1999, the Commission recommended that the EU begin negotiations
with five more CEE countries: Bulgaria, Romania, Slovakia, Latvia, and
Lithuania. No target date has been set for their accession, and all of them
must make substantially more progress in several areas before they can be
seriously considered for membership. The EU Commission has noted
shortcomings not only in agriculture, but also in the financial and energy
sectors. 

Potential benefits of EU accession for the CEE's are substantial. Their
economies will benefit from the inflow of structural funds (e.g., for
developing institutions and infrastructure) and rural development funds
from the EU budget. EU membership will also help attract foreign
investment. CEE farmers will benefit from the price and income supports
enjoyed by EU-15 farmers. For the EU, a primary benefit is a large,
integrated, European market with 100 million new consumers. The EU also has
political and strategic reasons for seeking the accession of its CEE
neighbors. This motivation has strengthened as a result of the Kosovo
crisis. The EU hopes that enlargement will bring greater prosperity, and
with it more stability, to the continent and help solidify democratic
institutions.

But both sides have become increasingly aware of the costs as well.
Accession will require immediate adoption of all EU legislation. In the
food and agricultural sectors, CEE producers, processors, and policy makers
are just beginning to realize the potential costs of conforming to the
entire body of EU regulations. Many producers, especially in Poland, are
increasingly fearful that they will not be able to compete with
high-quality EU products in a single market, particularly when the costs of
adopting EU regulations raise farmers' production costs. Accession will
also mean substantially higher food prices for consumers whose average
income is less than half the EU average. CEE meat prices, in particular,
could rise substantially, since current CEE meat prices are as much as 60
percent below those of the EU. 

The EU, in turn, is concerned about pressures from additional commodity
surpluses and the potential cost of providing income support to small,
inefficient CEE farmers. Recent analysis by USDA's Economic Research
Service (ERS) concluded that, under the current Common Agricultural Policy
(CAP) modified by Agenda 2000, enlargement could bring additional surpluses
of rye, beef, and pork, and that as a result the EU could have difficulty
meeting its commitment to the WTO on limiting export subsidies for beef and
pork.

At the same time, accession will bring benefits to the nonagricultural
sectors. The EU is providing substantial assistance in all sectors to help
the CEE's prepare for accession, much of it directed toward infrastructure
improvement. This assistance, combined with additional investment that is
likely to come as the CEE's prepare for accession, can generate alternative
off-farm employment for producers who cannot compete in an enlarged EU
(surplus labor has been a key impediment to greater efficiency in CEE
agriculture). Accession may also lead to a rise in land prices, but a lower
cost of capital. All of these shifts could lead to dramatic changes in CEE
production practices and thus accelerate changes that are required if the
countries are to complete the restructuring process. 

This article concentrates on the implications of EU accession for
agriculture and food production in the CEE's. The principal focus here is
on Poland and Hungary, since these are the largest agricultural producers
of the five first-tier countries. However, many of the conclusions hold
true for the other acceding countries. All the CEE's face the challenge of
aligning their institutions with those of the EU, and all have a long way
to go.

For Poland, the challenges are greater because of its fragmented farm
structure--average farm size is still just 8 hectares (1 hectare = 2.471
acres), up from 6 hectares in 1990. But Hungarian producers, too, are
beginning to worry about the costs of accession. 

Slow Progress Toward
Institutional & Regulatory Reform

Before any country can be accepted for membership, it must meet the
following criteria:

*  develop stable institutions to guarantee democracy, rules of law, and
respect for human rights;

*  develop an efficient market economy capable of competing on the
integrated market; and

*  demonstrate the ability to meet obligations of EU membership, including
implementation of political, economic and monetary goals (e.g., the full
range of the EU CAP and alignment of monetary policies with those of the
EU.)

Nearly all CEE's applying for membership have meet the first criterion. The
five first-tier countries have made substantial progress towards the
second, but have considerable work to do before meeting the third. 

EU laws applying to agriculture and food production number 20,000
comprising 80,000 pages. Working groups in the agricultural ministries of
all the CEE's are poring over these 80,000 pages and rewriting their own
legislation to conform to EU laws. All the CEE's have made considerable
progress toward harmonization of laws; however, building institutions to
implement the laws and regulations is a much bigger challenge. 

In general, Hungary is considered to be more prepared for accession than
Poland; in fact, the Hungarians have expressed fears that their accession
may be held up by Poland's lagging progress. But the EU Commission points
out some areas that Hungary still needs to address. Areas of concern for
both Hungary and Poland include the following:

Rural development policies. Both Poland and Hungary have large economic
disparities among regions, and both still need to improve infrastructure
and generate nonagricultural employment. In Poland, where 28 percent of the
labor force is in agriculture and could be eligible for compensation
payments from EU coffers under the current CAP, the EU is eager to see
accelerated efforts to move some labor out of agriculture. 

The EU is already providing substantial pre-accession funds to address
these shortcomings, and even more money would come after accession through
"Structural Funds" and rural development assistance. But the EU is
concerned about a lack of coordination in developing and implementing rural
policies: neither Poland nor Hungary has the administrative capacity at the
regional level to administer these funds. The EU has rejected several of
Poland's proposals for use of pre-accession funds, contending that the
proposals were not well developed. Commission reports complain that in
Hungary, nine different ministries are involved in rural policy.

Sanitary and phytosanitary regulations. Both countries have made
considerable progress in harmonizing their standards and regulations with
those of the EU. However, they lack the administrative structures to
enforce them. Poland's Ministry of Agriculture, for example, has no staff
carrying out inspections at meat plants; inspections are done by plant
personnel. 

The EU is particularly concerned about enforcement of sanitary and
phytosanitary standards at border crossings with third countries.
Facilities at border inspection posts are considered to be inadequate, and
border checks are limited to controls on certificates and other documents.
Actual physical inspections are done at destination, which falls short of
compliance with EU import rules with third countries.

Animal welfare regulations. CEE livestock producers would be subject to a
complex array of regulations involving animal welfare. Among these are
regulations governing the number of hens that can be kept in a cage,
limiting the number of hours animals can spend in transport, and
prohibiting the tethering of cattle. Larger livestock producers are
becoming more aware of the eventual need to comply with EU regulations on
animal welfare, and some are making efforts to bring their operations up to
EU standards. But animal welfare legislation has not yet been enacted in
any of the CEE's. 

Market support policies. The EU Commission has pointed out that price
support schemes for pork in both countries have yet to be harmonized to EU
standards. The CEE's must introduce supply control instruments such as
dairy quotas and set-aside requirements in the field crops sector.

The EU has expressed serious concern about Poland's Agricultural Market
Agency (AMA), which carries out intervention purchasing and administers
minimum prices for wheat, rye and dairy products. But activities of the AMA
go well beyond the narrower role of intervention agencies under the CAP. In
addition to intervention, AMA's responsibilities include state reserve
procurement, providing financing to companies purchasing grain at a minimum
price, and commercial activities. It also has considerably more flexibility
than EU intervention agencies in deciding when intervention should be
activated. Most of these AMA activities need to be privatized in order to
harmonize with the intervention and market information role of counterpart
agencies in the EU. 

Land markets. Most land is privately owned in Poland, and owners have clear
title to their land--an improvement over many of its neighbors. However,
Poland's land markets remain undeveloped. The EU Commission cites the need
for a more efficient system of contracts to transfer ownership, an
easy-to-apply system for using land as collateral, low-cost procedures for
resolving disputes, and an easily accessible information system of land
transactions, prices, and ownership. 

Impediments to a fully functioning land market are even more serious in
Hungary. Although most of Hungary's land went into private ownership in the
early 1990's, many landowners are without clear title. Moreover, only
individuals are allowed to own land; there is a prohibition on corporate
land ownership, and corporations are unable to use land as collateral.
Banks are reluctant to accept land as collateral, since they could be
prevented from taking ownership of the land.

Statistical reporting. The EU also criticized Polish statistics, pointing
to the need to update lists of farms from which samples can be drawn and
the need for better data on purchasing and distribution. Poland may be
unable to get EU structural funds if it fails to prepare sound regional
statistics. In Hungary, regional statistics regarding unemployment and
poverty need to be strengthened. Better market price quotation systems are
needed in both countries.

Can CEE Ag & Food Industries
Compete in an Enlarged EU?

The ability of CEE agricultural and food producers to compete in an
enlarged EU is a serious concern on both sides. CEE farmers and processors
worry that a flood of higher quality EU products could drive many of them
out of business. EU policy-makers worry about budget implications of
extending CAP protection to all CEE producers. 

Of the five countries slated for earliest accession, only Hungary is a net
exporter of total agricultural products to the EU. But both Hungary and
Poland are net exporters of specific commodities to the EU--live animals
(mostly cattle), meat and meat products, dairy products, and fruits and
vegetables. Hungary is a net exporter of grain to the EU, whereas Poland
imports grain. Both are net importers of feeds and processed foods. 

Agricultural trade is an intensifying bone of contention between the EU and
the CEE's. All the CEE's are party to EU Association Agreements, signed in
the early 1990's, which call for reduced tariffs on a wide range of
products. The agreements seem to be working well for nonagricultural
sectors, but implementation for agricultural products has been fraught with
controversy. Most recently, Poland, upset by subsidized pork exports from
the EU, retaliated by canceling most tariff preferences for agricultural
products exported by the EU. Such trade disputes serve to illustrate how
difficult final accession negotiations on agriculture will be.
 
ERS recently analyzed the combined effect of EU enlargement and upcoming EU
policy changes--i.e., Agenda 2000 (see AO October 1999)--on production and
trade of grains, oilseeds, and livestock in the CEE's. The analysis covered
Poland, Hungary, and the Czech Republic, with the assumption that the CEE's
would immediately adopt the CAP in 2002 (i.e., no transition period). Under
this simplified scenario, all CEE markets adjust to what would be
prevailing prices under Agenda 2000. In addition, it was assumed that CEE
producers would be eligible for compensation payments currently granted to
EU-15 farmers and would be subject to EU dairy quotas. Key results for the
three CEE commodity markets include the following:

*  The CEE's in aggregate become net importers of wheat. Hungary becomes a
slightly larger exporter, but these exports are outweighed by large imports
by Poland and the Czech Republic. Wheat prices in Poland and the Czech
Republic are currently above projected wheat prices under Agenda 2000.
Accession will thus bring about lower prices and higher wheat imports in
these two countries.

*  The CEE's become exporters of corn and other coarse grains and smaller
net importers of barley. All CEE coarse grain prices rise, since current
coarse grain prices in all the CEE's are 20-30 percent below those in the
EU.

*  Oilseed production declines in all CEE's analyzed, principally because
the new set of relative prices favors grain. Imports of oilseed meal
increase.

*  The CEE's become large net exporters of beef and pork. Because current
CEE beef and pork prices are so far below those of the EU, CEE producers
experience price rises of 40 to 60 percent. Output, particularly of pork,
expands accordingly. The rise in beef output is constrained by the EU dairy
production quota, as more than half of CEE beef production is from dairy
herd culls. But higher prices cause consumption to decline sharply, leading
to large surpluses.

*  Accession would not have significant impacts on total U.S. agricultural
exports as modest increases in CEE production would result in only slight
declines in U.S. exports of pork and corn. There would be a small rise in
U.S. soymeal exports.

Quality Differences, Input Changes 
To Affect Output

A number of complex issues not accounted for in these forecasts could
significantly alter the direction and magnitude of actual change in CEE
agricultural sectors in an enlarged EU. One is the question of relative
quality of CEE and EU products, particularly livestock products. Much of
the current differential in livestock and meat prices between EU and CEE
countries is due to lower quality, even though quality varies considerably,
particularly in the hog sector. Hogs slaughtered at top plants, which are
licensed for export, are generally of high quality, often having a lean
meat content of 58 percent or more. But less than 50 percent of Polish and
Hungarian hogs are slaughtered at plants with such high quality standards.
The remainder are slaughtered at smaller plants not licensed for export,
which are not currently required to meet such quality standards. Hogs
slaughtered at these plants tend to have a higher fat content. The leaner,
higher quality carcasses generally command a higher price--both Poland and
Hungary have a system of premiums for high-quality carcasses. In contrast,
all hogs slaughtered in the EU-15 must meet strict quality standards.

All hogs marketed in the enlarged EU will have to meet the higher quality
level, and it is difficult to assess the full impact of the more stringent
quality standards that will be imposed, with some farms and plants
expanding and/or changing practices and others exiting the sector. Because
the ERS analysis did not incorporate quality differentials within CEE
countries and across an expanded EU, projected gains for CEE meat
output--based only on higher prices in the CEE's--may be upper limits.

CEE meat output will also be affected by the very strict EU sanitary
regulations governing meat processing. Slaughterhouses will have to install
equipment for measuring back fat, apply the EU grading system to all
carcasses, and conform to a wide range of regulations regarding flooring,
equipment, and physical layout of facilities. Half of Poland's meat output
and around 40 percent of Hungary's comes from small plants that do not meet
EU standards. Many of these operate on the "gray economy," (i.e. they are
legal enterprises but do not comply fully with regulations governing taxes,
labor, or sanitary standards), and most will have to close down upon
accession. 

The higher costs incurred in satisfying EU quality standards would not
necessarily lead to declines in output. Preparations for accession could
instead lead to increasing concentration in the industry. As smaller
producers and processors are forced out of business, the more efficient
firms, which currently meet EU standards, could expand. Moreover,
pre-accession funds provided by the EU can also help existing plants speed
up the modernization process. 

Accession will likely lead to significant changes in markets for land,
labor, and capital, which could also hasten restructuring of CEE
agriculture. CEE agriculture is now highly labor-intensive because wage
rates are low and capital and other inputs are relatively expensive. If
labor is fully mobile throughout the enlarged EU, wage levels in the EU and
CEE's will tend to converge, and CEE wages could rise significantly.
Moreover, the Structural Funds and additional investment that will likely
come with accession will generate more employment in the CEE's, putting
upward pressure on wages. Higher wages will draw much of the excess labor
out of agriculture and should lead to consolidation of farms.

Land prices will likely also increase if all citizens in the expanded EU
have the right to purchase CEE land. Land prices in the EU-15 are currently
much higher than in the CEE's, and EU investors will be attracted by high
quality, low-priced land in the CEE's. Higher land prices would affect the
production of all field crops, leading to more input-intensive production
and thus higher yields. As modelled in the ERS analysis, CEE grain yields
remain substantially lower than EU yields after accession, reflecting a
continuation of current land-intensive production practices. With higher
land prices, these practices will no longer be economically rational, and
CEE producers may substitute more chemicals for land. In the livestock
sector, cattle output would be more affected than hogs or poultry, because
they now depend heavily on pasture for feed. 

Capital will be more readily available after accession. Currently,
investors consider the CEE's to be high-risk investments because of weak
contract enforcement, lack of clearly defined bankruptcy procedures, and
unclear property rights. EU accession will create a more stable business
environment and thus attract more foreign capital. 

Much Uncertainty Remains

Although all the CEE's have a long way to go before they are ready for
accession, the EU is reluctant to delay enlargement indefinitely for
political reasons explained earlier. In recognition of this reality, the EU
Commission in mid-October 1999 officially acknowledged the possibility of a
transition period. Specifically, the EU might allow a transition period
"for those areas where considerable adaptations are necessary and which
require substantial effort, including important financial outlays." 
Examples of such areas are environmental and infrastructure improvements.
Other areas that may have a transition period include land and labor
markets. The poorer EU countries are reluctant to allow full mobility of
CEE labor; in turn the CEE's want a transition period before foreigners
would be allowed to buy land.

But the EU insists that all regulatory measures essential for the
functioning of a single market be put in place immediately upon accession.
The Polish government, in contrast, wants no transition period, except in
the area of land markets. Polish producers fear that a transition period
would mean that they have to bear the costs of immediate implementation of
the EU regulatory regime, but have to wait a number of years before gaining
access to the full range of CAP support to agriculture. 

In addition to the possible transition period, there are many other areas
of uncertainty regarding the impact of EU enlargement, particularly the
timetable. The initial wave of CEE's may not accede until 2006 or later,
and the EU will not necessarily admit all five simultaneously. 

Impacts on commodity markets are also uncertain. ERS analysis suggests
increased surpluses of livestock products and rye. The inflow of Structural
Funds and capital investment could bring about a dramatic shift in the
structure of CEE livestock production and processing, leading to increasing
concentration in both. If these shifts in production practices take place,
output could increase. However, production in some of the CEE's could
actually decline due to increased costs incurred by compliance with EU
sanitary and animal welfare regulations. 

CEE producers and processors who are able to adapt to the EU regime could
benefit in the long term. Many smaller producers and processors will
probably
be forced out of business, and for this reason an increasing number of CEE
producers are opposed to accession. However, the transition might go more
smoothly than anticipated if accession generates enough nonagricultural
employment to absorb labor released from agriculture. Preparations for
accession could thus accelerate the restructuring process and leave
remaining CEE producers better prepared to compete in a global economy.
 
It also appears that impacts on global commodity markets will not be as
great as has been suggested by previous USDA analysis. Enlargement could
lead to a reduction in U.S. meat exports and a small increase in exports of
oilseeds and meal, but will likely not bring significant losses of markets.
In the longer term, U.S. trade could benefit if accession brings greater
prosperity and purchasing power to the region.  

Nancy J. Cochrane (202) 694-5143
cochrane@econ.ag.gov

BOX - Special Article

EU Agricultural Policy Instruments

The basic objectives of the EU Common Agricultural Policy (CAP) are to
increase agricultural productivity, ensure a fair standard of living for
agricultural workers, stabilized markets, guarantee regular supplies of
agricultural products, and ensure reasonable prices to consumers.

The current system is the result of a reform package implemented in
1993/94, EU's commitments in the Uruguay Round Agreement on Agriculture
(URAA), and the beginnings of EU Agenda 2000. The 1992 reforms reduced
support prices, implemented a system of direct compensation payments, and
introduced new supply control measures. Changes implemented in 1995 as part
of the EU's URAA commitments include the conversion of variable import
levies to tariffs.

The EU's Agenda 2000, finalized in March 1999, builds on the 1992 reforms
with further reductions in support prices for certain commodities, while
partially compensating producers for the price declines through direct
payments.

The principal policy instruments now in effect are:

Price support: The CAP is a price management system that supports the
income of EU farmers in two ways. First, authorities buy the surplus supply
of products when market prices threaten to fall below agreed minimum
(intervention) prices. Second, the CAP applies tariffs at the borders of
the EU so that imports of most price-supported commodities cannot be sold
into the EU below the desired internal market price set by EU authorities.
Methods used in managing agricultural prices in the EU include intervention
prices and export subsidies.

Intervention price: A market floor price (intervention price) triggers
market intervention mechanisms to support market prices. Farmers are able
to sell their products to the intervention authorities at the annually
adjusted intervention price. Products must meet minimum quality
requirements to be accepted into intervention. The surplus commodities are
then put into EU storage facilities.

Export subsidies (restitutions): When world market prices are below the EU
market price, exporters are paid a subsidy to enable them to export
competitively to the world market. If world market prices are above EU
internal market prices, an export tax may be imposed to prevent the outflow
of EU product. Such taxes are usually adjusted weekly or biweekly in line
with the fluctuation of world market prices. EU commitments under the URAA
set limits on the value and quantity of export subsidies.

Prices for major commodities such as grains, dairy products, beef and veal,
and sugar are dependent on the price support system. Other mechanisms, such
as subsidies to assist with storage of surpluses and consumer subsidies
paid to encourage domestic consumption of products like butter and skim
milk powder, supplement these basic underpinnings of the CAP to strengthen
domestic prices. Some items, most often fruits and vegetables, are
withdrawn from the market by producer organizations when market prices fall
to specified withdrawal prices.

Direct payments (compensation payments): In addition to price support
mechanisms, payments may be made directly to producers to help support
their incomes. Compensatory payments were instituted as part of the 1992
reform package to compensate grain and oilseed producers for price support
cuts. The payments, although established on a per-ton basis, are made to
farmers as a per-hectare payment, based on average historical yield in the
region where they farm. 

Supply control: The 1992 reforms also instituted a system of supply control
through a mandatory paid set-aside program. To be eligible for compensatory
payments, producers of grains, oilseeds, or protein crops must remove a
specified percentage of their area from production. Farmers are paid a
set-aside payment for area removed from production under this program.
Producers with an area planted to these crops sufficient to produce no more
than 92 tons of grain per year are classified as small producers and
exempted from the set-aside requirement. Supply control measures are also
in effect for the dairy and sugar sectors.

Agenda 2000 reforms will continue to shift the EU away from price supports
toward direct payments to producers. Key provisions of Agenda 2000 are:

*  a 15-percent reduction in support prices of grains, phased in over 2
years, to be partially offset by increases in direct payments;

*  a 10-percent minimum set-aside for crop land for 2000-06; and

*  a 20-percent reduction in support price for beef, to be phased in over 3
years and offset by direct payments.

For more details on Agenda 2000, see AO May 1999 and October 1999.
Mary Anne Normile (202) 694-5162
mnormile@econ.ag.gov 

BOX - Special Article

The European Union: Pressures for Change, Economic Research Service, U.S.
Dept. Ag., International Agriculture and Trade Report
Full report available in December   
Summary available now at http://usda.mannlib.cornell.edu/reports/erssor/ 
international/wrs-bb/1999/europe/ 

WINDOW ON THE PAST
Trade Topics in USDA Publications

Potential Markets

Our heavy foreign trade within late years has attracted much attention at
home and abroad. Numerous inquiries have been received regarding the
commercial opportunities offered by the former Spanish possessions. No
authority has been given to this Department to get exact information
regarding trade facilities in Puerto Rico, Cuba, and Philippine Islands.
The Section of Foreign Markets, has, however, collated and published
everything available regarding the trade of those islands. 

Frequent inquiry comes regarding trade in China and Russia, which seem to
offer great commercial possibilities in the immediate future. There is a
dearth of reliable information regarding both these countries.
Yearbook of Agriculture, 1899, Report of the Secretary, Section of Foreign
Markets    

Enlarging the European Community

The European Community (EC) and the three applicant countries Greece,
Spain, and Portugal are a major market for U.S. agricultural exports. . . .
The United States has a keen interest in the accession negotiations because
membership of Greece, Spain, and Portugal in the EC is likely to alter U.S.
agricultural trade patterns.

The decision by the three to apply for membership in the EC was largely a
political one concerned with perpetuating a democratic form of government.
Political decisions are not without economic ramifications, however, and
the practical problems of bringing the three countries into full EC
membership are numerous....

The crucial point to emphasize is that membership of Greece, Spain, and
Portugal will do little towards eliminating current surpluses in the EC-9
and will likely create surpluses of other commodities. . . . Production
incentives under the EC's Common Agricultural Policy (CAP) likely would
stimulate production in the three applicant countries. EC Commission 
officials are concerned that without major changes in the CAP, surplus
production will become considerably greater under enlargement.
Agricultural Outlook, November 1979

Contact: Anne B.W. Effland (202) 694-5319
aeffland@econ.ag.gov

END_OF_FILE