AGRICULTURAL OUTLOOK                                        September 21, 1999
October 1999, ERS-AO-265
               Approved by the World Agricultural Outlook Board
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CONTENTS

IN THIS ISSUE

BRIEFS
Livestock, Dairy, & Poultry: U.S. Beef Production To Drop From Record Level
Specialty Crops: Fewer Fresh-Market Pears in 1999 To Boost Prices 
Food Marketing: Food Price Increase in 1999 & 2000 To Be Lowest Since Early
1990's

COMMODITY SPOTLIGHT 
U.S. Corn Prices To Remain Weak Despite Record Domestic Use

WORLD AGRICULTURE & TRADE
U.S. Ag Exports To Turn Up in Fiscal 2000

EU's Agenda 2000 & Beyond

RISK MANAGEMENT
Assessing Agricultural Commodity Price Variability

RESEARCH & TECHNOLOGY
Biotechnology Research: Weighing the Options For a New Public-Private Balance

SPECIAL ARTICLE 
Infrastructure Investment in APEC Region Threatened by Financial Woes


IN THIS ISSUE

U.S. Corn Prices To Remain Weak

U.S. farm prices for corn are expected to remain weak in1999/2000.  While this
year's crop is smaller, supplies are essentially unchanged because of larger
carryin stocks.  Although prices strengthened when the impact of the drought
in the eastern Corn Belt became clear, abundant supplies in other major U.S.
growing regions are expected to keep the average farm price near the 1998/99
forecast of $1.95 per bushel.  Domestic use will likely set another record in
1999/2000, while U.S. corn exports decline because of increased competition
from China, continued large exports by Argentina, and declining world trade. 
Allen Baker; albaker@econ.ag.gov

U.S. Ag Exports To Turn Up in Fiscal 2000

U.S. agricultural exports are forecast to recover modestly in fiscal year 2000
to $50 billion, the first increase since 1996.  The gain from 1999--2
percent--is expected to be limited by relatively low prices.  For bulk
exports, the projected increase is 3 percent (volume is up 5 percent), and for
high-value products just over 1 percent. Propelling the gains are higher
global economic growth, especially in Asia, and reduced export competition for
some bulk commodities.  Carol Whitton (202) 694-5287; cwhitton@econ.ag.gov

Food Price Rises in 1999, 2000 Lowest Since Early 1990's

Consumers are benefiting from a low general inflation rate, with food prices
forecast to increase only 2 percent in 1999 and 2-2.5 percent in 2000, in part
because of large supplies of meats.  Food price increases have not been so low
since the early 1990's--when prices increased 1.2 percent in 1992 and 2.2
percent in 1993.  Annette L. Clauson (202) 694-5373; aclauson@econ.ag.gov

Assessing Ag Commodity Price Variability

Potentially large swings in farm prices and incomes have been a longstanding
farm policy concern.  Better understanding the patterns and forces behind
commodity price variability would help policymakers facilitate good risk
management practices and help farmers manage their price risks.  Within-year
price variability for corn and wheat futures contracts follows seasonal
patterns, and across-year price variability for wheat, corn, and soybeans is
negatively correlated with the level of stocks relative to total
disappearance.  General price levels for soybeans and most grains may move in
tandem with many of the same forces, but price variabilities are more
distinct, due likely to disparities in their supply and demand responsiveness. 
Randy Schnepf (202) 694-5293; rschnepf@econ.ag.gov

Striking A New Balance In Public-Private Agricultural Research

The revolution in biotechnology, coupled with strengthened patent protection
for biological inventions, suggests that the traditional view of agricultural
research--a public sector specializing in relatively basic research and a
private sector oriented toward applied research and technology
development--needs revision.  While some motivations for research are still
distinctly public (e.g., improving nutritional health and enhancing
environmental quality), research areas able to benefit both sectors suggest a
need to expand opportunities for public/private partnerships, such as the
cooperative research and development agreements used by USDA's Agricultural
Research Service. Nicole Ballenger (202) 694-5013; nicole@econ.ag.gov

Examining EU's Agenda 2000
 
The European Union's (EU) Agenda 2000, finalized in March, builds on key
agricultural reforms of 1992 by further reducing support prices for some
commodities while partially compensating producers for the price declines
through direct payments.  In general, Agenda 2000 will make modest changes in
the grain, oilseed, dairy, and beef sectors. For wheat, the reforms will
likely move the government purchase price below a rising world price, enabling
EU countries to expand wheat exports without subsidies.  Most other EU
agricultural commodities will remain uncompetitive in world markets, and will
require continued EU subsidization for export.   David Kelch (202) 694-5151;
dkelch@econ.ag.gov

Infrastructure Investment in APEC Region

A particularly troubling impact of the global financial crisis of 1997-98 has
been the scaling back of public and private infrastructure investment in the
most financially distressed economies of  the Asia- Pacific Economic
Cooperation (APEC) region--Indonesia, Malaysia, the Philippines, South Korea,
and Thailand.  Sizable investments are needed to maintain and expand
infrastructure across APEC to sustain economic growth and facilitate trade,
both within and among those economies and with the U.S. (over 60 percent of
U.S. agricultural exports goes to the APEC countries).  Infrastructure
development reduces marketing costs, benefiting both producers and consumers. 
Lowering these costs could have as positive an effect on food and agricultural
trade as removal or reduction of a tariff.  William T. Coyle (202) 694-5216;
wcoyle@econ.ag.gov

BRIEFS
Livestock, Dairy, & Poultry
U.S. Beef Production To Drop From Record Level

U.S. cattle inventories are set to decline through 2000, with beef production
likely down in 2000 and again in 2001. Behind the beef production falloff is
an expected decline in feedlot placements in second-half 1999. But before
then, beef production will reach a record in 1999 as heifer slaughter remains
near record large. 

Meanwhile, total red meat and poultry supplies will stay near record highs in
2000 as pork supplies remain large and the rate of broiler supply expansion
returns to levels of the mid-1990's. Continued low feed costs will help hold
down beef production costs. In addition, grazing conditions are favorable in
most parts of the country, and hay production is forecast at record levels.

The July 1, 1999, cattle inventory was down 1 percent from a year earlier,
continuing its decline from the 1996 cyclical peak. Most cow-calf operators
have lost money since 1995, but can expect positive returns above cash costs
this year. With the beef-cow inventory down 1 percent on July 1 from a year
earlier, and the number of beef replacement heifers down 4 percent, producers
are not likely to begin breeding more replacement heifers until at least 2000,
and the next gain in the calf crop will not occur until at least 2001. The
1999 calf crop is estimated to be the smallest since 1952.

With total number of cattle on feed on July 1 above a year earlier, the supply
of cattle available for marketing during the declining phase of the cattle
cycle is at its peak. As inventories decline, the trend in feedlot inventories
is clearly down over the next several years, even if heifer retention remains
low.

On July 1, cattle in feedlots with capacity over 1,000 head in the 7 monthly
reporting states were up 4 percent from a year ago and up 6 percent from 1997.
However, total placements will move below a year earlier in second-half 1999,
and they will continue declining until the calf crop rebounds. 

Falling feedlot placements ensure that beef production will begin to decline
fairly sharply through at least 2001, but not before breaking the 1976 record
for both commercial and total beef production in 1999. Steer and heifer
slaughter is expected to decline nearly 6 percent in 2000, after rising 2
percent in 1999 from a year earlier. The full extent of the dropoff will be
determined by the number of heifers actually retained for herd expansion.
Through the third quarter, heifer slaughter is the second largest after 1976.
Cow slaughter is expected to decline nearly 6 percent in 1999 and another 5-6
percent next year. 

Beef production is expected to remain above a year earlier through early fall.
Fourth-quarter production is expected to decline 1-2 percent from a year
earlier because of lower summer placements. Production in 2000 is expected to
decline 4-7 percent, with the largest year-to-year declines taking place next
spring and summer, reflecting large year-to-year changes in heifer slaughter.
This will also be the most difficult period of adjustment for end users as
supplies of higher quality beef tighten and prices rise. Retail markets, with
large supplies of competing meats, will likely see the greatest reductions in
beef offerings.

Fed-cattle prices are expected to remain in the mid-$60's per cwt through
early fall as large first-half placements are marketed. Prices are expected to
move into the upper $60's in late fall through first-quarter 2000. Supplies
will begin to tighten fairly substantially in the second quarter as demand
strengthens seasonally. Tight supplies will push up average prices to near $70
in the last three quarters of 2000, with the market possibly moving even
higher late in the year if the U.S. economy remains strong. 

Yearling feeder cattle prices have already strengthened as fed-cattle prices
held firm this spring and summer and as grain prices declined. Large grain
stocks are expected to hold down grain price increases through much of 2000.
Prices of 750- to 800-pound yearling steers are expected to average near $77
per cwt this summer, up from $68 in 1998. Prices are likely to average in the
low $80's in 2000, the first sustained rise to this level since 1993.

Per capita beef supplies are expected to remain about unchanged in 1999 from
last year's 68.1 pounds, but are likely to decline 3-4 pounds in 2000. At the
same time, however, broiler supplies are forecast up 5 pounds per capita from
1998 and will likely rise 4 pounds in 2000. Total red meat and poultry
consumption, a record-large 214 pounds per capita in 1998, is expected to
reach nearly 220 pounds this year and decline only modestly in 2000.

Large supplies of competing meats are likely to hold down beef retail price
gains over the next couple of years as beef supplies decline. Retail prices
for Choice beef are expected to average $2.83 a pound this year, up from $2.77
in 1998. Prices may rise to $2.86 in 2000, the highest since 1993 when total
per capita meat supplies were only 208 pounds. In 2000, supplies will be near
217 pounds per person. 

As overall beef supplies decline, buyers will increasingly compete for tight
supplies of cattle grading Choice, which is higher valued beef sold
extensively in domestic hotel-restaurant and export markets. Lower valued
beef, particularly Select grade and nonbranded beef sold in retail markets,
may have difficulty competing profitably against expanding supplies of other
meats at relatively low prices. 

At the producer level, demand for breeding stock that produce high-grade beef
will likely increase. In fact, a shift away from breeding stock yielding
low-grade beef is likely already underway, which may have supported production
of lower quality beef during the past year and dampened its retail price.
Consequently, the price spread between Choice and higher graded beef and the
lower grades may be increasingly reflected in feeder cattle prices. Discounts
may increase on stocker-feeder cattle that will not reach desired grade and
consistency characteristics at slaughter, particularly as the cattle inventory
begins its next cyclical expansion. 
Ron Gustafson (202) 694-5174; ronaldg@econ.ag.gov

LDP BOX
Feed & Forage Are Plentiful

With feed grain supplies remaining high in 1999/2000, relatively low prices
will continue to keep down costs for livestock producers (see Commodity
Spotlight). The farm price of corn in 1999/2000 is expected to average near
the 1998/99 average of $1.95 per bushel and well below 1997/98's $2.43. 

Forage conditions have been very favorable in most parts of the country. The
exception is the mid-Atlantic, eastern Corn Belt, and Northeast, where dry
weather has sharply reduced forage supplies. Total hay production in 1999 is
forecast at a record 161 million tons, up 6 percent from 1998 and 5 percent
higher than 1997. Yield is forecast record high, and acreage is expected to
rise 3 percent from a year earlier. Forage supplies look favorable for most of
the industry, given favorable grazing conditions in most areas and a reduced
cattle herd. Producers in areas with shortages can acquire stocks from areas
where supplies are plentiful, although shipping charges can limit transport
distances.

BRIEFS
Specialty Crops
Fewer Fresh-Market Pears in 1999 To Boost Prices 

Total U.S. pear production for 1999 is forecast down 1 percent from 1998, to
1.9 billion pounds. While harvest of Bartlett pears is projected to reach 1
billion pounds, up 6 percent from 1998, production of other U.S. pear
varieties is forecast at 854 million pounds, down 9 percent from last year.
Bartlett pears accounted for more than half of total U.S. pear production
during the last 3 years, but this year's increase is not large enough to
offset the decrease in other-than-Bartletts. The overall decline in pear
production this year, along with decreased supplies of domestic-grown apples,
indicates higher grower prices for fresh-market pears in 1999/2000. 

Bartlett production is forecast up in the three Pacific Coast states that
produce nearly all the U.S. Bartlett pear crop. California expects a 3-percent
rise from 1998, Washington 14 percent, and Oregon 2 percent during 1999. Over
70 percent of U.S. Bartlett pears are usually processed, while the balance are
marketed mostly during the summer. Downturns for other-than Bartlett are
projected at 4 percent in Washington and 15 percent in Oregon, but California
production remains essentially unchanged. Typically, over 80 percent of
other-than-Bartlett pears are for fresh use in the fall and winter months. 

Good quality and fruit size are being reported for the Bartlett pear harvest
in California. In Oregon and Washington, cold winter conditions that lasted
through spring slowed crop development. In other pear-producing states,
specifically in the Northeast region, drought conditions are resulting in
smaller size fruit.

The delay in harvesting pear crops in Washington and Oregon could give an
additional boost to grower prices. However, significantly larger carryover
inventories could offset some price strength. Stocks of fresh pears
(other-than-Bartlett varieties) in cold storage as of June 30, 1999, were 59
percent larger than the same time in 1998. Grower prices for fresh-market
pears, averaging 7 percent higher than a year ago for the first 6 months of
1999, reflected reduced fresh-market production in the fall of 1998. In July
and August the first two months of the 1999/2000 marketing season fresh pears
averaged 20.2 cents a pound ($404 per ton), 18 percent higher than the average
in July/August 1998.

Typically, stocks of Bartlett pears in cold storage are depleted by the end of
the marketing season. But as of June 30, 1999, Bartlett stocks totaled 3.7
million pounds, compared with zero a year earlier. Despite last year's lower
production, grower prices for processing pears averaged 8 percent lower in
1998/99 compared with the previous season.

Decreased production in 1998 raised U.S. imports of fresh pears during 1998/99
(July-June) to 190.5 million pounds, 27 percent above the previous season.
During the same period, U.S. exports of fresh pears fell to 305.2 million
pounds, 16 percent below record levels the year before. The smaller 1998 U.S.
pear crop, higher U.S. prices, increased supplies from the European Union
(EU), and weakened economies facing Brazil and many Asian countries all
contributed to the decline in U.S. pear exports during 1998/99. 

Export volume fell significantly among four of the five principal U.S.
purchasers: the EU (down 36 percent), Canada (down 17 percent), Brazil (down
41 percent), and Taiwan (down 7 percent). Exports to Mexico, however, rose 8
percent. Combined shipments to these markets made up 87 percent of total U.S.
pear exports during 1998/99. Lower U.S. fresh-market supplies that are likely
this year, along with expectations of higher prices, will again limit U.S.
export prospects during 1999/2000.  
Agnes C. Perez (202) 694-5255; acperez@econ.ag.gov 
BRIEFS
Food Marketing
Food Price Increase in 1999 & 2000 To Be Lowest Since Early 1990's

Consumers are benefiting from a low general inflation rate, with food prices
forecast to increase only 2 percent in 1999 and 2 to 2.5 percent in 2000, in
part because of large supplies of meats. Food price increases have not been so
low since the early 1990's when prices increased 1.2 percent in 1992 and 2.2
percent in 1993. With 8 months of Consumer Price Index (CPI) data already
collected in 1999, the annual average food CPI is 2 percent above the first 8
months of 1998. The inflation rate for the all-items CPI is forecast to be 2
percent in 1999 and 2.2 percent in 2000. 

The at-home component of the food CPI, which increased 1.9 percent in 1998, is
forecast up 1.7 percent in 1999 and 2-2.5 percent in 2000. The away-from-home
component, which increased 2.6 percent in 1998, is expected to increase 2.6
percent in 1999 and 2.5-3 percent in 2000. This component is heavily
influenced by competition among restaurants, fast-food establishments, and
meals offered by supermarkets. 

Food price changes are key in determining what proportion of income consumers
spend for food. In 1998, 11 percent of household disposable income went for
food with 6.7 percent for food at home and 4.4 percent for food away from
home down from 11.1 percent in 1997. The downward trend should continue in
1999 and 2000.

Meats. Retail meat prices are forecast up 2-3 percent in 2000 as combined red
meat and poultry production falls from a record 81.2 billion pounds in 1999 to
80.7 billion pounds in 2000. Total red meat and poultry consumption will reach
almost 220 pounds per capita in 1999, breaking the 1998 record of 214 pounds.
In 2000, consumption may decline 1-2 pounds. Increased supplies of poultry
will mitigate the smaller beef supplies expected in 2000. In 1998 and 1999,
large meat supplies and reduced prospects for higher price meat exports
depressed U.S. livestock and poultry prices, with retail prices falling 1.9
percent in 1998 and expected to increase 0.1 percent in 1999. 

Beef and veal. After setting a record for both commercial and total beef
production this year, beef production will begin a fairly sharp decline next
year. In addition to lower beef supplies, retail availability of higher
quality beef will tighten after the hotel-restaurant-export market competes
for the higher valued beef. Retail prices for Choice beef are expected to
average $2.83 a pound this year, up from $2.77 in 1998. Prices may rise to
$2.86 per pound in 2000, the highest average retail price since 1993. The CPI
for beef and veal is expected to increase 1.2 percent in 1999 and another 1-3
percent in 2000. Large supplies of other meats, particularly poultry, will
limit the increase. Also, improved eating quality, consistency, and increased
cut sizes have made both white-meat chicken and pork loins more competitive
with beef.

Pork. Commercial pork production is expected to be about 19.2 billion pounds
in 1999, up over 1 percent from a year earlier. Following two consecutive
record years, production is expected to fall to 18.6 billion pounds in 2000.
With plentiful supplies of pork and competing meats throughout 1998 and 1999,
pork retail prices fell 4.7 percent in 1998 and are expected to fall another
2.3 percent in 1999. The pork CPI is expected to increase 2-3 percent in 2000
as pork and beef supplies decline.

Retail pork prices in 1999 have remained relatively steady despite volatile
hog prices. Retailers have found that they can move pork off the shelf without
large price discounts, and consumer incomes are strong, increasing the demand
for meat. Over time, pork demand appears to have increased in response to
higher quality, greater consistency, and larger cut size offered by the
industry. Pork consumption may reach a record 53.5 pounds (per capita, retail
weight) in 1999, with an expected decline to 51.6 pounds forecast for 2000.

Poultry. The CPI for poultry is expected to be unchanged in 2000, after rising
only 0.3 percent in 1998 and 0.1 percent in 1999. Broiler production is
expected to continue growing, up 6 percent to 29.4 billion pounds in 1999, and
up 5.2 percent to 31 billion in 2000. Turkey production is expected to
increase slightly to 5.3 billion pounds in 1999. After 3 years of negative
returns for turkey producers, some production facilities have been converted
to chicken production.

Consumers are buying more poultry in response to the convenience of processed
poultry products and to fast-food promotions. Broiler consumption will be 77.8
pounds (per capita, retail weight) this year, up from 72.6 pounds in 1998, and
could reach 82.2 pounds in 2000. The fast-food market continues to grow,
especially demand for wings and skinless, boneless chicken breast. And with
downturns in the export market expected in 1999 and 2000, promotions of dark
meat (legs and thighs) have begun in the U.S. retail market. 

Fish and seafood. Despite larger imports of shrimp, tilapia, and salmon,
slower growth in U.S. catfish output should lead to an increase of 1.6 percent
in the fish and seafood CPI for 1999. In 2000, the index is forecast up 1-3
percent.

Eggs. Retail egg prices fell 3.3 percent in 1998 and are expected to fall
another 3.6 percent this year due to production increases of nearly 3 percent
each year. With egg production expected to increase 2 percent in 2000, the CPI
for eggs is expected to decline just 1-2 percent next year. Per capita egg
consumption is forecast to rise from 253.6 eggs in 1999 to 255.2 eggs in 2000. 

Dairy products. In 1998 and 1999, strong demand outstripped production of
milkfat products such as butter, cheese, and ice cream, leading to higher
consumer prices. The CPI for dairy products increased 3.6 percent in 1998 and
is expected to increase another 4.7 percent this year. Summer 1999 milk
production rose about 3 percent above a year earlier, with a smaller fall
increase expected. Good forage is expected to keep expansion in milk
production strong through the rest of 1999. However, dairy growth is slowed by
limited herd expansions in the northern U.S. With milk production forecast to
increase 2 percent next year, retail prices for dairy products are expected to
remain unchanged in 2000.

Fresh fruits. Higher retail prices for Valencia and navel oranges, grapefruit,
lemons, and pears are boosting the CPI fresh fruit index by 7.9 percent in
1999, after a 4.3-percent increase in 1998. Four days of freezing temperatures
in California late last December squeezed fresh citrus supplies through much
of 1999. The 1998/99 U.S. citrus crop dropped 23 percent from the previous
season, mostly due to poor weather. All citrus crops, except limes, were
smaller. Florida's citrus production was down 20 percent from the previous
year's record crop, and California's citrus output fell 39 percent. However
more stone fruit, grapes, and strawberries will be harvested in 1999 than
1998. After a record 1998 apple crop, production is likely to fall 7 percent
in 1999. In 2000, the CPI is expected to rise 2 to 4 percent.

Fresh vegetables. Fresh-market vegetable acreage is expected to increase 1
percent for 1999, with summer vegetable area for harvest forecast up 5 percent
over a year ago. After weather-related shortfalls in 1998, growing conditions
in major fresh vegetable areas returned to near normal in 1999. Consequently,
the fresh vegetable CPI is forecast to fall 4.2 percent in 1999.  In 2000, the
CPI is expected to return to trend growth, up 2 to 4 percent.

Processed fruits and vegetables. Although supplies of processed vegetables
were down in 1998, adequate supplies of most fruits for processing limited the
CPI increase for processed fruits and vegetables to 1.7 percent. The index is
expected to increase 2.3 percent in 1999 and 2-3 percent in 2000. In
first-half 1999, more navel oranges grown in southern California were sent to
processing because of freeze damage. 

Sugar and sweets. Domestic sugar production was up almost 3 percent to 8.3
million short tons in 1998/99. It is expected to hit a record 8.9 million
short tons in 1999/2000. Relatively low inflation, along with increased
production, is nudging up the 1999 sugar and sweets index by only 1.4 percent.
With 1999/2000 U.S. sugar production expected to be up 7 percent, the CPI is
projected up 1.5 to 2.5 percent in 2000 as demand remains strong in the bakery
and cereal sector.

Cereals and bakery products. This food category accounts for almost 16 percent
of the at-home food CPI. With grain prices lower this year and
inflation-related processing costs modest, the CPI for cereals and bakery
products is forecast to increase 2.5 percent in 1999. Most of the costs to
produce cereal and bakery products are for processing and marketing more than
90 percent in most cases with grain and other farm ingredients accounting for
a fraction of total cost. With competition among producers and consumer demand
for bakery products expected to remain fairly strong, the CPI is forecast up
2-3 percent in 2000.

Nonalcoholic beverages. The CPI for nonalcoholic beverages increased 1.1
percent in 1999, led by higher soft drink prices, and is forecast to increase
another 2 to 3 percent in 2000. Coffee and carbonated beverages account for 28
and 38 percent of the nonalcoholic beverage index. Lower coffee prices in 1999
reflect a near-record crop in Brazil, the largest producer of Arabica coffee
beans. Weather has been excellent for the current crop, and coffee trees have
finally recovered from effects of a freeze in 1994.
Annette L. Clauson, (202) 694-5373; aclauson@econ.ag.gov  
COMMODITY SPOTLIGHT 
U.S. Corn Prices To Remain Weak Despite Record Domestic Use

U.S. farm prices for corn are expected to remain weak in 1999/2000. While this
year's crop is smaller, supplies are essentially unchanged because of larger
carryin stocks. Exports are projected to decline, but with domestic use
setting another record, gains in 1999/2000 ending stocks should be limited.

Faced with low prices, U.S. corn producers trimmed plantings by 2 percent in
1999. Besides low prices, the decline in corn acreage is attributable to lower
prospective government payments for corn relative to soybeans under the
marketing assistance loan program. Lower plantings combined with
yield-reducing dry weather in the eastern Corn Belt is cutting U.S. corn
output to 9.4 billion bushels, down 4 percent from 1998. 

Over the last 10 years, planted acreage of corn, the primary feed grain in the
U.S., has consistently comprised 23 to 24 percent of acreage of major field
crops. Sorghum acreage has accounted for 3 to 4 percent, oats 1 to 3 percent,
and barley 2 to 3 percent. Like corn, planted acreages of sorghum, oats, and
barley declined in 1999. 

Average corn yield is forecast at 132.2 bushels per acre, down from 134.4
bushels in 1998. The eastern Corn Belt crop was planted earlier than in recent
years, setting up early-season expectations of higher yields, but dry weather
in many areas of the eastern Corn Belt has cut yield potential. In the western
Corn Belt, wetter conditions throughout the growing season have helped yield
potential. 

Domestic Use Forecast
Record High

Domestic use in 1999/2000 is expected to total a record 7.5 billion bushels,
up 1 percent from 1998/99, bolstered by gains in food/seed/industrial use. 

Food, seed, and industrial uses are forecast to remain strong, up 3 percent
from 1998/99 to 1.9 million bushels. Use at this level would represent 17
percent of total corn supply, up from 16.5 percent in 1998/99 but below the
17.6 percent of supply used in 1997/98. 

Total sweetener use of corn has not been as strong as earlier anticipated in
1998/99. Corn used in high fructose corn syrup (HFCS) principally in soft
drinks is forecast up 3 percent in 1998/99 from 532 million bushels in
1997/98. The hot summer months stimulated domestic sales, but exports of HFCS
in September 1998-June 1999 were down 6 percent from the previous year. Higher
tariffs limited export gains to Mexico to 1 percent. In 1999/2000, use is
expected to increase another 3 percent.

Glucose and dextrose use in 1998/99 is expected to be down 4 percent from
1997/98. Some "nonfat" products that used sweeteners (including those derived
from corn) to replace fats have not sold well and have been reformulated,
weakening the market for glucose and dextrose. In 1999/2000, corn used to
produce glucose and dextrose is expected to level off or rise slightly,
continuing a long-term trend similar to the rate of population growth.

In 1999/2000, beverage alcohol and manufacturing use of corn is expected to be
up 2 percent from the forecast 127 million bushels in 1998/99. The strong
economy is expected to keep sales of beverages strong, and low corn prices
should help keep manufacturing alcohol (used for rubbing alcohol and after-
shave, for example) competitive with alternatives.

Industrial uses of corn are expected to continue growing in 1999/2000, but not
at the strong pace of 1998/99. Corn used to make ethanol in 1998/99 is
forecast at 530 million bushels, up 10 percent from 1997/98. Low corn prices
have encouraged ethanol producers to keep output high. Ethanol stocks have
become large, preventing a runup in ethanol prices that would normally
accompany recent gains in gasoline prices. 

Corn used to make starch in 1998/99 (for products such as paper and wall
board) is forecast to decline 1 percent from 1997/98 to 230 million bushels,
possibly due to increased competition from wheat starch. The strong U.S.
economy would be expected to keep paper use (and thus starch demand) at a high
level. Builders are reportedly having problems finding wall board. This news
normally stimulates wall board production and boosts starch use. In 1999/2000,
starch use of corn is expected to rise 2 percent from 1998/99 as the strong
economy stimulates starch use.

Feed demand from the poultry and dairy sectors continues strong as production
expands, responding to strong domestic demand for meat and an expected
increase in meat exports. But feed demand from the beef and pork sectors is
expected to slip, leaving total feed use (including residual) unchanged at 5.6
billion bushels in 1999/2000.

Broiler producers have continued to expand production despite disease problems
in their hatchery supply flocks. Low grain prices and relatively strong
broiler product prices have encouraged producers to continue expansion. Turkey
and egg production are both expected to increase from 1999 levels. Likewise,
higher milk production will boost feed demand by the dairy industry.

Beef production is forecast to decline 6 percent in 2000. Cattle herds have
been declining for 2 years, and the number of calves available for feeding has
been declining. The USDA Cattle on Feed report released in August indicated
fewer feedlot placements than a year earlier and confirmed that beef supplies
will decline. With fewer cattle in feedlots in the months ahead, feed needs
will weaken in the beef sector.

Pork production is projected to increase 1 percent in 1999 but decline 3
percent in 2000. While very low hog prices caused many small producers to
abandon the industry in fourth-quarter 1998 and first-quarter 1999, large
operations have cut back very little, and production continues to increase in
1999, sustaining strong demand for grain. However, feed demand may weaken in
2000.

Competition Holds Down 
U.S. Exports

U.S. corn exports are likely to decline in 1999/2000 because of increased
competition from China, continued large exports by Argentina, and declining
world trade. Behind the increased competition and flat demand is large world
corn production, forecast at 592 million tons, down 2 percent mostly because
of below-trend yields in China. Significant increases are expected in
Argentina, Brazil, Mexico, South Africa, and the European Union (EU).
Production gains in Latin America will lower imports in that region. World
corn area continues to expand, with foreign area increases more than
offsetting the U.S. decline.

Throughout much of 1998/99, U.S. and world corn prices were low enough to
discourage the government of China from exporting aggressively (i.e., with
subsidies since internal prices are above world prices), and China's corn
exports dropped to less than half the previous year despite the record large
crop. However, with burdensome stocks and a new crop about to be harvested,
China sold over 2 million tons abroad when U.S. corn prices increased in late
July and early August. Most of those exports are expected to be shipped in
1999/2000. 

While world corn output is forecast down slightly in 1999/2000, production is
forecast down for all other coarse grains, particularly barley. Global barley
production is expected to fall dramatically, with world production down over 9
million tons or 7 percent. The EU, the world's largest barley producer and
exporter, increased the grain area set-aside for 1999 from 5 percent to 10
percent, and producers reduced barley plantings because wheat was generally
more profitable. In the Middle East and parts of North Africa, drought reduced
both area and yields of barley. In total, world coarse grain production is
forecast at 863 million tons in 1999/2000, down 3 percent from a year ago.

For the last 3 years, global coarse grain production exceeded consumption. In
1999/2000, world coarse grain consumption is forecast larger than production,
and a 6-percent decline in ending stocks is expected. Nevertheless, supplies
remain large, limiting U.S. price increases for corn and other feed grains.

The weighted-average price of corn received by U.S. farmers is forecast at
$1.75-$2.15 per bushel in 1999/2000, compared with a forecast $1.95 in
1998/99. In January-May 1999, the monthly farm price of corn averaged about
$2.05 per bushel but declined to a low of $1.74 per bushel in July when the
prospective crop suggested large supplies. Although prices strengthened when
the impact of the drought in the eastern Corn Belt became clear, abundant
supplies in other major U.S. growing regions are expected to dampen any
additional gains in 1999/2000.
Allen Baker (202) 694-5290 and Edward Allen (202) 694-5288;
albaker@econ.ag.gov, ewallen@econ.ag.gov  

COMMODITY SPOTLIGHT BOX
Gasoline Additives: MTBE v. Ethanol

Methyl tertiary butyl ether (MTBE) and ethanol are oxygenates--oxygen-rich
compounds which are added to motor vehicle fuels to make them burn more
cleanly.  MTBE is often produced from methanol (derived primarily from natural
gas).  Ethanol is derived primarily from corn and other agricultural products.
Under the Clean Air Act Amendments of 1990, Federal law requires a 2-percent
minimum level of oxygenates in reformulated gasoline sold in "nonattainment"
areas (generally metropolitan areas where ozone levels exceed federal
standards).  

MTBE is highly water soluble and persists in water if underground gasoline
tanks leak or if it is spilled.  Earlier this year, news reports of its
discovery in well water in California prompted calls for its elimination as a
gasoline additive.  California's governor has submitted a plan to the state
legislature to ban use of MTBE by the end of 2002.  If ethanol were to
completely replace MTBE in California and elsewhere, much more ethanol would
need to be produced. 

Also boosting prospects for ethanol use is a change in Environmental
Protection Agency (EPA) regulations to require gasoline with lower sulfur
content beginning in 2004.  Most processing technology to reduce sulfur
content also lowers gasoline's octane rating.  Ethanol is a prime additive
because it boosts gasoline's octane rating and has low sulfur content.  But
ethanol has a relatively high Reid Vapor Pressure (rvp)--a measure of
propensity to evaporate--and must be combined with a higher-cost low rvp
gasoline blend stock to meet requirements for reformulated gasoline.

Earlier this year, the EPA established a blue ribbon panel (including
representatives from government, industry, and environmental groups) to study
the use of oxygenates.  In July 1999, the panel recommended reducing the use
of MTBE.  The panel also recommended Congressional removal of the 2-percent
oxygenate requirement, a move favored by oil companies since it would give
refiners greater flexibility in finding a substitute for MTBE. 
WORLD AGRICULTURE & TRADE
U.S. Ag Exports To Turn Up in Fiscal 2000

U.S. agricultural exports are forecast to recover modestly in fiscal year 2000
to $50 billion, the first increase since 1996. The gain from 1999 2
percent is expected to be limited by relatively low prices, and export value
will remain below the levels of 1995-98. For bulk exports the projected gain
is 3 percent, and for high-value products (HVP's) just over 1 percent.

Propelling the export gain are higher global economic growth, especially from
recovery in Asia, and reduced export competition for some bulk commodities.
Gross Domestic Product (GDP) growth outside the U.S. is forecast to double to
2.9 percent in 2000, reflecting gains in almost every region, especially Japan
and the European Union (EU), two key U.S. markets. In addition, the value of
the U.S. dollar is projected to decline, particularly against the Japanese yen
and other Asian and Latin American currencies, which improves U.S. price
competitiveness in foreign markets. The dollar is expected to remain stable
against the Mexican peso and the Canadian dollar. 

U.S. agricultural imports are expected to rise $500 million from 1999 to $38
billion, the 13th consecutive record. Behind the gain are U.S. economic growth
and attractive import prices. U.S. GDP is forecast to grow at 2.5 percent in
2000, slightly slower than expected in 1999. Each of the largest import
categories horticultural products, red meats, and coffee will increase by
$100 million. Volume gains will be greatest for fruits and wine/malt
beverages. 

With export gains exceeding import growth, agriculture's projected trade
surplus in fiscal 2000 is $12 billion, up 4 percent from the 1999 forecast.
This is still the second-lowest surplus since 1987 and well below the
$27-billion surplus in 1996, the last record year for agricultural exports. 

Bulk Export Value 
To Rise Modestly

The value of U.S. bulk commodity exports (wheat, rice, coarse grains,
soybeans, cotton, and tobacco) is projected at $18.1 billion, a 3-percent
increase over 1999. With most export unit values for bulk commodities
projected to decline, the gain reflects mainly the anticipated increases in
volume for all bulk commodities except tobacco (to remain stable) and corn (to
decline). The bulk share of total agricultural export value will remain at 36
percent, unchanged from fiscal 1999. 

Bulk export volume is projected at 115.1 million tons, 5.3 million tons over
1999. Soybeans are expected to see the largest gain in volume, rising by 3.2
million tons. Exports of wheat are projected up 2.5 million tons, cotton up
400,000 tons, and rice up 100,000 tons. 

The projected record U.S. soybean harvest in 1999/2000 is expected to keep
world soybean production at a high level and prices weak. Consequently,
expected U.S. soybean exports in 2000 are forecast to rise 15 percent in
volume while gaining only 4 percent in value. Small decreases in South
American competitors' supplies should enable the U.S. to boost its share of
world soybean trade. 

The value of U.S. wheat exports is projected up 11 percent, due mostly to
higher volume, as export unit values are forecast only slightly higher than in
1999. Increased foreign demand and decreased export competition explain the
growth. Fiscal 2000 exports from Turkey and Eastern Europe significant
exporters in some years are expected to decline by at least 50 percent due to
smaller production. However, Australia and Canada still will be important
competitors for the larger demand. 

U.S. cotton exports in 2000 face expanding global supplies as well as an
expected increase in exports by China, a major importer in some years. U.S.
production will rebound to a more normal level of approximately 4 million tons
(18.3 million bales) from last year's drought-reduced low of just 3 million
tons (13.9 million bales). With larger production, U.S. exports are forecast
up 44 percent in quantity, but stiffer export competition will limit expected
gains in export value. 

Record U.S. rice production will bolster U.S. exports in 1999/2000. However,
export competition will heighten in 2000 and prices will fall sharply as
production rises in several major exporting countries (China, Thailand, and
Vietnam) and in several major import markets. While U.S. export volume is
projected at 3.3 million tons (up 100,000 tons), expected low prices will keep
export value at $1 billion (the same as 1999).

In contrast to all other bulk commodity exports, prospective U.S. exports of
corn fall 1.5 million tons in fiscal 2000 to 48.5 million tons, valued at $4.6
billion, as China boosts exports and intensifies competition in the world corn
market. Total U.S. coarse grain exports (value and volume) are forecast to
decline, with the drop in corn exports offsetting an expected increase in
barley and sorghum exports. 

HVP Exports To Recover 
From 1999 Decline

Greater world economic growth should begin to raise global incomes and
increase overseas demand for high-value product trade again in 2000. U.S. HVP
exports are forecast at $31.9 billion, 1.3 percent over 1999. Most categories
are projected up slightly, including soybean meal, red meats, poultry meat,
dairy products, fruits, and tree nuts. The only commodities not gaining are
soybean oil and vegetables. The HVP share of total agricultural export value
is essentially unchanged at 64 percent in 2000. 

The record-large U.S. soybean crop and expected gains in demand support
increased soybean meal exports in 2000, forecast at 6.3 million tons and $1.2
billion. Most of the gain is in volume, up 1 million tons; continued weak
export prices limit gains in value to $100 million. Forecast U.S. soybean oil
exports drop to $400 million (down $200 million) as soybean oil prices decline
under record-large world oilseed production (including a record palm oil
crop). 

Prices of both beef and pork are forecast to increase in 2000, which will
raise expected beef and pork export value by 7 percent. In addition, some beef
and pork food-aid shipments to Russia from 1999 will be pushed into
first-quarter fiscal 2000, raising expected export volume.

Exports of poultry meat are forecast at $1.8 billion, up $100 million,
supported by a small rise in demand from Asia and the Baltic States and
slightly higher export unit values. With economic turnaround for Russia
unlikely, the export volume of U.S. poultry meat is not expected to recover in
2000 after plummeting in 1999. 

Total horticultural exports are forecast to expand $200 million to $10.5
billion. U.S. fruit and tree nut exports are each forecast up $200 million.
Fruit exports should be bolstered by a recovery in the U.S. fresh orange crop
and by higher prices, along with growth in grapefruit and apple shipments to
Asia. A larger U.S. tree nut crop is projected to boost U.S. tree nut exports.
Offsetting some of the gain in fruits and tree nuts is a decline in vegetable
exports due to sharper export competition and flat demand.  
Carol Whitton (202) 694-5287; cwhitton@econ.ag.gov

WORLD AG & TRADE BOX
This is the first forecast of agricultural exports for 2000 (released August
31, 1999). Bulk commodities include wheat, rice, feed grains, soybeans,
cotton, and tobacco. High-value products (HVP) are total exports minus bulk
commodities. HVP includes semiprocessed and processed grains and oilseeds
(e.g., soybean meal and oil), animals and animal products, horticultural
products, and sugar and tropical products. Appendix table 27 presents a
breakout of U.S. agricultural exports and imports by major commodity
group both volume and value for 1998-2000.


WORLD AG & TRADE
EU's Agenda 2000 & Beyond

The European Union's (EU) Agenda 2000, finalized in March, builds on key
agricultural reforms of 1992 by further reducing support prices for some
commodities while partially compensating producers for the price declines
through direct payments. In general, Agenda 2000 changes in the grain,
oilseed, dairy, and beef sectors are modest and depend on world price levels.
But for wheat, the reforms will likely move the government purchase price
below a rising world price, enabling the EU to expand wheat exports without
subsidies. Besides moving the EU further from price supports in favor of
direct payments, Agenda 2000 will modify supply control measures. While Agenda
2000 effects on production and trade are modest, implications for the next
round of World Trade Organization (WTO) negotiations are more profound; the EU
will have more negotiating room on support prices, tariffs, and export
subsidies (depending upon the commodity) while still protecting its domestic
markets from imported agricultural products.

In 1992, the European Community (EC) adopted a set of reforms to its Common
Agriculture Policy (CAP) in pursuit of an agreement in the General Agreement
on Tariffs and Trade (GATT) multilateral trade negotiations. The reforms, the
most comprehensive in the nearly 30-year history of the CAP, have become the
philosophical basis for future changes in the CAP, featuring lower support
prices, partially decoupled direct payments, and cropland set-aside. 

Agenda 2000 represents the European Union's initial position for the next
round of WTO negotiations on agriculture, to begin in November 1999. Agenda
2000 is also a financial package and a prelude for the next EU enlargement,
which will include a number of Eastern European countries. The EU also imposed
a ceiling on CAP spending from 2000 to 2006, a ceiling that will surely be
surpassed if EU enlargement occurs during that time. In fact, the ceiling
probably would have been surpassed even without enlargement. Compensation
payments will continue and will likely be extended to East European farmers
(EU enlargement), putting even greater pressure on the CAP budget. 

If Agenda 2000 does not produce the desired results while meeting budgetary
and WTO commitments, the reforms could be revised as early as 2003, after
midterm reviews. Pressures for deeper reform will likely be greater in 3 years
because of the need to complete the WTO multilateral negotiations on
agriculture, the strain of mounting expenses on the CAP budget, and EU
enlargement encompassing countries with agricultural sectors competitive with
existing EU members. 

This analysis by USDA's Economic Research Service (ERS) compares an Agenda
2000 scenario with USDA February 1999 baseline projections. The baseline
projections were made with the assumption that the EU would use unreformed CAP
mechanisms to comply with its WTO limits on subsidized exports. The baseline
set-aside for cropland is 5 percent in 1998/99, 10 percent in 1999/00, 15
percent from 2000/01 to 2002/03, and a maximum of 17.5 percent from 2003/04 to
2009/10. In the baseline scenario, the EU does not accumulate stocks beyond
the historical average. The ERS analysis of Agenda 2000 suggests that most EU
agricultural commodities will continue to be uncompetitive in world markets,
and will require continued EU subsidization for exports. 

Domestic Support & 
Export Subsidies May Fall

In the Uruguay Round Agreement on Agriculture (URAA), countries agreed to
curtail programs and policies that provide direct economic incentives to
producers to increase resource use or production, such as administered price
supports, input subsidies, and producer payments not accompanied by
limitations on production. Support reductions were implemented by agreed
reductions to a country's Aggregate Measure of Support (AMS), a numerical
measure that quantifies the economic benefits from policies considered to have
the greatest potential to affect production and trade (AO December 1998). The
EU's compensatory payments, designed to replace farm income lost through
support-price reductions, as well as former U.S. deficiency payments, were
exempt from curtailment because they were considered to be payments under
production-limiting programs and are scheduled to be renegotiated in the
upcoming WTO Round. 

Production-enhancing policies, subject to AMS reduction, are considered to
have the largest production and trade effects. According to the URAA, the AMS
for production-enhancing policies was to have been reduced by 20 percent from
the 1986-88 base period. The 1992 CAP reforms exceeded the 20-percent
reduction required in the EU's AMS. Agenda 2000 also lowers the AMS because of
the reduction in support prices. Consequently, the EU appears able to agree to
a substantial reduction in its domestic support without affecting its internal
markets.

Even with price reductions of the CAP 1992 reform, the EU was constrained by
the quantity of subsidized exports allowed under the URAA. Grain and beef
exports were particularly troublesome because EU prices continued to exceed
world prices throughout most of the 1990's. Agenda 2000 price cuts will enable
the EU to export wheat without subsidy in 2000, and marginally more pork,
poultry, and eggs will be exported without subsidy because of lower feeding
costs. 

Grain and Milk Output To Rise

Under the EU's Agenda 2000 proposals, grain production would increase above
USDA's baseline projections. The 10-percent set-aside requirement, agreed upon
within the EU, is lower than the baseline for most years, making more land
available for production. However, grain yields are expected to be slightly
lower than baseline projections as farmers use less fertilizer in response to
a 15-percent cut in support price.

Based on USDA grain price projections in the 1999 baseline, the EU grain
intervention price would be below world and U.S. wheat prices but above world
and U.S. prices for corn, barley, and oats. With the world wheat price above
the intervention level, EU wheat producers could export at the world price
without subsidies. The price of other EU grains would remain at the
intervention level, above world prices. Growing wheat in the EU would be more
profitable than other grains, shifting some acreage out of coarse grains and
oilseeds and into wheat. 

Grain feeding would increase in response to the support-price cut, at the
expense of meal feeding. As the internal wheat price moves above the internal
price of other grains, wheat feeding would decline while feeding of barley and
corn would increase. The 15-percent cut in support price could make EU wheat
competitive in world markets in 2000, compared with 2005 in the baseline,
eliminating the need for export subsidies. The proposed grains intervention
price is well above USDA projected world prices for coarse grains. EU wheat
exports would increase above USDA estimates, while coarse grain exports would
remain at the EU's WTO subsidized export limits. 

The reduction in EU direct payments to oilseed producers would initially cause
a slight shift out of oilseed production into wheat production. However,
oilseed production would be slightly higher than USDA baseline projections,
due to the lower 10-percent set-aside.

While EU dairy reform has been postponed until 2005, milk production will
increase 1.2 percent in 2000 in response to the 1.2-percent increase in the
dairy quota. The quota will rise another 1.2 percent from 2005 to 2007. The
support price for skim milk powder (SMP) will be allowed to fall 15 percent
over the same 3-year period. 

Current EU dairy prices appear too high to allow the EU to export dairy
products without a subsidy. Currently, all EU butter exports, nearly all SMP
exports, and 82 percent of cheese exports are subsidized. Because the
15-percent reduction in support price is far smaller than average export
subsidies for both butter and SMP, the dairy support price will remain above
world prices and export subsidies will continue to be required. 

The support price for beef is cut by 20 percent, but because of lower feed
costs, increases in the dairy quota (more milk cows producing more calves for
beef), and larger direct payments, beef production will decline only slightly.
If the full 20-percent cut in the beef support price is passed on to
consumers, beef stocks could be eliminated. If half the price cut reaches
consumers, beef stocks could drop from 828,000 tons in 1998 to about 150,000
tons by 2007. The support price for beef will decline 556 euros/ton, far less
than the average export subsidy of 1,388 euros/ton in 1995/96-1996/97, thus
remaining above the world price and requiring subsidies for exports. 

Effects of Agenda 2000 on U.S. agriculture will vary by commodity. EU
livestock product exports will be small, producing only marginal effects on
U.S. livestock product exports. EU wheat exports are likely to increase
significantly under Agenda 2000, which will push the world price of wheat down
about 4 percent. Consequently, U.S. wheat production would decline about 1
percent (less than a million tons), and consumption would increase slightly in
response to the lower wheat price, diminishing exports by about 1.5 million
tons. 

Market Access Remains Restricted

The URAA provided for a minimum level of market access and maximum allowable
levels of domestic support and export subsidies. Market access committed
member states to tariffication and reduction of all border measures by an
average 36 percent over a 6-year period to 2000, and no less than 15 percent
for any individual tariff. Member countries also had to establish access
quotas equal to historical import levels to maintain current levels of imports
or, in the absence of historical imports, establish a minimum access quota
that would provide an opportunity for imports. However, "dirty tariffication"
occurred where countries exaggerated measures of domestic prices and/or
understated world prices, thus increasing tariffs. In addition, the chosen
base period against which the cuts would be measured was 1986-88, a time of
high levels of protection, which added to the high tariff levels allowable. 

Agenda 2000, by lowering intervention prices, effectively lowers the tariff on
grains and beef. The EU could thus agree to tariff reduction at least equal to
the reduction effected by Agenda 2000. However, EU tariffs are so high that
the EU could reduce tariffs by a substantial amount and still not face
competition from imports, with the exception of currently imported
high-quality grains such as durum wheat, malting barley, and high-quality
common wheat. No country is likely to penetrate the EU beef market because the
applied tariff is much higher than that required to protect EU producers. 

Consumer Issues Affect EU Ag Policy

Food quality and safety regulations will likely have little short-term impact
on the outcome of Agenda 2000 reforms for grains. EU corn producers are not
likely to be greatly affected by changes in competitive conditions resulting
from restrictions on genetically modified varieties, as little corn is
currently exported by the EU, and corn exports are not expected to expand
significantly even after support price cuts. Furthermore, EU corn producers
will continue to be protected by market barriers protecting grains. 

With respect to nutrition, a number of consumer advocates have pointed out
that the CAP undermines the advice of the latest medical research, which
emphasizes the need for increased vegetable and fruit consumption. Production
restrictions and encouraged market withdrawals make vegetables and fruits,
which are not addressed by Agenda 2000, relatively more expensive. 

The growing influence of consumers in agricultural policy is evidenced by the
EU's acknowledgment that one of the motivations for CAP reform is to address
consumer concerns. The CAP has been criticized for its cost and its large
share of the EU budget, for contributing to pollution and the spread of animal
diseases by promoting intensive agriculture and overproduction, and for
failing to promote economic development. However, support price cuts for
grains and beef may discourage overuse of chemicals and undesirable practices
associated with intensive livestock production. Provisions for promoting less
intensive production of livestock and other agri-environmental measures will
help meet environmental objectives. Targeting of funds to areas in greatest
need will help direct funds based on development objectives and farm income
equality goals.

Some of these consumer, animal welfare, and environmental pressures are
steering the EU toward common ground with its trading partners and away from
subsidizing overproduction. For example, consumers and animal rights'
advocates are pressing the EU for more stringent food safety regulations of
pathogens, pesticides, livestock production methods, and crops developed
through biotechnology. Farmers are increasingly being required to moderate the
effects of their practices on animal welfare and the environment. 

Some of these regulations have led to policy changes that will likely create
greater trade conflict. Trade disputes over hormones in beef, genetically
modified organisms (grains and oilseeds), fur trapping, battery cages
(confinement cages for layer hens), size of living space for livestock, and a
host of other issues have already surfaced between the EU and its trading
partners. 

Trade conflicts have been precipitated by mandated labeling in the EU,
demanded by activist consumer groups there. Labeling, whether mandatory or
voluntary, is one way food processors can transmit information to consumers
and target those who prefer foods produced in what they view as an
environmentally benign and humane way. 

Anticipating the Next WTO Round

The EU is better positioned to aggressively negotiate in the WTO round than in
the Uruguay Round. Because of the 1992 reforms and Agenda 2000, the CAP can
withstand a substantial cut in domestic support and lower tariffs without
compromising internal markets. But further cuts in allowable levels of
subsidized exports will require changes in the CAP beyond Agenda 2000. And
competitors have made it clear that subsidized exports will be the principal
target of the next WTO round.

Concurrent with the WTO round of negotiations will be budget issues generated
by EU enlargement. While EU enlargement does not appear to affect the WTO
negotiations in terms of market access, domestic support, or export subsidies,
enlargement will create severe budget problems under the strictures of Agenda
2000. With a budget fixed at 40.5 billion euros through 2006, the CAP will
have to be reformed again if enlargement is to occur. Deepening reforms could
produce fully decoupled CAP compensation payments and could lower support
prices to world levels, thus removing the need for export subsidies. Such a
move would pressure the EU's international trade partners to do likewise. 

The EU has stated that it plans to introduce consumer, environmental, and
animal welfare issues into WTO negotiations. The EU feels that if its farmers
are to incur costs because of labeling and processing regulations, imported
goods must be subject to the same cost-incurring regulations. If not, EU
representatives have stated that these exports will not be allowed to enter
the EU. The U.S. position is that these issues are already covered under the
URAA.  
David Kelch (202) 694-5151; dkelch@econ.ag.gov

WORLD AG & TRADE BOX
Agenda 2000 Reforms EU Farm Policy
The final agreement calls for:
--a 15-percent reduction in grains support price (18 euros/mt), phased in over
2 years, to be offset by an increase in direct payments (9 euro/ton);
--a 33-percent reduction in direct payments to oilseed producers, implemented
over 3 years, equaling the grains direct payment in 2002;
--a 10-percent minimum required cropland set-aside for 2000-2006;
--a 20-percent reduction in the support price for beef to 2,224 euros/ton, to
be phased in over 3 years and offset by direct payments;
--a delay in dairy reform until 2005/06;
--a 1.2-percent increase in the dairy quota in the first 2 years for a group
of specified deficit countries, and, starting in 2005, a 1.2-percent increase
in the group quota over 3 years for the remaining countries; and
--a limit to total agricultural spending for 2000-2006 of 40.5 billion euros
per year, in real terms.

RISK MANAGEMENT
Assessing Agricultural Commodity Price Variability

Price variability is a component of market risk for both producers and
consumers. Although there is no consensus as to what constitutes too much
commodity price variability, it is generally agreed that price variability
that cannot be managed with existing risk management tools can destabilize
farm income, inhibit producers from making investments or using resources
optimally, and eventually drive resources away from agriculture.

Market price volatility that is not offset by application of risk management
strategies can lead to sudden and large income transfers among various market
participants. For example, grain producers with high variable costs or
significant debt may face increased financial stress because of unexpected
downward swings in prices and income, and may be unable to repay creditors.
Input suppliers, farm lenders, processors, and producers in both the grain and
livestock sectors may see their business costs rise and may pass those higher
costs on to consumers. And insurance companies trying to set actuarially sound
revenue insurance rates when faced with increases in price variability must
raise premiums charged to farmers in order to maintain actuarial soundness (AO
August 1999).

Counterbalancing society's interest in the farm sector's ability to manage
price risk is an equally important interest in preserving a "natural" degree
of price variability. Price changes trigger supply and demand adjustments that
make markets work more efficiently. Thus, society has an interest not only in
helping market participants manage price risk via appropriate risk management
tools, but also in allowing markets to function efficiently.

An improved knowledge of the patterns of commodity price variability and the
forces behind it would aid policymakers in providing a policy environment
conducive to good risk management practices and would help farmers to better
understand and manage their price risks. USDA's Economic Research Service
(ERS) has undertaken research designed to identify trends or patterns in price
movements and variability over time nominal and inflation-adjusted and across
agricultural commodities. The research also explores factors influencing price
variability, such as strong seasonal patterns in production, market supply and
demand conditions, and government policies.

How Market Conditions 
Affect Price Variability

Agricultural commodity prices respond rapidly to actual and anticipated
changes in supply and demand conditions. Because demand and supply of farm
products, particularly basic grains, are relatively price-inelastic (i.e.,
quantities demanded and supplied change proportionally less than prices) and
because weather can produce large fluctuations in farm production, potentially
large swings in farm prices and incomes have long been characteristics of the
sector and a farm policy concern. 

The supply elasticity of an agricultural commodity reflects the speed with
which new supplies become available (or supply declines) in response to a
price rise (fall) in a particular market. Since most grains are limited to a
single annual harvest, new supply flows to market in response to a postharvest
price change must come from either domestic stocks or international sources.
As a result, short-term supply response to a price rise can be very limited
during periods of low stock holdings, but in the longer run expanded acreage
and more intensive cultivation practices can work to increase supplies. When
prices fall, the cost of storage relative to the price decline helps producers
determine if commodities that can be stored should be withheld from the
market.

Similarly, demand elasticity reflects a consumer's ability and/or willingness
to alter consumption when prices for the desired commodity rise or fall. This
willingness to substitute another commodity when prices rise depends on
several factors, including number and availability of substitutes, importance
of the commodity as measured by its share of consumers' budgetary
expenditures, and strength of consumers' tastes and preferences. Since the
farm cost of basic grains generally comprises a very small share of the retail
cost of consumer food products (e.g., wheat accounts for a small share of the
price of a loaf of bread and corn represents a fraction of the retail cost of
meat products), changes in grain prices have little impact on retail food
prices and therefore little impact on consumer behavior and corresponding
farm- level demand.

Increasing demand for grains for industrial use, whether from processing
industries or from rapidly expanding industrial hog and poultry operations,
further reinforces the general price inelasticity of demand for many
agricultural commodities. Industrial use of grains generally is not sensitive
to price change, since industrial users usually try to utilize at least a
minimal level of operating capacity year round. Also, in most cases, as with
retail food prices, the price of the agricultural commodity represents a small
share of overall production costs of agriculture-based industrial products. 

However, feed demand for grain, particularly for cattle feeding in the
Southern and Northern Plains states, is far more sensitive to relative feed
grain prices, since similar feed energy values may be obtained from a variety
of different grains. Cattle feeders in these states are quick to vary the
shares of different grains in their feed rations as relative prices change.

In general, elasticities of demand and supply for agricultural products are
both low but not uniform or consistent across commodities. For example, there
are several characteristics unique to wheat production in the U.S. that
suggest greater supply and demand elasticity (and, since supply and demand
respond somewhat faster, less dramatic price swings) relative to other field
crops in the face of external supply and demand shocks e.g., crop failure in
a competing exporter country or financial crisis in a major purchasing
country. 

First, U.S. wheat production is marked by two independent seasons, winter and
spring, with planting periods nearly 6 months apart. If it becomes apparent
that winter wheat production is substantially below market expectations due to
prevented plantings or weather-related declines in expected yield, some
potential production losses can be offset by increased spring wheat plantings. 

Second, the potential for surplus wheat production to enter agricultural
markets from a large number of competing wheat exporter nations (principally
Canada, Argentina, Australia, the European Union, and occasionally Eastern
Europe) increases the supply responsiveness of wheat beyond that of other
major grains. In addition, since two major U.S. wheat export competitors are
located in the Southern Hemisphere and their production cycle runs opposite
that of the U.S., still greater elasticity of supply in international markets
is possible.

Argentina and Australia have the opportunity to expand planted wheat acreage
in response to supply and demand circumstances in the U.S. within the same
marketing year, dampening the potential year-to-year variability of prices in
the U.S. market. While this potential additional supply limits price rises, it
may actually deepen price declines because high storage costs and limited
storage capacity frequently push surplus production into international markets
even when prices are low.

Third, wheat can serve dual functions as either food or feed. The feed
potential of wheat can have a dampening effect on price variability, either by
introducing an additional source of demand that prevents prices from falling
too low or by shutting off that same demand source when prices rise too high
relative to other feed grains.

Fourth, most government-assisted export programs have been directed at wheat
and have had a potential dampening effect on price variability in much the
same manner as feed demand they introduce an additional source of demand that
moves opposite prices. Because export programs are funded to deliver a fixed
value of commodities, the volume of U.S. program grain exports rises during
periods of excess supply and relatively lower prices, but falls when supplies
are tighter and prices higher.

Similarities Common in
Commodity Price Movements

In examining long time series of monthly average spot market prices for corn,
oats, soybeans, and several classes of wheat from major terminal markets, ERS
has found strong similarities in nominal and inflation-adjusted price
movements and variability over time and across agricultural commodities. Price
movements of corn, oats, and most wheat classes are similar mainly because of
their substitutability in livestock feeding, but their market-year price
volatility shows greater differences because the commodities differ in their
response to supply and demand shifts.

Nominal prices for these commodities, as reported by USDA's Agricultural
Marketing Service, have shown a general upward trend since the early 1930's,
interrupted by nearly two decades of fairly stable prices in the 1950's and
1960's. This period of relative stability ended with a dramatic price spike in
the early 1970's, a tumultuous period marked by an unexpected surge in world
grain demand and trade, coupled with poor harvests and rapid, dynamic
macroeconomic changes (AO September 1996). Since the mid-1970's, nominal
prices appear to have both a higher mean level and greater variability. The
past three seasons (1996-98) have witnessed a precipitous plunge in nominal
prices from the May 1996 spike when corn and two of the high-protein wheat
classes hard red winter and hard red spring attained record-high monthly
average spot market prices.

When monthly average price data are adjusted for inflation, a different
pattern emerges declining real prices since the late 1940's, interrupted by
the dramatic upward spike in prices of the early 1970's. The pattern of
inflation-adjusted price variability is less clear than the pattern of nominal
price variability, but it suggests that prices were more variable during the
three pre-World War II decades than since.

A common statistic for measuring the variability of a data series is the
coefficient of variation (CV), which expresses the dispersion of observed data
values as a percent of the mean. Since the CV is unit-free (a percent), it
facilitates comparison of price changes in different directions, across
different periods of time, and for different commodities. Marketing-year CV's
calculated from each commodity's inflation-adjusted series of average monthly
spot prices reflect the price volatility that occurred within each marketing
year. The nature and degree of this within-year price variability affect
decisions on the mix and level of farm activity, as well as on risk management
and marketing strategies. 

On the other hand, a comparison of CV's across market years provides an
indication of a commodity's longrun price variability. Such across-year price
variability influences firm expansion and capital-asset acquisition decisions,
and has a direct bearing on a firm's economic viability. In addition, the
longrun variability of commodity prices across marketing years reflects the
risk environment for agriculture relative to other sectors. 

A shortcoming inherent in using historical averages as a forecast of price
volatility is that such estimates fail to fully incorporate current market
information. For example, prices are likely to be more volatile than the
historical average during a year that begins with very low carry-in stocks.

The degree of variability in commodity prices is traditionally believed to
depend heavily on stock levels and on the nature and frequency of unexpected
shifts in demand and supply. Thus, essentially all market forces affecting
commodity price formation could potentially come into play in determining
price variability. Such forces include own supply (carry-in stocks,
production, and imports), supply of substitute crops (depending on end use),
and aggregate demand (domestic mill, feed, seed, and industrial use, and
exports). Own supply and supplies of competitor crops are directly affected by
weather, acreage, government policy, and international trade factors. Demand
is directly affected by price, income, shifts in tastes and preferences for
end uses, and population growth. Grain and seed characteristics i.e., type,
quality, protein content, and color are also key factors in price formation. 

The possibility of substitution in use is critical in determining strength of
correlation between different commodity prices. For example,
inflation-adjusted spot market prices for three winter wheat classes soft
red, hard red, and soft white winter and hard red spring wheat are highly
correlated, because they offer some similar characteristics to end users. Hard
amber durum, on the other hand, with its high protein level and specific
milling and end use qualities, offers the least opportunity for substitution
with other wheat classes and, as a result, tends to have slightly lower price
correlations with other wheat classes.

Price correlations among corn, oats, and wheat, although somewhat lower, are
still very strong and likely reflect their substitutability in feed markets.
Price correlations between these grains and soybeans are lower yet. Soybean
prices are principally derived from demand for its joint products oil and
meal. Soybean meal is generally included in feed rations as a protein source,
but may compete directly with other grains in feed rations as an energy
source, depending on relative prices. However, soybean oil used principally
as a food with some minor industrial uses has limited substitutability with
grains (corn oil being the major exception), thereby weakening the
soybean-grain price correlation.

Correlations of market-year price CV's for corn, oats, wheat classes, and
soybeans are sharply lower compared with price-level correlations. This
suggests that while general price levels for most grains and soybeans may be
influenced by or move in tandem with many of the same forces, commodity price
variabilities are more distinct and less strongly related to each other, due
likely to disparities in their respective supply and demand responsiveness to
price changes. 

Strong Seasonal Pattern Underlies Within-Year Price Volatility

The principal difficulty analyzing within-year price variability is that while
prices can be routinely observed for almost any time period (e.g., year,
month, week), the economic supply and demand factors that likely influence
price movements are generally reported only on a monthly or quarterly basis.
Research conducted jointly by ERS and North Carolina State University
attempted to circumvent this problem by transforming monthly and quarterly
data into weekly data representations. These were used to assess the
importance of relevant market information in forecasting within-year price
variability (measured as a rate of change) of settlement prices for the
Minneapolis Grain Exchange's September wheat futures contract and the Chicago
Board of Trade's December corn futures contract during the 1987-96 period.

Futures prices play a critical role in facilitating seasonal market
operations, because they provide a forum for forward contracting, as well as a
central exchange for domestic and international market supply and demand
information. Regional and local grain elevators rely on futures commodity
exchanges for hedging grain purchases and generally set their grain offer
prices at a discount (in areas of surplus production, such as the Corn Belt)
or at a premium (in deficit production areas, such as North Carolina) to a
nearby futures contract. As a result, cash prices and futures contract prices
are strongly linked i.e., both prices contain much of the same information
about variability.

Both corn and wheat futures contract prices display distinct patterns of
seasonal variability. For the December corn contract, a strong variability
peak occurs in June when there is a great deal of uncertainty surrounding the
true extent of plantings and likely yield outcomes for corn and other
spring-planted crops. Much of the acreage uncertainty is resolved with release
of USDA's June 30 Acreage report, while yield uncertainty is resolved in July
after corn pollination has occurred. A second, weaker peak occurs in October
and corresponds with the arrival of new information during the peak corn
harvest period. The seasonal component of corn price volatility then declines
rapidly prior to contract expiration.

This pattern suggests that the bulk of relevant information is synthesized by
the corn market during the critical summer growing months when estimates of
acreage and yields are largely determined. Supply news then tends to dominate
markets into the fall harvest, with little new information added during the
period immediately preceding contract expiration. 

The seasonal pattern for September wheat futures contract price variability
also shows two peaks, the first a weak early-season peak occurring in
January-March, a time of substantial uncertainty about the true condition of
the winter wheat crop and farmers' spring planting intentions. Much of the
uncertainty is resolved with USDA's release of its March 28 Planting
Intentions report.

A second, much stronger peak in variability occurs in late July and
corresponds with the arrival of new information during the peak wheat harvest
period and the critical growing period for the major feed grains. Domestic
prices for the U.S. wheat crop also depend heavily on international supply and
demand conditions, and some key market information governing international
developments does not reach the market until midsummer when USDA begins
forecasting major international crop production. Following the July
harvest-time surge, the seasonal variability then declines rapidly prior to
contract expiration. 

The volatility of corn and spring wheat futures prices also shows a strong
negative relationship with growing conditions better-than-average growing
conditions are associated with lower price variation. However, corn and wheat
prices differ in the association of variability with many of the remaining
supply and demand factors studied. This is likely due to differences in their
respective supply and demand responsiveness to price changes. 

For corn, increases in expected U.S. domestic demand published monthly in
USDA's World Agricultural Supply and Demand Estimates (WASDE) report had a
positive influence on price volatility, but changes in actual levels of corn
stocks estimated quarterly by USDA did not appear important, probably because
corn supply is estimated from a single annual crop, and because changes in
stocks are primarily a residual of often offsetting changes in other market
forces and therefore tend to move slowly between harvests. 

For wheat, changes in expected exports and domestic demand for all wheat
showed no influence on spring wheat price volatility, while increases in
actual all-wheat private stocks had a dampening effect on volatility. Lack of
a strong relationship between demand factors and spring wheat price volatility
is likely explained by winter wheat dominance of U.S. wheat exports, by the
shifting importance of wheat as government food donations versus commercial
export sales, and by the interplay of food-feed markets. 

The study found that the level of day trading (day traders enter and exit the
market with no outstanding balance at the end of the trading day) at each
commodity exchange correlated positively with both corn and spring wheat price
variability, likely because day trading allows prices to adjust to information
more quickly. On the other hand, market concentration measured using
Commodity Futures Trading Commission "commitment of traders" data on holdings
of the four largest traders had a negative influence on spring wheat price
volatility, suggesting that the action of large traders in highly concentrated
markets may decrease the volatility of wheat prices.

Forces Driving Across-Year
Price Variability

In joint research to investigate determinants of across-year price
variability, ERS and North Carolina State University constructed within-year
CV's from monthly average cash prices at major terminal markets during 1944-97
for Chicago/St. Louis soft red winter wheat, Chicago corn, and Chicago/Central
Illinois soybeans. Each CV reflects the price variability that occurred during
a market year. Then these market-year CV's were examined in light of
year-to-year changes in major supply and demand factors.

As expected, output price variability for all three commodities was found to
be negatively correlated with the level of stocks relative to total
disappearance; a ready supply available from stocks tends to make prices less
sensitive to new market information. However, as in the within-year study,
corn, soybean, and wheat price CV's exhibited key differences in their
association with most of the remaining supply and demand factors studied,
likely because of differences in their supply and demand responsiveness to
price changes. 

Since increases in production tend to dampen both prices and price variability
by contributing to an increase in total supply relative to market demand, any
change in acreage and yield (both of which have positive associations with
production) is expected to have a negative, indirect effect on price
variability through the influence on production. Change in yield shows a
strong negative relationship with corn price variability, but no relationship
with soybean and wheat CV's. Wheat's dual seasons (winter and spring) within a
single crop year and broad geographic diversity of production likely diminish
the influence of a single weather pattern on the aggregate wheat market.
Change in harvested acres is negatively related to wheat price variability,
but not to corn or soybean price variability. 

Change in demand, on the other hand, is expected to be positively associated
with price variability since increases in demand, whether domestic or
international, draw down total supplies and stocks, and decreases in demand
have the opposite effect. This was confirmed by a positive association between
corn price variability and both domestic use and exports.

However, wheat price variability showed no relationship to change in domestic
use and was negatively related to change in exports. The negative effect of
wheat exports on price variability tends to confirm the smoothing effect of
government export assistance programs, and suggests that U.S. wheat exports
act as a residual source of supply to world markets when domestic prices fall
low enough. The offsetting roles of food and feed usage in wheat price
volatility positive for widespread changes in domestic use for milling and
other food and industrial uses, but negative (and offsetting) when acting as a
residual outlet to feed markets result in a net neutral effect. 

Similarly, changes in the general level of input prices are expected to have
positive associations with price variability indirectly via their negative
influences on production and total supply. For example, rising input prices
tend to dampen production and, in turn, may raise price variability. However,
no relationship was found with corn and wheat price CV's. Instead, soybean
price variability showed a negative association with changes in input prices,
suggesting that soybean cost savings relative to corn and wheat played a role
(AO May 1999). As input prices rise, producers favor soybeans because net
returns are higher, resulting in greater acreage, more production, and lower
soybean price variability. 

Government policy influences are inherent in nearly all related supply and
demand variables. Several government program initiatives (including some that
preceded the 1996 Farm Act) were studied to directly measure the influence of
loan rates (which tend to act as support prices), expected deficiency payments
(which were intended to stabilize income but often had the unintended
consequence of limiting substitution in production because of associated
acreage restrictions), and acreage reduction programs (which were designed to
reduce supply by removing acreage from production). Results hint at some
effects on commodity price variability for wheat and soybeans from acreage
constraints and price support programs, but no government policy variable was
found to influence corn price variability.

While far from conclusive, these results suggest that past government programs
had a tendency to produce higher levels of price variability, at least for
wheat and soybeans. In every case where a government policy variable was found
to be important, it had a positive association with price variability. At
first glance, this effect may seem surprising. However, policies that are
intended to stabilize producer incomes a central goal of past policy are
apparently likely to increase the volatility of market prices if they distort
production and marketing arrangements.

Since the 1996 Farm Act, government policy has shifted away from potentially
price-destabilizing direct intervention in agricultural production processes
and markets. Instead, USDA's Risk Management Agency has been working to
provide the necessary tools and information for farm operators and other
participants in agricultural markets to better understand and manage risks
associated with producing and selling agricultural commodities. Although
effective techniques for managing inter-year price risk remain elusive, a
variety of management tools e.g., futures and options contracts, and various
crop and revenue insurance products (AO April 1999) exist for managing
within-year price risk.  
Randy Schnepf (202) 694-5293; rschnepf@econ.ag.gov

RISK MANAGEMENT BOX 
This article continues Agricultural Outlook's series on risk management.

RISK MANAGEMENT BOX
Are Prices More Volatile in Recent Decades Than Earlier?

An examination of the historical record of wheat, corn, oat, and soybean
prices during 1913-97 indicates the following patterns:
--Wheat prices tend to be less variable than prices for oats, corn, or
soybeans over the entire period and during most selected subperiods. The most
notable exception is the 1990-97 period when wheat price variability was above
average while soybean and oat variability were below the average for the
entire period.
--All five wheat classes, plus corn and soybeans, exhibited dramatic increases
in price variability during the 1971-75 period.
--Price variability for all commodities is noticeably higher in the
post-1970's era (1976-97) than during the pre-1970's period (1951-70).
--Price variability in the post-1970's period (1976-97) is slightly lower than
variability during the 1913-50 period.

Studying such a long price series gives greater perspective to current levels
of price variability and suggests that perhaps an anomaly with respect to
price variability occurred during the 1950's and 1960's, when heavy government
involvement in agricultural commodity markets including large government
stockholdings of wheat and feed grains coupled with low absolute levels of
world trade (relative to the post-1971 period) contributed to artificially
stable prices.RESEARCH & TECHNOLOGY
Biotechnology Research: Weighing the Options For a New Public-Private Balance

The revolution in biotechnology, coupled with strengthened patent protection
for biological inventions, is toppling conventional wisdom about the research
roles of the public and private sectors. Although the division of labor was
never precise, a longheld belief is that the combination of a public sector
specializing in relatively basic research and a private sector oriented toward
applied research and technology development generates the highest return on
the nation's total research and development (R&D) investments.

Today, however, it is increasingly evident that a sizable share of what was
once considered exotic basic science, such as genomic mapping, is being
conducted in the private sphere by large life science firms, such as Novartis,
Monsanto, DuPont, and Celera, and by many smaller biotech companies. The
expansion of their basic research programs explains in part why total research
expenditures by the private food and agricultural industry have nearly tripled
in real terms between 1960 and 1996, from about $1.3 billion to $4 billion,
and why total U.S. investment in agricultural research is much larger now than
ever before. This shift in the role of the private-sector research poses new
public policy questions and presents challenges for planning the public-sector
agricultural research agenda.

Among the challenges facing R&D decisionmakers and analysts: Is there a unique
and distinct role for public sector research as the private sector's role
expands?  What is the appropriate relationship between public and private
research entities?  How do public researchers gain access to critical basic
knowledge being generated by private firms?  And should public research
organizations be pursuing intellectual property protection as vigorously as
private firms?

Answering such questions may require a new conceptual framework for public R&D
decisions a framework likely to evolve slowly in relation to the speed with
which the biotechnology revolution is generating new knowledge of plant and
animal genomics and stimulating development of genetically enhanced
agricultural and agriculturally based products (AO March 1999).

Traditional View of Public-Private Split Is Fading

The traditional economic rationale for a strong public role in research is
based on the nature of R&D i.e., the product is information which, unless
kept secret, can be copied with minimal additional cost by anyone who wants to
use it. Lacking the ability to sufficiently recoup (or "appropriate") the
returns on their research investments, firms would likely conduct too little
research from the standpoint of potential benefits to society at large.

On the other hand, if firms are able to secure strong proprietary rights to
research discoveries, the benefits of new knowledge are unlikely to be widely
shared and many potentially beneficial uses may be precluded. A strong
public-sector role in conducting as well as funding research helps ensure both
a larger pool of R&D for the nation and broad dissemination of new discoveries
to other scientists and innovators who can advance and apply them.

This logic has been used to support the idea that the public-sector role
should emphasize basic research. Basic research has been the least
appropriable category of research because pure knowledge, once discovered, is
difficult to keep secret and its use by one person in no way precludes its use
by another. Applied research, on the other hand, may result in a physical
product or technology whose use can be restricted to those buying a copy.

Widely available basic research results are also likely to have the largest
positive "spillovers" that is, benefits that extend beyond the initial users
and that often underpin further research discoveries. For example, knowledge
of DNA structure has spawned and enhanced biomedical research discoveries all
over the world. By concentrating on basic research, the public sector can
maximize spillovers to the benefit of further advancements in both public- and
private-sector research, as long as the results of public-sector basic
research remain nonappropriable public goods.

Agriculture and agricultural technology have characteristics that have further
shaped the public sector's role in U.S. agricultural research over the last
100-plus years. Some research areas related to public concerns about
agricultural production and the food system for example, enhancing
environmental quality, conserving genetic resources, improving the nutritional
status of consumers, mitigating food safety risks, and protecting biological
security of the food system may have both basic and applied components that
are critical for building the science base for public policy. However, such
areas of research are unlikely to attract adequate private investment because
prospects for financial returns are relatively low or difficult to assess.

Further, economic returns from investing in development of many agricultural
production technologies, particularly self-pollinated seeds and new livestock
breeds, have historically been difficult for private inventors to appropriate,
not only because the products themselves provide the means to reproduce them,
but also because biological inventions until recently were not subject to
standard patent law. With no patent restriction, a farmer could, for example,
use the seed of self-pollinated plants in the next planting season, or even
sell the next generation of seed to others. Consequently, investment in crop
and livestock breeding research has been historically a largely public-sector
effort.

The extent to which private firms and individuals can profit from what were
previously considered basic scientific discoveries changed dramatically
following a 1980 Supreme Court decision that made it possible to obtain the
strongest form of intellectual property protection (utility patents) for
living organisms. In the last 10 years especially, the rate of patent
application and patent granting for biological inventions has accelerated
rapidly, particularly for genetically engineered plants and animals as well as
for individual genes with specific uses ("utilities").

In a departure from past experience with biological innovation, a number of
utility patents are for biological materials that enable scientific research.
Examples of enabling technologies are "promoter genes" (genes that control or
modify the action of other genes), "marker genes" (genes that, when discovered
in an organism, facilitate identification of an associated trait that is
otherwise not detectable), and specific cellular-level enzyme activation
processes. The value of these enabling technologies is a function of their
importance in the production of a biotechnology end product.

Development of a genetically engineered, salt-tolerant crop cultivar (a
patentable final product), for example, may rely on use of a bacterium-based
gene transfer technique (an enabling technology), which is itself patentable
and which may require a license for legal use. Biological enabling
technologies have been likened to computer software in that both have fairly
recently been deemed patentable, both can provide intermediate means to a
final goal, and both could easily be "pirated" to produce final goods were it
not for intellectual property protection.

The strengthening of intellectual property law for biological materials is
essential fuel for the engine of private-sector biotechnology innovation. It
allows those who invest scientific resources in research to recoup their
(often substantial) development costs through licensing rights to use an
enabling technology or retaining exclusive sales rights (for 20 years maximum)
on a final biological product. Basic science can now lead to unique and
patentable properties of specific biological materials. At the same time,
advances in biotechnology e.g., fast and accurate "DNA fingerprinting" to
identify patented DNA sequences have strengthened companies' ability to
protect their intellectual property. There is, therefore, a private incentive
to pursue what historically has been considered public-sector basic science,
because the results are no longer pure public goods.

Continued consolidation, vertical integration, and concentration in the
agricultural seed and chemical industries has raised some concerns about
expansion and control of agricultural R&D by private interests. With very
large life-science-based firms conducting appropriable research on
agricultural biotechnologies, questions arise about the concentration of power
proffered by patents and other means of protecting intellectual property.
However, evidence to date indicates that licensing of many enabling
technologies whose patents are owned by private firms is widespread. So, even
if few firms manage a large body of intellectual property, licensing may
temper the manifestation of substantial market power.

Of potentially greater concern is vertical integration of agricultural
biotechnology firms along a portion of the food supply chain. For example, a
chemical firm that owns a seed company focused on major row crops may have an
incentive to restrict the use of an enabling technology to its own seed firm
in order to limit competition in new row-crop seed. This in turn would limit
the number and type of end products likely to be developed from that enabling
technology to a level probably lower than if its use were licensed to many
seed companies (including firms that produce specialty crop seed along with
some major row-crop seed).

Sorting Out a Public 
Research Role

The strengthening of intellectual property protection for biological
inventions has weakened one of the historical justifications for public
support of agricultural research i.e., the inability of private entities to
sufficiently profit from research. By the same token, another major
justification i.e., to maximize knowledge spillovers by facilitating broad
dissemination of research finding appears to have been reinforced. These
developments suggest the need for decisionmakers to reevaluate public research
policy and to identify strategies that generate the greatest social return on
R&D investments. Key to policy planning is determining when and how the public
sector should interact with the private sector i.e., whether an area of
inquiry is purely in the public domain, is appropriate for public-private
partnership, or is most suitable for the public sector to pursue to prevent
control by the private sector.

Given that some motivations for research are distinctly public e.g.,
mitigating food safety risks, improving nutritional health, and enhancing
environmental quality they are unlikely in and of themselves to be a focus
for private endeavors. One benefit of stronger intellectual property
protection for agricultural research is that by creating an incentive for
private basic research, it offers an opportunity to redistribute limited
public resources to critical areas in the public domain. For example, genetic
resource conservation storing and conserving genetic resources for the
future may be viewed as a kind of insurance against loss of rare biological
material because it gives society the option of drawing upon these banked
resources at a later time.

Which genetic resources will be needed for breeding in the future, and when,
is unknown. The uncertainty of a return to such investment over a very long
time horizon means that genetic resource conservation would be seriously
underfunded by the private sector in relation to its longrun value to society.
This vital responsibility currently overseen by the National Plant Germplasm
System (NPGS) is generally agreed to fall within the public domain.

Carving out areas of distinctly public-sector research is, however, likely to
be more difficult than in the past, because it is increasingly likely that
some knowledge and/or biotechnological tools needed for public-sector research
thrusts will result from private activity and will be patented. For example, a
project to genetically modify papaya for disease resistance aimed primarily
at aiding less-developed countries not likely to compete with U.S. commercial
interests was complicated by the need for university-based researchers to
negotiate a half-dozen licensing agreements with private firms.

The potential for public-sector research to benefit from private-sector
research discoveries suggests a need to expand opportunities for partnerships.
Despite many complementary research interests, public-private partnerships are
not easy to forge, and disagreements over patent arrangements and licensing
rights can be major barriers.

Drawing firms into such agreements especially where making the findings
readily available may be one of the major goals can be very difficult.
Nonexclusive or limited-exclusive arrangements that assure broad dissemination
of findings may better serve the public interest, but first right to
exclusively license an invention may be the powerful inducement necessary for
firms to agree to participate. Alternatively, private firms may become willing
to give up some intellectual property protections if they receive something
beneficial in return such as access to scientific personnel, techniques,
infrastructure, or even professional credibility from association with a
public endeavor in effect, some in-kind compensation that enhances their
research efforts but would be more costly to procure through other means. For
example, in striving to forge partnerships with multinational firms, the
network of international agricultural research centers (known as the CGIAR
system) has stressed that it offers access to germplasm collections and the
mantle of CGIAR's credibility and goodwill in countries around the world.

One existing vehicle for public-private partnership is the cooperative
research and development agreement (CRADA), a mechanism that has been used by
USDA's Agricultural Research Service (ARS) since enactment of CRADA
legislation in 1986. USDA has typically used CRADA's to speed the transfer of
technology developed in the public sector to the private sector for
development of commercial applications. However, ARS has seen very few patents
arise from the 900 CRADA's established to date, which means there have been
few exclusive patent licenses associated with these cooperators. In the
current environment, the focus of CRADA's and other collaborations may shift
toward cooperative research projects or programs with multiple, complementary
outcomes for public and private participants.

A provocative question today is whether the public sector should strategically
target and perhaps defensively patent research in order to guarantee access to
and broad dissemination of certain critical types of new knowledge that might
otherwise be "locked up" by private firms. An example of biological research
critical to the public interest is the study of apomixis, asexual reproduction
through seed. The apomixis trait enables some flowering-plant species to
produce seedlings that are genetically identical to the mother plant, in
effect allowing hybrid cultivars to clone themselves. New knowledge gained
from apomixis research could generate a worldwide revolution in the economic
development and use of hybrid cultivars, including major food crops, but
potential limitations on biodiversity are profound. Identifying such research
areas for the public sector to undertake requires a broad vision of scientific
frontiers and their possibilities, coupled with insights into the investment
strategies of private firms.

New knowledge of biotechnology promises dramatic change in the ability to
create agricultural production and food industry applications to benefit
humanity and the natural environment. Some of this knowledge may result from
private research organizations which seek to restrict distribution to shield
potential returns and some may be uncovered within the public domain. In
either case, obtaining that knowledge requires expensive, long-term
investments.

Determining how public agricultural research institutions principally ARS and
state agricultural experiment stations fulfill their longstanding roles as
producers of knowledge for the public good requires more complex and strategic
decisionmaking than was the case just a decade ago. Some new criteria are
necessary for assessing what the public sector funds, where the public sector
should invest, and how circumstances of industry structure affect expected
returns to public investment.

One way to judge the value of a public-sector role in any particular type of
agricultural research is to ask: Who is likely to benefit from the fruits of
this research?  For example, ARS reviews the plan of work for a potential
CRADA to determine whether the outcome of the research could lead to
applications in specific areas of end use, or to more basic discoveries of a
new approach or enabling technology. The agency frequently declines
collaborations that could lead to monopoly power over technologies with
public-good value.

Other critical questions include: How are the benefits of the research likely
to be distributed along the food supply chain among input suppliers, farmers,
processors, and consumers?  Are public benefits likely to exceed public costs? 
The answers will help determine whether one form of public-private interaction
is superior to another, and to indicate how public-sector research
institutions and other public policy participants might influence the private
sector the new, major actor in agricultural R&D to pursue actions that
maximize the public good from the biotechnology revolution.  
Katherine R. Smith (202) 694-5500, Nicole Ballenger (202) 694-5013, Kelly
Day-Rubenstein (202) 694-5515, Paul Heisey (202) 694-5526, and Cassandra
Klotz-Ingram (202) 694-5519; nicole@econ.ag.gov

RESEARCH & TECHNOLOGY
A list of suggested readings is available from the authors.

RESEARCH & TECHNOLOGY BOX
Government Broadens Protection for Biological Discoveries

While limited types of patent protection for plants have been available since
1930, recent government actions have significantly expanded the scope of
safeguards for new biological discoveries. The landmark Diamond v. Chakrabarty
decision by the Supreme Court in 1980 ruled that a genetically engineered
organism could be patented under existing law. Subsequently, the U.S. Patent
Office set precedent rules during the 1980's that permitted granting utility
patents to new types of plants and plant parts (including seeds, tissue
cultures, and plant genes), and also to animal genes and new and unique breeds
of nonhuman animals.

During that decade, a series of new laws also changed the nature of
intellectual property protection available to public-sector discoveries. In
1980, the Bayh-Dole Patent Policy Act allowed individuals and institutions to
receive patents and then grant licenses for the results of research conducted
with Federal funds. The Stevensen-Wydler Technology Innovation Act of 1980,
later amended by the Federal Technology Transfer Act of 1986, authorized
cooperative research and development agreements (CRADA's) as a mechanism for
public-private research collaboration, and directed the public sector to
transfer rights to explore commercial possibilities to the private sector for
development and economic rent (profit) appropriation.

Plant breeding activities by traditional seed companies have clearly responded
to the new forms of intellectual property protection by intensifying their
research efforts. In recent years, the private-sector plant breeding
effort measured in scientist years was more than twice the public-sector
effort in USDA and state agricultural experiment stations combined. Although
seed companies continue to emphasize cultivar development, a study of plant
breeding R&D in the U.S. indicates that 40 percent of scientists specializing
in genetic enhancement and basic research are employed in the private sector,
with much higher shares for scientists studying hybrid crops. Nearly half of
all breeders of pureline cereal crops those that produce true-to-type seed
from generation to generation are in the private sector. Not surprisingly,
the private sector owns the majority of Plant Variety Protection Certificates
and patents awarded for multicellular living organisms.

RESEARCH & TECHNOLOGY BOX
How Is Agrobacterium tumefaciens Like Computer Software?

Agrobacterium tumefaciens is a pathogenic microorganism that naturally inserts
its own genes into plants that it infects. This trait has been refined for
biotechnological development, where Agrobacterium is used to transfer genes
from other organisms into plants. Although other gene transfer methods are
available, this enabling technology remains one of the easiest and most
effective methods for creating genetically modified organisms (GMO's).

Few would disagree that intellectual property protection (patents) should be
available to inventors of computer software--tools designed to enable
operation of computers. But the idea of intellectual property protection for
biological tools is somewhat harder to envision. Yet biological tools such as
Agrobacterium, like computer software, are:

--intermediate products whose value can only be realized through their use in
accomplishing another task in a different final product (a genetically
engineered organism or a computer); 
--easily accessible, whether or not one has a license to use them, so that the
potential for "pirating" reinforces the need for protection of the
intellectual property they embody; 
--able to resist exact replication, but can be imitated by similar products;
and 
--undergoing scrutiny by the legal system because of fears that producers of
final products for which these intermediate products are essential may
exercise undue power in the marketplace for the GMO's/computers they enable. 

SPECIAL ARTICLE 
Infrastructure Investment in APEC Region Threatened by Financial Woes

The global financial crisis of 1997-98 has had serious impacts on the
economies and food systems of the Asia-Pacific Economic Cooperation (APEC)
region. Consumer incomes have fallen, food costs have risen, and food
consumption has declined in the five most affected economies--Indonesia,
Malaysia, the Philippines, South Korea, and Thailand. A particularly troubling
impact has been the scaling back of public and private infrastructure
investment in these economies, where underinvestment in infrastructure is
already a problem. The level of infrastructure development is a significant
factor affecting the outlook for U.S. agricultural trade in these five
economies, which account for more than 10 percent of U.S. agricultural
exports. More than 60 percent of U.S. agricultural exports goes to the entire
APEC region.

Economic infrastructure includes:
--public utilities power, telecommunications, piped water supply, sanitation
and sewage, solid waste collection and disposal, piped gas, refrigerated
warehouses;
--public works roads and major dam and canal works for irrigation and
drainage;
--other transport sectors urban and interurban railways, urban transport,
ports and waterways, and airports;
--public, private, and international financial systems; and
--a legal system and property rights to protect private sector investment in
infrastructure.

Infrastructure development spurs a market's economic growth and thus its
demand for food, and it reduces marketing costs for both domestic and foreign
food products, lowering consumer prices and raising consumption. The level of
infrastructure development can enhance the competitiveness of imported food
products in large urban areas where international links via air and ocean
shipping may be cheaper than links between rural and urban areas within the
same economy. Underinvestment in infrastructure can leave rural areas
isolated, limiting the economic potential of the economy as a whole. Sizable
investments are needed to maintain and expand infrastructure across APEC to
sustain economic growth and facilitate trade, both within and among these
economies. 

Underdeveloped Infrastructure 
Hinders Economic Growth

Despite Asia's stellar economic performance up to 1997, the region's
infrastructure is among the most underdeveloped in the world, particularly in
nonurban areas. With a large rural population and the world's most rapidly
growing urban populations, Asia faces huge challenges in developing
infrastructure fast enough. The World Bank estimates that development in East
and Southeast Asia will have to generate $1.3 to $1.5 trillion in
infrastructure between 1995 and 2004 to sustain food system development and
economic growth it was accustomed to prior to the financial crisis.

Combined public and private sector investment in physical infrastructure
before the financial crisis in developing East and Southeast Asia (excluding
Japan) probably exceeded 5 percent of gross domestic product (GDP), or about
$80 billion a year. But private sector investment in East and Southeast Asia
declined by more than half after the boom year of 1996 as investors perceived
increased risk and uncertainty in many of the region's economies. Public
finance also declined. Economic contractions and slowdowns reduced tax and
tariff revenue and diverted public funds to underwrite failing banking systems
and to provide safety net programs for the growing numbers of poor. 

International financial institutions like the World Bank are also sources,
although relatively modest, for infrastructure investment. World Bank
allocations for infrastructure in 1998 in the Asia-Pacific region totaled
$2.02 billion, down from $2.54 billion in 1997. Asia Development Bank
allocations for transportation and communication projects were relatively
stable during 1995-98. 

Some economies have used spending on infrastructure projects as a way to
jump-start economic expansion China and Japan are examples. The recently
completed airport in Hong Kong (China), and the ongoing Three Gorges dam
project on China's Yangtze River, which at $50 to $70 billion is perhaps the
most costly infrastructure project in history, demonstrate Asia's capacity for
ambitious projects. However, infrastructure programs are often the first to be
cut when fortunes fall in developing countries, as recently seen in Indonesia
and South Korea and to a lesser extent Malaysia. 

As a result of the financial crisis, Indonesia's government currently has no
plans to enhance agricultural infrastructure. Plans to build better harbor and
cold storage facilities are being put on hold, and it will be some time before
an efficient Indonesian cold chain materializes (a marketing system that
protects quality and safety of perishable products from production to
consumption). With the high price of spare parts and other materials impinging
on the government's ability to maintain and repair roads and bridges, the cost
of transporting food products to and from the countryside is escalating. 

In Malaysia, investment in infrastructure development has been heavy over the
past decade, including major improvements in interstate highways, public
transit, and port facilities; a new international airport; and improved
electrical power generation. The financial crisis has led to cancellation of
one planned highway project and cessation of work on the Bakun Hydroelectric
Dam in Sarawak, but most other infrastructure projects are proceeding. In
Korea, where government outlays for rural infrastructure have been at
relatively low levels, the financial crisis has imposed greater budget
constraints on rural infrastructure investment.

Even before the financial crisis, deficiencies were apparent in the
infrastructure of a number of developing economies in APEC. While Asia's sea
and air links are well developed (Asia has the world's three busiest container
ports: Hong Kong; Singapore; and Kaohsiung, Taiwan), road and rail service are
far less developed in China, Southeast Asia, and Latin America than in more
developed parts of the world. The fragmented nature of Southeast Asia's
geography presents a unique challenge for road and rail development,
particularly in Indonesia and the Philippines, which are both large
archipelagos.

Road density (generally measured as road length per square kilometer) is
generally higher for developed, densely populated economies such as Japan,
Hong Kong (China), and the city-state of Singapore. Road service (generally
measured as kilometers per 1,000 people) is also greater in developed
economies. Many of the developing economies in the APEC region have both low
road density and low road service. As a result, rural areas are more isolated
than in other regions. 

For example, nothing comparable to the U.S. Interstate Highway System or Latin
America's Pan American Highway exists in Asia to link rural areas to urban
areas and to better integrate the diverse economies. Visionaries have
suggested grand schemes, from building superhighways linking countries in
Southeast Asia to building a Europe-Asia landbridge; however, such projects
remain distant dreams.

Urban Population Growth Strains Infrastructure

Projected growth in APEC's urban population will severely strain the region's
infrastructure and its capacity to provide basic services, including food
supply. The urban population is projected to grow from its current size of
about 1.1 billion to 2 billion in 2025, with most of the increase occurring in
China and developing Southeast Asia. 

One way to alleviate population pressure would be to invest in infrastructure
that integrates rural areas with the rest of the economy and allows rural
people to remain in rural areas by participating competitively in the economy
as producers and consumers. Since 1960, the Japanese government has spent
about 20 percent of its annual public works budget on agriculture, forestry,
and fisheries. Nearly all rural public roads are now paved, water supply and
sewage service have been greatly expanded, and most rural communities are
electrified. Providing this basic infrastructure has attracted other
industries to rural areas and given the rural population greater access to
urban opportunities. Eighty percent of the rural population can reach a large
city within an hour by car and more than 80 percent of farm household income
comes from nonfarm sources. Rural location of industry has been far more
instrumental than price support programs for farmers in sustaining rural
communities in Japan.

The Promise of Private-Public Partnerships

Public resources have long been counted on to develop the basic infrastructure
necessary for an economy's markets to function. But with deregulation and the
declining role of public investment, private capital, though still modest, is
becoming relatively more important. The role of the private sector has been
enhanced by public-private arrangements (such as leases and concessions) that
recognize the special nature of infrastructure and the need for economic
incentives to attract private sector interest. Technological change,
particularly in telecommunications, has also helped increase private sector
participation in infrastructure development. 

The private sector, with strong public sector backing, is critical to
introduction of competition and commercial principles to infrastructure
development. Private sector commitment also requires a well-defined property
rights system. Chile and Malaysia have made great strides in privatizing
infrastructure services. Chile's Concession Program, established in 1995, has
earmarked a number of road, airport, port, irrigation, and railroad projects
to be built, maintained, and operated by private companies under contract to
the government. Malaysia's program of infrastructure privatization goes back
to 1983. In 1996-2000,  the private sector is expected to invest three and a
half times what the public sector spends on roads, ports, water supply, power,
and telecommunications.

A key advantage of private sector involvement in the food system is lower
costs and increased efficiency. Adopting commercial principles has been shown
to enhance a system's ability to move food products, particularly perishable
products, quickly and cheaply from the point of production to the point of
consumption, sometimes across great distances. Privatization of the Manila
ports, for example, not only increased throughput, labor productivity, and
revenue to the government, but also reduced turnaround time by one-fifth to
one-third. Workers in New Zealand's Auckland Port, privatized in 1998, now
handle six times the volume of freight that was handled before privatization,
while the number of workers has declined by one-third and turnaround time has
been cut in half. 

Private investment in APEC's infrastructure development, despite its increased
role, has been modest, even accounting for the effects of the financial
crisis. If the World Bank's $1.5-trillion prescription for infrastructure
investment in developing East and Southeast Asia over 10 years is to be
realized, the private component will have to increase several-fold. This will
require accelerated development of bond markets in the region to attract
private capital, especially for financing large infrastructure and
capital-intensive industrial projects that require long-term fixed-rate debt
capital.

Improving Food System Efficiency

Infrastructure development reduces transaction costs, which benefits both
producers and consumers. Removal or reduction of these costs could have as
positive an effect on food and agricultural trade as removal or reduction of a
tariff or similar trade barrier. 
A sizable transaction cost in the APEC region's food system is postharvest
loss, especially for horticultural products (25 to 35 percent loss) vs. grain
(at 10 to 20 percent). Many of  these losses are attributable to inadequate
infrastructure: insufficient electricity for drying grain or refrigerating
fresh fruits and vegetables, lack of warehousing capacity, or inadequate
transportation.

Some national transportation systems are so inadequate and costly that it is
cheaper to import basic commodities from other parts of the region or world
than from geographically closer production areas within the economy. In the
Philippines, the cost of moving corn from some growing areas of Mindanao to
the poultry growers near Manila is estimated to be higher than importing corn
from Bangkok, Thailand.

In China, corn production is concentrated in the north and northeast, while
livestock production is in the southeast. The rail transport system, while
extensive, is prone to congestion and delay due to heavy traffic, inefficient
practices, and outdated equipment. It is often cheaper for livestock producers
in southern China to import corn from the U.S. or other foreign sources than
from north and northeastern China.

Efforts to reduce such costs and inefficiencies are being undertaken
throughout the region. Australia's Networking the Nation program aims to
enhance infrastructure and other support to communities in rural and remote
areas. Sixty percent of Malaysia's new roads will be built under a rural roads
program that aims to improve the accessibility of rural areas to the broader
economy.
Infrastructure investment is becoming a multinational issue. National
boundaries are becoming less relevant in a region that is moving toward free
trade under APEC's Bogor Declaration (which proposes free trade in the
region's developed economies by 2010 and in all economies by 2020). 

The formation of trading blocs like NAFTA (North American Free Trade
Agreement) and ASEAN (Association of Southeast Asian Nations) as well as
"growth triangles" in East and Southeast Asia reflect the multinational
benefits of infrastructure investments. These geographically contiguous areas
have coalesced to exploit economic complementarities and to overcome physical
and artificial constraints to rational allocation and use of resources within
a region. Changing trade flows under NAFTA, for example, have created
transportation bottlenecks along the U.S.-Mexico border, disrupting rail and
trucking service. Resolving border-crossing bottlenecks is critical to an
efficient food system and will require improved transportation facilities,
better administration, and more coordinated infrastructure planning that
subordinates national interests to regional interests.

"Growth triangles" in East and Southeast Asia are less formal than trading
blocs and their scope is usually limited to parts of rather than whole
economies. Two examples are Southern China: made up of Guangdong and Fujian
Provinces, Shenzhen, Hong Kong, and Taiwan; and Johor
(Malaysia)-Singapore-Riau (Indonesia). Infrastructure is critical to their
development, giving rural residents and farm households within the triangle
alternatives that keep them from the gravitational pull of urban areas.

The recent scaling back of infrastructure investment in the financially
distressed APEC economies is expected to be transitory. Equity markets across
Asia are up, and U.S. mutual funds targeting Asia have outperformed the Dow
Jones stock index since January 1999. With economic expansion accelerating in
1999 and 2000 and with interest rates and inflation under better control,
public and private infrastructure funds should become increasingly available
to the crisis economies.

But lack of public and private funds in the short term will affect maintenance
of existing infrastructure in the economically distressed parts of the APEC
region, and cause delay in new projects. Given the frequently large size of
and long lead times needed for many infrastructure projects, any cutback or
delay can have disproportionate consequences. These include:
--reduced potential for economic diversification in rural areas;
--increased transportation costs, raising food prices to consumers and
lowering returns to producers; and
--increased postharvest losses because of interrupted power,
telecommunications, refrigeration, and water supply.

In some instances, lowering transaction costs through improvements/expansion
of infrastructure could enhance the positive effects of reducing traditional
barriers to food and agricultural trade like tariffs and quotas. Lowering
tariffs on horticultural product imports, for example, may have little impact
on trade if infrastructure to facilitate trade--such as modern container
ports, reliable power to support refrigeration storage capacity, and ready
access to highway systems--is inadequate.

APEC was directed by its Ministers in 1997 to work with the private sector in
developing infrastructure initiatives for promoting integration and
diversification of rural economies in their efforts. In 1999, APEC and its
private-sector counterpart PECC (Pacific Economic Cooperation Council),
launched RISE Regional Integration for Sustainable Economies a public/private
initiative designed to improve the economic viability of rural regions of APEC
member economies through infrastructure investment.

Tapping private capital will be important in increasing the level of annual
investment in infrastructure commensurate with economic growth in Asia.
Supranational planning will be needed to harmonize infrastructure development
as national boundaries become less relevant to the trade reality in APEC.
William T. Coyle (202) 694-5216; wcoyle@econ.ag.gov
A key source of information for this article is the Pacific Food Outlook
1999-2000, published by the Pacific Economic Cooperation Council, August 1999.
For an electronic copy, visit http://www.pecc.org/ 

SPECIAL ARTICLE BOX
What Are APEC & PECC?

The Asia-Pacific Economic Cooperation (APEC) forum began in 1989 as an
informal grouping of 12 market-oriented Asia-Pacific economies with the goals
of better managing the growing interdependence in the Pacific region and
sustaining economic growth. APEC, now 21 members strong, facilitates
ministerial-level discussions and cooperation on a range of economic issues,
including trade promotion and liberalization, investment and technology
transfer, human resource development, energy, telecommunications, and
transportation. 

Members and dates of joining:

1989     Australia, Brunei, Canada, Indonesia, Japan,  Malaysia, New Zealand,
Philippines, Singapore, South Korea, Thailand, United States

1991     China, Hong Kong, Taiwan

1993     Mexico, Papua New Guinea

1994     Chile

1998     Peru, Vietnam, Russia

The private-sector counterpart of APEC is the Pacific Economic Cooperation
Council (PECC). It was founded in 1980 and brings together senior government,
academic, and business representatives to share perspectives and expertise in
search of broad-based answers to economic problems in the Asia-Pacific region.
PECC's membership is the same as APEC's plus Colombia. PECC is the only
nongovernmental organization with APEC observer status.

END_OF_FILE