
AGRICULTURAL OUTLOOK                                        April 22, 1999
May 1999, ERS-AO-261
               Approved by the World Agricultural Outlook Board
---------------------------------------------------------------------------
AGRICULTURAL OUTLOOK is published ten times a year by the Economic Research
Service, U.S. Department of Agriculture, Washington, DC 20036-5831.  Please
note that this release contains only the text of AGRICULTURAL OUTLOOK
-- tables and graphics are not included.

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



CONTENTS

BRIEFS
Field Crops: U.S. Farmers Curtail Feed Grain & Wheat Plantings in 1999
Livestock, Dairy, & Poultry: Cattle Inventory Expansion Likely Delayed Yet
Another Year Specialty Crops: U.S. to Remain Net Importer of Vegetables in
1999 Foreign Ag Policy: EU's Agenda 2000 to Revise Farm Policy

COMMODITY SPOTLIGHT
Catfish Farmers & Processors to Haul in Higher Revenues in 1999

FARM FINANCE
Farmers to Cut Borrowing Amid Income Uncertainty

RISK MANAGEMENT
Recent Developments in Crop Yield & Revenue Insurance
Tax-Deferred Savings Accounts for Farmers: A Potential Risk Management Tool

SPECIAL ARTICLE
Concentration & Competition in the U.S. Food & Agricultural Industries



IN THIS ISSUE...

Feed Grain & Wheat Planting Intentions Down    

Planting intentions for the eight major U.S. field crops total 250.7 million
acres in 1999, down 2.1 percent from last year's planted area and down 3.9
percent from the most recent peak in 1996.  With prices depressed from a year
earlier, farmers intend to reduce corn plantings to the lowest level in 4
years, cutting back other feed grain area as well, and to plant the fewest
wheat acres in 26 years.  In contrast, farmers intend to plant more soybeans,
cotton, and rice.  While prices for these crops are also lower, expected
returns are higher than for competing crops, bolstered in part by prospective
gains under government nonrecourse marketing loan programs for soybeans and
cotton.  Planting intentions and trend yields suggest a very large U.S.
soybean crop and a slightly reduced but still large corn crop in 1999.  If
wheat yields approximate the average for the last 3 years, production will
decline.

Catfish Industry to Haul in Higher Revenues

Catfish is the dominant, and most successful, sector of the U.S. aquaculture
industry, and accounts for over 50 percent of aquaculture production. 
Production is concentrated in four states--Mississippi, Alabama, Arkansas, and
Louisiana--with Mississippi's 65-percent share leading the way.  From 1990 to
1998, annual production of catfish rose from 392 to 599 million pounds, a
53-percent increase, the result of a rise in both total acreage devoted to
catfish ponds and average per-acre production.  The 5-7 percent increase
forecast for 1999 would bring total production to 630-640 million pounds. 
Since both farm and wholesale prices are expected to remain about the same as
1998, farm sales for the catfish industry in 1999 should approach $500
million, up from $469 million.

Farmers to Cut Borrowing Amid Income Uncertainty

Farm sector borrowing is expected to decline by $1.3 billion in 1999, ending
7 years of debt expansion. Given the expectation of lower crop prices and farm
income in 1999, as well as continuing uncertainty about the economies of some
major importers of U.S. farm products, farmers are likely to remain cautious
about debt use.  The 1999 debt forecast reflects the likelihood of fewer new
capital investments, as well as a relatively low incidence of farmers
borrowing their way out of cash-flow problems.  At yearend 1998, total farm
business debt was an estimated $170.4 billion, an increase of 3 percent from
1997, with nonreal estate loans up 3.4 percent and real estate loans up 2.6
percent.  The strong financial position of most commercial agricultural
lenders at yearend 1998 is expected to carry over into 1999. 

Recent Developments in Crop Yield & Revenue Insurance

The Federal crop insurance program in the 1990's has broadened the scope and
variety of risk protection products offered to producers.  The list of covered
crops has grown from about 50 in the early 1990's to more than 70 in 1999.  A
major reform in 1994 dramatically increased acreage covered by crop insurance
by increasing insurance premium subsidies, adding a basic coverage level
(catastrophic), and linking insurance to other farm programs. Maximum optional
coverage levels have also been raised under pilot programs for some crops in
some areas of the country. Revenue insurance, a relatively new product that
provides income protection against both price and yield fluctuations, has
captured significant shares of the crop insurance business. At the same time,
private insurance companies have played a larger role in delivering crop
insurance, developing new products, and sharing underwriting risk.  Still,
questions remain about the adequacy of crop insurance coverage.  
Tax-Deferred Savings Accounts for Farmers  

A program of tax-deferred savings accounts for farmers is among the
alternatives currently under consideration by Congress to help farm operators
manage year-to-year income variability.  A farmer could deposit funds into a
special Farm and Ranch Risk Management (FARRM) account during years of high
net farm income and draw on it during years with abnormally low income;
Federal income taxes would be deferred until withdrawal.  Taxpayers could
benefit if the additional financial diversification and liquidity these
accounts provide to farmers reduce the need for continued income support
programs or ad hoc farm disaster relief.  The program's effectiveness could be
limited if benefits are concentrated among operators with large farms and
relatively high off-farm income, or if farmers fund FARRM accounts with
existing liquid assets instead of new savings. 

Concentration & Competition in the U.S. Food & Agricultural Industries

Concentration and competition have come into focus as the U.S. food and
agricultural sector continues to industrialize, with farms or factories
expanding in size, becoming more specialized, and relying more on contractual
and administrative methods for buying or selling agricultural commodities. 
Concentration--a sharp decline in the number of buyers or sellers in an
industry--may limit competition and affect prices, depending on such factors
as ease of entry into the market, availability of substitutes for the product,
and the nature of rivalry among existing firms in the market.  Broad
structural changes associated with industrialization also raise issues
unrelated to competition and market prices, such as environmental concerns
involving large livestock operations or processing plants. 


BRIEFS

Field Crops
U.S. Farmers Curtail Feed Grain & Wheat Plantings in 1999

On the eve of planting decisions for major field crops in 1999, U.S. farmers
faced lower prices across the board, down 15 percent or more for most crops
from a year earlier. They responded by reducing planting intentions 5.4
million acres from last year's planted acreage. A net increase of 1-1.5
million acres enrolled in the Conservation Reserve Program (CRP) also played a
role in the decline.

Planting intentions for the eight major U.S. field crops (corn, soybeans,
wheat, barley, sorghum, oats, cotton, and rice) total 250.7 million acres in
1999, down 2.1 percent from last year's planted area and down 3.9 percent from
the most recent peak in 1996. Farmers intend to reduce corn plantings to the
lowest level in 4 years and cut back other feed grain area as well, and to
plant the fewest wheat acres in 26 years. In contrast, farmers intend to boost
cotton and rice area and will plant more acres to soybeans in 1999, the eighth
straight increase. Planting intentions and trend yields suggest a very large
U.S. soybean crop and a slightly reduced but still large corn crop in 1999. If
yields approximate the average for the last 3 years, wheat production will
decline by 10 percent.

Until this year, both soybean and corn plantings had increased each year since
implementation of the 1996 Farm Act, legislation which allows farmers more
flexibility in their planting decisions to respond to market signals. Unlike
earlier U.S. farm law, the 1996 Farm Act no longer ties producers'
participation in farm programs to base acreage planting requirements for a
specific program crop nor restricts production through acreage reduction
programs. As a result, corn and soybean acreage expanded into the
wheat-dominated Central and Northern Plains since 1996 because of relatively
higher net returns for these crops. Corn and soybean acreage also rose in
traditional cotton land in the Southeast in 1997 and 1998. 

Meanwhile, wheat acreage in the Northern Plains has declined as more land
traditionally planted to wheat was switched to minor oilseeds, such as
sunflower and canola, or summer fallow. For example, sunflower planted acreage
in North Dakota increased from 1.2 million acres in 1996 to 2 million in 1998
and 1999. 

Intended soybean acreage for 1999 is 73.1 million acres, 1 percent higher than
last year's planted acreage despite sharply lower prices. Large U.S. and
Brazilian soybean supplies and weak export demand have pushed soybean prices
at planting about 25 percent lower than 1998. Intended soybean plantings
increased in the Corn Belt (especially Iowa and Wisconsin) and in the Central
and Northern Plains (e.g., Nebraska and South Dakota) for several reasons.
Soybean yields have grown faster than corn yields, and adoption of genetically
modified herbicide-tolerant soybeans has reduced input costs for many farmers.
Prices of competing crops have also declined, and the loan rate for soybeans
has augmented expected market returns this year (under the nonrecourse
marketing loan program). Farmers in the Delta and Southeast (especially
Louisiana and Mississippi) intend to decrease their plantings of soybeans for
the second year after a spike in 1997. An attractive marketing loan program
has helped make cotton a more profitable alternative this year.

Corn growers intend to plant 78.2 million acres in 1999, down 2 percent from
last year's planted acreage because of lower expected corn prices, concerns in
the South about aflatoxin--a  fungus byproduct which prevents the use of the
corn for human consumption and sharply limits the use of the corn in livestock
feeding--and unusual dryness in the Southern Plains. Most of the decline in
intended corn acreage--1.4 million acres of the total is in the Southern
Plains, Delta, and Southeast regions, driven by acreage shifts to cotton and,
to a lesser extent, sorghum. A part of these corn acres probably will be left
fallow as well. 

States in this area showing the largest declines in acreage are Texas,
Mississippi, Louisiana, North Carolina, Arkansas, and Georgia. Several major
corn producing states--Iowa, Nebraska, Minnesota, and Wisconsin--also show a
decrease in planting intentions for corn as farmers switch to soybeans or
minor oilseeds, such as canola. Corn planting intentions are up slightly in
the Central Corn Belt (Illinois and Indiana), largely due to rotation with
soybeans.

Among other feed grains, barley planting intentions show the largest
percentage decline--17 percent from last year's planted acreage. Intended
barley plantings are down 500,000 and 190,000 acres in North Dakota, the
largest producing state, and Minnesota, the fifth largest producing state.
Contributing factors are the current low price of barley relative to other
crops and concerns over scab disease outbreaks. 

Planting intentions for sorghum are 9 percent lower than last year's planted
acreage. The bulk of the acreage decline comes from Texas, where sorghum area
is down 0.9 million acres, a 24-percent decline. Intended oat acreage is down
3 percent from last year's planted acreage, with more than half of that
decline in North Dakota.

Total wheat area intentions for 1999--at 63 million acres--are down 4 percent
from last year's planted area. The USDA Winter Wheat and Rye Seedings report
indicated in January that farmers planted 43.4 million acres of winter wheat
for harvest in 1999, the lowest since 1972. Responding to lower prices and
unfavorable planting conditions, particularly in the Southern Plains, farmers
reduced winter wheat plantings last fall by 7 percent from the year earlier. A
20-percent decline in the expected price for soft red winter wheat contributed
to a 0.8-million-acre decline in winter wheat acreage in the Corn Belt as
acreage shifted to soybeans. Similarly, low prices for hard red winter wheat
(HRW) led to a 1-million-acre decline in HRW wheat acreage in the Central and
Northern Plains region (Kansas, Nebraska, and South Dakota). In Montana,
winter wheat acreage was down 0.4 million acre from the previous year as
acreage shifted to spring wheat.

In 1999, farmers intend to increase spring wheat (including durum) plantings
to 19.6 million acres, up 0.2 million from last year's planted area. Driving
the increase is 4.3 million acres of prospective durum wheat plantings, a
12-percent jump from last year and the largest plantings since 1982. The
intentions indicate a shift from spring wheat to durum wheat in North Dakota,
where an attractive insurance policy overwhelmed market signals to reduce
durum plantings. Farmers intend to reduce "other spring" (i.e., non-durum)
wheat plantings 2 percent to 15.4 million acres in 1999, due mainly to a small
decline in the expected price for hard red spring wheat. 

Cotton planting intentions total 13.9 million acres, nearly 4 percent higher
than last year's planted acreage, with the increase coming mostly from
Mississippi and Georgia. While market prices for cotton have declined more
than 18 percent, the decline in expected per-unit return is only 11 percent,
in part because of the cotton marketing loan program. In comparison, expected
returns for competing crops, such as corn, wheat, sorghum, and soybeans, show
an even greater decline. In the South, planting intentions indicate corn
acreage will likely switch to cotton instead of soybeans. Cotton has higher
expected net returns than soybeans, reflecting a soybean-to-cotton price ratio
at the planting decision point of less than 10 an estimated break-even price
ratio between these two competing crops.

Rice growers intend to plant 3.6 million acres, a 7-percent increase from
1998, with long grain and medium grain plantings indicated up 6 percent and 13
percent from last year. Planting intentions are higher this year in all six
major producing states, with Mississippi and California indicating the largest
percentage increases. U.S. rice prices during the 1998/99 crop year, though
showing a modest decline from last year, are expected to decline less than
prices for competing crops such as soybeans.  

William Lin (202) 694-5303
wwlin@econ.ag.gov

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

BOX - FIELD CROPS

These estimates are based on farmer surveys conducted during the first 2 weeks
of March. USDA's Prospective Plantings report for 1999, released on March 31,
provides the first indication of farmers' spring planting intentions for major
field crops. With adverse weather or significant changes in crop prices,
actual plantings could vary from intentions. For example, persistent wet
conditions in spring could delay corn plantings and cause a switch from corn
to soybeans. USDA will release acreage estimates (in a survey completed around
June 1) in its June 30 Acreage report, after crops have been planted or when
planting intentions are more definite.

SIDEBAR - FIELD CROPS

With Soybean Prices Falling, Why Are Planting Intentions Up?

U.S. farmers' intentions to plant a record 73.1 million acres of soybeans in
1999, as reported in USDA's March 1999 Prospective Plantings, continue a
steady upward trend in soybean acreage since implementation of the 1996 Farm
Act. For farmers participating in Federal commodity programs, the legislation
provides nearly full planting flexibility to respond to the relatively higher
market returns for soybeans in recent years. 

But this year, the market price for soybeans is much lower. On March 15, 
new-crop soybean futures (November contract) settled at $4.90 per bushel, down
25 percent from a year earlier. So why is soybean acreage continuing to expand
when farmers face a dramatic price decline?  

USDA's Economic Research Service recently completed a study to quantify
farmers' planting decision response to prices. These acreage-price
relationships can be used to isolate the effects of commodity prices on field
crop plantings. In the case of soybeans, this year's increase in planting
intentions from 72 million acres in 1998 to 73.1 in 1999 can be accounted for
by four factors, with the Federal loan rate (under the nonrecourse marketing
loan program) pulling up the total.

ERS research indicates that this year's decline in the expected soybean price
by itself would reduce soybean plantings by 4.84 million acres from last
year's level. Research indicates soybean intended plantings decline 0.265
percent for each 1-percent decline in the expected soybean farm price. 

Partially offsetting this decline is the effect of lower expected prices for
competing crops, which encourages soybean plantings. Considered in isolation
from soybean prices, lower prices for corn (down 15.3 percent), wheat (down
15.6 percent), sorghum (down 15.3), and cotton (down 11.3) result in an
increase of 2.76 million acres in soybean plantings in 1999. The expected corn
price has the biggest impact (nearly 2.5 million acres), with research showing
that soybean plantings rise 0.225 percent for each 1-percent decline in the
price of corn.

Another increase in intended soybean plantings--amounting to 1.7 million
acres--can be attributed to additional acreage shifting out of winter wheat
due to changing costs and returns. This increase is in addition to the
increase accounted for by the price response for wheat described above, and is
based on a comparison of expected net returns among winter wheat's main
competing crops, including soybeans. Most of the acreage not planted to winter
wheat will be switched to soybeans, according to the Prospective Plantings
report, and not to other crops such as corn, partly because cost savings in
input use have been greater for biotech soybeans.

A fourth factor--the Federal soybean loan program, which guarantees farmers at
least $5.26 per bushel--pushes planting intentions up another 1.7 million
acres. As a per-unit revenue guarantee, the program essentially reduces the
expected decline in the soybean farm price from 25.3 percent to 16.5 percent. 

Combining the effects of these four factors results in a net increase of 1.3
million acres in soybean planting intentions. The 0.2-million-acre discrepancy
between the calculated amount and reported planting intentions reflects
differences between actual and predicted outcomes inherent in the analysis.

William Lin (202) 694-5303 wwlin@econ.ag.gov.

This analysis is based on information in a forthcoming ERS report that
examines acreage-price relationships for major field crops.


BRIEFS

Livestock, Dairy, & Poultry
Cattle Inventory Expansion Likely Delayed Yet Another Year

A series of indicators strongly suggest that the anticipated cattle herd
expansion will be delayed yet again. The number of cattle and calves (beef and
dairy) on farms and ranches on January 1, 1999 declined for the third
consecutive year, down 1 percent from a year earlier and down 5 percent from
the 1996 cyclical peak of 103.5 million.  The beef cow herd is down over 5
percent from 1996, and the number of cows and heifers that have calved
(heifers are not counted as cows until after their first calving) declined 1
percent from a year ago and nearly 3 percent from 1997. 

Most important for future production, the number of heifers being retained on
January 1 for possible breeding herd replacement was down 4 percent from a
year earlier.  The 1998 calf crop, although above expectations, was down 1
percent from a year earlier, and with the inventory of breeding and
replacement cattle also down, the 1999 calf crop will almost certainly
decline, virtually assuring that the cattle herd inventory will decline again
in 1999. 

Heifer slaughter in 1997 and 1998 was extremely large, leaving the number of
heifers available to enter the breeding herd in 1999 likely to be very low. 
Most of  these heifers will not be bred until late-spring to summer, to calve
in 2000.  If the number of heifers retained and bred this summer remains
relatively low, as it has for the last several years, the calf crop, and thus
feeder cattle supplies, will be down again in 2000, delaying any rise until
2001.  At such a low rate of heifer retention, even with reduced cow slaughter
in 1999, beef cow inventories on January 1, 2000 may be below the most recent
low of 32.5 million recorded in 1990, and could be the lowest since the
mid-1960's.

First-quarter cow slaughter and feedlot statistics on heifers provide an early
view of herd rebuilding dynamics.  Commercial cattle slaughter is expected to
decline 1-2 percent from 1998, and cow slaughter is expected to decline about
7 percent, as more are retained in the breeding herd.  First-quarter cow
slaughter has already shown a 4-percent decrease from a year earlier; however,
most of the decline was from dairy cows. Dairy calves remain an important
source of feedlot placements. Beef cow slaughter was down less than 1 percent
from a year earlier, but down 17 percent from first-quarter 1997.  In 1996,
the strongest year of breeding herd liquidation, cows comprised nearly 20
percent of the slaughter mix, and over 16 percent of the cow herd was
slaughtered.  In 1999, cow slaughter is expected to drop to 16 percent of the
commercial slaughter total.

Although heifers on feed in feedlots with a capacity of over 1,000 head were
down 4 percent from a year earlier on January 1, 1999, first-quarter feedlot
placements of heifers were up sharply, with the number of heifers on feed up 6
percent on April 1--indicating that strong heifer retention for the breeding
herd was likely going to be delayed for another year.  These feedlot
placements were likely of heifers that had been intended for breeding in late
spring-early summer, but instead were sent to feedlots when drought impact
from last summer and other financial pressures convinced producers they could
not yet afford to expand their herds.  Midyear figures on heifer retention
will confirm whether this is indeed the case, which would delay the expected
turnaround in cattle inventories until 2002. 

The supply of feeder cattle outside feedlots and available to go on feed was 1
percent below a year earlier on January 1, 1999. On April 1 the supply was
down 5 percent. Feeder cattle supplies and feedlot placements should begin to
decline this spring, as fewer heifers are available to be placed on feed, and
as steer placements continue to reflect the declining calf crops. 
Cattle-on-feed inventories will likely be down 10-12 percent by the beginning
of 2000.  Feedlot placements are likely to remain low through at least
mid-2000, and given the large number of heifers currently on feed, probably
will not increase until after the expected increased heifer retention in 2000
results in a larger calf crop in 2001.

Increased competition for a reduced inventory of cattle will result in
stronger cattle prices beginning in late 1999, with larger increases for
female stock and for stocker-feeder cattle as interest in rebuilding climbs. 
Cull cow prices are expected to show the largest gains as cow slaughter
declines fairly sharply.  As herd rebuilding begins, demand for replacement
cows will strengthen, and cows that might have gone to slaughter in the past 3
years are likely to be sold for breeding until more replacement heifers enter
the cow herd.  Utility boning cows are likely to average in the low $40's per
cwt, up from $36 in 1998 and $30 in 1996, when cow slaughter was very high. 

Fed-cattle price gains will be limited, however, by the still-large beef
supplies and the very large and expanding supplies of competing meats. 
Fed-cattle prices averaged $61.50 per cwt in 1998 and may average $63 to $66
this year.  Prices are expected to remain under pressure from large feedlot
inventories through summer, but removal of supplies through food aid to Russia
will begin to siphon off excess product.  Averages may reach the upper  $60's
in late 1999, but further supply reductions in 2000 will be necessary before
prices move up into the $70 range.

Yearling feeder-cattle prices are likely to average in the mid-$70's in 1999,
up several dollars from last year, and nearly $15 above 1996's low prices. 
Competition from pork and poultry will hold down price increases for fed
cattle and consequently, for feeder cattle.  Unless the beef export market
strengthens more than presently expected, price strength will be largely
dependent on how well beef competes at retail against lower priced meats.

Large feedlot inventories of heifers this winter not only will set back herd
rebuilding, but also will push up 1999 beef production estimates.  Declining
production and stronger beef prices will not begin until late 1999, and then
only if feeding costs and pasture conditions, primarily adequate moisture,
continue to be favorable for herd expansion.  

Ron Gustafson (202) 694-5174
ronaldg@econ.ag.gov


BRIEFS
Specialty Crops
U.S. to Remain Net Importer of Vegetables in 1999

In 1999, the U.S. is expected be a net importer of vegetables, melons, and
pulses for the fourth consecutive year. This year's trade deficit will likely
remain near 1998's level of $600 million as growth rates decline for both
imports and exports. Larger domestic supplies along with lower prices are
expected to limit import increases, while a strong dollar and larger foreign
supplies of items like dry beans will hobble export gains. In spite of the
strong dollar and reduced fresh vegetable supplies in 1998, Total vegetable
exports amounted to $3.2 billion, up 6 percent from 1997. The value of imports
jumped 22 percent to $3.8 billion, with much of the increase attributable to
higher prices for fresh-market commodities. 

The import share of U.S. vegetable and  melon consumption is rising, climbing
from 7 percent in 1990 to 11 percent in 1998. Rising imports have led to trade
tensions in some segments of the industry (e.g., fresh tomatoes, canned
mushrooms, frozen potatoes) as domestic growers cite unfair competition from
lower import prices. Nevertheless, imports are likely to continue rising over
the next several years, with strong "off-season" demand, continued interest in
tropical and other specialty vegetables, and lower import barriers as a result
of NAFTA and the Uruguay Round Agreement. 

With the advantage of lower transportation costs, Mexico and Canada have
historically been the top two U.S. suppliers, accounting for 50 and 19 percent
of U.S. vegetable imports. Rounding out the top five import sources are the
Netherlands (4 percent), China (3.7 percent), and Spain (3.5 percent). About
three-fourths of imports from the Netherlands are fresh-market
greenhouse-grown vegetables, while 60 percent of imports from Spain are canned
artichokes and pimentos. China primarily supplies products like canned
mushrooms, canned bamboo shoots, and dried vegetable products.

As the leading U.S. vegetable supplier, Mexico tends to receive the most
attention from market observers. The value of vegetable imports from Mexico
has risen 63 percent since 1994 to $1.9 billion in 1998. However, U.S.
vegetable imports from Canada have climbed even faster, jumping 152 percent to
$700 million in 1998--the largest increase among the top five suppliers.
Factors behind the increase include the reduced value of the Canadian dollar,
removal of import tariffs, the existence of multinational corporations
operating in both countries, and rising interest in greenhouse-grown
vegetables.

Growth in imports from Canada has been similar among the top three market
segments (fresh, canned, frozen) since 1994, with shares of total imports
relatively unchanged. U.S. fresh-market imports from Canada have risen 154
percent since 1994 to $320 million in 1998. A rapidly expanding specialty
market in the U.S. for greenhouse/hydroponic vegetables is a major factor
behind the increase, and Canada has the largest greenhouse vegetable acreage
in North America (about 700 acres). Frozen vegetable imports from Canada have
risen 162 percent to $295 million, with three-fourths of the total in french
fried potatoes. Most french fries enter under contract with fast-food firms.
Canada also appears to be shipping the ketchup to go with those fries. Ketchup
exports to the U.S. increased from a minute amount in 1993 to $19 million last
year. 

U.S. vegetable and melon exports claimed 9 percent of the 160 billion pounds
in total U.S. vegetable supplies during 1998--up from 6 percent in 1990.  With
mature domestic markets for many vegetables (e.g., canned vegetables,
potatoes), exports provide an avenue for market expansion. Export growth is
expected to continue as the elimination of impediments to free trade (e.g.,
questionable phytosanitary rules and labeling requirements) continues to open
world markets for U.S. vegetables. With quality products and aggressive
pricing, many U.S. vegetable market segments are highly competitive in world
markets.

Export dependence varies among vegetables, led by onions for dehydration (66
percent of supplies), dry edible peas and lentils (51 percent), fresh-market
cauliflower (34 percent), dry edible beans (24 percent), and fresh-market
broccoli (19 percent). But there is amazingly little variation of export
dependence across the three major market segments (fresh, canned, and frozen),
with exports accounting for 8-9 percent of supplies for each group.

Fresh-market vegetables and melons claimed the largest share of total
vegetable exports at about $1.1 billion for each of the past 5 years. Lettuce
(all types) was the largest fresh export in 1998 ($167 million), followed by
tomatoes ($120 million). Exports remove 8 and 6 percent of domestic supplies,
respectively, for these two commodities. These shares have remained fairly
constant for several decades as growth in domestic consumption has matched
rising exports.  

Gary Lucier (202) 694-5253
glucier@econ.ag.gov 


BRIEFS

Foreign Ag Policy
EU's Agenda 2000 to Revise Farm Policy

On March 26, 1999, the European Council--heads of state of European Union (EU)
member countries--reached an agreement on Agenda 2000, a 7-year (2000-06)
financial package that includes agricultural policy reforms, as well as
provisions for easing the expansion of the EU into Central and Eastern Europe
(CEE). Though the agricultural policy reforms are considerably less
substantial than those originally proposed by the European Commission in July
1997, Agenda 2000--aimed at the arable crops (grains and oilseeds), dairy, and
beef sectors--will shift the EU slightly further from price supports and
toward direct payments and supply control.

EU representatives have stated that provisions of Agenda 2000 will be the
basis for the EU's position in the upcoming World Trade Organization (WTO)
round on agriculture, expecting that agreement on Agenda 2000 will improve the
EU's negotiating position on export subsidies and import duties. However,
preliminary analysis of the revised Agenda 2000 proposals suggests that when
the current package is implemented, the EU will have to continue subsidizing
most agricultural exports. 

Over the past few years, the EU has accepted membership applications from 10
Central and Eastern European countries and from Cyprus. As the implications of
expanding the EU became more apparent, it became clear that the EU would have
to change existing policies in order to accommodate new alliances.

EU membership for CEE countries--most of which have not had the means to
provide much financial support to farmers--would increase their commodity
prices, stimulating agricultural production and increasing their reliance on
export subsidies. Applying current Common Agricultural Policy (CAP) mechanisms
to CEE countries would be very costly to the EU, and an enlarged EU would
certainly exceed its export subsidy commitments. The EU is already close to
reaching its WTO limits on permitted volume and value of export subsidies,
which will continue to decline until 2000. The next WTO round of agricultural
negotiations scheduled to begin in December 1999 is likely to bring further
cuts.

EU expansion is not the only force driving agricultural policy reform. The
European Commission has published analyses suggesting that under the current
CAP, the EU would build significant stocks across all major agricultural
sectors, and these stocks would not be exportable because of WTO export
subsidy constraints. The buildup of intervention stocks--government purchases
from farmers at relatively high support prices--would be large and costly to
EU countries.

Until the EU's 1992 reform of the CAP, high internal prices, protected by
import restrictions, provided the majority of income support to farmers. The
1992 reform lowered internal prices, supplemented farmers' income with direct
payments, and established a land set-aside--with a base rate of 17.5 percent
but actually ranging between 5 and 15 percent--for supply control. Agenda 2000
was designed to build on the 1992 reforms by further reducing prices for some
commodities and partially compensating producers through additional direct
payments. 

Originally proposed in July 1997 by the EU Farm Commissioner, Agenda 2000 was
revised by the European Commission in March 1998. Proposals by member
countries' farm ministers on March 11, 1999, were less ambitious--e.g.,
phasing in price cuts--than those made by the Commission, and the package
finally approved by the European Council was watered down further, calling for
smaller cuts in support prices and delaying the implementation of dairy
reforms. 

The final Agenda 2000 agreement calls for:

a 15-percent reduction in grains support prices--down from the original 20
percent--to be phased in over 2 years and partially offset by increased direct
payments;

a 33-percent reduction in direct payments to oilseed producers over 3 years to
equal the grains payment in 2002--no phase-in was originally proposed;

a 10-percent base rate for required land set-aside for arable crops during
2000-06;

a 20-percent reduction in the support price for beef compared with 30 percent
in the original proposal--to be phased in over 3 years and partially offset by
increased direct payments;

a 2.4-percent increase in the dairy production quota--1.2 percent to be
allotted to selected countries over the first 2 years and 1.2 percent to be
allotted to the remaining countries over 3 years beginning in 2005;

a delay in dairy price reform until 2005/06--formerly a 15-percent price
decline to be in place by 2003. 

For current EU members, the overall impact of Agenda 2000 on grains is
contingent on world grain prices when the reforms are implemented. The
15-percent cut in support prices is likely to increase grain feeding and make
EU wheat competitive on world markets, eliminating the need for export
subsidies. But the proposed grains support price is well above USDA projected
world prices for coarse grains. The EU currently has large stocks of coarse
grains, and Agenda 2000 is not likely to help significantly reduce them. The
reduction in EU oilseed payments is likely to cause a slight shift out of
oilseed production.

With the dairy quota increased 1.2 percent and dairy price reductions
postponed until 2005, milk production will increase and the EU will have to
continue subsidizing  dairy product exports. This could lead to difficulty in
exporting cheese, due to the EU's subsidized export limits under the WTO's
1994 Uruguay Round Agreement on Agriculture. 

Despite the reduction in the beef support price, Agenda 2000 is unlikely to
cause a significant drop in beef production. This is because of the proposed
dairy quota increase--much EU beef is a by-product of the dairy herd--and
because the increase in direct payments for beef will partially offset the
support price decline--556-euros/ton or about 40 percent of the recent average
subsidy. If the support price decline lowers retail beef prices, domestic
consumption could increase. Because the EU's current support price for beef is
so far above world market prices, all EU beef exports are subsidized, and
proposed beef reforms are not likely to reduce the EU beef price enough to
permit exports above the WTO bound.

Preliminary analysis of the European Commission's Agenda 2000 package
indicates that the EU will have to continue export subsidies for most
commodities. While the reforms will continue to move the EU away from price
support mechanisms, they will not eliminate the EU's surplus production
problems. Agenda 2000 is unlikely to have much impact on the U.S. farm sector,
but it may cause difficulties for U.S. negotiators in the next round of WTO
trade talks.  

Susan Leetmaa (202) 694-5153
sleetmaa@econ.ag.gov 


COMMODITY SPOTLIGHT

Catfish Farmers & Processors to Haul in Higher Revenues in 1999

Over the last 5 years, U.S. consumption of aquaculture products has increased,
and the trend is likely to continue. With increasingly stringent catch
limitations, the U.S. wild harvest is not expected to significantly expand in
the near future. Aquaculture production is poised to fill the gap as retailers
demand dependable quality and supply and research rapidly improves the
productivity of aquaculture operations.

U.S. catfish production is one of the largest aquaculture industries in the
world and is the dominant, and most successful, sector of the industry in the
U.S., accounting for over 50 percent of U.S. aquaculture production. From 1990
to 1998, annual production rose from 392 to 599 million pounds, a 53-percent
increase. Two years of relatively strong farm-level prices and a forecast for
low corn and soybean prices in 1999, which would keep feed costs down, have
led to expectations that growers will increase production again this year. An
additional  increase of 5-7 percent is forecast for 1999, which would bring
total production for the year to 630-640 million pounds. 

Catfish production is concentrated in the Delta states of Mississippi,
Alabama, Arkansas, and Louisiana, primarily because of warm climates, abundant
water, and heavy clay soils for pond construction. In 1998, these four states
accounted for 98 percent of total U.S. output, with Mississippi's 65-percent
share leading the way.

Increased catfish production has been the result of an increase in both total
acreage devoted to catfish ponds and average per-acre production. Estimates of
catfish pond acreage have risen from 152,000 acres in 1990 to 171,000 acres in
1998, but this additional pond acreage could account for only 24 percent of
the increase in fish production since 1990. The rest of the increase is due to
productivity, which climbed 36 percent from 2,580 pounds per acre in 1990 to
3,505 pounds in 1998. 

Several factors explain the increase: better disease resistance has led to
reduced mortality, improved strains of catfish have provided higher growth
rates, and better aeration equipment has both reduced mortality from low
oxygen levels and allowed growers to increase stocking densities. Per-acre
productivity levels are expected to continue to increase in the future,
chiefly through the development of improved strains of catfish. Researchers in
Mississippi recently announced a new strain of catfish ready for release that
is reported to grow 20-25 percent faster than strains currently used. Not only
is the growth rate higher, but the new breed is expected to have a lower feed
conversion rate, which means less feed will be needed to produce each pound of
edible meat. 

An Underwater Feedlot

A catfish farm is similar to any livestock feeding operation. Fingerling
catfish are grown in enclosures with special feeds, are carefully monitored
for any signs of disease, and are provided an optimum environment until they
reach market size. For catfish, the enclosures are ponds and the optimum
environment includes proper water quality and oxygen levels.

The greatest difference between catfish farming and hog or poultry operations
is that the production area is underwater and outside, so catfish farmers are
faced with problems that don't crop up in other livestock industries. Because
the fish are generally out of sight, monitoring their feeding habits and
health is much more difficult. In fact, the floating feeds used in the catfish
industry were originally developed as a way for farmers to monitor how
aggressively their fish were feeding; as long as fish are feeding
aggressively, a farmer can assume they are relatively healthy. 

While almost all hogs and chickens are grown inside specially constructed,
climate-modified buildings, open ponds leave catfish operations vulnerable to
less than ideal weather conditions and to predators. When water temperatures
become too hot or too cold, for example, the growth rates for the catfish
decline. Adverse weather conditions can also interfere with feeding or
harvesting. Predators, mostly birds, threaten catfish production, and growers
are evaluating a number of nonlethal ways of driving birds away from the
ponds. 

For catfish farmers, as for other livestock producers, feed costs make up a
large share of total variable production expenses. An average catfish feed
formulation can be up to 75 percent corn gluten feed and soybean meal. The
remaining 25 percent will be a combination of other feed ingredients,
including wheat middlings, cottonseed meal, fish meal, minerals, and vitamins.
With this dependence on feed, the feed-related forces driving expansion and
contraction of catfish production to resemble those faced in the hog and
poultry industries. The market forces these industries face are not identical,
however. The catfish industry is chiefly domestic with only small amounts of
imports and exports, while the poultry industry must consider export markets,
which absorb 18 percent of its production, and the red meat industry must
respond to both import and export markets.

From 1993 to 1998, prices for corn and soybean meal have changed dramatically.
Prices for corn averaged $2.22 a bushel in 1993, rose to over $3.50 a bushel
in 1996, and then fell to an average $2.21 a bushel in 1998, a drop of 37
percent in 2 years. The price of soybean meal over the same period followed a
similar pattern, averaging $199 a ton in 1993, rising to $267 in 1997, then
falling sharply to $163 a ton in 1998. Since corn and soybean meal prices are
expected to average even lower in 1999, catfish farmers' feed costs likely
will be flat or declining in 1999 while prices they receive from processors
are expected to remain stable, enhancing the farmers' returns.

Rising productivity per acre and lower feed costs have allowed the catfish
industry to maintain returns despite stable prices, which have ranged fairly
narrowly between 71 and 78 cents per pound through most of the 1990's, with
the exception of 1991 and 1992, when catfish prices fell into the low 60- to
upper 50-cent range. Wholesale prices have reflected the same stability, with
only limited fluctuations throughout the decade. This price stability, coupled
with year-round availability, has made catfish a more attractive product to
the food service industry and grocery chains and permitted expansion in
production.

Industry to Expand in 1999

Although per capita seafood consumption in the U.S. has been flat or declining
for the last decade, the catfish industry has expanded sales at a pace well
beyond the U.S. population growth rate. Catfish consumption has grown to
account for approximately 7 percent of total fish and shellfish consumption
and is expected to increase again in 1999 because of the strong domestic
economy.

In response to the forecast for strong economic conditions and low feed
prices, catfish farmers are expected to increase production in 1999 about 5-7
percent, while both farm and wholesale prices are expected to remain about the
same as they were 1998. As a result, farm sales for the catfish industry
should approach $500 million in 1999, up from the $469 million reported for
1998, which was itself 10-percent higher than in 1997. In 1998 most of the
increase in sales was attributed to higher sales by Mississippi growers, a
situation which is expected to continue in 1999. 

Early indications suggest growers are continuing to expand pond acreage, but
surveys also show inventory levels only slightly higher than 1998, which may
result in some short-term shortages of food-size fish early in the year,
although shortages probably will not reach last year's levels, when a
shortfall caused prices paid to farmers to jump 10 cents per pound.

As of January 1, 1999, growers anticipated 175,220 acres of ponds would be
used during the first-half of 1999, up 2 percent from the revised estimate of
acreage used in 1998. Most of this increase is attributed to a 5-percent
acreage increase in Mississippi. Farmers also reported they would be
renovating or building an additional 10,000 acres of ponds in the first half
of 1999, an increase interpreted as a delayed response to the relatively
steady farm prices and low feed costs over the last 2 years. The number of
growers was also up, with Mississippi experiencing a strong 27-percent
increase in farms. 

At the beginning of 1999, growers reported their inventories of large and
medium food-size fish had declined, but the decline was partially compensated
by a marginal increase in the number of small food-size fish in inventory. The
total inventory of small food-size fish has been relatively constant for the
last 3 years, despite rising inventories reported by Mississippi growers over
the same period. 

In total, the 248 million food-size fish in current grower inventories would
be expected to supply processors for only about 5 months if used at the rate
seen in 1998. Thus, the relatively tight supply of food-size fish is expected
to exert some upward pressure on prices during the first 3-4 months of 1999.
In January and February 1999, processing has been up 3-4 percent and farm
prices have risen to 71 cents per pound. Farm prices during this period also
will be vulnerable to weather-related disruptions to harvesting and any change
in the rate of off-flavor occurrences periods during which temporary changes
in fish flavor preclude marketing.

The inventory numbers for stockers, fish weighing 0.06 to 0.75 pound, were
estimated at the beginning of 1999 at 660 million, up 9 percent from the
previous year. Although a strong increase from 1998,  this inventory level is
still 27 percent below the 755 million reported at the start of 1997. How soon
these stockers reach food size will be an important factor in determining
whether growers experience a strong increase in prices in the first half of
1999 and if they do, how long those higher prices will last.

The reported inventory of fingerling, fish weighing less than 0.06 pound, was
down 2 percent from 1998, but inventories in the four major states, where most
of the processing plants are located, nearly matched the previous year at 921
million fish. These very small fish will be the chief source of food-size fish
supply during the second half of 1999. Because fingerling inventories were
about even with the previous year, the decline in prices as these fish reach
market size may not be as severe in the second half of 1999 as it was in 1998.
Broodstock inventory levels also were similar to those of  the previous year,
so egg and fingerling production during the first half of 1999 is expected to
be roughly similar to 1998.    

As processors rapidly move through the inventory of available food-size fish,
farm prices for food-size fish are expected to strengthen quickly in the first
quarter of 1999, with grower inventories of food-size fish near the previous
year's levels and processor inventories of finished product down 9 percent at
the start of 1999. Sales to processors in over the first two months of 1999
totaled 98 million pounds, up 3 percent from a year earlier. Farm prices are
expected to soften, however, in the second quarter of 1999, following the
seasonal increase in consumption associated with Lent and as the large
inventory of stockers begins to reach food size. 

Prices for stockers and fingerlings are also expected to rise slightly in
1999, and stocker and fingerling producers are likely to see expanded sales.
Food-size producers are expected to increase the size of their operations and
possibly the density of stocking in existing ponds as a result of somewhat low
starting inventories, expected strong processor sales in first-quarter 1999,
and expectations of continued low prices for corn and soybeans.

Gross processor revenues are expected to increase again in 1999. Total sales
are expected up 5-7 percent, mirroring the expected increases in farm
production. Processors' prices, however, are expected to show little change
from 1998 as a result of large supplies of competing meat. Stable prices and
increased sales should result in an increase in catfish processor revenues for
the fifth year in a row. For 1998, processor sales increased 8 percent to 281
million pounds, and in combination with a 2-percent increase in average price,
boosted processors' gross revenues by 10 percent $85 million to just under
$650 million. Processor sales in 1999 are expected to be dominated by sales of
fileted products.  

David Harvey (202) 694-5177
djharvey@econ.ag.gov


BOX - COMMODITY SPOTLIGHT

From Hatchery to Market: A Glossary of Catfish Terms

Fingerlings/fry: Fish weighing 0.06 pound or less (measured as 60 pounds per
1,000 fish or less).

Small stockers: Fish weighing over 0.06 pound and up to 0.18 pound (measured
as over 60 pounds and up to 180 pounds per 1,000 fish).

Large stockers: Fish weighing over 0.18 pound and up to 0.75 pound (measured
as over 180 pounds and up to 750 pounds per 1,000 fish).

Small food-size fish: Fish weighing over 3/4 pound and up to 1 pounds.

Medium food-size fish: Fish weighing over 1  pounds and up to 3 pounds.

Large food-size fish: Fish weighing over 3 pounds.

Broodfish: Fish kept for egg production, including males. Broodfish produce
the fertilized eggs which go to hatcheries. The most desirable individual size
is 3-10 pounds or 4-6 years of age.


FARM FINANCE

Farmers to Cut Borrowing Amid Income Uncertainty

In 1999, after 7 years of debt expansion, farm-sector borrowing is expected to
decline by $1.3 billion. Low prices for many key agricultural commodities, and
significant weather and disease problems in some regions, have both farmers
and their lenders concerned about farmers' ability  to repay existing loans
and qualify for new production loans. While net cash farm income has been
strong in recent years and 1999 is forecast to be above the 1990-98 average,
last year saw increasing variability in farm-sector economic performance by
region and commodity.

Debt Level Still
Relatively High

Since yearend 1992, total farm business debt has grown 22.5 percent--$31.3
billion--with nearly half of that increase coming in 1997-98. Farm business
debt--real estate plus nonreal estate loans--is estimated at $170.4 billion at
yearend 1998, up 3 percent compared with a 6-percent increase in 1997. But a
projected decline of 0.5 to 1 percent in 1999 will reduce total farm debt to
about $169 billion, still the second highest debt level since 1985. The
decline in part reflects a change in farmers' outlook toward debt. Both
farmers and lenders learned during the farm financial crisis of the 1980's
that borrowing cannot substitute for adequate cash flow and profits.

The 1999 forecast reflects a relatively low incidence of farmers borrowing
their way out of cash-flow problems as well as the likelihood of fewer new
capital investments. Adequate levels of working capital as well as additional
Federal funds made available by legislation passed in 1998 are also helping to
reduce loan balances and hold down new borrowing. Given the expectation of
lower prices and income in 1999, as well as continuing uncertainty about
economic recovery in nations that are major importers of U.S. farm products,
farmers are likely to remain cautious about debt use. 

Farm income is projected to decline in 1999--net cash income by 6 percent and
net farm income by 7 percent. In 1998, incomes were lower for many farmers--
particularly those specializing in corn, wheat, soybeans, and hogs--as
continued high levels of production for many farm commodities were more than
offset by substantial price declines. This year promises to be financially
challenging for these farmers. Although numerous farm subsectors were
profitable in 1998--e.g., broilers, cattle, vegetables, fruits, nursery and
greenhouse products--and have a strong outlook for 1999, subsectors with
losses will outweigh those with gains.
 
Favorable trends in the general economy should continue to maintain stable
interest rates, and farm-sector equity will rise by $16.9 billion, primarily
because of rising farmland prices. But neither higher equity nor stable--or
even lower--interest rates may be sufficient to offset the effect of lower
incomes. Even if farmers lower their credit use in 1999, ERS is forecasting
that lower income will cause farmers' use of debt repayment capacity--the
maximum debt that could be repaid from current income--to rise to 57 percent
in 1999, up from 55 percent in 1998 and 53 percent in 1997.

Nonreal Estate Loans
Grow Faster

Four institutional lenders--commercial banks, the Farm Credit System (FCS),
USDA's Farm Service Agency (FSA), and life insurance companies--accounted for
77.5 percent of all farm business loans outstanding at yearend 1998, with the
remaining share held by individuals and nontraditional lenders, primarily
input and machinery suppliers, cooperatives, and processors. Except for the
FSA, farm lenders' outstanding loan volume increased in calendar year 1998.

Agricultural lenders generally found the demand for agricultural credit
strengthened more for nonreal estate than for real estate loans in 1998. Total
loan volume outstanding increased 3 percent, with nonreal estate loans up 3.4
percent and real estate loans up 2.6 percent. This was the sixth straight year
that growth in nonreal estate loans exceeded growth in real estate loans, but
the volume of outstanding real estate debt still surpasses nonreal estate
debt $87.8 billion compared with $82.8 billion.

Nonreal estate business loans outstanding increased $2.72 billion in 1998,
some 55 percent of the 1998 rise in farm debt. Nonreal estate loans--mainly
short- to intermediate-term loans--are typically used for farm inputs,
equipment, and machinery. FCS outstanding nonreal estate loans increased $597
million--3.9 percent--while commercial banks' rose $1.51 billion--3.6 percent.

Despite adequate FSA loan authority in fiscal 1998, total FSA nonreal estate
loans outstanding decreased 4.1 percent in calendar 1998 to $4.1 billion and
are forecast to be about the same level in 1999. However, although total
direct FSA obligations (operating, ownership, and emergency) declined to $739
million, down 0.8 percent from fiscal 1997, direct operating loans
alone funds used primarily to meet production expenses were up 8 percent over
fiscal 1997, reaching $557 million. 

In 1999, nonreal estate loans outstanding should decrease about 0.5 percent
based on production and expense projections. Total planted acres for eight
major field crops--corn, sorghum, barley, oats, wheat, rice, cotton, and
soybeans--are projected to decline 2.1 percent to 250.7 million acres. Since
these eight crops accounted for virtually all the fluctuations in field crop
acreage in recent years, input quantities will likely stay near or slightly
lower than 1997 and 1998 levels, assuming no major change in production
practices.

With production, input quantities, and input prices projected to remain fairly
stable, farmers' production expenses in 1999 are expected to total $186.1
billion, up 0.5 percent over 1998, but still 1.3 percent below total 1997
production expenditures. These decreases relative to 1997 are the first
significant declines in production expenses since the 6-percent declines in
1985 and 1986. Cash production expenses are forecast to increase only 0.4
percent in 1999, still 1.7 percent--$2.9 billion--below the 1997 level, and
farm-sector interest expenses are anticipated to decline 3.1 percent to $13.7
billion, a drop of $431 million.

Reduced machinery sales in 1999 will also dampen the demand for short- and
intermediate-term farm loans. Unit sales of farm tractors, combines, and other
farm machinery continued the strong trend of recent years into 1998 before
dropping off significantly in the second half of the year. The overall farm
machinery sales forecast for 1999 is for a significant decline across a range
of equipment. The Equipment Manufacturers Institute (EMI), for example,
projects lower sales for many equipment categories, including declines of 8
percent for 2-wheel-drive tractors, 17 percent for 4-wheel-drive tractors, and
15 percent for self-propelled combines.

Farm real estate loans outstanding increased $2.2 billion in calendar 1998.
Commercial banks' real estate loan portfolios, holding 31 percent of total
real estate debt, increased  $1.4 billion--5.7 percent--marking the 16th
consecutive year of gains in commercial bank real estate loans.  FCS real
estate loans were up $1 billion--3.7 percent--and life insurance companies'
real estate loan portfolios gained  about $220 million--2.3 percent. However,
FSA real estate loans dropped $247 million--5.7 percent--and loans by
individuals and others fell $187 million--1 percent. 

For 1999, farm real estate loans outstanding are expected to decrease about 1
percent, in part reflecting reduced demand for mortgage loans (real estate
credit) from smaller increases in farmland prices. U.S. farmland values have
risen for 13 straight years (1987-99 inclusive). Per-acre U.S. farmland values
increased an estimated 5.2 percent in 1997 and 1.8 percent in 1998, but are
expected to slow to 1.5 percent in 1999, partly because of lower expected
returns from farming. Falling commodity prices may disproportionately affect
land values in areas specializing in commodities that are experiencing price
declines.

Lenders Remain Strong,
But More Cautious

Continued growth in loan demand contributed to the robust financial condition
of most commercial agricultural lenders in 1998, and these lenders are in a
strong position in 1999. However, the composition of loan portfolios and
changes in loan volume vary among the four traditional farm lender categories.

Commercial banks are the largest source of farm business credit, accounting
for 41 percent of all farm loans outstanding in 1998 and nearly 60 percent of
1998 growth in total farm debt outstanding. Commercial banks' total
outstanding farm loan volume of reached $69.9 billion in 1998, up 4.4 percent
from 1997.

The FCS a collection of federally chartered, borrower-owned credit
cooperatives that lend primarily to agriculture--held 25.8 percent, or $43.9
billion, of total farm business loans at the end of 1998, up 3.8 percent from
a year earlier. The FCS accounted for 32.5 percent of the increase in all farm
loans outstanding in 1998. FCS nonreal estate loans have made a strong showing
in the past 5 years, gaining 50.3 percent during 1993-98. The FCS real estate
loan market share reached 32.1 percent, edging up for the third consecutive
year after a decade of decline from the 43.7 percent share held in 1984. 

Direct loans from FSA, the government "farm lender of last resort," accounted
for 4.8 percent of all farm business loans at yearend 1998, down from 5.2
percent in 1997. FSA's total direct loans outstanding decreased 4.9 percent in
calendar 1998 to $8.2 billion, with real estate debt down more than nonreal
estate debt.

Lenders have grown more cautious in extending agricultural credit. While the
current situation does not warrant the label of crisis, the farm loan
portfolio losses of the early to mid-1980's are a recent memory. Lenders in
1998 were able to manage most farm loan repayment challenges given relatively
healthy farm incomes in recent years and additional Federal financial
assistance. The 1999 farm financial situation is not expected to lead to
unmanageable deterioration in lenders' portfolios. But if conditions that
materialized in the agricultural sector in 1998 persist--i.e., lower farm
prices for key commodities, coupled with uncertainties about the duration of
the downturn--lenders will increasingly face requests for renewal of poorly
performing loans and for new loans to customers who are less creditworthy.
Given a possible drop in income and tighter credit standards, some farmers
would need to reconsider any plans to use debt capital.

During the downturn of the 1980's, farm lenders learned that credit should not
be used as a replacement for lost earnings, and that earnings, not asset
inflation, assures debt repayment. Losses to both lenders and farmers made it
clear that farm businesses need a positive cash flow in order to manage debt
obligations successfully.

Today, despite low commodity prices, lenders appear confident about the
majority of their farm customers. Most farmers are not as heavily leveraged
(indebted) as they were 10-15 years ago. Veteran lenders cite significant
differences from the 1980's, including lower interest rates, greater owner
equity, better credit analysis and monitoring methods, and improved management
skills of producers. Lenders, on sounder financial footing themselves, have
greater flexibility to work with financially stressed customers to restructure
debt and provide credit for operating expenses.

The farm financial crisis of the 1980's altered the agricultural lending
environment. A general enhancement of loan oversight resulted in tighter
regulation for all types of agricultural lenders, and lender regulators now
insist that banks follow strict guidelines for approving borrowers and that
loans conform to sound banking practices. Bank examiners currently report few
problems with underwriting practices for agricultural loans. They do, however,
continue to monitor the extent to which banks' agricultural loan portfolios
are tied to major crops affected by declining payments under the 1996 Farm
Act, as well as the usual performance measures of banks' soundness, such as
capital and asset levels.

As the banking industry continues to move toward reducing lenders' risk, the
ongoing changes are putting added pressure on producers. Loan application
procedures are becoming more complex, and loan approval may be harder to
obtain because lenders' cash flow projections based on expected commodity
prices indicate some farmers may have added difficulty meeting debt service
requirements.

Can Lenders Supply
Adequate Credit?

Readily available and reasonably priced credit facilitates the high-technology
production methods necessary for U.S. producers to compete in global markets.
Currently, overall availability of funds is not a problem, since agricultural
lenders have more loan money on hand than they can profitably lend to the pool
of creditworthy borrowers made smaller by current short-term price
projections. Clearly, any credit crunch that borrowers may perceive in
agriculture is not from reduced availability of funds but from recent changes
in methods for loan processing and credit analysis--changes that were
implemented in response to the current risk environment surrounding
agricultural credit but based on lessons from the past.

The FCS is well positioned to supply farmers' future credit needs. It has
demonstrated financial strength in recent years as it underwent massive
restructuring of its organization and procedures. The FCS has access to
national money markets and can provide needed farm credit at competitive
rates. In 1999, FCS farm business debt is forecast to decrease about 2.2
percent, with mortgage debt expected to decline 1.7 percent and nonreal estate
debt to decline about 3 percent. But FCS has gained farm loan market share the
past 4 years (1995-98) after a gradual loss of share the previous 10 years.

The recent growth in commercial bank farm loan demand is reflected in
agricultural banks' average loan-to-deposit ratio, which grew to 72.5 percent
in the year ending September 30, 1998, up from 57 percent 6 years earlier.
High loan-to-deposit ratios do not necessarily constrain the origination of
new loans, since commercial banks have many nondeposit sources of funds, and
profitable, well-managed banks often have very high loan-to-deposit ratios.
Although rural banks make considerably less use of nondeposit funds than do
banks headquartered in metropolitan areas, banks in most rural markets today
can access nonlocal sources of funds. Overall, most banks have adequate funds
available for agricultural loans, although a few report a shortage of loanable
funds. 

Requests for FSA loans is one indicator of farm financial health, typically
increasing when farm financial conditions deteriorate. The pace of
applications for FSA assistance and loan obligation volume in the first
quarter of fiscal 1999 was up from the same quarter a year earlier. FSA's
fiscal 1999 total loan authority--covering direct and guaranteed loans for
ownership, operating, and emergency purposes--is up 17.7 percent over fiscal
1998 obligations. Federal funding for FSA-guaranteed loans--69 percent of
FSA's fiscal 1999 authority--continues to be considerably greater than the
amount authorized for direct loans to operators of family-sized farms unable
to obtain credit elsewhere. In fiscal 1998, FSA issued loan guarantees--for
loans made by commercial and cooperative lenders--totaling $1.44 billion, down
8.8 percent from a year earlier. FSA's fiscal 1999 authority for loan
guarantees is up 13.7 percent. 

FSA authority to issue direct loans (ownership, operating, and emergency) is
up 27.4 percent for fiscal 1999. On February 26, 1999, the Administration
requested a supplemental appropriation that would include authority for $105.6
million to support additional FSA farm loans of $1.1 billion, 51.1 percent for
direct loans. Passed by the House and Senate, this legislation is pending in
conference. 

The general financial health of agriculture today is stronger than in the
mid-1980's when the sector last experienced significant financial stress.
Overall, agricultural borrowers are less leveraged and more liquid, and those
who survived the 1980's are probably better financial managers today. Clearly,
however, agricultural lending is embarking on an era of increased uncertainty
that translates into more stress for specific portfolio segments. Many of the
contributing factors are beyond the control of individual farmers and lenders,
and certain critical factors, such as weakened ability of foreign customers to
buy U.S. agricultural products, may not go away soon.  

Jerome Stam (202) 694-5365 and James Ryan (202) 694-5586
jstam@econ.ag.gov
jimryan@econ.ag.gov


RISK MANAGEMENT

Recent Developments in Crop Yield & Revenue Insurance

[This article continues Agricultural Outlook's series on risk management.]

As policymakers consider strengthening the farm safety net, crop insurance is
once again in the spotlight. Among the questions being asked:  How well does
the current array of crop insurance products and coverage levels match the
risk management needs of producers?  How much does insurance help producers in
extended periods of low prices or with multiple-year crop losses?  How can the
government work effectively with the private sector to develop and deliver
insurance?

Although overall participation has declined from its peak in 1995 and
questions remain about the adequacy of coverage, crop insurance, which
includes yield-based as well as revenue insurance products, is used by many
growers. In 1998, growers paid about $900 million in crop insurance premiums
for about $28 billion in guarantees on about 180 million acres of crops. About
two-thirds of planted acreage of corn, soybeans, and wheat was covered by crop
insurance.

Crop insurance provides protection from a broad range of perils that can lead
to yield or revenue shortfalls. The type of protection depends on the type of
insurance. For instance, multiple-peril crop insurance (MPCI) protects against
yield shortfalls that are due to drought, flooding, frost, plant disease,
insect infestation, and other natural hazards beyond a grower's control.
Revenue insurance provides a degree of price protection not just yield
protection as under MPCI--covering sharp drops in expected revenue, which may
result from yield or price declines or a combination of the two. 

Although growers obtain insurance through private companies and their agents,
the Federal government plays a prominent role in the provision of crop
insurance. During 1995-98, USDA's Risk Management Agency (RMA), which
administers programs of the Federal Crop Insurance Corporation (FCIC), has
spent about $1.2 billion per year, on average, for premium subsidies,
administrative and operating subsidies, and net underwriting losses. RMA
promotes crop insurance participation through educational and other outreach
activities and--along with the insurance companies--develops new products.
FCIC and RMA also oversee the provision of crop insurance, setting and
approving premium rates and policy provisions, ensuring that companies can
cover potential underwriting losses, and approving privately developed
insurance products for subsidies and underwriting protection.

Crop Insurance: A Widening 
Array of Coverage

Since the early 1990's, the variety of insurance products, guarantee levels,
and crops included in the Federal crop insurance program has grown
substantially. Insurance product choices have expanded from a single offering
--individual-farm yield insurance called Actual Production History-Multiple
Peril Crop Insurance (APH-MPCI)--to include area-yield insurance and a variety
of crop revenue insurance products. The range of guarantee levels has been
enhanced by pilot programs to increase maximum guarantees available in some
areas of the country and by the provision, at low cost to producers, of a
minimum level of insurance coverage called CAT (short for catastrophic). The
list of crops for which insurance is available has grown from about 50 in the
early 1990's to more than 70 currently, including several types of fruit and
nut trees, grapes, nursery stock, and rangeland.

In addition to the growing array of coverage options available under the
federal programs, private insurance companies, agents, and brokers have
developed a variety of supplemental insurance products and have bundled crop
insurance with other risk management products. Examples of supplemental
products, for which producers pay additional premiums, include those that
increase the price at which insurance indemnities would be paid. Purely
private insurance against hail and fire damage continues to be widely
available. In 1998, producers in 46 states paid about $550 million in
crop-hail premium. About 60 percent of the crop-hail coverage was for corn and
soybeans.

While traditional APH-MPCI still accounts for the bulk of the Federal crop
insurance business, new types of insurance, particularly revenue insurance,
have attracted considerable interest.  Revenue insurance products--Income
Protection and Crop Revenue Coverage--first became available for a few crops
in selected areas in the 1996 crop year. Revenue Assurance was added in the
1997 crop year and Group Risk Income Protection and Adjusted Gross Revenue
were added for the 1999 crop year. Since the introduction of revenue
insurance, more crops and more areas have been added, and revenue insurance
has come to cover a substantial portion of insured acreage in some areas. Not
all insurance products, however, are available in all areas.

Revenue insurance has been especially popular for corn and soybeans, crops
that were the initial focus of the privately developed Revenue Assurance and
Crop Revenue Coverage. In 1998, revenue insurance products accounted for about
one-third of the corn and soybean acreage insured above the CAT level. Revenue
insurance covered more than 50 percent of corn acreage insured above the CAT
level in Iowa and 45 percent in Nebraska, and reached nearly 50 percent of the
above-CAT insured acreage for soybeans in these two states. Although wheat
accounts for a smaller portion of the overall crop revenue insurance business
than corn or soybeans, revenue insurance policies cover a considerable share
of wheat acreage in several states. In Kansas, Michigan, Nebraska, and Texas,
more than one-quarter of wheat acreage insured above the CAT level was covered
by revenue insurance in 1998. 

Revenue insurance choices continue to expand, with two new products being
introduced in 1999. Group Risk Income Protection (GRIP) adds a revenue
component to the Group Risk Plan (GRP) area-yield insurance. Coverage is based
on county-level revenue, calculated as the product of the county yield and the
harvest-time futures market price. GRIP is available for corn and soybeans
under a pilot program in selected counties in Iowa, Illinois, and Indiana
where GRP is offered. 

Adjusted Gross Revenue (AGR), the second new revenue insurance product, offers
coverage on a whole-farm rather than on a crop-by-crop basis. AGR bases
insurance coverage on income from agricultural commodities reported on
Schedule F of the grower's Federal income tax return. AGR targets producers of
crops--particularly specialty crops--for which individual crop insurance
programs are not presently available. Producers who obtain AGR must insure
crops for which crop-by-crop coverage is available under the individual crop
plans. In these cases the AGR whole-farm liability and premium are adjusted.
AGR is being offered as a pilot program in selected counties in Florida,
Maine, Massachusetts, Michigan and New Hampshire.

In addition to the growth in variety of insurance plans, the range of
insurance guarantees, which are calculated as the product of expected yield or
revenue and percentage coverage level, has been expanded. Crop insurance
coverage levels--percentages of expected yield--generally range from 50
percent for CAT to a maximum of 75 percent, increasing at 5-percent intervals.
Under 75-percent coverage, for example, the grower would absorb up to a 25
percent loss in expected yield or revenue, while the insurer would pay for
losses above 25 percent. 

At the high end, FCIC/RMA has increased the maximum coverage level available
for some crops in some areas, giving growers the option of purchasing
insurance at higher coverage levels, at higher premium costs. At the low end,
the provision of low-cost CAT coverage has already increased insurance
participation. 

Under pilot programs in 1999, FCIC/RMA increased the maximum coverage level
available for selected crops in selected areas from the current 75 percent to
85 percent. One pilot targeted areas where many growers have historically
insured at the maximum level and where losses have been infrequent; another
focused on areas where recent low yields may have reduced the yield or revenue
history on which guarantees are calculated. The maximum coverage level for
individual yield and revenue coverage was raised to 85 percent for corn and
soybean growers in 66 counties in Illinois, Indiana, and Iowa and for wheat
growers in 20 counties in Idaho, Oregon, and Washington. In addition, the
maximum coverage was increased to 85 percent for spring wheat and barley in
Minnesota, North Dakota, and South Dakota. Higher coverage levels are more
costly; the premium rate for 85 percent coverage is generally about 50 percent
higher than the premium rate for 75 percent coverage, and the additional
premium is unsubsidized.

While maximum coverage level has been a concern of some growers, others have
focused on the effectiveness of the CAT coverage level. CAT is a low coverage
level--50 percent of expected yield indemnified at 55 percent of expected
price for which producers pay a flat fee of $60 per crop. Despite the low
cost of CAT to producers, many have questioned whether it provides valuable
insurance coverage. The yield trigger, 50 percent of expected yield, has been
criticized as too low to provide a benefit except in rare cases, and the
maximum possible indemnity, less than 30 percent of the expected value of a
crop, has been criticized as inadequate. However, CAT was never intended to
provide substantive coverage, just benefits roughly the same as those under
previous ad hoc disaster programs.

CAT is a basic coverage level that was introduced under the Federal Crop
Insurance Reform Act of 1994. The crop insurance reform, which required
participants in farm programs to obtain crop insurance and which raised
premium subsidies for coverages above CAT, was designed to increase crop
insurance participation and reduce the need for ad hoc disaster assistance. In
1995, the first year of the reform, total insured acreage doubled to about 80
percent of eligible acres, and CAT accounted for the bulk of the expansion.

Since implementation of the 1996 Farm Act, which significantly changed farm
programs and eliminated the crop insurance requirement, CAT participation has
dropped dramatically. While overall insured acres have declined about 15
percent (average net acres insured for 1997 and 1998, compared with 1995 and
1996) and acres insured above the CAT level have increased by about 7 percent,
CAT acres have dropped about 40 percent.

The Value of Crop Insurance

The current array of crop insurance products is designed to protect against
shortfalls in yields or revenues that occur during a single growing season.
Insurance guarantees are set at planting, based on expectations about the
eventual levels of yields or revenues. By reducing or eliminating the chances
of sharply lower income as a result of losses from a particular commodity,
crop insurance can be a valuable risk management tool. The risk protection
that it provides can, for example, facilitate access to operating loans by
offering some financial security to a lender.

For insurance purposes, expected yields are based on yield histories, and for
individual farm coverage, the annual expected yield for a crop is usually
calculated as the average yield over the previous 4-10 years, depending on
data availability. While in most cases these actual production histories
provide reliable indications of the likely yield under normal conditions, they
can produce distorted pictures. 

If yields for a farm over a 4-10-year period differ significantly from yields
based on a longer history, then premiums will not be consistent with long term
expected losses. If yields are too high due to a few good years, the premium
will be lower than needed over the long term and vice versa. By the same
token, if recent historical yields differ from current expectations held by
the grower, he or she may consider the guarantees too high or too low. 

Under crop insurance rules, expected yield, and hence insurance guarantee, can
fall if a producer's yield declines over time. This potential for declining
guarantees has led to questions about the effects of repeated crop losses. In
the Northern Plains, for instance, several years of poor weather and plant
diseases have hampered crop production for some but not all producers,
reducing the historic yield and leading to complaints that insurance based on
actual production history no longer offers effective yield guarantees.  

FCIC/RMA authorized a pilot program in early 1999 that may help some growers
overcome the declining guarantee problem. In exchange for a higher premium,
growers can choose to use 90 or 100 percent of a transitional or T-yield
instead of the recent actual yields on the farm as the basis for the insurance
guarantee. (T-yields are based on Farm Service Agency program or county-level
yields and other data and are usually used in the Federal crop insurance
program to set insurance guarantees when a producer is unable to provide
records of farm-level actual production history.)  This "Yield Floor Option"
is available in 1999 for barley and spring wheat in Minnesota and North and
South Dakota.

In addition, provisions for multiple-year crop loss payments are included in
the Crop Loss Disaster Assistance Program, implemented under the 1999
Agricultural Appropriations Act. Under the disaster program, producers may
apply for payments from USDA in addition to crop insurance indemnities they
may have received. The program allows producers to file for payments based on
either a single loss in 1998 or on multiple crop losses between 1994 and 1998.
Although producers who did not have crop insurance may also receive benefits,
those with crop insurance would receive greater payments. And all producers
receiving benefits who did not have crop insurance in 1998 must obtain crop
insurance, where available, in 1999 and 2000.

Crop insurance, particularly revenue insurance, provides protection from sharp
drops in prices over each growing season. The products provide little
protection against declines in prices that occur between growing seasons and
over several seasons. Prices, or formulas for establishing prices, are
determined when insurance guarantees are set at planting. In the case of MPCI
yield coverage, RMA estimates an expected price. Revenue coverage uses prices
of futures contracts with delivery dates near harvest time. Both of these
procedures keep the value of insurance consistent with the expected value of
the crop. 

Multiple-year insurance contracts may offer a means of moderating the drops in
insurance coverage that can follow from several losses or from declines in
prices. But guarantees fixed for several years at a time would have the
potential to distort production if they exceed the market value of the crops
and undermine the actuarial integrity of the insurance program. Multiple-year
contracts could also be much more costly than annual crop insurance contracts.

The Government-Private 
Crop Insurance Partnership

Expansion in the Federal crop insurance program since the early 1990's has
been accompanied by expansion in the role of private insurance companies. The
companies have developed new products, notably Revenue Assurance and Crop
Revenue Coverage, and have borne an increasing amount of underwriting risk.
Still, the Federal government provides substantial support and direction to
the program. In products approved by the FCIC board of directors, it provides
premium subsidies to producers in order to encourage participation, expense
reimbursements to the companies to cover costs of selling and servicing 
policies, and underwriting risk protection to the companies.

Government involvement in providing crop insurance is explained in part by
several "market failure" arguments. One such argument is that natural
disasters associated with crop production tend to affect many producers in an
area at the same time, so pooling risk on a sufficient scale is difficult for
most private insurers. Another argument suggests that purely private markets
for crop insurance would fail because other producer responses to risk--
diversification, borrowing, drawing on savings--reduce the value of the
additional protection provided by insurance, making insurance unattractive
when offered at competitive market prices. 

In order to encourage participation in crop insurance, RMA provides subsidies
to reduce producer premiums. The amount of the subsidy depends on the type of
insurance and the coverage level. For CAT coverage, the premium is entirely
subsidized. For what has been the most popular "buy-up" (above CAT) coverage
level--65 percent of yield at 100 percent of price--the subsidy has been about
42 percent of the total premium. As a further incentive to purchase crop
insurance, the Secretary of Agriculture authorized up to an additional $400
million in premium subsidies for 1999 buy-up coverage. The additional funds,
part of the emergency assistance package passed by Congress in 1998, are
expected to reduce producer-paid premiums by about 30 percent. 

Under most private insurance, the premiums include administrative costs as
well as the costs of expected indemnities. Under the crop insurance program,
total premiums--producer-paid plus government subsidies--are designed to cover
only expected indemnities. For this reason, FCIC/RMA provides administrative
subsidies to insurance companies to cover the costs of selling and
underwriting policies, adjusting losses, and processing policy data. Because
administrative costs vary by type of insurance, the subsidy amount is designed
to match reimbursement to differing workloads. The administrative subsidy,
like the producer premium subsidy, is generally highest (in dollar amount) for
individual farm APH-MPCI buy-up coverage and lowest for GRP area-yield
insurance. The APH-MPCI subsidy is high because of the costs of establishing
individual farm yield histories and guarantees and adjusting losses on an
individual basis. The GRP subsidy is low because it requires no fieldwork to
adjust losses.

The underwriting exposure--potential gains or losses--of private crop
insurance companies has grown considerably. Underwriting gains or losses arise
as premiums are used to offset indemnities paid. In the crop insurance
program, private companies share the underwriting risk with FCIC. The
companies' crop insurance business is reinsured by FCIC under the Standard
Reinsurance Agreement (SRA). The companies can obtain additional reinsurance
in commercial markets. In 1992, the companies' total capital at risk--maximum
possible losses after FCIC reinsurance--was about $227 million. Since then, as
risk-sharing provisions of the SRA have been renegotiated and the size of the
crop insurance business has grown, the companies' total capital at risk has
grown to about $1.5 billion.

With the exception of 1993, growing conditions have been generally favorable
since 1992 and company underwriting gains have been sizable. Underwriting
gains totaled approximately $1.1 billion over 1992-98, an average of about
$155 million per year. The average, however, masks wide variation among areas,
companies, and years. For instance, net underwriting gains in 1997 were $352
million, while yield losses due to floods in 1993 were responsible for net
underwriting losses of $84 million. While the potential for underwriting gains
is large, the private companies are also exposed to large potential losses.
For example, had the 1988 drought occurred in 1998, when more acres were
insured and the companies' risk exposure was larger, it is estimated that net
underwriting losses would have exceeded $450 million.

Since the early 1990's, the Federal crop insurance program has expanded in the
scope and variety of risk protection offered to producers. A major reform
added a low-level of coverage, and combined with premium subsidies and linkage
to other farm programs dramatically increased insurance coverage. The maximum
coverage levels that producers can purchase have been raised under pilot
programs for some crops in some areas of the country. Revenue insurance
products have been developed and have captured significant shares of the crop
insurance business. 

At the same time, private insurance companies have played a larger role in
delivering crop insurance, developing new products, and sharing underwriting
risk. Nonetheless, questions remain about the effectiveness of the coverage
available under the crop insurance program in assisting producers in managing
the economic risks in farming, and crop yield and revenue insurance are likely
to be the focus of policy decisions about strengthening the farm safety net.

Robert Dismukes (202) 694-5294
dismukes@econ.ag.gov

BOX - CROP INSURANCE
A Brief Legislative History of Crop Insurance

1980 Federal Crop Insurance Act  
Crop insurance intended to replace disaster payments as primary form of crop
yield risk 
protection  
Insurable crops and areas greatly expanded
Premium subsidy instituted, at up to 30 percent of total premium
Private insurance companies and agents may sell and service crop insurance

1988-94 ad hoc disaster assistance
Enacted each year in part in response to low insurance participation.
Disaster assistance recipients were required to obtain crop insurance in the 
subsequent year.

1990 Food, Agriculture, Conservation, and Trade Act (1990 Farm Act)
Premium rate increases mandated to reduce excess losses
Target loss ratio established for all crop insurance
Actions to control fraud are mandated  
Private insurance companies to bear increased share of underwriting risk
FCIC authorized to reinsure and subsidize privately developed products

1994 Crop Insurance Reform Act
Restrictive legislative procedures instituted for enacting disaster assistance
Participants in farm programs must obtain crop insurance
Catastrophic coverage level (CAT) introduced
Premium subsidies for coverage levels above CAT are increased
Non-insured Assistance Program (NAP) created for crops not covered 
by insurance

1996 Federal Agriculture Improvement and Reform Act (1996 Farm Act) 
Requirement that participants in farm programs obtain crop insurance is ended
Pilot revenue insurance program is mandated

1998 Emergency assistance, included in 1999 Agricultural Appropriations Act
Crop-loss disaster assistance payments to producers authorized for single-year
(1998) or multiple-year (3 or more years between 1994 and 1998) crop losses;
payments slightly higher for those who had obtained crop insurance
Additional premium subsidies authorized for buy-up coverage in 1999, limited
to total of $400 million  Recipients of emergency assistance who did not have
1998 crop insurance must obtain crop insurance, where available, for 1999 and
2000 crop years

SIDEBAR - CROP INSURANCE

How Federal Crop Insurance Is Delivered

USDA's Risk Management Agency (RMA) is charged with the administration of crop
insurance programs for the Federal Crop Insurance Corporation (FCIC). FCIC/RMA
regulates and promotes insurance program coverage, sets standard terms--
including premium rates--of insurance contracts, ensures contract compliance,
and provides premium and operating subsidies. Crop insurance policies are
delivered--sold, serviced, and underwritten--by private insurance companies.
Insurance companies also develop new insurance products that are approved for
subsidies and reinsurance by FCIC and offer private coverages (without FCIC
support) that supplement federal crop insurance. 

About 18 insurance companies currently deliver crop insurance. The companies'
insurance portfolios vary in size and scope. The four companies with the
largest amounts of crop insurance account for about two-thirds of the volume
of total premium and each delivers insurance in about 40 states. While these
companies have large and widely spread portfolios, other companies deliver
smaller amounts of crop insurance over smaller areas. Most of the companies
with small crop insurance portfolios deliver in five or fewer states, and tend
to operate in low-risk states.

Companies compete for crop insurance business through insurance agents who
sell and service the policies. Most of the nation's 18,000 crop insurance
agents are independent agents who may sell insurance for more than one
company. Others are captive agents, selling for only one company. An agent is
usually paid a sales commission by a company proportional to the premium of
the policy sold. Loss adjusters for claims are employees or contractors of the
insurance companies.

Insurance underwriting gains or losses arise as total premiums (producer
premiums and premium subsidies) are used to offset indemnities paid. In the
crop insurance program, private companies share the underwriting risk with
FCIC by designating their crop insurance policies to risk-sharing categories,
called reinsurance funds. Because each of the funds allows different levels of 
risk sharing--potential underwriting losses when indemnities exceed premiums
and gains when premiums exceed indemnities, the proportion of losses paid or
gains earned varies by government fund.

Companies that qualify to deliver crop insurance must annually submit plans of
operation for approval by FCIC/RMA. A plan of operation provides information
on the ability of the company to pay potential underwriting losses and on the
allocation of the company's crop insurance business to the various risk
sharing categories or reinsurance funds.

Based on the policies designated to each reinsurance fund, companies retain or
cede to FCIC portions of premiums and associated liability (potential
indemnities). FCIC assumes all the underwriting risk on the company-ceded
business and various shares of the underwriting risk on the retained business,
determined by the particular category and level of losses. Companies can
further reduce their underwriting risk on retained business through private
reinsurance markets.

In addition to underwriting returns, the companies are paid a subsidy by FCIC
for administrative, operating, and loss adjustment costs. The rates of
administrative and operating subsidy vary by the type of crop insurance and
level of coverage and are applied to the total premium of each type of
insurance sold. The levels of administrative and operating subsidy and the
terms of the underwriting risk-sharing are specified in the Standard
Reinsurance Agreement (SRA), which applies to all companies delivering
FCIC-reinsured policies. The current SRA (1998) specifies the subsidy for
APH-MPCI at the CAT level at 11 percent (for loss adjustment). For buy-up
APH-MPCI and similar coverages, the administrative and operating subsidy is
24.5 percent of total premium; 22.7 percent for GRP; and 21.1 percent for most
crop revenue products.


RISK MANAGEMENT

Tax-Deferred Savings Accounts for Farmers: A Potential Risk Management Tool

[This article continues the series on risk management.]

Making tax-deferred savings accounts available to farmers is among the
alternatives currently under consideration by Congress to help farm operators
manage their year-to-year income variability.  Unlike the income averaging
provision for farmers included in the Taxpayer Relief Act of 1997, which
allows farmers to spread above-average income to prior tax years and avoid
being pushed into a higher tax bracket, tax-deferred savings accounts would
build a cash reserve to be available for risk management. By depositing income
into special Farm and Ranch Risk Management (FARRM) accounts during years of
high net farm income, farmers could build a fund to draw on during years with
abnormally low income. Federal income taxes on eligible contributions would be
deferred until withdrawal.

Proposals for tax-deferred risk management savings accounts originally
surfaced after passage of the 1996 Farm Act as a mechanism to encourage
farmers to save a portion of the 7-year transition payments. In 1998, as
Congress sought to expand the farm safety net and ease stress from recent low
prices and regional disasters, it again considered FARRM accounts. A bill to
authorize FARRM accounts has now been introduced in the 1999 Congressional
session (H.R. 957, S. 642), and is likely to generate more debate.

How FARRM Accounts 
Would Work

Under the current FARRM account proposal, farmers could take a Federal income
tax deduction for FARRM deposits of no more than 20 percent of eligible farm
income--taxable net farm income from IRS Form 1040, Schedule F, plus net
capital gains from the sale of business assets including livestock but
excluding land. Deposits would be made into interest-bearing accounts at banks
or other approved financial institutions, and interest earnings would be
distributed and taxable to the farmer annually. Withdrawals from principal
would be at the farmer's discretion--the program includes no price or income
triggers for withdrawal--and taxable in the year withdrawn. Meaningful income
triggers would admittedly be difficult to determine given the nature of
taxable farm income and the fact that price levels do not necessarily
correlate with farm-level yield or income variability.

Deposits could stay in the account for up to 5 years, with new amounts added
on a first-in first-out basis.  Deposits not withdrawn after 5 years would
incur a 10-percent penalty. FARRM funds would have to be withdrawn if the
account holder were disqualified from participating by not farming for 2
consecutive years. Deposits and withdrawals would not affect self-employment
taxes.

FARRM account eligibility would be limited to individual taxpayers--sole
proprietors, partners in farm partnerships, and shareholders in Subchapter S
farm corporations--who report positive net farm income and owe Federal income
tax. The program should be relatively easy to administer through the use of
existing income tax forms, with reporting requirements similar to those of
individual retirement accounts (IRA's). Contributions and distributions from
the accounts could be verified by matching income tax returns with records
from financial institutions where the accounts are held.

Although farm sole proprietors make up the largest share of potentially
eligible individuals, over two-thirds either report a farm loss or have no
Federal income tax liability and therefore could neither participate nor
benefit from participation. And actual participation could be significantly
less than the number eligible.

Using 1994 Internal Revenue Service (IRS) data, ERS estimates that 916,000
farmers would be eligible to contribute as much as $2.8 billion to FARRM
accounts each year. Farm sole proprietors account for over two-thirds of
eligible participants and three-fourths of potential contributions. But about
half of eligible farm sole proprietors would be limited to contributing less
than $1,000. Thus, each year only about one out of every six sole proprietors
could contribute more than $1,000. Contributions for farm partners would also
be small--averaging below $2,000--but subchapter S shareholders' contributions
could average $4,355.

Basing eligibility for contributions on positive net farm income would direct
much of the benefit of FARRM accounts to those relying on farming for more
than half their income. About two-thirds of potential contributions by sole
proprietors would be concentrated among the one-third of eligible sole
proprietors who receive more than half of their income from farming. A very
small share of limited resource farmers--gross farm sales under $100,000 and
household income less than $10,000--would be eligible to contribute and their
contributions would be rather small.

The amount of money that would be deposited into FARRM accounts and a minimum
account balance that would be sufficient to provide risk protection for either
farm operations or household living expenses are difficult to estimate. But
with over 80 percent of farmers limited to contributions of less than $1,000
in any given year, and with participation rates expected to be less than 100
percent, most farmers are not likely to accumulate significant reserves. Some
producers with low contribution limits may be able to deposit larger amounts
in years when farm income is higher. But the 5-year window for building
reserves and the generally low level of taxable net farm income combine to
reduce the likelihood that most farmers would be able to build balances
adequate to self insure risk exposure.

Although 1994 is the most recent year for which complete data are available,
it was not an especially good year for farm income. Examination of the most
profitable year during the 1990-94 period (1990) suggests that aggregate
potential contributions would have increased by about 25 percent to $3.5
billion. Thus, with 100-percent participation, potential 5-year contributions
could range from $14 to $17.5 billion. The official revenue estimate by the
Congressional Joint Committee on Taxation suggests that aggregate account
balances would be well below this amount as a result of withdrawals and less
than full participation.

Looking at data for 1996, a year when farmers benefited from both high farm
prices and high government program payments, it appears that estimates of
eligible participants and total potential contribution amount would not change
significantly. Despite a slight increase in total taxable income from farming,
the number of farmers with taxable farm income actually dropped by about
30,000. Moreover, the number of farmers and other taxpayers who owe no Federal
income tax has since increased, due in large part to the new child credit and
other tax relief measures enacted in 1997 and 1998. As a result, the number of
farmers who would be eligible to make contributions if the program is
implemented may actually be lower than 1994 data suggest.

Should Benefits Be Targeted?

Without a provision for targeting--specifying who is eligible to participate
and where the program benefits are expected to be concentrated--most of the
benefits of FARRM accounts would go to relatively few farmers, and some of the
benefits would go to individuals who do not rely on farming for their
livelihood. The FARRM account proposal currently on the table does not specify
a maximum annual contribution or a limit on accumulated balances. About 0.5
percent of farm sole proprietors would be eligible to contribute over $20,000
annually, adding up to more than 25 percent of total sole proprietors'
potential deposits. Off-farm income for this group exceeds $250,000, on
average, and a small subset of very high-income individuals would be eligible
for contributions averaging $50,000. In contrast, many farmers with
persistently low farm incomes, highly vulnerable to income swings, would
likely be ineligible to contribute or unable to build sufficient FARRM account
balances.

Concentrating benefits for individuals at high income levels and excluding
low-income farmers may raise concerns about appropriately targeting the
program. Targeting could be used to reach a specific group of farmers by
placing a cap on annual contributions or by limiting eligibility based on the
adjusted gross income (AGI) of the household. For example, restricting
eligibility to individuals with AGI under $100,000 would reduce potential
contributions by about one-third and cut the cost to taxpayers--from farmers
deferring taxes--nearly in half, but would reduce the number of eligible
farmers by less than 10 percent.

The 1996 proposal for tax-deferred savings accounts included a targeting
provision--a $40,000 annual contribution limit and a 10-year time limit for
withdrawals. A Canadian program for farmer tax-deferred savings limits both
annual contributions and accumulated balances, but has no time limit.

FARRM Accounts Are Intended
To Manage Risk, Not Taxes

To meet goals of program efficiency--benefits offsetting costs--and risk
management, FARRM accounts must create new savings rather than shift assets or
replace existing risk management practices. The cost of the FARRM account
program is primarily the decrease in government revenue associated with tax
deferral. The benefits are mainly farmers' increased financial stability and
diminished need for government farm program or emergency aid payouts. 

Creating new savings instead of shifting assets could mean a gain for
taxpayers and a stronger risk position for farmers. To enhance farmers' risk
management capabilities, new savings must come from reduced household
consumption or from funds that would have been invested in the business,
rather than from shifting existing savings, diverting future new savings,
borrowing, or depositing taxes deferred by making the contributions. But
evidence indicates that most potentially eligible farmers have ample resources
to shift funds into FARRM accounts instead of creating new savings. 

Information on interest earnings for potentially eligible individuals suggests
that contributions from existing liquid assets could fund a large portion
--about three-fourths of total potential contributions in the first year, and
more than half of eligible farmers have sufficient existing savings to fund
their FARRM account contributions for several years. Farmers with adjusted
gross income exceeding $100,000 are more likely to be able to fund a larger
proportion of their contributions from existing savings, while eligible
farmers with AGI under $50,000 have less existing savings available and are
more likely to create new savings if they decide to participate.

USDA's 1994-95 Agricultural Resource Management Study reveals that a majority
of households associated with farms that have gross sales of $50,000 or more
already keep liquid assets to meet unexpected expenses. If those liquid assets
were moved into FARRM accounts, the household would benefit from tax deferral
without incurring significant restrictions on the availability of funds, but
would not enhance their ability to manage risk.

Research on IRA's, similar in concept to FARRM accounts, documents a
significant amount of asset shifting rather than new saving. The FARRM program
provision that requires a contribution to be withdrawn within 5 years
effectively limits the amount of income that can be accumulated in the account
and prevents a FARRM account from becoming an additional retirement savings
plan. But asset shifting could be even more prevalent for FARRM accounts than
for IRA's because FARRM accounts remain liquid and, without price or income
triggers that must be reached to allow withdrawals, FARRM accounts do not lock
the money into long-term reserves. In addition, FARRM funds are not required
to remain on deposit for a minimum time and, like IRA's, contributions prior
to April 15 would apply to the preceding tax year, so depositing funds in
FARRM accounts for a short period could provide a 1-year income tax deferral.

A program of tax-deferred risk management accounts has the potential to
encourage farmers to provide their own safety net by saving money from
high-income years to withdraw during low-income years. Taxpayers could benefit
if farmers' additional financial diversification and liquidity reduce the need
for continued income support programs or ad hoc farm disaster relief.
Nonetheless, there are several potential limitations to the program's
effectiveness. These include: 1) low levels of taxable farm income that could
preclude most farmers from building meaningful account balances particularly
those most in need of risk management tools, such as limited resource and
beginning farmers; 2) concentration of program benefits among operators with
large farms and relatively high off-farm income; and 3) funding of  FARRM
accounts with farmers' existing liquid assets instead of new saving.  

James Monke (202) 694-5358 and Ron Durst (202) 694-5347
jmonke@econ.ag.gov
rdurst@econ.ag.gov

SIDEBAR - FARRM ACCOUNTS

Canada Already Has a Savings Plan for Farmers

Risk management savings accounts are not without precedent. In 1991, Canada
began the Net Income Stabilization Account (NISA) program to encourage farmers
to save for self-insurance (AO May 1995). The farmer's contribution earns a
3-percent interest rate bonus and is supplemented by a matching government
contribution. Unlike the U.S. proposal, a farmer's NISA contribution is not
tax-deferred, but government contributions and interest earnings are not taxed
until withdrawal. Annual farm contributions are limited to 20 percent of the
year's sales, and deposits eligible for government matching are limited to the
smaller of $7,500 or 3 percent of eligible farm sales--gross sales of most
primary commodities minus purchases of those commodities, such as seed and
feed.  NISA has no time limit on deposits, but account balances may not exceed
1.5 times the farm's 5-year average sales.

Analysis of the NISA provision that allows withdrawals only when income falls
below an established threshold suggests that rules for withdrawal can create
obstacles to the effective use of funds. Administrative delays in the
availability of funds to farmers reduce the program's usefulness as a source
of emergency funding. This partially explains why many Canadian farmers who
became eligible for withdrawals did not actually take funds from their
accounts.

BOX - FARRM ACCOUNTS

For more information, see "Do Farmers Need Tax-deferred Savings Accounts to
Help Manage Income Risk?"  Call 1 (800) 999-6779 for a printed copy (AIB
724-07) or access it on the ERS website at www.econ.ag.gov/epubs/pdf/aib724.


SPECIAL ARTICLE

Concentration & Competition in the U.S. Food & Agricultural Industries

The U.S. food and agricultural sector continues to industrialize, and the
effects have been particularly evident in the last two decades.
Industrialization is associated with a range of structural changes, including
larger firm size, specialized production methods, vertical coordination, and
concentration--sharp declines in the number of buyers or sellers of a product.
In the industrialization process, production units (farms or factories)
typically become much larger. They also become more specialized; for example,
livestock feeders buy feed instead of growing it, or hire labor instead of
providing it themselves. Buyers and sellers often change the way they do
business, relying less on open spot markets, and more on contractual and
administrative methods for buying or selling agricultural commodities. 

Industrialization creates broad changes far beyond the immediate effects on
individual operators. As larger and more specialized producers realize lower
production costs and increase production, competition  can force cost
reductions to be passed through in the form of lower commodity and food
prices.  For traditional producers whose costs do not fall, incomes are often
squeezed as farm prices decline. In addition to greater commodity volumes,
larger production units will often generate much larger volumes of waste
products (manure, odor, effluents), and existing methods of local pollution
control can be overwhelmed by more concentrated waste flows. New production
methods brought about by industrialization often lead to important changes in
labor forces, transportation, and land use patterns in local communities, with
major implications for local public services and local businesses.

Industrialization can also lead to concentration, which may limit competition
because concentrated sellers may be able to raise prices charged to buyers,
and concentrated buyers may be able to reduce prices they pay to sellers.
Reduced competition may in turn limit opportunities for society to gain from
industrialization, by limiting the spread of innovations and by tilting the
market's results in favor of the players with market power.

Concentration has become a concern in several key agricultural industries
linked closely to farmers. For example, recent railroad mergers have left two
major carriers serving grain shippers in the West, and the proposed sale of
Continental Grain's merchandising business to Cargill will concentrate grain
export facilities serving the Gulf Coast. Sharp increases in meat packer
concentration may affect livestock producers. And mergers in the seed industry
could potentially leave much of the important research and development in
biotechnology in the hands of a few companies. But industrialization (i.e.,
expanding firm size) does not necessarily lead to a reduction in competition,
and the structural changes generated by industrialization may have little
impact on competition. 

Distinguishing Industrialization 
From Concentration

Distinguishing between changes in concentration and broad patterns of
industrialization is important because firm size does not necessarily affect
how firms compete. Consider the statistics of the U.S. livestock sector. Hog
producers large enough to market at least 50,000 hogs in a year were virtually
unheard of in the 1970's. But by 1988, such very large operations accounted
for 7 percent of all hogs marketed, and by 1997 they accounted for over a
third of all marketings. The size of slaughter plants has grown along with
producer size; plants slaughtering at least 1 million hogs a year handled 24
percent of hog slaughter in 1975, but handled 87 percent by 1996.

Meat packers typically buy cattle from large feedlots (selling at least 16,000
cattle a year); today, a little over 200 large cattle feeders account for more
than half of the 28 to 29 million steers and heifers moving to meat packers.
Twenty years ago, large feeders accounted for less than 20 percent of
marketings. In the mid-1970's, about 13 percent of all fed beef came from
plants that slaughtered more than half a million steers and heifers a year;
two decades later, these large plants handled almost 80 percent of U.S.
fed-beef slaughter.

These statistics reflect industrialization; producers and packers have become
larger. In considering the potential effects of industrialization on
competition, however, it is necessary to distinguish size from concentration.

Concentration in cattle slaughter has increased dramatically, to levels that
in many instances indicate a lessening of competition. In 1980, the four
largest slaughter firms handled 36 percent of all steer and heifer slaughter.
By 1993, the four firm concentration ratio (CR4) rose to 80 percent, where it
has remained. 

But large size does not necessarily imply high concentration. The largest hog
producers and cattle feedlots are much larger than they used to be, but there
are still hundreds of them. They are not concentrated enough to be able to
alter prices. While concentration in the cattle slaughter industry has
increased dramatically, concentration in hog slaughter is still not unusually
high--CR4 stood at 56 percent in 1998. 

Moreover, high concentration doesn't necessarily mean large size. The only
supermarket in a small and isolated town likely has more power to raise food
prices than does a superstore competing with other large supermarkets in a
densely-populated metropolitan area.

High Concentration Can Lead 
To Less Competition... 

In highly concentrated markets, a small number of sellers may be able to avoid
competing with one another and may raise prices substantially. Similarly, a
small number of buyers may force prices down substantially if they can avoid
competing with one another. The following examples illustrate the issues.

The world market for lysine, a key ingredient in animal feeds, is dominated by
four sellers: the American firm Archer Daniels Midland (ADM), the Japanese
firms Ajinomoto and Kyowa, and a Korean producer, Sewon. ADM's entry into the
business in 1991 led to a price war, after which the four began to explicitly
collude; that is, they agreed to refrain from competing  on price and
attempted to jointly cut production and raise prices. During the period of
collusion, the conspiring firms were able to raise prices by 50-100 percent,
compared to periods when they were not colluding. 

Three major producers dominate the U.S. market for infant formula, and over
half of formula purchases is financed through USDA's Supplemental Nutrition
Program for Women, Infants, and Children (WIC). In 1989, Congress demanded
implementation of measures to contain WIC infant formula costs. One measure
was sole-source contracts awarded on the basis of competitive bids, under
which the firm offering the lowest net price (wholesale price minus a rebate
to state WIC agencies) would be awarded exclusive rights to all WIC sales in a
state. State WIC agencies would then bill the manufacturer for rebates on all
WIC voucher purchases of formula at authorized outlets.  

The sole-source contracts introduced competition into a highly concentrated
market. On average, formula makers charged a wholesale price of $2.48 cents a
can to retailers in 1996. Non-WIC households paid the wholesale price, plus
the retail markup. The WIC program received an average manufacturer rebate of
$2.10 cents a can, thus paying a net wholesale price of 38 cents a can (85
percent below the non-WIC price), plus the retail markup. Because WIC and
non-WIC products and marketing channels are identical, there are no relevant
cost differences between the two markets. The enormous size of the rebates
strongly suggests that these manufacturers have significant power to raise
prices above costs, and that they had significant market power in WIC markets
before the buying reforms were introduced.

Railroad mergers in the 1990's reduced the number of Western railroads from
four to two.  Analyses by USDA's Economic Research Service indicate that rail
rates for hauling grain rise as the number of railroads declines, and that
carrier consolidation would likely increase rates by 10-20 percent.  USDA
expressed reservations about the first merger (between Burlington Northern and
Atchison, Topeka, and Sante Fe) and opposed the second (between the Union
Pacific and Southern Pacific). The U.S. Department of Justice also opposed the
second merger, but the Surface Transportation Board, which has jurisdiction
over rail mergers, approved both mergers. 

USDA and cattle producers have repeatedly expressed concern over high
concentration in cattle slaughter, particularly in steers and heifers, where
three firms (IBP, Cargill, and Conagra) dominate the industry. High
concentration may result in lower prices paid to producers for cattle and
higher retail prices paid by consumers for meat. But academic and government
researchers have not found evidence of substantial price effects from high
concentration in meat packing. Estimates of cattle price effects from
concentration range from zero to a 4 percent decline. Moreover, the largest
effects occur outside the Great Plains (though the biggest packers' major
plants are in that region). 

.... But High Concentration Does Not
Always Reduce Competition

Why should the price effects of concentration vary so much across markets?  It
is because concentration limits competition when it combines unfavorably with
other factors, such as the nature of substitutes for the commodity subject to
high concentration, the ease of entry into the market, and the nature of
rivalry among existing firms in the market. 

Consider the nature of substitutes, using rail transport as an example. Trucks
and barges are workable substitutes for rail for some commodities and on some
routes. For grain shippers, trucks are good substitutes on short hauls, and
barges are good substitutes near the Mississippi and Missouri rivers; in those
regions, rising railroad concentration has little effect on rates, because
shippers can easily shift to competing modes. Increased rail concentration can
have important rate effects where there are few good substitutes, such as on
long-haul shipments from the Western Plains, far from large navigable rivers. 

Now consider entry barriers. Entry into railroading is exceptionally risky--a
carrier must commit a significant investment to trackage and rolling stock,
and the trackage really has no second-hand market (except as scrap). Because
of that risk, the only major railroad entry in the last 50 years was the
1980's expansion by Chicago and Northwestern into the highly profitable
coalfields in Wyoming's Powder River basin. 

Entry into the markets for lysine and infant formula, while not as difficult
as railroading, is nevertheless quite risky. Because one efficient plant can
account for a significant share of the market (e.g., ADM's one plant produces
half of U.S. lysine sales), any entrant must recognize that one additional
entry could bring prices down substantially, causing losses for the entrant. 
Moreover, production in each market involves specialized know-how, so that new
entrants could find themselves at a serious cost disadvantage compared with
incumbents.

On the other hand, there are fewer barriers to entry in cattle slaughter. A
new slaughter plant, while large and expensive, would still account for only 5
percent of industry sales. Because a single new entrant would not have the
potential effect on prices as in the other examples, entry is less risky.
Moreover, production processes in meat packing are relatively simple, without
the complex pieces of capital equipment and without the trade secrets found in
the other examples. All in all, entry is easier in meat packing, and existing
firms with large market share should therefore exert weaker effects on prices. 


Finally, consider rivalry among existing players, which in turn depends
greatly on how buyers (or cattle sellers in the case of meat packing) react to
changes in the prices offered by concentrated firms.  Many parents in the
non-WIC infant formula market rely on a physician's recommendation for a
specific brand. This strong brand loyalty means that formula buyers are
unlikely to respond rapidly to a price cut by one of the sellers in the
market; formula sellers therefore have weak incentives to cut prices, which
results in little price competition. By contrast, buyers in the WIC market
(i.e., state agencies) respond dramatically to price cuts: if a formula seller
cuts price below other brands, it gets all WIC sales in a state, while if it
raises prices above others, it loses all of a state's WIC sales. Because WIC
buyers react so strongly to price changes, formula sellers have strong
incentives to compete on price. 

Buyers in lysine and railroad markets (elevators, feed companies, grain
merchants) also have the expertise to compare alternative offers and have
strong incentives to seek lower prices for the large volumes that they buy.
They will often be quite responsive to individual price cuts, and rival
sellers have strong incentives to compete on prices. Indeed, lysine sellers
colluded as a way to reduce the price competition that continually broke out
among them.

Because the cattle market is concentrated on the buying side, the issue
concerns the responsiveness of cattle sellers to price offers made by
concentrated buyers, and the consequent incentives for buyers to compete on
price. USDA identified 19,395 separate sellers in a survey of 1992 cattle
purchases by large steer and heifer slaughter plants. Only 300 of those
sellers were large feedlots (each selling at least 16,000 head of cattle that
year). But large feedlots accounted for over 70 percent of all cattle sold,
and averaged nearly 400 transactions annually; that is, large feedlots sell a
lot of cattle and are in the market frequently. They should have the incentive
and the market expertise to react quickly to price differences among cattle
buyers, and consequently major meat packers should face strong incentives to
compete actively on price.  

Most cattle sellers (89 percent) in the 1992 USDA survey were small
farmer-feedlots. On average, small feedlots sold less than 200 cattle each to
the largest packing plants during the year, in just 2 to 3 transactions, and
together accounted for only 14 percent of all cattle sold to the plants. Those
sellers could be less able to react to price cuts by packers, and packers
could have opportunities to cut cattle price offers to smaller feedlots.

The few large meat packers appear to compete aggressively among themselves for
cattle, because entry barriers are low and because sellers react strongly to
price competition. That does not mean that meat packers will always compete;
competitive struggles among the firms in highly concentrated industries
sometimes abate over time as they come to know each other's strategies better.
Nor does it mean that meat packers compete aggressively on every cattle
purchase or that there may not be some anticompetitive behavior; they may
possess localized market power over some classes of sellers and in some
locations. But during 1992-93, after a dramatic period of growing
concentration in the 1980's and early 1990's, the meat packing industry had
not shown the broad evidence of market power that stands out so clearly in
some other sectors. Therefore, based on available information, it appears
unlikely that efforts to reduce concentration in meat packing would have
substantive effects on cattle prices.

Federal Competition Policies, 
Not Concentration

Federal competition policies generally address those markets in which firms
may be able to exercise market power. For example, merger statutes call for
restrictions on mergers that may tend to create monopoly or otherwise restrict
competition. The Department of Justice, the Federal Trade Commission and
Federal courts focus on mergers in highly concentrated markets where the
products or services have few substitutes, where the industry has barriers to
entry, and where there are other factors likely to limit competition. 
Antitrust policy on trade practices focuses on actions, frequently related to
marketing strategies and trade announcements, that principally serve to deter
entry or to extend a dominant firm's market power without having any
overriding business benefits.

Under U.S. statutes, explicit coordination of pricing and other economic
decisions by rival firms is illegal and subject to criminal penalties, even if
such collusion is unsuccessful in altering prices. As a result, enforcement
often emphasizes evidence of meetings and written, oral, or electronic
communications among rivals. But firms are more likely to attempt to collude
in markets where collusion might successfully lead to price changes, where
concentration is at least moderately high and where some other conditions
(entry barriers, limited substitution, and ability to curtail production)
conducive to market power are present.

Antitrust law can restrict actions that are anticompetitive, such as collusion
or a specific merger, but it cannot direct firms to take procompetitive
actions. Antitrust enforcement rarely focuses directly on the independent
pricing decisions taken by firms (e.g., deciding without collaboration to
refrain from price competition). In the case of the lysine conspirators,
antitrust laws were involved because conspiracy among firms could be
identified and deterred through fines and criminal penalties. The antitrust
laws could have been used against railroad mergers, where prohibiting a merger
may have preserved greater competition. Where manufacturers independently
refrain from competing with one another, some evidence of collusion or
concerted inaction would generally be required.

Antitrust law is not the only policy tool for affecting competition. Some
industries, meat packing for example, are subject to extensive Federal
regulation, and unfair or deceptive trade practices by meat packers that may
not be considered violations of the antitrust laws may violate the Packers and
Stockyards Act. In addition, USDA procurement policies have direct effects on
competition among makers of infant formula because USDA is a major buyer and
because existing industry conditions (high concentration, entry barriers, and
brand loyalty) create extraordinary potential for sellers to exercise market
power. Aggressive procurement strategies will have much weaker effects on
purchase prices in markets that are more competitive than infant formula.

Patent policies can also affect competition. A patent provides the holder with
the exclusive right to produce and market a new commercial product for a
specified period of time. Patent policy attempts to induce greater competition
among would-be innovators by limiting entry of competitors into the
newly-created market. Instruments of patent policy, including the breadth of
the patent, the length of the patent life, and the information that must be
disclosed in order to obtain a patent, tailor the terms of that tradeoff
between competition in innovation and competition in later production.

With each of these policy tools, concentration matters only to the extent that
it affects competition. Moreover, policies do not proceed under the assumption
that reductions in the number of competitors automatically reduces
competition. In each case, great emphasis is placed on understanding the
conditions under which reductions in competitors and increases in
concentration will lead to changes in market power and the ability to
influence prices.

Industrialization May Not Raise 
Competition Issues

Many food and agricultural industries are undergoing broad structural changes,
and the general trend is toward fewer but larger producers. In some markets,
structural changes have led to high concentration and significant market
power, and in some of those cases, Federal competition policies can counteract
market power without losing the economic advantages that industrialization
brings. 

Industrialization also raises issues that have little to do with market power
or competition. Industrialization may overwhelm existing environmental
controls, create intense new stresses on local public services, undermine the
incomes of producers using more traditional production methods, and change
rural communities. Competition policies are not designed to deal with these
issues; indeed, competition may even intensify those stresses. For example, if
large confinement feeding operations grow out animals at lower costs than
traditional operations, then the more competitive the industry, and the more
rapidly production shifts to large operations. If large operations generate
greater localized volumes of wastes, greater competition will also lead to
earlier and more intense environmental problems. 

Industrialization and structural change sometimes limit competition. But their
broader effects more often reflect competition while frequently undermining
traditional methods of production, environmental control, and public service
delivery. The challenge for policy makers is to identify which of
industrialization's effects should be constrained, and to design instruments
that can reach those policy goals.  

James MacDonal (202) 694-5391
macdonald@econ.ag.gov


END_OF_FILE