AGRICULTURAL OUTLOOK                                      October 20, 1999
November 1999, ERS-AO-266
               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.
---------------------------------------------------------------------------
AGRICULTURALCONTENTS

BRIEFS
Livestock, Dairy, & Poultry: Favorable Market for Poultry to Encourage Year
2000 Expansions

COMMODITY SPOTLIGHT
Weak Demand Dampens Outlook for U.S. Cotton

FARM & RURAL COMMUNITIES
What Makes a Small Farm Successful?
ERS Farm Typology: Classifying a Diverse Ag Sector
FSA Credit Programs Target Minority Farmers

FOOD & MARKETING
Role of Traditional Ag Markets: The Dry Edible Bean Industry

RESOURCES & ENVIRONMENT
Reducing Nitrogen Flow to the Gulf of Mexico: Strategies for Agriculture

SPECIAL ARTICLE
Implementation of Uruguay Round Tariff Reductions

IN THIS ISSUE

Reducing Tariffs Under Uruguay Round Agreement

Tariffs are considered a highly visible and easily negotiable target for
reductions during the next round of trade negotiations, to be launched by
the World Trade Organization in Seattle on November 30.  Under the Uruguay
Round Agreement on Agriculture, developed countries agreed to reduce all
agricultural tariffs by at least 36 percent, on average, over the period
1995 to 2000, with a minimum reduction of 15 percent per tariff-line (i.e.,
for a product or products to which the legally established tariff applies). 
Countries had a great deal of flexibility in deciding how much
each agricultural tariff would be cut, so average reductions vary by
country.  The U.S., European Union, Japan, and Canada will each slightly
exceed the average requirement, with overall cuts of 37 to 38 percent. 
Australia cut 75 percent of its agricultural product tariffs by levels
above the required 36-percent average, resulting in an average reduction of
48 percent.  Countries tended to cut the smallest tariffs by the greatest
amounts, with most large tariffs reduced by only the minimum amount. In the
next round, further reductions, particularly on the large tariffs, will no
doubt encounter serious resistance.   John Wainio; jwainio@econ.ag.gov

Cutting Ag Nitrogen Runoff to the Gulf of Mexico

A zone of hypoxic, or oxygen-deficient, water covers about 7,000 square
miles of the Gulf of Mexico at peak periods of the year.  The primary cause
of oxygen deficiency is believed to be high loads of nitrogen in the
discharge from the Mississippi River, with an estimated 65 percent coming
from agricultural activities.  USDA's Economic Research Service analyzed
the economic and environmental effects of three strategies for reducing
excess nitrogen releases into the Mississippi River basin: reducing
nitrogen use, restoring wetlands, and combining wetland restoration with
reduction in nitrogen use.  To achieve a 20-percent reduction in nitrogen
loadings, a policy of restrictions to cut nitrogen fertilizer use by 40
percent represents the most cost-effective strategy (least cost for
achieving the targeted reduction), but the combined strategy is nearly as
cost-effective.  Mark Peters (202) 694-5487; mpeters@econ.ag.gov

Weak Demand Dampens Outlook for U.S. Cotton

The U.S. cotton crop is projected to rebound from 1998's decade-low output,
but prospects of potential earnings from the larger output are dampened by
weak demand and rising stocks.  Sluggish U.S. cotton mill demand is the
result of persistent competition from manmade fibers and double-digit
growth in imports of textile and apparel products.  While higher foreign
demand will support increased U.S. exports, China's net exports of cotton
are trending upwards, and world prices have been dipping lower as a result. 
Increased world economic growth and lower cotton prices are boosting cotton
consumption in 1999/2000.  Stephen MacDonald (202) 694-5305;
stephenm@econ.ag.gov

FSA Credit Programs Target Minority Farmers

Racial and ethnic minority farmers often rely on USDA's Farm Service Agency
(FSA) loan programs for their credit needs, especially in regions where
minority farmers are clustered. Because many have limited financial
resources, minority family farmers are less likely than other
farmers to qualify for credit from private lenders and are more likely to
turn to FSA for credit.  Loan targeting by FSA sets aside a share of the
annual loan funding for farmers who may be socially disadvantaged--a term
that includes those who have been subject to racial or ethnic
discrimination.  While racial and ethnic minorities represent less than 4
percent of U.S. farmers, they comprise nearly 7 percent of all FSA direct
borrowers in 1999.  Steve Koenig (202)694-5353; skoenig@econ.ag.gov  

What Makes a Successful Small Farm?

Farmers may measure success of their farming operations in different
ways--e.g., providing adequate household income without having to work
off-farm; providing a rural lifestyle; or increasing gross sales, acreage,
or assets.  In analyzing farming practices that support successful
small farms, USDA's Economic Research Service focused on small-scale farms
(sales under $250,000) where farming is the primary occupation of the
operator, ranking the farms' success by returns to assets and by operating
expense ratios.  The analysis found that top-performing farms
are more likely than the lowest-performing farms to apply three critical
management practices:using production strategies that control costs,
actively marketing their products, and adopting effective financial
strategies such as maintaining cash and credit reserves.  Janet Perry (202)
694-5583;  jperry@econ.ag.gov 

Traditional Ag Markets & the Dry Edible Bean Industry

Evidence from the dry bean industry suggests that some observers may be
underestimating the ability of traditional "spot" markets to handle a
growing array of agricultural products. Conventional wisdom holds that as
demand for nonstandard products proliferates, production contracts will
increasingly come into use.  In contrast to spot market sales--where buyer
and seller do not interact prior to the transaction--production contracts
usually specify how the crop is to be produced and the compensation to the
grower.  But even as commodity specifications have become increasingly
complex, the use of spot markets continues to effectively coordinate buying
and selling of nonstandard dry beans.  Because it is relatively easy to
verify the typical product quality characteristics (e.g., foreign matter,
moisture content, and post-canning quality), dry bean buyers can purchase
from suppliers who provide desired quality without using contracts. 
William Chambers (202) 694-5312; chambers@econ.ag.gov

BRIEFS
Livestock, Dairy, & Poultry: Favorable Market for Poultry to Encourage Year
2000 Expansions

Poultry producers are having a relatively good year in 1999. Turkey
producers are enjoying the most profitable year since 1986. Combined with
feed costs nearly 20 percent below a year ago, higher prices in 1999 have
resulted in attractive profits and encouraged turkey producers to expand
production in second-half 1999 and in 2000. Retail turkey prices are just
slightly higher than last year. While broiler and egg production will not
be quite as profitable as in 1998, producers are still in a favorable
position to continue expansion in 2000. Broiler and egg production is
expected to increase more slowly in 2000 than in 1999.

The attractive profits enjoyed by the turkey industry are the result of
feed costs nearly 20 percent below a year ago and higher 1999 turkey
prices. Production declines in 1998 following losses the previous 2 years
prompted drawdowns of turkey meat stocks, leading to  higher prices in
1999. Production in 1999 is expected to be about unchanged from a year ago
as increased production in the second half of the year offsets lower
production in the first half. The increased profits of 1999 are expected to
encourage turkey producers to expand meat production in 2000 by about 2
percent. The number of birds raised should be about the same as in 1999,
with heavier weights accounting for the increase. 

Turkey supplies for the fall holidays should be about the same as last
year, with about 6 pounds per capita expected to be consumed in the fourth
quarter. Production is forecast to be the same as last year. Consumption
increasing with population will more than offset a decline in exports,
leaving ending stocks lower. Prices for turkeys at retail are expected to
be about 2 cents per pound higher than a year ago. Retailers will absorb
much of the increase in wholesale prices for turkeys, which are about 7
cents per pound above a year ago for Eastern Region Hens.

Broiler domestic disappearance this year is expected up about 5 pounds per
person from 1998 (retail-weight basis). This would be the largest annual
increase since consumption increased by more than 5 pounds between 1943 and
1944, when most other meats were being rationed and diverted for military
use. Since 1993, much of the broiler production increase had been absorbed
by the export market, but in 1999 and 2000 the domestic broiler market will
likely compensate for limited export expectations brought about by economic
weakness in Russia and many parts of Asia. Record profitability in the
broiler industry during 1998 encouraged stronger-than-usual production
increases in 1999. Both broiler and egg production are expected to increase
more slowly in 2000 due to weaker broiler and egg prices in second-half
1999 and slightly higher feed costs compared with year-earlier periods.

Whole-bird prices are expected to average about 58 cents per pound in 1999,
about 5 cents below a year ago. Whole-bird prices for 2000 are expected to
decrease an additional 2 cents to 56 cents  per pound. Whole broiler prices
have shown less weakness than parts prices this year as larger supplies of
both whole chicken and parts are being sold on the domestic market. Parts
prices have declined by about 10 percentage points more than
whole-bird-prices, from a year ago, due to increasing segmentation of the
chicken market. 

Since 1993, market segmentation has been important for chicken parts
markets as much of the dark meat has been exported, while nearly all of the
white meat has been marketed domestically. The increasing popularity of
deboned breast meat in the domestic market led companies to further
segment the market through bird weights to limit labor costs per pound of
product on their processing lines. Companies started growing heavier birds
for deboning, since the amount of labor to process a small breast is nearly
the same as for a large breast. Lighter weight birds make up the
whole-bird quote, while primarily heavier weight birds are cut up for the
wholesale parts market. Changing supplies of  these classes of birds have
affected the price movements.

USDA's Agricultural Marketing Service began publishing shares of broiler
slaughter by three weight categories in 1997. The lightest weight category
is targeted to be cut up and used in fast-food restaurants as bone-in parts
or to be sold whole for rotisserie preparation. The middle category refers
to birds targeted for the retail market, and the heaviest birds are used
for deboning. During 1999, the share of birds in the heaviest weight
category has been about 5 percentage points larger than in 1998. With the
share of birds for the two lighter categories about 5 percentage points
less than last year, the relatively tighter market for light birds and the
relatively larger supply of heavy birds have accounted for the smaller
price declines for whole birds versus parts on the wholesale market. 

Total egg consumption per person reached 254 eggs in 1999, continuing the
increase from about 236 in 1995. While consumption of eggs in processed
form has been increasing since 1981, shell-egg consumption decreased from
1979 to1995. From 1995 to 1997, declines in shell-egg consumption were
small enough that increases in processed egg consumption brought an
increase in total egg consumption. In 1998, there was an actual increase in
shell-egg consumption, and another increase is expected for 1999. Lower egg
prices are probably a major factor in increased usage. Changes in consumer
attitudes toward the effects of cholesterol in eggs and increased
promotional activities are also being credited with turning around the
consumption decline. 
Milton Madison (202) 694-5178:mmadison@econ.ag.gov

COMMODITY SPOTLIGHT

Weak Demand Dampens Outlook for U.S. Cotton

The 1999 outlook for U.S. cotton producers is somewhat mixed. This season's
U.S. cotton crop is projected to rebound from 1998's decade-low output,
with cotton area the largest in 3 years. But prospects of potential
earnings from the larger output in 1999 are dampened by weak demand and
rising stocks. The result is a less-than-robust outlook for the 1999/2000
(August-July) marketing year. 

For 1999 spring planting, producers released by the current farm
legislation from acreage restrictions were free to decide which crops to
plant and how many acres of each. With prices for major row crops at recent
lows, many cotton producers who had the option to plant other crops
decided that net returns for cotton were the most promising this year. As a
result, U.S. producers increased cotton plantings in 1999, despite the
subpar crop of 1998 still fresh in their memory.

The latest acreage estimate from USDA's National Agricultural Statistics
Service (NASS) indicates a 9-percent expansion in planted area and a return
to a lower, more "normal" average abandonment in 1999/2000. Harvested area
is projected to rise 25 percent from last season. While expected national
yield is below a year ago, cotton production is projected to rise 18
percent this season and inflate supplies.

Despite some weather-related setbacks again this year, production is
expected to rise in three of the four regions of the Cotton Belt. For 1999,
the South-west region is projected to capture top-producer status, a
distinction recently held by the Delta, this year's second-largest
production area. Each of these regions is expected to contribute
approximately 30 percent of U.S. cotton production in 1999, with the
Southeast and West contributing the remainder.

Although declining crop conditions have placed the latest NASS production
forecast well below the August projection, U.S. cotton production this
season is expected to push supplies above the 1998 season, even without the
substantial quantity of raw cotton imported last year. Beginning
stocks are equal to those of a year ago and imports are projected at a
minimum this season. U.S. cotton supplies are estimated to rise 12 percent,
perhaps too large an increase in an environment of sluggish demand with the
financial crises in Asia still reverberating. 

World Demand Is Key
To Cotton-Sector Turnaround

Given last season's worldwide decline in cotton demand in the wake of the
Asian financial crises, the extent of any demand rebound will play a key
role in the 1999/2000 outlook for the global cotton market. Early
indications are for world cotton demand to rise more than 2.5 percent this
season, above the average long-term growth rate of nearly 2 percent.
However, global cotton use is not yet expected to return to the pre-crisis
level of 2 years ago, and mill demand is projected to grow for foreign
countries in aggregate but not in the U.S. Sluggish U.S. cotton mill demand
expected this season is the result of persistent competition from
manmade fibers and double-digit growth in imports of textile and apparel
products. As competition from imports continues to force U.S. industry
participants to merge, close, or move mill operations abroad, domestic
cotton mill use is projected to fall slightly from last season's level and
future expansion is questionable. 

U.S. cotton exports, on the other hand, are expected to recover in 1999
from the dismal level of last season. Improvement in foreign import demand
and consumption are likely to support U.S. shipments in 1999, and exports
are projected to rise more than 25 percent. However, formidable
foreign competition in the global export market is expected to keep U.S.
cotton exports well below the average of the robust 1994-97 seasons. U.S.
cotton exports are forecast more than 2 million bales below recent levels
and more than 1 million bales below annual average exports in 1986-98,
the period since farm legislation introduced cotton marketing loans and
ended the loan rate's role as a price floor and a barrier to exports for
cotton.

An assumption underlying USDA's October forecasts for both export and
domestic consumption is the continuing inactivity of  Step 2 of the Cotton
Marketing Loan Program (AO September 1998). Funding for Step 2 through
fiscal year 2002, aimed at keeping U.S. cotton competitive on the
domestic and global market, was exhausted in December 1998; Congress has
approved a bill to provide additional funding for reactivating Step 2. It
is generally accepted that some expansion in exports and domestic use is
likely to result from a reactivated Step 2, but the extent depends on the
circumstances under which the program operates, and estimates vary widely.

China a Strong Influence
On World Cotton Prices

Among the major changes the world has seen in the last 40 years has been
the growing integration of China into the world community, and increased
openness of information about events in China. However, there is ample room
for further progress in the world's understanding of China's cotton
sector, and lack of understanding may translate into greater world price
instability. A number of uncertainties about China's behavior have been
holding down world prices during the first months of 1999/2000.

World cotton prices early in marketing-year 1999/2000 were the lowest since
the beginning of 1986/87. At that time, U.S. policy changed course, ending
government's acquisition of stocks to support market prices and ending the
withholding of government-purchased stocks from domestic and world markets.
These changes were made in a way to ensure that despite short-term price
declines as a result of this policy change, U.S. farmers would maintain
sufficient resources in agriculture to meet longrun demand. China exported
large amounts of cotton that season, further pressuring prices.

China again figures strongly in the causes underlying this season's
relatively weak prices to date and the expectation of relatively weak U.S.
exports. China's current policy like that of the U.S. in 1986/87 is aimed
at lowering government-held stocks, making policy adjustments to free up
some old stocks, and putting into place measures to prevent 1999/2000 and
future crops from becoming government-owned.

The centerpiece of China's new policy is termination of government's role
as sole legal purchaser of cotton and government's guaranteed purchase of
all available cotton at a price well above world levels. Although
withdrawal of this price floor has been widely anticipated in China,
production in 1999/2000 is nevertheless expected to be only slightly lower
than the year before. However, many forecasters expect a stronger downward
production trend in subsequent years. Given China's need to maintain
employment in a slowing economy, and a long tradition of high agricultural
self-sufficiency, it is unclear whether the government's willingness to
accept the social consequences of falling producer incomes will persist in
the face of potentially large declines in cotton production.

Another source of uncertainty relates to China's stock holdings. Until
recently, stock levels in China were regarded as a state secret, and while
stock levels have been publicly discussed lately by government sources in
China, none of the various published numbers can be verified. There is even
some question about whether or not all the reported stocks really exist. If
so, the quality and condition of these stocks is highly uncertain; they may
even be unusable.

Disposition of stocks from earlier years may depend partly on some
adjustment in current government policy. The Cotton and Jute Companies that
procured stocks for the government at guaranteed support levels above
market prices cannot release this older cotton at current prices
without recording monetary losses, which policy forbids. Conceivably this
policy constraint could change. 

China still publishes no complete estimate of domestic cotton use. In
addition, its production data have long been questioned by a wide range of
observers, and even trade data are somewhat suspect due to the acknowledged
widespread smuggling of a variety of commodities. In these circumstances,
it is difficult for the rest of the world to react to anything but China's
recent actual transactions with the rest of the world i.e., reported
exports and imports.

Current information indicates that China's net exports are trending
upwards. With little available information, the rest of the world generally
expects the level of cotton exports from China to continue rising. As a
result, world prices have been dipping lower. Cotton Consumption Reflects
Economic Health In the 1990's, stagnation in global cotton consumption has
been the order of the day, in contrast to the 1980's, when cotton
consumption underwent one of its greatest sustained surges of the
century. The current decade has seen the collapse of cotton consumption in
countries of the former Soviet Union, growth in production of polyester a
competing fiber rebounding to nearly record levels, and finally, financial
crises in Asia that drove cotton into the deepest consumption slump
seen in decades, contributing to depressed global exports and prices.

Rebounding consumption in 1999/2000 is not expected to fully make up for
the 4.1 percent decline in consumption in 1998/99. Although world economic
growth slowed only modestly in calendar 1999, a number of once rapidly
growing developing countries suffered severe setbacks, and longrun
consumption prospects there have weakened as a result.

The 1998/99 consumption decline probably reflects the reduced consumption
expectations of cotton consumers (purchasers at the retail level) for a
number of years into the future. Cotton consumers in Southeast Asia
undoubtedly have adjusted their longrun domestic consumption
expectations downward because of the economic crisis in Asia that began in
1997, and therefore the export share of the region's mill use (textile
production) is higher, pressuring mills elsewhere in the world. Cotton
consumers in China are probably less certain about their longrun cotton
consumption prospects, especially since China's textile exports have not
been robust lately. Devaluations and increased uncertainty have affected
the outlook for Brazilian and Russian cotton consumers. 

There are no obvious market candidates displaying positive longrun economic
adjustments that will lead to significant expansion of cotton consumption,
U.S. short-term general economic performance, however, continues to surpass
expectation, and generally positive news has been coming recently from
Europe and Japan.

World cotton consumption is expected to rise 2.6 percent in 1999/2000, well
below the rate in some years when consumption rebounded from earlier
declines, but still above the likely long-term growth potential. With world
economic growth expected to continue improving during calendar year 2000,
the lagged effect of recent lower cotton prices should support an
above-average outlook for cotton consumption. If stable economic growth is
maintained, cotton consumers' longrun outlook should eventually improve as
well.

Improving economic performance expected in the coming 12 months suggests
clothing demand could be rising in many developed as well as developing
countries. China's increased export rebates, floating procurement prices,
and recovering profitability in the textile sector indicate that
cotton consumption in China could increase in 1999/2000. Favorable exchange
rates for the Russian ruble and Brazilian real also suggest that cotton
consumption should improve in those countries. Because increased consumer
demand for cotton textiles in one country can translate to increased mill
use of cotton in a number of other countries, it is unclear where cotton
mill use will grow in 1999/2000. However, additional use in textile
exporters like India, Mexico, and Southeast Asia seems reasonable. 

Another although perhaps less certain factor in favor of growing cotton
consumption in 1999/2000 is reduced investment in manmade (chemical) fiber
production, particularly in Asia. Worldwide, the profitability of chemical
fiber production suffered from the recent economic slowdown, and in Asia
the cost of capital has risen with the introduction of floating exchange
rates and the higher degree of economic uncertainty in the region. Some
industry sources indicate that while manmade fiber production rose 6
percent in 1996 and 12 percent in 1997, growth slipped below 2 percent in
1998. Capacity growth has reportedly slowed dramatically, suggesting an
even smaller gain in global manmade fiber production in 1999.

With abundant cotton supplies projected again in many countries around the
globe, even the relatively robust consumption forecast for 1999/2000 is
expected to reduce world ending stocks only slightly. In the U.S., ending
stocks are projected to rise to 30 percent of use, equaling the highest
level in this decade. China's stocks are expected to fall, but virtually no
change is expected in the total for the rest of the world. In hindsight,
the 1986/87 shift in world prices ushered in by the 1986 U.S. policy change
to draw down government stocks helped sustain booming cotton consumption
through the end of the 1980's. Only time will tell if a similar outcome
will follow China's policy revisions and the pause in chemical fiber
capacity gains.  

Stephen MacDonald (202) 694-5305 and Leslie Meyer (202) 694-5307
stephenm@econ.ag.gov:meyer@econ.ag.gov

BOX - COTTON

Refueling Step 2 to Bolster U.S. Cotton Competitiveness

The 1990 farm legislation provided a mechanism Upland Cotton User Marketing
Certificates or "Step 2" of the Cotton Marketing Loan Program for keeping
U.S. cotton competitive on the world export market as well as for
encouraging domestic mills to use U.S. cotton instead of importing cheaper
foreign cotton. Step 2 provides payment to exporters and domestic mill
users of U.S. upland cotton when:

*  after 4 consecutive weeks, the U.S. price on the world market remains
more than 3 cents per pound above the weekly average of the five lowest
cotton price quotations from a variety of countries, and
*  the adjusted world price is no more than 34 percent above the per-unit
government loan rate available to cotton farmers.

Farm legislation passed in 1996 limited Step 2 expenditures to $701 million
during the period FY 1996 through 2002, but the program funds were
exhausted by December 15, 1998. The program has been inactive since then,
but Congress has approved a bill to provide additional funding. 

See AO September 1998 and July 1997 for details on Step 2.

FARM & RURAL COMMUNITIES

What Makes a Small Farm Successful?

BOX
ERS typology--small family farms
Limited-resource
Retirement
Residential/lifestyle
Farming as occupation
*   Lower-sales
*  Higher-sales 
END BOX

Farms and farm families remain powerful symbols in American culture. While
the economies of most places in the U.S. are not dependent on farming, the
issue of the survival of family farms continues to evoke strong response
from the public, particularly during periods when the farm sector is in
distress. For much of the public, the term family farm is synonymous with
small farm.

Analysis by USDA's Economic Research Service (ERS) indicates that despite
recent public attention to the difficulties faced by small-scale family
farmers, some operations are successfully negotiating current market
conditions. Although definitions of success may vary, these farmers
have developed or adopted practices that keep their small farms
economically viable. Their experiences may suggest strategies for success
in small-scale farming that are transferable to other operations.

The U.S. farm sector consists of a highly diverse set of businesses and
farm households, and "small" means different things to different people. A
variety of small-farm definitions has been used by USDA over the years,
including those based on small acreage, low sales volume, and the ability
of a farm to support a single family. However, the extent of acreage does
not necessarily correlate with sales volume. A berry farm of only a few
acres, for example, can generate a very large volume of sales; conversely,
cattle operations may have a low volume of sales but encompass many acres
of pasture. 

Small farms are currently defined, based on an ERS-developed typology (see
typology article), as operations with sales less than $250,000. While
considerably expanding the traditional sales-class definition of small
farms, operations with sales under $250,000 are small businesses compared
with other businesses in the general economy. 

Despite frequently documented constraints facing farmers with operations of
this size, small farms continue to be an important component in the U.S.
agricultural sector. Distributed across all regions of the country, small
farms make up 94 percent of all U.S. farms and constitute one of the
biggest single groups of U.S. business owners. Although large farms produce
large volumes of agricultural products, small farms still contribute a
substantial portion (38 percent) of the value of U.S. farm production and
control the majority (73 percent) of farm assets.

Many small-scale farm operations raise cattle, but a sub-group of small
farms, particularly higher-sales small farms, are more likely to produce
cash grains. The majority of the wheat, corn, rice, and other feed grains
produced in the U.S. comes from these operations. Small-scale farm
operators also hold much of the farmland of the U.S. and are key
participants in certain environmentally based government programs, such as
the Conservation Reserve Program (CRP) and the Wetlands Reserve Program
(WRP).

Farms may meet the ERS small-farm definition (sales under $250,000) for a
variety of reasons. For some, the farm may serve primarily as a residence,
rather than as a source of income. Some operators may be deliberately
scaling down their farm businesses as they retire. For others, the
farm may provide a significant portion of household income and/or a
significant source of employment. Some remain small because they have
limited resources.

Defining Successful Farms

In defining success, ERS analysts recognized that not all farmers have the
same goals for their farm businesses, for themselves, or for their
households. One family may concentrate on expanding its farm operation by
leveraging the business, while another may consider the lifestyle that a
farm offers as adequate compensation for low farm income. Among small-scale
farm operators and their households, each typology group contains stories
of farm families operating successful farming businesses based on their own
definitions of success. 

Through the ERS ARMS survey, farmers have been asked to weigh the
importance of selected measures of "success." These measures include: 

*  operation provides adequate income without having to work off farm, 
*  operation provides a rural lifestyle, 
*  operation would be able to survive adverse market or weather conditions,
*  gross sales are increasing,
*  equity or assets are increasing, 
*  acres operated is increasing, 
*  operation can be passed on to the next generation. 

For those operating limited resource, retirement, and residential/lifestyle
farms, the farm providing a rural lifestyle was more important than the
farm providing an adequate income. On farms that are larger and where
farming is a primary occupation, importance shifts to the farms' ability to
provide adequate income for the family.

Given these various measures and definitions of success, however, most
economists would say that successful operations are those that are
performing well based on production, managerial, and financial measures.
Good performance in this context means that the business has low costs of
production and earns an attractive family income. By focusing on an
"attractive family income," the concept of good performance can go beyond
simply adequate returns to the farm as a business to include the
relationship between the farm's success as a business and the well-being of
the operator's household. 

Even at sales of $250,000 or more, a farm would have to be highly efficient
for the business alone to provide adequate income for a family. In 1997,
average farm household income stood at $52,347, just above the $49,692
average for all U.S. households. In fact, average farm household
income has been on a par with the average U.S. household for many years,
but not without income from off-farm sources. Like most U.S. households,
farm households also have multiple sources of income, and even households
of larger farms have substantial off-farm income on average. Most
small farms have sales much lower than $250,000, so not surprisingly, a
larger share of average household income on small farms comes from off-farm
sources than is the case for larger farms.

In analyzing farming practices that support successful small farms, ERS
focused on the two groups of small-scale farms for which farming is the
primary occupation of the operator ("higher-sales" and "lower-sales"
farms). Since farm earnings make up a larger proportion of total household
income for primary-occupation farms than for other small-scale farm types,
examining economic measures of success was particularly applicable to them.

Farm-level data collected by USDA through the Agricultural Resources
Management Study (ARMS) allowed identification of  top-performing farm
businesses in the selected categories using standard measures of income or
profitability and cost structure. A ranking or distribution from
high to low returns or from low to high costs provided the basis for
designating high-performing farms. 

The analysis is national in scope, but based on data for only a single year
1996 which might affect characterizations and comparisons of specific areas
and/or farm production types for which 1996 was not a representative year. 

Characteristics of 
Successful Farms

Top performers (successful farms) were defined as farms in the top 25
percent of each selected category of small farms, based on either  returns
to assets or operating expense ratios. Using either standard, top
performers in each small-farm category were found in all major commodity
groups and in all regions, although top performers from different farm
categories tended to be concentrated in production of particular
commodities. 

While many small farmers tend to emphasize cattle as their principal
commodity, farmers in the top 25 percent of the distribution by returns to
assets were clustered in the production of "other cash grains" corn,
soybeans, and grains other than wheat and "other crops" vegetables, fruit,
other field crops (those not classified separately), and nursery or
greenhouse specialties. In the higher-sales group, , farmers most commonly
specialized in "other cash grains," not cattle. Top-performing higher-sales
farms were found in greater proportion in this specialty than in other
specialties, including other crops, cattle, other livestock, and wheat.
Because this analysis is for a single year, the recent financial
circumstances of farms in the Plains, especially the Northern Plains,
may influence whether grain farms continue to dominate the "successful"
farm categories.

Top-performing small farms are characterized by their successful
application of three critical management strategies: using production
strategies that control costs, actively marketing their products, and
adopting effective financial strategies. Controlling costs variable, fixed,
or economic costs (which provide a return to the unpaid labor, machinery,
equipment and other assets used in production) is a main feature of
top-performing farms. Controlling inputs leads to lower costs per unit of
output and thus to higher profits per unit of output. Keeping fixed costs
(such as mortgage payments or equipment costs) low by renting land or
machinery permits flexibility when market conditions vary. 

Production strategies differ between operators of top-performing small
farms and operators of other  small farms in the study groups. In addition
to keeping an eye on traditional production costs, producers in the top 25
percent of the lower-sales group reported greater use of forward pricing of
inputs, diversification into additional crop or livestock enterprises, as
well as renting land particularly share renting than did other farmers in
that group. Higher-sales farmers had similar characteristics. All these
strategies help farmers manage production risk. In both the higher-sales
and lower-sales groups, farmers in the top 25 percent are also more likely
to allocate some of their labor to off-farm work.

Top performers also actively engage in marketing their products. Active
marketing of crop and livestock commodities/products generally gathers
additional margins which increases profits through better timing of sales
to receive higher prices. Top-performing farms in both of the study
groups were more likely than other farms in those categories to use
marketing strategies like hedging or futures/options contracts, forward
contracting of sales through the use of marketing contracts, and spreading
sales over the year. Forward contracting of sales through marketing
contracts was not as useful for successful higher-sales farms, probably
because they concentrated in corn, soybeans, and grains crops not typically
grown under contract.

Financial strategies enable top performers to respond to changes in the
market. Data available for the ERS study reflect relatively low-intensity
financial practices such as maintaining cash and credit reserves that help
operators both meet unexpected cash flow difficulties and take advantage of
unexpected business opportunities. 

Crop insurance was included as a financial strategy in the study because
its purpose is income maintenance and assuring the farm's ability to meet
cash flow obligations. Successful higher-sales farms were more likely than
other higher-sales farms to maintain cash or credit reserves and to
have purchased the additional buy-up insurance that supplements basic
catastrophic policies. In the lower-sales group, top-performing farms
showed little difference in financial strategies from other farms in that
group, except that they were slightly more likely to use crop insurance
both catastrophic and additional buy-up insurance. 

Learning from Successful Farms

The diversity of the small-scale farm sector and the complexity of
business, household, and market connections for small-scale farms make it
imperative to understand what management practices seem to be behind
successful small farms. Tried-and-true management strategies such as
controlling costs and increasing efficiency and productivity are still
important. But the current economic environment demands more. 

Successful farming requires management strategies that reach beyond
production to planning and control of the marketing and financial aspects
of the business. Organization and planning along these lines may require
new skills, but they will also provide greater opportunities for farmers.
Analysis from this study indicates the value of an increased emphasis on
returns to management, rather than to capital, for success under current
business conditions.

Diversity of farm operations increases as new environmental regulations,
energy policies, and technologies lead to changes in the ways farmers
produce. Alliances, joint ventures, contracting, and other production
arrangements change the way farmers can organize resources and the level of
returns they can expect. Farmers are also responding to price signals by
diversifying their product mix to include not only food and fiber, but also
agricultural products used for fuels, medicines, and industrial products. 

Identifying practices that have helped farms of widely varied structures
and product mixes to succeed can be helpful as policymakers, educators,
farmers, and others face decisions about what strategies and policies may
be useful in lowering costs and conserving production and financial
resources for the full range of small-scale farm types.  

Janet Perry (202) 694-5583 and Jim Johnson (202) 694-5570
jperry@econ.ag.gov:jimjohn@econ.ag.gov 


FARM & RURAL COMMUNITIES

ERS Farm Typology: Classifying a Diverse Ag Sector

Farms vary widely in size and other characteristics, ranging from very
small retirement and residential farms to establishments with sales in the
millions. A farm typology developed by the Economic Research Service (ERS)
categorizes farms into more homogeneous groups than classifications based
on sales volume alone, producing a more effective policy development tool.

The typology is based on the occupation of operators and the sales class of
farms. In the case of "limited-resource" farmers, the asset base and total
household income as well as sales are low. Compared with classification by
sales alone, the ERS typology is much more reflective of operators'
expectations from farming, stage in the life cycle, and dependence on
agriculture.

The typology identifies five groups of small family farms (sales less than
$250,000):limited-resource, retirement, residential/ lifestyle, farming
occupation/lower-sales, and farming occupation/higher-sales. To cover the
remaining farms, the typology identifies large family farms, very large
family farms, and nonfamily farms.

The groups differ in their contribution to agricultural production, their
product specialization, program participation, and dependence on farm
income.

Defining the Farm Typology Groups

Small Family Farms (sales less than $250,000)

Limited-resource. Any small farm with gross sales less than $100,000, total
farm assets less than $150,000, and total operator household income less
than $20,000. Limited-resource farmers may report farming, a nonfarm
occupation, or retirement as their major occupation. Retirement. Small
farms whose operators report they are retired (excludes limited-resource
farms operated by retired farmers).

Residential/lifestyle. Small farms whose operators report a major
occupation other than farming (excludes limited-resource farms with
operators reporting a nonfarm major occupation).

Farming occupation/lower-sales. Small farms with sales less than $100,000
whose operators report farming as their major occupation (excludes
limited-resource farms whose operators report farming as their major
occupation). 

Farming occupation/higher-sales. Small farms with sales between $100,000
and $249,999 whose operators report farming as their major occupation.

Other Farms

Large family farms. Farms with sales between $250,000 and $499,999.

Very large family farms. Farms with sales of $500,000 or more.

Nonfamily farms. Farms organized as nonfamily corporations or cooperatives,
as well as farms operated by hired managers.

* The $250,000 cutoff for small farms was suggested by the National
Commission on Small Farms.

Differences among farm typology groups (e.g., product specialization,
program participation) are illustrated in the following pages using 1997
data from the Agricultural Resource Management Study (ARMS). The ARMS is an
annual survey conducted by ERS and by USDA's National Agricultural
Statistics Service.

[The printed and pdf articles will contain graphs illustrating following
points] Share of Farms, Assets, and Production Most farms are small, but
small farms account for a modest share of production. 

*  More than 90 percent of farms are small, and small farms account for
about 70 percent of the assets and land involved in farming.
*  Large family farms, very large family farms, and nonfamily farms account
for 61 percent of production. 

Specialization and Diversification 
Specialization and diversification vary among the farm typology groups.

*  Many small family farms specialize in beef cattle, an enterprise that
often has low labor requirements compatible with off-farm work and
retirement.
*  In contrast, two commodity groups cash grains and dairy account for
nearly two-thirds of all higher-sales small farms and over half of large
family farms.
*  Many small farms specialize in a single commodity, but higher-sales
small farms, large family farms, and very large family farms tend to
produce multiple commodities.

Government Program Participation
All farm typology groups participate in government farm programs to some
extent, but the participation rates and share of program payments vary.

     Transition payments are most important to higher-sales small farms and
large family farms. 
     The largest portion of government payments goes to higher-sales small
farms.
     Retirement and residential/lifestyle farms account for half of the
acreage in the Conservation Reserve and Wetlands Reserve Programs (CRP and
WRP).

Cost Control
"Top performing" farms are defined as the top 25 percent of each typology
group, ranked by returns to operators' labor and management.

*  Top performers in each group control expenses, resulting in a 30- to
50-percent gross cash margin (the expense ratio subtracted from 100
percent).
*  Each group includes farms earning positive returns.

Household Income
Dependence on farm inc ome varies by farm size.

*  Households operating very large farms, large farms, and higher-sales
small farms receive a substantial share of their income from farming.
 * The remaining small farm households derive virtually all income from
off-farm sources.

Robert A. Hoppe (202) 694-5572, Janet Perry, David Banker
rhoppe@econ.ag.gov,
jperry@econ.ag.gov, dbanker@econ.ag.gov  


FARM & RURAL COMMUNITIES

FSA Credit Programs Target Minority Farmers

Racial and ethnic minorities often rely on USDA's Farm Service Agency (FSA)
loan programs for their credit needs, especially in regions where minority
farmers are clustered. FSA direct and guaranteed farm loan programs, which
service 7 percent of all farms, are intended to provide credit to family
farmers unable to get credit from conventional sources at reasonable rates
and terms. Because many have limited financial resources, minority family
farmers are more likely to turn to FSA than to private lenders for credit. 

Minority Farmer Numbers Growing

According to the Census of Agriculture, four major groups of racial and
ethnic minorities are involved in farming; Blacks, American Indians, Asians
and Pacific Islanders, and those with either a Hispanic or Latino
background. From 1992 to 1997, the total number of farms operated by
Blacks, American Indians, and other racial minority groups rose 10 percent
to 47,658. In addition, the number of farmers who claimed a Hispanic or
Latino background rose 32 percent to 27,717. Growth in Hispanic or Latino
farmers and Asian farmers is consistent with growth of these racial
and ethnic groups in the U.S. population. 

The number of Black-operated farms, unlike farms of most other racial
minority groups, declined slightly from 1992 to 1997 to just 18,451 farms
and may continue to decline. Black farmers on average are older than
farmers of other racial groups. Only 4 percent of Black farmers are under
35 years of age, while nearly a quarter are at least 70 years old. 

Racial and ethnic minority farmers tend to be regionally clustered, often
the result of historical factors. Hispanic or Latino farmers tend to be
located in the Southwest, American Indians in the Plains, and Black farmers
along the Piedmont and Mississippi River Delta. Asian farmers are found
primarily in California. 

Racial and ethnic minority farmers tend to operate smaller operations than
nonminority farmers. Only about a third of minority farms reported sales
greater than $10,000 in 1997, compared with half for all farms. However,
some minority-operated farms are large, bringing the average size to
just under $103,000, the average for all farms. Farms operated by 

Blacks, however, had average sales of $26,000, while farms operated by
Asian and Pacific Islanders had sales averaging $209,000. A high proportion
of Asians and Pacific Islanders operate farms producing high-value fruit,
vegetable, or greenhouse crops, whereas over half of Black farmers have
small beef-cattle operations. 

Targeting Loans to Minorities

Since the late 1980's, legislative and administrative changes have
increased FSA loan services specifically targeted to farmers who may be
socially disadvantaged (SDA). The Agricultural Credit Act of 1987 (P.L.
100-233) defined SDA individuals as those who may have been subject to
discrimination because of their identity as members of a group, without
regard to their individual qualities. In addition to racial and ethnic
minorities, women are also considered an SDA group (this analysis includes
women in racial and ethnic minority groups only). Initially, the targeting
applied only to long-term real estate, or farm ownership loans, but the
Food, Agriculture, Conservation, and Trade Act of 1990 (P.L. 101-624)
expanded targeting to include operating loans. 

Targeting of loans is accomplished by setting aside a share of the annual
loan funding for use by SDA applicants, based on the proportion of SDA
farmers or residents in the county or state. Both direct and guaranteed
loan programs have targeting requirements. Direct loans are made through
FSA's county and state offices, and FSA-guaranteed loans are originated,
funded, and serviced by private-sector lenders. Through both direct and
guaranteed loan programs, $296 million was lent to SDA groups in fiscal
1999, about 8 percent of total FSA loan obligations. 

Racial and ethnic minority farmers make more use of direct loan programs
than guaranteed loan programs. About 1,200 borrowers, or only 3 percent of
all borrowers with FSA guaranteed loans, are racial and ethnic minorities.
While minorities represented less than 4 percent of U.S. farmers in
1997, they comprised nearly 6,600, or almost 7 percent of all FSA direct
borrowers in 1999 excluding lending in Puerto Rico. 

In counties where racial and ethnic minorities are clustered, these groups
have received a large share of all FSA direct loans since 1993. Minorities
received over 25 percent of all such loans since 1993 in 370 counties
(nationwide, counties number 3,101). Nationally, minorities received 9
percent of all FSA direct loans since 1993. 

In some regions, racial and ethnic minorities rely heavily on FSA as a
source of capital. In nearly 90 counties in the Mississippi Delta and
Virginia and Carolina Piedmont regions where Black farmers are
concentrated, over 25 percent of all Black farmers identified by the 1997
Census of Agriculture had received FSA direct loans since 1993. For many
counties on or near Indian reservations, over 25 percent of American Indian
farmers were recent FSA borrowers. Likewise, for some counties in West
Texas and the Southwest, over 25 percent of Hispanic farmers had obtained
an FSA loan in the last 7 years. 

Because racial and ethnic minorities are more likely to have low average
incomes and a limited asset base, they are less likely than other farmers
to qualify for credit from private lenders. Discrimination by
private-sector lenders represents another possible explanation for the
greater use of FSA direct loans by racial and ethnic minorities. Unlike
guaranteed loan programs, direct loans are administered by FSA offices and
do not rely on lending preferences or practices of private-sector lenders.
Minorities also tend to be located in regions where farm production is more
risky. Historically, all family-sized farms in many of the same regions
where minority farmers are clustered have been more reliant on FSA credit
programs than on private-sector lenders. 

Institutional factors may also play a role in racial and ethnic minorities'
reliance on FSA direct loans. Unlike FSA, other sources of
government-supported farm credit do not have specific minority lending
requirements. Neither the Federal Agricultural Mortgage Corporation (Farmer
Mac) nor the Farm Credit System, which are government-sponsored
enterprises, is required under Federal charter to target minorities. Some
larger commercial banks have an incentive to use FSA's guaranteed loan
program to lend to minority farmers, to meet statutory requirements of the
Community Reinvestment Act (CRA). But smaller banks that often serve rural
counties are largely exempt from CRA lending requirements. 

To help ensure that the needs of minorities are adequately served,.FSA has
taken steps in addition to targeting of loan programs. Beginning in 1993,
FSA implemented several policies to help alleviate discrimination that
might still be present in delivery of its programs. These included
revising EEO and Civil Rights training for state and county offices and
increasing representations of minorities on FSA county committees. FSA's
Small Farmer Outreach Training and Assistance Program now provides grants
to entities assisting minority farmers. In response to recommendations of
USDA's Civil Rights Action Team in 1997, an Outreach Office was
established within USDA to increase minority participation in all USDA farm
programs. Overall, lending data since 1993 indicate that the number of
minorities being served by FSA credit programs is increasing. 

In the short run, lower interest rates and favorable financing terms of FSA
loans should increase the probability of positive net farm income for
minority farmers. The ability of targeted loan programs to improve the
financial condition of minority farmers over the long term is less clear.
Because many minorities tend to be located in riskier farming regions, they
are much more susceptible to economic downturns brought on by low commodity
prices or weather-related disasters. Credit enhancement may not be
sufficient to enable these farms to survive such events. 

Steve Koenig (202) 694-5353 and
Charles Dodson (202) 720-4144
skoenig@econ.ag.gov
cdodson@wdc.fsa.usda.gov  

BOX - MINORITY FARMERS

Black farmers' claims that FSA programs were failing to adequately serve
their credit needs resulted in a class action lawsuit against FSA in 1997.
In the lawsuit, Black farmers alleged a pattern of discrimination in farm
loan programs between 1981 and 1996. In 1999, FSA agreed to settle the
lawsuit by compensating eligible plaintiffs. 


FOOD & MARKETING

Role of Traditional Ag Markets: The Dry Edible Bean Industry

A major change underway in the U.S. food and agricultural sector is the
rise of the production and marketing of products with specific
characteristics. As more products and uses are developed, and as consumer
tastes and preferences change, niche commodity markets will become
increasingly important. As a result, agricultural markets are becoming more
complex because they involve a wider range of differentiated commodities
and uses. 

Prices for standard commodities have long been the basis for signaling
quality and product specification through market channels. The classic
example is corn, which has traditionally been traded using broad quality
standards such as U.S. #2. But broad quality grades that define basic
commodities often do not adequately describe products destined for specific
uses and niche markets. In the case of corn, part of the market in recent
years has segmented into different value-enhanced products (e.g., high-oil,
high-starch, waxy, and organic). 

Conventional wisdom is that as nonstandard products proliferate, they will
be traded primarily with the use of production contracts, rather than
through "spot markets" or marketing contracts. Production contracts shift
many of the management decisions to the buyer of the commodity.
These contracts typically specify how the crop is to be produced including
the variety grown, inputs used, and timing of planting and harvest and the
compensation the grower will receive. This enables buyers to ensure that
they are receiving the correct product for the niche market. 

In contrast, marketing contracts usually specify only the price and
quantity to be traded. With a spot market, there is no interaction between
buyer and seller prior to the transaction, and the price is determined by
current supply-and-demand conditions. 

Although use of production contracts may expand, evidence from the U.S. dry
bean industry indicates that spot-market-based transactions can be used for
a far wider gr oup of commodities than previously thought. Exploring the
dry edible bean market sheds light on how changes in product specifications
influence market transactions and why agricultural markets are changing. 

Verifying Product Specifications

Increased consumption of processed foods, greater demand for ethnically
diverse meals, and greater demand for higher quality food products have led
to changes in industry specifications for dry beans. Traditionally, dry
beans were traded using broad USDA-style grades. Now such grades
are being replaced by specifications that are more complex and that more
clearly reflect the types of products consumers are demanding. 

For example, canning firms in the industry have developed their own product
specifications, which vary from firm to firm. As a result of changing
product specifications, trade between farmers, elevators, and canners now
involves a high level of interaction between market participants (canners
that purchase beans from elevators, which purchase beans from farmers).

Product specifications in the dry bean industry can be separated into three
general categories. The first category consists of product attributes
commonly found in USDA standards (but with more stringent tolerance levels)
such as specifications on foreign matter, moisture content, broken seeds,
color, and uniformity of size. 

The second category is similar to the first but includes a specification
for post-canning quality. Canning quality, or seed integrity, determines
the appearance of the product after it has been canned. Because seed
integrity consists of so many variables, it is difficult to develop an
objective pre-canning test that identifies the beans' quality (which is why
it has not been included in USDA specifications). Seed-coat checks defined
as small breaks in the seed coat are an objective measure commonly used for
this purpose. Unfortunately, seed coat checks do not always predict
post-canning quality, and there is no consensus on what constitutes a seed
coat check. The third category is specifications for organic dry beans, a
small segment of the bean industry.

An important factor in determining what form of marketing will prevail
(i.e., spot market or production contract) is related to how easily buyers
can verify that their specifications have been met. This varies by
category. 

Specifications in the first category (e.g., foreign matter or moisture
content) are far tighter than USDA's, but one can easily test for them.
This makes trade operate smoothly. Because it is easy to verify these
product quality characteristics, the buyer can choose not to purchase from
suppliers who are unable to provide the desired quality. In addition, price
premiums can easily be used to induce growers to provide the desired
product. 

The canner-elevator relationship for category 1 is fairly simple. A canner
issues a specification that defines tolerance levels for different
attributes, and the elevator fills the order. Very little further
interaction is required. Upon receiving a shipment, a canner inspects the
product to see if it meets specification. Since the attributes are easily
checked, the elevator has a powerful incentive to meet the canner's
specifications. The elevator-farmer relationship for category 1 is also
fairly simple. The fact that an elevator can easily identify the needed
attributes means it can offer premiums to farmers who grow products with
these attributes.

Product attributes in category 2 are slightly more difficult to test for
because there is no standard definition for canning quality. Different
canners have various expectations of canning quality and require elevators
to perform various tests on the beans they purchase. Many elevators have
developed canning labs to test the product to make sure it meets a given
canner's specification. If an elevator is unsure whether or not the canning
quality specification has been met, it will send a sample to the canner for
product evaluation, which includes canning trials to see how the beans
actually perform. These canning trials accurately identify quality, making
seed integrity an observable attribute. 

The relationship between canners and elevators regarding the second
category of dry bean attributes is far closer than for category 1, because
it is difficult for canners to specify exactly what they wish to purchase.
A high level of interaction and coordination is required to communicate
what product is needed and to agree upon a price, which is a very
subjective process. However, while these specifications are complex, a
contract is rarely used. Instead, canners test products and monitor
shipments. This works effectively because the specifications are
observable. 

Canning quality specifications also complicate the farmer-elevator
transaction, but they do not necessitate the use of production contracts.
Because farmers have a tremendous amount of control over canning quality
which is affected by seed variety, timing of harvest, and handling
procedures elevators have developed education programs to show farmers what
types of products to grow, and offer premiums for high quality beans.
Elevator managers have found that education programs are more effective
than production contracts in obtaining nonstandard goods because a contract
alone does not guarantee quality. 

In contrast, attributes in the third category specifications for organic
products are difficult to observe. There are no tests that can be used to
verify that a product is organic, which complicates marketing
relationships.  

Interestingly, farmers have moved into the elevator stage of production or
"forward integrated." Trade for organic products requires a significant
amount of monitoring for compliance, and forward integration eliminates one
stage of the supply chain that the canner must oversee. The level of
coordination between buyer (canner) and seller (farmer) is very high
because it is impossible to tell by observation if the product being traded
is organic. Because all organic products must remain identity preserved and
cannot be co-mingled with any other dry beans, organic beans are traded
exclusively through contracts between growers and canners. 

Even with contracts, canners are still concerned that growers might provide
a non-organic product. To address this concern, buyers visit growers
several times a year (even though growers have organic certification) to
make sure that they are providing a product that is truly organic. 

Implications for 
Commodity Marketing

If the desired attributes for a commodity can be identified through
inexpensive testing procedures, then traditional market forces are more
likely to coordinate transactions between buyers and sellers. But when
testing procedures are not available, are too costly, or are difficult to
use (as with organic beans), spot market trades encounter difficulties,
with the potential for a supplier to provide an inferior product without
the buyer's knowledge. In this case, it may be necessary for traders to
engage in production contracts that clearly specify the product that is
desired and how it is to be produced and handled. 

Some nonstandard agricultural products with observable attributes (e.g.,
high-oil corn and waxy corn) are traded via production contract. However,
this strategy is often employed by private firms to capture returns from
seed development rather than to achieve efficiency in moving nonstandard
products between buyers and sellers. This incentive to contract is not
present in the dry bean industry because new seed varieties have
traditionally come from land grant universities. 

Evidence from the dry bean industry suggests that some observers may be
underestimating the ability of traditional markets to handle a growing
array of agricultural products. Even as commodity specifications have
become increasingly complex, the use of spot markets and marketing
contracts continues to effectively coordinate buying and selling of
nonstandard dry beans. Rather than replacing market mechanisms with
production contracts, buyers use education programs and monitoring
activities to ensure customer demands are met.  

William Chambers (202) 694-5312
chambers@econ.ag.gov


BOX - DRY BEANS

Dry Bean Facts

World's largest producers
India (25 percent of world total), Brazil (15 percent), and China (just
over 10 percent), U.S. (10 percent), Mexico (10 percent)

Dry bean varieties grown in the US
Most prominent: pinto, navy, great northern, kidney Others: lima, blackeye,
black, cranberry, garbanzo, pink, small red, small white Major producing
states North Dakota, Michigan, Nebraska, California, Colorado 

Pinto production
North Dakota (45 percent of U.S. total), Colorado (20 percent), Nebraska
(10 percent)

Navy production
Michigan (57 percent), North Dakota (26 percent), Minnesota (10 percent)

Great northern production
Nebraska (85 percent), Idaho (6 percent)

Light red kidney production
California (23 percent), New York (20 percent), Nebraska (17 percent) 

Dark red kidney production
Minnesota (45 percent), Michigan (16 percent), Wisconsin (16 percent) 


RESOURCES & ENVIRONMENT

Reducing Nitrogen Flow to the Gulf of Mexico: Strategies for Agriculture

A zone of hypoxic, or oxygen-deficient, water in the northern Gulf of
Mexico stretches from the Mississippi Delta westward along the Louisiana
coastline to Texas. At peak periods, the hypoxic zone covers an area of
about 7,000 square miles, nearly as large as New Jersey. Located in the
midst of one of the most important commercial and recreational fisheries in
the U.S., the hypoxic zone poses a threat to the aquatic environment that
supports these fisheries.

Hypoxia is a deficiency in breathable oxygen sufficient to cause damage to
living  animal tissue. The hypoxic zone in the Gulf of Mexico is the result
of nutrient-laden water flowing into the Gulf from the Mississippi River.
The nutrients support unchecked growth of microscopic plants and
animals that use up dissolved oxygen in coastal waters, depriving other
forms of aquatic life of adequate oxygen to survive. Although the size of
the hypoxic zone varies during the year and some Gulf creatures are capable
of fleeing the "dead zone," the potential for damage to the coastal
fishing industry particularly the fish, shrimp, and crab harvests remains
substantial. 

While the interaction of several features of the Gulf have led to formation
of the hypoxic zone, the primary cause of hypoxia in these waters is high
loads of nitrogen in the discharge from the Mississippi River. Therefore,
any effort to control hypoxia in the Gulf must concentrate on reducing
excess nitrogen releases (soil nutrients  that can be washed away if unused
by plants) into the environment of the Mississippi River basin.

The multiple sources of nitrogen within the basin include atmospheric
deposition (rainfall), septic systems, municipal and industrial activities,
and farm operations (commercial fertilizer and animal manure use, legume
production, and mineralization of soil nitrogen). Data from the U.S.
Geological Survey indicate that  agriculture contributes an estimated 65
percent of nitrogen loadings to the Gulf from the Mississippi River. 

While uncertainty remains about the reduction in excess nitrogen releases
needed to stabilize the hypoxic zone, the best scientific judgement is that
it will take a 20-percent reduction in nitrogen from agricultural sources
within the Mississippi River basin to achieve this goal. Further, the
Mississippi River basin is so extensive (part or all of 31 states) that
nitrogen reduction policies directed at agricultural producers in the basin
will affect the entire farm sector.

In 1998, the White House Committee on Environment and Natural Resources
initiated a study to assess the costs and benefits of reducing nitrogen
emissions into the Gulf of Mexico. USDA's Economic Research Service (ERS)
contributed to the study by analyzing the economic and environmental
effects of three strategies for reducing excess nitrogen releases into the
Mississippi River basin: reducing nitrogen use, restoring wetlands, and
combining wetland restoration with reduction in nitrogen use. The results
indicate expected impacts on commodity prices, net cash returns to crop and
livestock producers, exports of major commodities, and nontargeted
environmental emissions, as well as social costs.

Strategies to Cut Ag Nitrogen
In the Mississippi River Basin 

Improved nutrient management practices that require less nitrogen
fertilizer can help reduce excess nitrogen runoff into the Mississippi
River basin. Farmers can reduce nitrogen fertilizer use by cutting
application rates (lowering production costs and possibly yield), by
utilizing nitrogen fertilizer more efficiently, or by switching to crop
rotations that include legumes to fix airborne nitrogen in the soil.
Nutrient efficiency (the proportion of available nitrogen utilized by
plants) increases when fertilizer applications are timed to match crop
needs and/or when fertilizer application rates are based on soil test
estimates of available nitrogen.

There is some evidence that many farmers apply more nitrogen than needed to
achieve optimal yields. In those cases, reducing nitrogen application rates
should have little impact on yields, leading to a "win-win" solution where
excess nitrogen releases are cut and farmers' incomes are increased because
of lower input costs. However, overapplication of fertilizer may be a
result of annual variation in growing conditions in a year of good weather,
plants utilize more nitrogen and little or no excess exists. While a
constant year-to-year application rate represents an appropriate economic
response to this uncertainty, it can lead to application of nitrogen in
amounts that exceed what plants actually need during a specific growing
season. This suggests that unless uncertainty created by fluctuating
weather conditions can be reduced, cutting nitrogen application rates would
impose significant costs on many producers and the agricultural sector
overall.

Another strategy for cutting nitrogen runoff is to create vegetative buffer
strips and wetlands that filter nitrogen from agricultural runoff by means
of plant uptake (absorption) or by emitting it to the atmosphere (nitrogen
constitutes 80 percent of earth's air, by volume) through the chemical
action of nitrogen and water (denitrification). Restoring wetlands also
eliminates nitrogen from the fertilizer that generally would have been
applied to the former cropland.

The effectiveness of wetlands as a filter for excess nitrogen loadings has
been well documented. A wetland demonstration project in Iowa showed that
wetlands retained from 40 to 95 percent of nitrogen contained in water
flowing into them.

Because wetlands can treat runoff from large areas, restoring wetlands may
be less disruptive to the agricultural sector than reducing nitrogen
fertilizer use. Restoring wetlands has the added benefit of providing
wildlife habitat and providing flood control. Although buffer strips
accomplish much the same purpose as wetlands in filtering nitrogen from
runoff and may be suitable in some situations, they are generally less
effective than wetlands and were not included in the ERS study. 

An alternative to relying strictly on reducing fertilizer use or filtering
would be a mixed approach reducing fertilizer use and restoring wetlands.
This mixed approach could be less costly than either of the other
approaches used separately because it allows greater flexibility in
reducing excess nitrogen releases. Small reductions in nitrogen use may
impose relatively small costs on agriculture producers, as they are able to
alter rotations to compensate for chemical fertilizers. As required
reductions in use increase, however, costs to agriculture producers become
proportionately greater as opportunities for substituting crop rotations
for chemical fertilizer are exhausted. The same is likely to be true of
wetlands restoration: producer costs accelerate as cropland conversion to
wetland rises. By exploiting the low-cost opportunities available under
each approach first, it may be possible to reduce the overall cost of
achieving the targeted reduction in agricultural nitrogen loadings. 

Three Strategies:
The Assumptions

ERS used a regional agricultural model to assess the effects of the three
strategies for achieving a 20-percent reduction in excess nitrogen releases
in the Mississippi River basin. The model predicts how producers will alter
production practices (land use, fertilizer application rates, crop
rotations, and tillage practices) in response to restrictions or changes in
economic incentives. It then estimates how these changes in production
practices affect supply and demand for crops and livestock, commodity
prices, farm income, and nutrient losses to the environment from soil
erosion and nitrogen releases. 

ERS found that reducing nitrogen releases from cropland by 20 percent in
the Mississippi River basin using improved nutrient management would
require a 40-percent reduction in nitrogen fertilizer use. The targeted
reduction in fertilizer use would be achieved by reducing fertilizer
application rates, substituting crop rotations containing legumes for
monoculture (continuous same crop), and reducing planted acres. The largest
reductions in nitrogen applied per acre would be concentrated in the Corn
Belt, where highly productive and nitrogen-intensive crops (those
requiring high amounts of nitrogen to achieve a high yield) predominate.
The effectiveness of reducing nitrogen releases by targeting nitrogen
fertilizer would be impeded by the sizable amount of acreage devoted to
legumes. Even though legumes do not generally use nitrogen fertilizer, they
fix nitrogen from the air, and some of the nitrogen not taken up by the
succeeding crop in the rotation can be lost through the leaching action of
surface water. 

Using additional wetlands to accomplish the targeted reduction in nitrogen
loadings would require restoration of 18 million acres of wetlands, a net
reduction of 15 million planted cropland acres (3.5 percent of total U.S.
cropland) in the Mississippi River watershed. Cropland suitable for
wetland restoration was identified and allocated among subregions based on
contribution to total excess nitrogen releases in the Mississippi River
basin. It was then assumed that the government purchased easements for the
identified land from farmers and compensated them for the cost of
restoring the acreage to wetland function.

The result showed a concentration of restored wetlands in the Corn Belt and
along the Mississippi River. Approximately 25 percent of the achievable
reduction in nitrogen loadings in the basin from the wetlands strategy can
be attributed to reduction in planted acres, and the remaining 75 percent
to the filtering action of wetlands. 

Using the mixed strategy to achieve a 20-percent reduction in excess
nitrogen releases in the basin, the model estimated results based on
restoring 5 million acres to wetlands and cutting nitrogen use by 20
percent. Reductions in nitrogen use and planted acres would account for
nearly 60 percent of the reduction in nitrogen loadings, with the remaining
40 percent due to wetland filtering.

Comparison of Strategies' Effects

Production and prices. Results indicate that reducing fertilizer use limits
the supply of nitrogen-intensive crops  primarily corn and sorghum and
raises prices of these commodities by more than 20 percent. Price increases
for other crops are more moderate, ranging from 10 percent for wheat to 2
percent for rice. The price of soybeans declines slightly because soybean
production expands as rotations that include soybeans become more
profitable relative to other rotations (the exceptions are some parts of
the Delta and Southeast). Livestock and fresh meat product prices
increase moderately in response to increased grain prices. 

Wetland restoration also causes crop prices to increase substantially, but
by considerably less than if nitrogen use is restricted. Research results
show that prices of corn and sorghum increase by 13 percent and 11 percent
because of a drop in total planted acres, but the price of soybeans also
increases (by 10 percent) because of decreased production. Soybean
production is concentrated in areas where conversion of cropland into
wetland is most likely to take place, causing total soybean acreage to
fall. 

Effects of the wetland restoration strategy on livestock prices are similar
to those of the fertilizer reduction strategy. Even though corn and sorghum
prices increase significantly less using the wetlands strategy, prices of
other important feeds, such as soybeans and hay, increase significantly
more, and livestock prices rise. 

The mixed strategy that combines wetland restoration with nitrogen
reduction has a more moderate effect on commodity prices. The price of corn
increases less up 9 percent v. 13-20 percent under the other two
strategies. At the same time, prices of soybeans and hay increase only
slightly, and substantially less than under the wetlands strategy. Since
corn and soybeans represent the dominant cost of livestock feed, overall
feed prices increase significantly less under the mixed strategy, resulting
in a more modest increase in livestock product prices.

Because increases in commodity prices from declining domestic production
affect the agricultural sector's competitiveness in world markets, the
fertilizer reduction strategy, which increases prices the most, causes the
greatest declines in agricultural exports.

Net cash returns. 

Net cash returns to crop producers increase under all three strategies,
while net returns to livestock producers decline because of increases in
feed costs. The fertilizer reduction strategy has the largest impact on net
returns to the farm sector. Net returns to crop producers increase 17
percent and net returns to livestock producers decline 5 percent, nearly
double the estimated change in net cash returns under the wetland
restoration and mixed strategies.

Within and outside the Mississippi River basin, net returns for cropping
enterprises increase by similar amounts. For livestock producers, however,
the declines in net returns within the basin are nearly double the drop in
the rest of the U.S. This reflects the predominance of high-feed-cost
operations (grain-fed livestock) within the Mississippi watershed relative
to lower cost grass-fed operations in the rest of the U.S.

Net returns to crop producers increase because gains from increases in
commodity prices outweigh losses from reduced production, reflecting the
price impact of a production decline in an area as large as the Mississippi
River basin. Since the demand for agricultural commodities is generally
unresponsive to changes in prices, the percentage increase in price
resulting from a production decline are greater than the percentage
reduction in production itself. 

However, gains and losses are not distributed evenly across the basin. All
three strategies will cause cropping to cease on some acreage within the
basin and alter production practices on others, but overall, production of
crops high in potential excess nitrogen releases shift out of the basin,
increasing excess nitrogen releases in the rest of the U.S. For example, if
the price of corn rises high enough because of cutbacks within the
Mississippi River basin, farmers farther east in the Middle Atlantic states
may find it profitable to plant additional acreage to corn. Some farmers in
the basin may experience severe declines in net returns, while others may
reap substantial benefits.

Environmental indicators. 

Wetland restoration outperforms both the nitrogen reduction and mixed
strategies with respect to impact on soil erosion from water, damage from
erosion, and excess nitrogen releases from farmland. The reduction in
planted acreage resulting from wetland restoration leads to a 5-percent
decrease in water erosion within the Mississippi River basin but a slight
increase in erosion in the rest of the country. It also leads to small
increases in nitrogen loadings outside the Mississippi River basin as
farmers adjust acreage and enterprise mix to market conditions resulting
from changes within the basin. 

Restricting nitrogen fertilizer use, on the other hand, leads to
significant increases in erosion both within and outside the basin. Erosion
increases because some farmers within the basin switch to rotations with
soybeans a commodity with production practices that are generally more
erosive than crops in current rotations. In addition, the fertilizer
reduction strategy leads to an 8-percent increase in excess nitrogen
releases outside the Mississippi River basin as farmers there increase
production of nitrogen-intensive commodities in response to higher prices  

The mixed strategy also leads to increased water erosion within the basin,
but since the mixed strategy has less impact on commodity prices, it has
less effect than the others on erosion and nitrogen loadings in the rest of
the country. 

Social cost. 

Net social cost of the three strategies the total impact on society as a
whole is the combination of:
*  the change in producer and consumer welfare resulting from changes in
production costs and commodity prices (net private costs);
*  minus costs of restoring wetlands;
*  plus net environmental benefits from establishment of additional
wetlands and changes in wind and water erosion.

A policy of restrictions to cut nitrogen fertilizer use by 40 percent
represents the most cost-effective strategy (most benefits relative to
costs) for meeting the targeted 20-percent reduction in nitrogen loadings.
The mixed strategy, however, is nearly as cost-effective as the
nitrogen reduction strategy. The mixed strategy also has some desirable
features that are not captured by a simple cost-effectiveness measure,
including a smaller impact on prices that results in smaller adjustments
throughout the nation.

Wetland restoration is the least cost-effective approach for reducing
excess nitrogen releases, even though nearly half the costs associated with
restoring wetlands are offset by benefits from increasing wildlife habitat.
The main reason for the relatively low cost-effectiveness of wetland
restoration is the high cost of taking productive farmland out of
production i.e., decreasing the overall efficiency of agricultural
production and the substantial costs of restoring wetland functions. 

Although agriculture is just one of a number of sources contributing to
high nitrogen loadings in the rivers and streams of the Mississippi River
watershed and the resultant hypoxic zone in the Gulf of Mexico, evidence
indicates that an estimated 65 percent of water-borne nitrogen carried
down the Mississippi River into the Gulf derives from agricultural
production. Changing agricultural production practices especially reducing
fertilizer use and converting farmland to wetland can play a significant
role in reducing excess nitrogen in waters flowing into the waters of
the Gulf.  

Mark Peters (202) 694-5487, Marc Ribaudo (202) 694-5488, Roger Claassen
(202) 694-5473, and Ralph Heimlich (202) 694-5504
mpeters@econ.ag.gov
mribaudo@econ.ag.gov
claassen@econ.ag.gov
heimlich@econ.ag.gov 

BOX - GULF OF MEXICO

The White House report on hypoxia is expected to be released on October 20.


SPECIAL ARTICLE

Implementation of Uruguay Round Tariff Reductions

The "Quint" group of major agricultural trading nations the U.S., the
European Union (EU), Japan, Canada, and Australia met September 30-October
1 to discuss objectives for the next round of multilateral trade
negotiations. One of the main U.S. objectives of the next trade round is
to achieve further cuts in agricultural tariffs. 

Prior to the last round of negotiations Uruguay Round (1986-94) tariffs on
agricultural goods, in sharp contrast to those on manufactured goods, were
scarcely touched. Even in those cases where they were reduced, the impact
on trade was often lessened by the existence of nontariff barriers (NTB's),
including quotas, variable levies, and discretionary import licensing. This
changed with the Uruguay Round Agreement on Agriculture (URAA), which
required countries to convert their agricultural NTB's to ordinary tariffs.
The weight of remaining protection in the agricultural sector has now
shifted toward tariffs, some of which are extremely high and provide
levels of protection that are unevenly distributed across countries,
commodity markets, and levels of processing. 

Signatories to the URAA agreed to bind new and existing tariffs at levels
above which they cannot be raised without penalties. Developed countries
further agreed to reduce all agricultural tariffs by at least 36 percent on
average over the period 1995 to 2000, with a minimum reduction of 15
percent per tariff-line (tariff-line refers to the product or products to
which the legally established tariff applies). Countries were also to
provide a minimum level of import opportunities for products previously
protected by NTB's. This was accomplished by creating tariff-rate quotas
(TRQ's), which impose a relatively low tariff on imports up to a minimum
access level. Because of the generally transparent and quantifiable nature
of tariffs, they are considered a highly visible and easily negotiable
target for reductions (compared with NTB's) during the next round of trade
negotiations, to be launched by the World Trade Organization (WTO) in
Seattle on November 30. 

While none of the Quint group of countries has indicated the extent to
which agricultural tariffs should be reduced, it is generally believed that
the U.S., Canada, and Australia will favor somewhat deeper cuts than the EU
or Japan. This article compares the level and nature of tariff protection
in these countries at the conclusion of the Uruguay Round and at the outset
of the next round, and highlights those sectors in each country where
tariffs remain particularly high. 

Selective Cuts Minimize Impacts

Under the URAA, countries had a great deal of flexibility in deciding how
much each agricultural tariff would be cut, so average reductions vary by
country. Australia cut 75 percent of its agricultural product tariffs by
levels above the required 36-percent average, resulting in the largest
average reduction at 48 percent. The other countries all slightly exceed
the average requirement, with overall cuts of 37 to 38 percent. Canada was
unique in cutting both within-quota and over-quota tariffs of their TRQs;
other countries cut only the over-quota tariffs. 

All countries except Australia tended to reduce their ad valorem tariffs
(tariff as a percentage of product value) by greater amounts than other
tariffs (e.g., specific monetary amount per unit of product). Studies that
calculated ad valorem equivalents (AVE) for these other tariffs indicate
that the top 20 rates in the EU, Japan, and Canada and the top 16 in the
U.S. are non-ad valorem tariffs. Given that these tend to be less
transparent than ad valorem tariffs, it is not surprising that
countries would apply this form of tariff to their most highly protected
products.

The use of tariff protection for agricultural products is most widespread
in the EU, followed by the U.S., Japan, Australia, and Canada, as measured
by the proportion of duty-free most-favored-nation (MFN) tariff lines. All
countries show a marked increase in the proportion of items that will be
duty-free after all of the Uruguay Round reductions are implemented. For
the Quint as a whole, this proportion will increase from 20 to 25 percent
by the year 2000. 

The provision that no individual tariff need be cut more than 15 percent a
modest reduction given the high level of some agricultural tariffs allows
countries to continue sheltering their import-sensitive commodities from
international competition. Canada, Japan, and the U.S. each utilized this
provision extensively by reducing about 30 percent of their tariff-lines by
the 15-percent minimum. In contrast, Australia cut 98 percent of its
tariffs by more than the minimum, while the EU reduced all of it tariffs by
at least 20 percent. 

The smallest cuts tended to be made on the over-quota tariffs of products
protected by TRQ's. Included in this category for Canada are poultry and
dairy products; for Japan, grain and dairy products; and for the U.S.,
sugar, peanuts, and dairy products. Not only were these tariffs reduced
by significantly smaller amounts than other tariffs, but they tended to be
higher to begin with.

Today, the majority of all tariffs are ad valorem. Agriculture is somewhat
unique in the extent to which specific or compound tariffs are still used,
largely because of the increased protection that they can provide against
large drops in import prices. 

"Base" tariffs reflect the level of tariff protection built into each
country's agricultural sector at the conclusion of the Uruguay Round and
are the starting point for making yearly reductions. Bound tariffs are the
maximum MFN rate (non-discriminatory tariffs extended among WTO members)
that a country will be able to charge on imports after the URAA provisions
have been fully implemented. However, countries may choose to apply a
tariff below the bound rate, and often do, particularly for imports from
trading partners that have been granted preferential rates or exemptions
(such as under NAFTA). Since MFN tariff schedules will most likely be the
subject of negotiations at the next round, it is the bound MFN tariffs that
are compared here. 

The most striking feature of each country's tariff profile is its low
overall level. By 2000, bound tariffs will average below 10 percent in each
of the Quint countries, with levels lowest for Australia, followed by
Canada, the U.S., EU and Japan. The calculated means exclude non-ad
valorem tariffs, since non-ad valorem tariffs cannot be averaged without
making assumptions about the level of import prices and exchange rates in
the year 2000. Thus, the calculated mean tariff cannot be interpreted as a
reflection of the overall restrictiveness of a country's trade policy.
Border protection is actually higher than indicated by the mean of a
country's ad valorem tariffs, because non-ad valorem tariffs tend to be
more protective than their ad valorem counterparts. On the other hand, a
great deal of trade takes place at tariffs that are lower than the MFN
level(including preferential rates under trade agreements like NAFTA). If
the actual tariffs at which trade took place were included in the
calculation, the mean would be lower.

The Canadian tariff schedule provides an excellent example of this
disparity between the two types of tariffs. A large number of Canada's
compound tariffs take the form of alternate duties (constructed to provide
added protection by hedging against changes in import prices), which
allows an AVE to be easily approximated. Canada's bound tariff on butter in
2000, for instance, will equal 298.7 percent, but not less than C$4,001 per
metric ton. The AVE of such a tariff could be higher than 298.7 percent
should import prices fall below C$1339.47 per metric ton (4001
divided by 2.987), while ensuring a minimum 298.7- percent ad valorem
protection when import prices are above this level. Combining the ad
valorem portion of these tariffs with Canada's ad valorem rates would give
overall base and bound simple means equal to 31.3 and 25.3 percent
(over 917 tariff lines), respectively, versus means of 7.4 and 4.8 percent
(over 762 tariff lines).

The economic and trade distortions associated with a country's tariff
structure depend not only on the size of its tariffs, but also on the
dispersion of these tariffs across all products. Two ways to
describe this is standard deviation from the mean value, which measures
absolute dispersion among all values in the group, and percentage of tariff
peaks, or the proportion of products for which the tariff level exceeds
some multiple of the mean.

Based on standard deviation, ad valorem tariffs for Australia show the most
uniformity, while those for Canada exhibit the most dispersion around the
mean. While evidence provided by the standard deviation is by no means 
conclusive, in general the more dispersion in a country's tariff
schedule, the greater the distortions caused by tariffs on production and
consumption patterns. Farmers will tend to increase production of those
products protected by high tariffs, while consumers will tend to shift
their purchases from products subject to high tariffs to competing
products with lower costs (due to lower or zero tariffs).

With all tariffs cut by at least 15 percent, dispersion in each country as
measured by standard deviation declines between the base and bound tariff
schedule. But when measured as the proportion of tariff lines that are over
three times the country mean (referred to as tariff peaks), dispersion
increases between base and bound tariffs in each country, except Australia.
An increase in tariff peaks occurs when high tariffs are reduced by less
than the average reduction over all tariffs. The greater the percentage of
tariff peaks in a country's schedule, the greater the potential
economic distortions, especially when highly substitutable products are
available on the domestic or international market. Products with ad valorem
tariffs that greater than three times the mean tariff include: for
Australia, potatoes and some flours and meals; for Canada, wheat barley,
and certain meat products; for the EU, tobacco products and some fruit
juices; for Japan, selected processed cheeses and meats; and for the U.S.,
peanuts, peanut butter, and certain fruits. 

Lower levels of tariff protection do not always mean the tariff schedule is
less distorting. Australia, which has the lowest mean and standard
deviation in its ad valorem tariffs, also has the highest proportion of
tariff peaks, while Canada, which has the second-lowest mean and the lowest
proportion of tariff peaks, has the highest standard deviation. 

By 2000, mean ad valorem base tariffs will have fallen by 37 percent in
Japan and the U.S., 36 percent in Canada, 34 percent in the EU, and 33
percent in Australia. Without exception, however, reductions in the mean
tariff are less than the average reduction over all ad valorem tariff
lines, an indication that low tariffs were reduced by a larger amount than
high tariffs.

The largest share of each country's ad valorem tariffs is less than or
equal to 5 percent ranging from 73 percent of Australia's tariffs to 44
percent of Japan's. The less-than-5-percent category includes what are
sometimes referred to as "nuisance" tariffs, tariffs so small as to not be
an impediment to trade but still require paperwork. All countries tended to
cut tariffs in this category by the greatest amounts, ranging from average
reductions of 76 percent in the EU to 47 percent in the U.S. To the extent
that these tariffs were already small enough to allow unlimited imports,
these cuts would not likely result in any appreciable trade increases.

Tariff rates between 5 and 15 percent account for between one-quarter and
one-third of ad valorem tariffs in Quint countries. Countries tended to cut
tariffs of this size by less than those in the 0-5 percent range, but by
more than their higher tariffs. The one exception was Australia, which
tended to cut tariffs of over 15 percent by larger amounts. For all
countries, the average cuts in both this category and the 15-25-percent
category were fairly significant, ranging from 30 to 48 percent, leading to
the conclusion that any significant trade expansion resulting from the
Uruguay Round tariff reductions probably occurred for products found in
these two categories. 

Tariffs over 25 percent include a relatively small number of critically
important tariffs, a great proportion of which are the over-quota tariffs
of a TRQ. Tariffs in this group tend to provide solid protection to a
country's domestic industry, and are sometimes high enough to preclude
trade. For this reason, countries agreed to create TRQ's during the Uruguay
Round, to ensure that at least a minimum amount of import opportunity
existed for these products. Most of the tariffs that were reduced by the
minimum amount allowable are found in this category. As these are the
tariffs that countries reduced by the least amounts and apparently value
the most, further reductions will no doubt encounter the greatest
resistance in the next round.

A subset of the final category are the megatariffs, often defined as
tariffs greater than 100 percent.  Megatariffs are sometimes referred to as
redundant tariffs, because they could be reduced significantly without
actually improving market access. Only Canada (with 4) and the U.S. (with
5) will have ad valorem tariffs of over 100 percent after 2000. The
relatively low number of ad valorem tariffs at high protection levels
results from countries favoring non-ad valorem tariffs for their most
sensitive products, as demonstrated in Canada's tariff schedule. At least
82 of Canada's 429 non-ad valorem agricultural tariffs will be greater than
100 percent in 2000 (using an AVE), even after being subjected to
reductions. Sixty-four of these will be greater than 200 percent, with
one over 300 percent.

Options for the Next Round

While converting NTB's to tariffs is generally regarded as a significant
step in trade liberalization, implementation of tariff cutting provisions
of the URAA is generally viewed as an important, but less substantial
outcome. Despite the progress made in reducing tariffs, cuts were generally
made in such a way as to minimize the resulting trade liberalization.
Tariffs most critical for protection of domestic agriculture generally are
only a subset of a country's total tariff schedule, and countries
tended to make extensive use of the flexibility offered by the Uruguay
Round provisions to reduce these tariffs by the lowest amounts allowable.

Agricultural tariffs tend to be higher than those on manufactured items,
and in addition are unevenly distributed across countries and commodities.
Tariffs provide greater transparency over NTB's, but some tariffs still
pose significant impediments to market access and involve high costs
to agricultural producers in exporting nations and to consumers in
importing nations. Achieving significant reductions of tariffs will be one
of the central objectives of the next round. For products with the highest
tariffs, even significant reductions may not actually make markets more
accessible to foreign competitors. Cutting these tariffs enough to increase
trade flows implies some sort of tariff-cutting formula, such as that
proposed during the Tokyo Round (1973-79), might be used to achieve deeper
cuts for high tariff rates. 

Another important aspect of tariff schedules is the distortion associated
with rates that vary over a wide range. Increases in tariff dispersion
could result in a country's trade becoming more, rather than less
distorted. This distortion can easily increase when implementation of
tariff reductions allows a bias toward smaller reductions for higher
tariffs.

Should some tariffs be eliminated rather than reduced?  Previous rounds
have seen proposals to eliminate "nuisance" tariffs (those under 2 or 3
percent) to avoid negotiating tariff reductions that have little or no
effect on world trade. An early agreement to eliminate these tariffs would
do little to increase trade, but would prevent countries from claiming the
reduction as a concession. The evidence from the URAA clearly demonstrates
that countries tended to reduce these tariffs by large amounts in order to
reach the 36-percent average cuts required over all tariffs. 

Similarly, within-quota tariffs associated with TRQ's could be eliminated
for the same reason. Since it was expected that countries would charge "low
or minimal duties" to provide minimum access, cuts in within-quota tariffs
can be viewed as being largely redundant. They do not result in market
expansion since imports in excess of the quota are subject to the higher
over-quota tariff. 

The existence of within-quota tariffs also makes it difficult to determine
why some TRQ's are not being filled. Either the TRQ is being administered
in a way that dissuades importers from taking advantage of the minimum
access amount, or the domestic price is less than the imported price
(including tariff). In the latter case, this may be because the
within-quota tariff has been set so high as to nullify the access
opportunity. A simple way to assure that these tariffs are not the reason
for unfilled quotas, particularly if the next round results in an agreement
to increase these quotas, is to eliminate them altogether.

Finally, eliminating the use of non-ad valorem tariffs (i.e., converting
them to ad valorem rates) would increase the level of transparency in
tariff schedules. Nevertheless, specific tariffs (monetary amount per unit
of product) are favored by some countries because the total duty on an
import shipment is easier for customs officials to determine, relying only
on the quantity imported, not quantity times price. But such tariffs
conceal the amount of protection by complicating the estimation of average
tariff levels, and can impede the level of market access promised by tariff
reductions should import prices decline, thus increasing the level of
protection (AVE) provided by the specific tariff. A suitable alternative to
eliminating non-ad valorem tariffs might be to require countries to provide
the WTO with their AVE's, so comparisons of protection provided by each
country's tariff regime could be easily made.   

John Wainio (613) 759-7452, Paul Gibson (202) 694-5194, and Daniel B.
Whitley (202) 694-5195 jwainio@econ.ag.gov, pgibson@econ.ag.gov,
dwhitley@econ.ag.gov

BOX - TARIFFS

This article is the second in an AO series on agricultural tariffs. It is
based on preliminary data from the Agricultural Market Access Database
(AMAD), being developed jointly by several organizations, including USDA's
Economic Research Service, Agriculture and AgriFood Canada,
the European Commission, the United Nations Conference on Trade and
Development, and the Food and Agriculture Organization of the United
Nations. Upon completion, the database will contain data at the tariff-line
level on market access commitments (tariffs and tariff-rate quotas) of
about 50 WTO members. In addition, where available, information on TRQ
implementation, trade, applied tariffs, and commodity production
and consumption will also be incorporated into the database.
The AMAD is expected to become available to the public early next year. For
more information about the AMAD, contact Paul Gibson, at
pgibson@econ.ag.gov. 

BOX - TARIFFS

Comparing Tariffs

Comparing tariff schedules across countries is difficult for a number of
reasons. First, countries levy tariffs in a number of ways: 1) as a
percentage of the value of imports (ad valorem tariffs), 2) as a monetary
amount per unit of import (specific tariffs), or 3) as a combination of the
two (compound tariffs). The percentage of bound agricultural tariffs among
the Quint countries levied on an ad valorem basis ranges from 98 percent in
Australia to 56 percent in Japan and the U.S. After the Uruguay Round
provisions have been fully implemented, ad valorem rates will account
for 69 percent of all agricultural tariffs in the Quint.

Essentially, one wants to compare the level of protection provided by each
tariff over time. While it is easy to gauge the relative protection
provided by two ad valorem tariffs, analyzing their non-ad valorem
counterparts requires calculation of an ad valorem equivalent (AVE)
dividing the non-ad valorem tariff by an import price or import unit value.
The level of protection of a non-ad valorem (on a percentage basis) varies
inversely with import price a decline in import price yields an increase in
the level of protection (and vice versa).

Once AVE's have been calculated, relevant comparisons of tariffs across
countries usually require calculation of a mean tariff, at the country or
commodity level. The mean tariff helps account for differing levels of
precision in countries' tariff schedules. For instance, in the category
cheese and curds, there are seven tariff lines for Australia and Japan, 34
for Canada, 48 for the EU, and 129 for the U.S. 

There are a number of ways to compute tariff means, none of which is
without bias. The most common used in this study is a simple (unweighted)
arithmetic average. Applying no weighting scheme is considered by some to
be inferior to weighting, since a "simple average" gives equal weight to
kumquat imports and wheat imports, if each enters as a single tariff-line
item under the national tariff nomenclature. 

Weighting based on import values, perhaps the most commonly used scheme,
may bias average tariff estimates downward, because items with the highest
tariffs will receive virtually no weight as almost no imports will enter
under such tariffs. Weighting based on shares of domestic value of
production would be preferable since highly protected commodities produced
in large amounts would get large weights, but production data at the
tariff-line level is rarely available. Therefore, to calculate a national
average, a tariff-weighting scheme is often based on simple (unweighted)
averages aggregated to a level where data on appropriate production weights
are available, as was done by the Organization for Economic Cooperation and
Development in a recent analysis. Ultimately, there is no ideal weighting
scheme.

END_OF_FILE
