AGRICULTURAL OUTLOOK                                        December 21, 1999
January/February 2000, ERS-AO-268
               Approved by the World Agricultural Outlook Board
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CONTENTS

AGRICULTURAL ECONOMY
Continuing Strength Seen for the U.S. Economy in 2000
Decline in U.S. Farm Income in 2000 Tempered by Government Payments

BRIEFS
Specialty Crops: Tree Nut Supply Bountiful

COMMODITY SPOTLIGHT
Declining Cigarette Consumption Follows Price Hikes

WORLD AGRICULTURE & TRADE
Agricultural Trade & the 1997-99 International Financial Crises

FARM & RURAL COMMUNITIES
A Safety Net for Farm Households?

SPECIAL ARTICLE
Water Pressure in China: Growth Strains Resources
 
1995-99 index will appear in pdf and printed editions


IN THIS ISSUE

Decline in U.S. Farm Income Tempered by Government Payments

The cumulative effect of 4 consecutive years of bumper crops in major
agricultural producing countries is bearing down on U.S. farm income.  Since
little or no growth is expected for farm product demand in the near term,
field crop prices are unlikely to improve unless widespread adverse weather
curtails global production and reduces supplies.  Net farm income is forecast
at $40.4 billion in 2000, a decline of $7.6 billion from the preliminary
estimate of $48.1 billion for 1999.  In 1998 and 1999, the U.S. government
helped maintain farm income and temper financial hardship for many producers
by enacting legislation to increase assistance to farmers.  For 2000,
government payments are forecast at $17.2 billion, accounting for 8 percent of
projected gross cash income--a $5.5-billion decline from 1999's estimated
record of $22.7 billion.   Mitchell Morehart (202) 694-5581;
morehart@econ.ag.gov

U.S. Economy Shows Continuing Strength

U.S. economic expansion continued in 1999 near the 4-percent rate of 1997 and
1998, but growth in Gross Domestic Product is expected to slow slightly in
2000 to 3.5 percent.  Over 2.5 million jobs will be added in 2000, and
compensation will rise 3.6 percent overall, triggering a strong rise in
personal income.  Solid consumer spending growth brought on by rising personal
income and stock market returns in 1999 will slow in 2000, but should be quite
strong, reflecting high consumer confidence.  The robust 1999 economic growth
was spurred by consumer and investment spending, which more than offset the
rise in the trade deficit.  David A. Torgerson (202) 694-5334;
dtorg@econ.ag.gov

Analyzing Farm Safety Net Scenarios

USDA's Economic Research Service (ERS) has analyzed the concept of government
assistance to agriculture based on ensuring some minimum standard of living
for farm households.  Guided by examples from existing Federal programs that
assist low- and  middle-income households, ERS constructed several safety-net
scenarios for assisting farm households, retaining current government
commodity programs.  Results indicate, for example, that households of almost
all farms classified as limited-resource in the ERS farm typology would
receive safety-net payments, compared with less than one-fifth who received
direct government payments in 1997.  Total safety-net payments going to
households of family farms with annual sales over $250,000 would be half the
amount of direct farm payments made to these farms in 1997.  Mitchell Morehart
(202) 694-5581; morehart@econ.ag.gov

Ag Trade & International Financial Crises

The 1997-99 international financial crises that began in parts of Asia and
spread to the former Soviet Union and Brazil led to currency depreciation,
reduced economic growth, and higher interest rates in those countries. 
Currency depreciation helped some agricultural producers in the crisis
countries by making their products more competitive in export markets and
raising domestic prices.  But consumption of agricultural commodities in
crisis countries fell as currency depreciation brought on higher prices for
domestic and imported goods and as income declined.

The economic upheaval in the crisis countries had global impacts.  For the
U.S., the financial crises, along with depressed global commodity prices,
reduced agricultural exports and decreased the agricultural trade surplus, but
lowered costs for imports and helped to keep inflation in check.  The recovery
of the crisis economies in 1999 will help boost  the volume of U.S.
agricultural exports in FY2000, although the overall value is expected to
remain flat.  Suchada Langley (202) 694-5227; slangley@econ.ag.gov

Growing Pressure on China's Water Resources

China is one of the world's most water-deficient economies, and water scarcity
is viewed as a major threat to China's long-term food security.  While the
agriculture sector is still by far the largest user of China's water
resources, rapid population expansion and economic growth are generating
rising demand for urban and industrial use.  China's leaders state that urban
and industrial users will have first priority and that the proportion of water
for irrigation purposes will decrease incrementally in the next few decades. 
While some areas continue to use water at unsustainable rates, the dominant
current trend is for both policy makers and farmers to begin adjusting to
conditions of less water available for agriculture.  The effects on crop mix
could have consequences for trade.  Frederick W. Crook (202) 694-5217

Cigarette Consumption Declines As Prices Climb

U.S. tobacco growers continue to be significantly affected by the November
1998 Global Tobacco Settlement between cigarette manufacturers and state
attorneys general.  Cigarette manufacturers increased prices to cover costs of
the settlement, pushing cigarette consumption to the lowest level since 1957. 
This resulted in reduced demand for tobacco leaf.  With cigarette and tobacco
leaf exports also falling, grower incomes are likely to decline.  Thomas
Capehart, Jr. (202) 694-5311; thomasc@econ.ag.gov

Tree Nut Supply Bountiful

Record world supplies of almonds, walnuts, and hazelnuts--the three most
important tree nuts in terms of global production and trade--are pushing
availability of tree nuts to all-time highs and depressing grower prices. 
This season's large supply and low nut prices overall will likely boost
consumption and trade volume in the U.S. and abroad.  U.S. exports of
almonds--the top-value U.S. horticultural export--are forecast to rise 13
percent from last year, due partly to a weakening U.S. dollar.  Exports of
U.S. walnuts are expected to reach a record high.  Doyle Johnson (202)
694-5248; djohnson@econ.ag.gov


AGRICULTURAL ECONOMY
Continuing Strength Seen for the U.S. Economy in 2000

[1999 data are estimates; 2000 data are forecasts]

The U.S. economic expansion continued in 1999, undeterred by a tripling of the
real trade deficit from 1997 through 1999. Despite some weakness in the
goods-producing sector, U.S. economic growth in 1999 continued near the
4-percent rate of 1997 and 1998.
Strong profits, low interest rates, and profitable business opportunities
brought robust growth in spending for business equipment and software. Solid
consumer spending growth continued as real wages and stock market returns
rose. The gains in domestic spending more than offset the effects of growth in
the trade deficit. 

Consumer spending will expand more slowly in 2000 than in 1999, with consumer
interest rates higher and credit conditions tighter, but spending should be
quite strong, reflecting the very high level of consumer confidence. Over 2.5
million jobs will be added in 2000, and compensation will rise 3.6 percent
overall at rates comparable to 1999, triggering a strong rise in personal
income.

USDA's Economic Research Service forecasts a growth rate of 3.5 percent in
Gross Domestic Product (GDP) in 2000, down slightly from an estimated 3.9
percent in 1999. The larger trade deficit will trim only about $50 billion off
GDP compared with the $100 billion it subtracted in 1999, leaving a still
healthy growth rate.

The major cloud over the strong U.S. economy in 1999 was the overall weakness
of the goods sector especially manufacturing, farming, and mining due in part
to the record-large trade deficit. The trade gap widened in 1999 as exports
fell and imports grew because of a strong dollar and slow world growth. The
goods sector had been hit by low prices even prior to the Asian financial
crisis as very large worldwide inventories had been building up in basic
manufactured products, field crops, and raw materials such as oil.

Although overall investment rose in 1999, lower overall profits and heavier
losses in general manufacturing and field crop operations curtailed
construction of new farm buildings and factories. Investment in software and
business equipment was up an estimated 30 percent due to strong spending for
productivity-enhancing systems, relatively low interest rates, and good
profits. Although the frantic pace of investment financing by corporate
businesses in late 1999 will show up in early 2000 as spending on plant and
equipment, investment spending growth overall is expected to slow to 5.7
percent. In 2000, a slowdown in housing growth (to 1 percent) will offset the
projected 7-percent growth in plant and equipment to keep investment growth
under 1999's estimated 6-percent rate.

As GDP growth is above the 10-year trend, the Federal Reserve is expected to
raise short-term interest rates 50 basis points (one-half percent) in
first-half 2000, helping to keep the rise in inflation in 2000 measured by
the Consumer Price Index (CPI) to less than half a percentage point. CPI
inflation should be at 2.6 percent in 2000, compared with 2.2 percent in 1999.
Long-term Treasury bond rates are expected to rise to an average of 6.5
percent, up from 5.6 percent in 1999. Competition from other countries for
investment funds as the global economy goes into full recovery is the major
reason for the climb in long-term U.S. interest rates.

The exception to relatively low general inflation is the energy sector. In
early 1999, farm fuel prices were very low as crude prices in late 1998 were
the lowest in real terms since 1947. Crude oil prices more than doubled during
1999 as worldwide growth and recovery in faltering economies spurred oil
demand. Oil output fell somewhat, despite rising demand, because OPEC members
stayed within their production quotas and non-OPEC countries such as Norway
did not increase output. The result was significant fuel price increases. For
example, the price of diesel fuel in 1999 increased over 30 percent from 1998.
Further fuel price increases are expected in 2000 as crude oil prices remain
high.

Labor Market Is Resilient

The overall labor market showed continued strength as employment grew by 2.6
million workers over the year. The service sector accounted for the net new
jobs for the economy in 1999 and is expected to be the primary source of over
2.5 million jobs that are expected to be added in 2000.

Despite the net job gain in 1999, the goods-producing sector lost jobs over
the year, and manufacturing alone lost about a third of a million jobs, in
both durable and nondurable production. Construction  fueled by new home
development, government infrastructure projects, and Hurricane Floyd
cleanup was the only goods-sector industry to gain jobs. For the economy as a
whole, mass layoffs defined by the Bureau of Labor Statistics as job losses
by more than 50 employees at one location continued at a relatively high rate
throughout the year, with the numbers of layoffs and affected workers both
very high.

The October 1999 unemployment rate, unchanged in November, was 4.1 percent,
the lowest since 1970. Unemployment is expected to continue low in the near
term. The employment-to-population ratio stayed high, with 64 percent of
people aged 16 and above working. Employment increases in some months of 1999
were small, due to shortages of workers, not soft demand.

Compensation both wages and salaries, and benefits increased steadily over
the year. At the same time, strong productivity growth kept inflation from
moving up sharply, and low inflation meant workers' purchasing power rose.
Annual wage growth was about 3.3 percent in the first 9 months of 1999, down
from 4 percent in 1998 but about the same as in 1996 and 1997. Since the
current tight labor market conditions started in 1996, employers have also
been more willing to provide workers with benefits such as more flexible
scheduling arrangements and on-site child day care. 

Growing labor compensation, strong employment growth, high levels of consumer
confidence, and rising household wealth supported a continued consumer
spending boom in 1999. Gains in real estate and stock markets provided large
increases in household wealth, so that consumers increased spending more than
their rising labor income. With every major category of consumer spending
growing faster in 1999 than in 1998 (in real terms) except for housing and
energy it is not surprising that savings as a percentage of after-tax
household income was at its lowest level in 50 years. The measured saving rate
was positive, but only because of an accounting change in the National Income
and Product Accounts that expanded the calculation of total pension savings to
include funds held in Federal, state, and local government retirement savings
plans.

A low household savings rate would normally have triggered a sharp rise in
long-term interest rates, given the strong demand growth for investment funds.
However, the gap between investment demand and household savings was filled by
state and Federal government budget surpluses, large business retained
earnings, and a continued net flow of financial investment funds into the
country. Long-term interest rates were up only 75 basis points (three-fourths
of a percent) by the end of 1999. The relatively modest rise in interest rates
allowed the stock market overall to continue bullish in 1999 and supported
strong consumer and business spending.

Strong U.S. Economy
Helped Fuel Asian Recovery

In 1999 some of the economies most directly affected by the global financial
crises began moving toward recovery. Three primary elements of the Asian
economic recovery were: 1) significant reforms by Asian governments and
corporations; 2) liquidity provided by the International Monetary Fund,  World
Bank, and the international community; and 3) export expansion. The strong
U.S. economy played a key role in promoting the third ingredient of recovery. 

In the short term, the Asian economies needed an increase in aggregate demand.
Asian domestic demand was too weakened by rising unemployment and falling
domestic wealth to revive growth, despite increased liquidity. Lowering
interest rates to raise Asian domestic demand would have further weakened
currencies. The weaker currencies would have triggered more capital outflow,
lowering demand in the short-term and increasing long-term structural
adjustment problems. Moreover, lowering interest rates would have signified a
backing away from needed reforms and induced even more capital flight. Lacking
a potential stimulus from either private or public Asian domestic demand, the
Asian countries needed to increase exports.

As the world's largest economy, the U.S. would be expected to absorb a large
share of rising exports from Asia. As it turned out, the world situation made
the role of the U.S. indispensable, and larger than many had initially
expected.

Most of the rest of the world was in no position to absorb increased exports.
Europe and Japan a major trading partner of the affected Asian countries were
experiencing sluggish growth at best in 1998 and early 1999. Slow-growth
countries are poor export markets. Many of the larger developing country
markets such as Brazil were themselves caught up in the financial crisis, so
their economies would not absorb new imports. The affected Asian countries
trade largely with each other, but could not look to each other as sources of
new export markets export growth to an economy in recession is most unlikely.
Clearly then, the booming U.S. economy was a prime candidate to absorb a very
large share of rising Asian exports.

The increase in exports was aided by a flight of investment funds to U.S.
financial markets starting in late 1997. The inflow of funds pushed U.S.
market interest rates down as foreign investors sought a safe haven in  U.S.
treasury securities, raising the price of bonds and thereby lowering yields.
The inflow of foreign funds also bid up the price of the dollar, making U.S.
exports more expensive and imports from Asia cheaper. As a result, the U.S.
through 1998 and 1999 absorbed a record level of imports. The overall strength
of the U.S. economy allowed a real trade deficit of more than $300 billion
while not appreciably slowing U.S. growth. Lower interest rates and low oil
prices for much of 1998 and 1999 boosted domestic sectors, more than
offsetting contraction in the U.S. trade sectors.

Once the affected economies were jump-started by higher export demand, they
provided a large part of the recovery stimulus for each other. Although
problems remain in other countries i.e., the former Soviet Union and parts of
Latin America the contagion of downturn from the Asia crisis is over. By the
end of 1999, Asia and much of the developing world was well on the road to
recovery. Most analysts expect world growth in 2000 to pick up, with
developing countries growing at a 5-percent annual rate about the same growth
rate as before the world financial crisis. Part of the recent oil price surge
was in fact due to increased Asian and developing economy growth. Prospects
are good for continued Asian growth in the medium term that will generally
have a positive influence on U.S. exports.

Strong U.S. Economy to Benefit 
Ag Sector & Nonmetro Areas

The typical U.S. farm business has operated in an extremely supportive
domestic and world economic environment over the last 5 or 6 years. Rapid U.S.
growth that helped to sustain growth in developing countries even as the
European and Japanese economies sputtered supported expanded exports of farm
products and manufactured goods. Oil prices were generally low and farm input
price inflation was quite modest as interest rates remained low. The exchange
rate of the dollar made U.S. farm products quite competitive until the world
financial crisis strengthened the U.S. currency.

Further, an expanding U.S. economy allowed domestic agricultural market (food)
demand to remain strong despite cutbacks in public assistance programs and
falling food stamp allotments. New jobs often provided recipients of these
program benefits with the means to maintain former spending levels for food.

In 1999, U.S. and global economic factors impacting U.S. agriculture were
mixed. First, recovery in crisis-affected countries, expectations of a weaker
dollar in 2000, and stronger world growth helped to keep U.S. farm export
prices from falling even further than they would have as worldwide supplies of
major crops mounted. Second, input price inflation overall was low, as costs
for wages and industrial materials rose more slowly than in 1998. However,
crude oil prices more than doubled from an unusually low level, and diesel
fuel prices rose more than 30 percent from late 1998 to late 1999.

By the last half of 1999, long-term Treasury interest rates remained low (up
just 75 basis points from 1998). But softness in the farm economy and
tightening conditions for credit both the standards to qualify for a loan and
the spread between the prime rate and the rate available to individual
borrowers caused long-term farm interest rates to rise significantly above
1998. Further, the Federal Reserve tightened credit in 1999 to reverse the
easing of credit in late 1998, thereby causing short-term Treasury yields to
rise about 1 percent by late 1999. Short-term credit rates for farmers rose
even more, reflecting the increase in default-risk premium higher premiums
due to higher perceived risk of default which long-term farm rates and other
small business loan rates also confronted.

The situation for farm exports should improve with even stronger world growth
and a further weakening of the dollar as investors move funds to Japan and
Europe, reflecting more robust financial prospects there. Price inflation for
manufactured farm inputs will likely be higher in 2000 than in 1999 as the
lagged effects of higher oil prices work their way into the system, with
higher fuel and fertilizer prices for the entire year. Crude prices are
expected to stay above $20 per barrel, pushing the average price of fuel in
2000 up sharply from the average for 1999 albeit an average that reflected
very low prices early in the year. Fertilizer costs, however, will not likely
move up, with natural gas prices remaining low because of large inventories.

Prospects for farm businesses are mixed. Overall, net farm income is expected
down in 2000, with row-crop producers seeing drops in income although
animal-products producers' income should rise. Off-farm income prospects for
farm households should improve as the expanding economy and continued labor
market tightness make more plentiful and better paying jobs available.

Rising U.S. exports will also benefit nonmetro areas. Nonmetro labor markets,
because of their larger share of manufacturing, mining, and
agriculture-related jobs, are more dependent on exports than metro labor
markets. When crises abroad brought a decline in export growth of U.S. goods
in 1997 followed by a sharp drop in early 1998 nonmetro employment growth
declined along with goods export growth, while metro labor markets were
largely unaffected. 

As goods exports rebounded in late 1998 and as the global financial crisis
abated, the shock to the nonmetro labor market subsided. Employment growth has
since been steady in nonmetro areas, although not as high as metro growth. In
2000, higher world growth and a weaker dollar are expected to improve
prospects for exports of manufactured goods and farm products, generating
additional jobs in nonmetro areas.  

David A. Torgerson (202) 694-5334 and Karen S. Hamrick (202) 694-5426
dtorg@econ.ag.gov
khamrick@econ.ag.gov


AGRICULTURAL ECONOMY
Decline in U.S. Farm Income in 2000 Tempered by Government Payments

The cumulative effect of 4 consecutive years of bumper crops in major
agricultural producing countries is bearing down on U.S. farm income. By
historical standards, this period has been unusually favorable for crop
production. Not only has there been little adverse weather, but rainfall has
generally been abundant and timely. In late 1997 and in 1998, rising world
commodity supplies in the face of weak international demand put downward
pressure on farm prices and reduced the value of U.S. agricultural exports.

At the conclusion of 1999, supplies of most agricultural commodities remain
large, as stocks carried over from 1998 were augmented by large 1999 world
crops. Since little or no growth is expected for farm product demand in the
near term, commodity prices are unlikely to improve unless widespread adverse
weather curtails global production and reduces supplies. In 1998 and 1999, the
U.S. government helped maintain farm income and temper financial hardship for
many producers by enacting legislation to increase assistance to farmers. 

Abundant supplies, low commodity prices, and increased government assistance
provide the context for calendar-year 2000 income forecasts. Net farm income
is forecast at $40.4 billion in 2000, a decline of $7.6 billion from the
preliminary estimate of $48.1 billion for 1999. Net cash income is forecast at
$49.7 billion, $9.4 billion less than the preliminary estimate for 1999. From
a longer term perspective, net farm income in 2000 is forecast to be 88
percent of its 1990-99 average, with net cash income at 90 percent of the
1990-99 average.

The impact of low commodity prices is reflected in a $1.7-billion drop in
total crop receipts from 1999 to $93.3 billion, the lowest since 1994. Year
2000 receipts are forecast down by $2.1 billion for major field crops,
although up $1.2 billion for fruit, vegetable, and greenhouse/nursery
products. Livestock receipts will increase for the second consecutive year to
$96.5 billion as a result of continued growth in the poultry sector and modest
improvement in cattle and hog operations. Dairy receipts are expected to fall
by nearly $2 billion from 1999, reaching their lowest level since 1997. 

Government assistance recently has played a key role in stabilizing gross and
net income for the U.S. farm sector, particularly for grain, soybean, and
cotton farms. For 2000, government payments are forecast at $17.2 billion,
accounting for 8 percent of projected gross cash income. This is a
$5.5-billion decline from 1999's estimated record of $22.7 billion. Continued
low commodity prices for major crop commodities generated a substantial
increase in 1999 loan deficiency payments (LDP's) over 1998 and will continue
to do so in 2000. LDP's are forecast at $7.9 billion for 2000, up from
preliminary estimate of $6.9 billion in 1999 and $1.8 billion in 1998. Some
portion of the 2000 LDP forecast could be taken by farmers as marketing loan
gains which are treated as cash receipts. 

The forecast for 2000 direct government payments also includes $2.8 billion in
emergency assistance from the fiscal year 2000 agricultural appropriations
legislation, in addition to payments under production flexibility contracts,
conservation, and other programs.

Government payments, including additional emergency assistance, were
sufficient to maintain 1998 and 1999 net farm income at, and even above, the
average for the decade. The majority of the payments came from three
government programs: production flexibility contract payments (Agricultural
Market Transition Act AMTA payments), loan deficiency payments, and emergency
supplemental appropriations enacted in October 1998 and again in October 1999.
The forecast for government payments for 2000 is markedly smaller than the
amount paid to farmers in 1999, with the difference largely due to the two
fiscal-year emergency supplemental appropriations. The forecast for 2000
includes modestly declining production flexibility contract payments and
rising LDP's. 

Total farm production expenses, forecast at $192.3 billion in 2000, are
expected to change by less than 1 percent for the third straight year, after
rising more than 4 percent each year from 1993 to 1997. A large part of this
leveling-off in expenses has been due to the fall in cash grain prices, 
resulting in lower feed costs to livestock producers. Total production
expenses in 2000 will equal 84 percent of gross receipts (exceeding 90 percent
of gross receipts less government payments). Operating margins (gross receipts
minus expenses) will be the tightest since the 1980-84 period. 

For farm households, a relatively large decline in 2000 farm income will be
partially offset by increasing off-farm income. Average farm household income
is forecast at $59,350, down from an estimated $61,363 in 1999 but close to
the 1998 level. Farm operators' household income has averaged about the same
as U.S. household income during the past three decades. While earnings from
farming activities have been volatile over time, earnings of operator
households from off-farm sources have been steadily increasing.

Debt Stable but 
Repayment Problems to Intensify

Farm business balance sheets, despite the increase in debt in recent years,
have shown steady improvement throughout the 1990's, especially since 1992.
Equity positions have generally improved, and debt-to-asset ratios have
declined as the increase in farm business debt has been more than offset by
the rise in farm asset value. Farm debt is anticipated to stand at $172.5
billion by the end of 2000, down slightly from 1999. With farm assets forecast
at $1,073.5 billion for 2000, farm equity should reach $901 billion by the end
of 2000. At this level, farm equity would be $7.2 billion above 1999. 

With the reduction in income and narrowing of margins in 2000, farmers will be
managing tighter cash flows. A higher proportion of debt service capacity will
be used, reducing farmers' credit reserves and exposing a larger share of
farms to potential debt repayment problems. The key factor that may contribute
to expected rising debt service problems is lower incomes rather than
substantially rising debt levels or falling asset values.

Farm debt repayment capacity use (actual debt expressed as a percentage of
maximum debt that farmers could service with current incomes) effectively
measures the extent to which farmers are using their available lines of
credit. This ratio indicates that, in 2000, farmers are expected to use more
than 66 percent of the debt that could be supported by their current incomes.
Farmers used about 59 percent of this hypothetical credit capacity in 1998.
The infusion of government payments in 1999 boosted net cash income and
increased the level of debt that farmers could service, which reduced debt
repayment capacity use to 56 percent. While debt repayment capacity use
remains relatively low compared with levels in 1977 through 1985, a period of
economic turmoil in the farm sector, its projected 2000 value will be its
highest level since 1985.

Farm Income Outlook by 
Region & Commodity

The persistence of low commodity prices in 2000 will aggravate cash-flow
problems for farm businesses in several regions. Relative to 1998, the largest
declines in average net cash income are expected in the Mississippi Portal,
Eastern Uplands, Southern Seaboard, and the Heartland (see map, page 20).
Southern areas of the country will be hard hit by continued low prices for
corn and soybeans and dramatic year-over-year price declines for rice and
tobacco. Higher cattle prices and relatively cheap feed should boost average
net cash income in the Northern Crescent, Northern Great Plains, and Prairie
Gateway regions relative to their 1994-98 average. 

In all regions except the Heartland and the Northern Crescent, at least one in
four farm businesses will not cover cash expenses. Relative to 1998, the
largest increases in the share of farms with negative net cash income occur
for the Southern Seaboard and Mississippi Portal (7 percentage points each).
The Eastern Uplands and Heartland regions also experience relatively large
increases in the proportion of farms with negative net cash income (up 6
percentage points each).

A relatively high percentage of farm businesses in the Northern Great Plains
and Prairie Gateway regions have had persistent debt repayment problems. While
the Northern Great Plains has had the highest incidence of debt repayment
difficulty, this situation should improve in 2000. In the Prairie Gateway, 18
percent of farm businesses are expected to have debt repayment problems, a
slight increase over 1998, but well below 1997. A substantial increase in farm
businesses with debt repayment difficulties is expected in the Mississippi
Portal. Its share of 20 percent with debt repayment difficulty would be the
highest of any region in 2000.

Current expectations are for net cash incomes for all farm types to be less in
calendar-year 2000 than in 1999. The story for net cash income is basically
the same for all commodities; a stable or, at best, very modest increase in
livestock receipts will not be sufficient to offset the continued erosion of
crop receipts; an assumed reduction in government payments from 1999 levels;
and a continued modest rise in production expenses.

Reductions in net income will be largest for major row-crop farms, with income
less than the previous 5-year average. Specialty crop and livestock farms will
also experience declines from 1999, but these farms, except hog operations,
should have incomes in 2000 that exceed their 1994-98 average. Farms with the
largest deviation from the 5-year mean will include tobacco, cotton, peanut,
and soybean farms, and general crop farms. The greatest increase in use of
debt service capacity will be among major cash grain farms, especially those
that specialize in production of wheat and corn.  

Mitch Morehart (202) 694-5581, Jim Ryan, David Peacock, and  Roger Strickland
morehart@econ.ag.gov
jimryan@econ.ag.gov
dpeacock@econ.ag.gov
rogers@econ.ag.gov

BOX - FARM INCOME

Loan deficiency payments (LDP's) compensate farmers for the difference between
market prices and Commodity Credit Corporation crop loan rates and essentially
help establish minimum per unit revenue for the applicable commodities. Once
the market price falls below the loan rate, the rise in LDP payments
essentially track the decline in cash receipts, or sales. 
Production flexibility payments and the "market loss" component of emergency
aid, which is generally paid as a proportion of the production flexibility
payments and to the same recipients, serves to stabilize revenues for those
farmers with production flexibility contracts. Conservation and other programs
provide rental income to certain farmers who have contracts under those
programs. In addition, there are disaster payments in the form of indemnities
(to those persons with contracts) and, in 1999, there was a buy-down of crop
insurance premiums charged farmers (i.e., increased subsidy level). The
premium buy-down continues in 2000.


BRIEFS
Specialty Crops: 
Tree Nut Supply Bountiful

Tree nuts are in abundant supply this season. Record world supplies of
almonds, walnuts, and hazelnuts the three most important tree nuts in terms
of global production and trade are pushing total availability of tree nuts to
all-time highs. U.S. crops of pecans, pistachios, and macadamia nuts, although
not records, are also expected to be large.

Record production in 1999 will result in burdensome supplies for farmers
worldwide, as carry-in stocks for the 1999/2000 season (July 1-June 30) were
already above normal for many nut crops. Since many varieties of nuts can
easily be substituted for each other, anticipated large crops and record
supplies for all tree nuts in most major producing countries are keeping nut
prices low overall. Carryover stocks at the end of the marketing season
(summer 2000) also will likely be very high, making supply adequate going into
next season.

The large tree nut supply this season will likely boost consumption and trade
volume in the U.S. and abroad; it will also, however, depress grower prices.
Low prices of domestically produced nuts that accompany the very large supply
will probably induce U.S. importers to purchase larger volumes of nuts to use
in mixed nut packs and other products that utilize nut varieties not grown in
the U.S., such as cashews and Brazil nuts. While peanuts are not a tree nut,
they are substitutable in some nut products, depending on relative prices.

In the U.S., almonds account for about 25 percent of total tree nut
consumption, followed by pecans (22 percent), walnuts (17 percent), pistachios
(8 percent), hazelnuts (3 percent), and all others, mostly cashews and Brazil
nuts (25 percent). Almonds are a bargain compared with pecans and cashews,
which are nearly triple the price at wholesale. Pistachios are nearly twice
the price of almonds, while hazelnuts cost 40 percent more and walnuts 20
percent more.

Large almond production increases in the U.S. and in Spain, coupled with large
stocks of U.S. almonds held in reserve, will push world supplies to record
levels, 30 percent higher than last year. Harvest of almonds which lead other
nuts in world production and trade is forecast at a record 488,000 metric
tons, shelled basis, (about 813,000 metric tons, in-shell basis) in the five
major producing countries this season. U.S. almonds grown solely in
California account for about 77 percent of total world production. Spain is
the second-largest producer (about 14 percent of production), and Italy,
Greece, and Turkey account for most of the remainder. Behind the production
increase, in addition to the crop's cyclical nature, are higher yields from
good weather and continued increases in bearing acreage.

U.S. almond prices have fallen 33 percent since 1996. Increased output in the
other producing countries has reinforced the downward trend in prices. Low nut
prices, however, will encourage higher consumption as well as expand export
demand. In the U.S. domestic market, the world's largest almond market,
consumption is forecast to increase by 6 percent to 450 million pounds in
1999/2000.

Almonds are the top-value U.S. horticultural export, well above wine, the
second most important horticultural export. Larger output, reduced prices, and
a weakening U.S. dollar are forecast to boost U.S. almond exports 13 percent
from last year. Typically, about two-thirds to three-fourths of the U.S.
almond crop is exported, with a value exceeding three-quarters of a billion
dollars in the last few years.

About two-thirds of U.S. almond exports goes to the European Union
(EU) primarily Germany, Spain, and the Netherlands, and about one-sixth is
shipped to Asia mostly Japan and China. Sales to Japan, currently the
second-largest export market after the EU, are expected up 15 percent in
1999/2000, due primarily to increased demand by the chocolate and baking
industries. Exports to China are forecast to nearly triple and perhaps surpass
Japan, India to double, and Korea to grow by one-third.

Shelled almonds, including prepared and preserved, accounted for 97 percent of
total U.S. almond exports in 1998/99. Asia is the largest importer of in-shell
almonds, purchasing nearly 75 percent of U.S. in-shell exports.

Developing new products to boost consumption in the U.S. and abroad is
critical in selling this year's record crop and sustaining higher levels of
use in the future as acreage and production climb. One new product is almond
milk, a lactose- and cholesterol-free nondairy beverage fortified with calcium
and vitamins. In cooperation with USDA's Market Access Program, the U.S.
almond industry is marketing almond milk in Australia and New Zealand. Another
industry effort was to organize consumer-oriented marketing campaigns aimed
at Germany, France, the United Kingdom, and Asia promoting almonds as a
healthy snack.

Walnut production in the six major producing countries is forecast to reach a
record 665,000 metric tons, in-shell basis, for the 1999/2000 marketing
season, up 10 percent from the previous season. China and the U.S. both expect
record crops, and each will account for about 38-40 percent of world
production. Acreage is fairly stable in the U.S., but is increasing in China.
The higher production is mainly the result of weather-enhanced yields,
stronger varieties, and a larger share of bearing age trees. U.S.
exports nearly half of domestic production are expected to hit a record, and
will total about 4 times the quantity exported by China.

Record world walnut output, coupled with a record world supply for all tree
nuts, will likely decrease already low walnut prices. U.S. walnut prices have
declined 36 percent since 1996. However, as with almonds, larger supplies and
anticipated lower prices will spur world exports and consumption. In
1999/2000, world exports are forecast to increase 18 percent, and world
consumption to rise 8 percent. Most of this growth is attributable to the
U.S., which will continue to dominate markets in Europe. Exports from China
are bound mainly for markets in the Far East and the Mideast, and are expected
to remain unchanged, as strong domestic demand commands the largest share of
production.

Working with the Market Access Program, the U.S. walnut industry is attempting
to expand sales abroad beyond the traditional holiday season by promoting
walnuts as a year-round healthy food in the home and by encouraging additional
usage in restaurants and bakeries. The strategy is aimed mainly at the three
largest markets for U.S. walnuts Germany, Japan, and Spain where U.S. exports
in 1998/1999 dropped below the previous three seasons. Although U.S. exports
are expected to reach a record high and domestic consumption is forecast up,
carryover stocks at the end of 1999/2000 will likely be at very high levels,
keeping pressure on prices.

Hazelnut output in the four major producing countries is forecast to decrease
a net 3 percent in 1999/2000 to 770,000 metric tons, in-shell basis. Marginal
production decreases in Turkey and Italy the two largest producers more than
offset significant increases in Spain and the U.S. Nevertheless, total world
hazelnut supply is up 15 percent from last year, due mainly to substantially
higher carryover stocks in Turkey.

In-shell use of tree nuts is very popular in the Mideast and Mediterranean
regions, with hazelnuts preferred over almonds due to their ready availability
and lower prices. Although relatively low hazelnut prices are expected to
encourage consumption and increase trade, U.S. shippers will face increased
international competition from the lower priced Turkish product. Hazelnut
prices are also affected by prices of other tree nuts, particularly the less
costly almonds and walnuts.

Hazelnut production in Turkey is so substantial in most years that it affects
export prices of tree nuts worldwide. Turkey typically produces 70 percent of
world hazelnut production and accounts for 80 percent of trade. In the past
few years, the Turkish government has tried unsuccessfully to implement
incentive programs to shift acreage out of hazelnut production in order to
reduce the persistent glut and raise grower prices. Yet high support prices in
Turkey still continue to attract producers, contributing to expanded hazelnut
plantings and production.

While there are no EU direct price support program for tree nuts, the EU is
taking steps to heighten the competitiveness of member countries' tree nut
producers. 

The EU has implemented an improvement plan in Spain's hazelnut and almond
sectors that provides a stipend to growers to plant improved, higher yielding
varieties. EU producer organizations are concerned that this program may end
in 2000.  

Doyle Johnson (202) 694-5248
djohnson@econ.ag.gov


COMMODITY SPOTLIGHT
Declining Cigarette Consumption Follows Price Hikes

Wholesale cigarette prices increased dramatically on the signing of the
November 1998 settlement between cigarette manufacturers and most state
attorneys general. The initial increase, 45 cents per pack on the day the
settlement was announced, was the largest in history and was followed 9 months
later by an 18-cent-per-pack increase. Together they produced a 50-percent
increase in wholesale prices and an estimated 6 percent slide in cigarette
consumption to about 435 billion pieces, the lowest since 1957. This drop
follows 1998's 3-percent decline in U.S. cigarette consumption. Further
decreases in cigarette consumption are likely as prices continue to increase,
excise taxes rise, and restrictions expand on smoking in public places. 

In addition to paying higher prices imposed by cigarette manufacturers,
partially to cover expenses of the settlement, cigarette consumers have faced
numerous state tax increases in recent years. Furthermore, the 24-cent per
pack Federal excise tax on cigarettes increased 10 cents in January 2000, and
will rise another 5 cents per pack in January 2002, to a total of 39 cents per
pack. The Consumer Price Index (CPI) for cigarettes indicates that retail
prices in November 1999 were 32 percent higher than a year earlier, compared
with the 1998 price rise of 12 percent. 

The price increase of November 1998, combined with lagging exports, set the
stage for reduced domestic consumption and output. Total U.S. cigarette
production was 679.7 billion pieces in 1998, down 5.5 percent from 1997
because of lower exports and shrinking U.S. consumption. In preliminary
estimates for 1999, production will continue 1998's slide. Output of
cigarettes is expected to drop 7 percent to 635 billion pieces, reflecting
continuing declines in consumption and exports. 

The U.S. is the world's largest exporter of cigarettes, and for many years
burgeoning exports offset declines in domestic consumption. However, export
volume that peaked at 243 billion pieces in 1996 has fallen to an estimated
170 billion in 1999. Cigarette exports are falling as U.S. manufacturers
transfer production of cigarettes to overseas sites to reduce costs and as
consumption declines in some of the major U.S. export markets as anti-smoking
activity increases. 

January-September 1999 cigarette exports were 115.7 billion pieces, compared
with 157.1 billion during the same period of 1998. During the first 9 months
of 1999, shipments to Japan were steady, but shipments to the European Union
(EU), the countries of the former Soviet Union, and some Asian markets
plummeted. Shipments to the EU dropped to 17.6 billion cigarettes, less than
half the level of the same period in 1998 and 70 percent below the high of
59.1 billion during January-September 1995. Exports to Turkey were 67.8
million pieces in 1999, compared with 4.5 billion during 1997. 

Imports account for a tiny proportion of total U.S. cigarette consumption.
Cigarette imports grew from 3.2 billion pieces in 1997 to 4.3 billion in 1998,
due primarily to increased grey market shipments legally exported U.S.
cigarettes that are shipped back for sale in the U.S. Grey market cigarettes,
despite duties and taxes, are still cheaper than cigarettes manufactured for
sale in the U.S., because of their lower initial price. Manufacturers charge
wholesalers less for cigarettes destined for export than for those to be sold
domestically. Imports are expected to advance again in 1999 to nearly double
1998 levels. 

Tobacco Leaf Crop & Exports 
Reflect Drop in Cigarette Use 

About half of tobacco grown in the U.S. is used in domestic cigarette
production. Flue cured and burley tobaccos are the main components of
cigarettes. The typical cigarette contains 34 percent U.S. flue cured, 22
percent U.S. burley, and the remainder is imported flue cured, burley, and
oriental leaf (oriental leaf is not grown in the U.S.). For 1999, flue-cured
acreage declined 64,000 acres from the previous year while burley acreage slid
less than 2,000 acres. The December 1 production forecast for all tobacco is
1.28 billion pounds, 14 percent below last year. During the past marketing
year (1998/99), about 63 percent of U.S.-produced tobacco was used for
domestic manufacture and the remainder exported. Estimated use of U.S. leaf
totaled 1.45 billion pounds, 4 percent below 1997/98. For 2000, flue-cured
leaf manufacturers' purchase intentions are 286 million pounds, down from
1999's 327 million pounds. 

As cigarette output has shrunk in recent years, manufacturers have used less
leaf. Purchase intentions have plummeted and loan stocks have accumulated.
Oversupply was worsened by weak export demand. The result has been lower
marketing quotas (the amount growers are allowed to sell) for flue-cured and
burley tobacco. Quotas dropped substantially in 1999 as manufacturers lowered
purchase intentions in response to declining cigarette consumption in the U.S.
and lower export volume. Flue-cured basic quotas slipped 18 percent to 667.7
million pounds, and burley quotas fell 29 percent to 450.6 million pounds. 

The value of U.S. tobacco leaf and product exports in 1998/99 (July-June) was
$5.7 billion, down from $6.5 billion the previous year. Imports were valued at
$1.2 billion, resulting in a tobacco trade surplus of $4.5 billion.
Unmanufactured tobacco export value totaled $1.4 billion, about the same as
1997/98, while product exports slipped nearly half a billion dollars to $4.3
billion. Unmanufactured tobacco imports were $372 million, about 23 percent
below the previous year. Lower cigarette exports were the main factor in the
declining tobacco trade surplus. 

The proportion of imported tobacco used in U.S. manufactured cigarettes has a
significant impact on tobacco growers. Imported leaf for cigarettes consists
of flue-cured, burley, and Oriental leaf types. Flue-cured and burley imports
are generally of lower quality and price than those varieties produced in the
U.S. and are substituted in blends to reduce manufacturing costs.  

In 1998, imported leaf made up 43.4 percent of U.S.-manufactured cigarettes,
compared with 44.8 in 1997 the highest level ever. The import share of the
blend began rising in the early 1990's, along with the popularity of discount
cigarettes that use greater proportions of imported leaf to reduce costs.
Since inception of the Tariff Rate Quota (TRQ) for tobacco leaf in 1998,
imports have risen because the TRQ is high enough that it does not constrain
imports. Furthermore, leaf that is imported and subsequently exported in the
form of products is subject to a refund of most of the duty. Previously,
U.S.-manufactured cigarettes could contain no more than 25 percent imported
leaf. 

Flue-Cured Auction Sales Plummet

Flue-cured auctions for 1999 ended on November 16, 1999. Sales ran for 56
days. Producer sales at auction totaled 645 million pounds, compared with 815
million pounds in 1998. Auction prices this season averaged $1.74 a pound
compared with $1.76 last year. The 170-million-pound decline in producer sales
of flue-cured leaf is a result of the sharp decline in the flue-cured quota in
1999 671.5 million pounds, down from 819.6 million pounds in 1998. Cash
receipts for flue-cured growers are expected to be 22 percent below last
year's.  

Hurricane Floyd interrupted the 1999 marketing season, and flue-cured tobacco
sales were cancelled for 1 week in late September. Ultimately, much of the
damage caused by the hurricane and subsequent flooding was to tobacco that had
already been purchased and was being processed or in storage. Cooperatives
purchased 136.4 million pounds, 21 percent of the sales. Last year, 82.4
million pounds (10 percent) went under loan. 

Flue-cured quality in 1999 suffered due to hot, dry weather in much of the
production area from the time of transplanting until early June. In addition,
a third of the Georgia crop has been damaged by tomato-spotted-wilt virus.
U.S. flue-cured production is estimated at 658 million pounds.  

Use of foreign-grown flue-cured leaf and stems declined in 1998/99. On July 1,
1999, stocks of foreign-grown flue-cured were 16 percent lower than a year
earlier. Stocks declined because cigarette manufacturers reduced cigarette
leaf imports, drawing down stocks of foreign leaf instead. 

Burley Crop Down Slightly 

The December 1 forecast of the 1999 U.S. burley crop is 545.4 million pounds,
down about 8 percent from last year. Quota cuts reduced planted acres.
Moisture was adequate during the spring, but extremely dry weather during late
July and August lowered yields. Yields for the 1999 crop are expected to
decrease slightly from last season. 

Marketings in 1999/2000 are forecast at about 536 million pounds, compared
with 589 million a year earlier. The effective quota of 690.1 million pounds
will likely be under-produced by less than 25 percent, compared with a
shortfall of nearly 40 percent last season. Since 1985, marketings have
consistently fallen short of the effective quota, especially in Tennessee.
Beginning in 1991, the quota law was changed to permit greater use of burley
quota, including belt-wide sales of burley quotas within counties, and lease
and transfer of quotas across county lines in Tennessee. These changes make it
easier for quotas to be aggregated into economically feasible operations. 

U.S. auction sales began on November 29 and were open for 13 sales days before
the Christmas break. During the first 8 days, 235 million pounds were sold for
an average price of $1.90 per pound. Loan takings were 76 million pounds, or
33 percent of producer marketings. The 1998 crop sold for an average $1.903
per pound, up 1.8 cents per pound from the previous marketing year's $1.885.
In 1999, price supports will average $1.789 per pound for all burley grades, a
gain of 1.1 cent per pound. The no-net-cost fee (an assessment paid by growers
and buyers to cover costs of the price support programs) is 3 cents per pound
each for growers and purchasers. Burley producers, like flue-cured growers,
will likely face a cut in cash receipts. 

Domestic use of U.S. burley in 1998/99 is expected to slide about 8 percent
from 1997/98 to about 350 million pounds, a much smaller decline than the
previous year's. About 63 percent of the crop will be used for domestic
cigarette production, 34 percent exported, and the remainder used for other
products, primarily smoking tobacco. Lower cigarette output and reduced leaf
exports contributed to the decrease in use. Carryover of U.S.-grown burley is
expected to rise about 6 percent as marketings exceed use. For the 1998/99
marketing year, exports should total 168.7 million pounds, just above 1997/98,
but short of the previous year's record 209.5 million pounds. 

The November 1998 Global Tobacco Settlement between cigarette manufacturers
and state attorneys general is having a significant effect on tobacco growers.
Cigarette manufacturers increased prices to cover costs of the settlement,
driving consumption down. Declining cigarette consumption caused manufacturers
to reduce cigarette production and purchases of leaf. Unless higher exports or
reduced imports of leaf compensate to maintain total use of tobacco, the USDA
tobacco program will automatically stabilize the market by reducing marketing
quotas for growers, preventing an oversupply which would drive prices down.
Although prices are steadied for the next year, nothing can compensate for the
underlying slide in overall demand for leaf and the inevitable reduction in
grower incomes in the longer run.  

Thomas Capehart, Jr. (202) 694-5311
thomasc@econ.ag.gov

BOX #1 - COMMODITY SPOTLIGHT

Tobacco Program Quotas & Price Supports

The USDA tobacco program is designed to stabilize and enhance grower incomes
through a system of marketing quotas and price supports. Operating expenses of
the program are paid from assessments levied on producers and buyers for each
pound of tobacco sold under the program. Marketing quotas (the amount growers
are allowed to sell) for flue-cured and burley tobacco are determined by
manufacturers' purchase intentions, loan stocks, exports, and some discretion
by the Secretary of Agriculture. Manufacturers' purchase intentions are the
amount of tobacco leaf companies commit to buying before the marketing year
begins. Companies are penalized if they do not purchase at least 95 percent of
the amount declared in their purchase intentions. Loan stocks are the tobacco
stocks held by grower cooperatives just prior to the quota determination. The
export component is the average of 3 previous years' exports. The sum of these
components can be adjusted as much as 3 percent, up or down, by the Secretary
of Agriculture. 

The national quota for a given type of tobacco is divided among growers in
proportion to the share of the total quota they farm. Individual growers can
market up to 103 percent of their quota without penalty. Individual grower
over-marketings up to 103 percent and under-marketings down to 97 percent are
carried forward to the next marketing year. 

In addition to restricting the quantity of tobacco marketed, the USDA tobacco
program also provides a support price (the loan rate) for each grade of
tobacco. The overall support price for flue-cured and burley tobacco is the
annual flue-cured and burley price support for the preceding year adjusted by
changes in the 5-year moving average of market prices (omitting high and low
years) and changes in the cost-of-production index. Costs include general
variable expenses directly related to tobacco production. The Secretary can
set the price support between 65 and 100 percent of the calculated change, as
price supports vary by the grade of leaf. The weighted average of the price
support for each grade within a type is equal to the overall support price for
the type of leaf. 

BOX #2 - COMMODITY SPOTLIGHT

Tobacco Production Contract Proposal

Prior to the 1999 marketing season, Philip Morris proposed a system of
contract purchases for leaf tobacco. The company presented the plan as a way
to ensure the availability of U.S.-grown leaf of the type and quality it
requires to manufacture cigarettes. It offered to buy, under a 3-year rolling
agreement, all the tobacco a grower could produce at a predetermined price
based on stalk position, grade, and quality. Philip Morris would communicate
with the grower regarding quality and ways to increase farm productivity.
Included was the firm's commitment to enter into contracts with large and
small growers in all flue-cured and burley production areas. Warehouse owners
would be compensated for receiving and processing tobacco produced under
contract. 

The proposal was dropped after growers indicated a strong preference for the
current auction marketing system. However, given trends in other commodities,
contracting arrangements for leaf tobacco may receive further consideration in
the future. 

The future of the tobacco program under production contracts would be
uncertain. Tobacco sold in this way bypasses the price support components of
the program. Price support is only available to growers who sell at auction.
Growers remaining in the program could be burdened with larger no-net-cost
assessments if costs of maintaining large loan stocks were spread among fewer
growers. 


WORLD AGRICULTURE & TRADE
Agricultural Trade & the 1997-99 International Financial Crises

The 1997-99 international financial crises that began in parts of Asia and
spread to the former Soviet Union and Brazil led to lower currency values,
reduced economic growth, and higher interest rates in crisis countries, and
affected agricultural prices, production, consumption, and trade worldwide.

While currency depreciation helped some agricultural producers in the crisis
countries by making their products more competitive in export markets,
depreciation generally hurt crisis-country consumers as domestic prices
climbed. Expanded agricultural production and reduced imports improved the
short-term agricultural trade balance of crisis countries, but long-term gains
in competitiveness will only come if the improved trade relationships last as
the crises wane. For the U.S., the financial crises and depressed global
commodity prices reduced agricultural exports and decreased the agricultural
trade surplus, but lowered costs for imports and helped to keep inflation in
check.

Prior to 1997, the Asian economies had experienced a decade of extraordinary
growth. Bank lending was the major vehicle for financing the economic
expansion, and a large part of the investment funds came from abroad. However,
the rapid growth was fueled mainly by increases in the quantity of inputs used
in production (primarily labor and capital) rather than a rise in
productivity. Lagging productivity growth diminished the longterm potential of
investment in these economies and reduced the likelihood that returns would be
sufficient to repay lenders. 


Weaknesses in the financial and banking systems (including corruption and
favoritism in lending), high dependence on short-term foreign debt denominated
in dollars, and insufficient financial oversight increased the vulnerability
of the crisis countries. As concern over the viability of bank lending
mounted, weaknesses in the financial and banking systems combined with
investor panic to create a situation akin to a bank run, triggering capital
flight (particularly foreign capital) and plunging equity (stock) prices.
Central banks in the crisis countries depleted foreign reserves trying to
defend fixed exchange rates of the affected countries in the face of growing
capital flight. Rapidly declining reserves further hurt investors' confidence
and put more pressure on exchange rates. The deteriorating situation became a
crisis in summer 1997.

The financial and economic consequences for crisis countries were severe:
35-75 percent depreciation in currencies, 2-14 percent reductions in income,
and 6-47 percent rises in interest rates during 1997-99. The financial turmoil
that erupted in Thailand in July 1997 and subsequently spread to other
countries set back world economic growth and trade.

This article is based on a study by USDA's Economic Research Service (ERS)
that details the impacts of economic upheaval on a group of crisis
countries Thailand, Indonesia, South Korea, Russia, and Brazil and on a
selected group of noncrisis countries China, Japan, Taiwan, and the U.S.

Crisis & Contagion

The most immediate effect of large-scale capital flight was major depreciation
of crisis countries' currencies. Currency depreciation drove up import prices
for consumers and producers in the crisis countries, and fueled economywide
inflation. Producers of primary tradable commodities that did not rely heavily
on imported inputs for production tended to benefit from currency depreciation
and higher domestic prices, while producers of high-value-added products who
depended heavily on imported inputs and borrowed capital saw costs escalate.

Consumption effects were more severe in the original crisis countries in this
study Korea, Indonesia, and Thailand because they were the first to suffer
rising domestic prices and significant declines in income and wealth. In
Korea, for example, real gross domestic product (total goods and services)
fell 5.8 percent in late 1997 through 1998, unemployment rose from 2 percent
to 6.5 percent, and consumption expenditures declined almost 2 percent as many
consumers lost income and wealth from across-the-board salary reductions and
plummeting stock-market values. For noncrisis countries, the economic effects
of the crisis were generally not as severe, although the extent depended on
their economic conditions at the outset.

The economic crises and depressed global commodity prices adversely affected
U.S. agriculture and other trade-dependent sectors, although the employment
and income effects were less long-lasting and severe than during the 1980's
developing country debt crisis. Crisis countries' demand for U.S. products
fell overall, but the decline in the volume of U.S. agricultural exports to
Asian countries was offset partly by an increased volume of exports to
noncrisis regions, especially NAFTA trading partners. North America is close
to surpassing East Asia for the first time as the number-one regional market
for U.S. food and agricultural exports.

While lower U.S. agricultural exports and higher imports narrowed U.S.
agricultural trade surpluses, U.S. market share was essentially stable for
most commodities, in volume terms, in major markets such as Japan. The decline
in total value of agricultural exports down 15 percent in fiscal year (FY)
1999 from FY1997 was predominantly a price phenomenon, caused by large
supplies from major exporting countries along with weakened demand from
crisis-affected countries. The net effect on U.S. producers' farm income was
negative.

The effects of exchange rate changes on commodity prices for U.S. exports
depended on how quickly and completely price impacts were passed through to
producers and consumers (i.e., exchange rate pass-through). The degree of
exchange rate pass-through is specific to a commodity and depends on factors
such as competitiveness of the industry, substitutability of the product, and
U.S. share of the market in a given country. For example, the response of
prices in the Japanese import market to changes in dollar/yen exchange rates
was relatively high for U.S. corn and soybeans the U.S. captures a large
share of the import market for these relatively homogeneous
commodities compared with pork and poultry in which the U.S. is less dominant
in Japan.

Agricultural Sector
Adjustments

The crises affected agricultural production and prices, consumption, and
trade.

Production and prices. Higher domestic prices (in domestic currency) as a
result of currency depreciation during the early stage of the crisis led to an
increase in commodity production in Brazil, Indonesia, and Thailand. Most
notable was increased output of primary commodities, whose prices rose more
than prices paid for inputs. In Brazil, for example, farmers benefited from
higher prices in terms of the local currency (the real) when domestic live
poultry prices rose in relation to production costs (mostly corn), leading to
a 5-percent increase in poultry production after the Brazilian crisis began in
January 1999. 

The 1997-98 Asian crisis appeared to stop the rise of wage rates and slow the
exodus of labor from farms. Farming became a more attractive alternative when
jobs in cities became hard to find, and rising domestic prices for farm
products provided an incentive for people to move back to farms and rural
areas. The financial turmoil reduced wage costs in both rural and urban
sectors in Korea, Thailand, and Indonesia.

Negative effects on production occurred when prices for output did not rise
sufficiently to offset increased input prices. For some farm commodities
heavily dependent on imported inputs such as fertilizer, feed, seeds, or
chemicals, lower currency values led to higher costs of production, resulting
in a cost-price squeeze for producers in some sectors, such as textile
production in Thailand and poultry and textile production in Indonesia. 

Higher interest rates adversely affected agricultural production in some
countries at the early stage of the crisis. In Korea, for example, as
livestock producers anticipated higher interest rates combined with higher
feed prices from the depreciated Korean won, Korean livestock producers rushed
cattle to market for slaughter in December 1997. As a result, beef production
temporarily increased and prices declined.

Consumption. Consumption of agricultural commodities in crisis countries
declined because of higher prices for domestic and imported goods, lower
income from slowed economic growth, and general inflation brought on by
currency depreciation during the crises. The annual inflation rate at the peak
of the crisis in Thailand was 8 percent, as high as 70 percent in Indonesia,
and nearly 8 percent in the first 5 months of Brazil's crisis.

Higher food prices and lower income induced diet changes and in some cases
changed consumers' buying strategies, at least in the short run, in many
affected countries. Indonesian consumers substituted cheaper tofu protein
products for expensive meat, causing soybean imports to increase and meat and
corn imports to decline. Wheat products such as bread had been a popular item
among Asian consumers. After the crisis, as the cost of wheat and wheat flour
increased, Asian consumers switched to cheaper sources of carbohydrates such
as rice. Indonesian per capita wheat consumption, for example, fell 39
percent. Even in noncrisis countries like Japan, consumers turned to lower
quality (and lower priced) cuts of imported beef.

Trade. Currency depreciation raised prices of imports and exports in terms of
domestic currency, but lowered prices of exports in terms of foreign currency.
Export prices rising more than import prices makes a country more competitive
in international trade, and depreciation may thus have a beneficial impact on
its balance of trade. However, the effect may vary among sectors. In Korea,
for example, export prices overall increased more than import prices, but for
agricultural commodities, export prices increased less than import prices,
because of the worldwide drop in agricultural commodity prices.

Trading firms adjusted their mix of goods when currency depreciation raised
prices. Sheep hides and skin or low-quality hides and skin were substituted
for higher quality cattle hides and skins. In Indonesia, cheaper and lower
quality Vietnamese rice (25-percent broken) substituted for Thai rice
(5-percent broken). Polyester replaced cotton in shipments to Thailand and
Korea. Brazilian importers switched from expensive milled rice to paddy rice,
raising paddy rice imports by 244 percent during January-June 1999. For
noncrisis countries such as Japan, the effects of reduced global commodity
prices for some imported commodities outweighed the exchange-rate effects of
the lower yen, benefiting importers.

High credit costs in some countries hindered export potential, particularly
for those export commodities that depended on imported inputs such as cotton,
feeds, and hides. Textile industries in Indonesia and Thailand were
particularly hard hit as credit constraints set back their export potential.
Indonesia's poultry industry collapsed due partly to expensive credit and high
costs of imported feeds.

The value of U.S. agricultural exports dropped $8.3 billion  about 15
percent from FY1997 to FY1999. In volume terms, the decline in exports to the
crisis-affected countries was almost offset by increased exports to other
regions, particularly NAFTA countries. This suggests that the decline in value
was due mainly to lower export prices, in large part from record world grain
and oilseed output that contributed to depressed global prices. U.S.
agricultural imports also increased during the same period, reflecting the
robust U.S. economy and growing demand for variety and off-season supply of
horticultural and other products.

Changes in agricultural policy in response to the crisis affected trade.
Elimination of the Indonesian monopoly agency (BULOG) that has authority over
imports of rice, wheat, soybeans, and garlic was a direct result of the
financial crisis and affected trade of those products. The International
Monetary Fund (IMF) along with other organizations arranged multibillion
dollar financial aid packages for Indonesia, Korea, Thailand, Russia, and
Brazil that spelled out conditions to be met by recipient countries. As part
of its $42-billion IMF-led financial aid package, Indonesia agreed to reduce
import tariffs on food and to open its market for rice, wheat, soybeans, and
garlic. But BULOG still retains a key role in rice purchasing, distribution,
and inventory management. The U.S., as well as other developed countries,
responded to the crises in Asia and other areas by providing financing to the
crisis-affected countries to help them pay for imported agricultural products.

Varying Impacts
Of the Crises

The international financial crises during 1997-99 were severe for economies of
the directly affected countries. The impacts of the crises vary among crisis
and noncrisis countries, as well as among different economic sectors within a
given country. The ERS study indicates that market impacts in the crisis
countries from significant depreciation of their currencies, accompanied by
changes in interest rates and income, depended on existing economic
conditions, government policies, and the financial and banking institutional
framework prior to the crisis. 

Impacts on agricultural sectors in the crisis countries were mixed, raising
production of some commodities and lowering others, and were also a function
of prevailing economic conditions, agricultural policies, interest rates,
price effects of exchange rate changes, and credit conditions within
individual countries. Production of some primary agricultural commodities
increased, providing an incentive for some farmers to stay on the farm and
motivating some workers in the cities to trade job scarcity for the pursuit of
agricultural activities in rural areas.

Currency depreciation boosted agricultural exports from crisis countries by
making prices more favorable to foreign purchasers, but imports decreased as
income and wealth declined and goods from abroad became relatively more
expensive than domestic products. Faltering demand in the crisis countries
reinforced the general downward trend of world agricultural prices,
contributing to a reduction in value of U.S. agricultural exports and a
narrowing of the U.S. agricultural trade surplus.

The effects of the crises on U.S. agriculture were determined by the existing
structure of industries, relative use of capital and labor, and the nature of
competition with other countries while the crises persisted. While the
financial crises in Asia, Brazil, and Russia have had some impact on U.S.
agricultural trade, export volume has remained fairly steady as the U.S. has
been shifting to less reliance on Asia and toward greater reliance on NAFTA
trading partners as a market and supplier of imports. The value of U.S.
agricultural exports fell significantly, largely from price declines as a
result of record world grain and oilseed production.

The value of Asian currencies stabilized in 1998 and interest rates have since
declined, but crisis-country economies continued to contract through the end
of the year. After 2 years of setbacks, some crisis economies finally started
to turn the corner in 1999, with South Korea and Thailand leading the
recovery. With increasing economic growth in Asia, the market for food and
agricultural products will once again grow. The volume of U.S. agricultural
exports is expected to rise in FY2000, but value is expected to remain flat at
$49 billion.  

Suchada Langley (202) 694-5227
slangley@econ.ag.gov

An International Agriculture and Trade Report, "International Financial Crises
and Macroeconomic Linkages to Agriculture," will be published by ERS in winter
1999/2000.


FARM & RURAL COMMUNITIES
A Safety Net for Farm Households?

Current low prices for key farm commodities, combined with the 1996 Farm Act's
lessening of farm sector reliance on government programs, are generating
fundamental questions about the ultimate goals of farm policy and about
alternative farm safety net concepts. Most discussions of the farm safety net
issue focus on traditional farm program instruments, such as crop insurance
and direct payments. While these policy tools provide income support to
production agriculture the farm business their rationales are unlike most
other forms of government support to individuals, which focus on the economic
circumstances of households. 

This article provides a general illustration of several scenarios for
government assistance to agriculture, drawing on Federal programs that assist
low- and  middle-income households and that are based on the concept of
ensuring some minimum standard of living. A review of current Federal
assistance programs reveals a variety of ways to provide a safety net using
this concept. Guided by these examples, USDA's Economic Research Service (ERS)
constructed three scenarios for assisting farm households, based on different
definitions of minimum standard of living: 1) regional median household
income, 2) 185 percent of the poverty line, and 3) average household
expenditures. 

The costs of the three scenarios in 1997, a relatively good year for
agriculture, were measured as the cumulative difference between each farm
household's income (which includes any direct government payments) and these
thresholds. A fourth scenario is presented, based on the amount of
compensation necessary to ensure that self-employed farm operators receive an
adequate return to their labor and management. 

Any discussion of government programs that assist farmers would involve not
only a consideration of policy goals but also a recognition of the
heterogeneity of the farm sector. There is no representative farm, and program
impacts would vary depending on various farm characteristics. 

To capture the economic and geographic diversity of today's agriculture, ERS
has already developed a farm typology (AO November 1999) and a regional
segmentation (AO April 1999). The farm typology (see box below) considers not
only the size of the farm business, but also whether farming is the primary
occupation of the operator; the regional scheme reflects geographic
specialization in commodity production. Using these farm classification
schemes, ERS compared the four alternative safety-net scenarios in terms of
cost, distribution of farm household benefits, and rate of qualification for
assistance, and contrasted the scenarios with the amount and distribution of
actual direct government payments to farmers in 1997. The scenarios make no
assumptions about whether safety-net payments are a substitute or an addition
to current farm program payments.  

The first three safety-net scenarios based on thresholds of regional median
household, percentage of poverty line, and average household
expenditures were applied to roughly 1.7 million farm households (80 percent
of total farms) identified in USDA's 1997 Agricultural Resource Management
Study (ARMS). Operations classified in the ERS farm typology as retirement
farms and very large family farms (gross sales of $500,000 or more) are not
considered. The former group is not as actively engaged in farming, while the
latter tend to support more than one household at income levels well above the
thresholds used here.

The fourth scenario constructed by ERS based on compensation for farm labor
and management is limited to operators who identify farming as their primary
occupation and whose farm businesses are organized as sole proprietorships.
This group included about 700,000 farm businesses in 1997 (36 percent of total
farm businesses). 

While this study considers the impacts on farm types and on regions
separately, the information is aggregated by region, and the distribution of
farm types within regions can partially explain any disparity in the regional
impacts for a given scenario. The analysis presented here does not consider
implementation costs nor any secondary costs that may arise from the negative
incentives created by programs employing similar bases for support. No
adjustments or assumptions are imposed on existing farm programs. Farm
household income is defined here on a before- tax basis.    

Scenario 1: 
Regional median household income

Safety-net costs for Scenario 1 are based solely on bridging the gap between
median household incomes in each region and actual farm household income that
falls below the median. The median U.S. household income in 1995 was $35,050,
based on data from the Bureau of the Census. County incomes from which the
U.S. median is derived were weighted by the number of county households and
averaged to obtain regional median income estimates. The Consumer Price Index
(CPI) was used to adjust these estimated regional median household incomes to
1997 values. Costs and distribution of benefits are estimated by farm type and
region for 1997.

Annual costs of a farm safety net based on median regional household income
are estimated at $12.5 billion for 1997 ($17,275, on average, per qualifying
household). The farm typology group that would receive the majority of
benefits are the limited-resource and the farming occupation, lower-sales farm
households. Costs of this safety net scenario were lowest for the large family
farm typology group, totaling about $260 million.

While each farm typology group contained farms with incomes below the safety
net threshold, the proportion that would qualify for assistance varied
greatly. For example, nearly all limited resource farm households qualified
for assistance using this safety net measure. In contrast, only 17 percent of
large family farm households qualified. More than one in three farms
designated as farming occupation, higher sales qualified for assistance,
although closing their gap costs less than for the residential lifestyle
group, where only 29 percent qualified for assistance. The costs of ensuring a
minimum standard of living depend on both the number of households that
qualify for assistance and the magnitude of difference between their household
income and the threshold level.

Costs for the regional median household income scenario were highest in the
Northern Crescent and Eastern Uplands regions (where limited resource and/or
farming occupation, higher sales farms are numerous) and the Heartland region
(the most farm populated), which together accounted for almost 60 percent of
total safety net costs. Safety net costs were lowest in the Basin and Range
region, although a high proportion of farm households in this region qualified
as a result of the low household income of residential lifestyle farms in that
region. The high share of qualifying farm households largely reflects reduced
opportunity in the Basin and Range region's nonfarm economy, because for the
majority of U.S. residential lifestyle farm households, off-farm income more
than offsets any negative farm income. In 1997, only three regions the
Northern Crescent, Southern Seaboard, and Basin and Range had 50 percent or
more of farms qualifying for assistance using this safety net measure.

Scenario 2: 
185 percent of the poverty line

Several Federal assistance programs target households with incomes less than
185 percent of the poverty threshold, including the Supplemental Nutrition
Program for Women, Infants, and Children (WIC) and the National School Lunch
and School Breakfast Programs. 

The poverty line for a family of four (the size of the average farm family)
was $16,400 in 1997; 185 percent of this amount is $30,340. Safety net costs
for Scenario 2 are based on bridging the gap between 185 percent of the
poverty level and the actual income of each farm household that falls below
this level in each farm type and region. 

The annual costs of this safety net scenario are estimated at $7.8 billion for
1997 ($15,120, on average, per qualifying household). With the threshold about
$8,000 less than for Scenario 1 (regional median household income), costs in
Scenario 2 were nearly $5 billion less. Under Scenario 2, about 514,000 farm
households would receive assistance, compared with almost 730,000 households
with the threshold of regional median household income. 

As in Scenario 1, the bulk of benefits under this scenario would accrue to
farm households in the limited resource and farming occupation, lower-sales
groups. These two typology groups have the highest proportion of farms that
qualify for assistance, 96 percent and 45 percent, respectively. 

Average cost per recipient is highest for the limited resource and large
family farm classifications, each having costs at over $18,000 in 1997. This
result may be indicative of the chronic nature of low household income for
limited resource farm households, while more reflective of a short-term cash
flow problem of the farm business for the large family farm households, all of
which depend on farming as their principal source of income and are more
susceptible to farm business losses resulting from poor weather and other
factors.

The regional concentration of costs is similar to results for the median
household income safety net. Three regions the Heartland, Northern Crescent,
and Eastern Uplands account for over 50 percent of total costs for 1997. The
Basin and Range, Northern Great Plains, and Mississippi Portal Regions were
the lowest cost regions. The low cost for the Northern Great Plains was
surprising, given that this region had the largest share of farms classified
as farming occupation, lower-sales, and the lowest average household income at
$38,911 in 1997. However, many qualifying farm households in this region had
income in 1997 that was not very far below the 185 percent of poverty
threshold level.

Scenario 3: 
Average adjusted expenditures

Safety net costs for Scenario 3 are based on the gap between average adjusted
U.S. household expenditures and the actual income of each farm household that
falls below that threshold. U.S. household expenditures averaged $33,797 in
1996, according to the Consumer Expenditure Survey. However, housing and
transportation expenditures incurred by farm households are about half those
incurred by U.S. households. To reflect this, average U.S. household
expenditures were adjusted to $25,863 for this study. This adjustment does not
imply that farm households spend less on housing and transportation than other
households, but that some of these expenses are commingled with the farm
business. 

Total cost for 1997 of a safety net based on average adjusted expenditures is
estimated at $6.1 billion ($13,500, on average, per qualifying household),
lower than the safety net scenarios based on median household income and on
185 percent of  poverty. About 450,000 farm households (25 percent of the 1.7
million farm households considered in the analysis) would have qualified for
assistance in 1997 under Scenario 3. 

Accounting for more than 70 percent of the total cost of this safety net
measure are households in the limited-resource and farming occupation, lower
sales typology groups. Ninety percent of limited-resource households and 30
percent of farming occupation, lower-sales households had incomes below the
safety net threshold. In contrast, only about 10 percent of the
residential/lifestyle and large family farms categories qualified for
assistance. 

The Northern Crescent and Eastern Upland regions had the highest Scenario 3
safety net costs, estimated at $1.2 billion and $950 million, respectively.
Costs in the Northern Crescent region are accumulated primarily by farm
households classified as farming occupation, lower-sales. In the Eastern
Upland region, limited-resource farms account for two-thirds of the cost. In
the Fruitful Rim region, which is characterized by relatively large specialty
crop farms, average cost per qualifying household is $23,000, nearly two times
higher than for other regions. Many specialty crop farms are large operations,
which require the full-time employment of the operator and family. In this
situation, the farm household is entirely dependent on farm income.

Scenario 4: 
Median hourly earnings of the nonfarm self-employed

A safety net measure based on median hourly earnings focuses more specifically
on the ability of farm businesses to provide an adequate return to
owner/operators (rather than focusing on farm household income). Farm
households would benefit as earnings for the farm business are supplemented. 

Median hourly earnings of nonfarm self-employed individuals who worked at no
other job amounted to $10 per hour in 1997, according to the Bureau of the
Census Current Population Survey. Safety net costs for Scenario 4 are based on
the difference between the median hourly earnings of nonfarm self-employed
persons and the estimated hourly earnings of farm operators who identify their
primary occupation as farming and whose earnings fall below the median. To
calculate the earned income gap used to estimate costs and distributional
effects, this hourly wage gap is multiplied by the annual hours worked by each
qualifying farm operator and aggregated by farm type and region. Excluded from
this scenario are residential lifestyle farmers and about 77 percent of
limited-resource farms because they do not identify farming as their primary
occupation.

Annual cost for the earnings safety net is $10.4 billion ($19,915 on average
per qualifying farm); nearly three in four farm businesses qualified for
assistance. Among the different farm typology groups, farming occupation,
lower-sales farm businesses involved the largest cost, at $6.7 billion, under
this earnings scenario. Most farms in this classification (86 percent)
qualified for assistance, second only to the limited-resource group, with 98
percent of farm operators (with farming as primary occupation) earning less
than the safety net threshold of $10 per hour. Average cost per recipient
ranged from $14,000 for limited-resource farms to nearly $24,000 for the
farming occupation, higher-sales category. 

Two regions the Heartland and Northern Crescent accounted for over 40 percent
of the earnings safety-net costs for 1997. These regions contained 36 percent
of farming occupation, lower-sales farm businesses in 1997. Average costs per
recipient ranged from $15,000 in the Eastern Uplands to over $23,000 in both
the Northern Great Plains and Basin and Range regions. The Eastern Uplands
region had the highest share 88 percent of farm operators qualifying for
assistance in any region. 

Comparison with
Direct Farm Payments  

In 1997, direct government payments to farms including production flexibility
contract payments, loan deficiency payments, and other program
payments totaled $7.5 billion (paid to farmers and landlords). Only one of
the scenarios considered here adjusted average expenditures generated lower
total costs for 1997. Distributional effects by both farm type and region,
however, are strikingly different. These scenarios do not assume that
safety-net payments are either a substitute or an addition to current farm
program payments.

The Federal Agriculture Improvement and Reform Act of 1996 (Farm Act)
instituted a shift in Federal farm programs toward increased operator control
by removing acreage and production restrictions. Farmers with a historical
production base for wheat, corn, grain sorghum, barley, oats, upland cotton
and rice were eligible to sign production flexibility contracts. The original
legislation provided specific payments to farmers over a 7-year period which
generally decline after the first few years (except as modified by subsequent
emergency legislation). 

The Farm Act also provided for loan deficiency payments (LDP's) for major
field crops, including oilseeds. Farmers are eligible for LDP's when posted
county prices (or adjusted world prices for upland cotton, and rice) fall
below the established government commodity loan rate adjusted for local
conditions. The third major component of programs providing direct government
payments are environmental conservation programs, in which eligible farmers
receive annual payments on the amount of environmentally sensitive acreage
enrolled in these programs.

About 36 percent of all farms received some type of direct government payment
in 1997, with payments per farm averaging $7,987. By farm typology group, the
share of farms receiving payments ranged from less than one fifth of
limited-resource farmers to three-fourths of farms in the farming occupation,
higher-sales and the large family farm groups. 

With the safety-net concept applied using the alternative scenarios, the
distribution of total program benefits would change dramatically. Almost all
limited-resource farm households would receive safety-net payments. Even
though a lower percentage of farming occupation, lower-sales farm households
would receive benefits than under current farm programs, the amount of payment
per recipient would be more than twice as high. The total amount of safety-net
payments going to large and very large farms would be half the amount of
direct payments to these categories of farms in 1997.

The regional results also show that under the scenarios described here, farm
households in the Northern Crescent, Eastern Uplands, Southern Seaboard, and
Fruitful Rim regions would generally receive a higher level and a greater
proportion of benefits than under current programs. Farms in these regions
generally produce dairy products, beef, hogs, fruits, vegetables, and other
farm products which are not under the commodity programs.

The Safety Net & 
Future Farm Policy  

This article has presented three approaches to a farm household safety net
based on income or expenditure thresholds already used in other Federal
assistance programs, and a fourth that is also based on the concept of a
minimum standard of living. While implementation issues are not addressed,
these safety net approaches could be used in conjunction with some form of
commodity program. Were this minimum-standard type of safety net concept
introduced as policy, the amount of compensation would likely be adjusted to
reflect lower threshold levels than used in this analysis, current tax
benefits for the poor, and benefits from other Federal assistance programs.

A primary benefit of applying to the agricultural sector a safety net concept
based on supporting a minimum standard of living would be the effectiveness:
farm household income changes would be compensated up to some agreed-upon
level year-in and year-out, as commodity prices, production, or other factors
changed. 

The drawbacks of this type of safety net stem from possible negative
behavioral incentives. For example, a farmer may see no need to make capital
investments or business decisions to improve farm income, knowing that a
safety net provides a reasonable and reliable income support without the risk.
In the absence of a safety net, some inefficient farmers would exit farming;
in the presence of a safety net, these farmers may instead continue to farm.
Insofar as society may wish that these farmers exit (e.g., because they
operated inefficiently), a safety net can lead to a suboptimal outcome. 

The farm sector is clearly heterogeneous, and a one-size-fits-all policy
prescription cannot simultaneously fulfill all policy goals. But a clear
understanding of objectives and intended beneficiaries must be the starting
point for discussions of future farm policy.  

Linda Ghelfi, Craig Gundersen, James Johnson, Kathy Kassel, Betsey Kuhn, Ashok
Mishrok, Mitchell Morehart, Susan Offutt, Laura Tiehen, and Leslie Whitener 
morehart@econ.ag.gov; (202) 694-5581
whitener@econ.ag.gov; (202) 694-5444

BOX 
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.


SPECIAL ARTICLE
Water Pressure in China: Growth Strains Resources

China is one of the world's most water-deficient economies, and water scarcity
is viewed as a major threat to China's long-term food security. While the
agriculture sector is still by far the largest user of China's water
resources, rapid economic and population growth is generating rising demand
for urban and industrial use, increasing pressure on water supplies. 

In 1995, China's annual renewable water resources were estimated at 2.8
trillion cubic meters, which ranked fifth in the world behind Brazil, Russia,
Canada, and Indonesia. The U.S. ranked sixth with 2.5 trillion cubic meters.
However, in terms of per capita water resource availability, China is one of
the lowest in the world. 

China and the U.S. face some similar conditions with respect to water. Both
countries have large agricultural economies, extensive irrigated cropland, and
farmers facing increasing competition for water from urban, industry,
transportation, and hydropower users. But several elements make management of
water resources particularly challenging in China, including an uneven
distribution of rainfall, a very large population, several large urban areas
in a dry area covering about half the country, and a complex
legal/institutional framework for water distribution and use. 

China's ability to feed itself will depend, in part, on how it deals with its
water problems. The linkages between China's agricultural policy and its water
management policy, and implications for the timing and magnitude of water
availability are strategic issues for China's agricultural trade.

Water Resources, Population 
Distributed Unevenly

A monsoon climate dominates China's rainfall patterns. The monsoon arrives
from southeast Asia bringing rain during the spring and summer months and
receding in the fall. Normally there is little precipitation in China in
winter and the early spring months. The monsoon rains are heaviest in south
China, and precipitation becomes progressively less towards the north and
west. For the intensively cultivated areas in the north China plain and
Manchuria (northeast China), most of the annual rainfall comes in June through
September. 

Provinces that have an annual average rainfall of less than 600 millimeters
can be found in north, northeast, and northwest China. About half of China's
arable land is located in this relatively dry area that includes high plateaus
and deserts.

Another characteristic of China's water resources is that only a few major
rivers, including the Yangzi River (in south China) and the Yellow River (in
north China), flow through an extended portion of the country. Many major
rivers quickly exit the country and provide major water resources to
neighboring countries.

The uneven distribution of rainfall and scope and configuration of China's
river basins mean that stream flows and runoff from the basins vary greatly.
For example, annual runoff from the Yangzi (also know as Chang) river is
estimated to be 1 billion cubic kilometers of water, compared with 0.028
billion cubic kilometers of runoff for the Hai river located in north China.

USDA's Economic Research Service estimates that 34 percent of China's
population (1.2 billion total) lives largely in the relatively dry region
(north, northeast, and northwest China). The rest live in provinces on the
plains along the eastern seaboard. The dry region is host to large urban
centers, including seven cities with populations of more than 2 million people
and 81 cities with 200,000-500,000 people. The largest are equivalent in
population to major U.S. cities: Beijing, with 7.3 million (San Francisco bay
area has 6.7); Tianjin, with 5.2 million (Boston area has 5.8); and
Shijiazhuang, with 1.9 million (equal to Cincinnati). These large Chinese
cities compete with agriculture for scarce water resources.

The large number of people living in this relatively dry region has great
impact on water resource use. In the densely populated Hai river basin, for
example, industrial output is growing rapidly, and the basin is intensively
cultivated (it is a major grain producing area). However, water availability
per capita is only 308 cubic meters per year. In contrast, residents in the
Pearl River basin in the wet area of China have 13 times more water available
per capita. Clearly, low annual precipitation rates and large populations in
some provinces in the dry part of China mean low per capita water resource
availability.

Demand Increasing, 
Usable Water Availability Shrinking

Since economic reforms were initiated in the early 1980's, China's economic
growth has been rapid, particularly in the nonagricultural sectors. The
manufacturing sector, for example,  grew 12 percent annually during the last
two decades, compared with 9.8-percent growth in the overall economy. 

World Bank analysts estimated that industry in 1980 used 45.7 billion cubic
meters of water 10.3 percent of total water consumed. They estimate that by
2000, industrial use of water will more than double to 177 billion cubic
meters and account for 23 percent of total water use. 

Municipal (urban) demand for water has also grown, although it remains a
relatively small share of total use. The number of residents in China's cities
is projected to increase from 191 million in 1980 to an estimated 400 million
in 2000. Urban residents with increasing incomes are buying washing machines
and renting apartments that include flush toilets and individual shower
facilities activities that increase urban water use. In 1980, urban residents
used 6.8 billion cubic meters of water, 1.5 percent of total water use. By
2000, they are expected to increase use to 29.4 billion cubic meters, 3.8
percent of the total. 

Per capita water use in cities varies greatly by region. In Tianjin in the dry
Hai basin, for example, residents use only 135 liters of water per day,
compared with 339 liters per day in the wet urban areas in the southern
province Guangdong. Urban water use in both areas has also increased as mayors
in major cities embarked on beautification campaigns to plant trees, shrubs,
flowers, and grass along roadways and in municipal parks. 

Rural residential demand for water was 25.6 billion cubic meters in 1980, 5.8
percent of total use. By 2000 this use is expected to rise to 51.7 billion
cubic meters, 6.8 percent of use. According to the 1997 census of agriculture,
only 17 percent of rural households had access to tap water. China's
government has embarked on a program to put in tap water systems for rural
villages. As this program progresses, more households will have access to
regular supplies of tap water and consumption (for washing machines, showers,
and nonirrigation farm use) will increase. 

China's leaders state that urban and industrial water users will have priority
over agricultural water use and that the proportion of water for irrigation
purposes will decrease incrementally in the next few decades. Nevertheless,
current food security policies are inducing farmers to expand and to maintain
a high level of food grain (wheat, rice, and corn) production (AO March 1997).
These pressures have pushed farmers to use both surface and underground water
resources to boost grain yields. World Bank analysts estimated irrigation
water use in 1980 at 365.6 billion cubic meters, 82.4 percent of total water
use. But they anticipate that even though use of irrigation water will
increase to 506.4 billion cubic meters in 2000, competition for other uses
will reduce the share of water for irrigation to 66.2 percent of total. In
some areas of dry north China, water tables have dropped substantially,
suggesting that water is being extracted (mostly for agricultural use) at a
faster rate than aquifers can be recharged. 

In China's dry northwest area, upstream users have increased use of irrigation
water. This use has raised grain output (largely one-season grain crops) in
the upland areas, and new irrigation projects are being constructed in part to
boost rural income in these largely poor areas. But the resulting loss of
water for downstream areas means, for example, that the Yellow River often now
goes dry well before it reaches the sea. 

Downstream users in the dry northern area have not only lost surface water to
irrigate their two grain crops a year, but the decreased stream flow may well
affect the recharge of some aquifers. With less surface water available
downstream, municipalities, industry, and agriculture have increased their use
of underground water resources. In a number of areas in dry north China,
including Beijing, underground water is being depleted so quickly that there
are large areas with cones of depressions (water table drops at well
locations), dry wells, seawater intrusions in groundwater areas adjacent to
the ocean, and land subsidence. The problem is severe in the Cangzhou area of
Hebei province, for example, where 400-meter deep wells are now being used to
provide irrigation water to grow wheat and corn.

The rapid rise in urban population areas and industrial growth rates has been
accompanied by a rise in the pollution level in China's waterways. In the
absence of sufficient water treatment plants, large volumes of raw sewage are
dumped daily into local streambeds, and industrial water is often untreated.
When polluted upstream water is returned to the stream flow, water quality
downstream is degraded. In some cases, polluted water in the streams has
seeped into ground water. 

Managing the Gap Between 
Water Demand & Availability

Assuming the extension of current trends in water demand and availability well
into the next century, the projected deficit would be huge, and several crisis
scenarios could be envisioned. On the other hand, water users could
conceivably adjust consumption patterns as the gap widens between demand and
availability and water use becomes more costly (i.e., higher prices for water
as more energy is required to extract ground water). Policymakers might also
assess the situation and respond with appropriate programs. This perspective
suggests significant shifts in water use but not necessarily catastrophic
crises. 

A team of U.S. experts recently visited China and saw evidence of both
perspectives. The team concluded that while some areas continue to use water
at unsustainable rates, the dominant current trend is for both policy makers
and farmers to begin adjusting to conditions of less water available for
agriculture. 

China has the opportunity to increase its available water supplies through
careful management. Water used upstream could be returned to river flows to be
used again downstream if water polluted through urban and industrial use is
treated appropriately first. Initiatives to encourage more efficient use of
existing water supplies are already underway in some areas. The difficulties
will be for national and local governments to craft policies and rules within
China's complex cultural and legal-administrative system that provide
incentives for users to increase efficiency of water use, and for polluters to
clean up the water they use and return clean water to stream flows.

With water policies giving highest priority to urban and industrial users,
China's water districts, agricultural extension personnel, and government
authorities acknowledge these water use expectations and are currently
promoting both technical and institutional changes to increase irrigation
efficiency. 

To increase efficiency, local authorities and farmers are promoting lining
ditches with concrete and use of plastic pipe to reduce conveyance losses from
water source points to fields. Farmers are beginning to use spray and drip
irrigation systems where conditions permit, instead of less efficient flood
irrigation. Research units in government ministries have projects to develop
efficient irrigation systems which will fit into the structure of rural China
where fields are very small, farmers are relatively poor, and individual farms
lack ready access to bank loans.

Authorities also encourage managers of irrigation districts to increase the
efficient distribution and delivery of water to farmers. They are beginning to
experiment with treating water as a commodity in which price becomes an
important consideration. In the past 5 decades, irrigation districts have
charged little or no fee for delivering water to farm fields. But irrigation
districts are beginning to increase fees to cover operating expenses and plan
to eventually charge full costs. Farmers have resisted paying fees for
irrigation water, partly because they helped build the projects with their own
unpaid labor.

The rising cost of pumping water is encouraging more efficient water use.
Local government technicians are beginning to teach farmers how to efficiently
use their irrigation water so that farmers will know when to apply water, how
often, and how much. In the very dry areas of northwest China, farmers (with
little or no assistance from the government) are developing rain catchment
systems that drain water into underground cisterns. Water in the cisterns is
used for domestic needs and for very efficient drip irrigation systems that
deliver water to crops in small fields. 

In 1999, China's Ministry of Agriculture initiated a "Dryland Farming Program"
in  response to the country's water scarcity and to expected decreasing
available water supplies in the coming decades. The program includes a)
creating seed varieties with high yields and low water use (with great hopes
pinned on biotech techniques), b) developing field cultivation practices that
will conserve water, and c) constructing field terraces to reduce water runoff
and control erosion. Through this program, the government also pays for some
equipment purchases to encourage adoption of new cultivation practices. Some
farmers have reduced water losses by using plastic film between rows to limit
evaporation. With the rising cost of water, farmers are beginning to switch
from planting crops that have high water use to those which use less water. 

The Ministry of Water Resources, which has responsibility for underground and
surface water resources, is concerned about the increasing demand for water,
falling water tables, increasing incidence of cones of depression, and land
subsidence. The ministry has begun actively managing underground water
supplies by developing rules and procedures for drilling new wells, requiring
permits for extracting water from wells, and establishing measures to prevent
pollution of underground aquifers. The Ministry also manages water commissions
that allocate river water to provinces and oversees the building of flood
control and hydro-electric facilities such as the enormous Three Gorges Dam on
the Yangzi River. With China's rapidly changing economy and overlapping
jurisdictions of various institutions interested in water, it will be
challenging to formulate rules that will give stakeholders incentives (or
penalties) for ensuring the long-term life of its aquifers.

Given water shortages in dry northern China, is it feasible to transfer water
from the water-rich south to the north?  Transfer projects have been discussed
for more than two decades, but construction costs are high and thus far no
projects have been initiated. The Ministry of Water Conservancy, charged with
responsibility for projects to transfer water from south to north, has teams
of researchers completing feasibility studies for an eastern route, a middle
route and a western route. The ministry seems to be favoring the middle route.
But little of the proposed transferred water is expected to be used for
irrigation purposes. The unit cost of transferred water likely will be so high
that only urban and industrial users could bear the costs. 

Implications for Trade

Changes in China's water availability in the coming decade will force
important changes in the country's agricultural economy. Clearly there will be
less water available for irrigation purposes, and it is difficult to predict
how China's farmers will adjust to the changing conditions. China's rural
economy will not collapse, nor will crop production cease because of dwindling
water supplies. Nonetheless, there could be substantial changes in the mix of
crops planted due to changes in demand and availability of water supplies. 

Farmers may switch from using scarce irrigation water on lower value grain
crops to raise higher value fruit and vegetable crops instead. More dryland
crops such as sorghum, millet, and cotton may be planted, rather than crops
such as corn and rice which require higher water use. There could be less
double cropping in China's dry northern areas. For example, farmers in the
Beijing area currently raise winter wheat and summer corn in the same year.
With reduced water supplies, they may have to choose between these crops. 

The prospective changes in output composition will affect the kinds and
quantities of agricultural products traded in the coming decades. As
production of fruits and vegetables increases, some of China's products may
become very competitive in international markets, while opportunities in
China's market will likely develop for U.S. exports such as wheat, corn, and
soybeans. 

China's economy is expected to grow at an annual rate of over 7 percent during
the next decade. This rapid economic growth, along with continued increases in
population, will put considerable stress on China's natural resource base.
Sustainable growth in the next few decade depends in part on how China crafts
policies relating to land and water use. It will also depend on whether China
will continue its food grain self sufficiency policies or increasingly rely on
its comparative advantage and participate in world trade on a much larger
scale.  

Frederick W. Crook and Xinshen Diao (202) 694-5219
xinshen@ers.usda.gov 

BOX - SPECIAL ARTICLE

This article is based on 3 years of research by USDA's Economic Research
Service on China's water situation and on the visit to China in September 1999
by the U.S. Water Team. The team included representatives from USDA's
International Cooperation and Development Division, Foreign Agricultural
Service, Agricultural Research Service, Natural Resource Conservation Service,
and Economic Research Service, as well as the U.S. Geological Survey. An
exchange of teams to study water issues had been proposed by USDA and China's
Ministry of Agriculture in December 1997. This article also draws on the
"China-U.S. Water Resources Management Workshop" held in April 1999 in Tucson,
Arizona. The conference, attended by scientists and researchers from both the
U.S. and China, was sponsored by a Working Group of the U.S.-China Forum on
Environment and Development. At the 1997-98 meetings in the U.S. and China,
both sides agreed to focus attention on environmental and water issues. 

END_OF_FILE
