AGRICULTURAL OUTLOOK                                        February 25, 1998
March 1998, ERS-AO-249
               Approved by the World Agricultural Outlook Board
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CONTENTS:

AGRICULTURAL ECONOMY
Rail Problems Disrupt Grain Shipments

BRIEFS
Asia Crisis To Trim Prospects For U.S. Meat Exports 
Mexico Taxes U.S. HFCS

COMMODITY SPOTLIGHT
Good Weather Nets Abundant Citrus Crops in 1997/98

WORLD AGRICULTURE & TRADE
World Hog Production: Constrained by Environmental Concerns?

FOOD & MARKETING
Federal Milk Marketing Order Consolidation & Reform

SPECIAL ARTICLE
Argentina's Economic Reforms Expand Growth Potential For Agriculture


IN THIS ISSUE

Good Weather Nets Abundant Citrus Crops in 1997/98

Large U.S. citrus crops will likely keep grower and retail prices for most citrus
(fresh and processed) at or below 1996/97 levels well into the summer.  U.S.
orange production is forecast record-high at 14.3 million tons, up 12 percent
from last year, due to favorable weather in Florida and California and expanded
acreage in Florida.  Despite large orange crops and significant stocks of frozen
concentrated orange juice (FCOJ) in both the U.S. and Brazil (the world's largest
producer), near-term futures contract prices for FCOJ on the New York Cotton
Exchange have rebounded to 97 cents per pound solids in mid-February since
bottoming out in October.  The recent rise is due partly to early reports that
the 1998/99 Brazilian orange crop could be down significantly.

U.S. grapefruit producers also find themselves with another large crop this year,
although nearly 6 percent smaller than a year ago.  Supplies remain abundant, and
as a result, prices have dropped and grower revenues have shrunk.  After several
years of poor returns, the Florida grapefruit industry is now pondering supply
control options. 

Rail Problems Disrupt Marketing Flows

During the second half of 1997, rail congestion in the western U.S. on the Union
Pacific/Southern Pacific (UP/SP) and Burlington Northern Santa Fe (BNSF) lines
snarled traffic and brought freight shipments in some areas to a complete halt. 
In the fourth quarter of 1997, grain carloadings dropped 6 percent on BNSF and 28
percent on UP/SP from a year earlier.  The severity of the western rail service
problems ultimately resulted in emergency action by the Surface Transportation
Board (STB), the Federal agency responsible for oversight and regulation of  the
Nation's railroads. 

The 1997 western rail service problems, resulting from the inability of the
largest grain-hauling railroads to position and move their equipment, were
substantially different from equipment shortages and service delays commonly
referred to as "rail car shortages," which result from high demand.  The crisis
provides an example of the increased importance of an adequate grain handling and
transportation infrastructure in an era when grain production and marketing
decisions are driven by market signals, not government programs.   

 World Hog Production Faces Environmental Constraints

International trade in pork has risen dramatically in recent years.  Exports of
the major pork exporting countries grew at an annual rate of 4 percent during
1989-97, and USDA's baseline projection indicates continuing growth in
international pork trade into the next century.  The extent to which the four
leading pork exporting countries--the U.S., Canada, Denmark, and Taiwan--can meet
forecast growth will be determined largely by the ability of their pork
industries to expand.  

An adequate land base for spreading manure residues is essential, because no
other economically viable means of manure utilization currently exists.  With
virtually insurmountable land constraints in small, densely populated Taiwan and
Denmark, the U.S. and Canada with their relatively large land endowments had
seemed the most likely to expand production.  However, public demands for
stricter governmental regulation may also constrain hog production in the U.S.
and Canada.  

As a result, world pork prices could increase more sharply than expected as
demand increases over time.  Higher prices may stimulate further expansion of hog
industries in countries like Mexico and Brazil with large land endowments, good
feed supplies, and low levels of regulation.

Asia Events Trim U.S. Meat Export Prospects

Economic turmoil in Asia is expected to trim U.S. meat export prospects in 1998. 
As Asian currencies depreciate and incomes fall, demand will contract in some key
Asian markets and competition will increase from other countries whose currencies
are also losing value against the U.S. dollar.  At the same time, the relatively
strong dollar is making the U.S. market more attractive to foreign meat exporters
seeking alternatives to Asian markets.  
Due largely to declining sales to Japan and South Korea, U.S. beef and pork
exports are likely to fall in 1998, and poultry exports will see slower growth. 
U.S. beef imports are expected to rise, as the decline in U.S. cow slaughter and
a strong U.S. dollar enhance marketing opportunities for Australia and New
Zealand, the leading exporters of processing beef.   

Reforms in Argentina Spur Agricultural Growth 

A combination of dramatic economic reforms and strong price incentives in
Argentina during this decade have set the country on course to reach its full
agricultural production and trade potential.  The reforms have reined in
inflation, reduced or rescinded agricultural export taxes and input tariffs, and
privatized much of the transport infrastructure, leading to lower marketing costs
and greater investment.  As a result, Argentine farmers were able in 1996/97 to
respond to strong world crop prices with a substantial increase in harvested
acreage and in use of inputs such as fertilizer and specialized farm equipment.
Total grain and oilseed production reached 53 million tons, eclipsing the
previous record by nearly 8 million.  
Preliminary indications for 1997/98 favor a second recordbreaking harvest. 
Extremely favorable weather is expected to put total grain production at 36
million tons and total oilseed output at 23 million tons--both records.  USDA's
1998 baseline projects modest growth in Argentina's grain and oilseed output
during 1997/98-2007/08. 

Argentina's livestock sector has benefited less from the reforms than have the
grain and oilseed sectors.  By the end of 1997, the Argentine cattle inventory
stood at 50.3 million head, the lowest in 27 years.  But most observers expect a
turnaround in 1998 as the cattle industry follows the crop sector in adopting new
technology and improving management practices.


AGRICULTURAL ECONOMY

Rail Problems Disrupt Grain Shipments

The 1997 U.S. grain harvest was the second largest on record.  U.S. production of
corn, soybeans, wheat, sorghum, barley, oats, and rye totaled 15.8 billion
bushels.  Only the 1994 crop, with its 16.2 billion bushels of grains and
soybeans, surpassed 1997's bumper crop. The harvest included the largest soybean
crop and the third largest corn crop ever recorded.  But for all that, many grain
shippers and receivers will remember this harvest for another reason severe rail
congestion.  

During the second half of 1997, rail congestion in the western U.S. snarled
traffic and brought freight shipments in some areas to a complete halt. 
Agricultural shippers in the southern Plains and western Corn Belt, like many
other rail shippers in those regions, experienced serious rail service
disruptions and lengthy shipment delays throughout the last half of 1997.  The
severity of the western rail service problems ultimately resulted in emergency
action by the Surface Transportation Board (STB), the Federal agency responsible
for oversight and regulation of  the Nation's railroads.  Only since late
December has the situation improved substantially.

Rail service disruptions create serious problems for grain shippers, particularly
in the western U.S.  In 1995, 40 percent of all grain shipments moved to market
by rail.  For wheat, a key crop in the southern Plains, railroads move 60 percent
or more of all shipments and as much as 75 percent of all export shipments.  Even
in the eastern U.S., where truck and barge transportation is more important, rail
still accounts for more than 40 percent of all corn and wheat shipments.  With
railroads shipping more than 4.7 billion bushels of grain, on average, each year
since 1990, any substantial rail service problems severely restrict the capacity
of the entire U.S. grain handling and transportation infrastructure.

Starting in July, the recently merged Union Pacific/Southern Pacific Railroad
system (UP/SP) experienced a cascading service failure.  While opinions differ as
to the actual precipitating cause, the difficulties first manifested themselves
in the Houston, Texas, area.

Houston is home to many petrochemical facilities and is a critical port and rail
hub.  Too many cars were permitted into Houston's Englewood Yard, slowing the
yard's operational efficiency and forcing incoming trains to pull into sidings
before entering the yard.  While trains were holding in the sidings, waiting for
congested main lines and switching yards to clear, the 12-hour crew service
limits specified in UP/SP's labor agreements expired.  This forced UP/SP to find
new crews, already in short supply because of growing traffic levels.  

The problem worsened quickly.  Crew shortages and congestion tied up locomotives
badly needed elsewhere on the UP/SP system.  UP/SP began to shift crews and
locomotives from other parts of their system into the Houston area, but this
simply compounded the problem.

Stronger-than-anticipated intermodal and petrochemical demand, incompatibility
between the computer systems used by UP and SP, slow implementation of labor
agreements between UP management and SP union employees, lack of adequate
locomotive power, and a series of train accidents also served to complicate
UP/SP's early attempts to reduce the Houston congestion.  Some of these problems,
particularly the shortage of locomotive power, reflected long-term operating
problems inherited from the cash-strapped SP when UP acquired the line in 1996.  

As UP/SP congestion snowballed, the fall harvest shipping season went into full
swing.  Troubles on the beleaguered UP/SP quickly spread to areas outside the
southern Plains and to the other major grain-hauling western railroad, the
Burlington Northern Santa Fe Railway Company (BNSF).

Western Feeders & 
Country Elevators Hardest Hit

Western livestock and poultry feeders located outside the traditional grain belt,
and grain shippers in the southern Plains and western Corn Belt, were severely
affected by the rail service problems that began in July and hindered grain
shipments throughout the rest of 1997.  Particularly hard hit were the country
elevators in these regions that buy grain directly from producers and ship to
domestic users or to larger interior and export grain handling facilities.

Disruptions and delays in rail service forced many western livestock and poultry
feeders to shift to truck transportation for their feed supplies.  Poultry
feeders in Arkansas and East Texas shifted to grains and feed products trucked
from inland river points or from as far away as Missouri and Iowa.  Western
Plains hog feeders and California feedlot operators scrambled to secure steady
supplies of feed grains and feed ingredients normally delivered by rail.

The problems that began for western feeders as early as August subsided
substantially by mid-November.  Country elevator shippers, however, continued to
suffer from rail service problems.  Shippers in the southern Plains States of 
Colorado, Kansas, Oklahoma, and Texas experienced service problems first and
perhaps to the greatest extent.  The size of the hard red winter (HRW) wheat crop
surprised most observers.  Production estimates for the four states increased
throughout the summer as yield predictions grew from the trend estimates of 29.5
bushels per acre in early May to 35.3 bushels per acre by August.  

Yields in Kansas, estimated in May at 32 bushels per acre, actually totaled 46
bushels per acre when the harvest was completed.  The increased yield in Kansas
alone added 150 million bushels of wheat to the crop.  The unexpectedly large
wheat crop and strong market signals to carry stored grain forward in expectation
of higher prices left many grain elevators in the southern Plains full to
capacity with little or no room for the record feed grain harvest that followed.

Country elevator shippers in the western Corn Belt and corn producing areas of
the northern Plains also experienced serious rail service problems during the
final months of 1997.  To a great extent, the rail service disruptions and delays
in these areas were a spillover from problems that had started in the southern
Plains.  As congestion on UP/SP increased and demand to move grain grew with the
fall harvest, service disruptions spread northward.  Shippers in Minnesota,
Nebraska, and the corn producing areas of North and South Dakota experienced
these problems as the harvests in their areas came into full swing.  Country
grain shippers, particularly in Nebraska, experienced rail car placement delays
and car order backlogs on UP/SP that often exceeded 30 days.  Delays and backlogs
for grain car orders were nearly as bad on BNSF, which ultimately was forced to
cancel some of its guaranteed rail car service during the worst of the problems
in November.  

The inability to move harvested feed grains, particularly corn, forced many
country elevator shippers to pile grain outside as they waited for empty rail
cars that should have been at their facilities days or weeks earlier.  With the
approach of winter, the risk of quality deterioration in these outdoor grain
piles increased rapidly.  USDA's Farm Service Agency (FSA), which administers
warehousing operations under the Commodity Credit Corporation, reported requests
for emergency grain storage permits that totaled 93.7 million bushels at their
peak in early November.  

Only one state requesting emergency storage was east of the Mississippi River. 
Of the remaining states, Nebraska and Kansas led with requests totaling 45.9 and
18.6 million bushels.  The 1997 FSA requests were the largest since the mid-
1980's.  Facilities not party to an FSA Uniform Grain and Rice Storage Agreement
also reported outdoor storage, raising even further the total amount of grain
piled outside awaiting shipment.

1997 Rail Disruption Not
Typical "Rail Car Shortage"

This past year's rail service problems were substantially different from the
equipment shortages and service delays commonly referred to as "rail car
shortages."  Such shortages are typically associated with periods of strong
demand for grain transportation driven by high levels of grain demand, especially
for export.  

In such markets, current grain prices typically exceed those for grain delivered
months or even weeks in the future.  These conditions create very real pricing
signals for farmers and shippers to move grain now, not later.  This can quickly
overwhelm the shortrun capacity of the transportation system and leave many
shippers waiting for available rail equipment.  

Shippers have routinely experienced these types of problems in the past few
years.  By contrast, 1997's service problems resulted from the largest grain-
hauling railroads' inability to position and move their equipment--not from an
overwhelming demand for grain transportation.

During the last half of 1995, when export demand was strong and many western Corn
Belt and northern Plains shippers experienced serious rail equipment shortages
and service problems, grain carloadings on the major railroads averaged 29,000
per week.  Grain carloadings during the last half of 1997 averaged just 22,800
per week.

The seriousness of the UP/SP and BNSF congestion problems and their substantial
effect on shippers during the closing months of 1997 are apparent from
comparisons of 1996 and 1997 quarterly grain carloadings on the major western
railroads--BNSF, Kansas City Southern (KCS), and UP/SP.  Third-quarter 1997
versus 1996 grain carloadings were up on all three of the western railroads but
fell sharply during the fourth quarter of 1997 on BNSF and UP/SP.  In the third
quarter, BNSF was up 17 percent and KCS and UP/SP were up 10 percent over the
previous year.  In the fourth quarter, KCS carloadings were up 13 percent, but
dropped 6 percent on BNSF and 28 percent on the troubled UP/SP.  Taken together,
grain carloadings on the three railroads were down an average 2,950 per week
during the fourth quarter of 1997.  This  amounts to over 10 million bushels less
of grain being moved each week during October-December 1997, compared with 1996.

Export grain shipments were also affected by the western rail problems.  Although
rail shipments of grain to export facilities nationwide during the fourth quarter
of 1997 were virtually unchanged from 1996, rail shipments to export houses along
the Texas Gulf Coast were down 10 percent.  

Despite congestion-related reductions in rail capacity, greater use of truck and
barge transportation in the southern Plains allowed exports of HRW wheat to
increase 60 percent in the fourth quarter of 1997 over 1996--HRW wheat export
inspections at Texas and Louisiana export elevators showed increases of 74 and
288 percent.  The nearly three-fold increase in HRW wheat export inspections at
elevators along the Mississippi River in Baton Rouge and New Orleans, Louisiana,
reflect increased barge shipments of HRW wheat. These barge shipments originated
from inland river facilities in Oklahoma along the Arkansas River and at Kansas
City on the Missouri River.  

Not all of this shift to barge transportation was driven by the western rail
problems.  But the share of HRW wheat exports moving off the Mississippi River
did increase from 4 percent during the fourth quarters of 1994-96 to 10 percent
during the fourth quarter of 1997.

Surface Transportation Board 
Takes Emergency Action

As the scope of the railroad service problems in the western U.S. became evident,
shippers began to press the Surface Transportation Board (STB) for relief.   In
response, STB instituted a proceeding (STB Ex Parte No. 573) and scheduled a
public hearing to provide individuals an opportunity to report on the status of
rail service in the western U.S. and to review proposals for solving the service
problems.  

All of the western railroads and a variety of shippers, shipper groups, and local
and state officials participated in this public hearing, held in Washington, DC,
on October 27, 1997.  USDA, fulfilling its statutory authority and responsibility
to represent the transportation interests of agricultural producers and shippers
by participating in STB proceedings, reported concern about the declining quality
of western railroad service, particularly about how these service problems were
affecting grain storage. 

Following this public hearing, STB concluded that a transportation emergency did
exist.  To facilitate a resolution, STB directed that a number of specific
actions be taken to address the severe congestion problems affecting the Houston
area and to free up facilities throughout the UP/SP system.  By using its
emergency powers so aggressively, STB confirmed the severity of the rail service
emergency--STB's emergency powers are rarely invoked except when a railroad
ceases operations due to bankruptcy.  At the request of USDA, STB required UP/SP
to make a weekly report detailing its service performance to agricultural
shippers.

By law, the STB can direct service only on a temporary basis.  With its 30-day
service order scheduled to expire, the STB scheduled another public hearing on
December 3, 1997.  At the hearing, USDA reported that there had been little, if
any, improvement in western railroad service to agricultural shippers.  As
evidence, USDA noted that grain shipments on both UP/SP and BNSF had fallen
dramatically compared with prior-year levels.  The amount of grain approved for
emergency storage, USDA added, was almost entirely related to the inability of
the western railroads to provide adequate service to agricultural shippers.

The following day, STB found that although service was showing some signs of
improvement, the transportation emergency in the West continued to exist.  STB
then extended and modified its service order for an additional 90 days.
Agricultural commodities were recognized as a key concern, and STB ordered both
UP/SP and BNSF to provide weekly reports of their agricultural transportation
performance.

Since early December, service provided by the BNSF has returned to normal levels,
but UP/SP continues to lag its prior-year performance. 

Grain Output & Storage 
Affect Rail Demand

The differences in factors that lead to a smooth postharvest shipping season and
those that result in one like 1997's can be relatively small.  The level of
production and carry-in stocks of grains and soybeans relative to available
storage provides a good indicator of the need for harvest-time grain
transportation.  In 1996, when shippers experienced few problems during the
postharvest season, grain and soybean production totaled 15.3 billion bushels,
just 3 percent lower than in 1997.  With the addition of carry-in stocks, this
volume of grain amounted to 88 percent of total on- and off-farm storage
capacity.  (Storage capacity at export facilities is not included in off-farm
capacity in these comparisons.)  In 1997, with carry-in stocks up 43 percent,
production plus carry-in equaled 94 percent of total storage capacity--up just 6
percentage points from 1996.

However, this measure--production and carry-in stocks relative to storage--was
not uniform across the U.S., indicating the importance of providing adequate rail
service to key producing regions.  In the hard-hit southern Plains States of
Colorado, Kansas, Oklahoma, and Texas, production and carry-in stocks equaled 101
percent of storage capacity.  In Kansas, possibly the state most adversely
affected by the rail service problems, production and carry-in was 117 percent of
storage capacity.  In the western Corn Belt states of Iowa, Minnesota, Missouri,
Nebraska, and South Dakota, production plus carry-in totaled only 95 percent of
storage capacity for the region, but for the states most affected by the rail
problem--Missouri, Nebraska, and South Dakota--the measure was 100 percent. 

In the eastern Corn Belt--Illinois, Indiana, Michigan, Ohio, and Wisconsin--
production and carry-in stocks also equaled 100 percent of storage capacity. 
Shippers in these states, however, faced only minor rail-related transportation
problems.   Slowed shipment times and delays in placements of empty grain cars
for loading were largely the result of high grain transportation demand in the
East.  Some covered hopper rail cars used to move fertilizers into the West
during late summer were also trapped in the western rail congestion and slow to
return to eastern railroads for harvest-period grain service.  

The availability of barge and truck transportation, however, combined with
increased service by the eastern railroads--Conrail, CSX Corporation, Illinois
Central Railroad Company, and Norfolk Southern Corporation--kept harvested grain
moving out of local facilities.  Grain carloadings on the eastern railroads
actually increased by 19 percent during the fourth quarter of 1997, compared with
1996. 

A wide variety of factors affect the Nation's grain marketing and transportation
infrastructure.  These factors can contribute to an efficient and smoothly
operating marketing system or grind the system to a halt, forcing country grain
elevators to pile grain outside and leaving grain users struggling to meet short-
term needs.  As 1997's western rail service crisis demonstrated, operating
problems that begin on a single railroad can quickly snowball into widespread
service disruptions that affect shippers and receivers in many regions.

The 1997 western rail service crisis provides an example of the increased
importance of an adequate grain handling and transportation infrastructure in an
era when grain production and marketing decisions are driven by market signals,
not government programs.  Producer planting and marketing flexibility is
dependent upon the ability of the grain handling and transportation system to
adjust quickly to changing market conditions and customer needs.  

The actions taken by STB in response to last year's service problems were one-
time emergency actions directed specifically at the UP/SP situation.  Those
actions are presently set to expire on March 15, 1998.  Rail transportation
problems, however,  will likely confront grain shippers again.  While the outcome
may be much the same, the causes of future problems will likely be substantially
different from those that led to the 1997 western rail service emergency.
Jerry D. Norton (202) 720-4211 and William J. Brennan (202) 690-4440,
Agricultural Marketing Service
Jerry_D_Norton@usda.gov
William_J_Brennan@usda.gov


BRIEFS

Asia Crisis To Trim Prospects
For U.S. Meat Exports 

The economic turmoil in Asia is expected to trim U.S. meat export prospects in
1998.  As Asian currencies depreciate and incomes fall, demand will contract in
some key Asian markets and competition will increase from other countries whose
currencies are also losing value against the U.S. dollar.  At the same time, the
relatively strong dollar is making the U.S. market more attractive to foreign
meat exporters seeking alternatives to Asian markets.  As a result, net exports
of U.S. red meats are expected to shrink in 1998, adding to already abundant U.S.
meat supplies.

The weakening of demand in Asian markets stalls growth in what has become a
flourishing outlet for U.S. meat exports.  Rising incomes and changing dietary
preferences in developing countries, as well as negotiated reductions in trade
barriers worldwide, have resulted in a rapid increase in world meat trade since
the late 1980's.  

The U.S., with a large domestic market, plentiful feed grain supplies, and a
well-developed meat infrastructure and marketing network, was poised to take
advantage of the rising demand for meat.  The U.S. beef sector benefited greatly
from the growing  international market for high-quality grain-fed beef, and the
poultry sector found an outlet for lower priced dark meat products preferred by
Asia, Mexico, and the Newly Independent States of the former Soviet Union.

In the period since the late 1980's, the strong export market induced a dramatic
shift in the U.S. trade balance for meats.   U.S. meat imports during the period
declined slightly, while U.S. meat exports--led by poultry--rose rapidly.   In
1992, the U.S. became a net meat exporter instead of a net importer, and net meat
exports rose each year from 1992 to 1997.  With negotiated reductions in trade
barriers, the U.S. was able to match products to markets, increasing the exported
proportion of domestic meat production from 3 percent in 1988 to 11 percent in
1997.  

Since 1995, the growth of world meat trade has been slowed by several disease
outbreaks (bovine spongiform encephalopathy or "mad cow" disease, foot-and-mouth
disease, swine fever, and avian influenza), as well as food safety concerns (E.
coli and listeria).   The recent economic problems in Asia and the weakening
currencies of  traditional U.S. meat importers such as Canada are creating
further challenges to trade growth.  

U.S. beef exports are likely to decline 7 percent to about 1.99 billion pounds in
1998, in contrast to a 14-percent rise in 1997 from the previous year.  While
sales to Mexico are expected to increase, they will likely be offset by declining
sales elsewhere, primarily to Japan and South Korea.

In Japan and Korea--two key markets for U.S. meat--Australian beef is becoming
more attractive.  As the U.S. dollar appreciated against Asian currencies between
June and December 1997, Japan's yen declined 12 percent against the U.S. dollar
but remained steady against the Australian dollar.   In Korea, the won fell 67
percent against the U.S. dollar but only 49 percent against Australia's currency. 

If the current trend in exchange rate movement continues into 1998, the U.S.
could see an erosion of market share in Japan and Korea, especially since U.S.
fed-cattle prices are expected to increase about 2 percent in 1998.  Continued
weakness in the Australian dollar against the yen could mitigate the price rises
in Australia's short-fed and higher quality range-fed beef, which is preferred by
the Japanese market.  But the loss of market share will likely be less in Japan
than in Korea, whose economy has been severely affected by the Asian events.  

Korea is required to import at least 187,000 tons (product weight) of beef in
accordance with its Uruguay Round commitments.   In 1998, 40 percent of the
imports will be through tenders, which can in effect steer demand toward products
of a specific quality, making exchange rate movements  less important.  But the
remaining 60 percent, imported under the Simultaneous Buy-Sell (SBS) system, will
likely be driven by cost concerns.  

Although the collapse of the won has made Korea's imports from all sources more
costly, weakness in the Australian dollar against the U.S. dollar could make
Australian beef more desirable.   Given Korea's shortage of foreign exchange,
tenders will likely seek the lowest value products, and purchases under the SBS
system will be very price-sensitive.  As a result, imports under both the tender
and the SBS system will tend to favor Australia, causing U.S. export shares in
Korea to fall significantly.

U.S. beef imports, after falling in the mid-1990's, rose 13 percent in 1997 and
are expected to rise an additional 15 percent in 1998.  As the liquidation phase
of the U.S. cattle cycle ended, cow slaughter declined sharply, opening the U.S.
processing beef market just as Asian currencies and those of Australia and New
Zealand were devaluing against the U.S. dollar.   This provides a marketing
opportunity for Australia and New Zealand, the leading exporters of processing
beef and by far the two largest suppliers to the U.S. 

U.S. exports of pork are expected to decline in 1998 about 5 percent from 1997
levels, which were up about 8 percent over 1996.  The projected 1998 decline in
U.S. pork exports to 990 million pounds is based on declining sales to Japan and
Korea.  

In Korea, demand for imported pork will shrink due to a sharply depreciated
currency, lower incomes, and increased domestic pork supplies as herds are
liquidated.  U.S. exports to Japan are also expected to be off in 1998, due
primarily to competitively priced Korean pork products and a stronger U.S.
dollar.  For Japanese importers, increased Korean pork production and the
dramatically depreciated won makes Korean fresh pork loins an attractive buy. 
However, lower U.S. domestic pork prices, especially for lower value products,
will be attractive to Mexico and Russia, which may substitute pork for lower
value poultry products.  

Among the factors in last year's estimated rise in U.S. pork exports was the
early-1997 outbreak of foot-and-mouth disease in Taiwan, which spread chaos in
global pork markets.  The outbreak devastated the Taiwanese industry and
effectively eliminated a major pork exporter from the world market.  With the
Japanese Safeguard tariff (a WTO legal mechanism to protect domestic producers
from excessive imports) slated for removal by midyear, the absence of Taiwan
raised expectations for U.S. pork exports.   In addition, the outbreak of swine
fever in the Netherlands was expected to open up the German market for Denmark, a
major competitor of the U.S. in the Japanese market.

However, the surge in U.S. exports to Japan failed to materialize.   Taiwanese
pork differs from U.S. product, offering several characteristics (darker meat
color, tougher texture, and sweeter flavor) preferred by the Japanese consumer. 
Also, the rescission of the Safeguard mechanism removes the need for Japanese
processors to maintain large stocks of pork; the ability to draw on those stocks
reduced the need for imports in 1997.

U.S. pork imports are projected at 575 million pounds in 1998, down roughly 9
percent from 1997, which was 2 percent above 1996.   Increased U.S. pork
production and lower exports are factors in this year's drop in imports.  In
addition, the major U.S. suppliers--Canada and Denmark--are expected to focus on
other markets.  Denmark will likely help fill the shortfall in the European Union
caused by outbreak of swine fever there.  Canada will likely use its competitive
exchange rate advantage over the U.S. to gain market share in Japan.   

A lowering of the forecast for 1998 U.S. poultry exports since yearend 1997 is
attributable to three events over the last several months.   First is the
continuing financial crisis in many Asian countries.   While some severely
affected countries, such as Indonesia and Thailand, are not major markets for
U.S. poultry, South Korea is a key market for U.S. turkey, and Japan is one of
the largest purchasers of U.S. poultry.

Second, the currencies of Thailand and Brazil have depreciated considerably
against the dollar over the last several months, giving their products a price
advantage over the U.S.  Both Thailand and Brazil are major poultry exporters and
compete with the U.S. in many markets.  

Third is the outbreak of avian influenza in Hong Kong, a situation that is still
being monitored.   The potential for spread of a new strain of influenza that can
be transmitted from live poultry to humans could have serious impacts on world
poultry shipments.   Hong Kong is the second-largest market for U.S. broilers and
turkeys, and the largest market for other U.S. chicken products. 

The forecast for broilers has been lowered since late 1997 by 100 million pounds,
and expected exports for turkeys and other chickens have been reduced by 40
million pounds each.  Total U.S. broiler exports for 1998 are now expected to be
4.75 billion pounds, only 2 percent above last year's exports.   

The reduction from the yearend estimate for broiler exports is based mainly on
lower expected shipments to Hong Kong and Japan.   In Hong Kong, the continuing
avian flu crisis has prompted consumers to curtail purchases of poultry products. 
This affects U.S. exports not only to Hong Kong, but also to China through Hong
Kong.  Hong Kong has temporarily banned imports of live birds from China, which
has lowered prices in China and reduced China's need to import U.S. poultry
parts.  The reduction of shipments to Japan is expected to result from stronger
competition from Thailand and Brazil.

While Asian markets are expected to decline or to show little growth in 1998,
shipments to other markets are expected to continue growing.    Exports to
Russia, the Baltic States, and South Africa among others are expected to
increase, although at a slower rate than in 1997.   Even with higher export
quantities, the value of exports may decline as strong competition among broiler
exporters and the availability of low-cost U.S. pork products put downward
pressure on prices.

Exports of turkey and turkey products are expected to total 610 million pounds in
1998, up 2 percent from 1997, in sharp contrast to the double-digit increases of
the past 5 years.  The lowered estimate is due mainly to expected smaller
shipments to Hong Kong and Korea.   Hong Kong is the second-largest market for
U.S. turkey exports, and consumers have greatly reduced their consumption of
turkey as well as broilers.  With the devaluation of Korea's currency, that
country is also expected to reduce imports of U.S. turkey products.   Reductions
in Asian markets are expected to be partially offset by higher shipments to
Mexico, the largest U.S. market, as economic growth there fuels demand for
poultry products.

Exports of mature chicken are now forecast at 390 million pounds in 1998, up only
2 percent from 1997, compared with a 45-percent increase the year before.  While
Asian markets are expected to be weak, growth in shipments to Mexico, Canada, and
other markets is forecast to offset the decline in Asia.
Leland Southard (202) 694-5187, Shayle Shagam (202) 694-5186, David Harvey (202)
694-5177, and Mildred Haley (202) 694-5176
southard@econ.ag.gov 
sshagam@econ.ag.gov
djharvey@econ.ag.gov
mhaley@econ.ag.gov

BRIEFS

Mexico Taxes
U.S. HFCS

The recent increase in U.S. high-fructose corn syrup (HFCS) exports to Mexico has
raised concerns in the Mexican sugar industry.  The price of sugar in Mexico is
now sufficiently high that HFCS is an attractive substitute for many sweetener
users.  

In the U.S., almost all manufacturers who can utilize a liquid sugar (e.g., soft
drink bottlers, confectioners) have switched to HFCS.  A similar loss of sugar's
market share to HFCS could occur in Mexico, particularly if the price of sugar
remains relatively high.  Mexico's soft drink makers are meeting a part of their
growing sweetener needs with HFCS from both the U.S. and domestic producers. 

When U.S. exports of HFCS to Mexico jumped from 60,000 tons (commercial weight,
not dry basis) in 1995 to 184,000 tons in 1996, the Mexican Government initiated
an anti-dumping investigation at the request of its National Sugar Industry
Chamber, the association of Mexico's sugar producers.  On June 24, 1997, Mexico
issued a preliminary ruling and imposed temporary duties on U.S.-based companies
exporting HFCS to Mexico.  Meanwhile, Mexico investigated major U.S. firms for
dumping of HFCS at below production costs in order to secure market share.  In
September 1997, the Office of the U.S. Trade Representative requested World Trade
Organization consultations, which are ongoing.  

On January 23, 1998, the Mexican Government announced the final results of the
investigation, imposing anti-dumping tariffs for HFCS imports.  The duties that
went into effect January 24 range between $63.75 and $100.60 per metric ton for
HFCS-42 and between $55 and $175 per metric ton for HFCS-55.  The duties are
applied to each firm individually.  Even with the temporary anti-dumping duties
in place since June, U.S. exports of HFCS to Mexico continued in 1997, with
January-November exports totaling almost 180,000 tons, compared with 160,000 tons
for the same period in 1996.  

Trade reports allude to an agreement exacted by Mexican sugar mills from soft
drink bottlers to limit their use of HFCS for the next 3 years, although the
Mexican Chamber for the Sugar and Alcohol Industries (CNIAA) recently denied the
reports.  CNIAA indicates that their discussions with bottlers were only for the
purpose of improving sugar production and distribution, as well as to establish
clear rules on use of their products.

Two Mexican companies, both affiliated with U.S. companies, have recently built
facilities to manufacture HFCS in Mexico and now produce an estimated 250,000
tons a year (compared with about 8 million tons in the U.S.).  However, output
may fall below this--Mexico is reportedly considering limits on corn imports in
order to curb HFCS production. 

Although Mexico was a net sugar importer in the early 1990's, Mexico began to
export significant amounts in 1994/95.  Mexico sugar exports are forecast to
reach 750,000 tons (raw value) in 1997/98, compared with imports of 80,000 tons. 
Factors contributing to the exportable sugar supply include higher production in
the wake of government deregulation and privatization in the early 1990's,
decreased demand following the peso devaluation, and rising HFCS use in the last
few years.  In addition, the domestic price of sugarcane--which is controlled in
part by government policy--has been raised several times in the last few years.

A sustained exportable sugar surplus could lead to higher U.S. imports from
Mexico.  NAFTA specifies that until September 30, 2000, Mexican low-duty sugar
access to the U.S. is limited to the amount of Mexico's net surplus of sugar, up
to 25,000 metric tons, raw value.  (Mexico was given a NAFTA allocation of 25,000
tons for 1996/97 and also for 1997/98.)   The total U.S. sugar import quota in
1997/98 is 1.605 million tons.  From October 1, 2000, through September 30, 2008,
Mexico's access will increase, and after October 1, 2008, the tariff on sugar
will drop to zero, ushering in free trade with Mexico in sugar. 

Nydia R. Suarez (202) 694-5259
nrsuarez@econ.ag.gov


COMMODITY SPOTLIGHT

Good Weather Nets Abundant Citrus Crops in 1997/98

U.S. consumers should find ample supplies of citrus fruits and juices in
supermarkets this season.  The bountiful supplies are due largely to excellent
orange crops in both Florida and California.  U.S. orange production is forecast
record-high at 14.3 million tons, up 12 percent from last year due to favorable
weather in Florida and California.  In addition, bearing orange acreage in
Florida has been expanding ever since growers replanted trees following several
freezes in the 1980's.  The average state yield continues to increase as these
trees mature. 

The large citrus crop will likely keep grower and retail prices for most citrus
and citrus products at or below year-earlier levels well into the summer.  The
bulk of fresh citrus fruits are marketed from late-fall through spring in the
U.S.  

The U.S. is the second-largest producer of oranges and total citrus fruit in the
world, accounting for 19 and 17 percent of world production in 1997.  Florida's
orange production is forecast record-high this year, and should more than double
the size of the freeze-damaged Florida crops of the early to mid-1980's.  In
addition, growers in California (the largest supplier of oranges to the U.S.
fresh market) are harvesting their largest orange crop since the 1982/83 season.  

Florida's early and mid-season varieties such as Hamlins (early), Parson Browns
(early), and Pineapple Oranges (mid) were abundant from October through February,
as were navel oranges from both California and Florida.  Larger supplies of
Valencia oranges (a late-season variety) will be available from Florida this
spring and from California through late summer.  

The record supply of oranges has helped push down grower and retail prices below
year-earlier levels.  The preliminary January grower price for oranges was $2.58
per box, 35 percent lower than a year ago.  The January retail price for fresh
navel oranges was 53 cents per pound, just slightly below a year ago.  Both
grower and retail prices for fresh-market oranges have risen since last fall,
suggesting a strengthening of demand, possibly due to improved quality.  However,
as summer approaches, retail prices for fresh oranges are likely to again fall
below year-earlier levels as large supplies of Valencia oranges hit the market
beginning in May or June.

Although weather patterns induced by El Nino have left their mark on much of the
country this winter, citrus production in the U.S. has encountered few problems. 
For the most part, California's citrus crop has escaped damage.  And despite
record rainfalls in much of Florida, the citrus crops suffered little or no
damage, although standing water impaired harvest at times. 

Record Juice Output
Forecast in 1997/98

The large orange crop will also mean ample supplies for juice processors in the
U.S. this year.  Most orange juice processing takes place in Florida, where about
95 percent of the crop is typically processed into juice (in California, 25
percent or less of the crop is processed).  During the 1996/97 processing season
(December-November), Florida accounted for 95 percent of all orange juice
produced in the U.S., with California, Texas, and Arizona accounting for the
rest.  With this year's forecast of juice yield (i.e., pounds of sugar solids per
box of oranges) just slightly less than a year ago, the 12-percent increase in
orange production should lead to record orange juice production.   

In addition to a record orange crop in the U.S., estimates from Brazil--the world
leader in orange (36 percent) and total citrus (25 percent) production in 1997--
indicate that the 1997/98 marketing-year orange crop (July-June) will be up 12
percent from a year earlier.  Other major producers of oranges are Mexico (5
percent of the world total), Spain (3 percent), and Italy (3 percent).

Brazil is not only the world leader in orange production, but also in production
and exports of orange juice (the U.S. is second).  While the expanding U.S. juice
supplies will likely limit U.S. imports from Brazil, increased production in both
countries will likely stiffen competition in export markets.  Through the first
half of the Sao Paulo (Brazil) orange juice marketing season (July-December),
U.S. imports of Brazilian juice were down 31 percent from a year earlier.  Total
U.S. exports of orange juice during the same time period were also down 8 percent
from a year earlier, reflecting increased competition from Brazil in the world
market. 

However, the U.S. export pace is expected to pick up in the coming months as
Brazilian supplies decline and U.S. supplies increase seasonally.  U.S. orange
juice exports are forecast at a record 120,000 metric tons (65 degrees Brix) in
1997/98 (December-November), up 15 percent from 1996/97.  Increased demand for
high-quality single-strength orange juice and strong marketing efforts by U.S.
companies have boosted exports each year since 1993/94. 

Much of the competition for export markets occurs in Western Europe, which is
typically the major export market for both Brazilian and U.S. orange juice. 
During the 1996/97 U.S. marketing year (December-November), the U.S. exported
55,000 metric tons to Western Europe, a 34-percent increase from the previous
crop year.  Western European countries accounted for 52 percent of U.S. orange
juice exports during the 1996/97 marketing year, up from 44 percent in the
previous year.   

Imports of juice to the U.S. are expected to account for about 10 percent of
supply, down from a peak of 37 percent in the mid-1980's when U.S. output was
down sharply.  Despite more-than-adequate domestic production, the U.S. continues
to import some juice (primarily from Brazil) for blending purposes, particularly
at the beginning of the U.S. season when oranges are less mature and the juice
lacks sufficient color or sweetness.

FCOJ Futures Prices
Stage Modest Recovery

Although Brazilian frozen concentrated orange juice (FCOJ) stocks were not
excessively large at the beginning of the Brazilian processing season (July
1997), they have increased significantly since then.  Stocks are expected to
remain fairly high into Brazil's next harvest, which will begin in May or June. 
Meanwhile, Florida's FCOJ stocks at the beginning of the Florida processing
season (December 1997) were estimated to be over one-quarter larger than a year
earlier.  

Despite large crops and significant stocks of FCOJ available in both countries,
near-term futures contract prices for FCOJ on the New York Cotton Exchange
rebounded to 97 cents per pound solids (as of February 18) since they bottomed
out at 67 cents on October 13, 1997 (the lowest near-term contract price for FCOJ
since February 9, 1993).  After a little more than a year of mostly below-average
near-term contract prices, the market has risen to approach average prices since
mid-January 1998.

The recent rise in futures prices is due partly to early, unofficial reports that
the 1998/99 Brazilian orange crop could be down significantly.  Another possible
reason is growing confidence in world demand for orange juice and the ability of
producers to market their products.  Although season-ending stocks have risen for
2 consecutive years in Florida, total domestic consumption is forecast record-
high.  If orange juice marketers can continue to expand consumption through
product differentiation and competitive pricing, FCOJ prices may be able to hold
at or rise above recent levels. 

Grapefruit Prices See
Downward Pressure

Much like U.S. orange growers, grapefruit producers find themselves with another
large crop this year, although nearly 6 percent smaller than a year ago. 
Supplies remain abundant and as a result, prices have dropped and grower revenues
have shrunk.  Growers in Florida, accounting for about 80 percent of U.S.
grapefruit production, have been hurt the most by declining revenues.  After
several years of poor returns to growers (often below production costs) caused by
strong supplies and stagnant demand, the Florida grapefruit industry is now
pondering supply control options.

Grapefruit bearing acreage and production in Florida peaked in 1996/97 as growers
harvested fruit from over 139,000 acres, up 35 percent from the 1989/90 season. 
However, unlike the orange industry in Florida, the grapefruit industry has
realized little growth in demand for fresh product or juice since expansion of
acreage by both industries following the freezes in the 1980's.  For grapefruit,
the gain in bearing acreage has led to a 56-percent increase in production, but
not without a huge collapse in prices and returns to growers.  During the 1996/97
season, on-tree returns to grapefruit growers were less than 25 percent of the
level in 1989/90.

The collapse in prices and returns is also due to stagnant processor demand for
grapefruit.  Grapefruit juice inventories have remained fairly high, and
processors have drastically reduced the prices they offer growers for raw-
product.  Unless there is a dramatic increase in demand for grapefruit, low or
negative returns to growers are likely to continue until either grove abandonment
or supply management takes place.

In addition to fresh oranges and grapefruit, supplies of lemons, tangerines (such
as clementines from Spain), and other citrus are also generally abundant.  U.S.
lemon production for the 1997/98 season is up 9 percent from a year ago, and
prices are sharply lower.  The preliminary January grower price was nearly 60
percent below a year ago.  Quality from both California and Arizona has been
reported as mostly fair to good, but demand has been somewhat lagging--shipments
are only about 4 percent ahead of last year's pace.  However, the strongest
portion of the shipping season begins in March, and grower prices typically begin
to rise into the summer as seasonal demand picks up.  With increased production,
and early season movement lagging somewhat, consumers will find abundant supplies
of fresh lemons this spring and summer.

Although U.S. production of tangerines, tangelos, and temples has declined this
year, size and quality are mostly average or better.  Demand for tangerines has
been moderately strong, with grower prices averaging higher than a year ago in
December and January.

Imports from Spain of clementines, a fruit slightly smaller than a typical U.S.-
grown tangerine, appear to be up this year--the result of a good crop and
expanding markets.  Clementines are marketed primarily along the East Coast of
the U.S., but markets are slowly expanding to the South and Midwest as well. 
Clementines are generally marketed in the U.S. from October to March, providing
early-season competition for U.S.-grown tangerines.  Despite this year's smaller
U.S. crop, early-season grower prices (October-November) for U.S. tangerines were
below last year before rebounding in December.
Charles Plummer  (202) 694-5256
cplummer@econ.ag.gov


COMMODITY SPOTLIGHT BOX #1

Supply Control Ahead for Florida Grapefruit?

No formal supply control program will be put in place this season for Florida
grapefruit.  In the only formal action taken thus far, the Florida Citrus
Commission (FCC) voted in November 1997 to amend the Citrus Stabilization Act to
allow language that authorizes supply management.  This proposal will be given to
the Joint Citrus Industry Legislative Committee and, if approved, will be
presented to Florida legislators for action this spring.  If passed into law, the
FCC would then have the authority to pursue a referendum to allow growers to vote
on a grapefruit supply control program for future seasons.

If a program is approved, the FCC would most likely use an allotment plan to
limit Florida grapefruit production over a 5-year period.  The FCC would appoint
a panel of member growers from different growing districts to establish a
production base for the industry and for individual operations.  Grower
allotments would then be derived based on utilization numbers from the previous 5
seasons.  Growers would harvest no more than their allotment amount, unless they
purchased part or all of an allotment from another grower.

Another supply control option being explored could be accomplished through the
Citrus Administrative Committee (CAC).  The CAC is currently evaluating the
process needed to add supply control language to the current Florida grapefruit
marketing order.  In this situation, volume control would take place at the
packinghouse level.  Plans at both the grower and packinghouse levels would aim
to match supply with demand so that prices return some profit to growers more
quickly than if marketings proceeded without regulation.


COMMODITY SPOTLIGHT BOX #2

Despite Large FCOJ Supplies, Retail Prices Firm in 1997

Retail prices for frozen concentrated orange juice (FCOJ) stayed high throughout
most of 1997, despite a record 1996/97 orange crop in Florida that produced
record orange juice supplies.  In 1997, while both Florida grower prices and
near-term futures prices sank to very low levels, retail prices did not decline
until the end of the year, about 12 months after grower and futures prices
declined.  Usually, retail prices track these other prices fairly closely, with a
lag of only a few months.

As a result of the basically unchanged retail prices, FCOJ consumption did not
expand, leaving end-of-year stocks high.  Modest demand coupled with high
production in 1996/97 resulted in FCOJ stocks reaching their highest level in
years.  While retail prices have dropped some since last fall, the decline
probably is not sufficient to effectively reduce this year's ending stocks,
especially in light of another record crop and juice production year expected for
1997/98.  As a result, another stock buildup is expected at the end of this
season.

There is no real consensus in the orange juice industry as to why FCOJ retail
prices did not decline in response to large supplies.  One possibility could be
the increased popularity of ready-to-consume orange juice, particularly not-from-
concentrate juice.  Aided by frequent advertising promotions throughout the year,
consumers have been changing their preferences for single-strength over FCOJ. 
For the convenience of purchasing juice ready to consume, many consumers seem
willing to pay a higher price.  

In response to the growing popularity of ready-to-consume orange juice and its
fairly stable price throughout the year, processors and retailers may have
focused more on promoting this kind of orange juice verses FCOJ.  Because not-
from-concentrate juice tends to be a price leader, the average retail price of
FCOJ may not have responded as rapidly to supply changes as in the past. 

Susan Pollack (202) 694-5251
pollack@econ.ag.gov


WORLD AGRICULTURE & TRADE

World Hog Production: Constrained by Environmental Concerns?

International trade in pork has risen significantly in recent years.  Exports of
the major pork exporting countries grew at an annual rate of 4 percent during
1989-97 as a result of bilateral and multilateral trade agreements, income
growth, and technological innovations in transport and shelf-life extension. 
There is little doubt that as incomes continue to grow, markets continue to
liberalize, and science finds new ways to extend the shelf life of fresh meat
over longer periods, international trade in pork will increase further.  USDA's
baseline projection indicates continuing growth in international pork trade into
the next century.

U.S. agriculture, as a major exporter of grain and meats, will need the answers
to several important questions about future growth in international pork trade:
Which countries are likely to be the leading exporters in the next century?  Will
the exporting countries that now dominate international pork markets still
dominate in 2006?  What factors can help identify countries that might become or
remain leading pork exporters?


In 1997, four countries--the U.S., Canada, Denmark, and Taiwan--accounted for
about 60 percent of pork exported by the major pork-exporting countries.  The
U.S., a recent player in the world pork market,  accounted for 20 percent, with
primary export markets in Japan, Canada, Mexico, and Russia.  Canada accounted
for 19 percent with important markets in the U.S. and Japan.  Denmark, which has
a long history as a pork exporter, accounted for 17 percent.  Denmark's most
important markets outside the European Union (EU) are Japan, South Korea, and the
U.S. 

Taiwan,  a recent entrant to the world pork market, accounted for 15 percent of
1996 exports by the major pork-exporting countries, with over 95 percent of
Taiwan's exports going to Japan.  In early 1997, however, Taiwan's hog herd
became infected with foot-and-mouth disease (FMD).  As a result, Japan and most
other pork-importing countries banned imports of Taiwanese pork.  USDA expects
that Taiwan will eventually overcome the effects of FMD and resume exports to
Japan, perhaps within 5 years.  In the meantime, Japan's demand for pork is being
met primarily by the U.S., Denmark, and Canada.

The extent to which these four leading exporting countries will be able to meet
forecast export growth will be determined largely by the ability of their pork
industries to produce more hogs.  Expansion of a country's hog production
capacity is limited by its resource base.  Of the three key hog production
resources--land, labor, and capital--land is most likely to constrain future
growth in pork production in these four countries.

Land is the key resource in pork production because of its multiple functions:
land is, of course, necessary to house the animals.  Hog feed supplies are
frequently drawn from the domestic land base, as in the U.S. and Canada. 
However, the land requirement for animal housing facilities is relatively
minimal, and the absence of a land base adequate to supply feed can be mitigated
by importing feed, as is done by both Denmark and Taiwan.  

Where land is a nonsubstitutable input into the hog production process is in
manure utilization.  An adequate land base for spreading manure residues is
essential, simply because no other economically viable means of manure
utilization currently exists.  Indeed, manure utilization accounts for most of
the land needs of a hog operation.

Manure is typically stored in a tank or a lagoon facility, which allows the water
content to evaporate.  The storage facility's manure residuals are later spread,
usually over fields where the soil and crops draw fertilizing nutrients
(primarily nitrogen and phosphorus) from the manure residues.  When manure
residue is applied at rates above the nutrient-absorption rates of the soil and
crops, the danger of runoff and subsequent groundwater pollution increases.  

Until recently, land requirements for manure utilization on expanding hog
production facilities were usually met by a combination of two methods:
increasing application rates (i.e., applying greater quantities of manure to a
fixed quantity of land) and increasing the area of application (i.e., applying
manure at the same rate to a greater land area).  Expanding hog facilities in the
U.S. and Canada--countries with relatively large land endowments when viewed at
the national level--typically have leaned toward expanding application area,
while facilities in Denmark and Taiwan--countries with small land endowments--
have more typically increased manure application rates.  

Recent expansion of large, intensive hog production facilities has made manure
utilization a topic of public debate in each of the four leading exporting
countries.  In view of the relatively high densities of hog inventories and the
human population in Denmark and Taiwan, public concerns are perhaps predictable.  

Less predictable has been public debate in the U.S. and Canada, where land is
apparently plentiful.  But in the U.S., for example, there are hundreds of
counties where nutrients available from animal manures exceed 100 percent of crop
system needs.  In these areas, the public debate becomes acute concerning any
type of livestock operation expansion.  

Thus despite large bases of sparsely populated land, public demands for stricter
governmental regulation of hog industry expansion and manure disposal have risen
to a level that may constrain hog production in the U.S. and Canada.  Indeed,
expansion constraints in all four countries may limit export growth rates to
below those expected in response to projected growth in international pork
demand.  

U.S. Responds to Public 
Environmental Concerns 

In the U.S., concerns are aimed primarily at large, intensive hog operations and
the threats they pose to the environment and to the public's "quality of life." 
Although small, the risk of water pollution via manure lagoon leakages or spills,
and the odor that accompanies large, intensive livestock operations, have induced
citizens at local, county, state, and Federal levels to advocate more strict
regulation of existing and proposed operations.  In some states, as well,
environmental concerns and efforts to restrict structural changes in the
livestock industry--especially increasing size and concentration of operations--
have become politically linked, bringing further pressure to bear on hog industry
expansion.

Citizens close to new or expanded intensive hog production facilities have
articulated a broad range of proposals for regulation, from heightened scrutiny
by local zoning boards to statewide moratoria on new hog production facilities. 
Because these and similar measures have implications for the ability of the U.S.
hog industry to expand, the level of environmental regulation may become a key
determinant of the future scale of the U.S. pork export industry.  These new
measures may also have a lasting effect on the structure and distribution of the
U.S. hog herd.

For example, in late August 1997, North Carolina--the second largest hog
producing state in the U.S.--instituted a statewide moratorium on new or
expanding hog operations.  Effective retroactively from March 1, 1997, through
March 1, 1999, the moratorium applies to operations of 250 head or more.  Exempt
from the moratorium are operations that rely on manure management systems other
than lagoons.  

In addition to the moratorium, the law restored the right of county governments
to zone hog operations larger than 4,000 head on feed.  The law also imposed set-
backs (i.e., mandated distances between hog production operations and other
structures, such as houses, churches, schools, and hospitals) and restrictions on
manure spreading.  The law directs the North Carolina Department of Agriculture
to plan a phase-out of anaerobic lagoons and spray fields as primary manure
utilization methods.

A 90-day moratorium on new or expanding hog operations was imposed by executive
order in Kentucky in July 1997 to allow the state sufficient time to formulate
and issue emergency regulations to specify set-backs and to limit the size of
lagoons.  In Minnesota, zoning authorities in three counties have imposed
temporary moratoria on hog production, while a fourth county imposed a permanent
moratorium on expansion.  Moratoria on new and expanded hog operations have also
been proposed in Mississippi and Nebraska.  

In Iowa, the Humboldt County Board of Supervisors proposed ordinances in 1995
that would require county approval of new or expanding hog facilities, require
financial assurance bonds to indemnify potential cleanup costs of abandoned
facilities, and regulate manure application.  Although the Iowa Supreme Court
suspended enforcement of the ordinances in June 1997 pending judicial review, the
Humboldt County ordinances appear to have effectively framed the terms of the
expansion debate in Iowa.  Broadly, the key question is whether the right to zone
land use resides with the state or with counties.  Since counties have
demonstrated a tendency to regulate agricultural land use more strictly than the
state government, operators of large, intensive hog production facilities tend to
favor state land-use laws that are uniform across counties.  

In South Dakota, the expansion debate revolves around the South Dakota Family
Farm Act (a 1974 law that restricts corporate farming) and the use of zoning
restrictions to limit expansion efforts that the act currently allows.  A 1995
interpretation of the law encouraged large, corporate hog producers to explore
production opportunities in South Dakota.  In response to a proposal by Tyson
Foods to raise 500,000 slaughter hogs per year in Hyde County, voters there
passed an ordinance imposing 4-mile set-backs from neighboring properties. Since
set-backs of this magnitude make large hog operations nearly impossible,
corporate hog producers like Tyson Foods are effectively locked out of Hyde
County. 

Moreover, a current effort to amend South Dakota's constitution would prohibit
corporations and syndicates from owning or maintaining livestock.  Cooperatives
and family farm corporations in which family members own a majority interest and
on which at least one family member lives would be exempt.  The amendment would
effectively prohibit contract hog production, as practiced by large hog producers
such as Murphy Family Farms, Carroll's Family Farms, and Tyson Foods.

Kansas and Nebraska also restrict corporate farming in favor of small family-
owned operations.  Currently, these laws are being challenged in both States by
large hog producers attempting to expand their operations.  In Kansas, Murphy
Family Farms has applied for an operations permit as a family farm to raise more
than 260,000 sows.  In Nebraska, a North Dakota corporation is attempting to set
up operations to produce 500,000 hogs per year.  The corporation maintains that
by managing the operations but not owning the hogs, it is exempt from Nebraska's
1982 law banning corporate farming.

Because of its relatively sparse population and its hot, dry climate that
facilitates manure utilization, Oklahoma has seen its hog numbers increase almost
seven-fold from 1991 to 1997. Public concerns related to potential water and air
pollution from intensive livestock production led to the Oklahoma Concentrated
Animal Feeding Operations Act, signed into law in June 1997.  The law requires
licensing for animal confinement operations of more than 5,000 head built after
September 1, 1997, requires liquid waste storage facilities, establishes set-
backs based on operation size and location within the state, and sets minimum
distances between the base of manure lagoons and local water tables.  Further,
the new law requires financial assurances for waste cleanups, and 3-year
environmental histories of all license applicants.

In addition to the debate taking place at the state level, Federal legislation to
regulate hog operations is under consideration.  The Animal Agriculture Reform
Act, introduced in Congress in late October, would require livestock operations
raising more than 1,330 hogs, 57,000 chickens, 270 dairy cattle, or 530 slaughter
cattle to submit a manure handling plan to USDA for approval.  

The legislation would prohibit spreading manure at rates above crop nutrient
requirements; for levels beyond those allowable for fertilizer, the plan would
identify ways of handling, storing, applying, transporting, and disposing of
animal manure.  The legislation was conceived in order to set national
environmental standards for large livestock producers, thus preventing
competition between states that might include reductions in pollution standards
as incentives to large operations.

The Administration's recently released Clean Water Action Plan will also focus
attention on livestock operations and land application of manures, together with
resources and actions to help protect water quality and the environment.

As the struggle for consensus between the U.S. hog production industry and the
public continues, the economics of the tradeoffs between expansion of low-cost
intensive production operations and public demands for environmental quality are
becoming more clearly defined.  Increased environmental regulation increases the
costs of producing hogs in the U.S., leading to production of fewer hogs than
without the new restrictions/regulations.  If U.S. consumer demand and the other
major exporting countries' production costs remain constant, imposing higher
costs on the use of land resources for the U.S. hog industry will increase
domestic pork prices and may reduce U.S. competitiveness in international pork
markets.   

The extent to which a more heavily regulated U.S. hog production industry can
retain its international competitiveness will depend in part on how governments
in other pork-producing countries choose to respond to their own citizens'
environmental concerns.  As in the U.S., when foreign governments impose land-use
restrictions and other regulations on hog confinement operations, the
international competitiveness of their pork products may be reduced.  Thus, the
relative costs of additional environmental regulation in the U.S. and the other
major exporting countries will be an important determinant of international
competitiveness.  

In Canada, large intensive hog operations face challenges similar to those facing
U.S. hog producers.  In Denmark, hog producers have maintained international
competitiveness despite relatively heavy environmental regulation at both the
national level and from the EU.  In Taiwan, public concerns about the
environmental effects of intensive hog operations have been overshadowed by the
outbreak of FMD.

Hog Producers Face
Regulation in Canada ...

Although the Canadian hog inventory is only about one-fifth of the U.S. herd,
producers in Canada are subject to similar market forces that are driving the
U.S. hog industry to restructure into fewer, larger, vertically coordinated
operations.  As in the U.S., public concerns about environmental consequences
accompany the Canadian hog industry's new production structure and practices.  

Many residents who live near expanding or proposed hog production facilities,
particularly in Ontario and Manitoba, have expressed concerns regarding the
potential for water and air (odor) pollution from large production facilities. 
Consequently, restrictions similar to those being imposed in the U.S. are
appearing in Canada as well.  

For example, expansion permits to build new or existing facilities have been
contested and/or blocked in Rondeau Bay and East Hawkesbury, Ontario.  In Usburne
Township, Ontario, a recently enacted regulation requires expanding hog producers
to file professionally prepared nutrient management plans; Turnberry Township,
Ontario, enacted such a requirement for operations larger than 150 animal units. 
In June 1997, Councillors for the municipality of Douglas, Manitoba, rejected an
application for construction of a new 3,000-sow facility on the basis of public
concerns about odor, well pollution, and lower property values.

Provincial governments in Saskatchewan and Alberta also appear to be viewing
growth of intensive hog operations with caution.  A court in Saskatoon,
Saskatchewan,  ruled in October 1997 that an environmental assessment was
necessary before construction could begin on a planned large hog operation.  In
Alberta, the Provincial government recently announced that a study will be
conducted to assess the environmental impact of intensive crop and livestock
production.

Canadian hog enterprise budgets published by the Ontario Ministry of Agriculture,
Food, and Rural Affairs indicate that Canadian producers already pay more than
U.S. producers for manure treatment.  Thus, the key to enhancing the
international competitiveness of Canadian pork products will hinge in part on
whether the increasing returns to scale generated by current structural
adjustments are enough to compensate for the increasing costs of environmental
regulation.

... & in Denmark
& Taiwan

Several EU member states have set up environmental regulation programs either to
improve water quality or to improve the quality of coastal waters for tourism or
fisheries, as in Denmark.  Danish legislation effectively limits the expansion of
hog production by restricting the level of nitrate pollution from agriculture.  
Prompted by high water pollution from animal waste in the mid-1980's, Denmark set
out in the early 1990's to reduce agricultural nitrogen leaching through several
programs directed at manure storage/spreading and at fertilizer management.  

Danish livestock farms must possess a manure storage capacity equivalent to
production for 6-10 months, depending upon the number of animals held.  Hog
farmers must limit the amount of nitrogen in manure that will be spread per
hectare to 1.7 livestock units.  Farms exceeding this density may comply with the
standards by spreading their excess manure on neighboring farms.  Set-aside land
is not counted as part of the livestock base area and therefore cannot be used
for manure spreading.  No manure may be spread on frozen ground or on non-
vegetated soil from after harvest to November 1.  Manure must be worked into the
soil within 12 hours of spreading. 

The Danish Agricultural Act of 1994 has encouraged a shift to less intensive
livestock production by stipulating that livestock farmers must own certain
percentages of the area needed to meet manure spreading requirements, depending
on the number of animal units on the farm. For example, operations with up to 120
units must own at least 25 percent of the land required to spread the manure
produced; those with 250 animal units must own at least 60 percent; and those
with over 500 units must own 100 percent of the required land.  To expand
livestock capacity, farmers must own or purchase the required amount of land for
additional manure spreading.  Previously, producers were permitted to rent land.  

Farms larger than 25 acres are required to maintain a fertilizer management plan
and balance sheet, and may not exceed the official standards for fertilizer
application without risking a fine.  To reduce nitrate leaching from bare soil
during the winter months, farmers are encouraged to keep a green cover on 65
percent of cultivated area.

Hog operations in Denmark must also comply with national regulations developed in
response to EU directives.  In December 1991, the European Community (EC, now the
EU) issued the EC Nitrate Directive to prevent and reduce nitrate pollution of
waters from agricultural sources within the EC.  The Directive set the maximum
nitrate concentration allowed in water at 50 mg per liter, in line with the safe
level recommended by the World Health Organization and other EC directives
concerning drinking water quality.

The EC Nitrate Directive also set standards and procedures with which member
states must comply in order to manage nitrate problems.  Member states were
required by December 1993 to identify vulnerable zones where agricultural
pollutants affected the aquatic environment and to establish a Code of Good
Agricultural Practice to prevent further unnecessary agricultural nitrogen
emission.  By December 1995, member states were expected to design an action
program based on the Code of Good Agricultural Practice for handling chemical
fertilizers and manure in the identified zones. These programs are to be fully
implemented by December 1999. 

The Nitrate Directive stipulates that the action program must limit the
application of animal manure to 153 pounds of nitrogen per acre, including manure
from grazing livestock.  However, to help member states in regions of intensive
livestock production comply with the Directive, the nitrogen limit may be
extended to allow up to 189 pounds per acre from 1996 to 1999.  Member states may
set different levels of nitrogen if justified by criteria such as long growing
seasons, crops with high nitrogen uptake, or high net precipitation, provided the
objectives of the Nitrate Directive are not violated.

Member states must also set up a monitoring system to evaluate their action
program and ensure it adequately fulfills the objectives of the Code of
Agricultural Practice.  Corrective measures must be taken if the program fails to
meet their objectives.  The program must be reviewed at least once every 4 years. 
 

Under both national and EU regulations, Danish hog producers have been dealing
since the early 1990's with the kinds of restrictions that challenge U.S.
producers today.  Despite higher production costs caused in part by environmental
regulation, high-value Danish pork products remain competitive in many markets
outside the EU.  Among the factors that compensate for higher production costs
and thus contribute to maintenance of  international competitiveness are the
vertically coordinated production and processing structure of the Danish pork
industry and a strong emphasis on marketing.

Taiwan's hog inventory grew by 600 percent from 1960 to 1995, largely a
reflection of the development of Taiwanese pork exports to Japan.  Prior to the
outbreak of foot-and-mouth disease  in late March 1997, Taiwan exported 95
percent of its pork production to Japan.  

The juxtaposition of Taiwan's population density with a large, intensive
livestock industry prompted its government to propose a 6-year plan in 1991 to
reduce hog production by one-third.  However, high hog prices from an expanding
Japanese export market reduced producer incentive to meet government objectives.  

At the same time, the Water Pollution Control Act, which became law in Taiwan in
May 1991, set standards for hog waste treatment.  Restrictions on hog waste
treatment were tightened in 1993, but implementation was not complete at the time
of the FMD outbreak.  

Reports from Taiwan indicate that before resuming production, operators will be
required to meet standards for hygiene, land use, and environmental protection,
suggesting that smaller, less capitalized operators may be forced out of
business. Indeed, the Government of Taiwan announced a new 6-year production
program in April 1997 that will encourage 80 percent of hog producers with fewer
than 2,000 head of hogs to exit the industry.  The official announcement cited
Taiwan's imminent accession to the World Trade Organization (WTO) as
justification for the structural change.  WTO membership will likely be
accompanied by expanded access to Taiwan's pork markets, necessitating the
development of a competitive domestic pork industry to compete with imports.

Increased regulation of hog production in Taiwan and the prospects of pork market
liberalization will likely form an effective ceiling on hog production, and the
FMD outbreak makes such an outcome even more likely, for three reasons.  First,
after the easing of environmental effects from intensive hog production brought
about by the FMD-related reduction in hog numbers, Taiwanese citizens are likely
to exert considerable pressure on an increasingly responsive government for
enforcement of existing environmental regulation.  

Second,  many smaller production operations will likely not survive the FMD
outbreak because of the high costs of restarting hog production and of compliance
with more strongly enforced environmental restrictions.  Third, the FMD outbreak
provided an incentive for many large Taiwanese hog producing interests to
relocate some of their production facilities outside Taiwan.  Now, rather than
depending solely on facilities in Taiwan, export income is being generated by
Taiwanese-owned hog production operations in other countries such as Canada. 
Together, these factors point to a permanently smaller hog herd in Taiwan.  

New Exporters May Enter 
International Pork Markets

Increased public regulation of the risks of environmental pollution implies two
non-exclusive sets of conclusions: one for pork exporting countries with small
land endowments (Denmark and Taiwan), and another for countries with relatively
large land endowments (the U.S. and Canada).  For the U.S. and Canada, increased
regulation of environmental risks implies fewer hogs produced at higher per-head
costs, leading to higher domestic prices for pork.  

For countries with small land endowments, increased environmental regulation
implies a ceiling on inventory numbers, such as the stringent regulation of 
manure spreading in Denmark.  In Taiwan, the costs of compliance with
environmental restrictions, together with trade competition and disease factors,
will likely hold the Taiwanese herd below its pre-FMD level of 12 million head.  

Limitations on inventories, however, do not necessarily imply a limitation on the
potential profitability of the hog export sectors, as Denmark has shown.  Future
profitability for the pork industries in exporting countries with small land
endowments will probably result more from technological innovations and cost
reductions than from expansion.  This suggests that while Danish and Taiwanese
shares of the expanding world market may decline, industry profitability may
actually increase. 

With virtually insurmountable land constraints in the small, densely populated
countries of Taiwan and Denmark, the U.S. and Canada, with relatively large land
endowments and much less dense populations, had seemed most likely of the major
exporting countries to expand production and meet expected increases in world
demand for pork.  But with environmental constraints on land use in all four
leading pork exporting nations, world pork prices could increase more sharply
than otherwise as demand increases over time.

A higher cost structure brought about by environmental regulation, coupled with
higher world pork prices, may stimulate development of hog industries in
countries that currently import pork, as well as in countries with relatively
low-cost resources.  Nations with relatively large land endowments, good feed
supplies, and relatively low levels of regulation may develop pork export
capacities.  Mexico, Brazil, Argentina, and Uruguay could be strong candidates as
major pork exporters if their disease control efforts are successful.  
Mildred Haley (202) 694-5176, Elizabeth A. Jones (202) 694-5149, and Leland
Southard (202) 694-5187
mhaley@econ.ag.gov
eajones@econ.ag.gov
southard@econ.ag.gov

BOX--WORLD AGRICULTURE & TRADE

The Administration's Clean Water Action Plan and related documents are available
on the Internet at http://www.nhq.nrcs.usda.gov/cleanwater/


FOOD & MARKETING

Federal Milk Marketing Order Consolidation & Reform

The 1996 Farm Act included two significant changes under the Dairy title as part
of the effort to reduce government intervention and regulation of agriculture and
to move agriculture toward a greater market orientation. The first of these was
the phasing out of the dairy price support program, which for years established
the minimum price for milk; the second was the requirement that the U.S.
Department of Agriculture (USDA) consolidate and reform the Federal Milk
Marketing Order (FMMO) system.  

The law mandated that USDA reduce the number of milk marketing orders from 31 to
no less than 10 and no more than 14 by April 4, 1999.  USDA announced publication
of the proposed rule on January 23, 1998, to solicit public comment on proposals
for consolidation of the order system, changes to classified pricing, replacement
of the Basic Formula Price, and changes in order provisions, terminology, and
classification of milk by end-use.  

The FMMO system was set up in the 1930's when milk producers had no alternatives
to selling their milk to local handlers and were often captive to unfair buying
practices by milk dealers or handlers.  FMMO's were designed to level the playing
field by returning some market power to producers.  A milk marketing order--which
covers only Grade A milk (about 95 percent of milk production)--is a
geographically defined fluid milk demand area.  Within each region, handlers'
milk sold in the milk marketing order is "pooled" to generate a uniform average
price, called the blend price.  

FMMO's set monthly minimum prices (classified pricing) for different uses of
milk.  Class I milk is milk for fluid consumption; Class II milk is used to
produce soft products such as ice cream, cottage cheese, and yogurt; and Class
III milk is used to manufacture hard products such as butter, nonfat dry milk,
and cheese.  In recent years, many marketing orders have also defined a Class
III-A category for milk used to make nonfat dry milk. 

The minimum prices for Class I and II milk are determined by adding fixed
differentials to the Basic Formula Price (BFP), which is based on the old M-W
(Minnesota-Wisconsin) price, updated by a product price formula.  The BFP also
currently serves as the Class III price.  The current Class II price is constant
over all marketing orders at 30 cents above the Class III (BFP) price.  The Class
I differential varies for each milk marketing order; generally, the Class I
differentials increase from northern to southern markets, ranging from a low of
$1.20 in the upper Upper Midwest to a high of $4.18 in Miami, Florida.

Data are collected within each marketing order on the quantities of milk used in
each class of milk in the order.  A blend price, or average, is calculated based
on the class prices and the quantities used in each class.  The blend price
becomes the minimum that handlers must pay producers or producers' cooperatives. 
Since all handlers must purchase at the minimum class prices, handlers who
produce  cheese, butter, and nonfat dry milk ultimately receive payments back
from the marketing order pool to compensate for the difference between the blend
price and the lower Class III and III-A prices.  In contrast, Class I and II
handlers must pay into the pool the difference between the blend price and their
higher class prices.

How Does Order Reform 
Affect the Present System?

In the 1996 Farm Act, USDA was directed to consolidate the milk marketing orders,
which will generally enlarge the area and expands the number of producers and
handlers covered by a typical order.  USDA's proposed rule would consolidate the
present 31 orders into 11.  

No orders would remain geographically unaffected, although some orders would see
only minor changes.  The Arizona order, for example, has only a minor change--the
addition of the Las Vegas area.  Nine orders in the proposed rule combine at
least two orders from the former system, with some combining as many as five. 
The new order also would include some previously unregulated area.   All
producers will be able to vote on the final orders after the final rule is
published. 

The 1996 Farm Act also granted California dairy producers--who have a separate
state milk marketing order--the right to vote to join the FMMO system as a
separate order.  USDA's proposed rule does not include California, since a
petition from the state's producers to be included in the FMMO system was not
received in time to be evaluated before issuance of the proposed rule in January. 

In conjunction with the consolidation, USDA was authorized to consider several
other changes to FMMOs, including multiple basing points.  In the current order
program, the price surface has traditionally recognized the Upper Midwest as the
dominant surplus milk production area or basing point.  In the proposed rule,
USDA now recognizes multiple locations as surplus production areas, and the price
surfaces under the proposed pricing options reflect these multiple basing points.

In the proposed rule, seven different price surface options are presented, two in
significant detail.  Option 1A is based in part on results generated by a model
created at Cornell University, adjusted for more recent economic conditions that
have occurred.  USDA expresses a preference for one option, called Option 1B in
the proposed rule, which  is a more market-oriented price surface also generated
by the Cornell model.  Option 1B would be phased in over a 5-year period, with
the new Class I differentials in each marketing order phased in by 20 percent
each year until the new differentials are reached.  Two other phase-in methods
for Option 1B would provide compensation to producers by adding a fixed amount to
the Option 1B differentials over the 5-year phase-in period.  

Other options analyzed in the proposed rule include a proposal by Mid-American
Dairyman, Inc., which leaves the differentials unchanged from the current system
but would floor the BFP at $13.63--the record level established in 1996.  An
option proposed by the International Dairy Foods Association (IDFA) would change
the price surface for Class I milk and have only two class prices--fluid milk and
other milk.

The 1996 Farm Act also authorized USDA to consider multiple component pricing for
developing prices for milk used in manufacturing products.  Under USDA's proposed
rule, component prices (protein, butterfat, and other nonfat solids) would be
used to determine the values of milk used in Class III (milk used in cheese) and
a new Class IV (milk used in butter and nonfat dry milk).  USDA would use
information on market prices for cheese, butter, nonfat dry milk, and whey to
determine the values of milk components and determine minimum prices using
formulas that incorporate these component values.  In recent months, the proposed
Class III price has been running above the current BFP and the proposed Class IV
price above the Class III-A price.  The new Class II price would be set at 70
cents above the Class IV price versus 30 cents above the Class III price
currently.  Recent experience also suggests the Class I price would increase.

What Will Be the Economic Effect?

Consolidation has two basic impacts on the blend prices received by producers. 
First, utilization rates (the relative use of each class of milk) change when
orders are combined--some old orders will bring lower Class I utilization to new
orders, lowering the basic blend price, and vice versa.  The second, and less
obvious, change relates to the "zoning" of blend prices under an order.  Zoning
is the practice of setting the blend prices differently at rural and urban
processing plants within a marketing order to encourage the movement of milk to
urban areas to satisfy the demand for fluid milk.  In effect, the blend price at
a rural processing plant is set to reflect the cost of moving milk to urban areas
and plants, compensating producers for supplying milk to where it is needed.

An analysis of changes in three hypothetical orders provides an example of how
the consolidation and zoning may affect the producer blend price.  Under the
current system, the differences between the Class I prices in these hypothetical
marketing orders are around 10 cents--Order A is about 10 cents higher than Order
B, and Order C is about 10 cents lower than Order B.  Because the Class I
utilization in each of these orders is about 50 percent, the effective
differences between the blend prices at the base points in each separate
marketing order under the current system would be about 5 cents between A and B
and between B and C.  When the orders are combined, B's base point  becomes the
base point for the new order.  Thus the new zoned blend price for A is 10 cents
higher than the B price, and the blend price for C is 10 cents lower than the B
price, a change of 5 cents for each.  

Changes in the Class I price surface will affect producer revenues and consumer
costs, although the final effect will be determined by how much milk is used in
Class I products (Class I utilization).  In economic terms, the effect of
classified pricing can also be called price discrimination.  Under price
discrimination, higher prices can be charged for the same raw product in the
market with a more inelastic demand (i.e., where a 1-percent change in the price
of that product will result in a less-than-1-percent change in the quantity of
that product demanded).  
To increase revenue in a market with inelastic demand, a seller can either raise
prices or reduce supply.  Since the demand for fluid milk is more inelastic than
the demand for milk for manufacturing, under a higher Class I price surface,
revenue in the fluid market will increase, despite lower quantity consumed.  

The reduction in the quantity demanded in the fluid market due to higher prices
will create a larger supply in the manufacturing market, which could reduce the
revenue to producers in this market.  The increased revenue in the fluid market
would be greater than the lower revenue in the manufacturing sector--i.e., the
revenue increase in the fluid market would be greater than the revenue loss in
the manufacturing sector.  

As a result, consumers would pay more on average for dairy products and producer
incomes would increase.  Regionally, producers in areas with high Class I
utilization will gain more from higher Class I differentials.  Producers in areas
with low Class I differentials will gain less.  Since Option 1B eventually
results in lower Class I prices overall, Option 1B may return less income to
dairy farmers and lead to lower consumer expenditures for dairy products compared
with Option 1A. 

The proposed Class III and Class IV prices will also affect producers and
processors.  At the present time, it appears that the proposed Class III and
Class IV prices would be higher than their predecessors.  Thus, the new order
system could raise the cost of milk going into the products using these classes
of milk.  A second impact of higher Class III and Class IV prices will be higher
Class I and Class II prices than would have occurred under the current price
formulas.

USDA will be accepting comments on its proposed rule through March 31.  These
comments will be reviewed and a final rule will be announced, followed by
informational meetings and a producer referendum early next year.
Richard P. Stillman (202) 694-5188
stillman@econ.ag.gov

Box

Detailed information on economic impacts of FMMO reform, as well as the text of
the proposed rule and other supporting material are available on the Internet at
http://151.121.3.150/dairy/reform or from USDA-AMS Dairy Programs, P.O. Box
96456, Washington, DC 20090-6456.


SPECIAL ARTICLE

Argentina's Economic Reforms Expand Growth Potential For Agriculture

Argentina, one of the world's leading agricultural exporters, may be poised to
realize the full agricultural production potential afforded by its temperate
climate and some of the world's richest farmland.  A combination of dramatic
market-oriented reforms and strong price incentives in the 1990's have led to key
changes in the way the country produces and markets agricultural commodities. 

Prior to the reforms, successive ineffectual or flawed government programs had
resulted in extended periods of economic instability marked by chronic public
sector deficits, endemic and highly variable inflation, and low savings and
investment.  When the current administration took office in July 1989, the
economy was in crisis and the government insolvent.  Inflation during July 1989
alone was 200 percent, and the economy was experiencing unprecedented stagnation. 
Decades of neglect had left Argentina with a deficient infrastructure, a poor
communications network, falling labor productivity, and growing poverty.  

The Law of Convertibility, which went into effect in April 1991 and guaranteed a
one-to-one conversion of pesos into dollars, began reining in both inflation and
the fiscal deficit.  In addition to halting the government's inflationary
financing, the administration implemented a far-reaching economic restructuring
program that included wholesale privatization of government-owned industries and
utilities, deregulation of the economy, restructuring of government institutions,
and reforms in the country's legal framework.  The new policies have set the
country on a path of fiscal and monetary prudence that has lowered inflation and
spurred private investment.

In the agricultural sector, the reforms eliminated the institutions and policies
of the past five decades that had shifted resources from agriculture to other
sectors of the economy.  Elimination of the National Grain and Meat Boards, once
important vehicles for government intervention in the marketing system, was
largely symbolic, as many of their functions had already been transferred to the
private sector.  But combined with the government's initiatives to divest itself
of Board-owned inland and port facilities, it represented another solid reform.  

Agriculture benefited from other privatization initiatives, including the
granting of road and railroad concessions to the private sector, privatization of
communications and power sectors and ports, and partial sale of the state oil
company as these actions increased the efficiency of these sectors and thus
reduced farmers' costs.  The main trade policy instruments for transferring
wealth from agriculture to other industries--export taxes on agricultural
commodities and tariffs on imported inputs--were gradually reduced or rescinded. 
The Law of Convertibility eliminated the ability to tax agricultural exports
indirectly through manipulation of the exchange rate.  This, coupled with the
trade policy reforms, removed the distortions between domestic and international
prices.

As a result of the reforms, Argentina's gross domestic product (GDP) grew 6
percent per year on average from 1991 to 1997, increasing each year except 1995. 
However, the agricultural sector continued to stagnate for several years.  As
with other export-oriented sectors, agriculture had been handicapped by a fixed
and increasingly overvalued real exchange rate.  The appreciation of the peso
squeezed the profits of Argentina's commodity producers, whose income was derived
from dollar-denominated international commodity prices, while their costs for
domestic goods and services were denominated in pesos.  Domestic taxes had
increased, real interest rates remained high, and access to credit was
insufficient.  This created tremendous pressure on the farm sector to become more
efficient, while encouraging major farm groups to seek assistance from the
government.

In response to farmers' financial stress, the government announced additional
policy measures in August 1993. The Fiscal Pact, as these measures were
collectively called, was designed to reduce both federal and local taxes that
were constraining the ability of Argentina's agricultural sector to compete in
world markets.  Most important, the government agreed to eliminate the asset tax
on land.  Other federal and local taxes were scheduled for elimination or
reduction over 1993-95.  It should be noted, however, that no substantive
government policies, programs or subsidies were enacted to encourage the
production of grains, oilseeds, or livestock  in Argentina, nor do any exist
currently.  At the same time as measures under the Fiscal Pact were being
implemented, the private sector was becoming more efficient and developing new
and innovative marketing and financial tools for producers.  

Argentina's Crop Producers
Cash in on Reforms

During the 1996/97 marketing year, the vast array of changes in the Argentine
economy and the agricultural sector allowed crop producers to respond
aggressively to the strong international commodity prices of the previous season. 
Farmers dramatically increased their plantings and their use of productive inputs
in 1996/97.  Aided by near-perfect weather, they harvested record wheat, corn,
and rice crops.  Land harvested to grains and oilseeds in 1996/97 totaled about
22 million hectares, 3 million above the previous year's record-high.  An
estimated 2-million-plus hectares of good pasture land, previously devoted almost
exclusively to cattle, was planted to crops.  

Before the 1995/96 season, many analysts had assumed that the 1983/84 record of
18.7 million hectares represented an upper bound on the amount of land available
for grains and oilseeds, which could rise only with significant investment. 
While some investment did take place, the sector has shown that it is much more
capable of responding to high prices than previously thought.

In addition to record area harvested, 1996/97 saw record yields for corn and rice
and near-records for wheat and sorghum.  Total grain production (35.6 million
tons)  and exports (23.4 million tons) reached record levels.  In previous years,
these gains would have come at the expense of oilseeds, but the area harvested to
oilseeds was the second highest ever.  And while soybean yields were the lowest
in 8 years, production of all grains and oilseeds together totaled almost 53
million tons, exceeding the 50-million mark for the first time and eclipsing the
previous production record by almost 8 million tons.

For 1997/98, preliminary indications are that Argentina is poised to enjoy a
second record-breaking harvest in as many years.  Even though planted area for
all commodities dropped about 3 percent over the previous year, expected yields
have more than compensated due to extremely favorable weather conditions.  Total
grain production is estimated at 36 million tons and total oilseed production at
23 million, both records.  Wheat production is estimated at 13.9 million tons, 2
million less than the previous year, but record production of corn (16.5 million
tons) and soybeans (16 million tons) is expected.  

Last year, the government announced a goal for grain and oilseed production of 60
million tons by 2000.  Even though the extremely favorable weather of this year,
which is estimated to have produced 59 million tons of grains and oilseeds,
should not be mistaken for the norm, it seems likely that the 60 million mark
could be surpassed before 2000.  While the potential for drawing additional land
into grain and oilseed production in the future is debatable, the potential for
increasing yields remains bright. 

Future yields should increase with growth in use of inputs such as fertilizers
and specialized farm equipment.  While many production practices common in the
U.S., including a high level of mechanization, have been used in Argentina's
principal grain and oilseed producing region, the Pampa, the use of fertilizers
and chemicals had traditionally been extremely low in Argentina.  In addition to
its high cost, other factors holding down use of fertilizer included the richness
of the soil and its high content of organic matter; the rotation of crops with
sown pastures; and development of crop varieties not particularly responsive to
fertilizer.  

Argentina has always relied on imports for most of its fertilizer needs, and the
costs of imported inputs began to drop after passage of the Law of Convertibility
and the reductions in import tariffs.  By 1995, fertilizer use had reached a
record 1.2 million tons, compared with less than 100,000 tons 10 years earlier. 
In 1996, fertilizer consumption increased again, vaulting to 1.6 million tons,
five times the 1991 level.  Sales of agrochemicals (primarily herbicides) also
increased sharply, nearly tripling between 1991 and 1996.  

The growth in use of these inputs was accompanied by an increase in planting of
improved seed varieties.  Use of chemicals and improved seeds are expected to
continue rising as costs decrease and more farmers realize the potential gains. 
During the 1996/97 season, fertilizer was applied on an estimated 65 percent of 
wheat and 50 percent of corn area, up from an estimated 50 and 25 percent,
respectively.  While over 90 percent of the fertilizer used is currently
imported, fertilizer companies are making investments to manufacture it locally. 
With urea consumption in Argentina expected to increase to 1.2-1.5 million tons
by 2000, the country will probably still have to import large quantities of
fertilizer.  

With increasing confidence in the agricultural sector, farmers stepped up
purchases of machinery such as tractors, harvesters, and irrigation equipment. 
In 1995 alone, irrigation equipment sales, benefiting also from lowered import
costs, were double the total for all previous years.  

Changes in farm management practices will also push up yields. No-till cropping,
for example, which is becoming more common, particularly for soybeans, has led to
more intensive land use as soybeans are double-cropped with wheat. 

With greater reliance on the market, Argentine farmers have been forced onto a
steep learning curve in managing resources to increase output, and in marketing
the output.  Farmers are making more extensive use of marketing tools, such as
futures and options, to lock in favorable prices.  

During calendar-year 1997, an estimated 20 million tons of commodities was traded
on the futures market, up nearly 400 percent over 1992.  The government has been
championing the use of futures and options to promote more orderly marketing of
grain and to minimize the effects of price swings on farmers.  The upward trend
in use of these instruments is expected to continue with the recent elimination
of the 27-percent profit tax on foreign commodity trading firms doing business in
Argentina's Boards of Trade.  Brazilian trading firms, in particular, are
expected to increase their presence in the Argentine futures market, as Argentine
commodities comprise a large share of Brazilian imports.  Some traders estimate
an increase of about 5 million tons in total exchange volume as a result of the
new regulations, providing needed additional liquidity to the market.

Argentina's farmers have also benefited from privatization of much of the
transportation and handling infrastructure that has generated major improvements
in rail service and port facilities and an increase in export capacity. 
Privatized railways carried over 17 million tons of freight in 1996, 12 percent
more than in 1995 and 29 percent above 1994.  About 21 percent of the country's
grains and oilseeds are transported by rail, and grain accounts for 46 percent of
all rail freight.  Greater competition and efficiency gains have reportedly
lowered freight costs by 20-25 percent in the grain producing region.

Major expansion and upgrades in port facilities have occurred near Rosario, along
the Parana River.  Exports from the Parana ports, mainly grains and oilseeds and
their products, have increased from about 16 million tons in 1992 to nearly 21
million tons in 1996.  This growth is expected to continue, as many firms are
expanding their loading and processing capacity for grains and oilseeds.  A major
project is also underway to develop the waterway further north into Paraguay and
Brazil so that products, mainly soybeans, can be brought in large quantities by
barge for processing and export through Argentina.

Livestock Sector
Fails To Match Crop Gains

Argentina has been associated with beef production and exports since at least the
turn of the century.  It is currently the world's sixth-largest beef producer and
fifth-largest exporter.  Since the late 1970's, however, Argentina's beef
production and exports have decreased, particularly as a share of world output
and exports.  The country's economic problems throughout the 1980's reduced
incentives for long-term investments such as cattle production.  Beef, a staple
in Argentina, suffered from government efforts such as price controls and
government-imposed "beefless days," aimed at reducing inflation for the urban
population.  Productivity, particularly in the cow-calf sector, is low, a result
of reproductive diseases (such as brucellosis) and, until recently, foot-and-
mouth disease (FMD).

Argentina's livestock sector has been less of a beneficiary of the reforms of the
1990's than the grain and oilseed sectors.  By the end of 1997, the Argentine
cattle inventory stood at 50.3 million head, the lowest in 27 years.  The herd
had decreased by more than 5 million in less than 5 years.  The period included 2
years of drought and several years of strong competition from the more profitable
grains and oilseeds, prompting farmers to increase slaughter in order to devote
more land to crops.  Real cattle prices had been dropping since 1992, while
production costs and taxes remained high.  

Structural deficiencies continue to prevail in the livestock sector.  It has been
one of the last sectors in agriculture to receive fresh capital, for a number of
reasons.  Real interest rates remain high, reducing the attractiveness of long-
term investment in cattle and beef production.  Tax evasion through black market
sales has proved to be a particularly tough and pervasive problem in the
livestock sector.  The government is trying hard to control the tax evasion in an
effort to encourage more local and foreign investment.  Until recently, foreign
direct investment, while estimated to have grown significantly in the overall
food sector in the early 1990's, had been notoriously absent in the beef
processing sector. 

At present, the main factor constraining production is the inefficiency of the
cow-calf sector.  Although existing technology would allow for at least a
doubling of average productivity in most areas, technology adoption by farmers
has been very low, hampered by owner absenteeism, low educational level of the
average cow-calf operator, and inefficient farm size.  In addition, past periods
of economic instability were not conducive to long-term investments such as
cattle.  Recent developments, however, suggest that this may be changing. 
Advanced producers, for example, have adopted a very successful practice called
"early weaning," whereby calves are weaned (with supplementation) when they are
between 2-3 months old, allowing the cows, and especially the heifers, to improve
their body condition sooner, thereby dramatically improving pregnancy rates. 

The most significant recent development in the Argentine livestock sector was the
U.S. announcement in August 1997 that it would begin importing fresh boneless
beef from Argentina under a 20,000-ton quota, after more than 60 years of
prohibition.  The presence of FMD had effectively banned Argentine beef from the
world market for FMD-free fresh and frozen beef.  In 1990, the Argentine National
Animal Health Service initiated a comprehensive FMD vaccination program.  At the
time of the U.S. announcement, there had been no outbreak of the disease in over
3 years.

New markets should now open for Argentine beef in Asia as well.  This will help
the cattle industry to stabilize and possibly begin expanding production,
although the current financial and economic crisis currently plaguing Indonesia,
Thailand, Malaysia, the Philippines, and South Korea will have a short-term
negative impact on their imports of agricultural commodities, especially high-
value products such as red meats. 

Growth Picture for 
The Next 10 Years

Can Argentine agriculture sustain the growth of the last few years?  USDA's 1998
baseline includes projections of Argentine production, consumption, and trade for
major agricultural commodities over 1998-2007.  

Grains.  The area under grain cultivation is expected to grow modestly throughout
the projection period, from a base of 10.7 million hectares in 1997/98 to 11.4
million by 2007/08--still slightly lower than the 11.7 million hectares harvested
in 1996/97.  This is explained by wheat area, which jumped to 7.1 million
hectares in 1996/97 from 4.5 million the previous year in response to a sharp
price spike.

Wheat area is projected to grow from 5.7 million hectares in 1997/98 to only
about 6.3 million by 2007/2008.  Average yields, however, are anticipated to grow
at about 2 percent per year, so production is expected to reach a record 16.3
million tons and exports a record 11.4 million tons by 2007/2008.  This should
enable Argentina to maintain its place as fifth-largest wheat exporter in the
world, increasing its market share from an estimated 7.8 percent in 1998/99 to 9
percent in 2007/08.

Rice is a relatively small crop in Argentina, but production has been on an
upward trend for several years and is expected to continue.  Rice area is
projected to increase by almost 70 percent, from 235,000 hectares in 1997/98 to
400,000 in 2007/08, and production to more than double to 1.6 million tons.  

Since the formation of MERCOSUR, the Southern Common Market, the bulk of
Argentina's rice exports have been to Brazil.  Future growth in the Brazilian
market will continue to provide the incentives for growth in Argentina's
production.  At the same time, improvements in rice quality are underway, which
should increase opportunities for Argentine exports in other markets.  Argentine
rice exports are projected to reach almost 1.4 million tons by 2007/08, from
600,000 tons in 1997/98.  Should talk of joint Argentine-Brazilian ventures in
the rice sector come to fruition, Argentine production could easily expand beyond
baseline projections. 

Argentina is the world's second-largest corn exporter after the U.S., but its
yields are still much lower than those of the U.S.  Some analysts believe it is
Argentina's corn crop that holds the most potential for expansion via higher
yields.   

The USDA baseline is projecting that Argentine corn yields will reach an average
of 5.75 tons per hectare by 2007/08--still more than 35 percent below the average
projected U.S. yields.  Given that the excellent weather this year is expected to
produce yields of about 5 tons per hectare, the level for 2007/08 may well be
underestimated. Production for 2007/08 is expected to be about 18.9 million tons,
with 12.8 million tons exported.  The production number represents an increase of
only 15 percent over the estimate for the current year, and may now be considered
by many as too modest, as farmers continue to increase their use of inputs,
expand their use of hybrid seed and improve their planting practices.  Improved
hybrids have several advantages:  they can be planted in higher densities, have a
shorter growing season, can be sown in lower soil temperatures, and respond
better to fertilizer.

Oilseeds.  The outlook for oilseeds in Argentina is for continued expansion,
although at a slower pace than in the recent past.  Rapid expansion in soybean
area between the early 1970's and the mid-1990's was fueled by the high profits
earned by Argentine soybean farmers. During a period of favorable soybean/corn
price ratios between 1985 and 1990, area devoted to corn dropped 1.4 million
hectares while soybean area expanded by 1.45 million.  Since then, soybean area
has continued to expand, moving onto less productive land taken from pasture. 

Soybean harvested area is projected to increase from 6.8 million in 1997/98 to
about 7.8 million in 2007/08.  As much of this additional land will come from
increased double-cropping with wheat, yields are expected to grow by a modest 1.2
percent per year.  The projected growth in yields may be on the conservative
side, however, as more farmers are reportedly moving to shorter maturity
varieties that are less prone to early damaging frosts.  These varieties can also
be planted over a wider geographical area.

Production is expected to increase to 19.5 million tons in 2007/08 from 16
million in 1997/98, while exports are expected to remain in the area of 2.5
million tons.  The share of soybeans exported will drop from 16 to 13 percent,
with most of the production increase going to the crushing industry.  The oilseed
crushing industry in Argentina has undergone rapid expansion in the last 10
years, resulting in greater and more efficient capacity. The industry is expected
to continue to change, as crushing capacity becomes more concentrated among
fewer, more efficient firms.  Both local and international firms are expanding or
modernizing older plants or building new ones, and it seems likely that the
industry will be able to handle the 16-million-ton crush projected in the
baseline for 2007/08.

Argentina is currently the world's largest exporter of soybean oil and the
second-largest exporter of soybean meal.  Most of the soymeal and oil produced
will continue to be exported.  Increasing soybean production combined with a
larger, more efficient crushing sector and expanding markets for meal and oil
should ensure that Argentina remains a world leader in soymeal and soyoil
exports.   Soymeal exports are expected to increase from 9.5 million tons in
1997/98 to 12.1 million by 2007/08, while soyoil exports will expand from 2
million to 2.5 million tons.

For sunflowerseed, the other major oilseed produced in Argentina, production is
expected to expand during the baseline period by about 30 percent, to 7.5 million
tons.  The bulk of this expansion will come from improved yields, as very little
additional area is expected to be devoted to this crop, beyond the 3.3 million
hectares currently planted.  As with soybeans, the vast majority of sunflowerseed
will likely continue to be crushed domestically and exported as meal or oil.

Unlike in the grains sector, export taxes still affect the oilseeds sector.  To
encourage domestic processing, an export tax of 3.5 percent on soybeans is in
place, while oil exports obtain an export rebate of 1.35 percent on crude and
3.15 percent on refined.  Most Argentine oil exports are of crude oil. 

Livestock.  Most observers believe that 1998 will see a turnaround in the
Argentine cattle industry.  A growing domestic economy,  the depleted stock of
cattle, and strong export prospects buoyed by a clean bill of health on foot-and-
mouth disease are expected to put upward pressure on Argentina's cattle prices
and initiate a moderate cattle rebuilding phase.  

There is renewed investor interest in the cattle sector--cattle, land, and meat
packing operations.  The price of feeder cattle is currently 45 percent higher
than a year ago.  The price of land for breeding cattle is 30 percent higher than
the 1977-96 average, while good land for fattening cattle (which is also good for
cropping) increased more than 100 percent from the average of the past 20 years. 

Key assumptions in the USDA baseline for Argentina are that the cattle birth rate
will show a slight but steady increase, that slaughter rates will go up slightly
as a result of more efficient feeding and improved pasturing, and that per capita
domestic beef consumption will continue to decline.   The decline in consumption
is primarily as a result of health considerations, although should Argentina gain
widespread access to the Asian beef market, this would put upward pressure on
beef prices and could accelerate the move away from beef consumption to poultry
and pork consumption. 

Beef production is expected to increase from 2.55 million tons in calendar year
1997 to 2.8 million in 2008.  Beef slaughter is expected to decline slightly in
the first projection year, allowing modest rebuilding in the cattle inventory. 
Increased production in the future, however, will depend as much on heavier
slaughter weights as on increased herd size.  

Per capita beef consumption, which dropped from 85 kilograms per person in 1986
to 60.8 in 1997,  is projected to drop further to 54.6 kilograms by 2008. 
Exports will increase from 455,000 tons in 1997 to 650,000 in 2008.  

The baseline assumes that Argentina continues to export primarily grass-fed beef,
competing mainly with Australia and perhaps New Zealand, but also that it gains
limited access to Asian countries.  In order to tap new FMD-free  markets in
Asia, Argentina's feedlot industry would have to expand in order to supply the
grain-fed beef the Asian markets demand.  Relative grain and beef prices will be
the main factors dictating this expansion; the baseline results suggest that less
than 5 percent of Argentina's beef production in 2007/08 will be produced in
feedlots.  

In the longer term, Argentina could likely export grain-fed beef to new markets
in Asia while continuing to export grass-fed product to Europe and Latin America,
as Argentina has the natural resources to significantly expand its feedlot
capacity.  Any earlier or stronger expansion in feedlot production than
anticipated in the baseline would have implications for the level of grains and
oilmeals available for export.   

What's Ahead

The reforms of the 1990's paved the way for an expansion in the acreage planted
to grains and oilseeds to take advantage of strong world prices in the mid-
1990's.   Most significantly, producers are rapidly expanding their use of
fertilizers and agricultural chemicals.  In addition to contributing to higher
yields, the increased input use and improved crop cultivation practices are
having an impact on traditional crop/livestock rotational schemes, making
additional land available for cropping.

High profit expectations, the result of strong prices, low inflation, and wide
adoption of modern technology aided by excellent weather, have led to successive
unprecedented grain and oilseed crops in 1996/97 and 1997/98, on harvested area
the size of which was not envisioned even as little as 4 years ago.  Pasture land
previously used for cattle was diverted to crops in 1996/97.  At current and
projected prices for crops and cattle, very little of this land is likely to
revert back to livestock.  

About 30 million hectares in Argentina are fit for grain and oilseed farming. 
Some of this land is still being used exclusively for cattle and will probably
eventually become almost exclusively cropland.  Much of the cattle production
found in the central Pampa has already been moved to more marginal areas in the
region, where further technological development will be needed in order to
maintain or improve production efficiency.  According to some sources, the
Argentine cattle/beef business is just now beginning to undergo a process of
improved management and greater use of technology, similar to that which the crop
sector is currently undergoing, although the pace for livestock is expected to be
slower.  

Whether and when these changes will take place, Argentina has already come a long
way toward reshaping its agricultural sector.  With an expanded and more
efficient productive base, a more modernized and less costly marketing system,
and market-oriented government policies, the country appears poised to exploit a
growing international demand for agricultural products.  Argentina has always
been dependent on export markets as an outlet for the bulk of its grain and
oilseed production, and with a relatively small, slow growing population and
already high per capita consumption rates, most of the future increases in output
will find its way onto world markets. 
John Wainio (202) 694-5286 and Terri Raney (202) 694-5235
jwainio@econ.ag.gov
tlraney@econ.ag.gov

SPECIAL ARTICLE BOX #1

NOTE:  

Weights of commodities presented in this article are in metric tons.  

1 hectare = 2.47 acres

SPECIAL ARTICLE BOX #2 

Argentine Agriculture 

Climatic and topographical variations divide Argentina into six distinct
agricultural regions, only one of which--the Pampa--is conducive to widespread
cultivation of grains and oilseeds.  The Argentine Pampa region is located in the
east central part of the country and occupies an area slightly more than 50
million hectares, or about 18 percent of the country's total land area.  The
region can be divided into three zones according to predominant use: cropping,
mixed crop/livestock, and livestock. 

The typical producer in the Pampa tends to operate a joint grain-oilseed-
livestock enterprise, with each activity competing for land.  Cattle operations
in Argentina can be classified into three major systems: cow-calf (breeding),
cow-calf/feeding, and feeding/finishing.  Larger operations often own separate
cow-calf and fattening operations. More than 97 percent of total beef output is
produced from cattle that are grazed on pasture, either native or improved
(planted to grasses or small grains).   

Grain and oilseed production is both competitor and complement to cattle raising
in Argentina.  Crop competition with cattle tends to be limited to steers and
feeder heifers, as cow-calf production in Argentina is located mainly in areas
not suited to crop production.  In making year-to-year decisions about the mix of
crops and pastures, the producer is often influenced as much by current weather
conditions, ages and numbers of cattle on hand, and rotational considerations, as
by current prices.  At the same time, crop production and cattle raising are
considered highly complementary, given the practice of rotating crops with sown
pastures to maintain soil fertility. 

SPECIAL ARTICLE BOX #2  

USDA's baseline projections are not intended to forecast the future, but rather
to construct a picture of Argentina's agricultural sector under a set of specific
assumptions and outcomes.  The results are the product of many approaches,
including modeling and expert analysis, and are predicated on the assumption that
Argentina's current macroeconomic and agricultural policies continue through the
projection period.  This assumes that the government can continue to support the
Argentine currency at the rate of one peso to the dollar, a policy that has been
successful until now.  It also assumes continuation of a program of monetary
stability and fiscal austerity that will keep inflation in check.  These measures
in turn are assumed to lead to real GDP growth during the next 10 years of about
4.5 percent annually.

The projections were made based on information as of November 1997, assuming
average weather and yields for 1997/98 and beyond.  Projected prices for the
major commodities are expected to continue to decline through 2007, but at a
slower rate than long-term trends.
END_OF_FILE 