AGRICULTURAL OUTLOOK                                          July 21, 1998
August 1998, AO-253
               Approved by the World Agricultural Outlook Board
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CONTENTS:

BRIEFS

U.S. Soybean Acreage Increasing Again for 1998
World Rice Trade Soars to Record 

Coffee Prices Coming Down from Highs

COMMODITY SPOTLIGHT

Record U.S. Wheat Yield, Large Stocks Pressure Prices

Melons: Food for the Angels?

WORLD AGRICULTURE AND TRADE

Mexican Supermarkets Spur New Produce Distribution System

RESEARCH & TECHNOLOGY

Hard White Wheat: Changing The Color of U.S. Wheat?

SPECIAL ARTICLE

U.S. Farmers Are Rapidly Adopting Biotech Crops  

IN THIS ISSUE

Record U.S. Wheat Yields Pressure Prices in 1998/99

Large back-to-back wheat production in the U.S. and globally, along with weak
demand, is driving down prices.  This contrasts starkly with the situation just
3 years ago when low global stocks, modest U.S. production, and relatively
strong demand elevated the season-average farm price to a record $4.55 per
bushel.  This season, another large U.S. crop and the absence of any major
weather problems in most other wheat-producing countries will lead to further
gains in U.S. stocks.  Several key wheat- importing countries are expected to
maintain or reduce import levels because of increased domestic supplies.  As a
result, the U.S. season-average farm price may fail to break $3 for the first
time since 1990/91.  A record winter wheat yield, coupled with a forecast higher
spring wheat yield (including durum), has put the U.S. all-wheat yield at a
forecast record 42.6 bushels, surpassing 40 bushels for the first time. 

Hard White Wheat: A Promising Option for Farmers?

The introduction of promising varieties of hard white wheat (HWW), pending
possible release next year, has raised speculation about whether wheat growers
in Kansas and elsewhere in the Great Plains might make a dramatic switch from
hard red to hard white wheat.  University and industry studies show that HWW has
a relatively high milling extraction rate and quality characteristics suitable
for whole-wheat bread, oriental noodles, and other products.   However, several
agronomic and economic factors will help determine the speed and extent of its
adoption, and HWW must establish its advantages with users as well as growers. 

World Rice Trade Soars to Record 

World rice trade in 1998 is projected to be a record 23.4 million tons, up 24
percent from last year and more than 11 percent higher than the previous record
in 1995.  This year's robust trade is primarily driven by weather-related
production problems, mostly caused by the 1997/98 El Nino, which have severely
reduced crops in several major importing countries in South and Southeast Asia
and across much of Latin America.  Rice trade in 1999 is projected at 20.2
million tons, 14 percent below the 1998 record, but still the third highest on
record.

Farmers Rapidly Adopting Biotech Field Crops

U.S. farmers have weighed in resoundingly in favor of the new genetically
modified crop varieties that feature resistance to pests and the ability to
tolerate herbicides.  Farmers' rapidfire adoption of these varieties area has
soared to about 50 million acres in just 3 years in the market has been
propelled by potential cost savings and reductions in input use.  The second
wave of genetic modification will focus on product or Aoutput@ traits such as
improved nutritional qualities and processing characteristics. 


Genetically modified crops now on the market reflect very substantial
investments by the private sector.  Reports on the effectiveness of the new
varieties are generally favorable, and users have indicated that the higher cost
of the seed is offset by reduction in chemical costs.  But adoption by farmers
has been so rapid and the technology is so new that only limited assessment of
economic, agronomic, and environmental impacts has been made. There are concerns
about potential buildup of resistance by insects and weeds, and trade issues
have arisen as other countries, notably the European Union, have lagged the U.S.
in the approval of genetically modified crops. The impacts, problems, and
solutions will become more evident as the technology evolves.

Supermarkets Reshape Mexico's Produce Distribution System

The Mexican produce distribution system is in the midst of major structural
change.  Although small, specialized produce shops or stalls account for the
bulk of consumer produce purchases, supermarket chains are rapidly gaining
market share and challenging the capacity of the produce distribution network.
The emerging marketing system is changing not only the kinds of produce demanded
by Mexican households, but its quality, consistency, packaging, and handling. 
U.S. producers may have a window of opportunity for providing Mexican
supermarkets the quality and consistency of produce the Mexican distribution
system cannot yet deliver.

Melon Consumption Shows Steady Growth in 1990's

Per capita consumption of melons continues to trend higher in the 1990's,
growing 24 percent since the decade began, and reaching 30.4 pounds in 1997. 
Among the factors in consumption growth are year-round demand and availability,
increasing health consciousness among consumers, strong economic growth, and
more creative marketing.  Melon sales have benefited from pre-cut product
displays and instore salad bars that have become mainstays of retail produce
marketing in the 1990's.  The annual retail value of all melons, including
imports, likely averages $3-4 billion.

While cantaloupes are reportedly purchased more often than any other type of
melon, watermelon accounts for over half of melon consumption by weight. Imports
complement U.S. domestic output to provide consumers with melons year-round. 
Imports accounted for 20 percent of total U.S. consumption in 1997, up from a
10-percent share in 1980.  The combination of year-round availability,
enterprising promotion, and nutritional savvy among consumers favors continued
expansion of melon demand. 

BRIEFS

Field Crops

U.S. Soybean Acreage Increasing Again for 1998

U.S. farmers have planted 72.7 million acres of soybeans in 1998, a 3-percent
increase over last year, according to USDA's Acreage report released June 30.
This would be the sixth consecutive year of higher soybean acreage. Farmers are
expected to harvest a record 71.7 million acres of soybeans.

The March 31 USDA Prospective Plantings report indicated farmers' crop
intentions for spring plantings in 1998, while estimates of planted and
harvested acreage in the Acreage report were based on surveys conducted during
the first two weeks of June. Compared with the Prospective Plantings report,
planted area is 1 percent higher for soybeans and 2 percent lower for total
wheat (durum is down 9 percent and "other" spring wheat is off 7 percent). Corn
planted area is essentially unchanged. 

Harvested acreages and actual yields will be strongly influenced by weather
conditions as crops grow. If they persist, extreme dry conditions will reduce
crop potential across much of the South. But overall, normal weather will result
in large output and lower season-average farm prices for most U.S. field crops
in 1998/99 compared with a year earlier (see June-July 1998 AO).

Estimated soybean acreage generally rose above last year's levels in the Corn
Belt States while declining in most of the Southeast and Mid-Atlantic States. In
addition, soybean acreage increased to expected record levels in Kansas,
Minnesota, North Dakota, and Wisconsin. The dry weather during April in the Corn
Belt allowed farmers to finish seeding corn ahead of normal and bumped up
soybean plantings. However, excessive rainfall hampered planting in the eastern
Corn Belt during May but planting had caught up by month's end. Farmers in the
Southeast and Mid-Atlantic continue to face dry conditions.

Corn plantings also increased in 1998 to an estimated 80.8 million acres, up 1
percent from last year and unchanged from the Prospective Plantings report. This
is the highest planted corn acreage since 1985. Corn acres harvested for grain
increased to an estimated 74.3 million acres, also up 1 percent from 1997. Total
acreage for the Corn Belt States declined slightly for 1998, largely at the
expense of higher soybean plantings (AO May 1998). Outside of the Corn Belt,
acreage increased sharply in Louisiana, Texas, and South Dakota due to higher
expected returns relative to other crops. Despite a cool spring that delayed
plant development, the recent warmer weather has boosted corn growth throughout
the Corn Belt. USDA reported that 68 percent of the corn crop was in good or
excellent condition as of July 12. 

Sorghum plantings dropped again in 1998 to an estimated 8.9 million acres, down
12 percent from 1997, as acreage declined in most of the major producing States.
The largest drop occurred in Texas, as low feed grain prices and dry soil
conditions reduced potential plantings. Area also declined in Kansas the largest
sorghum producing State for the second consecutive year.

Barley plantings declined in 1998 to an estimated 6.45 million acres, which
would be the lowest on record. The largest declines were in North Dakota and
Minnesota as farmers shift from traditional crops (i.e., barley and wheat),
which have been beset by low prices and disease problems, to alternatives such
as soybeans, flaxseed, sunflowers, canola, and dry beans. Because of very warm
and dry spring conditions, most of the 1998 barley crop was seeded ahead of
normal. 

A sharp increase in 1998/99 carryin stocks, stemming from weakening use in
1997/98, is expected to push the feed grain supply to the highest level since
1994/95, when there was a record corn crop. In addition, sharp competition from
other suppliers and economic problems in Asia will constrain a strong response
in export markets. In turn, farm prices for corn are expected to be fairly weak
in 1998/99. Most of the U.S. corn crop has entered the critical pollination
phase.

All wheat planted acreage for 1998 is estimated at 65.8 million acres, down 7
percent from last year and the lowest planted area in 10 years. This decline is
mainly because of drastically reduced spring wheat acreage, as unfavorable
prices and several years of widespread disease problems encouraged Northern
Plains producers to plant other crops such as soybeans and sunflowers (see the
Commodity Spotlight in this issue for more on the wheat outlook).

Cotton plantings for 1998 are estimated to total 12.9 million acres, 6 percent
below 1997 and 300,000 acres less than the March Prospective Plantings report.
Adverse weather has affected cotton more than other major field crops in 1998.
During the spring, farmers in the Southeast and Delta regions had planned to
shift from cotton to corn because of expected higher corn returns. The exception
was Texas, where producers intended to increase cotton plantings from last
year's low levels due to wet conditions. Dry soil and high temperatures in the
Southern Plains and the Southeast hindered spring planting in many States. 

Texas, the largest cotton-producing State, has been the most affected by a
withering drought, with one-third of the crop in either very poor or poor
condition at the end of June. At the other extreme, excessive rainfall and
below-normal temperatures linked to El Nino delayed planting and crop
development in California, where acreage declined 17 percent from 1997. Crop
conditions at the end of June showed 80 percent of the California cotton either
in very poor or poor condition. Prospects for a smaller U.S. crop led to a rise
in cotton prices from May to June (unlike prices for corn, wheat, and soybeans,
which declined). 

Rice plantings for 1998 are estimated at 3.22 million acres, up 5 percent from
1997, with long-grain acreage up 10 percent from last year. Acreage was up from
1997 across the South, particularly in Arkansas, Louisiana, and Missouri. The
expansion was due to favorable prices relative to nearly all alternative crops,
especially soybeans. In contrast, area in California declined the most as
extremely wet field conditions hampered and delayed planting. 
Mark Simone (202) 694-5312
msimone@econ.ag.gov 

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

Field Crops

World Rice Trade Soars to Record 

World rice trade in 1998 is projected to be a record 23.4 million tons, up 24
percent from last year and more than 11 percent higher than the previous record
in 1995. While this year's record is largely due to abnormal weather, world rice
trade is likely to remain strong in the foreseeable future. Rice trade in 1999
is projected at 20.2 million tons, 14 percent below the 1998 record, but still
the third highest on record. USDA's long-term baseline projects trade to rise to
24.6 million tons over the next decade, a much higher level than at any previous
time. These projected trade gains reflect freer trade, and continued population
growth. 

This year's robust trade is primarily driven by weather-related production
problems, mostly caused by the 1997/98 El Nino, which have severely reduced
crops in several major importing countries in South and Southeast Asia and
across much of Latin America. Total Asian imports are projected at a record 10.9
million tons, up 6.1 million tons from 1997. Similarly, Latin America will
import a record 2.8 million tons, up 452,000 tons from last year.

The record trade is occurring at a time when the Asian financial crisis has
reduced incomes and credit availability in many Asian countries. Because the
buying power of middle and higher income consumers has declined in several
countries, many in the region are shifting from higher cost meats, fruits, and
vegetables to lower cost rice. In addition, rice consumption historically has
not been very responsive to price changes, a result of its being critical to
most Asian diets and the lack of viable substitutes for many consumers. Thus,
any price increase associated with the explosion in trade would dampen use only
slightly.

Two factors have prevented this extremely high import demand from driving up
prices to record levels. First, the substantial devaluation of the Thai baht and
other Asian currencies in the second half of 1997 which precipitated the
economic crisis caused international rice prices to plunge last summer and fall.
Second, the major Asian rice-exporting countries have large exportable supplies
this year. Thailand, India, China, and Pakistan produced record crops in
1997/98, while the Vietnam crop was near-record. And U.S. supplies were the
second highest on record. These six countries account for over 80 percent of
world rice exports. 

Although crops were smaller in several major rice-producing countries Indonesia,
Bangladesh, the Philippines, and Brazil world rice production is projected at
almost 568 million tons (rough basis) for 1997/98, the largest ever produced.
The 1998/99 crop is projected at 575 million tons another record primarily a
result of expected normal weather in Southeast Asia and Latin America. Prices
rose only slightly in the first quarter of 1998, even though imports began to
rise rapidly. But even with the currency devaluations, financial crisis, and
initially large exportable supplies, trading prices have risen modestly since
second-quarter 1998, as exportable supplies tightened especially in Vietnam and
Pakistan and imports continued to rise.

The late arrival of the 1997 Asian Monsoon caused a 2- to 3-month delay in the
planting of Indonesia's main crop, leading to reduced plantings and lower
yields. The 1997/98 total crop is projected at 47.5 million tons, rough basis,
down 3.5 percent from 1996/97. Input shortages due to the Asian economic crisis
hindered the crop as well. The 1996/97 crop was down 3.6 percent from the
1995/96 record crop.

These crop shortfalls are behind a 5-million ton import projection for
Indonesia, more than six times higher than a year earlier and the largest amount
of rice ever imported by a single country. Thailand and Vietnam will supply the
bulk of Indonesia's imports, mostly low-quality rice. Japan, the U.S., Taiwan,
and others will provide food aid to Indonesia. In total, Indonesia will likely
receive at least 1.2 million tons of rice as food aid or soft loans in 1998. 

For 1998/99, Indonesian rice production is projected to rise to 50.8 million
tons, allowing 1999 imports to contract to 1.5 million tons still a sizable
amount. Over the long term, pressure from a rising population, the high cost of
additional rice production, and lack of financial resources to invest in new
rice land and improve infrastructure is expected to keep Indonesia a major
importer in the world rice market. 

El Nino caused severe drought in the major rice-growing areas of the Philippines
as well, severely cutting its dry season crop. The total 1997/98 crop is
projected at 10.3 million tons, nearly 8 percent smaller than a year earlier. To
prevent retail prices from rising and to forestall food shortages, the
Philippines began purchasing rice in late 1997, mostly from Vietnam, China, and
Thailand. Total rice imports in 1998 are projected at a record 1.75 million
tons, more than double a year earlier. Imports are projected to drop to 900,000
tons in 1999, as production rises to 11 million tons. For the long term, the
Philippines faces strong population growth, very limited resources to invest in
new land and infrastructure, and very slow yield growth, necessitating large
imports of rice.

Inadequate water, lack of fertilizer, and pest problems reduced Bangladesh's
1997/98 fall harvested crop to 27.3 million tons, more than 3 percent less than
the previous year. Bangladesh is projected to import 1 million tons of rice in
1998, up from just 45,000 tons a year earlier. Most of these imports will be
from neighboring India, limiting India's ability to export to Southeast Asia. A
4-percent increase in production to 28.5 million tons in 1998/99 will reduce
Bangladesh's import needs next year to just 350,000 tons. Bangladesh is
projected to be only a modest importer of rice over the next decade.

Latin America also experienced rice crop losses from El Nino, although in some
cases it was flooding, rather than drought, that led to lower yields and reduced
area. Brazil's 1997/98 paddy crop is projected at 8.5 million tons, down more
than 10 percent from a year earlier, primarily due to severe flooding in the Rio
Grande do Sul, the country's largest rice-growing area. Brazil will import a
record 1.2 million tons of rice in 1998, up from 850,000 tons a year earlier and
the bulk of expanded total imports to Latin America in 1998. Because flooding
also occurred in neighboring Argentina and Uruguay which typically account for
most of Brazil's imports Brazil will likely import over 500,000 tons from
outside the region, with the U.S. likely to be the largest supplier.

While normal weather is expected to allow Brazil's production to increase 15
percent to 9.8 million tons in 1998/99, imports will remain sizable at 1 million
tons in 1999. Brazil has been unable to increase production to keep pace with
consumption growth. The largest crop on record 11.8 million tons was produced in
1987/88, and area has since dropped substantially. Brazil is projected to remain
a major importer for the next decade, although it is unlikely the U.S. will
maintain much of Brazil's market given lower transportation costs and the tariff
advantages held by Argentina and Uruguay as members of MERCOSUR.

El Nino-related crop difficulties also have led to increased imports by Ecuador,
Panama, Honduras, and the Dominican Republic in 1998. Ecuador typically exports
small quantities of rice within South America, and Panama is usually
self-sufficient. While Columbia and Costa Rica did not experience crop damage in
1997/98, both countries are importing substantially more U.S. rice this year.
Similarly, drought in Guyana and Surinam relatively small exporters has reduced
exports from these two countries.

As a result of the reduced crops in Latin America, U.S. rough rice exports are
at a record level projected at 25 million cwt in 1997/98, double a year earlier.
Rough rice will account for almost 30 percent of total U.S. rice exports of 85
million cwt (rough basis) a record share and Latin America will import the bulk
of it. The region has been a growing market for U.S. rice exports mostly rough
rice since the beginning of the decade. Rough rice exports are projected at 23
million cwt in 1998/99, barely below this year's record. The major factor
driving the strong 1998/99 U.S. rough rice projection is large purchases by
Brazil this spring for delivery in 1998/99. The strong pace of rough rice
exports has been the major factor supporting U.S. farm prices this year. 
Nathan Childs (202) 694-5292
nchilds@econ.ag.gov  

BRIEFS
Specialty Crops

Coffee Prices Coming Down from Highs

Coffee lovers will be drinking more Brazilian varieties this fall. USDA
forecasts Brazil's 1998/99 harvest at a near-record 36 million bags, a third of
the world's total and 50 percent above the 1997/98 marketing year (July-June).
The Brazilian crop in 1997/98, an "off" year, produced only 23.5 million bags
(60 kg or 132 pounds each). Brazil's coffee crop typically alternates on and
off a function of the biological competition between fruiting and branch growth.
But this year the rise in production is greater than usual.

For the current crop, weather has been excellent for growth and maturity of the
cherrylike beans. In addition, coffee trees in Brazil have recovered from the
effects of a freeze in 1994, and strong prices in the last couple of years led
growers to increase area and improve orchard care.

The current large Brazilian crop is forcing other countries to cut prices. In
the U.S. market, price and country of origin are the two main determinants of
competitive position. Brazilian coffees have not achieved the cachet enjoyed by
Colombian and Central American coffees. But Colombian and Central American
producers began cutting prices last spring on news of Brazil's favorable weather
and excellent crop potential. Major U.S. roasters have announced price cuts on
their most popular brands.

The lower prices could reverse the U.S. trend toward lower coffee consumption.
Total U.S. consumption  averaging 18 million bags or 2.4 billion pounds
annually is down 15 percent from 20 years ago. A factor in the changing tastes
of coffee consumers as well as consumers of wine is a shift toward higher
quality but lower total volume. 

Other coffee-producing countries are concerned that Brazil's large crop will cut
into their export earnings, which amount to about $8 billion annually. World
supplies of coffee for 1998/99, including carryin stocks, are forecast at 132
million bags, 6 percent above a year earlier. Forecast production from other
South and Central American countries, as well as Kenya and the Ivory Coast, are
mostly unchanged from 1997/98 levels. Increases in Vietnam will offset decreases
in other Asian countries. 

Coffee is produced from two types of beans: arabica and the less expensive
robusta. Brazil produces mainly arabicas, and some robustas, while virtually all
Colombian and Central American coffees are arabicas. Robustas, which make up
15-20 percent of U.S. imports, go mainly to soluble (instant) coffee or are
blended with arabicas.

Coffee importers, looking for bargains, have turned increasingly from Brazil to
Asia. Asian coffee prices averaged 75 percent of Brazil's in fiscal 1991, and
just 50 percent in 1997. Brazil's share of the U.S. market declined from 28
percent in fiscal 1991 to about 11 percent recently. Asia's share has increased
from 8 percent to 19 percent, due largely to increases from Vietnam, while
Colombia, Mexico, and Guatemala have together maintained a 40-percent share.

Before roasting, the beans are referred to as green coffee. Most coffee is
imported green and then roasted, ground, and packaged for distribution.
Increasingly, roasted coffee is sold as whole beans. Per capita consumption of
coffee in the U.S. averages about a cup and a half per day of regular coffee,
and less than a fifth cup of instant.

U.S. retail coffee prices have been on a roller coaster ride since the summer of
1994. Swings of 5-10 percent in world supplies and a tendency for roasters to
reduce inventories contributed to the wide price fluctuations. According to the
Green Coffee Association, U.S. stocks declined from 9.4 million bags at the end
of 1992 to 1.4 million bags ending 1997. In 1994 and in early 1998, consumers
facing soaring prices cut back on consumption, lowering the demand for imports.

Consumer prices this fall could dip 5-10 percent below last fall. Moreover, in
the last couple of years, Brazil's farmers have planted new acreage, with more
trees per acre and better fertilizer and pest management. If Brazil produces
another bumper crop in 1999/00, prices could drop further and U.S. consumption
could expand. 
John Love (202) 720-5912, 
World Agricultural Outlook Board 
jlove@oce.usda.gov  

COMMODITY SPOTLIGHT
Record U.S. Wheat Yield, Large Stocks Pressure Prices

Large back-to-back wheat production in the U.S. and globally, along with weak
demand, is driving down wheat prices. Just 3 years ago, low global stocks,
modest U.S. production, and relatively strong demand elevated the season-average
farm price to a record $4.55 per bushel. This season, another large U.S. crop
and the absence of any major weather problems in most other wheat-producing
countries will lead to further gains in U.S. stocks. As a result, the U.S.
season-average farm price may fail to break $3 for the first time since 1990/91.

U.S. winter wheat plantings were down from a year earlier, suggesting a smaller
crop in 1998. However, generally favorable weather, especially during harvest,
will boost the winter wheat yield to a record 46.6 bushels per acre. State yield
records will be set in Texas, Oklahoma, and Kansas. Coupled with a forecast
higher spring wheat yield (including durum), the U.S. all-wheat yield is a
forecast record 42.6 bushels, breaking the 40-bushel barrier for the first time
and up 2.9 bushels from last year's record.

Unlike last season, when the average price received by farmers peaked in
September, monthly average prices received by farmers are expected to follow a
more normal seasonal pattern in 1998/99, hitting seasonal lows during harvest
(June through September) then increasing to reflect carrying charges. Wheat
prices will likely remain under pressure for this season, barring severe weather
or disease problems in the Northern Plains through the end of harvest in
September. Also, production prospects for corn and soybeans will have a
significant impact on wheat prices.

Domestic feed and residual use of wheat is projected to increase sharply this
season as lower wheat prices make wheat feeding of livestock more attractive.
Even with the larger wheat feeding, ending stocks are forecast to hit 868
million bushels, the same as the 1990's high set in 1990/91. Since food use and
exports will rise only modestly, wheat must compete as a feed grain to avoid
further increases in ending stocks. U.S. exports in 1997/98 are expected to be
up slightly as competition in the world market will continue to be keen because
of large world supplies.

U.S. Wheat Supplies Expand to 11-Year High

Total U.S. wheat production in 1998/99 is forecast at 2.52 billion bushels, 9
percent above the USDA forecast in June 1998 and nearly unchanged from 1997/98.
The record yield offsets lower harvested area in 1998 farmers switched to crops
with higher expected returns and left more land fallow. With larger beginning
stocks, however, and steady year-over-year imports, the U.S. wheat supply in the
1998/99 (June-May) is forecast to rise 9 percent to 3.34 billion bushels, the
highest level since 1987/88.

In the Southern Plains, a mild winter and warm spring weather have pushed the
winter wheat harvest ahead of normal. As of July 12, 76 percent of the winter
wheat crop was harvested, well above the 5-year average of 63 percent. Kansas
was 98 percent completed, compared with an average of 82 percent. The Kansas
Agricultural Statistics Service recently reported that protein is averaging 11.5
percent this year, compared with 11.8 percent last year, and a 10-year average
of 12.4 percent. Test weights have averaged 61.5 pounds per bushel, compared
with 60.6 pounds last year and a 10-year average of 59.8 pounds. Since average
protein content of HRW is reportedly below normal, price premiums for
high-protein wheat will be strong this year. 

Hard red winter (HRW) wheat production prospects continued to improve during
June, especially in Kansas and Oklahoma, with yield forecasts based on July 1
conditions up 10 bushels and 4 bushels per acre, respectively, from the June
forecasts. Total HRW output is forecast at 1.18 billion bushels, up 19 percent
from the June forecast and 5 percent above 1997. HRW is used in a wide variety
of products, particularly bread, and is expected to account for about 43 percent
of total U.S. wheat use in 1998/99.

Soft red winter (SRW) wheat production is forecast at 451 million bushels in
1998, down 33 million bushels from last year. Quality is a major concern in the
Corn Belt, particularly southern Illinois, where excessive rainfall during the
spring will likely lead to scab and vomitoxin problems. These problems will be
monitored closely as the new crop comes onto the market. SRW is forecast to
account for about 18 percent of both U.S. wheat production and use. 

White winter wheat production (mostly soft wheat) is forecast at 268 million
bushels, down 4 percent from 1997 due to fewer acres planted. Washington,
Oregon, Idaho, and Michigan account for most U.S. white wheat production. 

According to the June 30 Acreage report, farmers seeded 3.7 million acres to
durum wheat, up 14 percent from last year but down 375,000 acres from the March
planting intentions. Based on July 1 conditions, production of durum wheat in
the U.S. is forecast to total 126 million bushels in 1998, up 46 percent from
1997. This production level, coupled with a sizeable expansion of durum acreage
in Canada and larger crops in the European Union (EU) and North Africa, will
reduce the price premium over other wheat commanded by durum in recent years. 

The other spring (non-durum) wheat crop is forecast to decline 11 percent in
1997/1998, primarily reflecting a smaller planted and harvested area as farmers
either fallowed the land or shifted acres to durum wheat, soybeans, and other
field crops. The June 30 Acreage report indicated that planted and harvested
acreage of other spring wheat declined about 20 percent from last year. Farmers
will harvest about 15 million acres in 1998. Based on July 1 conditions,
production of other spring wheat is forecast to total 498 million bushels in
1998. The first survey-based forecast indicates an average yield of 33.5 bushels
per acre for other spring wheat, compared with 29.9 bushels last year. As of
July 5, 69 percent of the spring wheat crop had already produced heads, compared
with a 5-year average of 45 percent.
Mack N. Leath (202) 694-5302
mleath@econ.ag.gov

World Wheat Yield Also A Record

World wheat production is expected to decline in 1998/99 as falling wheat prices
discouraged plantings, but smaller total area will be partly offset by a
forecast record global yield. Larger crops in some major importing countries are
expected to reduce global imports. Only a small reduction in global stocks is
expected. Wheat stocks in several key countries, especially China and the U.S.,
are relatively large. 

Despite a 2-percent drop in area, world wheat production in 1998/99 is projected
to reach 601 million tons, down only 1.5 percent from the previous year's
record. Global area is forecast down 4.7 million hectares, mostly in the Newly
Independent States of the former Soviet Union (NIS), the U.S., and Canada. NIS
area is expected to drop 2.2 million hectares because of low prices, difficulty
marketing last year's crop, and weather-delayed spring wheat planting. In the
U.S. and Canada, relatively low prices have led to wheat area shifting to other
crops, especially oilseeds, decreasing 1.8 million and 0.8 million hectares.
Argentina, Brazil, and Eastern Europe are also expected to shift area out of
wheat and into more profitable crops. However, wheat area is expected to
increase for several major producers, including the EU, Turkey, and Australia,
where good profits in recent years have encouraged expansion.

A record average world wheat yield is expected in 1998/99, as generally
favorable growing conditions for winter wheat have prevailed across the Northern
Hemisphere. Only a few major wheat producers have harvested their 1998/99 wheat
crops, so global yield projections are very tentative at this stage. However,
most large wheat-producing countries are expected to have good yields. The
global average is slightly higher than in 1997/98 when some countries, like
China and Argentina, had exceptional yield growth, and others, such as North
Africa and Australia, faced weather-driven yield losses. 

World wheat supplies in 1998/99 are forecast up because beginning stocks are
expected to increase by 22 million tons, offsetting production declines of 9
million tons. Wheat supplies in 1998/99 are expected to increase in China, the
U.S., the EU, North Africa, Turkey, and Pakistan, while declining in Canada 
and Argentina. 

Global beginning stocks in 1998/99 are forecast to reach 133 million tons, the
largest since 1994/95. Stocks are building because of record world wheat
production in 1997/98. Beginning stocks in 1998/99 are projected up in most of
the world's largest wheat-producing nations, including China, the U.S., the EU,
India, Eastern Europe, and the NIS. Canada is an exception, with sharply lower
stocks than a year ago because of smaller 1997/98 production and strong exports. 

World wheat consumption is expected to exceed production slightly, reaching 603
million tons, an increase of 15 million tons from the previous year. Major
events around the world, such as the Asian macro-economic crisis, are not
expected to create large shifts in human wheat consumption, and lower world
wheat prices are unlikely to spur large increases in the use of wheat for food.
However, use of wheat as an animal feed is forecast to increase.

U.S. Export Share To Grow

Several key wheat-importing countries are expected to reduce or maintain imports
unchanged because of increased domestic supplies and a reduced sense of urgency
to own wheat, given low world prices. China is expected to maintain minimal
wheat imports. Even though wheat production in China is forecast down from last
year's record, it is still expected to be larger than domestic consumption,
adding to already burdensome stocks. Moreover, China's central government has
announced it will not pay as much as it has in the past for provinces to
purchase and store wheat. Combined with last year's record crop, the new policy
has put downward pressure on  wheat prices. 

India's wheat production is also down from last year's record but larger than
earlier anticipated. Given large government procurement and stocks, imports are
expected to drop. Record yields and production are expected to cut import needs
by Pakistan, a key market for U.S. white wheat. Production in North Africa is
expected to rebound somewhat from devastating drought in 1997/98; imports,
including durum, are expected to decline. The EU has increased its durum area
and yield prospects are much improved from last year. Thus, the EU is forecast
to reduce imports. Eastern Europe and the NIS are not expected to increase
imports, despite sharply lower production, because stocks are high, domestic
demand is weak, and foreign exchange limited. 

Wheat imports are expected to see robust growth in Latin America and the Middle
East and a slight increase in Eastern Asia, but this growth will be more than
offset by reductions in other markets. 

Although world wheat trade is expected to decline 2 percent, U.S. wheat exports
are forecast up 4 percent to 29 million tons in 1998/99 (July-June). Reduced
exports from several competitors are expected to increase U.S. market share over
the previous 2 years, but the share would remain below most other years. 

Canada's exports are expected to drop 22 percent because of reduced supplies,
especially of high-protein bread wheat. Canada's cutback should open
opportunities for increased exports of U.S. hard red spring (HRS) wheat and
high-protein hard red winter (HRW) wheat. Argentina is also expected to provide
less competition for U.S. wheat, especially late in the U.S. marketing year, as
reduced 1998/99 supplies in Argentina lead to lower exports.

The EU and Australia are expected to increase wheat production. The EU is
expected to provide increased competition throughout the marketing year,
especially in those markets seeking the cheapest wheat.

The mixed picture of competition for U.S. exports will tend to boost price
spreads for U.S. farmers between wheat of different classes and protein levels.
Reduced competition from Canada, for example, is likely to boost premiums for
high-protein hard wheat while increased competition from the EU and Australia is
likely to depress soft wheat prices. 
Edward W. Allen (202) 694-5288
ewallen@econ.ag.gov  

COMMODITY SPOTLIGHT BOX

Will the Asian Financial Crisis Affect 1998/99 U.S. Wheat Exports?

The Asian financial crisis is likely to have only a small effect on U.S. wheat
exports in 1998/99. Only a small portion of the U.S. wheat export market is at
stake in the countries most affected by the financial problems in Asia. South
Korea, Thailand, Malaysia, the Philippines, and Indonesia together accounted for
only 11 percent of U.S. wheat (grain) export volume in 1997/98. These countries
also accounted for 12 percent of global wheat imports. 

Despite stagnant or declining incomes, changes in per capita wheat consumption
in the region are expected to be small. Most of the region's wheat imports are
used for noodles or rolls and bread. In South Korea, Thailand, Malaysia, and
even the Philippines, smaller incomes and higher prices (in local currencies)
have not led to a shift by consumers away from noodles to rice, tubers, and
other grains. (However, there probably is some shifting away from bread, rolls,
and other baked goods.) In fact, Thailand and the Philippines are forecast to
have record wheat imports in 1998/ 99, with lower priced feed wheat from Eastern
Europe accounting for some of the increase in the Philippines. Malaysia's wheat
imports are forecast near record. Large world supplies are lowering global wheat
prices, making imports more affordable.

The net effect of the crisis on per capita food use of wheat is expected to be
much smaller than for higher priced items like meat or the feed grains used to
produce meat. Reduced incomes may actually prevent consumers in the region from
shifting from staples, such as wheat-based products, to meats, fruits, and
vegetables. And when GSM credits (U.S.-backed guarantees) are made available to
a country like South Korea, with some of it earmarked for wheat, it is possible
that the U.S. share of that wheat market could increase. 

Because Australia dominates the Indonesian market (i.e., the U.S. market share
is small), any change in imports would affect the U.S. indirectly as Australian
grain becomes more available for other export markets. Indonesia's wheat
consumption could be the most affected, because it is most seriously affected by
economic and political problems, and has a relatively low per capita income
level. Government intervention to import wheat and moderate domestic prices has
prevented flour prices from rising as much as expected given changes in the
exchange rate. Consequently, Indonesia's imports are projected to remain steady
at 4 million tons in 1998/99. 

In Japan, it is very unlikely that economic problems are having a measurable
effect on wheat consumption. Income levels are high enough that eating noodles
or rice is not a budget issue, but entirely a matter of taste and preference.
Japan is a major wheat importer the world's second largest in 1997/98. 
Edward W. Allen (202) 694-5288
ewallen@econ.ag.gov COMMODITY SPOTLIGHT

Melons: Food for the Angels?

Mark Twain wrote of watermelon in 1894: "When one has tasted it, he knows what
the angels eat." Americans appear to agree with this assessment, as per capita
use of watermelon and other melons continues to trend higher in the 1990's. 

Melons are consumed frequently as desserts, snacks, fruit salads, breakfast
foods, picnic foods, edible plate garnishes, and in drinks, and are used in many
other creative ways (e.g., watermelon salsa). Up until two decades ago, melons
were largely seasonal delights that appeared in the market for a few months and
then disappeared as late-summer and fall fruit crops were harvested. Today,
imports during the winter and early spring help satisfy consumer demand for
year-round supplies of melons. In 1997, U.S. consumption of melons reached 8.2
billion pounds double the 1980 level. 

At the grower/shipper level, the domestic melon crop was valued at $836 million
in 1997 with cantaloupe accounting for half of the total. The annual retail
value of all melons, including imports, likely averages $3 billion-$4 billion.

Melon crops common in the U.S. are of the Cucurbitaceae (gourd) botanical
family the family that includes cucumbers, squash, and pumpkins. Cantaloupes are
reportedly purchased more often than any other melon. By weight, however,
watermelon is the most-consumed melon in the U.S., followed by cantaloupe and
honeydew. In addition, several specialty varieties are commonly found in
supermarkets, including crenshaw, casaba, Santa Claus (also called Christmas
melon), and Persian melons.

What is referred to as cantaloupe in the U.S. is actually muskmelon. True
cantaloupes, common in Europe, lack the characteristic netted rind of the
muskmelon and are not grown commercially in the U.S. Within the melon family,
muskmelons are part of a group that also includes honeydew, crenshaw, casaba,
and Persian melons. 

U.S. Melon Use Highest Since Mid-1940's

Since 1990, per capita melon use has increased 24 percent to 30.4 pounds the
highest since the mid-1940's, a time when fewer substitutes (e.g., processed
snacks and desserts) were available. Consumers have increased use of each of the
three major melons, with cantaloupe rising the most. Per capita use of
cantaloupe has risen 27 percent since 1990. Cantaloupe, in fact, has been
gaining popularity for many years. Consumption of this popular breakfast and
dessert melon has doubled since 1980 to 11.7 pounds per capita and is expected
to rise again this year. 

Watermelons, the largest of all melons, account for slightly over half of U.S.
melon consumption. In 1996, watermelon use reached 17.4 pounds per person (the
highest since 1958) before falling to 16.1 pounds with a weather-shortened crop
in 1997. Despite the short-lived temporary decline in 1997, watermelon use is up
50 percent since 1980. Americans consumed 2.6 pounds of honeydew melons in 1997,
up from 2.1 pounds in 1990 and 1.4 pounds in 1980. 

Melon consumption has been increasing for a number of reasons that include:
  emergence of year-round demand and availability,
  increasing health consciousness among consumers,
  strong economic growth,
  more creative marketing, and
  adoption of improved varieties.

Over the past two decades, as incomes have risen and consumers have become more
health-conscious, the demand for fresh fruits and vegetables has increased. As
consumers slowly integrated more produce into their diets, demand has risen for
year-round supplies of seasonal produce such as melons. The demand has been met
during the winter and early spring by increased imports. It is now common to
find a variety of melons in supermarkets and at salad bars throughout the year.
Nearly half of the increase in U.S. melon consumption since 1994 is accounted
for by rising imports. 

The economic expansion during the 1990's has also boosted melon consumption,
with increased incomes allowing consumers to spend more on meals away from home.
The continued prevalence of salad and breakfast bars during the 1990's has
familiarized consumers with convenient pre-cut melons. Industry surveys of
produce consumers also suggest that consumers with higher incomes tend to
purchase a wider variety of produce. This may favor increased consumption of
specialty melons like crenshaw and casaba during economic expansions.

In the 1990's, several concepts have gained favor in retail produce marketing.
These include pre-cut product displays and instore salad bars. In the case of
melons, this type of marketing tends to appeal most to small households who
might not otherwise purchase whole melons. Also, increased consumer information
in the produce department (nutritional information, recipe tips,
point-of-purchase advertising, and colorful displays) may be influencing
purchases.

Strong promotional efforts by industry groups like the National Watermelon
Promotion Board and the Produce for Better Health Foundation which runs the
national 5-A-Day for Better Health program in cooperation with the National
Cancer Institute have likely helped educate children and adults on the
nutritional merits of vegetables and fruits, including melons. Melons are
excellent sources of vitamin C. In addition, cantaloupe (and watermelon to a
lesser extent) is a good source of beta-carotene and also contains potassium,
iron, and some fiber. Although honeydew and casaba melons contain less vitamin C
than cantaloupe, they are still excellent sources, and also provide potassium,
iron, and dietary fiber. Watermelon contains small amounts of lycopene, a color
compound found in heavy concentrations in tomatoes and thought to be a deterrent
to some forms of cancer.

Finally, the industry has improved the products offered to consumers through
better harvesting and handling (ensuring more consistent melon quality) and the
introduction of new hybrid varieties (better flavor). For example, cantaloupe
producers are continuing to adopt new varieties that provide consistently high
sugar content (called soluble solids). Cantaloupe growers have also increased
quality by switching from shed packing to placing fruit directly into shipping
boxes in the field, which reduces handling and scuffing. Melons are also now
moved quickly from the field to cooling rooms prior to shipping to maintain
maximum quality and shelf life. 

For watermelon, improvements in quality and availability of seedless and smaller
icebox varieties have helped spur demand. The popularity of seedless watermelon
has been on the rise over the past decade. According to industry sources,
seedless watermelon is more popular in the West (particularly California), with
seeded watermelon heavily favored in the South. Most other regions favor seeded
varieties slightly more than seedless. Production of seedless watermelons
requires that about a third of the area in a field be planted to seeded
varieties, which act as pollinators for the sterile seedless varieties.
Proponents of seeded varieties can thus rest assured that seeded watermelons
will always be available.

Southern Climate Favors Melon Production

Requiring a long, frost-free growing season for optimal yields, melons are grown
principally in the southern half of the Nation. California, Texas, and Arizona
are the only States that commercially produce all three major melon varieties.
The top five States account for 84 percent of U.S. melon production. 

California, the leading melon producer with 35 percent of the crop, ships melons
from May through November. California is the Nation's top producer of
cantaloupes (60 percent of the crop during 1995-97) and honeydews (74 percent),
and is the third leading producer of watermelons (17.6 percent). About 54
percent of California's melon crop consists of cantaloupes. 

Texas, the second leading producer of melons, grows 15 percent of the crop.
Texas ships melons largely during May-July, except for watermelons, which are
shipped through December. Texas is third in cantaloupe and honeydew production
and is the fourth leading producer of watermelons. Cantaloupe and honeydew
production is concentrated in the lower Rio Grande Valley and the Trans Pecos
region, while watermelon is grown in several areas of the State. 

Georgia produces watermelon and some cantaloupe and accounts for 13 percent of
the U.S. melon crop. With improved yields the past few years, Georgia has become
the second leading producer of watermelons (18.2 percent of the crop) and
produces 5 percent of the Nation's cantaloupe. A majority of the melon acreage
is concentrated in the south central area of the State.

Florida produces 11 percent of the U.S. melon crop with most production in
watermelons. While it is traditionally the Nation's leading producer of
watermelon (18.3 percent of the crop), Florida's acreage in other melons is
limited. The State's shipments peak in May and June. Output is spread over more
than 30 counties, but southern counties account for about 40 percent of the
crop.

Arizona completes the top five, producing 10 percent of the U.S. melon crop.
Arizona is the second leading producer of cantaloupes, with 22 percent of the
crop. The State harvests a spring and a fall crop of both honeydews and
cantaloupes; shipments run from May through November and volume peaks in early
summer. 

Imports Round Out Seasonal Availability 

China is the leading producer of melons, accounting for 46 percent of the world
total, followed by Turkey (9 percent) and Iran (5 percent). The U.S. is fourth,
with close to 5 percent of output.

World per capita use of melons in 1996 was estimated at 24 pounds. Among the top
15 producing countries, Turkey has the highest per capita use at 223 pounds.
Israel is second at 179 pounds, followed by Greece at 150 pounds. The U.S. is
41st.

Watermelon accounts for the largest portion of melon use in the world. Although
most watermelon is prized in the U.S. for the sweet melon flesh, it has varied
uses in other countries. Roasted watermelon seeds are popular in parts of Asia.
Also in Asia, watermelon seeds are sometimes ground into a type of cereal
product to make bread. In Russia, watermelon juice is fermented to make
alcoholic drinks. In many areas of the developing world, melons of all types are
routinely used as animal feed. 

The bulk of world melon trade tends to be concentrated within regions, due
largely to the cost of transportation (melons are bulky) and competition from
local suppliers. The Food and Agriculture Organization of the United Nations
reports that only 4 percent of world melon use comes from import sources.
Imports of cantaloupe and other melons account for 7 percent of use while only 3
percent of world watermelon use originates from foreign sources. In 1996, world
melon trade was valued at $1 billion. 

Imports complement U.S. domestic output to provide consumers with melons
year-round. Average temperatures in most areas of the U.S. are too low for
reliable production of melon crops during the winter and early spring months.
From December to April, U.S. melon use depends almost entirely on imports.
Imports accounted for 20 percent of year-round U.S. consumption in 1997, up from
14 percent in 1990 and 10 percent in 1980. 

Proximity to low-cost producers in Mexico and Central America, combined with
strengthening off-season domestic demand (winter/early spring), has made the
U.S. the world's leading melon importer. A net importer of melons, the U.S.
accounts for 25 percent of the world's melon import volume 15 percent of
watermelon imports and 34 percent of global imports of cantaloupe and other
melons. U.S. imports were valued at $230 million in 1997, with cantaloupe
accounting for the largest share at 58 percent. 

Mexico provided 54 percent of the total volume of U.S. melon imports in 1997.
Among the nations covered by the Caribbean Basin Initiative (CBI) are other
major sources Honduras (17 percent of the U.S. market), Guatemala (11 percent),
and Costa Rica (11 percent). Under the CBI, signed into law in 1983, melons
imported from member nations enter the U.S. duty-free. 

Most melons from Mexico enter during the duty-free period set by NAFTA (mainly
December-April), when U.S. production is largely nonexistent. However, some
Mexican melons enter during the tariff-protected periods in late spring and
summer. The high pre-NAFTA in-season tariffs for melons other than watermelon
(as high as 35 percent ad valorum) are now being phased out over 15 years (until
2008). For watermelon imports, a declining tariff (20 percent at the start of
NAFTA implementation) as well as a safeguard quota (not filled as yet in any
year) are in effect during the main U.S. season (May 1-September 30).

From the early 1980's until 1994, Mexico had been steadily losing share of the
U.S. cantaloupe and honeydew markets to CBI nations. However, during the past
few years, Mexico's share of these markets has increased despite intense
competition from several CBI nations. In 1993, Mexico claimed 47 percent of all
U.S. melon imports, and by 1997 its share had risen to 54 percent. 

The Mexican melon sector is hamstrung by low yields, while several Central
American countries (especially Costa Rica) have benefited from foreign and
domestic investment in modern production methods. Despite lower yields, Mexico
has regained market share, largely because the 1995 peso devaluation and tariff
reductions under NAFTA helped offset the cost advantage enjoyed by more
efficient competitors. 

While U.S. melon imports have risen 82 percent since 1990, exports have doubled,
totaling $80 million in 1997. Exports now absorb 5 percent of the U.S. melon
supply up from 4 percent in 1990. Canada accounts for 90 percent of U.S. melon
exports, with Japan a distant second at 5 percent. Rising U.S. melon exports to
Canada reflect the similarities in consumption trends between the two countries. 

The potent combination of improved varieties, year-round availability,
enterprising promotion, and nutritional savvy among consumers both in the U.S.
and Canada favors continued expansion of melon demand into the new millennium. 
Gary Lucier 694-5253
glucier@econ.ag.gov  

COMMODITY SPOTLIGHT BOX #1

Is It Ripe?

Melons have drawn the ire of consumers in the past because of perceptions of
poor quality. Undoubtedly some of these perceptions were related to the presence
of immature melons in the store. Consumers can lessen the chance of taking home
a melon that tastes like a cucumber by following a few simple rules. 

For watermelon, the industry suggests consumers choose a melon that is
symmetrical and free of bruises, cuts, and dents. The melon should be heavy for
its size, and the rind should have a healthy sheen. The key test is to turn the
melon over and check the color of the underside (where the melon was touching
the ground). The underside of a ripe watermelon should be pale or creamy yellow. 

A good-quality cantaloupe will be free of defects and will be firm except around
the stem end, which should be a bit softer and have some give. The keys to
ripeness can be found on the stem end. When cantaloupes are ripe in the field,
they "slip" from the vine when pulled at harvest, leaving a fairly smooth stem
end. A melon at room temperature should have the characteristic sweet melon
smell at the stem end. 

Determining the ripeness of a honeydew melon is a bit more difficult since the
clues are harder to spot. A ripe honeydew melon should have a rind that is
fairly firm (not hard), is free of defects, has a waxy feel, and is a creamy
yellow color. The stem end should have some give and should emit a sweet melon
aroma.

COMMODITY SPOTLIGHT BOX #2

According to the National Water-melon Promotion Board, a recipe for watermelon
rind pickles (a product still popular in the southern U.S.) was included in the
first American cookbook published in 1796. 

WORLD AGRICULTURE AND TRADE

Mexican Supermarkets Spur New Produce Distribution System

The Mexican produce distribution system is in the midst of major structural
change. Although small, specialized produce shops or stalls account for the bulk
of consumer produce purchases, supermarket chains are rapidly gaining market
share. 

Supermarket growth in Mexico is explosive: the number of stores has leapt from
less than 700 in 1993 to 3,850 in 1997. The pace is continuing with several new
store openings scheduled each week. Convenience stores that retail fresh produce
are also expanding rapidly. Combined, these recent developments are changing the
way produce makes it way from the farm to the consumer the rapid rate of
innovation at the retail level is forcing changes in the distribution chain.

Mexican firms are constructing state-of-the-art supermarket chains that are
challenging the capacity of the produce distribution network. Truck fleets,
wholesale markets, packers and shippers, and farmers are all trying to adapt to
new demands. A similar transformation occurred in U.S. produce markets following
the Second World War. The development of the produce distribution system in
Mexico will not replicate the evolution of the U.S. system, but there are and
will be many similarities.

The contemporary supermarket is the product of almost 70 years of adaptation to
continuous innovations in infrastructure, technology, and management. The
supermarket was created August 4, 1930, when the first King Kullen store opened
in Jamaica, New York. Supermarkets distinguished themselves from earlier retail
food establishments by offering self-service shopping; separate departments for
produce, meat, bakery, and other grocery items under one roof; discount pricing;
a centralized distribution system; and large-volume procurement. 

The dramatic growth of supermarkets in the U.S. in the 1930's and 1940's
coincided with the rapid rise in automobile and refrigerator ownership.
Automobiles made it possible for consumers to carry larger purchases home over
longer distances, and created competition with smaller neighborhood retailers.
Household refrigeration enabled consumers to keep food in storage for longer
periods of time, enabling household members to shop less frequently, perhaps
only once or twice a week for highly perishable items such as fresh fruits and
vegetables.

Supermarkets have existed in Mexico for decades, but until the 1980's they were
few and catered principally to upper-income households and expatriates.
Consequently, they have had an upscale, high-price image. The success of the
recent expansion is the result of extending the customer base to lower income
households. 

Most Mexicans purchase produce in stall-like shops in municipal markets (41
percent) or from produce carts that set up in neighborhood street markets,
tianguis (20 percent). Unlike supermarkets, these are not self-service
operations: the consumer asks for a kilo of tomatoes and the proprietor selects
and weighs the product. The customer and the proprietor often know each other,
so there is a social element to the exchange. Although most urban households
have refrigeration, produce tends be consumed within a day of purchase.
Consequently, these shops stock ripe produce and their customers shop several
times a week.

Supermarkets present a radically different shopping experience. In Mexico,
supermarkets are called tiendas de autoservicio, literally, self-service stores.
Some supermarket produce is prepackaged and sticker-priced, but most is
displayed in bulk and weighed at the check-out. Although there are produce
personnel on the shop floor, a supermarket transaction is anonymous compared
with a traditional market. Some Mexican consumers find this intimidating,
particularly those who have recently moved to the city from the countryside.

There is strong competition between supermarkets and traditional markets. As in
the U.S., supermarkets place newspaper advertisements to draw customers into the
store during the midweek lull in volume. In Mexico, a second objective is to
convert traditional shoppers into supermarket shoppers. One chain even bills its
weekly sales as "tianguis days" to emphasize the low, street-market prices and
to expand its customer base. 

Because it is price-sensitive and purchased frequently, produce is a common
loss-leader, and featured prices are often below wholesale costs. Supermarkets
recoup the negative margin on featured produce if customers make other,
nondiscount purchases and become regular customers. Small produce stalls cannot
afford to match the chains' produce discount, and their market share is
gradually being eroded. 

Forging a New Supply Chain

The emerging marketing system is changing not only the kinds of produce demanded
by Mexican households, but its quality, consistency, packaging, and handling.
The development of U.S. supermarket chainstore operations in the 1950's and
1960's was spurred in part by infrastructure development. The U.S. interstate
highway system and the growth of refrigerated truck transportation freed produce
shippers from dependence on railroads and allowed deliveries to facilities
outside central market districts. This enabled chain stores to build their own
distribution centers and accommodate high-volume direct shipments from producers
under central inventory control.

Chains benefit from economies of scale in storage, distribution, and marketing.
The higher a firm's sales volume, the more widely it can spread its fixed costs.
Greater sales volume also yields more predictable demand and lower inventory
risk. However, to realize these efficiencies, chain stores need a guaranteed
flow of consistent quality produce to serve consumer demand. For a tightly
managed inventory system to work, the entire supply chain must be coordinated.
So chain stores are willing to pay a premium for these services. 

Chain stores ensure quality control by contracting directly with a
grower/shipper's sales agent or a produce broker to have product shipped
directly to their private distribution centers, rather than obtaining products
from local wholesale markets. By internalizing wholesale services within the
firm, they are able to avoid the extra costs and time associated with obtaining
produce through an intermediary.

As direct procurement by chains expands, the share of produce flowing through
central wholesale markets declines. In the U.S., the central wholesale share has
stabilized around 30 percent, although increased demand for specialty, organic,
and "ethnic" produce has recently raised the share slightly. Mexico is entering
a stage in which the wholesale share will decline rapidly. However, because
consumption growth is so robust, the absolute volume of wholesale shipments may
not fall. 

Pressure to Upgrade Packing 

Chain stores drive down costs at all links in the distribution chain. One focus
of efficiency gain is reducing the proportion of produce that must be discarded
because of damage or poor quality. Good quality control at the farm and
packer-shipper level generates savings for the rest of the distribution chain no
one wants to haul poor-quality produce to an urban distribution center only to
have to throw it out. Thus, the demand for predictable quality generates a
demand for better sorting, packing, and shipping.

In the U.S., produce packing evolved through several stages. Bulk hauling in
large wooden crates or jute sacks first shifted to smaller standardized wooden
crates, then to fiberboard cartons. Cartons are generally cheaper, provide
superior protection, and yield fewer losses. The next innovation (unitization)
placed cartons on standard-sized pallets. This allowed the use of forklifts,
reducing loading times, product losses, and labor costs. Unitization is
widespread in the U.S., although not universal. 

In Mexico, in contrast, unitization is the exception rather than the rule.
Produce that is primarily exported, such as vine-ripe tomatoes or bell peppers,
faces the scrutiny of major chain buyers in the U.S., Europe, and Asia, fueling
substantial investment in state-of-the-art sorting, handling, and packing
technology. Export tomatoes, for example, are exactingly sorted for size, color,
and quality. They are packed in high-quality cases; stacked on pallets; and
chilled, stored, and shipped in controlled atmosphere containers. Mexican apples
are also immaculately packed because of direct competition with imports from the
U.S., Canada, Chile, and New Zealand.

Products that are not principally exported or do not face import competition are
usually less well sorted and packed. Product losses are unnecessarily high and
much of the cost of sorting is shifted from areas near the farm with low labor
costs to higher cost areas in town.

Mexican Government Assists Transition

In the U.S., the legal and regulatory infrastructure for produce marketing
developed under the umbrella of various agencies of the USDA, particularly the
Agricultural Marketing Service. In Mexico, regulation of the supply chain is
divided between two ministries: SAGAR the Ministry of Agriculture responsible
for production agriculture, and SECOFI the Ministry of Commerce responsible for
agricultural marketing from the farmgate to the consumer. 

SECOFI has been working with ANTAD, the Mexican supermarket trade association,
to develop industrywide standards for produce grades, cartons, and packages.
SECOFI is also establishing information networks to better integrate state-level
and regional markets. The central market of Mexico City plays an unusually large
role in matching supply and demand among provincial markets. It is common for
produce to be shipped to Mexico City only to be purchased for use in a market
close to the production region. This "product tourism" through Mexico City
results in unnecessary transportation costs and shipping losses. 

Mexico City's central market may dominate because it has sufficient liquidity to
ensure that a shipment will be sold promptly and paid for in a timely manner.
The growing market for produce quality should attract investment by independent
packer-shippers, but uncertainty about dispute settlement between farmers and
shippers may be inhibiting investment at this stage of the supply chain. An
improved system of payment and dispute resolution may reduce product tourism and
encourage independent packer-shippers.

In the U.S., the Perishable Agricultural Commodities Act (PACA) requires
commercial buyers and sellers of fruits and vegetables to be licensed and makes
contract disputes subject to arbitration. Licenses are revoked if traders do not
honor their commitments. In Mexico, business is often conducted with a
handshake; however, commerce over longer distances makes one's word of honor
vulnerable to opportunism. The use of formal contracts will likely expand
further into the countryside.

As SECOFI works with the supermarket industry and its supply chain, SAGAR is
developing programs to help smaller farmers adapt to these new demands of the
retail sector. The equipment required to efficiently sort and pack is often very
expensive. Credit is also expensive, so only larger, well-capitalized farms and
firms have been able to deliver consistent quality to supermarkets. Smaller
farms do not, individually, ship enough produce to justify such investments.
Consequently, they are at an increasing disadvantage as the demand for quality
expands. Unlike in the U.S., marketing cooperatives are not widespread in
Mexico, nor has incorporation been common among smaller farms. 

The universal pattern of industrialization has been that most smaller scale
farmers are forced off the land and into manufacturing and service occupations.
This is a difficult transition and many countries have tried to moderate the
process through agricultural and rural development policies. In Mexico, despite
many policies to ameliorate conditions in the rural economy, the supermarket
revolution will likely hasten agricultural consolidation.

Implications for International Trade

A long-term expansion in the volume and value of produce trade between the U.S.
and Mexico reflects the continuing integration of the two economies. The trade
flows are complementary with regard to season and reflect the growing demand for
year-round supplies of fruits and vegetables. The bulk of Mexican exports to the
U.S. are in the winter, and the bulk of U.S. exports to Mexico are in the summer
and fall.

U.S. producers may have a window of opportunity for supplying Mexican
supermarkets with the quality and consistency the Mexican distribution system
cannot yet deliver. Systems of quality assurance and a secure cold chain of
refrigerated shipping have emerged in Mexico, but only in certain sectors. For
example, packaged, prewashed salads imported from the U.S. have become popular
in Mexico; concerns about food safety have raised the demand for packed salads.
At the moment, U.S. firms are the primary suppliers of this product and the
services and quality it embodies. Further integration of the produce systems of
North America should yield more strategic alliances between U.S. and Mexican
retail chains; a fully integrated truck and rail network; harmonization of
produce standards, contracts, and dispute resolution; and greater complementary
trade.
David Skully (202) 694-5236, John Link (202) 694-5228, and Debra Tropp,
Agricultural Marketing Service (202) 720-8326 
dskully@econ.ag.gov; jlink@econ.ag.gov Debra_S_Tropp@usda.gov  

RESEARCH & TECHNOLOGY

Hard White Wheat: Changing The Color of U.S. Wheat?

Many U.S. wheat breeders are now making a concerted effort to develop hard white
wheat (HWW) varieties, which accounts for less than 1 percent of U.S. wheat
acreage. Kansas State University (KSU), for instance, is devoting about 75
percent of its wheat breeding program to white wheat, up from 10-25 percent in
the 1980's. This fall, KSU is planting foundation seed of two new varieties for
possible release next year (the release was originally scheduled for this fall).
Other States, such as Idaho, Washington, Colorado, Montana, and Nebraska, are
devoting at least 20-40 percent of their breeding programs to HWW as well. 

HWW plays a strategic role in these State breeding programs because of its
end-use characteristics. According to extensive university and industry studies,
HWW is regarded to have superior milling and breadbaking characteristics to hard
red winter wheat (HRW) because of HWW's higher milling extraction rates (i.e.,
more flour per bushel of grain milled to the same color standards), less bitter
aftertaste for whole wheat bread, and color qualities preferred by some
consumers. These end-use characteristics appeal to both domestic and foreign
wheat buyers, thus providing potential markets for wheat farmers growing HRW. 

The development of promising varieties has raised speculation about whether
wheat growers in Kansas and elsewhere in the Great Plains might make a dramatic
switch from hard red to hard white and the consequences for the U.S. wheat
industry. Some breeders expect HWW acreage to expand rapidly because of its
higher milling extraction rates and better quality characteristics. Nonetheless,
there are both agronomic and economic questions that will determine the speed
and extent of its adoption.

Will HWW remain a niche product or will it become a major new class of wheat? 
For farmers, the most critical questions are how it yields and what are the
price premiums relative to competing classes of wheat. Trial yield tests
indicate that the two new KSU HWW varieties produce 3-4 bushels more per acre
than the State average. The trial yield is comparable to trial yields of some of
the State's most popular HRW varieties. This yield advantage should encourage a
wider adoption of these new HWW varieties than those released in the early
1990's, which did not yield as high as then-existing HRW varieties. Results from
actual farm experience will be needed to verify the yield advantages achieved at
the experiment stations. 

U.S. farmers will adopt any new product if it increases net returns or proves to
have other advantages. This is amply demonstrated in the cases of Roundup Ready
soybeans and Bt corn (see Special Article). HWW adoption promises to be slower
because it must establish its advantages with users as well as growers and
provide economic incentives across the board.

To avoid price discounts assessed to "mixed" wheat, the HWW would have to be
kept separate from other classes because mixing would (1) eliminate the
extraction rate advantage, and (2) possibly lower the grade if the level of
"contrasting classes of wheat" exceeds the limit. Segregation may be costly
initially, but it would be less so as elevators handle larger volumes of HWW.
For example, farmers and elevators in barley areas routinely separate feed
barley from malting barley. 

Another question revolves around end-users willingness to pay more for the
wheat. While there are potential niche uses for HWW, prices will be shaped by
the market and be influenced by other classes of wheat. If HWW expands beyond
the specialty level, costs will be drawn down by larger volumes and economies of
scale.

Current Status: Production Contracts Preserve HWW Identity

Based on a compilation by the Economic Research Service, U.S. farmers have
increased HWW plantings to 100,000-140,000 acres for harvest in 1998. About half
is winter wheat (planted in fall, harvested in following summer) and the rest is
spring (planted in spring, harvested in summer). This accounts for only 2-3
percent of U.S. white wheat acreage just 0.2 percent of all U.S. wheat acreage.
(For the top five producing States, HWW accounts for 0.6-0.9 percent of total
wheat acreage.)  The remaining white wheat is "soft," which lacks the elastic
properties necessary for baking pan bread (i.e., loafs) and instead is used for
products such as cakes, cookies, flat breads, and some noodles. 

Montana, Colorado, Kansas, Idaho, and California account for over 95 percent of
total HWW acreage. In Kansas, Colorado, and California, producers plant
primarily winter varieties, while producers in Idaho and Montana plant mostly
spring varieties.

Behind much of this year's increase in HWW is a cooperative, Pro/Mar Select
Wheat, Inc. In an effort to expand its business, it contracted with members to
plant 40,000 acres of HWW (Idaho 337S variety a spring variety) in Montana in
1998. 

In Idaho, HWW acreage is estimated to have expanded from 8,000 acres in 1997 to
15,000 acres this year in response to increased market demand. In Colorado, HWW
acreage totaled only 7,000 acres in 1996, but expanded to at least 20,000 acres
in 1998 as domestic millers contracted with growers at premiums over HRW,
reportedly ranging from 25 to 35 cents per bushel.

Most HWW is grown through production contracts and marketed under
identity-preserved programs because elevators and millers would discount prices
if HWW were mixed with other classes of wheat. For example, Pro/Mar obtained an
exclusive right to contract the HWW variety (Idaho 377S) with producers in Idaho
when the University of Idaho released it last year. Initially, Pro/Mar
restricted production contracts to its member-producers in Idaho. Now it has
extended contracts to growers in other States. Pro/Mar has total control over
the distribution of Idaho 377S seeds to member-producers, and the purchasing
contracts bar farmers from retaining seed for planting the next season (i.e.,
all HWW harvested must be sold back to Pro/Mar). 

Since Idaho 377S must not be contaminated with other varieties at harvest,
harvesting equipment must be thoroughly cleaned. HWW must also be segregated
from other varieties during handling, storage, and transportation until it
reaches the final end-user.

In Kansas, the American White Wheat Producers Association (AWWPA) a farmer
cooperative chartered in 1988 to market HWW enters into contracts with its
members to grow the association's HWW varieties. Growers must purchase certified
seed from an AWWPA-certified seed dealer and take measures to ensure wheat
quality, such as treatment of disease and insect infestation and growing HWW on
summer-fallow land so that it will not be mixed with other classes of wheat.
They are also encouraged to grow wheat only in drier areas to avoid sprout
damage because HWW is predisposed to preharvest sprouting if too much rain
occurs near harvest time and delays harvest. In addition, all fields are
inspected by AWWPA and producers are required to submit a 35-pound grain sample
from each field after harvest. 

In return, producers receive prices above the base price of HRW in Hutchinson,
Kansas, depending on the premiums that end-users are willing to pay. In the
mid-1990's, the premium was set by the AWWPA at 15 cents per bushel; however,
market forces have determined the premium in recent years. Producers are
required to sell all HWW production to AWWPA and deliver their wheat crops to a
designated receiving point usually an elevator, but sometimes a flour mill.
AWWPA can arrange for hauling the grain, with shipping costs reduced from
producer returns.

AWWPA owns no elevators, trucks, flour mills, or baking facilities. Instead, it
contracts with flour mills for the milling and packaging of whole white wheat
flour and other HWW-based food ingredients (e.g., patent flours, brans, and
white wheat bulgar). Total contracted production is 20,000 acres in 1998, which
is greater than in previous years. The AWWPA plans to expand its contract
acreage in the near future with the release of the new KSU varieties. 

Like Pro/Mar, AgriPro in Colorado contracts with producers to grow two HWW
varieties (Platt and Solomon). HWW wheat produced under the contract is then
sold to ConAgra and shipped to its mill in Denver. Premiums in the range of
25-35 cents per bushel are offered to producers in exchange for their efforts to
preserve grain identity.

Behind Demand For Hard White Wheat

There are several potential reasons for favoring hard white wheat over hard red
wheat. For millers, the white wheat has a flour extraction rate 1-2 percentage
points higher than red wheat when both are milled to similar color standards.
For consumers, whole-wheat products made from hard white wheat may be more
appealing to those favoring whiteness. White bran is less obvious than red bran
in flour and food products. In addition, bran from white wheat is used in
breakfast and snack-type foods and commands a higher price than bran from red
wheat.

U.S. millers can use hard white wheat for most of the same uses as hard red
wheat. However, there appear to be three specialty products for which hard white
wheat's end-use characteristics are well suited: whole-wheat breads, tortillas,
and oriental noodles.

HWW is used to make increasingly popular whole-wheat breads. Bread made from
whole HWW flour is lighter colored and less bitter than bread made from red
wheat. The bran of white wheat contains less of the phenolic compounds that give
whole red wheat bread a stronger, bitter flavor. Thus, less sugar is needed for
making whole white wheat bread. Beside the ingredient cost savings,  lower sugar
content appeals to nutrition-conscious shoppers.

Tortillas are a traditional Mexican flat bread made from either corn or wheat.
Corn tortillas predominate in Mexico, while consumption of wheat tortillas
exceeds corn tortillas by 2 to 1 in the U.S. Reportedly, U.S. consumers
generally prefer bright white tortillas, which may give HWW an advantage over
HRW wheat.

Tortillas made from wheat are used increasingly in the U.S. as so-called wraps
for a variety of non-Mexican cuisine. This practice began in the mid-1990's in
California and has been taken up by the Nation's fast-food industry. This
innovative use of tortillas is helping to boost consumer demand for wheat in the
U.S., which bodes well for white wheat demand.

Makers of noodle flour in East and Southeast Asia tend to favor white wheat for
making certain oriental noodles. U.S. soft white wheat is well suited for making
some of these noodles. However, other types require a hard white wheat (with
low-level protein, sometimes referred to as "semi-hard" in Asia), of which the
U.S. now produces little. Australia wins out because it can supply large
quantities of high-quality hard white wheat.

Most Asian noodle manufacturers use a flour made from a blend of wheats based on
relative prices and desired end-use characteristics. Color and texture
characteristics imparted by Australian white wheats are particularly suited to
these blends. Australia currently supplies half of the wheat (including
Australian Standard White) for noodle demand in Asia, according to reports from
noodle manufacturers in South Korea, China, Hong Kong, Philippines, Taiwan,
Singapore, Malaysia, Thailand, and Indonesia.

Noodles made from Australian wheats are renowned for a stable white or yellow
color essential for producing a desirable noodle. Compared with wheats from
Australia, U.S. red wheats tend to contain high levels of an enzyme, polyphenol
oxidase (PPO), that U.S. researchers found to be responsible for noodle
discoloration. Raw noodles (which, along with partially boiled noodles, are
preferred by many Asian consumers) made from U. S. red wheats may discolor to
green, dark brown, or black within 24 hours of manufacture. The rate of
darkening of fresh noodles is important because they might not be consumed for 1
or more days after manufacturing. 

The new KSU HWW varieties are expected to compete with mid-protein Australian
wheat offerings (Hard, Premium, and Noodle) in international markets. They will
have lower protein levels than Australian Prime Hard, but greater than
Australian Standard White. According to the foreign offices of the U.S. Wheat
Associates, Asia imports more than 400 million bushels of wheat (including
Australian Standard White) for making noodles, which accounts for one-half of
total wheat imports into Asia. (Asia, including China, accounts for about
one-third of world wheat imports.)  One of the two varieties of KSU HWW still
lacks color stability. U.S. researchers are working on improvements in order to
match the quality of Australian wheat for making oriental noodles. For the last
several years, Canada has also been working on developing white wheats for the
Asian market.

Will HWW Yields Outweigh Higher Marketing Costs?

Expanded HWW production depends upon the economics of adopting new HWW
varieties, which, in turn, is driven by market demands for this new class of
wheat. The economic forces include yield potential of the new HWW varieties, the
price premium offered by the market, and any differences in the costs of
production and marketing between HWW and competing classes of wheat. Differences
in net producer returns of HWW and the competing class depend primarily on
yields and prices, since the costs of production may not be much higher than for
HRW on a per-bushel basis. 

In Kansas, for example, the new KSU varieties have a yield advantage of 3-4
bushels (per acre) over the average of current HRW varieties based on 1997 trial
yield test results. However, it still would take 2-3 years to reach commercial
production stage in Kansas when farmers sell grain to be milled. Thus, it will
take some time before they can be widely grown to determine farmer acceptance
and observe if yield gains on the farm match those in the trials. 

It is unlikely that producers will receive more than modest premiums due to
marketing expenses associated with keeping white wheat segregated in the
HRW-dominated areas. For example, flour millers would have to make some
adjustments to their operations such as separate storage and processing of the
grain, and separate milling specification for the higher extraction rate in
order to accommodate a new class of wheat. 

Higher flour extraction rates are another driving force for a possible expansion
of HWW acreage. The higher flour extraction rates would entice flour millers to
accept HWW as a new class of wheat in their milling operation.

Marketing System Must Adapt To Preserve HWW Quality 

For HWW production to expand widely, the marketing system will need to preserve
the identity of HWW to avoid discounts by buyers. Presently, identity is
preserved by controlling plantings only specific seeds certified by seed
companies or farmer cooperatives are permitted for plantings. Producers are not
permitted to keep HWW seeds for next season's plantings. As acreage expands,
identity preservation (IP) could extend to IP marketing by class, instead of
just by variety, so long as the HWW quality characteristics are maintained. 

Large-scale segregation would be required from production points, storage,
transportation, all the way through end-users. Limited onfarm storage space
might present more of a challenge for Kansas than for the Northern Plains, where
there is typically more storage capacity. Also, as production expands,
segregating HWW from other classes of wheat may initially call for hauling the
wheat crop to more distant elevators, which increases marketing costs. However,
as HWW acreage substitutes for red wheat, storage space may be less of an issue.
Elevator space will increasingly become available to handle white wheat.
Elevators will likely adapt by handling different classes of wheat, or by
specializing in HWW. Currently, some seed companies or farmer cooperatives
contract with selected elevators to handle just HWW. 

While IP is a deviation from the current norm, there are indications that other
field crops are also likely to require segregation in the near future. New
varieties (e.g., high-oil corn and high-oleic soybeans) with special traits
aimed at enhancing various user characteristics are already hitting the market.

An expansion of HWW production and subsequent potential for export has
implications for grain grades and standards. Current U.S. wheat standards allow
a 2-percent limit on contrasting classes of wheat and a 5-percent limit on total
wheat of other classes for U.S. No. 2  wheat (the base grade of exported wheat). 

For price-sensitive buyers, such as those in the Middle East and Indian
Subcontinent where HWW could be used for making some flat breads such as pita,
because of its higher extraction rate and lighter color the standards might be
accepted without requiring a tighter limit in contract specification. (Semi-hard
wheat is preferred by flour millers in these regions for making certain flat
breads). However, tighter limits than U.S. wheat standards allow may be
specified in the contract to reflect needs of quality-sensitive buyers. For
those buyers who are especially sensitive to purity, they could contract
directly with U.S. producers under an identity preservation program.

How to measure the wheat color would remain an issue to be addressed in
determining the level of contrasting classes of wheat. The technology to
distinguish white from red wheat is available. The single-kernel hardness
tester, although extremely accurate, reportedly costs as much as $90,000 per
unit, which may not be affordable to many elevators. Visual inspection is the
traditional, less expensive option, but it may not be very accurate.  

HWW: Niche or Mainstream?

The prospects of HWW acreage expansion will depend on how much end-users value
this class of wheat. Over the next 3 to 4 years, HWW sales will be mainly to
domestic markets. Exports are expected to remain minimal until sales are
sufficient to provide a consistent supply. Small shipments using containers
would likely be uncompetitive with Australian wheat, although shipments can be
separated in a wheat cargo to reduce transport costs. Exports could go to Mexico
for making tortillas and pan bread, to Asia for making oriental noodles, and to
the Middle East and Indian Subcontinent for flat bread. 

The rate of  expansion in HWW acreage will initially be limited by the
availability of certified seed. Approximately 1,000 bushels of combined
foundation seeds for the two new KSU varieties will be available for plantings
in the fall of 1998. In subsequent years, the supply of certified seed will be
limited by sales of HWW to domestic flour millers (instead of retained for seed)
to demonstrate to farmers that there is a market outlet. Based on KSU's current
distribution plan, nearly 2 million bushels of certified HWW seed is targeted
for harvest in Kansas in 2000. In addition, according to KSU, marketing plans
submitted by bidders to receive the foundation seeds indicated that one-half to
three-quarters of this certified seed may be sold to farmers for seedings in
fall 2000 and the remainder sold to flour millers and for market development
trials. HWW area would then equal 8-12 percent of Kansas wheat acreage harvested
in 2001. 

Assuming traditional adoption rates for popular HRW varieties would apply to the
new HWW varieties because of yield advantages, HWW acreage would expand further
to nearly 15 percent of Kansas wheat acreage harvested in 2002. However, this
comparison is not completely valid because previous varieties involved no
changes in marketing or storage and had established market outlets. Also,
concern about sprout damage will dampen optimism about a fast adoption of HWW.
Thus, considering all the factors together, HWW acreage most likely will not
expand beyond 10-15 percent of Kansas wheat area in 2002, unless it is proven to
producers that HWW offers higher revenues.

Without significant price premiums, the primary adoption driver would have to be
the yield advantages. If trial yield gains are achieved by farmers, it would be
similar to a popular HRW variety Jagger which was introduced in 1994. But it was
not until 1998 that Jagger reached 20 percent of seeded acreage in Kansas. The
amount of foundation seed for the two HWW varieties (1,000 bushels) is smaller
than for Jagger when it was released (3,000 bushels). These comparisons suggest
that the area planted to the two new varieties in Kansas will be less than 15
percent by year 2002, especially if the varieties do not have improved yields as
breeders expect. 
William Lin (202) 694-5303 and Gary Vocke (202) 694-5241 
wwlin@econ.ag.gov
gvocke@econ.ag.gov  


SPECIAL ARTICLE

U.S. Farmers Are Rapidly Adopting Biotech Crops  

In just the last few years, adoption of genetically modified crop varieties has
increased dramatically among several mainstays of U.S. agriculture corn,
soybeans, and cotton. Farmers have voted resoundingly in favor of the new crops
as acreage soared to about 50 million in the 3 short years since commercial
introduction. Further gains in acreage are expected in the years ahead. Research
is also underway on genetically modified wheat, but commercial introduction is
several steps away.

The new crop varieties currently being grown feature resistance to pests and the
ability to tolerate herbicides. Farmers' rapidfire adoption of these varieties
has been propelled by potential cost savings, including reductions in input use,
although adoption has been so rapid and the technology is so new that only
limited assessment of the economic impact has been made. Likewise, environmental
pros and cons are being raised by proponents and critics.

Input traits such as pest resistance and herbicide tolerance represent the
"first wave" of the new agricultural biotechnology, offering advantages to
farmers in the production phase without changing the final product. The second
wave of genetic modification will focus on output traits such as improved
nutritional features and processing characteristics. More of these crops will be
available commercially in the next few years. 

The first generation of genetically modified (GM) crops has the potential to
increase farmers' net returns through savings in production costs, reductions in
chemical use, increased flexibility in crops planted, and in some cases, yield
advantages. As farmers perceive benefits of the technology to outweigh the
costs, growers' adoption of insect-resistant and herbicide-tolerant crops is
spreading at a rapid pace.

Development of genetically modified organisms (GMO's) is an advance over
conventional breeding techniques, which crossed similar plants or animals to
create new varieties. Modern biotechnology, which includes genetic modification,
applies cellular and molecular biology to expand the range of traits found in
plants, animals, and microorganisms. Bt corn, for example, is enhanced with a
gene from a naturally occurring soil bacterium (Bacillus thuringiensis) to
produce proteins that kill specific groups of insects.

Much of the research on genetically modified organisms began in the 1980's, with
a fairly slow incubation period before the altered crop varieties were ready for
the market. In contrast, commercialization has been rapid, partly because the
testing and approval process in the U.S. is relatively rapid, especially
compared with Europe. In the U.S., genetically modified crops on the market have
been approved  by USDA's Animal and Plant Health Inspection Service (APHIS), the
Environmental Protection Agency (EPA), and the Food and Drug Administration
(FDA). 

Genetically modified crops reflect very substantial investments, largely by
private sector firms. These new varieties are proprietary, and farmers pay a
premium for the seed. The technology is generally available through many seed
companies. For some products, the premium paid by farmers covers a technology
fee that goes to the company that developed the technology. These firms have
begun devising arrangements that respect intellectual property rights, which are
critical in providing incentives to invest and develop products.  Many major
companies that develop and patent the technology are merging, acquiring, or
forming alliances with seed companies. 

Currently available genetically modified crops should have little or no direct
impact on prices received by farmers, assuming the varieties are accepted by
consumers and by other countries. This is because the products are basically
indistinguishable from conventional crops. Output traits, on the other hand,
will enhance the value of the crops for end-users, with more pronounced effects
on pricing and marketing. Subsequent articles will focus on this value-enhanced
generation of products and the economic implications.

The adoption of genetically modified crops also has implications for trade
because other countries, notably the European Union (EU), have lagged the U.S.
in approval of GMO's and in the development of regulations. Most trading
partners have placed no restrictions on GMO imports from the U.S., but
roadblocks  have been encountered in the EU because of the slowness of the
approval process as well as consumer concerns. 

For a relatively small group of U.S. consumers and in some foreign markets, a
niche market for non-GMO products may develop, similar to the present market for
organic foods, that will involve identity-preserved production and marketing.

The Major New Pest-Resistant & Herbicide-Tolerant Crops

Herbicide-Tolerant Oilseeds. Insertion of a single gene, derived from a common
soil microorganism, makes soybeans immune to glyphosate, the active ingredient
of Monsanto's Roundup herbicide. In 1996, the first year of commercial
production, U.S. farmers harvested about 1 million acres of genetically
modified, glyphosate-tolerant soybeans. By 1997, as seed became available in
most producing regions, about 9 million acres were grown. U.S. farmers are
expected to harvest more than 20 million acres this year, about 30 percent of
total soybean acreage, and by the year 2000, more than half could be planted to
varieties with this gene. Another soybean variety that is near U.S.
commercialization is resistant to an alternative herbicide, glufosinate ammonium
(Liberty), which differs from glyphosate in some features.

This technology is also being enthusiastically adopted by other world producers,
including Argentina and Canada. In Brazil, the world's second-largest soybean
producer, the government is likely to grant permission to raise
herbicide-tolerant soybeans soon, and the outlook for adoption by farmers is
very favorable (Monsanto predicts 20-30 percent use within 2 to 3 years after
commercialization in Brazil). Imports of genetically modified  soybeans for
crushing are allowed into Brazil on condition that the resulting meal and oil be
re-exported. 

Why have farmers so enthusiastically adopted herbicide-tolerant soybean
varieties?  The higher cost of the seed is reportedly offset by a reduction in
input costs. When planting Roundup Ready (glyphosate-tolerant) soybeans, for
example, most farmers can limit herbicide treatment to a single application of
Roundup shortly after the crop emerges from the soil, while the conventional
herbicide program can involve multiple applications of several types of weed
killers. Using glyphosate-tolerant soybeans, farmers can cut chemical costs by
10-40 percent, depending on the region and on the farmer's management practices. 

Other oilseeds such as sunflowers, canola, and flax are also being genetically
altered for herbicide tolerance. With no broad-spectrum weed control previously
used for canola, yields of this crop have risen when the new varieties were
planted. Canada preceded the U.S. in adopting herbicide-tolerant canola,
planting 4 million acres by 1997. In 1998, nearly half of Canada's canola area
(about 6.5 million acres) is expected to be seeded to herbicide-tolerant
varieties. Glufosinate-tolerant canola was approved for U.S. producers in early
1998.

Bt and Herbicide-Tolerant Corn. Bt corn is designed to resist damage from the
European corn borer (ECB), a major insect pest in the Corn Belt. Because the
borer tunnels inside the stalk, the impact is not always readily apparent until
damage has occurred. Bt corn, while resistant to specific groups of insects such
as the corn borer, has not been shown to have a  direct effect on beneficial
insects.

Bt corn was first approved for sale in 1996, and use expanded greatly in 1997.
Acreage has increased sharply in 1998, with the Bt trait incorporated into an
increasing number of hybrids. Industry sources indicate Bt corn could be planted
on 15-18 million acres in 1998 (about 20 percent of U.S. corn acreage), up from
less than 5 million acres in 1997. 

Because of the difficulty in predicting infestation and in properly timing
treatment, the effectiveness of spraying had been mixed. Moreover, not all
farmers who grow Bt corn treated their fields previously to control the corn
borer. Given the indications of favorable yield, many farmers who had not
previously sprayed for corn borer are apparently planting Bt corn to protect the
crop against heavy infestations, and the higher yields can offset the added seed
costs.

Results have generally been very positive in terms of protection from borer
damage, compared with non-Bt corn in adjacent areas. However, yield performance
was dependent on the particular hybrid. Where infestation was very heavy, yields
of Bt corn varieties in some areas were dramatically higher than non-Bt corn. 

The next major pest control feature would target the rootworm. This technology
will be introduced in the next 2 or 3 years, and market prospects look
promising. The industry is also working on disease resistance. Moreover, the
industry expects further improvement in yield results as Bt becomes available
with more elite germplasm. 

Outside the U.S., some major corn producers, including Brazil and Argentina, are
expected to grow Bt corn in the near future. European growers are also
expressing strong interest in Bt corn, but political barriers in the EU could
cloud the outlook.

Herbicide-tolerant corn is now on the market, including varieties that tolerate
popular herbicides based on glyphosate (Roundup Ready corn), on glufosinate
ammonium (Liberty Link corn), and on imidazolinone (IMI corn). Some
herbicide-tolerant corn has also been developed through conventional breeding.
For 1998, seed is available for more than 7 million acres of IMI corn, over 6
million acres of Liberty Link corn, and 900,000 acres of Roundup Ready corn. 

Farmers' response to herbicide-tolerant corn is more complicated than for
insect-resistant varieties such as Bt corn. Weed problems tend to be more
varied, both by geography and by year. Usefulness and performance of
herbicide-tolerant corn will vary by region and management practice. In areas
where conventional tillage is more common, weed control may be less dependent on
herbicide use, making adoption of herbicide-tolerant corn less likely.

Bt and Herbicide-Tolerant Cotton. Adoption of genetically modified cotton is
expanding rapidly, although the experiences of farmers vary and have not been
without problems. Genetically modified cotton is available with insect-resistant
and herbicide-tolerant traits, and some varieties combine the two traits.
Adoption should continue to grow as farmers learn how to manage these varieties
and as seed developers offer new varieties.

In 1996, a genetically engineered cotton, Bollgard, became available
commercially. This Bt cotton was developed to control the tobacco budworm and
bollworm and reduce the amount of insecticides needed.

Producer response to Bt cotton was mixed, with  positive outweighing negative,
according to a paper presented at the Beltwide Cotton Production Conference in
January 1997. In a 1996 Monsanto survey of about four-fifths of the producers
using Bollgard, about 80 percent of the surveyed producers were satisfied.
Monsanto reported that U.S. growers using Bt varieties realized a modest yield
increase over non-Bt cotton and that there was a decline in the use of
insecticides. While overall insecticide use is expected to decline with Bt
varieties, many factors affect the performance of any genetically modified
crops: seed varieties, insect levels, weather, and other environmental
conditions.  For example, in 1996 some Texas producers using Bt cotton where
insect infestation was unusually high claimed losses from cotton bollworm damage
on 18,000 acres.

Producers are beginning to understand that use of Bt cotton does not eliminate
all necessary pest management practices and that continued monitoring of insect
activity is necessary. Given heavy insect infestations, some insecticide
spraying may still be needed to achieve adequate control.

Roundup Ready cotton was introduced commercially in 1997, as well as limited
quantities of varieties that combined genes containing both Roundup Ready and
Bollgard Bt. Overall, results from Roundup Ready cotton appear favorable.
However, some producers in the Mississippi delta and in Texas reported some
losses from bollworm damage with herbicide-tolerant cotton, which was attributed
to possible interactions of many factors such as weather, management practices,
and the particular crop variety used.

Calgene markets a genetically engineered product BXN cottonseed  resistant to
the herbicide Bromoxynil. Producers have reported favorable results. Calgene
plans to introduce cotton varieties containing both the BXN and Bt gene in 1998. 

Producers planted genetically modified cotton (mainly Bollgard) on about 13
percent of U.S. cotton acreage in 1996, or about 1.9 million acres. In 1997,
about 25 percent of U.S. cotton acreage, approximately 3.4 million acres, was
planted to genetically modified cotton. Industry expectations are for continued
growth in GM cotton in 1998.

Future plans are to develop additional tolerances of insects, diseases, and
nematodes, and incorporating genes designed to improve yield, harvestability,
and drought and salt tolerance of cotton. In addition, as for other crops, the
next "wave" will add "output" traits e.g.,  fiber qualities including natural
colors that eliminate the need for chemical dyes. 

Adoption of GM varieties by competitor nations is underway. Monsanto introduced
genetically modified cotton to Australia in 1996. Bt cotton has also been sold
in Mexico and China, and efforts are underway for sales in Argentina, South
Africa, and Brazil. 

An Early Assessment of the New Technology

In addition to cost savings, an incentive to adopt any new technology is
convenience. Pest-resistant crops can reduce management tasks by, for example,
reducing pest scouting needs and eliminating insecticide use. Incentives for
using herbicide-tolerant crops are also strong, as growers can simplify their
herbicide use and often reduce the number of applications of the targeted
chemicals. On the other hand, as new herbicide-tolerant crops proliferate,
farmers will need to keep track of which herbicides can or cannot be applied to
a particular crop.

Most of the new technology introduced so far is not aimed explicitly at
increasing yields. However, some of the new corn products will effectively boost
yields by cutting losses to pests or weeds, protecting the yield potential of
the particular hybrid. Benefits will vary from year to year and over different
locations, depending on environmental factors such as the level of pest
infestation that may have otherwise lowered yields.

Because there is no solid estimate on yield loss at the national level due to
pest damage, it is difficult to assess the impact on aggregate yields from
adoption of Bt corn and cotton. But if adopted widely enough, and if yield
advantages are sustained, it could "bump" the average U.S. yields above
long-term trends.

For soybeans, it is not clear whether herbicide-tolerant crops currently have a
yield advantage over conventional varieties. While less weedy fields may enhance
yields and reduce foreign material, other soybean varieties may be better
tailored in certain locations to withstand pests, disease, or adverse weather
conditions. As more varieties with these traits include the gene for herbicide
resistance, U.S. yields may show improvement. In general, elite germplasm will
still be the underlying driving force in crop productivity gains, regardless of
the new technology applied. 

To the extent that the new genetically modified crops, particularly the
insect-resistant varieties, reduce the use of agricultural chemicals, they will
appeal to farmers attempting to minimize the environmental impacts of their
operations. The environmental benefits of herbicide-tolerant crops derive from
the reduction in the number of chemical applications, reduction in energy use
due to fewer passes across the fields, and reduction in the need for tillage.

Moreover, substitution of both glyphosate and glufosinate for other chemicals
has potential environmental benefits. These two herbicides have less residual
soil activity than some other herbicides. This means that runoff of chemicals
into groundwater could be minimized. Herbicide-tolerant crops also accommodate
no-till operations, which reduce erosion of topsoils.

Some critics are concerned that insects or weeds may develop resistance to the
technology intended to suppress them. In the case of insect resistance, organic
producers and gardeners, for example, are concerned about resistance to Bt,
because it is an effective and environmentally friendly pesticide which they
have used as a spray. 

Companies selling Bt seed have a strong economic incentive to prevent the
development of insect resistance, in order to preserve the value of Bt seed, and
they acknowledge that development of resistant insect populations is a real
threat to the long-term effectiveness of Bt crops. Producers using Bt seed sign
agreements with the seed companies to follow certain production practices as
part of an insect resistance management program.

For both cotton and corn, two-part pest management plans were developed by the
Environmental Protection Agency (EPA). First, the developing company must ensure
that the Bt strains carry enough toxin to kill most feeding insects so that they
cannot mate. Second, the developing company must ensure that farmers plant
nearby areas to a non-Bt variety in order to provide a refuge for survival of
nonresistant insects. Such management plans will likely involve costs to
growers. 

Chemical and seed companies are also prepared to tap different strains and
versions of Bt and to offer new generations of product, similar to the practice
with some antibiotics in addressing resistance. The effectiveness of these
measures will need to be evaluated over time.

Continued use of a particular herbicide raises fear of weed resistance. Another 
potential problem is weed shift, with species most susceptible to the herbicide
declining over time, while less susceptible species build up. Further monitoring
and research are needed over time to address such concerns adequately.

Trade & Genetically Modified Organisms  

In late 1997 and in 1998, friction occurred over EU acceptance of U.S. corn
exports because particular GM varieties from the 1997 crop had not yet been
fully approved under the EU's approval process. This has effectively blocked
imports of U.S. corn by Spain and Portugal, which typically purchase U.S. corn
every year. 

Although the particular varieties were approved by an EU scientific advisory
panel and an EU regulatory committee, other hurdles remained, including approval
by France. As one of two member countries that sponsored the corn varieties,
France must grant its consent before the corn varieties can be marketed in the
EU. The United Kingdom, the second sponsoring country, previously granted its
consent in June 1998.

Rapid introduction of new genetically modified varieties and a slow approval
process in the EU suggest delays could occur again under the prevailing
regulatory system. Moreover, the environmental impact as well as food safety is
a concern in the EU. In addition, the EU passed a labeling requirement, which
could provide disincentives to imports of foods processed from genetically
modified crops, and could increase costs.

Looking Ahead

Early indications are that many of the new crop technologies are beneficial to
U.S. farmers, although adoption is not without risk. Because the technology is
so new, assessments of its effectiveness, cost and labor savings, yield
advantages, and ecological impacts are limited. Sustained performance (such as
weed control) over time, including performance of the new technologies under
stress conditions like drought, is an unknown that could influence future
adoption rates. Growing concentration among seed and chemical companies will
present additional unknowns for farmers. 

Meanwhile, many new features on the input side are expected to be introduced
soon, such as resistance to more insect pests. In the future, "stacking" of
multiple traits in one variety will become more common, such as combining
herbicide tolerance, disease resistance, and end-use or output properties. The
breeding process becomes more complicated as the number of genes involved
increases, so it is unlikely that one variety will ever be best for all
situations. But "stacking" will likely broaden the appeal of genetically
modified crops.

Given the considerable investment in research by the private sector, and the
rapid adoption by farmers, the brisk pace of innovation in developing
genetically modified crops is likely to continue. Economic and agronomic impacts
will become more evident as the technology evolves.

Peter A. Riley (202) 694-5308, Linwood Hoffman (202) 694-5298, and Mark Ash
(202) 694-5289
pariley@econ.ag.gov
lhoffman@econ.ag.gov 
mash@econ.ag.gov

SPECIAL ARTICLE BOX #1 

USDA does not make official estimates of acreage or production of genetically
modified varieties--the data are included in the total estimates for the various
crops. The numbers cited here were developed from industry sources, and are not
official USDA data. Information on the cost and effectiveness of the various
genetically modified crop varieties is drawn largely from private-sector sources
and from universities. Use of brand names in the article is for identification
of products, and does not constitute an endorsement of any product.


END_OF_FILE
