AGRICULTURAL OUTLOOK                                        November 20, 1998
December 1998, AO-257
               Approved by the World Agricultural Outlook Board
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IN THIS ISSUE.

BRIEFS
Specialty Crops: Sweet Potatoes Are No Longer Just Holiday Fare
Specialty Crops: Higher Tree Nut Prices for the Holidays

COMMODITY SPOTLIGHTS
Large Supplies, Sluggish Export Prospects Pressure Corn Prices
U.S. Peanut Consumption Rebounds

TRANSPORTATION
The Western Rail Crisis: One Year Later

WORLD AGRICULTURE & TRADE
Indonesia's Crisis: Implications for Agriculture

FARM FINANCE
The 1997 Tax Law: New Incentives for Farmers To Invest for Retirement

SPECIAL ARTICLE
The Uruguay Round Agreement on Agriculture: The Record to Date


IN THIS ISSUE...

Large Supplies, Sluggish Export Prospects Pressure Corn Prices

U.S. corn farmers, now wrapping up the second-largest harvest in history, face
weak prices in 1998/99.  The large increase in corn supply is expected to
outstrip the rise in demand, keeping downward pressure on prices.  Although
domestic use of corn will rise to a new record, only a small recovery in U.S.
exports is likely.  Global import levels are weak, despite low prices, because
of economic and financial problems in several regions of the world.  U.S. corn
exports will remain comparatively low, although forecast to rally from the
depressed performance of 1997/98 as competitor shipments decline.  Pete Riley
(202) 694-5308; pariley@econ.ag.gov

U.S. Peanut Consumption Rebounds

Before the recent rebound in domestic food use of U.S.-grown peanuts, demand
had weakened in the early 1990's.  Stagnant commercial peanut use, rapidly
falling government purchases, and rapidly rising volumes of imported peanuts
and products had combined to reduce demand.  But industry promotion efforts
launched in 1996 have paid off, and while it is difficult to measure the
impact, U.S. edible peanut consumption rose nearly 2 percent in 1997/98, to
2.17 billion pounds.  Lower peanut prices and introduction of new products may
also have helped boost consumption.  While the issue of peanut allergies may
cut into U.S. peanut consumption in the short run, the most immediate
challenge for the U.S. peanut industry may be the recent appearance of peanut
butter/paste imports from Mexico.  Scott Sanford, Farm Service Agency (202)
720-3392; scott_sanford@wdc.fsa.usda.gov

The Western Rail Crisis: One Year Later

Rail service in the western U.S. appears to have improved substantially
following a series of service failures which snarled traffic beginning in the
summer of 1997.  Steps taken by Union Pacific Railroad in response to last
year's crisis, although slowing recovery in the short term, will add to
overall rail capacity in the region for many years to come.  Recent
improvements should allow carriers to handle the 1998 grain and soybean
harvest, which promises to be the largest in history.  Bumper crops of grain
and soybeans have combined with large carryin stocks to push grain storage
capacity beyond its limits in many regions, but this fall's ground piles of
grain are not the result of transportation snags.  The large crops, worldwide
economic problems, and increased competition have reduced demand for U.S.
grain, particularly at Pacific Northwest ports.  William J. Brennan (202)
690-4440; William_J_Brennan@usda.gov

Indonesia's Crisis: Implications for Agriculture

Triggered by a regional financial crisis that began in Thailand in July 1997,
Indonesia's sudden economic collapse in 1997-98 had several contributing
factors, including a rapid increase in short-term, private debt and a weakly
regulated banking system.  The economic chaos has cut U.S. agricultural
exports to Indonesia by more than half, from $639 million in January-September
1996 to $312 million during the same period in 1998.  By itself, Indonesia is
not a large market for U.S. agricultural exports, which totaled $57.2 billion
in calendar year 1997.  However, Indonesia and its ailing Southeast Asian
neighbors, together with South Korea, accounted for 16 percent of the increase
in U.S. agricultural exports from 1990 to 1996.  Gary Vocke (202) 694-5241;
gvocke@econ.ag.gov

The 1997 Tax Law: New Incentives for Farmers To Invest for Retirement

Recent changes under the Taxpayer Relief Act of 1997 offer new choices and
opportunities for retirement planning at a time when farmers have a number of
incentives for diversifying total assets beyond the farm.  The tax law changes
for Individual Retirement Accounts present new tax benefits, while lower
capital gains tax rates reinforce farmers' traditional inclination to reinvest
in farm assets to provide income at retirement.  Although incentives in the
new tax law are likely to increase overall investment, they will likely
generate relatively little additional diversification into off-farm assets,
given farmers' historical preferences.  James Monke (202) 694-5358;
jmonke@econ.ag.gov

Uruguay Round Agreement on Agriculture: The Record to Date

During the 3 years since initial implementation of the Uruguay Round Agreement
on Agriculture (URAA), the record is mixed.  The Uruguay Round's overall
impact on agricultural trade can be considered positive in moving toward
several key goals, including reduction of  agricultural export subsidies, new
rules for agricultural import policy, and disciplines for sanitary and
phytosanitary trade measures.  The URAA has also encouraged a shift in
domestic agricultural policies away from practices with the largest potential
to affect production, and therefore, to affect trade flows.  However,
significant reductions in most agricultural tariffs will have to await a
future round of negotiations.  Mary Anne Normile (202) 694-5162;
mnormile@econ.ag.gov




                                   
BRIEFS
Specialty Crops

Sweet Potatoes Are No Longer Just Holiday Fare

Less-than-ideal weather across the major growing regions in the South this
summer is expected to reduce supplies of sweet potatoes this holiday season
and the rest of the 1998/99 marketing year. The decline is not likely to be
severe, and grower and retail prices are expected up only modestly in 1998/99. 

Sweet potatoes are traditionally associated with Thanksgiving, and shipments
rise predictably every November as the holiday approaches. November typically
accounts for about 20-25 percent of domestic shipments of sweet potatoes a
root vegetable that is rich in vitamins and minerals, low in fat and calories,
and cholesterol-free. Shipments also increase during the holidays that follow
(Christmas, Hanukkah, and the New Year), as well as around Easter. These major
winter and spring holiday seasons together account for about 40-45 percent of
domestic sweet potato shipments.

Although sales always shoot up during the holidays, consumers appear to be
showing an increased interest in sweet potatoes throughout the year. In recent
years, consumption of sweet potatoes during the summer (June-August) has
increased significantly compared with the early 1980's. Summer sweet potato
shipments averaged nearly 15 percent of the annual total in 1995-97, up from
only 7 percent during 1980-82.

Year-round popularity is boosting overall per capita consumption of sweet
potatoes and has helped reverse a declining trend. Per capita utilization
averaged 4.6 pounds in 1994-97, up nearly 10 percent from the 1989-93 average.
Per capita use had reached an all-time low of 3.9 pounds per person in 1993
following a slow and steady decline that began in the 1920's when sweet potato
consumption was 29 pounds per person. Growing consumption of other vegetables,
such as white potatoes in processed form, helped lower sweet potato
consumption during this period.

The recent turnaround in consumption may be attributed to several factors,
including improved storage facilities, introduction of new sweet potato
products, and increased use of sweet potatoes in the food-service industry.
Over the past 20 years, many growers have invested in improved storage
facilities so they can offer quality sweet potatoes year-round. After a curing
process (in which the sweet potatoes are placed in a heated, humid environment
for several days and then cooled), sweet potatoes can be stored for up to a
year in controlled-atmosphere sheds, depending on product condition.

Besides increasing the storability of sweet potatoes, the curing process helps
smooth exterior imperfections and converts natural starches in the sweet
potatoes to sugar an improvement in taste for many consumers. Green (uncured)
product is typically shipped toward the end of the summer into the early fall,
as cured product from the previous crop begins to dwindle and fresh product
from the new crop is being harvested. Harvest varies by production area but
generally begins with small quantities in mid to late June and runs into
November. Cured sweet potatoes are typically shipped beginning in late October
or early November, and can last into August or September.

Year-round availability and improved product quality has led to inroads in the
food-service industries. Many restaurants, particularly several national
steakhouse chains, have added sweet potatoes to their menus as a complement or
alternative to white potatoes. Sweet potatoes can be served boiled, baked, and
mashed, or used in casseroles, breads, and pies. Sweet potatoes can even be
french fried and chipped like white potatoes. And unlike white potatoes, cured
sweet potatoes can even be served raw like carrots (as sticks, shavings, etc).

Sweet potatoes are produced in 25-30 states. However, commercial production is
concentrated in 11 states, mostly in the South. The leading producers are
North Carolina (36 percent of U.S. production in 1997), Louisiana (25
percent), California (15 percent), and Mississippi (8 percent). On average,
about 87 percent of the U.S. sweet potato crop is sold for food uses. Nonfood
uses include 8 percent for seed 5 percent for animal feed, shrinkage, and
losses. 

Most of the U.S. supply of sweet potatoes is domestically produced, but
imports (including yams, a botanical cousin) have increased over the last 20
years. Imports currently account for about 5 percent of supply (up from 1
percent in 1978). However, much of this volume goes directly to Puerto Rico
from Costa Rica, the Dominican Republic, and Jamaica and does not reach the
continental U.S. U.S. exports of sweet potatoes are also fairly small only
about 2 percent of annual production. 

In 1997, the U.S. exported 30 million pounds of sweet potatoes, at a value of
$8.9 million. The vast majority of these exports (97 percent) went to Canada,
with over 5 million pounds of product shipped in October when Canadians
celebrate Thanksgiving. The second-largest export market is the United Kingdom
(0.5 million pounds in 1997).

With a seemingly renewed consumer interest in sweet potatoes, grower cash
receipts for sweet potatoes increased 34 percent between 1990-93 and 1994-97,
totaling $208 million in 1997. Consistent yields and relatively stable prices
in the past several years have kept plantings relatively stable. For 1998,
harvested area was likely down less than 1 percent from a year ago (planted
area was down 1 percent this spring). North Carolina reported a slight
increase in harvested area (up 3 percent), while Louisiana and Mississippi
remained unchanged. California harvested acreage was down 6 percent due to
excessive rain during planting.

Despite little change in overall harvested acreage, production is likely to be
down in 1998 from a year ago due to a lower national average yield. Weather
conditions for much of the 1998 growing season were less than ideal in many
sweet potato growing areas. From 1994 to 1997, yields were well above the
long-term trend, due partially to adoption of improved varieties that are
specific to soil type and climate.

Until late August, much of North Carolina's crop suffered from hot, dry
conditions. However, late August and early September hurricanes (Bonnie and
Earl) brought much-needed rain without damaging winds allowing the crop to
size nicely. Overall, crop quality is good.

Circumstances are similar in Louisiana, but the outcome may be mixed. Southern
Louisiana suffered from summer drought, then was hit by heavy rains in
September. The rain encouraged sweet potato sizing, but excessive moisture in
some fields contributed to crop deterioration, including formation of soft
spots. In northern Louisiana, some farmers irrigated, and some areas received
timely rain at the end of the growing season. For the State, harvest ran
behind schedule throughout the season, and output is likely to be down from
last year. Quality is expected to be generally good. 

USDA's National Agricultural Statistics Service will release the first
forecast of sweet potato yield and production in January 1999. With a yield
decline of 10 percent (to 146 cwt per acre), production would be approximately
12.1 million cwt. At that level, grower prices could rise from last year's
season average of $15.80 per cwt to as high as $16-$17. A more moderate 2-5
percent decline in yields (12.8-13.2 million cwt in production) would likely
peg season-average price at $15.50-$16.50. Shipping-point prices are virtually
unchanged this fall from a year ago in North Carolina and Louisiana. Markets
show steady demand, with volume about 10 percent lower in Louisiana and 15
percent higher in North Carolina compared with a year earlier.
Charles S. Plummer (202) 694-5256
cplummer@econ.ag.gov  


BRIEFS
Specialty Crops Higher Tree Nut Prices for the Holidays

Smaller production of U.S. tree nuts, except pistachios, will result in
generally higher prices this holiday season and into 1999. However, larger
carryover from last year's record crops will augment supplies and moderate
price increases. With the largest beginning stocks in 3 years, supply is off
only 9 percent, despite a drop of 27 percent in total output.

U.S. production of the six major tree nuts (almonds, walnuts, pecans,
pistachios, macadamias, and hazelnuts) is expected to total nearly 900 million
pounds (shelled basis) in 1998, the third-highest during the last 5 years.
Cool, wet spring weather hampered tree nut crop development for California
almonds and walnuts and for Oregon hazelnuts. The inclement weather also
delayed nut maturity and harvest by as much as 2 weeks in some areas. Growers
and handlers (firms that process and market nuts) prefer an early harvest
because it allows them to sell their product into markets in advance of
foreign competition and establish a "seller's position."

Hot, dry conditions in many areas of the Pecan Belt (southern tier of states)
from spring to mid-summer caused pecan yields to fall substantially. Abundant
rains came later in the season, but were generally not beneficial to this
year's production.

Smaller supplies and higher prices will cut total domestic tree nut
consumption to 580 million pounds (2.1 pounds per capita) in 1998/99, down 2
percent from a year earlier. This figure includes tree nut imports mostly
cashews, Brazil nuts, pecans, chestnuts, pine nuts, and some others which are
expected to remain steady this season at about 240 million pounds. Exports are
projected at 630 million pounds, slightly lower than last season but the
second-highest on record.

Almond prices will rebound as supply shrinks. Almond production in California
is forecast at 540 million pounds (shelled), down 29 percent from last year's
record . But coupled with large carryover stocks, total marketable supply
(excluding culls and inedibles) should be the third highest on record at 690
million pounds. Grower prices this season are expected to be near $2 per
pound, up from an average of $1.55 in 1997/98 but below 1996/97 ($2.08) and
1995/96 ($2.48).

The 1997/98 season marked the second consecutive year when almond value
exceeded $1 billion. Almond exports reached a record 463 million pounds, while
domestic consumption increased slightly to 136 million pounds (0.51 pounds per
person). With a large share of the crop exported, almonds account for only
about 25 percent of total domestic consumption of tree nuts compared with 60
percent of total tree nut production. U.S. export volume and domestic prices
in 1998/99 will depend on competing tree nut supplies, particularly Spanish
almonds (down sharply) and Turkish hazelnuts (up sharply). World almond
production is estimated to be off 29 percent this season.

Walnut production drops as well. California production of English walnuts is
forecast to decrease 28 percent to 220,000 tons (in-shell) in 1998, well below
last year's record. Grower prices are expected to increase to near $1,400 per
ton (in-shell) in 1998/99 as supplies contract 9 percent. Grower prices last
season averaged $1,310 per ton (in-shell), near the mid-point of average
prices received during the past 10 years ($1,000-$1,600). Some price breaks
may occur this season, depending on global tree nut supplies and regional
market demand. The California walnut industry, for example, is pushing demand
by offering wholesale price discounts for early-season shelled walnuts. U.S.
exports have trended up in recent years, but walnuts produced in France and
China are expected to provide keen competition this year in European markets.
World walnut production is estimated to be 5 percent lower this season.

Pecan crop is down sharply. Drought and hot weather conditions through much of
the South and Southwest reduced the 1998 pecan crop to 183 million pounds
(in-shell), sharply lower than last year's 338 million pounds. The smaller
crop will be partially offset by higher beginning stocks and more imports
expected from Mexico, so grower prices may rise only modestly this season. In
addition, the final crop size last year was much larger than buyers and
sellers assumed when they negotiated prices. Consequently, handlers have been
working down "expensive" inventory and will be reluctant to bid prices up
sharply.

Record pistachio production surprises industry. The 1998 California pistachio
crop is forecast at a record 195 million pounds (in-shell), following last
year's record 180 million pounds. A much smaller crop was expected because
pistachio trees are typically "alternate bearing." This year's yield is
expected to be a record 2,960 pounds per acre, and area is record high at
65,900 bearing acres. 

Last year's crop depressed grower prices only slightly, and the value climbed
to a record $203 million. A much smaller crop in Iran, the world's largest
producer and exporter, created substantial foreign market opportunities for
U.S. exports. This season, Iranian production will likely be up, which will
increase competition for California pistachios. About 50 percent of the U.S.
crop is typically exported. Carryover stocks of pistachios are relatively
small, so handlers must rely on current crop supplies to meet domestic and
export demand.

Hazelnut production falls sharply. Hazelnut production in Oregon and
Washington is forecast at 16,500 tons (in-shell). This compares with the
record 47,000 tons in 1997 and 18,500 tons in 1996 and continues an
alternate-bearing pattern of the last several years. Poor weather affected
bloom and crop development, and the trees are recovering from record-high
yields last year. While the U.S. crop is much smaller than production in
Turkey, the world's largest hazelnut producer, U.S. hazelnuts are recognized
in the world market for their size and quality. In 1998/99, U.S. hazelnut
prices may decline despite the small crop because Turkey's production is up
sharply. According to industry estimates, the Turkish hazelnut crop is 650,000
metric tons (in-shell), up 35 percent from 1997.

Total value of U.S. tree nut production is a record. Value exceeded $2 billion
for the first time in 1997/98. Gross return per acre, excluding pecans,
averaged $2,524 per acre, the highest on record and $320 above the previous
marketing season. Strong export demand is a major factor behind these
favorable financial returns. During the 1994/95 marketing season, total export
quantity exceeded domestic use for the first time and has been above it ever
since. In 1998/99, about two-thirds of the crop is projected to be exported,
compared with just under half in 1988/89. 

Higher returns in recent years have affected plantings. U.S. bearing acreage
of tree nuts reached a record of over 700,000 acres in 1997/98 and is expected
to increase another 1 percent this season. (Pecan acreage is excluded from the
total and not estimated, because a significant part of production comes from
native and seedling plants which grow wild or in small and widely scattered
plantings.) 

Despite this year's downturn, tree nut production is expected to continue
trending upward, as new acreage more than offsets acreage losses. Typically,
growers remove some trees 8-12 years after planting as orchards become
crowded. But instead of removing and discarding trees, some growers,
particularly pecan producers, are beginning to transplant them to another
location to start a new orchard. This reduces the "startup" time to reach full
bearing yields from 7-8 years to about 2-3 years. New orchards are also being
planted with more trees per acre. In addition, new varieties produce at an
earlier age, are more prolific at maturity, and are more resistant to disease
and insects. 
Doyle Johnson (202) 694-5248
djohnson@econ.ag.gov  


COMMODITY SPOTLIGHT

Large Supplies, Sluggish Export Prospects Pressure Corn Prices

U.S. corn farmers, now wrapping up the second-largest harvest in history, face
weak prices in 1998/99, a situation reflected in most other commodity markets.
A large increase in the supply of corn is expected to outstrip the rise in
demand, pushing carryout stocks to the highest since 1992/93 and keeping
downward pressure on prices.

Although domestic use of corn will rise to a new record, only a small recovery
in U.S. exports is likely. Global import demand is weak, despite low prices,
because of economic and financial problems in several regions of the world.
U.S. corn exports, while forecast to increase from the depressed performance
of 1997/98 because of declining competitor shipments, will remain
comparatively low. U.S. market share of world exports is projected at 68
percent, up from 60 percent in 1997/98 but below the 74-percent average of the
previous 10 years.

Low prices and the abundant supply of corn will fuel continued gains in
domestic disappearance in 1998/99. Total U.S. use is forecast at 7.7 billion
bushels, up 3 percent from the 1997/98 record, as both feed and residual use
and food, seed, and industrial use expand. While low corn prices will benefit
all end-users, the demand response to low corn prices will be tempered in some
cases by low prices for users' products such as meat. 

Production & Yield in 1998 Is Second Highest

Corn production is forecast at 9,836 million bushels, up 5 percent from 1997
and second only to the 10.1-billion-bushel crop of 1994. Because of higher
carryin stocks, corn supply for the 1998/99 marketing year will be slightly
larger than in 1994/95 and the largest in 11 years. 

Planted area rose about 1 percent to 80.8 million acres, the highest since
1985, despite strong competition from soybean plantings, which reached a
record high. Despite concerns at planting time about potentially weaker
markets, uncertainty about weather ran higher than usual. Questions about
whether the El Nino weather pattern might result in severe heat and drought
stress similar to what hit the Midwest in 1983 and in some other El Nino years
caused some growers to see at least an outside chance for a sharp spike in
prices. 

Average yield of corn in 1998 is forecast at 133.3 bushels per acre, slightly
above the long-term trend. This would be the second-highest yield behind 1994,
when yields reached 138.6 bushels. The growing season turned out reasonably
well for most of the Corn Belt, although there was considerable variability as
in most years with numerous reports of localized problems, stemming largely
from excessive moisture. Impressive yield gains occurred in much of the
northern and western tier of the Corn Belt, and record crops are forecast for
Kansas, Nebraska, Minnesota, South Dakota, and North Dakota.

Corn crops in Texas and several smaller corn-producing States across much of
the South, however, were decimated by heat and drought. Some of the corn also
was contaminated by aflatoxin, preventing or severely limiting the corn's use
for processing or animal feeding. Forecast output in Texas is down about 30
percent from last year and will be the smallest crop since 1991. The national
impact is limited because the region produces a relatively small share of the
total crop.

This year has been another demonstration of the corn sector's strong
productivity growth, even when conditions are imperfect. Although the path has
been erratic due to droughts and other weather disruptions in some years, corn
yields have advanced impressively over the last few decades. Since the early
1960's, average U.S. yield has doubled, with underlying trend growth of about
1.7 to 1.8 bushels per year. Improved genetics account for about 60 percent of
the gains, according to industry sources. Seed companies are continually
upgrading and replacing hybrids. The recent introduction of Bt corn has
reinforced yield gains by reducing losses caused by the European corn borer
(AO August 1998). 

Food, Seed, & Industrial Use To 
Continue Strong

The generally favorable outlook for economic growth in the U.S. is expected to
support gains in most industrial uses of corn, such as starch used in building
materials and in production of paper. Population growth and taste preferences
are driving much of the growth in food use of corn, including the upward trend
in corn used for snack foods. Food, seed, and industrial use of corn (FSI) is
forecast to increase 4 percent from the 1997/98 record to 1,850 million
bushels, reflecting fairly steady growth in most categories. 

Gains in some categories of use often reflect substitution for other
ingredients. For example, increased use of corn sweeteners in recent years has
been the result of the popularity of fat-free foods, in which corn sweeteners
help to provide taste to compensate for loss of the fat. This particular use
seems to be flattening and may contract slightly as some fat-free formulas are
discontinued. High-fructose corn syrup (HFCS) use expanded dramatically in the
1980's as it replaced sugar in many soft drinks, and growth has remained
strong in the 1990's as consumption of soft drinks and other beverages,
continues to increase. Corn used to make beverage and manufacturing alcohol is
expected to show a small decline in 1998/99, reflecting a downturn in the
export market. This stems mainly from economic problems in Russia. 

The use of corn for fuel alcohol (ethanol) is forecast to grow 8 percent in
1998/99, a slower rate of gain than the 12 percent in 1997/98. Since the sharp
decline in 1995/96, when corn shortages and record-high prices curtailed
ethanol production and led to some plant shutdowns, use has been rebounding. A
number of smaller plants have opened recently, and output in 1998/99 is
expected nearly to equal the peak year of 1994/95.

For some ethanol producers, current low corn prices are resulting in very
favorable margins, especially where production is contracted for oxygenate
use. However, ethanol prices in spot markets are low because of the influence
of cheap gasoline and petroleum products. This could limit ethanol's use as an
octane booster, as well as provide competition in some oxygenate markets. In
addition, prices of the main ethanol co-products are weak. These include corn
gluten feed and meal and distiller-dried grains, whose prices have been pulled
down by large competing supplies of soybean meal and other protein sources
used in animal feed.

Large Livestock Production To 
Sustain High Feed Demand 

With declining prices for corn and other grains, along with a dramatic fall in
the price of protein meal, feed costs are down sharply. Large production of
livestock, particularly hogs and broilers, combined with low feed prices, will
keep feed demand high. However, record meat supplies and some clouds on the
export horizon have resulted in low prices for red meats, which could temper
the benefits of low feed prices and eventually limit expansion by some
livestock operations.

Corn feed and residual use is forecast at 5,850 million bushels, up 3 percent
from the previous year's record high. Supporting the increase are a sharp
decline in availability of grain sorghum for feed, along with an expected
decline in the feeding of wheat, which was up in the summer months of 1998. 

The cattle sector is in a liquidation phase, and the total number of cattle,
as well as cattle on feed, will decline in the year ahead. In the near term,
however, delayed marketings (as producers await higher prices) and cheap feed
have resulted in feeding cattle to heavy weights, supporting high corn use.

Expansion in the poultry sector will also contribute to growth in feed use.
Egg production is expected to increase 2 percent in 1999, and turkey output
should remain about unchanged after declining more than 4 percent in 1998.
Broiler production is forecast to increase 5 percent in 1999, following
lackluster growth of less than 2 percent in 1998. Broiler prices have been
very strong throughout the summer and fall, supported by the fast-food
industry's robust demand for breast meat, and low feed prices have meant
excellent margins on broilers. 

The export outlook is a concern, however, and broiler prices are expected to
soften as the pace of exports slows. U.S. poultry exports are expected to
decline in 1999, the first drop since 1984.

In September 1998, hog producers planned further expansion in the months
ahead, despite low prices. Pork production in 1999 is expected to be up 3
percent from 1998 and up nearly 13 from 1997. Very large inventories will
contribute to high feed needs. Export growth has continued strong in 1998,
boosted by low prices and by sales of lower value cuts. Since the September
survey of farrowing intentions, hog prices have continued to decline to the
lowest level since the early 1970's. However, sow slaughter rates have not
increased significantly. 

In contrast to most meat prices, milk prices have been very strong in recent
months, and these price signals are expected to lead to an increase in milk
production in 1998/99. Although no increase in milk cow numbers is
anticipated, milk per cow should be up, strengthening feed use. 

Corn Prices To Be Lowest 
Since 1987/88

Corn prices began a steep descent during the latter half of the summer and are
likely to remain weak in the months ahead, reflecting supply and demand
developments in the corn market and the generally weak price outlook for most
other crops. Carryin stocks of corn for 1998/99 are up 48 percent from a year
earlier to 1,308 million bushels, and stocks are projected to increase for the
third consecutive year. The projected carryout of 1,779 million bushels will
be the highest since the 2,113 million in 1992/93.

The season-average farm price of corn in 1998/99 is forecast at $1.80-$2.20
per bushel. The midpoint of this range would be the lowest since $1.94
recorded in 1987/88. The lowest corn price so far in the 1990's is $2.07 in
1992/93, a year that saw a record crop, record domestic use, sluggish exports,
and very large stocks somewhat similar to the 1998/99 outlook. 

However, under provisions of the 1996 Farm Act, the production flexibility
contract (PFC) payments most farmers will receive from the government this
season will average 37 cents per payment bushel. In addition, farmers will
receive 50 percent of their 1997/98 PFC payment under loss assistance
announced by USDA in late October. For corn, PFC payments averaged 49 cents
per bushel in 1997/98. Many producers may also receive payments under disaster
assistance programs.

Another program available to farmers in the corn market this year is loan
deficiency payments (LDP's). Farmers can receive an LDP when the posted county
price for corn (which is usually in line with the local cash price) falls
below the county loan rate (AO October 1998). Many farmers have taken the LDP
this fall and then apparently put corn in storage because prices have been
low. But storage space is limited in many areas because of large supplies, and
if an LDP is taken, the corn is not eligible for the government loan program.

Another uncertainty is the seasonal price pattern. Corn prices typically
bottom out around the harvest months of October and November and then climb
slowly until mid-summer. Prices in 1997/98, however, deviated from the normal
seasonal pattern. Prices were highest over the first half of the marketing
year and then declined as demand weakened and new-crop prospects improved.
This year, the futures market would indicate high enough contract prices in
the months ahead to cover storage costs for many producers. But if too many
farmers hold corn early in the year, providing some support to prices by
keeping cash markets relatively tight, there is risk that heavier sales later
in the year could depress prices unless demand is very strong.

Moderate Rise Projected 
For U.S. Exports

Although global corn trade is expected to decline for the second year in a
row, U.S. exports will rise as other exporters reduce shipments. Following a
steep decline over the previous 2 years, U.S. exports in 1998/99 are forecast
at 1,675 million bushels, 11 percent over the previous year. 

World trade is forecast to drop 2.5 percent in 1998/99 to 62 million tons, the
lowest since 1993/94, because of sluggish demand in several key importing
countries, increased domestic production in others, and competition from feed
wheat, rye, and barley in some markets. In many cases, reduced incomes are
limiting importers' response to low feed grain prices, and low meat prices in
several meat exporting countries are also making meat imports an attractive
option. In countries where financial problems are severe, consumers are
cutting back on meat purchases. 

Japan's corn imports are forecast to slip to the lowest since the mid-1980's.
Japan is the largest importer and by far the largest U.S. market. While
industrial use of corn is steady, the major use is for feeding, which has been
inching down for several years as Japan's meat imports have risen. 

South Korea, the world's second-largest importer, is forecast to reduce its
corn imports again, down 13 percent to 6.5 million tons because of the
financial crisis and large imports of feed wheat. In addition, imports by
Taiwan, the third-largest importer, are forecast to be flat at 4.5 million
tons due to an outbreak of hoof-and-mouth disease in 1997 that reduced hog
inventories. Imports were around 6 million tons before the outbreak. 

Corn imports by Southeast Asian nations in aggregate are not expected to show
much change. The major corn buyer in the region, Malaysia, which has
essentially maintained its poultry sector, is forecast to increase imports
slightly to 2.3 million tons. Indonesia will not import at all, after
purchasing 600,000 tons of corn in early 1997/98 before the worst of the
financial crisis hit. Because of a sharp drop in feed use, Indonesia actually
exported 500,000 tons in 1997/98 and is expected to export again in 1998/99.
Imports by the Philippines and Thailand, which are on a much smaller level,
are forecast to decline slightly. Both countries are expecting substantially
larger crops in 1998/99.

Corn use and import demand will continue very low in the Baltics and New
Independent States of the former Soviet Union for the foreseeable future,
although the U.S. announced in early November that it will provide Russia
500,000 tons of corn under concessional terms. As recently as 1991/92, annual
imports were 10 million tons, but have fallen to around 500,000 tons in the
last several years. The decline of the Soviet market was largely offset by
growth in Asia and other developing regions. 

Currently, the outlook for import demand remains reasonably strong in some
other regions. Only a small decline is forecast for Mexico's corn imports,
down 250,000 tons from the 4.5 million of 1997/98, remaining well above the
minimum NAFTA import requirement of just under 3 million tons. Elsewhere in
Latin America, corn imports are expected to stay fairly strong. Imports by
North Africa and the Middle East are forecast to increase modestly, after
dipping from the record 1996/97 high last year. 

Export Competition To Slacken

Shipments by most foreign corn exporters are forecast to decline in 1998/99,
bolstering U.S. export prospects. The sharp declines in U.S. exports in the
last 2 years had resulted largely from rising competition. Foreign exports
increased by 7 million tons (60 percent) in 1996/97 and by another 6 million
(30 percent) in 1997/98 to a record 26 million tons. The increases reflected
strong grower response to high prices, as well as favorable weather and
changing policies in some countries.

Corn exports by Eastern Europe will decline about 30 percent in 1998/99 after
a sizable drop in production. The region's exceptionally large crops in
1997/98 propelled exports to the highest level since the early 1990's. With
domestic consumption still relatively low because of low livestock
inventories, much of the production gain was exported to markets in the Middle
East, North Africa, and even Asia. 

The greatest decline in 1998/99 is projected for Argentina, where production
and exports have soared in the last few years. A more stable economic
environment has promoted investment in agriculture and improvements in
infrastructure, leading to more use of modern inputs, particularly improved
corn seed and increased application of fertilizer, pushing yields higher. Corn
acreage increased modestly in the first half of the 1990's and then jumped
nearly 30 percent in 1996/97, pushing production to a record 15.5 million tons
as producers reacted to high corn prices. 

Argentina's production climbed another 25 percent in 1997/98 to 19.3 million
tons. Excellent weather plentiful rains associated with the El Nino weather
pattern and continued gains in technology propelled yields well above the
long-term trend. Despite recent growth, Argentina's domestic corn market is
small, and most production gains move into export channels. Exports reached an
estimated record 13 million tons in 1997/98.

In 1998/99, Argentine growers are expected to cut back corn acreage slightly,
with prices for soybeans relatively more favorable. Corn production is
forecast to decline about 20 percent in 1998/99. Average yield is expected to
drop from the exceptionally high 1997/98 level, but is forecast the second
highest on record due to continued growth in input use. Exports of corn will
also fall, projected down 19 percent. 

China's corn production in 1998 is forecast at 124 million tons, up 19 percent
from last year's drought-reduced crop and the second highest ever. Corn
acreage increased nearly 500,000 hectares, and yields are expected to be up
sharply. Heavy summer flooding did not affect important corn growing areas,
and the abundant moisture was beneficial for corn.

Growth in China's feed demand, having weakened in recent months, is not likely
to recover to the torrid expansion of earlier years. Weaker pork and poultry
exports and continued large imports of chicken parts into China are slowing
feed demand, as is the slower growth in the economy and real per capita
income. The price of pork, the main meat consumed in China, has declined
sharply as consumers purchase less meat.

China's corn exports are forecast at 4 million tons, down from 6 million in
1997/98, but as always, there is a great deal of uncertainty in China's trade
outlook. A large domestic crop and some slowing in domestic demand imply large
exportable supplies. The need to make space for incoming crops has sometimes
been cited as a reason for exports in recent years. It is conceivable that
some old crop from 2 or 3 years ago, procured at much lower prices, could be
exported if still in stocks and if storage costs were covered. However, low
prices in export markets could hold back China's sales since new policies are
supposed to prevent selling at prices under costs.
Pete Riley (202) 694-5308 
priley@econ.ag.gov  

COMMODITY SPOTLIGHT BOX

China: Uncertain Player in the World Corn Market

In 1994/95, U.S. corn exports got a strong boost when China switched in a
matter of months from being a large exporter to a large importer of corn. Many
analysts saw this as marking a long-term turnaround in China's trade status.
Although China is the world's second-largest producer of corn, its vast
population, limited agricultural land, and a sharp rise in livestock and
poultry production and consumption were expected to keep China dependent on
imports to meet growing demand for feed grains. This may still be an accurate
appraisal for the long run, but in the short run a different scenario has
developed. China resumed significant exports of corn in 1996/97, and its
imports have since shrunk to very small levels.

In the early 1990's, strong income growth and improving diets led to rapid
growth in feed use. Not only did consumption growth outstrip production, but
distribution within China also presented problems. The bulk of the population
and of meat production are in southern China, while most surplus corn is
produced in the northeast. An overburdened transportation network could not
always keep up with demand for transferring northeastern corn to southern
livestock producers.

By 1994/95, at a time of high inflation and rising grain prices, the
government of China decided to allow corn imports and halt exports. Corn
imports soared to 4.3 million tons from zero the previous year. Much of the
corn was destined for joint-venture feed operations established through
foreign investment.

In the same year, China's corn exports declined to 1.4 million tons from 11.8
million the previous year. On a year-to-year basis, the increase in imports
and drop in exports meant a net trade shift of 14.7 million tons (579 million
bushels). Most of this change benefited the U.S. The spurt in U.S. exports
that year and expectations that China would remain an importer helped to drive
up U.S. and world corn prices.

China's large imports ended by the latter half of 1995/96. By that time, U.S.
and international corn prices had risen to record highs, making imports less
attractive. Perhaps more importantly, China's government made a concerted
effort to raise domestic corn production by implementing a new program, the
governors' grain responsibility system, which aimed at attaining
self-sufficiency in grain.

Although China's corn output had been trending upward for many years, the
growth rate accelerated in 1995/96. Acreage increased as free-market prices
rose and the government raised protection and fixed-quota prices. With
favorable weather, yields increased and production reached a record. Acreage
and yields rose again in 1996/97, leading to a further 14-percent gain and a
record 127-million-ton crop.

While the grain sector had been liberalized to a considerable extent over the
previous years, there were still strong administrative measures taken to
encourage corn output, apparently using the network of local government
officials and cadres. These efforts contributed to larger plantings, greater
use of improved seed, and improved cultivation practices as more "scientific
methods" were adopted.

With record harvest and large supplies, market prices for corn began to fall.
In 1997/98, corn plantings dropped, and combined with a serious drought
resulted in a large decline in production. Nevertheless, the huge accumulated
stocks permitted another increase in exports.

During the 1997/98 marketing year, USDA's forecasts for China's corn were
unusual in that production was reduced in response to the drought while export
forecasts were raised in response to sales and shipment data. The critical
unknown was the size of China's corn stocks, since information on China's
grain stocks is considered a state secret.

Livestock production in China has also apparently been overestimated,
reflecting some analytical issues associated with estimates for a large sector
that includes substantial backyard production, as well as anomalies such as
double counting of animal slaughter and inflated output statistics reported by
local officials (AO November 1998). Recognition of this overestimation,
coupled with a recent slowing in meat consumption growth, is consistent with
other indications that feed grain supplies are large.

An underlying issue hampering outside analysts' understanding of the feed
grain situation in China is the dominant role of the central government in the
grain sector. The government makes all decisions on corn and other grain
exports, which are implemented by COFCO, a state firm that acts as an agent.
The criteria that guide export decisions are not always clear.

Corn imports are also controlled, allowing for the current situation in which
international prices for corn are currently below local prices in much of
China, but imports remain very small. Imports are allowed only under quotas
assigned by the government and are permitted only if the purchasing enterprise
or firm in China re-exports a finished product. Such finished products include
starch and other processed corn products, but not meat from livestock fed on
imported corn.

Last spring, the government of China announced a number of reforms aimed at
eliminating costly subsidies and reducing the heavy financial losses the
central government has incurred in managing the purchase, storage, and
transportation of grains. The new policy includes a prohibition on sales of
grain by state grain enterprises below cost. Also, the government wants
farmers with fixed quota prices to sell all of their marketable grain to
state-owned Grain Bureaus, effectively creating a monopsony buying situation.
These reforms seem likely to obscure the role of price signals local markets
have provided, and they could reverse the recent movement toward greater
market orientation.

For more information on China's grain policies, see "China's Grain Reforms of
1998" in the November 1998 Grain: World Markets and Trade (Foreign
Agricultural Service, USDA) at
http://www.fas.usda.gov/grain/circular/1998/98-11/dtricks.htm


COMMODITY SPOTLIGHT

U.S. Peanut Consumption Rebounds

The humble peanut may lack the glamorous image of some of its competitors such
as cashew nuts, almonds, pistachios, and pecans. And with a farm-gate value of
less than $1 billion for the 1997 crop, peanuts barely manage to squeeze in
among the nation's top ten field crops, falling far below the $24-billion corn
crop. 

But the familiar peanut butter sandwiches in the worker's lunch box and on the
school lunch menu confirm a widespread perception of the peanut (AKA ground
nut or goober) as a staple item in the American diet. And while not a key
player on the national farm scene, the peanut is a long-established commodity
in some regions of the U.S., helping to shape the culture and economy of those
regions. Peanuts are particularly important to local economies in the coastal
plains areas of southwest Georgia and southeast Alabama, the Tidewater area of
Virginia, the coastal plains of North Carolina, and portions of central and
far west Texas.

Peanuts also count on Capitol Hill. U.S. producers of peanuts for food use
have long benefited from a government program that has provided price support
at levels well above world market prices. During the 1980's and 1990's, when
price support for other commodities was being reduced in amount and coverage,
price supports rose for peanut producers based on increases in costs of
production. Also encouraging production during 1986-95 were high levels of
government purchases of peanut products for food assistance programs and a
minimum national poundage quota. The peanut program that emerged from the 1985
and 1990 farm legislation (specifically for food use peanuts) was likely the
envy of other commodity groups and was a testament to the power of supporters
of the U.S. peanut program in Congress and elsewhere.

For most government program crops, the passage of new farm legislation in 1996
marked a dramatic move forward along a path to increased market orientation of
farm policy. Under the 1996 Farm Act, program payments were no longer linked
to planting decisions, nor to market prices. The emphasis turned to increasing
producer reliance on market signals when deciding on resource allocation to
maximize income.

But changes in the peanut program brought about by the 1996 farm legislation
were relatively minor compared with changes for other affected crops. For food
use peanuts, supply control in the form of production and import quotas
remained in effect. And support prices, though reduced, were maintained well
above prices that would likely prevail in the absence of the program. Peanut
program advocates may have been relieved to survive the sweeping changes made
in other program crops. But U.S. producers faced another problem: extremely
bleak domestic demand for food peanuts since the early 1990's. 

Once-Steady Demand 
For Food Peanuts Turns Weak

During the 1950's through the 1980's, annual U.S. food use of peanuts was on a
strong run, setting records in 31 of the 40 years. Over this period, food use
of peanuts exhibited a very stable growth rate, increasing at 2.1 percent per
year. In the late 1980's, peanut food use vaulted higher as a result of
increasing government purchases for domestic feeding programs (e.g., School
Lunch Program and Temporary Emergency Food Assistance Program). Food use
peaked in 1989 at 2.324 billion pounds (in-shell).

A severe drought in the 1990/91 crop year (beginning in August) reduced supply
and drove up prices for peanuts and peanut products. As a result, the average
retail price of a pound of peanut butter reached a record $2.21 in April 1991,
19 percent over a year earlier. Consumption dropped sharply in 1990/91, but
rebounded in 1991/92. Prior experience with short crops and high prices
suggested that a complete recovery in consumption growth would likely
materialize within a couple of seasons as supplies rebounded and prices
moderated. Indeed, a year after April 1991, peanut butter prices had fallen to
$1.96 and were down to their pre-drought levels ($1.86) by April 1993.
However, the years following 1991's initial consumption rebound saw an
unexpected weakening in demand for food peanuts.

When peanut consumption not only failed to rebound following a return to more
normal prices, but also took a nosedive in the mid-1990's, analysts began to
focus on other factors driving down use. In the early 1990's, stagnant
commercial peanut use, rapidly falling government purchases, and rapidly
rising volumes of imported peanuts and products combined to reduce demand for
U.S.-grown food peanuts. The government curtailed purchases sharply in 1993
and subsequent years in response to reduced appropriations on food assistance
programs and perhaps a reluctance by some meal planners to include peanuts and
peanut products because of the fat content. Government purchases declined from
a peak of 172 million pounds (in-shell equivalent) in 1992/93 to a low of 49
million in 1995/96. Meanwhile, nongovernment purchases of peanuts and products
had stabilized at about 2.02 billion pounds beginning in 1992. 

A phenomenon that profoundly affected the demand for U.S. peanuts for food use
was a runup in imports of peanuts and products beginning in the late 1980's,
initially in the form of peanut butter and later as peanuts, when trade
agreements (i.e., the North American Free Trade Agreement and the GATT Uruguay
Round Agreement) increased import quotas. Prior to these changes in trade
patterns, imports were such an insignificant factor in the consumption of food
peanuts (one-tenth of 1 percent) that the peanut quota (U.S. food-use peanuts)
in a given year was virtually equivalent to projected peanut use. But for the
first time, the concept of quota peanut use as only a subset of total edible
peanut use has come into play. 

Compared with the pre-drought highs in 1989, total purchases fell by about 250
million pounds, or 11 percent, by the end of 1995/96. By 1995, food use of
domestic-origin peanuts had fallen to 1.84 billion pounds (in-shell), a
468-million- pound drop from its 1989 peak. Total food use of peanuts fell by
less 256 million pounds as peanut and peanut butter imports increased 212
million pounds (in-shell).

U.S. Peanut Industry 
Struggles To Regain Footing

With trade agreements opening up the U.S. peanut market to an increase in raw
peanut imports, total imports were much higher than in previous years (nearly
10 percent of total food use in 1997/98) and would grow at a modest rate in
future years. (The Uruguay Round Agreement, however, also restrained peanut
butter imports, which had been unregulated and rapidly growing.) It was clear
that the U.S. market could absorb increases in imports and still expand
domestic consumption of U.S. food peanuts only if the industry could grow the
total domestic market for food-use peanuts. Such growth had not been seen in
years, but the alternative was declining sales of high-value food peanuts and
declining farm income.

Peanut industry leaders did not have to look far to find another agricultural
commodity group that had undergone a similar upheaval. In the 1970's and early
1980's, the U.S. cotton industry had watched as polyester and rayon drew
market share away from cotton. But the trend changed as cotton, a natural
product, fit very well into a reversal in consumers' preferences away from
manmade fibers. Aided by a coordinated industry promotion effort, cotton rode
the wave of consumer sentiment to a position of dominance in textile mill use.
By the end of the decade and into the 1990's, domestic mill use of cotton was
increasing by an average of about a half million bales a year. 

Peanut proponents, on the other hand, found themselves rowing upstream, as
consumers focused on healthier eating habits, including reducing consumption
of high-fat foods. Peanuts, while high in protein, are also high in fat.
Additionally, press reports spotlighted incidences of allergic reactions to
peanuts, prompting suggestions from some quarters to ensure that those with
allergies did not inadvertently consume peanuts and products.

By the mid-1990's, the image of peanuts as a food product was under frequent
attack for a broad spectrum of reasons. In response, the peanut industry
organized to promote their product by identifying the particular problem and
by focusing on the findings of highly credible scientific research.

The Peanut Institute, formed in 1996 by members of the American Peanut
Shellers Association, began to assess the results of a Gallup poll on
consumers' attitudes about peanuts. The survey revealed that many consumers
considered peanuts fattening. It also showed that the industry should improve
consumers' knowledge not only about food attributes of peanuts in general, but
also about how peanuts fit into a balanced diet. For instance, some consumers
thought that peanuts contain cholesterol, which is only found in animal
products. Most fat in peanuts is monounsaturated and polyunsaturated (i.e.,
not saturated). Substituting unsaturated fat for saturated in the diet has
been shown to lower blood cholesterol levels, which may reduce risk of
coronary heart disease.

In addition, the Peanut Institute funded a study that highlighted the presence
in peanuts of the antioxidant resveratrol, the same substance found in red
wine to which doctors attributed reduced incidence of heart disease and cancer
rates among some segments of the French population. Another study, done at
Penn State University, showed that peanuts and peanut butter in a diet could
lower total cholesterol and LDL cholesterol levels. With these findings in
hand, the peanut industry set about extolling the positive attributes of their
product and correcting misconceptions. Fortunately for the Peanut Institute,
which operates on a small budget, the research findings were widely publicized
by more than 400 newspapers and 60 television stations. 

While it is difficult to measure the total effect of these findings on
consumer attitudes and their marketplace decisions, U.S. edible peanut
consumption is on the rebound. Total edible use rose to 2.13 billion pounds
(in-shell) in 1996/97, up nearly 3 percent from 1995/96. In 1997/98, total
edible use rose another 1.7 percent, to 2.17 billion pounds. Lower peanut
prices may have been a factor in boosting consumption, while the introduction
of new products (e.g., flavored spreads for dipping) gave consumers some
choices previously not available. Modest increases in government purchases of
peanuts and products have also aided consumption.

Calculating Food Use Is Critical 

Trends in peanut consumption are closely monitored by USDA in order to
implement the peanut program properly, specifically to help set the annual
marketing quota. Under the Federal Agriculture Improvement Act of 1996, the
Secretary of Agriculture must offer a peanut program if peanut farmers approve
the use of poundage quotas. U.S. peanut producers approved poundage quotas for
marketing years 1998-2002 in a mail referendum held December 1-4, 1997. 

The national peanut poundage quota for the marketing of food-use peanuts is
the quantity of peanuts projected for domestic food use in the upcoming
marketing year. (The quota includes shrinkage, crushing residual, and
allowance for disaster transfers and underproduction.) An accurate forecast is
critical because a short estimate could drive the cost above what may have
prevailed for food peanuts to manufacturers, and ultimately to consumers. On
the other hand, overestimation could result in peanut program outlays when
excess peanuts are sold at market prices (less than the loan rate). These
costs may ultimately have to be borne in large part by peanut producers
according to a multistep procedure designed to ensure that there is no loss to
the government (in principal or interest) when operating the peanut marketing
loan program.

For the 1998 peanut crop, USDA announced a national peanut poundage quota of
2.334 billion pounds (in-shell), up 3 percent from 1997. The 1997 national
peanut poundage quota was up 3 percent from the 1996 level. These quota
increases reflect an apparent return to more normal rates of growth in annual
U.S. peanut consumption. 

But just as the peanut industry looks for a return to normalcy in its market,
storm clouds could be forming again. Recently, allergic reactions to peanuts
and peanut products have captured press attention again. In August, the U.S.
Department of Transportation (DOT) issued a letter to the 10 largest U.S.
airlines informing them that according to the Air Carrier Access Act, they
must accommodate passengers with disabilities including those with allergies
to peanuts. The DOT ordered peanut-free buffer zones on aircrafts, including
the row of seats with the allergic passenger(s) and the rows directly in front
and behind.

The DOT decision prompted a sharp reaction by peanut proponents from Georgia
to Capitol Hill. Peanut producers, while concerned about losing the airlines'
business due to what producers perceive as an overreaction to the problem,
fear that government purchases of peanuts and peanut products are at risk
(including large purchases for the school lunch program). On Capitol Hill,
congressional representatives of peanut-producing states were quick to call
for a meeting with DOT officials. With the issue far from settled, some
airlines have pointed out that the easiest long-term solution is to serve an
alternative, such as pretzels. 

In addition to the allergy issue, the U.S. peanut industry faced peanut
butter/paste imports from Mexico for the first time in July. Imports from
Mexico in August were nearly double the July level. In the late 1980's and
early 1990's, it was a similar experience with unchecked, rapidly expanding
imports of peanut butter/paste from Canada that undercut demand for U.S. food
peanuts. Those imports were subsequently capped under provisions in the
Uruguay Round Agreement. However, imports from Mexico are not limited in
quantity, provided the peanut butter is made from peanuts that are of Mexican
origin.

After considering historical trends in U.S. total edible peanut use and other
factors likely to affect the demand for U.S.-origin peanuts for domestic food
use, USDA will announce a final quota by December 15.

In late 1998, domestic food use of U.S. peanuts appears to be on the rebound.
However, history has clearly demonstrated that the marketplace can be very
fickle. The issue of peanut allergies may cut into U.S. peanut consumption in
the short run, but research is underway to develop in the next few years a
peanut without the allergen. The recent appearance of peanut butter/paste
imports from Mexico, which are under no quantity restrictions, are potentially
the most serious challenge for the U.S. peanut industry in the immediate
future. The U.S. food peanut industry must continue to promote its product in
order to expand the market sufficiently to allow for growth in domestic
production while absorbing larger imports.
Scott Sanford, Farm Service Agency (202) 720-3392
scott_sanford@wdc.fsa.usda.gov  

COMMODITY SPOTLIGHT BOX

U.S. food use of peanuts is comprised of shelled and in-shell. Edible shelled
use, by far the larger of the two, is reported according to four categories.
Snack peanuts and peanut candy are two such categories, and together account
for slightly less than half about 45 percent of total shelled peanut use.
Peanut butter is by far the largest category, usually amounting to one-half of
shelled use. "Other" edible uses account for a small amount of peanuts. 
Bucking trends in use among other categories, in-shell consumption has set
records in 3 of the past 4 years. While this category includes the traditional
"ball park" peanuts, new products like flavored in-shell peanuts (e.g.
jalapeno, spicy, cajun and salty) have likely helped boost consumption. In
1997/98, use of in-shell peanuts was a record 184 million pounds and
represented nearly 9 percent of U.S. food use of peanuts.


TRANSPORTATION

The Western Rail Crisis: One Year Later

In the summer of 1997, the Union Pacific Railroad (UP) suffered a cascading
service failure that snarled traffic and brought freight shipments in some
areas to a complete halt. It proved to be the beginning of the worst rail
service crisis in 20 years (AO March 1998). Early optimism that the service
problems might quickly be resolved proved premature, and only since mid-August
1998, after more than a year of substandard service, has rail service in the
western U.S. returned to stability. But many steps taken by UP early in the
crisis, although slowing its recovery in the short term, will add to overall
rail capacity in the western U.S. for many years to come.

The recent improvements in rail service should allow carriers to handle the
1998 grain and soybean harvest, which promises to be the largest in history.
Yet despite the UP recovery and overall improvements in rail service in the
western U.S., grain shippers this fall encountered many of the same storage
problems experienced last year.
Bumper crops of grain and soybeans have combined with large carryin stocks to
push grain storage capacity beyond its limits in many regions. Particularly
hard-pressed for storage are areas in the Corn Belt and corn-producing regions
of the Northern and Central Plains. This fall's ground piles of grain,
however, are not the result of transportation snags but of large crops,
worldwide economic problems, and increased competition that have reduced
demand for U.S. grain, particularly at Pacific Northwest export facilities.

UP's service problems in 1997 originated in the Houston/Gulf Coast region,
which elicited little surprise among those in the rail and grain industry
familiar with operations in that area. Houston is a key node in the U.S. rail
network, with direct links to Los Angeles, Kansas City (via Dallas/Ft. Worth),
St. Louis, Chicago, New Orleans, and the Mexican border crossings, and Houston
has long been considered one of the most troublesome spots in the U.S. rail
network. A congestion problem similar to the 1997/98 event occurred there in
1978.

Rail traffic patterns in the Houston region are complex and difficult to
manage because Houston's importance is threefold: the region is at once a key
transit point in the U.S. rail network, a critical port, and home to many
important petrochemical facilities. Consequently, Houston originates a
significant amount of rail traffic (particularly chemical traffic), terminates
a considerable volume of traffic (particularly agricultural traffic), and
serves as an important transit point for other traffic. 

The extent of rail traffic moving to, through, or from Houston make the
configuration of rail infrastructure in the Houston/Gulf Coast region both
complicated and fragile. It is complicated by virtue of geography and because
much of this rail complex was developed somewhat haphazardly at a time when
Houston was far less important to the U.S. rail network. It is fragile because
for many years the financial weakness of the Southern Pacific Railroad (SP)
prevented that firm from making investments in the Houston area that might
have prevented or mitigated some of the problems seen last year.

Problem Solving: One Step Back, Three Steps Forward

The noticeable improvement in UP's rail operations starting in mid-August
1998, came just in time to handle the 1998 fall harvest shipments. Two key
factors laid the foundation for recovery in the troubled western region.
First, the market found alternatives to UP's service. Second, slowly but
doggedly, UP pulled itself together by simply going about its business,
unifying its operations after the merger with SP (approved in 1996), and
investing in much-needed capacity expansion.

At the height of the rail service crisis, many western livestock and poultry
feeders shifted to truck transportation for their feed supplies. For example,
poultry feeders in Arkansas and east Texas trucked their feed products and
grains from inland river points or from as far away as Missouri and Iowa.
Western Plains hog feeders and California feedlot operators scrambled to
secure steady supplies of feed grains and feed ingredients normally delivered
by rail. Trucking grain such long distances is a short-term measure. In a
longer term development, shippers have turned away from UP, which has lost
significant market share to its principal competitor, Burlington Northern
Santa Fe (BNSF).

The rail service recovery was also facilitated by the working out over time of
UP's service recovery plan. Key elements were the implementation of the UP/SP
merger and the investment of significant funds by UP to undertake much-needed
capacity expansions in several critical locations. 

Conventional wisdom suggests that the merger of UP and SP caused the service
failure in Houston. Conventional wisdom could be right many railroad observers
believe that UP failed to listen to SP personnel who had critical knowledge of
the yard operations in Houston. But it could be wrong while the service
failure occurred after the merger was approved, it began before UP and SP
actually combined operations in the Houston area. SP's facilities were
inadequate, and a breakdown in Houston may have been inevitable.

In any case, some of the steps UP took to implement the merger and restore
service in the long run initially intensified short-term problems. For
example, after a period of recovery in January 1998, UP implemented
directional running operations across its Southern Tier. Prior to the merger,
the two railroads had a number of parallel lines running across eastern Texas,
Arkansas, and southern Missouri. UP switched several of these single-tracked
mainlines, which had previously handled two-way traffic, into "one-way-only"
service lanes. 

Directional running increases system capacity by improving both train speed
and yard efficiency, and was anticipated to be one of the primary benefits of
the UP/SP merger. However, when UP implemented the system, the result was
almost disastrous. Because former SP engineers were new to the UP lines, just
as UP engineers were unacquainted with the former SP lines, UP's locomotive
crews needed to be trained and certified on these unfamiliar routes. This
training disrupted rail operations and reduced the number of crews available
for duty, and service tumbled to unacceptably low levels. 

UP also integrated the SP into its computer system during the crisis.
Railroads are sophisticated users of information technology, and rail
operations as diverse as crew calling and train dispatching depend on a
railroad's information and telecommunications technology. UP integrated the SP
into its computer-driven Transportation Control System (TCS) in four phases.
Disruptions occurred in each case as trains operating on the SP system were
stopped and information on their locations, along with the contents and
routing instructions of each carload, was entered into UP's main computer
system. The last (and largest) of these TCS "cutovers" began July 1, 1998,
when the remaining SP lines in the West were folded into UP's operations.
Shortly after this TCS cutover, USDA received numerous complaints from
agricultural shippers in California. But again, the short-term pain associated
with this step was needed to integrate UP/SP operations and restore rail
service to normal levels.

UP's service woes demonstrated that its infrastructure could not adequately
handle major disruption or anticipated traffic growth. An aggressive capital
spending campaign aimed at increasing system capacity laid the groundwork for
UP's recovery while complicating it in the short-term. UP expects to spend
$400 million on merger-related capital projects in 1998; much of this
investment is in the Houston/Gulf Coast region where UP intends to spend some
$600 million over the next 3-5 years. In addition to these merger-related
capital investments, UP invested an additional $400 million during the summer
of 1998 in a massive track maintenance and capacity expansion project on its
Central Corridor between Chicago and Utah. Although these capital investment
projects will provide the infrastructure needed for better service in the
years ahead, their initial implementation slowed UP's service recovery this
spring and summer.

Only since mid-August 1998 has UP's service returned to normal. UP's terminal
performance, grain car movements, and train velocity have all improved in
recent weeks, and several weather-related disasters confirm that UP's
"recoverability" its ability to handle unanticipated problems with only minor
disruptions has improved markedly. 

A case in point was UP's handling of the effects of Tropical Storm Charlie,
which produced severe flooding in the Rio Grande Valley in late August. UP's
crucial Sunset Line from Houston to Los Angeles was washed out in three dozen
places in Texas, yet UP was able to reroute most of its trains over other
lines during track repairs. Service was restored within 2 days. Had floods of
this magnitude occurred 3 or 4 months earlier, most analysts believe that UP's
Texas operations would have been crippled. In March 1998, problems at the
border had halted UP trains as far away as Kansas and forced UP to embargo
traffic to Laredo.

But in the aftermath of Tropical Storm Charlie, which forced the U.S. Customs
Service to shut down all international trade by rail and road at the Laredo
gateway, traffic resumed without difficulty once floodwaters ebbed. More
recently, UP has responded to additional weather crises, including Hurricane
Georges, severe flooding in Texas, and heavy rains in the middle regions of
the country. So far, UP has maintained and even improved rail service to most
shippers during these weather disruptions.

Fall Situation for Grain Shippers & Railroads

The situation for midwestern grain shippers this fall is, in some ways, much
like last year. Excellent grain and soybean crops have left many country
elevators and subterminals piling grain on the ground as available storage
capacity was again pushed beyond its limits. This year's grain piles, however,
have almost nothing to do with rail transportation problems, but resulted from
bumper crops and slack export demand for U.S. grains and soybeans.
Particularly hard hit are the Northern and Central Plains and the western
growing areas of the Corn Belt. Lack of demand for midwestern grain at Pacific
Northwest ports is affecting shippers and producers in these regions, as well
as the two western railroads BNSF and UP that serve this market.

U.S. production of grains (excluding rice) and soybean for the 1998/99
marketing year is forecast to be an all-time record at 16.2 billion bushels,
up 3 percent from last year and 13 million bushels higher than the previous
record in 1994/95. With large carryin stocks, this year's available supplies
are the largest since the mid-1980's. September 1 stocks, at 4.4 billion
bushels, were up 22 percent from a year ago and the largest since 1993. This
year's September stocks also mark the third consecutive year in which grain
and soybean stocks have grown, gradually adding to the demand for storage at a
time, when storage capacity has been trending downward, at least up until this
year.

From December 1, 1987 to December 1, 1997, U.S. grain storage capacity has
consistently been on the decline, falling more than 4.4 billion bushels to
18.9 billion in 1997. Most analysts, however, anticipate that storage capacity
will have expanded during 1998 when USDA's National Agricultural Statistics
Service releases storage capacity numbers for December 1, in its January 1999
Grain Stocks report. Even so, September 1 stocks and fall production (corn,
sorghum, and soybeans) in the Central Plains and eastern and western Corn
Belts reached or surpassed available storage capacity, forcing elevators and
farmers to scramble to put grain into temporary storage or ground piles. Low
harvest-time prices and a weak basis (difference between futures market price
and local cash price) have also encouraged farmers to hold grain at least into
the early months of 1999, adding to the demand for storage.

While many producers continue to hold grain in anticipation of higher prices,
projected grain and soybean use for 1998/99 suggests that processors, millers,
feeders, and exporters will demand more grain this marketing year than last.
Domestic use for 1998/99, projected at 11.8 billion bushels, would be up 2
percent from last year and an all-time high. Export use this marketing year,
while not a record, is also projected up 5 percent from last year at 3.9
billion bushels. If these projections hold, 1998/99 grain and soybean use
would total 15.7 billion bushels, just 6 million bushels short of the 1994/95
record.

Domestic commodity demand is driving demand for rail grain transportation,
which has strengthened throughout calendar year 1998. Grain carloadings on
U.S. railroads during the first two quarters of 1998 were down 6 percent from
the same period in 1997 and 11 percent from 1996. Third-quarter grain
carloadings this year, however, were up 2 percent over third-quarter 1997 and
11 percent over 1996.

Grain carloadings have increased substantially with the beginning of the
fourth quarter, although carloadings through October continue to be down 2
percent from last year. As the fall harvest shipping season went into full
swing, grain loadings, which had averaged 22,100 cars per week for the first
three quarters, jumped to an average 26,400 cars weekly for October. This
upswing is consistent with the normal seasonal pattern of grain shipping, but
this year's October numbers are running ahead of last year by 3 percent and
ahead of the same weeks in 1996 by 6 percent.

It was strong demand for rail-delivered grain in the eastern U.S., however,
that kept grain carloadings nationwide from falling well below last year's
levels. As a group, the major eastern railroads Conrail, CSX Transportation,
Illinois Central, and Norfolk Southern have reported grain carloadings up each
quarter over the same quarters in 1997. In contrast, the major western
railroads BNSF, Kansas City Southern, and UP have experienced losses in grain
carloadings as a group every quarter so far this year compared with last year.
Driving these losses in rail grain traffic in the western U.S. is the loss of
demand for grain from the upper Midwest and Plains at the Pacific Northwest
export facilities along the Columbia River in Oregon and Washington, and on
Puget Sound in Seattle and Tacoma, Washington.

Rail shipments of grain for export so far in 1998 have been down nationally
for the third straight year. Carloads of grain shipped to export position from
January through October were down 12 percent this year from 1997, down 21
percent compared with 1996, and down 42 percent from 1995. The loss in export
rail grain demand has occurred despite stronger-than-expected demand for
export wheat at the Texas Gulf. While shipments to Texas Gulf ports have been
up 17 percent from 1997, shipments to the Pacific Northwest have been down 30
percent.

The impact of the loss in the Pacific Northwest export rail market is
substantial for shippers and producers in the western reaches of the corn belt
in Nebraska, southwestern Minnesota, and eastern North and South Dakota. It
has also resulted in a serious loss in rail grain traffic for the two
carriers BNSF and UP serving this market. Rail shipments to the Pacific
Northwest accounted for 60 percent of all export rail shipments during
1995-97. Export rail shipments to the next-largest export rail market at the
Texas Gulf during the same years were roughly half the volume shipped to
Pacific Northwest facilities. But in third-quarter 1998, shipments to the
Texas Gulf actually exceeded shipments to the Pacific Northwest.

Not only have financial problems in Asian importing countries reduced demand
for U.S. grain, but they have also reduced total waterborne commerce trade in
the Pacific sea trade lanes, which has led to a surplus of vessels (AO May
1998). As a result, ocean freight rates for grain shipments to Japan from U.S.
Gulf ports, for example, are down 44 percent from the previous three-year
average. Ocean rates from Pacific Northwest ports, on the other hand, have not
fallen as far, narrowing the ocean rate differential between Gulf and Pacific
Northwest ports enough to make Gulf ports an attractive option. Since shipping
midwestern grain by rail to the Pacific Northwest is generally more expensive
than by barge to the Gulf, the lower ocean freight rate differential leaves
grain exporters little incentive to book sales from Pacific Northwest ports.
Until that differential widens, shipments through the Pacific Northwest are
likely to remain at current low levels, keeping rail transportation demand in
this corridor well below normal levels and reducing grain transportation
demand on BNSF and UP.

The drop in rail volumes to the Pacific Northwest has occurred largely because
of reduced demand for the export of corn from these ports. So far for 1998,
Pacific Northwest ports have accounted for only 13 percent of total corn
exports, compared with 24 percent during 1995-97. While total U.S. corn
exports through September 1998 were down 12 percent from last year, Pacific
Northwest corn exports plummeted by 58 percent for the same period. U.S. corn
exports have tended to level off since the second quarter of 1997 and even
turned up somewhat in the third quarter of 1998, but Pacific Northwest corn
exports have continued to fall.

Contrast with earlier years is even more dramatic. Export inspections of corn
at Pacific Northwest facilities totaled 478 million bushels during the first
three quarters of 1995 but reached only 137 million bushels for the first
three quarters of this year. The difference between the volume of corn
exported from the Pacific Northwest in the first 9 months of 1995 and the
first 9 months of this year is roughly the equivalent of 100,000 rail carloads
of grain or 2,564 additional carloads per week for BNSF and UP, the two
railroads that serve this port region. Had volumes remained the same in 1998
as they were in 1995, grain traffic for these two railroads would have been 17
percent higher through September this year.

Lack of demand for midwestern grain at Pacific Northwest ports hurt not only
shippers and producers who rely on this market, but also the UP and BNSF. Last
year these railroads struggled to meet shipper demand; this year their grain
business has suffered from lack of export demand in the Pacific Northwest
market.
William J. Brennan (202) 690-4440 and Jerry D. Norton (202) 720-4211,
Agricultural Marketing Service, USDA
William_J_Brennan@usda.gov
Jerry_D_Norton@usda.gov  


Indonesia's Crisis: Implications for Agriculture

After years of rapid growth, poverty reduction, and political stability,
Indonesia slipped into a deep economic crisis in 1997-98. Triggered by a
regional financial crisis that began in Thailand in July 1997, Indonesia's
sudden economic collapse was preceded by several contributing factors
including a rapid increase of short-term, private debt and a weakly regulated
banking system.

The economic chaos has cut U.S. agricultural exports to Indonesia by more than
half, from $639 million in January-September 1996 (before the crisis) to $312
million during the same period in 1998. By itself, Indonesia is not a large
market for U.S. agricultural exports, which totaled $57.2 billion in 1997.
However, it is one of several countries in Asia caught up in this regional
crisis. Indonesia and its ailing Southeast Asian neighbors, together with
South Korea, accounted for 16 percent of the increase in U.S. agricultural
exports from 1990 to 1996. During this period, annual growth of U.S.
agricultural exports was 11 percent for this group of countries compared with
7.3 percent for the world. 

Drought & Currency Devaluation
Generate Social Unrest

Indonesia's economy was placed in a precarious financial position partly
because of the borrowing practices of Indonesian companies. The World Bank
estimates that from 1995 to the beginning of the regional crisis, private
firms were saving 9-11 percent on the cost of loans by borrowing in foreign
currencies without protection from currency devaluation. These firms assumed
that the government's exchange rate controls would protect them from this
risk.

But when it became too expensive for the government to defend the country's
currency in August 1997, the rupiah began depreciating. The exchange rate
spiraled out of control beginning in late 1997 as foreign investors panicked
and started withdrawing their funds. At the same time, local firms with
foreign borrowings began selling rupiah to purchase enough foreign currency to
cover their principal and interest payments, furthering the rupiah's decline.

As the rupiah depreciated, the foreign debt of these local firms soared to
levels far exceeding their debt repayment capacity. The country's banking
sector froze, unwilling either to provide the short-term financing needed for
operating capital or to open letters-of-credit for imports of raw materials
and intermediate inputs some industries needed to operate. Businesses began
shutting down and unemployment began rising.

The financial crisis hit when the country was being subjected to one of its
worst droughts in 50 years. The El Nino-induced drought lowered production of
food, including rice, the staple. Food shortages and the inflationary pressure
from devaluation led to rapidly rising food prices. As prices for food and
other necessities soared and unemployment increased, the buying power of large
segments of the population eroded. Social unrest erupted in May 1998, ending
the 32-year Suharto presidency. Given the depth of current economic and
related problems, positive economic growth is unlikely to resume within the
next 2-3 years.

To deal with the financial crisis, the Government of Indonesia (GOI) and the
International Monetary Fund (IMF) established a framework of reforms for an
IMF loan to Indonesia in a series of agreements in late 1997 and early 1998.
The reforms in the agreement directly affecting agriculture included
eliminating the import monopoly of Indonesia's National Logistics Agency
(BULOG) as well as subsidies for wheat, wheat flour, sugar, soybeans, and
garlic. Other measures involved reducing import tariff rates on all food items
to a maximum of 5 percent, deregulating trade in agricultural products across
district and provincial boundaries within the country, and removing all formal
and informal barriers to investment in palm oil plantations.

The consequences of the financial crisis and the drought for Indonesians have
been uneven. Many farmers are benefiting from higher export demand for their
produce with the devaluation of the country's currency, and farmers outside
the drought areas are receiving higher prices for food crops. The urban poor
are most affected by food shortages and high food prices.

Among the U.S. exports affected by the Indonesian crisis, the largest
dollar-value reductions are in cotton fiber and soybeans, the leading U.S.
exports to Indonesia. Percentage value losses are greatest for U.S. exports of
corn used in livestock feeding and for the higher-valued livestock and
horticultural products.

Crisis Slows 
Textile Industry

Little cotton is grown in Indonesia because it is not able to produce
competitively. However, the abundant availability of low-cost labor has been
the basis for the rise of a large spinning and textile industry, turning out
products for its domestic market and for export. Indonesia had become one of
the world's largest importers of cotton fiber and has been a top-five importer
of U.S. cotton in recent years.

Though Indonesia's textile exports have increased with its currency
devaluation, overall textile production has decreased. With the onset of the
financial crisis, domestic purchases of textile products dropped more than
exports increased. Several large and medium textile mills have offset the loss
of domestic sales by increasing their exports from 60-70 percent of output to
as much as 95 percent of output. Indonesia's key competitors in textile trade
include Pakistan, India, the Philippines, and Malaysia.

The volume of Indonesia's cotton fiber imports have dropped significantly with
the crisis. Many spinning mills have closed, unable to import cotton fiber due
to the difficulty in opening letters-of-credit, the lack of short-term credit
for operating capital, and the sharply devalued Indonesian currency which made
imports far more expensive. In addition, production costs have been rising as
the minimum wage was raised, interest rates increased, and the cost of water
and electricity rose. Currently it is estimated that only 4-4.5 million
spindles (for thread making) are in operation, down from a total of 6-7
million spindles installed.

With the worsening of the crisis in 1998, Indonesia has increased its use of
USDA's GSM-102 program for financing cotton imports. Registrations for the
first 10 months of fiscal year 1998 are approaching a record $35 million, up
from the fiscal 1997 total of $13 million. However, Australia has become a
more competitive cotton exporter to the Indonesian market compared with the
U.S., with the 25-percent devaluation of the Australian dollar against the
U.S. dollar since March 1997. The U.S. and Australia were the leading
suppliers of cotton to Indonesia in the 1995/96 marketing year (beginning
August) with shares of 36 percent and 21 percent. Australia replaced the U.S.
as the number one supplier in 1996/97 and will likely remain at the top in
1997/98.

Demand Drops for
Soybeans, Wheat & Feedstuffs 

Soybeans are an important protein source for many lower income Indonesians and
contribute 15 percent of the protein consumption in the country. The two
principal soy foodstuffs are tempeh (fermented soybean cake made using whole
soybeans) and tofu. These soybean products are a more affordable source of
protein than livestock products. Domestically grown and imported soybeans are
used only for food. Soybean meal required for livestock feeding is entirely
imported. Soybean production is not well suited for Indonesia's climate.

As soybean prices rose and incomes fell with the onset of the crisis, a
decline in soybean consumption by low-income consumers has been offset by
middle-class consumers switching from livestock products to soybean-based
protein sources. Nevertheless, Indonesia's total soybean imports have fallen.
U.S. soybean exports to Indonesia are off 36 percent in January-September 1998
from the same period in 1996. With economic recovery, sales to Indonesia are
expected to continue only at or slightly above current levels in the near
term, given that establishing an efficient process for private sector imports
will likely take some time.

In the longer term, imports should expand as consumption gains once again
outpace production increases. Indonesia's recent liberalization of soybean
imports as part of the IMF loan arrangement will encourage soybean trade. As a
result of liberalization, a cooperative of soybean product
producers Indonesian Tahu and Tempe Producers Cooperative reportedly plans to
start importing soybeans monthly beginning in January 1999 under USDA's GSM
102 export credit program.

Wheat consumption and imports will be sharply lower the next 3-5 years until
consumer incomes recover. All wheat consumed in Indonesia is imported because
the crop is not well suited to Indonesia's tropical climate.
In the past, BULOG controlled virtually all aspects of the importation,
distribution, and pricing of wheat. Now that wheat imports have been
liberalized, Indonesia will offer post-recovery opportunities for commercial
sales of U.S. wheat in a market that has been dominated by Australia and
Canada in the past. The largest usage of wheat flour (60 percent) is for
making instant noodles. The baking industry takes an additional 30 percent of
flour, and biscuit manufacturers use the remaining 10 percent. When Indonesia
purchases U.S. wheat in the future, it will likely include soft white wheat
for confectionery products and for noodles.

Soybean meal and corn usage plummeted with the collapse of Indonesia's poultry
production, which consumed more than 90 percent of the country's manufactured
feed before the crisis and was the largest and fastest growing Indonesian
livestock sector. Poultry producers faced a profit squeeze due to reduced
consumer demand  from the economic slowdown and escalating feed costs
following the currency devaluation. The crisis also sharply reduced the
availability of short-term credit for poultry producers, and the poultry
industry may decline even further in 1999 if economic conditions remain
unchanged or worsen. 

From 1985 to 1997, broiler output had been expanding at an annual rate of 13.6
percent. Broiler production is now only 30-40 percent of the pre-crisis level
of 13-14 million birds per week. Egg production is also just 30-40 percent of
the pre-crisis level (1,800-2,000 tons per day). 

Indonesian soybean meal imports declined to 430,000 metric tons in marketing
year 1996/97 (beginning October) from a year-earlier level of more than 1.1
million metric tons. India has been the predominant supplier of soybean meal
to Indonesia, followed by Brazil. U.S. corn exports to Indonesia have
essentially evaporated, declining from $32.5 million in January-September 1996
to less than $200,000 in 1998.

Prior to the crisis, the poultry industry's rapidly increasing feed
requirements for corn had started to outpace domestic corn production, and
corn imports had begun to rise. But with the onset of the crisis, Indonesian
corn importers began exporting corn to Malaysia and Thailand. Corn imports are
expected to resume only when the poultry industry begins to recover.

It may take 4-6 years before the Indonesian poultry industry returns to its
former scale. The pace of recovery will be determined by recovery of the
country's economy, reform of its financial systems, and growth in consumer
income.

Drought Hurts Rice &
Palm Oil Production

Near self-sufficiency in rice has long been a strategic objective of
Indonesian agricultural policy. However, BULOG generally purchases rice in
international markets to offset production shortfalls. To offset crop losses
due to the El Nino-related drought, Indonesia is expected to import a record
5.7 million tons of rice in calendar year 1998, almost one-fourth of total
world rice trade and the largest amount of rice ever imported by a single
country. Thailand and Vietnam have supplied the bulk of Indonesia's imports,
with China and Pakistan also selling significant quantities. 

This year has demonstrated that even small production shortfalls (less than 5
percent in 1997/98) in a country that is a major consumer of rice can lead to
substantial imports relative to the world rice market. Rice production in
1998/99 is expected to rebound with the ending of the drought, so imports will
likely drop back to previous levels.

Future rice policy is still uncertain as IMF and the Government of Indonesia
continue discussions. Apparently, BULOG will continue to stabilize domestic
rice prices with imports and procurement/distribution of domestic rice.

The drought also reduced palm oil production in Indonesia, and in neighboring
Malaysia, the world's two largest exporters of palm oil. Now that the drought
is over, palm oil production should begin recovering with the next crop
production cycle which begins in March 1999.

As the crisis deepened in early 1998, the price of cooking oil rose very
rapidly. The GOI tried various restrictions on palm oil exports in an effort
to limit domestic cooking oil price increases. More recently, the GOI
substituted export taxes for the export restrictions on crude palm oil and
some of its byproducts to as high as 60 percent, to encourage producers to
direct more products toward the domestic market.

These efforts by the GOI to curtail exports, combined with the general
financial uncertainty for the near term, may have limited the expansion of the
palm oil sector this year. The Indonesian Palm Oil Producers Association
reports that planting of new seedlings has fallen to about 75 percent of the
normal annual level. The impact of this slowdown in plantings will not be
immediate because palm trees do not begin oil production for 5-6 years.

The financial crisis that swept through the Southeast Asia region has affected
Indonesia more than its neighbors. The slowdown in U.S. agricultural exports
to Indonesia has been uneven across commodities. U.S. exports to Indonesia are
expected to resume growing when the economy turns around, but the growth will
likely be slower than in the recent past.
Gary Vocke (202) 694-5241
gvocke@econ.ag.gov  

WORLD AG & TRADE BOX

Easing the Impact on Indonesia's Poor

Since Indonesia's economic and weather problems began in 1997, the number of
people in poverty has increased sharply. To assist the growing number of poor,
the Government of Indonesia has expanded a targeted program through the
National Logistics Agency (BULOG) that provides 10 kg of subsidized rice per
month to poor and near-poor households. (The Food and Agriculture Organization
of the UN estimates that the country's population of 203 million consumes an
average of 149 kg of rice per person annually, compared with 24 kg of corn and
19 kg of wheat.) This subsidized rice program is now reaching several million
households. The government has also set up food-for-work projects in
drought-stricken areas.

The U.S. Government is also providing food assistance to Indonesia during this
crisis with a $52-million package under the P.L. 480 Title II program. The
grant includes 73,482 tons of rice, 314 tons of corn-soybean blend, and 11,040
tons of wheat-soybean blend for arrival from August through December. An
additional donation of wheat under the Section 416(b) program totaling 500,000
metric tons is being prepared for delivery over the next several months.


FARM FINANCE

The 1997 Tax Law: New Incentives for Farmers To Invest for Retirement

The investment goals of farmers increasingly include retirement planning as
well as building the farm business. Good retirement planning requires
allocating limited financial resources to preserve an acceptable standard of
living during retirement. Farmers historically relied on farm assets to build
their business and provide income during retirement. Tax-advantaged plans such
as Individual Retirement Accounts (IRA's) or Keogh plans encourage off-farm
diversification but frequently compete with farm investment decisions that
promote economic viability of the farm operation. 

Recent changes under the Taxpayer Relief Act of 1997 offer new opportunities
at a time when farmers have several motives for diversifying total assets
beyond the farm. Individual farm income may be more variable following the
decoupling of farm payments from production and prices in the 1996 Farm Act.
Also, income variability may contribute to land price volatility, creating
more uncertainty about the future value of this major asset. Furthermore,
uncertainty about the future level of Social Security benefits increases the
motivation for prudent financial planning. 

The tax law changes, in effect, offer conflicting incentives for farmers,
perhaps more so than in the past. While plans such as IRA's offer new tax
benefits, lower capital gains tax rates reaffirm farmers' inclination to
reinvest in farm assets such as land and breeding or dairy livestock. The
investment incentives in the new tax law are likely to increase overall
investment but generate relatively little additional diversification into
off-farm assets, given the historical investment preferences of farmers.

How Farmers Have Planned

Many farmers' retirement strategies focus on investments that expand or
improve the farm operation, with the intent to rely on farm assets for
retirement income. Some also plan to transfer those assets to a family member
who will continue to farm, or to other heirs who may be less interested in the
farm business because of a nonfarm occupation. Balance sheets of the farm
sector suggest that diversification among broad asset classes is limited for
farm households. Financial assets comprise only about 7 percent of total
assets, while real estate represents about 70 percent. This reflects the
comfort level that farm assets provide many farmers.

Off-farm diversification of household assets is often recommended as a means
of reducing risks and as a consideration in structuring some estates. Farm
resources alone also may be insufficient for living expenses of more than one
household if retirement reduces the amount of labor available to operate the
farm. Farm equity may be particularly at risk, especially if it is
concentrated in farmland.

Preferential capital gains tax treatment has been very important for farmers,
especially given the capital-intensive nature of farming. Many farm assets
qualify for capital gains treatment, including farmland and other real estate,
and breeding and dairy livestock which are frequently culled to maintain a
productive herd. 

About one-third of farm sole proprietors report capital gains income in any
given year, three times the frequency for all other taxpayers, and twice that
for other small businesses. About two-thirds of dairy farms and about half of
other livestock operations report capital gains income each year. While not
explicitly a retirement investment, buying additional farmland or expanding a
breeding herd may serve as a de facto retirement account by dominating a
farmer's asset base and by competing with alternative nonfarm uses of
investment funds.

Some taxpayers are clearly motivated by tax incentives for retirement savings,
but many do not take advantage of the opportunity. While farmers are more
likely than other taxpayers to use IRA or Keogh plans, roughly 9 out of 10
fail to contribute during any given year, and at least one-third may not have
any such accounts. Farmers use individual retirement incentives more
frequently than other taxpayers because they are more likely self-employed. In
a 1995 Federal Reserve survey, about 42 percent of farmers reported having an
IRA or Keogh account, compared with 25 percent of the nonfarm population.
Another survey indicated that two out of three large-scale midwestern crop
farmers had a tax-deferred retirement plan. But only 10 percent of farm sole
proprietors contribute to an IRA or Keogh plan in any given year, according to
IRS data (still higher than the 6 percent of the nonfarm population making
contributions).

Despite an apparent overall lack of diversification in assets, farmers and
landlords over age 65 receive many different sources of taxable income,
according to IRS aggregate tax data. Social Security benefits and
distributions from IRA's/pensions each comprise about one-sixth of aggregate
income for these older farmers and landlords. But only a half to two-thirds
receive income from these sources. Interest and dividend income is even more
important for many retirees, comprising about one-fourth of the group's total
income. Together, these figures suggest considerably more diversification than
balance sheets, partly because the value of Social Security and some pension
benefits is rarely included as an asset. Yet, individual retirees may not have
the breadth of diversification as suggested by aggregate income, since
interest and dividends tend to be concentrated among the wealthier farmers.

IRA's, Capital Gains, 
& the 1997 Tax Law

IRA's are an attractive retirement planning tool because of tax savings over
the life of the investment. However, an individual's total contribution to all
IRA's is limited annually to the smaller of earned income or $2,000. The
"classic" deductible IRA reduces taxable income (and taxes) in the year of the
deposit, but the deduction may be limited for some employees who have a
retirement plan at work. Distributions before age 59 are taxed and generally
subject to a penalty. When the money is withdrawn, it is taxed as ordinary
income whether it represents principal or earnings. 

The 1997 tax act allows employees who have a retirement plan at work to earn
more income and still qualify for deductible IRA contributions. The adjusted
gross income (AGI) on a joint return that triggers limits on deductibility is
raised to $50,000 in 1998 and gradually increases to $80,000 by 2007. Spouses
who do not have a retirement plan at work but are married to someone who does
are no longer disqualified from deductible IRA's unless AGI exceeds $150,000.
With many farm families working in off-farm jobs, these changes are
increasingly important for farmers. An estimated 300,000 additional farm
households became eligible for deductible contributions beginning with the
1998 tax year.

The 1997 law also created a new type of IRA   the nondeductible "Roth IRA"
which allows tax-free earnings if funds are withdrawn after 5 years and the
individual has reached age 59, died, or become disabled. Contributions to
Roth IRA's are phased out for couples with AGI exceeding $150,000.

Roth IRA's are also more flexible than traditional IRA's. Principal can be
withdrawn without penalty before age 59 or within 5 years, giving Roth IRA's
an advantage if the farm household needs more liquidity. In addition, fund
withdrawal is not required after age 70 and contributions may continue to be
made, allowing farmers to use Roth IRA's to store and build wealth for
bequests. Nearly all farm households qualify for the new Roth IRAs.

Long-term capital assets such as farmland are viewed frequently as retirement
savings, but are not eligible to be IRA's. However, capital gains have
received special treatment in the tax code over the years, although less so
from 1986 to 1997. Prior to the Tax Reform Act of 1986, 60 percent of capital
gains was excluded from taxation and the remainder was taxed at ordinary tax
rates. The 1986 act taxed gain on the sale of capital assets at the same rate
as ordinary income, except that a top marginal rate of 28 percent applied to
gains from assets held longer than a year.

After the 1997 act, the maximum capital gains tax is 20 percent for assets
held more than a year. A 10-percent rate applies to taxpayers in the
15-percent tax bracket (for example, joint returns with taxable income less
than $42,350 for 1998). In addition, lower rates will apply beginning in 2001
for assets held more than 5 years. In contrast with treatment before the act,
when only taxpayers above the 28-percent bracket benefited from the maximum
rate on capital gains, the new array of capital gains tax rates offers all
taxpayers some level of preferential treatment.

Besides investing for retirement, some households intend to transfer wealth to
the next generation. For these farmers, estate tax considerations are also
important. If the farm business is expected to continue within the family,
provisions for special valuation and the new family business exclusion under
the 1997 act encourage business investment because more of an estate can be
transferred tax-free. Heirs also benefit from a long-standing provision that
eliminates capital gains taxes on inherited property by allowing them to use
the value of the decedent's property at death for purposes of determining
future gains (i.e., a step-up in basis).

Impacts of the Tax Changes

The new opportunities for IRA's and reduced capital gains taxes encourage
investment and savings for retirement, but the preferred investment choice
varies among individuals and depends upon the tradeoff between paying taxes
now or later. An investor with a regular taxable investment such as farmland
pays taxes on profit as income is generated and on the capital gain only when
the asset is sold. Money in IRA's, on the other hand, is taxed only prior to
investment (i.e., Roth IRA) or when redeemed (i.e., deductible IRA), with all
flows treated as ordinary income.

Analyzing investment options helps identify which ones would be most
beneficial to the individual investor. The following results are based on a
simulation that incorporates the tax effects on alternative investments held
for 15 years. Because farmland and the S&P 500 stock market index (a proxy for
IRA returns) have had fairly similar total returns and risks from the early
1960's to the late 1980's, a 10-percent annual total rate of return (capital
gains plus reinvested earnings) is used for both. Also, they are both
investments in equity that have had cyclical periods of gains and losses.
Results from this analysis are based on long-term averages and are not
necessarily representative of future or short-term trends.

Compared with regular taxable investments such as farmland, Roth and
deductible IRA's clearly offer greater after-tax future values, about 25
percent more. This is especially true for longer holding periods when any of
the return is a currently taxable dividend or interest that can grow
tax-deferred in the IRA. However, if investors are concerned about IRA
restrictions or have more to invest than allowed under the program, regular
taxable investments such as farmland are increasingly attractive because of
lower capital gains taxes.

Choosing between the two types of IRA's depends on an individual's marginal
tax bracket in retirement relative to today. That is, does the farmer expect
taxable income to change enough between now and retirement to move into a
different tax bracket? Based on total longrun investment value, deductible
IRA's are preferred over Roth IRA's if marginal tax rates are expected to fall
substantially at retirement. Roth IRA's are better if tax rates are expected
to rise. If the marginal tax rate is expected to remain the same in retirement
as today and the investor has less than $2,000 to invest, Roth and deductible
IRAs yield the same value after taxes in the long run. However, if investors
have more funds, the Roth IRA yields a greater future value, because more
pre-tax income receives preferential treatment under the Roth IRA.

Overall, investment by farmers should increase as a result of the investment
incentives which became effective for the first full year in 1998. Provisions
for IRA's and capital gains create complex tradeoffs, but both encourage
additional investment. Deductible and Roth IRA's offer the greatest after-tax
return. But lower capital gains tax rates encourage more investment in regular
taxable investments [e.g., land] and increase future after-tax wealth for
investors who do not qualify or dislike the restrictions of an IRA.

Given the relatively low past use of IRA's by farmers, a big shift in off-farm
diversification is not likely, unless investor education and advertising
change individual behavior. Furthermore, while farmers may have new financial
incentives to diversify away from the farm, they also have strong incentives
to continue to invest in certain farm assets because of capital gains
treatment and estate-tax considerations.
James Monke (202) 694-5358
jmonke@econ.ag.gov  

NOTE:
USDA does not endorse any particular retirement plan. 


SPECIAL ARTICLE

Uruguay Round Agreement on Agriculture: The Record to Date 

During the 3 years since initial implementation of the Uruguay Round Agreement
on Agriculture (URAA), the record is mixed. The Uruguay Round's overall impact
on agricultural trade can be considered positive in moving toward several key
goals, including reducing agricultural export subsidies, establishing new
rules for agricultural import policy, and agreeing on disciplines for sanitary
and phytosanitary trade measures. The URAA may also have contributed to a
shift in domestic support of agriculture away from those practices with the
largest potential to affect production, and therefore, to affect trade flows.
However, significant reductions in most agricultural tariffs will have to
await a future round of negotiations. 

The Uruguay Round of Multilateral Trade Negotiations, completed in 1994 with
the signing of the Uruguay Round Agreements at Marrakesh, created the World
Trade Organization (WTO) to replace the General Agreement on Tariffs and Trade
(GATT) as an institutional framework for overseeing trade negotiations and
adjudicating trade disputes. The Uruguay Round extended GATT/WTO rules of
trade to new areas, such as intellectual property and services. Among the most
significant accomplishments of the Uruguay Round was the creation of new
disciplines on agricultural trade policy, to be implemented over the period
1995-2000 (1995-2004 for developing countries).

Until the Uruguay Round, agriculture had received special treatment under GATT
trade rules through loopholes, exceptions, and exemptions from most of the
disciplines that applied to manufactured goods. As a result, the GATT had
allowed countries to use measures such as agricultural export subsidies, which
were disallowed for other sectors, as well as a multitude of nontariff
barriers that restricted trade in agricultural products.

Because of the predominance of nontariff barriers in agricultural trade, trade
in agricultural products was largely unaffected by the previous rounds of cuts
in tariffs on industrial products. Participants in the Uruguay Round continued
the GATT's special treatment of agricultural trade by agreeing to separate
disciplines on agriculture in the Agreement on Agriculture (URAA), but
initiated a process aimed at reducing or limiting agriculture's exemptions and
bringing it more fully under GATT disciplines.

Under the URAA, countries agreed to reduce agricultural support and protection
substantially by establishing disciplines in the areas of market access
barriers (trade restrictions facing imports), domestic support (subsidies and
other programs that raise domestic agricultural prices and farm income), and
export subsidies. These three sets of disciplines on agricultural policy are
sometimes referred to as the "three legs of the stool" which, in an
interdependent and mutually reinforcing way, support the liberalization of
agricultural trade sought in the URAA.

In addition, the Agreement on the Application of Sanitary and Phytosanitary
Measures (SPS Agreement) established rules to prevent countries from using
arbitrary and scientifically unjustifiable health and environmental
regulations as disguised barriers to trade in agricultural products. And a new
process for settling disputes among WTO members, agreed to during the Uruguay
Round, holds promise for improvements in the resolution of trade disputes
involving agricultural products. The SPS Agreement and the new Dispute
Settlement Understanding have brought formerly insoluble trade disputes under
the WTO's umbrella and may generate unilateral reform, although problems with
compliance may continue, as under previous agreements.

Despite the Uruguay Round's radical revision of the rules governing
agricultural imports, the new rules have achieved only limited reduction in
effective protection. The guidelines for establishing new tariffs, tariff
reductions, and tariff-rate quotas were sufficiently general to allow members
considerable latitude in their implementation, and many countries have
manipulated details of the agreement to limit the implications of the new
rules for their own agricultural sectors. 

Market Access Room To Maneuver

Under the market access disciplines of the URAA, all nontariff barriers
(NTB's) were banned, including quantitative import restrictions, variable
import levies, and all other border measures other than ordinary customs
duties. NTB's were converted to ordinary tariffs (a process called
"tariffication"), and all preexisting and new tariffs were to be bound i.e.,
set through a GATT/WTO negotiation, with the country subject to a penalty if
raised and subjected to a schedule of reductions. Tariffs created by
conversion of NTB's were constructed based on the difference between internal
market prices and world market prices for each product. This process resulted
in very high tariffs, or "megatariffs," for some products.

To avoid any negative impact on trade related to tariffication, quotas were
set to assure that historical trade (current access) levels were maintained,
and minimum import opportunities (minimum access) were established where trade
had been minimal. These current and minimum access levels were accomplished by
instituting tariff-rate quotas (TRQ's). A TRQ applies a lower tariff to
imports below a certain quantitative limit (quota), and permits a higher
tariff rate on imported goods after the quota has been reached.

These new disciplines, however, provided for flexibility in implementation,
and many countries have found ways to limit impacts on their own agricultural
sectors. Latitude in selecting which domestic or world prices to use in
constructing new equivalent tariffs from NTB's frequently led to tariffs set
at levels that provided greater protection than had previously existed,
including some at very high levels. 

Guidelines for tariff cuts also provided considerable flexibility to minimize
actual cuts in protection. Members agreed to reduce all preexisting and newly
created tariffs by a simple average of 36 percent across all tariff lines, but
no less than 15 percent for any tariff. By making large cuts in tariffs for
commodities that do not compete with domestic production or large percentage
cuts in already-low tariffs, the 36-percent average reduction could be
achieved with minimal cuts in tariffs on products more sensitive to
competition.

Some countries calculated the quota at a broad level of product aggregation,
such as "meat" or "dairy products," and then allocated the total TRQ rather
arbitrarily among the sub-products, minimizing trade in import-sensitive
commodities. Still others delayed allocating the aggregate TRQ's to individual
commodities until the implementation period, which left them the flexibility
to set allocations based on market conditions. 

In some cases, countries may have adopted within-quota tariffs too high to
allow trade to reach the full quota amount. In other cases, countries used
relatively large cuts in within-quota tariffs to meet the overall 36-percent
reduction requirement. If an original within-quota tariff is already
relatively low, allowing the full quota amount to be imported, then such a
reduction of the within-quota tariff would not necessarily expand trade. 

Distortions produced by disparities among tariffs, among commodities, among
countries, and between primary and processed products have also caused
concerns about URAA implementation. For example, tariffs for processed
products are commonly higher than tariffs for primary products. Such "tariff
escalation" can be a significant bias against trade in processed products. 

New Mix of Domestic Policies
Reducing Potential Trade Effects

The Uruguay Round recognized that domestic agricultural programs contributed
to a large share of the distortions in world agricultural markets. Domestic
policies encouraged production beyond levels that would occur otherwise,
resulting in displacement of lower cost imports. High support prices, set
above world prices, led countries to dispose of excess production on the world
market through use of export subsidies or dumping. 

The URAA required countries to reduce outlays on programs and policies that
provide direct economic incentives to producers to increase resource use or
production, such as administered price supports, input subsidies, and producer
payments that were not accompanied by limitations on production. Support
reductions were implemented by agreed reductions to a country's Aggregate
Measure of Support (AMS), a numerical measure that quantifies the economic
benefits from those policies considered to have the greatest potential to
affect production and trade (AO October 1997). 

Under the domestic support provisions of the URAA, governments can continue
assisting their agricultural sectors and rural economies through those
programs presumed to have the smallest effects on production and trade the
"green box" policies. These include domestic food aid, certain types of income
support, research, inspection, natural disaster relief, and other programs
like crop insurance, environmental programs, and rural assistance. To be
eligible for inclusion in the green box, policies must not act as an effective
price support, must "have no, or at most minimal, trade-distorting effects or
effects on production," and must meet other specific criteria that apply to
individual programs. 

In the original WTO agreement, 26 countries made commitments to reduce
domestic support. As of May 1998, 24 countries had notified the WTO of their
compliance with these commitments. An analysis of these notifications shows
that all countries reporting their 1995 support levels are meeting their
commitments to reduce trade- and production-distorting subsidies from the
1986-88 base level agreed to in the URAA. Most countries reduced this support
by more than the required amount. 

Among the countries notifying the WTO about their 1995 domestic support, the
value of support, as measured by the AMS, has decreased significantly. The
total value of support from these policies in 1995 was $115 billion, about 60
percent of the level in the 1986-88 base period. However, countries could
exempt production-limiting programs that base payments on fixed rather than
actual production. Including these payments would show a smaller decline in
domestic support.

How did compliance move so rapidly? Although some of the decline in the AMS
has occurred simply because the domestic support levels in the 1986-88 base
period were high, some has also been the result of policy changes undertaken
by several countries since 1986-88. There is now less reliance on price
support and more reliance on direct payments and green box policies. The
European Union's (EU) reform of its Common Agricultural Policy (CAP) from 1992
to 1995, for example, reduced support prices and increased producer payments
that are linked to production limiting programs; Japan has reduced
administered prices or held them constant since 1986-88; and the U.S.
undertook important reforms under both the 1990 and 1996 Farm Acts that
reduced the amount of direct payments included as part of the AMS and
increased the amount of direct payments counted as part of the green box
policies.

While support from policies believed to have the greatest effects on
production and trade has declined in many countries, support from green box
policies has increased by 54 percent from 1986-88 to 1995. Most of the $127
billion in expenditures on green box policies went for domestic food aid,
infrastructure services, other general government service programs, and
investment aids for disadvantaged producers. These expenditures can be
considered to have a relatively small effect on agricultural production and
trade.

Changes in the mix of domestic policies away from reliance on AMS policies and
toward more green box policies might lead to expectations that related effects
on production and trade may also have become smaller. However, in order to
guarantee increased world market orientation, complementary reforms in trade
policies must also take place. And the question of whether all programs
reported in the green box have no significant production effects bears further
investigation.

Meeting Commitments 
To Reduce Export Subsidies

Disciplining export subsidies, which are used by countries to bridge the gap
between high domestic prices and lower world market prices, was one of the
URAA's most significant accomplishments. Export subsidies distort agricultural
trade by contributing to weakness in world market prices, by interfering with
the advantage of low-cost producers competing in export markets and by raising
the market share of high-cost producers.

In the URAA, countries agreed to cuts in both the volume of subsidized exports
and the expenditures on export subsidies. Of the 25 countries that have
commitments to cut export subsidies, the EU by far employs the most. The EU
accounted for nearly 84 percent of the $7.6 billion of export subsidies
reported to the WTO for 1995 and roughly the same share of the $8.4 billion
reported for 1996. The U.S. ranked ninth overall in export subsidy
expenditures in 1995 and fourth in 1996, following the elimination of export
subsidies by a number of other countries and higher U.S. dairy export
subsidies.

Nearly all of the 25 WTO member countries with export subsidy commitments have
submitted notifications for 1995 and 1996. High world grain prices kept most
countries' use of export subsidies well below their WTO commitments in both
years, in volume and in value. The EU even imposed taxes on grain exports. 

Among countries that exceeded their commitments in 1995, export subsidies
generally were well within commitment levels in 1996. Two of the three
countries exceeding volume commitments in 1996 claimed the right to carry over
"unused" portions of their 1995 commitments to make up for the 1996 overrun.
In response, other countries argued that flexibility provisions in the
agreement were meant only to allow a country to pay back when it exceeded its
limits, not as an opportunity to "bank" unused subsidies.

Despite the relatively satisfactory record of compliance with export subsidy
commitments, the waivers and circumventions that may undermine the substantial
export subsidy disciplines of the URAA are a concern to many WTO members.
Hungary, for example, obtained a waiver from its export subsidy commitments,
which it argues were miscalculated, and some members believe the EU and Canada
instituted export marketing policies that allow them to circumvent their
subsidy commitments. The EU, for example, claims the right to export processed
cheese that would otherwise exceed WTO commitment levels by applying export
subsidies available for component ingredients skim milk powder and
butterfat that are well below WTO commitment levels.

Canada's two-tier price system for milk, established in 1995, prices milk
cheaper when used in exported manufactured dairy products than when used
domestically. Canada's milk pricing system has drawn complaints that it allows
circumvention of export subsidy commitments because exports under this program
have not been reported to the WTO. The U.S. and New Zealand are challenging
Canada's policy through the WTO's dispute settlement mechanism.

So far, very few countries have changed their policies substantially to
conform with their export commitments. The combination of strong grain markets
in the years thus far reported, and the high base levels from which cuts were
required, have permitted most countries to accommodate required reductions
under their current policies. However, as export subsidy allowances decline in
later years of the agreement and as market prices decline, some countries may
have to adopt policy changes to comply.

SPS Agreement 
Protection from Risk, Not Obstruction of Trade

Some of the most important new disciplines affecting trade in primary and
processed agricultural products are found in the WTO's SPS Agreement. Sanitary
and phytosanitary measures regulating the movement of products across
international borders are necessary to protect the public health and/or the
environment from pests, diseases, and contaminants. However, these measures
can also be used to obstruct trade opportunities created by other trade
liberalization policies. 

In the Uruguay Round, separate disciplines were negotiated for SPS measures
for the first time. Prior to the Uruguay Round, disciplines on the use of SPS
measures were ineffective no SPS measure had been successfully challenged
before a GATT dispute settlement panel, and several prominent disagreements
over SPS measures in the 1980's remained unresolved. 

The SPS Agreement recognizes the sovereign right of WTO members to adopt SPS
measures to protect the life or health of humans, animals, or plants, but
requires these measures to be based on a risk assessment. Measures based on
international standards are presumed to be in compliance with the agreement.
Countries may adopt stricter measures that provide a higher level of health or
environmental protection than international standards, but scientific evidence
must support the claim that the alternate measures actually do so. Countries
must allow imports from countries with different SPS rules if the exporters
demonstrate that their measures are equivalent to the importers'. 

The SPS Agreement also includes a transparency provision that requires
countries to notify WTO trading partners of changes in SPS measures that
affect trade. SPS notification requirements have contributed to improved
transparency and more reliable information on other countries' SPS measures
among WTO member countries. 

The SPS Committee, established by the SPS Agreement, has been used as a forum
to air grievances over SPS measures. When bilateral exchanges through the SPS
Committee fail to resolve differences, formal WTO consultations, which may
lead to negotiated settlements, have in some instances obviated the need for
referring the matter to a WTO dispute resolution panel, which ends in a
judgment. An example in which formal consultations led to a negotiated
settlement was the resolution of the U.S. dispute with South Korea over the
latter's shelf-life requirements. Formal consultations may also successfully
resolve the 1996 complaint by the U.S. against some of South Korea's numerous
inspection measures that result in excessive port delays. 

To date, three SPS disputes have advanced to WTO dispute settlement panels:
the EU-U.S./Canada Hormones dispute over the safety of hormonal growth
stimulants used in U.S. and Canadian beef cattle production, and the
Australia-Canada Salmon and the Japan-U.S. Varietals disputes over measures
applied by Australia and Japan to protect fish stocks and orchards,
respectively, from exotic pathogens. In all three disputes, WTO panels found
the SPS measures in question were inconsistent with these countries'
obligations under the SPS Agreement. 

The SPS Agreement legitimizes SPS complaints, which could not even be
registered under previous trade agreements, and the increasing number of
formal complaints in the first 2 years since the agreement took effect
suggests that the prospects for disciplining the use of SPS measures impeding
agricultural trade may have improved since the Uruguay Round. But beyond the
high-profile WTO disputes, the past two years have seen a number of unilateral
and negotiated decisions to ease SPS trade restrictions. As WTO members review
SPS regulations to determine whether they and their trading partners are in
compliance, regulatory authorities in several instances are either
unilaterally modifying regulations to comply with the SPS Agreement or
voluntarily modifying regulations after bilateral exchanges. 

The SPS Agreement may be credited with being an important contributing factor
in inducing some countries to revise especially conservative measures.
Regulatory changes resulting from the SPS Agreement include U.S. actions
allowing imports of uncooked beef from disease-free regions of Argentina and
the replacement of the ban on Mexican avocados with a limited import program.
Similar examples include the lifting of a 46-year old ban on U.S. tomatoes by
Japan, acceptance of Canadian salmon by New Zealand, and Australia's
acceptance of cooked poultry meat. 

New Round To Target
Further Reform

As part of the URAA, member countries agreed to begin negotiations for a
continuation of the agricultural reform process in 1999, one year before the
end of the URAA implementation period (1995-2000). The world agricultural
trading system is now well positioned for further trade liberalization, having
undergone the process of revising the rules that apply to agricultural trade,
bringing new disciplines to bear on the use of trade-distorting domestic
policies, cutting export subsidies, disciplining the use of SPS measures, and
putting in place a dispute settlement mechanism better equipped to bring
difficult trade disputes to resolution. 

Tightening countries' leeway in implementing the rules adopted in the Uruguay
Round could be a fruitful area for further negotiations. The challenge for the
next round will be to extend the progress made in the Uruguay Round toward
bringing agriculture more fully under the WTO disciplines that have applied to
goods in other sectors.. 
Mary Anne Normile, (202) 694-5162
mnormile@econ.ag.gov
Contributors: Fred Nelson, Ed Young, Susan Leetmaa, Karen Ackerman, Donna
Roberts, John Wainio, Gene Hasha, and David Skully, Economic Research Service;
Kevin Brosch, Foreign Agricultural Service  

SPECIAL ARTICLE BOX
New Dispute Settlement Process: Early Reviews Favorable

The Uruguay Round addressed a shortcoming of the GATT dispute settlement
process that had presented serious problems for agricultural trade the
weakness of the process in enforcing existing rights and obligations. Under
the old GATT system, any country could "block" the creation of a dispute
resolution panel by refusing to agree on its formation. Similarly, even when a
panel had been formed and the parties had litigated the dispute before the
panel, a single country could "block" the adoption of the panel report. This
gave the losing party the power to veto an adverse ruling. 

Dispute panels were also not necessarily obliged to make a decision. They
could simply hold that they did not know how to interpret a particular
provision of the GATT or how to apply a particular provision in the
circumstances presented. As a result, a panel could avoid holding whether the
complainant was right or wrong. These and other weaknesses seriously
undermined confidence in the dispute settlement system and therefore in the
GATT agreements themselves. 

The new WTO Understanding on the Rules and Procedures Governing the Settlement
of Disputes (DSU) addressed these weaknesses. A single WTO member may no
longer block the formation of a panel. The DSU now requires consensus to block
panel formation, making dispute settlement effectively automatic upon the
filing of the complaint, since there can be no consensus not to establish a
panel without the complaining party. Similarly, a single party can no longer
block panel reports. Adoption of panel reports is automatic within 60 days of
the date of the circulation of the report unless a party has appealed. In
cases of appeal, adoption of the appellate decision is automatic after
completion of the appeal process. The DSU makes it clear that the function of
panels is to decide, not to avoid, difficult issues presented in disputes.

The improved dispute settlement mechanism has enabled the WTO to adjudicate
cases based on presumed violations of the SPS agreement, as well as other
agricultural trade disputes. The EU Banana Import case a challenge to the EU's
system of import preferences given to former European colonies has been fully
adjudicated, although not yet implemented to the satisfaction of the U.S., and
a panel has heard a challenge by Brazil to EU market access for poultry. A
significantly greater number of agriculture-related disputes has been brought
and adjudicated within the past 3  years than during any comparable period in
the past. 

Furthermore, since the WTO Agreements came into force, there have been
satisfactory settlements of several trade disputes without having to resort to
the formal dispute settlement process e.g., in disputes over Hungarian export
subsidies, Philippines pork and poultry tariff-rate quota administration, and
Korean shelf-life rules. Under the old GATT system, these types of
agricultural disputes involving export subsidies, market access, and SPS
issues often dragged on for years. Initial evidence indicates that the WTO
dispute settlement system is a significant improvement over its GATT
predecessor. 
Kevin Brosch, Foreign Agricultural Service (202) 720-1667 
broschk@fas.usda.gov

END_OF_FILE
