AGRICULTURAL OUTLOOK                                        May 21, 1998
June 1998, AO-252
               Approved by the World Agricultural Outlook Board
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CONTENTS:

BRIEFS
Grain and Soybean Prices Forecast Lower in 1998/99 Large U.S. Meat & Poultry
Production In 1999, Cattle Prices To Rise Dry Bean Plantings Up for 1998, But
Little Change in Potato Acreage   Prices Could Rise for Some Stone Fruits This
Summer

COMMODITY SPOT
U.S. Red Meat and Poultry Markets In a Global Setting

Taking Measure of the Dollar's Value

FOOD & SAFETY
Food Safety Technologies: A Potential Role for Ozone?

FARM FINANCE
Farm Credit Use Up for 6th Straight Year
        Box: Farmers & Bankruptcy Law Reform

RESOURCES & ENVIRONMENT
Agriculture & Wetlands: Is "No Net Loss" Achievable?

SPECIAL ARTICLE
Livestock Restructuring in CEE/NIS Countries


IN THIS ISSUE

Large Supplies Color Markets
Large U.S. supplies in 1998/99 will reduce season-average farm prices for most
field crops from 1997/98, based on USDA's first 1998/99 forecasts of U.S. and
world supply and demand.  After surging to record highs during 1995 and 1996,
grain prices are forecast to return to the levels of the early 1990's, while
soybean prices will return to levels last seen in the 1980's.  The slump also
reflects weaker foreign demand.  Although lower prices will encourage gains in
domestic consumption in 1998/99, export growth will be relatively limited
because of larger supplies in some competing countries and weak import demand
resulting from the Asian economic crisis.

Red meat and poultry production will remain large in 1999, about unchanged
from 1998.  Increases in pork and broiler production will likely offset a
sharp decline in beef production.  Primary market prices for hogs and poultry
are expected to be about the same as in 1998, while cattle prices rise. 
Despite stagnant hog and poultry prices in 1999, producer returns are expected
to improve as feed costs decline.

Growth Slowing for U.S. Red Meat and Poultry Exports
U.S. red meat--beef and pork--and poultry meat exports are expected to grow
about 2 percent in 1998, a sharp slowdown from the double-digit rates that
have prevailed in the 1990's.  About the same rate of increase in meat exports
is forecast for 1999, although production is expected to increase about 3
percent in 1998 and remain about the same in 1999.  Reduced demand in Asian
markets, especially Japan and Korea, will lead to significantly reduced U.S.
meat exports to the region this year.  However, strong demand in Russia and
Mexico will help U.S. meat exports continue to grow.  In 1998, Russia is
projected to increase its meat imports to about 2.5 million tons, and Mexico's
meat consumption is expected to grow faster than its production in 1998,
resulting in a 15-percent increase in meat imports.

Livestock Sectors Restructure in CEE/NIS Countries
One of the most dramatic adjustments brought on by liberalization of the
economies of Central and Eastern Europe (CEE) and the Newly Independent States
(NIS) has been the virtual free fall in their livestock sectors.  In that
liberalization, consumer and producer subsidies for meat were eliminated, and
producers were exposed to new international competition.  Consumer demand
plummeted, and producers were increasingly squeezed between falling output
prices and skyrocketing production costs. The result was a drastic decline in
livestock inventories of all kinds.
The situation is beginning to change, however, in some of the transition
economies, particularly in the CEE countries.  In general, the restructuring
process is quite far along in Poland and Hungary, but remains incomplete in
most of the NIS countries.  A major impediment to the complete restructuring
of the region's livestock sectors is the poor development of institutions
needed to support markets, including clearly defined property rights,
bankruptcy procedures, enforcement of contracts, a credit system, and market
infrastructure. 

Enhancing Food Safety With Ozone
Ozone recently gained approval for use in the U.S. food processing industry as
a disinfectant wash or spray to help rid food of dangerous pathogens
(bacteria, parasites, fungi, and viruses).  When dispersed into water, ozone
can kill bacteria--like E. coli--faster than traditionally used disinfectants,
such as chlorine.  Most bottled water is safely treated with ozone, and nearly
200 municipal water treatment plants in the U.S. employ ozone to help cleanse
their drinking water.  The adoption of ozone technology in food processing
depends upon economic competitiveness with existing and emerging technologies
that sanitize food, as well as its effectiveness in enhancing food safety. 

Agriculture & Wetlands: Is No Net Loss Achievable?
Wetlands have figured prominently in policy debates since the mid-1970's;
public benefits that accrue from keeping wetlands in their natural state often
run counter to private interests in converting wetlands.  Federal wetlands
programs have evolved from incentives for conversion to regulatory programs
for conservation and incentives that encourage restoration and retention.  
Given the difficulty in estimating public benefits and private costs
represented by different wetland policies, the best use of wetlands is
uncertain. No net loss of wetlands is a Federal policy goal that emerged in
1989 and that has garnered bipartisan support, reflecting a compromise between
those who believe that too few wetlands have been converted and those who
believe that too many have been lost.  The U.S. appears to be approaching
achievement of no net loss of wetland acreage in the 1990's.  But the goal may
not be sustained if economic conditions spur additional wetland conversion,
wetland provisions of the Clean Water Act are weakened, the link between
wetland preservation and farm program payments is diminished, or Federal
funding for wetland restoration programs is reduced or eliminated. 


BRIEFS
Field Crops
Grain and Soybean Prices 
Forecast Lower in 1998/99

Large U.S. supplies in 1998/99 will reduce season-average farm prices for most
field crops from 1997/98, based on USDA's first 1998/99 forecasts of U.S. and
world supply and demand.  After surging to record highs during 1995 and 1996,
grain prices are forecast to return to the levels of the early 1990's, while
soybean prices will return to levels last seen in the 1980's.  The slump also
reflects weaker foreign demand.  Although lower prices will encourage gains in
domestic consumption in 1998/99, export growth will be relatively limited
because of larger supplies in some competing countries and weak import demand
resulting from the Asian economic crisis.  

Planted area for field crops, except winter wheat, is based on USDA' s
Prospective Plantings report for 1998, released on March 31.  Harvested area
is based on historical averages of  harvested-to-planted ratios and yields are
derived from historical trends or averages, with the exception of winter wheat
where survey results are used.  Since planting is still underway and harvest
is several months away for most crops, growing conditions could change
substantially, resulting in significantly different production.  U.S. crop
prices will be influenced not only by weather conditions in the U.S. and other
countries, but also by changing demand conditions, both in the U.S. and
globally. 

U.S. soybean production is expected to top last year's record.  Foreign
supplies are already huge, with a record South American soybean harvest nearly
complete.  As a result, soybean farm prices are projected at $4.75 to $5.75
per bushel, the lowest level in over 10 years.   U.S. acreage is forecast
record large as farmers, particularly in the Corn Belt, shift toward soybeans. 
The estimated 1998/99 yield of 39.5 bushels per acre would be the highest
since the 1994/95 record.  Soybean yield growth has accelerated in recent
years, due in part to increased narrow-row plantings.

USDA projects higher U.S. soybean exports in 1998/99, but gains will be
smaller than last year as competition with South American supplies remains
strong in the early stages of the crop year.  A smaller gain is also projected
for domestic crush, primarily due to greater competition from foreign protein
meal suppliers in the world market and some slowing in foreign demand,
particularly in Asia.  Larger carry-in stocks and record output will outweigh
increases in domestic and foreign demand, boosting projected ending soybean
stocks to the highest level since 1986/87.

Reflecting a healthy increase in expected supply and the likelihood of
continued export weakness, corn prices are expected to decline in 1998/99. 
The season-average farm price is projected at $2.05-$2.45 per bushel, compared
with $2.40-$2.50 estimated for 1997/98 and the $2.63 average of the last 5
years (including 1997/98).

The 1998 U.S. corn crop is forecast to be the largest since the 1994/95
record--yields are projected to rebound to the long-term trend and acreage is
also forecast higher.  Ending stocks of corn are expected to climb to the
highest level since 1992/93, despite a projected rise in use in 1998/99 (with
total demand second only to the 1994/95 record).  Moderate growth in domestic
use reflects slowing growth by livestock and ethanol producers.  Reduced
competition from Eastern Europe and China will contribute to higher U.S.
exports in 1998/99.  However, gains will be muted with continued strong
competition from Argentina, along with slack demand from East Asia due to the
economic crisis and reduced imports from Taiwan because of a smaller hog
population (see Commodity Spotlight). 

Lower acreage and yields will reduce the U.S. wheat crop 7 percent in 1998.  
In response to price drops, farmers are reducing wheat area and seeking
alternative crops.  Wheat prices declined in 1997/98 as global wheat
production reached a record level in 1997/98, with the U.S. harvesting its
largest crop in 7 years. 

Despite the smaller 1998 U.S. crop, large carry-in stocks will expand total
supplies to the highest level since 1990/91 and push down the average farm
price for wheat to $3.05-$3.45 per bushel for 1998/98, compared with $3.40
estimated  for 1997/98. 

Domestic use for wheat is projected to increase in 1998/99.  Food use
continues its long-term growth trend, and the greater availability of wheat
makes wheat feeding an attractive option.  Wheat exports are also projected to
be higher for 1998/99 as reduced supplies from competitors such as Argentina
and Canada allow the U.S. to regain some market share.  However, the U.S. will
face continued strong export competition from both Australia and the European
Union in 1998/99, whose supplies are projected to be unchanged or larger. 

Rice production is projected to be 2 percent greater in 1998/99, the second
largest crop ever produced.  Unlike soybeans, corn, and wheat, the
expectations for rice in 1998/99 are considerably more favorable as demand,
both domestic and foreign, is projected to remain strong.  As a result, the
average farm price is projected to remain firm at $9.20-$10.20 per
hundredweight, compared with $9.60-$9.80 for 1997/98.  

Domestic rice consumption has continued to expand because of a growing share
of the U.S. population with Asian and Latin American heritage and a greater
emphasis on healthier diets.   U.S. rice exports have risen with strong demand
for rough rice from Latin America.  

Cotton production for 1998/99 is projected to be 11 percent lower than 1997/98
because of  acreage declines and lower expected yields (returning to the 
1993-97 average).  With cotton prices down for the second straight year,
intended cotton acreage is down in both the Delta region and the Southeast for
1998.

Domestic mill use is projected to remain unchanged from 1997/98, as rising
textile imports are expected to offset growth in retail cotton consumption. 
Cotton exports are projected to be 20 percent lower in 1998/99 because of
reduced U.S. supplies and greater foreign competition.  Nevertheless, total
cotton demand is projected to exceed production during 1998/99, resulting in
lower ending stocks.   Mark Simone (202) 694-5312
msimone@econ.ag.gov

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

BRIEFS
Livestock, Dairy & Poultry
Large U.S. Meat & Poultry 
Production In 1999, Cattle Prices To Rise  

Red meat and poultry production in 1999 is forecast at 79 billion pounds,
about unchanged from 1998.  Increases in pork and broiler production will
likely offset a sharp decline in beef production.  Primary market prices for
hogs and poultry are expected to be about the same as in 1998, while cattle
prices rise.  Hog prices likely will remain in the high $30's per cwt,
wholesale broilers near 55 cents per pound, turkeys near 60 cents per pound,
while average choice steer prices will likely rise from the mid-$60's per cwt
in 1998 to the low $70's next year. Despite stagnant hog and poultry prices in
1999, producer returns are expected to improve as feed costs decline.  The
general inflation rate is expected to rise only about 2 percent, keeping costs
of other inputs in check.  

In 1999, U.S. exports of red meat and poultry are forecast to rise about 3
percent, up from only about a 2-percent rise in 1998, but well below the
double-digit growth during the first half of the 1990's.  Meat import growth
is expected to taper off to 3 percent in 1999 from 10 percent this year. 
Rising beef imports account for the increases, as more processing beef is
imported to offset low domestic cow slaughter.  Red meat imports generally
declined in the early and mid-1990's.

Beef production should begin to decline sharply in 1999, reflecting reductions
in the cattle inventory since 1996.   Despite the near 6-percent drop,
production will remain historically large.  With the exception of the 
near-records during 1994-98 (ranging from 24.3-25.4 billion pounds),
production in 1999 will be the largest since 1978.  (The record is 25.7
billion pounds in 1976 when cattle inventories were liquidated rapidly.)  Beef
production is forecast nearly unchanged this year from 1997, supported by
increased heifer slaughter and record slaughter weights.  Declining cattle
inventories will continue to reduce feedlot placements over the next couple of
years.  Lower feeder cattle supplies will combine with  increased heifer
retention (for herd rebuilding) to reduce beef production sharply beginning
this fall through at least 2000.

Strong heifer retention--encouraged by relatively low feed costs and good
forage and grazing prospects--is expected this summer, beginning the initial
phase of stabilizing the cattle inventory.  An expected increase in corn and
soybean plantings, favorable moisture and planting conditions in most grain-
and soybean-producing areas, and continued slow grain export sales will likely
hold down feed costs for the next year.  Present moisture conditions also
suggest much improved grazing and forage prospects.  

Last summer, grazing conditions deteriorated and grain prospects were clouded
by poor weather at the very time many producers had to decide whether to
retain heifers for herd replacements or sell them.  Many were sold and placed
in feedlots throughout the fall, bolstering beef supplies in the first half of
1998.  Unless grazing and grain prospects decline sharply, many more heifers
will be bred this summer to calve in 1999, setting the stage for at least
modest herd expansion beginning in 2000.

Fed-cattle prices remain under pressure from large beef and record total meat
supplies.  A slowdown in the beef export pace, particularly to South Korea and
Japan, is also moderating price gains.  Prices have strengthened from the low
$60's per cwt in first-quarter 1998 to the mid-$60's this spring.  Prices will
likely remain there until rising to the low $70's this fall as beef supplies
tighten.  Last year, prices averaged nearly $66 per cwt in every quarter. 
Record total meat supplies (with prices of other meats declining relative to
beef) will hold down price gains in 1999.  Fed-cattle prices are likely to
average in the low to mid-$70's. 

As supplies decline this fall and in 1999, retail prices for Choice beef are
likely to rise into the mid-$2.80's, up from a forecast $2.80 in 1998
(unchanged from the 1996 and 1997 averages), but well below the $2.93 record
in 1993.  This record may be safe even in 2000, when per capita beef supplies
are likely to be the tightest, as continued large supplies of pork and poultry
at relatively lower prices stifle price advances.  In addition, a larger
proportion of  Prime and Choice beef has entered the hotel-restaurant and
export markets in recent years.  A trend toward offering beef with lower and
more variable quality at retail makes it increasingly difficult to maintain
consumer acceptance and raise prices.   Meanwhile, improved eating quality
consistency and increased cut sizes have made both white-meat chicken and pork
loins more competitive with beef.  

The financial crisis in Asia will likely remain a drag on beef trade through
1999, but it could ease in the latter part of the year if financial reforms
stimulate consumer confidence.  Stagnating demand is expected to limit U.S.
sales to Korea.  But continued strong growth in exports to Mexico and an
expected modest increase to Japan could boost U.S. beef exports by 3 percent
to 2.1 billion pounds in 1999.

Tightening supplies of processing beef in the U.S. are expected to increase
demand for imported beef.  If the Australia-U.S. exchange rate remains at its
current level, imports from Australia should increase.  Given the increased
price of domestic processing beef, the U.S. will likely be a destination for
foreign product squeezed out of Asia.  U.S. imports in 1999 could increase
about 5 percent to 2.8 billion pounds. 

Pork production is expected to rise about 2 percent in 1999, after posting a
nearly 10-percent gain in 1998.  Although per capita pork supplies are
expected to rise, hog prices are expected to be about the same as in 1998 due
to the sharp reduction in beef supplies.  With abundant pork supplies and
reduced beef available, retailers will likely favor pork over beef for
featuring.  Retail pork prices could edge lower  in 1999 due to this increased
featuring and to a narrowing of the farm-retail price spreads from record wide
spreads in 1998.

This year, the nearly double-digit rise in pork production, along with a 
3-percent rise in competing meat supplies and a lackluster pork export market,
is expected to pressure hog prices down about a third from 1997.  Hog
producers, particularly those with higher costs, are facing a profit squeeze,
though lower feed costs are softening the effect of low hog prices.  
Declining feed costs may push cash costs down into the low to mid-$30's per
cwt, forestalling a liquidation of the breeding herd.  Modest expansion by
large, lower-cost producers is expected to continue, while the exit of higher
-cost producers may have accelerated.

Pork exports are expected to increase 3 percent in 1999 as Mexico and Russia
purchase attractively priced lower-value products.  Despite the appreciation
of the dollar against the yen, shipments to Japan are expected to remain
relatively steady.  Japan is the largest U.S. customer for the higher-valued
pork products.

Broiler production is expected to continue growing slowly in 1999, up 4
percent after increases of 3.5 percent in 1997 and 1998.  Broiler producers
are expected to remain cautious when making production decisions, as there
will continue to be very large domestic meat supplies and uncertainty in the
export market.  Lower feed costs in 1998 will more than offset lower broiler
prices and improve net returns to broiler producers.  

Broiler exports in 1999 are expected to reach 5.025 billion pounds, up only
slightly over 1998's forecast 4.924 billion pounds.  Slower growth is expected
in shipments to Russia, other Newly Independent States (plus the Baltics),
Mexico, South Africa, and a number of Asian markets (chiefly Japan).  U.S.
poultry exports to Hong Kong are forecast to rebound somewhat in 1999, but
remain below 1997.  U.S. poultry exports will also face strong competition
from U.S. pork exports and foreign poultry producers--U.S. pork exports
compete as a prime ingredient in processed products and sausage.
   
Turkey production is expected to decline in 1999 after 3 years of negative
returns for turkey producers.  Modest export demand and competition from large
pork supplies in the domestic market are expected to prevent price rises. 
Some turkey production facilities will convert to chicken production.  Turkey
exports are expected to grow to 600 million pounds in 1999 after falling to a
forecast 557 million pounds in 1998.  Continued growth in the Mexican market
and higher shipments to Hong Kong will be behind the increase.  Exports to
Korea are expected to remain depressed due to its financial problems.

Egg production is expected to continue increasing in 1999.  Lower feed costs
are expected to offset lower wholesale egg prices, maintaining attractive net
returns for producers that began in 1995.  Large increases in chicks hatched
for table-egg production signal a continuation of larger flock sizes for next
year.  Egg exports are forecast to reach 243 million dozen in 1999, up 3
percent from 1998's forecast.  Higher projected shipments to Canada and
rebounding exports to Hong Kong are expected to provide most of the increase.

For further information, contact:  Leland Southard, coordinator; Ron
Gustafson, cattle; Leland Southard, hogs; Mildred Haley, world pork; Jim
Miller, domestic dairy; Richard Stillman, world dairy; Milton Madison,
domestic poultry and eggs; David Harvey, poultry and egg trade, aquaculture. 
All are at (202) 694-5180.
 
BRIEFS
Specialty Crops
Dry Bean Plantings Up for 1998, 
But Little Change in Potato Acreage 

When planting this year's dry bean and potato crops, producers have had to
assess both the current market situation and the possibility of unusual
weather continuing as the result of El Nino.  USDA's Prospective Plantings
report indicates U.S. dry bean growers intend to plant 1.94 million acres in
1998.  This would be 5 percent more than a year ago and 1 percent more than
the average for the 1990's.  Improved prospects for exports to Mexico, the
United Kingdom, and Iraq in the coming year are likely the driving force in
increasing dry bean planted acreage this spring.

Most of the indicated gain in dry bean acreage will be in North Dakota (up 17
percent to a record high) and Minnesota (up 18 percent).  North Dakota farmers
grow primarily pinto and navy beans, while Minnesota growers plant kidneys,
navies, and pintos.  Farmers in Nebraska and Utah are also expected to plant
more dry beans (up 5 and 3 percent).  Pinto beans are grown in both these
States, and Nebraska is also the principal producer of Great Northern beans,
which are expected to see strong export growth to Iraq this year.  Since the
loosening of trade sanctions last year, the U.S. can ship food and
humanitarian items directly to Iraq.

Increased dry bean acreage is anticipated despite a 25-percent decrease in
average grower prices for the first 7 months of the 1997-98 marketing year
(September-March) compared with the same period a year ago.  However, grower
prices have strengthened 30 percent from their harvest lows last fall.  Most
of the gain in prices came when Mexico, where bean production fell short last
year, auctioned import licenses for up to 100,000 tons of beans during the
year (Mexico imports mainly pinto and black beans). 

Reduced dry bean area is expected in California (down 11 percent), Michigan (5
percent), and Colorado (4 percent).  California's large stocks of lima beans
are behind the acreage reduction in that State, while heavy stocks and low
prices for navy beans are encouraging Michigan growers to consider alternative
crops like soybeans.

The current overall market situation indicates little change in potato acreage
from last fall's 1.2 million planted acres.  Planted acreage may increase
slightly in some high-yielding areas in western States, but will likely
decrease in Maine and the Red River Valley of North Dakota and Minnesota. 
Increased plantings of dry beans, sugar beets, and soybeans substitute crops
in several important potato growing States also seem to signal little increase
in fall potato acreage.

The U.S. fall potato crop accounts for about 90 percent of total annual U.S.
potato production.  The marketing season runs from September to August, with
most spuds sold from storage during November to August.  Major fall producing
States include Idaho, Washington, Oregon, Colorado, North Dakota, Minnesota,
Wisconsin, and Maine.  Depending on the area and weather, planting typically
begins in March and continues into June. 

Prices for the 1997 crop (marketed through August 1998) have rebounded
significantly following a year of the lowest prices since 1987.  Record
production in 1996 caused grower prices to fall to $4.93 per cwt for the
1996/97 marketing year.  Reduced production last fall has since helped to
raise grower prices (September to February) for all potatoes 19 percent above
year-earlier levels.  Prices for fresh potatoes, up a dramatic 53 percent from
a year ago, account for most of the increase.  Prices for processing potatoes,
up only 1 percent from the same period a year ago, are limited by contracts
with processors made prior to last fall's growing season.

Retail prices have not reflected the significant increase in grower prices for
fresh potatoes.  Average retail prices for fresh potatoes from September
through February were up only 6 percent.
  
Although reduced production last fall boosted grower prices, inventories of
both fresh potatoes and frozen potato products (mostly french fries) remain
high.  Fresh stocks this spring, although below last year's record levels, are
5 percent above the average of the last 5 years.   Additionally,  higher
prices this season have contributed to lower disappearance this season down 2
percent through April from last year's record.  Processor use through April
was down 7 percent from last year's record, but is only 1 percent below the
level of 2 years ago.

The recent increase in processing use has helped contribute to record-large
stocks of frozen potato products.  Much of the recent inventory buildup has
occurred in the Pacific States (California, Washington, Oregon), especially
Washington and Oregon.  In recent years, Pacific States have accounted for
between 40 and 45 percent of fry inventories during March and April.  This
spring, however, their share is up to about 48 percent of U.S. fry
inventories.  With inventories at such high levels and a forecast for lower
domestic consumption of fries in 1997/98, exports are likely to become
increasingly important to fry producers in the Pacific States this year. 

Although french fries are still the predominant potato export, the upward
trend in fry exports has slowed somewhat in the past 2 years.  French fry
export volume increased just 3 percent from 1995 to 1996, recovering its pace
in 1997 with a 13-percent increase.  This is still a marked decline from the
27-percent average annual growth of the previous 4 years and the 51-percent
average during 1985-95.  North American markets continued strong in 1997, with
exports up 48 percent from 1996, but growth in East and Southeast Asian
countries (including Japan) slowed to 13 percent from the 688 million pounds
exported in 1996.  East and Southeast Asian countries still account for about
85 percent of U.S. french fry export volume.

Competition in export markets will likely remain rigorous throughout much of
1998 for potatoes and potato products, with record production in Canada and a
return to normal production in Europe (both large exporters of french fries)
in the fall of 1997.  Tightness in export markets in East and Southeast Asia
is also likely to continue due to economic crises in the region.  For the 
6-month period ending in February 1998--the first half of the new marketing
year--U.S. french fry export volume to East and Southeast Asia was up just 3
percent from a year earlier, and export value was down.  Total U.S. french fry
export volume to all markets was up 5 percent during the period, while value
was up close to 2 percent.

Based on overall market conditions and estimates of current-season prices,
acreage of planted potatoes for 1998 (all seasons) is projected to be about
unchanged from last year.   Given recent trend yields and average acreage
abandonment, total production for 1998 (all seasons) would be about 460
million cwt--virtually unchanged from last year.  However, given the
disappointing winter and spring crops due to the El Nino weather pattern,
growers may plant more acreage for fall harvest as a precaution.  USDA's first
official estimate of planted acreage for fall potatoes, to be released in
July, should provide a clearer indication of production, prices, and trade
potential in the coming year.  
Charles Plummer (202) 694-5256 and Gary Lucier (202) 694-5253  
cplummer@econ.ag.gov
glucier@econ.ag.govBRIEFS
Specialty Crops
Prices Could Rise for Some Stone Fruits This Summer

Heavy rains in California in February and hailstorms in late March and early
April have affected  the State's 1998 production of stone fruits, especially
plums and nectarines.  Because California is a major production region for
peaches, plums, and nectarines, prices for these stone fruits are likely to be
higher this summer than a year ago.  California produced, on average, 71
percent of U.S. peach output and 89 percent of the Nation's plums during 1995
through 1997, according to USDA's Noncitrus Fruit and Nut 1997 Preliminary
Summary.  The 1992 Census of Agriculture indicates that California growers
produce about 93 percent of U.S. nectarines.       

Preliminary estimates from the California Tree Fruit Agreement (CTFA)
--a grower-funded organization that promotes fresh-market stone fruits
--put California's 1998 plum shipments about 30 percent below last year,
nectarine shipments about 9 percent lower, and peaches about 3 percent  lower. 
Last year, USDA reported California production of plums, nectarines, and
peaches at 486 million, 528 million, and 1.9 billion pounds.  Last year's
nectarine crop was a record; output of plums was the largest since 1994, and
peach production was the largest since 1980.  
 
Lower production of stone fruit is expected to combine with other factors to
drive prices higher this season.  California's relatively cool spring weather
--about 10 degrees below normal--is delaying fruit development about 7-10 days
for plums and 12-14 days for nectarines and peaches.  The CTFA anticipates
California's plum harvest to begin in mid-May, and the first peaches and
nectarines could be ready for picking around May 27.  

In South Carolina and Georgia, a 3-day freeze during the second week of March
brought significant bloom damage to early peach varieties in these key
producing States.  The likelihood of smaller peach shipments from the
Southeast this summer, coupled with the delay in all stone fruit development
in California, will help push up prices, particularly in May and June, the
early part of this year's stone fruit season. 

The spring hailstorms contributed to the projected drop in California's plum
output this year, damaging about 15 percent of the crop.  In addition, the
peak bloom period for many California plum orchards occurred in late February,
and the cool, rainy weather at that time hampered pollination and resulted in
a light fruit set. 

Despite the heavy rains in February, California peaches and nectarines escaped
significant damage.  Peak bloom for most peach and nectarine orchards occurred
in early March--later than for plums--and the crops benefited from 3
consecutive days of dry weather.  Because peaches and nectarines, unlike
plums, are self-pollinating (bees are not necessary), the wet, cool weather on
some days during the peak bloom period did not disrupt the pollination
process, and the blooms came in heavy.  

The nectarine crop was affected by the spring hailstorms, though peaches
suffered little damage because the fruit's fuzzy skin affords protection. 
Another factor in the production outlook is that both nectarines and peaches
have had two consecutive bumper crop years.  Because of the alternate bearing
nature of these fruits, this could signal lower output this year.
Agnes Perez (202) 694-5255
acperez@econ.ag.gov

For further information, contact: Susan Pollack and Agnes Perez, fruit; Gary
Lucier, vegetables; Nydia Suarez, sweeteners; Doyle Johnson, tree nuts and
greenhouse/nursery; Tom Capehart, tobacco; Lewrene Glaser, industrial crops. 
All are at (202) 694-5260.

COMMODITY SPOTLIGHT
U.S. Red Meat and Poultry Markets In a Global Setting

As the United States has become a larger player in world meat export markets
in the 1990's, events in other major exporting and importing countries have
had a greater effect on domestic prices and production.  Not only are domestic
producers affected by world prices and quantities of meats traded, but they
are also affected by the changing composition of the trade, i.e. the products
being traded. As a result, the U.S. market outlook is now determined in larger
part by the global market than was the case before the export surge of the
1990's. 

After several years of rapid increases, however, growth in U.S. red meat and
poultry trade is expected to slow in 1998.  Red meat and poultry exports are
expected to grow about 2 percent in 1998, compared with the double-digit rates
that have prevailed until now in the 1990's.  About the same rate of increase
in meat exports is forecast for 1999, although production is expected to
increase about 3 percent in 1998 and remain about the same in 1999.  After
generally declining in the 1990's, U.S. meat imports rose 11 percent in 1997
and are expected to rise about 10 percent in 1998 then taper off to about 
3-percent growth in 1999.

During the last decade, global production (defined as output in the major
producing and trading countries as reported by USDA's Foreign Agricultural
Service) of meat--beef, pork, and poultry--has increased about 3 percent
annually.  These gains have been led by poultry and supported by pork. 
Poultry meat production has expanded more than 5 percent each year on average,
offsetting little or no growth in beef production since 1988.  Global poultry
meat production surpassed beef in 1995 and the gap has continued to widen as
beef production has remained stagnant.  Pork is the most widely produced meat,
with  China accounting for over half of the world total.  

China's output has determined trends in global meat production over the last
decade.  China's meat production has jumped 10 percent annually since 1988. 
When China's production is excluded, global production of meat has risen only
about one-half percent each year.  Beef and pork production have actually
declined, and only poultry meat shows an increase--nearly 4 percent--each
year.

Poultry meat is a cheaper source of meat protein than beef and consumption
growth has been especially strong in China, Russia, and Mexico in recent
years.  Even in a developed market such as the U.S., consumers are buying more
poultry.  Lower prices relative to red meats, the convenience of processed
poultry products, and promotions of poultry products in the fast-food industry
have all contributed to this trend.

As a result of the strong and growing world demand for poultry meat, U.S. 
exports have advanced at a double-digit pace in the 1990's.  Pork exports have
increased at about 3 percent annually, while beef exports have actually
declined. The U.S. supplies about 53 percent of global poultry imports. 

World Situation in 1998

In 1998, global production and consumption of beef, pork, and poultry meat are
expected to expand about 3 percent to nearly 188 million tons.  Production
growth is slightly higher than in 1997.  

Exports from the leading meat exporting countries, with the exception of the
EU, are expected to decline in 1998.  U.S. red meat exports are not expected
to expand in 1998, the first time since 1985, due to a 2-percent reduction in
beef foreign sales. 

In 1998, the U.S. meat and poultry sectors are confronted with three major
hurdles: the lingering effects of food safety concerns, the Asian financial
situation, and the increasingly competitive environment for meat trade.

In 1996, the bovine spongiform encephalopathy (BSE) situation in the European
Union contributed to a slowdown in the growth of global meat consumption and
trade.  The lingering effects of food safety concerns began to dissipate in
1997 and the outlook for both beef consumption and trade began to improve in
the latter part of 1997.  However, during the last quarter of 1997, Asian beef
imports began to slow as reports of E. coli and listeria contamination in
other Asian markets raised concerns about food safety in the beef supply.  In
1998, beef consumption in Asia is expected to fall as consumers return to
eating more pork.

The avian influenza outbreak in Hong Kong and the subsequent slaughter of Hong
Kong's poultry flock added more uncertainty in one of the largest poultry
trade markets going into 1998.  An outbreak of foot-and-mouth disease (FMD) in
Taiwan in 1997 shut that country, one of the largest pork exporters, out of
the global export market.  Classical swine fever (CSF) has disrupted the pork
markets in the European Union.

The Asian financial crisis hit in the last half of 1997, threatening to limit
meat imports and reduce consumption growth in some major Asian markets for the
U.S.  The U.S. sends 40 percent by volume and 53 percent by value of its total
meat exports to Asian Pacific Rim markets.  In 1997, U.S. red meat--beef and
pork--exports to Asia were valued at $2.5 billion and poultry meat exports
were $680 million.  

Partly as a result of the Asian financial crisis, the competition in global
meat markets is probably as great or greater than ever.  The bulk of global
meat trade is concentrated in a few major markets, and as consumption growth
slows or shrinks in key markets, competition will intensify.  The devaluations
of the Thai and Korean currencies substantially boosted their competitive
position in the export market for poultry and pork.  The strengthening U.S.
dollar against the Australian dollar is also likely to provide opportunities
for expansion of the Australian share of the Asian beef market.

U.S. Exports Mirror 
Asian Market Demand

Reduced demand in Asian markets, especially Japan and Korea, will lead to
significantly reduced U.S. meat exports this year.  Japan's sluggish economy
is likely to temper any advance in meat consumption.  Pork consumption is
expected to rise marginally, having declined in 1997 after food safety
concerns and the FMD outbreak in Taiwan that cut off imports from Japan's
leading pork supplier.  Beef consumption is expected to remain the same as
last year and poultry meat consumption to decline slightly.  

The U.S. is also expected to face increased competition in reaching the
Japanese market.  Japanese trade statistics for the first quarter of 1998
indicate that Korea has nearly tripled its pork exports to Japan early in
1998.  The sharp devaluation of the Korean won has substantially improved the
competitive position of Korean pork.  U.S. pork exports also rose early in the
year, unlike last year when Japanese imports were slowed by the threat of
triggering import restrictions.

Japanese beef consumption and imports are not expected to exceed 1997 levels. 
While Japanese beef imports picked up at the end of 1997 and into 1998, 
first-quarter 1998 imports still have not returned to the level that was
reached in 1996 prior to food safety concerns.  Early indications are that
Australia has increased its share of Japanese beef  imports.  

Japanese poultry meat consumption is expected to slip again in 1998 and
imports are likely to be the same as in 1997.  Both China and Thailand have
increased exports to Japan, especially of boneless chicken leg meat.  Thailand
has made further inroads into the Japanese market not only because of its
devalued currency but also by providing further processed chicken to the
convenience-conscious Japanese market.

Korea's beef consumption had been steadily rising until 1998, when the
economic crisis began cutting into consumption.   Korean consumers are
expected to buy less meat and substitute cheaper cuts when they do buy.  As a
result, beef consumption is expected to drop in 1998.   Korea is also one of
the world's leading beef importers. As part of its WTO commitments, Korea
agreed to import 187,000 tons of beef in 1998.  However, trade statistics for
the first two months of 1998 indicate that Korean beef imports were about 80
percent below year-ago levels.    In response to the Korean credit squeeze,
the U.S. has provided nearly $147 million in GSM-102 credit guarantees to
facilitate beef shipments into Korea. 

China's production and consumption of both beef and pork are estimated to be
in balance, although per capita consumption of beef is low.  It is estimated
that China consumes nearly all of the beef and pork it produces.  Beef imports
and exports are negligible, and pork exports have been declining.  But China
is the world's second largest poultry meat importer.  For the past decade,
Chinese poultry meat consumption grew at a double-digit pace.  Growth is
expected to be slower in 1998.

China has expanded its domestic poultry meat production, partly reflecting
expectations of increased exports.  However, the anticipated increases did not
materialize; devaluation of the baht improved Thailand's competitive position
in the Japanese import market, preempting expected Japanese demand for poultry
from China.  The larger supply of Chinese poultry has reduced domestic prices
and limits the competitiveness of imported poultry meat.  Chinese poultry meat
imports in 1998 are projected to drop for the first time in 10 years.

Because Hong Kong is a major transhipment point for poultry meat to China,
Hong Kong has become a leading poultry meat importer.  Imports are expected to
decline for the first time since 1981 as ample supplies of poultry meat in
China reduce demand for re-exports. 

Concerns about BSE and the discovery of E. coli in beef from a local
slaughterhouse in March 1997 slowed Hong Kong beef consumption and imports. 
As a result, pork consumption rose nearly 9 percent, and is expected to
increase again in 1998.  After the avian influenza outbreak in December 1997,
when Hong Kong destroyed its chicken inventory and banned live chicken imports
from China, red meat consumption reportedly jumped 30-40 percent, as consumers
substituted beef or pork for chicken.  The rise in consumption was probably
bigger for pork given the local preference.  Although figures are not yet
available, beef consumption very likely increased in early 1998, since the
winter season is the peak period for meat consumption and live chicken imports
were cut off until February 1998.  Poultry meat consumption is expected to
return to normal levels in mid-1998.

Taiwan fell from its position as the world's third leading pork exporter when
exports plummeted after the March 1997 outbreak of FMD.  Pork consumption also
plunged, while beef and poultry meat consumption rose.   Taiwan's pork
consumption is expected to recover in 1998 as consumer confidence returns for
domestic pork, encouraged partly by lower prices.  However, Taiwan's pork, in
any significant quantity, will likely remain out of the international market
until at least 2003.

Russian and Mexican Markets 
Sustain U.S. Exports in 1998

Russia imported 2.3 million tons of meat in 1997, compared with 2.2 million
tons for Japan, usually the world's leading importer of meat.  In 1998, Russia
is projected to increase its imports to about 2.5 million tons.  A majority of
Russian meat imports will be poultry meat--1.3 million tons--followed by about
750,000 tons of beef and nearly 500,000 tons of pork. 

Since the collapse of the Soviet Union, meat production and consumption have
steadily declined as the new governments have withdrawn financial support, and
there have been localized shortages of the grains necessary to maintain
previously high levels of meat production (see Special Article).  Poultry
production has dropped more than beef and pork and is expected to drop another
8 percent in 1998.

Russia has been able to boost its meat protein consumption with imports of
poultry meat.  While beef and pork consumption continue to decline, poultry
meat imports have allowed Russian consumption of meat to decline at a much
slower rate than its falling meat production.  The U.S. dominated the Russian
poultry meat import market with its ample supplies of low-cost leg quarters,
and is expected to continue to dominate in 1998, even as the EU aggressively
targets the Russian market.

Mexico continues to be a critical expanding market for meat.  Mexico's meat
consumption is expected to grow faster than its production in 1998, resulting
in a 15-percent increase in meat imports.

Beef consumption in Mexico grew 4 percent in 1997, reflecting strong growth in
incomes as the economy continued to expand at a healthy pace.  Domestic beef
production in Mexico is not sufficient to meet consumer demand, and imports
have continued to increase from the low of 1995 when Mexico's economy was
suffering from the peso devaluation.  Mexico's beef imports surged 83 percent
in 1997 to 150,000 tons, and they are expected to increase 30 percent in 1998. 
The U.S. supplies the vast majority of beef imports to Mexico.

Mexico's pork consumption has increased as the economy has grown.  A 5-percent
increase in pork consumption, to 960,000 tons, was seen in 1997 as pork
supplies increased and the economy continued to strengthen.  A further
increase of 2 percent, to 976,000 tons, is forecast in 1998.

Pork imports increased 28 percent to 41,000 tons in 1997, much of it imported
from the U.S. by Mexican sausage producers.  The U.S. average share of the
Mexican pork market has been 97 percent, and little or no change is expected
in 1998.  Mexican imports are forecast to increase to 47,000 tons in 1998,
encouraged by lower U.S. pork prices.

Poultry meat production in Mexico will  continue to expand at a much higher
rate than beef and pork in 1998; economic recovery since the peso devaluation
and falling grain prices are boosting poultry production.  The pace is only
slightly ahead of consumption gains, however, and imports will increase
further in 1998.

EU Meat Production 
Plagued by Disease Problems

The EU meat market is still affected by disease problems in 1998--bovine
spongiform encephalopathy (BSE) in the cattle sector and classical swine fever
(CSF) in the hog sector.  The EU is the world's third largest meat producer
and consumer, behind China and the U.S., and the world's largest pork
exporter.

In 1997, EU pork production was originally expected to expand as beef demand
was suppressed by the BSE outbreak in 1996.  However, a severe outbreak of CSF
in the Netherlands curtailed pork expansion.  Through live hog trade from the
Netherlands, CSF outbreaks occurred in Spain, Germany, and Belgium.  As a
result of these outbreaks, the Dutch government has moved to reduce the swine
herd, since heavy concentration of animals is believed to propagate CSF.

Denmark benefited from problems in the Netherlands with rising producer prices
and substantially increased exports outside the EU in 1997.  Denmark is
expected to boost exports again in 1998, with growth anticipated in Japan,
Denmark's largest export market.

The EU beef market continues its slow recovery from the BSE crisis.  Despite
marginal growth expected in 1998, consumption of 7.1 million tons remains
lower than the pre-BSE crisis level of 7.4 million tons in 1995.  Total EU
beef production is expected to decline 2 percent in 1998 to 7.6 million tons,
reflecting lower cattle inventories.  

EU beef trade remains weakened from the crisis.  Although exports are
gradually improving, they are expected to remain 9 percent below the 1995
level, at 2.4 million tons in 1998.  Due to a growing number of export license
requests, the EU Commission decided to cut export refunds for fresh and frozen
boneless beef by 50 percent in February, the sixth time since August 1997 that
refunds have been reduced.  In 1998, total imports are forecast to be 13
percent lower, at 1.8 million tons, than the pre-BSE crisis level.

Another serious imbalance has developed in the EU beef market as a result of
the BSE crisis, and intervention buying by the EU Commission is again
necessary to relieve the market of large beef stocks, which reached 900,000
tons on January 1, 1998.  The artificial incentives and resulting market
distortions of the EU beef regime--made worse by the BSE crisis--have led to
new proposals for a reform of the Common Agricultural Policy as it relates to
the beef sector.

Canadian Meat Production Expands

Canada is expected to further expand meat production in 1998, led by gains in
pork and poultry meat production.  The cattle industry's liquidation in 1996-97, 
which boosted beef production, is over and cattle inventories are expected
to stabilize at the 1997 level.  Canada's beef imports are not expected to
increase in 1998, although the U.S. share could decline again in favor of
Australia.  Expansion and aggressive marketing by western Canadian packers in
the eastern Canadian markets are expected to compete with U.S. exports into
eastern Canada.  Canadian beef exports are unlikely to expand in 1998 because
of the financial situation in Asia.

The U.S. has historically been the largest market for Canadian pork, but
record U.S. pork supplies and lower U.S. pork prices will most likely keep
more Canadian pork at home in 1998.  Canada was able to expand its share of
the Japanese pork market in 1997 as Taiwan's absence opened up additional
opportunities.  With new, modern processing facilities coming on line in the
near future, Canada's exports are expected to increase further in 1998,
particularly if the Canadian dollar remains weak vis-a-vis the yen and other
competitor currencies.  
Joel Greene, Foreign Agricultural Service, (202) 720-6553 and Leland Southard
(202) 694-5187
greenej@fas.usda.gov
southard@econ.ag.gov

Taking Measure of 
The Dollar's Value

How best to measure the value of the dollar is a constant question in
international economics.  The correct answer is that no single measure fits
all situations, and selecting a measure often depends on how it will be used.  

Some measures are straightforward.  Bilateral rates measure the value of the
dollar against another currency.  These are helpful in understanding what
affects exports to particular markets.  For example, analyzing changes in the
yen-dollar exchange rate helps explain changes in beef exports to Japan.  If
the dollar's value rises against the yen, the price of U.S. beef to Japanese
consumers would increase (assuming pass through by marketers) and imports from
the U.S.  would likely decline.

The "value" of the dollar becomes more complex when considering overall U.S.
agricultural exports or even a single commodity because there are few
instances in which a commodity is exported to a single country.  For this, the
analyst needs a measure of value that accounts for how the dollar is
performing against the currencies of many countries. 

In economics, such a measure is referred to as an effective exchange rate
index.  This measure of value is constructed by taking weighted averages of
several bilateral exchange rates  and combining them into a single index.  The
countries and the weighting scheme would depend on the market (commodity)
being examined.

Another consideration when looking at "value" is determining what the dollar
will really buy.  Here the answer depends partially on inflation rates in the
trading countries.  Economists take account of differing inflation rates
between trading partners by calculating so-called Purchasing Power Parity
(PPP) exchange rates.  The PPP exchange rates (or real rates) depend on two
factors--the change in the market value of a currency and the difference in
inflation rates between trading partners.  So if the market value of the
dollar rose 7.2 percent last year (as it did by one measure) and foreign
prices on average rose about 4 percent faster than U.S. prices, the "real"
value of the dollar would have risen around 3 percent.  

Agriculture-Based
Exchange Rates

Since 1988, the Economic Research Service (ERS) has published measures of the
dollar's real value through a set of indices focused on world agricultural
markets.  The original set covered agricultural products in total, as well as
wheat, corn, soybeans, and cotton.  These exchange rate indices covered both
customer and competitor currency values.  ERS recently added more categories,
including high-value, consumer-oriented products (one of the fastest growing
U.S. exports), vegetables, red meats, fruits and fruit juices, and poultry. 
The 20 indices are available for months beginning in January 1970 (the
original set of indices began in 1976).

A fixed-weight scheme is used, with the weights calculated as 5-year averages
(1990-94).  For customer indices, the weights are the shares of U.S. exports
during the 1990-94 period for a particular commodity.  For the competitor's
indices, weights are country shares during the 1990-94 period of world exports
(excluding U.S. exports) for a particular commodity.  

The actual construction of an exchange rate index is simple.  First, real
bilateral rates are calculated by multiplying the U.S. dollar exchange rate by
the ratio of consumer price indices in the U.S. and the foreign country.  This
real rate is then divided by its average 1990 exchange rate to form an index. 
Next, each country's real exchange rate (now in index form) is multiplied by
its share of trade in the particular commodity category.  The final step is to
sum all of the weighted rates to get that commodity's indexed exchange rate. 

New Calculations Reflect
Changes in World Market

Values for some of the indices in the original set have changed.  This is due
in part to changes in weights, and in part to a change in the mix of
countries.  A few small developing countries have been dropped since they fell
below 1 percent of trade in the particular commodity category.  This affected
mainly the cotton indices for customers and competitors.  More significantly,
Russia was added to customer indices for wheat and for total agriculture. 

The new customer index for total agricultural products has the dollar's value
averaging about 2 percent above the original index for 1992-95, and about 0.8
percent higher the following 2 years.  The wheat index has a more significant
change, averaging 5 percent higher over the 1992-95 period.  Finally, the
value of the dollar averages about 3 percent lower over the 1976-85 period in
the cotton index.

Two competitor indices were altered.  The cotton index shows the dollar's
average value lower by almost 8 percent in 1976-89.  The new competitor
soybean index values the dollar somewhat higher overall, and with a
significantly higher value--20 percent--beginning in 1994.  This change
results from Brazil rebasing its consumer price index.

What Do the Indices Tell Us?

Both the customer and competitor indices are constructed so that an upward
movement indicates a rise in the dollar's value and a subsequent loss of price
competitiveness for U.S. exports.  The extent of the loss depends on how much
of the rise an exporter is willing to pass on to customers; a U.S. exporter
could cut prices to ameliorate some of the adverse competitive effects of the
dollar movement.  

Interestingly, a loss in U.S. competitiveness can occur even without a rise in
the dollar vis-a-vis customer currencies.  This is because agricultural
exports from U.S. competitors are generally priced in U.S. dollars.  For
example, U.S. price competitiveness in the world poultry market apparently
improved when the customer-based dollar declined 4.5 percent in 1996/97.  But
because the dollar also appreciated 13 percent against competitor currencies
during the same period, competitors could cut their dollar export prices by up
to 13 percent and not impact their home currency-denominated profits.  If they
cut dollar prices 10 percent, U.S. relative price competitiveness declines 10
percent.  At the same time, home currency-denominated profits would still rise
about 3 percent. 
Tim Baxter, (202) 694-5318
tbaxter@econ.ag.gov


FOOD SAFETY
Food Safety Technologies: 
A Potential Role for Ozone?

Ozone, a form of oxygen commonly associated either with its ability to guard
against the sun's harmful ultraviolet radiation or with smog, recently gained
approval for use in the U.S. food processing industry to help rid food of
dangerous pathogens (bacteria, parasites, fungi, and viruses).  In July 1997,
ozone was deemed "generally recognized as safe" (GRAS) as a disinfectant for
foods by an independent panel of experts sponsored by the Electric Power
Research Institute.  

For any substance commonly used in the U.S. prior to January 1, 1958, the Food
and Drug Administration (FDA) allows its use in other products if an
independent panel of experts deem the substance and its use as GRAS.  The GRAS
determination in treating food products was an expansion of uses already
approved for ozone. 

Ozone has long been recognized as a disinfectant for water, first used in a
U.S. water drinking plant in 1940.  Today, nearly 200 municipal water
treatment plants, from Orlando to Los Angeles, employ ozone to help cleanse
their drinking water.  Most bottled water is treated with ozone as well, a
practice stemming from a 1982 Food and Drug Administration (FDA) affirmation
of ozone as GRAS in this product. 

Prior to July 1997, however, the only approved use of ozone in food products
was for the storage of meat in gaseous ozone, granted by USDA in 1957.  Now,
processors of fresh fruit, vegetables, poultry, and red meat are examining
ozone as one of several new technologies to ensure food safety. 

Potential Benefits

The strength of the case for using ozone may rest with its versatility and
environmental benefits over some existing food sanitizing methods.  Ozonated
water can be used on food products as a disinfectant wash or spray.  When
dispersed into water, ozone can kill bacteria--like E. coli O157:H7--faster
than traditionally used disinfectants, such as chlorine.  

Ozone also kills viruses, parasites, and fungi.  The U.S. Environmental
Protection Agency, in conjunction with the Safe Drinking Water Act of 1991,
confirmed that ozone was effective in ridding water of hazardous pathogens,
including chlorine-resistant Cryptosporidium. 

Coupling two processes---washing food with ozonated water and the subsequent
ozonation of the recaptured water--reduces the amount of water needed in the
food washing system (which lowers costs, particularly for high-water users
such as fruit and vegetable packers and processors).  In addition, any
wastewater discharged by an ozonation process used  as a substitute for
conventional chlorine-based food washing and spraying systems, is free of
chlorine residuals, a growing environmental concern in groundwater pollution.  

Food products treated with ozone are also free of disinfectant residues. 
Because it is an unstable gas, ozone decomposes in about 20 minutes into
simple oxygen, leaving no trace of the ozone disinfectant on the food. 

Ozone also acts as a disinfectant in its gaseous state.  It can be applied to
sanitize food storage rooms and packaging materials, which may help to control
insects during storage of foods and prevent spoilage of produce during
shipping.  Gaseous ozone is also listed as an alternative disinfectant for
water-sensitive produce, such as strawberries and raspberries in the Guide to
Minimizing Microbial Food Safety Hazards for Fresh Fruits and Vegetables (a
document forthcoming from FDA and USDA). 

The Electric Power Research Institute is examining the use of ozone as a
fumigant in food storage beyond the already approved use for meat.  Methyl
bromide has commonly been used as a fumigant to prevent insect infestation of
commodities such as grapes, raisins, cherries, nuts, and grains, but its use
is being phased out under the Clean Air Act (Amendments of 1990).  The
phaseout prohibits the U.S. production and importation of methyl bromide
starting January 1, 2001.  Interestingly, the phaseout is intended to halt the
depleting effect of  methyl bromide on the Earth's protective ozone layer. 

Interest in Ozone Systems Builds . . .

The food processing industry has faced mounting concerns in recent years about
its ability to provide a consistently safe food supply.  Food passes through
many hands--from growing, picking, boxing, shipping, to final processing--
prior to reaching the consumer.  Most past efforts to avoid contamination of
food centered on preventing exposure to sewage or animal manure early in the
production process.  

Because of the incidence of food contamination along the entire chain of
production, and the recognition that many pathogens--some have recently
emerged--are found in even healthy animals, the industry has realized that
some form of disinfection, perhaps at multiple points, is necessary.  Each
year in the U.S., an estimated 6.5-33 million illnesses and up to 9,000 deaths
are caused by foodborne diseases (AO July 1996).

Centuries-old methods of treating food, such as drying, smoking, and use of
simple substances like salt, no longer adequately prevent spoilage in today's
food marketing system.  These methods to prevent contamination can also alter
a food's taste.  

Food processors have turned to other technologies to both decontaminate and
preserve products without substantially changing the appearance, taste,
texture, or nutrient content of the food.   These methods include steam
pasteurization, used principally in meat processing where beef carcasses are
exposed to steam for short periods of time; flash pasteurization, a heating
process to kill bacteria in juice; and irradiation, which uses low-dose
radiation to treat meats, fruits, vegetables, and spices.

As a nonthermal method of disinfecting food, ozonation reportedly alters taste
little, unlike some heat-based steam and flash pasteurization systems that
cook the product.  Further, in some foods, ozone proponents indicate flavor is
enhanced by ozone's ability to neutralize chemicals, pesticides, and bad
tastes from gases produced by ripening or decay.  

In 1995, the National Live Stock and Meat Board and various universities
conducted research that showed an ozone wash reduced bacterial contamination
on beef carcasses to a level equal to conventional carcass trimming and
washing methods.  (Under specific conditions, hot-water washing, an
alternative process, resulted in consistently lower bacterial populations on
beef carcasses.)  In mid-May, 1998, research was completed by California
Polytechnic State University which revealed ozone reduced pathogens on
surfaces of lettuce, meat, and poultry.

Now that ozone has received a "generally recognized as safe" designation, a
few firms have adopted or begun testing ozone-based systems.  Recent televised
news reports highlighted a Florida citrus grower washing oranges and
grapefruit in ozonated water.  The Vermont Department of Agriculture is
examining the potential of ozone to wash apples used in the apple cider
industry.  

Industrial gas-producing companies are developing mechanical systems for
processing poultry that filter out biological waste material in poultry
chiller water and then add ozone to disinfect the washwater.  In January 1998,
two New York-based companies, one an all-natural chicken processor, announced
pilot tests of an ozone system in their processing plants.  (Before a firm
adopts an ozone system, a pilot test is required by the USDA's Food Safety and
Inspection Service--FSIS--conducted under FSIS protocols.)   And in April
1998, an agricultural corporation in California contracted to install an ozone
system that is intended to replace a combined chlorine wash and steam
pasteurization process. 

. . . But Adoption May Be Slow

Having achieved GRAS status, will ozone be widely adopted in the food
processing sector?  As with any new technology, the lack of commercial
experience in disinfecting food with ozone may hinder its implementation. 
Although the potential benefits of ozone are being identified, complete
industry specifications (e.g., treatment lengths, concentration levels) have
not been developed for the application of ozone to the array of foods that may
be treated with this technology.  

Associated with the lack of commercial specifications is the absence of
government guidelines and standards on ozone use in food processing.  As most
food processing plants are government-inspected, processors are reluctant to
use ingredients that are not explicitly government-approved.  Further, as
ozone is a toxic gas and respiratory irritant, issues of accidental discharge
and worker safety are a concern. 

And how much will an ozone system cost?  Ozone must be produced onsite because
of its short life before converting back to oxygen; thus, ozone generators and
diffusers are necessary at the food processing plant.  According to one
manufacturer, ozone generators, which produce the gas by passing dry air or
pure oxygen between parallel electrodes, may cost between $10,000 to $100,000,
depending on the size needed for the processing operation.  The amount of
ozone needed to disinfect various foods also figures in the cost equation. 
Manufacturing ozone requires substantial electricity--about ten times more
than for the production of chlorine.    

Little cost analysis has been done yet, but based on initial activity in the
industry, ozone technology may be economically competitive with other
disinfecting processes.  Upfront costs are similar for ozone and conventional
washing systems, for example, but they are significantly lower than for others
such as irradiation.  Cost factors for chlorine-based systems, such as
transportation and storage of the gas, may offset higher onsite costs for
ozone gas production.
  
Ozonation of water supplies, bottled water, and food is a virtually unknown
process to most U.S. consumers.  If regulatory and commercial hindrances are
resolved, consumer acceptance of ozonation of food may be a final obstacle
before food processors adopt ozone technology.  Consumers are often slow to
accept new products or even traditional products that are manufactured with a
new and unfamiliar process.  Therefore, most companies are unwilling to be
first in offering innovative products, which often require costly marketing
efforts. 

Consumer preferences may offer some insight about the acceptance of new
products.  Test market surveys by an independent marketing research firm in
early 1998 indicated acceptance of ozonated foods when consumers are
knowledgeable of various processing methods.  Three food processing methods--
existing chlorine rinses, newly approved irradiation, and ozonation--were
explained to consumers, who were then asked if they would purchase products
treated by these methods.  Eighty percent of consumers indicated a preference
for products treated with ozone when given the choice of chlorine,
irradiation, or ozone processes (other disinfecting processes such as steam
pasteurization and hot-water rinses were not included in the survey). 

The disinfecting ability of ozone is evidenced by its generally accepted use
in treating water supplies in the U.S. and Europe, where the first commercial
application of ozone to cleanse drinking water was in France in 1906. 
However, disinfecting food with ozone is only now emerging.  The development
of ozone technology in the U.S. food processing industry is dependent upon
proper safeguards in its use to assure worker safety, economic competitiveness
with existing and emerging technologies that sanitize food, as well as its
effectiveness in enhancing food safety.      
Alex Majchrowicz (202) 694-5355
alexm@econ.ag.gov

FOOD SAFETY BOX 1
Ozone is only one of many food sanitizing ingredients and processes being
used, examined, or proposed to improve food safety.  Chlorine is the most
commonly used chemical to kill pathogens on food, but chlorine dioxide,
hypochlorite, and trisodium phosphate also have been studied for use in
washwater to disinfect food products.  Irradiation of meat, through low-dose
radiation or electron beams, was approved by the Food and Drug Administration
in December 1997.   Steam pasteurization, flash pasteurization, and
ultraviolet radiation are additional methods that can sanitize food.  Each
method has its advantages and disadvantages, and research continues on which
methods or combinations of sanitizing processes work best for specific foods.

FOOD SAFETY BOX 2
The "generally recognized as safe (GRAS)" designation for ozone in food
processing by an independent panel (i.e., nongovernmental) allows for its use
unless proven unsafe by the FDA, the principal government agency that
regulates the safety of food ingredients.  However, any new uses of a
substance, such as the direct application of ozone as a disinfectant on food
products, would benefit from formal FDA approval in gaining commercial
acceptance.  Presently, the FDA has formally approved ozone to treat only one
"food" item, bottled water.

A requirement for GRAS status is that a panel of experts undertake a detailed
study of the ingredient and present its findings to the FDA.  Panel members
are not chosen by the FDA, which does not have a seat on the panel.  In the
case of ozone, experts from food science, food technology, nutrition,
toxicology, and ozone chemistry served on the panel. 

FARM FINANCE

Farm Credit Use Up for 
6th Straight Year

The volume of farm business debt is expected to increase in 1998 for the sixth
consecutive year.  Farm credit usage has increased in recent years, buoyed by
generally favorable income conditions in the farm sector.  Factors at work in
1998 include expectations of quite stable interest rates coupled with overall
lower net cash  income for the farm sector.  Total farm business debt--real
estate and non-real estate loans--is forecast to reach about $172 billion by
the end of 1998, up about 3.8 percent from 1997 and the highest level since
1985. 

At the end of 1997, farm business debt amounted to $165.9 billion, up 6.2
percent from a year earlier.  The 1997 increase was the largest annual
percentage gain in outstanding loans since 1981 and placed the sector's debt
level about $28 billion above the previous low in 1989.  In recent years, the
growth in nominal farm debt has outpaced inflation.  From yearend 1993 to the
end of 1997, total farm debt grew 16.7 percent, compared with an increase of
9.7 percent in the GDP deflator, which reflects price changes in all goods and
services transactions in the U.S.  In contrast, from yearend 1989 through
yearend 1993, farm debt grew 3 percent, while the GDP deflator increased by
14.4 percent.   

Nationwide, farm operators' expanding use of credit is not expected to place
excessive demands on their ability to meet their debt obligations.  Increases
in total farm debt in the 1990's have been well below the double-digit
expansions of the 1970's.  And total farm debt at the end of 1997 was still
14.4 percent below 1984's peak.

Most agricultural lenders benefited from the continued growth in loan demand
in 1997, and these lenders are in a strong financial position in 1998. 
However, changes in loan volume and the composition of loan portfolios vary
among the four traditional classes of farm lenders--commercial banks, the Farm
Credit System (FCS), USDA's Farm Service Agency (FSA), and life insurance
companies.

Together, these lenders accounted for almost 77 percent of all farm loans
outstanding in 1997.  The remaining share of farm credit comes from
individuals and from nontraditional lenders, primarily input and machinery
suppliers, cooperatives, and processors.  All farm lender classes saw
increases in outstanding loan volume in 1997, except for the government "farm
lender of last resort"--the FSA--which accounted for only 5 percent of all
farm business loans in 1997.

Activity Up for 
Real & Non-real Estate Loans 

Agricultural lenders generally found the demand for agricultural credit
strengthened more for non-real estate than real estate loans both in 1997 and
for the period from yearend 1992 through 1997.  Farmers are using the
increased borrowing to expand operations, update capital, and purchase
additional farmland--often at higher prices than a year ago.  Real estate,
non-real estate, and total outstanding loan volume increased 4.9, 7.6, and 6.2
percent, respectively. 

Non-real estate loan volume increased $5.68 billion in 1997, up 7.6 percent
from 1996.  Non-real estate loans are typically for farm inputs, equipment,
and machinery.  Some 58 percent of the growth in total farm loan volume in
1997 occurred in the short- to intermediate-term non-real estate loan
portfolio.  Outstanding non-real estate FCS loans increased by $2.76 billion
or 6.9 percent, compared with $5.47 billion, or 8.9 percent, for commercial
banks. 

In 1998, non-real estate business loans outstanding are anticipated to
increase about 4 percent.  Farmers are expected to spend about $185 billion
for agricultural inputs and $164.4 billion in cash expenses, the same level as
1997 for both, although USDA forecasts increases in prices of most
agricultural inputs in 1998.  In the first two seasons following enactment of
the 1996 farm legislation, farmers planted 261 million acres annually to the
eight major field crops (corn, sorghum, barley, oats, wheat, rice, upland
cotton, and soybeans).  These crops accounted for virtually all of the changes
in principal crop acreage during the past 2 years.  Total area planted to
these crops is projected to decline 1.57 percent in 1998.  The expansion in
farm business loans following the farm act has been due largely to increases
in prices of inputs such as fertilizers rather than to changes in the amount
of planted acres.  

Strong machinery sales help maintain the demand for short- and intermediate-
term farm loans.  Unit sales of farm tractors, combines, and other farm
machinery were strong in 1997.  Purchases of farm tractors totaled 75,608
units, up 13 percent from 1996.  Combine purchases were up 7.2 percent to
9,662.  Tractor sales are forecast to be strong again in 1998, although they 
may not reach the 1997 level.  Overall demand for machinery, including
combines, is anticipated to be steady.

A larger share of loan demand for these inputs is now met by "captive" finance
firms  owned by the machinery companies.  Such nontraditional lenders are
defined as institutions whose primary contact with farmers has historically
been to provide goods and services other than credit.  
Farm real estate loan volume increased $4.1 billion or 4.9 percent in 1997. 
Outstanding FCS real estate loans accounted for $1.45 billion or 35.9 percent
of the increase; commercial banks gained $1.96 billion or 48.6 percent of the
total increase.  FCS reported a 5.6-percent increase in farm mortgage loans
outstanding for the year ending December 31, 1997.  This compares with 3.5
percent in 1996 and 0.8 percent in 1995.  Among life insurance companies,
total farm real estate lending activity (their entire farm loan portfolio) was
up 4.8 percent during calendar 1997.

Outstanding farm real estate loans are expected to increase about 3.5 percent
in 1998.  Activity in the land market and higher farmland prices should
continue to create stable demand for mortgage loans (real estate credit). 
U.S. farmland values per acre increased 6.2 percent in 1996, 5.8 percent in
1997, and are expected to advance about 5 percent in 1998, marking 12 straight
years of U.S. farmland value increases.

The increase in nominal U.S. farmland values during 1993-97--35.9 percent--
tripled the 11.5-percent increase in the GDP deflator.  In contrast, the rate
of increase in farmland values following the 1987 low lagged inflation through
1992.  The 1993-97 increases represent the strongest yearly gains, both in
nominal and real terms, since the recovery began in 1987.   

Farmers are expected to use their available credit lines more fully in 1998
than in 1997, based on ERS projections of the maximum debt that farmers could
repay out of current income.  The amount of farmers' income available for
payments on loans determines the maximum debt farmers can take on, given
current interest rates and loan terms.  

The debt repayment capacity use (actual debt expressed as a percentage of
maximum feasible debt) will increase for the second consecutive year to about
61 in 1998--although it remains close to the 1990-95 average and is well below
the levels of the early to mid-1980's.  Farmers in 1997 tapped a greater share
of the credit estimated to be available to them (56 percent) than in 1996 (49
percent) in order to maintain or expand their operations.  The effect of
favorable interest rates throughout 1997 was not sufficient to offset the
combined effects of rising debt and lower net cash income.  The 1996 level
represented a drop in use of debt repayment capacity from the previous year
despite a rise in farm business debt, as net cash income levels rose and
interest rates declined. 

Lenders Respond to Growth

From yearend 1992 through 1997, total farm debt grew $26.6 billion or 19.1
percent.  Commercial banks led the growth with $15.4 billion, followed by
nontraditional lenders with $8.5 billion and the FCS with $4 billion.  Total
debt expansion in 1998 is expected to be about $6.3 billion, compared with the
1997 increase of $9.7 billion.  

Commercial banks, the largest source of farm business credit, accounted for
40.5 percent of all farm loans outstanding at yearend 1997.  The total volume
of outstanding farm loans by commercial banks reached $67.2 billion in 1997,
up 8.9 percent from 1996.  For farm real estate lending alone, the expansion
was even stronger, rising 8.4 percent and marking the 15th consecutive year of
gains.  Commercial banks accounted for 56 percent of the growth in total farm
debt outstanding in 1997.

The recent growth in farm loan demand experienced by commercial banks is
reflected in their loan-to-deposit ratios.  In the year ending September 30,
1997, average loan-to-deposit ratios grew to 70.3 percent for agricultural
banks, up from 59.7 percent 4 years earlier.   Agricultural banks are those
whose ratio of farm loans to all loans is higher than the average for all
other banks.
  
High loan-to-deposit ratios do not necessarily constrain the origination of
new loans.  Commercial banks have many nondeposit sources of funds, and
profitable, well-managed banks often have very high loan-to-deposit ratios. 
Although rural banks make considerably less use of nondeposit funds than banks
headquartered in metropolitan areas, evidence shows that most rural banking
markets are served by banks that use nonlocal sources of funds to some extent. 
Overall, adequate funds are available from banks for agricultural loans, with
few banks reporting a shortage of loanable funds.

Overall lending by individuals and others will increase about 5 percent.  This
category includes land contract sales of real estate, and merchant and dealer
credit on the non-real estate side.  The growth of merchant and dealer credit
is forecast to expand over 7 percent in 1998, with much of this growth
generated by captive or subsidiary finance divisions of farm input suppliers. 
Life insurance company lending to farmers is expected to be quite strong in
1998, with a forecast growth of 4 percent.  Active companies continue to have
sufficient loanable funds to meet demand and are aggressively competing on
rates, terms, and loan-to-value ratio.  

The FCS--a collection of federally chartered, borrower-owned credit
cooperatives that lend primarily to agriculture--held total farm business
loans of $42.6 billion at the end of 1997, up 6.9 percent from a year earlier. 
It accounted for 28.4 percent of the increase in all outstanding farm loan
volume in 1997.  FCS non-real estate loans grew by an impressive 45.4 percent
from  yearend 1993 through 1997.  In 1998, FCS non-real estate loans are
forecast to rise almost 3.5 percent.  FCS mortgage debt is expected to rise
about 3.8 percent in 1997, the fourth consecutive annual gain after declines
in 9 of  the previous 10 years. 

The FCS, which has access to national money markets and can provide needed
farm credit at competitive rates, is well positioned to supply farmers' future
credit needs.  The system has demonstrated financial strength in recent years
while undergoing massive restructuring of its organization and procedures.  In
an effort to enhance loan quality and expand market share, the FCS is offering
farm customers competitive interest rates and credit arrangements.  The FCS
gained farm loan market share the past 3 years after a gradual loss over the
previous 12 years, and in 1998, FCS farm business debt is forecast to increase
about 3.5 percent. 

FSA outstanding farm loans declined in 1997.  The agency held only 5 percent
of all farm business debt in 1997, down from 16.3 percent in 1987.  The
availability of direct FSA loans to operators of family-sized farms unable to
obtain credit elsewhere continues to decline as the agency continues the
emphasis on guaranteed loans that began in the early 1980's.  Despite adequate
loan authority in fiscal 1997, total FSA direct loans decreased 8.7 percent in
calendar 1997 to $8.3 billion, and its loan portfolio is expected to continue
declining.

FSA's funding authority to guarantee loans by commercial and cooperative
lenders will be down 11.6 percent in fiscal 1998.  Loan guarantees totaling
$1.57 billion were issued in fiscal 1997, down 14.9 percent from fiscal 1996,
despite the emphasis on guaranteed loans.  FSA loan demand in 1998 is
difficult to predict because it depends in part on the extent of adverse
weather as well as on economic conditions that affect the farm sector.  The
increase in farm business loans guaranteed by the Small Business
Administration in recent years has resulted in a downturn in demand for FSA-
guaranteed loans.

Adequate Credit Access in 1998

The outlook for 1998 indicates that competition remains keen among lenders for
high-quality farm loans.  Trends in the general economy should maintain stable
to lower interest rates, which will tend to sustain farm loan demand.  

But the generally favorable conditions that have strengthened the financial
position of farm lenders over the past several years could change somewhat in
1998.  Lenders will be dealing with a farm sector whose economic performance
is forecast to be slightly under the 1990-97 average.  Net cash income
declined 8.2 percent in  1997 and is forecast to decline another 5-6 percent
in 1998.  And the impact of the forecast decline in 1998 will not be evenly
distributed over all farm operations but will vary by region, commodity, and
farm size. 

Producers continue to be cautious in acquiring new debt, and lenders continue
to carefully scrutinize the creditworthiness of borrowers.  Farmers will need
to demonstrate adequate cash flow, and some marginal operators and beginning
farmers will continue to lack credit access.  Some farmers experiencing rising
debt and/or lower net cash income may have difficulty meeting their debt
service obligations.  But farmers who are good credit risks are in a strong
position to acquire credit in 1998.  
Jerome Stam (202) 694-5365 and James Ryan (202) 694-5586 
jstam@econ.ag.gov 
jimryan@econ.ag.gov


FARM FINANCE BOX
Farmers & Bankruptcy Law Reform

The current debate on national bankruptcy policy is not neglecting
agriculture, with Federal legislation pending that would extend the life of
the flexibility provisions for family farmers under Chapter 12 of the
bankruptcy code. The rising tide of bankruptcy filings in the U.S. despite a
strong economy has prompted legislative proposals to address the problem.  In
1997, a record 1.4 million bankruptcy petitions were filed, up 19.1 percent
from a year earlier and the seventh consecutive annual record.  

The National Bankruptcy Review Commission, authorized in 1994, presented a
1,498-page report to Congress with 172 recommendations in October 1997.  The
report contains a chapter on farmer bankruptcy, including recommendations to
make Chapter 12 farmer bankruptcy legislation permanent, to increase the
eligible debt limit from $1.5 to $2.5 million per farm, and to change payment
procedures of bankruptcy court trustees.  For the agricultural sector, income
risk has increased, adding to the significance of the bankruptcy issue--under
the 1996 Farm Act, farm payments are no longer tied to commodity prices. 
Although no major, sustained weather adversity has occurred since
implementation of the 1996 farm legislation, this perennial threat adds
another factor to the agricultural bankruptcy equation.

A revised bankruptcy policy is likely to emerge in the current Congress,
driven by the impending Chapter 12 sunset date of October 1, 1998, and by
popular support for extending protections for family farmers.  Chapter 12,
which originated with the Family Farmer Bankruptcy Act of 1986, was a response
to the farm financial crisis of the early to mid-1980's.  Added to the
bankruptcy code on November 28, 1986, Chapter 12 was set to expire on October
1, 1993, but Congress extended it for another 5 years.  

In July 1997, legislation was introduced in the Senate to make Chapter 12
permanent, and passed by voice vote in October.  The House has not acted on
this legislation, but a bankruptcy package that includes Chapter 12 extension
was passed by the Judiciary committee on May 14, 1998. 

Chapter 12 gives family farmers considerably more leverage to demand
concessions from lenders in the bankruptcy process than under the code
normally governing reorganization of business debt (Chapter 11).  Most farmer
bankruptcy reorganizations are now filed under its provisions.  Chapter 12
allows family farms (as defined in the bankruptcy code) with regular income to
adjust their debts and protect their assets.  It makes available to farmers a
bankruptcy procedure whereby debtors submit a repayment plan directly to the
bankruptcy court, with no review by creditors (the equivalent of a Chapter 13
bankruptcy program for individuals with regular income).  Chapter 12
bankruptcy plans are made for 3 years, but with court approval may be extended
to 5 years.  

Creditors cannot reject a court-approved debt repayment plan developed under
Chapter 12 if the plan will provide them at least as much as under a Chapter 7
filing, in which debtor assets are liquidated.  Farmers can reduce the amount
they owe, extend the payment period, and lower the interest rate on existing
loans to the current fair market rate or lower.  As a consequence, secured
creditors' bargaining positions are weakened.  The writedown or "discharge" of
secured debt is limited to the current market value of the underlying land or
other asset, which can be less than the original loan value.  In return, the
farmer agrees to a repayment plan for the remaining debt.

When Chapter 12 went into effect in 1986, its immediate impact was to slow the
pace of farm liquidations.  Since its enactment through December 1997, some
19,610 cases have been filed under its provisions.  The farmer bankruptcy
rate, based on Chapter 12 data, has stabilized, although at a level above that
for all farmer bankruptcies prior to the farm financial crisis of the early to
mid-1980's.

Chapter 12 presents policymakers with a dilemma.  Do the benefits of Chapter
12 outweigh the costs?  And how are the costs distributed?  If failing
economic operations should not survive, then Chapter 12 has not been a
success.  According to ERS analysis, the major marginal effect is to encourage
both inefficient farmers, who would otherwise liquidate, and efficient
farmers, who would otherwise continue their operations at greater expense, to
reorganize their businesses under the protection of bankruptcy.  The Chapter
12 provisions increase the legal and administrative costs of  bankruptcy by
encouraging bankruptcy filings by some farmers who would not otherwise have
done so.  They also raise indirect costs by giving farmers the opportunity to
reorganize inefficient farms, although this impact could be mitigated by
allowing lenders to recapture writedowns in secured debt if asset values
recover. 

If good social policy dictates keeping farmers in business regardless of their
profitability, then Chapter 12 has succeeded.  It provides family farmers
facing bankruptcy a streamlined means to reorganize their debts and keep their
farms.  And the impact of Chapter 12 goes beyond the 19,610 farmers who have
filed under its provisions through 1997 because the potential leverage it
affords debtors encourages lender-borrower negotiations out of court and
encourages more prudence in granting farm credit. 
Jerome Stam (202) 694-5365 
jstam@econ.ag.gov

For more information on bankruptcy and other issues in agricultural and rural
finance, visit the Economic Service web site at
http://www.econ.ag.gov/epubs/pdf/aib724/
 
RESOURCES & ENVIRONMENT

Agriculture & Wetlands: Is "No Net Loss" Achievable?

"No net loss" of wetlands is a Federal policy goal that emerged in 1989 and
has garnered bipartisan support.  To date, "no net loss" has been interpreted
to mean wetlands should be conserved wherever possible, and that acres of
wetlands converted to other uses must be offset through restoration and
creation of other wetlands, maintaining or increasing the total wetland
resource base.  The Clinton administration's 1998 water quality initiative
calls for a net gain of 100,000 acres of wetlands per year beginning in 2005. 
 
Wetlands issues have figured prominently in policy debates at the Federal and
State level since the mid-1970's.  The public benefits that accrue from
keeping wetlands in their natural state often run counter to private interests
in converting wetlands to uses with higher economic returns. 
 
But over the last 25 years, greater scientific understanding of the functions
of wetlands has increased general recognition of the public benefits of
conserving and restoring them.  Direct and indirect public incentives for
wetland conversion have been withdrawn, wetland conversion has been regulated
in Federal water quality legislation and in numerous state laws, farm program
benefits have been tied to wetland conservation, and voluntary programs have
been funded to restore cropland formerly converted from wetlands.  Thirty-
three States have adopted the "no net loss" goal in administering their
environmental protection programs. 

Recent reductions in wetlands losses and increases in wetland restoration have
resulted in significant progress toward achieving the "no net loss" goal, due
largely to reduced agricultural conversion.  How have these changes come
about?  Is "no net loss" an optimal goal?  Can it be achieved and sustained in
the future?  What is agriculture's role?

Recognizing Public Benefits

Wetlands are complex ecosystems that provide a range of ecological,
biological, and hydrologic benefits that are recognized by society.  Providing
fish and wildlife habitat is the most widely recognized wetland function. 
Because organisms may depend totally or partially on wetlands for shelter,
feeding, or breeding habitat, losses can cause declines in biodiversity or
threaten the sustainability of remaining species,  populations, and
ecosystems.  

For example, high wetland losses in California have threatened 220 animal and
600 plant species.  Long-term (1955-85) declines of mallard and pintail duck
populations (35 and 50 percent) are related to wetland losses.  Some 41 U.S.
fish species that spend part of their life cycles in wetlands have become
extinct in the past century, and 28 percent of freshwater fish species are
seriously reduced in abundance and distribution.  Over one-third of all bird
species in North America rely on wetlands, and wetlands are the preferred
habitat for many fur-bearing animals, such as muskrat, beaver, otter, mink,
and raccoon. 

Wetlands improve water quality by functioning as living filters, removing
nutrients and sediments from surface and ground waters.  Wetlands retain or
remove nutrients through uptake by plant life, adsorption into sediments,
deposits of detritus such as organic matter, and chemical precipitation. 
Vegetation and flat topography in wetlands slow water flow, causing sediments
to be deposited in the wetland, and reducing siltation of rivers, lakes, and
streams.  Wetlands are often found where the water table is close to the
surface, resulting in fluctuating discharge or recharge of ground water
supplies. 

Wetlands function as a barrier to shoreline erosion from wave action because
their interlocking root systems stabilize soil at the water's edge, enhance
soil accumulation through sediment trapping, curb wave action, and slow water
currents.  Wetlands act as huge sponges, temporarily storing flood waters and
releasing them slowly, thus reducing flood peaks and protecting downstream
property owners from damage.  Wetlands are often natural flood conveyances,
channeling flood waters from upland areas into receiving waters and mitigating
extreme flood events.  

Because of the varied functions performed by wetlands, they are a resource
valued by fishermen, hunters, boaters, downstream property owners, public
water supply and flood control authorities, and recreationists.  Owners of
wetlands cannot realize the full societal benefits of wetlands because
landowners generally cannot earn returns on such benefits.  However, the
benefits of converting wetlands to cropland and other uses can be realized
directly by farmers and other landowners.  

Governments seek to balance competing private and public claims on wetlands
through a combination of regulatory programs and economic incentives.  
Federal wetlands programs have evolved from incentives for conversion to
regulatory programs for conservation and incentives that encourage restoration
and retention.  In addition, 44 States have wetland laws, and wetland
definitions in 46 States are comparable to those used in Federal programs. 
However, enforcement of wetland policies is less widespread: 40 states have
staffing for their programs, 33 track and enforce wetland permits, but only 26
have penalties for violation of their wetland laws.  

Is "No Net Loss" an Optimal Goal?

In determining whether "no net loss" of wetlands is an appropriate policy goal
in the U.S. today, the difficulty lies in estimating the socially optimal mix
of wetland protection and conversion, taking into account the marginal
benefits and costs both to individual landowners and to the public.  The total
initial stock of wetlands in the contiguous U.S. at the time of European
settlement is estimated to have been about 221 million acres.  Today,
unconverted wetland acreage is about 124 million acres, and converted wetland
acreage about 97 million.   

The net marginal benefits realized by individual landowners from protecting an
incremental acre of wetlands are relatively low, since few of the benefits of
wetland protection can be captured by individual landowners.  Examples of
private benefits that can be captured include hunting, fishing, scenic
enjoyment, and recreational opportunities, and possibly economic returns from
haying, grazing, or timber harvesting.  The individual's marginal benefits
from protection would be expected to decline as the amount of protected
wetland acreage rises.

The net marginal benefits realized by individual landowners from converting an
incremental acre of wetlands are relatively high, since conversion makes
possible more intensive agricultural or developed uses that provide returns
directly to the individual landowner.  Marginal benefits from conversion would
decline as converted wetland acreage increases.  The privately optimal
allocation of wetlands is the point at which converting an additional acre
would cost a landowner the same in terms of foregone benefits from protection
as would be gained in benefits from conversion. 

Both conversion and protection generate public benefits in addition to private
benefits.  In the case of wetland conversion, these may include increased
agricultural output, lower consumer prices, public health, and, historically,
national expansion and settlement.  However, public benefits to conversion are
now small, since settlement is no longer a national priority, alternative
means have been found to protect public health, and remaining wetlands capable
of conversion are small relative to the cropland base.  

In the case of wetland protection, most benefits accrue to the public.  Adding
public benefits of protection to the individual marginal benefits results in
marginal benefits to society significantly higher than the individual benefits
alone.  Thus the socially optimal allocation of the initial stock of wetlands
implies more wetlands protected and less converted than under the privately
optimal allocation.

From European settlement through the mid-20th century, public benefits of
wetland protection were not recognized.  Even if benefits had been recognized,
the initial stock of wetlands was sufficiently high that the marginal benefits
of protecting any were low.  By contrast, both public and private benefits
from conversion were recognized, motivating public subsidies for wetland
drainage and conversion.  Thus, what was considered the socially "optimal"
level of wetland conversion was relatively high.  But as the public benefits
of wetland protection became more fully appreciated, the socially optimal
allocation of wetland resources implied a higher level of wetland protection.

Given the difficulty in estimating public benefits and private costs
represented by different wetland policies, the socially optimal allocation of
wetlands is uncertain.  If we have already reached the individual's optimal
allocation, then "no net loss" would be inadequate from a public policy
perspective; a net gain of wetlands would be necessary to reach the socially
optimal allocation.  On the other hand, if historic wetland conversion has
just brought us to the socially optimal allocation, then "no net loss" is an
appropriate policy goal.  The "no net loss" goal represents a preference for
the status quo, reflecting a compromise between those who believe that too few
wetlands have been converted and those who believe that too many have been
lost.

Section 404 of the Clean Water Act implements the "no net loss" goal with a
regulatory review process that handles small conversions through general
permits, and conducts thorough, qualitative reviews of the social costs and
private benefits of major proposals impacting wetlands. A comparison between
private benefits and social costs is made for each permit, despite the fact
that balancing these costs and benefits for optimization is impossible to
assess for U.S. wetlands as a whole.

Have We Achieved "No Net Loss"?

A reassessment of national data on wetland conversion that addressed
interagency differences in methods over time confirmed a dramatic reduction in
wetland losses between the 1950's and the 1990's.  Net rates of wetland
conversion have dropped, from an estimated more than 800,000 acres per year
before 1954 to less than 80,000 acres per year in 1982-92.  

Agriculture's share of annual gross conversion dropped from more than 80
percent over the period 1954-74 to 20 percent during the decade 1982-92. 
These long-term reductions in wetland conversion for agriculture coincide with
enactment of Federal and State wetland conservation programs starting in 1972,
and passage of the Swampbuster provisions in the 1985 Food Security Act to
protect wetlands from conversion by farm program participants.  Pressure to
convert wetlands to cropland also subsided in 1982-92 as commodity prices
fell, but it is difficult statistically to separate policy and market factors.

The U.S. appears to be approaching achievement of "no net loss" of wetland
acreage in the 1990's.  Some have suggested that Federal wetland programs can
now be eliminated.  However, eliminating current wetland programs would likely
increase wetland conversion rates, depending on other economic factors. A
critical question is whether the progress toward the goal can be sustained.  
In order to sustain the "no net loss" goal, wetland losses will have to be
further reduced, or wetland restoration will have to be dramatically
increased.  

During the last farm bill debate, proposals to exempt many wetlands from
Swampbuster provisions were considered, but rejected.  If farm program
payments are reduced at the end of the current Farm Act (2002), the
disincentive for wetland conversion is also reduced.  Simulations by USDA's
Economic Research Service (ERS) show that without Swampbuster, increased
wetland conversion for agriculture is likely.  

In the short run, 5.8 to 13.2 million acres would convert profitably to
agricultural production, based on USDA baseline expected prices.  However, in
the long run, increased crop acreage would increase commodity supplies,
depress commodity prices for all farmers, and result in reductions of farm
income of $1.6 to $3.2 billion annually.  The relatively few landowners with
wetlands to convert would have minor increases in farm incomes, while the
majority of farmers, with no wetlands to convert, would see their farm income
reduced. 

Some have suggested compensating wetland owners for the burden of existing
conservation and restoration programs.  Compensating wetland owners would be
costly, ranging from $30 to $180 billion depending on the extent of wetlands
compensated, the timing of compensation payments, and interactions between
compensation and the rate of wetland conversion.  And compensation for the
large acreage of agricultural wetlands, while substantial, pales by comparison
with the smaller but much higher valued acreage of wetlands subject to urban
development.  Even with recent and forecast Federal budget surpluses, it is
unlikely that political support will be forthcoming for such massive
expenditures to conserve wetlands. 

Wetland restoration programs have restored nearly 500,000 acres of previously
converted wetlands.  USDA's Wetland Reserve Program, which is authorized to
restore and protect up to 975,000 acres of cropland that was formerly
wetlands, is the largest and most visible of a host of restoration programs
being implemented by government agencies, many in partnership with
organizations like Ducks Unlimited and The Nature Conservancy.  Accounting
problems prevent a clear assessment of the role of restoration programs in
achieving "no net loss," but budget constraints again make it unlikely that
restoration programs alone can sustain "no net loss" in the face of diminished
regulatory programs.  
 
Finally, although the reduced pace of wetland loss gives rise to optimism
about achieving "no net loss" of wetland acreage, it raises new issues about
the quality of wetlands conserved.  Maintaining and improving the quality of
remaining wetlands is an important goal because fully functioning wetlands
provide services valued by society that degraded wetlands cannot.  

An ERS analysis of changes in soil erosion, irrigation, deforestation, and
urbanization in watersheds with significant wetlands indicates that 75 percent
of watersheds have suffered degradation in some or all of these four wetland
quality indicators.  Decreases in forest cover occurred in 87 percent of
wetland watersheds, and increased urbanization in 96 percent.  Improvements in
two of the indicators were seen in some watersheds--more than 60 percent
showed reductions in water-caused soil erosion, and 22 percent had decreases
in irrigation.  
Policy changes are largely responsible for the reduction in wetland conversion
overall, especially the reduction in wetland conversion for agriculture since
the mid-1980's.  In the absence of these policies, the economic incentives for
agricultural wetland conversion, especially in periods of favorable commodity
prices, are sufficient to encourage substantial additional wetland conversion
for crop production.  Because achievement of the "no net loss" goal depends on
public and private efforts, the goal may not be sustained if economic
conditions spur additional wetland conversion, if Section 404 is weakened, if
Swampbuster's leverage from farm program payments is diminished, or if
continued funding for wetland restoration programs is not forthcoming.
Ralph Heimlich (202) 694-5477 heimlich@econ.ag.gov 

This article is based on a forthcoming ERS report.  Also contributing to this
article:  Keith Wiebe, Roger Claassen, Dwight Gadsby, and Robert House.  


RESOURCES & ENVIRONMENT BOX
Evolution of Wetland Policy for Agriculture

Wetland policy in the U.S. has evolved from promoting drainage and conversion
from the mid-19th century through the 1970's, to initiatives aimed at
protecting remaining wetlands and restoring others.  Key recent policies
include:
       1972: Regulation of dredge and fill activity in wetlands under Section
       404 of the Clean Water Act (Federal Water Pollution Control Act
       Amendments)
       1977: Elimination of direct Federal incentives for wetland conversion in
       Executive Order 11990 
       1985: Denial of farm program benefits for producers who convert wetlands
       for crop production after 1985 in the so-called Swampbuster provisions of
       the Food Security Act 
       1986: Elimination and tightening of provisions that created favorable
       income tax treatment of wetland conversion in the Tax Reform Act 
1990: Restoration of cropped former wetlands through the Wetlands Reserve
Program of the Food, Agriculture, Conservation, and Trade Act.

Swampbuster and the Wetlands Reserve Program were continued under the 1996
Farm Act.  


SPECIAL ARTICLE

Livestock Sector Restructuring in CEE/NIS Countries

One of the most dramatic adjustments brought on by liberalization of the
economies of Central and Eastern Europe (CEE) and the Newly Independent States
(NIS) has been the virtual free fall in their livestock sectors.  In that
liberalization, consumer and producer subsidies  for meat were eliminated, and
producers were exposed to new international competition. Consumer demand
plummeted, and producers were increasingly squeezed between falling output
prices and skyrocketing production costs. The result was a drastic decline in
livestock inventories of all kinds.

The situation is beginning to change, however, in some of the transition
economies, particularly in the CEE countries.  In general, the restructuring
process is quite far along in Poland and Hungary, but remains incomplete in
most of the NIS countries.  Poland never did experience the declining trend in
hog numbers that was observed in the other countries, and hog and poultry
numbers have begun to stabilize elsewhere in CEE countries.  Cattle numbers
continue to decline, however, and inventories of all species are still
declining in the NIS countries. 

In order to identify the reasons behind the diverging paths these countries
have taken and to analyze scenarios for future development, USDA's Economic
Research Service (ERS) has been studying the restructuring of the livestock
sectors of the transition economies.  The project focuses on five countries--
Poland, Hungary, Romania, Russia, and Ukraine--that represent a cross-section
of the ongoing structural changes.  ERS has analyzed some of the differences
that have emerged among these countries since 1990 and the reasons behind the
relative success of countries such as Poland and Hungary. 

Economic Liberalization Led to Restructuring

The decline in the CEE and NIS livestock sectors began with the price and
trade liberalization early in the transition of these economies from central
planning to market orientation.  Producer and consumer subsidies were removed
or drastically reduced, price controls were removed, and nontariff border
restrictions were abolished, allowing a flood of imports from the West.  The
response on both the supply and demand sides came swiftly.  Real incomes fell
as prices rose faster than wages, and consumer demand for meat plummeted.  On
the supply side, producers were squeezed between rising prices of feed and
other inputs, which adjusted quickly to world levels, and falling real output
prices.  

A second factor affecting the livestock sector is the farm restructuring and
land redistribution that took place in many of these countries.  Early in the
transition, especially in the CEE countries, state farms and cooperatives were
privatized, restructured, or liquidated--a process generally accompanied by
the wholesale transfer of animals into private hands.  The new livestock
owners lacked adequate facilities for the animals and could not afford proper
feed, leading to widespread slaughter--even of prize breeding animals--or
export of live animals.  Livestock that remained on large state-owned
complexes, often heavily indebted and short of cash even when supported by
soft government loans, usually did not fare any better.

Producer Response Linked to Farm Structure

The initial effect of the macroeconomic shocks on livestock varied across
species and depended also on the structure of production before the
transition.  

Poultry declined significantly throughout the region in the early years of the
transition.  Poultry is more dependent than other livestock on high-quality
protein feed and suffered more from the deterioration in feed quality.  The
CEE and NIS countries also found it difficult to compete with low-cost chicken
legs from the U.S.

In general, poultry fared better in Poland and Hungary, in part because a
large share of production was private before the transition.  Both countries
also had a well-established tradition of contracting between processing plants
and producers, whereby processors provided baby chicks and feed against
delivery of finished birds.  Poultry in Romania, Russia, and Ukraine tended to
be concentrated in large state-owned complexes, which were heavily subsidized
under the previous communist regimes, and had great difficulty adjusting to
the new economic conditions.

Cattle numbers fell sharply throughout Eastern Europe and are still in
decline.  Consumers there greatly prefer pork to beef; cattle are raised
primarily for dairy production, with beef mainly a byproduct.  Before the
transition, dairy products were subsidized even more than meat.  Following
removal of these subsidies, there was a significant drop in consumer demand. 
East European cattle numbers were severely affected by the dairy industry's
collapse. 

In the NIS, in contrast, cattle did not fare as badly as hogs and poultry.  In
Russia, beef is preferred to pork, and meat and dairy products were subsidized
about equally.  Cattle in the NIS were likely less affected by a demand shock
from the removal of dairy subsidies than were CEE cattle.  Also, NIS cattle
producers were able to substitute forage crops and pasture grazing for mixed
feed to a greater extent than were cattle producers in Eastern Europe.  In
Romania, for example, most cattle were on cooperatives before the economic
transition.  These cooperatives were liquidated in 1991, and that process was
accompanied by massive redistribution of cattle to private producers, most of
whom did not have sufficient land to keep them.  The NIS did not experience
the liquidation of cooperative farms that occurred in many of the East
European countries, so producers continued to have access to grazing land.  In
Poland, farms were already small and fragmented--not well-suited for grazing
cattle. 

Trends in hog numbers varied considerably across the region and seem to have
been linked closely to changes in farm structure.  In Poland, 75 percent of
hogs were on private farms even before its economic transition in 1989. 
Poland has had a clearly defined hog cycle since 1970, and this pattern did
not change after 1989--hog numbers continue to rise or fall in response to
grain prices.  Elsewhere, hog inventories dropped sharply in the early years
of the transition and continue to decline in the NIS, although they've
recently recovered in CEE countries.  

Hogs in Russia, Ukraine, and Romania were concentrated on very large, state-
owned complexes, some with as many as 500,000 hogs.  The complexes were
heavily dependent on concentrated feeds based on imported protein meal.  They
received substantial subsidies and tended to employ large amounts of both
labor and capital.  In addition, the complexes in Russia and Ukraine generally
did not have enough land to grow their own feed, and many were also located
far from feed and energy supplies.  With the economic transition, prices of
feed, energy and other inputs rose, while output prices and subsidies fell. 
The complexes responded by slaughtering livestock, although in many cases the
animals simply starved to death. However, the farms continued to employ large
numbers of workers and were not relieved of their social welfare obligations
such as health care, housing, and pensions.  

Hog complexes in Romania operated under somewhat more favorable conditions
than those of the NIS, until 1997.  Most complexes were in Romania's grain
belt and were able to grow their own feed grains.  But Romanian hog complexes
were in precarious financial condition and remained afloat only through soft
credit and subsidies from the state.  The government that took power in
January 1997 cut these subsidies and began privatization in earnest, which has
reduced hog numbers in 1997 and 1998.

In contrast to the experience of state-owned hog operations, hog numbers in
the private sector rose in most of the transition economies.  Alternate feed
rations for hogs are more available than for poultry, and private producers
responded to transition-induced increases in concentrated feed prices by
substituting lower quality feeds.  The result was lower feed productivity
(more kilograms of feed are required per unit of liveweight gain), longer
feed-out times, and less output per animal.  Private producers have
essentially substituted their own labor (which has had a low opportunity cost)
for high-priced material inputs, which has allowed private hog producers to
hold their own.  Most of these hogs, however, are produced on subsistence
farms--very little of this output enters the market.

Poland, Hungary Move Forward While Others Lag 

Seven years into the transition, some CEE countries are much further along in
the restructuring process than other transition economies.  Inventories and
output of all livestock continue their decline in Russia and Ukraine.  In
contrast, hog and poultry numbers are stabilizing or even increasing in Poland
and Hungary, although cattle numbers continue to lag.   Pork and poultry
output are on the rise, and livestock exports from Poland and Hungary have
risen as both countries find markets in the West.  Livestock numbers
stabilized in Romania in 1995 and 1996, but the sector is once again in
decline with the disruptions caused by privatization.  Romania, Russia, and
Ukraine continue to be net importers of livestock products.

A significant class of commercially oriented private producers in Poland and
Hungary now recognize the importance of meeting the quality standards of
foreign markets.  Many producers in both countries still produce mainly for
their own consumption, but even in Poland, where the average farm size is
still just 8 hectares (up from 7 in 1990), a growing number of producers have
50 or more animals and produce mainly for the market.  In Hungary, around half
the animals belong to corporate farms, many of which are foreign-owned.  

Polish and Hungarian producers are tending toward more efficient use of higher
quality feed ingredients--the ratio of kilograms of feed to kilograms of
liveweight gain for poultry is around 2 to 1, and for hogs close to 3 to 1. 
The improvement has been particularly impressive in Poland, where feed ratios
of 6 to 1 were typical for hogs in 1989.  Polish farmers have almost entirely
abandoned feeding potatoes to hogs, in favor of grains.  Preparing potatoes
for use as feed is very labor-intensive, and apparently the value of labor has
increased to the point where this practice is not regarded as economical. 
Only the very smallest two-hog farms still feed potatoes.

Poland and Hungary are also further along in privatizing the processing
sector.  The processing industry in Hungary is fully privatized (thanks
largely to foreign investment), and about 60 percent of the Polish meat
processing industry is privatized.  Even in Polish companies in which the
state retains a share, managers are under pressure to keep the companies
afloat without support from the state treasury.  Failing plants are allowed to
go bankrupt, rather than bailed out with soft loans.  

The commercial livestock industry has not developed to this extent in Romania,
Russia, or Ukraine.  Livestock in these three countries are still owned by
either small, subsistence-level farms or inefficient, quasi-privatized
corporate farms.  As subsidies are cut further, the corporate farms continue
to contract.  Moreover, private producers in Russia and Ukraine have depended
heavily on their close relationship with corporate farms--they have free use
of land and are able to acquire other inputs from their "mother" farms.  As
subsidies to the state farms have been reduced, private producers have lost
some of these benefits.   Also, marketing channels continue to be dominated by
monopolistic state-owned enterprises, which serve the needs of 
state farms.  Private producers increasingly bypass these channels and market
directly.

Incomplete Institutional Reform 
Inhibits Restructuring

A major impediment to the complete restructuring of the region's livestock
sectors is the poor development of institutions needed to support markets,
including clearly defined property rights, bankruptcy procedures, enforcement
of contracts, a credit system, and market infrastructure.  These institutions
are better developed in Poland and Hungary than in Romania, Russia, or
Ukraine, but are not fully developed even in Poland and Hungary.  The lack of
such institutions inhibits the free movement of factors of production and
slows the transition of the livestock sector from subsistence farming to a
fully commercial sector.  Even when relative prices might favor expansion of a
part of the livestock sector, producers are often unable to respond because of
a lack of these institutional supports.

Enterprise privatization.  The privatization of farms and agribusinesses is
complete in Hungary and nearly complete in Poland.  In Romania, Russia, and
Ukraine, state-owned enterprises have been transformed into various types of
joint-stock or shareholding companies, but the state continues to be the
majority owner.  

A significant share of state ownership in the production and processing of
livestock and other products inhibits the options of private producers in
several ways.  State production units tend to receive a disproportionate share
of state subsidies, giving them an advantage over private producers.  State
dominance of marketing channels limits marketing options, tends to depress
producer prices, and leads to direct marketing.  State ownership of grain
storage and feed mills also raises production costs for private producers.

More rapid enterprise privatization is blocked by several impediments.  These
countries lack bankruptcy procedures or enforcement mechanisms and
privatization procedures may be clumsy.  Overvaluation of assets discourages
potential investors, and sometimes privatization agencies are reluctant to
allow a large, vertically integrated enterprise to be dismantled.  Employees
of the state-owned enterprises also tend to resist privatization, fearing
unemployment and loss of benefits such as health care.  Restrictive labor laws
put in place to protect these workers discourage potential investors who may
want to shed some of the labor.

Land markets.  The development of land markets is also critical to
agricultural markets.  Poorly functioning land markets block the development
of economies of scale and perpetuate subsistence farming.  Without clear
title, producers cannot offer land as collateral for credit.  Moreover,
without clear ownership rights, those using land have no incentive to conserve
the resource, resulting, for example, in overgrazing and environmental
degradation. 

Land markets are undeveloped in most of the transition economies and are
completely lacking in Russia and Ukraine.  While members of the former
collective and state farms received rights to shares of land, the absence of
titles impedes their ability to farm a plot of land privately, or to sell or
lease it.  In Romania, 80 percent of the land has been in private hands since
1991, but a moratorium placed on land sales was only recently lifted, and
there are not yet any procedures to facilitate land transfers.

In Poland, land is privately owned with clear titles and there are no legal
restrictions on sales or leases. Yet, in practice, the land sale market is
extremely thin with little demand since agriculture is still not considered
profitable.  At the same time, landowners remain reluctant to sell because of
few employment opportunities outside agriculture.  

Land sales are legal in Hungary as well, but only individuals may buy and sell
land; restructured cooperatives and commercial companies can only lease land. 
Consequently, a Hungarian landowner whose piece of land is in the middle of a
large tract leased by a cooperative will find very few potential buyers.

Market infrastructure.  The market infrastructure (transportation, storage and
handling facilities, processing and retail networks, communications, and
market information) inherited from the centrally planned economies was heavily
centralized, designed to meet the state's needs and entirely inadequate for
smoothly functioning markets. 

Poland and Hungary have seen significant improvements in their physical
infrastructure: highways have been upgraded, public transportation has
improved, and telephone communications are more reliable.  These improvements
are made possible largely through foreign investment and technical assistance. 
The improved infrastructure has reduced transaction costs and helped to
attract more foreign investment.  

Russia, Romania, and Ukraine, however, have seen very little investment in
market infrastructure.  In Russia and Ukraine, transport services are centered
on railroads, and limited highways are deteriorating.  Transportation costs
from farmgate to consumer in Russia are estimated to be 20-40 percent of the
costs of production.   Because the existing market structures are geared
toward serving large cooperatives and state farms, emerging private producers
face severe infrastructural limitations.   As a result, private producers
increasingly bypass these marketing channels and market directly to consumers,
slowing the development of an efficient economywide distribution system.

The high transactions costs associated with poor market infrastructure explain
the apparent anomaly that Russian meat processing operations located near the
large urban markets of Moscow and St. Petersburg actually prefer importing
meat over contracting for domestic meat to maintain processing capacity.

Market information.  Market information--broadly disseminated reports of daily
prices on different markets--is essential to the efficient movement of goods. 
Market news reporting is now well developed in Poland and Hungary and is
improving in Russia, but remains rudimentary in Romania and Ukraine.  The lack
of widely available market information creates a severe handicap for small,
private producers.  Large producers, both state and private, have their own
sources of information.  Low-cost, publicly available information helps level
the playing field so that small producers can compete.

Credit.  Private producers are frequently limited in their decisionmaking by a
lack of ready cash.  A hog producer may believe that changes in relative
prices of hogs and feed would make expanding his operation profitable.  But
without credit, producers find it difficult to purchase additional animals or
feed, let alone invest in a new barn or small feed mill.  

Both supply of and demand for commercial credit is constrained in the region. 
Producers are unwilling or unable to pay commercial interest rates.  Banks
view agriculture as risky and unprofitable, and are particularly reluctant to
lend to producers who cannot offer land as collateral.  Governments have
attempted to step in with a variety of subsidized credit programs--in many
cases, loans are provided against future delivery of output.  But these
programs offer mainly short-term credit, and governments in the region
frequently lack the funds to meet even a small share of the demand for credit.

Rule of law.  Russia, Ukraine, and Romania lag significantly behind Poland and
Hungary in the development of a market-based legal framework that underlies
the sanctity of commercial contracts and other aspects of the rule of law in
commerce.  Inconsistent application of the law and random enforcement of
penalties continue to undermine business transactions in these three
countries, as does the ad hoc recognition of property rights by regional
governments.  Widespread corruption and the ever-present "mafia" still impede
commerce in many cases.  Such conditions greatly increase the risk of
investment, diverting expansion capital elsewhere.

For countries such as Romania, Ukraine, and Russia, the question remains open
whether their governments will make real progress in removing institutional
obstacles to full restructuring of the livestock sector.  If they do, and
land, labor, and capital begin to move freely, then the coming decade should
see the consolidation of household plots into commercially viable farms and
the emergence of a class of true corporate farms operating on a hard budget
constraint.  

But an equally realistic scenario suggests little progress toward
institutional reform, with further declines in inventories likely in the short
term as governments find themselves unable to subsidize state farms at the
current level.  Eventually, the declines will halt and the livestock sectors
in these countries could exist for several years at a low-level equilibrium.

The future of Poland and Hungary is increasingly tied to preparations for EU
accession.  Completion of institutional reform will be a prerequisite for
membership, and the principal question is when rather than whether these
reforms will be complete.  Thus, questions about the future net trade position
of these two countries and the changing balance of factors used in livestock
production and processing industries (and between meat production and non-
agricultural sectors) have become paramount.
Nancy Cochrane (202) 694-5143, Britta Bjornlund (202) 694-5142, and
Olga Liefert (202) 694-5155
cochrane@econ.ag.gov
oliefert@econ.ag.gov
brittab@econ.ag.gov

This article is drawn from "Restructuring of the Livestock Sectors in the
Transition Economies of the NIS and Central and Eastern Europe," an article in
the forthcoming ERS publication Transition Economies: Agriculture and Trade
Report.

SPECIAL ARTICLE BOX

The prospect of eventual EU accession increasingly dictates agricultural
policies in Hungary and Poland and has led to measures encouraging livestock
producers and processors to upgrade their operations so that they can meet EU
standards.  Various measures are being taken to induce producers to grow
leaner hogs.  Hogs in both countries are rapidly approaching 60- percent lean
content.  Polish plants that produce more than 250 kg per week must have
equipment to measure the fat content precisely and are required to pay
producers a premium for high lean yield over 60 percent and a discount for
lean content under 60 percent.

Hungary provides a variety of subsidies and price supports to encourage plants
to raise their lean yield standards.  The system of guaranteed prices has been
replaced by a set of target prices, but this support only applies for hogs
slaughtered at plants applying EU standards.  In addition, any Hungarian
producer who trades in an ordinary sow for a swine with an acceptable pedigree
can receive a subsidy of 30 percent of the value of the new sow; the producer
must be a member of the Hungarian Breeders Association and must use boars or
semen provided by the association.  This subsidy is not attractive for small
producers, since these high-quality animals must be raised in good conditions,
which raises production costs.

Poland's intervention in the meat market is much less pervasive than
Hungary's.  But, like Hungary, much of Polish support to livestock producers
is intended to encourage the development of larger units that will be able to
produce according to EU standards.  Poland's Agency for Agricultural Markets
(AMA) carries out intervention purchasing of hogs, but plants authorized to
purchase on behalf of the AMA must be licenced to export and must meet EU
standards.  Furthermore, all carcasses purchased must meet the EU grading
standard.

These measures have encouraged the development of a class of private,
commercial livestock producers.  In both countries, a segment of small-scale
producers remains who produce either for home consumption or for sale to small
processors who do not meet EU standards, but they are increasingly left to
their own devices.  The new policies are expensive and, especially in Hungary,
distort production decisions, but they have contributed to the creation of
better functioning markets.

END_OF_FILE