AGRICULTURAL OUTLOOK                                       March 26, 1998
April 1998, AO-250  
               Approved by the World Agricultural Outlook Board
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CONTENTS

AGRICULTURAL ECONOMY
U.S. Agricultural Outlook for 1998

BRIEFS
Rain & Freezing Temperatures Damage Horticultural Crops

COMMODITY SPOTLIGHT
U.S. Horticultural Trade: Long & Short-Term Factors

WORLD AGRICULTURE & TRADE
Free Trade Area of the Americas: Potential Advantages for U.S. Agriculture

FARM & RURAL COMMUNITIES
Long-Term Trends Mixed for Agricultural & Rural Employment

RESOURCES & ENVIRONMENT
Precision Agriculture: Information Technology for Improved Resource Use

FOOD & MARKETING
Food Prices for 1998 Could Be Lowest Since Early '90's

SPECIAL ARTICLE
Trade Prospects Support Bright Outlook in USDA's Long-Term Baseline




AGRICULTURAL DEMAND AND OUTPUT TO STRENGTHEN IN NEXT DECADE

Farm Cash Receipts To Dip in 1998 . . .
 
The U.S. agricultural economy in 1998 is edging down from the record-high
income in 1996, with performance expected to be slightly below the 1990-97
average.  Market receipts are likely to decline to $198 billion from a
record $202 billion in 1996 and from $201 billion in 1997, as lower grain
receipts reduce the total return to crops.  Livestock receipts will decline
slightly as lower hog revenues more than offset a small increase for cattle. 
With overall production expenses declining a little, held in check by lower
interest rates and feed costs, net cash farm income is forecast to decline
to about $52 billion, more than $2 billion below the average of 1990-97.

Prices of corn and wheat are expected to remain firm in 1998/99.  U.S. wheat
supplies are expected up only slightly, and for corn, domestic use and
exports expand as production increases.  Large U.S. and foreign soybean
production in 1998/99 is projected to lead to another decline in the season-average farm price.  During the first half of 1998, record-high per capita
meat and poultry supplies will drive down returns. 

. . . While Long-Term Ag Prospects Are Bright, Led by Trade

Strong global trade prospects and a market-oriented domestic agricultural
policy combine for a favorable outlook for U.S. agriculture over the next 10
years.  In USDA's long-term baseline projections, assumptions of generally
favorable global economic growth, combined with liberalized trade associated
with the Uruguay Round agreement and unilateral policy reforms, support
strong expansion in global trade and in U.S. agricultural exports through
the year 2007.  Projected economic growth for many developing countries
occurs at income levels that can promote increasingly diverse diets and
increase demand for meats and other high-value products.

Greater market orientation in the domestic agricultural sector under the
1996 Farm Act puts U.S. farmers in a favorable position for competing in the
global marketplace.  Strong agricultural demand leads to increased output
and strengthening prices, but farm income gains are slightly less than
inflation, so real net farm income is down through 2007. 

Export markets are the largest source of demand growth for most U.S. crops. 
Stocks-to-use ratios will tighten for major field crops through 2007, and
the historical downward trend in real (inflation-adjusted) crop prices is
projected to slow.  Record total meat supplies, including an increasing
proportion of poultry, are projected through the baseline, with declining
real prices for meats. 

Precision Ag: Technology for Improved Resource Use

By collecting and analyzing information to tailor production inputs like
fertilizers to specific plots within a field, precision agriculture (PA) can
improve resource use, increase profits, and reduce environmental impacts of
agricultural production.  While its promises are attractive, the performance
of PA systems remains largely unproven, and its adoption is not yet
widespread.  Neither the economic nor environmental advantages of PA have
been conclusively demonstrated, in part because resource conditions vary so
widely from farm to farm and region to region.  According to a report by the
National Research Council, public functions in PA involve filling critical
auxiliary roles--particularly in measurement technology, new approaches to
research, and training and education--in an otherwise robust private
development of the technologies. 

Update on 1998 Food Price Outlook

Consumers are expected to pay between 2 and 3 percent more for food in 1998
than in 1997.  If the increase is closer to 2 percent, it could be the
smallest  rise in the Consumer Price Index (CPI) for food since the early
1990's.  Last year's retail food price increase was 2.6 percent.

What determines whether this year's price rise will be closer to 2 or to 3
percent are a number of factors, particularly those affecting the CPI's for
meats, and for fruits and vegetables, which account for 19 and 15 percent of
the food-at-home index, respectively.  For meats, large supplies and
dampened prospects for U.S. exports this year will limit price increases. 
For fresh vegetables, heavy rains in California this past winter are
expected to result in periods of short supply and higher prices throughout
the spring.  Strawberry crops in both Florida and California sustained
severe damage from heavy winter rains, and the severity of the price impacts
will depend on the duration of the wet weather pattern.  


Table 1.  Key Statistical Indicators of the Food and Fiber Sector

                                1997                           1998
                        --------------------      --------------------------
                         III     IVF   Annual     IF     IIF    IIIF 
AnnualF

Prices received by 
 farmers (1990-92=100)   107     106     107      --      --      --      --
  Livestock/products      99      97      99      --      --      --      --
  Crops                  115     113     115      --      --      --      --
 
Prices paid by 
farmers (1990-92=100)
  Production items       116     115     116      --      --      --      --
  Commodities/services, 
   int., taxes/wages     116     116     116      --      --      --      --
    

Cash receipts($ bil.)1/   49      61     201      48      42      48     198
 Livestock($ bil.)        23      23      93      23      22      23      91
 Crops($ bil.)            26      38     109      25      20      25     107

Retail prices (1982-84=100)
 All food                158     159     157     160     160     161     161
  At home                158     159     158     160     161     161     161
  Away from home         157     159     157     159     160     161     161

Ag. exports ($ bil.)2/  12.9     16.3   57.3    14.4    12.9    12.5    56.0
Ag. imports ($ bil.)2/   8.7      9.2   35.8     9.4     9.5     9.9    38.0
  
Commercial production
 Red meat (mil.lb.)   10,939  11,167  43,209  11,209  11,074  11,342  44,773 
        
 Poultry (mil. lb.)    8,395   8,355  33,235   8,235   8,755   8,755  34,330
 Eggs (mil. doz.)      1,606   1,667   6,460   1,630   1,640   1,665   6,625
 Milk (bil. lb.)        38.8    38.2   156.6    39.2    40.9    38.7   157.2

Consumption, per capita
 Red meat/
  poultry (lb.)         52.5    53.8   208.5    53.0    53.8    54.4   215.8
 
Corn beg. stock 
 (mil. bu.)3/          4,494   2,497     425     883   7,230      --     883
Corn use 
 (mil. bu.)3/          2,001   1,617   8,850   3,021      --      --   9,310

Prices 4/
 Choice steers--Neb. 
  Direct ($/cwt)       65.65   66.61   66.32   61-62   63-67   64-70   64-68
 Barrows/gilts--IA, 
  So. MN ($/cwt)       54.45   43.53   51.36   34-35   37-39   39-45   36-38
 Broilers--12-city  
  (cts./lb.)            62.0    54.0    58.8   55-56   56-58   57-61   55-58
 Eggs--NY gr. A large 
  (cts./doz.)           79.7    88.2    81.2   78-79   68-72   72-78   74-79
 Milk--all at 
  plant ($/cwt)        12.70   14.40   13.38  14.45-  12.80-  12.50-  13.40-
                                               14.65   13.30   13.30   14.00
Wheat--KC HRW 
 ordinary ($/bu.)       4.49    3.76    3.82    4.16      --      --      --
Corn--Chi. ($/bu.)      2.86    2.64    2.74    2.78      --      --      --
Soybeans--Chi. ($/bu.)  7.19    6.95    7.60      --      --      --      --
Cotton--Avg. spot 
 41-34 (cts./lb.)      71.40   67.64   69.89      --      --      --      --



                  
                        1991    1992    1993    1994    1995    1996    1997
                        ----------------------------------------------------
Farm real estate 
 values 5/,6/
  Nominal ($/acre)       703     713     736     782     832     890     945
  Real (1982 $)          521     507     511     529     550     574     598
 
1/ Quarterly data seasonally adjusted at annual rates.  2/ Annual data based 
on Oct.-Sept. fiscal years ending with year indicated.  3/ Sept.-Nov. first 
quarter;Dec.-Feb. second quarter; Mar.-May third quarter; Jun.-Aug. fourth 
quarter; Sept.-Aug. annual.  Use includes exports & domestic disappearance.  
4/ Simple averages, Jan.-Dec.  5/ 1990-94 values as of January 1.  1986-89 
values as of February 1.  6/ The 1989-94 values are revised based on the
1992 Census of Agriculture.  F = forecast, -- = not available.


 AGRICULTURAL ECONOMY

U.S. Agricultural Outlook for 1998

The U.S. agricultural economy is edging down from the record-high income
levels of 1996.  In 1998, the overall economic performance is expected to be
slightly below the average of 1990-97.  Areas of concern continue to be
producers in regions affected by bad weather, and some wheat, cattle, hog,
and dairy producers who have had to reduce cash balances or incur debt to
withstand short-term financial pressures.  Farm cash receipts set a record
of $202 billion in 1996 and were similar to that level in 1997, with crop
receipts rising well above the average of the 1990's and livestock receipts
at about the average.

This year, market receipts are likely to decline to $198 billion, as lower
grain receipts reduce the total return to crops.  Livestock receipts will
decline a little as lower hog revenues more than offset a small increase in
cattle returns, while dairy remains about unchanged.  With overall
production expenses declining slightly, held in check by lower interest
rates and feed costs, net cash farm income is forecast to decline to about
$52 billion, more than $2 billion below the 1990-97 average.

The farm sector balance sheet improved in 1997 as asset values rose more
than debt increased.  Farm real estate values have risen every year since
the mid-1980's, including a 6-percent increase in 1997.  A 5-percent gain is
expected in 1998.  Farmers will take on more debt, reaching the highest debt
level since 1985, but the overall debt-to-asset ratio is expected to decline
from 15 percent at the end of 1997 to slightly under 15 percent at the end
of 1998 as farm real estate values rise.  

Taxpayers will see stability in farm program costs with direct government
payments, forecast at $7.4 billion for 1998, down from $7.9 billion in 1997
and accounting for only 3.7 percent of gross farm income.  The big drop in
farm payments will come for the 2001 crop year when production flexibility
contract payments drop nearly 20 percent from $5.05 billion (in 2000) to
$4.07 billion.    

Consumers will see a year of modest food price inflation in 1998, with the
Consumer Price Index (CPI) for food rising 2-3 percent.  In 1997, the CPI
for food rose 2.6 percent, compared with a 3.3-percent increase in 1996 when
record-high grain and milk prices pushed up retail food prices.  In 1998,
areas to watch include meats, where retail pork prices are expected to
decline by 4-6 percent; ample supplies of beef, poultry, and fruit will also
restrain food price increases.  The effects of wet weather on spring
vegetable harvests in California could also affect vegetable prices (see
"Briefs"). 

In 1998, U.S. agriculture will continue to adjust to the increasing risks
that accompany changes in domestic farm and trade policy, as well as to the
profusion of new technologies and marketing arrangements that are emerging. 
These risk-creating changes will also provide the chance to lower costs,
improve products, shift risks, and open new markets internationally.     

Strong Macroeconomy
Supports Food Demand 

Despite the considerable uncertainty raised by the Asian financial situation
(AO February 1998), the U.S. economy looks like it will support strong food
demand in 1998.  At this point, world economic growth looks like it will
slow from 3.1 percent in 1997 to something closer to 2.5 percent.  While
less favorable for exports, such growth would still be stronger than during
the first half of the 1990's, when it averaged 1.9 percent.     

In the U.S., after very strong 3.8-percent growth in 1997, this year's real
Gross Domestic Product is expected to grow about 2.7 percent.  This forecast
includes the effects of the Asian turmoil, which is expected to trim 0.3 to
0.4 percentage points off U.S. economic growth.  A slowdown in corporate
profits and business investment in inventories, a tight labor market, and
reduced net exports are expected to contribute to the lower rate of growth. 
After the U.S. economic surge in 1997 and the Federal Reserve's concern
about potential inflationary effects of the tight labor market, it now
appears the Asian situation will restrain growth sufficiently without
Federal Reserve intervention.

Although the stronger dollar will add to the U.S. trade deficit and limit
U.S. economic growth, many other positives will maintain its momentum. Lower
long-term interest rates will support investment and construction.  Consumer
confidence remains near record highs, and inflation is likely to be little
changed, held down by the rising value of the dollar and oil prices that
recently hit a 14-year low.  

While all of these macro statistics infer a firm base of domestic demand for
food, they also bode well for farmers' cash flow accounts.  With energy
prices and interest rates down and feed expenses likely down, farm
production expenses are forecast to decline for the first time since 1992
when recession was ending, interest rates were falling, and acreage controls
were limiting plantings.  

Crop Market 
Developments

A year ago, USDA forecast that large U.S. and world crops of grains,
soybeans, and cotton would lead to a softening in crop prices and a
rebuilding of stocks.  Those forecasts proved to be fairly accurate as
weather was generally conducive to crop plantings and crop development.  In
addition to large U.S. and world crops, the Asian currency crisis has
further contributed to the bearish price outlook for major crops. 

Compared with a year ago, the price farmers received for all crops during
January was down 4 percent.  However, the price drops have generally been
larger for the major crops.  The price of corn was down 4 percent, but
soybeans and upland cotton were down 8 percent and wheat was down a whopping
17 percent in January.  

U.S. and world crop production were generally exceptional in 1997/98.  U.S.
wheat production (2.5 billion bushels) was the highest since 1990, as wheat
yields were record high.  U.S. corn production was the third highest on
record, reaching nearly 9.4 billion bushels.  U.S. soybean production
exceeded the record set in 1994/95 by 210 million bushels, as planted
acreage topped 70 million acres for the first time since 1982.  And cotton
production of nearly 19 million bales was only slightly below the record set
in 1994/95.  Globally, wheat production and oilseed production set records
in 1997/98.

Large U.S. and world production of grains, soybeans, and cotton have lowered
U.S. crop prices and raised carryover for 1997/98.  The U.S. season-average
farm price of wheat is expected to be down about 20 percent, and wheat
stocks on June 1 are forecast to be up by over 50 percent compared with 1
year ago.  Soybean stocks are forecast to nearly double this season, while
soybean prices are expected to be down about 12 percent.  Corn prices are
forecast to fall by 6 percent in 1997/98 as carryover stocks increase by 7
percent.

Lackluster growth in U.S. exports due to large world crops and the Asian
crisis is also contributing to the dropoff in U.S. grain and cotton prices. 
Both wheat and corn exports are expected to be well below the average of the
1990's.  U.S. soybean exports, however, are expected to be record high in
1997/98 as world demand for oilseeds continues to expand.      

Despite the decline in corn exports, total corn use in 1997/98 is forecast
to be the second largest on record, as domestic use is expected to expand by
nearly 9 percent.  For corn, growth in domestic use has continued to expand
faster than growth in exports.  From 1990/91 to 1996/97, domestic use of
corn increased by 17 percent while corn exports were up 4 percent. 
Continued expansion of livestock and poultry production and lower corn
prices are forecast to increase feed and residual use by 9 percent and food,
seed, and industrial use by 8 percent in 1997/98.         

 Even though stocks of major crops are expected to increase in 1997/98,
stocks will continue to remain at modest levels for most crops, with the
possible exception of wheat.  The stocks-to-use ratio at the end of the
1997/98 season is forecast to be near 10 percent for corn and soybeans and
about 23 percent for cotton.  In contrast, the stocks-to-use ratio for
wheat--at over 28 percent--would be the highest since 1990/91.

Large U.S. Soybean & Corn
Crops Forecast This Year

In 1998/99, changes in relative returns and a 2 to 2.5-million-acre decrease
in CRP enrolled acreage is expected to result in a small expansion in corn
and soybean plantings, while acreage planted to cotton and wheat are
expected to decline.  Total plantings of major crops will likely be down
slightly despite the decline in CRP enrollment, as lower crop prices and
returns cause some producers to reduce planted area.

Assuming trend yields, U.S. soybean production is projected to exceed this
past year's record, reaching nearly 2.8 billion bushels in 1998/99.  Corn
production is forecast at nearly 9.8 billion bushels, which would be 5
percent above last year and the second highest on record.  But, lower
acreage and a decline in yields from last year's record are expected to
cause wheat production to fall by 9 percent to 2.3 billion bushels, and
reduced planting could lead to a 7-percent decline in cotton production in
1998/99.    

Declining foreign production and improved macroeconomic conditions in Asia
into next year should enhance export prospects for corn in 1998/99, while
large foreign supplies of wheat and soybeans are expected to continue into
1998/99, causing U.S. exports for these crops to remain essentially flat. 
U.S. corn exports are projected to rebound, reflecting reduced competition,
especially from China.  China is projected to swing from being a net
exporter of corn to a net importer, and Eastern Europe and Argentina are
expected to export less.   

Prices of corn and wheat are expected to remain firm in 1998/99.  For wheat,
a small increase in total supplies is expected to be offset by higher
exports and domestic use.  The corn market would also appear nearly in
balance, with domestic use and exports expanding as production increases. 
The exception is soybeans, where another record crop and large foreign
production in 1998/99 are projected to lead to another decline in soybean
prices.

Plantings of rice are expected to rise, reflecting firm 1997/98 market
prospects boosted by exports of rough rice to Latin America and continued
expansion of domestic demand.  Global trade will be strong in 1998,
particularly markets in Southeast Asia, including Indonesia and the
Philippines where drought has reduced rice production.

Livestock, Poultry, & Dairy 
Market Developments

The most striking developments in U.S. agricultural markets have been
occurring on the animal product side, notably the loss of export growth and
the production effects of the cattle and hog cycles.  With animal products
accounting for 45 percent of gross farm receipts, the economic performance
of this sector undergirds the well-being of much of agriculture. 

During the first half of the year, record-high per capita meat and poultry
supplies drive down returns for livestock and poultry producers.  Consumers
will be in hog heaven as they find one bargain after another in the meat
case of their supermarket.  Per capita meat consumption on a retail weight
basis is expected to surge to an all-time high of 216 pounds in 1998.  It
was just 202 pounds in 1990 and averaged 208-210 pounds during the mid-1990's.

Obviously, such a high level of consumption can only be accommodated by
sharply lower meat and poultry prices.  The expected 4.5-percent increase in
meat and poultry supplies that will move through domestic channels is being
caused by the first decline in U.S. meat and poultry exports in the 1990's,
an increase in beef imports (caused by the rising value of the dollar, weak
Asian demand, and low cow slaughter), large increases in pork and poultry
production, and more beef production than earlier expected.

For 1998, the beef market will see more supplies in the near term but less
later on.  A key development of 1997 was the continuing liquidation of
cattle, a contraction that began in 1995.  The pace of cow slaughter began
to slow in late 1997 and early 1998, but ranchers will not begin to retain
sufficient heifers to rebuild herds and eventually turn the cycle up, until
later this year.  Three factors jump out as discouraging expansion--larger-
than-expected supplies of competing meats, weak prices for feeder cattle,
and short hay supplies, with hay prices setting a record high for the month
of January.  

A slowdown in fed-cattle marketings and record slaughter weights have kept
beef supplies up, resulting in lower fed-cattle prices than expected. 
Producers placed large numbers of  heifers on feed rather than retaining
them for the breeding herds last summer.  

Beef production is now expected to be up slightly during the first half of
1998, compared with a year earlier.  This is keeping fed cattle prices in
the low $60's per cwt.  With break-even prices in the high $60's, feedlots
are taking a loss of $5-10 per cwt on cattle now coming out of feedlots,
which depresses the price they pay for feeder cattle.  This will not
continue.  With fewer cattle on farms, fewer feeder calves will be available
to feedlots, fewer steers will be fed and slaughtered, and retail supplies
of beef will shrink.  The question is when.  

This is expected to begin later this spring (with retail supplies beginning
to decline in the fourth quarter) and could go on through the year 2000.  In
1996, beef production was up 1.2 percent.  In 1997, beef production was
unchanged, and in 1998, USDA forecasts a decline of less than 1 percent,
although the drop in production will grow as the year unfolds and could be
down 3 percent by the fourth quarter.  The conclusion then is fed cattle
prices will rise and feedlots will have to pay more for feeder cattle.  

By late 1998, fed cattle could be over $70 per cwt, 20 percent above recent
levels, and feeder cattle could be in the low $80's, compared with the mid-
$70's recently.  This will mean better news for cow-calf producers.  By
1999, returns to cow-calf producers should be strongly positive, and that
would provide an incentive to rebuild herds, though this outcome hinges on
good crops this year.  

Pork supplies will be especially heavy in 1998 as a 10-percent increase in
production is expected to combine with export losses and pull down 1998 hog
prices a whopping 25 percent below the 1997 average.   One key development
has been the pattern of expansion.  Many states are continuing to pursue
"moratoriums" on hog expansion and restraints on production (AO March 1998). 
Consequently, observers are trying to discern whether environmental,
structural, or other issues will restrain future hog expansion.  Some
traditional producing states such as Iowa and Minnesota are expanding faster
than the U.S. average, as are Southwest and western areas such as Oklahoma,
Texas, Utah, and Colorado.  North Carolina is below the U.S. average.
  
Broiler returns were reasonably good during 1997 and have remained above
cash expenses even during the period of weak wholesale broiler prices
experienced this quarter.  In addition, export growth will be slower in 1998
but still positive as Russia, Hong Kong, China, and Japan continue as major
buyers.  For 1998, USDA forecasts that production will rise 4 percent, and
with abundant meat supplies, broiler prices are expected to average only 56
cents per pound, compared with 59 cents during 1997. 

Lastly, the dairy market has been recovering since the very low prices
during the first half of 1997.  Strong cheese and butter prices pulled the
basic formula price (BFP) for January 1998 to the second highest ever for
that month.  Nevertheless, the milk-feed price ratio is not strong enough to
signal milk production expansion, and low dairy-quality hay supplies remain
a concern.  Consequently, milk production is expected to be about unchanged
in 1998 compared with 1997. A good economy and expanding demand will keep
milk prices firm, with the all-milk price expected to average slightly above
the 1997 level.  

One uncertainty is the outcome of the Federal Milk Marketing Order hearing
to establish a floor on milk used for Class I and Class II products. 
Because milk prices are seasonal and likely to go lower over the next
several months, a floor, if established, would raise producers' returns
above current projections.  For example, a $13.50-per-cwt floor on the BFP
could raise the farm-level milk price by 25-35 cents per cwt during the
second half of 1998 above what it would otherwise be.  However, because the
floor is expected to be temporary, production would likely be affected
little. 
Keith Collins
Chief Economist, USDA


AGRICULTURAL ECONOMY BOX  

Weather--A Key Uncertainty

When will El Nino cease to influence weather and what will the next weather
pattern mean for crop plantings and crop development this spring and summer? 
At this point, all major crop growing areas except the Upper Midwest and
Northern Plains have more than ample soil moisture.  In fact, if there is a
concern, it is whether soils in the Southeast and Southwest will be dry
enough at normal planting dates.  These areas typically begin planting corn
in March, cotton in April, and soybeans in May.  The longer that excess
moisture delays planting in the South, the more likely producers will shift
from corn to cotton and ultimately to soybeans.  

Excessive moisture could pose a similar problem for eastern Corn Belt
producers, although the current National Weather Service forecast calls for
a drier April and May.  Delays in planting could leave producers with the
choice of planting earlier maturing varieties--with the prospect of lower
yield--or switching to soybeans.  Further switching of acreage to soybeans
combined with the prospect of a record South American crop would soften
soybean prices but boost corn prices in 1998/99.  

A wet spring followed by a dry summer would support prices for both soybeans
and corn, and there are insufficient stocks to prevent major price runups if
a severe drought occurs.  If current good conditions for winter wheat
continue, however, and other crop yields are above trend, the current,
somewhat bearish, price expectations could decline further.

The 1998 meat surplus, marginal milk expansion, and relatively low feedgrain
stocks make for an uncertain livestock industry.  Bad weather this year
could cause very high feed prices.  That would recommence the cattle herd
liquidation and spin dairy returns well into the red.  Because hog prices
are now 35 percent lower than in 1996 (when cash corn hit $5 per bushel), a
runup in corn prices in 1998 due to weather would have a much different
effect on hogs than the effect in 1995 and 1996.  The hog industry would be
severely affected and, with continuing shrinkage in cattle numbers, the meat
and milk sectors would face serious dislocations, with consumers facing
dramatic retail meat price increases in 1999 and beyond. 

AGRICULTURAL ECONOMY NOTE

The projections and discussions in this article are drawn from a
presentation at USDA's 1998 Agricultural Outlook Forum held in Washington,
D.C., on February 23-24, 1998.  Near-term numbers reflect official USDA data
as of February 23, 1998, the date of presentation at the forum.  Long-term
numbers were prepared in October-December 1997 and are published in USDA's
Agricultural Baseline Projections to 2007, released in February 1998. 
USDA's 1998 baseline estimates are fully accessible via the Internet at:
http://www.econ.ag.gov/epubs/pdf/waob981/ 

BRIEFS

Rains & Freezing Temperatures Damage Horticultural Crops

Heavier than normal rains this past winter have caused large losses to fruit
and vegetable growers in California and Florida.  The strawberry crop was
hit hardest with damage in California estimated at $23 million and in
Florida between $10 and $12 million.  The major price impact of the winter
deluge will be felt this spring, as vegetable and strawberry marketings may
be sporadic due to planting delays, slowed growth, or the need to replant.  

The steady pattern of storms throughout February slowed fieldwork
considerably in both States.  With little time between storms for fields to
dry out, growers were hard-pressed to complete cultural work and plant
spring crops.  This includes both fresh-market vegetables like lettuce,
broccoli, and tomatoes, and processing crops like tomatoes and spinach.  In
addition, late-February rains in California reduced the activity of bees
during pollination of almond trees, which may reduce output.  A continuation
of this wet weather pattern into the spring could lead to more serious
supply problems (due to increased incidence of plant diseases as well as
planting and harvest delays) and large fluctuations in market prices for
spring vegetables, summer stone fruit, and nuts.  

Strawberries for winter and early spring shipment are grown in southern and
central California and in Florida, regions that have experienced heavy storm
damage this winter.  The rains disrupted production and harvesting
activities in both States.  In California, growers stripped a lot of moldy
and decayed strawberries off the plants.  Lower fruit quality increased the
amount of strawberries sent to processing rather than to the fresh market. 
According to the Florida Strawberry Growers Association, harvested volume
was lower than expected around Christmas, when demand is normally strong.  
Moreover, heavy rains reduced Florida volume again in February.  

If the weather should clear up in both States during March when all
producing areas will be harvesting, a strawberry glut could occur whereby
product from both California and Florida (which normally ships first) could
flood the market at the same time, dropping prices.  A seasonal
strengthening of demand during the Easter season could mitigate the plunge
in prices.

For fresh vegetables, periods of short supply are expected to elevate prices
throughout the spring.  During the first half of 1998, retail prices for
fresh vegetables are likely to average about 10 to 15 percent higher than a
year earlier.  In contrast, large citrus crops this year have kept retail
prices down, although the storms have caused some delays in harvesting. 
Lower retail prices for fresh oranges are expected to continue throughout
1998.  Citrus fruits, the major U.S.-produced fruit in the market during the
early portion of the year, were already developed by the time the stormy
weather began.  Citrus fruits are less susceptible to storm damage because
the fruit is protected by a thick skin and by the tree. 

The rains have hampered harvesting activities for oranges in Florida and
California, where growers expect large crops.  Shipments to Florida
processors through mid-February, however, exceeded the previous year by 4
percent.  Grapefruit production is down this year from last year, and slower
movement this winter is a result of both harvesting delays and reduced
exports.  The heavy rains provide a perfect environment for diseases and
fungi.  In addition, saturated soil can weaken tree roots.  These conditions
stress the trees and could affect crop production and increase tree loss in
future years.  Any damage to tree crops may take several years before it
becomes evident.  

Three consecutive days of freezing temperatures in mid-March could
significantly reduce the peach crop in the southeastern U.S.  Earlier-than-
normal blooms for the early-variety peaches, induced primarily by warm
temperatures, were among those heavily damaged by the frigid temperatures. 
The extent of crop damage in the region is unknown at this point. 

Increases in produce prices are not expected to be as severe in 1998 as in
1995 when California fields were washed out.  Heavy spring snow melt in 1995
caused severe flooding, causing an estimated $652 million of damage to
California's fruit and vegetable crops, with the severest losses in the
almond, strawberry, plum/prune, lettuce, and wine grape crops.  During the
spring of 1995, shipping-point prices for all fresh-market spring vegetables
averaged 56 percent above year-earlier levels.  Retail vegetable prices then
rose 25 percent, and strawberry prices rose 13 percent. 

Likewise, in 1982/83, also a strong El Nino year, heavy winter rains forced
spring-1983 fresh vegetable prices 14 percent above the previous year. 
Prices for celery, broccoli, cucumbers, peppers, and tomatoes peaked in
early spring while lettuce prices peaked a bit later.  A similar scenario
may develop this year.  However, it could be exacerbated by higher prices
for potatoes, onions, and cabbage due to lower stocks and strong exports. 
In 1983, lower prices for these three high-volume vegetables helped limit
the increase in spring-season retail vegetable prices to just 3 percent
above the previous spring.  

Vegetable growers can take several steps to augment the supply of spring
produce.  For example, when inclement weather forces delays in planting,
direct seeding can be bypassed to save time.  Some growers elect to start
seeding cauliflower, broccoli, and tomatoes in greenhouses and set the young
plants in the ground by hand when fields dry out.  

Also, some of the larger firms can increase their acreage in other areas,
States, or even other countries when conditions warrant.  Lettuce acreage is
reportedly up this year in New Mexico and Arizona, normally minor producing
States during the spring.  Responses such as these raise grower costs but
benefit consumers by steadying supply and moderating prices.  

This past winter, supplies of leafy vegetables remained strong because the
majority of these vegetables are grown in the desert valleys of California
(Imperial) and Arizona (Yuma).  Imperial is one of the few counties in
California that was not declared a disaster area, since rain there was much
less intense.  Crops like lettuce, broccoli, and cauliflower remained in
good condition and good supply during the rainy period.  

The brunt of the winter storms hit the coastal areas of California (e.g.,
Ventura, Santa Barbara, and Monterey counties), which produce a smaller
percentage of winter vegetables.  Despite the heavy storms, many growers in
these coastal areas were able to resume harvest activities for crops like
broccoli and cauliflower after short delays to wait for fields to dry out. 
However, some growers lost crops or received lower prices because rain
reduced the quality and marketability of items like broccoli, cauliflower,
and leaf lettuce.

Most warm-season vegetables like tomatoes, peppers, and snap beans come 
from Florida and Mexico--not California--during the winter.  Although there has
been no freeze in 1998, Florida growers have also had to contend with
drenching rain and cool temperatures this winter.  

With tomato acreage up this year, Florida's shipment volume has been above
that of a year ago, when a severe freeze limited output.  Tomato and green
pepper volume from both Florida and Mexico was good in January, with
shipping-point prices for tomatoes averaging about $7 per 25-pound box. 
However, by mid-February, prices had jumped to more than $16 per box as
shipments from Mexico slipped and cool weather in Florida slowed growth.  

Reduced Mexican volume was expected this winter due to a rare December
freeze in west Mexico, which caused tomato and pepper plants to drop more
than a third of their blossoms.  Most warm-season vegetables were affected
by this freeze, eventually reducing import volume late in January and into
February.  Import volume improved in March and helped limit price increases
during the transition to spring-season growing areas.
Gary Lucier (202) 694-5253, Susan Pollack (202) 694-5251, and Agnes Perez
(202) 694-5255
glucier@econ.ag.gov
pollack@econ.ag.gov
acperez@econ.ag.gov

COMMODITY SPOTLIGHT

U.S. Horticultural Trade: Long & Short-Term Factors

Export markets continue to be a major source of growth in the U.S.
horticulture sector.  Exports as a share of horticultural production value
grew from 20 percent in calendar year 1990 to a forecast 28 percent in 1998,
and will likely continue to grow during the next decade.  U.S. horticultural
exports are forecast to reach a record $10.8 billion in calendar year 1998,
up 7 percent from 1997 and nearly double the level of 1990.  

Despite the large growth in exports in this decade, the U.S. remains a net
importer of  horticultural products.  As U.S. consumers have become more
willing to try new fruit and vegetable varieties, the import share of
domestic horticultural consumption has increased during the 1990's,
particularly for fresh produce.  The fresh-market import share of total U.S.
fruit and vegetable consumption, in volume, increased from 18 to 21 percent
(excluding bananas, the share grew from  9 to 13 percent).  The value of
total horticultural product imports grew more than 50 percent since 1990.

If long-term projections hold for the next decade, the U.S. could achieve a
trade-balance surplus in horticultural products, fueled mainly by global
income growth.  While the import value of horticultural products is
projected to grow at a steady rate of 4 percent per year between 1998 and
2007--USDA's baseline projection period--growth on the export side is
projected between 5 and 7 percent per year. 

Trade Propelled by Increased 
Global Income & Market Access 

Fruit and vegetables will account for 98 percent of total horticultural
export value on average during the baseline period (greenhouse and nursery
products constitute the remaining 2 percent). Underlying long-term factors
in the outlook for U.S. fruit and vegetable trade include income growth in
customer nations and enhanced global market access stemming from trade
liberalization.  Also at work are short-term factors such as changes in U.S.
dollar exchange rates in foreign markets, which intermittently enhance or
hinder U.S. trade prospects.  The effects of trade impediments and of
productivity changes due to technological innovations may be  long- or
short-term.   

Global economic growth will fuel export demand for U.S. fruit and vegetables
through the turn of the century and beyond 2001; as countries become
wealthier, their demand for high-valued commodities increases.  The effects
of income growth on consumption are more pronounced in developing countries
which, compared with developed countries, are expected to spend larger
shares of additional income on food items like meat and fruit and vegetable
products.  Moreover, economic growth projections for most developing
countries are higher than the world average over the baseline projection
period. 

Developing countries account for an increasing share of U.S. fruit and
vegetable exports.  In Asia, markets such as Hong Kong, Taiwan, South Korea,
Indonesia, Thailand, and the Philippines will remain important purchasers of
U.S. fruit and vegetables despite their current financial problems.  South
America is another developing region where growth in U.S. fruit and
vegetable exports has been strong in the 1990's.  Economic growth in this
region is projected to double in 1997 and beyond from the annual average
during 1990-96.   

International trade agreements have increased market access for specific
fruit and vegetable products, which will stimulate future export growth in
the U.S. fruit and vegetable industry.  Last year, mainland China opened its
market to California fresh table grapes and Washington cherries, and Japan
permitted entry of most major varieties of U.S. fresh tomatoes.  China
continues to ban the importation of most U.S. fruit, citing phytosanitary
concerns.  It was because of phytosanitary concerns that the Japanese market
had been closed to U.S. fresh tomatoes until the summer of 1997. 

Tariffs on fresh table grapes and cherries to China and on tomatoes shipped
to Japan remain high, and these new markets still need to be developed.  But
signs of their strong market potential include China's projected per capita
growth in gross domestic product of over 8 percent annually over the next
decade; the steps China has taken to reduce import duties on a wide range of
horticultural products including fresh grapes and cherries; its enormous
population base, the largest in the world; and Japan's rapidly growing
western-style food-service industry.

In the short run, the outlook for U.S. fruit and vegetable trade is clouded
by currency devaluations in Asia since late-summer 1997, particularly in
Southeast Asia, South Korea, and Japan.  In countries with depreciating
currencies, U.S. products are generally priced relatively high compared with
domestic goods, dampening demand for U.S. commodities in these markets. 
Meanwhile, exports from these countries will be priced competitively in the
U.S. and other markets.  

Because many U.S. horticultural exports are not staple items in the diets of
most developing Asian countries, consumers there are more likely to
substitute local goods or even to do without, particularly for commodities
such as fresh fruit, wine, and nuts.  U.S. exports of a number of fruits and
vegetables to Asian countries from September to December 1997 were lower
than shipments during the same period in 1996, with fresh grapes, almonds,
and frozen potatoes among the exceptions.  Even before the financial crisis
in Southeast Asia, the Japanese yen had depreciated, accounting  for much of
the decrease in Japan's imports of U.S. fruit and vegetable exports during
the past 2 years.   

But Japan's imports of frozen potatoes declined neither in volume nor value
in 1997, due likely to strong Japanese demand for french fries.  Frozen
potatoes are number-one among U.S. fruit and vegetable products exported to
this market.  Also, record U.S. production of grapes and almonds in 1997
resulted in lower prices for these commodities, and along with high quality,
helped the U.S. maintain competitiveness in the Asian market. 

The Southeast Asian market, although a relatively small outlet for U.S.
fruit and vegetables, grew from 3 percent of U.S. fruit and vegetable
exports in 1990, in value terms, to about 5 percent in 1997.  South Korea is
also a small U.S. market, while Japan accounted for approximately 17 percent
of total fruit and vegetable export value in 1997, about the same as in
1990.  Once the financial conditions improve in these Asian countries, U.S.
fruit and vegetable exports will likely resume their strong performance.  

Fluctuations in world supplies also affect U.S. exports--and imports--in the
short run.   Supply fluctuations are usually unpredictable and in most cases
are due to weather, such as the effects of the El Nino phenomenon.  The
overall impact of El Nino on 1998 fruit and vegetable production could
generate some downward adjustment in the export forecast.  

The effects of trade barriers that diminish export opportunities for U.S.
fruit and vegetable producers could  be long- or short-term.  Natural trade
barriers include high transportation costs to distant markets, and
artificial barriers include legal measures such as government protectionist
policies.  Liberalization of trade through international agreements has been
instrumental in relaxing many legal trade barriers by reducing tariffs and
by harmonizing the technical barriers to trade.   

Under phytosanitary requirements--technical trade barriers--importing
countries set standards that potential trade partners must meet, presumably
to protect human health or prevent the spread of pests and diseases.  For
example, Japanese imports of U.S. apples are limited to Red and Golden
Delicious apples from Washington and Oregon.  

The Japanese, concerned mainly about the spread of fire blight, impose
rigorous and costly import requirements on U.S. apple shippers.  The
Japanese require cold treatment and fumigation with methyl bromide before
shipment, and inspection of U.S. apple orchards three times during the
production stage--U.S. growers intending to export to Japan must register
the acreage.  These requirements are apparently having an impact.  None of
the Washington and Oregon growers have registered acreage for the 1997/98
export program, and no U.S. apple shipments to Japan are expected this
season.   

In June 1997, Brazil imposed a mandatory fumigation-at-origin requirement
for all U.S. fruit entering their market, following detection of the Pacific
spider mite in recent shipments.  By the end of July, Brazil agreed to limit
this fumigation requirement to peaches, nectarines, and apricots.  The sharp
growth in U.S. fresh fruit exports to Brazil in the 1990's is attributed
mainly to increases in key items such as apples, pears, peaches, and plums. 
Prospects for future stone fruit exports to this market could be dampened if
the mandatory fumigation-at-origin requirement remains in effect.  

Technological innovations can increase a country's competitive advantage and
therefore its world market share as it gains the ability to offer higher
quality products for the same price or to provide products of comparable
quality for a lower price.  But because new technologies can be  exported, 
any gains in export market shares may be short term.  

Mexico's tomato export sector, producing mainly in the Sinaloa and Baja
California regions, has imported U.S.-initiated production technology over
the last few years, including the adoption of extended shelf-life (ESL)
varieties.  These varieties, used in Florida for the past 20 years, are far
less suited to Florida's climate than to Mexico's and have boosted Mexico's
tomato export capacity significantly.  The peso crisis in 1995 provided
additional incentive in the short run for Mexican producers to export to the
U.S.  To increase competitive advantage in the long run, U.S. producers will
have to adopt ESL varieties suited to Florida's climate and at the same time
consider changes in harvesting and marketing practices to accommodate
successful production of ESL varieties.

Safety concerns have heightened among U.S. consumers about produce available
in the U.S. market.  Two recent food scares in the U.S. involved imports of
raspberries from Guatemala and frozen strawberries from Mexico.  Fresh fruit
and vegetable imports are a large and growing share of total U.S. fruit and
vegetable imports.  Undertakings to improve food safety standards both in
the U.S. and in the countries that supply produce to the U.S. are critical
in maintaining consumers' confidence and their demand for fruit and
vegetables.  An example of such an undertaking is the Administration's
legislative initiative to halt imports of fruits and vegetables from
countries with inadequate safety standards.

U.S. Export Prospects 
In the Decade Ahead

Long-term prospects for U.S. horticultural trade appear good, with a trade
surplus possible by the end of the next decade.  Exports will continue to be
a primary source of growth for the industry.  Projections for only slight
increases in domestic fruit and vegetable consumption over the next decade
underscore the continued importance of export demand in raising producer
earnings. 

Export growth will be driven mainly by world economic growth, particularly
in developing regions, and by international agreements to liberalize global
trade.  The Asian financial crisis will likely result in diminished demand
for a number of U.S. fruit and vegetable products in that region in the
short run.  But because of the strong export growth to Asia during most of
the 1990's, and projections of higher economic growth in the region than in
the world overall, Asia will remain an important market for U.S. fruit and
vegetables, particularly with the emergence of new markets such as China. 
Similarly, increased economic growth in other developing regions, such as
South America, will help expand market opportunities for U.S. exports.  
Agnes Perez (202) 694-5255
acperez@econ.ag.gov

BOX - COMMODITY SPOTLIGHT

Horticultural products encompass fruit and nuts (including juice and wine),
vegetables (including potatoes, dry beans, and mushrooms), and greenhouse
and nursery products.  Essential oils and ginseng are not included. 



 WORLD AGRICULTURE & TRADE

Free Trade Area of the Americas: Potential Advantages for U.S. Agriculture

At the Second Summit of the Americas scheduled for April 1998 in Santiago,
Chile, formal negotiations are set to begin on formation of a Free Trade
Area of the Americas (FTAA) by the year 2005.  President Clinton and the
leaders of 33 other Western Hemisphere nations had pledged to negotiate an
FTAA at the initial summit held in Miami in December 1994.  
The Americas include key markets for U.S. agricultural exports, major
suppliers of agricultural imports for the U.S. market, and strong U.S.
competitors in certain agricultural markets.  U.S. interest in forming an
FTAA stems in part from the broad goal of fostering economic and political
stability in the hemisphere and also from the desire to secure more open and
transparent rules for U.S. trade and investment in the rapidly growing
markets of Latin America [AO March 1998, January-February 1997]. 

Analysis by USDA's Economic Research Service (ERS) indicates that for the
U.S. agricultural sector, both exports and imports would be higher with U.S.
membership in an FTAA, and exports and imports would be lower if an FTAA
were formed that excluded the U.S.  While U.S. membership would result in a
net addition in the value of agricultural imports (the additional imports
would exceed additional exports), the ERS analysis demonstrates that an
assessment of trade agreements simply in terms of  net trade flows can be
misleading; in terms of farm income, the U.S. agricultural sector would be
slightly better off within an FTAA than outside it. 

The U.S. has played an active role in preparations for FTAA negotiations.
How the FTAA evolves--and particularly, whether or not the U.S. joins--may
have important implications for the U.S. economy.  But pending congressional
approval of "fast track" negotiating authority for the administration, the
other prospective FTAA members would not likely be willing to negotiate
because without this authority, the U.S. Congress could change elements of
the agreement before ratification (AO November 1997). 

The Americas
As Trade Partners

Agricultural trade in the Americas is governed by an increasingly complex
network of regional trade agreements as well as the parameters of World
Trade Organization (WTO) rules.  About 40 regional and bilateral agreements
are operating in the Americas, and at least another dozen are currently
under negotiation.  Almost every country in the hemisphere belongs to one or
more comprehensive regional trade agreements, and several countries, notably
Chile, maintain extensive networks of bilateral agreements.  The
hemisphere's five most comprehensive agreements are the North American Free
Trade Agreement (NAFTA), the Mercado Comn del Sur (MERCOSUR), the Andean
Group, the Central American Common Market (CACM), and the Caribbean
Community and Common Market (CARICOM).

For every regional group in the hemisphere except the Southern Cone, or
MERCOSUR (Argentina, Brazil, Paraguay, and Uruguay, with Chile and Bolivia
as associates), the U.S. is a critical source of agricultural products. 
Total U.S. agricultural exports to western hemisphere nations in 1997
amounted to slightly over $17 billion, or about 25 percent of all U.S.
agricultural exports.  The U.S. supplies 66 percent of agricultural imports
by its NAFTA partners Canada and Mexico, 48 percent for Central America, 35
percent for the Caribbean, and 27 percent for the Andean Group (Bolivia,
Colombia, Ecuador, Peru, and Venezuela).  Only 11 percent of MERCOSUR's
agricultural imports come from the U.S.  

U.S. market shares for most commodities follow the same general order--highest 
in NAFTA, followed by Central America, the Caribbean, and the Andean Group, 
with the lowest U.S. shares in MERCOSUR.  But the magnitude of U.S.
market shares varies considerably by commodity.  For example, U.S. producers
supply more than 65 percent of the hemisphere's imports of poultry, coarse
grains, and oilseeds, but less than 15 percent of dairy product and raw
sugar imports. 

The hemisphere is also a key source of U.S. agricultural imports, supplying
about 50 percent of the U.S. total, valued at $19.7 billion.  NAFTA partners
alone supply 30 percent of U.S. agricultural imports, with 20 percent split
fairly evenly among the Central American, MERCOSUR, and Andean countries. 
The Caribbean supplies only about 1 percent of total U.S. agricultural
imports--primarily sugar.  

Measuring the Effects 
Of an FTAA

Economists classify regional trade agreements as "second best" policies
because, unlike global agreements, regional agreements discriminate between
members and outsiders.  By reducing or eliminating trade barriers among a
group of countries, a regional agreement may open new trade channels in
goods which the members produce cheaply and efficiently.  This is called
"trade creation."  When trade creating liberalization occurs, capital and
other resources used in production are reallocated toward more efficient
uses--e.g., toward crops that grow well in a particular climate, or toward
industries that are competitive.  This raises returns on investments and
improves the overall economic well-being, or "welfare" of the members.  This
welfare gain can increase members' demand for all goods--including goods
made by outsiders--providing an additional boost to global economic welfare.

On the other hand, if a regional agreement shelters high-cost producers
within the group and excludes lower cost goods from outside the area, this
is called "trade diversion."  Trade diversion leads to less efficient
allocation of resources in the global economy, and directly harms countries
outside the agreement.  It may, if severe enough, even hurt members.  If the
trade diversion is not too severe, however, it may benefit members more than
it hurts outsiders, so that the net effect on the world economy is positive. 

A particular trade agreement, like the FTAA, is likely to have both trade-creating 
and trade-diverting effects.  Whether the agreement is beneficial--for members, 
outsiders, or the world as a whole--depends on which effect dominates. 

As a member of a hemispheric FTAA, the U.S. would be likely to increase
trade with other countries in the hemisphere.  Productive resources would be
reallocated within the U.S. economy toward more competitive sectors as
producers take advantage of the new export opportunities.  Rising imports
would challenge the less competitive sectors and further encourage the
reallocation of resources toward more competitive sectors.  While the less
competitive sectors of the U.S. economy would decline in an FTAA, gains in
the competitive sectors would more than offset those losses.  

As an outsider, the U.S. could be helped or hurt by formation of an FTAA. 
If trade creation dominates, the resulting improvements in economic
efficiency and welfare for the members could increase trade with outsiders
as well.  In this case, the U.S. would be expected to benefit even as an
outsider.  On the other hand, if trade diversion dominates and U.S. exports
are blocked, the U.S. would clearly be hurt.  

Because economic theory alone cannot determine how a particular agreement
might affect the U.S. economy, empirical analysis is needed to clarify the
issue.  Empirical analysis of the implications of an FTAA for U.S.
agriculture--with U.S. participation and without--is provided using a model
developed by ERS.  This global computable general equilibrium model was used
to isolate the effects of an FTAA from the other policy changes that are
taking place in the hemisphere.  

A "base" scenario was developed to represent a stylized view of agricultural
production and trade in the Americas and with the rest of the world under
full implementation of existing policies.  Specifically, NAFTA, MERCOSUR
(including Chile), and the Uruguay Round agreement of the General Agreement
on Tariffs and Trade are fully implemented in the base scenario.  The model
takes into account economic activity in both the agricultural and
nonagricultural sectors.    

Building on the base scenario, ERS then constructed two different scenarios
under a hemispheric free trade agreement.  Under the first, all countries in
the Western Hemisphere except the U.S. eliminate most trade barriers among
themselves, while trade policies between each of those countries and the
U.S. remain unchanged.  The U.S. remains a member of NAFTA, but the NAFTA
partners also join the FTAA.  

Under the second FTAA scenario, the hemisphere-wide agreement eliminates
most trade barriers among all the Americas, including the U.S.  The ERS
analysis measured  how U.S. agricultural trade under each of the two FTAA
scenarios would differ from the base scenario.   It is important to note
that the scenarios discussed here are simulations of what would occur under
specific policy assumptions.  They do not represent observed data for any
specific year.  A Free Trade Area of the Americas that includes the U.S.
(FTAA+U.S.) would result in about $580 million (real value) in additional
exports for U.S. agriculture compared with the base scenario--a difference
of 1 percent --and $830 million more agricultural imports for U.S.
consumers--3 percent.  

The net increase in U.S. agricultural imports does not imply that U.S.
agriculture would be hurt by the agreement.  Actually, because freer trade
promotes more efficient use of productive resources in the economy, U.S.
agricultural income would be slightly higher under the FTAA compared with
the base ($180 million or less than 0.1 percent).

In the FTAA+U.S. scenario, U.S. agricultural exports to Central America, the
Caribbean, and the Andean countries are 30 percent higher than the base
scenario, and show the greatest gains in terms of value.  U.S. exports to
MERCOSUR are 50 percent higher.  U.S. exports to NAFTA would be slightly
lower (less than 1 percent), as U.S. exporters gain more favorable access to
other markets in the hemisphere.   

U.S. imports from MERCOSUR would be 30 percent greater in the FTAA+U.S.
scenario, and purchases from Central America, the Caribbean, and Andean
countries would be 6 percent above the base scenario.  Imports from NAFTA
and the regions outside the hemisphere would be slightly lower. 
  
On the other hand, an FTAA that excludes the U.S. (FTAA-U.S.) could cost the
agricultural sector about $130 million per year in lost exports (2 percent). 
Farm income shrinks by $50 million, or less than 1 percent compared with the
base. 

Under the FTAA-US scenario, U.S. exports to Central America, the Caribbean,
and the Andean Group would be $180 million or almost 7 percent below the
base scenario. This occurs because other major exporters in the hemisphere
gain preferential access to these markets while barriers against the U.S.
remain intact.  U.S. exports to the NAFTA partners are not harmed, however,
because the U.S. retains open access to these markets even after they join
the FTAA-US.  Some but not all of the losses in U.S. exports to the
hemisphere would be offset by gains in Asia, Europe, and the rest of the
world.

In addition to the reduction in U.S. agricultural exports, imports would be
very slightly lower--by about $90 million or less than 1 percent--as tariff
reductions in member countries bid products away from the U.S. market. 
Imports from NAFTA partners would decline the most as Canada and Mexico gain
access to other markets in the hemisphere, but imports from Central America,
the Caribbean, and the Andean countries would also be lower.  U.S. imports
from Asia and Europe would be greater than the base, filling part, but not
all, of the gap.  

Although the potential economic gains for U.S. agriculture are small, ERS
analysis clearly shows that the sector would be better off by joining an
FTAA than by remaining on the sidelines.  Moreover, by improving the
economic well being of the trade partners, an FTAA could increase their
demand for agricultural (and other) products.  An FTAA could also simplify
the complex system of regional and bilateral trade preferences emerging in
the hemisphere and could ensure that U.S. exporters gain or retain access to
regional markets on a comparable basis with other exporters' access. 
Further, an FTAA could help countries "lock in" the economic reforms they
have already adopted, improving the long-term outlook for growth and
stability in the hemisphere.  Terri Raney (202-694-5235), Xinshen Diao, and
Agapi Somwaru
tlraney@econ.ag.govBOX #1 - WORLD AG & TRADE

Trade Agreements in the Americas

The largest and most comprehensive regional trade agreement in the
hemisphere is the North American Free Trade Agreement (NAFTA) among the
U.S., Canada, and Mexico.  Under NAFTA, which went into effect January 1,
1994, the member nations have eliminated almost all agricultural trade
barriers among themselves, with the more sensitive barriers with Mexico
being phased out by 2008. 

The MERCOSUR agreement among Argentina, Brazil, Paraguay, and Uruguay is
second to NAFTA in total population and gross domestic product of member
nations.  MERCOSUR began in 1991, and by 1995 it had eliminated almost all
agricultural trade barriers among members, although certain products are
being gradually liberalized.  The few remaining barriers for agricultural
trade among MERCOSUR members will be phased out by 2013--except for sugar,
which is still under negotiation.  

The MERCOSUR countries adopted a common external tariff for most
agricultural products in 1995, with longer transition periods for sensitive
products.  The common external tariff is less than 20 percent for most
agricultural products, with a average of about 14 percent.  MERCOSUR is
expanding rapidly, having added Chile and Bolivia as associate members in
1996, and potential agreements with many other countries in the region,
including Canada, Mexico, and the Andean Group are currently under
discussion.

The Andean Pact among Bolivia, Colombia, Ecuador, Peru, and Venezuela was
established in 1969 and was revived as the Andean Group in the early 1990's. 
The Andean Group is adopting a common external tariff for products from
nonmember countries, consisting of four tariff levels: 5, 10, 15, and 25
percent.  However, Bolivia requested and has been granted permission to
apply only the two lower tariff rates, and Peru applies only the two higher
tariff rates.  Andean Group countries also apply a price band system for
many agricultural imports, so applied tariffs may be adjusted up or down to
compensate for variations between international and domestic prices.   

Products covered by the system are palm oil, soybean oil, rice, sugar,
barley, milk, corn, soybeans, wheat, chicken, and pork.  As noted above,
Bolivia reached a bilateral agreement with MERCOSUR in 1996, and the rest of
the Andean Group is currently negotiating with MERCOSUR.

The Central American Common Market (CACM) and the Caribbean Community and
Common Market (CARICOM) encompass most of the remaining countries in the
hemisphere.  Like the Andean Pact, the CACM and CARICOM agreements were
moribund for many years following their beginnings in the 1960's, before
being revitalized in the early 1990's.  

The CACM--among El Salvador, Guatemala, Honduras, Nicaragua, and Costa 
Rica--seeks to eliminate trade barriers among members and to establish a common
external tariff of no more than 15 percent for final goods and to 0 percent
for raw materials.  CARICOM--among Antigua, Bahamas, Barbados, Belize,
Dominica, Grenada, Guyana, Jamaica, Montserrat, St. Kitts-Nevis-Anguilla,
St. Lucia, St. Vincent, and Trinidad and Tobago--has similar goals, but is
moving more slowly than the CACM.  

By 1995, the CACM had eliminated barriers on internal trade for all but
seven agricultural products.  The CACM's progress in establishing a common
external tariff has been uneven, with El Salvador moving more quickly than
the other members.  External tariffs for agricultural products currently
range from 0 to 20 percent, with about half of all agricultural products
carrying the highest rate.

The three NAFTA signatories have a number of preferential arrangements with
other countries in the hemisphere.  The U.S. grants preferential access for
agricultural imports from most of the smaller economies in the region under
nonreciprocal agreements such as the Caribbean Basin Initiative and the
Andean Trade Preference Act.  These agreements offer preferential access to
the U.S. market for most countries in the hemisphere with the important
exceptions of Argentina, Brazil, and Chile.  

Canada also provides trade preferences for most of the smaller countries in
the hemisphere, has a bilateral agreement with Chile, and is negotiating a
bilateral agreement with MERCOSUR.  The Canadian agreement with Chile covers
most agricultural products, but it exempts the Canadian dairy and poultry
sectors and allows Chile to maintain its system of price bands (variable
tariffs) for wheat, flour, vegetable oils, and sugar.  

Mexico has been aggressive in pursuing regional and bilateral agreements
throughout the hemisphere.  In addition to its NAFTA membership, Mexico
belongs to the Group of Three along with Colombia and Venezuela, and has
agreements with Chile and MERCOSUR.  BOX #2 - WORLD AG & TRADE

About the ERS Model

The model used in this analysis was developed by ERS and the University of
Minnesota.  The data used in this global computable general equilibrium
model come from the Global Trade Analysis Project (GTAP), version 3.  The
model is static, and is global in the sense that all regions of the world
are covered, and production and consumption decisions in each region are
consistent with economic theory.  

Trade flows among regions are multilateral in the model, and world prices
are determined by world market clearing conditions--in other words, demand
for each commodity in the world has to equal its supply.  Values are in real
terms (1992 dollars).  The general equilibrium feature of the model means
that resources can move among sectors--for example, land can be switched
between crops, and labor can move between agricultural and nonagricultural
sectors.

The country/regional aggregations in the model include: the U.S., Canada,
Mexico, Argentina, Brazil, Chile, Other Western Hemisphere, EU-15, Asia, and
Rest of World.  The agriculture sector is represented by the following
commodity aggregations: rice, wheat, other grains (corn, barley, sorghum),
non-grain crops (oilseeds, fresh fruits and vegetables, unrefined sugar, and
cotton), livestock, meats, dairy and dairy products, beverages and tobacco,
and other processed food products.  The rest of the economy is represented
by an aggregate manufacturing sector (excluding food processing) and a
services sector.

The estimated impacts of an FTAA depend critically on the initial levels of
trade protection and the degree of trade liberalization assumed in the
model.  Trade restrictions for the countries and commodities in the model
are represented as ad valorem tariffs.  These initial tariffs are
approximations, because some of the country and commodity categories in the
model represent aggregations and because some nontariff barriers are not
included in the data.  

For each of the scenarios examined, the assumed degree of trade
liberalization is simulated by reducing the initial tariffs.  Because full
trade liberalization does not necessarily imply the elimination of all trade
barriers--sanitary and phytosanitary standards (SPS), for example--the
initial level of protection in the model is not always reduced to zero even
though the pure tariff component is assumed to be eliminated.
FARM & RURAL COMMUNITIES

Long-Term Trends Mixed for Agricultural & Rural Employment

Most U.S. occupational groups and industries, especially services and retail
trade, are expected to post job gains through 2006, according to recently
released projections by the U.S. Bureau of Labor Statistics (BLS).  Although
BLS does not forecast employment trends by region, the projections provide
indications of the job picture for rural areas.  

A large share of rural workers are employed in industries that BLS expects
to grow.  But the industries with projected employment losses and the
occupations projected to see slow growth--notably agriculture and
manufacturing--employ a larger share of rural than urban workers. 
Employment in agriculture, mining, and manufacturing is expected to decline. 
Within the agricultural industry, production agriculture is expected to
experience a substantial loss of jobs, while agricultural services--including landscaping and horticultural services--continue to add jobs.

BLS projects that 18.6 million jobs will be created from 1996 to 2006,
bringing the total number of U.S. jobs to 151 million in 2006.  Job growth
can be projected both by industry group and by occupational group. 
Projections by industry indicate that nearly all of the expected new jobs
will be in service industries, with large growth projected in health
services; business services, including personnel supply services (temporary
help services); social services, including residential care and child care;
and engineering, management, and related services.

Employment in the agricultural industry is expected to be stable--only a 
1-percent decline in jobs is projected.  However, production agriculture is
expected to decline by 253,000 jobs (11 percent) by 2006.  In contrast,
agricultural services--in particular, landscaping and horticultural
services--are expected to add 240,000 jobs (18 percent) by 2006.  Despite
employment losses, production agriculture is expected to maintain an annual
increase in real output of 1.6 percent as a result of improvements in
agricultural techniques.  

This projected change in the composition of agricultural employment
continues the trend seen since 1986.  Between 1986 and 1996, employment in
production agriculture declined by 6 percent (147,000 jobs), while
agricultural services increased by almost 60 percent (490,000 jobs).  The
net result--which also included a loss of 29,000 jobs in forestry, fishing,
hunting, and trapping--was about a 10-percent increase in employment in the
agricultural industry.

Projections also indicate that U.S. employment in all major occupational
groups is expected to increase, although employment in agricultural
occupations is expected to grow by only 1 percent.  BLS projects that
professional specialty occupations--which have high educational attainment
requirements--and service occupations--characterized as having low skill
requirements--will generate half of the total job growth.  Among
professional specialty occupations, the largest gains are expected for
teachers, librarians, and counselors; for computer, mathematical, and
operations research occupations; and for health assessment and treatment
occupations.  Employment in service occupations is expected to be mainly in
food preparation and service, cleaning and building service, protective
service, and personal service (such as hairdressers, home health aides, and
child care workers)

The agriculture, forestry, and fishing occupational group is expected to
grow by 37,000 jobs.  Although job losses are expected for farm workers and
for farm operators and managers--especially self-employed farmers--these
losses will be more than matched by gains in gardening, nursery, and
greenhouse/lawnservice occupations.  The higher growth rates of other
occupational groups, however, will mean that agriculture, forestry, and
fishing occupations' share of total employment will decline to 2.5 percent
in 2006--down from 2.9 percent in 1996, and 3.3 percent in 1986, making this
occupational group the smallest in the economy.

Rural Positioning for
Job Growth & Shifts

A large share of rural workers are employed in industries and occupations
expected to grow by 2006.  Among the projected growth industries, rural
areas have about the same proportion of employment as do urban areas, except
for the services industry--in 1995 (the most current data available), only
23 percent of rural jobs were in services, compared with 32 percent of urban
jobs.  

At the same time, however, rural areas have a larger share of workers
employed in the sectors and occupational groups with projected slow or even
negative growth, suggesting that rural economies are disadvantaged in their
positioning for expected work-force changes during the next decade.  In the
manufacturing sector, for example, an important employer in rural areas (17
percent of total rural employment), productivity growth and strong demand
for manufactured products are expected to support 2.4-percent annual growth
in real manufacturing output.  But these very productivity gains are
expected to contribute to the loss of 350,000 manufacturing industry jobs
nationwide. 

Rural areas also have a larger share of workers employed in the occupational
groups expected to have the least employment growth--agriculture, forestry,
fishing, and related occupations; precision production, craft, and repair
occupations; and operators, fabricators, and laborers.  The only slow-
growing  occupational category that currently has a larger share of urban
than rural workers is administrative support, including clerical,
occupations.  Average growth is expected to be fastest in occupations
requiring at least an associate degree, and rural workers are less likely
than urban workers to have such post-secondary education.  

The five occupations expected to generate the most new jobs by 2006 are
cashiers, systems analysts, general managers and top executives, registered
nurses, and retail salespersons.  These five occupations account for about 6
percent of rural employment, versus an urban share of 8 percent.  The five
occupations expected to lose the most jobs are sewing machine operators--
garments; farmers; bookkeeping, accounting, and auditing clerks; typists and
word processors; and secretaries--except for legal and medical secretaries. 
About 6 percent of rural workers are in these jobs, versus 5 percent of
urban workers. 

However, despite job losses, agriculture, mining, and manufacturing will
still employ millions of workers.  In addition to the 18.6 million new jobs
expected to be created by 2006, BLS projects that 32 million jobs will
become open due to replacement needs, which will be in all occupational
groups and at all levels of training and education.

Rural areas have done well so far in the 1990's--rural economies weathered
the recession of 1990-91 better than their urban counterparts, and rural
areas continue to show solid economic performance by several measures,
although employment growth has softened in the last 2 years.  Rural areas
experienced a net inflow of 1.5 million people migrating from urban areas in
1990-96.  Employment growth has been strong, unemployment has been low, 
and real earnings have increased.  

Rural areas have also increased employment in manufacturing during the
1990's, despite a nationwide decline in manufacturing jobs during the same
period.  The task now facing rural areas is to utilize their economic
advantages, such as lower land and labor costs, in order to manage labor
market changes over the next decade.
Karen S. Hamrick (202) 694-5426
khamrick@econ.ag.gov

SMALL BOX

More details on BLS employment growth projections are available on the
Internet at 
http://stats.bls.gov/emphome.htm, or in the November 1997 issue of BLS's
Monthly Labor Review.FARM & RURAL COMMUNITIES BOX--1

What's Behind the Employment Growth Projections?

Prospects for U.S. employment by industry and by occupation depend primarily
on major economic developments.  BLS projections are based on a group of
assumptions about the U.S. macroeconomy that can be characterized as
slightly more conservative than the October Blue Chip consensus long-range
projections, the most commonly cited report of the consensus of 
macroeconomic forecasters.  BLS expects that real Gross Domestic Product
(GDP) will increase 2.1 percent annually from 1996 to 2006, slightly less
than the 2.3-percent growth rate achieved in 1986-96.  

Much of the expected slowdown in GDP growth is due to a slower growing labor
force.  Over the next decade, the population distribution will shift to age
groups with lower labor force participation, such as the youth labor force
(age 16-24) and the labor force age 55 and older.  The aging of the baby
boom generation is expected to increase the median age of the labor force to
40.6 years old, the highest since 1962.

BLS expects that the foreign trade sector will be the fastest growing
component of real GDP and that exports will grow faster than imports,
resulting in an improved trade position.  (Note, however, that the
projections were done before the Asian financial crisis.)  BLS assumptions
include decreased Federal spending (both defense and nondefense), a balanced
Federal budget by 2006, and a surplus in the combined Federal and state
budgets, leading to a downward trend in long-term interest rates.  

Gross private investment is expected to increase 3.3 percent annually,
faster than GDP growth.  Consequently, productivity is expected to grow 1.1
percent per year, an increase over the 0.9-percent annual growth rate seen
in 1986-96.  In turn, real per capita disposable income is expected to
increase by 1.1 percent annually as well.

BLS projects that the Hispanic population will continue to grow faster than
the Black population, and by 2006, the Hispanic labor force is expected to
increase its share of the total civilian labor force from 10 percent to 12
percent, compared with a steady share of 11 percent for Black workers.  
Non-Hispanic White workers will make up 73 percent of the work force, while
Asians and other groups are expected to be 5 percent of the total.
FARM & RURAL COMMUNITIES BOX--2

Classifying by Industry & Occupation

The Bureau of Labor Statistics classifies jobs in two ways.  An industry
classification identifies the sector that employs a worker, while occupation
designates a type of job.  

For example, the agricultural industry includes crop production; livestock
production; agricultural services (e.g., crop services, veterinary services,
farm labor and management, and landscaping); forestry; and fishing, hunting,
and trapping.  Agricultural occupations include animal breeding and
training; animal care; veterinary assistance; farm work; farm operation and
management; farming and forestry supervision; forestry and logging;
gardening, nursery, and greenhouse/lawnservice occupations; gardening and
groundskeeping; and fishing, hunting, and trapping.

For any given job, the industry designation does not necessarily coincide
with the occupation classification.  A worker in an agricultural occupation
may actually work outside the agricultural industry, while a worker in a
nonagricultural occupation may work in the agricultural industry.  For
example, an accountant--an occupation classified as executive,
administrative, and managerial--who works for a farm operation would be
classified in the agricultural industry.  Along the same lines, a farm
worker--an agricultural occupation--employed on a farm is in the
agricultural industry, while a groundskeeper--also an agricultural
occupation--employed by an automaker is classified as part of the
manufacturing industry.RESOURCES & ENVIRONMENT

Precision Agriculture: Information Technology for Improved Resource Use

A farmer walks through his soybean field in central Illinois, heading for a
spot pinpointed by a remote sensing image the farmer downloaded in that
morning's e-mail.  Pest infestation in this small spot, indicated by a
change in the "vegetative index," would not ordinarily be detected this
quickly.  Untreated, it could spread rapidly and destroy his entire crop.
The farmer opens his palm-top computer, brings up information on the pest,
completes an economic threshold analysis, and determines what control
measures he will use.  He records the exact location of the infestation
using the integral global positioning system (GPS) receiver and alerts his
pest control advisor and custom pesticide applicator via cellular phone
link.

Meanwhile, a wheat farmer in Nebraska is recording yields as her combine
passes through the field, pinpointing the location of each yield amount with
the GPS receiver linked to the yield monitor.  This and previous years'
yield maps entered into a geographic information system (GIS) help her plan
the fertilizer regime for this field to optimize economic yield and reduce
nitrogen leaching to the groundwater. 

These vignettes are not science fiction.  Precision agriculture (PA), a new
suite of information technologies, has the potential to improve resource
use, increase profits, and reduce environmental impacts of agricultural
production.  While its promises are attractive, the performance of PA
systems remains largely unproven.  The National Research Council (NRC) 
recently convened an expert committee to assess precision agriculture and
explore its implications for 21st-century farming, particularly for the
public role in its adoption and development.  This article highlights the
committee's findings.

What Is 
Precision Agriculture?

As with any fledgling technology, precision agriculture has various
definitions.   The NRC committee defines it as "...a management strategy
that uses information technologies to bring data from multiple sources to
bear on decisions associated with crop production."  Fundamentally,
precision agriculture acknowledges that conditions for agricultural
production, as determined by soil resources, weather, and prior management,
vary across space and over time.  Given this inherent variability,
management decisions should be specific to time and place rather than
rigidly scheduled and uniform.  

Precision agriculture provides tools for tailoring production inputs to
specific plots within a field, thus potentially reducing input costs,
increasing yields, and reducing environmental impacts by better matching
inputs applied to crop needs.  Information technologies used in precision
agriculture cover three aspects of production: data collection or
information input, analysis or processing of the precision information, and
recommendations or application of the information. 

Data collection occurs both before and during crop production, and is
enhanced by collecting precise location coordinates using the GPS.  Data
collection technologies operating in advance of crop production include grid
soil sampling, yield monitoring, remote sensing, and crop scouting. 

Other data collection takes place during production through "local" sensing
instruments mounted directly on farm machinery.  For example, soil probes
mounted on the front of fertilizer spreaders can continuously monitor
electrical conductivity, soil moisture, and other variables to predict soil
nutrient concentrations and to instantaneously adjust fertilizer application
at the rear of the spreader.  Optical scanners detect soil organic matter,
or "recognize" weeds, to instantaneously alter the amount or application of
herbicides applied. 

Precise data are useless unless they can be analyzed or processed to enable
management adjustments.  Geographic information systems (GIS) are the
principal technology used to integrate spatial data coming from various
sources in a computer.  This is primarily an intermediate step, because data
collected at different times on the basis of different sampling regimes and
different scales must be combined for use with subsequent decision
technologies, such as process models, artificial intelligence systems, and
expert systems.  

Computer process models use frequent time-steps to simulate the processes of
crop growth, or the generation and movement of nutrients and pesticides
through the environment.  Artificial intelligence systems use heuristic or
empirical decision rules, rather than the theoretically based relationships
in most process models, to recommend appropriate management choices.  Expert
systems incorporate the "rules of thumb" used by human experts that match
the conditions reflected in the input data in order to reach
recommendations.  

This is not "push button" farming.  The  alternatives and recommendations of
these decision technologies are subject to the expert judgment of
agronomists, crop consultants, and the producer.  Precision agriculture
applications may depend on these immediate technologies, or may simply pass
"raw" data directly from the GIS to the human decisionmakers. 

The point of collecting and processing precise data is to manage each part
of the field appropriately.  Ideally, recommendations and applications of
production inputs for each plant could be adjusted to optimize output
according to the producer's agronomic, economic, and environmental goals. 
In practice, technology limits how small an area can be addressed and how
finely inputs can be calibrated.  Variable-rate technology (VRT) application
generally describes precise control of inputs, which can include fertilizer
and micronutrient application, liming, seed variety and rate, pesticides,
irrigation water, and drainage. 

Communications links cut across all three stages of the precision farming
process, contributing to data collection, analysis, and application.  Fiber
optic and satellite communication links, local area networks (LAN's), and
the like link producers, cooperatives, Extension experts, processors, input
dealers, consultants, and others involved in the production process.  These
communications links enable a nearly continuous electronic "conversation" or
virtual community that puts many heads to work on interpreting precision
information for better production decisionmaking. 

Not Yet Widely Adopted

Precision agriculture has not been widely adopted, to date.  Because it is a
suite of technologies that can be adopted piecemeal and combined in various
ways, estimating the current level of adoption is difficult.  Only a small
percentage of farmers actively seek out new technologies and apply them.

Adoption of precision agriculture for subfield management is a refinement of
good whole-field management practices.  USDA's Cropping Practices Survey
data for 1994 show that only a third of acres planted to major field crops
(corn, wheat, soybeans, cotton, and potatoes) was soil-tested for nutrients. 
Pest scouting was done on slightly more than half of planted acres.  Given
the relatively low adoption of whole-field practices, the rapid adoption of
subfield management technologies is not likely.  

Precision agriculture is driven by computers, but a USDA survey shows that
only 31 percent of the 2 million U.S. farmers and ranchers had computers in
1997, and only 13 percent had Internet access.  A 1996 Purdue University
survey of 1,500 ag chemical dealers found that only about a quarter of
dealers had 10 percent or more of their customers using field mapping or
other PA practices.  A quarter of dealers surveyed expected that over 30
percent of their customers would be using field mapping, yield monitors, and
other precision ag techniques within 2 years.

Combine-mounted crop yield monitors are one of the most popular ways for
producers to get into precision agriculture, with industry sources reporting
about 17,000 in use in North America in 1997, up from 50 in 1992. 
Commercially available yield monitors are currently available only for corn,
soybeans, and wheat, and are being developed for bulky crops like potatoes,
sugar beets, and peanuts.

Co-ops and other input dealers are key drivers in precision agriculture
adoption.  The Purdue University survey also found that by 1998, 30 percent
of the respondents expected to offer grid soil sampling with GPS, 35 percent
expected to offer field mapping, and 29 percent expected to offer
controller-driven variable-rate application.  There are important regional
and size differences in expected dealer adoption of PA services: 45 percent
of Midwest dealers and 54 percent of co-ops and large independent dealers
expected to offer field mapping by 1998 versus 17 percent in other regions
and 34 percent of small independent dealers.

There has been some concern that there is a scale bias to precision
agriculture, with larger farms more able to adopt and reaping more potential
gains.  PA technologies can give operators of large farms the same explicit
detailed knowledge of their land that operators of small farms have had
implicitly.  However, the size of the investment required for precision
agriculture (about $7,000 for a yield monitor and GPS receiver, plus $3-$7
per acre for grid soil testing) is not prohibitive for smaller operations.  

The most expensive component of precision agriculture, variable-rate
fertilizer application, is offered on a custom basis by fertilizer dealers,
with the cost often embedded in fertilizer material prices.  Although many
larger farms have been PA innovators, the advantage may be one of
technological sophistication rather than deep capital resources.  

Implications for Profits 
& for the Environment

At this stage in the emergence of precision agriculture, neither the
economic nor environmental advantages of subfield management have been
definitively demonstrated.  Any assessment of precision agriculture has
several serious conceptual problems to overcome.   Information technologies
often contribute in indirect ways to the farmer's better understanding of
his cropping system and changes to it.  Some of those changes, such as
reductions in total use of chemical fertilizers, are easily observed.  Other
changes are more subtle but will be expressed in higher productivity and
lower runoff that, given the year-to-year variation in results due to a
multitude of factors, may be impossible to isolate.  

Because precision agriculture is a suite of technological tools that can be
adopted piecemeal or in varying combinations, there are unlikely to be
uniform answers regarding performance for all the possible permutations. 
Precision agriculture adjusts management decisions to suit variations in
resource conditions.  Because these conditions vary so widely from farm to
farm and region to region, generalizations about performance across all
situations are unlikely to be true. 

Current costs for precision agriculture are estimated at $9-$23 per acre;
future costs are likely to drop.  Much less is known about the labor and
time needed to integrate the systems and keep them running, or what true
custom rates would be if "unbundled" from services provided by farm chemical
and input dealers.  Most of the costs likely to be borne by the farmer are
to acquire information about the soils, yields, and pest problems occurring
over the field.  Chemical dealers are making major investments in PA
equipment, particularly VRT applicators, because they can purchase larger,
more economical equipment and can spread the costs over many farmers'
fields, reducing the cost per acre. 

Most of the scant literature on the profitability of precision agriculture
focuses on variable-rate fertilizer application.  A review of 15 studies
showed that precision methods were not profitable in 5 studies, profitable
in 5, and showed mixed results in 3 (2 studies were inconclusive).  

The studies showed little uniformity in the period over which investments
were amortized, the discount rate, which PA components farmers invest in and
which are acquired through consultants or dealers at custom rates, the grid
size for soil sampling, and the nutrients that are managed on a precision
basis.  The duration of studies varied as well, with empirical studies at
most 3 years, and simulation studies varying from 1 to 24 years.  There is
likely as much temporal variation in PA profitability as there is across
resource situations, so the longer the study, the more reliable the results. 


Cost reduction is only part of the promise of precision agriculture. 
Analysis by USDA's Economic Research Service shows that a 10-percent
reduction in nutrient and pesticide applications for major field crops would
reduce costs only $2.14 to $23.97 per acre, while a 10-percent increase in
yields would produce gains of $11 to $162 per acre.  Thus, any increases in
crop yields from precision management are likely to be as much or more of a
basis for adoption than are cost reductions.  

Much of the enthusiasm off the farm for precision agriculture can be
attributed to the eminent good sense of matching input applications to plant
needs.  Precision agriculture is simply a more disaggregated version of the
kinds of best management practices (BMP's) already recommended at the field
level.  But there is much more to learn about the impact of PA on water and
air quality relative to conventional techniques.  

Plot studies in Minnesota and Missouri showed reductions in nitrogen applied
and in unrecovered nitrogen in the soil with variable-rate application, at
little or no loss in crop yield.  A study in Nebraska demonstrated
reductions in pesticide applications from early detection, and reductions in
herbicides from selective application to weeds.

Synergy between variable-rate application and biotechnology offers another
way that precision can improve agriculture's environmental performance. 
Seed systems enhanced with natural insecticidal properties of Bacillus
thuringiensis (Bt) can confer economic and environmental benefits when
employed on a whole-field basis, but are likely to be more effective when
applied on a precision basis.  

For example, if there are yield penalties associated with some of these
varieties, they may be planted only in areas of high weed infestation or
where onboard sensors indicate higher organic matter (that could be
associated with greater need for pre-emergence herbicide application). 
Precision application of Bt-enhanced seed could slow the development of
resistance compared with whole-field application. 

Public Roles in 
Precision Agriculture

One of the more important charges to the National Research Council committee
studying precision agriculture was to assess appropriate public roles in the
development of the technology.  Each of the recommendations made by the
committee implicitly envisions a role for public agencies.  

Precision agriculture is based on satellite imagery, the GPS satellite
network, and the Internet, all developed with massive public investments for
defense and space objectives.  Despite this initial large, but inadvertent,
public role in technological infrastructure investments, the committee was
generally convinced that private interests were well able and motivated to
further the development and dissemination of precision agriculture.  The
committee regarded public roles in measurement technology, new approaches to
research, unbiased evaluation, and training and education as filling
critical ancillary or facilitative roles in an otherwise robust private
development of the technologies.  

Publicly funded research into the science underlying potential improvements
in measurement methods is key, both in developing new sensors and
manipulating and analyzing spatially referenced data.  The committee also
called for new approaches to basic agronomic research.  PA methods for the
first time open up the possibility of accounting for interactions between
factors affecting crop growth in a way that cuts across scientific
disciplines, using data generated by precision farmers themselves.  The ever
finer spatial scales enabled by the technology make earlier generalizations
from limited plot studies obsolete.  

An area of concern for the committee is an objective evaluation of the pros
and cons of PA technologies.  Farmers are caught in a barrage of competing
claims and hyperbole generated by developers and boosters of precision
agriculture.  Unbiased evaluations of the economic and environmental
performance of precision cropping systems are needed to help farmers decide
whether and when to adopt these new methods.  The committee concluded that
public leadership in collaborations among agencies, professional
organizations, technology providers, and producers would provide the fullest
and fairest basis for comparing methods.

The committee's other recommendations concern the movement, ownership,
aggregation, and provision of data.  In general, the capacity to move large
quantities of digital data has been developed in proportion to population,
with the highest "band width" for electronic data in urban areas. 
Widespread adoption of precision agriculture will be accompanied by a 
many-fold expansion in the volume of electronic data moving among producers,
suppliers, consultants, and customers in rural areas.  Ensuring that
adequate connectivity exists in rural areas is at least partly a public
role.  

The large volume of data generated by grid soil testing, satellite images,
crop yield monitoring, and other precision technologies has to be shared
among producers (who may or may not collect the data), consultants and input
suppliers, Extension agents, university and USDA researchers, and commodity
buyers.  All of these may exercise some control or ownership over the data.  

Issues of ownership and privacy are compounded as the data are combined with
that from other entities, transformed, aggregated, interpreted, and
analyzed.  These kinds of intellectual property issues, while new to
farming, are not unique.  A public role is to search out existing law on
such issues, reinterpret it for PA needs, and ensure that all parties agree
to and exercise appropriate protections for data ownership and privacy.  
Ralph Heimlich (202) 694-5477
heimlich@econ.ag.gov


RESOURCES & ENVIRONMENT NOTE


This article highlights a study sponsored by USDA and by the Department of
Energy's Idaho National Energy Lab.  The study was conducted by the Board of
Agriculture of the National Research Council, the operating agency of the
National Academy of Sciences.  The findings were published in "Precision
Agriculture in the 21st Century: Geospatial and Information Technologies in
Crop Management" (National Academy Press, 1998).  To order call, 1 (800)
624-6242 or via internet at http://www.nap.edu.  

The National Academy of Sciences is a private, nonprofit society of
distinguished scholars engaged in scientific and engineering research,
dedicated to the furtherance of science and technology and to their use for
the general welfare.  Under its charter granted by Congress in 1863, the
Academy has a mandate to advise the Federal government on scientific and
technical matters.  

RESOURCES & ENVIRONMENT BOX

Glossary of Precision Agriculture

Artificial intelligence (AI) systems.  Predict outcomes or recommend actions
based on computer-based learning that incorporates experience through
developing heuristic rules, rather than through encoding theoretical
relationships between variables from disciplinary science.  

Crop scouting.  Periodic ground-level inspection of the crop for weed, insect,
disease, and moisture stress problems.  Scouting often involves use of
pheromone or other insect traps to estimate pest levels as part of integrated
pest management (IPM) approaches.    

Expert systems.  Often considered a branch of AI, expert system models are
differentiated from other AI approaches because the rules governing decisions
are input by human experts, rather than deduced experientially by the system. 
In PA, expert systems would include rules for when to spray for specific pests,
when to till, etc., modified by the past, current, and expected conditions
represented by soil, weather, pest level, and other data input from the GIS. 

Geographic information systems (GIS).  Computerized map and database program
that contains spatial (map) and attribute (characteristic) data linked by a
common geographic identifier.  GIS software provides for overlays and
geographic analyses of multiple mapped layers, representing the spatial
patterns of soils, crop yields, input applications, drainage patterns, and
other variables of interest in a PA system.

Global positioning system (GPS).   Determining precise location (latitude and
longitude) based on radio signals from 4 or more of the 24 satellites in the
GPS launched and maintained by the U.S. Department of Defense (DOD).  GPS
location is generally accurate to within 100 meters, with 95 percent
probability, because DOD purposefully degrades the signal timing to frustrate
enemy use of more precise locational information, a process called "selective
availability."  Selective availability is scheduled to be lifted within the
next decade.

Grid soil sampling.  Collection of soil samples based on a systematic grid laid
out across a farmed field.  Soil samples are analyzed in a laboratory to
determine soil characteristics such as texture, organic matter, pH, and
concentrations of nitrogen, phosphorous, potassium, or other nutrients. 

Local sensing.  A generic term for sensors mounted on farm machinery or
equipment to detect soil conditions, nutrient concentrations, weed density and
location, soil moisture, livestock identity, and other conditions for real-time
input to variable-rate applications. 

Process models.  Detailed simulations of crop, livestock, or tree growth based
on agronomic, physiologic, or hydrogeologic theory and implemented at short
(daily, hourly) time steps.  

Remote sensing.  Data on light reflectance--collected by instruments carried
in airplanes or orbiting satellites--that can be used to estimate the spatial
pattern and vigor of vegetation at small areas within the field.  Satellite
remote sensing, such as the LANDSAT thematic mapper and SPOT satellites, can
collect data with a spatial resolution of 10-30 meters, while airborne sensors
and the next generation of satellites can achieve spatial resolutions of 1-5
meters.  

Yield monitoring.  Automated measurement of the amount of production taken at
intervals as the combine or harvester passes over a field.  To date, reliable
yield monitors have been developed for corn, soybeans, and wheat, and are being
developed for potatoes and sugarbeets.  Data from the yield monitor must be
integrated with data on vehicle speed, head position, and crop moisture level
derived from separate sensors.  These data are combined in onboard computers
to produce an estimate of harvested yield for each area of the field that can
be incorporated into a GIS database for the field.


FOOD & MARKETING

Food Prices for 1998 Could Be Lowest Since Early  90's

Consumers are expected to pay between 2 and 3 percent more for food in 1998
than in 1997.  If the increase is closer to 2 percent, it could be the smallest
rise in the Consumer Price Index (CPI) for food since the early 1990's--1.2
percent in 1992 and 2.2 percent in 1993. Last year's retail food price increase
was 2.6 percent.

Modest rises in the food CPI are projected to continue, according to USDA's
1998-2007 baseline, increasing at an average rate of about 2.5 percent through
2007.  This compares with an average rise of 3.1 percent in the general
inflation rate projected for this period.   

What determines whether this year's rise will be closer to 2 or to 3 percent
are a number of factors that are as yet uncertain. The first is whether the
sluggish export market for beef, pork, and poultry continues throughout 1998. 
The second concerns the duration of the El Nino phenomenon and related
turbulent weather in fresh vegetable growing areas of Florida, California,
Arizona, Texas, and Mexico.  With beef, pork, and poultry accounting for 19
percent of the food-at-home CPI, and fruits and vegetables an additional 15
percent, these unknowns could have a major effect on food prices in 1998.  

Underpinning retail food price changes are general economic developments in
recent years and the relationship between farm and marketing costs.  Food price
increases have been limited by the low general inflation rate, which is
forecast to increase 2-3 percent in 1998.  Increasing economies of size in the
farm sector have also helped slow growth in food production costs, but the
farm-value share of the retail price for most food items has continued to
decline, expected at just 24-25 cents of the food dollar in 1997 and 1998. 
Retail prices are thus determined more by processing and marketing costs, which
generally parallel the general inflation rate and which tend to rise more
slowly than farm costs.  

Also, a growing share of the food dollar has been spent on purchases of food
prepared away from home--over 47 percent for the past 2 years, compared with
39 percent in 1968 and 45 percent in 1978.  Away-from-home food prices, which
contain a large service component, are being held down by competition among
restaurants and fast-food establishments.

The food-at-home CPI increase of 2.5 percent in 1997 was moderated by lower
grain prices, large supplies of competing meats (a result of lower grain
prices), adequate supplies of fresh fruits and vegetables, increased sugar
production, and strong competition in the soft drink and prepared food
industries.  The 1997 price increase of 2.8 percent for food away from home was
the largest since 1991 and was driven partly by tighter labor markets that have
pushed up wages generally.  However, continued strong competition among
restaurants and fast-food establishments limited the pass-through of higher
wage and raw materials costs to consumers.  An additional limited pass-through
is expected for early 1998, as labor and raw material costs have stabilized.

The revised CPI item structure implemented by the Bureau of Labor Statistics
in December 1997 changes the relative importance, or weight, of some of the key
food categories in terms of expenditure shares, which influences the all-food
CPI.  Meats, for example, which accounted for 12.2 percent of the all-food CPI
under the previous structure, fell to 10.9 percent.  Among the other major
categories whose weights changed are fruits and vegetables--from 12.7 to 9.9
percent--and cereals and bakery products--from 9.2 to 10 percent.

The interplay of specific factors in the individual food CPI sectors helps
explain the food price changes in 1997 and those expected in 1998.

Meats.  Large meat supplies and reduced prospects for exports in 1998 are
exerting downward pressure on U.S. livestock and poultry prices. The meat,
poultry, and fish index, which increased 2.9 percent in 1997, is expected to
drop as much as 2 percent in 1998.  Large meat supplies, combined with currency
devaluations in other countries and the need to find alternatives to sagging
Asian markets, are making the U.S. a more attractive market for foreign
exporters and challenging the U.S. in global markets.  As a result, net exports
of U.S. red meat are expected to shrink in 1998, adding to already abundant
meat supplies competing for the U.S. consumer dollar.
 
o             Beef and veal.  After increasing a modest 1.7 percent in 1997, the CPI for
beef and veal is expected to increase at about the same rate in 1998--between
0 and 2 percent--as large supplies of competing meats and less-than-robust
international trade hold down price increases at least until late summer. 
Commercial beef production in 1998 is expected to fall less than 1 percent from
1997 levels, although per capita beef supplies are expected to rise fairly
sharply as the Asian financial crisis and the strong U.S. dollar lower beef
exports and increase imports.  U.S. beef exports are likely to decline about
2 percent in 1998, as reduced sales to the Pacific Rim offset any increased
sales to Mexico.  

o             Pork.  Forecasts of a 10-percent increase in pork production in 1998
should lead to the largest per capita consumption rate since 1994, increasing
about 4 pounds from 1997 levels to almost 70 pounds per person.  With
expectations of plentiful supplies of pork and competing meats throughout 1998,
pork retail prices are expected to fall 4-6 percent, following a 5.2-percent
rise in 1997.  U.S. pork exports in 1998 are expected to be 990 million pounds,
off about 5 percent from 1997.  Lower demand is expected in Asia, particularly
in Japan, as a stronger U.S. dollar and lower priced Korean pork products
erodes U.S. market share.

o             Poultry.   Production of broiler meat in 1998 is expected to be almost
28.4 billion pounds, up 4 percent from 1997, while turkey production is
expected to be down 1 percent following weak net returns in 1996 and 1997. 
During the past several months, export prospects for U.S. poultry have become
less certain due to the continuing financial crisis in many Asian countries;
currency depreciation against the U.S. dollar in Thailand and Brazil which
gives them a competitive price advantage over the U.S. in many major markets;
and the outbreak of avian influenza in Hong Kong--and subsequent dampening of
demand for all poultry products--which was the second-largest market for U.S.
broilers and turkeys.  

As these conditions continue into 1998, broiler production increases will
likely slow down from initial brisk levels.  The CPI for poultry is expected
to be unchanged, after increasing 2.8 percent in 1997.

o             Other meats.  The price movements of these highly processed food items
(hot dogs, bologna, sausages) are influenced by the general inflation rate as
well as the cost of the meat inputs.  Retail prices of these products increased
2.8 percent in 1997, and are expected in 1998 to remain flat.

o             Fish and seafood.   Almost 50 percent of fish and seafood consumed in the
U.S. comes from imports.  Imports for 1997 were up--salmon, shrimp, crawfish,
mussels, tilapia, and oysters.  Domestic production of catfish and trout was
also up.  In the 1990's, U.S. per capita seafood consumption has remained flat,
between 14.8 and 15.2 pounds of edible meat per year, with population growth
accounting for any increases in total domestic seafood consumption.  The CPI
for fish and seafood is expected up 1-3 percent in 1998 compared with 2.3
percent in 1997.

o             Eggs.  Following volatile egg prices and a CPI increase of 18 percent in
1996, higher production and lower export levels during 1997 led to larger U.S.
consumption of eggs and a drop of 1.5 percent in average retail prices.  With
table-egg production expected to increase further in 1998--by about 2 percent--consumption is expected to increase again, to the highest level since 1988. 
The CPI for eggs in 1998 is expected to be flat.

o             Dairy products.  Higher milk production, along with modest dairy product
demand, led to a 2.4-percent CPI increase in 1997.  Production in 1997 rose
about 1 percent from 1996 levels, with demand up and feed costs down. 
Increased output led to large U.S. commercial dairy stocks, particularly of
nonfat dry milk and American cheese. With milk output expected to increase
slightly this year, retail prices for dairy products are forecast to increase
from 0 to 2 percent in 1998.

o             Fats and oils.   Since fats and oils are highly processed food items,
their prices are influenced by the general inflation rate as well as by U.S.
and world supplies of vegetable oils.  The CPI for fats and oils is expected
to increase a modest 1-3 percent in 1998, following a rise of just 0.9 percent
in 1997. 

o             Fruits and vegetables.  Plentiful supplies of both domestic and imported
fruits and vegetables limited retail price increases in 1997.  But higher
prices for potatoes, onions, and cabbage due to lower stocks and strong
exports, along with delayed plantings, could result in periods of short
supplies and elevated prices through spring 1998.  (See "Briefs," page XX, for
a discussion of this year's weather impacts on horticultural crops.)  

o             Fresh fruits.  Total fruit-bearing acreage has increased steadily for the
past 5 years.  Citrus fruit acreage has expanded as re-plantings in Florida
following the late-1980's freezes have begun to bear fruit.  These trees, which
include oranges and grapefruit, will produce increasingly larger crops into the
early 2000's.  California has also expanded its orange production areas, with
most of its crop going for fresh use; Florida's oranges are used mainly for
juice. 
              
Supplies of summer fruits were also abundant in 1997, bringing about
generally lower increases in prices and expanded export opportunities. 
California, the largest U.S. producer of peaches, produced another bumper
crop in 1997.  Supplies of nectarines, plums, apricots, and sweet cherries
were also abundant in 1997.  Apple production was down about 2 percent in
1997, with a smaller Washington crop and smaller fruit size in North
Carolina and Virginia.  Supplies of bananas, which are virtually all
imported, were ample during the past 2 years.  

Despite heavier-then-normal rains in California and Florida this winter,
citrus fruits were already developed by the time the stormy weather began,
although the rains have hampered harvesting activities for this year's large
orange crops. The 1998 peach crop in the southeastern U.S. could be
significantly reduced as a result of 3 consecutive days of freezing
temperatures in mid-March, although peaches are a small component of total
fruit production.  The fresh fruit index, which increased a modest 0.8
percent in 1997, is expected to increase 2-4 percent in 1998, with strong
U.S. demand expected to continue and exports projected to rise. 

o             Fresh vegetables.  Growing conditions in the major fresh vegetable
producing areas were mixed in 1997.  A January freeze in Florida resulted in
minimum damage to several fresh-market vegetables--squash, snap beans, green
peppers, eggplant, and tomatoes--with the impact on retail prices for these
items less than originally expected.  Fresh-market vegetables grown in
states not affected by the freeze are potatoes, lettuce, onions, celery,
broccoli, cauliflower, and cabbage.
              
Growing conditions normalized during the spring and summer months, but the
weather did an about-face in the last quarter of 1997.  Torrential rains in
Florida; rain and cold in the desert areas of California, Arizona, and
Texas; and an unusual December freeze in west Mexico led to lower supplies
and higher retail prices for tomatoes, bell peppers, lettuce, and broccoli. 

In addition to the price effects of the weather-related problems, U.S.
growers reduced harvested area from a year earlier for some fresh-market
vegetables and for potatoes (both processed and fresh), raising prices in
fall 1997 from a year earlier.  On an annual basis, fresh vegetable retail
prices increased 2.9 percent in 1997.  Prices in 1998 are expected to
increase 3-5 percent.  Prices in the first half of the year likely to
average about 10-15 percent higher than a year earlier due to periods of
weather-related supply shortages in the wake of heavy rains in California. 
The magnitude of the annual increase depends on several factors:
continuation of the unsettled weather patterns related to a strong El Nino
through spring; 1998 plantings; and expected higher prices for potatoes,
which account for the highest expenditure share of the vegetable CPI.

o             Processed fruits and vegetables.  Contract acreage for the five leading
processing vegetables (tomatoes, sweet corn, snap beans, green peas, and
cucumbers) was down 3 percent in 1997, after a 9-percent decline in planted
acreage a year earlier.  However, processed vegetable prices increased a
modest 2.3 percent in 1997 and are expected to increase a modest 1-3 percent
in 1998 because of plentiful supplies.  Processing tomato supplies are
expected up 10 percent, and supplies of corn, beans, and peas are expected 
about the same as 1997.  The ready availability of supplies also kept the
CPI increase for processed fruits to 2.5 percent in 1997, with an expected
increase of 0-2 percent in 1998. 

o             Sugar and sweets. Domestic sugar production was down 2 percent to 7.2
million tons in 1996/97 but is projected up 9 percent in 1997/98; higher
sugar beet prices and lower prices for competing crops led to acreage
increases in both years.  Lower retail prices for selected sugar-related
food items in 1997 held the sugar and sweets CPI to under 3 percent. 
Although U.S. sugar consumption has grown by about 1.9 percent per year
since 1985/86 and industrial use of sugar has risen, the CPI increase is
projected at a moderate 1-3 percent in 1998. 

Cereal and bakery products account for a large portion of the at-home food
CPI--almost 15 percent.  While significantly higher grain prices contributed
to higher retail prices for selected bakery products in 1996, grain prices
came down in 1997.  Moreover, most of the costs to produce cereal and bread
products are for processing and marketing--more than 90 percent in most
cases--making grain and other farm ingredients a generally minor cost
consideration.  Competition for market share among the three leading
breakfast cereal manufacturers led to a drop of 9.7 percent in the cereal
component of the index from 1995 to 1996, with an additional decrease of 1.4
percent from 1996 to 1997.  With competition among producers expected to
continue, the CPI for cereals and bakery products is expected to rise by
just 1-3 percent in 1998, following the 1997 increase of 2.1 percent.  

o             Nonalcoholic beverages.  Coffee and carbonated beverages are the two
major components, accounting for 32 and 50 percent of the nonalcoholic
beverages index.  Lower coffee prices drove the index down by 2.4 percent in
1996, but the index moved up again in 1997--by 3.7 percent--reflecting a
jump of 12.6 percent in coffee prices.  Speculation about a smaller 1997/98
coffee crop in Brazil (the largest Arabica coffee producer), and an
uncertain labor situation in Colombia, led to sharp increases in green
coffee costs on the world market in spring and summer 1997.  These price
increases, combined with low U.S. coffee stocks, produced wholesale price
fluctuations that translated into higher retail prices for 6 months of the
year.  

A 1.4-percent drop in carbonated beverage prices mitigated the increase in
the nonalcoholic beverages index in 1997.  Competition in the soft drink
industry between the two major competitors peaked during the summer months,
continued through the end of the year, and led to the reduction in
carbonated beverage prices.  Moreover, prices of Robusta coffee beans, the
primary ingredient in retail-store coffee blends, increased less sharply
than prices for Arabica beans, which are used in gourmet coffees.  Smaller
increases in Robusta prices along with the drop in the carbonated beverages
index checked what might have been a larger increase in the nonalcoholic
beverages price index in 1997.  With coffee prices continuing to decline
since August 1997, the CPI for nonalcoholic beverages is expected to
increase 1-3 percent in 1998. 

o             Other foods.  Other miscellaneous foods are highly processed and
largely affected by changes in the all-items CPI.  These products include
frozen dinners, pizzas, and precooked frozen meats.  Competition among these
products and from the away-from-home market should continue to dampen retail
price increases for items in this category.  In 1997, the CPI for this
category increased 3.2 percent and is expected to increase 2-4 percent in
1998.
Annette Clauson (202) 694-5373
aclauson@econ.ag.gov


SPECIAL ARTICLE

Trade Prospects Support Bright Outlook
In USDA's Long-Term Baseline 

Strong global trade prospects and a market-oriented domestic agricultural
policy combine to produce a favorable outlook for U.S. agriculture over the
next 10 years.  In USDA's long-term baseline projections, assumptions of
generally favorable global economic growth, combined with liberalized trade
associated with both the GATT agreement and unilateral policy reforms,
support strong growth in global trade and U.S. agricultural exports.  While
the baseline was completed before the full extent of the Asian crisis was
evident, the long-term scenario represented in the projections would not be
greatly altered if Asia recovers as expected over the next 3 to 4 years and
resumes its long-term growth.

Greater market orientation in the domestic agricultural sector under the
1996 Farm Act puts U.S. farmers in a favorable position for competing in the
global marketplace.  Agricultural  producers now respond to signals from the
marketplace rather than to government commodity programs, making
agricultural production economically more efficient.  

With convergence of productive capacity and projected demand, nominal market
prices rise, farm income increases, and the financial condition of the
agricultural sector stabilizes.  Management of risk will be important for
farmers, reflecting the reduced role of government in the sector.  The
sector will be highly competitive, with successful producers having strong
technical and managerial skills, and the trend toward fewer but larger farms
will continue.  

A combination of small increases in farm-level prices and moderate increases
in marketing costs means that consumer food prices will continue to rise
less than the general inflation rate.  The largest price increases generally
occur among the more highly processed foods, such as cereals and bakery
products and other prepared foods, foods whose prices are related more to
the costs of processing and marketing than to the costs of farm commodities. 
Expenditures for meals eaten away from home account for a growing share of
food spending, reaching almost half of total food spending by 2007.

Macroeconomic assumptions used for the baseline provide a setting for strong
growth in agricultural demand, both domestically and in international
markets.  Domestic macroeconomic assumptions include deficit reduction
resulting in a balanced Federal budget, which leads to lower interest rates,
rising investment, higher productivity, and stronger growth in gross
domestic product (GDP) than in the last decade.  Real GDP growth averages
about 2.5 percent from 1998 to 2007, with consumer price inflation averaging
about 3 percent.

Global economic growth averages over  3 percent annually in the next decade,
well above growth during 1990-96.  Macroeconomic growth in developed
countries averages about 2.5 percent through 2007 as low inflation and low
interest rates lead to an improvement from the 2-percent growth in the first
half of the 1990's.  Aggregate growth for developing countries over the next
10 years is projected to average near 5.5 percent, compared to 5-percent
growth in 1990-96.  The developing Asian economies are expected to remain
growth leaders in the longer term, despite 1997's currency devaluations and
related economic slowdowns in Southeast Asia.

Importantly, the projected growth for many developing countries occurs at
income levels that can promote increasingly diverse diets and increase
demand for more meats and other high-value products.  Income growth enhances
demand for agricultural goods, both through increases in direct food use and
through derived demand for livestock feeds to meet increases in meat demand. 

Economic growth of the former Soviet Union (FSU) and countries in Eastern
Europe improves over the next few years, following economic decline during
the transition from centrally planned economies.  Countries that are further
along in the transformation to market economies and in integration into the
global economy (such as Poland) have higher projected growth earlier in the
baseline.

Baseline projections incorporate provisions of the 1996 Farm Act and assume
that the act is extended through the end of the baseline.  The 1996 Act
redesigned income support programs and discontinued supply management
programs for major field crops.  Production flexibility contract payments
established by the act are generally unrelated to current plantings or to
market prices.  In aggregate, these payments decline from 1997 through 2002. 
Expanded planting flexibility under the act permits producers to base
cropping choices more fully on signals from the marketplace.  The 1996 Farm
Act also phases out price supports for dairy and requires the consolidation
and reform of Federal milk marketing orders.

The baseline assumes that the Conservation Reserve Program (CRP) will
increase to its maximum authorized level of 36.4 million acres by 2001.  CRP
enrollment involves a competitive selection process based on an
environmental benefits index that takes government costs into consideration.

The baseline assumes full compliance with all bilateral and multilateral
agreements affecting agriculture and agricultural trade.  Projections assume
full compliance with the internal support, market access, and export subsidy
provisions of the General Agreement on Tariffs and Trade (GATT) Uruguay
Round Agreement.  The baseline assumes no accession to the World Trade
Organization by the FSU, China, or Taiwan; no enlargement of the European
Union (EU)  beyond its current 15 members; no implementation of more
liberalized trade among the countries of the Asia-Pacific Economic
Cooperation; and no expansion of the North American Free Trade Agreement. 
Agricultural and trade policies in individual foreign countries are assumed
to continue to evolve along their current paths. 

Field Crop Prices 
Strengthen

Productive capacity for crops in the U.S. is projected to rise in the next
decade as a result of increases in land use and productivity.  Yields for
most crops are projected to rise at or near their long-term trend levels. 
These gains reflect, in part, the acquisition of agricultural land by
larger, generally more efficient farms, continuing a long-term trend. 
Nonetheless, gains in use outpace yield increases for corn, wheat, soybeans,
and rice, so additional land is brought into production.  Additional area is
drawn into production based on market incentives, since production
flexibility contract payments are not dependent on current production
decisions.  

By 2007, Planted acreage for major crops rises about 20 million acres above
average plantings in the early 1990's.  More than half of this increase in
cropland use has already occurred.  Increased planting flexibility under the
1996 Farm Act has facilitated these acreage increases and will continue to
do so over the rest of the baseline period.  Planting flexibility also
allows farmers to adjust the mix of crops planted in response to changes in
relative net market returns among the crops.

Export markets are the largest source of demand growth for most U.S. crops. 
Reduced trade barriers under the Uruguay Round agreement combined with
strong global economic growth raise world agricultural trade and U.S. crop
exports.  U.S. exports of feed grains and wheat expand the fastest. 
Increasing coarse grain exports largely reflect stronger economic growth in
developing regions, where higher incomes result in diet diversification and
rising demand for meat.  This leads to expanding foreign livestock sectors
and demand for feed.

Increases in global wheat trade also reflect rising incomes in developing
countries.  However, U.S. wheat export growth slows somewhat after 2000 as
global wheat prices rise high enough to permit unsubsidized competition from
the EU.  This allows the EU to export wheat beyond its GATT agreement
quantity limits on subsidized wheat exports.  Rising global import demand
for soybeans and soybean meal reflects expansion of developing country
feed-livestock sectors and increases U.S. soybean and meal exports during the
baseline period.  However, tightening domestic supplies and rising prices
allow U.S. competitors from South America to capture a greater share of
world soybean and meal trade.  U.S. cotton exports maintain a 25-26 percent
share of a growing global market.  

Domestic demand for most crops is projected to grow slightly faster than
population.  Notably stronger domestic demand for rice reflects increasing
numbers of Americans of Asian and Latin American origin and a greater
emphasis on dietary concerns.  Gains in corn sweetener use and in corn used
for ethanol production also exceed population growth rates.  Increases in
domestic soybean crush reflect continued strong growth in poultry production
and demand for soybean meal.  Domestic wheat use, however, is nearly flat as
declining wheat feed use offsets food use gains.  Greater U.S. exports of
cotton yarn, fabric, and semifinished products will promote growth in
domestic mill use of cotton, although increases in textile imports--mostly
apparel--and competition from manmade fibers limit domestic gains. 

Long-term trends in supply/demand balances for the major field crops imply
tightening stocks-to-use ratios and strengthening nominal prices from 1999
to 2007.  The historical downward trend in real (inflation-adjusted) crop
prices is projected to slow.

Sugar production rises in the baseline, led by gains in beet sugar
production, which accounts for a growing share of domestic sugar production. 
Per capita sugar use rises about 2.5 pounds per person over the next 10
years, with growth slowing from recent years due to continued substitution
of other sweeteners such as high-fructose corn syrup.

Tobacco production generally declines in the baseline due to reduced
domestic use and declining leaf exports.  Domestic use falls as cigarette
exports stabilize and domestic consumption continues its long-term decline
due to higher taxes, increased regulation limiting smoking and sales, and
heightened awareness of links between smoking and various diseases.  Leaf
exports decline due to the price and quality competitiveness of other
producers.

The farm value of U.S. horticultural crop production (including
greenhouse/nursery) increases over 3 percent annually through 2007.  While
there will be some gains in per capita consumption of fruits and vegetables
domestically, an increasing share of horticultural production value will go
to export markets, reflecting foreign income growth and trade
liberalization. 

Record Meat Supplies Projected

Record total meat supplies are projected through the baseline, including an
increasing proportion of poultry.  Per capita consumption of red meats
declines, and towards the end of the baseline, per capita poultry
consumption surpasses per capita red meat consumption on a retail-weight
basis.  Declining real prices for meats along with increasing real
disposable income allow consumers to buy more total meat with a smaller
proportion of disposable income.  Per capita consumption of eggs rises in
the baseline as greater use of eggs in processed foods offsets declining
shell egg use.

The livestock sector continues adjustments over the next few years following
the high feed costs of 1995/96.  As grain prices have fallen, pork and
poultry production have rebounded.  However, with tight forage supplies and
longer biological production lags for cattle, beef production falls through
2000.  For the remainder of the baseline period, lower feed prices than in
1995/96, replenishment of forage supplies, low inflation, and strong demand
(domestic and export) result in returns to producers that encourage
increases in red meat and poultry production. 

Cattle herds rebuild from a cyclical low in 2000 (97 million head) to near
102 million head by 2007.  Shifts toward a breeding herd of larger cattle
and heavy slaughter weights partially offset the need for expanding cattle
inventories to previous levels.  The beef production mix continues to shift
toward a larger proportion of fed beef.  The U.S. remains the world's
primary source of high-quality, fed beef.

Pork production becomes more vertically coordinated, with larger, more
efficient  operations.  This structural shift results in a more inelastic
industry supply curve, dampening hog sector cycles.  The U.S. becomes an
increasingly important net pork exporter, reflecting cost competitiveness of
U.S. operations, as well as greater environmental constraints for some
competitors that limit their production gains.  

Technological advances and improved production management will continue to
be important in the broiler and turkey industries, but will be unable to
hold down production costs as significantly as in the past 10 years. 
Competition in global poultry markets holds U.S. poultry exports to moderate
gains, although export gains are expected for broiler parts, especially for
dark meat.

Dairy productivity gains offset declining cow numbers over the next 10
years, allowing milk production to grow.  Real milk prices fall, pushing
weaker operations out.  However, milk production continues to expand in the
West and on large dairy operations in the North.  Expansion in commercial
use of dairy products is led by sales of cheese and dairy ingredients for
processed foods, while fluid milk sales remain flat.

Net Farm Income Rises, Boosting 
Farm Sector Net Worth

Net farm income rises gradually through the baseline period as strong
agricultural demand leads to increased output and strengthening prices. 
However, gains are slightly less than inflation, so real net farm income is
down through 2007.  The agricultural sector relies increasingly on the
marketplace for its income as direct government payments fall throughout the
baseline and represent less than 3 percent of gross cash income beyond 2000. 
As provided for in the 1996 Farm Act, production flexibility contract
payments decline from 1997 to 2002.

Both crop and livestock receipts are up in nominal terms due to larger
production and higher prices.  Production expenses increase in the baseline,
with expenses for nonfarm-origin inputs--such as labor, fertilizer, and
pesticides--rising faster than expenses for farm-origin inputs.  Cash
operating margins stabilize, with cash expenses representing about 75
percent of gross cash income.  

Higher nominal farm incomes and relatively low interest rates assist in
asset accumulation and debt management, leading to an improved balance sheet
for the farm sector.  Farm asset values increase throughout the baseline,
led by gains in agricultural land values.  Increases in farm debt rise less
rapidly than in the past, and debt-to-asset ratios continue to drop from
over 20 percent in the mid-1980's to less than 13 percent by the end of the
baseline.  

With asset values increasing more than debt, farm equity rises
significantly.  Increasing nominal farm income in the baseline, combined
with rising farm equity, means relative financial stability in the farm
sector.  The trend toward fewer but larger farms continues, as producers who
are more efficient and better managers acquire the production resources of
exiting farmers.

The 1996 Farm Act transferred income variability risk from the government to
farmers.  Although baseline projections assume no shocks, normal variations
in supply and demand will occur; net farm income is potentially more
variable from year to year because production flexibility contract payments
are fixed regardless of market prices.  Total revenue will reflect market
price variation more directly, where previously a portion of this risk was
managed through deficiency payments linked to market prices.  

Marketing alternatives to manage risk and buffer a portion of this
potentially greater income volatility will become more important for many
farmers.  Some farmers will expand their use of futures and options markets,
possibly using new instruments such as yield contracts.  Many producers
continue to use crop insurance for yield protection and may expand coverage
using revenue insurance now available in some areas.  Other alternatives to
manage risk include diversification of production, contracting in advance
for the future sale of the commodity, integrated ownership, and involvement
with more value-added processing beyond the farm gate.  

Trade Prospects Remain Bright,
Led by High-Value Products

The USDA baseline projects strong growth in global trade of bulk and high
value agricultural commodities, together with strengthening bulk commodity
prices.  With U.S. agriculture facing relatively sluggish growth in domestic
demand and becoming increasingly dependent on trade for growth, expanding
global demand and prices support steady gains in farm output and market-
based incomes. 

The total value of U.S. agricultural exports rises steadily from $57.3
billion in fiscal 1997 to nearly $85 billion in 2007.  U.S. agricultural
import values also rise, but with exports increasing more, the net
agricultural trade balance rises about $12 billion from $21.5 billion in
1997.  High-value product (HVP) exports grow more rapidly than bulk
commodity exports and are projected to account for about 63 percent of total
U.S. agricultural exports by 2007.  HVP export gains are led by exports of
horticultural products and animal products.  Although bulk exports are
projected to grow more slowly than HVP exports, faster growth in most bulk
exports compared with the 1980's is expected to be a key source of export
strength during 2000-2007.  

Several factors drive the favorable prospects for global farm trade.  Key
among these is the outlook for relatively strong economic growth across
developing countries, including those in Latin America, North Africa, and
the Middle East where economic performance was generally weak during much 
of the 1980's and early 1990's.  The anticipated restoration of positive growth
in the transition economies of Eastern Europe and the former Soviet Union is
another key shift in the macroeconomic outlook.  Compared with developed
economies, consumer food demand in both the developing and transition
economies should be highly responsive to improvements in income.  Also
fundamental to the trade outlook are the increasingly market-oriented
domestic and trade policy regimes across many developed and developing
countries.  These reforms--arising from multilateral, regional, and
unilateral initiatives--should permit the impacts of expanding consumer
demand to be transmitted into world markets.

As the 1996 Farm Act steadily increases the dependence of U.S. agriculture
on market returns, the economic health of the sector will be increasingly
linked to developments that affect global demand and U.S. competitiveness. 
Despite the solid fundamentals in the outlook, many uncertainties could
alter projected gains in world trade and strengthening of world prices. 

Rising Developing Country Incomes 
To Benefit Feed Grains . . .

Coarse grains are projected to show the fastest trade growth among bulk
commodities, due to rising meat consumption and feed demand across
developing regions.  Trade in soybeans and meal, while projected to be
slower than feed grains, will also be driven higher by expanding feed-livestock sectors in developing countries.

World import demand for coarse grains is projected to strengthen in the
baseline, with annual growth averaging 3.4 percent through 2007.  Global
trade is projected to exceed the 1980/81 record of 108 million tons in 2001
and reach over 132 million tons by 2007.  

Stronger economic growth is expected to fuel higher coarse grain imports by
China, Southeast Asia, North Africa, the Middle East, and Latin America. 
East Asian imports are projected to remain steady, as declining feed demand
in Japan due to rising meat imports is roughly offset by moderate growth in
feed demand in Korea and Taiwan. Taiwan's feed imports are expected to begin
recovering by 2000, as hog numbers start to rebound from the 1997 foot-and-mouth
disease (FMD) outbreak and as poultry production continues to expand.  

Southeast Asian feed grain imports are expected to be slowed by the effects
of the financial crisis, but show strong longer term growth.  The FSU, one
of the world's largest importers during the 1980's, is expected to be a
small net importer of coarse grains late in the baseline, as animal numbers
increase with an improving economy.

Significant growth in both corn and barley trade is expected.  The largest
gains in corn imports are expected to occur in China, Southeast Asia, and
North Africa and the Middle East, where demand for feed for livestock is
expected to continue expanding rapidly.  For barley, much of the demand
growth will occur in China and other malting barley markets.  Growth in feed
barley trade is expected to be slowed by constrained supplies and substitution 
of other feeds.  China's coarse grain demand, however, is central to the projected 
growth in global trade, and the recent drop in China's imports has created additional 
uncertainty. 

U.S. exports of coarse grains are projected to rise in the near term, as
China returns to being a net corn importer and competition from Eastern
Europe declines.  The U.S. share of world coarse grain trade is projected to
grow to more than 66 percent, but will decline somewhat near the end of the
baseline as stronger prices boost foreign production and U.S. area expansion
is increasingly limited by the CRP and crop competition.  Although
Argentina's corn exports are projected to rise, wheat and oilseed prices are
likely to limit corn expansion in Argentina, leaving the U.S. the major
beneficiary of robust import demand for corn.

Growth in world soybean and meal trade is projected to remain strong,
although somewhat slower than during the last 10 years because of weak
demand growth in the FSU, Japan, and the EU.  Combined trade of soybeans and
meal is projected to grow about 2.1 percent annually through 2007, with
growth in soybean trade projected at 1.8 percent and meal trade at 2.3
percent.  Developing economies account for virtually all of the projected
soybean and soybean meal import growth.  Import demand is projected to
expand most rapidly in China.  Economic difficulties slow Southeast Asian
imports during 1998 and 1999, but growth is then expected to resume.  Income
growth also supports robust gains in livestock and feed protein demand in
South America, the Middle East, and North Africa.

The U.S. soybean market share is projected to remain about 68 percent
through 2007, while the U.S. share of the soybean meal market shrinks from
19 percent to 16 percent.  U.S. market shares remain lower than achieved in
the 1980's because limited potential for expanding U.S. area and rising
domestic feed demand--partly driven by growing meat exports--constricts U.S.
exportable supplies.  Brazil's stronger internal feed demand is expected to
slow its meal exports, but Argentine and Indian exports are projected to
show solid long term-growth. 

. . . As Well As Food Grains & Oils

Wheat trade is also expected to respond to stronger income growth and
continued urbanization in developing regions.  World wheat trade is
projected to grow about 2.5 percent annually through 2007, significantly
faster than in the previous 10 years.  Most growth is expected to occur in
lower- and middle-income countries across Asia, Latin America, North Africa,
and the Middle East.  China's wheat imports, a key source of uncertainty in
the outlook, are projected to rebound from recent low levels, as domestic
yields fall back to trend levels, area remains limited, and demand growth
outstrips production.  In non-producing areas of Asia, income gains and
urbanization will continue to shift consumer preferences away from rice and
other traditional staples and toward wheat-based foods and meat.  In North
Africa and the Middle East, rising incomes and market-oriented farm reforms,
including privatization of trade, are expected to boost imports.

U.S. wheat market share is projected to grow until 2000, then decline slowly
when prices become high enough for the EU to export without subsidy.  In the
later years of the baseline, U.S. exports are increasingly affected by slow
yield growth, large acreage in the CRP, and increased competition from the
EU and others.  While EU exports are likely to be controlled by the Uruguay
Round limits on subsidized exports during 1998-2000, the extent of EU
competition after 2000 will depend on EU policies, particularly management
of its land set-aside program.  The baseline assumes a 10-percent set-aside
to take advantage of export opportunities for wheat while minimizing risks
of building excess stocks of barley.  Initially, land constraints and
competitive prices for other crops are expected to limit wheat exports by
Argentina, Australia, and Canada, but competition by these and
nontraditional exporters is expected to increase in response to
strengthening prices later in the baseline. 

Rice trade is projected to grow about 2 percent annually through 2007, with
growth strengthening after 2000.  Anticipated growth remains about the same
as in the 1980's and the early 1990's.  Long-grain varieties are expected to
continue to dominate trade, despite anticipated gains in medium-grain
(japonica) rice imports by Japan and South Korea under the Uruguay Round
agreement.  The U.S. rice export market share is expected to remain near the
recent level of 13.5 percent through 2000, then decline to about 11 percent
by 2007.  Small U.S. production gains, strong domestic use, and high prices
relative to competitors are expected to limit the volume of U.S. rice exports.

World vegetable oil trade is projected to grow 2.7 percent annually, less
than the rates achieved in the 1980's and the early 1990's.  Rising incomes
and import demand in China, India, and Pakistan will be the main drivers of
trade growth.  Soybean oil trade is projected to slow more than total
vegetable oil trade, with projected annual growth of 1.8 percent during
1997-2007.  That compares with growth of about 9 percent in the early
1990's, when U.S. and EU subsidies contributed to sharp import gains in
developing countries.  During 1997-2007, growth in soybean oil trade will be
curbed by reduced U.S. export subsidies, negligible oilseed expansion in the
EU, and higher relative prices that shift demand toward competing oils,
particularly palm oil.  The U.S., Argentina, Brazil, and the EU continue to
account for more than 90 percent of world soybean oil exports--Argentina
remains the largest exporter.

World cotton trade is expected to grow 1.7 percent annually through 2007,
reversing much of the decline suffered during the previous 10 years.  The
contraction of world cotton trade that began in the late 1980's stemmed from
the sharp decline in Russian demand and the continued shift of the spinning
process from traditional cotton-importing countries to cotton-producing
countries.  

During the baseline period, demand is expected to begin rebounding in Russia
and Central and Eastern Europe, and consumption gains in Mexico, Brazil, and
China are expected to outpace production and push up world trade.  In
addition, pest and disease problems are expected to constrain growth in
Pakistan's raw cotton production and textile exports, strengthening raw
cotton demand by some other textile exporters that rely on imported cotton. 
U.S. cotton exports are also expected to trend upward during 1998-2007, with
the U.S. market share remaining near 25 percent. 

Meat Trade To Sustain Growth 

Rising meat demand and increased market access in East Asia and China are
expected to be the key sources of  sustained growth in world beef, pork, and
poultry trade.  Much of the growth in beef and veal import demand is
projected in the Pacific Rim countries, where higher incomes and lower trade
barriers, which reduce internal prices, are expected to increase demand. 
While economic problems associated with the Asian currency crisis may slow
Asian imports in the near term, significant growth is expected in the longer
term.  Larger beef imports are expected by Mexico and Russia, where income
growth will increase beef demand more rapidly than domestic production can
respond.

The U.S., Australia, and Argentina are all projected to continue to increase
beef exports through 2007, with Australia and the U.S. likely to vie for the
role of leading exporter.  Argentina has the potential to expand sales to
new markets now that it has been recognized as free of foot-and-mouth
disease (FMD) and is projected to gradually expand exports to become the
fourth largest beef exporter.  Cutbacks in subsidized EU exports and a
reduction in beef production in New Zealand will limit export growth. 

World pork trade is projected to continue to expand, driven largely by
rising demand in several of the major pork importers, including Mexico,
Japan, and Hong Kong.  The FSU and Central and Eastern Europe are expected
to have significant, although somewhat variable, influence on the world
market.  The U.S. will assume a dominant export role in global pork trade,
increasing exports by almost 70 percent between 1998 and 2007.  Robust U.S.
export growth reflects a restructured U.S. pork industry with greater export
orientation and internationally competitive costs.  The U.S. is expected to
gain market share from Taiwan, whose exports of pork are assumed to cease
until 2003 in the aftermath of the FMD outbreak in 1997.  EU pork exports
will increase, as it continues to export unsubsidized pork over and above
the Uruguay Round limits on subsidized exports.

Continued rapid growth in poultry meat trade is projected, based on
anticipated gains in the largest import markets, including the FSU, China,
Japan, Hong Kong, Mexico, Canada, and the Middle East.  Most of the growth
in world trade is expected to come from expanded shipments of relatively
low-priced poultry parts, especially in emerging markets in middle- and
lower-income countries.  The U.S. is expected to maintain a large share of
this expanding market since many of those products are less preferred in the
U.S.  Exports of processed products are expected to grow, but to remain a
relatively small percentage of total trade.
Paul Westcott (202) 694-5335 and Rip Landes (202) 694-5275
westcott@econ.ag.gov 
mlandes@econ.ag.gov

SPECIAL ARTICLE BOX--1
Baseline Design and Uses

USDA's longrun baseline provides projections for the agricultural sector
through 2007.  Projections cover agricultural commodities, agricultural
trade, and aggregate indicators of the sector, such as farm income and food
prices.  The projections are a conditional longrun scenario with no shocks
and are based on specific assumptions regarding the macroeconomy,
agricultural policy, the weather, and international developments.  The
projections incorporate provisions of the Federal Agriculture Improvement
and Reform Act of 1996 (1996 Farm Act) and assume that current agricultural
law remains in effect through 2007.

The baseline projections are one representative scenario for the
agricultural sector for the next decade.  The projections are not intended
to be a Departmental forecast of what the future will be.  Instead, the
baseline provides a description of what would be expected to happen under
the 1996 Farm Act, with very specific external circumstances.  Thus, the
projections in the baseline are conditional on those assumptions.  

Once the baseline is established, an important use of the projections is in
analyzing alternative scenarios.  The baseline provides a point of departure
for discussion of alternative farm sector outcomes that could result under
different assumptions, ranging from different macroeconomic assumptions to
agricultural policy changes to weather shocks.

SPECIAL ARTICLE BOX--2
USDA Baseline Availability

The projections and discussion in this article draw from long-term
projections published in the Departmental report USDA Agricultural Baseline
Projections to 2007.  The projections were prepared in October-December 1997
and the report was released at USDA's annual Outlook Forum in February 1998. 


USDA's 1998 baseline projections are available electronically on the
Internet at:  http://www.mannlib.cornell.edu/data-sets/baseline/94005.  

An ERS briefing room for agricultural baseline projections has also been set
up at: http://www.econ.ag.gov/briefing/baseline. SPECIAL ARTICLE BOX--3

Effects of Asia Financial Crisis 
On U.S. Agricultural Trade Value

The macroeconomic assumptions used for the USDA baseline were made in the
Fall of 1997 when the outcome of the Asian financial crisis was highly
uncertain.  The baseline assumed a moderate Asian crisis scenario in which
the currency devaluations and related economic slowdowns were confined to
Thailand, Indonesia, Malaysia, and the Philippines, not spreading to other
countries in East Asia, South Asia, or China.  Impacts on those four
Southeast Asian countries were assumed to affect growth only through 2000,
with policy reforms and international financial support leading to a
recovery of economic growth in subsequent years.  

A more recent analysis of the impacts of the Asia financial crisis was
conducted by USDA in late December 1997, after the baseline was completed,
to assess the evolving Asian situation (AO February 1998).  For this
analysis, growth and exchange rate impacts in the four major Southeast Asian
economies were deepened from those assumed in this baseline, and impacts
were extended to Japan, Korea, Taiwan, Australia, Argentina, Brazil, and
Mexico.  Growth and exchange rate impacts were assumed for 1997-2000, with
the crisis resolved in 3 to 4 years.  Income growth was slowed for China,
but no devaluation was assumed. 

In addition to the moderate impacts of the Asia crisis on U.S. agricultural
exports of about 1 percent annually already included in the baseline
projections, the late-December assessment estimated that U.S. agricultural
exports would be further reduced by 3 percent in 1998, 5 percent in 1999,
and 4 percent in 2000.  Annual exports in later years would reflect the
degree of economic recovery in affected countries.  In this worsened crisis
scenario, fiscal-year 1998 impacts affect high-value product exports, such
as meats and horticultural products, more than bulk commodity exports. 
Export reductions for bulk commodities and high-value products are about
equal in later years.  These estimated reductions reflect only the effects
of the Asia crisis and do not include other changes in the trade outlook
that occurred since the baseline analysis was conducted.  

SPECIAL ARTICLE BOX--4
Sources of Uncertainty in Trade Prospects

Global trade prospects in the baseline are bright for the next 10 years. 
However, as much as any time in the recent past, they are subject to an
array of both general and country-specific uncertainties.  Among these is
the potential for an economic shock, such as the Asian financial crisis, to
create a sustained slowdown in economic growth across a number of
significant developing country markets.  Another concerns the degree to
which agricultural supplies, particularly in developing and transition
economies, respond to the introduction of biotechnology as well as to the
new macroeconomic and price environment they are expected to face over the
next 10 years.  

Country-specific uncertainties include the potential for different but
plausible assumptions on key policies or on technical parameters in specific
countries--such key markets and competitors as China, the European Union
(EU), and the former Soviet Union (FSU)--to significantly alter global
market projections.

Developing Countries' Economic Growth Is Critical 

Prospects for stronger growth in per capita incomes across most developing
and transition regions during 1998-2007, compared with the 1980's and early
1990's, are central to the projected expansion of bulk commodity trade.  To
a significant extent, the favorable outlook should be resilient to shocks
because it rests on such factors as more coordinated macroeconomic
management in developed countries, greater commitment to market-oriented
policies in developing and transition regions, and an increasingly open
world trading system.  

Any number of events could alter this economic outlook.  The ongoing
financial crisis in Asia is the most obvious.  Other possible scenarios
include a new oil price shock stemming from disrupted Middle East supplies,
or a loss of political support for sustaining reforms in such areas as Latin
America and the FSU.  However, in order to fundamentally alter the currently
broad-based demand outlook, the economic shocks would need to be sustained
and affect a number of significant markets. 

A December 1997 analysis of the Asian financial crisis by USDA's Economic
Research Service indicates that the crisis could push major commodity prices
down 2-5 percent during 1997-2000, compared with the baseline projections,
and bring reductions in world trade volumes of 1-4 percent.  Global trade
impacts are softened because the most seriously affected Southeast Asian
countries, while growing rapidly, still account for small shares of world
trade, and the larger East Asian markets are relatively inelastic to income
and price shocks.  Also important, lower prices will push up import volumes
in some other markets.  

Supply Response Difficult To Predict

The baseline real price projections for major commodities are above the
long-term trend, implying that gains in agricultural production will not
continue to outpace demand at the same rate as in the past.  Stronger gains
in productivity, particularly on the part of competitors, would undermine
the projected strength of U.S. farm exports and income.  

A number of factors make it particularly difficult to predict productivity
gains confidently during the projection period.  More market-oriented farm
policies in the U.S. and elsewhere will make farm output more responsive to
price changes, but the degree of price-responsiveness is difficult to
predict.  Many developing and transition economies, particularly those in
Latin America and Central and Eastern Europe (CEE), are expected to have
vastly improved macroeconomic conditions that are more conducive to
investment and productivity gains than has been the case in the past 10
years.  

Another potentially significant factor is the possibility in both developed
and developing countries for faster gains in crop and livestock productivity
through biotechnology.  Finally, it is unclear to what extent environmental
and resource constraints--including water shortages, soil degradation, and
pest management problems--will affect farm output.

The productivity growth rates included in the baseline attempt to account
for these dynamics but generally call for slower growth in crop yields than
occurred during 1986-96, particularly in developing countries.  But, given
the significant change in the economic, policy, and technology climate,
alternative outcomes for productivity gains are possible.  Recent large
gains in cropped area and input use in Argentina, and evidence of improved
incentives for producers and investors in agricultural infrastructure in
Brazil, indicate the possibility of larger supply responses than anticipated
in the baseline.

China's Trade Remains a Big Question

China's future role in world markets is probably the largest source of
uncertainty in the trade outlook for many agricultural commodities.  USDA
projections for China indicate that dynamic economic growth will increase
demand for foods and feeds faster than production capacity, because of
China's limited resource base.  It is assumed that trade policy will be
increasingly open and practical, allowing relatively low-priced imports to
meet a growing share of demand, particularly in urban and coastal areas.  

While the data available for China, together with the paths taken in
neighboring countries, tend to support this general story, the data on
virtually all aspects of agricultural production and consumption in China
may not be accurate.  In most cases, current levels of trade are so small
relative to domestic supply and use that minor, and entirely plausible,
changes in assumptions can alter trade projections significantly.  

The most reliable agricultural data for China are trade data, which are
verified by partner country information.  A current concern is that recent
declines in China's imports of two key commodities, wheat and corn, are not
explained by other available data.  This recent trade behavior raises
questions about the data on such variables as crop area, yields, food use,
feed use, and stocks, as well as baseline projections based on those data. 
Reducing the uncertainty created by China in the outlook will require
improvement in the availability and reliability of data.

EU Policy Management Will Affect Markets

There is significant uncertainty about the measures the EU will use to meet
its subsidized export and minimum import commitments under the Uruguay Round
agreement.  Alternative assumptions on management of the current Common
Agricultural Policy (CAP) or for introduction of reforms under the Agenda
2000 initiative could have significant impacts on the baseline projections
for such commodities as wheat and coarse grain.

The baseline assumes that the EU will use current CAP policy mechanisms to
meet its Uruguay Round limits on subsidized exports.  For grains, it is
assumed that any production in excess of intervention purchases and onfarm
use that cannot be exported will depress the internal market price and
dampen output.  Exports without subsidy occur only when the world price is
equal to or greater than the average EU price.   It is assumed that the land
set-aside rate will be adjusted to constrain surplus production.  The
set-aside rate is set at 5 percent from 1997/98 to 1999/2000, and then
increased to 10 percent through 2007.  Under baseline market conditions,
maintaining a 5-percent set-aside would likely generate surplus stocks of
wheat and barley, while raising the set-aside toward the EU statutory level
of 17.5 percent would preclude opportunities to export wheat without
subsidy.  In the longer term, it is assumed that the EU will not allow
stocks to accumulate above the historical average level; larger stocks are
viewed as a short-term strategy for dealing with excess supplies. 

Alternative EU policy scenarios are plausible under the CAP and could have
significant market impacts.  A higher EU set-aside would reduce projected EU
exports of wheat and barley, likely pushing up U.S. wheat and corn exports. 
A smaller set-aside could produce significantly more competition for U.S.
wheat exports, but since it is very unlikely that EU barley could be
exported without subsidy, this scenario would likely require holding large
barley stocks or somehow reducing internal barley prices to stimulate barley
feed use.  

Implementation of reforms under the EU's Agenda 2000 initiative, which has
proposed shifting toward world prices for grains and eliminating the set-aside, 
could have a major impact on projections.  Although some type of
reform seems likely during the projection period, such measures have not
been included in the baseline because both the nature and timing of the
eventual package of reforms are too uncertain.  Such changes, if
implemented, would likely increase EU competitiveness in the world wheat
market, while limiting coarse grain exports.  

Transition Economies Create Large Uncertainties

Future developments in both consumer demand and farm output in the larger
agricultural economies of the FSU and Central and Eastern Europe will be
very important to global markets and  particularly hard to assess.  For the
FSU, current USDA projections call for a recovery to only modest rates of
economic growth, very limited gains in farm productivity, and small levels
of grain exports through 2007.  Stronger growth in incomes, productivity,
and export competitiveness are projected for the CEE region.  The outcomes
for each region are difficult to project because they are dependent on the
uncertain pace of policy and institutional reforms, and because the economic
responses of producers and consumers in their new policy environment are
hard to predict.     

For the FSU, the projections assume that liberalization of markets and
restructuring of agricultural enterprises will continue at their current
slow pace. Crop productivity gains in the FSU are expected to be small,
largely because little progress is anticipated in land reform.  Grain
exports out of the region are expected to remain hampered by high internal
transport costs.  Livestock production is assumed to recover very slowly
because of the slow progress of economic reforms that could reduce
production costs and increase competitiveness.  Faster progress in reforms
to agricultural input and output markets or in improving transport
infrastructure could lead to significantly more FSU competition in global
grain markets than included in current USDA projections. 

The CEE projections incorporate a steady increase in efficiency in the
agricultural sector, reflected in rising yields and greater feeding
efficiency in the livestock sector.  Projected productivity gains are
stronger than in the FSU because of rising incomes, lower interest rates,
greater progress in implementing reforms, and growing investment in both
agriculture and food processing.  With these assumptions, the baseline
projects modest growth in the region's exports of grains and livestock
products.  Significantly faster or slower growth in exports is plausible,
however, depending on the pace of reforms and the economic responses of
producers and consumers. 

Potential for Multilateral Policy Change

While the USDA baseline allows the policies of individual countries to
continue to evolve in a manner consistent with past trends and analyst
judgment, assumptions on bilateral, regional, and multilateral policy are
based solely on agreements in place as of November 1997.  Although a number
of policy changes under discussion may occur during the projection period
(enlargement of the EU-15 to include one or more of the CEE countries and
WTO accession by China and Taiwan), the terms and timing of such agreements
are too uncertain to include in the baseline. 

The EU's Agenda 2000 communication recommends that accession negotiations
begin with Hungary, Poland, Estonia, the Czech Republic, and Slovenia in
1998, with the actual timetable dependent on progress in meeting policy
targets.  A preliminary ERS analysis covering a slightly different group of
countries (Hungary, Poland, Czech Republic, and Slovakia) indicates the
potential impacts of enlargement under two policy scenarios: one where
current CAP policies are applied to the acceding CEE countries, and another
where agriculture in the enlarged EU shifts to world prices and the acreage
set-aside program is abolished (AO June 1997).  Both scenarios require major
adjustments.  When adopting the relatively high EU CAP prices, the CEE
countries expand output sharply and reduce consumption.  Under the terms of
the current CAP, grain exports of the EU-19 would likely fall, with higher
feed use in countries of the current EU-15 more than offsetting increased
production in the CEE countries.  

If the enlarged EU-19 shifted to world prices, which are below CAP prices,
the increase in CEE production would be smaller, but there would be
significant declines in production and increases in consumption in the EU-15.  
If the EU-19 adopted world prices and abolished the set-aside, the
analysis suggests larger wheat exports, as well as larger coarse grain
imports.

The terms of a possible accession to the World Trade Organization (WTO) by
China and Taiwan are under discussion, with much uncertainty about required
policy reforms and timing.  A recent ERS study suggests the potential
impacts of accession (AO July 1997).  For agriculture, the results indicate
a 3-percent increase in world trade, led by an $8-billion increase in
China's annual net agricultural imports.  Modest increases are predicted in
world agricultural product prices, with the largest impact on coarse grain
prices.   Larger grain imports are indicated for China and Taiwan and larger
exports by North America, Southeast Asia, and South Asia.  U.S. agriculture
benefits from higher exports, farm income, and export prices. 

Uncertainty in Long-Term Outlook Will Continue

Just as weather shocks and business cycles affect short-term developments,
the long-term trade outlook can be fundamentally changed by alternate
outcomes in each of these trade-related areas of uncertainty.   Although
analysts will continue to improve their understanding of these issues, many
important components of the long-term outlook are likely to remain
uncertain.  

In some areas, including supply response and developments in transition
economies, sharp changes in policy regimes can mean that historical behavior
offers relatively few clues about future responses.  In other areas,
particularly China, analytical problems associated with poor data and
unclear policies defy an immediate solution.  Likewise, the potential for
unilateral policy change by significant players in the markets will remain a
source of uncertainty.  

On the other hand, current prospects for stronger and broad-based growth in
developing countries will likely be an important source of resiliency in the
baseline outlook for strong growth in bulk commodity demand.  Another source
of resiliency could be continued progress in implementing bilateral or
multilateral policy reforms that can further expand global and U.S. trade,
particularly for high-value agricultural products.
Rip Landes (202) 694-5275
mlandes@econ.ag.gov

END_OF_FILE