AGRICULTURAL OUTLOOK                                       October 21, 1998
November 1998, AO-256
               Approved by the World Agricultural Outlook Board
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CONTENTS

BRIEFS
Livestock, Dairy & Poultry: Hog Producers Signal Plans To Expand
Specialty Crops: U.S. Orange Crop To Decline Sharply in 1998/99

COMMODITY SPOT
U.S. Rice Prices Remain Firm Despite Bumper Supplies 

WORLD AGRICULTURE & TRADE
U.S. Textile Imports & Cotton Production Weave New Relationship

RESOURCES & ENVIRONMENT
Environmental Policy & the WTO

SPECIAL ARTICLE
China's Livestock Sector Growing Rapidly


IN BRIEF

China's Livestock Sector Growing Rapidly

China is among the world's largest producers and consumers of animal proteins. 
Although current per capita consumption of animal proteins is lower in China
than in wealthier nations, it is increasing rapidly as China's economy and
personal incomes grow.  Increasing overall population and rural-to-urban
migration is expected to foster continued rapid growth in demand for animal
products.  Despite measures to increase feed efficiency, China has the
potential to become a growing market for feedstuffs and/or animal protein
imports, as demand for meats, fish, eggs, and milk is expected to outstrip
domestic feedgrain supplies.  And because of the sheer size of China's
livestock sector, even relatively small changes in either livestock inventory
growth or meat demand trends can have notable impacts on global trade
projections for feedstuffs or animal proteins.

Environmental Policy & the WTO

The World Trade Organization (WTO) recognizes that environmental protection is
a legitimate policy goal, despite the fact that environmental policies can
effectively alter production and price levels and thus disrupt trade patterns. 
When environmental policies are assumed to affect trade and production only
minimally, the "green box" provisions of the Uruguay Round Agreement on
Agriculture permit such policies to be exempt from a country's commitments to
reduce support to agriculture.  Discussions between now and the conclusion of
the WTO mini-round on agriculture scheduled to begin in late 1999 may address
a number of unresolved questions, such as how to assess the tradeoff between
environmental protection and trade distortion and how to interpret "minimal
trade-distorting effects." 

U.S. Rice Prices Remain Firm Despite Bumper Supplies

Relatively high prices at planting pulled up U.S. rice area more than 5
percent in 1998 from a year earlier to nearly 3.22 million acres, the second
consecutive annual increase.  The larger planted area will more than offset a
drop in yield to produce the third-largest rice crop on record.  U.S. farm
prices are projected to remain firm during the 1998/99 marketing year, given
expectations of record domestic use, continued strong exports, and smaller
ending stocks.

Global rice production is projected to drop more than 2 percent from the
1997/98 record of 385.4 million tons, a result of weaker crops in several
major Asian rice producing countries, particularly China and India.  The low
level of global stocks relative to use will likely have minimal impacts on
world trade and international prices, as supplies in these two countries
remain adequate for domestic needs and as several exporting countries --
particularly Thailand, Vietnam, and Pakistan--are projected to produce large
crops in 1998/99. 

U.S. Textile Imports & Cotton Production Weave New Relationship 

U.S. imports of cotton textiles and apparel have been rising during 1998 at
twice the average rate of the last decade.  In part because of this import
surge, U.S. textile mills are expected to use less cotton fiber in 1998/99. 
The U.S. milling industry purchases domestically produced cotton fiber almost
exclusively, and farmers are seeing their best customer reduce its purchases. 
At the same time, Asian textile exporters that traditionally ship to the U.S.
are expected to enter the next century with weaker currencies and with notably
lower wages and incomes than originally expected, making their exports more
price competitive.  However, the increasing technical complexity and vertical
integration of the U.S. textile industry, combined with several decades of
global trade liberalization, will help U.S. cotton farmers continue to find
both domestic and foreign customers for their fiber.

Hog Producers Signal Plans To Expand

Hog producers plan to continue increasing production over the next 6 months,
according to the September Hogs and Pigs report, despite sharply lower hog
prices.  Large supplies of pork and competing meats have pushed hog prices
nearly 40 percent below a year ago.  This might have been expected to lead to
a decline in farrowings, dampening prospective pork production gains next
year.  But many producers may be receiving higher prices through carcass
quality pricing and forward contracts, and corn and soybean meal prices have
declined this year.  Consequently, returns to production may have dropped less
sharply than the decline in average hog prices would suggest. 

 U.S. Orange Crop To Decline Sharply in 1998/99

After 2 years of record-setting citrus crops, adverse weather is expected to
lower U.S. production 17 percent from last season.  Wet and cool conditions
have reduced production prospects in California, and wet weather in Florida
this past winter followed by drought in the spring stressed orange trees. 
Florida's citrus crop is expected to drop about 18 percent from last year,
with orange production accounting for most of the decline.  The orange crop,
primarily used for juice, is forecast at 8.6 million tons, down 22 percent
from last year.  Smaller crops in Florida and in Brazil, the world's other
major orange juice producer, could boost grower prices this season, but large
beginning stocks will partially offset declines in orange juice production.


BRIEFS
Livestock, Dairy, & Poultry
Hog Producers Signal Plans To Expand

Hog producers plan to continue increasing production over the next 6 months,
according to the September Hogs and Pigs report. As of September 1, hog
producers indicated they intend to have 2 percent more sows farrowing in
September-November than a year earlier, and 3 percent more in
December-February than a year earlier. If the September plans are realized, an
increase in pork production is assured in 1999. The September-November
farrowing intentions are slightly reduced from the 3-percent increase
producers indicated last June. 

States where large producers dominate, such as North Carolina and Oklahoma,
account for most of the increase in December-February farrowing intentions.
Several traditional hog producing States also reported increases, including
Illinois, Iowa, Michigan, and Ohio.

Pork production is expected to rise about 9 percent this year over 1997. Given
the lackluster returns that are expected to continue next year, growth in pork
production is expected to slow to about 4 percent in 1999. Although corn and
soybean meal prices have plummeted, bringing down costs of feed the major
component of hog production costs hog prices are nearly 40 percent below a
year ago due to large supplies of pork and competing meats. 

After about a year of unfavorable returns, producers normally begin to
liquidate their breeding herds, leading to reduced sow farrowings and pig
crops. The smaller pig crops result in reduced pork production about 6 months
after farrowing. The present period of unfavorable returns began in late 1997,
which might have been expected to lead to a decline in farrowings, dampening
prospective pork production gains next year.

Several factors may explain this contrast with the increase in farrowing
intentions in the Hogs and Pigs report. First, current estimations of
producers' costs and returns are based on live-weight price at the time of
sale. But since many producers sell on a grade and yield basis (i.e., price is
determined by the quality of carcass), they may be receiving an effective
price higher than the live-weight price. Second, producers who forward
contract hogs receive a price based on a pre-negotiated formula usually tied
to the futures markets. This year, such pricing raised the effective price
received by these producers because producers locked in higher prices before
they declined. Finally, current low corn and soybean meal prices pushed
break-even prices (based on cash cost) below the hog prices expected by next
year. Consequently, returns to hog production may not have dropped as sharply
as the decline in average hog prices suggests.

In addition, business planning periods are becoming longer as production units
expand. Thus, production plans are based on the outlook for the next several
years rather than just the current year.

Increasing supplies of pork and large supplies of poultry will keep hog prices
hovering near $30 per cwt next year. But this fall, prices will likely be in
the mid- to high-$20's as slaughter hits its seasonal peak. In some weeks,
federally inspected slaughter has exceeded 2 million head, near the levels
reached in 1994. 

Hog prices are expected to average $33-$34 per cwt in 1998, compared with $51
last year. The last time hog prices dropped below this level was in 1972 when
they averaged $27 per cwt. Prices in 1999 are expected to average about the
same as in 1998.

The Bureau of Labor Statistics retail pork price index is expected to decline
5-6 percent in the second half of 1998, after showing a 4-percent decline from
a year earlier in first half of the year. This gradual decline in retail
prices is not unusual because declines in farm value take over a year to be
passed on to consumers, according to ERS research. 

For all of 1998, retail prices are expected to decline about 5 percent.
However, if prices were weighted by volume sold (in contrast to a simple
average), the average retail price would be lower because a larger proportion
of sales occurs when particular cuts are featured. 

The abundant supplies of higher value pork cuts will provide consumers an
attractive alternative, especially if beef prices rise substantially. Starting
late this year, beef production is expected to decline, and year-over-year
decreases should continue through 1999. Per capita pork consumption is
expected to rise about 7 percent (3 pounds) this year. A 4-percent gain (2
pounds) is expected in 1999. 

Lower prices have also boosted pork exports volume is up over a third during
January-July compared with a year ago. For the year, U.S. pork exports are
expected to post a double-digit increase, but most of the increase is due to
attractive prices of lower value cuts. These products compete with an abundant
supply of dark poultry meat products in the international markets. 

Reduced prices for lower value cuts, such as picnic hams and trimmings, have
provided incentives for low-income countries like Russia and Mexico to more
than double their year-over-year purchases. Russia and Mexico account for
about 10 and 20 percent of U.S. pork exports. Given the precarious position of
developing countries in world capital markets, prospects for maintaining large
export volumes even at very low prices are questionable. In the second half
of 1998, monthly exports to Russia are expected to fall, reflecting that
country's financial crisis. U.S. exports to Mexico could also be slowed if
tariff-rate quotas are reached.

Strong sales of Canadian hogs to the U.S. have continued. Imports of Canadian
hogs are expected to exceed 4 million head this year, up from 3.2 million in
1997. The favorable U.S.-Canadian exchange rate and a 4-percent increase in
the September 1 Canadian hog and pig inventory suggest that Canadian hogs are
going to continue heading south of the border. 
Leland Southard (202) 694-5187
southard@econ.ag.gov

For further information, contact: 
Leland Southard, coordinator; Ron Gustafson, cattle; Leland Southard, hogs;
Mildred Haley, world pork; Jim Miller, domestic dairy; Richard Stillman, world
dairy; Milton Madison, domestic poultry and eggs; David Harvey, poultry and
egg trade, aquaculture. All are at (202) 694-5180. 


BRIEFS
Specialty Crops
U.S. Orange Crop To Decline Sharply in 1998/99

After 2 years of record-setting citrus crops, adverse weather is expected to
lower U.S. production to 15 million short tons in 1998/99, down 17 percent
from last season. Wet and cool conditions have reduced production prospects in
California, and wet weather in Florida this past winter followed by drought in
the spring stressed orange trees, reducing fruit set from the previous 2
years. These conditions also slowed crop development in both States, and
harvest is expected to begin later than last year.

Despite a 2-percent rise in bearing acreage, the California navel orange crop
is forecast 23 percent lower than last year at almost 1.3 million tons and 15
percent below 2 years ago. Smaller fruit size and reduced fruit set are the
major factors in the decline in the navel crop (which mostly enters the fresh
market through spring). Because consumers generally prefer larger fruit, the
smaller fruit size could limit price increases that would otherwise result
from the reduced supply. Fresh-market supplies from California will likely be
down next summer as well the California Valencia crop is forecast down 7
percent at 1.05 million tons. 

Florida's citrus crop is expected to drop about 18 percent from last year and
16 percent from 1996/97, with orange production accounting for most of the
decline. The orange crop, primarily used for juice, is forecast at 8.6 million
tons, down 22 percent from last year. A smaller orange crop is also expected
in Brazil, the world's other major orange juice producer. 

Smaller orange crops in both countries could boost grower prices this season,
which could lead to an increase in retail juice prices. However, large
beginning stocks in the U.S. (season beginning December) and Brazil (season
beginning last July) will partially offset declines in orange juice
production.

The U.S. grapefruit crop is forecast at 2.63 million tons, up slightly from
the final quantity utilized last year but down 9 percent from 1996/97. Larger
crops in Florida and Texas are expected to offset smaller crops in California
and Arizona. Stagnant demand for grapefruit (both fresh and processed) could
push the final utilized production estimate below the current forecast. The
size of this year's crop in Florida is expected to put downward pressure on
prices for growers, who have experienced depressed prices over the past few
years.

Citrus area in Florida has stopped expanding, according to the biennial citrus
tree inventory released in early September by the Florida Agricultural
Statistics Service. Area had been rebounding after losses from several freezes
in the 1980's. As of January 1, 1998, citrus bearing acreage dropped 3 percent
from the last survey in 1996 to 787,709 acres, marking the first decline in 11
years. 

Since the mid-1990's, flat or declining returns for citrus growers have
sharply lowered planting incentives in Florida. The State now has 609,209
bearing acres of oranges, 127,800 bearing acres of grapefruit, and 50,700
bearing acres of specialty citrus such as tangerines, temples, tangelos, and
limes. 

Grapefruit acreage declined 8 percent, more than any of the citrus crops. The
decrease in acreage of white seedless varieties was greater than for red
seedless. The proportion of land planted to red grapefruit varieties has
increased throughout the 1990's, reflecting U.S. and European consumer
preferences.

Acreage of oranges increased by less than 1 percent since 1996. Despite the
minimal acreage gain, the number of orange trees increased 2 percent because
newer blocks of trees, especially in the southwestern part of the State, are
planted at a higher density than older plantings. Valencia orange acreage,
which accounts for about 48 percent of orange acreage, is up about 2 percent
from 1996. Acreage of Hamlins (which rank second) increased 1 percent, and
acreage declined for navel, ambersweet, and pineapple orange varieties. 
Susan Pollack (202) 694-5251
pollack@econ.ag.gov.  


COMMODITY SPOT
U.S. Rice Prices Remain Firm Despite Bumper Supplies 

Relatively high prices at planting pulled up U.S. rice area more than 5
percent in 1998 from a year earlier to nearly 3.22 million acres, the second
consecutive annual increase. The larger planted area will more than offset a
drop in yield to produce the third-largest rice crop on record. Long grain
rice (produced mostly in the South) accounts for virtually all of the area
expansion; medium grain plantings (produced mostly in California, Arkansas,
and Louisiana) are down substantially.

In both 1997 and 1998, rice prices were relatively high at planting compared
with historic rice prices as well as prices for virtually all alternative
crops primarily soybeans. And while season-average farm prices for corn,
wheat, and soybeans were projected last spring to decline in 1998/99, no price
drop was projected for rice. In fact, while rice prices have declined only
slightly, season-average prices for other grains and soybeans have dropped
substantially since 1996/97. 

Producers' initial planting intentions as reported in the Prospective
Plantings report, released in March, were for 3.06 million acres of rice.
However, plantings were revised upward in the June 30 Acreage report to nearly
3.22 million acres as strong monthly cash prices continued for rice compared
with declining prices during the spring for soybeans, wheat, and feed grains.

The major factor behind the relatively strong U.S. rice prices in 1997/98 was
the record level of U.S. rough (unhulled) rice exports, mostly southern long
grain. In 1997/98, the U.S. exported a record 26 million cwt of rough rice,
more than double a year earlier. Much of this rapid expansion in U.S. rough
rice exports is due to El Nino-related production difficulties in Latin
America that reduced corps in several importing and exporting countries (AO
August 1998). For 1998/99, rough rice exports are projected at 24 million cwt,
down only slightly from the 1997/98 record. 

When the 1996 farm bill was signed, many industry analysts believed U.S. rice
plantings would contract since prices were expected to decline. Exports were
projected to drop as well with the smaller production. However, world trade
has been much larger than expected, raising U.S. prices and keeping U.S. area
and exports substantially above the levels projected in 1996.

Rice is produced in Arkansas, Louisiana, Mississippi, and Missouri, mostly
along the Mississippi River Delta. Arkansas is the largest rice producing
State, accounting for 48 percent of total production in 1998. California also
produces rice and is the second-largest growing State. Florida grows a very
small amount of rice (not included in production statistics), mostly in
rotation with sugarcane.

Strong Prices Drive 
Area Expansion

While U.S. farm prices have declined since the fall of 1997, they have
averaged nearly $9.45 per cwt relatively high compared with historic rice
prices. For example, from 1990/91 through 1994/95, U.S. rice prices averaged
only $6.98 per cwt, with prices exceeding $9 in only four months. In February
and March when planting decisions were being made U.S. monthly cash prices
averaged more than $9.60 per cwt.

In fact, U.S. rice prices exceeded $9 per cwt from November 1995 through the
end of 1997/98 market year, the longest period of sustained prices at this
level since the late 1970's through the early 1980's. The average price during
the first 2 months of the 1998/99 market year was about $9.18 per cwt. The
recent price weakness has primarily been due to declining long grain prices,
largely a response to expectations of a record long grain crop. 

Despite the large crop, U.S. farm prices are projected to remain relatively
firm during the 1998/99 marketing year (August-July), given expectations of
record domestic use, continued strong exports, and smaller ending stocks. The
1998/99 season-average farm price is forecast at $8.75 to $9.75 per cwt,
compared with $9.64 for 1997/98. The average farm price of $9.96 in 1996/97
was the highest since 1980/81. Until the start of 1998/99, virtually all of
the price strength for the past 2 years had been for southern long grain rice. 

Throughout 1997/98, prices for California medium grain rice remained at least
$1.50 per cwt below prices in the South and showed no strength during the
year. This was due largely to a record 1997 California crop and weak export
demand for U.S. medium grain rice. However, substantially smaller 1998 medium
grain crops in both California and the South mean that total supplies of
medium grain rice will be extremely tight in 1998/99. As a result of expected
tight supplies in 1998/99 and recent sales to Japan, California medium grain
milled prices have already risen several times since June. 

In contrast to the relatively strong rough rice prices, prices for long-grain
milled rice declined during most of the 1997/98 market year and have continued
dropping in 1998/99. In late September, milled prices in Houston dropped to
$375 per ton the lowest in nearly 3 years. Prices had been $408 per ton from
early March through mid-August, compared with $463 per ton in early summer
1997. A steady decline in U.S. milled rice exports and a substantial price
difference over Thai rice the major competitor of the U.S. in certain
international long grain milled rice markets during most of the 1997/98
market year accounted for much of the drop in U.S. long grain milled prices
that year. 

Record Long Grain Plantings 
Offset Lower Yields

Long grain plantings accounted for virtually all of this year's acreage
expansion and are projected to rise 10 percent to a record 2.5 million acres.
Nearly all long grain rice is produced in the South, and all of the increase
is in the South. Medium grain plantings are projected to drop almost 10
percent to 689,000 acres, the smallest since 1989. This decline is split
evenly between the South and California.
In the South, long grain plantings rose 225,000 acres or 10 percent to almost
2.5 million cwt. In contrast, medium grain area in the South dropped 35,000
acres or 13 percent from 1997 to 237,000 acres. Medium grain plantings
account for less than 9 percent of total southern rice plantings in 1998, the
smallest share on record.

Generally higher prices at planting for high-quality long grain rice than for
medium grain account for most of the shift in southern acreage from medium to
long grain rice. In addition, some disease problems with medium grain
varieties in Louisiana in the mid-1990's have contributed to several years of
declining medium grain plantings in the State. Low prices at planting and an
extremely wet spring that hindered field work and severely delayed plantings
accounted for most of the decline in California medium grain acreage.

This year's strong expansion in southern long grain acreage with Arkansas
accounting for the bulk is also due to the high expected profitability of
rice compared with alternative crops mostly soybeans given price expectations
at planting. For many rice producers, strong prices and high yields (compared
with most alternative crops) more than offset the higher costs of rice
production. Rice has much higher chemical, custom operations, fuel,
fertilizer, and fixed costs than most other field crops.

In contrast to the area expansions in the South, California rice plantings
dropped 32,000 acres to 480,000, the smallest acreage in half a decade. All of
the decrease was for medium grain.

The national average yield for all rice is forecast at 5,696 pounds per acre,
down more than 3 percent from last year and the lowest since 1995. The smaller
projected yield is due primarily to expectations of lower yields in California
resulting from the late plantings, and severe heat and dryness in most of the
South this summer.

The decline is also due partly to a shift in share of total planted acreage
from the higher yielding California medium grain rice to the lower yielding
southern long grain. California yields are typically a third or more higher
than for southern rice, primarily a result of the varieties grown and the
climate.

The 1998 U.S. rice crop is projected at 181.5 million cwt, up more than 1
percent from 1997. This is the second year in a row of increasing rice
production, as the drop in average yield is more than offset by larger planted
area. The long grain crop is projected to rise nearly 10  percent to a
near-record 133.2 million cwt, while the medium grain crop is projected to
drop more than 16 percent to 46.7 million cwt, the lowest since 1989.

U.S. rice supplies are projected to be 219.2 million cwt, up nearly 2 percent
from 1997/98 and second only to the 1994/95 record of 230.9 million cwt.
Slightly larger beginning stocks, greater imports, and a bigger crop account
for the larger projected supplies.

Food Use To Grow More Slowly,
Exports To Remain Strong

Since 1990/91, total domestic use of rice, which has nearly doubled in the
past 15 years, has grown an average of more than 3 percent annually. However,
this rate has slowed in the past 2 years, and USDA's long-term forecasts
(released February 1998) indicated that total domestic use will grow at a
little over 2 percent a year over the next 10 years.

While changing culinary preferences of the U.S. population toward grain-based
foods have spurred some of the growth, much of the expanded food use of rice
has been due to large increases in the Asian and Hispanic segments of the U.S.
population during the last two decades. A large and growing share of this
consumption, however, has been supplied by imports of the preferred aromatic
rices such as Thai jasmine and basmati from India and Pakistan. Projected
total rice imports of 10 million cwt are expected to account for 12 percent of
food use.

Total U.S. rice use, including exports as well as domestic use, is forecast at
192.9 million cwt in 1998/99, up 4 percent from a year earlier. Total domestic
use (comprised of food use, beer, and seed) is projected at a record 103.4
million cwt, up nearly 2 percent from a year earlier. Food use accounts for
all of the expansion, projected at a record 84 million cwt, up 2 million from
1997/98.

U.S. exports are projected at 84 million cwt in 1998/99, down slightly from a
year earlier. Rough rice exports, while projected to drop 2 million cwt from
last year's record to 24 million, would still be the second highest ever.
Large purchases of U.S. rough rice by Brazil last spring for shipment in
1998/99 are behind the robust U.S. rough rice export forecast.

While U.S. rough rice exports have generally been increasing this decade, last
year's record and this year's projected near-record shipments are due largely
to El Nino-related production difficulties in much of Latin America. Rice
crops in both importing and exporting countries in the region were reduced,
magnifying the impact on U.S. exports.

Latin American countries generally prefer to import rough as opposed to milled
or brown rice. The U.S. is the only major rice exporting country that allows
rough rice exports. (Most exporters prefer to ship milled rice to capture
value added.)  Thus, the U.S. was in a prime position to export large amounts
of rough rice when crop shortfalls hit Latin America. 

To encourage rough rice imports, nearly all Latin American rice importing
countries place a lower tariff on rough than on milled, semi-milled, and brown
rice. Furthermore, Mexico and five Central American countries (Costa Rica,
Guatemala, Honduras, El Salvador, and Nicaragua) effectively ban imports of
Asian rice for phytosanitary reasons. The bans are strongly promoted by local
milling associations, as milled rice from Asia can underprice most domestic
rice in Central America.

U.S. exports of milled rice are projected to rise nearly 800,000 cwt to 60
million, the first increase since 1994/95. Stiff price competition from Asian
exporters in certain high-income markets mainly the European Union, the
Middle East, and South Africa is a principal reason for the decline in U.S.
milled rice exports in recent years. This year's expected increase in milled
exports is due to larger projected supplies and slightly lower expected
prices.

Latin America, the Middle East, Europe, and Japan are expected to remain
important markets for U.S. rice. Latin America is the largest market for U.S.
rice exports, taking a record 46 percent on a milled-equivalent basis, nearly
all Southern long grain. Canada remains a steady U.S. long grain market, with
U.S. exports expanding slightly. In recent years the U.S. has lost market
share in South Africa and the Middle East, a result of lower priced Asian
rice.

U.S. ending stocks are projected at 26.3 million cwt in 1998/99, down almost 5
percent from a year earlier. Stocks as a share of total use are forecast at
13.6 percent, down from 14.7 percent a year earlier and the lowest since
1995/96.

Among grain types there are substantial differences in stocks. Expected tight
supplies of medium grain rice have terminated the price premium enjoyed by
producers of long grain milled rice in the U.S. since August 1996. Combined
medium/short grain stocks are projected at 8.8 million cwt, the lowest since
1980/81. In contrast, long grain ending stocks are projected at 16.5 million
cwt, the largest since 1992/93.

For the 1998/99 crop year, relatively strong world trade and an extremely
tight global stocks-to-use ratio will likely limit any major drop in
international trading prices. World rice trade in calendar year 1999 is
projected at just over 20.4 million tons. While down 4.5 million tons from the
1998 record, trade would still be the third highest on record. However, weak
currencies across most of Asia will continue to place downward pressure on
international prices.

Internationally traded prices for long grain rice have dropped more than 5
percent since mid-September, due to a lack of new purchases. However, prices
are still well above year-earlier levels. Prices had dropped steadily in
summer and fall 1997 in response to devaluation of the Thai currency in July.
Thailand is the largest rice exporting country, followed by Vietnam. In late
1997, Indonesia and the Philippines began to purchase massive quantities of
rice, as both importers faced severe shortfalls in their 1997/98 crops.
International prices rose modestly throughout the first half of 1998 in
response to record world demand. However, the substantial currency
devaluations across much of Asia, and the region's severe financial and
economic turmoil, have limited price increases to modest amounts.

Global rice production in 1998/99 is projected to drop more than 2 percent
from the 1997/98 record of 385.4 million tons (milled-equivalent basis), a
result of weaker crops in several major Asian rice producing countries,
particularly China and India. With consumption projected to rise slightly to a
record 385.1 million tons, ending stocks will drop nearly 17 percent to 43.4
million tons, the smallest since 1982/83. The stocks-to-use ratio is projected
at 11.3 percent, the lowest since 1972/73.

While the global stocks-to-use ratio is projected to be extremely low, several
factors indicate that any impact on world trading prices will be small. First,
because the bulk of the reduction in stocks is projected to occur in China and
India two exporters there will be little impact on import demand. Both
countries had large stocks going into 1998/99, a result of record 1997/98
crops. Also, while crops in Japan and South Korea are projected smaller in
1998/99, no impact on trade volumes is likely because minimum import levels
for both of these countries are fixed by the World Trade Organization and
purchases above minimum levels are unlikely given expected stock levels.

Finally, large crops are projected for Thailand, Vietnam, and Pakistan all
major Asian rice exporting countries and production is projected to rebound
in both exporting and importing countries in South American. For the U.S., the
larger expected crops in South America will likely limit U.S. rough rice
exports and price strength in 1999.
Nathan Childs (202) 694-5292
nchilds@econ.ag.gov  


WORLD AGRICULTURE  & TRADE
U.S. Textile Imports & Cotton Production 
Weave New Relationship

U.S. imports of cotton textiles (yarn and fabric) and apparel have been rising
during 1998 at twice the average rate of the last decade. In part because of
this import surge, U.S. textile mills are expected to use less cotton fiber in
1998/99. The U.S. milling industry purchases domestically produced cotton
fiber almost exclusively, and farmers are seeing their best customer reduce
its purchases. 

At the same time, Asian textile exporters that traditionally ship to the U.S.
are now expected to enter the next century with weaker currencies and with
notably lower wages and incomes than originally expected, making their exports
more price competitive. Consequently, the coming termination of U.S. textile
import quotas in 2005 could have a larger impact on textile trade and cotton
production than previously anticipated. 

During 1998, the U.S. economy and U.S. dollar have probably been their
strongest against the rest of the world since the mid-1980's. In particular,
the U.S. economy and currency have strengthened enormously relative to the
textile exporting countries affected by the Asian financial crisis. The volume
of U.S. textile imports during January-June 1998 compared with a year earlier
rose 22 percent. Imports from Thailand, South Korea, and Pakistan rose 40, 30,
and 45 percent.
Since the system of import quotas originally developed under the Multi-fibre
Arrangement (MFA) will largely remain in effect through 2005, the potential
for imports from these countries has limits. However, World Trade Organization
(WTO) rules schedule a gradual elimination of quota restrictions through
termination of selected quotas before 2005 and accelerated increases in
quantities for the remaining quotas.

Changes in the nature of the textile industry and in trade policy have altered
the structure of world textile trade since the 1980's. The increasing
technical complexity and vertical integration of the U.S. textile industry,
combined with several decades of global trade liberalization, suggest that
U.S. cotton farmers will continue to find both domestic and foreign customers
for their fiber despite a continually shrinking U.S. share of apparel sold in
the U.S. and worldwide.

Apparel Imports Grow 
Despite Quotas

The MFA quotas evolved during the decades before the Uruguay Round of the
General Agreement on Tariffs and Trade (GATT), largely in response to surging
imports of apparel from developing countries. Although textiles have become
increasingly capital-intensive, apparel remains probably the world's most
labor-intensive industrial good. Thus, apparel industries in high-wage,
developed countries like the U.S. are inevitably vulnerable to competition
from developing countries. The MFA quotas reflected this quota levels and
growth rates for apparel were more restrictive than those for yarn and fabric,
and the termination of apparel quotas to meet WTO obligations is scheduled to
occur later, on average,  than the termination of yarn and fabric quotas.

Apparel production has steadily migrated to developing countries despite the
use of MFA quota restrictions. When these export-oriented apparel industries
first appear in developing countries, they are likely to import fabric from
more developed countries. Later, fabric production appears, with yarn imported
from more developed countries. Finally, a yarn industry develops, and fiber is
imported. A number of Asian countries have followed this sequence, beginning
with Japan, followed by Taiwan and  South Korea, then China and Southeast
Asia. Bangladesh is at an intermediate stage it is just beginning to replace
its textile imports with a domestic industry and Vietnam has only recently
begun expanding its apparel exporting industry.

Two generalizations help explain why a growing apparel industry in a
developing country has traditionally resulted in a growing textile industry
there. One concerns the reduction of transaction costs through vertical
coordination between apparel and textile industries sharing a common economic
environment. Since developing countries may accumulate a significant share of
their industrial financial and human capital through foreign trade in apparel,
a logical application for these new resources is producing a familiar product
with an assured market textiles. Domestic textile production means that the
apparel and textile industries share a common currency and economy, making
them less likely to incur the cost of changing customers (for the apparel
industry) or suppliers (for the textile industry) during periods of economic
disruption. This, along with cultural affinity, can encourage specialized
investment within the industry with less risk that foreign firms or their
governments will later appropriate inordinate shares of potential profits.
Specialization permits economies of scale, and the reduced risk permits
greater amounts of such cost-cutting specialized investment.

The other generalization is that developing countries have traditionally
pursued policies that favor nascent capital-intensive industries, even at the
expense of existing labor-intensive ones. Their underlying premise has been
that by increasing the amount of capital available per member of the labor
force, the wages and well-being of the population will increase. To this end, 
developing countries have tended to subsidize capital, lowering the cost of
developing a capital-intensive textile industry to supply the already existing
local apparel firms. Also, trade policies have assured that effective rates of
tariff protection for textile products have been high often in excess of 100
percent. 

While firms exporting apparel products have had widespread access to duty-free
textile imports, this access has not always been consistent. Quantitative
restrictions, credit restrictions, and duty prepayments, among other methods,
have been used to restrict imports. More over, sudden policy changes have also
occurred. During the 1970's, for example, Indonesia assessed import duties on
the basis of assumed prices rather than invoices, to avoid the under-invoicing
inspired by currency controls. In 1975, the assumed prices on textiles were
raised 75 percent. In contrast, Indonesia operated concessionary exchange
rates for raw cotton and cotton yarn to facilitate its imports when the
country's currency was overvalued.

Under these circumstances, the shift of apparel production out of a developed
country like the U.S. has eventually resulted in the shift of the initial
fiber-consuming segment of the industry yarn production as well. A
continuation of this trend could have negative implications for U.S. cotton
farmers since foreign yarn producers utilize a lower share of U.S. fiber than
do domestic yarn producers. Indeed, during the 1970's and early 1980's, as the
U.S. share of world cotton yarn production fell, the U.S. share of cotton
fiber production fell as well. However, technical change and restructuring in
the U.S. textile and apparel industries, and a global trend toward trade
liberalization, mean these older relationships are not likely to exert as
strong an influence. 

U.S. Cotton: Fiber for a Restructuring Industry

Under competition from imports, and in response to the opportunities provided
by the North America Free Trade Agreement (NAFTA) and the Caribbean Basin
Initiative, U.S. textile and apparel industry has become more amenable to
undertaking foreign direct investment (FDI) and exporting from the foreign
plants, two strategies that tend to preserve U.S. fiber consumption despite
growing apparel imports. Attrition in the U.S. apparel industry has fallen
more heavily on smaller firms, leading to an increase in the average firm's
capital and knowledge intensity, making it more likely for the  average firm
to engage in FDI or in outward processing. Firms engaged in outward processing
of apparel perform only the most capital-intensive steps like cutting
fabric in the developed country and contract the labor-intensive steps such
as sewing to a developing country. 

Vertical integration has proceeded since the 1980's to a greater extent in the
U.S. industry than elsewhere, and a company that pursues vertical integration
domestically is likely to pursue it globally. The same efforts to capture
profits from intangible capital (e.g., brand loyalty, technical expertise)
occur across borders as well as within the home country of the vertically
integrated firm. Thus, with vertical integration, the capital-intensive
production would more likely remain in the firm's home country than would be
the case if the steps were performed by different firms, even as the
labor-intensive steps are moved to low-wage countries. 

These developments have not been confined to the U.S. Relatively greater rates
of vertical integration and FDI are long-standing attributes of Japan's
textile industry, and outward processing trade between Europe and Eastern
Europe has also increased. Poland has become the second largest market for the
European Union's fabric (after the U.S.), resulting in a reduced cotton fabric
trade deficit for the EU. Tunisia and Morocco are also important EU outward
processing points. 

Trade liberalization may reduce developing countries' ability to limit imports
from developed countries. While it is possible for developing countries with
balance-of-payments problems to maintain quantitative restrictions on trade
and remain in conformity with WTO provisions, the trend has been toward
reducing such barriers. By not subsidizing and protecting capital-intensive
industries, developing countries can more effectively exploit their
comparative advantage in producing labor-intensive goods. This would imply
importing capital-intensive intermediate products, and under conditions of
general global liberalization of trade and investment, new patterns such as
these are already emerging. 

During the first half of 1998, Mexico was the largest source of textile and
apparel imports to the U.S. surging 40 percent from January to June with a
group of Caribbean Basin countries (led by Honduras and the Dominican
Republic) the second largest, rising 23 percent. U.S. exports of textiles to
these regions also rose substantially, and virtually all of the cotton fiber
used by their industries was U.S.-origin. Liberalization of textile trade with
Mexico and, to a lesser extent, the Caribbean Basin, has permitted increased
FDI by U.S. companies and domestic investment by Mexican, Caribbean, and
Central American firms oriented to using U.S. cotton.

In 1997, Asia accounted for less than half of all U.S. cotton textile and
apparel imports, compared with 65 percent in 1993. North America (including
Mexico and the Caribbean Basin) accounted for 37 percent of all U.S. cotton
textile imports, compared with 19 percent in 1993. This textile trade shift
can be quantified in terms of U.S.-produced cotton fiber, based on earlier
research by USDA's Economic Research Service on the amount of U.S.-sourced
cotton fiber embodied in textile and apparel imports from various countries.
In 1993, nearly 2.1 billion pounds of cotton textiles and apparel were
imported by the U.S. from the 10 largest import sources, and about 26 percent
of that was returning U.S.-produced fiber. During 1997, 3.1 billion pounds
were imported from the 10 largest sources, and nearly 40 percent was returning
U.S. fiber.

Forecasting future developments in the location of textile production will
require careful examination of each country's domestic investment, changing
industry structure, and changing international trade policies. With
potentially large shifts in apparel production after 2005, this examination
will be crucial in foreseeing the future international distribution of textile
production. 
During most of the 20th century, increased foreign apparel production also
pulled textile production into countries that utilized a higher proportion of
non-U.S. fiber, reducing prospects for U.S. cotton growers. However, a
continuation of more recent trends in industrial organization and trade policy
could mean textile trade rather than production follows shifting apparel
production, sustaining cotton production in the U.S.
Stephen MacDonald (202) 694-5305
stephenm@econ.ag.gov  


RESOURCES & ENVIRONMENT

Environmental Policy & the WTO

The need of countries to protect their environment and to conserve natural
resources does not fit neatly into the free market framework that underpins
the Uruguay Round Agreement (URA) on Agriculture. Under the URA, participating
nations are required to reduce the level of domestic support for agriculture
as well as agricultural trade barriers. Unless carefully designed with
economic forces in mind, environmental policies can effectively alter
production and price levels and thereby distort trade patterns.

The World Trade Organization (WTO) the institution that enforces URA 
rules recognizes that environmental protection is a legitimate policy goal.
When environmental policies are assumed to affect agricultural production and
trade only minimally, such policies are permitted by the WTO to be exempt from
the country's commitments to reduce support to agriculture, under the "green
box" exemption. 

Policies that qualify for the green box exemption must not support prices or
increase consumer costs, and must be financed by the Federal government.
Additionally, green box environmental programs must limit subsidies to the
farmers' extra cost of complying, prices and production cannot be factors in
green box land retirement programs, and land must be retired for a minimum of
3 years. 

With criteria for green box designation already defined, discussions between
now and the conclusion of the WTO mini-round scheduled to begin in late 1999
may address a number of unresolved questions, such as how to assess the
tradeoff between environmental protection and trade distortion and how to
interpret "minimal trade-distorting effects."

The Rationale for Green Box 
Environmental Policies

In the U.S., numerous environmental and natural resource policies are designed
to limit the damage caused by agricultural activities. These
policies frequently implemented through a partnership between Federal and
State governments are directed at a diverse range of problems that include:
     surface water pollution attributable to agricultural production,
including runoff from crop and livestock operations;
     loss of wetlands that otherwise improve water quality, reduce soil
erosion, conserve surface water, improve subsurface moisture, contribute to
flood control, enhance natural beauty, and provide habitat for migratory
waterfowl and other wildlife;
     soil erosion which diminishes recreation activities, increases costs of
water treatment and dredging of navigation channels, silts up drainage and
irrigation channels, and causes the sedimentation of reservoirs; and,  
     improper management of land, which ultimately harms the environment
through sedimentation, pollution of surface waters, and loss of highly
productive and unique soil.

A free market framework may not effectively protect the environment and
conserve scarce natural resources. For instance, when the private benefits of
conservation practices are small, farmers and ranchers may contribute to
unsustainable patterns of natural resource use and to environmental
degradation that is excessive from a public perspective. Such "market
failures" are unlikely to be self-correcting, and the WTO acknowledges that
environmental protection and natural resource conservation are legitimate
public activities.

Environmental and natural resource green box policies rely on a mix of
instruments such as technical assistance, cost-sharing, rental and easement
payments, and conservation research and development. In the U.S., green box
expenditures on rental and easement payments have increased in relative
importance since 1985 compared with expenditures of cost-share programs for
conservation practice applications. Most rental payments are administered
through the Conservation Reserve Program (CRP) for land taken from production
and turned into protective cover. Through the Environmental Quality Incentives
Program (EQIP), producers implementing structural practices (e.g., animal
waste management facilities, terraces, and filterstrips) receive up to 75
percent of the projected cost through cost-share agreements with the
Government or receive incentive payments for adopting management practices for
conservation purposes.

These policies can affect production levels, prices, and patterns of trade. If
large enough, land retirement programs can reduce production for specific
commodities. In 1995, 9.4 percent of total cropland in the U.S. was idled
under the CRP. Although the CRP aims to retire environmentally sensitive
cropland, it may generate output effects. USDA's Economic Research Service has
shown that environmentally sensitive land may not be economically marginal in
terms of production potential. 

Green box programs such as the EQIP can also affect costs through the
introduction of more environmentally benign technologies which might not have
been adopted in the absence of government cost-share programs. If new
technologies are adopted on a large scale, they can potentially affect
production, prices, and trade. Programs such as the CRP and EQIP are presumed
to have minimal trade distorting effects, and are thereby eligible for WTO's
green box exemption.

Question for the Upcoming
WTO Mini-Round

How will the tradeoffs between environmental protection and trade distortion
be assessed?

A sound evaluation of tradeoffs is needed to determine eligibility for
inclusion in the WTO's green box. Otherwise, national governments could use
the green box exemption to further protectionist goals or to affect the terms
of trade.

Environmental cost-benefit analysis can be used to evaluate the economic
effects of green box policies. Data on indicators of environmental quality or
degradation, and on economic values of environmental quality changes are
needed to implement this technique. But because markets for attributes of
environmental quality may not exist, it is difficult to assign monetary values
to environmental quality changes within a country. 

Also, environmental quality changes in one country may be valued differently
by consumers in other countries, further complicating the assignment of
monetary values. For example, trade barriers may be erected to prevent imports
of genetically modified crops, which are believed to enhance environmental
quality in the exporting country (by reducing chemical inputs in some cases)
but not in the importing country (due to concerns about the technology in
general). Such difficulties may limit the WTO's capacity to determine whether
the stream of environmental benefits supplied by a green box policy justify
the costs of trade distortion.

Once countries submit domestic policies supposedly falling into the green box,
how will the WTO decide which policies are legitimate?

Because certain environmental and natural resource conservation green box
policies allow for small changes in production, a country may have an
incentive to use domestic policy to increase its competitiveness on the world
market (e.g., paying livestock producers for maintaining open landscapes). And
while failure to adhere to most requirements of the green box is fairly easy
to detect, the meaning of  "minimal trade-distorting effects" is open to
interpretation. 

In some instances, environmental and natural resource policies are used to
correct for pre-existing market failures (e.g., idling highly erodible land
that would otherwise be used for production). In these cases, the actual
effectiveness of such policies depends on their ability to reallocate
resources in a way that results in more than minimal trade effects. An open
question is whether placement of such policies in the green box will be
permitted.

Will the WTO limit the scope of environmental subsidies?

Agriculture provides important environmental services while curtailing others.
On the positive side, farmers who maintain certain wetlands help improve water
quality and provide floodplain areas to lessen flooding damages. Wetland
preservation may also protect wildlife. Agricultural production may result in
carbon sequestration (i.e., in soil), helping to reduce greenhouse gas
concentrations. Providing environmental amenities such as rural landscapes is
another service of agriculture.

But agricultural activities also contribute sediment, nutrients, pesticides,
and potentially, pathogens to water resources, possibly impairing drinking
water, recreation, navigation, and other water uses. Wetlands have been
converted to agricultural use.

An issue for the WTO is the extent to which nations may provide support for
producers to provide amenities or to prevent impairments to the environment.
If a country subsidizes agriculture for supplying environmental services,
criteria have yet to be settled upon for determining the legitimacy of such a
claim.

Should developing countries be treated in the same way as developed countries? 


As a result of funding capabilities and preferences, developed countries
typically spend proportionally more on funds for environmental and natural
resource policies than their less developed counterparts. In reality, many of
the environmental and resource problems faced by developing countries are more
severe. Still at issue is whether less developed countries should be allowed
greater flexibility in expenditures on environmental and resource policy.

Future discussion on the green box must tackle some of these issues.
Otherwise, some countries could use the green box exemption to further a
protectionist trade agenda or to manipulate the terms of trade in their favor.
Utpal Vasavada (202) 694-5494
Steve Warmerdam (510) 643-5420
vasavada@econ.ag.gov  
warmerda@are.Berkeley.edu 
Dale Leuck, Mark Smith, and John Sullivan also contributed to this 
article.  

RESOURCES & ENVIRONMENT BOX

Selected Green Box Environmental Programs 

USDA-Administered Programs

     Environmental Quality Incentives Program (EQIP) Through use of technical
assistance, education, cost-sharing, and incentive payments, EQIP assists
farmers and ranchers in adopting management techniques that reduce nonpoint
surface and groundwater pollution. Fiscal 1998 appropriated funding: $200
million.

     Conservation Reserve Program (CRP) Since 1987, the CRP has reduced
annual erosion by one-fifth by providing rental payments to agricultural
producers who retire environmentally sensitive cropland. Fiscal 1998
expenditures: $1.8 billion.

     Conservation Technical Assistance (CTA) Technical assistance for farmers
and ranchers who implement soil and water conservation and water quality
improvement.  Fiscal 1998 appropriated funding: $ 541.7 million. 

     Farmland Protection Program (FPP) The FPP allocates funds for purchase
of conservation easements and other types of interests in land the has prime,
unique, or other highly productive soils. USDA spent $18 million in fiscal
1998. 

     Wetland Reserve Program (WRP) The WRP assists landowners in returning
farmed wetlands to their original condition through easement payments and
restoration cost-shares. Fiscal 1998 appropriated funding: $218.5 million.

     Emergency Conservation Program (ECP) The ECP provides financial
assistance to farmers recovering from natural disasters and conserving water
during periods of severe drought. Fiscal 1998 appropriated funding: $34
million.

     Wildlife Habitat Incentives Program (WHIP) The WHIP promotes voluntary
implementation of on-farm management practices to improve wildlife habitat. 
Fiscal 1998 appropriated funding: $30 million.

     Conservation Farm Option (CFO) The CFO is a pilot program for eligible
producers that consolidates payments from environmental programs into a single
payment in exchange for implementing practices to protect soil, water, and
wildlife. Fiscal 1998 authorized funding: $15 million, reduced to $11 million
by supplemental appropriations.

EPA-Administered Programs  
     Nonpoint Source Program Established by Section 319 of the Clean Water
Act, this program provides States with program guidance, technical support,
and limited funding to establish nonpoint source pollution management plans.
Fiscal 1998 operating plan budget: $119.3 million. 

     Coastal Zone Management Act Reauthorization Amendments (CZARA) States
with an approved coastal zone management program were required to submit to
EPA a program before July 1995 which outlines management measures for nonpoint
source pollution to restore and protect coastal waters. Implementation of
plans is not required until 1999.

     Wellhead Protection Program Authorized by the Safe Drinking Water Act,
this program protects ground water supplies used as public drinking water from
contamination by agricultural chemicals, including pesticides and nutrients.
Fiscal 1998 operating plan budget: $12.1 million.
State-Administered Programs

     Water Quality Improvement Programs Some 44 States have passed laws or
instituted programs to protect water quality. States use a variety of
approaches to address water quality problems, including economic incentives,
education programs, controls on inputs and practices, and controls on land
use.

Utpal Vasavada (202) 694-5494
vasavada@econ.ag.gov  


SPECIAL ARTICLE
China's Livestock Sector Growing Rapidly

China is among the world's largest producers and consumers of animal proteins.
Although current per capita consumption of animal proteins is lower in China
than in wealthier nations, it is increasing rapidly as China's economy and
personal incomes grow. China has the potential to become a growing market for
feedstuffs or animal protein imports, as demand for meats, fish, eggs, and
milk is expected to outstrip domestic feedgrain supplies. 

Because of the  sheer size of China's livestock sector, relatively small
changes in either livestock inventory growth or meat demand trends can have
important implications for projections of global trade in feedstuffs or animal
proteins. China is already the world's largest consumer of most livestock meat
products. However, due to China's relatively low income levels, per capita
animal protein intake remains much lower than its neighbors'. For example,
citizens of South Korea eat 5 times as much animal protein per capita as those
of China, Japan 7 times, Taiwan 9 times. Per capita animal protein intake in
the U.S. is 11 times greater.

China's per capita consumption is influenced partly by differences between
urban and rural consumption of meat products.  Policy measures that encouraged
urban meat consumption have resulted in two very different animal protein
consumption patterns. Urban per capita consumption of almost all the different
protein products are double or triple that of rural residents.

Pork accounts for half of all the animal proteins consumed by China's
residents. Partly because of government policies discouraging pork production
to favor more efficient animal protein operations, pork's share of total meat
consumption fell from 86 percent in 1980 to 76 percent in 1996. Per capita
consumption at home increased 63 percent in rural areas but rose little in
urban areas. 

Poultry meat and eggs contribute 26.5 percent of consumer animal protein
intake. As per capita at-home consumption tripled (from 0.76 to 2.44 kilos) in
the last 15 years, poultry meat's share in total meat consumption doubled,
from 7.2 percent  in 1980 to 14.2 percent in 1996. Per capita at-home
consumption of eggs increased from 2.04 kilos to 5.03 kilos. 

Beef, mutton, and milk account for only a small share of China's total animal
protein consumption, but their shares have been increasing. Beef's share of
total meat consumption rose from 2.5 percent in 1980 to 5 percent in 1996, as
per capita at-home consumption tripled. Consumption of mutton and goat meat
rose slightly from 4.2 percent to 4.4 percent of total meat consumption, while
per capita at-home consumption doubled from 0.4 kilos per person in 1980 to
0.9 kilos in 1996. Milk accounts for only 0.2 percent of total animal protein
consumption, and per capita consumption of milk in 1996 remained very low at
1.8 kilos.

Protein from fish accounts for 15.8 percent of animal protein consumption, but
per capita at-home consumption of aquatic products in general is still low,
despite increasing from 1.8 kilos in 1980 to 4.6 kilos in 1996. 

Policy Changes Boost Production

Animal protein demand has been satisfied primarily from domestic output, which
has grown dramatically during the last 10 years. Between 1986 and 1996,
China's total animal product output reportedly tripled, from 38.1 to 118.3
million tons. However, recent research implies that the reported growth is
exaggerated, suggesting that China's production was overstated during much of
the 1990's and was understated during the 1980's.

Nonetheless, there is no doubt that livestock output has grown rapidly in the
last decade. Since 1980, reform policies emphasizing market incentives and
reducing or limiting government intervention have stimulated rapid growth in
China's meat production. The government reduced control over livestock
production and marketing, and followed this with reduced controls over oilseed
products and other feed ingredients. 

Controls on grain production and marketing also influence the livestock
sector. Farmers are required to sell a fixed quantity of grain to
government-owned grain stations at a fixed quota price, but can choose among
several outlets for any additional grain they produce. They may sell more
grain to the government grain station at market or support prices, sell the
grain at local open market prices, or feed the grain to livestock and later
sell their animals or animal products at local markets.

Frequent changes in government grain policies have been a leading factor in
the variability of livestock output over the past few decades, a condition
that is likely to continue into the next decade. Driven by rising concern that
China's domestic feed grain and protein meal output may not meet rapidly
increasing demand, the government is currently supporting feed- efficient
livestock production, particularly poultry, fish, and grass-fed ruminant
operations, while reducing support for less efficient pork producers.

Pork remains by far the largest component of China's livestock production
sector, though its position is declining. Currently published data suggest
production between 1980 and 1996 increased substantially, although
overreporting has produced uncertainty in the pork output series. Constraints
on feed grain supplies are likely to slow future growth of China's pork
output. The structure of pork production has changed as output has gradually
shifted from individual farm households using traditional technology (from 95
percent of output in the mid-1980's to about 80 percent in 1996) to
specialized livestock-producing households and commercial firms applying
modern technology. The largest potential future gains in feeding efficiency
will come from continued modernization of the pork sector.

Poultry production increased rapidly between 1980 and 1996, although data on
poultry meat and egg production are less reliable than other livestock data
because such a large proportion of the birds are produced by individual farm
households, rather than in specialized operations. Egg output grew
dramatically from 2.6 million tons in 1980 to 19.5 million in 1996; poultry
meat output grew from 1.9 million tons in 1986 to 10.7 million in 1996.

Growth in poultry and egg output is expected to remain strong, though less
rapid than in the previous 15 years. Production growth was stimulated not only
by general market-oriented policy reforms, but also by direct government
support for such projects as specialized poultry breeding operations.
Government plans call for continued support of the poultry industry, but
future growth will depend on changes in per capita income and relative prices
among competing sources of animal protein. 

Beef production rose sixfold between 1980 and 1996. More efficient use of crop
residues in intensive crop-growing regions contributed to the rapid growth,
but statistics may overstate actual growth over the last decade. Because
cattle were treated in the communist accounting framework as a "means of
production" (for draft use, rather than for meat) and were collectively owned
until the early 1980's, beef consumption was discouraged and limited, creating
a tendency to underreport beef cattle before the early 1980's. The expansion
of more efficient feeding practices is expected to boost production in the
coming decade. Ammoniation, for example, by adding anhydrous gas or liquid
ammonia to high-cellulose content crop residues, increases the crude protein
and digestible energy levels in the feed, as well as increasing animal feed
intake. Beef output is likely to increase more slowly than in the past,
however, because of consumer preferences for other meats.

Mutton and goat meat output more than quadrupled between 1980 and 1996. A
large part of the increase came from expansion in intensively cropped areas in
eastern China, the result of government policies supporting more efficient
feeding of crop residues. Such policies are expected to continue in the coming
decade and should further stimulate production in intensively cropped areas.

China's consumers do not have a long or well established tradition of
consuming dairy products, but dairy output has expanded dramatically from 1.4
million tons in 1980 to 7.4 million in 1996, primarily supplying increased
urban demand for milk. Tighter feed grain supplies over the next decade will
likely reduce the rate of growth, since limited pasture makes dairy production
in China particularly grain-intensive. A portion of increasing domestic demand
for dairy products such as nonfat dry powdered milk will likely be met through
imports.

The most rapid growth of all animal protein products in China was in aquatic
product output, which rose from 4.5 million tons in 1980 to 32.9 million in
1996, making China the world's largest producer. Prospects for the coming
decade are mixed. While the Government has invested heavily in equipment to
increase the ocean catch, world fish resources are declining and traditional
fishing nations are increasingly conscious of overfishing and damage to marine
ecosystems. 

China hopes to expand domestic aquaculture systems because fish are very
efficient converters of grain and oilseed meals to meat. However, water
shortages in North China and environmental problems in South China pose
constraints to continued rapid expansion. Only moderate output growth is
expected in the coming decade.

Trade May Fill Production Gaps

Several USDA studies of China's agricultural economy from 2005 to 2025
forecast that production of feed grains and oilseed meals will increase
through time, but that demand for feed and oil meals will outpace supplies and
the supply/demand gap will widen. China will almost certainly continue to
encourage producers to implement efficiency measures to save on increasingly
scarce feed supplies. 

Government-supported programs to accelerate the growth of the poultry,
aquatic, and grass-fed bovine animal industries are among the strategies
already in place. Although pork remains the preferred meat in China, the price
for pork may rise relative to other meats unless China is able to increase
grain and oilseed production to meet domestic feed requirements. A relative
increase in the pork price vis-a-vis other animal protein products will induce
consumers to switch to other products.

Government policies have severely limited China's trade in livestock products.
A strategy of grain self-sufficiency limited the growth of domestic livestock
production in past decades, while a strategy of meat self-sufficiency
restricted imports of livestock products. China uses tariff-rate quotas,
value-added taxes, and health and sanitary requirements to limit meat imports.
China's meat exports face similar barriers in other countries as well as bans
against China's meat products because of the existence of Newcastle and
foot-and-mouth diseases. Thus trade accounts for a very small share of China's
livestock economy. In 1996, China exported about 1 percent of its livestock
products and imported a similar amount.

Despite these limitations, China is a major importer of poultry parts which
have high domestic demand particularly legs, wings, and feet and is a major
exporter of poultry parts primarily breasts to other Asian countries. China
currently exports feed grain (primarily corn), although it is expected to
gradually return to being a net corn importer. China is also a major world
importer of soybeans and soymeal to support domestic livestock production and
is expected to require increasing amounts of protein meal imports in the
future. Even though China achieves a fairly high percentage of
self-sufficiency in grain production, even a small percentage shortfall leads
to large imports because of China's enormous population.

In the next decade China may increasingly look to international markets for
additional sources of feedstuffs or meats, as well as for export
opportunities. China will likely continue to import some animal parts for
which internal prices are high because of strong domestic demand, such as
chicken wings and feet, and export animal parts for which domestic demand and
internal price are low. China is preparing to join the World Trade
Organization (WTO), and meat trade issues e.g., comparative production
advantages, sanitary and phytosanitary problems, and human health
concerns have been discussed within China.

China sees other benefits in exporting meat products as well. Its trade
strategy allows for import of a portion of animal feeds to be transformed
internally into value-added meat products, which are then to be exported back
onto the world market. China is continuing to strengthen its export markets in
Hong Kong and Macao and is looking for opportunities to increase sales to
neighboring Japan, the Newly Independent States of the former Soviet Union,
Indonesia, and the Middle East. 

China's population will continue to grow, although the rate is projected to
slow from 1 percent in 1996 to 0.7 percent in 2005, and large numbers of rural
residents are expected to continue to migrate to urban centers over the next
few decades. Increasing overall population and rural-to-urban migration is
expected to foster continued rapid growth in demand for animal products.
Demand for meats, fish, eggs, and milk in the future is likely to outstrip
China's ability to produce these products using its own feed crops. Despite
its measures to increase feed efficiency, China has the potential to become a
large market for imported animal protein foods and/or feedstuffs.
Frederick W. Crook (202) 694-5217 and W. Hunter Colby (202) 694-5215
fwcrook@econ.ag.gov
whcolby@econ.ag.gov  

SPECIAL ARTICLE BOX
Problems in Measuring China's Livestock Sector

Over the past decade, researchers at USDA's Economic Research Service have
identified a number of analytical issues and anomalies associated with China's
animal protein economy that make it difficult to assess the current situation
as well as future trends in either livestock inventories or feed grain demand.
Because of the size of China's population, small changes in per capita animal
protein consumption lead to relatively substantial changes in projections of
China's future demand for feedstuffs. Similarly, because of the enormous
livestock inventory in China, relatively small changes in feed/meat conversion
ratios lead to large changes in feedstuff use projections. In addition,
government production, marketing, and foreign trade policies continue to have
an important effect on the livestock economy and policy changes add additional
uncertainty in producing projections. 

A number of inconsistencies exist in the data describing this economy. For
example, the quantity of grain used for feed reported in China's grain balance
sheets is insufficient to support current reported livestock production. This
suggests that either the feed/meat conversion rates are far more efficient
than is likely, grain output is underreported, livestock production is
overreported, or a combination of these possibilities. There is also a
contradiction between growth in grain supplies and in livestock product
output. Livestock product output has grown at about 5 percent per annum even
when available grain supplies grew slowly, declined, or were stagnant.

Researchers in China and the U.S. have observed that per capita meat
availability as measured by Government production and population statistics is
roughly 50 percent larger in 1996 than per capita meat consumption as measured
by the State Statistical Bureau (SSB) urban and rural household income and
expenditure surveys. Scholars in China have questioned this growing gap. 
Most researchers agree that some animals slaughtered have been double counted
and that in some cases, local cadres inflated output statistics to earn better
performance evaluations. Work is now underway at ERS to address the
implications of a reduction in China's official meat production statistics on
its projected future grain import demand.

China's State Statistical Bureau (SSB) recently began conducting sample
surveys on livestock inventories. Results from the surveys and from China's
first agricultural census (completed in January 1997) will provide useful
benchmarks. In the latest China's National Economic and Social Development
Communique, published on March 5, 1998, the SSB confirmed the problem of
overreporting by revising red meat output downward by about 20 percent.
However, China has not yet released revised detailed individual meat
production or animal inventory numbers.

China's statistical officials have indicated that a revised historical series
of detailed meat and animal inventory statistics will likely be released by
China's State Statistical Bureau sometime in 1999. SSB officials are currently
working on developing an appropriate methodology for re-estimating the
individual historical data series. Once that is determined, the revised
historical data series will have to be reviewed by other relevant government
agencies (particularly the Ministry of Agriculture) before it is officially
released.

Given the acknowledged problems in China's livestock data, the assessments in
this article should be viewed as tentative. Despite the uncertainties,
however, there is no doubt that livestock product markets in China are
significant to world markets, and their importance is likely to become much
greater in the future. 

END_OF_FILE
