AGRICULTURAL OUTLOOK                                        December 22, 1998
January/February 1999, AO-258
               Approved by the World Agricultural Outlook Board
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AGRICULTURAL OUTLOOK is published ten times a year by the Economic Research
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IN THIS ISSUE

BRIEFS
Livestock, Dairy, & Poultry: Broiler Prospects Shaped by Financial Crises
Abroad, Lower Feed Costs

Specialty Crops: Green Industry Cash Receipts Growing Despite Import
Competition

Farm Structure: More Farmers Contracting To Manage Risk

COMMODITY SPOTLIGHT
Cigarette Price Increase Follows Tobacco Pact

FARM FINANCE
Net Farm Income to Decline but Remain Near 1990-98 Average

RESOURCES & ENVIRONMENT
Conservation on Rented Farmland: A Focus on U.S. Corn Production

SPECIAL ARTICLE
Transportation Technology Eases the Journey for Perishables Going Abroad


IN THIS ISSUE

Net Farm Income To Decline but Remain Near 1990-98 Average

USDA's financial outlook for U.S. agriculture remains generally favorable,
despite recent price collapses for many commodities.  With prospects of lower
production expenses and additional government payments authorized by recent
legislation, net farm income for 1999 is forecast down $3.4 billion to $44.6
billion, still near the 1990-98 average of $45.5 billion.  Farmers' equity
should increase for the 10th straight year, reflecting the combination of a
relatively small increase in agricultural assets and a modest decline in farm
debt.  Nonetheless, specific segments of the industry and areas of the country
will continue to struggle with cash flow problems.


Financial Crises Abroad, Lower Feed Costs Shape Broiler Prospects

Economic crises in Asia and Russia have combined to depress U.S. poultry
export projections for 1998 and 1999, especially for broilers.  The 1998
broiler export estimate has been lowered to 4.5 billion pounds and the
forecast for 1999 reduced to 4.3 billion.  Because the export market impact
has been on dark meat, which represents only 25-35 percent of the value of a
broiler, the strength of the domestic market has offset potential negative
effects on profitability.  U.S. broiler producers net returns were near
record levels this summer as wholesale meat prices have been up and feed costs
have been about 20 percent below a year earlier.  As a result, U.S. broiler
production is expected to grow about 5 percent in 1999. 


Green Industry Receipts Grow Despite Imports

The U.S. green industry--producers of indoor and outdoor flowers and
plants--has seen cash receipts rise an average $500 million per year for more
than a decade despite a steady loss of domestic market share to foreign
growers.  Consumer confidence in a robust economy, and low interest rates that
spur new housing and businesses, will push retail floral and plant product
purchases to a record $54.6 billion in 1998, up $2.9 billion from 1997. 


Cigarette Price Increase Follows Tobacco Pact

Key elements of the recent agreement between the tobacco industry and state
attorneys general require manufacturers to pay $206 billion to states over a
25-year period (including $300 million annually for research to reduce youth
smoking and to support other anti-smoking measures). Combined with expenses
from four previous individual state settlements, the agreement will have an
inflationary effect on cigarette prices -- the wholesale price of cigarettes,
including tax, has already gone up nearly 50 percent since January 1998. 
Cigarette consumption is expected to decline, curbing demand for tobacco leaf
and reducing marketing quota levels.  This year's higher tobacco prices mask
the potential for lower quotas to reduce overall cash receipts for growers. 


Farming Under Contract

Nearly $60 billion of  U.S. crops and livestock--about one-third--was grown
or sold under contract in 1997, according to USDA's Agricultural Resource
Management Study, and more than 1 in 10 farm operators reported income from
contractual arrangements.  Two-thirds of farms with contracts (marketing
and/or production) in 1997 were small family farms (sales under $250,000), but
larger family farms (sales $250,000 and over) and nonfamily farms accounted
for more than three-fourths of the value of products grown and sold under
contract. 


Conservation on Rented Farmland: A Focus on U.S. Corn Production

ERS analysis indicates a significant relationship between land tenure and corn
farmers' decisions to adopt certain conservation practices.  Based on 1996
data, cash-renters and share-renters are less likely than owner-operators to
adopt contour farming, strip cropping, or grassed waterways--practices
offering only longer term benefits. Cash-renters are also less likely to adopt
conservation tillage, a practice that provides short-term profits as well as
longer-term benefits, while share-renters adopt this practice at about the
same rate as owner-operators.

These findings may have implications for resource use and environmental
quality in U.S. agriculture, since USDA's Natural Resources Conservation
Service estimates that half of U.S. cropland needs additional conservation
treatment in order to maintain productivity.  If the percentage of farmland
rented, especially through cash leases, continues to rise as it has in recent
decades, future adoption of certain conservation practices, at least for corn
producers, may be lower than otherwise expected. 


Technology Eases Perishables' Journey

Advances in transportation technology have extended the marketing reach of
U.S. perishable products by reducing delivery times, maintaining product
quality, and reducing costs.  The revolution in perishable product shipping
technology began with containerization handling standardized containers
filled with cargo, rather than handling the cargo itself.  Next came
"reefers" -- 20- or 40-foot boxes with their own refrigeration units -- and a
further refinement -- controlled atmosphere technologies -- which allowed
shippers to regulate gases and humidity within containers to slow ripening,
retard discoloration, and maintain freshness of supersensitive perishables. 
Conventional refrigerated carriers are meeting the container ship challenge by
concentrating into fewer and larger firms, utilizing capacity more effectively
year-round, speeding cargo handling, and installing highly efficient
refrigeration systems.


BRIEFS

Livestock, Dairy, & Poultry

Broiler Prospects Shaped by Financial Crises Abroad, Lower Feed Costs

Economic crises in Asia and, more recently, in Russia, have combined to
depress U.S. poultry export projections for 1998 and 1999. Most of the
decrease has come in broiler exports; the 1998 broiler export estimate has
been lowered to 4.5 billion pounds, and the forecast for 1999 has been reduced
to 4.3 billion. These would be the first decreases in broiler exports since
1984.

In September 1998, a dramatic downturn occurred in broiler exports to Poland,
the Baltic States Latvia, Lithuania, and Estonia and Russia and the other New
Independent States (NIS) of the former Soviet Union. Broiler shipments to
these countries accounted for 52 percent of all U.S. broiler exports. 

Over the first 9 months of 1998, shipments to these countries had reached 1.9
billion pounds, about even with the same period in 1997. While direct sales to
Russia were down 13 percent (190 million pounds), sales to Estonia, Latvia,
and Poland increased almost 50 percent to 450 million pounds. U.S. broiler
exports to these countries are largely transshipped to Russia and other NIS
countries, following traditional transportation and distribution patterns.
Exports to Poland through September totaled 138 million pounds, even though
Poland has set an annual quota on broiler imports of only 80 million pounds.
Direct shipments to NIS countries other than Russia increased 250 percent from
the previous year in the first 9 months of 1998.

After averaging 216 million pounds a month over the first 8 months of 1998,
broiler exports to the Baltic States and Russia and other NIS countries
plunged to 27 million as the devaluation of the ruble raised domestic prices
and lowered consumer incomes. Exports to Russia and surrounding countries are
expected to begin gradually increasing in 1999 as the ruble's exchange rate
stabilizes and economic recovery plans are put in place, but exports for the
year are expected to be significantly lower than in 1998. 

The Asian economic crisis, in contrast, has not depressed broiler exports,
although it has had negative effects on shipments of other U.S. poultry
exports. The crisis began in Korea, Thailand, Malaysia, Indonesia, and
Singapore, but quickly affected the economies of  Hong Kong and Japan. Among
the earliest affected countries, Singapore and Korea are significant markets
for U.S. poultry products, and Thailand is a major broiler producer and U.S.
competitor. The decline of Thailand's baht against the dollar has made its
broiler exports more competitive with the U.S. in Hong Kong/China and Japan,
helping to bring U.S. broiler product prices down in these markets. Hong Kong
is a major market for poultry products, and it also serves as the chief port
for poultry products destined for China. Hong Kong/China and Japan are the
primary Asian markets for U.S. broiler products, accounting for 26 percent of
all exports in 1997. 

At the beginning of 1998, U.S. broiler exports to Hong Kong/China fell
significantly as consumers avoided all chicken products following a scare that
Avian influenza might be able to pass from poultry to humans. By early spring,
however, exports of broilers to Hong Kong/China rebounded to levels above the
previous year and through September were 2 percent above the same period in
1997. Exports of broiler products to Japan have also risen, but exports of
U.S. turkey products, eggs, and other chicken products, pressured by lower
broiler product prices, have fallen considerably in 1998. Japanese consumers
are likely substituting lower valued U.S. broiler products for higher priced
broiler products from other sources, as well as for higher-priced poultry
products from the U.S. 

Domestically, U.S. broiler producers are encountering higher prices and lower
feed costs than a year earlier. Broiler production is expected to increase
about 5 percent in 1999 as increased producer profitability makes production
increases more attainable and attractive. Producer net returns were near
record levels this summer as wholesale meat prices have been up and feed costs
have been about 20 percent below a year earlier. Because the export market
impact has been on dark meat, which represents only 25-35 percent of the value
of a broiler, the strength of the domestic market has offset potential
negative effects on profitability.

Broiler production had increased only fractionally in the second and third
quarters of 1998 relative to a year earlier, as hatchery supply flock problems
and low profitability in late 1997 limited increases in bird numbers and as
hot weather slowed growth rates in some leading southern production areas. In
response to high net returns over the summer, however, pullet hatch for
potential placement in the hatchery supply flock in September was 19 percent
higher than a year earlier. Egg sets in incubators for broiler production were
up between 4 and 5 percent in mid-November for the 15 states surveyed. And
stronger increases in broiler-type chick hatch in the fall indicate production
should increase more vigorously in 1999. Prices for whole birds set a record-
high average for 1998. Prices for whole birds are expected to continue
stronger than a year earlier into early 1999, but for most of the year should
be slightly weaker than a year earlier as production increases accelerate.
Prices for whole birds in 1999 are not expected to match the record-high
levels of August 1998. 

Stronger prices for skinless, boneless breast meat and wings, up about 10
percent and 20 percent from year-earlier levels since May, reflect strength in
the fast-food market. Leg quarter prices dropped significantly when the
Russian market collapsed, peaking at over 38 cents a pound on the northeast
wholesale market in mid-August and hitting a low of 17 cents in December.
Plentiful pork supplies are also competing with low-priced poultry products in
the export market. Recovery of price levels for leg quarters in 1999 depends
on a whether sales to Russia and Asia increase and supplies of competing beef
and pork decline. David Harvey (202) 694-5177 and Milton Madison (202)
694-5178 djharvey@econ.ag.gov mmadison@econ.ag.gov


BRIEFS 

Specialty Crops

Green Industry Cash Receipts Growing Despite Import Competition

The U.S. "green" industry producers of indoor and outdoor flowers and
plants has enjoyed rising cash receipts for more than a decade despite a
steady loss of domestic market share to foreign growers (AO July 1997). In
1998, consumer confidence in a robust economy, along with relatively high
disposable income and low unemployment, helped push floral and plant product
purchases to record levels. Similarly, low interest rates have spurred new
housing and business starts, helping fuel demand for landscaping products and
services.

The green industry or nursery and greenhouse sector  has two major
subsectors: floriculture (cut flowers, cut cultivated greens, and potted
flowering and foliage plants), and environmental horticulture (trees and
shrubs, bedding and garden plants, and turfgrass). Environmental horticulture
dominates green industry sales, accounting for four-fifths of growers' cash
receipts.

Retail expenditures for nursery and greenhouse products reached $54.6 billion
in 1998, up $2.9 billion (5.5 percent) from 1997. Environmental horticulture
products generated $38 billion in retail sales ($141 per capita) while
floriculture product sales totaled $16 billion ($61 per capita).

Overall, 91.5 percent of domestic sales of nursery and greenhouse products in
1998 was U.S.-grown products. Foreign competition is felt most keenly in
floriculture, where U.S. share of 1998 domestic sales fell to 72.8 percent
(down 1.3 percent from 1997). Of the $1.1 billion in floral and nursery
products imported in 1998, cut flowers alone accounted for 60 percent.

In contrast, U.S.-grown environmental horticulture products accounted for 97.3
percent of the U.S. retail sales market, holding at the previous year's level.
Since these products generated 80 percent of green industry grower cash
receipts, the projected 5-percent rise in spending for outdoor plant products
in 1999 bodes well for the green industry sector.

Grower cash receipts increased 5 percent to $12 billion in 1998 compared with
$11.4 billion in 1997. The green industry's high-value-product sales accounted
for more than one-tenth of 1998 total U.S. crop cash receipts. Cash receipts
in most floriculture and environmental horticulture product categories are
increasing annually at 4-5 percent, and bedding and garden plants have been
experiencing even faster growth.

Bedding and garden plants subsector leads green industry growth. Bedding and
garden plant cash receipts jumped 8 percent in 1998. A similar increase is
expected in 1999. These outdoor products -- flowering, nonflowering, and
vegetable plants -- are generally "annuals" rather than "perennials," and may
be sold in flats, pots, or hanging baskets. Flowering annuals, used by
homeowners and businesses to provide instant seasonal color, are often
discarded and replaced when their decorative value diminishes.

Bedding plant supply is usually timed for spring and fall marketing, because a
spring-summer, fall-winter rotation is common in the U.S. For example, popular
flowering bedding plants such as impatiens, geraniums, petunias, and New
Guinea impatiens may be purchased by homeowners and landscapers for the
spring-summer season, to be replaced by pansies, garden mums, and flowering
kale for the fall-winter cycle.

The relatively fast growth of domestic grower receipts for bedding and garden
plants has occurred partly because these products have little or no import
competition. Imports are generally restricted for phytosanitary reasons, and
international shipments of plants in growing media is costly and complex. 

Expenditures for environmental horticulture products other than bedding and
garden plants increased 5 percent in 1998 to about $32 billion ($118 per
capita). Grower cash receipts are projected to rise to $7.5 billion in 1999
for products in this category, which includes trees, shrubs, bulbs, ground
covers, turfgrass, nursery stock for commercial fruit and vegetable production
and home plantings, and seedlings for Christmas tree plantations, wildlife,
and conservation purposes.

Cut flower and cut green subsectors are still struggling with imports. In
1998, U.S. growers scaled back the area planted to production of cut flowers
and cut cultivated greens because of competition from imports. The U.S. share
of domestic retail sales dropped to 45 percent, and USDA projects further
production cutbacks by U.S. growers in 1999. Nevertheless, grower sales of
U.S.-produced cut flowers and cut greens were up 4 percent in 1998, reaching
$639 million.

Despite modest gains in grower cash receipts in 1998, grower sales of the
major cut flowers, including roses, carnations, chrysanthemums, and gladioli,
were lower. Domestic production of the major cut flower varieties continues on
a downward track, while production of specialty cut flowers (such as
snapdragons, baby's breath, statice, gerbera daisies, sunflowers, and asters,
many of which are field-grown rather than greenhouse-grown), continues to
increase. Cut flower imports totaled $650 million (import value) in 1998,
accounting for at least two-thirds of the volume of U.S. cut flower sales.
This represents an increase of 9 percent over 1997.

Domestic production of cut cultivated greens fell in 1997, but rebounded in
1998 to about $130 million in growers cash receipts, up 9 percent from 1997
but still below 1996. At the same time, however, imported quantities continue
to increase and now account for about one-third of U.S. sales. Imports of cut
greens were valued at $50 million in 1998, up 5 percent from 1997.

Potted foliage and flowering plant sales are up. Grower sales of potted
flowering and foliage plants for indoor use totaled $1.7 billion in 1998, up 3
percent from 1997. Increased consumer and business demand for indoor plants
stems from their aesthetic value as well as their ability to absorb indoor air
pollutants.

Potted flowering plants accounted for about 55 percent of potted plant cash
receipts and potted foliage plants for the remaining 45 percent. Sales of
potted plants are expected to trend upward again in 1999, with flowering and
foliage varieties making similar gains.

The most popular varieties of flowering plants include potted poinsettias,
African violets, florist azaleas and chrysanthemums, cyclamens, kalanchoes,
hydrangeas, orchids, and lilies. Recently, foliage plant sales have increased
and are expected to continue strong. Dieffenbachia, schefflera, ficus,
spathiphyllum, bromeliads, and philodendrons are among the most popular
foliage plants.

As with bedding and garden plants, import competition for potted plants is
limited by U.S. phytosanitary regulations. In order to lessen the risk of
introducing foreign plant diseases or insects, importation of plants with
roots in soil or other growing media is strictly controlled. As a result, most
imports are cuttings or propagative materials used by growers to start new
plants.

Industry sales will likely continue to grow. Despite increasing competition
from imports, cash receipts for green industry producers have been gaining an
average $500 million per year. In nominal terms, producer prices for most
flower and plant crops have been fairly stable; volume increases have pushed
grower sales upward in almost all categories.

With demand for floral and nursery-related products linked to the health of
the general economy, economic growth generally leads to higher retail sales in
the nursery and greenhouse sector. In fact, green industry sales are projected
to grow at twice the rate of the general economy in 1999.

Strong demand from consumers, businesses, and institutions for flowers,
plants, and landscaping greenery is expected to continue, pushing U.S. retail
sales to $57 billion in 1999, $40 billion for environmental horticulture and
$17 billion for floriculture. Even if U.S. producers capture a smaller share
of that domestic market, it will still translate into increased income. Green
industry growers' cash receipts are projected to reach $12.5 billion in 1999. 
Doyle C. Johnson (202) 694-5248 djohnson@econ.ag.gov


For more data and analysis, visit the Floriculture and Environmental
Horticulture Briefing Room at http://www.econ.ag.gov/floral/ Available at this
site is the ERS report "Floriculture and Environmental Horticulture." October
1997. The next report will be available in October 1999.


BRIEFS

More Farmers Contracting To Manage Risk

Almost a third of crops and livestock produced by American farmers was grown
or sold under contract in 1997, according to USDA's Agricultural Resource
Management Study (ARMS). Departing from a tradition of independent farm
operators who have complete control over production and marketing decisions,
contracting is a growing trend in American agriculture (AO May 1997). Today,
more than 1 in 10 farm operators report income from contractual arrangements. 

Contracting offers farm operators the advantages of reducing risks of price
swings, sharing production costs, and stabilizing income. For contractors
(primarily processors and packers), these arrangements assure a ready supply
of uniform, high-quality farm products and ease inventory management problems.

Contracts, either written or oral agreements, will generally spell out the
parties' understanding of how a commodity is to be produced and/or marketed,
including specifications for quantity, quality, and price. Marketing contracts
are commonly used for crops, while production contracts are more prevalent in
the livestock industry.

Under a marketing contract, a price (or pricing mechanism) is established for
a commodity before harvest or before the commodity is ready for marketing.
Most management decisions remain with the grower, who retains ownership of
both production inputs and output until delivery. With a marketing contract,
the farmer assumes all risks of production but shares price risk with the
contractor.

A production contract details who supplies the necessary production
inputs, the contractor or the farmer (contractee), as well as the quality and
quantity of a particular commodity and the compensation due the farmer for
services rendered. Under livestock production contracts, the farmer is paid to
provide housing and care for the animals until they are ready for market, but
the contractor actually owns the animals.

Although cash markets still dominate the agricultural sector, nearly $60
billion (31.2 percent) of total production was covered by contracts.
Commodities produced under marketing contracts accounted for 21.7 percent of
the total U.S. value of production, while those under production contracts
accounted for 9.5 percent. In 1997, 9 percent of farmers sold at least part of
their output through marketing contracts, and 2.2 percent had some income from
production contracts. 

Between 1991 and 1997, the share of commodities produced under marketing
contracts increased from 16 percent to 22 percent of total U.S. value of
production. The production contract share of the total has varied between 10
and 15 percent, with no clear trend.

Topping the list of crops produced under marketing contracts were fruits and
vegetables, with $11 billion sold through contract, 40 percent of the value of
all fruits and vegetables produced. Other crops with large shares of
production value under marketing contracts were cotton ($1.9 billion, or 33
percent); corn ($1.7 billion, or 8 percent); soybeans ($1.7 billion, or 9.4
percent); and sugar beets ($973 million, or 82 percent). Just under 10 percent
of the value of cattle production was sold under marketing contracts, compared
with more than 60 percent of the value of dairy products.

Production contracts are more likely to be used for livestock. Poultry and
poultry products accounted for over 50 percent of the total value of
commodities under production contracts, and cattle and hogs another 41
percent. Within the poultry category, 70 percent of the commodity value of
production was produced under production contracts. In contrast, 33 percent of
the value of production of hogs and 14 percent of cattle were covered by
production contracts.

While farms of all types and sizes engage in contracting, two-thirds of farms
with contracts (marketing and/or production) in 1997 were small family farms
(sales under $250,000). However, larger family farms (sales $250,000 and over)
and nonfamily farms accounted for more than three-fourths of the value of
products grown and sold under contract.

Larger family farms were more likely to use contracting than small family
farms, 53 percent compared with 8 percent. Larger farms were also more likely
than other farms to use production contracts instead of marketing contracts.
Larger family farms accounted for 65 percent of the total value of commodities
produced under production contract, while nonfamily farms accounted for 21
percent and small family farms for the remaining 14 percent.

Farms with marketing contracts -- 9 percent of all farms -- outnumbered those
with production contracts by 4 to 1. While small farms made up almost 70
percent of the farms engaged in marketing through contracts, they accounted
for only 27 percent of the total value of production sold under marketing
contracts.

Dairy products marketed by small farms under contract were valued at $6.3
billion, or more than half of the marketing contract value of production on
small farms. Small family farms sold $1.6 billion of fruit and vegetables
through marketing contracts, 20 percent of the value of all fruit contract
marketings and 5 percent of the value of all vegetable contract marketings.
Other crops raised on small farms and marketed through contracts include
soybeans, cotton, and corn, but contracted value of these commodities totaled
just $1.4 billion. 

Larger family farms sold 70 percent of their total value of dairy products
through marketing contracts, as well as 66 percent of their fruit and 38
percent of their cotton. Other crops grown under marketing contract on larger
family farms include vegetables, corn, and soybeans. Commodities under
marketing contracts on nonfamily farms were predominantly fruits, cattle, and
dairy products.

As government programs become more market-oriented, all farm operators will
need to continue developing their risk mana gement skills in order to protect
their operations from high debt levels and unpredictable price swings.
Contracting is likely to be a part of farmers' efforts to reconcile production
preferences with expected conditions in the marketplace, locking in purchasers
for their products, sharing costs with investors, and ensuring compensation
for their labor. David Banker (202) 694-5559 and Janet Perry (202) 694-5583
dbanker@econ.ag.gov jperry@econ.ag.gov


COMMODITY SPOTLIGHT

Cigarette Price Increase Follows Tobacco Pact

The recent agreement worked out between the tobacco industry and state
attorneys general on November 16, 1998 requires manufacturers to reimburse
states for costs of treating smoking-related illnesses and provides for
specific measures to reduce underage smoking. Combined with expenses from four
previous individual state settlements, the agreement will have an inflationary
effect on cigarette prices. Manufacturers had already raised wholesale prices
four times in 1998 prior to the settlement, resulting in a 14-percent overall
rise at the wholesale level, in part in anticipation of future expenses.
Adding increases since the settlement, the wholesale price of cigarettes,
including tax, has gone up nearly 50 percent since January 1998.

Key elements of the pact require manufacturers to pay $206 billion to states
over a 25-year period (including $300 million annually for research to reduce
youth smoking and to support other anti-smoking measures). The pact also
limits sporting event sponsorship and advertising (including a ban on cartoon
characters) and prohibits "branded" merchandise, merchandise made available to
customers that displays the name or symbols of a brand of cigarettes. Tobacco
industry organizations such as the Tobacco Institute and the Council for
Tobacco Research are disbanded. Agreements in the four previously settled
individual state lawsuits commit the industry to an additional cost of about
$45 billion over 25 years.

Signed just a few days after it was announced by the 46 states that had not
already settled individually, as well as by the District of Columbia and
several territories, the new tobacco settlement, unlike the abortive June 1997
agreement, requires no approval by Congress. The narrower scope of the current
agreement reflects its more limited goals: reimbursing states for smoking-
related health costs under Medicaid, restricting advertising and promotional
sponsorships by tobacco companies, and putting an end to lawsuits initiated by
states against cigarette manufacturers. This agreement forgoes a complete ban
on advertising for sporting events, as well as authorization for the
regulation of tobacco by the Food and Drug Administration (e.g., possible
restrictions on nicotine content of tobacco products), which would have
required Congressional approval. And the industry remains subject to
individual and class action lawsuits. 

On November 23, the day of the new settlement's signing, two major cigarette
companies raised wholesale prices by 45 cents per pack, the largest increase
in history. Other manufacturers will follow. Retail prices, while not likely
to reflect the entire increase, will rise substantially, as most of the
settlement's cost will be passed on to consumers. 

Higher cigarette prices, as well as increased taxes in some states, could
cause consumption to slide as much as 25 percent over the next 10 years,
compared with an expected decrease of 17 percent at the current rate of
decline. Growing restrictions on permissible smoking areas and increased
awareness of health risks associated with smoking had already fueled a decline
in U.S. cigarette consumption at a rate of about 2 percent per year since its
peak at 640 billion pieces in 1981. Domestic cigarette consumption is forecast
to decline to 470 billion pieces in 1998 from 475 billion in 1997. 

After increasing nearly every year since the mid-1980's, U.S. cigarette
exports also turned downward in 1997 as offshore production by U.S.
manufacturers rose and as demand declined in some major consuming nations.
U.S. cigarette exports fell 11 percent to 217 billion pieces in 1997, and the
decline is expected to continue. The economic crisis in Asia is likely to
exacerbate shrinking demand in Pacific Rim nations. 

In 1998, U.S. cigarette output is expected to total 680 billion pieces, down
from 720 billion in 1997, when cigarettes sales were $50.4 billion and
accounted for 94 percent of U.S. tobacco product sales. Lower cigarette
consumption will likely curb demand for tobacco leaf. While the tobacco
agreement calls for no specific compensation for growers, manufacturers are
negotiating voluntary payments to make up for the lost value of quotas
resulting from declining leaf demand. At press time, no agreement has been
reached.

Tobacco Auction Prices Higher

Flue-cured and burley tobacco represent 95 percent of tobacco grown in the
U.S. Flue- cured tobacco, also known as Virginia-type tobacco leaf, is grown
in the southeastern U.S. and cured under heat to achieve world-renowned golden
leaf. Burley tobacco is air-cured; leaf is hung in a well-ventilated barn
during the curing process and is grown in Kentucky, Tennessee, Virginia, West
Virginia, Indiana, Ohio, Missouri, and North Carolina. Both types are used
primarily in cigarette manufacture. Tobacco is also used in cigars, snuff,
chewing tobacco, and smoking tobacco.

Flue-cured auction markets closed November 12 after being open for 64 days,
about the usual period. Quality was good, similar to last season. Depending on
grade, prices averaged $1.76 per pound, up 1-3 cents from a year earlier. 

Traditionally, flue-cured tobacco has been sold in "sheets," piled on large
burlap squares. This year, bales which can be moved more efficiently in
warehouses were tried and proved successful. Sales of baled leaf were
substantial in some markets and brought higher per-pound prices. 

Production in 1998 was lower, and marketings totaled just 816 million pounds
compared with about 1 billion last season. Drought in Florida, Georgia, and
South Carolina lowered yields, and reduced domestic demand for leaf and
declining exports led to a drop in the 1998 quota. 

Under the Federally administered tobacco program, growers are allowed to
market up to a quota set to support tobacco prices. The Flue-Cured
Stabilization Corporation, a quasi-governmental corporation, offers to buy
tobacco that does not receive an auction bid greater than its support price.
With a smaller crop, different grade mix, and large world supplies, the Flue-
cured Stabilization Corporation took 10 percent of total producer sales
compared with 19 percent last season. 

On December 15, USDA announced the flue-cured marketing quota for the
1999/2000 marketing year (July-June). The quota prior to adjustment for
previous year's over- and under-marketings is 666 million pounds, 18 percent
below the 1998 quota of 814 million pounds, and 32 percent below 1997's quota
of 974 million pounds. The 1999 quota is the lowest since poundage quotas were
instituted for flue-cured in 1965. 

The tobacco quota is calculated using a formula that sums domestic
manufacturers' purchase intentions, the average of the preceding 3 year's
exports, and an adjustment to maintain a minimum stock level. This sum can be
adjusted up or down as much as 3 percent by the Secretary of Agriculture -- 
the Secretary adjusted the quota upward by the full 3 percent in 1998. 

Burley auction markets opened on November 23 for the 1998 season. Burley
markets generally open in November and continue through late February or early
March. The 1999 burley marketing quota will be announced February 1.

Despite larger harvested acreage, lower yields pulled down 1998 burley
production by 2.5 percent to an estimated 632 million pounds (including 450
million in Kentucky). This year's quality is good, better overall than last
season. With a smaller crop and higher price supports, prices are expected 2-3
cents per pound higher than a year ago to about $1.91 per pound. The price
support level for 1998 was set at $177.80 per cwt, up $1.80 from 1997. 

Any rise in cigarette prices in 1999 will be mostly related to post-farmgate
market developments rather than higher tobacco prices. Tobacco is a relatively
small part of the total cost of producing cigarettes, about 5 percent, and
cigarette companies can adjust for higher domestic prices by increasing their
use of imported leaf.      

U.S.-made cigarettes and a growing share of foreign production are "American-
blend," containing a blend of about 47 percent flue-cured, 40 percent burley,
and 13 percent Oriental leaf. About 60 percent of leaf in U.S.-made cigarettes
is domestically grown. Oriental tobacco, which is not grown in the U.S., is
mostly imported from Turkey, Greece, and Macedonia. 

Cigarette manufacturers import about 35-40 percent of the tobacco used in
cigarettes because foreign tobacco is less expensive (although lower in
quality). As a result, the U.S. is both the world's largest tobacco importer
and one of the world's largest exporters of leaf. About one-third of U.S.
output is shipped to foreign markets for manufacturing cigarettes. 

This year's higher tobacco prices mask the effects of declining quota levels,
which could reduce overall cash receipts for growers. While tobacco support
prices shelter farmers from large downturns in prices, declining demand for
tobacco leaf over time caused by declining cigarette output results in lower
quotas. As growers' tobacco marketings are restricted, their incomes fall. 

The long-term decline in demand will inevitably result in lower incomes for
growers and their communities. Increased exports of tobacco leaf may provide
some relief to growers, but may be limited by the tobacco program itself.
Since the program was designed to protect U.S. tobacco farmers by increasing
U.S. prices, it also has the effect of making U.S. tobacco less competitive on
the world market. Over time, U.S. tobacco farmers will be forced to turn to
supplementary crop or livestock enterprises or off-farm sources of income. 
Thomas Capehart, Jr. (202) 694-5311 thomasc@econ.ag.gov

For more data and analysis, visit the ERS Tobacco Briefing Room at
http://www.econ.ag.gov/briefing/tobacco/ 


FARM FINANCE

Net Farm Income To Decline but Remain Near 1990-98 Average

USDA's financial outlook for U.S. agriculture remains generally favorable,
despite the recent price collapse for many commodities. With additional
government support payments and with prospects of lower production expenses,
net farm income for 1999 should remain near the 1990-98 average.

The financial soundness of the overall U.S. farm balance sheet reinforces the
USDA outlook. Farmers' equity in agricultural assets should increase for the
10th straight year, reflecting the combination of relatively small increases
in assets and a modest decline in farm debt. Nonetheless, specific segments of
the industry and areas of the country will continue to struggle with cash flow
problems. 

Net farm income in 1998 and 1999 is receiving a significant boost from
approximately $5.6 billion in government support as part of the 1999
Appropriations Act, which is in addition to support provided under the 1996
Farm Act. These additional payments provided under the legislation will boost
1998 net farm income, while disaster payments, coupled with stable to
declining production expenses and improved receipts for some commodities
(notably livestock, cotton, fruit, and nursery and greenhouse products), will
reduce the adverse impact of low grain prices on 1999 income. 

Net farm income, which accounts for changes in farm inventories and noncash
income and expenses, is forecast at $44.6 billion in 1999. This is down from
the revised 1998 preliminary estimate of $48 billion, which would be the
fourth highest on record, trailing only 1996 and 1997 by any significant
amount. The 1999 forecast is only slightly below the decade's $45.5-billion
average.

Net cash income, the return to farm operators from sales and other cash income
minus out-of-pocket expenses, is estimated at $59.1 billion for 1998, the
second highest on record. The 1999 forecast is $55.5 billion -- above the 
1990-98 average. 

Production Value & Expenses Unchanged

The value of crop and livestock production is forecast to be $197.4 billion in
1999, virtually unchanged from 1998. Production of many agricultural
commodities is expected to remain high, barring adverse weather in major
producing states. Consequently, crop receipts will continue to be pressured by
low market prices as in 1998. Prices for many commodities fell to new lows in
1998, and there is little reason to expect significant changes in 1999.
Commodity Credit Corporation loan rates are supporting revenues from major
crops to some extent. 

In 1999, lower farm prices are expected to be partly offset by lower expenses,
due mainly to lower input prices and interest rates. Farmers will likely
continue to modify their financial strategies and production measures to
achieve additional cost savings. For example, some businesses will refinance
existing debt into longer term obligations, reducing interest expenses.
Adoption of new technologies such as Bt corn should help lower production
costs.

The value of commodity production in 1999 is expected to exceed the 1990-98
average by almost $11 billion because of high production, with crop value up
5.5 percent and livestock value up 4.9 percent. The values of production in
1998 and in 1999 are exceeded only by 1996 and 1997 when higher crop values
pushed up the total. In those 2 years, farmers benefited from an unusual
combination of large harvests and high prices, resulting in part from strong
export demand.

In 1999, total farm expenses are forecast to be $186.1 billion, up 0.5 percent
from the revised forecast for 1998. Expenses decreased in 1998, the first
significant drop in total expenses since 6-percent declines in 1985 and 1986.

Interest rates and fuel prices are at the lowest levels seen in recent years,
which will help farmers hold down production costs in 1999 if low levels are
maintained as expected. The average interest rate on outstanding debt will
fall, although exact movements in interest rates and their effect on debt
structure are not known. Low oil prices, in addition to keeping a lid on fuel
prices, should also translate into stable to lower fertilizer prices. Farm
wage rates will probably rise less than in the previous 3 years, which were
characterized by tight labor markets and increases in production of labor-
intensive crops. The only significant jump in input prices will be cattle and
calves for feeding operations, expected up 10-20 percent as supplies tighten. 

In response to low crop prices, farmers may seek lower rental rates from
landlords as rental arrangements are finalized in the first quarter. Some
analysts are predicting a significant drop in cash rent rates. Operators may
also moderate the amount of crop production inputs. 

Farm Balance Sheet To Remain Strong

The viability of the farm economy derives in large part from the financial
soundness of the balance sheet. Assets should continue to increase in value,
though at a slower rate than in recent years. Farmers' equity in agricultural
assets is projected to increase for the 10th straight year, totaling more than
$900 billion at yearend 1999. 

Farm real estate values, which represent the largest component of farm assets,
are expected to increase in value in 1999 (although more modestly than in
previous years), reflecting relatively low inflation and borrowing costs. The
national rise in farm real estate values reflects the counterbalancing of
lower prices in areas where agricultural uses dominate, and rising land prices
in areas subject to urban pressure.

Meanwhile, farm debt is expected to decline slightly to $169.1 billion in
1999, ending 6 years of increases in farm sector debt. The forecast decline
reflects fewer new capital investments financed by debt and a relatively low
incidence of farms borrowing their way out of cash flow problems. Adequate
levels of working capital and additional government support are also helping
to hold down borrowing. Farm debt remains about $24 billion below its 1984
peak.

Farmers may choose to save a substantial portion of the payments they receive
under the recent emergency assistance package in the 1999 Appropriations Act
in anticipation of more limited credit availability in the spring. While ample
funds are available for lending to creditworthy borrowers, bankers in some
regions of the country have indicated that, given the commodity prices that
are likely to be used in projecting next season's receipts, some borrowers may
have difficulty showing that their operations have a positive cash flow -- a
requirement for production loans. 

Any credit availability gaps may be filled by the increasing number of
machinery, seed, and chemical suppliers that have ventured into the lending
business. Besides expanding their traditional use of financing as a means to
boost product sales, these input suppliers are offering financing to meet
farmers' full production credit needs.

In 1999, farmers are expected to use their available credit lines more fully
than in recent years. Farmers are expected to use a larger proportion of their
debt repayment capacity, the level of debt that could be supported by their
current incomes, based on current bank interest rates and a 7-year repayment
period. The proportion used by farmers rose from 45 percent in 1993 to 56
percent in 1995. In 1996, high net cash incomes and lower interest rates
reduced debt repayment capacity use to 51 percent, despite a rise in farm
business debt. Expected favorable interest rates and reduced debt in 1999 will
not be sufficient to offset the effect of lower net cash income; debt
repayment capacity use is expected to rise to 55 percent in 1998 and 57
percent in 1999. 

Income Changes, Farm Debt Distributed Unevenly 

Most, but not all, financial problems faced by producers in 1999 will be cash
flow-related. These cash flow difficulties, however, will reflect different
conditions from those in the early 1980's when falling asset values and
excessive debt in the farm sector, together with high inflation and interest
rates in a fragile general economy, triggered a widespread farm financial
crisis. During the farm financial crisis in 1981, 38 percent of available
income was used for interest expense, compared with only about 17 percent in
both 1998 and 1999.

In 1999, the reduction in debt, coupled with favorable interest rates, is
expected to ease the impact of lower income. Total interest expenses are
anticipated to decline about 3 percent in 1999. However, it appears that as a
group, farm operators will have less income available to meet 1999 principal
and interest payments on their loans, and those operators experiencing the
greatest reduction in income may experience additional difficulty in meeting
debt service requirements in 1999. 

In 1998, many farms struggled with cash flow as some regions experienced poor
weather and as abundant U.S. and foreign supplies squeezed commodity prices.
With supplies projected to continue large, these farms may get little relief
in the form of higher commodity prices in 1999. 

Farm operators in the Lake States, Corn Belt, and Northern Plains accounted
for almost 48 percent of all farm operator debt at the end of 1997. Almost 28
percent of the debt in these regions was owed by operators reporting sales
between $50,000 and $250,000, a group consisting mainly of smaller family farm
operations. While operations in these size classes tend to produce commodities
currently experiencing low prices (e.g., wheat, corn, and soybeans), they are
benefiting from additional government payments authorized in the recent
emergency assistance package.

Overall, many farms will enter 1999 with more optimistic prospects than a year
earlier. Beef cattle farms and ranches should see increased earnings based on
higher prices and a likely drop in expenses. The hog sector, after enduring
low prices and industry restructuring, should see some rebound in income. The
economic outlook is also favorable for other commodity subsectors such as
vegetables, fruits, and cotton. 

Farm Household Income To Rise

In recent years, prosperity in the nonfarm economy has been key in maintaining
average farm household income. This year will be no exception to this trend.
Despite expected lower income from farming, farm household income should
increase in 1999 with a significant contribution from off-farm earnings. 

Farm operator household income has averaged about the same as U.S. household
income during the past three decades. Farm operator household income averaged
$52,300 in 1997 and is forecast to be about the same, $51,000 and $52,000, in
1998 and 1999. 

Forecasts of average operator household income are not highly sensitive to
forecasts of farm income because farm earnings make up only a small share of
total operator household income (only 10-17 percent since 1988). In 1977, off-
farm wages made up 54 percent of operator household income. Off-farm income
can make up such a large portion of farm household income because an
establishment qualifies as a farm with only $1,000 of sales.

For households operating farms with sales of at least $100,000, earnings from
farming make an important contribution to household income. Households
operating these farms are affected the most by changes in farm sector income.
These larger farms, however, account for only about 15 percent of all family
farms. 

The remaining 85 percent of family farms fall in the limited-resource,
retirement, residential, or lower sales categories and depend on off-farm
sources for practically all of their household income. Households operating
residential or lower sales small farms rely on off-farm wages or self-
employment earnings for most of their income. Operators of limited-resource
and retirement farms rely heavily on Social Security and other public
programs. (In 1997, about 42 percent of limited-resource farmers reported they
were retired.) None of these farm households are affected greatly by changes
in farm sector income. Mitch Morehart (202) 694-5581 and Robert McElroy (202)
694-5578 morehart@econ.ag.gov rmcelroy@econ.ag.gov


FARM FINANCE BOX

Government Farm Payments for 1998 To Be Decade's Second Highest

New legislation has prompted a substantial increase in expected government
payments for 1998 and 1999 over the 1997 level. This includes supplemental
support from the Omnibus Consolidated and Emergency Supplemental
Appropriations Act for Fiscal Year 1999 signed in October. It also includes
the offer to provide farmers 100 percent of their fiscal year 1999 production
flexibility contract (PFC) payments before January 1, 1999 under legislation
signed into law in August 1998. 

USDA projects that these legislative packages combined with payments under the
1996 Farm Act will amount to direct payments of $12.9 billion to farmers by
the end of calendar 1998 and $10.2 billion in 1999, up from $7.5 billion in
1997. For the 1990's, government payments exceeded these forecasts only in
1993, when payments totaled $13.4 billion. 

Under the 1996 Farm Act, participants received PFC payments of $5.7 billion in
fiscal year 1998 and will receive $5.5 billion in fiscal 1999. To estimate
calendar year payments, the conventional assumption is that 20 percent of the
fiscal year payment is taken before December 31. 

The legislation signed in August changed the rules so that farmers could take
all of their fiscal 1999 PFC payments in the remaining months of 1998 rather
than receiving half in mid-December or mid-January and the rest by September
1999 as provided under the 1996 Farm Act. Some farmers, particularly those in
areas affected most by climatic disasters and lower prices for grains and
soybeans, are expected to take their entire fiscal 1999 payments in 1998. It
is too early to know exactly how much of the fiscal 1999 payment will be
requested before yearend, so the analysis assumes that an additional 10-12
percent could be added in 1998. This would increase PFC payments in calendar
1998 by about $600 million and reduce calendar 1999 PFC payments by the same
amount.

Under the October Appropriations Act, almost $6 billion of new funding will be
injected into the agricultural sector, with about $5.6 billion expected to be
disbursed as direct government payments in 1998 and 1999. Nearly $2.9 billion
will be disbursed as additional payments to farmers based on fiscal 1998 PFC
payments before the end of calendar 1998. The bulk of the remaining funding is
intended for disaster payments, with most of the disaster component likely to
be disbursed in calendar 1999. Assuming that no more than 10 percent of the
disaster funds will be disbursed before the end of calendar 1998, about $3
billion in additional government payments for 1998 and $2.5 billion for 1999
will be distributed to farmers from this legislation. 

Following sharp declines in major crop prices, loan deficiency payments
emerged as a significant portion of direct government payments in 1998 (AO
October 1998). Farmers can receive the difference between the loan rate ($1.89
per bushel for corn in 1998, for example) adjusted to local market, and the
daily market price, also adjusted to the local market. Once they have taken a
loan deficiency payment for an eligible commodity, farmers can no longer place
this same crop under a nonrecourse loan. Total loan deficiency payments for
1998 crops were $1.4 billion as of mid-December.

Access the full Economic Research Report on Agricultural Income and Finance,
including more details on individual commodities.
http://usda.mannlib.cornell.edu/reports/erssor/economics/ais-bb/1998/

For more information, see the Farm Service Agency's Background Information:
Non-Recourse Marketing Assistance Loans and Loan Deficiency Payments, March
1998, available at
http://www.fsa.usda.gov/pas/publications/facts/nonrec98.pdf.

RESOURCES & ENVIRONMENT

Conservation on Rented Farmland: A Focus on U.S. Corn Production

Does land tenure (ownership vs. leasing) affect a farm operator's adoption of
conservation practices?  Analysis by USDA's Economic Research Service (ERS)
suggests that at least for corn production, which accounted for about one-
fifth of all cropland in 1996, the answer is yes.  Recent data from the 1996
Agricultural Resources Management Survey (ARMS) indicate that owner-operators
are more likely than renters to adopt certain conservation practices for corn
production. 

With over 40 percent of U.S. farmland leased in 1992 (the most recent year for
which national farmland tenure data are available from the Census of
Agriculture), including about half of all farmland in Corn Belt states and
California, conservation decisions by operators who rent farmland have
implications for overall adoption of conservation practices in the U.S. And if
a trend toward increased leasing of farmland continues (farmland leasing grew
in the U.S. by more than 2 million acres per year between 1982 and 1992) those
implications may become even more significant in the future. USDA's Natural
Resources Conservation Service (NRCS) estimates that over 200 million acres,
or about half of all U.S. cropland, needs additional conservation treatment in
order to maintain productivity.

Noneconomic factors -- sensitivity to local water quality problems, for
example, or a general attitude toward the environment -- play a role in
farmers' decisions on whether to adopt conservation practices. Economic
factors such as short-term profitability and long-term asset value also play a
significant role. Renters are likely to be more concerned about short-term
profitability of land they rent than about its long-term value, while
owner-operators are likely to be concerned with both. So differences between
renters and owner-operators in the adoption of conservation practices are
probably not surprising. 

Differences in farmland leasing arrangements will also likely affect adoption
of conservation practices. Farmland leasing in the U.S. commonly takes one of
two forms. Cash-renters usually pay all operating expenses, including a fixed
cash rental payment to the landlord, and own the crop. Share-renters typically
share some operating expenses and the final crop with the landlord. According
to the 1988 Agricultural Economics and Land Ownership Survey (AELOS, a follow-
on survey to the 1987 Census of Agriculture and the most recent national data
available on use of different leases types), share leases represented 30
percent of all farmland lease contracts in 1988 in the U.S. and about 40
percent of lease contracts in the Corn Belt. AELOS reports that landlords
participate more frequently in farm management decisions under share leases
than they do under cash leases. The landlord's participation may make share-
renters more likely to adopt conservation practices than cash-renters.

Although the analysis in this article focuses on the adoption of selected
conservation practices by U.S. corn producers, and although current data
limitations constrain the ability to generalize from these results to other
commodities and practices, new ARMS data over the next 2 years will permit
similar analyses of U.S. wheat and soybean producers. However, analysis of
other conservation practices particularly permanent conservation structures
such as terraces will continue to be limited by incomplete data on such
questions as lease duration, landlord participation in conservation decisions,
and the establishment date of conservation practices.

Land Tenure & Conservation -- Is There a Link?

A wide variety of activities may be considered conservation practices, given
their role in providing on-farm or off-farm conservation benefits, including
maintaining or improving soil fertility, reducing soil erosion, and reducing
runoff of nutrients and pesticides. Among the conservation practices common in
corn production are conservation tillage, grassed waterways, contour farming,
and strip cropping. 

Conservation tillage includes any tillage and planting system that leaves 30
percent or more of the soil surface covered with crop residue to reduce soil
erosion by water or, for control of wind erosion, maintains at least 1,000
pounds per acre of flat, small-grain-residue equivalent on the surface
throughout the critical wind erosion period. 

Grassed waterways are natural or constructed channels covered in suitable
vegetation that control erosion and spread the flow of water from the field. 

Contour farming involves preparing land, planting, and cultivating a crop
along the contours of a field to reduce erosion, increase water infiltration,
and control runoff water. 

Strip cropping involves growing different crops in a systematic arrangement of
strips across or along the contour of a field to retain runoff for moisture
conservation and to reduce soil erosion, increase water infiltration, and thus
protect water quality.

Each of these practices provides on-site and off-site benefits over the long
term. In addition, conservation tillage may result in short-term profit
increases to the farmer because of reduced labor and machinery costs. 

For the purposes of studying tenure effects on adoption of conservation
practices, USDA's Economic Research Service (ERS) examined 1996 ARMS data on
use of conservation practices by U.S. corn producers. The study divided these
practices into two categories: those that may provide short-term profits in
addition to conservation benefits (conservation tillage) and those that
provide benefits only over a longer time period (contour farming, strip
cropping, and grassed waterways). 

The rates of use of conservation practices that provide short-term profits as
well as conservation benefits were expected to be similar among renters and
owner-operators, while the rates for practices providing only longer term
benefits were expected to be higher for owner-operators. Share-renters, whose
landlords were likely to be more involved in management decisions, were
considered more likely than cash-renters to adopt practices with long-term
benefits.

Summary statistics from ARMS data indicated that essentially the same
proportion -- 31 percent of owner-operators, 28 percent of cash-renters, and 
33 percent of share-renters -- used conservation tillage. For contour farming,
strip cropping, and grassed waterways, 43 percent of owner-operators, 37
percent of cash-renters, and 23 percent of share-renters adopted at least one
of those practices.

These statistics, however, are potentially misleading if considered in
isolation from other factors that may influence the adoption of conservation
practices. Farmers' ages, for example, might affect their inclination to adopt
conservation practices, and if one age group is more heavily represented
within a tenure type, the effect of age on practice adoption could be confused
with the effect of tenure. To isolate the impact of tenure, the effects of
land conditions and of socioeconomic, demographic, and climatic
characteristics on the adoption of conservation practices were measured using
ARMS data, as well as data on temperature and precipitation.

This analysis indicated younger operators, more highly educated operators,
those with a larger percentage of total area in corn and soybeans, and those
with larger farms were more likely than other farmers to use conservation
tillage, as were farmers with land designated as highly erodible. The
potential for significant time savings and lower machinery costs encourages
adoption by larger farms; time savings may not be as critical for smaller
operations. Farmers with improved drainage on their land were less likely to
use conservation tillage; fields benefiting from drainage improvements would
most likely have soils and topographic characteristics that are less well
suited to the use of conservation tillage.

Younger farmers, those with less acreage, and those with a smaller percentage
of farm area in corn or soybeans were more likely to use at least one of the
conservation practices with longer term benefits (contour farming, strip
cropping, and grassed waterways). A highly erodible land (HEL) designation as
well as high levels of precipitation and cool temperatures also tended to
encourage use of these three practices. Small farm operators who had an
occupation other than farming, were retired, or had gross sales under $100,000
and total farm assets under $150,000 were less likely to use any of the
conservation practices analyzed.

Controlling for these non-tenure factors allowed isolation of tenure's effect
on adoption of conservation practices. The analysis found that cash-renters
were significantly less likely than owner-operators to use conservation
tillage, while share-renters behaved much like owner-operators in conservation
tillage practices. Both share-renters and cash-renters were significantly less
likely than owner-operators to adopt at least one of the practices with longer
term benefits.

Farmers' participation in government programs was also considered as a
possible factor affecting the use of conservation practices. Under the
conservation compliance provision established in the 1985 Farm Act, farmers
with HEL are required to implement approved soil conservation practices in
order to receive some USDA program benefits. This requirement provides policy
makers some leverage to encourage farmers to adopt conservation practices. 

However, it is difficult to statistically disentangle the interaction of
program participation and farming of HEL; most farmers in the ARMS sample who
cultivated HEL also received payments through USDA programs and were thus
subject to conservation compliance. This made it impossible to distinguish the
effect of program participation (i.e., the compliance requirement) on adoption
of conservation practices from the effect of HEL designation alone.

Implications for the Future

These findings on the effects of tenure on conservation practices may have
implications for resource use and environmental quality in U.S. agriculture,
since NRCS estimates that half of U.S. cropland still needs additional
conservation treatment in order to maintain productivity and more than half of
U.S. farmland in key agricultural regions is now leased. Moreover, the Census
of Agriculture indicates that a large and increasing proportion of farm
landlords are neither engaged in nor retired from any agricultural activity,
and that disengagement from farming tends to increase the use of cash
leases -- the percentage of farmland rented under cash leases has risen in
recent decades. 

As the current farm population ages, historic increases in leasing and in
farmland ownership by nonfarmers will likely continue, while factors such as
provisions of the 1996 Farm Act could also be changing leasing patterns. The
1997 Census of Agriculture, for which data are expected in 1999, and a follow-
on survey of agricultural landowners being considered for 2000, will be
helpful in determining whether historic farmland tenure patterns are
continuing. If they are, this analysis suggests that adoption of conservation
practices may be lower in the future than otherwise expected, if renters
continue to adopt such practices at lower rates.

While this research has analyzed adoption of conservation practices as a
private choice based on farmers' maximization of private net returns, the
adoption of these practices also provides public benefits in the form of
moderation of downstream water flows, provision of wildlife habitat, and
improved water and air quality. But public leverage to encourage adoption of
conservation practices through conservation compliance requirements may
diminish as the incentive to participate in farm programs declines with the
level of program payments under the 1996 Farm Act. With such changes,
identifying the effects of land tenure on adoption of different conservation
practices may become increasingly important.

Meredith Soule (202) 694-5552, Abebayehu Tegene (202) 694-5527, and Keith
Wiebe (202) 694- 5529 msoule@econ.ag.gov ategene@econ.ag.gov
kdwiebe@econ.ag.gov 


SPECIAL ARTICLE

Transportation Technology Eases the Journey for Perishables Going Abroad

Perishable agricultural products, many of which U.S. farmers could only have
dreamed of selling abroad just 10 years ago, now account for about 20
percent -- a growing share of total U.S. food and agricultural exports. 

Income growth overseas and accompanying changes in food preferences and diets
are most often cited as drivers behind the more-than-decade-long shift in U.S.
agricultural exports from bulk commodities (e.g., wheat and soybeans) to
nonbulk items (e.g., meats and fruit). While income growth and some policy
measures to liberalize trade are key determinants in the rise of perishable
shipments, advances in transportation technology are equally important. For
U.S. agriculture to benefit from growing overseas demand for, say, fresh
asparagus, shippers must be able to deliver perishable products to purchasers
thousands of miles away with no substantial loss in freshness and quality.

For many producers, marketing prime-quality perishable products abroad was
largely infeasible or prohibitively expensive until new technologies were
developed during the last 30 years. Packaging innovations, fruit and vegetable
coatings, bioengineering, and other techniques that reduce deterioration of
food products have helped shippers extend the marketing reach of U.S.
perishable products. In addition, new technologies in transport are gradually
opening the ocean trades to a host of perishable products. As a result, U.S.
exports of horticultural products now travel much greater distances than
before. 

Outside North America, markets for U.S. perishable products are concentrated
in high-income Asian countries and to a lesser extent in Europe. Today, beef
and pork produced in the U.S. Midwest is chilled or frozen in regional packing
houses, moved overland to west coast ports, and shipped by sea to Japan and
South Korea. Fresh broccoli goes by ship from California to Japan, and fresh
cherries travel the ocean from Washington State. Perishable products as
fragile as avocados, lettuce, mangoes, and nectarines are increasingly
transported by sea to Asia and Europe from the U.S. and from other suppliers
like Mexico and Chile.

Trans-ocean transportation costs are still much higher for many perishable
products than for raw agricultural products like cotton or nonperishable
products like nuts and raisins. However, new developments in ocean shipping
have made it possible to preserve the quality of perishables during transport
and still bring down transportation costs. For example, successfully shifting
perishable product exports from air to ocean transport can reduce
transportation costs by as much as 75 percent.

In addition, satellite technologies, particularly global positioning systems
(GPS), which are becoming increasingly available and less expensive, enable
shippers to follow their cargo around the world electronically. Sitting at
computer terminals, they can monitor quality, reduce risk (and costs) of
liability claims, and shorten cargo retrieval time. Profitability of
perishable product trade will likely increase further as ocean shipping
technologies continue to adapt to the requirements of horticultural products
and as shipping lines expand use of these technologies.

U.S. exports of perishable products increased from $3.5 billion in FY 1989 to
$10.7 billion in FY1998.  Meats accounted for about half of perishable exports
in FY 1998 and fresh fruit and vegetables about one-fourth. Other
countries and U.S. consumers also benefited from improving transportation
technology, as the U.S. imported $11.7 billion of perishable products in
FY1998, with horticultural products (including fresh vegetables, fruit and
juice, bananas, cut flowers, and nursery stock) accounting for 60 percent. 

A Boost for Ocean Shipping -- Containers & Cold Chills

The high cost of loading and unloading is one reason transportation costs tend
to decline with distance. The revolution in perishable product shipping
technology began with a simple idea called containerization handling
standardized containers filled with cargo, rather than handling the cargo
itself. Containerization led to a radical change in global shipping practices
known as intermodalism moving goods by linking two or more modes of travel.

Containerization is recognized as a major contributor to the steady reduction
in world transportation costs since the 1950's. For perishable products,
however, the increased speed of handling and reduced transport costs that came
with containerization were not enough. Ocean transport of cooled and frozen
cargo received a substantial boost with development of mobile refrigerated
containers called "reefers" in the 1960's.

Reefers, like regular containers, are 20-foot or 40-foot boxes with their own
refrigeration units. Reefers can be carried alongside general, nonchilled
containers, an advantage that has challenged the competitiveness of
conventional, dedicated refrigerated cargo ships that lack this flexibility.

The reefer share of containerized cargo is now about 9 percent and accounts
for about 20 million tons of cargo annually. Although deep-freeze and
dedicated refrigerated vessels are also important for perishable product
trade especially in carrying palletized chilled hardy fruit such as apples,
peaches, pears, grapes, kiwifruit, citrus, and bananas the reefer container
trade is growing more rapidly and is considered better suited to carrying the
hardy fruits as well as produce needing more careful handling, like asparagus.

Increasingly efficient and accurate cooling systems have allowed refrigerated
carriers to maintain temperatures with great accuracy (plus or minus a quarter
degree Celsius) for some time. More recently, however, controlled atmosphere
(CA) technologies added refinements that have extended the shelf life of
perishable products and thus expanded the types of perishables that can be
shipped in reefers without spoilage.

CA technologies allow operators to lower the respiration rate of produce by
monitoring and adjusting oxygen, carbon dioxide, and nitrogen levels within a
reefer. In this way, CA can slow ripening, retard discoloration, and maintain
freshness of supersensitive perishables like lettuce, asparagus, peaches,
mangoes, and avocados that would not survive well during ordinary refrigerated
ocean transport. Not all CA systems are the same: some especially
sophisticated ones are combined with systems to maintain relative humidity, a
crucial factor for some produce such as grapes. 

In addition, remote reefer monitoring systems can transmit and collect
performance information electronically so that physical checks are not
required while the reefer is stacked in the hold or on a dock.  The remote
system may also activate an alarm, helping minimize losses when problems arise
at sea or in the container yard.

Container Ship Technology Keeps Pace

Accompanying advances in containerization has been change in container ship
technology. Container vessels are being built larger and larger, making them
more competitive with traditional refrigerated vessels. Increasing cargo
capacity generally leads to lower per-unit costs.

In the 1970's, container ships on the world's major trade routes were built to
carry an average of about 2,500 TEU's (standard containers with exterior
dimensions measuring 20 feet by 8 feet by 8 feet). New vessels deployed on
major routes are often 5,000-6,000 TEU's. Per-container vessel operating costs
are about 50 percent lower for a current 5,000-TEU ship compared with a 2,500-
TEU-vessel.

The challenge, however, is to increase capacity while maintaining stability
and safety particularly important for ships carrying tall stacks of
containers. New hull shapes and ballasting systems improve stability at sea,
while bow thrusters make these large vessels more maneuverable in port than
their smaller predecessors.

The largest container ship now in service, the Sovereign Maersk (built and
registered abroad), is estimated by industry analysts to have capacity upwards
of 6,600 TEU's, which includes space for over 800 refrigerated TEU's. The
refrigerated capacity alone makes the gigantic Sovereign Maersk equivalent to
a medium-sized conventional refrigerated carrier. Vessels of this size are
expected to become much more common and ships may get even larger. As a
result, container ships are expected to increase their market penetration at
the expense of conventional refrigerated carriers, especially in the major
transatlantic and transpacific trades.

At the same time, the conventional refrigerated shipping industry is not
standing still. New ship designs allow more rapid loading and discharge, with
forklifts moving throughout the holds. Onboard cooling plants have become
highly efficient. The industry is concentrating into fewer and larger firms to
increase efficiency, and vessel pooling arrangements help companies utilize
capacity more effectively. Some refrigerated carriers can now carry loads of
containers on deck, and operators are increasingly using their refrigerated
vessels to carry other cargoes, such as autos and palletized machinery, on a
seasonal basis, which helps even out earnings for carriers.

Although it is likely that container ships will dominate the perishable trade
between North America, East Asia, and Europe, conventional refrigerated
vessels can serve many smaller ports, especially in the developing world, that
are unable to handle large container vessels. Thus, in north-south trade and
in certain niche markets, conventional refrigerated ships may have a brighter
future, but even here, competition from container vessels is bound to increase
as costs decline.

Constraints on Shipping Perishable Products Remain

Despite tremendous progress in adapting shipping technology to the marketing
of perishables, there remain significant constraints to the expansion of
perishable product trade. Some constraints derive from economic and
environmental issues associated with the technologies.

First, CA technologies, particularly some of the more complex systems, are
expensive for carriers to adopt and install, especially at a time when
shipping rates are low and exporters are still undecided whether a potentially
higher price in foreign markets justifies the premium they pay for shipping
via CA. Although continued technological refinements and developments and
increasing competition among manufacturers of CA systems are bringing
investment costs down, much of the CA reefer trade is seasonal (timed, for
example, to the fruit harvest) and therefore particularly vulnerable to income
swings. The reefer business can be very profitable because of the high value
of the cargo, but some industry analysts believe that the CA reefer trade,
while continuing to grow, will remain a niche market. 

Some questions also remain as to how international environmental agreements
and national environmental regulations will affect the availability of
economical and environmentally friendly refrigerants for reefer systems.
Chlorofluorocarbon compounds (CFC's), the predominant refrigerants used in
reefer containers, are being phased out under the terms of the 1990 Montreal
Protocol international treaty because of their damaging effect on the ozone
layer.

The most popular replacements for CFC's are hydrochlorofluorocarbons compounds
(HCFC's), which have limited ozone depletion potential. However, HCFC's are
expected to be phased out in favor of hydroflourocarbons (HFC's), which have
zero ozone depletion potential but some global warming potential. The Kyoto
Agreement on climate change, while not presently ratified, suggests the
possibility of bans or caps on these "greenhouse" gases. If proposed
restrictions on HFC's become a reality, refrigerated shipping will face
serious challenges in finding acceptable substitutes.

Hydrocarbons, such as propane or butane, are a possibility, but these are
flammable. Ammonia systems using cooled brine, which were common before the
adoption of Freon (a CFC) in the late 1970's, may be adapted to address
environmental concerns. Although new ammonia-brine systems are attractive,
ammonia is hazardous and brine is quite corrosive and difficult to pump.
Ammonia systems that use carbon dioxide as a secondary refrigerant may hold
greater long-term promise.

Perhaps most critical to expansion of perishable trade are infrastructure
linkages to make ocean shipping of perishable products not only
technologically feasible but also profitable for all the players. Reefer
container trade requires that ports on both ends provide sufficient crane
capacity, adequate storage space, and ready access to highway and rail systems
designed for container traffic. Efficient inspection and customs services by
government agencies, as well as port-to-market distribution systems, are
critical since most fresh produce must arrive on store shelves within 24 hours
of unloading.

How many ports worldwide currently have the necessary infrastructure and the
necessary links to internal markets to handle large volumes of reefer
container trade? Although there are many "containerports," container traffic
and traffic growth are clearly concentrated around the largest few. Of the top
100 containerports in 1997, 10 accounted for more than 45 percent of all
container throughput.

By far the largest throughput is handled at ports in Hong Kong and Singapore
(each with 10 percent of 1997 container throughput), followed by Kaohsiung in
Taiwan and Rotterdam in the Netherlands, each with less than half the volume
of the largest two ports. In the U.S., the five leading container ports (Long
Beach, Los Angeles, New York/New Jersey, San Juan, and Oakland) together
accounted for 9 percent of world container throughput. Although these figures
mean little in terms of the ability of other ports to respond to growing
consumer demand for perishable products, they do suggest a challenge to the
diversification of perishable product trade beyond major, high-income markets.

What lies behind the rapid growth in U.S. exports of perishable products over
the past 10 years? The general decline in trade barriers, such as tariffs and
import quotas, and worldwide income growth play major roles. But the
contribution made by advances in transportation technology, particularly in
ocean ship- ping, tends to be ignored. These advances have extended the
marketing reach of U.S. perishable high-value products to distant markets by
reducing delivery times, maintaining product quality, and reducing costs.
Nicole S. Ballenger (202) 694-5202, William T. Coyle (202) 694-5216, William
J. Hall (Seaport Consultants, Seattle), Brian McGregor (AMS, USDA) and Roy G.
Hawkins (Southern University). Zhi Wang and Mark Gehlhar, ERS, also
contributed to this article. wcoyle@econ.ag.gov nicole@econ.ag.gov


SPECIAL ARTICLE BOX

Containerization Led the Revolution in Ocean Shipping

"The new system [containerization] was not only safer but faster and much
cheaper, as it drastically cut labor and insurance costs. It was also secure:
sabotage and other perils were much less likely. In the end it brought about
new kinds of cargo ships and dockyard machinery, changed the look of port
cities, challenged organized labor, altered domestic transportation methods,
and even affected the patterns of world trade." [Audacity: The Magazine of
Business Experience, Spring 1994]

SPECIAL ARTICLE BOX

New Technology May Protect the Planet As Well As Produce

Controlled atmosphere (CA) technology, now used primarily in shipping highly
sensitive perishables, may develop as one substitute for chemical treatment of
agricultural products during shipping. A number of companies are working
collaboratively with USDA to investigate more environmentally friendly
technologies to eradicate insects that harm fruit, vegetables, feed, and wood
products.

For example, methyl bromide is a broad-spectrum pesticide, used primarily as a
soil fumigant but also as a fumigant for commodities entering or leaving the
U.S. Because of concerns about methyl bromide's high toxicity and ozone-
damaging properties, production and importation of the pesticide is scheduled
to be phased out by January 1, 2005 under terms of the Montreal Protocol, an
international treaty to protect the earth from ozone-depleting substances.
However, the treaty exempts preshipment and quarantine uses of methyl bromide.

EPA, working closely with USDA, state agriculture departments, and other
stakeholders, will define preshipment and quarantine uses that will be
exempted from the phaseout. CA systems that kill insects with low temperatures
and a mixture of naturally occurring gases could become one of several
effective substitutes for methyl bromide treatment.


SPECIAL ARTICLE BOX

Impatience Begets Innovation

Malcolm McLean, founder of Sea-Land, the largest U.S.-based ocean carrier,
made a major contribution to the technology of perishable product shipping. In
1937, he waited on a dock in Hoboken, New Jersey with a ship-bound truckload
of North Carolina cotton. For hours he observed the complicated, labor-
intensive process of goods being unloaded from trucks, moved onto the ship,
and juggled into their proper places in the hold. As the story goes, he
wondered why his truck trailer could not simply be lifted up and placed on the
deck of the ship without its contents being touched.

McLean made his idea a reality in 1956 when he purchased a small tanker
company, adapted the ships to carry trailers, and launched the Ideal X from
Port Newark in the New York harbor. When he later converted from conventional
truck trailers to specially engineered steel boxes that could be stacked
several deep inside the hold, he had launched the era of the cargo container.
In 1966, one of his new container ships crossed the Atlantic to Rotterdam,
launching the first trans-Atlantic and later trans-Pacific containerized
shipping service.


SPECIAL ARTICLE BOX

Transportation & Trade Workshop
USDA's Economic Research Service is sponsoring a workshop to identify research
needs and priorities in the transportation sector. Technological and
Structural Change in the Transportation Sector: Impacts on the Future of U.S.
Food and Agriculture Trade March 17-18, 1999, in Washington, DC. For
information, contact Bill Coyle (202) 694-5216; wcoyle@econ.ag.gov
                           
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