AGRICULTURAL OUTLOOK                           December 21, 2000             
January/February 2001, ERS-AO-278
               Approved by the World Agricultural Outlook Board
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CONTENTS

IN THIS ISSUE

AGRICULTURAL ECONOMY
Slower Growth for U.S. Economy in 2001   
Exchange Rate Indexes & U.S. Agricultural Trade 

BRIEFS
Ag Economy: U.S. Ag Markets Show Signs of Improvement 
Livestock, Dairy, & Poultry: Surging Demand Pulls Dairy Industry in New
Directions       

COMMODITY SPOTLIGHT                                         
Cigarette Consumption Continues to Slip  

WORLD AG & TRADE
Global Agricultural Negotiations Underway at the WTO

FARM & RURAL COMMUNITIES
Hired Farm Labor: Comparing the U.S. & Mexico

SPECIAL ARTICLE
EU Enlargement: Negotiations Give Rise to New Issues


IN THIS ISSUE

Slower Growth for U.S. Economy in 2001

U.S. economic growth slowed markedly in the second half of 2000. From a
breakneck rate of 6 percent in the first half of 2000, forecast growth in
Gross Domestic Product (GDP) decreased significantly in the second half of
2000, resulting in an average annual growth rate expected at 5.2 percent.
In 2001, GDP growth is expected to drop further, averaging 3 percent, owing
to continued tightness in labor markets, a slowing of consumer income
growth, and tightening credit that will slow business investment. Despite
these trends, the U.S. economy will probably not experience a recession,
because of overall increases in productivity and investment, a reduced
trade deficit, and continued gains in consumer income and jobs. Inflation
rose moderately in 2000 to 2.3 percent and will increase slightly in 2001
to around 2.5 percent due to higher labor and energy costs. David A.
Torgerson (202) 694-5334; dtorg@ers.usda.gov

Surging Demand Pulls Dairy Industry in New Directions

Growth in milk output is expected to ease slightly in 2001, which may allow
prices for milk and dairy products to recover in calendar 2001. Since late
1999, very large supplies have put prices under pressure, even as the
strong economy generated the strongest demand in many decades. With the
economy projected to expand in 2001, although more slowly, consumer income
and spending should continue to gain. Thus, demand for dairy
products--especially those used by restaurants or as ingredients in
prepared foods--is expected to stay strong. James Miller (202) 694-5184;
jjmiller@ers.usda.gov  

Global Agricultural Negotiations Underway at the WTO

Global trade negotiations on agriculture, which the World Trade
Organization (WTO) opened in Geneva in March 2000, are expected to address
three areas of national agricultural policy: market access limitations
(tariffs, tariff-rate quotas, and other trade barriers), domestic support
to agricultural producers, and export subsidies. These policies cause world
agricultural prices to be about 12 percent below the level they would
otherwise be, according to recent analysis by USDA's Economic Research
Service. 

Nearly 80 percent of world agricultural price distortions are accounted for
by developed economies. Reform commitments implemented by developed-country
WTO members during 1995-2000 include: reducing tariffs by 36 percent and
converting most nontariff barriers to tariffs or to tariff-rate quotas;
reducing aggregate levels of domestic support by 20 percent; and placing
declining ceilings on the value and volume of subsidized exports. Over the
long term (about 15 years), full elimination of agricultural price
distortions would lead to an increase in world welfare, or consumer
purchasing power, of $56 billion annually, with nearly one-fourth accruing
to the U.S. alone. Mary E. Burfisher (202) 694-5235; burfishr@ers.usda.gov  

EU Enlargement: Negotiations Give Rise to New Issues

The European Union (EU) continues active negotiations with 10 countries of
Central and Eastern Europe (CEE) for membership in the EU. Negotiations
that began in March 1998 with five CEE's (Poland, Hungary, Czech Republic,
Slovenia, and Estonia) expanded to five others in October 1999--Latvia,
Lithuania, Slovakia, Bulgaria, and Romania. Cyprus and Malta--two non-CEE
states--are also candidates for membership.

Several recent developments could dramatically alter the impact of
accession on agriculture in Europe. Accession will most likely be delayed
from earlier expectations and will probably include a transition period. EU
negotiators have also expressed reluctance to grant CEE farmers the full
range of Common Agricultural Policy support immediately on accession. In
addition, depreciation of the euro since 1999 means that the gap between
CEE and the generally higher EU prices has narrowed considerably, and that
higher prices anticipated by CEE producers upon accession may not
materialize. Nancy J. Cochrane (202) 694-5143; cochrane@ers.usda.gov

Hired Farm Labor in the U.S. & Mexico

U.S. farmers are holding their own in competing for workers and providing
wage increases that generally keep pace with the cost of living. However,
foreign-born workers--mostly from Mexico--make up an increasing share of
U.S. hired farm labor. The movement of Mexican workers to U.S. farms
largely reflects wage differentials between the U.S. and Mexico, as well as
differences in employment prospects. Taking into account seasonal
fluctuations, U.S. agriculture employed an average of 890,300 hired
farmworkers in 2000, with an average wage of $8.29 per hour compared with
$13.69 for nonfarm jobs. In contrast, Mexican agriculture employed about
2.3 million hired laborers over 12 years old in 1998, with an average
8-hour wage of about $3.60, although the wage differential is somewhat
overstated because the cost of living is lower in Mexico. Availability of
hired farm labor in both countries is likely to influence production and
trade of labor-intensive commodities such as greenhouse and nursery
products and fruit and vegetables. Steven Zahniser (202) 694-5230;
zahniser@ers.usda.gov

Cigarette Consumption Continues to Slip 

U.S. smokers are projected to consume about 430 billion cigarettes, down
from 435 billion in 1999 and 450 billion in 1998. Behind the continuing
drop in consumption lie spiraling cigarette prices, greater awareness of
health risks, and continuing restrictions on smoking areas. Two years ago,
manufacturers boosted wholesale prices to cover the expenses incurred from
the 1998 tobacco agreement with state attorneys general. In 2000, a rise of
10 cents per pack in the Federal excise tax pushed up cigarette prices
further. Thomas Capehart, Jr. (202) 694-5311; thomasc@ers.usda.gov


AGRICULTURAL ECONOMY
Slower Growth for U.S. Economy in 2001

U.S. economic growth slowed markedly in the second half of 2000, ushering
in the "soft landing" many analysts had hoped for. From a breakneck rate of
6 percent in the first half of 2000, forecast growth in Gross Domestic
Product (GDP) decreased significantly in the second half of 2000, resulting
in an average annual growth rate expected at 5.2 percent. 

In 2001, GDP growth is expected to drop further, averaging 3 percent, owing
to continued tightness in labor markets, a slowing of consumer income
growth, and tightening credit that will slow business investment.
Inflation, which rose moderately in 2000 to 2.3 percent according to the
GDP deflator, will increase slightly in 2001 to around 2.5 percent due to
higher labor and energy costs. Despite these trends, it is unlikely the
U.S. economy will experience a recession; overall increases in productivity
and investment, a reduced trade deficit, and continued gains in consumer
income and jobs all point to economic growth in the coming year.

Consumer spending will likely increase by 3 percent in 2001, but it will be
held in check by a tight labor market, more limited credit, and higher
energy prices. Consumer spending grew at a slower rate in 2000 than in
1999; in particular, spending on durable goods such as cars, appliances,
and furniture deteriorated throughout 2000 as a consequence of relatively
heavy consumer spending in 1996-99. Major appliance manufacturers saw sharp
declines in earnings, and auto manufacturers were forced to offer
aggressive price rebates and credit discounts to prevent steep drops in
sales. 

Overall, consumer spending in the third quarter of 2000 grew at an
annualized rate of 3.8 percent, which outpaced growth of 3.1 percent in
consumers' disposable income. Although the savings rate fell, it was the
smallest decline in 2 years. In 2001, growth of income from labor will be
about the same as in 2000 (largely due to higher wages), and a decline in
income from other sources, such as stock dividends, will be offset by lower
capital gains taxes paid. This will result in disposable income growing at
3 percent, the same rate as in 2000 and directly in line with consumer
spending.

Despite consistent growth in wages, workers are likely to face a slowdown
in employment growth in 2001 as businesses' profit growth slackens and
difficulties in finding appropriate workers persist. The trend became
evident in 2000, as the low U.S. unemployment rate (4 percent) and a dearth
of skilled workers led to higher labor costs for many U.S. companies.
Workers' total compensation packages, which include wages plus benefits,
rose at an annualized rate of 4.6 percent for the first 9 months of 2000 as
employers, hamstrung by the tight labor market, were forced to absorb much
of the rise in health insurance costs. 

Rising energy prices remained a persistent concern for businesses and
consumers alike in 2000. Although the markets for other raw materials
remained relatively static, crude oil prices finished the year near $30 per
barrel, up sharply from $9.39 per barrel of December 1998. The high price
of oil not only drove up consumer and corporate energy bills; it also
contributed to increased trade deficits. Rising natural gas prices will
further contribute to rising consumer and business energy expenses. 

Fortunately, the impact of oil price increases on the U.S. economy will be
relatively small in 2001, thanks to a general lack of upward pressure on
prices of raw materials, increased domestic competitiveness in the U.S.
economy, a relative drop in the size of energy expenditures in the economy,
and oil prices that, in real terms, are only $5 per barrel above the
1985-99 average. In fact, the impact of the 2001 oil market on the economy
should be smaller than that of the 1974, 1979, or even 1990 oil shocks.
Growth has slowed about 0.2 percent and overall inflation is about 0.3
percent higher than it would have been compared with a year with normal
real crude prices. 

As consumer spending dropped off in the last half of 2000, investment
spending by businesses slowed. Tighter credit standards, a slowdown in
profit growth, falling equity prices, and higher commercial interest rates
brought the third quarter's business investment growth down from more than
19 percent in the first half of the year to low single digits. Solid
consumer spending combined with strong profits should bring growth of 5 to
6 percent in business investment spending in 2001, and the profits from
such investment are expected to remain substantial. However, the tight
credit situation, higher commercial interest rates, and slowing profit
growth will keep business investment spending below the recent double-digit
growth rates of 1995-99. 

Growth in business spending in 2001 will be partly offset by smaller
additions from Government spending. Commercial interest rates will rise,
reflecting an increase in the market risk premium. From early 2000 to the
third quarter, the risk premium on junk bonds compared with Treasury bonds
rose to 8 percentage points. A recent Federal Reserve survey of lending
officers showed that businesses must now meet higher credit standards when
they apply for loans. These new, more stringent requirements in the private
market, coupled with the tight labor market, will slow capital and
employment expansion.

As a result of slowing economic growth, moderate inflation, and expected
easing of short-term interest rates by the Federal Reserve, yields of
Treasury and AAA bonds will drop in 2001. However, the general tightness in
credit markets seen in the last half of 2000 should persist in 2001,
resulting in higher interest rates for junk bonds and commercial loans.

The View 
From Abroad

The U.S.'s powerful economic growth was reflected overseas throughout 2000.
Overall, world average GDP increased by 4 percent in 2000, enhanced by a
spectacular growth spurt of 7 percent in Asia. In North America, Mexico's
GDP growth registered more than 6 percent; Canada's GDP came in at just
under 5 percent. Profiting from rising crude oil prices, the economies of
the Middle East grew nearly 5 percent. The economies of South America grew
a solid 3.4 percent, despite problems in Argentina, Venezuela, and Peru.

Despite this robust global performance, growth rates of most developed
nations (with the exceptions of Japan and Germany) should decline by 0.5 to
1 percent in 2001. The economies of many Asian nations will slow as well
because growth rates seen in 2000, which reflect a sharp turnaround from
the 1998 financial crisis, are unsustainable. High crude oil prices in
early 2001 will be a major factor stunting growth not only in the developed
countries and Asia, but in some of the more vulnerable developing nations
as well. Higher world interest rates, a smaller U.S. trade deficit, and a
weaker dollar will have a marginally negative impact on world growth. 

World demand for agricultural exports played a key role in offsetting the
strengthening of the dollar in 2000; even though they became more expensive
in relative terms, U.S. agricultural exports saw a modest increase. The
demand for dollars stemmed from uncertainty associated with the recovering
economies in Asia and Latin America and a lack of confidence in Asian and
developing economy stock markets, as well as foreign investors' view of the
U.S. as a safe haven. However, the U.S. trade deficit (more than $400
billion in 1996 dollars), a weak U.S. stock market, and improving financial
conditions in other developed countries and Asia will all serve to weaken
demand for dollars in 2001. The resulting decrease of funds flowing into
the U.S. will boost long-term private interest rates, even as short-term
U.S. Treasury bonds stabilize and long-term U.S. Treasury bill yields fall
slightly. A weaker dollar and ongoing, if slower, world growth will lead to
a slight improvement in the U.S. trade deficit in early 2001. The deficit
should decrease further in the second half of 2001, when slower world
growth is likely to result in lower oil prices. 

Challenges for 
U.S. Agriculture in 2001

Slower domestic and world growth in 2001, coupled with the lingering impact
of a strong dollar, mean a more expensive and potentially more problematic
business environment for U.S. farmers in 2001. Agricultural exports in
particular will be affected, much as they were in 2000. Although the value
of the dollar rose less than 2 percent in 2000, its value relative to the
currencies of other countries that export farm products rose even more. As
a result, prices of U.S. farm exports rose considerably compared with those
of foreign competitors. 

Even though the dollar is expected to weaken somewhat in 2001, agricultural
exports will grow at a slower rate than exports of manufactured products.
If the domestic economy were to experience a recession in 2001, world
growth would decrease sharply and U.S. farm exports would decline. On the
domestic front--again, barring a recession--growth in after-tax personal
income will ensure that U.S. consumers keep buying domestic agricultural
products at a healthy rate.

Although higher energy prices will not have a dramatic effect on the
overall U.S. economy, they have triggered increases in farm expenses. While
fuel prices will not likely rise as dramatically in 2001 as they did in
2000, fuel expenses for many farmers will be up from 2000. Peak farm diesel
use is in the spring when prices will be up from a year earlier.
Electricity and natural gas prices should rise as well, and increasing
natural gas prices will in turn raise the cost of nitrogen-based
fertilizer. The fertilizer price index should be up in 2001 more than it
was in 2000. The tight labor market is expected to push the cost of farm
labor higher in 2001 than in 2000. 

Projections for farm credit in 2001 are mixed. A tighter credit market will
make it harder for less financially sound farmers to get commercial credit,
and interest rates for average borrowers who do qualify for short-term
loans will be higher than in past years. Good customers with sound balance
sheets may pay slightly less for credit. Average long-term real estate
loans may be cheaper depending on institutional lending practices, as
yields on Treasury bonds fall compared with 2000. 
David A. Torgerson (202) 694-5334
dtorg@ers.usda.gov


AGRICULTURAL ECONOMY
Exchange Rate Indexes & U.S. Agricultural Trade

The value of the dollar has increased sharply in the last several years.
Between April 1995 and September 2000, the U.S. real agricultural
trade-weighted exchange rate (based on bilateral exchange rates weighted by
share of exports) appreciated by 25 percent, reversing about 10 years of a
declining dollar value. In addition, the U.S. dollar has appreciated even
more against currencies of trade competitors, making U.S. producers less
competitive in world markets. Between April 1995 and September 2000, the
U.S. dollar appreciated 42 percent relative to currencies of U.S.
competitors.

The exchange rate--the price of a currency in terms of another currency--is
arguably the single most important variable in determining the economic
environment for trade sectors. Exchange rates affect trade by determining
the relationship between international and domestic prices. Changes in the
real (inflation-adjusted) exchange rate result in the raising or lowering
of prices of U.S. goods in local currency terms around the world. An
appreciating dollar raises the price of U.S. goods on the international
market, while a depreciating dollar lowers these prices. Exchange rate
movements are particularly important for agriculture sectors in countries
like the U.S., where exports account for a major portion of agricultural
production. 

Historically, movements in exchange rates have accounted for approximately
25 percent of the change in U.S. agricultural export value. Other factors,
such as the income growth rate in developing countries, the growth and
productivity of foreign agriculture sectors that compete with the U.S., and
weather conditions accounted for much of the rest. But in the last 5 years,
the appreciation of U.S. dollar has become a handicap for U.S. agricultural
exports. Continuing appreciation has allowed competitors to gain market
share and in turn expand their production. Losses in U.S. market share may
have been even greater if low world prices had not deterred growth in
foreign production. 

A major event contributing to appreciation of the dollar was the 1997-99
international financial crisis. As countries in Asia and elsewhere
experienced the crisis, their economies contracted sharply while the U.S.
economy continued to expand rapidly. The differential between the robust
growth of the U.S. economy and slow or negative growth in other countries
led to large inflows of capital into the U.S., generating demand for
dollars that simultaneously appreciated the dollar and depreciated local
currencies around the world. 

This recent period of appreciation has been a major contributor to lower
U.S. agricultural exports in recent years. From a peak of nearly $60
billion in fiscal 1995, U.S. agricultural exports declined to $49 billion
in 1999. World demand is improving, though, and U.S. exports are forecast
at $53 billion in 2001, up from $51 billion in 2000.

Appreciation of the dollar was a major factor in the 2-percent decline in
global share of all U.S. agricultural exports between 1992 and 1998. The
export performance of specific U.S. goods, however, varied depending on the
relative exchange rate movements of competitors and importers and on
specific foreign market conditions. U.S. wheat's market share, for example,
lost 10.5 percentage points between 1992 and 1998. The global market share
of U.S. corn declined by about 3 percentage points over the same period. In
contrast, the global market share of fresh and frozen U.S. poultry exports
increased over 8 percentage points between 1992 and 1998. The export market
share of U.S. cotton increased 1.6 percentage points during this period. 

Exchange rates can be used to assess shifts in the competitiveness of U.S.
agricultural products as the value of the dollar changes relative to other
currencies. Bilateral rates measure the value of the dollar against another
currency. These are helpful in understanding what affects exports to
particular markets. The "value" of the dollar becomes more complex when
considering overall U.S. agricultural exports or even a single
commodity--each commodity is generally exported to several countries. The
analyst needs a measure of value that accounts for the dollar's performance
against currencies of the countries that are important in trade of a
specific commodity. In economics, such a measure is referred to as an
effective exchange rate index, which takes weighted averages of several
bilateral exchange rates and combines them into a single index.
(Agricultural Outlook's Table 26 presents indexes of trade-weighted
exchange rates. The database is available at
http://usda.mannlib.cornell.edu/data-sets/international/88021/)

Market and competitor weighting schemes are the two most frequently used
when calculating indexes for trade analysis. For market indexes, the
weights are shares of U.S. exports for a particular commodity. For
competitor indexes, weights are country shares of world exports (excluding
U.S. exports) for a particular commodity. Both market and competitor
indexes are constructed so that an upward movement indicates a rise in the
dollar's value and a subsequent loss of price competitiveness for U.S.
exports. 

For example, the U.S. cotton market index reflects the overall level of the
dollar relative to currencies of U.S. cotton importers. The U.S. cotton
competitor index reflects the overall level of the dollar relative to
currencies of U.S. competitors in the world cotton market. Between 1970 and
2000, foreign cotton exporting countries maintained their competitiveness
with low-valued currencies relative to the U.S. dollar, except in1987-94. 

Weights for individual indexes depend on performance in countries that are
important for trade in that commodity. For cotton, China accounts for the
largest share of U.S. exports at 25 percent (northeast Asia accounts for 54
percent). Nearly 60 percent of U.S. corn exports go to northeast Asia, with
Japan accounting for 30 percent. Exports of U.S. soybeans are shipped
mostly to Europe (40 percent) and northeast Asia (37 percent). U.S. rice
exports are less concentrated: to Europe (26 percent), Latin America (18
percent), Mexico (9 percent), Canada (8 percent), and to North
Africa/Middle East (13 percent). Because of the size of their market
shares, bilateral exchange rates of these nations and regions are the most
significant components of the respective commodity trade-weighted exchange
rate indexes.

Variations in these market shares lead to different trends in
trade-weighted exchange rates across commodities and commodity groupings.
For instance, long-term exchange-rate patterns for wheat, corn, and cotton
have been quite different due to differences in destination
countries--major wheat markets are Asia and North Africa, major corn
markets are Asia and Mexico, and major cotton markets are Asia and Latin
America. Long-term appreciation in the wheat exchange rate may be one
factor in the long-term stagnation of U.S. wheat exports. Also,
trade-weighted exchange rates for bulk commodities and processed
intermediate products have more closely tracked overall U.S. agricultural
exchange rates than have those for horticulture and processed products and
high-value processed products. 
Mathew D. Shane (202) 694-5282
mshane@ers.usda.gov

AGRICULTURAL ECONOMY BOX
Exchange Rate Terms

Exchange rate. Rate at which one currency trades for another.

Real exchange rate. The nominal exchange rate adjusted by relative rates of
inflation as measured by consumer prices indexes. Thus, the real China yuan
is equal to the nominal yuan worth approximately $0.12 (November 17, 2000),
times the ratio of the USCPI and China CPI measured at some common base
year such as 1995. This yields a real 1995 yuan of $0.125.

Trade-weighted exchange rate. A weighted-average index of bilateral
exchange rates between trade partners using trade volumes as weights.
Usually shares of either exports or imports are used as weights, but
sometimes exports and imports combined can be used as weights.

Currency appreciation (depreciation). Occurs when one currency declines
(increases) relative to another. Appreciation implies that one currency
become more valuable relative to another and hence less is required in
exchange for the other currency. Thus, depreciation of the euro over the
past year means more euros are needed to buy dollars.

Devaluation. Occurs when a government decides to reduce the value of its
currency relative to others. 

Effective exchange rate. Another term for the total trade-weighted exchange
rate.

BRIEFS
Ag Economy: U.S. Ag Markets Show Signs of Improvement 

U.S. agricultural markets continue to show some improvement from the large
supply/weak demand conditions of the late 1990's. Although markets for
major field crops continue to have plentiful supplies, export demand is
improving slowly and market prices appear to be picking up. Markets for
livestock are generally stronger than for field crops, as 2000 witnessed
gains in average prices for cattle and hogs.

Despite continued weak market prices for field crops in 2000, net farm
income for the year has been forecast in the mid-$40 billion range, up from
$43.4 billion in 1999. Producer income was bolstered in 2000 by direct
payments to producers of major field crops under the 1996 Farm Act (e.g.,
production flexibility contract, loan deficiency, and Conservation Reserve
Program payments) and a third infusion of emergency government assistance.
Record government payments in 2000 helped keep farm income near the 1990-99
average. Even with the addition of recently enacted emergency assistance
(fiscal 2001 appropriations), government payments to the sector will
decline in 2001, likely resulting in lower farm income. 

As in recent years, government loan deficiency payments (LDP's), which
provide government support payments to major field crop producers when farm
prices drop below local loan rates, will continue to supplement returns
from the marketplace. 

Fuel expenses for the U.S. farm sector in 2000 were over $8 billion, about
40 percent above 1999. Total production expenses were up 5 percent to $178
billion. Costs for fuel and other energy-related inputs will continue to
concern producers in 2001. 

Agricultural exports are forecast at $53 billion in fiscal 2001, up from
$51 billion in 2000. Tonnage is forecast up for bulk commodities, but large
global supplies of many commodities continue to limit price gains. Cotton
is the exception. A major drag on U.S. exports has been the rising value of
the dollar, which has boosted the price of U.S. farm exports in foreign
markets (see "Agricultural Economy: Exchange Rate Indexes & U.S.
Agricultural Trade" ). 

A main reason for continued low domestic prices for major field crops is
favorable weather in major U.S. producing areas and many foreign countries.
The markets reflect record corn and soybean crops harvested in 2000.
Domestic use of most crops is anticipated to remain strong in 2000/01, and
exports should improve somewhat. Nevertheless, ending stocks will expand
for soybeans and corn, keeping downward pressure on prices for the fourth
consecutive year.

A key exception to favorable weather in 2000 was in the southern and
central Great Plains, where hot and dry weather last summer and fall
produced severe drought conditions. Many crop producers in this region
(particularly cotton) lost a substantial portion of their production and
income. Cattle producers in the region encountered animal losses due to the
heat and lack of water and experienced rising costs for feed as local feed
supplies dried up. 

Red meat and poultry production is forecast to reach a record high in 2000,
and output is projected to edge even higher in 2001. Feed costs remain
relatively low, keeping production expenses in check for many livestock
producers. 

Despite record total meat supplies, the robust U.S. economy continues to
fuel demand and sustain farm prices. Hog prices are expected to average in
the lower $40's per cwt in 2001, after a $10 rebound in 2000 ($44 average).
Likewise, cattle prices, despite large supplies of competing meats at
relatively low prices, have rebounded from the lows reached in the
mid-1990's. Modest gains in broiler production in 2000 and 2001 will lead
to slightly lower prices--forecast in the mid-$0.50's per pound for both
years, down from $0.58 in 1999.
Dennis A. Shields (202) 694-5331
dshields@ers.usda.gov


BRIEFS
Livestock, Dairy, & Poultry: Surging Demand Pulls Dairy Industry in New
Directions       

Dairy markets during 1998-2000 faced one major question: Will milk
production expand enough to meet the extraordinary growth in demand for
dairy products?  In 1998 and most of 1999, production did not keep pace,
and prices soared. Since late 1999, however, the situation has reversed.
Prices fell in response to pressure from very large supplies, even as the
strong economy generated the strongest demand in many decades. 

Growth in milk output is expected to ease slightly in 2001. This drop in
growth may allow prices for milk and dairy products to recover in calendar
2001, at least somewhat. With the economy projected to expand in 2001,
consumer incomes and spending should continue to gain. Demand for dairy
products, therefore, is expected to stay strong, although actual growth may
ease a bit. Demand for dairy products used by restaurants or as ingredients
in prepared foods will probably be particularly brisk.

Markets for dairy products have changed substantially in recent years.
Retail sales no longer are the main outlet for most dairy products and,
during the last few years, have lagged behind other outlets. Although most
fluid milk is still sold at retail, cheese and butter are used mostly by
away-from-home dining establishments or by makers of processed food. Large
shares of ice cream and fluid cream sales also are outside retail channels.
In total, slightly less than half of milkfat and only slightly more than
half of skim solids are now sold through retail stores. 

Sustained economic growth has produced improved consumer incomes, strong
stock prices, and low unemployment. Inflation and interest rates have
stayed relatively low. As a result, consumers have been in the mood to
treat themselves and, atypically for this far into a growth period, have
been boosting real expenditures for food. Spending for food away from home
has grown fastest, although retail food expenditures have also increased.
Dairy products are far from unique in benefiting from strong demand.
High-quality beef, the more expensive cuts of beef and pork, and
commercially prepared foods generally have been favored.

Since 1997, commercial use of cheese has grown by almost 5 percent per
year, even though prices have been relatively high throughout most of that
period. The strong restaurant market has increased cheese demand.
Restaurants like cheese for its versatility and flavor, as well as for its
prominent role in a number of ethnic cuisines. In particular, fast-food
chains include cheese, often paired with bacon, as a component of their
special feature sandwiches. Pizza sales and sales of commercially prepared
entrees using cheese also continue to increase. This powerful demand for
cheese supports dairy markets overall, since cheese now uses about half the
milk supply.

Retail sales of cheese have increased, too, although these increases were
somewhat more modest until weaker prices prevailed in 2000. Consumers have
expanded their cheese buying for themselves and guests in their homes,
although the increase in restaurant meals has limited these gains somewhat.
Retail demand reportedly has been better for specialty cheeses than for the
more common cheeses. 

Despite almost constant buffeting by high (sometimes extremely high) and
volatile prices in recent years, butter sales have been brisk, rising 6
percent annually since 1997. Large shares of butter go into away-from-home
eating, particularly in more expensive restaurants, and into more expensive
prepared foods. Retail sales also have grown because butter is now seen as
a "little luxury" consumers can afford. Fluid cream sales also have flowed
briskly for many of the same reasons.

Not all dairy sales have been strong. Demand for dairy products sold mostly
at retail generally has weakened. In recent years, fluid milk sales have
been basically flat. Greater away-from-home eating has reduced fluid milk
use because people tend to order other beverages in restaurants. Yogurt use
has slipped somewhat since 1997. Retailers have become more restrictive
about the space allocated to yogurt, and yogurt as a light lunch may have
lost some popularity. Consumption of cottage cheese has been about steady.

Although regular ice cream consumption has risen (particularly premium ice
creams), the overall frozen dessert category has stagnated. A strong
economy is not necessarily good news for ice cream. Consumers perceive it
as a "cheap luxury"--one they can easily afford to replace with more
expensive treats. 

The only major weakness in dairy demand has been for skim solids as
ingredients in processed foods. Use of nonfat dry milk and other forms of
skim solids grew during the early and mid-1990's because of the
introduction and short-term popularity of nonfat and low-fat versions of
foods. But the collapse in the market for most of these products has
sharply reduced demand for skim solids as ingredients. In addition,
substitution of whey solids (and possibly milk proteins) for skim solids
has undergone one of its periodic surges.
James Miller (202) 694-5184
jjmiller@ers.usda.gov


COMMODITY SPOTLIGHT                                         
Cigarette Consumption Continues to Slip  

In line with a set of related downward trends over the past several years,
U.S. manufacturers are making fewer cigarettes, and those they are making
contain increasingly less domestic and more imported leaf. In 1999,
cigarettes made in the U.S. contained 48.5 percent foreign leaf, a record
high. But some downward trends appear to be easing. Compared with 1999,
U.S. demand for cigarettes through July 2000 was down only 1 percent; as of
September, cigarette exports were holding at about 96 percent of the
year-earlier level.

In 1999, the U.S. consumed an estimated 435 billion cigarettes (2,136 per
person), 15 billion fewer cigarettes than in 1998. In 2000, consumers are
projected to smoke about 430 billion cigarettes (2,103 per person). Behind
the continuing drop in consumption lie spiraling cigarette prices, greater
awareness of health risks, and continuing restrictions on smoking areas.
Two years ago, manufacturers boosted wholesale prices to cover the expenses
incurred from the 1998 tobacco agreement with state attorneys general. In
2000, Federal excise taxes went up 10 cents a pack; and cigarette prices
continued to go up. 

In 1999, cigarette exports also continued to decline, down 50 billion
cigarettes from a 1996 peak of 250 billion. But even with demand for U.S.
cigarettes lower in major markets such as Europe and Japan and offshore
production of U.S. brands higher, cigarette exports through September 2000
were about 96 percent of those in the same period during 1999.

Prospects for tobacco leaf exports have been looking up for 2000, as global
supplies--copious in 1998 and 1999--seem to be more in line with demand.
The 1997 figure of 490 million pounds (declared weight) had fallen to 420
million pounds by 1999. Still, smoking continues to decline in many
countries that usually buy U.S. leaf, and with prices higher than world
levels, it is difficult to pry open new markets. Some lower income
countries are further put off by the absence of a U.S. Government credit
program for tobacco exports (to guarantee commercial credit), which is
forbidden by legislation. 

Although many tobacco growers remain under financial pressure, these
developments should have little adverse effect on the local economies of
tobacco-producing areas. Since 1970, total personal income (in constant
dollars) in the nation's 424 tobacco-growing counties has risen fairly
steadily, with a cumulative increase of nearly 150 percent. Over the same
period, tobacco sales have remained fairly constant in nominal dollars ($2
billion to $3 billion) and have declined in real (inflation-adjusted)
terms. 

Growth in off-farm income has been key to offsetting declines in tobacco
revenue. Most tobacco is produced in or near expanding metro areas, with
nearly three-fourths of estimated tobacco receipts originating in counties
in or adjacent to small metro areas. This translates into greater economic
opportunities for the grower--nonfarm jobs to supplement tobacco income,
rising land values, and a customer base for fruits, vegetables, and
pick-your-own or other onfarm businesses, such as paid fishing or hunting.
These small metro areas are near cities such as Richmond and Petersburg,
Virginia; Raleigh, Durham, and Winston-Salem, North Carolina; and
Lexington, Louisville, Kentucky and Knoxville, Tennessee.

Flue-Cured Sales 
Decline

Flue-cured and burley are the major types of tobacco grown in the U.S. and
accounted for 92 percent of leaf production in 2000. The 2000 flue-cured
markets closed on November 2. A relatively ideal flue-cured tobacco growing
season in most areas led to one of the better quality crops in recent
years, with only one producing area (Type 14--Georgia and Florida)
undergoing drought conditions early in the growing season. 

Sales of flue-cured tobacco at auction in 2000 totaled 513.8 million
pounds, representing 92 percent of the marketing quota set for the year and
82 percent of the estimated crop of 623.8 million pounds. (The
quasi-governmental Flue-Cured Stabilization Corporation offers to buy
flue-cured tobacco that does not receive an auction bid higher than its
government-set price support level.)

Both total volume and value of flue-cured varieties slid from 1999 numbers.
The drop in volume was due to the 18-percent decrease set last year for the
2000 quota. Final gross volume sold at auction (including resales) totaled
574.7 million pounds, compared with 711.7 million pounds in 1999. The
average price was 179 cents per pound, compared with 173.6 cents in 1999.
Flue-Cured Stabilization Corporation loan takings--tobacco which fails to
make the grade support level and is purchased under the tobacco program at
its price support level--were 27.2 million pounds, compared with 136.4
million pounds in 1999. Lower marketings and higher quality reduced loan
takings. 

The market for burley tobacco opened on November 20. Through December 13,
gross sales totaled 169.7 million pounds, 223.8 million pounds less than
the previous season. Prices are running higher than last season, and
offerings were of higher quality. During the first 14 days of sales, the
average price for burley was about 6.3 cents a pound greater than last
season. Preholiday sales continued through December 14 and markets will
reopen January 8. Before the holiday break, about 38 percent of expected
production had been sold. Sales consisted of less fair- and low-quality
leaf than last year. 

Flue-Cured Marketing Quota 
Down for 2001

On December 15, 2000, USDA announced the flue-cured marketing quota for
2001: 548.9 million pounds, 1 percent above 2000. The total national
acreage allotment was set at 262,253 acres, 1 percent over 2000. However,
higher onfarm carryover from 2000 will lower the effective quota (the
amount of tobacco that can be marketed) to 543 million pounds or 3 percent
below last season. (See sidebar on quota.) 

Lower beginning stocks held by the industry will dampen flue-cured supplies
(marketings plus beginning stocks) in 2001 by over 100 million pounds.
Flue-cured supplies will be about 1.6 billion pounds.

USDA must announce the 2001 burley quota by February 1, 2001. Carryover on
October 1, 2000, was 140 million pounds higher than a year earlier, as
marketings exceeded use. Because this year's burley marketings are expected
to fall short of the quota set for 2000, next year's quota for burley will
likely be set higher. (A poor-quality burley crop in 1999 led to
legislation that forgave the debt on more than 200 million pounds of burley
loan stocks.)

Expected marketings in 2000 of about 420 million pounds of burley would
result in burley supplies of 1.5 billion pounds, about the same as the
previous year. However, with the disposition of forgiven 1999 burley loan
takings uncertain, supplies could range as low as 1.26 billion pounds if
the forgiven tobacco is destroyed, which is likely. 
Thomas Capehart, Jr. (202) 694-5311
thomasc@ers.usda.gov

COMMODITY SPOTLIGHT BOX #1
Tobacco Types

Tobacco is primarily grown in six states. North Carolina ranked first and
Kentucky second, followed by Tennessee, South Carolina, Georgia, and
Virginia. Tobacco is also grown in Maryland, Pennsylvania, Missouri,
Indiana, Ohio, Wisconsin, Alabama, Connecticut, and Massachusetts. The two
top states together accounted for 65 percent of total production in 2000.

Flue-cured and burley are the major types of tobacco grown in the U.S. and
accounted for 92 percent of leaf production in 2000. Flue-cured tobacco,
also known as Virginia-type tobacco leaf, is grown in the southeastern U.S.
and cured under heat to achieve its world-renowned golden leaf. Burley
tobacco--grown in Kentucky, Tennessee, Virginia, West Virginia, Indiana,
Ohio, Missouri, and North Carolina--is air-cured; the leaf is hung in a
well-ventilated barn during the curing process. Maryland, fire-cured,
air-cured, and cigar types complete the remaining 8 percent. 

Most flue-cured and burley is used in cigarette manufacture. Maryland leaf
is used solely for cigarettes. Fire-cured and air-cured are used primarily
for chewing, snuff, and pipe tobacco and roll-your-own-cigarettes. Cigar
leaf is divided into three types: filler, binder, and wrapper, named after
the three parts of a cigar. However, most binder and filler tobaccos are
now used for chewing and smoking tobacco. Cigar wrapper leaf is in a class
of its own, bringing prices 10 times that of other tobacco. Nearly all
wrapper--grown under protective shade--is exported to cigar-producing
countries.

COMMODITY SPOTLIGHT BOX #2
Tobacco Program Sets Quotas & Price Supports 

The USDA tobacco program sets marketing quotas and price supports (loan
rates) to benefit tobacco growers. Assessments levied on producers and
buyers cover the costs of purchasing, processing, and storing tobacco until
it is sold.

Marketing quotas limit how much tobacco--both flue-cured and
burley--growers are allowed to sell. Four factors combine to set the
quotas: manufacturers' purchase intentions, loan stocks, exports, and the
discretion of the Secretary of Agriculture.
1. Manufacturers' purchase intentions are the amount of tobacco leaf
companies commit to buy and are established before the marketing year
begins. Companies must purchase at least 95 percent of the amount declared
in their purchase intentions or pay a penalty. 
2. Loan stocks are the amount of tobacco held by grower cooperatives just
before the marketing quotas are set. 
3. The figure for each year's exports is the average of the 3 previous
years' exports. 
4. The Secretary of Agriculture has the discretion to adjust the sum of the
first three factors as much as 3 percent up or down.

Once the national marketing quota for each kind of tobacco is set, the
figure is divided among growers in proportion to the acreage they devote to
growing that kind of tobacco. Individual growers can market up to 103
percent of their share of the quota without penalty. The tobacco a grower
markets above 100 percent in 1 year, or tobacco under-marketed down to 97
percent, is carried forward to the next marketing year. The effective quota
is the marketing quota adjusted by net carryover held by individual farms.
It is the quantity that can actually be marketed by producers.

The USDA tobacco program bases each year's price support (loan rate) for
tobacco on the price support for the preceding year. The past year's figure
is adjusted based on changes in two other figures: the 5-year average of
market prices (omitting high and low years) and a cost-of-production index.
The Secretary of Agriculture can set the price support between 65 and 100
percent of the calculated change. Price supports vary by the grade of leaf.
The overall support price for a type of leaf--for example,
burley--therefore, is the weighted average of the price support for each
grade of that type.

COMMODITY SPOTLIGHT BOX #3
President Establishes Tobacco Commission

On September 22, 2000, President Clinton signed an executive order
establishing the "President's Commission on Improving Economic Opportunity
in Communities Dependent on Tobacco Production While Protecting Public
Health." The Commission will (1) advise the President on changes in the
tobacco farming economy and (2) recommend ways to improve economic
opportunity and development in communities that rely on tobacco production
without further exposing consumers, particularly children, to the hazards
associated with smoking. The Commission held two public forums in
November--one in Raleigh, North Carolina, and one in Louisville, Kentucky.
The group is scheduled to submit a preliminary report to the president on
December 31, 2000, and a final report no later than May 2001.

WORLD AG & TRADE
Global Agricultural Negotiations Underway at the WTO

Global trade negotiations on agriculture, opened by the World Trade
Organization (WTO) in Geneva in March 2000, are expected to address three
areas of national agricultural policy. The three areas are market access
limits (tariffs, tariff-rate quotas, and other trade barriers), domestic
support to agricultural producers, and export subsidies. 

Agricultural trade barriers and producer subsidies inflict real costs, both
on the countries that use these policies and on their trade partners. Trade
barriers help keep inefficient domestic producers in operation, result in
forgone opportunities for more efficient allocation of national resources,
and lower demand for trade partners' products. Domestic subsidies induce an
oversupply of agricultural products and keep some resources in agriculture
that could be employed more profitably in other sectors.

Oversupply of agricultural commodities leads to low prices and increased
competition for producers in other countries and can create the need for
export subsidies to dispose of excess domestic production. Consumers are
harmed not just by the direct effect of tariffs in raising the cost of
imports, but also by inefficiencies in their economy that result from
tariffs and subsidies. When an economy is performing below its potential,
consumers' income and welfare are reduced.

The new negotiations present an opportunity to achieve further reductions
in global trade-distorting agricultural policies. Under terms of the
Uruguay Round Agreement on Agriculture (URAA), the negotiations will also
include some "built-in" agenda items--i.e., member countries' experiences
with implementation of Uruguay Round commitments; effects of URAA reduction
commitments on world trade in agriculture; nontrade issues such as
environmental concerns, rural development, and food security; and
provisions for special and differential treatment of less developed
countries. 

Gains of URAA 
Have Proven Fragile

The Uruguay Round of the General Agreement on Tariffs and Trade (GATT)
ended in 1993 having fundamentally altered the treatment of national
agricultural policies under multilateral rules of global trade. In the
Agreement on Agriculture, members determined that trade-distorting
agricultural policies should be disciplined or constrained, so that market
forces rather than government intervention can increasingly drive
agricultural markets. 

In committing to greater market access, members agreed to reduce tariffs by
36 percent (24 percent for developing countries) and to convert most
nontariff barriers to tariffs or to a two-tier tariff system called
tariff-rate quotas (TRQ's). TRQ's allow a limited quantity of imports to
enter a country at a relatively low tariff, with higher tariffs imposed on
over-quota imports. 

Member countries also agreed to reduce their aggregate levels of domestic
support to agriculture by 20 percent (13 percent for developing countries).
In addition, both the value and volume of subsidized exports were placed
under limits scheduled to decline through the end of the URAA
implementation period. Developed countries implemented URAA reform
commitments during 1995-2000, and less developed countries will continue
the process through 2004.

The experience to date from implementation of the URAA has demonstrated
that policy reform is difficult to achieve. Global agricultural tariffs
remain high, and there is substantial disparity in tariffs among countries
and across commodities. For example, the average U.S. agricultural tariff
is relatively low (12 percent) compared with 21 percent for the European
Union, 24 percent for Canada, 33 percent for Japan, and 152 percent for
Norway. The global average rate is 62 percent. High import tariffs imposed
by U.S. trade partners are a significant impediment to U.S. agricultural
export growth.

Disparities across commodities within countries' tariff codes can intensify
the distorting effects of tariffs. For example, escalation of a country's
tariffs between bulk commodities and processed agricultural products--i.e.,
a higher effective rate of tariff protection on the final product than on
inputs--can significantly affect trade in processed products, a fast
growing but price-sensitive component of global agricultural trade. And
while tariff-rate quotas have replaced many nontrade barriers, many have
complicated import regimes, often with rules that are not easy to
understand, and some have very high upper tier rates. 

Domestic farm support levels declined early in the implementation period,
helped by strong world prices. Also, many countries chose to adopt less
distorting types of domestic subsidies that are exempt from URAA limits.
For example, some countries have reduced their reliance on subsidies that
are directly linked to the production of specific crops, and instead
provide payments that are not dependent on farmers' current decisions about
which crop or how much to produce. The shift toward less distorting
(exempt) programs has been influenced at least in part by URAA principles.
However, since 1998, global expenditures on nonexempt types of domestic
support have increased in response to low world prices. 

The URAA placed limits on export subsidies for individual commodities, but
allowed for some flexibility. Lower usage levels early in the URAA
implementation period, when prices were high, enabled some members to bring
forward unused levels and recently apply the subsidies when prices were low
and ceilings had been reached.

Sources of Global 
Agricultural Distortions

Despite gains made by the URAA, remaining global agricultural policy
distortions impose substantial costs on the world economy. Agricultural
tariffs, domestic support, and export subsidies push world agricultural
prices to about 12 percent below what they would otherwise be, according to
recent analysis by USDA's Economic Research Service. Over the long term
(about 10-15 years), trade-distorting farm policies will result in a
reduction in world welfare (loss in consumer purchasing power) of $56
billion annually, which represents about 0.2 percent of global GDP. 

Most of the agricultural market distortions, as measured by world price
effects, are attributed to a small number of countries. Developed economies
account for nearly 80 percent of world price distortions. The European
Union (EU) accounts for 38 percent, the U.S. 15 percent, Japan plus Korea
13 percent, and Canada 2 percent. These countries typically employ
different mixes of price-distorting policies. For example, export subsidies
are an integral part of the EU's domestic price support system. As a
result, the EU alone accounts for more than 90 percent of global export
subsidy expenditures. 

The EU and the U.S. together account for most of the global distortions
related to domestic producer support. Most other countries rely mainly on
tariffs to support their farm sectors. Particularly in developing
countries, tariffs are a more practical farm support policy because they
raise government revenue, while domestic programs entail government
expenditure. But tariffs are a potentially more distorting type of farm
support than domestic producer subsidies, because they directly affect
consumers as well as producers.

There are two dimensions in calculating potential welfare gains to an
economy from further policy reform. The first relates to removing
distortions in consumption and production decisions. These are the "static"
gains in welfare (purchasing power) that accrue after producers and
consumers fully adjust to changes in prices when tariffs and subsidies are
removed. Despite higher world food prices, consumers in most countries
would benefit from static gains because tariff elimination lowers consumer
prices of imported foods and because policy reforms increase overall
economic efficiency. Static welfare gains worth about $31 billion annually
to the world economy would accrue over time and reflect increases in income
(wages and return on investment) relative to expenditure.

Most static gains from trade liberalization would accrue to countries with
the largest initial policy distortions. Developed countries receive most of
the global static welfare gains from full policy reform ($28.5 billion
annually), compared with potential welfare gains for developing countries
of about $2.6 billion. Some agricultural importing countries that face
higher world prices but have few domestic policy distortions would realize
static welfare losses from full trade liberalization. 

The second dimension in calculating the benefits of global policy reform
involves dynamic gains--i.e., the long-term effects of increased
investment, and the opportunities for increased productivity that are
linked to more open economies. All countries can benefit from the potential
dynamic gains of global policy reform. Reforms lead to greater investment
by increasing potential returns, and additional investment increases the
productive capacity of economies. Developing countries in particular, which
have substantial potential for productivity gains from technological
change, stand to benefit directly from more openness to the rest of the
world. 

If developing countries eliminate their own agricultural import barriers
and are thereby more exposed to products and competition from more advanced
economies, they can increase their economy-wide productivity by
accelerating their rate of learning new skills and the adoption of more
advanced technologies that are embodied in imports from more developed
countries. Reflecting their greater dynamic potential for growth, these
economies are expected to draw increased global investment, increasing
their resource availability. Developed countries will benefit by enhanced
investment opportunities. Dynamic gains--investment and productivity
growth--due to policy reform account for about 45 percent of total benefits
from full trade liberalization. 

Over the long term, full elimination of agricultural price distortions
would lead to an increase in world welfare, or consumer purchasing power,
of $56 billion annually, with nearly one-fourth accruing to the U.S. alone.
Because U.S. tariffs, domestic support, and export subsidies are relatively
low, most of the benefit for the U.S. would come from policy reforms in
U.S. trade partners.

Because of its technological maturity, the U.S. will not enjoy substantial
direct benefits from dynamic gains. But U.S. agriculture will benefit from
dynamic gains in developing countries that import U.S. farm products as
growth in demand increases in those economies. In the long run, full policy
reform could lead to higher world prices for U.S. farm exports, the real
value of U.S. agricultural exports could be 19 percent higher each year,
and U.S. agricultural imports could be up 9 percent.

Movement toward a more market-oriented and orderly global agricultural
trading system is important for the U.S. because of the large and
increasing role of trade in U.S. agricultural production and food
consumption. As technological advances and increased productivity lead to
higher levels of production, expanding export markets provide an outlet for
U.S. food and agricultural products. For consumers, trade rules help to
ensure access to a safe, varied, and abundant year-round supply of food.

Global policies that distort agricultural trade impose substantial
long-term costs on U.S. producers, consumers, and the world economy. U.S.
agricultural tariffs and subsidies are relatively low, suggesting that U.S.
domestic adjustments to its own reform commitments are likely to be small
relative to the potentially large benefits of global reform. Furthermore,
reforms of U.S. policies within a global framework can help to ensure the
overall, long-term competitiveness of the U.S. farm sector in world
markets. 
Mary E. Burfisher (202) 694-5235, Xinshen Diao (IFPRI), 
and Agapi Somwaru
burfishr@ers.usda.gov
Xinshen Diao is an economist with the International Food Policy Research
Institute (IFPRI). This article does not necessarily reflect the views of
IFPRI. 

WORLD AG & TRADE BOX
Forthcoming publications related to the WTO
--Agricultural Policy Reform in the WTO: The Road Ahead (Summary Report). 
USDA/ERS AIB No. 758, December 2000
--Agricultural Policy Reform in the WTO: The Road Ahead.  USDA/ERS
Agricultural Economic Report (forthcoming)
--Agricultural Market Access: Profiles of Global Tariffs and TRQ's
(forthcoming)

Visit the USDA/ERS briefing room on WTO issues at: 
http://www.ers.usda.gov/briefing/wto/. 


FARM & RURAL COMMUNITIES
Hired Farm Labor: Comparing the U.S. & Mexico

As unprecedented economic expansion continues in the U.S., employers face
increased competitive pressures to obtain workers necessary for their
businesses. In this competitive environment, U.S. farmers are holding their
own, securing similar numbers of hired laborers as in previous years and
able to provide wage increases that generally keep pace with the cost of
living. However, U.S. farmers rely heavily on foreign-born workers, most of
whom come from Mexico and many of whom lack legal authorization to work in
the U.S. This phenomenon appears to be more prevalent than in the past and
reflects wage differentials for farm labor between the U.S. and Mexico, as
well as differences in employment prospects.

In contrast, Mexican agriculture has access to a sizable pool of
native-born workers. Farmworkers in Mexico, as in the U.S., typically
complement their employment in agriculture with nonfarm work. But unlike in
the U.S., farmworkers are in relatively plentiful supply in Mexico and
provide a stable, legal source of labor for agriculture. This will benefit
Mexican farmers as they seek out new export markets. Differences in the
availability of farm labor affects the economic health of agriculture in
both Mexico and the U.S, including the extent to which agricultural
producers participate in international markets.

Characteristics of Hired 
Farm Labor

U.S. agriculture employed an average of 890,300 hired farmworkers in 2000,
according to USDA's National Agricultural Statistics Service (NASS). The
number of hired farmworkers fluctuates seasonally, from roughly 700,000 in
January to 1.1 million in July. Semi-annual data suggest an upward trend in
the numbers of hired farmworkers from 1996 to 1999, followed by a decrease
in 2000.

In October 2000, the average wage for hired farmworkers in the U.S. was
$8.29 per hour. Wages for field and livestock workers were generally lower,
averaging $7.76 per hour. (The average wage for hired farmworkers does not
reflect housing and food benefits that some farmworkers receive from their
employers.) At the same time, the average wage outside agriculture was
$13.69 per hour and the Federal minimum wage was $5.15 per hour. Like the
total number of hired workers, the wage for hired farm labor fluctuates
seasonally, but has tended to keep pace with the cost of living since 1996. 

The relatively high agricultural wage rates in the U.S. attract
foreign-born farmworkers, especially from Mexico. According to data from
the Department of Labor's National Agricultural Workers Survey (NAWS),
people born in Mexico made up 78 percent of all U.S. farmworkers in crop
agriculture in fiscal year (FY) 1998, up from an annual average of 68
percent during FY's 1993-95. People born in Central America constituted an
additional 3 percent of farmworkers in crop agriculture. NAWS data also
show that 57 percent of Mexican-born farmworkers were undocumented (i.e.,
lacked legal immigration status) in FY 1998, compared with an average of 51
percent during FY's 1994-95. The figures are similar for all foreign-born
farmworkers in U.S. crop agriculture--i.e., 57 percent were undocumented in
FY 1998, up from an average of 50 percent during FY's 1994-95.

Off-farm employment provides an important supplement to agricultural
earnings for both native and foreign-born farmworkers. During FY 1998,
farmworkers in U.S. crop agriculture were employed for an average of 34
weeks in the U.S.--31 weeks in agriculture and 3 weeks in nonfarm
employment. An additional 8 weeks were spent in the U.S. not working, and 9
weeks were spent outside the country. U.S.-born farmworkers devoted a
greater portion of the year to nonfarm employment, while the foreign-born,
not surprisingly, spent a greater portion of the year abroad. Among
foreign-born farmworkers, time spent abroad averaged 11 weeks in FY 1998,
up from an average of 8 weeks during FY's 1993-94. Possible explanations
for this shift include heightened enforcement of U.S. immigration
restrictions; improved economic conditions abroad that lure foreign-born
workers to jobs in their home countries; and the possibility that increased
U.S. earnings, either from farm or nonfarm employment, allow foreign-born
farmworkers to spend more time in their native countries.

In Mexico, agriculture employed about 2.3 million people above the age of
12 as hired laborers in 1998, according to the Mexican Secretariat of Labor
and Social Provision's Encuesta de Empleo (Employment Survey). An
additional 136,000 workers performed specialized tasks in agriculture, such
as the operation of machinery, and another 3.5 million Mexicans worked
without pay in the farm operations of their families. The potential pool of
agricultural workers in Mexico thus consists of almost 6 million people.

Agricultural employment in Mexico decreased 0.7 percent between 1996 and
1999, due primarily to urbanization absorbing land and labor in the states
of central Mexico. In these states, agricultural employment is falling at
an average annual rate of 7.6 percent. In the rest of the country, however,
agricultural employment is growing at an annual average rate of 3.8
percent. 
Agriculture employs a large proportion of the population in some parts of
Mexico. This is particularly true in the southern states, which have
relatively high levels of poverty and a larger indigenous population. For
example, agriculture represents 56 percent of employment in Chiapas,
Mexico's poorest state.

Labor productivity in Mexican agriculture is roughly one-fifth the
productivity in the rest of the economy. About 20 percent of the workforce
is engaged in agriculture, but the sector contributes just 5 percent of
GDP. Labor productivity tends to increase as production shifts from basic
grains to more export-oriented crops such as fruits and vegetables.
Government efforts to raise productivity in agriculture concentrate on
training and technology transfer by private extension services supported by
the Mexican government.

The wage differential between Mexican and U.S. agriculture is huge. The
daily wage for 8 hours of farm work in Mexico is about $3.60 in U.S.
currency, compared with the U.S. average of $66.32 in October 2000.
However, these figures overstate the real wage differential between Mexican
and U.S. agriculture, because the cost of living in Mexico is lower than in
the U.S.

Agricultural wages in Mexico decreased in real terms at an average annual
rate of 4.3 percent between 1989 and 2000, while wages in manufacturing
rose at an average annual rate of 0.6 percent. Despite this growing
disparity, there is little evidence of a single commodity or activity in
Mexico's agriculture facing difficulties in obtaining hired labor.

Labor markets are highly seasonal in Mexican agriculture. Most rural
workers are employed part-time in agriculture and work the rest of the time
in nonagricultural sectors such as construction, manufacturing, and
services, particularly in the southern states where there is only one
crop-growing season due to limited infrastructure for irrigation. Rural
workers generally shift from one economic activity to another, and usually
none of these activities becomes a permanent job.

Some rural Mexicans--mostly young people--leave their villages in search of
employment and find work in a wide variety of economic sectors, either in
Mexico or the U.S. Personal contacts and social networks often are deciding
factors in the search for work. Of the 2.3 million hired farmworkers in
Mexico, around 1.4 million are migrants, most of whom range in age from the
early 20's to mid-30's.

The migration of farmworkers within Mexico follows three main routes,
generally from communities of origin in the south to farm operations in the
north. Along the Pacific coast, migrants work seasonally in the production
of fruits and sugar cane, and year-round in vegetables. In north-central
Mexico, migrant labor helps produce key crops such as cotton, apples, and
various vegetables, primarily between August and January. Along the Gulf
coast, farm operators employ migrants to produce sugar cane, cotton,
oranges, and coffee, except during July, August, and September.

The Link Between 
Farm Labor and Trade

Hired farm labor is a major input for U.S. agriculture. The most recent
U.S. census of agriculture indicates that expenditures for hired farm labor
in 1997 totaled $14.8 billion, 10 percent of total farm production
expenses. Hired labor is the third largest of the expenditure categories
defined by the census, following livestock and poultry and animal feed.

Hired labor accounts for an especially high percentage of production
expenses in three sectors of U.S. agriculture--greenhouse, nursery, and
floriculture (40 percent); fruit and tree nut farming (27 percent); and
vegetable and melon farming (23 percent). Each of these sectors is engaged
in international trade, with both exports and imports of vegetables and
preparations experiencing particularly rapid growth during the 1990's.

Trade in these sectors runs in both directions. In 1999, the U.S. was a net
exporter of fruits and preparations and of nuts and preparations, and a net
importer of vegetables and preparations and of nursery and greenhouse
products. Thus, changes in the availability of hired farm labor are likely
to influence U.S. trade in these sectors and the extent to which imports
meet domestic food consumption needs. Increased availability of hired farm
labor should facilitate greater domestic production of these
labor-intensive products, while decreased availability should have the
opposite effect.

During the 1990's, the Mexican government intensified its efforts to orient
the country's agricultural sector toward the export market. By pursuing
Mexico's comparative advantages in fruits, vegetables, and some specialized
processed foods, the government expected to increase rural income and
employment, reduce migration from rural areas, and alleviate poverty.

Agricultural labor has provided an important base for these efforts, since
the production of fruits and vegetables in Mexico is labor intensive
relative to other agricultural commodities, just as it is in the U.S. For
fruits and vegetables, the labor requirement from soil preparation to
harvest ranges from 42 worker-days per hectare for carrots to 216 per
hectare for tomatoes. In contrast, wheat, sorghum, and barley each require
about 10 worker-days per hectare. Maize and beans, two traditional staples
of Mexican agriculture, require 26 and 22 worker-days per hectare.

To secure greater market access for its agricultural products, Mexico
negotiated a series of free trade agreements with 34 countries. The most
prominent of these accords, the North American Free Trade Agreement
(NAFTA), was implemented in 1994 and provides for substantially freer trade
among Canada, Mexico, and the U.S. In addition, a culture of standards and
quality high enough to enable Mexico's products to compete in international
markets has emerged and is spreading rapidly.

Within this context, the modern sector of Mexico's agriculture is capturing
the benefits of freer trade while offering seasonal employment to
farmworkers from the traditional agricultural sector. Export growth of
several labor-intensive commodities has been dramatic. Mexico's asparagus
exports climbed rapidly between 1993 and 1999, rising from $41 million to
$248 million. Also, tomato exports from Mexico averaged $555 million
annually during 1995-99, compared with an annual $395 million in 1993-94.
However, the gap between modern and traditional farms has widened due to
large differentials in organization, technology, and financing.

Keys to the Future

Factors that influence the market for hired farm labor also affect the
future of agriculture in both Mexico and the U.S. Some of these factors are
specific to agriculture; others are related to the general economy and
government policy.

Commodity prices. The demand for hired farm labor and other inputs is
influenced, in part, by the value of farm output. Thus, when commodity
prices are low, wage rates for hired farmworkers are more likely to be low.
Similarly, a marked upswing in commodity prices would strengthen the demand
for hired labor and place upward pressure on wages. This effect would be
felt most strongly in the labor-intensive sectors of U.S. and Mexican
agriculture.

Technologies that substitute for labor. The pace at which technologies that
substitute for labor are implemented is likely to differ between Mexico and
the U.S. due to the different resource endowments of the two countries and
their disparate levels of economic development. However, with freer trade
and more integrated markets under NAFTA, new technologies should be
available at roughly the same time to producers in all three NAFTA
countries, regardless of whether they originate in Canada, Mexico, or the
U.S. Ultimately, the pace of technological change is likely to be dictated
by the potential impact of new technologies on farm balance sheets, as well
as perceptions of farm operators about the future availability of farm
labor.

Differential wage rates. The extent to which agriculture is able to obtain
the services of hired labor depends in part on the attractiveness of
relative compensation offered for farm work versus nonfarm jobs. This is
particularly true in the U.S., where labor markets are relatively tight.
Compared with agricultural work, nonfarm jobs in the U.S. tend to offer
higher wages, as well as year-round employment, employee benefits, and more
predictable working conditions. Where workers have a choice, these
attributes likely draw some prospective farmworkers away from agriculture,
including both U.S. natives and persons born abroad.

In 1999, median weekly earnings for full-time workers engaged in farm work
and full-time workers in all occupations differed by $255, as measured in
October 2000 prices. Over the last 10 years, this gap has not changed
appreciably when earnings are adjusted for inflation. Between 1990 and
1999, the farm-nonfarm differential ranged from a low of $247 in 1990 to a
high of $264 in 1992.

The wage differential narrows considerably when earnings of farmworkers are
compared with workers in nonfarm occupations that require little or no
advanced education. While drywall installers, construction laborers and
butchers and meat cutters earn substantially more than farmworkers, the
earnings of janitors and cleaners and textile sewing machine operators are
comparable to those of farmworkers. Moreover, these figures may misstate
the actual earnings differential since they do not account for regional
differences in the cost of living. Nevertheless, these statistics provide
further evidence that U.S. agriculture has the capacity to compete in the
market for hired labor.

The promise of prosperity in Mexico. Sustained expansion of Mexico's
economy, accompanied by real growth in wages and salaries, should diminish
the relative appeal of the U.S. labor market and draw workers back to jobs
in Mexico. In early 1996, the Mexican economy began a gradual recovery from
the recession caused by the peso crisis. During the first three quarters of
2000, Mexico's annual rate of real GDP growth has exceeded 7 percent,
compared with an average annual rate of 5.1 percent from first-quarter 1996
to fourth-quarter 1999. Wage growth, however, has been slow to follow.

Economic growth in Mexico is likely to be accompanied by continued efforts
to broaden the country's economic development. Increased public and private
investment in the poorest areas of the country should reduce outmigration
from rural Mexico to urban areas.

In addition, illiteracy among some rural workers has been a major
constraint inhibiting the transfer of labor from agriculture to more
productive sectors of the Mexican economy. Public expenditures in education
and training should enable rural Mexicans to increase their off-farm work
activities and to obtain better paying jobs.

As urbanization absorbs land and labor from rural Mexico, jobs in Mexican
agriculture could become more available to less skilled urban workers.
Continued public and private investment in infrastructure, such as roads
and communications, should facilitate labor mobility between regions and
link areas of economic activities.

Mexican financial development. Agriculture in Mexico is a very risky
business. As a result, private financial capital does not usually flow to
agriculture, except for large and modern farms. Mexico's system of public
"development banks" is in poor health, although various trust funds have
been created to restructure bad loans and to write off certain debts for
agricultural producers. The development of a stronger and more vibrant
financial sector in Mexico is likely to increase capital flows to
agriculture, thereby increasing agricultural activity and employment.

Immigration policy. In recent years, U.S. decisionmakers have considered a
wide range of legislative proposals concerning the status of foreign
farmworkers. Most of the proposed legislation would increase the number of
authorized foreign-born farmworkers in the U.S., either by providing legal
immigration status to some number of undocumented persons already in the
country or by allowing additional workers to enter the U.S. temporarily as
guestworkers. Mexico's president advocates a long-term goal of transforming
NAFTA into a common market in which labor would move freely across national
boundaries.
Steven Zahniser (202) 694-5230 and Florencio Trevio (SAGAR)
zahniser@ers.usda.gov
florencio.trevio@sagar.gob.mx

Note: Florencio Trevio is director of policy evaluation, Mexican
Secretariat of Agriculture (SAGAR), General Directorate of Agricultural
Studies. This article does not necessarily reflect positions of SAGAR.

FARM & RURAL COMMUNITIES BOX

The U.S. Department of Labor conducts the annual National Agricultural
Workers Survey (NAWS) to examine the demographic and employment
characteristics of farmworkers in crop agriculture, including field workers
in nursery products, cash grains, field crops, and all fruits and
vegetables, along with field packers and supervisors. NAWS does not include
secretaries or mechanics employed by farm operations or workers in the H-2A
program. The H2-A program enables U.S. employers to hire temporary,
nonimmigrant farmworkers from abroad if they can certify that sufficient
laborers are not available in the U.S. and that employment of these workers
will not adversely affect wages and working conditions of U.S. workers.


SPECIAL ARTICLE
EU Enlargement: Negotiations Give Rise to New Issues

The European Union (EU) continues active negotiations with 10 countries of
Central and Eastern Europe (CEE) for membership in the EU. Negotiations
began in March 1998 with five CEE's (Poland, Hungary, Czech Republic,
Slovenia, and Estonia). In October 1999, the EU agreed to open negotiation
with five others--Latvia, Lithuania, Slovakia, Bulgaria, and Romania.
Cyprus and Malta--two non-CEE states--are also candidates for membership.

In 1999, USDA's Economic Research Service (ERS) analyzed implications of
the enlargement of the EU by inclusion of the first five CEE candidates (AO
December 1999). Economic model results suggested that EU enlargement could
bring increased regional surpluses of beef, pork, and rye, but could also
reduce surpluses of wheat. Recent developments differ from some of the
assumptions underlying that analysis and thus some of its predictions.

Accession will most likely be delayed from earlier expectations and will
probably include a transition period. EU negotiators have also expressed
reluctance to grant CEE producers (farmers) the full range of Common
Agricultural Policy (CAP) support immediately on accession. In addition,
depreciation of the euro (the EU's new unitary currency) since 1999 means
that the gap between CEE and the generally higher EU prices has narrowed
considerably, and that higher prices anticipated by CEE producers upon
accession may not materialize. Another important issue is the eventual
levels at which CEE supply controls are fixed. All these factors could
dramatically alter the impacts of accession on agriculture in Europe. 

Accession Not Likely Until 
At Least 2005 . . . 

On November 8, 2000, the EU Commission issued its annual set of reports on
the readiness of each candidate-country for membership. A major
disappointment for all the CEE's was the refusal of the EU to name a
definite date for accession. EU officials state that they are hopeful that
negotiations with the first group will be completed by the end of 2002. But
all the EU member countries must then ratify the agreement, and this
process could take up to 18 months. Thus, 2004 seems to be the earliest
realistic date for enlargement of the EU with at least some of the 10 CEE
candidate countries. Other EU officials say that 2005 is the first feasible
date for accepting new members.

The reports praised most of the candidate countries for substantial
progress toward harmonizing their legislation with that of the EU, but
pointed out that all have more work to do in setting up structures needed
to implement EU programs. The EU criticized nearly all the candidate
countries for failure to guarantee the rights of minorities (principally
the Romany), implement EU environmental standards, and battle corruption.
In general, the EU Commission considered Hungary and Estonia to be the most
ready for accession. Poland, Slovenia, and the Czech Republic also have a
realistic chance for early accession, and Slovakia and Latvia are not far
behind. 

Although the report on Poland still included that country in the list of
countries almost ready for accession, the EU remains deeply concerned about
lagging productivity in Poland's agricultural sector. The EU Commission
insists on faster progress toward farm consolidation and a reduction in the
labor force employed in agriculture.

A delay in accession will give the CEE's more time to undertake
institutional reforms needed to enable their farmers to compete in a single
market. EU officials have also hinted that a delay in the accession
timetable could make it more likely that CEE producers could receive
compensation payments upon accession. The budget in Agenda 2000
(agricultural and financial policy reforms to the EU's CAP) included
substantial outlays to aid infrastructure development in the initial years
of accession; it was envisioned that these outlays would begin in 2002 or
2003. Delays in accession beyond the year 2002 means that funds budgeted
for 2002-04 would not be used. EU Agricultural Commissioner Franz Fischler
has suggested that these savings could be redirected to provide higher
direct payments for CEE producers. However, such a redirection of funds
would have to be approved by the EU member states.

. . . But Price Gaps 
Are Narrowing

As accession is delayed, the gap between CEE and EU producer prices
continues to narrow to the point where it is entirely possible that in 2005
or 2006 any price gaps will be negligible, primarily because of continued
depreciation of the euro. (Since launching of the euro in January 1999, its
value had fallen from $1.16 to $0.85 by November 2000.) For example, in
April 1999, the EU intervention wheat price was 70 percent above the
Hungarian producer price. (The intervention price is the market floor
price, less quality discounts, that triggers intervention mechanisms to
support market prices.) In April 2000, the difference was just 29 percent,
and the Polish wheat price was well above the EU intervention price.
Patterns are similar with the prices of beef, pork, and feed grains.

The principle impact of a narrowing price gap will be to reduce potential
pork and beef surpluses. Production will rise less than projected in 1999,
and domestic consumption will not decline as much as projected earlier.
Likewise, grain surpluses will be lower than earlier projected, although
there could still be a shift from wheat to feed grains. Agenda 2000
establishes the same intervention price for wheat, barley, and corn. CEE
feed grain prices are currently well below CEE wheat prices. As a result,
the ratio of feed grain prices to wheat prices will shift in favor of feed
grains.

Transition Periods 
Now Likely

In initial discussions about enlargement, both CEE and EU officials
insisted that there be no transition period. CEE producers would
immediately be eligible for all CAP support. But they would have to
implement all EU legislation and regulations upon accession. 

Both sides are now talking openly about the possibility of a transition
period. For political and strategic reasons, the EU wants to move as
quickly as possible to admit new members. At the same time, the November 8
reports point to a number of areas where candidate countries still need to
improve. In tacit recognition of the immense challenge of implementing the
full range of EU regulations, EU officials are now saying that a transition
period may be necessary.

A transition period, however, means different things to the EU and the
candidate countries. The EU has implied its willingness to allow a
transition period for CEE candidates to implement environmental regulations
that will require very large investments. But the EU also seeks a
transition period before the CEE's are eligible for the full range of CAP
benefits, including a 10-year period before CEE producers are eligible for
compensation. In fact, one Polish analyst insists that the EU budget in
Agenda 2000 does not even contain funds needed to provide any compensation
payments to Polish farmers until at least 2010.

The CEE's all insist that they receive the full range of benefits
immediately upon accession, but have requested transition periods for
meeting some of the requirements for accession. Poland and Hungary have
both requested the following: 
--a transition period (18 years for Poland, 10 years for Hungary) before
foreigners be allowed to purchase land;
--a 3- to 5-year period in which to meet the full range of quality
standards for meat and milk, during which time those products not meeting
EU standards would be sold only on the domestic market; and 
--permission to sell meat not meeting EU standards to third countries
during the transition period.

In addition Hungary has requested exemption of existing wine stocks from EU
standards until stocks are depleted.

Extra time to comply with EU sanitary regulations would ease the burden on
smaller livestock producers and processors of the CEE's. Roughly half of
Poland's meat output and 40 percent of Hungary's comes from processing
plants that do not meet EU standards. Owners believe the investment needed
to bring their plants into compliance is so prohibitive that they would
have no alternative but to close down. 

The EU has not given an explicit response to these requests. The EU has
expressed willingness to grant transition periods in areas that will
require large investments, but only if these exceptions do not interfere
with the functioning of a single market. It is unlikely that EU officials
will agree to the full range of exceptions requested by the CEE's.

In addition, if the EU were to agree to the CEE proposals to allow lower
quality products to be sold on domestic markets, some sort of border
controls between the CEE's and the current EU member countries would have
to continue. Such controls would be contrary to the idea of a single
market.

CEE producers could find themselves considerably worse off if the EU
position on the shape of a transition period prevails. The two principal
benefits anticipated by CEE producers are higher farm prices and access to
direct payments currently enjoyed by EU member producers. Direct payments
constitute a significant share of farm income in the EU. The 2000/01
payment for grains, for example, was 58.5 euros per ton, equivalent to
nearly half the intervention price. It is quite possible that CEE producers
would see no rise in revenues while incurring higher costs as they strive
to comply with EU regulations. Without direct payments, they would find it
very difficult to compete with EU producers whose substantial direct
payments offset high production costs. In recognition of this
vulnerability, CEE negotiators have refused to consider any sort of delay
in eligibility for direct payments.

Supply Controls--Another 
Bone of Contention

The EU CAP provides for production quotas for milk, sugar, starch, and
dried fodder. Agenda 2000 calls for continuation of these quotas (although
the quotas will rise). In addition, direct payments provided to grain and
oilseed producers are tied to a so-called base area and reference yield,
set at a recent historical average for each region or country. Direct
payments for male bovines, suckler cattle, and ewes are subject to national
limits on herd sizes and limits on stocking density (livestock units per
hectare.) These supply controls are the subject of intense negotiation
between the EU and the CEE's, and the outcome could have important impacts
on both post-accession production in the CEE's and their competitive
position in an enlarged EU.

The EU is proposing to base all these quotas on 1995-99 average output and
yields. The candidate CEE's have requested higher quotas, citing the now
familiar argument that output in that period was still well below its
potential because of the shocks brought about by the transition from
centrally planned economies. Commodity and country examples include: 

Milk. Average 1995-99 output of milk was 11 million tons in Poland and 1.9
in Hungary. Poland is requesting a milk quota of 11.2 million tons in 2003
rising to 13.7 million tons in 2008. Hungary requested a quota of 2.8
million tons. 

Grain. Hungary requested that 3.6 million hectares grain be eligible for
payments and wants those payments to be made on a yield of 5.2 tons per
hectare. In fact, Hungary's grain area during the 1990's ranged from 2.3 to
2.5 million hectares, and average yield was 4 tons per hectare. Poland
likewise requested a reference yield 15 percent higher than the 1986-90
average and a base area equivalent to the 1989-91 average, arguing that
this would allow Polish grain output to expand to 30.8 million tons from
the current level of 24-26 million tons.

Beef. None of the CEE's has a well-developed beef cattle sector. CEE cattle
have traditionally been dual-purpose dairy-beef animals. They were raised
primarily for dairy products, and beef was considered a byproduct. In
addition, cattle numbers throughout Eastern Europe fell by a third to a
half during the early years of the post-1989 transition due to a drop in
consumer demand for milk. Both Poland and Hungary, eyeing the high beef
prices that would come with accession, would like to develop a specialized
beef cattle industry. However, EU proposals to use current herd levels as
upper limits for beef cattle payments could reduce incentives to expand the
beef sector.

A New Look at 
Land, Labor, and Capital

Production practices in Eastern Europe reflect relative costs of the
primary factors of production--land, labor, and capital. Currently, land
and labor are relatively cheap, while material inputs (feed, fertilizer,
etc.) are very expensive, and capital is both expensive and difficult to
obtain. The result is labor-intensive production and yields substantially
below those of the EU.

Accession will likely bring substantial capital inflows. One important
source of new capital is pre-accession funds pledged by the EU to aid the
CEE's in their preparations for accession. There are two funds: 

--Instrument for Structural Policies for Pre-Accession (ISPA) to support
infrastructure projects in transportation and the environment with an
annual budget of 1,040 million euro per year; and

--Special Accession Program for Agriculture and Rural Development (SAPARD),
targeted specifically to efforts to support sustainable agricultural and
rural development during the pre-accession period. The EU has budgeted 520
million euros annually for the 10 CEE countries.

Both funds carry a 50-percent cofinancing requirement, and CEE governments
must demonstrate they have established government structures capable of
administering the funds. These requirements have slowed the actual
disbursal of funds, but this year funds have begun to flow to the CEE's.
Poland, for example is due to receive the first tranche of a
168-million-euro SAPARD package. Of this, 15 percent will be spent on
farming projects, 35 percent on food processing, 10 percent on rural
projects, and 40 percent on infrastructure. One project to be funded will
provide grants of 25,000 euros to hog breeders and dairy farmers to bring
their operations into compliance with EU standards.

The other source of new capital is accelerating foreign investment in the
region, particularly in CEE food-processing sectors. Food processing is
becoming more concentrated as a result, and more plants are being
modernized to meet EU standards. These plants are already beginning to
invest in primary production, to ensure a reliable supply of high quality
raw product.
Potential impacts on land and labor markets are complex.

Land. If foreigners are allowed to buy CEE land, then one can expect CEE
land prices to rise. Even if foreign land ownership is restricted during a
transition period, any rise in producer prices could put upward pressure on
land prices. But two factors could limit that upward pressure. First, as
pointed out above, prices for field crops may not rise as much as
previously assumed. Second, a base yield set at the relatively low level of
1995-99 would limit the income potential of the land. 

Labor. If labor is fully mobile throughout the enlarged EU, one would
expect some convergence of CEE and EU wages. Higher wages could also result
in the CEE's if the expected inflows of investment generate an increase in
the demand for labor. However, labor mobility is a hotly contested issue in
the negotiations. Several of the less wealthy EU members, fearing an
outmigration of CEE workers, are insisting on a transition period before
allowing full movement of CEE workers.

Another issue affecting wage developments is the relative skill levels of
EU and CEE workers. A number of recent studies have pointed to a widening
skills gap between CEE and EU workers and criticized the CEE's for
insufficient investment in human resources. Poland is considered to be more
of a problem in this regard than Hungary or the Czech Republic. One study
estimates that Polish labor productivity is five times below that of the EU
average and warns that unemployment could rise significantly after
accession. Any rise in investment will lead to greater demand for skilled
labor and a decline in demand for less skilled workers.

Is There A Silver Lining?

The outcome of discussions of direct payments and supply controls could
have a profound impact on the size and structure of CEE agriculture after
accession. Without further restructuring, the agricultural sectors in the
CEE's, particularly Poland, could shrink after accession. 

On the other hand, the probable delays in accession will give more time to
CEE producers and processors to carry out needed restructuring and prepare
to compete in a single market. This process will be aided by expected
capital inflows from foreign investors and EU pre-accession funds. 

The result could be that despite the costs associated with accession, CEE
agricultural output will remain stable or even rise. However, the structure
of the sector could change profoundly. Structural changes could be most
dramatic in Poland. The Communists failed in repeated attempts to
collectivize Polish agriculture, with the result that Poland is the only
CEE beginning its transition with an agricultural sector dominated by small
private farms. Ironically, preparations for EU accession could do more to
force changes in Polish agriculture than the Communists were able to do in
40 years. 
Nancy J. Cochrane (202) 694-5143
cochrane@ers.usda.gov

SPECIAL ARTICLE BOX
The Double-Zero Agreements

A key initiative undertaken by the EU to prepare candidate countries for
accession has been negotiation of a so-called double-zero agreement with
each of the 10 candidate CEE's. The core of each agreement is elimination
of tariffs and exports subsidies for a wide range of raw agricultural
products. By July 2000, the EU had signed agreements with all candidate
CEE's except Poland, which signed in September 2000.

The agreements are asymmetric in favor of the CEE's, in that they grant
concessions for a higher share of CEE exports to the EU than for EU exports
to the CEE's. The EU regards these agreements as an important step towards
the ultimate goal of a single market.

The double-zero agreement with Hungary took effect July 1, 2000. It calls
for reduced tariffs and an end to export subsidies for 72 percent of
Hungary's unprocessed agricultural products and 54 percent of the EU's. The
agreement establishes three lists of goods. All tariffs will be abolished
for goods on the first list--a third of Hungary's agricultural exports to
the EU. The second list includes pork, poultry, cheese, and wheat. For
these goods, tariffs will be abolished for exports up to a given quota,
provided exports above the quota are not subsidized. The duty-free quotas
are to increase by 10 percent per year. The third list of goods will be
subject to preferential tariff rates and includes exports of honey,
mushrooms, and apple juice from Hungary and exports of cut flowers,
tomatoes, apples, and rice from the EU. The elimination of export subsidies
could make the export of some products to the EU more difficult. Even so,
some Hungarian officials expect this agreement to generate an additional $1
billion of sales to the EU per year. The agreement does not cover live
cattle, beef, dairy products, or wine. For beef and dairy product exports,
Hungary will receive a share of a CEE-wide quota. Wine is covered under a
separate agreement.

Poland was the last of nine candidate CEE's to sign a double-zero
agreement. Negotiations were dealt a setback by Poland's decision in late
1999 to raise tariffs substantially for wheat, flour, beef, dairy products,
and hops imported from the EU. The EU maintained this was a violation of
the 1992 Europe Agreement, and the two sides temporarily suspended
negotiations. Ultimately, Poland agreed to withdraw these tariff increases
but only in exchange for a more favorable double-zero agreement.

According to the new agreement between the EU and Poland, tariffs will be
completely removed on 75 percent of food products traded between Poland and
the EU, including fruit, vegetables, horse meat, live animals, and
mushrooms (the first list.) Pork, beef, poultry, milk, dairy products, and
wheat are on the second list, for which the agreement establishes duty-free
import quotas, which are to be increased by 10 percent per year. This third
list of goods for Poland includes rapeseed and sugar. The EU also agreed to
stop all subsidized exports to Poland. 

The long-term impact of these agreements is negligible, since they will
become void once the CEE' accede to the EU. But in the short term they will
bring losses in tariff revenues that could be offset by increased exports
of fruit, vegetables, meat, and other products. Both Polish and Hungarian
poultry producers expect to benefit during the preaccession period.
However, in the case of Poland, for the time being, the duty-free pork
quota is only theoretical because the EU maintains a ban on imports of
Polish pork due to disease problems. And all the CEE's fruit and vegetable
exports will continue to be subject to minimum import price requirements,
which will continue to exclude all but the very top quality CEE products.


END_OF_FILE
