

The text of the March issue of Agricultural Outlook has been revised
to include the article on China's accession to the World Trade
Organization (see contents), which had been awaiting final review. The
pdf version of this article (including graphics) is now posted on the
ERS website.  Go to  http://www.econ.ag.gov/briefing/wto/china.htm and
click on the article title. The full pdf version of the March
Agricultural Outlook will be on the ERS website later this week.




AGRICULTURAL OUTLOOK                                      February 29, 2000
March 2000, ERS-AO-269
               Approved by the World Agricultural Outlook Board
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AGRICULTURAL OUTLOOK
MARCH 2000
AGO-269

CONTENTS

IN THIS ISSUE

BRIEFS Livestock, Dairy, & Poultry: Hog Producers' Returns Improve

Specialty Crops:  Cutbacks Ahead for Processing Tomato Acreage

Risk Management:  Crop & Revenue Insurance: Premium Discounts Attractive to
Producers

COMMODITY SPOTLIGHT World Meat Trade Shaped by Regional Preferences &
Reduced Barriers

WORLD AGRICULTURE & TRADE China's WTO Accession Would Boost U.S. Ag Exports
& Farm Income

TRANSPORTATION North American Railways--A Further Urge to Merge?

SPECIAL ARTICLE U.S. Farm Policy: The First 200 Years

IN THIS ISSUE

China's WTO Accession Would Boost U.S. Ag Exports & Farm Income

China's participation in the World Trade Organization would result in
significant gains in U.S. agricultural exports and farm income, based on
recently completed analysis by USDA's Economic Research Service.  U.S.
exports of grains, oilseeds and related products, and cotton would be $1.6
billion above projected USDA baseline levels in 2005.  Additional gains
would result from significantly greater market access for other products,
such as poultry, pork, beef, citrus, other fruits, vegetables, tree nuts,
and forest and fish products.  U.S. net farm income would be $1.7 billion
higher than baseline projections in 2005.  Hunter Colby (202) 694-5215;
whcolby@ers.usda .gov

Railroads' Urge to Merge

A proposed railroad merger between Burlington Northern Santa Fe and
Canadian National would create North America's largest railroad, stretching
50,000 miles from Nova Scotia to Los Angeles, and from the Gulf of Mexico
to British Columbia. The proposed merger, announced in December 1999, is
primarily an "end-to-end" combination, which is less likely than a parallel
combination to weaken competition.  The two firms will seek approval from
the U.S. and Canadian governments over the next year, asserting benefits
stemming from their ability to avoid intercompany interchange of freight
cars with the delays that result and replace them with more efficient
intracompany transfer of cars at interchange points. For agriculture, the
implications of the merger include its potential to affect the relative
trade advantages of U.S. and Canadian producers.  Keith Klindworth,
Agricultural Marketing Service (202) 720-4211; Keith.Klindworth@usda.gov

World Meat Trade: The Shape of Things to Come

Forces driving the growth in world meat trade since the mid-1980's are
still at work in shaping trade patterns.  Since 1985, global meat trade has
advanced because of significant reductions in trade barriers, notably the
relaxation of barriers by Japan and South Korea, regional trade agreements
among the countries of North America (NAFTA) and South America (MERCOSUR),
and the opening of new markets for poultry in Russia and China. 

Diversity among trade partners in preferences for particular meat products
is also a factor that can enhance trade.  U.S. consumers, for example,
favor chicken breasts over dark meat, while in China and Mexico, dark meat
is more valued.  Further relaxation of trade barriers and progress in
controlling animal diseases will allow expansion of intra-industry
trade--with countries importing and exporting different cuts of meat from
the same animal species-- and will allow countries to exploit relative cost
advantages.  John Dyck (202) 694-5221; jdyck@ers.usda.gov

Hog Producers Look to Higher Returns 

U.S. hog producers are benefiting from the combination of a declining hog
inventory that is reducing pork production and raising prices, and a
booming economy that is fueling demand for meat products.  Hog prices
rallied in the last half of 1999, while feed costs remained relatively low,
boosting producers' returns. Breeding herd reductions continuing since late
1998 ensure higher hog prices, lower pork production in 2000, and a rise in
producers' returns if feed costs continue low.  Retail prices are expected
up 4-6 percent in 2000 after declining for 2 years.  Leland Southard (202)
694-5187; southard@ers.usda.gov

200 Years of U.S. Farm Policy

Since the founding of the national government, farmers have been supported
by a series of markedly different policy approaches.  In general, Federal
farm policies have been rooted in attempts to ensure opportunities for
individuals and families to make a living at farming.  In the earliest
period, Federal land policy offered the opportunity to become a farmer with
minimal investment.  Succeeding periods brought new policy approaches
intended to help farmers improve their incomes in the face of burgeoning
production and fluctuating prices.  Current challenges facing farm
policymakers--e.g., continuing structural change, complexities of global
trade, and new environmental goals--will require creativity in crafting
farm policy for the future.  Anne B. W. Effland  (202) 694-5319;
aeffland@ers.usda.gov

Premium Discounts Boost Crop & Revenue Insurance Coverage

Sparked by $400 million in premium discounts for "buy-up" coverage as part
of emergency assistance legislation, farmers' participation in crop
insurance increased in 1999.  Total insured acres reached 196 million, up
about 8 percent from 1998, and acres insured at buy-up 
levels--coverage above minimum catastrophic coverage (CAT)--increased by 19
percent.  The discounts-- applicable to any federally supported crop yield
or revenue insurance plan-- dropped producers' after-subsidy premium costs
for buy-up coverage about 30 percent, on average, across all buy-up levels. 
Higher levels of buy-up participation are expected to continue in 2000,
with Federal agriculture appropriations for FY2000 providing funds for
premium discounts.  Robert Dismukes (202) 694-5294; dismukes@ers.udsa.gov

Cutbacks Ahead for Processing Tomato Acreage 

The record-high 1999 processing tomato harvest prompted processors to
sharply increase domestic stocks of tomato-based products--up 37 percent in
December 1999 from a year earlier--and will likely lead to a cutback in
contract tonnage and output in 2000.  Early estimates indicate a possible
decline of 10-20 percent in planted acreage from a year ago, and early
contract prices are about 9 percent below last year's average.  Charles
Plummer (202) 694- 5256; cplummer@ers.usda.gov

 BRIEFS

Livestock, Dairy, & Poultry: Hog Producers' Returns Improve

U.S. hog producers are benefiting from the combination of a declining hog
inventory that is reducing pork production and raising pork prices, and a
booming economy that is fueling demand for meat products. Hog prices
rallied in the last half of 1999, while feed costs remained relatively low,
boosting producers' returns. 

In 1999, hog prices generally climbed throughout the year from the low
levels in December 1998, when prices were about the same as in 1970. Prices
averaged $36 per cwt in fourth-quarter 1999, the quarterly high for the
year and $14 over a year earlier. From December into February 2000, prices
remained in the high $30's and low $40's, exceeding break-even (returns
equal cash costs) for the first time since late 1997. 

Producers began reducing breeding herds in late 1998, responding to low
returns over that year, and continued reducing through 1999. The reductions
ensure lower pork production in 2000 (with seasonal variations), higher hog
prices, and a rise in producers' returns if feed costs continue low. 

The December Hogs and Pigs report confirms the forecast of about 4 percent
less pork production in 2000. Farrowing intentions reported for
December-February were down 3 percent from a year earlier and the same as
reported in September. Intended farrowings for March-May are down 5 percent
from March-May 1999. Prospects for higher producers' returns have improved
since the survey was taken because hog prices have risen about $3 per cwt. 

With smaller pig crops, per capita pork consumption in 2000 will likely
decline about 2.5 pounds from 1999. Hog prices are expected to continue to
strengthen and average near $40 per cwt, compared with the mid-$30's in
1999. With continuing low feed costs, producers' returns are above
break-even. In the past, 3 to 6 months of favorable returns generally led
producers to decide to expand breeding herds. However, financial stress and
structural changes over the past 2 years could alter this pattern. Once
producers decide to expand, pork production usually begins to increase
about a year later. 

Based on the market hog inventory, pig crops, and farrowing intentions
reported in December, pork production in 2000 is expected to total about
18.6 billion pounds, compared with a record 19.3 billion in 1999. The
projected supply of slaughter hogs would suggest a larger decline in
production, but heavier dressed weights will help moderate the decline. 

Hog prices began the first quarter of 2000 in the high $30's per cwt after
averaging above previous expectations in December when meat product
movement was exceptionally strong. However, prices may come under downward
pressure later in the quarter, slipping from the low $40's expected in
February, as food-away-from-home demand moderates after the winter holiday
season and total meat production continues to rise. Pork belly prices have
been extremely high, in part reflecting bacon demand from fast-food
restaurants and lower supplies. 

In the second quarter, lower red meat production, moderate poultry output,
and seasonal influences will likely push hog prices to around an average
$40 per cwt. With beef production declining sharply in second-half 2000,
hog prices are expected to average in the low to mid $40's in the third
quarter, declining seasonally to the high $30's in the fourth quarter.
Given the outlook for a continuing strong economy, vacation travel during
the summer months should be strong, fueling demand for meals at fast-food
restaurants. Rising demand at these restaurants should support high pork
belly prices. Also, higher beef prices will make pork products more
attractive in retail stores. 

Retail pork prices (as measured by the consumer price index) are expected
to increase 4-6 percent in 2000 after a 2-year decline that was partially
the result of reduced hog prices. Even with an expected rise in hog prices
this year, farm-to-retail price spreads appear to have reached a new
plateau near $1.80 per pound. The largest retail price increases will occur
in the first half of the year, mirroring the rise in hog prices. Strong
demand from fast-food outlets is expected to push up bacon prices as
restaurants bid bacon away from retail food stores. 

U.S. pork exports in 1999 totaled 1.17 billion pounds, 5 percent less than
in 1998. Most of the export decline can be attributed to reductions in
shipments to Russia. Before the ruble crisis of August 1998, Russia was the
second-largest U.S. pork export market. Russia's pork imports have resumed,
although at very low levels, but subsidized European pork exports have
largely replaced commercial U.S. exports. Food aid now comprises a large
percentage of U.S. pork shipments to Russia. 

Asian markets showed revived interest in U.S. pork in 1999. Exports to
Korea about doubled. Taiwan's World Trade Organization membership agreement
with the U.S. boosted U.S. pork exports to Taiwan by 112 percent over the
same period in 1998. Exports to Japan, the largest U.S. pork export market,
were 9 percent a year earlier. Sales to Hong Kong declined 24 percent, due
largely to competition from subsidized exports from the European Union. 

The U.S. continues to be an attractive import market for Canadian and
Danish pork, especially as U.S. pork prices rise. Total U.S. pork imports
increased 17 percent in 1999. Pork imports from Canada the uncontested
leading foreign supplier of U.S. pork increased 26 percent in 1999. The
strong U.S. economy, relatively weak Canadian currency, and rapidly
restructuring and expanding Canadian pork industry all account for strong
U.S. imports of Canadian pork. 

The U.S. continued to import record numbers of Canadian hogs in 1999.
Through November, 4.1 million Canadian hogs came south, about even with
1998 imports, although the composition differed. In 1998, slaughter hogs
comprised two-thirds of live hog imports, and feeder animals the other
third, while in 1999, feeders and slaughter hogs were evenly divided. U.S.
demand for Canadian feeder pigs grew because of low-priced corn, attractive
processor prices for fed animals, and an increased number of contracts
between growers and processors that offer producers a premium over spot
prices. 

Mexico usually takes over 90 percent of U.S. live hog exports, and imported
record numbers in 1998. However, restrictive Mexican trade policies and
higher U.S. hog prices reduced the number of U.S. hog exports through most
of 1999. Mexico's anti-dumping duty imposed on U.S. hogs in October 1999,
effective for 5 years, more than doubled the price of U.S. hogs there.
Consequently, the export market for U.S. hogs has declined dramatically
since last fall, and exports were down 23 percent in 1999.  

Leland Southard (202) 694-5187 and Mildred Haley (202) 694-5176
southard@ers.usda.gov mhaley@ers.usda.gov

 BRIEFS

Specialty Crops:  Cutbacks Ahead for Processing Tomato Acreage

Spurred by low stocks of tomato products and strong wholesale prices,
tomato processors purchased a record-large tomato crop in the fall of 1999.
The 12.8-million-ton crop exceeds the previous record set in 1994 by 11
percent. With excellent weather (warm and dry) in California which accounts
for 95 percent of processing tomato production the quality of the crop was
high and the harvest season was long. An unusually large volume of tomatoes
was harvested as late as October.

The record-setting harvest helped processors to replenish stocks of
tomato-based products estimated at 9.1 million tons in December 1999, 37
percent above a year earlier. However, despite strong domestic and export
demand for processed tomato products, the sharp increase in domestic
stocks, combined with increased stocks in other countries, will likely lead
to a cutback in contract tonnage in 2000. Since nearly all tomatoes for
processing are grown under contract, the result will be a reduction in
acreage of processing tomatoes this spring.

Tomatoes are second only to potatoes in U.S. vegetable consumption. During
the past 20 years, U.S. annual per capita use of tomatoes and tomato
products has increased by nearly 30 percent, reaching a total 
fresh-weight equivalent of 93 pounds per person in 1998. Processed tomato
products, including items such as sauces, ketchup, pastes, salsa, and
juice, accounted for 81 percent of that total.

Domestic per capita use of processed tomato products was substantially
higher in the 1990's, averaging 75.5 pounds per capita, up 19 percent from
an annual average 63.5 pounds in the 1980's. The increase is likely the
result of continued expansion in food-service demand (food purchased in
restaurants and fast-food establishments), especially for Italian and
Mexican-style dishes. Some of the increase may also be due to rising public
awareness of the health benefits of processed tomato products in the diet.
Several medical studies in the 1990's linked diets rich in tomatoes and
tomato products to reduced risk of various cancers and heart disease.

While domestic per capita consumption of processed tomato products surged
heading into the 1990's, it leveled off as the decade progressed. Per
capita use averaged just under 75 pounds in 1995-99, compared with an
average 76 pounds in 1990-94. Total domestic use of processed tomato
products decreased from 10.2 million tons in 1998 to 9.9 in 1999, but is
expected to rise to 10.3 million tons in 2000. However, with strong export
potential in the coming decade, slow growth (or even a slight decline) in
domestic demand does not necessarily translate into no growth in 
long-term domestic production.

The U.S. has been the world's largest producer of processed tomato products
for several decades, but only recently have exports become an increasingly
important outlet for U.S. producers. Prior to 1989, exports of processed
tomato products rarely accounted for more than 1 to 2 percent of total
processed tomato supply (on a raw-equivalent basis). Since then, however,
the value of U.S. exports of processed tomato products has nearly
quadrupled from $60.1 million in 1989 to $237 million in 1998 and the
export share has steadily risen to 12 percent of total supply.

Although markets for Western-style cuisine served by American chain
restaurants have already matured in Europe and the U.S., other markets
especially Asia and South America continue to expand. The U.S. should
remain well situated to continue increasing exports of processed tomato
products.

Despite the long-term expansion potential for the processing tomato
industry, the currently large domestic and international inventories of
processed tomato products point to reduced output in 2000. With an expected
cutback in processors' output, contract prices (between growers and
processors) for the 2000 crop are likely to be significantly lower and
contract acreage will fall. Some early estimates indicate a possible
decline of 10-20 percent in planted acreage from a year ago, and early
contract prices are about 9 percent below last year's average. Combined
with average acreage abandonment and yields, this would put 2000 production
of tomatoes for processing between 9.6 and 10.8 million tons.

Production at the upper end of this range would be unlikely to reduce
processors' stocks significantly, because processors often buy their
growers' quality production beyond the target tonnage. Large output, along
with persistent large stocks, could lead to another acreage cut in 2001.
However, with production at the lower end of the range, and with continued
strong domestic and export demand, processors could reduce inventories to
more comfortable levels and eliminate, or at least limit, the need for an
acreage cutback again next year.  

Charles Plummer (202) 694-5256  cplummer@ers.usda.gov

 BRIEFS

Risk Management:  Crop & Revenue Insurance: Premium Discounts Attractive to
Producers

Sparked by $400 million in premium discounts, farmers' participation in
crop insurance, particularly at "buy-up" coverage levels, picked up in
1999. Total insured acres increased about 8 percent from the 1998 level,
reaching 196 million, and acres insured at buy-up levels where the premium
discounts applied increased by 19 percent.

The new premium discounts funded under the emergency assistance package in
the 1999 agriculture appropriations legislation (FY1999 Omnibus
Consolidated and Emergency Supplemental Appropriations Act) supplemented
existing crop insurance premium subsidies. The discounts, along with
increases in the maximum allowable yield or revenue guarantee from 75
percent of expected yield or revenue to 85 percent for some crops in some
areas were intended to address concerns about the adequacy of crop
insurance coverage in helping farmers protect against yield and revenue
risk.

Coverage and participation in the Federal crop insurance program have been
shifting in recent years. A major reform enacted in 1994 increased overall
insurance participation, primarily by offering a minimum catastrophic
coverage (CAT) to producers at low cost a fixed processing fee per crop
instead of a risk- or actuarially based premium and by requiring that
producers obtain crop insurance in order to receive other farm program
benefits. As a result, total insured acres increased greatly in 1995, with
more than half of covered acreage insured at the CAT level.

After 1995, however, insured acres declined, dropping from 221 million in
1995 to 182 million in 1998. Producers choosing to drop CAT coverage
accounted for the decline, particularly after mandatory crop insurance
linkages with other farm programs were eliminated in 1996. Producers were
then given the choice of obtaining crop insurance or signing a waiver of
eligibility for disaster benefits. Between 1995 and 1998, CAT-insured acres
dropped by about 45 percent.

A common complaint about CAT coverage is that, while low in cost, it
provides little protection. During 1995-98, CAT coverage at 50 percent of
the producer's expected yield and 60 percent of expected price (50/60
coverage) cost $50 per crop (the processing fee). In 1999 and subsequent
years, indemnification was reduced to 55 percent of expected price and the
processing fee rose to $60 per crop. Thus in 1999, the maximum CAT
indemnity that would be paid out in the event of total crop failure was 28
percent of a producer's expected revenue.

While CAT coverage declined, acres insured at buy-up levels (any coverage
level above CAT) grew modestly between 1995 and 1998. Many producers
contended that buy-up coverage, particularly at top levels, was too costly.
Because the premium subsidies are fixed amounts, the subsidy share of total
premium declines as coverage level increases, except for a peak at the
65-percent yield or revenue guarantee level where the fixed amount jumps.
Since premium subsidies for revenue insurance are based strictly on the
yield portion of an insurance contract, revenue insurance subsidies are
generally a lower proportion of total premiums than their yield-based
insurance counterparts.

Insurance premium discounts included in the 1999 emergency assistance
package made buy-up insurance coverage levels more affordable for crops
harvested in 1999. The discounts applicable to any federally supported crop
yield or revenue insurance plan except CAT dropped producers' 
after-subsidy premium costs for buy-up coverage about 30 percent, on
average, across all buy-up levels.

Reduced costs for buy-up insurance led to widespread increases in
participation in 1999. Buy-up acreage including crop yield and revenue
plans increased in nearly every state, and climbed nationwide from 120
million acres in 1998, to 143 million in 1999. Among states with the
largest amount of buy-up acreage in 1998, gains in 1999 were particularly
strong in Illinois (up 28 percent), Texas (up 22 percent), and North Dakota
(up 16 percent), increasing the buy-up share of insured acreage in each of
the three states to at least 70 percent in 1999. The Mississippi River
Valley and Delta region, which had little buy-up business in 1998, showed
strong increases (at least 25 percent) in buy-up coverage, but still less
than half of insured acreage in this region was covered at buy-up levels in
1999. 

Buy-up acreage increased in 1999 for each of the crops with the largest
insured acreage in 1998 corn, soybeans, wheat, and cotton. The rise in
buy-up acreage was especially strong for cotton (a 35-percent increase),
though cotton, compared with other major crops, continues to have the
smallest proportion of insured acreage covered at buy-up levels.

In addition to increasing buy-up acreage overall, producers moved to higher
guarantee levels within the buy-up category in 1999. While 65 percent of
expected yield continues to be the most popular guarantee level, the share
of acreage insured at this level declined as the shares of acreage insured
at the 70 and 75 percent levels increased, likely indicating that producers
substituted higher levels of coverage for lower.

Increasing coverage levels is expensive, whether the cost is borne by
producers or by the government. As coverage level increases, the likelihood
that the insured will collect an indemnity increases, so each additional
increment in coverage costs more than the previous increment. This
increasing cost means, for example, that the total premium increases 78
percent going from 65 percent coverage to 75 percent, compared with an
81-percent premium increase going from 75 percent coverage to 85 percent.
As a result of the rapidly ascending rate schedule, the $400 million in
premium discounts, which represents roughly 30 percent of total premium
subsidies and discounts applied to buy-up coverage, leads to somewhat
modest increases in coverage levels.

Premium discounts, along with concerns about declining commodity prices,
have led many purchasers of buy-up coverage to choose revenue insurance
products. Although revenue insurance particularly the most popular revenue
product, Crop Revenue Coverage (CRC) is often more expensive than
yield-only insurance, evidence suggests the newly available premium
discounts may have brought the cost of revenue coverage within reach of
more producers.

In 1999, the availability of revenue products increased more crops, more
counties by about 30 percent, while the number of acres insured under
revenue plans grew by more than 90 percent from 1998. In many counties in
the Corn Belt, revenue plans now account for more than half of buy-up
insured acres.

How much did subsidies and discounts raise participation?  If producers are
generally unresponsive to premium changes, increasing government payouts
for premiums could raise program costs dramatically while having little
effect on overall participation. Last year's crop insurance experience,
when large premium discounts were made available and many producers added
or upgraded coverage, perhaps gives a good idea of how producers react to
additional support for purchasing insurance protection.

Higher levels of buy-up participation are expected to continue in 2000.
Although the 1999 legislation funded emergency assistance premium discounts
for only 1 year, appropriations for fiscal year 2000 (the Agriculture,
Rural Development, Food and Drug Administration, and Related Agencies
Appropriations Act, 2000) included $400 million in premium discounts for
2000. Estimates for 2000 point to a 20-25 percent producer premium discount
for buy-up coverage (in addition to existing subsidies), depending on
expected crop prices and the number of producers choosing to insure or to
increase their protection.

Additional premium discounts for buy-up insurance coverage, similar to
those included in the emergency assistance legislation for 1999 and 2000
crops, could become a permanent part of producer premium subsidies. In
September 1999, the House of Representatives passed the Agricultural Risk
Protection Act of 1999 (HR 2559), which would boost buy-up premium
subsidies, and would reform other Federal crop insurance program
provisions. Over the past several months, the U.S. Senate Committee on
Agriculture, Nutrition and Forestry has seen bills introduced that would
also boost insurance subsidies, as well as a bill that would provide direct
payments to producers undertaking a variety of risk management activities.  

Robert Dismukes (202) 694-5294 and Joseph Glauber (202) 720-6185
dismukes@ers.usda.gov joseph.glauber@usda.gov

 COMMODITY SPOTLIGHT

World Meat Trade Shaped by Regional Preferences & Reduced Barriers

World trade in meats has grown rapidly since the mid-1980's. The trade
involves shipping primarily cuts of meats and edible offal rather than
carcasses or live animals. Emerging patterns of trade are due only
partially to relative advantages in countries' production costs. The
presence or absence of trade barriers has also influenced trade patterns,
as have disparities in preferences among trading partners for particular
meat cuts. 

In the last 15 years, U.S. exports of the three major meats beef, pork, and
poultry meat have grown faster than meat exports from other countries, and
the U.S. has evolved from primarily a meat importer to a large meat
exporter. U.S. meat exports totaled $6.5 billion in calendar 1998, compared
with $2.8 billion in imports. On a value basis, the U.S. has become a net
exporter (exports exceed imports) of beef, pork, and poultry with the
export value of each exceeding $1 billion. Nevertheless, the U.S. remains
the world's largest beef importer and a major pork importer. 

This article summarizes a forthcoming study by USDA's Economic Research
Service of the pattern of world meat trade, factors behind the surge in
U.S. net exports of meat, and issues that may shape future U.S. meat trade. 

The Impact of Trade Barriers 

Market supply and demand factors within nations determine trade potential,
but tariff and nontariff barriers can shift market supply and demand,
preventing or inhibiting trade. While many serious barriers remain,
significant reductions in barriers since 1985 have advanced the growth of
world meat trade. Japan's beef imports surged following the dismantling of
its quota system for beef imports (negotiated in the 1988 
Beef-Citrus Agreements), and reductions in tariffs since 1995 (negotiated
in the Uruguay Round). South Korea opened its beef market with an import
quota in 1988, and has raised the quota level several times. Large
increases in meat trade in North America have been associated with the
U.S.-Canada and NAFTA agreements, and expanded meat trade within South
America has been associated with the MERCOSUR agreement. 

In the 1990's, major new markets emerged in Russia, especially for poultry
meat, after the break-up of the Soviet Union and the policy changes that
ensued. China and Hong Kong became fast-growing markets for poultry as
market changes in China allowed imports to increase. The proposed terms of
World Trade Organi-zation (WTO) entry negotiated with China and Taiwan, as
well as the end of Korea's pork and poultry meat quotas in 1997 and the
approaching end of its beef quota in 2001, mark the fall of barriers that
will affect trade flows in the future. 

Sanitary rules can be a key nontariff barrier also affecting meat trade.
Disease-free countries are very cautious about imports of fresh, chilled,
and frozen meats, which can bring pathogens into a country. In general,
these countries ban imports from areas where targeted diseases occur. Once
various national boards and/or international panels such as the World
Animal Health Organization recognize a country as free of a disease, it can
export to countries that monitor imports for purposes of controlling that
disease. 

The U.S. and other countries have eradicated certain infectious diseases
among meat animals, at considerable cost. The disease-free status of the
U.S. free of major animal diseases such as foot-and-mouth, hog cholera, and
Newcastle has benefited its meat exports. Meat imports into the U.S., on
the other hand, have been constrained by disease concerns. For example,
U.S. imports of poultry meat are small in part because potential suppliers
such as Mexico and China are not recognized as free of Newcastle disease.
In recent years, Uruguay, Argentina, and the Mexican state of Sonora have
achieved U.S. recognition of disease-free status for some diseases. These
regions have favorable and growing prospects of shipping approved meats to
the U.S. 

Lower Costs Boost Exports

Meat exporting areas tend to be located near large feed supplies to
minimize costs of transporting bulky feeds. Feed production requires land,
and countries with large areas of land suited for feed production dominate
meat exports. Areas that produce abundant grain, such as the U.S., Canada,
Brazil, and the European Union (EU), are major exporters of pork and/or
poultry meat. The U.S. and Canada also feed grains and meal to cattle, for
further weight gain and improved quality, and export beef. Countries with
large pasture area produce and export grass-fed beef (Australia, Argentina,
and New Zealand). 

Meat animal production in a number of other countries depends on imported
grains, meals, and roughage. The easing of meat import barriers in some of
these countries in the last 15 years has expanded opportunities for meat
exporters. Partially because shipping meat can be more efficient than
shipping feeds, countries such as Japan and Korea are importing a rising
share of their meat consumption as meat import barriers fall. 

Supplying meat involves not only animal production, but also slaughter,
processing, and distribution. Costs of these operations vary significantly
across countries, and can affect relative competitiveness in world trade.
For example, some studies have concluded that in the recent past the cost
of processing cattle in Australia or hogs in Canada was higher than in the
U.S. because of lower labor costs in large, modern U.S. plants. Brazil,
China, and Thailand appear to have an advantage over the U.S. and other
countries in deboning and processing broiler meat, because of lower labor
costs. 

Economies of size or scale can lower the cost of meat processing and
marketing and thereby affect meat trade. As the size of the processing
plant increases, meat processing costs drop, and as meat firms are
consolidated into larger businesses the costs of marketing, research and
development, and management can be spread over larger production complexes
and the per-unit cost thereby lowered. Economies of size require
sufficiently large markets to absorb the processed meat. Denmark's pork
industry, relatively large compared with its population, depends on export
markets in the EU, Japan, the U.S., and elsewhere. In Australia, although
the population is relatively small, beef plants can achieve economies of
size with sufficient export outlets. 

Supplying meat cuts to foreign markets involves particular transportation
requirements. Until the 1980's, transport by ship was limited largely to
frozen meat. However, continuing advances in containerized shipment of meat
over the last 15 years have allowed chilled, unfrozen beef and pork to
cross the seas by ship from North America and Oceania to Japan, and still
have sufficient shelf life to compete well upon arrival (AO
January/February 1999). In many markets, fresh or chilled meat is preferred
over frozen meat for some uses, and chilled meat exports are expected to
grow. 

Differing Preferences  Underlie Trade Gains

Some meat trade flows are strongly influenced by factors other than the
costs of supplying a market (animal purchase, processing, and
transportation). U.S. exports of poultry meat and offal (hearts, livers,
feet, etc.) are an example. Their growth exceeded that of beef and pork
exports since the mid-1980's. Striking differences in U.S. and foreign
consumer preferences for broiler cuts and offal appear to be a major
reason. The U.S. poultry industry has not experienced significant
competition from imported poultry meat, in part because of U.S. import
restrictions based on disease concerns.

U.S. consumers favor chicken breasts and pay higher prices for them than
for dark meat legs, thighs, and wings. There is little U.S. demand for
chicken feet. Much of the rest of the world has opposite preferences:  dark
meat is preferred, and prices for chicken legs are typically higher than
for chicken breasts. For example, although broiler production costs are
higher in Japan than in the U.S., partly because Japan's feed must be
imported, breasts from domestic broilers are priced lower in Japan than in
the U.S. In Japan, breasts are a low-valued byproduct of broilers grown for
legs and other dark meat. In the U.S., on the other hand, legs, other dark
meat, and offal are low-valued compared with breasts. 

This difference in preferences provides a marketing opportunity for U.S.
poultry meat exports. U.S. firms export wings, feet, other dark meat and
offal to China and Hong Kong; legs to Japan; and dark meat and offal to
Mexico. These export markets pay more for such cuts than U.S. consumers. In
addition, the low U.S. price of chicken-leg quarters makes them affordable
to Russian consumers, who also generally prefer dark meat. U.S. exports of
breast meat are small relative to dark meat, except shipments to Canada
where preferences are similar to those in the U.S. 

Differences in poultry preference among countries can lead to complementary
trade flows. Because of differences in preferences, Japan exports modest
quantities of chicken feet to Hong Kong, and China ships boneless legs and
processed chicken to Japan. Newcastle disease in chicken flocks outside the
U.S. currently precludes some potential import flows into the U.S., but as
disease issues are overcome, bilateral trade in parts may occur on a wider
scale, particularly between the U.S. and Mexico. Mexican tastes for dark
broiler meat and offal complement U.S. tastes for breasts. 

Current trade data on international beef and pork markets often refer only
to "cuts" in general rather than identifying the specific cuts crossing
borders. This obscures global diversity in preferences for red meat cuts.
However, in some markets, the market value of a slaughtered hog or steer is
clearly determined much differently than in the U.S. The market value of
U.S. hogs is concentrated in the muscle meats, while the market value of
all internal organs (e.g., heart, liver, stomach, intestines) typically
constitutes only 5 percent of the slaughtered animal's value. In Taiwan,
for example, the valuation is different. Internal organs often provide
15-20 percent of the value of a slaughtered hog. The high price of hearts,
tripe, and other offal in some foreign markets encourages annual U.S.
exports of over $500 million of beef and pork variety meats. 

Quality preferences for certain products also vary. North America and East
Asia prefer grain-fed, marbled beef, while Oceania and South America
produce and consume leaner grass-fed beef. Pork quality factors in Japan
where tolerance is low for pale or soft meat differ from those in North
America. These differences lead to significant trade flows, such as the
export of grass-fed beef from Oceania to North America and Japan for
grinding into hamburger mixes. Denmark markets pork from 
heavier-weight pigs with more fat marbling to Germany, and ships pork from
smaller, leaner pigs to the United Kingdom, where bacon with less fat and
more meat is preferred. 

Firms with multinational marketing strategies base their trade on
international differences in demand. They send carcass parts and offal to
markets where they can expect the highest return. Some firms also have a
multinational production strategy, with production bases in two or more
countries. This allows them to reduce risks such as weather, disease, and
exchange rate movements, and to take advantage of different resource bases.
The largest meat processing firms are U.S.-based and have production
facilities in other countries as well, including Canada, Australia, Mexico,
and China.

The existence of markets linked by firms with international marketing
strategies, but differing in their ability to produce meat and in their
preferences, means that intra-industry trade, with countries importing and
exporting different cuts from the same animal species, is likely to expand.
Intra-industry marketing by firms may expand both imports and exports of
U.S. meats in the future. If future reductions in trade barriers and
advances in animal disease control occur, meat trade flows will increase. 

An increase in imports would lower U.S. prices for some products,
benefiting consumers. The U.S. industry, with its ability to supply large
amounts of most kinds of meat, is likely to find that new international
markets will emerge where U.S. meat has a cost advantage and/or where
product preferences complement those of U.S. consumers. U.S. advantages
disease-free status, abundant forage and domestically grown feed, as well
as large production (achieving economies of size) position the U.S.
industry to profit from greater freedom in global meat trade. Expanded U.S.
meat exports in the future will benefit meat processing firms and farms
producing meat animals.  

John Dyck (202) 694-5221 Kenneth Nelson (202) 694-5185 jdyck@ers.usda.gov
knelson@ers.usda.gov

Major Partners in Meat Trade

Japan is the leading market for U.S. meat exports, taking $2.4 billion, or
over 36 percent of U.S. meat exports in 1998. Beef to Japan constituted
almost 20 percent of the total value of U.S. meat exports to all
destinations. Scarcity of pasture makes calf production costly in Japan.
Feed production is limited, and Japan must import most feeds, usually from
the U.S. Labor costs in Japan's processing plants are high relative to the
U.S. and farms are often too small to achieve economies of size. Thus, meat
production costs in Japan are higher than in the U.S. and some other meat
exporting countries, so Japan increasingly imports its meats. In 1998,
Japan was second only to the U.S. in beef imports, was the world leader in
pork imports (excluding intra-EU trade), and was the third-largest poultry
meat importer, following Russia and China/Hong Kong. 

Japan imports red meats only from countries free of foot-and-mouth disease,
and among these, the U.S. is the largest supplier. Consumer preference for
grain-fed beef supports the U.S. market share in Japan, since much of
Australia and New Zealand's beef is grass-fed. Improved trade data and
further research will determine how Japan differs from the U.S. in the type
of red meat cuts preferred, but preference differences in variety and
poultry meats are apparent. Japan imports U.S.-supplied beef tongues,
livers, other organs, and frozen chicken legs. All these parts are valued
more highly in Japan than in the U.S., and amount to almost $500 million in
U.S. exports. 

Mexico, taking over $900 million of U.S. meat exports in 1998, is the
second-largest U.S. market. Like Japan, Mexico purchases all the major
meats beef, pork, poultry, and variety meats. U.S. grain-fed beef sells
well there, as most of Mexico's domestic production is grass-fed. Mexican
tastes for dark broiler meat and variety meats complement U.S. tastes.
Mexico's proximity to the U.S. and reductions in trade barriers under NAFTA
have stimulated growth of U.S. exports. 

Russia emerged as a major market for U.S. poultry meat, variety meat, and
pork after the breakup of the Soviet Union and its centrally planned
economy. Russian producers have had difficulty organizing markets to
produce meat profitably, and their high production costs encourage
competition from imported meats. As a result, production has fallen and
meat imports have climbed, even though Russian consumers became poorer and
their meat consumption fell (AO June/July 1999). In 1998, Russia was the
world's third-largest beef importer, second-largest pork importer, and
leading importer of poultry meat. 

Russian imports of U.S. meats exceeded $700 million in 1998, after peaking
in 1996 at $1.1 billion. Consumers found the prices of U.S. dark broiler
and variety meat attractive. The ruble's high value was a key factor in
encouraging U.S. meat imports, which declined after the currency
depreciation in fall 1998. 

Canada was the fourth-largest U.S. export market for meats in 1998, with
sales amounting to almost $700 million. Beef, poultry meat, and pork are
the major meat exports to Canada. Canada's supply management of broilers
ensures relatively high domestic broiler prices. U.S. exports of poultry
meat, aided by geographic proximity, are priced lower than Canadian poultry
parts. Canada does have tariff-rate quotas that are designed to partially
protect the Canadian poultry industry. 

The situation is different for beef and pork. Canada exported $1.2 billion
of the red meats to the U.S. in 1998, much more than it imported. The end
of Canada's subsidies to grain transportation increased domestic supplies
and reduced feed costs in western Canada, making it more attractive to feed
the grain locally. The nearby, open U.S. border has encouraged North
American firms to take a regional marketing perspective, and their
investments in Canadian slaughter and processing plants are bringing down
their total costs of producing meat. In addition to meat, Canada shipped
$1.2 billion in live cattle and hogs to the U.S. in 1998. 

The fifth-largest market for U.S. meats (at $550 million) is Hong Kong,
together with China. Because Hong Kong re-exports large quantities to the
rest of China, while also importing meat from China, the markets are
tightly linked and treating them as one market while reviewing trade is
convenient. Both markets absorb U.S. poultry meat and offal, and also pork
and beef variety meats and muscle cuts. With a large population, rising
income, and tastes that complement U.S. preferences, China is a key future
market. 

Leading sources of U.S. meat imports, besides Canada, are Oceania and the
EU. Australia and New Zealand, both with large grazing areas, in 1998
shipped nearly $800 million in frozen, grass-fed beef to the U.S. for
grinding into hamburger mixes, as well as about $170 million worth of lamb,
a regional specialty. Significant investment by U.S. and Asian firms in the
Oceania cattle sector help tie that production to the U.S., Japanese, and
Korean markets. Growth in Asian demand for grain-fed beef imports in the
last 15 years led to diversion of some grass-fed cattle destined for
slaughter for the U.S. market to become grain-fed beef for the Asian
market. U.S. imports from the EU, primarily frozen and processed pork from
Denmark, have stabilized in recent years.

 WORLD AGRICULTURE & TRADE

China's WTO Accession Would Boost U.S. Ag Exports & Farm Income 

Accession of China to the World Trade Organization (WTO) would potentially
add $1.6 billion by 2005 to the annual tally of global U.S. exports of
grains, oilseeds and oilseed products, and cotton. Much of the $1.6 billion
represents direct U.S. sales to China; these commodities would enjoy
significantly greater access to the immense Chinese market. This figure
does not take into account other U.S. commodities such as fruit and
vegetables, animal products, and tree nuts, which would also enjoy
increased access once Chinese duty reductions are implemented. U.S. farm
income stands to gain considerably from the rise in exports. 

Over the past 20 years, U.S. agricultural exports to China have grown from
negligible levels to $1.1 billion in fiscal year 1999. Estimation of
additional exports under China's pending accession to the WTO are based on
preliminary analysis by USDA's Economic Research Service (ERS). The
analysis is in turn based on China's WTO commitments under the
comprehensive bilateral trade agreement with the U.S. 

The U.S.-China agreement, signed in Beijing on November 15, 1999, followed
13 years of negotiations. The agreement signaled China's desire and
commitment to participate in the global trade community, and was a major
step toward securing China's entry into the World Trade Organization (WTO). 

After China negotiates bilateral agreements with several other WTO Members,
all Working Party Members, including the U.S., must reach consensus on the
draft protocol package--the complete package of commitments that will be
the basis for WTO Members' decision on whether to admit China to the WTO.
The package is then sent forward to the WTO General Council for final
approval.  The protocol package reflects the best market access commitments
from each bilateral agreement.

-----BOX----- The projections and discussion in this article draw on USDA
agricultural Baseline projections released at USDA's 2000 Agricultural
Outlook Forum in February. The longrun baseline projections, through 2009,
assume no shocks (and no WTO accession by China) and are based on specific
assumptions regarding macroeconomic conditions, policy, weather, and
international developments.

----end BOX----

Accession to Reduce  Ag Trade Barriers 

Under terms of the U.S.-China bilateral agreement, which will be
incorporated into the final WTO accession protocol, China has committed to
eliminate nontariff barriers on agricultural imports upon its accession to
the WTO and to implement a series of tariff cuts between 2000 and 2004. In
addition, China committed to establish tariff-rate-quotas (TRQ's) for
wheat, rice, corn, cotton, and soybean oil with gradually increasing quota
levels, mostly over the same period. 

For goods subject to a TRQ, a specified quantity of imports i.e., quota may
enter at a low tariff rate, and additional imports are assessed a higher
tariff. The negotiated TRQ's are not "minimum purchase" commitments i.e.,
they do not require China to actually import at the full TRQ amount.
Rather, by cutting tariffs, they provide the opportunity for trade to the
extent that domestic demand exceeds supply.

WTO accession is expected to expand China's imports of farm products,
particularly for major agricultural commodities which have TRQ's. An
important element in China's increased imports will be the growing shares
of TRQ imports reserved for private traders. 

China's commitments to reduce barriers to agricultural imports include the 
following:

*  A system of TRQ's will expand market opportunities for major
agricultural commodities, including corn, wheat, cotton, rice, and soybean
oil. The quantities of these commodities allowed in at the low
"within-quota" tariff rate will increase annually from 2000 through 2004
(except soybean oil which will be fully liberalized with nothing but a
bound duty by 2006).

*  Significant cuts in tariffs will be completed by January 2004. For
agricultural products overall, tariffs will drop from an average of 22
percent to 17.5. For certain agricultural exports deemed important to the
U.S. (e.g., animal products, fruits, and dairy products), the average
tariff will fall from 31 to 14 percent.

* A growing share of the rising TRQ imports is reserved for nonstate
trading entities to encourage private-sector participation in China's trade
activities.

*  Use of export subsidies for farm products will end, and 
trade-distorting domestic subsidies will be capped and reduced.

*  Sanitary and phytosanitary (SPS) barriers must be based on scientific
evidence.

In analyzing the likely changes in China's and in U.S. trade in major
agricultural commodities arising from China's accession to the WTO, ERS
used the global Country Linked System of models (see box below). ERS
measured the estimated trade level under China's accession, relative to
USDA's 2000 Baseline projection a 10-year projection of international
supply, demand, and trade of major agricultural commodities. Since Baseline
projections were built on existing patterns of trade and assumed China was
not a WTO Member, the difference between the two levels reflects the likely
impacts of China's accession to the WTO. 

The commodities analyzed for impacts on China's agricultural trade were
corn, wheat, rice, cotton, and soybeans and their products, while a broader
set of commodities was considered for the U.S. trade and farm income
impacts. Although China's imports of poultry, pork, and beef are expected
to increase following WTO accession, China's livestock product trade was
not analyzed. However, China's domestic feed costs do impact its domestic
supply and demand for livestock products.

Some of the key assumptions underlying the analysis include: 

*  general economic and policy assumptions as in the 2000 USDA Baseline;

*  no economic growth impact on China from WTO accession (i.e., maintains
7.4 percent average annual growth as under baseline projections); 

*  reduction in China's large agricultural commodity stocks in the near
term; 

*  relaxation of China's government policy favoring soybean imports over
soy oil or soy meal imports; and

*  treatment of China's accession to the WTO as equivalent to implementing
the bilateral agreement.

The final level and timing of China's import growth due to WTO accession
depends on factors that are difficult to anticipate and gauge. These
include how rapidly and how extensively China's government adjusts its
domestic agricultural production, pricing and marketing policies, and
institutions in response to the more liberalized trade environment.

China's Ag Imports Should Rise

Between 2000 and 2009, China's average annual net imports of major
agricultural commodities (corn, wheat, rice, cotton, soybeans and their
products) are expected to increase $1.5 billion from baseline levels due to
WTO accession. By the midpoint of the projection period (2005), the net
gains in import value are expected to be $1.6 billion, almost double the
Baseline level.

Corn. China committed to establish a 4.5-million-ton tariff-rate quota for
corn in 2000, rising to 7.2 million by 2004. Within-quota imports would be
subject to a low duty (1 percent), while over-quota duties would be high 77
percent in 2000 dropping to 65 percent by 2004. Nonstate trade companies
with the right to trade would be allocated 25 percent of the quota in 2000,
rising gradually to 40 percent in the year 2004.

China's accession to the WTO is projected to result in an average annual
increase of $497 over the Baseline in its net corn trade between 2000 and
2009. During this period, the Baseline projects China will be a net corn
exporter of $426 million on an annual average basis. In sharp contrast, the
WTO scenario projects annual average net corn imports by China amounting to
$71 million. 

China is currently a large corn exporter, and imported an average of less
than half a million tons of corn annually over the last 3 years. China's
imports are not projected to reach the full TRQ amount by the end of the
projection period (2009) because the expected declines in price and
production are not likely to be rapid or dramatic. Imports are nonetheless
expected to increase steadily because of the TRQ provision that creates
effective market access opportunities for nonstate trade companies in corn
imports and because of the demand that already exists.

Increased corn imports following WTO accession should put downward pressure
on domestic prices and production in China. This downward pressure
reinforces China's recent move to align prices more closely with the world
market by reducing the floor (or protection) price paid to farmers for
government purchases of corn. It is unclear, however, whether this downward
price pressure will contribute to additional changes in production,
consumption, and stockholding, and this generates substantial uncertainty
regarding the pace of the expected longrun upward trend in imports.

The most likely outcome is reduced area planted to corn, reduced
production, increased consumption, and higher levels of imports. South
China is expected to be the destination for much of these additional
imports, given the large demand for livestock feed in that region. North
China should continue to procure supplies primarily from local domestic
production. However, if production in North China does not drop
dramatically in response to the expected lower prices, China may maintain
significant levels of exports to neighboring Asian countries. Although such
exports could displace U.S. shipments, the U.S. is expected to capture the
majority of China's additional trade, and those gains are likely to more
than make up for any losses in third-country exports.

Wheat. China committed to a tariff-rate quota of 7.3 million tons for wheat
in 2000, rising to 9.64 million in 2004. The duty for within-quota imports
would be 1 percent, while the over-quota duty would be 77 percent in 2000,
dropping to 65 percent by 2004. Nonstate trade companies with the right to
trade would be allocated 10 percent of the TRQ.

China's accession to the WTO is projected to result in an average annual
increase over the Baseline of $484 million in net wheat imports between
2000 and 2009. The Baseline projects annual average net imports of $243
million by China during this period, compared with an annual average of
$727 million in net wheat imports in the WTO scenario. 

China has imported less than 2 million tons of wheat each year over the
last 3 years, and stocks are relatively high. Nevertheless, imports are
expected to increase under WTO accession because of demand for
high-protein-content wheat in urban areas and a decrease in trade barriers
for the previously banned U.S. Pacific Northwest soft white wheat.

While stock adjustments could delay rising imports, even relatively modest
changes in production and consumption would quickly drive imports above
previously expected Baseline levels. China is expected to surpass Baseline
wheat import levels almost immediately upon WTO accession.

Recent changes in government procurement policy lowered wheat protection
prices and initiated a phasing out of government purchases of 
low-quality wheat. This is expected to reduce marginal areas planted to
winter wheat in northwest China and the region south of the Yangtze River,
and spring wheat areas in northeast China. Lower prices will reduce wheat
production overall, may modestly increase consumption and, in turn, foster
higher levels of imports. South China is the likely destination for much of
the additional imports needed to meet the demand for wheat (for noodles,
cakes, biscuits and pastries). North China should continue to be supplied
primarily by domestic production, though it too relies on imported wheat
for blending purposes.

Rice. China committed to a tariff-rate quota of 2.66 million tons for rice
in 2000, rising to 5.32 million in 2004. Within-quota and over-quota tariff
rates are the same as for corn and wheat. Half the quota would be reserved
for medium/ short grain (japonica) rice; the remainder would be for long
grain (typically indica) rice. (For a discussion of rice types, see AO
December 1999.) Nonstate trade companies with the right to trade would be
allocated 50 percent of the quota for japonica imports and 10 percent of
the indica quota. 

China is a large net exporter and would remain so upon WTO accession.
Compared with the Baseline, China's net annual average rice exports are
expected to increase by $15 million between 2000 and 2009 due to WTO
accession. However, because of the cap on domestic subsidies, China's
internal prices could drop, reducing rice production as well as exports to
third-country markets. 

Although the share of the TRQ quota for japonica rice is 1.3 million tons
rising to 2.6 million, China is not likely to import material quantities of
japonica rice in the near future. China currently imports indica rice
almost exclusively, mainly premium Thai jasmine for high-income urban
consumers. There is little likelihood that China's WTO accession would
prompt a large increase in its indica rice imports.

Cotton. China committed to a tariff-rate quota of 743,000 tons for cotton
in 2000, increasing to 894,000 in 2004. The within-quota import duty would
be 4 percent, and the over-quota duty would decline from 69 percent in 2000
to 40 percent by 2004. Nonstate trade companies with the right to trade
would be allocated 67 percent of each year's quota.

China's accession to the WTO is projected to result in an average annual
increase over the Baseline of $328 million in net cotton imports between
2000 and 2009. The Baseline projects annual average net imports of $429
million by China during this period, compared with an annual average of
$757 million in net cotton imports in the WTO scenario. 

China began liberalizing its domestic cotton marketing channels and prices
in September 1999, and WTO accession will extend liberalization to cotton
trade. Because China's domestic prices were fixed until recently at levels
set during a period of near-record-high world prices, effective price
reform could be expected to lower domestic prices and production and raise
consumption, and China's textile exports to developed countries would be
greater with accession to the WTO, further increasing cotton consumption.
Under the Uruguay Round Agreement, the developed-country import quotas for
textiles and apparel, created through the Multifiber Arrangement (MFA), are
scheduled for elimination by 2005 for all WTO Members (although the U.S.
would have recourse to two new product-specific safeguards to protect
against any surge of imports). Without WTO membership, China would continue
to face bilaterally negotiated quotas in its major export markets. 

With prices and production lower and consumption higher, relaxation of
import barriers would increase cotton imports. The key unknown in this
scenario is the size and expected utilization of China's cotton stocks.
Policy changes that support a drawdown of stocks could delay the onset of
increased imports.

A rapid clearing of stocks during the very early period of implementation
means imports would be lower than would otherwise be the case. This
suggests further that exports could be larger than USDA projections for the
period. However, the likelihood and duration of such a situation is
extremely difficult to gauge because data on the size and usable share of
China's stocks are considered a state secret.

Soy oil, soy meal, and soybeans. China committed to a tariff-rate quota of
1.72 million tons for soy oil in 2000, rising to 3.26 million in 2005.
Within- quota imports would be subject to a low duty (9 percent), while
over-quota duties would be assessed at 74 percent in 2000, falling to 9
percent in 2006. Nonstate trade companies with the right to trade would be
allocated 50 percent of the TRQ in 2000, rising to 90 percent in the year
2005. The TRQ system for soy oil would be eliminated by 2006 and converted
to a bound 9-percent tariff rate.

China's accession to the WTO is projected to result in an average annual
increase over the Baseline of $348 million in net soy oil imports between
2000 and 2009. The Baseline projects annual average net imports of $455
million by China during this period, compared with an annual average of
$803 million in net soy oil imports in the WTO scenario.  

China is expected to import growing amounts of over-quota soy oil as the
over- quota duty declines, and imports will see strong growth after the soy
oil TRQ system is eliminated after 2005. Palm and rapeseed oil are
potential competing products for soy oil. But continued strong demand for
soy oil for home consumption and for use in some specific processed food
items limits to some extent the potential substitution for soy oil imports.

In addition to the soy oil TRQ, China is also binding import tariffs for
soybeans (3 percent) and soy meal (5 percent) and allowing unrestricted
trade by all nonstate companies with the right to trade. China's accession
to the WTO is projected to result in an average annual increase in soy meal
imports of $221 over the Baseline between 2000 and 2009. The Baseline
projection is for annual average net imports of $281 million by China
during this period, compared with an annual average of $501 million in net
soy meal imports in the WTO scenario. 

China's annual average soybean imports under WTO accession are projected to
be $398 million lower than the Baseline projection, in response to a change
in the current trade policy that favors bean imports over imports of oil
and meal. With liberalized trade in meal and oil, inefficiencies of the
domestic crushing industry will reduce the competitiveness of soybean
products relative to direct imports. Therefore, soybean product imports are
expected to increase to meet rising demand for soy meal for livestock feed
and soy oil for the food processing industry and for cooking. The result
will be lower domestic soy oil and soy meal prices. Due to a reduction in
soybean imports relative to the Baseline, the net gain in average annual
soy complex imports (soybeans, soy oil, and soy meal) due to WTO accession
is expected to be a relatively modest $171 million over the projection
period.

U.S. Farm Income Should Rise

Accession of China to the WTO would increase the volume of global U.S.
exports of most major field crops over Baseline levels. Higher foreign
demand for field crops and related products would lead to an increase in
U.S. major field crop prices, which would boost farm income. Average price
increases for corn, wheat, upland cotton, and soybeans would be 1.5 to 4.5
percent above Baseline levels over the 2000-09 period.

China is expected to increase its imports of processed soybean products
(oil and meal), while decreasing its imports of unprocessed beans. U.S.
soybean exports would decline by about 6 percent, on average, over the
2000-09 period. How- ever, exports of soybean oil and meal would show a
concurrent average increase of 23 and 12 percent, respectively. Increased
demand for soybean products would increase demand for soybeans used to
produce them and increase the soybean price.

Higher crop prices would raise feed prices in the U.S. livestock industry.
As a result, profitability of livestock production would decline, and
producers would reduce production. This would reduce supply and increase
both farm and retail prices. Farm prices for steers, hogs, and broilers
would increase, on average, from 0.5 to 2.5 percent above Baseline levels
over the 2000-09 period.

Increased U.S. export volumes coupled with higher commodity prices would
raise the value of global U.S. exports of major field crops in 2005 by $1.6
billion, or 2.6 percent, over the Baseline projection. Most of this
increase would be associated with the export of bulk commodities.
Additional gains would result from significantly reduced tariffs for other
products excluded from this analysis, including poultry, pork, beef,
citrus, other fruits, vegetables, tree nuts, and forest and fish products. 

Net farm income for the sector, taking into account reduced government
outlays,  would increase in 2005 by $1.7 billion, or 3.9 percent, over the
Baseline projection. Higher crop prices together with higher product demand
would increase cash receipts from farm marketings of crops by $1.8 billion
over the Baseline in 2005. Cash receipts from farm marketings of livestock
products would be $1.4 billion over the Baseline, due to higher livestock
prices. Total farm production expenses would be $1.5 billion above the
Baseline, due primarily to higher feed costs.

Over the 2005-09 period, the increase in total cash receipts is partially
offset by reduced government payments. The government currently offers a
marketing loan program for most major field crops. This program is designed
to offer income protection to producers when crop prices are low by filling
the gap between the announced program loan rate for the crop, and the
market price. The Baseline projects that these loan deficiency payments
(LDP's) will be paid to eligible producers over the 2000-06 period. An
increase in farm prices would reduce payouts of LDP's. Price increases
would put annual LDP's $0.3 billion below the Baseline, on average, over
the 2000-09 period.

With higher prices for agricultural products, especially livestock
products, retail food prices would rise very slightly above Baseline
levels.  

Hunter Colby (202) 694-5215, J. Michael Price (202) 694-5329, and Francis
C. Tuan (202) 694-5238 whcolby@ers.usda.gov mprice@ers.usda.gov
ftuan@ers.usda.gov

BOX

China's WTO Accession Effort: A Chronology

1986  People's Republic of China applies to join GATT (General Agreement on
Tariffs and Trade).

1994  China begins a new push to join GATT.

1995  World Trade Organization (WTO) created to replace GATT as an
institutional framework for overseeing trade negotiations and adjudicating
trade disputes. 

1995-97   China cuts import duties on many goods, but maintains high
tariffs on others, particularly agriculture products.

1999  April 8. China offers major trade concessions in negotiations with
the U.S., but differences over key issues remain. The two countries issue a
statement committing to finish negotiations in 1999. November 15.
U.S.-China negotiators agree on a bilateral market access deal, moving
China a step closer to joining the WTO.

2000  China continues bilateral negotiations with other interested WTO
Members (the European Union and Argentina, among others) 

BOX

Behind the Numbers the Country Linked System

The China WTO analysis uses the Country Linked System of models (CLS),
developed at USDA's Economic Research Service. The system contains 42
foreign country and regional models, and the Food and Agricultural Policy
Simulator (Fapsim) model of U.S. agriculture. The country models account
for policies and institutional behavior, such as tariffs, subsidies, and
trade restrictions. A rest-of-world model handles any missing
country/commodity coverage. In general, production, consumption, imports,
and exports in the models depend on world prices (determined by the
system), on macroeconomic projections (determined outside the system), and
on domestic and trade policies (determined inside or outside the models).
The CLS is large, containing about 18,000 equations per year of projection,
and incorporates an extensive amount of USDA country and commodity
analysts' expertise.

The China model used in this analysis incorporates behavior of state
trading enterprises (STE's) into import and export equations for each
commodity. World price signals enter the domestic market only to the extent
that these STE's respond. China's domestic prices adjust until suppliers
make available just as much as users will want to buy. Analysts' judgement
addresses the institutional and behavioral changes that are expected to
accompany WTO accession (e.g., liberalization of agricultural markets and
allowing private importing firms in China). In the WTO scenario,
liberalization of agricultural trade was introduced into the China model by
increasing China's likelihood of purchasing imports (i.e., shifting the
intercepts of the import equations). 

Fapsim is an annual econometric model of U.S. agriculture whose structure
reflects economic theory and institutional knowledge of the sector. The
model contains over 700 equations that describe supply, use, prices, and
policies, such as commodity loan rates and marketing loans. 

The system reaches simultaneous equilibrium in prices and quantities for 24
world commodity markets, for each of 12 projected years in this analysis.
The 24 commodity markets include coarse grains (corn, sorghum, barley, and
other coarse grains); food grains (wheat and rice); soybeans, rapeseed,
sunseed, and other oilseeds (and their corresponding meals and oils); other
crops (cotton and sugar); and animal products (beef and veal, pork,
poultry, and eggs). 

Ralph Seeley (202) 694-5332  rseeley@ers.usda.gov

 TRANSPORTATION

North American Railways--A Further Urge to Merge?

A proposed merger between Burlington Northern Santa Fe Railroad (BNSF) and
Canadian National Railroad (CN) would create North America's largest
railroad, stretching 50,000 miles from Los Angeles to Halifax, Nova Scotia,
and from the Gulf of Mexico to Vancouver, British Columbia. The new holding
company, North American Railways, would surpass all other railroads in
North America in revenue, miles of track, and number of employees.

The announcement on December 20, 1999, shocked nearly all rail industry
observers, who generally believed that service-related problems stemming
from recent railroad mergers in the U.S. had temporarily cooled the
industry's merger fervor of the past 5-6 years. If the merger is approved
by the U.S. and Canadian governments, the announcement may mark the
beginning of a new "urge to merge" as other railroads in North America
scramble to find partners.

BNSF currently operates one of the largest rail systems in North America
with over 34,000 route-miles of track in 28 states and two Canadian
provinces. The Canadian National Railroad (CN), the only transcontinental
rail system in North America, is one of two large Canadian railroads and
operates 16,000 route miles in nine Canadian provinces and 15 U.S. states.
Until it was privatized in 1996, CN was owned and operated by the Canadian
government. Both CN and BNSF railroads have diversified traffic bases
consisting of coal, merchandise, grain, and intermodal shipments
(containers or truck trailers carried on railroad flatcars). Principal
interchanges between the two railroads are at Chicago, Memphis,
Duluth/Superior, and Vancouver. 

The international dimension of the merger promises to make it provocative
among the general populace in the U.S. and Canada, based on its sheer size
and potential for integrating railroad service and markets in both
countries. But Canadian ownership and operation of rail lines in the U.S.
is not new. Canadian Pacific acquired the Soo Line in the late 1980's, and
last year Canadian National acquired Illinois Central, giving CN a direct
route to the Gulf of Mexico. Three-quarters of CN's revenue is currently
from U.S. operations and transborder shipments.

The proposed merger is primarily an "end-to-end" combination, which is less
likely than a parallel combination to lessen competition. BNSF and CN will
make this point when seeking approval over the next year. Reportedly, only
20 shipping points would see the number of direct rail competitors reduced
from two to one. 

The BNSF and CN assert a number of benefits from their proposed merger,
most of which would stem from their ability to replace intercompany
interchange of freight cars, and the delays that result, with more
efficient intracompany transfer of cars at interchange points. Thus, BNSF
and CN could offer more efficient single-carrier through service to more
points in the U.S. and Canada than ever before. Other potential benefits
indicated by the carriers are:

*  integrated, seamless, single-rail service between Canada and the U.S.
with a single invoice and a single account manager;

* enhanced intermodal service connecting eastern Canada with the U.S.
Southwest and Pacific Coast points, and the Port of Halifax with the U.S.
Southwest.

*  more through service by avoiding crowded interchange yards such as
Chicago where cars can sit for days;

* access to new markets for some BNSF-CN shippers e.g., British Columbia
forest product producers could ship via a single carrier into California
and Arizona and into the lower Midwest and Southwest;

*  direct, single-railroad line service to 30 states and Mexico for auto
and auto parts manufacturers in Michigan and Southern Ontario, whose CN
shipments have to be handed off to other western carriers at Chicago; and

*  improved access for Canadian shippers into Mexico and for Mexican
shippers to Canada.

Effect on Agricultural Trade

The proposed merger is likely to have little effect on total U.S.
agricultural exports to Canada, the second-largest U.S. market, because
most products in this trade are not transported by rail. In fact, 57
percent of the $9 billion of agricultural and forest products shipped from
the U.S. to Canada in 1998 consisted of items that almost always move by
truck fresh and processed fruits and vegetables, meats, dairy products,
snacks, and other consumer-ready foods. Other commodities bring the
"non-rail" market share to at least 75 percent. Only 6 percent of the value
of U.S. agricultural exports to Canada consists of commodities that
typically move long distances by rail (e.g., grain and forest products).
Consequently, unless new markets develop as a result of the BNSF-CN merger,
it should have no appreciable effect on U.S. agricultural exports to
Canada.

In contrast, products generally shipped long distances by rail dominate
Canadian exports to the U.S. Because the proposed merger extends
single-line rail service into Canadian production areas for forest and bulk
agricultural products, it will likely increase these types of Canadian
agricultural exports to the U.S. Forest products account for more than half
of Canadian agricultural exports to the U.S. ($18.8 billion total in 1998)
and bulk exports account for another 6 percent. Only 23 percent of the
total were commodities shipped mostly by truck fresh and processed fruits
and vegetables, meats, dairy products, snacks and other consumer-ready
foods.

Would the merger encourage the use of Canadian ports for exporting U.S.
grain?  Probably not, because the CN east-west route across western Canada
is circuitous relative both to the more southern Canadian Pacific line and
to the BNSF route to U.S. Pacific Northwest ports. Moreover, the BNSF
currently has most westbound export movements from U.S. northern tier
states locked up, and would be unlikely to compete against itself by
promoting the routing of grain through Canada on the CN. Other factors
mitigating the likelihood of U.S. grain moving to export via the CN are
that Canadian grain handling costs are higher, capacity problems at the
Canadian west coast have at times limited the quantity of exports, and
grain exports at Vancouver are periodically disrupted by labor disputes. 

The merger should also not significantly affect offshore Canadian grain
exports, as long as Canadian export rail rates remain capped. Canadian
grain for export is usually shipped at statutorily-set railroad rates, not
available to U.S. shippers, which are capped at just above variable cost.
In contrast, railroads in the U.S. price in a more commercial environment
at what the traffic will bear. As a result of these two radically different
pricing systems, Canadian rail rates for grain movements to West Coast
export positions are currently only 50-60 percent of U.S. rail rates for
comparable movements out of the Pacific Northwest. Still, Canadian grain
has occasionally moved through U.S. ports for export when logistical
problems have arisen in Canada. Southbound movement of Canadian grain
through the U.S. grain transportation system would be much more likely if
railroads in Canada were ever allowed the pricing freedom of railroads in
the U.S.

Finally, although grains and oilseeds comprise only 2 percent of the value
of U.S.-Canada bilateral trade in agricultural and forest products, the
merger should increase trade of these commodities by improving the
efficiency of the rail linkages between Canada and the U.S., thereby
lowering shipping costs. The largest single merger-related effect on
U.S.-Canadian agricultural trade is likely to be on exports of Canadian
forest products to the U.S., because of  the magnitude of trade in this
commodity and the importance of rail to its cross-border movement.

Potential Impacts On Trade Relations

As merits of the merger are debated over the next year, a number of
implications are likely to concern U.S. agricultural interests. The merger,
for example, could affect the relative trade advantage of U.S. and Canadian
grain producers. Specifically, U.S. producers and exporters are likely to
perceive that the merger could heighten the ability of the Canadian Wheat
Board (CWB), which has single-desk selling authority for wheat exports, to
use its size and affiliation with the Canadian government to negotiate
preferential rate and service packages with the BNSF-CN system to move
Canadian grain into the U.S. While the historic involvement of the CWB in
transportation is currently under review in Canada, a merged BN-CN system
will certainly allow all Canadian grain shippers much greater and lower
cost access to U.S. markets than before. 

Examples of preferential rate/service packages negotiated for Canadian
grain shipments into the U.S. are currently coming to light. Research by
the Upper Great Plains Transportation Institute and other industry
organizations indicate that Canadian Pacific rail rates from points in
Canada to Minneapolis are currently as much as 20 percent or 18 cents per
bushel lower than for similar or shorter distances on the CP from North
Dakota to Minneapolis. Industry contacts indicate that these CP rate
discounts for movement of Canadian wheat to Minneapolis were put in place
by the CP in response to a similar rate package negotiated with Canadian
National by the CWB. While the Wheat Board's actual involvement cannot be
verified, this issue is certain to be raised in debate on the proposed
merger.

U.S. agricultural shippers are also likely to be concerned about the timing
of the proposed merger, as the U.S. rail industry and its customers are
still recovering from a series of mergers that disrupted rail service. Rail
service problems in the western and eastern U.S. that followed recent
mergers, such as the Union Pacific/Southern Pacific merger (AO March 1998,
December 1998) and the split of Conrail, have raised awareness among
railroads, shippers, receivers, and government regulators of the potential
for major service disruptions when two large railroads merge.

The control and influence such a large company would have over North
American wheat exports is another area of concern among agricultural
interests. Industry sources indicate that BNSF already controls over half
of wheat movements in the U.S., and its share of high-protein hard red
winter and spring wheat exports is even higher. CN is one of only two
railroads in Canada moving Canadian wheat to export position, and has a 51
percent market share of all Canadian grain movements. When railroads
service "captive" shippers, it is the railroad that determines when those
shippers can participate in markets. U.S. agricultural interests will be
interested in how a combined BNSF-CN system would ration capacity among
competing U.S. and Canadian grain shippers when demand for rail service
exceeds supply. 

Finally, many shippers in the U.S. are likely to be concerned about the
North American railroad structure following the BNSF-CN merger. Just five
Class I railroads would remain in North America (Class I railroads have
operating revenue of at least $259.4 million and together account for 71
percent of U.S. mileage operated, 89 percent of railroad employees, and 91
percent of freight revenue.)  Other possible railroad mergers could be on
the horizon. A followup combination between carriers such as Union
Pacific-Southern Pacific and Canadian Pacific is not only likely but
probable if the proposed BNSF-CN merger is approved.

The Next Steps

The proposed merger must be approved by stockholders of each company, by
the U.S. Surface Transportation Board (STB), and by a Canadian court
regarding compliance with Canadian regulatory requirements. In the U.S.,
both the BNSF and the CN are expected to file their formal merger
application with the STB in March 2000. The STB has up to 30 days after the
filing to issue a procedural schedule a timeline that will guide
participation of all parties in the proceedings. Under current law, STB
review and evaluation of the merger can take up to 22 months after
application, or a shorter period of time if merger participants petition
for an expedited review. The BNSF and the CN have already petitioned the
STB for a ruling one year after they file their merger application. 

Because of likely followup mergers in the North American rail system in the
wake of a BNSF-CN merger, the STB is reexamining its long-held policy of
evaluating the proposed railroad merger at hand without considering the
impact of other railroad mergers that would likely result. As a first step,
STB has announced that it will hold a public hearing on March 8 on the
subject of major railroad consolidations and the present and future
structure of the North American railroad industry. 

The proposed merger has cast renewed attention in the U.S. Congress on
reauthorization of the STB as the U.S. regulatory body responsible for
railroad oversight and on whether or not to increase STB legal authority to
regulate railroads. Some members of Congress favor transferring regulatory
oversight over railroad mergers to the U.S. Department of Justice, which
adjudicates the merits of mergers, acquisitions, and consolidations under
antitrust law for most other U.S. industries.

The issues in the proposed merger illustrate how business consolidations
across national borders in key service sectors such as transportation can
complicate trading relationships among countries. U.S. agricultural
interests are likely to be hesitant about supporting the proposed
combination for several reasons. Service problems stemming from past U.S.
railroad mergers are fresh memories, and the net benefits to U.S.
agriculture from the merger are likely to be small. Other concerns revolve
around the interplay between the new railroad and the Canadian Wheat Board,
and other North American railroad mergers that may follow if this merger is
approved. The proposed merger and potential followup mergers in North
America are likely to make transnational ownership and operation of North
American railroads a major transportation issue in both the U.S. and Canada
over the next few years.

Keith Klindworth (202) 720-4211, Agricultural Marketing Service
Keith.Klindworth@usda.gov

 SPECIAL ARTICLE

U.S. Farm Policy: The First 200 Years

Recent stresses in the agricultural economy, coinciding with the approach
of the year 2002 when the current farm bill expires, have stirred debate
about the direction U.S. farm policy should take in the immediate future.
At the same time, passage into a new century and a new millennium heralds a
time to consider the future of farm policy over the longer term, raising
questions about the goal of public support for agriculture what it has been
and should be. Reflection on the precedents and origins of the policy can
help frame the debate. 

Reviews of the past as a backdrop for present and future policy often stop
at the 1920's in their look backward. Although the last 70 years
undoubtedly are critical for comprehending the rationale of current and
recent policies, they mark a period when a single approach, one
characterized by programs of farm income support, dominated farm policy.
Since the founding of the national government more than 200 years ago,
farmers have been supported by a series of markedly different approaches,
which roughly coincide with four periods, all of which overlap through
decades of debate and transition. 

In the first period, roughly 1785-1890, the focus of "farm" policy was land
distribution and expansion of settlement through numerous private farm
operations. The second period, from about 1830 to 1914, focused on
improving the productivity of farm operations, through support of research
and education. The third period, approximately 1870-1933, ushered in
limited regulation of markets, infrastructure improvements, and provision
of economic information to help farmers compete. The fourth period, since
1924, focused on direct government intervention to provide farm income
support. Whether we are currently in a time of transition toward a new type
of policy remains to be seen, but over the last 15 years or so, debate
about farm income support policies has accelerated. Movements toward more
open global trade, an increasing emphasis on market-driven production
decisions, and attention to environmental costs of agricultural production
have all influenced current policy discussions.

Within each of these periods, public policy that addresses the needs of
agriculture has faced conflicting interests, often grounded in the
consequences of policies and developments of earlier periods. Although
resolution of these conflicts has been different in each period, throughout
the years a remarkably consistent public consensus has remained: that the
problems inherent in farming warrant public support.

Promoting Agriculture in the New Nation

For the first five or six decades after the U.S. became a nation, the focus
of national government was expansion and development. As land transfers,
purchases, and treaties added territory to the U.S., policies were
formulated to encourage the movement of population and industry to fill the
space. Policy developments in this period that led to widespread access to
land for farming, in a sense laid the foundation for public policy toward
the agricultural sector. 

Early Federal land policy favored sale of large amounts of land at
relatively high prices, to bring revenues to the new government and to
transfer public lands into private hands as rapidly as possible. Slow
sales, however, and pressure from interests that favored transfer of public
lands to small, independent farmers led to progressively more liberal laws
governing sale of public lands. Minimum prices per acre were reduced and
credit terms eased by legislation in 1790 and 1800. Later laws in 1820,
1841, and 1854 reduced prices further, forgave outstanding debts for land,
provided means for illegal settlers "squatters" to gain title to land they
occupied, and eventually, through the Homestead Act of 1862, provided for
free distribution of land to anyone who would settle and farm it. Land
distribution on these terms continued in unsettled areas into the 20th
century, but the bulk of American farmland had been claimed and the
traditional American frontier declared closed by 1890.

Debate over these land distribution issues reflected the conflict between
two political-economic philosophies. Those in favor of selling large
parcels at high prices believed public lands were an asset that should be
sold to bring the greatest revenues to the government, reducing the need
for taxes and assuring that the landowners could afford to develop it
constructively. 

Those who favored lower prices and smaller minimum parcels believed the
best use of public land was to foster as much settlement as possible by
small, independent farmers. Widespread settlement would support further
development by increasing population in new areas, fueling economic growth,
and in the earliest years, securing the territorial claims of the new
nation. It would also assure the development in the new territories of a
reliable independent citizenry not beholden to the politically or
economically powerful. These citizens would own their own land and depend
only on the labor of their own families for their well- being, exemplifying
the agrarian ideal.

Debate between the two points of view was also embedded in the regional
politics of the day. In the first decades of the 19th century, older states
along the eastern seaboard resisted relatively open access to land for
farming in the West. Settlement in the new areas threatened their political
dominance and threatened the national treasury through loss of potential
revenues from land sales and increasing demands for transportation
developments to link the old and new regions. 

In the decades preceding the Civil War, proponents of the southern
plantation system of agriculture began to oppose the increasingly open
access to public land. They viewed it as public promotion of an
agricultural system based on an agrarian ideal that was at odds with their
own system. With secession of the southern states in 1860, southern
political leaders left the U.S. Congress, leaving proponents of free
distribution of public land and other forms of assistance to small farmers
virtually unopposed. Success in embedding this agrarian ideal in land
policy, symbolized by passage of the Homestead Act, laid the basis for
continued influence of that ideal in farm policy debates into the future.
The national government had used its resources in this case land to
encourage and support expansion of an agricultural structure of independent
family farms. Thus Federal land policy created a precedent of Federal
support for an independent family farm system, which has continued to be a
prominent public goal of farm policy. 

Moving Agriculture Toward Efficiency

As land policy continued encouraging increasing numbers of independent
farmers across the U.S., improving American farmers' productivity and
quality of life became a goal among progressive farmers, journalists,
educators, and producers of commercial farm inputs. In the 1820's, farmers
began to organize into state and county agricultural societies and to
promote the need for specialized training and scientific research to
advance the productivity and professionalism of the industry. 

Much of the support for these ideas came from older farming regions of the
South and East, which had begun to suffer from competition with newly
opened lands in the West. The availability of extensive, fertile lands on
which staples like wheat, cotton, and livestock could be produced more
cheaply forced farmers in older, settled regions to evaluate their
production methods. Years of cultivation without attention to preserving
fertility of the soil had led to falling yields and even abandonment of
land, particularly in areas growing cotton and tobacco. Some of these
farmers saw potential for greater competitiveness through, for example,
improved fertilizers and better methods of preparing soil for planting.
Agricultural education and scientific research would be the source of these
potential improvements.

Agricultural leaders looked to government for support of education and
research programs. To a certain extent, the call for Federal support for
improved productivity in farming grew out of the consequences of earlier
land policy Federal distribution of public lands in the West increased
competition for farmers in the older regions of the nation, making the
Federal government partially responsible for helping farmers in the older
regions improve their productivity. But arguments for public support of
agricultural education and scientific research rested largely on the belief
that to be effective, advancements in agricultural productivity needed to
be broadly accessible to the large population of independent farmers on
whom the nation depended for food and fiber.

The U.S. was maturing as a nation and experiencing rapid urban and
industrial growth in cities along the eastern seaboard. As manufacturing
developed, employing increasing numbers of people, agriculture became a
distinct economic sector, working in tandem with other industries to help
the nation grow. Improving the productivity of this sector would support
the development of other industries, by releasing labor for emerging
factories, and by providing food and fiber for the increasing urban
population, as well as inputs for these new industries textile mills, for
example.

Federally supported agricultural education and scientific research
eventually took four major forms:  establishment of the U.S. Department of
Agriculture, authorization of a national system of agricultural colleges,
appropriation of Federal funds to support agricultural science research at
state agricultural experiment stations, and organization of an adult
education system, USDA's Cooperative Extension Service. The first two of
these took place in 1862, the year the Homestead Act was passed. Federal
support for agricultural research at state experiment stations began about
a decade later in the 1870's, while the Cooperative Extension Service was
established in 1914.

Agrarianism Clashes with Industrialism

As agriculture, manufacturing, and other industries continued to expand,
the increasing consolidation and wealth of urban-based industries began to
contrast with the relative poverty and unconsolidated nature of
agriculture. Beginning in the 1870's and lasting through the 1890's,
chronic national surpluses of farm products depressed prices, while on a
regional level repeated droughts, grasshopper infestations, and other
natural disasters compounded problems for farmers in the recently settled
lands of the Great Plains and Far West. Repeated national financial panics
throughout the period made credit scarce and expensive. Meanwhile, as
farmers saw their incomes falter, they watched the rising revenues and
increasing political influence of railroads, processors, and urban
financial interests, apparently the beneficiaries of regional monopolies,
high interest rates, and high tariffs that protected manufacturing and
other industries at the expense of farmers.

Demands from farm interests for Federal action drew on the same ideology
that had supported free distribution of public lands. Free land turned out
to be insufficient, particularly as farmers moved beyond 
self-sufficient frontier farming and became increasingly dependent on
markets. Having settled western lands with Federal government support,
farmers on these lands looked to the Federal government for new kinds of
support when they began to face decades of harsh conditions.

Farmers, primarily in the West and South, organized to demand assistance in
the form of Federal government regulation. Eventually forming the Populist
Party in the 1890's, they advocated national government control of an
expanded money supply, government ownership of transportation (railroads)
and communication (telegraph) systems, an income tax to replace high
tariffs as a source of Federal revenue, and continued government support
for distribution of land to small, independent farmers.

The Populist assumption that fostering agriculture was a proper concern of
government remained essentially unquestioned, although not all participants
in the debate believed government regulation of markets was the proper form
of assistance. As Populist ideas spread, particularly in the Plains, other
farm organizations proposed expanding education and research programs to
help individual farmers compete in free markets. During the 1910's and
1920's, these programs were administered particularly through the
Cooperative Extension Service and USDA's new Bureau of Agricultural
Economics, established in 1924. During the same period, legislation
exempting agricultural cooperatives from antitrust regulation left farmers
free to join together for the purpose of purchasing inputs or marketing
their products. Market information services and infrastructure development,
especially farm-to-market roads, through Department of Agriculture programs
equipped small rural producers with market access and economic information
that larger commercial interests acquired privately. 

Tackling Economic Depression  & Chronic Overproduction

During the years 1910-14, the rise in population migration from rural areas
to cities and the end of what had been a continual expansion of acreage in
agricultural production led to slower growth in food production. With
increased demand for food from growing U.S. urban populations and during
the second half of the decade, from a world embroiled in war, food prices
reached levels at which farmers seemed to have achieved incomes on a par
with other sectors of the economy. The U.S. farm population peaked around
1910 at about 32 million and the number of farms in the U.S. peaked around
1920 at about 6 1/2 million.

Soon after the war ended, however, international food demand plummeted as
European production started to recover, and U.S. farm prices fell sharply.
In response, farm leaders began laying out a proposal for a national
program to support farm prices by controlling domestic supplies and using
exports to absorb surpluses. Although Presidential vetoes held off the
program during the 1920's, Congress twice passed measures providing for
direct government intervention to lift farm prices by controlling supplies.
The Federal government did implement some programs to regulate markets and
to improve farm credit, but the limited intervention had little effect in
improving the farm economy.

It took a Depression to get the price supports farmers wanted. The demands
of agriculture for an equal share of prosperity were swept up in a much
broader package of direct Federal interventions as the economy at large
faltered at the end of the 1920's. Beginning with Franklin Roosevelt's New
Deal in 1933, the solution to rapidly falling farm incomes was primarily
price supports, achieved through dramatic reductions in supply. Supply
controls for staple commodities included payments for reduced planting and
government storage of market-depressing surpluses when prices fell below a
predetermined level. For perishable commodities such as milk and some
specialty crops, supply control worked through a system of marketing orders
that provided negative incentives for producing beyond specified levels. 

The combination of price supports and supply management functioned as the
essential outline of Federal farm policy from 1933 until 1996, and
continues to figure in current debate, although the mechanisms and relative
weights of the policies' components were modified by successive farm
legislation. In some years, notably during World War II and postwar
reconstruction, and again during the early 1970's and mid-1990's, global
supplies tightened sharply, sending demand and prices soaring above farm
price supports and rendering acreage reduction programs unnecessary. But
for most of the period, repeated cycles of above-average production and/or
reduced global demand put downward pressure on prices, keeping the programs
popular and well funded. 

Deepening distress in the agricultural economy in the 1920's and economic
depression in the 1930's had fueled political support for a new direction
in farm policy. Limited market regulation and programs to help farmers
compete had not been enough to keep farm incomes from falling; the call for
more direct intervention had gained support. Continued public support for
direct intervention after World War II arose for different reasons. 

Low prices and consequent low farm incomes of the 1920's and early 1930's
had been the result of surpluses created by sharply reduced global and
domestic demand, beginning with Europe's return to normal production after
World War I and followed by the international economic depression of the
1930's. Surpluses in years following World War II resulted from rapidly
increasing productivity, exacerbated by continuing high price supports that
kept production above demand. The apparent success of production controls
and price supports in raising and maintaining farm incomes by the
mid-1930s, however, made a continuation of these policies publicly
acceptable.

Nonetheless, intense debate between proponents of high price supports and
those who believed farm prices should be allowed to fluctuate according to
market demand continued from the mid-1950's to the mid-1960's. The debate
was set in the context of large surpluses, low prices, and efforts led by
the Eisenhower administration to return the U.S. economy and government
bureaucracy to pre-New Deal, pre-World War II structures. Out of the debate
between advocates of very high price supports and mandatory production
controls and those who wished to end direct government market intervention
came a compromise for farm policy. The Food and Agriculture Act of 1965
made most production controls voluntary and set price supports in relation
to world market prices, abandoning the "parity" levels intended to support
farm income at levels comparable to the high levels achieved during the
1910's. A system of direct income support ("deficiency") payments
compensated farmers for lower support prices. 

The debate over price supports and supply control reccurred with enough
intensity to divert the direction of policy in the mid-1980's. The new
setting was the farm financial crisis and its aftermath, along with efforts
by the Reagan presidency to end "big government" and place the American
farm economy on a free-market footing. This time, with steadily increasing
government stocks of program commodities and Federal budget deficits at
record levels, the argument against continuing expensive government support
of the farm economy gained support. At the same time, the farm crisis began
to undermine some of the farm sector's confidence that domestic price
supports and production controls were a very effective way to secure U.S.
farm income in a global economy. Supported U.S. prices reduced
international marketing opportunities and increasing global supplies
undercut domestic production control efforts. Farm legislation passed in
1985 and 1990 maintained the traditional combination of price supports,
supply controls, and income support payments, but introduced changes that
moved farmers toward greater market orientation i.e., lower price supports,
greater planting flexibility, and more attention to developing export
opportunities for farm products. 

By the time of the Federal Agriculture Improvement and Reform Act of 1996,
which legislated a dramatic shift in the character of Federal assistance to
farmers, farm policy seemed to be again passing into a new period, pressed
by the rising costs of farm income support programs and by the 
requirements of global agreements that farm income support programs keep
production decisions tied to market signals. The new policy consensus
behind the 1996 legislation held that farmers would be better equipped to
compete in global markets under a system that allowed nearly complete
planting flexibility and that promised continued government efforts to
enhance access to international markets. To ease the transition from
previous policy, the 1996 act offered a program of decreasing fixed income
support payments no longer tied to production decisions.

Another Transition at Hand?

During the period of short supplies and high prices immediately following
passage of the 1996 Farm Act, the consensus favoring the new policy
direction held. With the return of low prices in 1998 the result of good
weather and global financial crises the debate has resumed about whether
traditional policies of direct income support tied to price fluctuations
are the most effective solution to farm income variability. But a host of
post-World War II developments in agriculture has led to a markedly changed
context for farm policy in the last decade and a half, and that new context
has produced some new challenges.

Increasing productivity has reduced the number of people needed to work on
farms and decreased profitability has reduced the number who can be
supported by income from a single family farm. While many farm residents
have left rural areas for employment in cities, others have stayed and
found employment or developed businesses to supplement their household
income. Sources of income to farm households have greatly diversified,
complicating questions of how the appropriate level of farm income support
should be calculated and how it should be delivered.

Also since World War II, the business of farming and food production has
become increasingly consolidated and industrialized. Average farm size
continues to grow. Contract production in poultry, hogs, and other
commodities has become common. Consolidation is evident in the food
processing, transportation, and trading sectors of the agricultural
economy. Consumer preferences in diet and food preparation have changed
dramatically. These and other developments have led to production processes
and business relationships resembling other industries more than the
traditional agrarian model of small independent producers the model on
which earlier periods of farm policy have been based.

International trade issues have grown in importance over the last 50 years,
as soaring productivity of U.S. farms has created a need for additional
outlets for U.S. goods, preferably in export markets. But these issues have
gained increased significance in deliberations over domestic farm policy in
the last 15 years as new global and regional agreements have been
negotiated that require reduction in trade-distorting farm policies. Income
support policies that have been traditionally used since the 1930's are
limited in this trade environment because they can affect individual
production decisions which in turn can affect global commodity markets.

Equally challenging will be integrating the increasingly complex and
changing goals of environmental policy with agricultural policy.
Conservation programs for agriculture began primarily as efforts to combat
soil erosion, an objective driven largely by concern for improving
productivity. More recently, efforts have focused on a broader array of
issues water and air quality, wildlife habitat, and open space and
landscape preservation not driven by concern for agricultural production,
although they may offer such benefits. The goal, rather, has become
controlling environmental impacts beyond the farm. 

These postwar developments seem likely to produce some marked changes in
the approach to farm policy, although they do not yet seem to have weakened
public support for some kind of direct assistance to farmers. The tradition
of public support for farmers has persisted through a long history of
changing contexts and policy responses from access to land to access to
education and research and from marketing and information programs to
income support programs. 

All of these policies have been rooted in attempts to ensure opportunities
for individuals and families to make a living at farming, beginning with
Federal land policy. With its promise of virtually open access to land, the
policy offered nearly anyone the chance to become a farmer with a minimal
investment. Each period since has ushered in a new policy approach intended
to help farmers improve their incomes in the face of ever-increasing
production. Current challenges facing farm policymakers may test the
strength of public support for the direct income support programs typical
of the last 70 years, and will surely require creativity in crafting
policies that function well in the new context of advanced structural
change, global trade constraints, and new environmental goals.

Anne B. W. Effland, (202) 694-5319 aeffland@ers.usda.gov

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