AGRICULTURAL OUTLOOK                                        April 21, 2000
May 2000, ERS-AO-271
               Approved by the World Agricultural Outlook Board
---------------------------------------------------------------------------
AGRICULTURAL OUTLOOK is published ten times a year by the Economic Research
Service, U.S. Department of Agriculture, Washington, DC 20036-5831.  Please
note that this release contains only the text of AGRICULTURAL OUTLOOK --
tables and graphics are not included. 

Subscriptions to the printed version of this report are available from 
the ERS-NASS order desk.  Call toll-free, 1-800-999-6779 and ask for stock 
# SUB-AGO 4001, $65/year.  ERS-NASS accepts MasterCard and Visa.
---------------------------------------------------------------------------
CONTENTS

IN THIS ISSUE

BRIEFS
Specialty Crops: U.S. Dry Bean Growers to Reduce  Plantings
Livestock: Heifer Liquidation Continues to Support Beef Production
Farm Economy: Farm Income Down in 2000
Farm Economy: Gush in Oil Prices to Exert Modest Impact on U.S. Economy

COMMODITY SPOTLIGHT
U.S. Farmers to Expand Plantings of Soybeans, Corn, & Cotton in 2000

FARM FINANCE
Farm Finances Remain Healthy
Rising Interest Rates Place Upward Pressure on Farm Lending Rates

RESOURCES & ENVIRONMENT
Curbing Nitrogen Runoff: Effects on Production & Trade

SPECIAL ARTICLE
A Fair Income for Farmers?


IN THIS ISSUE

U.S. Farm Income Down in 2000

U.S. farm income is forecast down in 2000 as government payments to farmers
decline from a record high in 1999 and as rising fuel prices push up
production costs.  Assuming no new emergency funding legislation, net farm
income in 2000 is forecast to decline to $39.7 billion from the preliminary
estimate of $44.2 billion for 1999.  With field crop prices remaining
relatively low and hog and cattle prices moving higher, crop farms will be
affected more than livestock.  

Fuel costs for farmers will be only modestly affected by the recent retreat
in crude oil prices until at least late summer, after plantings are
complete. The agriculture sector generally has limited ability, in the
short run, to pass on higher fuel costs to consumers in the form of higher
output prices. 
Farm income: Bob McElroy (202) 694-5578; rmcelroy@ers.usda.gov; Oil prices:
David Torgerson (202) 694-5334; dtorg@ers.usda.gov  

A Fair Income for Farmers?

Political debate over agricultural subsidies and the notion of a "fair"
income from farming is likely to continue as farmers face persistent low
field crop prices and the prospect of reduced farm income in 2000.  To
address policy implications of the debate, USDA's Economic Research Service
(ERS) analyzed the financial performance of farms, delineating them by
enterprise (commodity) type.  Financial performance was measured by
examining a farm's revenue relative to its economic costs of production.  

Focusing on wheat farms (those for which at least half of total value of
production is from wheat), ERS found that the characteristics of U.S. wheat
farms and their financial performance indicate diversity in the ways
farmers manage their businesses and earn their living.  Such heterogeneity
illustrates the difficulties that confront policymakers in reaching
consensus about the level and distribution of government income support. 
Mitchell Morehart (202) 694-5581; morehart@ers.usda.gov

U.S. Soybean, Corn, & Cotton Plantings to Rise in 2000

Planting intentions for the eight major U.S. field crops (corn, soybeans,
wheat, barley, sorghum, oats, cotton, and rice) total 252.6 million acres
in 2000, up about 1 million from last year's planted area.  On the eve of
planting decisions, farmers faced mixed price signals for major field
crops--prices were up for corn, soybeans, and cotton from a year earlier,
but down for winter and spring wheat.  Farmers intend to plant a record 75
million acres of soybeans and the largest cotton area (15.6 million acres)
since 1995. Corn plantings are expected to expand 1 percent to 78 million
acres.  U.S. farmers have indicated their intention to modestly cut back
the biotech share of planted acreage.  William Lin (202) 694-5303;
wwlin@ers.usda.gov  Dry bean growers intend to reduce acreage 9 percent
from 1999's 2 million. With low dry bean prices, planting intentions are
down in each of the six major dry-bean-producing states--North Dakota,
Michigan, Nebraska, Minnesota, Colorado, and California.  Reduced output
and somewhat stronger export demand should trim dry bean stocks this
season, pushing aggregate dry bean prices for 2000/01 slightly above lows
experienced during 1999/2000.   Gary Lucier (202) 694-5253;
glucier@ers.usda.gov

Farm Finances Remain Healthy 

The overall financial health of farmers and their lenders remains solid in
early 2000, despite low prices for major farm commodities over the last few
years.  Large Federal payments to farmers producing food and feed grains,
oil crops, and cotton have mitigated the negative effect of lower prices on
farm financial conditions and have played a key role in stabilizing farm
income. Government payments, by providing liquidity to farmers, are
reducing demand for credit and underpinning farm creditworthiness.  All
major institutional lender groups continue to report generally healthy farm
loan portfolios, and most lenders report low levels of delinquencies,
foreclosures, net loan charge-offs, and loan restructuring. Jerome Stam
(202) 694-5365; jstam@ers.usda.gov

Higher interest rates in the general economy are expected in second-half
2000 and first-half 2001, putting upward pressure on interest rates for
farm loans. However, the expected rise in farm loan rates is less than for
nonfarm interest rates, reflecting the less-interest-sensitive deposit base
of rural banks as well as the strong competition they face from the Farm
Credit System. Paul Sundell (202) 694-5333; psundell@ers.usda.gov

Curbing Nitrogen Runoff: Production & Trade Effects 

Policy decisions to mitigate the environmental impacts of agricultural
production involve trade-offs among economic interests and environmental
goals.  USDA's Economic Research Service posited a goal of 10-percent
reduction in agricultural nitrogen release, analyzing four alternative
generic policy approaches: a "green payment" to producers for reducing 
fertilizer use; regulation limiting per-acre nitrogen use; a tax on
nitrogen fertilizer; and buffer strips and other land retirement. These
policy approaches have varying effects on commodity prices, on agricultural
trade and other economic indicators, on government costs, and on consumers,
as well as ancillary effects on soil erosion. Mark E. Smith (202) 694-5490;
mesmith@ers.usda.gov


BRIEFS

Specialty Crops: U.S. Dry Bean Growers to Reduce  Plantings

After wearing out a few pencils in determining the proper crop mix for this
season, dry bean growers have indicated they intend to reduce acreage 9
percent from the 2 million of 1999. Double-digit percentage cuts in acreage
are not uncommon in the dry bean industry, having occurred in 1991, 1992,
and 1996. This spring, growers intend to reduce area in each of the six
major dry-bean-producing states--North Dakota, Michigan, Nebraska,
Minnesota, Colorado, and California--led by a 22-percent drop in Minnesota
and a 14-percent drop in Nebraska. Assuming acreage abandonment remains
near the 7-percent average for the industry, dry bean harvested area could
be the lowest since 1993. 

There are compelling reasons for this prospective decline in dry bean
acreage:

*  low dry bean prices,

*  costs exceeding potential revenues,

*  Federal marketing loan program benefits for competing crops, and

*  flat export markets.

Early-spring U.S. grower prices for all dry beans were 15 percent below low
levels experienced a year ago. This was the third consecutive annual price
decline, following 10-percent drops in each of the past 2 years. In 1999,
producers planted the fourth-largest area in the past 55 years and received
the lowest prices since 1992. Grower prices were almost universally low
across every class of dry beans (class refers to the various types of bean
such as pinto, blackeye, and navy). 

This is relatively unusual, because most dry bean classes are actually
separate markets with little apparent substitutability among them--supply,
demand, and prices tend to vary independently. Thus, for example, when
pinto bean or dark red kidney bean prices are down, navy bean and light red
kidney bean prices may be up. In most years, the separate markets tend to
have offsetting effects on industry-wide acreage changes. However, fairly
uniform weather over all production areas, as experienced last year, can
produce similar yield patterns and production changes in all bean classes. 

The cost of producing dry beans varies depending on location and production
practices. In most areas, grower prices prevailing in mid-March were
several dollars short of covering unit cash costs under average yields.
Many growers in states such as Michigan and Minnesota, looking at grower
prices of $10-$11 per cwt this spring, could foresee nothing but red ink.
As a result, many decided to reduce dry bean acreage.

Planting another crop may have been a tough decision. Prices for most
competing crops that dry bean growers typically include in their rotations
have also been declining. According to the Census of Agriculture, crops
grown in conjunction with dry beans tend to vary regionally, but wheat,
corn, and alfalfa are top choices, and prices for each of these are below a
year ago, although commodity loan rates for wheat and corn are unchanged
from 1999. For selected states, the following competing crops are typically
grown on dry bean farms:

*  Michigan--corn, wheat, soybeans, oats, and alfalfa;

*  North Dakota--wheat, barley, corn, soybeans, and sunflower seed;

*  Nebraska--corn, wheat, alfalfa, and sugar beets;

*  Colorado--corn, alfalfa, wheat, barley, and sugar beets;

 * Idaho--alfalfa, wheat, barley, sugar beets, and corn; and

 *  California--wheat, fruits, cotton, vegetables, and sugar beets.

Federal marketing  loan program payments are projected to be substantial
again in 2000. Diversified dry bean growers surely considered these
benefits for competing crops while making spring planting decisions.
Because there are no loan programs for dry beans, cash-strapped farmers are
apparently shifting some acres from dry beans to crops with marketing loan
benefits during this time of nearly universally low prices. With
prospective dry bean acreage down 186,000 acres, growers have opted to
concentrate more on program crops such as wheat and corn.

In 2000, U.S. production of dry beans is expected to decline from last
year's 33 million cwt. Trend yields, combined with the prospective acreage
decrease, suggest that total dry bean output could fall to 28-30 million
cwt, with reduced output for most classes, particularly navy, black, and
Great Northern beans. The combination of reduced output and somewhat
stronger export demand should trim dry bean stocks this season, pushing
aggregate dry bean prices for the 2000/01 season modestly above lows
experienced during 1999/2000.

U.S. dry bean export volume has been sluggish during the first third of the
1999/2000 marketing year, declining 7 percent, with classes such as pinto,
Great Northern, and small red down about 40 percent. Exports are
significant for the U.S. dry bean industry, which ships about 20 percent of
domestic output to foreign markets through commercial sales and Federal
food aid donations. A substantial volume of U.S. dry bean exports is
concentrated among relatively few countries. Top U.S. markets in 1998/99
included Mexico (19 percent of all exports), the United Kingdom (UK) (16
percent), Canada (9 percent), Japan (4 percent), and Italy (3 percent).

Despite the slow start and large supplies of dry beans in many parts of the
world, U.S. exports during the remainder of the 1999/2000 marketing year
(September-August) are still expected to increase moderately over the
previous year--eventually strengthening lackluster prices. Currently
prevailing low domestic prices should trigger increased demand from
established trading partners such as the UK and Mexico. 

Shipments to Mexico should grow beyond those of a year ago. Last season, an
8-month delay in auctioning NAFTA dry bean import certificates (required to
allow monitoring of the tariff-rate quota on dry beans) largely prevented
commercial shipments of U.S. beans from entering Mexico until September.
This year, the first auction of NAFTA dry bean import certificates by the
Mexican Secretariat of Commerce and Industry (SECOFI) was February 14,
2000, so exports should proceed more smoothly.

Although the U.S. is second only to Burma as the world's leading exporter
of dry beans, competition in world markets is keen. Canada is a major
competitor in overseas markets such as the UK. In Canada, low stocks
prompted a 55-percent production spike in 1999, boosting stocks
significantly and dropping prices. A thriving export market supports
forecasts for about a 5-percent rise in acres planted by Canadian growers
this spring. However, assuming yields drop back to trend levels, Canada's
production will remain near last year's elevated levels (about 6.5 million
cwt) with average prices dropping slightly as stocks creep upward.  

Gary Lucier (202) 694-5253
glucier@ers.usda.gov


BRIEFS
Livestock: Heifer Liquidation Continues to Support Beef Production

Beef production will continue record large at least through summer,
bringing 2000 output just below the 1999 record. Behind current gains in
beef production are record-high slaughter weights and historically large
numbers of heifers on feed and heifer slaughter, which will likely decline
sharply this fall as more heifers are retained for breeding. 

Dry conditions throughout much of the country last fall through late
winter, particularly in southern winter grazing areas, forced more cattle
into feedlots. These are cattle that normally would not have been placed on
feed until late winter or early spring. Numbers of heifers on feed remain
large and even more were placed on feed this past fall and winter rather
than retained for herd expansion. On April 1, heifers on feed were up 8
percent from a year earlier and up 14 percent from April 1, 1999 (in seven
monthly reporting states with at least 1,000 head capacity). With cattle
entering feedlots earlier than usual, feeder cattle supplies on April 1
were down nearly 8 percent from a year earlier. With monthly placements
above year-earlier levels from August through February, fed-cattle
marketings will likely remain record high through summer. 

Improving moisture conditions are aiding spring pasture development
following an unusually dry fall-winter season, and March feedlot placements
declined 1 percent from very large placements in 1999. As long as crop
planting and grazing conditions remain fairly favorable, placements well
into next year are expected to remain below year earlier levels, reflecting
the declining cattle inventory.

On January 1, 2000, all cattle and calves in the U.S. totaled 98 million
head, down 1 percent from a year earlier, the fourth year of decline from
the 1996 peak of 103.5 million head. Total cow inventories and replacement
heifer inventories continue to decline slightly.

In addition to higher-than-expected feedlot placements through February,
beef production is bolstered by slaughter weights that are likely to remain
on a record-setting path as demand remains strong for higher quality beef
with consistent eating qualities. However, improved grazing and replenished
livestock pond water this spring may result in lower cow slaughter over the
next couple of years. 

In spite of large competing meat supplies, demand remains strong, and
cattle prices rose over the winter quarter. Larger beef supplies and
seasonal gains in the proportion grading Choice and above will temper the
sharp jump in prices from last fall when Choice supplies were very tight. 

Fed-cattle prices averaged near $70 per cwt this past winter, up nearly $8
from a year earlier. Although continued heavy slaughter weights and large
slaughter potential place cattle feeding operations in a weaker bargaining
position, a strong economy and continued high consumer confidence helps
support beef prices, particularly hotel-restaurant demand for higher
quality beef. Prices are likely to range from $67 to $71 this spring and
summer as a larger share of fed-cattle grade Choice and higher. Prices will
likely rise into the low $70's this fall as the impact of reduced feedlot
placements beginning in late winter reflect 4 years of declining cattle
inventories.

Similarly, feeder cattle prices are likely to remain in the mid-$80's per
cwt for much of the year, up from an average $76.39 in 1999. Prices will be
increasingly sensitive to forage and crop developments this spring.
Declining feeder cattle supplies and continued strong demand for beef will
support prices. Prices for lighter weight stocker cattle for grazing
programs will remain very strong as supplies decline and spring/early
summer grazing prospects improve.

Retail prices for Choice beef averaged $2.88 a pound in 1999, up 11 cents
from a year earlier and the strongest since 1993's $2.93. Per capita beef
consumption rose to 69.2 pounds from 68 pounds in 1998. Prices peaked in
December 1999 at $3.02 a pound with beef purchases for millennial events. 

In 2000, prices likely will return to more typical levels of premillennial
1999 and average in the upper $2.90's a pound. Prices for retail Choice
beef declined to the mid-2.90's in January-February, with first-quarter per
capita beef consumption rising just over a pound from both 1998 and 1999.
Retail prices are likely to remain in the mid- to upper $2.90's until fall,
when they are expected to rise above $3 per pound. Per capita beef
consumption will decline from 1999's peak, following the decline in beef
production. 

Beef prices are in a position to remain high for multiple reasons. Both
hotel-restaurant and export demand for high-quality beef appear very
strong, and will be enhanced by economic growth resurgence in Asia. In
March, the price spread between Choice and Select boxed beef was $6.14 per
cwt, up from $1.57 a year earlier. Last fall, when Choice beef supplies
were tight and demand strong, the spread ranged from $11 to $15.

Ron Gustafson (202) 694-5174
ronaldg@ers.usda.gov

For more information on the beef market, see Dairy and Poultry Situation
and Outlook at
http://usda.mannlib.cornell.edu/reports/erssor/livestock/ldp-mbb/2000/

SIDEBAR - Livestock Brief

May Hay Stocks Likely Down 

Dry conditions throughout a large portion of the U.S. into late winter
raised concerns about crop and forage prospects in 2000. With the heaviest
feeding season from December through early spring, hay stocks are likely
down sharply. In general, conditions have been relatively dry since
1995/96, particularly in the southern half of the U.S. Dry conditions
spread into the northern parts of the U.S. in the winter of 2000. Ample
spring grazing and rebuilding hay stocks will be significant factors for
many cattlemen considering herd expansion. 

Hay stocks were down 3 percent from a year earlier on December 1, 1999, but
they remain adequate for reduced inventories of roughage-consuming animals.
However, feed use has been extensive, and supplemental feeding will likely
remain high until spring grazing is available from April through June. 

Supplemental feeding between the May 1, 1999 and December 1 stocks report
was very heavy as many areas simply had very little accumulated forage for
grazing, and moisture-deficient small-grain winter pastures provided little
grazing. The seasonally heavy supplemental feeding period from December 1,
1999 through the May 1, 2000 stocks report suggests that hay stocks will be
pulled down even with the fairly mild winter. 

Despite some producers' concerns about feed supplies, grain stocks remain
large, keeping grain prices in check. The farm price of corn is expected to
range from $1.85 to $1.95 per bushel in 1999/2000, about the same as last
year and well below 1997/98's $2.43. In addition, hay prices in general
remain below a year earlier.


BRIEFS
Farm Economy: Farm Income Down in 2000

Net farm income in 2000 is forecast to decline to $39.7 billion--the lowest
since 1995. This would be $4.5 billion below the preliminary estimate of
$44 billion for 1999, and down $0.7 billion from the initial 2000 forecast
issued last December. Net cash income is forecast at $48.6 billion, down
from the preliminary 1999 estimate of $54.5 billion. The income drop is due
to an expected decline in government payments from a record high in 1999,
as well as higher production costs resulting from rising fuel prices. Net
farm income is forecast at 79 percent of its 1990-99 average, with net cash
income at 80 percent. 

With large supplies of most agricultural commodities and prospects for
little or no near-term growth in demand, prices for major crops will likely
remain low. While production expenses have risen with the recent rise in
fuel prices, they may stabilize and perhaps decline as farmers adjust
practices to reduce costs.

Total crop receipts are forecast up slightly from 1999 but are still below
1996-98 levels. Receipts for soybeans are showing healthy increases over
1999, with corn steady and wheat down slightly. For tobacco farmers,
decreased marketing quotas have resulted in dramatic declines in receipts
for both 1999 and 2000. In the livestock sector, hog receipts are showing
the most improvement (up nearly 30 percent), and receipts for cattle and
calves are up 6 percent. Dairy receipts, however, could see a 9-percent
drop after declining 2 percent last year. 

Assuming no emergency funding legislation, total government payments to
farmers in 2000 are expected to drop to $15.9 billion (7.1 percent of gross
cash income) from $20.6 billion in 1999. The revised 1999 estimate is $2.1
billion less than the forecast issued in December 1999 by USDA's Economic
Research Service. The new estimate reflects data from USDA's Farm Service
Agency indicating about $1.5 billion less emergency aid disbursed in
calendar 1999 than anticipated (shifting more to 2000) and lower loan
deficiency payments than earlier expected. Government payments are
estimated at 9.1 percent of gross cash income in 1999.

Total production expenses in 2000 are forecast to rise 2.9 percent to
$197.5 billion, or 88 percent of gross cash income--the highest share since
1980-84. Rising fuel prices are a major factor behind the higher costs, and
fuel expenses for 2000 are currently forecast at $9 billion, up 40 percent
from 1999. Although crude oil prices retreated somewhat in late March, fuel
prices will be only modestly affected until at least late summer when
planting is complete (see following article). 

While fuel and oil expenses are directly accounting for only about 4.5
percent of total production expenses, rising energy costs affect a broader
set of inputs. Higher fuel prices are also reflected in higher expenses for
machine hire and custom work, repairs, and transportation. In addition,
higher expenses for fertilizer and chemicals (derived from oil) could be
seen over the next several crop years if oil prices remain at current
levels. Some farmers will likely make some adjustments to their production
and harvesting practices to moderate impacts.

Nationally, net cash income for farm businesses (gross sales over $50,000)
is forecast down 11 percent for 2000, but up 12 percent from the 1994-98
average. The brunt of cash-flow problems is expected to fall most heavily
on farming operations in the Mississippi Portal, Southern Seaboard, and
Northern Great Plains regions, where average net cash income is forecast
down 38 percent, 18 percent, and 18 percent, respectively. 

For the Mississippi Portal, generally higher expenses and lower expected
government payments for cotton and soybeans--major crops grown in the
region--leave income down more than in any other region. In addition, while
cotton and soybean receipts are rebounding from last year, rice prices are
off, pushing total crop receipts down 2 percent. 

The share of farms in the region expected to end the year in a favorable
financial position (positive net income and relatively low debt) is lower
than last year--57 percent, down from 67 percent. At the same time, the
share of vulnerable farms (negative net income and relatively high debt)
could rise to 7 percent, up from 5 percent last year. These farm businesses
will need to address the shortfall in earnings quickly by liquidating
inventories or tapping other working capital, selling off machinery and
equipment, or offsetting farm losses with savings or off-farm income. Those
without sufficient equity may need to restructure loan terms.

Average net cash income in the Southern Seaboard region is expected down,
due primarily to lower crop receipts and higher production expenses.
Livestock receipts should remain relatively steady for the year as lower
dairy receipts offset higher hog and cattle receipts. Government payments,
while falling in 2000, will not drop as much as in the Mississippi Portal,
where program commodities account for more production. As in all other
regions, the share of farms in a favorable financial position will fall
slightly while the share of financially vulnerable farms will increase
somewhat. In the Northern Great Plains, lower government payments and
higher expenses are more than offsetting higher receipts.

In 2000, wheat farms (more than 50 percent of gross sales from wheat) will
be affected more than any other major commodity farms, with average net
cash income dropping 39 percent. Livestock, primarily cattle, is important
to many wheat farms, but higher cattle receipts will not be enough to
offset lower government payments for wheat and increased production
expenses. Corn farms could see net cash incomes fall an average 17 percent.

Net cash income for cattle operations will hold about even as higher cattle
prices are offset by lower government payments (for crops) and higher
expenses. Hog farms will be unique in 2000 as the one category of farm
showing an income gain, forecast up 52 percent. Higher hog prices will
overcome lower government payments and higher expenses.

Dairy operations will take a hit from all sides--lower dairy sales, only
slightly higher government payments, and higher expenses. Average incomes
are expected to fall 19 percent this year.

These forecasts are averages for all farms in the regions or among farms
producing specific commodities. Some farms will outperform the average in
their region or commodity group.  

Bob McElroy (202) 694-5578 and Robert Green (202) 694-5568
rmcelroy@ers.usda.gov
rgreen@ers.usda.gov

SIDEBAR - Farm Economy brief

Net cash income is the difference between cash receipts and cash expenses.
This cash-based concept measures the total income farmers receive in a
given year, regardless of the year in which the marketed output was
produced. It indicates the availability of funds to cover cash operating
costs, finance capital investments and savings, service debts, maintain
living standards, and pay taxes.

Net farm income is the difference between gross farm income and total
expenses. This accrual-based concept measures the profit or loss associated
with a given year's production. Additions to inventories are treated as
income. Nonmoney items such as depreciation, the consumption of farm-grown
food, and the net imputed rental value of operator dwellings are included.


BRIEFS
Farm Economy: Gush in Oil Prices to Exert Modest Impact on U.S. Economy

No farmer, truck driver, or automobile driver could overlook the rise in
petroleum fuel prices of the last 13 months. No other farm input or major
consumer price has risen as much as fuel in the past year. Retail diesel
fuel prices reached $1.50 per gallon in mid-March, up from a national
average of 95 cents in February 1999. Gasoline prices shot up 60 cents per
gallon, reaching more than $1.60 per gallon in some areas. 

Crude oil prices have driven the rise in fuel prices. On December 10, 1998,
the crude oil price closed at $10.76 per barrel (West Texas
Intermediate)--the lowest since March 1974. A year later the crude price
had climbed to $25.23, peaking at $34.13 on March 7, 2000. By late March,
prices retreated to around $27 at news that the Organization of Petroleum
Exporting Countries (OPEC) would expand production to offset part of the
past year's shortfall.

Crude oil prices had risen as OPEC, in cooperation with other major oil
producers, reacted to very low oil prices by sharply cutting production.
The production shortfall caused a drawdown of crude oil stocks at the rate
of 1 million barrels per day over the last 13 months. 

In late March, OPEC expanded official production quotas by 1.45 million
barrels per day--short of the expected 1.75 million. During the OPEC
meeting,
Iran refused its expanded quota of 300,000 barrels per day. Nevertheless,
Iran has expanded production since March, so the increases in oil supplied
should amount to a daily quota expansion of 1.75 million barrels. This
expansion, together with an increase in production by non-OPEC producers,
will allow inventories to be replenished and demand for products to be met. 

Many analysts expect gasoline prices to rise as much as an additional 10
cents per gallon in early summer, even as crude oil production expands and
crude oil prices recede. The normal seasonal spike in gasoline demand
(associated with summer vacation travel) will keep gasoline prices high
into mid-summer, as this source of crude oil demand competes with the need
for inventory restocking to meet fall demand for heating oil. However,
gasoline prices are expected to decline to $1.35 by early August as summer
gasoline demand recedes and supply expands.

As diesel fuel becomes more plentiful, national diesel prices could slip to
$1.40 per gallon by the time harvest begins this fall, down from $1.45 per
gallon at the end of March. But diesel fuel prices could be up sharply
again by the end of the year if heavy vacation driving or cold winter
weather results in an insufficient inventory buildup of crude oil. This
would result in higher fuel costs at spring planting.

The impact on the U.S. economy is likely to be minimal this year and in
2001, even under a tighter supply scenario than currently expected. First,
the recent crude oil price rise, when adjusted for inflation, is a smaller
percentage rise than in the major runups of 1974, 1979, and 1990. Moreover,
deregulation and increased international competitiveness have limited the
ability to pass on increases in raw material prices. Second, the
goods-producing sectors of the economy, such as manufacturing and
agriculture, have become more fuel-efficient in the last 30 years. Third, a
larger share of U.S. output is in the service sector than in the 1970's,
and this sector generally uses less energy per dollar of output than the
goods industries. Finally, a large share of recent growth has occurred in
the technology sectors (both goods and services), which also use
proportionately less energy compared with "old economy" industries. 

The overall rise in U.S. core consumer price inflation (excludes fuel and
energy) as a result of higher oil prices should be less than 0.2 percentage
points per year for 2000 and 2001. Growth in U.S. Gross Domestic Product
(GDP) attributed to high oil prices is expected to be 0.1 percentage points
lower in 2000. 

The impact will be more noticeable for U.S. farmers than for the general
economy. U.S. farmers--particularly producers of energy-intensive crops
such as corn and cotton--should see substantial increases in production
costs as output prices remain relatively unchanged (see farm income brief).
Although the agriculture sector has become more petroleum-efficient with
use of improved equipment and less energy-intensive cultivation practices,
the sector must absorb much of the cost increases because it has limited
ability, in the short run, to pass them on to consumers in the form of
higher output prices. 

Nevertheless, if crude oil prices remain in the current range of $25-26 per
barrel, U.S. agricultural output in 2000 will be relatively unaffected, and
the impact on the consumer price index for food will be negligible. But in
the longer run, higher costs would dampen agricultural production and farm
income. 

Fertilizer producers will see their production costs rise modestly.
Production of ammonia-based fertilizer is extremely natural gas-intensive,
and natural gas prices tend to move up and down with petroleum prices. But
with plentiful supplies of natural gas, the rise in natural gas prices
should be modest in 2000 and 2001, and fertilizer prices will be relatively
unaffected by energy prices in 2000 and up only moderately next year.  

David Torgerson (202) 694-5334
dtorg@ers.usda.gov

Watch the ERS Issues Center at www.ers.usda.gov for more information on the
impact of higher oil prices on U.S. agriculture.


COMMODITY SPOTLIGHT

U.S. Farmers to Expand Plantings of Soybeans, Corn, & Cotton in 2000

[These estimates are based on farmer surveys conducted during the first 2
weeks of March. USDA's Prospective Plantings report for 2000, released on
March 31, provides the first indication of farmers' spring planting
intentions for major field crops. With adverse weather or significant
changes in crop prices, actual plantings could vary from intentions. For
example, persistent wet conditions in spring could delay corn plantings and
cause a switch from corn to soybeans. USDA will release acreage estimates
in its June 30 Acreage report, after crops have been planted or when
planting intentions are more definite. The report will be available at
http://usda.mannlib.cornell.edu/reports/nassr/field/pcp-bba/]

On the eve of planting decisions for major field crops in 2000, U.S.
farmers faced mixed price signals prices increased about 4 percent for
corn, 8 percent for soybeans, and 6 percent for cotton from a year earlier,
but showed a decline of about 11 percent for winter wheat and 5 percent for
spring wheat. Producers' ne  response was a nearly 1-million-acre increase
in planting intentions from last year's planted acreage.

Planting intentions for the eight major U.S. field crops (corn, soybeans,
wheat, barley, sorghum, oats, cotton, and rice) total 252.6 million acres
in 2000, up 0.4 percent from last year's planted area and down 3.2 percent
from the most recent peak in 1996. Farmers intend to plant a record 75
million acres of soybeans (1 percent higher than in 1999 and the ninth
straight increase), expand corn plantings 1 percent to 78 million, and
plant the largest cotton area (15.6 million acres, up 5 percent) since
1995. 

Trend yields, along with planting intentions, suggest a corn crop slightly
larger than last year and a very large U.S. soybean crop in 2000. In
contrast, farmers intend to plant the smallest wheat acreage since 1973
down 2 percent from last year and if yields equal the average for the last
3 years, wheat production will decline.

Farmers' planting intentions continue to show the effects of the 1996 Farm
Act, which allows program crop producers more flexibility to respond to
market signals by changing their enterprise mix. For example, with
producers' participation in farm programs no longer tied to base acreage
planting requirements and acreage reduction restrictions, farmers are free
to pursue soybeans' relatively higher net returns, and soybean plantings
grew by more than 10 million acres between 1996 and 2000 (assuming 2000
intentions are realized). 

Soybean acreage has expanded in the wheat-dominated Central and Northern
Plains. Some wheat acreage in the Central and Northern Plains was also
switched to minor oilseeds, such as sunflowers and canola. Expansion in
minor oilseeds was fairly dramatic in 1997 and 1998, but except for canola,
has since tapered off. For example, sunflower plantings in North Dakota
increased by about 70 percent--from 1.2 million acres in 1996 to 2 million
in 1998--declining to 1.7 million in 1999. Plantings are expected down
again this year to 1.4 million acres as sunflower acreage makes way for the
higher-net-return canola. As a result, farmers intend to plant a record
canola crop (1.5 million acres) this year.

Soybeans. 

Intended soybean acreage for 2000 is 74.9 million acres--1 percent above
last year's planted acreage, in part because of expected price gains and
marketing loan benefits for soybeans relative to other crops. Soybean
acreage is expected to remain unchanged in Iowa and decline slightly in
Illinois, the two leading soybean producing states. 

The increase in intended soybean plantings in the Central and Northern
Plains outpaces that in the Corn Belt this year. Soybean plantings in the
Central and Northern Plains are expected up 1.2 million acres--0.5 million
in South Dakota, 0.4 million in North Dakota, and 0.3 million in Nebraska
as wheat acreage is switched to soybeans. In the Corn Belt, the 0.5-milli
on-acre expansion of soybean plantings is concentrated in Minnesota (0.3
million), Wisconsin (0.1 million), and Indiana (0.1 million). 

In contrast, farmers in the Delta and Southeast (especially Louisiana and
Mississippi) intend to decrease their plantings of soybeans for the third
year after a spike in 1997. Poor soybean yields in 1998 and 1999 have
helped to make cotton a more attractive alternative in these areas this
year.

Provisions of the marketing loan program make soybean production attractive
to many producers across the U.S. because of the relatively high loan rate
and the potential for marketing loan gains (repayment of government loans
below the original loan rate) and loan deficiency payments (LDP's) that are
expected to provide a higher per-bushel net return than for competing
commodities when the market price falls below the commodity loan rate.
Other factors in the record expansion of soybean acreage since 1996
include: 1) planting flexibility under the 1996 farm legislation; 2)
adoption of biotech herbicide-tolerant soybeans, which reduces input costs
for many farmers, increasing profit potential; and 3) relative returns for
competing crops.
 
Corn. 

Corn growers intend to plant 77.9 million acres in 2000, up 1 percent from
last year's planted acreage because of higher expected corn prices,
reflected in the new crop futures price after early January. To many
producers in Illinois and Iowa, corn prices anticipated for the new crop
appear attractive compared with returns for soybeans. Even though marketing
loan provisions may entice producers to grow soybeans, the soybean-to-corn
price ratio (after allowing for the effect of soybean marketing loans) at
active planting decision times (February through March) was around 2.4 to
1--lower than the 2.5 breakeven price ratio at the national level,
suggesting that corn prices could be competitive with soybean prices paid
to producers in those two states. The 0.1-million-acre decline in soybean
plantings in Illinois probably indicates a switch to corn plantings.

Intended corn plantings in the Corn Belt this year are largely unchanged
from last year, with declines in Indiana, Minnesota, and Wisconsin (down
0.1 million acres each from last year), largely offsetting increases in
Illinois and Iowa. Intended corn acreage is up a net 0.5 million acres in
the Central and Northern Plains, where increases in South Dakota, North
Dakota, and Kansas total 0.6 million acres. Nebraska intentions indicate
that producers will increase soybean plantings by 0.3 million acres,
probably from acreage formerly in corn and winter wheat.

The increase in intended corn acreage is rather modest in the South (the
Delta, Southeast, and Southern Plains regions), as decreases in corn
acreage in Oklahoma and North Carolina offset increases in other states in
the area. Corn land not being planted to corn in Oklahoma is probably
switched to cotton or sorghum, or left fallow.

Other feed grains. 

Among "other feed grains," only barley planting intentions show an
increase--10 percent above last year's planted acreage. Intended barley
plantings are up 550,000 acres in North Dakota, the largest producing
state, and 70,000 acres in Minnesota, the fifth-largest producing state.
Factors in these increases are higher premiums for malting barley, gains of
about 3 percent in barley farmgate prices, and abating concern about scab
disease outbreaks from inadequate soil moisture. Producers in Montana have
indicated intentions to lower barley plantings by 100,000 acres, probably
because they switched to winter wheat last fall.

Planting intentions for sorghum are 3 percent lower than last year's
planted acreage. The bulk of the acreage decline is in Texas, where sorghum
area is down about 0.4 million acres (an 11-percent decline), and in
Kansas. Intended oat acreage is down 6 percent from last year's planted
acreage, with most of the decline in Texas, the Dakotas, and Montana.

Wheat. 

Wheat area intentions for 2000 total 61.7 million acres--down 2 percent
from last year's planted area. USDA's Winter Wheat Seedings report
indicated in January that farmers had planted 42.9 million acres of winter
wheat for harvest in 2000, but the March Prospective Plantings report
revised this figure upward to 43.2 million--still the lowest since 1972 but
declining only slightly from last year. 

Responding to expected 11-percent-lower prices, and dryness in hard red
winter wheat areas, particularly in the Central and Southern Plains,
farmers in Oklahoma, Texas, Kansas, and Nebraska reduced winter wheat
plantings last fall by 3.5 percent (0.9 million acres) from a year earlier
and are shifting to soybeans and corn. Similarly, low prices for soft red
winter wheat and dry conditions last fall led to a decline of 180,000
winter wheat acres in Illinois and Michigan. In Montana, winter wheat
acreage was up 0.5 million acres from the previous year as acreage that had
shifted to spring wheat last year switched back to winter wheat.

In 2000, U.S. farmers intend to lower spring wheat plantings (including
durum) to 18.4 million acres, a decrease of 1 million from last year's
planted area. Prospective durum wheat plantings are down 0.4 million
acres--an 11-percent drop from last year and other spring wheat acreage
will fall by 0.4 percent to 0.5 million acres, with reductions mostly in
South Dakota and Montana.

In North Dakota, other spring wheat intended plantings are up 0.2 million
acres, reversing last year's shift from other spring wheat to durum. The
1999 shift to durum resulted from availability of an attractive crop
insurance policy that overwhelmed market signals that would otherwise have
reduced production of durum, but instead stimulated an increase of 0.5
million acres in North Dakota durum plantings. The insurance policy is cut
back substantially this year in terms of number of counties where coverage
is offered and in the level of price guarantees, which are now more in line
with current market prices. Some farmers have returned to planting other
spring wheat. Nevertheless, intended plantings for other spring wheat are
still down 0.5 million acres overall from last year as producers switch to
more profitable alternatives such as soybeans and corn.

Cotton. 

Planting intentions for cotton total 15.6 million acres, an increase of 5
percent from last year. Although cotton area is anticipated higher in all
producing states, the bulk of the increase is expected in five states:
Texas, California, Louisiana, North Carolina, and Mississippi. While market
prices for cotton increased about 6 percent from last year, the expected
per-unit return in 2000 (after adjusting for marketing loan gains and
LDP's) shows an increase of about 7 percent. This makes cotton plantings
attractive relative to competing crops such as corn, wheat, sorghum, and
even soybeans.

In the South, planting intentions indicate soybean acreage (expected to
decline about 0.4 million acres) will likely be switched to cotton
(expected to increase 0.3 million acres). Expected net returns are higher
for cotton than for soybeans, reflecting a soybean-to-cotton price ratio of
about 8 (after adjusting for the effects of both cotton and soybean
marketing loans) at the planting decision point (February through March).
This compares with an estimated breakeven price ratio of about 10 between
these two competing crops. In addition, an improved crop insurance program
attracted some producers to growing cotton this year.

Rice. 

Growers intend to plant nearly 3.4 million acres to rice, an overall
6-percent decline from 1999, with long grain plantings down 8 percent and
combined medium and short grain plantings up 4 percent from last year.
Planting intentions are lower this year in all southern states except
Missouri, with Mississippi and Texas indicating the largest percentage
declines. In contrast, growers in California indicate a 5-percent expansion
in rice plantings, a result of relatively strong prices for medium grain
rice, the bulk of the state's crop. A record 1999 U.S. rice crop and an
80-percent increase in ending stocks from last year have lowered the
expected price for the 2000 rice crop, making plantings to competing crops
such as cotton and soybeans more attractive.  

William Lin (202) 694-5303
wwlin@ers.usda.gov

For further information, contact: Mack Leath, domestic wheat; Ed Allen,
world wheat and feed grains; Allen Baker, domestic feed grains; Nathan
Childs, rice; Mark Ash, oilseeds; Steve MacDonald, world cotton; Les Meyer,
domestic cotton. All may be reached at (202) 694-5300.

SIDEBAR - Commodity Spotlight

Expected Cutback in Biotech Share of Corn & Cotton Plantings

U.S. farmers have indicated intentions to cut back the share of acreage
planted to corn and cotton developed through biotechnology. In 2000, shares
of intended plantings for bioengineered (biotech) corn and cotton are down
in major producing states--from 33 percent to 25 percent for corn, and from
55 percent to 48 percent for cotton. This signals a reversal of rapid
adoption trends for biotech corn and cotton since 1996, when biotech seed
was introduced. Change in the share of intended plantings of biotech
soybeans is less clear, but the biotech share of soybean intended plantings
accounts for 52 percent of total soybean acreage this year.

The adoption momentum for biotech corn and cotton has slackened. Factors
that affect farmers' net returns--such as whether yield-increasing
potential offsets a higher cost for biotech seed, and whether observed
infestation levels of certain target pests indicate likely savings on
pesticide costs--play a major role in producers' decisions regarding
planting biotech crops vs.using conventional varieties. Uncertain market
prospects for biotech crops triggered by potentially widening interest in
food labeling regulation in various countries, as well as possible shifts
in consumer preferences toward nonbiotech foods might also contribute to
the cutback (AO April 2000).

Although the decline in biotech corn plantings this year might partially
reflect an overall market uncertainty for biotech crops, market demand for
nonbiotech corn is currently very limited, accounting for only 1 percent of
1999 U.S. corn production, according to USDA's Economic Research Service.
However, a reportedly record-low infestation level of European corn borers
(ECB) in 1999, resulting from a general decline in borer populations,
reduces the cost-effectiveness of biotech Bt varieties, which produce a
protein that is toxic to the borer. 

USDA's Cooperative State Research, Education, and Extension Service, as
well as university studies, report that ECB density in a few big
corn-producing states--e.g., Illinois, Wisconsin, and Minnesota--declined
to less than 0.5 borers per stalk in 1998 and 1999, compared with the
recent peak of 1.5-3.5 in 1995. Some university studies also indicate that
Bt corn's yield-increasing potential and pesticide cost saving may not
offset the higher seed cost (about $9 per acre more than conventional
varieties). As a result, the share of acreage planted to Bt corn declined
to 19 percent in major producing states from 25 percent last year. The
share of intended plantings of herbicide-tolerant corn remains at 4
percent, but the share in 1999 included both biotech and conventional
varieties.

Market demand for nonbiotech soybeans accounts for only about 2 percent of
U.S. soybean production. In contrast to corn, herbicide-tolerant
soybeans--the most rapidly adopted biotech crop to date--remain popular
with farmers this year. USDA's National Agricultural Statistics Service
(NASS) estimates that just over half (52 percent) of this year's soybean
acreage will be planted to herbicide-tolerant soybeans (excluding
nonbiotech herbicide-tolerant varieties) compared with 57 percent last year
(when NASS estimates included both biotech and conventional 
herbicide-tolerant varieties).

According to a recent study by the National Center for Food and
Agricultural Policy, herbicide-tolerant soybean varieties are popular with
farmers not because of any significant yield-increasing potential, but
rather because of the simplicity and flexibility of a weed control program
that utilizes a single herbicide without causing crop injury. In addition,
planting herbicide-tolerant soybeans may provide cost savings from fewer
herbicide applications, and herbicide-tolerant soybean production is
compatible with low-tillage and narrow-row planting systems, which gained
popularity over the last decade. These distinctive advantages for
herbicide-tolerant soybeans probably play a key role in keeping biotech
soybean planting intentions near one-half of soybean acreage.

The share of planting intentions for herbicide-tolerant cotton is down,
dropping from 28 percent last year to 20 percent. The increase of nearly
200,000 acres in mostly conventional upland cotton acreage in California,
where little biotech cotton is grown, explains about half the decline.
Another factor is the inflated 1999 share of biotech cotton following the
large abandonment of cotton acreage (about 1 million acres, more likely
conventional acreage) in Texas last year, because last year's shares are
calculated as a percent of harvested acres. The expected biotech share in
2000 is calculated as intended biotech plantings divided by total intended
planted acreage.


FARM FINANCE

Farm Finances Remain Healthy

The overall financial health of farmers and their lenders remains solid in
early 2000, despite low prices for major farm commodities over the last
couple of years. Large Federal payments to farmers have mitigated the
negative effect of lower prices on farm financial conditions and have
played a key role in stabilizing farm income, particularly for farms
producing food and feed grains, oil crops, and cotton. For 3 years
beginning in 1998, farmers are expected to receive $49 billion in direct
government payments, up from $22 billion in 1995-97. This includes $14
billion of emergency payments from legislation enacted in 1998 and 1999.

Government payments, by providing liquidity to farmers, are reducing demand
for credit and underpinning farm creditworthiness. Lenders have ample funds
to loan and most farmers who applied for credit have been able to obtain
credit for the 2000 crop year. However, without additional emergency farm
payments this year, farm lenders will be dealing with a farm sector whose
net cash income is forecast to decline 11 percent in 2000 (see Farm Income
brief on p. 6). 

Many farmers, particularly small operators, depend more on off-farm than
farm income for total household income. On average, 88 percent of total
farm operator household income in 1998 came from off-farm sources. Even for
large family farms (total sales $250,000 to $500,000), a substantial
portion of total household income in 1998--44 percent--came from off-farm
sources. These large family farms had average household income exceeding
twice the average for all U.S. households in 1998, with a very large
contribution to total income coming from off-farm wages. For the majority
of family farms, stability in off-farm income is at least as important to
creditworthiness and overall financial health as stability in farm income.
The general economy is strong, and prospects for off-farm income remain
generally good across the country.

Nevertheless, if low commodity prices persist throughout 2000, cash-flow
problems for farm businesses--particularly large ones that depend heavily
on farm income--could grow in the absence of continued emergency farm
payments. In 2000, farmers are expected to substantially increase the use
of their available debt repayment capacity, a measure of the extent to
which farmers are using their lines of credit. Farmers are expected to use
almost 66 percent of the debt that could be supported by their current
incomes. This is up from an estimated 56 percent in 1999, but well below
the 1981 peak of 107 percent. 

Farm Debt Stable,
Interest Rates Up

Farm debt at the end of 2000 is forecast at $173 billion, essentially
unchanged from 1999. Uncertainty over how long commodity prices will remain
low is depressing demand for farm credit. In addition, an upward trend in
farm interest rates makes borrowing for capital expenditures more
expensive. 

After rising briskly during much of the 1990's, farm debt has leveled off
since 1998, as farmers have been more conservative with their borrowing.

The national farm balance sheet remains strong. Farm-sector equity is
projected to total $900 billion at the end of 2000, up slightly from levels
reported the last few years. Farmland currently accounts for roughly 77
percent of farm-sector assets, and a little over half of total farm debt is
collateralized by farmland. Consequently, the financial security of farm
borrowers and their lenders is affected by changes in farm real estate
values. 

Nationally, farmland values have increased at an average compound rate of
over 4 percent since 1987. This has significantly improved the financial
position of many farm businesses, strengthening their ability to borrow and
to weather the current period of lower cash receipts from crops. 

Since 1991, the total value of farm real estate rose over $200 billion to
$831 billion in 1999, although growth has slowed in recent years with
sharply lower field crop prices. (Growth in farmland values is expected to
be minimal in 2000.) Farmland values have been aided by record government
payments and by other factors, such as the nonfarm or urban demand for farm
real estate. ERS estimates that the urban influence on farmland values
accounts for 25 percent of the market value of all U.S. farmland. 

Interest rates on farm loans "bottomed out" during the first quarter of
1999 and then trended higher into early 2000. Increases are largely the
result of five 25-basis-point increases in the Federal funds target rate
instituted by the Federal Reserve since June 1999 (1 basis point is 0.01
percentage point). Further increases in the Federal funds rate are likely
in 2000 as the Federal Reserve tries to rein in rapid economic growth and
thereby avert inflation. Because commercial lending rates, such as farm
loan rates, are tied to the Federal funds rate, further increases in farm
loan rates are likely in 2000 (see the following article on interest rate
prospects). 

A rise in interest rates on new farm loans could put additional financial
burden on highly leveraged farms, particularly those that have borrowed
heavily for recent expansion in production. On the other hand, some farm
households benefit from rising interest rates because their interest income
from investments rises. 

Farm debt tends to be concentrated among a relatively small number of
farms, with larger farms more dependent than smaller farms on borrowed
capital and on farm income to repay loans. Roughly half of all farms report
having no debt at yearend.

Despite expected higher farm interest rates for 2000, total interest
expenses paid by the farm sector are expected to rise only modestly in 2000
as total credit use falls somewhat and there is the usual delay in
repricing (from refinancing) much of farm debt. Some farm debt,
particularly farm real estate debt, is financed over longer terms at fixed
interest rates. Farmers and their lenders tend to shift from fixed-rate
loans to lower cost variable-rate loans then interest rates rise.

To help farmers cope with cash flow problems in 2000, Congress boosted the
authority of the Farm Service Agency (FSA) to make and guarantee farm
loans. FSA can now make farm ownership and operating loans at interest
rates of 5 percent and reduce rates on guaranteed loans by 4 percentage
points. As the "lender of last resort" for the farm sector, FSA provides or
guarantees loans to farmers who cannot otherwise qualify for loans at
commercial institutions.

Congress has authorized more than $4 billion in FSA guaranteed loan program
lending and $1.7 billion in direct loan program lending for fiscal 2000. In
fiscal 1999, FSA made or guaranteed $3.8 billion in farm loans. If all
authorized funds were loaned in fiscal 2000, it would be the highest level
of USDA farm lending since the farm financial stress of the mid-1980's. As
of the end of April, it appears that funding is sufficient to meet program
demand. 

Farm Lenders Remain Strong 

Financial institutions serving agriculture continued to experience improved
conditions in 1999, and some additional gains are possible in 2000. The
sound position of agricultural lenders reflects the generally healthy state
of farmers' finances in the mid-1990's and a strong nonfarm economy. But
continued low prices for key agricultural commodities, regional weather and
disease problems, and uncertainty over future Federal farm support continue
to raise concerns among lenders about the ability of some farmers to repay
new or existing loans. 

At the end of 1999, commercial banks accounted for 40 percent of all farm
debt outstanding, making them the leading agricultural lenders. The Farm
Credit System (FCS), which holds 27 percent of all farm debt, is second to
commercial banks. Farmers obtain 22 percent of their credit needs from
merchants, dealers, and individuals (e.g., through land purchase credit
contracts). FSA holds about 5 percent (and guarantees another 5 percent) of
all farm debt,  and its programs target family-sized farms with limited
resources. For these farms, FSA is a more important source of credit than
its national share of total farm debt implies. A handful of life insurance
companies supplies about 6 percent of credit to the agriculture sector. 

All major institutional lender groups continue to report generally healthy
farm loan portfolios. Most lenders report low levels of delinquencies,
foreclosures, net loan charge-offs, and loan restructuring. Even FSA
reported an improving farm loan portfolio for the 11th consecutive year.
These aggregate farm lender indicators are expected to remain favorable
barring a sustained increase in farm financial stress. Furthermore, even if
financial stress were to increase markedly, there would be a lag before it
affected financial institution performance at the national level. 

The financial health of commercial banks specializing in agricultural
lending (agricultural banks) remained sound going into 2000. Delinquent
farm loan volume and charge-offs of agricultural loans did increase
modestly during 1999, and bank examiners noted greater carryover debt at
farm banks. Nonetheless, agricultural banks reported high average returns
on equity and assets, and loan loss provisions were consistent with an
optimistic outlook regarding future loan losses. These developments
indicate that problems in the farm sector have not seriously affected farm
bank loan portfolios. Only one agricultural bank failed in 1999, and only
five failed during 1994-99. 

Banks continue to have sufficient funds to lend to creditworthy farms. The
average loan-to-deposit ratio for agricultural banks was nearly 72 percent
as of the first of the year, up from 68 percent a year earlier and 57
percent at the end of 1992. However, in the current financial environment,
commercial banks can easily access nondeposit sources of funds. The
Gramm-Leach-Bliley Act of 1999, which became law in November 1999, allows
farm banks to supplement other sources of loanable funds by providing
improved access to a stable source of long-term funds from the Federal Home
Loan Bank System. Commercial banks, as well as other lenders, can also use
the Federal Agricultural Mortgage Corporation to fund farm and mortgages. 

The financial condition of the Farm Credit System remained solid entering
2000. Loan volume was up 3 percent in 1999, and capital continues to grow.
Loan portfolio quality is strong, having improved since December 1998.
During 1999, the FCS reported net income of over $1.2 billion, down only
slightly from 1998. In the last 2 years, higher provisions for loan losses,
many in conjunction with problem loans originated by one FCS bank (which
were loans to co-ops and not farmers), have reduced reported FCS income.

FSA's direct loan program delinquency rate fell for the 11th consecutive
year to 15.6 percent at the end of fiscal 1999. Outstanding direct loan
volume also slipped below $9 billion as loan repayments and write-offs
exceeded new lending activity. Extensive use of loan-servicing options
(e.g., deferred payments) has helped keep FSA delinquencies from rising.
However, delinquent guaranteed loan volume rose slightly to 2.4 percent,
the highest delinquency rate since fiscal 1985, when the guarantee programs
were first emphasized.

Life insurance companies historically have provided mortgage credit to the
farm sector and now specialize in supplying large credit needs, often in
amounts exceeding $1 million. Life insurance companies that are still
active in farm lending report that they have adequate funds for qualified
borrowers and that current borrowers continue to meet repayment terms. 

While the financial health of agriculture has slipped somewhat over the
last couple of years, it remains strong for most farm types and in most
regions. Overall, leverage remains at modest levels, and most farmers have
been able to repay their loans or work out alternatives with their lenders.
By stabilizing farm incomes, government assistance has in turn played an
important role thus far in stabilizing farmland and farm credit markets.
Major farm lenders have been able to accommodate their agricultural
borrowers and in general are in good financial condition.  

Jerome Stam (202) 694-5365, Steve Koenig (202) 694-5353, Dan Milkove (202)
694-5357, Jim Ryan (202) 694-5586
jstam@ers.usda.gov
skoenig@ers.usda.gov 
dmilkove@ers.usda.gov
jimryan@ers.usda.gov


FARM FINANCE
Rising Interest Rates Place Upward Pressure on Farm Lending Rates

Higher nominal and real interest rates in the general economy are expected
in second-half 2000 and first-half 2001, putting upward pressure on
interest rates for farm loans. Interest rates have moved sharply higher in
the general economy since fall 1998. From October 1998 through late March
2000, nominal 3-month Treasury bill interest rates rose roughly 1.8
percentage points--from slightly below 4 percent to over 5.7 percent. Over
the same period, the 10-year Treasury bond was up approximately 1.6
percentage points to 6.1 percent.

Inflationary expectations have changed little since fourth-quarter 1998.
Short-term median inflationary expectations (1 year ahead) increased only
0.15 percent, while median long-term (10-year) inflationary expectations
remained unchanged at 2.5 percent, according to the Survey of Professional
Forecasters. Thus, the rise in both short- and long-term nominal interest
rates is due almost entirely to rising real interest rates (nominal rate
minus inflation rate equals real interest rate).

From early 1995 until late 1998, Treasury bond rates moved generally
downward, primarily because of declining short- and long-term inflationary
expectations, and the Asian financial crises of 1997 and 1998. The Asian
financial crises not only lowered nominal and real U.S. interest rates
(especially for high-quality debt securities) by slowing world growth and
world credit demand, but also increased demand (and prices) for U.S.
financial assets (e.g., money market instruments, bonds, and stocks) as a
relatively low-risk investment. By fourth-quarter 1998 (1998IV), nominal
yields on 1- and 10-year Treasury bonds fell to approximately 4.4 and 4.7
percent.

Four main factors have contributed to rising real interest rates since
1998IV:
1) strong growth in private credit demand, 2) tighter monetary policy to
head off higher future inflation, 3) lower household saving, and 4) weaker
growth in foreign demand for U.S. financial assets in recent quarters.
Growth in credit demand by households and nonfinancial businesses has
accelerated sharply since 1997. After growing at a 6.4-percent rate in
1997, household credit growth accelerated to 8.7 in 1998 and 9.4 percent in
1999. Nonfinancial business credit demand has shown a similar pattern of
strong growth in recent years, up 8.2 percent in 1997 and accelerating to
10.5 percent in 1998 and 10.6 percent in 1999. Growth in household and
business credit demand is not expected to slow substantially until 2001.

A tightening of monetary policy since summer 1999 has also raised
short-term interest rates. Between late June 1999 and late March 2000, the
Federal Reserve Board has raised its target for the Federal funds rate from
4.75 to 6.00 percent (this is the rate depository institutions charge each
other for borrowing funds on deposit at Federal Reserve Banks). By raising
the costs of acquiring bank reserves for depository institutions, the
Federal Reserve Board has placed upward pressure on short-term interest
rates and, to a smaller extent, long-term rates. Substantial additional
tightening by the Fed remains likely in second-half 2000 and early 2001,
unless economic growth slows substantially and inflation remains low.

The supply of savings entering credit markets directly or indirectly from
households has slowed sharply since 1998IV. Total household savings
declined from $228 billion in 1998IV to $120 billion in 1999IV as the
personal saving rate (savings as a share of personal disposable income)
fell from 3.5 percent in 1998IV to 1.8 percent in 1999IV. The personal
savings rate is expected to increase only modestly (to 2 percent) in 2000
and to reach 2.8 percent in 2001.

Foreign purchases of U.S. financial assets, although still very large, have
slowed in recent quarters. Foreign financial investment in the U.S. in 1997
through mid-1999 surged with the onset of the Asian financial crises and
accompanying slower foreign growth in 1997 and 1998, and with the boom in
the U.S. stock market. Net foreign purchases of U.S. financial assets
peaked in 1999II at $479 billion, slowing to $350 billion by 1999IV. With
foreign growth and demand for capital expected to increase substantially in
2000 and 2001, real interest rates and expected returns on U.S. assets
(e.g., stocks, bonds, and real estate) will likely have to rise further to
encourage increased purchases of U.S. financial assets by foreigners.

Both Treasury rates and farm loan rates from commercial banks are expected
to rise throughout 2000 and the first half of 2001, although expected
increases are more moderate than over the last 2 years, because of somewhat
slower real growth and less additional tightening by the Federal Reserve. 

Interest rates on farm loans will likely increase less than most nonfarm
interest rates. A mild increase in inflation is expected. Continued strong,
though slower, productivity growth will moderate upward pressure on
inflation resulting from a combination of very high employment rates in
labor markets, general tightness in product markets, and higher overall
petroleum prices.

Rates charged on farm loans must in the long term earn competitive
risk-adjusted returns for lenders that are comparable to returns from
nonfarm financial assets. Therefore, the rise in real interest rates in the
general economy will continue to place upward pressure on farm loan rates
charged by private lenders. However, the expected rise in farm loan rates
is less than for nonfarm interest rates. This reflects the strong
competition from the Farm Credit System--which aggressively pursues the
larger, more established, lower--risk farm borrowers as well as the less
interest-sensitive deposit base of rural banks. Rural banks are heavily
dependent on consumer deposits (checking and savings accounts, plus time
deposits of less than $100,000) for the bulk of their loan funds. Rates
paid on consumer deposits typically respond sluggishly and with a lag to
rising open market interest rates.

In addition, loan rates at rural banks typically respond more slowly to
changes in open market interest rates. These banks generally prefer to
price their business loans at the average cost of bank funds, keeping the
interest rate margin between the cost of funds (the rate paid to
depositors) and return from lending (expected interest rate paid by
borrowers) fairly stable. 

Finally, because of the overall weaker farm income outlook for 2000 as well
as recent increases in real interest rates, agricultural lenders will be
more hesitant to substantially raise real interest rates charged to farm
borrowers. If real farm lending rates increase substantially, lenders risk
higher probabilities of loan defaults and the prospect of reduced overall
loan quality. Private farm lenders also face strong competition from the
Farm Credit System. The competition from FCS further reduces expected
increases in real interest rates on farm loans.

Paul Sundell (202) 694-5333
psundell@ers.usda.gov


RESOURCES & ENVIRONMENT
Curbing Nitrogen Runoff: Effects on Production & Trade


RESOURCES & ENVIRONMENT
Curbing Nitrogen Runoff: Effects on Production & Trade

As U.S. policy makers seek to minimize adverse effects on the environment
from agricultural operations, their decisions will have impacts on
agricultural trade and on other aspects of the agricultural economy. Since
alternative policy tools may be used to achieve environmental goals,
information on potential trade and other effects of specific policy
instruments can be useful for decision makers, who face trade-offs among
consumer, producer, taxpayer, and environmental interests. 

Most studies of trade and environment linkages have focused on the
manufacturing sector, where environmental policies have shown little direct
influence on trade. This may be because the cost of compliance with
environmental regulation is a relatively small fraction of the total cost
of production, or because of limitations in measuring the stringency and
enforcement of environmental regulation. Such studies often use pollution
abatement costs as a measure of the cost of environmental regulation, but
if such costs are underreported (due either to lack of reporting or to lack
of implementation of abatement technologies), they may not reflect the true
effect of environmental regulation on trade or other areas of the economy.

Sales abroad are an important component of market returns for a number of
commodity producers. Research on agricultural trade shows varying effects
of environmental regulations and policies. If domestic environmental
policies have relatively little effect on production costs, agricultural
trade effects would be expected to be small as well. Some studies show that
specific environmental policies may have significant trade effects and
large increases in production costs. For example, agricultural chemical use
restrictions in the U.S. and the European Union (EU) may significantly
affect trade by reducing production, which can dramatically increase
production costs per unit of output while also shrinking exports. 

Likewise, a ban on methyl bromide use as a soil fumigant in the U.S. may
boost U.S. imports of specific vegetables from Mexico (AO August 1999).
Implementation of the EU's Nitrate Directive (which limits nitrogen
applications to the soil) would have considerable effects on EU net trade
of livestock, livestock products, grains, and oilseeds, according to one
study by USDA's Economic Research Service (ERS).

This article focuses on a specific policy goal an environmental goal of
reducing nitrogen releases that result from agricultural operations. Excess
nitrogen released into waterways promotes growth of microscopic organisms
that use up dissolved oxygen, leaving insufficient oxygen in the water for
other forms of aquatic life, such as fish. Excess nitrogen is a key issue
in strategies to address the hypoxic zone in the Gulf of Mexico (AO
November 1999), and in the Environ-mental Protection Agency's development
of regional water quality nutrient criteria under the Clean Water Action
Plan. 

A goal of 10-percent reduction in nitrogen releases from agriculture is
used here to illustrate the effects of a small change in nitrogen releases
on production and trade. To reduce nitrogen releases by 10 percent, four
alternative generic policy approaches are evaluated: 

*  a "green payment" which producers receive from the government to
compensate for lower returns resulting from lower crop yields caused by
reduced fertilizer use; 

*regulation to reduce per-acre nitrogen use; 

*  a tax on nitrogen fertilizer; and 

*  buffer strips and other land retirement to intercept field runoff and
reduce nitrogen fertilizer use. 

The first three approaches require a reduction in nitrogen use nationally
by a little under 20 percent to achieve a 10-percent reduction in nitrogen
releases. The green payment policy would require payments of about 2.5
times the price of nitrogen fertilizer to attain this reduction, and the
tax on nitrogen fertilizer would have to approach 75 percent. For the
regulation scenario, a lowering of per-acre nitrogen fertilizer
applications was simulated. For the land retirement/buffer strip scenario,
two-thirds of the 10-percent reduction in nitrogen release was assumed to
come from the interception of runoff by buffers and about one-third from
the decrease in acreage planted.

Which Scenario Produces 
Strongest Market Effects?

Economic and environmental effects of the four alternative environmental
policy types were analyzed using the U.S. Regional Agricultural Sector
Model. The analysis covers policy effects on most major agricultural
commodities. In terms of commodity market effects on grains, wheat is
generally representative of most grains in the analysis. Results show that
in all four scenarios, wheat production declines from reduced acreage or
reduced nitrogen fertilizer, or both. Export volume decreases under all
scenarios but drops the most in the land retirement alternative. A land
retirement policy reduces wheat acreage and production the most, with
correspondingly greater price-boosting effects and consumption and export
reductions.

Wheat exports and other indicators are affected least under the green
payment scenario. Green payments, if not tied to acreage reduction,
encourage acreage expansion, which partially offsets the
production-depressing effects of reduced fertilizer use. Hence, the
resulting consumption, price, and trade effects of this policy are the most
modest of the four alternatives. 

A regulatory policy that restricts per-acre nitrogen use has greater market
effects, in general, than a green payment. Cultivated acreage increases
slightly under the regulatory policy, countering some production
contraction from reduced fertilizer use per acre, but acreage increases
less than under the green payment policy. Wheat prices rise and exports
slip more than under the green payment alternative. 

Under a nitrogen tax, cultivated wheat acreage declines, reinforcing the
production-depressing effect of reduced nitrogen use. Market prices rise,
second only to the land retirement alternative. Consumption and exports
fall, second only to the land retirement alternative.

The effects of these policy alternatives on soybeans, which fix nitrogen
and receive much less nitrogen fertilizer than grains, are markedly
different from the effects on wheat. Soybean production, consumption, and
exports generally increase as some grain producers switch to soybeans, with
lower prices under all four scenarios except the land retirement
alternative.

Comparing Overall Effects of 
Policy Alternatives

From a farm-sector perspective, the four policy alternatives produce
varying effects on consumers, crop producers, and livestock producers.
Since prices rise proportionately more than production falls, crop
producers' net cash receipts rise and livestock producers' receipts decline
because of higher feed costs. 

Under a green payment scenario, crop producers as a group gain from higher
market prices as fertilizer use and production fall, and in addition,
receive $2.9 billion in government payments for reduced fertilizer use.
Consumers and livestock producers lose as crop prices rise, but this effect
is relatively small compared with the other three scenarios. 

The regulation scenario brings higher net cash receipts to crop producers,
but the effect is less than under a green payment scenario since the
regulation alternative provides no government payments. Consumers and
livestock producers fare worse under a regulatory scenario than under a
green payment scenario because production is lower in the regulatory
alternative, pushing up prices and adding to food and feed costs. 

Under the tax scenario, crop producers receive the benefits of higher
prices for their commodities, but they must pay a tax on every pound of
fertilizer used (total tax charges are almost $3.3 billion). Crop producers
gain only slightly under this scenario, while consumers and livestock
producers fare worse than under the regulatory scenario again because of
higher food and feed costs. 

A land retirement policy to reduce nitrogen losses yields the greatest crop
producer benefits, aside from the green payment policy, and the worst
downside effects--higher food and feed costs--on consumers and livestock
producers.
Moreover, costs to taxpayers are estimated at around $1.6 billion--lower
than the public outlays for green payments. 

While nitrogen losses are the focus of the simulated policies, reducing
soil erosion is an aim of USDA conservation efforts as well. The policies
modeled to reduce nitrogen releases also have ancillary, or secondary,
effects on soil erosion--some adverse and some desirable. As greater
acreage is planted under the green payment and regulatory policies, soil
erosion and erosion damages rise. Conversely, soil erosion and/or erosion
damage decline under the tax policy and the land retirement policy, both of
which encourage contraction in cultivated acres. The land retirement/buffer
strip scenario yielded the greatest decrease in soil erosion and erosion
damage costs. 

No Simple Formula

The choice of domestic policy instruments to achieve an environmental goal
has trade and other economic and environmental implications, generating
trade-offs among various concerns. Policies that lower production also
lower exports. Given an objective of reducing agricultural nitrogen
releases, policies aimed directly at reducing nitrogen use have lesser
trade and other market effects than a policy of land retirement. 

Among the three input-targeted policies, a green payment policy achieves
the environmental goal with the least market-price escalation. A green
payment approach also generates the smallest consumer costs and the
greatest producer benefits, but it also involves the greatest government
cost and results in the largest increase in soil erosion. 

In contrast, a land retirement policy to achieve the same nitrogen loss
reduction has export-reducing effects almost six times that of a green
payment policy, with the largest costs to consumers. Producer benefits in
the land retirement scenario are second only to green payments, and the
reduction in soil erosion is the greatest of any scenario. 

In selecting environmental policies to mitigate the impacts of agricultural
production, trade-offs arise between and within economic interests and
environmental goals. A policy choice to achieve one environmental objective
may exacerbate (or ameliorate) another environmental problem. The choice of
policies affects agricultural trade and other farm-sector economic
indicators. No one policy will satisfy all stakeholders.

Mark E. Smith (202) 694-5490, Mark A. Peters (202) 694-5487, John P.
Sullivan
(202) 694-5493, Utpal Vasavada (202) 694-5610, and Thomas W. Worth (202)
694-5262
mesmith@ers.usda.gov
mpeters@ers.usda.gov
johnp@ers.usda.gov
vasavada@ers.usda.gov
tworth@ers.usda.gov  


SPECIAL ARTICLE
A Fair Income for Farmers?

Persistence of low commodity prices and prospects of reduced farm income in
2000 have prompted ongoing discussion regarding the amount and form of
assistance that should be provided to agriculture through government
programs. Questions have arisen about the efficacy of current farm programs
in providing a safety net for farmers' income, particularly after 2
consecutive years of emergency assistance packages totaling nearly $15
billion. In an effort to strengthen the farm safety net, USDA Secretary
Glickman earlier this year proposed several initiatives that would deliver
a total of $11 billion to agriculture over the next 3 years. But political
debate over agricultural subsidies and the notion of a "fair" income from
farming is likely to continue.

The idea of a fair income from farming draws on a long tradition of
promoting "equity" or "parity" between the farm and nonfarm sectors,
although what is meant by fair is often vague. Recently, USDA's Economic
Research Service (ERS) extrapolated from nonfarm safety net concepts to
analyze costs associated with income transfers from Federal taxpayers to
farmers. Three illustrative safety-net scenarios were based on a goal of
ensuring some minimum standard of living for farm households, and one was
based on a goal of providing adequate compensation for farm labor and
management (AO January-February 2000). The analysis met with some criticism
because of a perceived association of income transfers with social welfare
programs. Critics assert that farmers do not want to be given a "welfare
check" but rather want to earn a fair income from working at the business
of farming.

To explore that perspective, ERS is investigating the implications of a
fair income goal for contemporary U.S. agriculture by analyzing the
financial performance of farms, delineating farms by enterprise type--i.e.,
field crop, specialty crop, or livestock--to capture the heterogeneity in
farming today. This article focuses on the financial performance of wheat
farms--farms with at least half of total value of production from wheat.

What is a Fair Income?

A common definition of fair income for a farm business is a level of income
that enables the farm to pay its bills i.e., revenue from the sale of
commodities is sufficient to cover the costs of production. Such a farm may
be called financially viable. Note, however, that this definition does not
include a return to the operator. Thus, a financially viable farm may
generate income that is sufficient to cover business expenses but not
provide adequate income to support a household.

To capture the short- and long-run dimensions of farm financial viability,
the analysis considers three measures of farm production costs. Variable
costs are defined as expenses incurred in the production process that vary
with the quantity and prices of inputs used--e.g., seed, fertilizer, fuel,
repairs, and wages paid to hired labor. Total cash costs are defined as
variable costs plus expenses for overhead items such as rent, taxes,
insurance, and interest payments. Economic costs are total cash costs plus
an allowance for depreciation, along with an imputed return to management
and to unpaid labor of the operator and family.

A farm can often survive for a year if revenue covers variable costs, or
even for several years if revenue covers total cash costs, particularly if
the operator is able to draw on cash reserves or other liquid assets, to
borrow against assets, or to obtain income from nonfarm sources. However,
such remedies are only temporary. In order to sustain the business over a
longer period, revenue must cover economic costs. For example, in the short
run, the allowance for depreciation (an economic cost) may be deferred and
aging equipment may be repaired (a cash cost). But in the long run, as
machinery wears out or becomes obsolete, the shortage of funds for
replacement may affect the farm's ability to generate revenue.

Total farm revenue is defined in this analysis to include estimated cash
receipts from market sales of crop and livestock commodities (annual
average state-level commodity price multiplied by volume of production),
direct government payments, and crop insurance indemnity payments. Market
receipts are estimated conservatively in order to isolate the impact of
costs on financial performance in a given crop year. Accordingly, the
analysis assumes that all production is sold in the current year, and that
no strategy is employed to improve price performance above the season
average--i.e., no gains from forward contracting or from hedging.

Direct government payments--primarily production flexibility contract
payments, loan deficiency payments (LDP's), and conservation payments
(e.g., from the Conservation Reserve and Wetlands Reserve Programs)--are
included in the definition of revenue, although they would not universally
be considered part of "fair income."  The primary focus of this analysis is
the long-term viability of wheat farms, which to some degree is influenced
by a fixed payment made to eligible producers whether or not they produce a
commodity. These guaranteed payments may offset expenses associated with
farm loans (interest expense) or other overhead cost items. In the short
run, the decision to produce depends on whether market revenue augmented by
marketing loan benefits cover variable costs of production. Short-run
financial efficiency (the extent to which variable costs or total cash
costs are covered by revenue, measured after the decision to produce has
occurred) pertains to the outcome of the decision to produce.

Data on U.S. farm businesses and households are from USDA's Agricultural
Resource Management Study (ARMS), conducted annually by ERS and the
National Agricultural Statistics Service. Farmers' responses to survey
questions enable ERS to analyze production costs, revenue, and the relative
importance of income from various sources--i.e., from the farm business,
from off-farm employment or investment, and from government payments. Data
from the ARMS may be aggregated to give a national perspective on the
distribution of farm costs and revenues, or may be distributed by selected
characteristics to illustrate the striking heterogeneity in the financial
circumstances of farms and farm households in ways useful to policy debate
(AO November 1999). 

Farm Size Affects Cost Structure

This analysis focuses on the long-run financial performance of wheat
farms farms with at least half of total value of production from
wheat because of the relatively wide geographic dispersion of wheat
production, the significant role of government support, and the prolonged
stress in the export-dependent wheat market. With the focus on long-term
economic viability, it is total revenue, including decoupled government
payments (i.e., not linked to production level) that is compared with total
costs of production. In this framework, there are clear distinctions in
financial performance among the estimated 44,000 U.S. wheat farms. Just
over one-third of all wheat farms earned enough revenue to cover their
economic costs of production, and to sustain the farm business over many
years. Nearly two-thirds were able to cover total cash costs, allowing
survival at least to the next year.

Government payments were important to wheat farms' revenue in 1998,
averaging nearly $20,000 per fa rm or over 20 percent of an average $90,000
gross cash income. The bulk of direct government payments are from
production flexibility contracts (authorized by the 1996 Farm Act and
scheduled to end after 2002) and from the CRP. A relatively small share
derives from LDP's--the mechanism to ensure a per-unit revenue floor (the
loan rate) for program commodities. If contract and CRP payments were
excluded from farm income, and LDP's were the sole source of direct
government payments, income on only about a quarter of
wheat farms would have been sufficient to cover economic costs.

Classifying wheat farms by economic cost per dollar of revenue--a measure
of financial efficiency--allows identification of three distinct groups.
The most financially efficient farm businesses cover their economic costs
i.e., cost per dollar of revenue is below 1. Financially efficient
("low-cost") farms account for 35 percent of all wheat farms and produce 50
percent of the U.S. wheat crop. In proportion to their production share,
wheat farms in the financially efficient group received close to 50 percent
of all Federal payments to wheat farms, but for most of them, market
revenue alone was sufficient to cover variable, cash, and economic costs.

At the other extreme are the least efficient ("high-cost") wheat farms,
with costs more than half again as large as returns--cost per revenue
dollar is 1.5 or higher. These account for 37 percent of all wheat farms
but for just 14 percent of wheat production. Other sources of income or
equity are required for these farm businesses to remain viable. Farms in
the "mid-range" efficiency group--over one-fourth of wheat farms, with
costs per dollar of revenue between 1 and 1.5--account for the remaining 36
percent of wheat production and represent farms that are close to becoming
financially viable. Mid-range farms are more likely to become viable
through higher prices, lower costs, and/or larger Federal payments.

What accounts for variation in the economic efficiency of wheat farms? 
Farm size and scale economies in large part explain cost differences
between farms in the low- and high-cost groups. However, on average,
mid-range and low-cost farms are quite similar with respect to acres
operated, production assets, and output (earning potential). Thus,
economies of scale are not the driving factor in relative financial
efficiency of the mid-range group and the most economically efficient.
Instead, higher input costs seem to be key. Seed, fertilizer, and chemical
expenses are about one-third higher for the mid-range group, as are repair
and maintenance costs. Also, mid-range farms have almost twice the average
interest payments and debt compared with the lowest cost farms.

Classifying mid-range farms according to ERS farm typology indicates the
group includes limited-resource farms (gross sales under $100,000, farm
assets under $150,000, and household income under $20,000); small farms
(gross sales under $250,000 with operators whose primary occupation is
farming); and large family farms (gross sales $250,000 or more). The
high-cost farms, in comparison, are predominantly farms classified as
retirement and residential/lifestyle (operators report a primary occupation
other than farming), although they include significant numbers of
limited-resource farms as well.

Analysis of farm household income for mid-range farms indicates that, on
average, the farm business is the main source of income for the household.
In contrast, farms in both the lowest and highest cost groups had
significant shares of income from off-farm sources that helped to support
the farm household.

The difference in economic efficiency between the mid-range and lowest cost
farms is likely attributable to relative effectiveness in management
decisions on production practices and technologies, marketing strategies,
and financing. Some mid-range farmers may also be constrained in their
ability to lower input costs if their farms are sited on unfavorable soils
or in areas with difficult weather or pest problems.

Getting to a "Fair" Income

Characteristics of U.S. wheat farms and their financial performance
indicate diversity in the ways farmers manage their businesses and earn
their livings. For that reason, an implication of this analysis is that
there is no one fair price or fair income level, as the unit returns or
revenue required for survival of the highest cost farms are well above
those of the lowest cost farms. Such heterogeneity illustrates the
difficulties in reaching consensus about government price and income
support levels. However, the differences among wheat farms do provide some
basis for assessing the sensitivity of the cost/revenue distribution to
increases in revenue (either through higher prices or direct payments) and
to reductions in costs that might result in a better, if not fairer, income
from the farm business.

Farmers can often raise returns by adopting marketing strategies to improve
price prospects for their crops. Top-performing farms routinely hedge,
forward contract, and employ other strategies to raise returns above
season-average (AO November 1999). Although marketing strategies will not
enable every farmer to obtain the maximum price, revenue is generally lower
if output is simply sold into cash markets at harvest.

In this analysis, if the price received by farmers rose 25 percent above
the season average--an increase not unusual when using marketing
strategies--the share of wheat farms covering their economic costs would
have increased to more than 40 percent from 35 percent. On the other hand,
if the 1998 U.S. average price of wheat doubled to $5.60 per bushel, the
share of farms meeting economic costs would increase to two-thirds.

Even among farms of the same size, a cost differential exists between the
lowest and the mid-range cost groups, suggesting that cost reduction
through good management decisions and adoption of better technology would
be a powerful way to improve financial prospects for those whose costs
exceed returns. For example, the analysis indicates that if costs were
reduced 20 percent while production was increased 20 percent, the share of
wheat farms with sufficient revenue to cover economic costs would double to
two-thirds, even with no price increase.

ERS research suggests that management decisions are responsible for the
cost differentials and that differences in educational levels explain why
some farmers make more effective decisions leading to better cost control.
The ARMS data show that more than half of farmers in the low-cost group
completed college, compared with about 30 percent in the mid-range group
and 15 percent in the highest cost group. 

Technological innovation has the potential to lower costs, either by
reducing the level of inputs needed for a given level of output or by
increasing output without also increasing inputs. However, farmers must
make good adoption decisions, and adopting new technology is a risky
business that poses additional challenges to management skills.

One Policy No Longer Fits All 

Before World War II, the shift toward specialization that would transform
U.S. agriculture had not yet begun in earnest, and national agricultural
policy did not have to confront the striking heterogeneity observed today.
In the 1930's, farms were likely more similar than farms today in cost
structure and revenue, making the range of economic costs per revenue
dollar much narrower. Depression-era farms resembled each other not only in
size, but also in enterprise diversity of their operations. Specialization
in production has introduced scale economies that now explain a significant
part of cost differentials in U.S. farming, and has presented public
policymakers with new challenges.

In the pursuit of a fair income for all farmers, the distributional impact
on the sector varies according to the approach to the problem. When farms
reduce costs through improving production and management practices, the net
benefits of the cost saving accrue to individual farms and should persist
until aggregate output expands and lowers price. When the Federal
government implements policies that raise farm prices nationally or provide
income assurance, both financially efficient and inefficient farms may
benefit. But without changes in cost structure, high-cost farms would
likely be vulnerable to financial loss if these income transfers or
effective per-unit revenue floors were unavailable in the next season. When
government makes direct payments based on historical production levels,
farmers who stand to benefit most are those who grew the most in the past.
Neither direct government payments nor government intervention to raise
market prices encourages cost reduction by farmers, and the mid-cost group
may suffer when the payments are used by their lower cost neighbors to
expand output and put downward pressure on prices.

Without change in either onfarm management decisions or in the approach of
government policy, earning a fair income sufficient to cover economic costs
of production from the market is a dim prospect for a significant portion
of wheat farmers in the U.S. today. However, about one-third of all wheat
farmers can survive and prosper as long as they maintain their low-cost
positions. Another third or so, which has very high production costs,
survives because it is comprised mainly of households that do not depend on
farming as the main source of income and that make economic decisions that
allow them to subsidize farm losses with income from other sources.

The final third of wheat farm households--the mid-range cost group--does
depend on the farm business for its livelihood but experiences production
costs high enough to jeopardize long-term survival. In these circumstances,
across-the-board, one-size-fits-all commodity policies that help the
low-cost group expand and prosper are likely irrelevant to the highest cost
group, and fail to ensure survival of the financially marginal mid-range
group. Targeted policies that recognize and address the source of financial
inefficiency are more likely to succeed with this mid-range group, as would
better access to off-farm earning opportunities that would provide a buffer
for the cost problems they experience.

Mitchell Morehart (202) 694-5581, Betsey Kuhn (202) 694-5400, and Susan
Offutt
(202) 694-5000
morehart@ers.usda.gov
bkuhn@ers.usda.gov
soffutt@ers.usda.gov

SIDEBAR - Special Article

Defining the Farm Typology Groups

Small Family Farms (sales less than $250,000)*

Limited-resource. Any small farm with gross sales less than $100,000, total
farm assets less than $150,000, and total operator household income less
than $20,000. Limited-resource farmers may report farming, a nonfarm
occupation, or retirement as their major occupation. 

Retirement. Small farms whose operators report they are retired (excludes
limited-resource farms operated by retired farmers).

Residential/lifestyle. Small farms whose operators report a major
occupation other than farming (excludes limited-resource farms with
operators reporting a nonfarm major occupation).

Farming occupation, lower-sales. Small farms with sales less than $100,000
whose operators report farming as their major occupation (excludes
limited-resource farms whose operators report farming as their major
occupation). 

Farming occupation, higher-sales. Small farms with sales between $100,000
and $249,999 whose operators report farming as their major occupation.

Other Farms

Large family farms. Farms with sales between $250,000 and $499,999.

Very large family farms. Farms with sales of $500,000 or more.

Nonfamily farms. Farms organized as nonfamily corporations or cooperatives,
as well as farms operated by hired managers.

* The $250,000 cutoff for small farms was suggested by the National
Commission on Small Farms.


END_OF_FILE