AGRICULTURAL OUTLOOK             March 22, 2000
April 2000, ERS-AO-270
             Approved by the World Agricultural Outlook Board
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IN THIS ISSUE

AGRICULTURAL ECONOMY
Outlook for the Farm Economy in 2000

Global Trade & International Issues Shape Long-Term Outlook for U.S.
Agriculture

BRIEFS
Food & Marketing: Food Price Outlook for 2000--An Update

COMMODITY SPOTLIGHT
U.S. Organic Agriculture Gaining Ground

WORLD AGRICULTURE & TRADE
Free Trade Area of the Americas: What Are the Benefits for U.S. Agriculture?

Emerging Trade Issues for Developing Countries

Biotechnology: Implications for U.S. Corn & Soybean Trade

SPECIAL ARTICLE

Biotechnology: U.S. Grain Handlers Look Ahead


IN THIS ISSUE

U.S. Organic Agriculture Gaining Ground

U.S.-certified organic cropland more than doubled during the 1990's, and two
organic livestock sectors--eggs and dairy--grew even faster, according to a
new study by USDA's Economic Research Service.  U.S. producers are turning to
organic farming systems as a way potentially to lower input costs, decrease
reliance on nonrenewable resources, capture high-value markets and premium
prices, and boost farm income.  Markets for organic vegetables, fruits, and
herbs have been developing for decades in the U.S., and organic grain and
livestock markets are beginning to emerge.  Under USDA's new proposal for
regulating organic production and handling in the U.S., announced March 7,
2000, purchasers of organic foods would be able to rely on uniform and
consistent national standards for defining the term "organic." Catherine
Greene (202) 694-5541; cgreene@ers.usda.gov
Near-Term Weakness Remains in U.S. Farm Economy
Overall conditions in the farm economy in early 2000 are largely a replay of
last year.  Markets for major commodities, particularly field crops, are very
weak as supplies remain relatively large.  Despite the severity of the market
downturn for many producers, an overall farm economic crisis has not
materialized, due in large part to built-in government support and
supplemental emergency economic and disaster assistance.  Positive
developments in U.S. agriculture this year include higher cattle and hog
prices and a fairly strong national farm balance sheet.

Longer term developments, including movement back to sustained global economic
growth, will strengthen agricultural trade and income prospects for U.S.
farmers, according to USDA's 10-year baseline projections. Economic recovery
is now underway in most of the countries affected by the global financial
crisis of the late 1990's.  Economic growth, especially in developing
countries, is providing a foundation for gains in global demand, agricultural
trade, and U.S. agricultural exports.  Incomes in many developing countries
are at levels where consumers eat more meat and other higher valued food
products and where consumer food demand is particularly responsive to income
changes.  Paul Westcott (202) 694-5335; westcott@ers.usda.gov

Modest Food Price Rise Expected

The consumer price index for all food is expected to increase 2-3 percent in
2000, following a 2.1-percent increase in 1999, the smallest since 1992's 1.2-
percent gain.  The 2000 rise will be closer to the high end of the projected
range if energy prices remain at elevated levels for 6 months or more or if
there is greater-than-expected demand for meat products, which appears to be
strengthening despite higher prices. Annette L. Clauson (202) 694-5389; 

Free Trade Area of the Americas: The Benefits for U.S. Agriculture

Progressive elimination of trade and investment barriers within the Western
Hemisphere is the goal of the Free Trade Area of the Americas (FTAA), a
regional agreement now under negotiation among 34 countries, including the
U.S.  The FTAA will expand market opportunities for U.S. agricultural products
in the hemisphere by progressively eliminating tariffs and nontariff barriers,
facilitating investment, and helping to lock in the unilateral policy reforms
of member countries.  The agreement will also consolidate the many subregional
free trade agreements in the Western Hemisphere that could otherwise put
nonparticipating countries, including the U.S., at a competitive disadvantage. 
U.S. agricultural export growth, and the more efficient resource reallocation
that follows reduction of trade barriers, will strengthen U.S. farm income. 
The commitment of the pact to implement and advance WTO disciplines suggests
that the FTAA can complement U.S. efforts to liberalize agriculture in a
multilateral setting.  Mary Burfisher (202) 694-5235; burfishr@ers.usda.gov

Emerging Trade Issues for Developing Countries

Global trade negotiations will involve increasingly significant participation
by developing countries, both in setting agendas and in forging agreements. 
Since agriculture often provides a large share of export earnings for
developing countries, major policy change influencing global agricultural
trade directly affects their earnings and their financing of imports. 
Improved market access for agricultural products is among the agricultural
trade issues of importance to all developing countries.  Key issues for
particular countries are determined by the specific commodities they trade, by
their economic and trade policies, and by their level of development. 
Developing countries are recognizing that participation in multilateral trade
negotiations provides an opportunity to enhance their trading position and
advance their development goals.  Michael Trueblood (202) 694-5169;
trueb@ers.usda.gov

Biotechnology: Implications for U.S. Corn & Soybean Trade & Grain Handlers 

Uncertainty in marketing bioengineered crops abroad stems in part from
potential limitations from government policies and the direction and intensity
of consumer preferences.  One key factor in assessing the degree and nature of
potential impacts is export share of use, which for U.S. corn was about 18
percent in 1998/99 and for soybeans was even higher at 42 percent.  With the
U.S. supplying two-thirds of global corn trade, importers cannot easily
satisfy such large demand with alternative sources.  Traditional competitive
forces (primarily prices) appear to be the main driving factors behind changes
in observed bilateral trade patterns for soybeans.  The biotech issue has
potential to influence world trade flows, and consumer preferences may create
two potential markets in the future. Nicole Ballenger (202) 694-5013;
nicole@ers.usda.gov

Segregation of biotech and nonbiotech commodities could become a consideration
for grain handlers.  Keeping nonbiotech products separate from
undifferentiated "standard" commodities can be accomplished by either "crop
segregation" or "identity preservation."  These marketing practices to
preserve a commodity's unique characteristics are not new, but are an
extension of practices already used to preserve differentiation of value-
enhanced commodities such as high-oil corn and low-saturated-fat soybeans. 
USDA's Economic Research Service has developed a scenario indicating that
added costs for segregating nonbiotech corn and soybeans could be higher than
the added costs of segregating value-enhanced crops.  William W. Lin (202)
694-5303; wwlin@ers.usda.gov


AGRICULTURAL ECONOMY

Outlook for the Farm Economy in 2000

[Projections and discussions in this article are drawn from a presentation at
USDA's 2000 Agricultural Outlook Forum held in Arlington, VA, on February
24-25, 2000. See the following article for a summary of long-term prospects
for U.S. agriculture.] 

Overall conditions in the farm economy in early 2000 are largely a replay of
last year. Markets for major commodities, particularly crops, are very weak.
Agricultural exports are moving sideways, forecast at $49.5 billion in fiscal
2000, only $0.5 billion above last year's level. Export volume this year is
projected down--by 4 percent--as wheat and corn tonnage declines. 

Forecast U.S. farm prices illustrate the severity of the market downturn for
many producers, but an overall farm economic crisis has not materialized, due
in large part to built-in government support and supplemental emergency
economic and disaster assistance. Prices for soybeans in the 1999/2000
marketing year are expected to be the lowest since 1972/73; cotton prices so
far have been the lowest since 1974/75; corn and wheat prices are expected to
be the lowest since 1986/87; milk, the lowest since 1990/91; and rice, the
lowest since 1992/93. 

While these statistics may generate pessimism for U.S. producers, the reduced
prices provide a measure of benefit to many consumers, and a number of
positive developments in U.S. agriculture are noteworthy. Also, cattle and hog
prices in 2000 are expected to be higher than a year ago.

Global economies are improving. World economic growth in 2000 is forecast to
exceed 3 percent, a rate not seen since 1997. Southeast Asian economies are
expected to grow 6 percent this year, in contrast to a 6-percent contraction
in 1998. And Latin America is expected to post a 2.7-percent gain, emerging
from recession in 1999. U.S. exports to these regions should improve, but
overall export recovery will be slow, as little import growth is expected from
major, or formerly major, markets such as Japan, China, Russia, and the
European Union. The strength of the U.S. economy has raised domestic demand
for many commodities. For instance, per capita meat consumption was
record-high in 1999 despite rising prices for red meat.

The national farm balance sheet is fairly strong, a considerable plus, because
the more solvent the average farmer, the greater the resiliency to face weak
markets. Record-high prices in the mid-1990's helped strengthen financial
positions coming into this market downturn. Farmers helped themselves by
holding back on equipment purchases, paying off debt, and curtailing debt
expansion. At the same time, farm real estate values have continued to rise,
up 18 percent over the past 5 years. Record-high government payments have
shored up farm income the past 2 years--contributing to the second-highest
level of U.S. net cash farm income ever in 1999--which has helped support real
estate values and reduced the degree of leverage on farm real estate. However,
little to no growth in farmland values is expected over the next couple of
years.

Agricultural banks generally are in good shape, with a fairly low level of
delinquent and nonperforming loans. The share of such loans in the portfolio
of agricultural banks in late 1999 was one-fifth the level of the mid-1980's.

Growth in farm production costs has been slow, due to low inflation,
relatively low interest rates, and low feed costs. One detrimental cost
component is the large increase in oil prices, which could raise farmers' fuel
and oil costs by up to several billion dollars in 2000, depending on the
actions of oil-producing nations (see forthcoming AO).

Improvement in productivity and efficiency continues in U.S. agriculture.
These gains bolster the U.S. competitive position in global markets, make
better use of productive resources, and benefit those producers employing the
efficiency techniques. And while some think that structural changes such as
consolidation and dislocation must accompany any efficiency gains, the number
of U.S. commercial-size farms has declined only 0.4 percent annually since
1993. 

Crop surpluses do not rival past surplus levels. This year's ratio of world
carryover stocks to total use for feed grains, for example, is about the same
as it was during the first 5 years of the 1990's, and 20 percent below the
average of the 1980's. This means that while global demand is recovering
somewhat slowly, a weather disaster could easily cause a substantial runup in
feed grain prices. Global wheat stocks are also well below highs of the
mid-1980's.

Cash Receipts for Major Crops 
To Fall

Despite the positive elements, the farm economy picture for 2000 remains
clouded by the prospect of very weak farm income. USDA forecasts that farm
cash receipts will fall to $190 billion in 2000, $2 billion below last year
and $18 billion below the record set in 1997. Lower receipts and lower
government payments than last year are forecast to reduce net cash income for
2000 to $49.7 billion, down nearly 20 percent from 1999 and the lowest since
1986. 

Government payments have been offsetting much of the decline in cash receipts
for major crops. Total government payments increased from $7.5 billion in 1997
to a record $23 billion last year. In calendar 2000, government payments,
without any new legislation, will likely exceed $17 billion, the
second-highest ever.

Reviewing a few major commodities illustrates why 2000 prospects look so weak.
In 1999, U.S. producers planted the lowest wheat acreage since 1972, and even
lower acreage and production are likely in 2000. On top of that, low
precipitation and soil moisture in the Plains states are likely to reduce the
yield on winter wheat below trend. With lower acreage, U.S. production could
fall 200 million bushels below last year. The weather pattern since last fall
has looked similar to 1996, which saw below-trend wheat yields. A reduced U.S.
wheat crop may lead to slightly stronger prices, but wheat prices will remain
under pressure, as weather has generally been favorable elsewhere in the
world. The largest U.S. carryover stocks since 1988 will also limit price
gains. 

The corn market has been strengthening, driven by record-high total use for
the 1999 crop, but the price is still expected to average only $1.90 a bushel,
slightly below 1998. While corn acreage is likely to be down slightly in 2000,
higher yields will keep next season's total supplies near this year's level.
With total use also near this year's level, keeping ending stocks about the
same, corn prices are expected to show only modest improvement next season. 

In January, the farm price of soybeans continued to recover from the low
$4-per-bushel range of last summer, the lowest in three decades. For the 1999
crop, prices are forecast to average $4.70 per bushel, a little below the
previous year. Expanding soybean acreage was the story of the 1990's, and area
is likely to expand again in 2000, as relative returns (including government
marketing loan benefits) look preferable to some other crops (AO May 1999 and
December 1999). With trend yields, we could see record production, another
year of rising carryover, and prices even lower than for the 1999 crop.

Cotton and rice prices have been very low this year as carryover stocks of
both are rising. In 2000, cotton production is expected to be up, but price
prospects could possibly improve, especially if China continues to reduce
production and stocks. China lowered its procurement prices on cotton as much
as 40 percent for the 1999 crop, which should restore some balance to cotton
markets in China and in the U.S. For rice, carryover stocks on August 1 are
expected to be nearly double last year's. The 33-percent drop in this year's
farm price should reduce acreage and production in 2000, but the large carryin
will likely continue to pressure prices.

Other crops face mixed prospects in 2000. Cash receipts for fruit, vegetables,
and greenhouse and nursery crops are expected to rise $1.2 billion to $42
billion. While fresh vegetable prices are likely to increase from last year's
reduced levels, fresh citrus prices are settling back to normal levels after
the December 1998 freeze. Exports of horticultural products are likely to rise
slightly in 2000 after 2 flat years, as Asian economies strengthen and U.S.
citrus supplies recover. 

Tobacco producers continue to struggle; receipts will decline again in 2000 to
$1.8 billion, down $0.4 billion from last year. Higher retail cigarette prices
and reduced use are causing sharp farm quota reductions. Peanut production may
decline slightly, with a return to trend yields, lowering cash receipts
somewhat. Sugar production is likely to flatten, due in part to lower prices,
but there is increasing uncertainty over 2000/01 imports, supplies, program
costs, and international trade obligations.

Livestock Prices Projected Up

The picture for livestock and poultry is more encouraging than for crops.
Cattle prices are projected to average about 5 percent higher in 2000
following last year's nearly 7-percent increase, as liquidation of the U.S.
cattle herd finally leads to reduced beef production, which is forecast down
by 1 percent. Lower hog numbers are expected to reduce pork production about 3
percent this year, which could push hog prices to around $40 per cwt for the
year and enable many producers finally to operate in the black. Broiler prices
this year are projected to be off about 3 percent from last year, but producer
net returns are expected to continue positive due to lower feed costs.

Milk is a key part of farm income accounts, with producer sales of $22-$23
billion in recent years. Milk prices were record high in 1998 and near-record
high in 1999, which caused last year's milk production to register the highest
year-to-year gain of the decade. This surge will pressure farm milk prices for
several months, with the 2000 all-milk price forecast to average 12 percent
below 1999.

U.S. consumers will enjoy an abundant, affordable food supply again in 2000.
The consumer price index for food during the 12 months ending in January rose
only 1.5 percent, the smallest 12-month increase since 1992. In 2000, an
increase in the range of 2 to 3 percent is expected. Upward pressure will come
from beef and pork, reflecting tightening supplies. On the other hand, dairy
products and citrus should be better buys this year, and fresh vegetables are
likely to be plentiful again, based on winter acreages. 

Because the farm economy faces weak markets, the role of government will be
prominent again this year. First, substantial government payments will be made
under current programs. For example, payments under the marketing assistance
loan programs, which were nil in 1996 and 1997, are forecast at $8 billion for
the 2000 crops. Second, USDA has announced five new initiatives using the
Secretary's discretionary authority. These are in various stages of
implementation and include a bioenergy program, farm storage facility loan
program, enhanced Conservation Reserve Program incentives, a freeze for the
2000-crop loan rates, and another large humanitarian assistance package.
Third, the administration has offered a legislative proposal for providing
additional income support, conservation benefits, and risk management
assistance. 

In addition to government action, many uncertainties will affect the
marketplace, including global weather disruptions; biotech acceptability;
continuing structural changes such as expanding supply chains, contracting,
and market segmentation; and economic growth and policies in areas like Japan
and China.  

Keith Collins
Chief Economist, USDA


AGRICULTURAL ECONOMY

Global Trade & International Issues Shape Long-Term Outlook for U.S.
Agriculture

Developments in the international arena results in relatively weak U.S.
agricultural prices in the initial years of USDA's 10-year baseline
projections. But the longer term picture includes sustained global economic
growth and stronger agricultural trade and income prospects for U.S. farmers. 

Sizable harvests in the U.S. and abroad over the past several years, partly in
response to high prices in the mid-1990's, have pushed up global supplies for
many agricultural commodities. Additionally, world agricultural demand in the
late 1990's was weakened by the global financial crisis. 

Consequently, the U.S. agricultural sector has faced strong foreign
competition in a weakened global trade setting. The value of U.S. agricultural
exports has fallen from a record of almost $60 billion in fiscal 1996 to about
$49 billion estimated for fiscal years 1999 and 2000. While export volume in
1999 and in 2000 is up from 1998, low commodity prices have held down total
value. 

U.S. net farm income is off as well--from nearly $55 billion in 1996 to $40.4
billion expected in 2000--although declines have been buffered by increases in
government payments--marketing loan benefits increased as prices of major
field crops dropped, and emergency legislation generated additional farm
payments. Farm income is expected to decline through 2001, largely reflecting
a reduction in direct government payments from recent high levels. The
baseline assumes no additional payments from emergency legislation, although
marketing loan benefits continue to play an important role in the U.S. farm
sector in the near term as large global supplies keep agricultural prices
under pressure. With reduced farm income over the next few years, debt
management will be crucial to the financial condition of the agricultural
sector. Despite near-term cash flow difficulties, a strong financial position
achieved during the 1990's will help farmers during this period. 

Economic recovery is now underway in most crisis-affected countries, and
global demand and trade are strengthening. Export volumes and commodity prices
are projected to turn upward in 2001, leading to gains in U.S. agricultural
export values. 

Longer run developments in the agricultural sector reflect continuing
macroeconomic improvement, with the global economy moving back to a period of
sustained growth, due in part to structural reform in countries most affected
by the global financial crisis of the late 1990's. Economic improvements,
particularly in developing countries, provide a foundation for further gains
in global demand, agricultural trade, and U.S. agricultural exports. Incomes
in many developing countries are at levels where consumers diversify their
diets and include more meats and other higher valued food products, and where
consumption and imports of food and feed are particularly responsive to income
changes.

Overall, the improving agricultural demand prospects are driven by the outlook
for healthy economic growth in most of Asia, Latin America, North Africa, and
the Middle East; moderate gains in developed countries; and continued progress
toward freer trade through ongoing unilateral policy reforms and existing
multilateral agreements. Solid prospects for trade expansion in these regions
are expected to more than offset relatively weak growth in parts of Asia,
Africa, and the former Soviet Union (FSU). 

Expanding production potential in a number of foreign countries, however, will
result in continued strong export competition throughout the baseline period.
For example, by the middle of the projection period, U.S. wheat exports face
greater competition when the European Union (EU) can export wheat without
subsidies. Argentina and China are expected to remain strong competitors in
coarse grains trade. And U.S. exports of soybeans and products face continuing
competition from Argentina and Brazil.

Despite continued competition, improved trade growth leads to rising market
prices and export earnings during the last half of the baseline. The total
value of U.S. agricultural exports is projected to increase to almost $76
billion by 2009, with both bulk and high-value product exports projected
higher.

As agricultural trade and U.S. exports expand, large global supplies are
reduced and agricultural prices rise, leading to gains in farm income.
Further, with commodity prices rising, direct government payments fall and
then level off, and the agriculture sector increasingly relies on the
marketplace for its income. 

Increasing farm incomes and relatively low interest rates assist in asset
accumulation and debt management, resulting in relative stability in aggregate
financial conditions in the farm sector. Debt-to-asset ratios, for example,
continue the downward trend of the last 15 years from the high levels of over
20 percent in the mid-1980's.

Consumer food prices are projected to continue a long-term trend of rising
less than the general inflation rate. Consumers are projected to spend an
increasing share of their food dollar on meals eaten away from home.

International Issues & Uncertainties

Shaping these projections are a number of international developments, while
several uncertainties could lead to alternative outcomes.

Macroeconomic conditions in developing countries. The projected strengthening
of bulk commodity markets in the baseline is linked closely to macroeconomic
conditions in developing countries, particularly the expectation of robust
economic growth and a return to historical trends in exchange-rate movements.
Baseline assumptions are consistent with many independent forecasts, but
recent shocks to income growth and exchange rates associated with the Asia
crisis underscore the uncertainties in projecting both economic activity and
agricultural trade in developing regions. 

The baseline trade outlook for bulk commodities and meats is highly dependent
upon assumed income growth and local exchange rates in the developing Asia
region. This stems from the region's large share of world trade volume in
these commodities, relative openness to trade, and responsiveness of food
demand to changes in income and prices. Global impacts of slower growth or
reduced local currency valuations in the Latin American or the transition
economies (the FSU and Eastern Europe) would also be significant, but smaller
than for developing Asia, largely because these regions generally account for
smaller shares of global demand and trade. Alternative macroeconomic
assumptions for the Africa and Middle East region tend to result in smaller
global impacts than for other regions. Although this region accounts for large
shares of world wheat and coarse grain trade, the region's markets and
consumers tend to be relatively less responsive to income and price changes. 

Change in sources of global import demand. During the 1980's and early 1990's,
global trade in wheat and coarse grains was unstable with no overall growth,
largely because of erratic market behavior of the transition economies of the
FSU, as well as China. For both wheat and coarse grains, however, underlying
growth in other regions, particularly the developing regions, has been
relatively strong and stable. For the 2000-09 period, markets for these
commodities appear poised for growth even without significant contributions
from China and the FSU.

In contrast to grains, the market for soybeans and meal has shown  steadier
expansion, particularly since the late 1980's, buoyed by gradual growth in the
dominant EU market. For 2000-09, however, declining EU import demand is
projected to slow overall trade growth, despite continued expansion in China
and other regions. 

World meat trade has shown strong growth since the mid-1970's, with
fluctuating demand by the transition economies of the FSU accounting for the
bulk of instability in trade volume. Expansion in Asian markets is projected
to help sustain future growth, but developments in the volatile FSU market
will be important to the overall outcome. 

China's agricultural supply and demand. Prospects for China's future trade
remain a major uncertainty in the outlook. Under baseline assumptions, which
exclude China's potential accession to the WTO, China's grain imports are
projected to show little growth through 2009. Recently announced changes in
China's grain procurement policy imply somewhat lower future grain area, but
trade impacts of these policy changes are expected to be more than offset by
other factors. These factors include very high grain stocks that are likely to
be reduced over the next decade, somewhat slower growth in incomes and food
demand, and increased government investment in agricultural research,
development, and infrastructure that is likely to have a positive impact on
crop yields. China's accession to the WTO would likely significantly boost
global and U.S. agricultural trade (AO March 2000).

Agenda 2000 reforms in the EU. In March 1999, the EU enacted agricultural
policy reforms under Agenda 2000, including reduced intervention prices,
increased direct income support, and a lower cropland set-aside. These policy
changes further shift the EU from price supports to direct payments in order
to increase the global competitiveness of EU agriculture. However, the
baseline analysis indicates that the EU will continue to need subsidies to
export most agricultural products, making those exports subject to Uruguay
Round (UR) limits.

The extent to which Agenda 2000 reforms will make EU wheat more competitive in
world markets is a key uncertainty in the outlook. In the baseline, the lower
intervention price makes EU wheat competitive in world markets without subsidy
by 2004/05, allowing exports to rise above subsidized export limits set in the
Uruguay Round. How much EU wheat exports rise will then depend in part on the
responsiveness of EU farmers in switching from high-yielding feed wheat to
lower yielding food-quality wheat for export markets. Despite lower
intervention prices, EU coarse grains are not expected to become
price-competitive in world markets, and exports remain constrained by UR
limits on subsidized exports. 

Changes in EU oilseed payments under Agenda 2000 are not expected to have
significant impacts on oilseed production. However, lower intervention and
market prices for grain feeds are projected to dampen long-term demand and
imports of protein feeds, including soybeans.  

Paul Westcott (202) 694-5335; westcott@ers.usda.gov
and Rip Landes (202) 694-5275; mlandes@ers.usda.gov

NOTE:  
USDA's complete 2000 baseline projections are available at:
www.ers.usda.gov/briefing/baseline/
The projections were prepared in October-December 1999 and are published in
USDA Agricultural Baseline Projections to 2009, released in February 2000. The
projections assume no shocks and are based on specific assumptions regarding
macroeconomic conditions, policy, weather, and international developments. 


BRIEFS

Food & Marketing: Food Price Outlook for 2000--An Update

The consumer price index (CPI) for all food is expected to increase 2-3
percent in 2000, following a 2.1-percent increase in 1999. Food at home is
projected to rise 2-2.5 percent, while food away from home should increase
2.5-3 percent. Last year's all-food rise was the smallest since the
1.2-percent gain in 1992.

The all-food CPI increase will be closer to the high end of the range if
energy prices remain at elevated levels for 6 months or more. Another factor
pushing the CPI to the high end would be greater-than-expected demand for meat
products, which appears to be strengthening despite higher prices. A booming
domestic economy is fueling this demand and bolstering prices.

Beef and veal. 
After increasing 2 percent in 1999, the CPI for beef is expected to increase
4-6 percent in 2000, the largest gain since 1993. Domestic beef supplies are
likely to tighten in fourth-quarter 2000 and remain tight over the next couple
of years. With supplies smaller and prices higher, consumption is expected to
lower by 0.6 pounds in 2000, to 68.7 pounds per capita.

Beef production was up nearly 3 percent in 1999 to 26.5 billion pounds,
breaking the 1976 record. Production is expected to remain high in first-half
2000 as cattle-on-feed inventory remains record high, then to decline sharply
in the second half of the year. Exports are expected to decline 1 percent in
2000 because of slightly lower production, higher prices, and an expected halt
in beef donations to Russia. Beef imports for 1999 surpassed earlier
expectations, up almost 9 percent, and are expected to reach a record 3
billion pounds in 2000, up 5 percent from 1999.

Pork. 
Reduced pork output is expected to boost retail pork prices 4-6 percent in
2000, after declining 1.8 percent in 1999 and 4.7 percent in 1998. Following 2
consecutive record years, production is expected to fall 3 percent to 18.7
billion pounds in 2000. Responding to low returns in 1998, hog producers began
to reduce breeding herds late in the year, continuing through 1999. Pork
consumption in 2000 will likely decline 2.5 pounds from 1999 levels to 51.7
pounds per person in 2000. Supporting the gains in pork prices will be sharply
declining beef production in second-half 2000 and moderating broiler
production in 2000.

Poultry. 
The CPI for poultry is expected to increase 0-2 percent in 2000, following a
0.5-percent gain in 1999. Projected declines in beef and pork production and a
slower rate of growth in broiler production should prevent broiler prices from
dropping. Broiler meat production is expected to increase to 30.8 billion
pounds in 2000 from 29.5 billion pounds in 1999. Turkey production, which was
5.2 billion pounds in 1999, is forecast to increase slightly, reaching 5.3
billion pounds in 2000.

Broiler exports are expected to expand in 2000, with greater shipments going
to a number of Asian markets and to a slowly recovering Russian market. U.S.
broiler exports in 2000 are expected up 2 percent to 4.8 billion pounds in
2000, about the same growth rate as in 1998. Demand in developing countries is
expected to expand due to rising populations and a growing preference for a
western-type diet.

Eggs. 
Retail egg prices are forecast unchanged in 2000 following a 5.4-percent drop
in 1999. Egg production increased nearly 4 percent in 1999, lowering wholesale
and retail egg prices. With feed costs in check, returns to egg production
were positive in 1999, and table-egg production is expected to increase about
2 percent in 2000. Higher production levels and slower growth in exports led
to lower retail prices in the last 3 years. Per capita consumption is expected
to reach 258.6 eggs in 2000, up 1 percent from 1999. 

Dairy products. 
For most of 1999, milk production could not keep pace with demand, and the CPI
for dairy products increased 5.8 percent. Retail prices are expected to
decline 1-2 percent in 2000 as milk production expands due to higher producer
prices last year, lower feed prices, and ample alfalfa supplies.

A robust economy is projected to keep dairy demand brisk in 2000. Strong
consumer demand for dairy items, especially cheese, butterfat products, and
gourmet ice cream, is expected to continue this year. Consumer readiness to
buy these items is due partly to rising disposable personal income. Increased
spending for away-from-home meals, and the willingness to pay for convenience
and other forms of commercial food preparation are also important factors.

Fats and oils. 
Prices increased 1 percent in 1999 and are expected up 1.5-2.5 percent in
2000. The small increase was due largely to lower retail prices for butter,
which accounts for 31 percent of the fats and oils index (butter was
transferred from dairy products category in December 1997). The remaining
items in the fats and oils index are highly processed food items (e.g., peanut
butter, salad dressing), and their price changes are influenced by the general
inflation rate as well as U.S. and world supplies of vegetable oils.

Fresh fruits. 
The fresh fruit index rose 8 percent in 1999, due mainly to higher retail
prices for fresh oranges (navel oranges up 49 percent and Valencia oranges up
44 percent), which account for 20 percent of the fresh fruits index. Retail
prices for many other fruits also averaged above the previous year, including
grapefruit (up 8 percent), grapes (up 16 percent), lemons (up 11 percent),
peaches (up 5 percent), pears (up 2 percent), and strawberries (up 3 percent).
Retail apple prices were lower in first-half 1999, reflecting sales of the
record 1998 crop. Apple production fell 7 percent in 1999, and prices since
last fall have remained above year-earlier levels. The fresh fruit CPI is
forecast to increase 2 to 3 percent in 2000, with continued strong U.S.
consumer demand offsetting a return to normal production levels (following a
reduced 1998/99 citrus crop). 

Fresh vegetables. 
Fresh-market vegetable acreage for harvest increased 1 percent in 1999, with
summer vegetable area up 5 percent over a year earlier. Growing conditions in
major fresh vegetable areas were normal in 1999, and the CPI for fresh
vegetables fell 3 percent. With reduced grower and retail prices, growers may
have the incentive to cut acreage in 2000. However, winter-season vegetable
acreage in primary desert production areas in southwestern U.S. is up for
several major vegetables, including tomatoes and lettuce. Assuming normal
weather and growing conditions in the major fresh vegetable growing areas in
2000, the fresh vegetable index is forecast to increase 2-3 percent.

Processed fruits and vegetables. 
Adequate supplies of most fruits and vegetables for processing limited the
rise in the CPI for processed fruits and vegetables to 2.1 percent in 1999.
The index is expected up 2-3 percent in 2000. 

Sugar and sweets. 
The sugar and sweets index rose only 1.4 percent in 1999, reflecting
relatively low inflation and increased production. The CPI is projected to
increase 1.5-2.5 percent in 2000, despite a forecast record 9 million short
tons of sugar production in 1999/2000, as demand remains strong. U.S. sugar
consumption has expanded at a rate of about 1.9 percent per year since
1985/86.

Cereal and bakery products. 
These items account for a large portion of the at-home food CPI-- almost 16
percent. The CPI for cereals and bakery products increased 2.2 percent in
1999, reflecting modest gains in processing costs and lower grain prices in
1999. In most cases, processing and marketing account for more than 90 percent
of cereal and bread production costs , with farm ingredients a minor component
of total cost. With consumer demand for bakery products expected to remain
fairly strong, the CPI is forecast up 2-3 percent in 2000.

Nonalcoholic beverages. 
The CPI for nonalcoholic beverages, up 1 percent in 1999, is forecast to
increase 2-3 percent in 2000. Carbonated beverages and coffee are the two
major components, accounting for 38 percent and 28 percent of the nonalcoholic
beverages index. Retail prices for soft drinks recovered slightly in 1999
following declines in 1997 and 1998. Partially offsetting these gains were
lower coffee prices, reflecting a near-record crop in Brazil, the largest
producer of arabica coffee beans. Excellent weather for the current crop
should lead to an ample supply and larger U.S. stocks with continued lower
consumer prices. The U.S. imports up to 80 percent arabica beans along with
15-20 percent robustas, which go mainly to soluble (instant) coffee or are
blended with arabicas. 

Other foods. 
Miscellaneous prepared foods are highly processed and are largely affected by
changes in the all-items CPI. These products include frozen dinners, pizzas,
and precooked frozen meats. Competition among these products and from the
away-from-home market should continue to dampen retail price increases for
items in this category. In 1999, the CPI for this category increased 2.1
percent and is expected to rise 2-3 percent in 2000. 

Annette L. Clauson (202) 694-5389
aclauson@ers.usda.gov


COMMODITY SPOTLIGHT

U.S. Organic Agriculture Gaining Ground

Organic farming became one of the fastest growing segments of U.S. agriculture
during the 1990's, and producers, exporters, and retailers are still
struggling to meet consumer demand for a wide range of organic products.
Certified organic cropland more than doubled in the U.S. during the 1990's,
and two organic livestock sectors--eggs and dairy--grew even faster, according
to a new study from USDA's Economic Research Service (ERS). The study updates
USDA estimates of land farmed with organic practices during 1992-94 with 1997
estimates, and provides state- and crop-level detail that has been unavailable
in the past. 

Organic produce, milk, eggs, pasta, frozen dinners, and pharmaceuticals are
among the many items that consumers count on finding in natural foods
supermarkets and are beginning to expect in mainstream supermarkets as well.
The International Trade Centre UNCTAD/WTO (ITC) estimates that combined retail
sales of organic food and beverages in major world markets for these goods--
primarily the U.S., Japan, Denmark, France, Germany, Italy, the Netherlands,
Switzerland, and the U.K.--amounted to $11 billion in 1997 and $13-$13.5
billion in 1998. Organic food sales in 1997 accounted for 1 to 2 percent of
total food sales in most of these countries, including the U.S., and
medium-term growth rate forecasts range from 5-10 percent annually for Germany
to 20-30 percent for the U.S. and 30-40 percent for Denmark, according to the
ITC. 

U.S. producers are turning to organic farming systems as a potential way to
lower input costs, decrease reliance on nonrenewable resources, capture
high-value markets and premium prices, and boost farm income. Farmers in 49
states dedicated 1,346,558 acres of farmland to organic production systems and
used third-party organic certification services in 1997. Two-thirds of the
farmland was used for growing crops, with Idaho, California, North Dakota,
Montana, Minnesota, Wisconsin, Iowa, and Florida as the top producers. Nearly
half the states were raising certified organic livestock. Colorado and Alaska
had the largest amount of organic pasture and rangeland. 

In the fruit, vegetable, and specialty grain sectors, organic farming has made
deeper inroads than in other farm sectors. While only one-tenth of a percent
of U.S. corn and soybean crop acreage was grown under certified organic
farming systems in 1997, over 1 percent of oats, dry peas, and tomatoes was
grown organically and about 2 percent of apple, grape, lettuce, and carrot
acreage was organic. Nearly one-third of the U.S. buckwheat, herb, and mixed
vegetable crops was grown under organic farming systems in 1997. 

More recent reports from some U.S. certifiers indicate that the momentum seen
in organic certification during the ERS study period has continued. California
Certified Organic Farmers, one of the top certifiers in that state, estimates
1999 acreage at 96,878, up 38 percent from 1997. Idaho estimates its 1999
certified organic cropland (excluding wild-harvested herbs) at 85,061 acres,
up 55 percent from 1997. Farm Verified Organic, a private certifier
headquartered in North Dakota and operating in multiple states, estimates it
certified 99,987 acres in 1999, also up 55 percent from 1997. Preliminary
estimates from the Washington Department of Agriculture show 1999 certified
acreage at 30,000, up 150 percent from 1997. 

Organic farming systems rely on ecologically based practices such as cultural
and biological pest management, and virtually exclude the use of synthetic
chemicals in crop production and prohibit the use of antibiotics and hormones
in livestock production. Under organic farming systems, the fundamental
components and natural processes of ecosystems, such as soil organism
activities, nutrient cycling, and species distribution and competition, are
used to work directly and indirectly as farm management tools. For example,
habitat needs for food and shelter are provided for predators and parasites of
crop pests, planting and harvesting dates are carefully planned and crops are
rotated, and animal and green manures are cycled in organic crop production
systems. 

Organic livestock production systems attempt to accommodate an animal's
natural nutritional and behavioral requirements. Livestock standards address
the origin of each animal and incorporate requirements for living conditions,
access to the outdoors, feed ration, and health care practices suitable to the
needs of particular species. For example, dairy cows must be organically
managed for a year prior to producing organic milk, must receive only
100-percent organic feed and allowed supplements, must have access to pasture,
and cannot be treated with antibiotics. 

U.S. governmental efforts to facilitate organic production have focused
primarily on developing national certification standards to assure consumers
that these commodities meet a consistent standard and to streamline interstate
commerce in organically grown agricultural products. It was private
organizations, mostly nonprofits, that began developing certification
standards in the early 1970's as a way to support organic farming and thwart
consumer fraud. Some states began offering organic certification services in
the late 1980's for similar reasons. On the Federal level, Congress passed the
Organic Foods Production Act of 1990 to establish national standards for
organically produced commodities. This legislation requires that all except
the smallest organic growers must be certified by a state or private agency
accredited under national standards currently being developed by USDA. 

Forty organic certification organizations, including a dozen state programs,
conducted third-party certification of organic production in 1997, many
following the standards outlined in the Organic Foods Production Act of 1990.
All of the state and private groups certified organic production of crops, and
16 of these groups certified production of livestock as well. State and
private groups that currently certify growers are expected to seek
accreditation by USDA when the national program standards are implemented. 

Specialty Crops Show Big Gains

[One acre equals 0.4047 hectares.]

Markets for organic vegetables, fruits, and herbs have been developing for
decades in the U.S., and these crops are grown organically in more states than
any other type of commodity. State and private groups certified over 180,000
acres of these crops in 44 states in 1997, more than double the amount
certified in 1994, with the biggest gains in cultivated and wild-harvested
herbs. 

About 2 percent of top fruit and vegetable crop acreage--apples, carrots,
lettuce, and grapes--was managed organically. Large farms with hundreds or
thousands of acres produced organic processed tomatoes, wine grapes, and other
high-value crops on a commercial scale, while numerous farms with small
acreages still specialized in mixed-vegetable production for direct marketing
to consumers and restaurants.

Organic vegetable crops were produced on 48,227 acres in the U.S. in 1997.
Tomatoes, lettuce, and carrots were grown on about a quarter of total organic
vegetable acreage, mixed vegetables were grown on a third, and the remainder
was "other" or "unclassified." Mixed vegetable production is characterized by
small acreages and parcels with a large number of horticultural crops. In
1997, U.S. farmers and market gardeners gained certification for nearly 3,000
acres of organic mixed vegetables on farms or parcels that were 5 acres or
less, and for over 14,000 acres on farms and parcels over 5 acres. New York
organic producers had over 1,400 acres in the 5-acres-or-less category. 

According to USDA producer surveys, certified organic vegetable growers have
smaller acreages than conventional growers, and a much higher percentage use
direct marketing. Over three-quarters of certified organic vegetable producers
surveyed by USDA in 1994 had less than 10 acres of vegetables, compared with
only 35 percent of the conventional vegetable producers. Nearly half of the
surveyed organic producers, and the majority of those with under 10 acres,
reported marketing their vegetables directly to consumers through farmers'
markets, consumer subscriptions, restaurants, and other direct marketing
outlets. 

California producers grew nearly half of the organic vegetables certified in
1997, using six private groups for certification. California growers produced
over 4,400 acres of lettuce, about 2,600 acres of carrots, and nearly 2,000
acres of tomatoes in 1997. Colorado, Washington, Arizona, Oregon, Minnesota,
New York, Illinois, and Florida had at least 1,000 acres of organic vegetables
each in 1997, certified by a mix of state and private groups. Washington
growers had over 1,400 acres of organic tomatoes, and Arizona had over 1,200
acres of certified organic lettuce. 

Demand for carrots was strong during the ERS study period (1992-97), and
monthly organic prices in the Boston wholesale market, for example, averaged
110 percent higher than for conventionally grown carrots. Prices for organic
processing tomatoes were consistently over 100 percent higher than for
conventional processing tomatoes at the farm gate level during 1990-96,
according to private-sector price reports. 

Organic vegetable production for national distribution and export was
concentrated in only a few states in 1997--California, for example, had six
times more certified organic vegetable acreage than any other state--but
growers in at least 43 states had some acreage devoted to organic vegetables.
Over 2 percent of vegetable acreage in top vegetable producing states, such as
California and Arizona, as well as minor producing states, such as
Massachusetts, Maine, and Vermont, was managed under organic farming systems
in 1997. Vermont has an organic farming association that has been promoting
local organic agriculture for almost three decades, and that state had the
highest percentage (24 percent) of its vegetable acreage under organic
management. 

Organic apples, citrus, grapes, and other fruits and nuts were grown on over
49,000 acres in the U.S. in 1997. Grapes accounted for 39 percent of total
acreage certified that year, followed by apples (18 percent), citrus (12
percent), and tree nuts (10 percent). California growers produced almost all
of the organic grapes. Organic apples were produced in 16 states, and Arizona,
California, Washington, and Colorado had between 1,000 and 3,000 acres each. 

California, Florida, Arizona, and Texas were the top citrus producers (organic
and nonorganic). The Texas Agricultural Extension Service indicates that
organic citrus production potential is high in that state because most of the
sucking insect and mite pests are under partial biological control, and
cultural techniques and plant material quarantines effectively address many
major citrus diseases. Nine states produced organic tree nuts in 1997 on 4,908
acres, with California growers producing 3,542 acres of the nuts (almonds,
walnuts, and pistachios) and Texas producing 913 acres (mostly pecans). 

Certified organic herbs were produced for culinary and medicinal uses in 32
states on over 6,400 acres in 1997, led by California and Washington. State
and private agencies also certified over 80,000 acres of forests, scrublands,
and other natural areas in three states for wild-harvesting organic herbs and
other crops in 1997. The Idaho Department of Agriculture's Organic
Certification Program, for example, certified 52,000 acres of certified
organic wild-harvested St. John's wort, a popular medicinal herb, in 1997.
Certified organic cut flowers were produced in a dozen states on 288 acres in
1997, and mushrooms, flowers, and other crops were also organically grown in
377,296 square feet of greenhouses in 10 states in 1997. 

Adoption Varies
For Grains & Livestock

Organic farmers grow a diversity of field crops because of the key role crop
rotation plays in controlling weeds and maintaining fertility in organic
farming systems. Data from organic certification agencies indicate that
organic farmers are growing major grains and oilseeds on a small scale, along
with a host of other field crops. Only one-tenth of a percent of the U.S. corn
and soybean crops was managed organically in 1997, and over 1 percent of the
oats and dry pea crops was certified organic. Over 3 percent of the U.S.
millet crop, 6 percent of the flax crop, and nearly one-third of the U.S.
buckwheat crop was certified organic. 

Certified organic grains were grown in 35 states in the U.S. in 1997. North
Dakota was the top producer with over 50,000 acres. Wheat was produced under
certified organic farming systems on over 125,000 acres in 1997, corn was
grown on over 42,000 acres, and oats and barley were each grown on almost
30,000 acres. Other certified organic grain crops--sorghum, rice (including
wild rice), spelt, millet, buckwheat, and rye--were grown on less than 15,000
acres each. Montana had the most acreage of certified organic wheat, Minnesota
led in corn and buckwheat acreage, and North Dakota had the most acreage of
oats, millet, and rye in 1997. Idaho had the most certified organic barley
acreage, and California had the most certified organic rice.

ERS estimates of 1997 certified organic wheat and corn acreage are 31 percent
greater than estimates by the private sector for 1995. U.S. farm-level organic
corn prices averaged 35 percent higher than U.S. cash prices for conventional
corn in 1995, and the premium gap widened in 1996 and 1997, according to an
analysis of private-sector data by a South Dakota State University economist.
Hard red spring wheat organic prices were 50 percent or more higher than U.S.
cash and futures prices for conventionally grown spring wheat. ERS estimates
of 29,748 acres of certified organic oats in 1997 is more than double the
private sector estimates for 1995, as organic oat prices averaged 35 percent
higher than U.S. cash prices for conventional oats in 1995 and the price
spread widened in 1996 and 1997. 

The ERS estimate of certified organic soybean acreage in the U.S. in 1997,
about 82,000 acres, is 74 percent greater than the private-sector estimate of
47,200 acres for 1995. Expansion of organic soybean acreage was due in part to
annual organic soybean prices, which averaged nearly double or more the U.S.
cash and nearby futures prices of conventional soybeans between 1995 and 1997.
Greater use of specialty markets by organic grain producers might partly
explain these price differentials. 

Certified organic dry peas and lentils were grown on 5,187 acres in the U.S.
in 1997, and Montana and North Dakota were the leading producers. Certified
organic dry beans were grown on 4,641 acres in the U.S. in 1997, and
California was the biggest producer. Certified organic oilseeds--including
flax and sunflowers--were grown on 31,433 acres in 18 states in 1997, with
North Dakota, California, and Utah the leading states.

Producers grew 62,460 acres of certified organic alfalfa hay, 11,579 acres of
grass silage and haylage, and 42,758 acres of unclassified hay and silage in
1997. Thirty-nine states had certified organic hay and silage production,
ranging from under 100 acres each in Arkansas, New Hampshire, Nevada,
Delaware, Rhode Island, and West Virginia to over 5,000 acres each in Idaho,
Wisconsin, New York, North Dakota, Minnesota, Montana, Vermont, and South
Dakota. Acreage of these crops expanded 51 percent between 1995 and 1997, as
the number of certified organic milk cows more than doubled during that
period. 

Organic meat and poultry markets have lagged those for crops, partly because
meat and poultry could not be labeled as organic until February 1999, when a
provisional label was approved by USDA. Food crops and nonmeat animal foods
(eggs and dairy products) are regulated by the Food and Drug Administration,
and have been allowed to carry an organic label throughout the 1990's. While
the number of certified organic beef cows, hogs and pigs, and sheep and lambs
declined sharply during the study period, 1992-97, the number of dairy cows
and layer hens increased sharply. The market for organic meat products is
beginning to grow now that organic labeling is permitted, and is starting to
push up use of certified organic pasture and rangeland and demand for
certified organic feed grains.

Farmers and ranchers raised certified organic cows, pigs, and sheep in 23
states in 1997. Dairy cows were managed organically in 13 states in 1997, and
New York was the leading state with 3,386 animals, followed by Wisconsin
(2,509 dairy cows) and Minnesota (2,425 dairy cows). Pennsylvania, California,
and Maine also had over 1,000 organic dairy cows each. The number of certified
organic milk cows in the U.S. nearly tripled between 1992 and 1994, and more
than doubled between 1994 and 1997. Organic dairy sales in mainstream
supermarkets were up 200 percent or more--albeit from a small base--in
Baltimore, Phoenix, Detroit, Boston, and other major markets between December
1997 and December 1998, according to industry sources.

The U.S. had 537,826 certified organic layer hens in 1997, up sharply from
47,700 in 1994. California was the leader in organic poultry production, with
350,000 organic birds, followed by New York (161,304 birds) and Virginia
(62,400 birds). Other organic animal specialties, including goats, fish, and
bee colonies, were certified in several states.

Organic Production Expanding

While adoption of organic farming systems showed strong gains between 1992 and
1997 and the adoption rate continues high, the overall adoption level is still
small--only two-tenths of 1 percent of all U.S. cropland was certified organic
in 1997. Obstacles to adoption include large managerial costs and risks of
shifting to a new way of farming, limited awareness of organic farming
systems, lack of marketing and technical infrastructure, inability to capture
marketing economies, insufficient numbers of processors and distributors, and
limited access to capital. State and private certifier fees for inspections,
pesticide residue testing, and other services represent an added production
expense for organic producers. And farmers can't command certified organic
price premiums during the 3-year required conversion period before crops and
livestock can be certified as organic.

Europe has converted a much higher level of farmland to organic management--
about 1.5 percent of total agricultural land was organic in 1997--and adoption
levels ranged from 10 percent in Austria and 7 percent in Switzerland to 2
percent in Germany and 0.4 percent in the U.K. Most countries in Europe have
offered direct financial support for conversion to organic farming since the
late 1980's. 

Several states in the U.S. have begun providing financial support for
conversion to organic farming systems as a way to capture environmental
benefits of these systems. In Iowa, organic crop production has been an
approved state conservation practice since 1997, and is eligible for
cost-share support from USDA's Environmental Quality Incentive Program. In
Minnesota, the Department of Agriculture implemented an Organic Cost Share
Program in 1999, which is designed explicitly to reimburse Minnesota producers
for up to two-thirds of the cost for organic inspection and certification.
Also, several of the state-run certification programs in the U.S. charge
nominal or very low fees to encourage organic production. A recent policy
analysis from the University of Georgia suggests that these state incentive
payments will be helpful for growers who are already interested in organic
production, but cautions that more obstacles need addressing to attract most
large producers. 

In addition to government efforts in developing national certification
standards, and in expediting interstate commerce in organic products, USDA has
been facilitating and promoting organic exports for several years. A pilot
program to offer organic crop insurance is also under development. Several
other USDA research programs have focused on organic and sustainable farming
systems since the 1990's, and more such programs are beginning to take shape.  

Catherine Greene (202) 694-5541
cgreene@ers.usda.gov

BOX--Organic Farming
USDA Proposed Rules for Organic Farmers and Handlers

Purchasers of organic foods would be able to rely on uniform and consistent
national standards for defining the term "organic," under USDA's new proposal
for regulating organic production and handling in the U.S. The proposal,
announced March 7, 2000, addresses the methods, practices, and substances used
in producing and handling organic crops, livestock, and processed foods. It
includes requirements for labeling, certification, and the accreditation of
certifiers. 

The new proposal reflects recommendations made in over 275,000 responses to
USDA's initial proposal in December 1997. Currently, organic food is certified
by various state and private organizations that apply their own standards in
defining the term "organic." The proposed regulations are similar to most of
the standards organic producers and handlers currently use, and are intended
to be flexible enough to accommodate the wide range of operations and products
grown and raised throughout the U.S. The new rules require operations that
grow or process organic foods to be certified by USDA-accredited certifying
agents. USDA-certified operations may label their products as organic.

Farms and handling operations that sell less than $5,000 per year of organic
agricultural products are exempt from certification. These producers and
handlers must still abide by national standards for organic products and must
comply with labeling requirements. Retail food establishments that sell
organically produced agricultural products but do not process them are also
exempt from certification.

The proposed regulations would prohibit use of genetic engineering (genetic
modification), irradiation, and sewer sludge in the production of organic
foods. The production requirements apply to the way the product is created,
not to measurable properties of the product itself. Although specific
practices and materials used by individual organic operations may vary, the
proposed standards require every aspect of organic production and handling to
comply with provisions of the Organic Foods Production Act of 1990, which the
new rules would implement. The national standards would include a National
List of approved and prohibited substances for use in organic production and
handling (approved synthetic, and prohibited nonsynthetic, substances).
Producers must operate under an organic system plan approved by an accredited
certifying agent.

Crop Standards

For all crop products intended for sale as organic, the proposed organic crop
production standards detail the following:  
*   land would have no prohibited substances applied to it for at least 3
years before the harvest of an organic crop;
*   crop rotation would be implemented; 
*   the use of genetic engineering (included in excluded methods),
irradiation, and sewage sludge is prohibited;
*   soil fertility and crop nutrients would be managed through tillage and
cultivation practices, supplemented with animal and crop waste materials and
allowed synthetic materials;  
*   preference would be given to the use of organic seeds and other planting
stock, but a farmer could use nonorganic seeds and planting stock under
certain specified conditions;  
*   crop pests, weeds, and diseases would be controlled primarily through
management practices including physical, mechanical, and biological controls.
When these practices are not sufficient, a biological, botanical, or allowed
synthetic substance may be used. 

Livestock Standards

Livestock standards apply to animals used for meat, milk, eggs, and other
animal products represented as organically produced. The proposed livestock
standards provide details of the following requirements:
*   animals for slaughter must be raised on an organic operation from birth,
or no later than the second day of life for poultry;  
*   producers would be required to feed 100 percent organically produced feeds
to livestock but could also provide allowed vitamin and mineral supplements;  
*   organically raised animals could not be given hormones or antibiotics;  
*   preventive management practices, including the use of vaccines, would be
used to keep animals healthy;  
*   producers would be prohibited from withholding treatment from a sick or
injured animal; however, animals treated with a prohibited medication would be
removed from the organic operation;  
*   all organically raised animals would have to have access to the outdoors,
including access to pasture for ruminants, and animals could be temporarily
confined only for reasons of health, safety, or to protect soil or water
quality.

The public will be able to submit comments on this revised proposed rule in
both written and electronic form for 90 days after its publication in the
Federal Register March 13, 2000. USDA will then review and categorize the
comments, make any necessary revisions to the proposed rule, and submit a
final rule for publication in the Federal Register. Discussion of public
comments will be included in the final rule.

Implementation of the regulations, starting with the first round of certifier
accreditation, can begin when the final rule is published. During the first 18
months of implementation, all clients of certifiers are considered
USDA-certified immediately upon USDA accreditation of their certifier.
Certified operations must comply with the national standards and will be
assessed by their certifier on the anniversary date of their original
certification.

For further information on the proposed rules, visit USDA's Agricultural
Marketing Service/National Organic Program (NOP) website at
www.ams.usda.gov/nop/, or contact NOP staff by phone (202) 720-3252, or email,
NOP.Webmaster@usda.gov. The official public comment period on the revised
proposed rule is March 13 through June 12, 2000.

BOX Organic Farming

Measuring Adoption of Organic Farming Systems in the U.S.

The ERS study of expansion of organic farming analyzed 1997 data from 40 state
and private certifiers. Uncertified production was excluded, even though it
may represent a large segment of organic production, because of difficulty in
determining production criteria used by uncertified growers. A similar
approach was used in USDA's 1992-94 analysis of U.S. organic production.

Membership directories, acreage reports, and other sources of certified
acreage and livestock data were obtained from U.S. certifiers and used to
calculate 1997 estimates of certified acreage in the U.S. Eleven of the
private certifiers provided certification services in more than one state in
1997. Several of these certifiers provided services in only a few adjacent
states, but three of them provided services in 20 states or more. Acreage
reports and other data sources for most of these national certifiers,
particularly the larger ones, showed crop acreage and livestock numbers by
state. The California Agricultural Statistics Service obtained data from one
of the certifiers for this study.

Certified organic acreage and livestock estimates were calculated by state and
by commodity, with several exceptions. First, several certifiers had already
updated 1997 data records with data for 1998, and their 1998 data were used in
this report. Second, data that could not be broken down by commodity are
reported at an aggregate level. The amount of acreage that could not be
classified by commodity varied by farm enterprise (9 percent of grain acreage,
4 percent of legume acreage, 40 percent of oilseed and hay acreage, 38 percent
of vegetable acreage, and 21 percent of fruit acreage). Finally, some data
could not be classified by state (well under 1 percent of the total) and are
included in a regional category. 

BOX - Organic Farming

Selected USDA Programs and Projects to Facilitate Organic Production

Market facilitation
Agricultural Marketing Service, USDA--National Organic Program,
www.ams.usda.gov/nop/.
Foreign Agricultural Service, USDA--Organic export promotion, Organic
Perspectives newsletter, www.fas.usda.gov/htp/.

Research and education
CSREES, USDA--Sustainable Agriculture Research and Education Program,
www.sare.org/san/
CSREES, USDA--National Research Initiative Competitive Grants, includes
Biologically Based Pest Management Program,
http://www.reeusda.gov/crgam/nri/programs/progdesc/biobased.htm, and others.
CSREES, USDA--Small Farm Program, www.reeusda.gov/agsys/smallfarm/ 
NAL, USDA-Alternative Farming Systems Information Center,
http://www.nal.usda.gov/afsic.
Beltsville Agricultural Research Center, ARS, USDA--The farming systems
project, (includes organic trials) and others,
www.barc.usda.gov/psi/susag/int-pro.htm, cavigelm@bs.ars.usda.gov
Economic Research Service, USDA--Organic production and marketing research,
www.ers.usda.gov; cgreene@ers.usda.gov and lkglaser@ers.usda.gov.

Risk reduction
Risk Management Agency, USDA--Organic insurance pilot program under
development, Contact:  Sharon Hestvik (202) 720-6685;
Sharon_hestvik@wdc.fsa.usda.gov.

Conservation practice standards
Natural Resources Conservation Service, USDA--Conservation practice standards,
www.nrcs.usda.gov


WORLD AGRICULTURE & TRADE

Free Trade Area of the Americas: What Are the Benefits for U.S. Agriculture?

Progressive elimination of trade and investment barriers within the Western
Hemisphere is the goal of the Free Trade Area of the Americas (FTAA), a
regional agreement now under negotiation among 34 countries, including the
U.S. In the interest of free trade, participants have agreed that "all tariffs
are on the negotiating table," including tariffs on agricultural imports. With
comprehensive global negotiations under the World Trade Organization having
faltered at the Seattle meeting, regional trade pacts such as FTAA become more
important for expanding trade and investment opportunities.

The FTAA is one of several regional trade agreements (RTA's) in which the U.S.
participates. Others include the North American Free Trade Agreement (NAFTA)
and the Asia Pacific Economic Cooperation (APEC) forum. The FTAA process began
in December 1994, when President Clinton and 33 other heads of state made a
commitment at the Miami Summit of the Americas to liberalize trade and
financial markets in the region. 

Two developments helped lay the groundwork for the FTAA. First was the
solidification of democracies. By 1994, almost all states in the Americas had
adopted a democratic form of government. Among the goals of the FTAA is to
advance and strengthen democratic values and institutions in the hemisphere by
enhancing prosperity through freer trade. Second, during the previous decade
many Western Hemisphere countries, including the U.S., had shifted toward
policies that emphasized free markets, less government intervention, and more
open and competitive trade relations. The FTAA principles of open markets,
hemispheric integration, and sustainable development should reinforce the
greater market orientation of economic policy in the region.

Formal negotiations, which began in April 1998, are expected to conclude by
2005. Negotiations are proceeding in nine separate groups: agriculture; market
access; investment; services; government procurement; dispute settlement;
intellectual property rights; subsidies, antidumping and countervailing
duties; and competition policies. Specific objectives have been identified for
each negotiating group, including agriculture. While agriculture is being
addressed in a separate negotiating group, it will also be affected by
negotiations in other groups, such as market access and subsidies,
anti-dumping, and countervailing duties. There are procedures to ensure that
the work of separate groups is coordinated. Each group is developing a chapter
for the final agreement, which is expected to be a balanced, comprehensive,
single undertaking, with consensus on all chapters.

What will the pact mean for U.S. agriculture?  Implications for U.S. producers
are likely to have several dimensions. Foremost, the FTAA will expand market
opportunities for U.S. agricultural products in the hemisphere by
progressively eliminating tariffs and nontariff barriers, facilitating
investment, and helping to lock in members' unilateral policy reforms. The
agreement will also consolidate the many subregional free trade agreements in
the Western Hemisphere, such as the MERCOSUR free trade area among Brazil,
Argentina, Uruguay, and Paraguay, which can otherwise put nonparticipating
countries, including the U.S., at a competitive disadvantage. Provisions of
these many subregional trade pacts are certain to influence the outcome of the
FTAA. Finally, because the FTAA will be negotiated concurrently with the
opening of multilateral negotiations on agriculture under the WTO, scheduled
for later in 2000, it could help define and advance the global talks,
providing benefits for U.S. agriculture that extend beyond the Western
Hemisphere. 

FTAA Will Expand U.S. Ag Trade

Because Western Hemisphere countries' tariffs on agriculture tend to be higher
than on other products, the FTAA is expected to lead to more substantial
increases in U.S. agricultural trade than in other U.S. sectors. A recent
analysis by USDA's Economic Research Service concluded that when tariffs are
eliminated in the FTAA, U.S. agricultural exports to and imports from other
Western Hemisphere countries will increase annually in the short run (first 5
years after the agreement) by 8 and 6 percent respectively, and by 8 and 7
percent in the medium run (5 to 15 years). Total U.S. agricultural exports and
imports will increase by 2 and 3 percent respectively in the short run, and by
1 and 3 percent in the medium run. In the long run (beyond 15 years), U.S.
agricultural exports could continue to grow, but at a slightly lower rate than
in the early period following trade liberalization. U.S. agricultural export
growth and the more efficient resource reallocation that follows reduction of
trade barriers will strengthen U.S. farm income. 

The FTAA will benefit both the U.S. and other participants. Productivity gains
in Latin American countries, as they open their markets to international
competition, are expected to increase their incomes and demand for U.S.
products. Trade liberalization is generally presumed to advance productivity
through two channels: it allows greater imports of goods that embody
technological advances, and it creates greater incentives to save and invest.
These dynamic gains from trade liberalization are likely to do more than
tariff reduction to increase U.S. agricultural trade under the FTAA.
Productivity gains in Latin American countries will increase their demand for
U.S. products as well as their competition with the U.S. in third-world
markets. 

The impacts on U.S. trade vary among commodities. An FTAA should increase the
wheat market share of the U.S. and Canada in Brazil. Gains in U.S. exports of
corn, soybeans, and cotton in the hemisphere are expected, while there may be
little impact on U.S. rice, meats, and dairy trade. The agreement could have
major implications for U.S. sugar, peanuts, and orange juice. U.S. sugar
prices, production, and exports could decline significantly, and imports could
increase, giving U.S. consumers more access to inexpensive imported sugar.
U.S. peanut producers in the traditional quota production areas of the
Southeast might have difficulty competing at world prices. Removal of tariffs
may create incentives to import less-expensive Brazilian orange juice, which
may displace some Florida juice. 

In addition to the elimination or reduction of tariffs and other measures, a
prominent agricultural topic in the FTAA negotiations is sanitary and
phytosanitary (SPS) measures. Over the next 5 years, one task of FTAA
negotiators will be to define a method and a process to ensure that SPS
measures applied in the hemisphere are consistent with the WTO Agreement on
the Application of SPS Measures, which became effective in June 1995. 

The WTO's SPS agreement imposed disciplines on members' use of measures to
protect human, animal, and plant life from foreign pests, diseases, and
contaminants. These disciplines were intended to protect the right of member
countries to adopt trade measures designed to protect human health and the
environment, while minimizing the potential for disguising trade barriers as
SPS measures. 

FTAA & Regional Trade Pacts

Regional trade agreements in the Western Hemisphere have been referred to as a
spaghetti bowl, a description of the region's crisscrossing web of
preferential trade pacts. Some of the 30 RTA's in force in the Western
Hemisphere date back to the 1950's and 1960's. These preferential agreements
are of several types. Free trade agreements, such as NAFTA, provide for
duty-free treatment on most goods traded among the partners, while each member
country maintains its own tariffs on nonmembers' products. In a customs union,
such as MERCOSUR, members erect common external tariffs as well as liberalize
internal trade. In nonreciprocal agreements, such as CARICOM's agreements with
Venezuela and Colombia, access to a larger market, generally in a more
developed country, is offered without demands for reciprocity.

Whether RTA's are beneficial or detrimental to the world trading system has
been debated for decades. Some argue that these agreements are inherently
discriminatory because they extend preferences to pact members and are thus
inconsistent with the global community's commitment to multilateral principles
under the General Agreement on Tariffs and Trade (GATT), the WTO's precursor.
Regional trade pacts have been allowed as an exception to global trade rules,
provided they meet the criteria outlined in GATT Article 24, which are
intended to minimize RTA's trade diverting impacts. 

An added criticism of the Western Hemisphere's spaghetti bowl of trade pacts
is that the multiple rates create an inefficient system of preferences. But,
others argue that whenever a regional trade agreement achieves trade
liberalization, the world is better off, in part because of the expectation
that any trade liberalization will have a dynamic effect that may eventually
lead to greater global trade liberalization. 

The history of trade pacts in Latin America lends support to both viewpoints
on regionalism. Early agreements were often protectionist. They tended to
exclude sensitive sectors from trade liberalization, particularly agriculture,
and attempted to create protected export markets by adopting or maintaining
high tariffs against nonmembers. 

Western Hemisphere trade pacts over the past decade have had a different
character. Some have been used to consolidate the greater market orientation
of members' trade policies. The North American Free Trade Agreement (NAFTA),
for example, helped to lock in Mexico's policy reforms of the late 1980's,
including its unilateral trade liberalization and the reform of its foreign
investment code. MERCOSUR eliminated most tariffs among its members, as well
as lowering tariffs against the rest of the world. 

The FTAA process is certain to be affected by the presence of established
RTA's within the region. Countries in some regional trade pacts are
negotiating as a bloc, at least on some issues, to advance their common
interests within the FTAA. Members negotiating as blocs are MERCOSUR, the
Andean Pact, and the CARICOM union of Caribbean countries. This development
has helped solidify some issues, such as the high priority the FTAA has placed
on facilitating the full participation of smaller and developing economies in
the free trade pact.

By including all sectors in trade liberalization, the FTAA promises to achieve
more in agriculture than has so far been achieved in some of the region's
other trade pacts. Agriculture is a sensitive sector, particularly in smaller
economies where a large share of the population depends on it for a
livelihood. Agricultural goods are not included in free trade agreements of
the Central American Common Market (CACM), the Latin American Free Trade
Association (ALADI), or the Group of Three, which includes Colombia, Mexico,
and Venezuela. Remaining trade barriers have become irritants among Latin
American trade partners, particularly practices like price bands. Most
agricultural goods are included in NAFTA, MERCOSUR, and CARICOM, with some
notable exceptions, including sugar, dairy, poultry, and eggs. 

Agreements that include agriculture can put the U.S. at a competitive
disadvantage when the U.S. is not a member. In MERCOSUR, for example, U.S.
exporters have benefited from lower MERCOSUR tariffs on goods shipped by
outside countries, but U.S. exporters now face tariff differentials in the
MERCOSUR market that favor member suppliers. Likewise, Chilean bilateral free
trade agreements with Canada and Mexico provide duty-free treatment on most of
their agricultural products, but Chile maintains an 11-percent
most-favored-nation tariff on goods from other countries, including the U.S.
Discriminatory subregional trade preferences against nonmembers in the Western
Hemisphere will disappear when the pacts are subsumed into the FTAA. 

FTAA & the WTO

Although the full round of global negotiations under the WTO has been
postponed, negotiations on agriculture will begin as scheduled, later in 2000.
FTAA talks on agriculture will parallel those in the WTO over the next several
years. The two negotiations will likely influence each other. 

One objective of the FTAA has been to maintain consistency between the
regional trade pact and the WTO. This is being done by building upon the
foundations laid by the WTO in areas such as SPS regulations, and by defining
methods for incorporating into the FTAA any progress made in the WTO venue. In
the area of SPS, the FTAA will work to achieve full implementation of the SPS
agreement within the hemisphere. Progress within the FTAA on complex topics
such as equivalence and harmonization of standards could help to advance the
multilateral process if a regional consensus can be achieved. 

The global scope of some issues may limit the ability of a regional pact to
effectively address them. For example, agricultural export subsidies, which
are used mainly by the European Union (EU), cannot be fully disciplined within
the FTAA. On issues such as these, the most effective role for the FTAA will
be to try to advance progress in the WTO by solidifying a common position. In
the case of export subsidies, FTAA members have agreed to work within the WTO
toward eliminating export subsidies and prohibiting their reintroduction in
any form. Domestic support is also addressed more effectively in multilateral,
rather than regional, negotiations.

Delay in the Seattle round of multilateral trade negotiations has sparked
greater interest in regional trade pacts as an alternative route toward trade
and investment liberalization. In agriculture, the planned opening of
agricultural trade negotiations at the WTO means that both regional and
multilateral paths can be pursued. Some have argued that regional trade pacts
can derail multilateral negotiations by creating protectionist fortresses with
an interest in preventing further WTO disciplines on agricultural trade. In
the case of the FTAA, the commitment of the pact to implement and advance WTO
disciplines suggests that the FTAA can complement U.S. efforts to liberalize
agriculture in a multilateral setting.  

Mary Burfisher (202) 694-5235 and John Link (202) 694-5228
burfishr@ers.usda.gov
jlink@ers.usda.gov

BOX - FTAA

The FTAA Chronology

Summit of the Americas
1994            Miami, Florida
1998            Santiago, Chile

Trade Ministerials
1995             Denver, Colorado
1996             Cartagena, Colombia
1997             Belo Horizonte, Brazil
1998             San Jose, Costa Rica
1999             Toronto, Canada 

Negotiating Group on Agriculture 
(four to five meetings annually)
May 1998 February 2001
     Miami, Florida 
March 2001 February 2003
     Panama City, Panama
March 2003 December 2004
     Mexico City, Mexico

BOX - FTAA

Objectives of the Negotiating Group on Agriculture of the Free Trade Area of
the Americas

*   Progressively eliminate tariffs and nontariff barriers, as well as other
measures with equivalent effects, which restrict trade between participating
countries. All tariffs will be subject to negotiation. Various trade
liberalization timetables may be negotiated to facilitate the integration of
smaller economies and their full participation in the FTAA negotiations. 

*   Ensure consistency of the FTAA with the WTO Sanitary and Phytosanitary
Agreement, so that SPS measures will be applied only to achieve the
appropriate level of protection for human, animal, or plant life or health;
will be based on scientific principles; and will be maintained only with
sufficient scientific evidence. 

*   Eliminate agricultural export subsidies affecting trade in the hemisphere. 

*   Identify other trade-distorting practices for agricultural products,
including those that have an effect equivalent to agricultural export
subsidies, and bring them under greater discipline. 

*   Incorporate progress made in the multilateral negotiations on agriculture
to be held according to Article 20 of the Uruguay Round Agreement on
Agriculture, as well as the results of review of the SPS Agreement. 

BOX - FTAA

U.S. Trade with the Americas

The U.S. is by far the world's largest agricultural exporter. As the richest
and most populous country in the Americas, it is also the region's largest
market for agricultural products. Total agricultural trade between the U.S.
and other countries of the Americas is growing rapidly, doubling since 1989.
In terms of total value, U.S. agricultural imports from the Americas--$19.9
billion in 1998--are only slightly higher than U.S. exports to the region--
$18.5 billion. In terms of shares of U.S. trade, however, the region is
substantially more important as a source of imports for the U.S. than as a
destination for U.S. exports. About 54 percent of all U.S. agricultural
imports come from Western Hemisphere countries, while about 36 percent of U.S.
agricultural exports go to the region. 

NAFTA trading partners (Canada and Mexico) dominate U.S. agricultural trade,
together supplying about 34 percent of total U.S. imports and taking 25
percent of total U.S. agricultural exports. This asymmetry in U.S. import and
export market shares is even more pronounced for other Western Hemisphere
countries, which together supply almost 20 percent of total U.S. agricultural
imports but purchase only 10 percent of U.S. agricultural exports.

The U.S. is a vital source of agricultural imports for the region. About 36
percent of all U.S. agricultural exports go to the Americas, which accounts
for almost 45 percent of the agricultural goods imported by the region. The
dichotomy is most striking for the Central American and Caribbean countries,
which together take about 5 percent of all U.S. agricultural exports, but
where the U.S. shipments account for almost 20 percent of their agricultural
imports. Similarly, about 3 percent of U.S. agricultural exports go to the
Andean countries, while the U.S. supplies more than 28 percent of their
agricultural imports. 

U.S. dominance is strongest within NAFTA, where the U.S. supplies about
two-thirds of agricultural products imported by Canada and Mexico (25 percent
of U.S. ag exports), and weakest in MERCOSUR, with only 8 percent of that
market (1 percent of all U.S. ag exports). Within NAFTA, the U.S. maintains a
strong market share not only for total agriculture but also for each of the
major product groups (grains, oilseeds, livestock products, and horticulture).
In MERCOSUR, where the U.S. share of total agricultural imports is relatively
low, the U.S. share of each of the major product groups is also low. This
pattern suggests that proximity of markets, factor endowments, and perhaps
broad-based trade agreements play a strong role in determining where U.S.
exports dominate. 

Proximity to Canadian and Mexican markets and participation in NAFTA provide
U.S. farmers a strong competitive edge. Conversely, distance from the Southern
Cone and exclusion from MERCOSUR create substantial impediments to U.S.
agricultural exports. The same pattern does not hold for the Andean Group or
for Central America and the Caribbean, where U.S. market shares vary
considerably by commodity category, with relatively weak U.S. exports of
horticultural and consumer goods and relatively strong U.S. exports of bulk
and intermediate goods.

U.S. Trade Partners in the Western Hemisphere

North America: Canada, Mexico (NAFTA)
South America: Argentina, Brazil, Paraguay, Uruguay (MERCOSUR); 
Bolivia, Colombia, Ecuador, Peru, Venezuela (Andean Community); Chile
Central American region: Belize, Costa Rica, El Salvador, Guatemala, Honduras,
Nicaragua, Panama
Caribbean region: Anguilla, Antigua and Barbuda, Aruba, Bahamas, Barbados,
Bermuda, Cayman Islands, Dominica, Dominican Republic, Grenada, Guadeloupe,
Haiti, Jamaica, Leeward and Windward Islands, Martinique, Montserrat, St.
Kitts and Nevis, St. Lucia, St. Vincent and Grenadines, Trinidad and Tobago,
Turks and Caicos Islands

BOX - FTAA

Major Trade Agreements in the Western Hemisphere

Regional scope agreements (cover a large number of countries in the region)
LAIA/ALADI---Latin American Integration Association (officially ALADI) 
Argentina, Bolivia, Brazil, Chile, Colombia, Ecuador, Mexico, Paraguay, Peru,
Uruguay, Venezuela
Customs unions (members remove trade barriers among participants, and set a
common level of trade barriers for outsiders)
Andean Community
Bolivia, Colombia, Ecuador, Peru, Venezuela
CACM
Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua
CARICOM
Bahamas, Jamaica, Belize, Montserrat, St. Kitts and Nevis, Antigua and
Barbuda, Dominica, Saint Lucia, Barbados, St. Vincent and Grenadines, Trinidad
and Tobago, Grenada, Guyana, Suriname.
MERCOSUR
Argentina, Brazil, Paraguay, Uruguay

Free trade agreements (members remove trade barriers among participants)
NAFTA
Canada, Mexico, U.S.
Group of Three
Colombia, Mexico, Venezuela
Bolivia   Mexico
Canada   Chile
Central America - Dominican Republic
Costa Rica   Mexico
Chile   Mexico
Mexico   Nicaragua

Nonreciprocal Agreements (concessions are one-way, usually granted by an
industrialized country to less developed countries)
CARICOM   Colombia
CARICOM   Venezuela
CBI   U.S.
Caribbean Basin Initiative (CBI): Antigua and Barbuda, Bahamas, Barbados,
Belize, British Virgin Islands, Costa Rica, Dominica, Dominican Republic, El
Salvador, Grenada, Guatemala, Guyana, Haiti, Honduras, Jamaica, Monserrat,
Dutch Antilles, Nicaragua, Panama, St. Kitts and Nevis, St. Lucia, St. Vincent
and Grenadines, Trinidad and Tobago.
ATPA   U.S. 
Andean Trade Preference Act (ATPA): Bolivia, Colombia, Ecuador, Peru.

Bilateral agreements: economic complementation free and preferential trade s
Scope (not as comprehensive as customs unions and free trade agreements)
Argentina - El Salvador
Bolivia   Guatemala
Brazil   Honduras
Chile   Mexico
Colombia   Nicaragua
Costa Rica   Panama
Dominican Republic   Peru
Ecuador   Venezuela

Source:  Foreign Trade Information System, Organization of American States. 
Economic Research Service, USDA


WORLD AGRICULTURE & TRADE

Emerging Trade Issues for Developing Countries

Developing countries are increasingly active participants in multilateral
trade negotiations. Of the 135 countries in the World Trade Organization, 70
percent are self-designated as developing countries. In contrast, only 48
countries participated in the multilateral Kennedy Round negotiations in the
mid-60's, and only about half were developing countries. Moreover, current and
future WTO negotiations will involve significant participation by developing
countries, both in setting the agenda and in forging various agreements. The
developing countries attribute their minor role in the Uruguay Round to lack
of understanding of multilaterally agreed-upon rules governing global trade
and to lack of resources to fully participate in the negotiations.

Developing countries are realizing that it is in their interest to help shape
rules on global trade policy. Since agriculture often provides a significant
amount of the export earnings of developing countries, major policy changes
influencing global agricultural trade directly affect their earnings and their
financing of imports. The Uruguay Round Agreement on Agriculture (URAA),
negotiated during 1986-94, for the first time developed multilateral rules for
agriculture similar to those governing trade in non-agricultural products. 

Developing countries are not necessarily a monolithic group regarding trade
issues. For example, developing countries, particularly the lowest income
countries, were afforded trade concessions under the URAA Special and
Differential Treatment (SDT) provision, allowing them to make relatively
smaller tariff reductions over longer periods of time compared with developed
countries, and largely exempting the poorest or "least developed countries"
from any major change. Countries benefiting from SDT, especially low-income
net food importers, tend to favor continuation of the provision. On the other
hand, middle-income developing countries like Argentina and Brazil, leading
food exporters, advocate freer trade in agriculture, arguing that SDT lowers
the economic benefits of trade reform. Policy concerns of developing countries
also vary by region and by type of commodities they trade.

This article highlights major agricultural trade issues of importance to lower
income developing countries in Latin America, South Asia, and Sub-Saharan
Africa that are likely to emerge in future negotiations. Commodity trade
flows, regional economic policies, and unsettled Uruguay Round issues are
reviewed.

Commodities & Policy Issues 
Vary by Region

The specific commodities that are traded influence the trade issues that are
important to developing countries. Most smaller and lower income developing
countries export only a few primary commodities (such as sugar, cocoa, and
bananas) and depend on imports for many goods, including food. Their
high-priority trade concerns are limited and are concentrated on only a few
export commodities. In larger economies, trade interests and issues are
diverse and their negotiating agendas are correspondingly larger.

Historical patterns of trade influence many countries' trade interests. More
than half of developing countries' trade is with industrial countries.
Moreover, geographical proximity influences trade patterns. For example, the
U.S. is the most important trading partner of Latin American countries.
Consequently, many of these countries are more concerned with changes in U.S.
trade policies than with changes in other industrial countries.

Since the late 1980's, most developing countries have made major policy
changes liberalizing their agricultural markets. Economic and trade responses
have varied, depending on their policy adjustments and resource endowments.
Agriculture's share of total trade, in general, has declined in most
developing countries in recent decades as trade in industrial goods has
rapidly increased. However, agriculture still represents a larger portion of
total trade for developing countries than for developed countries. 

The Latin American and Caribbean (LAC) region is host to a wide variety of
agricultural trading interests. Argentina and Brazil are two of the largest
net food exporters among developing countries. But if these two countries are
excluded, the region is a net food importer. Most countries in Central and
South America are exporters of beverage crops, fruits and vegetables, and
sugar. They tend to be importers of grains, oilseed products, and dairy
products. The Caribbean countries are largely service-oriented economies that
typically depend on imports to provide most of their food supplies.

Many LAC countries have engaged in macroeconomic reform and trade
liberalization over the past 15 years, abandoning a development strategy known
as "import substitution and industrialization" (ISI). The earlier strategy
attempted to promote domestic industrial development by using policy
instruments that included highly protectionist trade barriers. Trade reforms
that have been implemented effectively lowered transaction costs and trade
barriers, leading to greater trade and economic growth in most of the LAC
countries. 

For example, most import quotas were eliminated, while tariffs were
dramatically lowered and simplified. The variety of tariff rates for different
types of goods also was significantly reduced and simplified. Countries that
previously employed multiple exchange rates to ration scarce foreign exchange
simplified their regimes with unified exchange rates. Countries that
previously supported overvalued exchange rates allowed exchange rates to be
determined by market forces, helping eliminate trade deficits and reduce
borrowing from foreign countries. 

LAC countries have negotiated numerous bilateral and regional trade agreements
to promote trade in recent years. These agreements have led to important
intraregional trading blocs, notably NAFTA and MERCOSUR, that are now
prominent features of the region. Total exports of goods and services within
the LAC region (intra-regional trade) have increased from about 15 percent of
the region's total exports in 1988 to 21 percent in 1997.

South Asia's share of global exports has remained around 1 percent, unchanged
for the last two decades despite high economic growth. Principal exports from
this region are textiles, garments, carpets, leather products, and
agricultural commodities such as cotton, rice, and tea. In recent years,
exports have shifted from food and primary products to manufactured products.
The European Union (EU) and the U.S. remain major destinations for South
Asia's exports, with East Asia becoming an important market in recent years.

Regional trade within South Asia is limited, less than 4 percent of the
region's total trade. India maintains a growing trade surplus in the region,
with 1995 regional shipments accounting for 5 percent of its total exports. In
contrast, India's imports from the region are only one-half percent of its
total imports. Regional trade in South Asia is hampered by India's
protectionist policies and the longstanding political conflict between India
and Pakistan.

In South Asia, trade barriers for all goods and services are generally high,
although they have been lowered significantly since the early 1970's. Tariffs
averaged 39 percent during 1994-98, compared with about 6 percent for
developed countries. However, tariff rates differ significantly across the
region. Nepal, for example, imposes no tariffs on primary products, and its
tariffs on most other products range up to 20 percent. Applied tariff rates in
India and Pakistan, on the other hand, often exceed 50 percent. Nontariff
barriers, designed to manage domestic supply and protect the domestic
manufacturing sector, are prevalent in the region, although they have declined
by more than 85 percent between the 1980's and 1990's. 

South Asia's agricultural policies generally have been driven by goals of
self-sufficiency, which led to trade policies such as export restrictions,
licensing procedures, monopoly controls, and export taxes. Since the reform
policies implemented in the 1990's, export restrictions have been removed from
almost all agricultural commodities in Bangladesh, Pakistan, and Sri Lanka,
and from a number of agricultural commodities in India. However, government
control of exports and licensing requirements continues to inhibit most major
agricultural commodity exports in India, and some agricultural exports and
imports in Pakistan.

The Sub-Saharan Africa region continues to be highly dependent upon European
importers, which recently took about 51 percent of the region's exports, down
from around 80 percent in the 1960's. Despite efforts to diversify, exports
continue to be mostly unprocessed primary commodities, such as coffee, cotton,
and ores. In 29 out of 47 Sub-Saharan African countries, as few as three
primary commodities provide at least 50 percent of total export revenues.
Trade in Sub-Saharan Africa is strongly affected by trade preference
arrangements, particularly the Lom agreement giving goods from African,
Caribbean, and Pacific (ACP) countries preferential access to EU markets.

Most Sub-Saharan African countries have liberalized their domestic and
international trade markets since the mid-1980's. Many countries have
significantly liberalized their exchanges rates, allowing them to adjust to
market levels. These changes have yet to increase the region's share of global
trade. Sub-Saharan Africa's share of world exports has actually been
shrinking, from 3.7 percent in 1960-62 to 1.5 percent in 1994-96, although its
exports have grown. 

Nontariff barriers have taken the form of government licenses or other forms
of approval of imports. But, since the mid-1980's, most countries have reduced
the number of products requiring prior approval to import. Several countries
in Sub-Saharan Africa, including Madagascar, Kenya, Nigeria, and Zambia, also
have begun to promote exports, by reducing export controls, lowering export
taxes, reducing the role of marketing boards, and establishing economic
processing zones where production occurs in duty-free areas that are close to
shipping locations. There also have been efforts to negotiate or re-negotiate
trade agreements among countries (such as the Southern African Development
Community or SADC), but historically these agreements have not significantly
increased trade in the region. 

Trade Issues Vary Among Countries

The "three pillars" of URAA concerns are market access, domestic support, and
export competition. Market access includes conversion of nontariff barriers
into bound tariff levels and reduction of existing tariffs. This has set the
stage for future negotiation to finish converting nontariff barriers to tariff
barriers, lowering existing tariffs, increasing minimum access levels for
tariff-rate quotas, and reducing export taxes. 

In the area of government domestic support for agriculture, the URAA rules
determined which policies were permitted and which were to be reduced during
the implementation period. Trade-distorting domestic support levels are
scheduled for reductions based on an "Aggregate Measurement of Support," which
measures the monetary value of government support to a sector. 

Along with domestic support, continued reductions in all trade distorting
subsidies and further clarification of policies and programs that distort
trade are key subjects for future negotiation. In the area of export
competition, countries agreed to reduce their export subsidy programs and
refrain from introducing new subsidy programs.

Most developing countries did not set up a reduction schedule for their
domestic support programs, and domestic support or export subsidies may be
exempt under SDT accorded to developing countries. Elimination of domestic
agricultural supports, while generally a top priority for those developing
countries exporting agricultural products, may receive tepid support from food
importing countries, especially in Sub-Saharan Africa. Such countries are
apprehensive that any reduction of support may result in food shortfalls and
increased food prices.

For the poorest countries, foreign exchange availability to finance food
imports is closely linked to improved access to developed country markets.
Many developing countries have argued that future negotiations on agriculture
should focus on improving market access   by lowering average tariff levels as
well as through reduced tariff escalation, the practice of levying higher
tariff rates on value-added products than on basic commodities. Protection of
domestic agricultural producers by developed countries limits market access
and therefore demand for developing country commodities. This protection
reduces prices of agricultural commodities exported by low-income countries,
which lowers export revenues and hampers their ability to purchase food
imports. 

Food security-related trade issues, such as declining food aid budgets and
potential rising food prices, are a growing concern for many developing
countries. This is particularly true for low-income net food importing
countries in Sub-Saharan Africa, South Asia, and Latin America, which have
become more dependent upon food imports in recent decades.

Market access is particularly important for countries in South Asia and
Africa, where access to textile and apparel markets in developed countries is
a top priority. The Uruguay Round's Agreement on Textiles and Clothing phases
out the Multifiber Arrangement (MFA), a treaty dating from the 1970's that
attempted to limit textile and clothing imports from developing countries. The
MFA will be phased out over 10 years, but most of the change is postponed to
the final year, 2005. This raises two concerns for exporting developing
countries: that the agreement itself precludes any further negotiation on
textile issues in the near future, and that it may be politically impossible
for importing countries to carry out their Uruguay Round obligations with such
a significant proportion of the liberalization deferred to the end of the
phase-out period.

Another issue for low-income developing countries is the erosion of favorable
effects from trade preference arrangements. For the LAC countries, the recent
WTO ruling against the European Union on its preferential arrangement for
imported bananas from former colonies illustrates how competition is likely to
intensify between high-cost, less efficient producers in developing countries
who benefit from preference arrangements and lower-cost producers who do not
enjoy such arrangements. Likewise, products from Sub-Saharan Africa, which
currently face no tariffs in Europe, will confront stiffer competition as
developed countries lower their tariffs under URAA and future WTO agreements
to other developing countries (especially East Asian countries).

Nontariff barriers have become an important issue for middle-income developing
countries, particularly in Latin America and Asia, unable to export their
agricultural products to industrialized countries. These middle-income
countries claim that nontariff barriers, such as complicated sanitary and
phytosanitary requirements, very high health standards, and procedures that
take decades to approve an exporting country's production system, have
essentially blocked their exports from many potential markets. In upcoming
negotiations, debate about nontariff barriers will be further complicated by
concerns regarding the environment, biotechnology, and unfair labor practices.
Given their limited resources, most developing countries have requested
technical assistance from developed countries in interpreting and adopting
complex technical rules. Most WTO developed country members are willing to
provide such assistance.

Improved market access for their agricultural products appears to be a top
priority among developing countries. Participation in multilateral trade
negotiations presents developing countries with opportunities for better
market access for their agricultural products, as well as opportunities to
preserve or change global trade regulations that will enhance their
participation in the global trading system while allowing them to meet their
development goals. Recognizing this, an increasing number of developing
countries in the WTO have started to actively participate in multilateral
trade negotiations, such as the recent WTO Ministerial in Seattle.  

Anita Regmi (202) 694-5161, Michael Trueblood (202) 694-5169, and Shahla
Shapouri (202) 694-5166
regmi@ers.usda.gov
trueb@ers.usda.gov
shapouri@ers.usda.gov


WORLD AGRICULTURE & TRADE

Biotechnology: Implications for U.S. Corn & Soybean Trade

[About the Data
U.S. trade data are from calendar year Foreign Trade of the U.S. (FATUS),
ERS/USDA..  Other countries' calendar year trade data are from the United
Nations FAOSTAT and COMTRADE databases.  In this article, use equals supply
minus stocks.]  

The introduction of biotechnology into the U.S. food and fiber system has
raised questions about possible effects of the new technology on U.S.
agricultural trade and the U.S. agricultural marketing system. Producers of
major field crops such as corn and soybeans have rapidly embraced
bioengineered varieties because of their ability to enhance yields and reduce
pest-management costs. Nevertheless, these farmers have begun to face
uncertainty in marketing bioengineered products abroad, in part because of
potential limitations from government policies and the direction and intensity
of consumer preferences. Consumer preferences regarding biotech products have
been cited as a factor in the performance of U.S. exports.

The Biosafety Protocol--an environmental agreement aimed at protecting
biodiversity--was adopted by more than 130 countries on January 29, 2000, in
Montreal, but must be ratified by 50 countries before it can go into effect.
This process could take 2-3 years. The scope of the Protocol does not cover
food safety. To a large extent, the Protocol will not alter the status quo for
bulk commodities containing a biotech component. Countries may, as many
currently do, require approval of new biotech crop varieties under their
national laws and regulations.

The European Union (EU) approval process for imports of bioengineered
varieties has been a particular source of consternation for U.S. exporters.
Although some bioengineered corn varieties have been approved by the EU, a
number of other corn varieties approved and planted in the U.S. have yet to be
accepted by the EU, and a de facto moratorium currently exists on EU
approvals. To date, however, the one biotech soybean variety commercially
grown in the U.S. is approved in the EU market.

While only a small fraction of U.S. corn acreage has been planted to these
non-EU-approved corn varieties, fears of having shipments delayed or halted if
unapproved varieties are commingled with approved varieties has prompted some
U.S. corn exporters to forego the EU market altogether. Meanwhile, a number of
countries around the world have announced plans to move forward with labeling
requirements for bioengineered foods, generating concern that the U.S. might
lose export markets or that U.S. food processors will face significant
labeling-related costs.

These circumstances suggest the need to take stock of the potential impact of
biotech trade restrictions on U.S. commodity exports and markets. An
examination of the global markets for corn and soybeans--which are similar but
which differ in some significant ways--can highlight factors that may be key
to assessing the degree and nature of potential effects. Key factors include
the importance of trade as a share of demand for U.S. commodities, trading
partners' inclination to buy from the U.S. rather than competing suppliers,
flexibility in the U.S. marketing system to respond to "differentiating"
demands of importers, and regulatory actions taken by governments. 

Most U.S. Corn
Remains Stateside

In marketing year 1998/99, the domestic corn market claimed more than 80
percent of total corn use (use equals total supply less stocks). With such a
large domestic component--consisting of feed use (61 percent), food use (8
percent), and ethanol and sweeteners (13 percent)--the U.S. corn market should
be cushioned significantly from international biotech issues.

The export component of U.S. corn use is 18 percent, with shipments going to
countries throughout the world but nearly evenly distributed among four
countries or regions: Latin America, Japan, "other East Asia," and Africa and
the Middle East. These four markets account for 94 percent of total U.S. corn
exports. EU purchases--about 300,000 tons in 1998/99-- represent less than 1
percent of U.S. corn exports, a drop from 4 percent prior to biotech-related
problems. The EU has remained relatively self-sufficient in corn, indicated by
the large volume of trade among member countries (intra-EU trade) relative to
imports from nonmembers.

The EU represents the one documented loss of U.S. corn exports resulting from
issues related to biotech products. The volume of corn exports to the EU fell
more than 90 percent in 1998, a decline due largely to delay in the EU
regulatory approval process. Moreover, this market represented an import quota
to compensate trading partners for the loss of market when Spain and Portugal
joined the EU. However, this market opportunity has been virtually eliminated
by delays in the EU regulatory process. 

Patterns in world trade over time depend on a number of factors, including
relative proximity, historical trade ties, and degree of price sensitivity in
a market. The biotech issue is another factor that may influence world trade
flows. Global commodity markets are composed of many bilateral trade flows
linking individual country markets. A high degree of price sensitivity means
that small price differentials arising between competing suppliers may
generate dramatic changes in trade flows. This is illustrated by examining
bilateral flows of corn in the pivotal period between 1995, when U.S. corn
exports totaled 60 million tons, and 1998, when corn exports had fallen back
to 41 million.

Most of the drop in U.S. corn exports from 1995 to 1998 is attributable to a
fall in shipments to "other East Asian countries," including China. U.S. corn
exports to this region plunged from 20.4 million tons in 1995 to 8.6 million
tons in 1998, largely because of increased global supplies and weak demand
when China, a net importer in 1995, became a net exporter in 1998. Fierce
price competition among competing suppliers to the East Asian market generally
plays a major role in import decisions, causing strong shifts in trade
relationships.

Malaysia, which imported most of its corn from the U.S. in 1995, made a
dramatic switch away from U.S. corn in 1998, as China, a long-time supplier,
once again became the dominant supplier by offering lower prices. Malaysia
substitutes corn from China with relative ease because of its historical
bilateral ties with China and its relative proximity.

The Malaysian example typifies the general price sensitivity of trade
relationships in East and Southeast Asia. Japan, however, stands apart from
other East Asian countries with regard to its importing decisions, because of
the strong government role in managing food imports. The U.S. has remained the
dominant supplier of corn to Japan, and the U.S. share of Japan's imports has
been roughly the same over time despite major disruptions in the corn market,
because Japan favors a reliable and stable trade relationship. 

Mexico provides an example of an importer that has consistently relied on the
U.S. as its dominant supplier because of market conditions. This strong
bilateral tie is explained by geographic location and shipping logistics, as
well as the reluctance to incur large transaction costs of switching to
nontraditional suppliers--e.g., negotiation of contracts with new suppliers
and exposure to risks of an unfamiliar supplier. Mexico's reliance on the U.S.
as its sole supplier of corn provides continuity in foreign demand similar to
the stable demand from the U.S. domestic market. While total U.S. corn exports
fell dramatically from 1995 to 1998, Mexico's imports from the U.S. actually
increased 80 percent. Colombia's relatively close proximity to the U.S. also
seems to explain its stable trade pattern. More than 60 percent of Colombia's
corn imports come from the U.S. 

Clearly, U.S. corn suppliers face a diverse foreign market, and competitively
priced corn seems to be a larger consideration for some importers than for
others. Direct price competition between the U.S. and China will likely
continue to be a key factor in U.S. market share in the East Asian market. But
proximity and historical trading ties also play a role.

From a global perspective, with the U.S. supplying about two-thirds of total
corn trade, importers cannot easily satisfy such large demand with alternative
sources. Furthermore, the U.S. does have to its advantage a long history of
being a dominant supplier in a number of countries where purchasers would
likely be reluctant to incur the costs associated with switching to
nontraditional suppliers unless the U.S. were unable to deliver crops that fit
their import needs. 

Issues stemming from biotech preferences will be a factor to be considered
along with other factors in purchasers' import decisions--price, proximity,
and historical trading relationships. But unlike sudden shocks that the global
corn market has historically experienced (e.g., adverse weather or government
policy changes), changes stemming from biotech preferences will likely be more
gradual, giving producers and grain handlers the opportunity to anticipate and
prepare for potential market adjustments.

Stiff Competition
In Soybean Market

Exports play a larger role in the market for U.S. soybeans than for corn.
Shipments to foreign markets amount to about 42 percent of U.S. soybean use--
including meal and oil. A symmetry exists in U.S./EU soybean trade--i.e., U.S.
soybeans make up a large share of EU soybean imports (39 percent), and EU
purchases make up a large share of U.S. soybean exports (33 percent). If
soybean exports were to fall suddenly, there would be significant impact on
the U.S. soybean market unless the U.S. were able to quickly find alternative
buyers. However, efforts to replace U.S.-produced soybeans would impose higher
prices on foreign consumers--at least in the short term. Foreign consumers
would also face higher prices as suppliers sought to recoup costs associated
with developing separate marketing channels for nonbiotech crop varieties.

A dramatic drop in U.S./EU soybean trade is unlikely because of EU reliance on
imports from the U.S., and because biotech soybeans commercially grown in the
U.S. are EU-approved. However, it is unclear how the EU regulatory regime will
evolve, particularly in relation to the potential commercialization and
approval of new biotech soybean varieties.

As in the case of corn, the global market for soybeans experienced significant
changes in recent years. Between 1997 and 1998, U.S. soybean exports fell from
26 million tons to 20 million, although world trade remained nearly constant.
The drop in U.S. exports resulted from price competition that led to expanding
foreign sales for every other major soybean exporting country and most
importer countries switching some purchases to non-U.S. soybeans. Unlike the
corn market, where the decline in demand for U.S. exports was somewhat limited
to East Asian countries, the U.S. experienced an across-the-board drop in
soybean exports. The U.S. faces direct competition from top soybean exporting
countries in nearly all markets, since competitors have established bilateral
trade ties in those same markets. The Mexican market, an exception because it
has few alternative suppliers, increased its imports of U.S. soybeans. 

Traditional competitive forces (primarily prices) appear to be the main
driving factors behind the changes in observed bilateral trade patterns for
soybeans, and the price-competitive nature of the market has implications for
producer decisions to plant bioengineered seed. In order to remain in
business, all producers, including those in the U.S., need to remain globally
competitive and strive to adopt cost-reducing technologies. Bioengineered seed
is one of those technologies. A possible strategy for some producers is to
sell in niche markets willing to pay a higher price for differentiated
products, including products not derived from bioengineered crops. 

Potential Profit & Cost
In Differentiated Products

Among buyers in some countries, demand may co-exist for both biotech crops
(grown from bioengineered seed) and nonbiotech crops (grown from seeds
developed with traditional plant breeding techniques). The extent to which
demand for one or the other will eventually dominate may vary significantly
from country to country. Some exporting countries are likely to produce and
export both types of crops, and to develop marketing systems that offer
consumers products that are differentiated according to their biotech status.

Such product differentiation is merely an extension of a trend already
established for high-value products in grain and oilseed markets. Other
differentiated products such as high-oil corn, hard endosperm corn, white
corn, waxy corn, nutritionally dense corn, high oleic soybeans, and improved
food-quality soybeans are already fixtures in the marketplace.

The Japanese soybean market is one example of how U.S. agriculture may tap
into opportunities presented by potential demand for nonbiotech commodities,
and how new marketing channels emerge to accommodate shifts in demand. In
contrast to the EU, a significant amount of soybeans in Japan are consumed by
humans. Although Japan continues to import biotech soybeans for use in animal
feed, the U.S. has also been successfully exporting both organic and
nonbiotech soybeans to the Japanese food-use market at a considerable price
premium. 

U.S. exports of organic and nonbiotech soybeans suggest that some U.S.
producers and companies have pursued profits from potential foreign demand for
nonbiotech foods. If there are premiums to be earned for nonbiotech
commodities (or for any varieties with other specific traits of value to
users), then suppliers of marketing services that help producers meet these
specific demands are likely to emerge. 

For example, in 1999, Clarkson Grain and Nisshin Shokai announced a program,
called Fresh Pure Green, to assure buyers (principally Japanese soy food
manufacturers) that their soybeans are nonbiotech varieties and 99.5-percent
free of bioengineered material. The company contracts directly with farmers
for specific varieties that are identity-preserved, from planting through
harvest, storage, delivery, cleaning, and conditioning. The company relies on
an independent certifying agency, the Illinois Crop Improvement Association,
to sample and test the soybeans to assure they meet the 99.5-percent standard. 

In the long run, consumers around the world will decide what premiums they
will pay for nonbiotech products, and producers in different countries will
consider the relative prices for biotech and nonbiotech crops in relation to
their local farming conditions when deciding what to plant. Both the magnitude
of preferences (demand) and the costs of providing different products (supply)
will determine the market outcome.

Regulatory actions of governments around the world will also influence the
impact of biotech issues on trade. The EU recently adopted labeling
regulations for foods containing a biotech ingredient or containing any
ingredient with a biotech content of 1 percent or more. Further, to avoid
labeling, if the food contains less than 1 percent biotech material,
processors must prove that introduction of the biotech content occurred
accidentally. However, it is unclear whether enforcing a 1-percent threshold
for food is technically feasible, especially where commingling can occur at
many locations in the marketing chain. The EU is currently drafting feed
labeling regulations.

Japan is also developing food labeling regulations. In August 1999, the
Japanese government announced it would institute mandatory labeling of over 20
foods and food ingredients produced from biotech corn and soybeans, to be
effective in April 2001. Last fall, well ahead of scheduled government
implementation of labeling requirements, a few tofu manufacturers, brewers,
and soy sauce and soy protein food manufacturers announced that they will
cease using biotech corn or soybeans in their operations. These companies are
apparently seeking to cultivate niche markets for nonbiotech foods.

A number of other Asian export markets--South Korea, Thailand, Indonesia, and
Hong Kong--as well as Australia and New Zealand, also have decided to follow
suit, drafting labeling regulations they expect to implement soon. Canada
recently announced that it intends to encourage voluntary labeling. 

Full implementation of labeling regulations, while responding to some consumer
concerns, could hinder market adjustment by increasing the costs of market
segregation and voluntary labeling that may be naturally occurring in response
to differentiating demands. Government labeling policies may specify the set
of products requiring labeling and determine the tolerance levels for
products. If the tolerance level is unduly low or if the standard exceeds the
capabilities of currently available technologies--such as diagnostic tests--to
reliably differentiate products, mandatory labeling could lead to increased
costs.

Potential changes in consumer preferences and the likely evolution of
technologies to segregate and verify biotech-free products mean that standards
need to change over time. Adapting government regulations to these dynamic
market conditions requires widespread public and industry discussion. 

Prices Capture Biotech Tradeoffs

Not surprisingly, prices summarize all the impacts of biotechnology on both
demand and supply for corn and soybeans. On the demand side, consumers must be
willing to pay higher prices for nonbiotech crops in order to cover higher
costs of production and marketing. Consumer preferences may create two
potential markets and a choice for producers in the future. Producers may face
a trade-off between potentially higher prices for nonbiotech crops and lower
costs of producing biotech commodities. 

Prices play a central role in all types of global market adjustments. In any
year, a large number of corn and soybean importing countries switch suppliers
readily to obtain the lowest market price, and producers face constant
pressures to cut costs in order to remain competitive. The global market
impact of a country's preferences regarding biotech products depends on the
size of the affected trade flow. EU corn imports represent a small share of
global corn trade, but the EU is the world's largest soybean importer. On top
of shifts in global markets for biotech crops, consumer willingness to pay for
nonbiotech foods also creates a new market that U.S. producers and traders
have started to supply. To date, evidence shows that the higher price,
nonbiotech market remains small.  


Nicole Ballenger (202) 694-5013, Mary Bohman (202) 694-5150, and Mark Gehlhar
(202) 694-5273
nicole@ers.usda.gov


SPECIAL ARTICLE

Biotechnology: U.S. Grain Handlers Look Ahead

Market prospects for genetically-modified crops are tinged with uncertainty.
U.S. producers have rapidly increased acreage devoted to production of crops
developed through biotechnology (biotech), which has the potential to increase
yields and reduce pest management costs. However, some consumers in the U.S.
and abroad--particularly the European Union--remain wary of the new technology
despite reviews by the U.S. Food and Drug Administration that have determined
that biotech foods currently in the market are safe for human consumption. As
a result, grain handlers, food manufacturers, and others in the global
marketing chain are attempting to balance the issue of divergent consumer
demand with producers' desire to capture the cost-saving potential of biotech
crops.

Although trade pattern changes arising from shifts in consumers' preferences
have been quite modest so far, segregation of grain into biotech and
nonbiotech may increasingly become a consideration. Questions are being raised
about possible adaptations in the marketing system. What are the likely costs
of large-scale segregation?  How has the U.S. grain marketing system already
responded to changing demands?  And, how is the system likely to change in the
future?

Consumer Preferences
& Market Uncertainty

Adoption of biotech varieties has been rapid in the U.S. Since the mid-1990's,
U.S. acreage in insect-resistant corn and cotton, and herbicide-tolerant
soybeans has increased dramatically. By 1999, nearly 60 percent of
soybean-harvested acres in the U.S. was planted to herbicide-resistant
soybeans, while nearly 40 percent of corn-harvested acreage and over 60
percent of cotton-harvested acreage was planted to biotech varieties.

Whether U.S. farmers will continue to expand their seeding of biotech crops
this spring depends primarily on how they anticipate acceptance of biotech
crops in domestic and foreign markets, which rests upon consumers' attitudes
toward biotech food and feed products. At present, market demand for
nonbiotech corn is very limited, accounting for only 1 percent of 1999 U.S.
corn production. This demand stems primarily from 1) European Union (EU)
imports, where products containing biotech ingredients must be labeled, 2) a
few brewers in Japan that accept only nonbiotech corn as a grain ingredient,
3) domestic seed use, and 4) a handful of domestic food manufacturers that
recently decided to use only nonbiotech ingredients.

According to analysis by USDA's Economic Research Service (ERS), market demand
for nonbiotech soybeans now accounts for about 2 percent of U.S. soybean
production and is associated mainly with 1) domestic seed use, 2) food
soybeans exported to Japan (about 200,000 tons a year) under identity
preservation (IP) marketing for making tofu, soy sauce, and other soy foods,
and 3) a few niche markets in the EU. Most EU imports of soybeans and soybean
meal (16 million tons of soybeans and 19 million tons of soymeal) are used for
animal feed, but a small share (less than 1 million tons) is used for food.
Despite the relatively small market shares for nonbiotech corn and soybeans,
demand for nonbiotech commodities is highly fluid and could expand quickly,
depending on whether consumers' preferences for nonbiotech food products
expand, as well as consumer preferences regarding the use of biotech crops in
industrial uses and in livestock feed.

During the last 2 years, U.S. corn exports to the EU dropped about $200
million per year, on average, primarily because of declining exports to Spain
and Portugal resulting from a moratorium on EU approval of new corn varieties
already being grown in the U.S. The share of U.S. corn exports destined for
the EU declined from 4.5 percent in fiscal year (FY) 1995/96 to less than 1
percent in FY1997/98 and FY1998/99. U.S. grain processing companies are
concerned not only about corn exports, but more importantly, about exports of
processed byproducts, such as corn gluten feed and meal. Export sales of U.S.
corn byproducts have outpaced corn sales to the EU for a number of years. For
example, the value of corn byproducts exported to the EU totaled $403 million
in FY1998/99, far exceeding the $22-million export value for corn.

Some large U.S. grain processors--e.g., A.E. Staley and Archer Daniels Midland
(ADM)--announced in April 1999 they would not accept EU-unapproved corn
biotech varieties for processing for fear of jeopardizing their byproduct
exports to the EU. Last summer, ADM advised producers to segregate biotech
crops from nonbiotech crops, but reversed this decision in early February 2000
as weak demand for the higher priced nonbiotech grain became apparent.

Some countries have begun to require that foods containing biotech ingredients
be labeled. The EU recently adopted labeling regulations for foods and is
currently drafting feed labeling regulations. Japan, Korea, Australia, and New
Zealand are among other countries proposing mandatory labeling policies for
bioengineered foods. Potentially widening interest in food labeling regulation
could be an impetus for more farmers and grain handlers to assess their
ability to segregate or begin to take steps necessary to segregate.

Over the last year, a few food manufacturers decided to end the use of biotech
crops in their operations. In July 1999, the Gerber and Heinz companies
announced that their baby food processing facilities would immediately stop
using biotech inputs. In January 2000, Bestfoods, Inc., decided to end its use
of biotech ingredients in manufactured foods destined for the EU, in order to
avoid the biotech labeling requirement, and Frito-Lay Inc. announced that it
would cease using biotech corn in its snack food manufacturing. 

Strategies to Separate 
Nonbiotech Grain

Current demand for nonbiotech corn and soybeans is weak, and according to
grain trade sources, European consumers appear generally unwilling to pay
premiums for bulk shipments of nonbiotech commodities. However, if
circumstances were to change and demand for nonbiotech commodities were to
strengthen, it would be necessary to form supply chains on a larger scale that
keep the nonbiotech product separate from undifferentiated "standard"
commodity grain. This could be accomplished by either "crop segregation" or
"identity preservation (IP)."  These marketing practices to preserve a
commodity's unique characteristics are not new, but rather an extension of
practices that have heretofore been used to preserve differentiation in
markets for value-enhanced commodities such as high-oil corn and STS soybeans
(nonbiotech, but herbicide-tolerant).

Identity preservation (IP) is the more stringent (and expensive) of the two
methods and requires that strict separation--typically involving containerized
shipping--be maintained at all times. IP is often used for marketing
commodities like food-grade corn and soybeans. Testing for biotech vs.
nonbiotech status typically occurs just prior to containerization. IP lessens
the need for additional testing as control of the commodity changes hands, and
it lowers liability and risk of biotech/nonbiotech commingling for growers and
handlers. 

Crop segregation requires that crops be kept separate to avoid commingling
during loading and unloading, storage, and transportation. This supply chain
system thus requires cleaning of equipment such as augers, as well as
transportation and storage facilities. Such a handling process has been in
place for some time for specialty grains (e.g., high-oil corn). But
containerization is generally not involved, and testing to check for the
presence of biotech content--which occurs at various points in the marketing
system (e.g., country elevator, terminal elevator, and final purchaser)--is
more critical. 

Because of limited demand for nonbiotech corn and soybeans and the expense of
maintaining separate storage facilities, few grain elevators have attempted to
segregate and market nonbiotech products. Last September, Sparks Companies
conducted a survey of 100 midwestern grain elevators and found that 11 percent
were differentiating for nonbiotech corn and 8 percent for nonbiotech
soybeans. Of the surveyed elevators, only 1 percent offered premiums for
nonbiotech corn and 3 percent offered producer premiums for nonbiotech
soybeans. The premiums varied widely, depending on the elevator's location and
the intended consumer market for the product. According to other industry
sources, common nonbiotech price premiums ranged from $0.05 to $0.10 per
bushel for corn and $0.10 to $0.15 per bushel for soybeans. The lower end of
the premium range reflects less strict tolerance levels (i.e., more biotech
content) and vice versa. In February 2000, the Farm Progress Company's survey
of 1,200 U.S. elevators indicated that 24 percent plan to segregate corn and
20 percent plan to segregate soybeans in the fall. Elevators are likely
anticipating food labeling regulations in other countries.

Effective segregation or IP--which begins at the farm level--is particularly
difficult if a farmer grows both biotech and nonbiotech varieties of a certain
crop. Pollen drift is a natural occurrence over which farmers have little
control but which can lead to the unintended presence of biotech material in
nonbiotech crops. Using buffer zones may help minimize biotech commingling
from pollen drift, but it remains a serious problem for effective crop
segregation or IP.  Pollen drift is a less critical issue for a
self-pollinated plant like soybeans than for corn.

Not only must farmers keep biotech and nonbiotech plots separate, but they
must also prevent commingling with biotech varieties during harvest,
transport, and storage by cleaning all equipment and onfarm storage
facilities. Testing methods are sensitive enough to detect very small amounts
of biotech material, making it difficult to clean equipment thoroughly enough
to meet a very strict standard. A recent straw poll of 400 U.S. farmers
conducted by Reuters in January 2000 found that 15 percent of farmers have
made or are planning to make the necessary investments to handle or segregate
nonbiotech crops in the fall.

Elevators must also develop stricter control over handling procedures in order
to maintain segregation. A key problem at the elevator stage is that
segregation will likely slow the rate of turnover in a high-volume business.
The elevator industry operates with very thin margins--differences between
prices paid to sellers and prices received from purchasers--and elevator
profits depend on moving large volumes of product quickly. Segregation slows
the process because it involves tests to ensure that the grain is truly
nonbiotech. In addition, farmers must form multiple queues (for biotech and
nonbiotech) to deliver their grain, unless elevators specify days on which
they accept only biotech or nonbiotech varieties. Particularly during peak
harvest periods, delays can be a serious problem, and the need to segregate
aggravates the problem.

Segregation also reduces the volume the elevator can maintain, because with
commingling prohibited, some elevator bins will likely remain partially empty.
This is referred to as "storing air" and may be a significant expense incurred
by elevators when segregating different types of grain. In addition, elevators
must clean all their equipment, including augers and bins, to make sure that
no commingling occurs beyond the tolerance level. The tolerance level for
biotech content in large part determines the degree of difficulty for grain
handlers to maintain segregation of nonbiotech commodities--the stricter the
tolerance level, the harder for grain handlers to comply.

The elevator's ability to segregate depends in large part on the size of the
operation and the type of facilities at each location. There are currently no
official estimates regarding the number of elevators that have the ability to
segregate. However, the National Grain and Feed Association estimates that, at
a 1-percent or lower tolerance level for biotech content, roughly 5 percent of
the nation's elevators can achieve segregation without major new investments.
At these elevators, two parallel-track supply chains generally already exist,
one for handling standard bulk grains and the other for segregated grains. 

Elevators that will be able to segregate most effectively have a large number
of bins of varying capacity as well as multiple pits (where grain is dropped
before being moved to a storage bin). Multiple pits enable the elevator to
dedicate pits for either biotech or nonbiotech, reducing the likelihood of
commingling. In addition, the size distribution of bins--e.g., a large number
of small bins vs. a small number of large bins--affects the number of
commodities an elevator is able to segregate. Elevators located on rivers may
be able to segregate at lower cost and with less inadvertant commingling than
inland terminals because they can often load grain directly onto vessels, with
fewer unloadings and loadings.

Elevators can use a variety of strategies to facilitate segregation. A grain
handling firm may commit facilities at certain locations to handling only
biotech or nonbiotech grains. Specializing in this way will prevent onsite
commingling, ensure that elevator services are provided for nonbiotech crops,
and may preclude the need for additional investments. Another strategy would
be for a given elevator to accept nonbiotech and biotech crops on different
days, enabling the elevator to regularly clean equipment and maintain crop
segregation while minimizing elevator queues.

Segregation also poses logistical problems for grain transportation.
Currently, grains and oilseeds are commonly transported to export elevators in
unit trains of up to 100 cars or by barge. If effectively maintaining crop
segregation makes it necessary to shift transportation away from unit trains
toward smaller units (such as individual rail cars), transportation costs
could increase significantly. According to the North American Grain Exporters
Association, setting acceptable biotech content levels at about 5 percent or
higher would increase costs only modestly. But if biotech-free thresholds were
made increasingly stringent, costs would rise. One industry source suggests
that if the threshold for biotech content were as low as 1 percent (a
threshold this tight would likely require IP), transportation costs could
potentially double. 

Nonbiotech Marketing Could Mirror
Value-Enhanced Grain

The current system of agricultural marketing relies on broad, standardized
quality grades to signal value (establish a price scale) through the market,
and is based on commingling to achieve a particular quality. As consumers
demand agricultural commodities with specific characteristics (such as
nonbiotech), buyers and sellers will utilize alternative coordination
strategies that are likely to resemble those used for marketing value-enhanced
products.

The most successful value-enhanced grain crop to date is Optimum high-oil corn
(HOC), developed by Dupont using traditional breeding methods (as opposed to
biotechnology) and released in the U.S. in 1992. In 1999, U.S. farmers planted
about 1 million acres to HOC. Feed from high-oil corn--with an oil content of
6-8 percent compared with less than 4 percent for commodity corn--provides a
significantly higher level of energy than standard corn. The added value from
this crop comes from reduced expenditures for fat supplements in the feed
ration, improved digestibility, and improved feed efficiency. Since 1998,
about 50 percent of the high-oil-corn supply was grown by farmers who fed it
directly to their own livestock. The remainder was exported to nations where
fat additives are in short supply (for example, Mexico, Japan, and Taiwan).

High-oil corn--along with a wide variety of other value-enhanced feed grains
and oilseeds--is marketed through a business of Dupont, Optimum Quality Grain
(OQG), which licenses this technology to more than 80 seed dealers. Given that
the value of this product differs between domestic and export markets, OQG has
developed a two-tiered marketing approach to capture the crop's value.

Domestic farmers who grow HOC to feed their own livestock purchase the seed
(generally at a premium) from licensed technology providers. For HOC exports,
OQG contracts with growers and pays a premium for the HOC crop. These
contracts involve few management restrictions, but do require the grower to
purchase the seed from a licensed dealer who usually charges the grower a
technology fee. For the 2000 corn contract, OQG is offering a $0.15-per-bushel
premium for HOC at the 7-percent level, and higher as oil content increases.
The crop is examined using near-infrared transmittance technology at all
elevator transfer points to determine the oil content of the commodity. 

The logistics of the export marketing system are managed by OQG and strategic
partners--ADM, ConAgra, and Consolidated Grain and Barge. A farmer seeking a
contract to grow HOC (or any other value-enhanced variety that OQG deals in)
can identify interested local elevators through the internet. Optimum Quality
Grain ensures that high-oil corn is segregated throughout the supply chain
through a network of contracts that coordinates movement of the crop--from
farm to elevator to barge to ocean freight to consumers who pay a premium for
the product. 

Other strategies are used to market products with selected characteristics.
For example, Japanese consumers have very strict and specific quality
requirements for food-grade soybeans. Japanese firms hire brokers who contract
with U.S. farmers to produce exactly the type of soybean they require and pay
premiums for those characteristics. Specific tolerance levels are indicated in
the sales contract, as is often a provision for quality testing. However,
testing methods currently available in the market place may not be totally
reliable.

The market for nonbiotech commodities is not yet well understood. Lack of
information about the magnitude of premiums that consumers may be willing to
pay for nonbiotech crops make near-term decisions difficult for elevators and
farmers. Compounding the difficulty is uncertainty about the effectiveness of
product quality monitoring and about tests to accurately determine whether a
crop meets yet-to-be-determined biotech tolerance standards. These problems
suggest that nonbiotech crops will be marketed in ways that differ from
standard commodities, and that at least in the near term they will be sold as
niche market products using many of the same marketing techniques currently
used for value-enhanced products.  

William W. Lin (202) 694-5303, William Chambers (202) 694-5312, and Joy
Harwood (202) 694-5310
wwlin@ers.usda.gov

BOX - Biotech Marketing

Segregating Nonbiotech Crops: What Could It Cost?

Segregation of nonbiotech grains and oilseeds is essentially an extension of
the handling process for specialty grains and oilseeds, which has been in
place for some time. A University of Illinois study of segregation costs
reported by 84 U.S. handlers of specialty grains and oilseeds in the spring of
1998 indicates that separation of specialty corn (high-oil corn or HOC) and
specialty soybeans (Synchrony Treated Soybeans or STS--a herbicide-tolerant,
but not biotech variety) adds, on average, $0.06 per bushel for HOC and $0.18
per bushel for STS soybeans (excluding purchasing premiums) above the
customary costs of handling standard bulk commodities at each of those
elevators. Segregation costs include the additional costs of storage,
handling, risk management (for example, if quality is not as high as specified
in the contract), analysis and testing, and marketing (expenses associated
with negotiating contract terms). Minimum oil content specified in the
contract generally ranges from 6 to 8 percent (7 percent, on average) for high
oil corn. In contrast, quality for specialty soybeans is controlled by
specifying in the contract that growers plant only the STS variety developed
by DuPont.

In order to develop a scenario analysis, USDA's Economic Research Service
examined each of the cost items in the Illinois study at three points along
the marketing chain--country elevator, subterminal, and export elevator--to
determine adjustments or modifications needed to estimate approximate
segregation costs for nonbiotech corn and soybeans. Although the costs of
segregation vary significantly among the surveyed elevators, results indicate
that, across all elevators surveyed, costs for segregating nonbiotech crops
could be higher than for specialty crops. 

Although the estimated costs are not small, they do not imply that disarray
would occur in the grain marketing system if nonbiotech crops were handled on
a larger scale. If nonbiotech crops remain a niche market, many elevators may
choose to accept bulk grain and not attempt to distinguish between biotech and
nonbiotech characteristics. This would be particularly true for those
elevators handling the large portion of domestic corn and soybeans destined
for feed use

Not all elevators that choose to distinguish between biotech and nonbiotech
would bear the costs identically. Some elevators currently handle niche market
crops at relatively low cost, particularly if they are equipped with multiple
pits and have bin space configured to facilitate segregation. In addition,
specialization across elevators (some handling biotech, others nonbiotech)
would also result in much lower added costs to the handling system. Further,
adjustments in the grain marketing system would work to lower costs as
economies of scale in handling are realized and new testing procedures are
developed.

The ERS estimates, which should be taken as rough ballpark figures given the
limited data currently available, indicate that, on average across the 84
surveyed elevators, segregation could add about $0.22/bushel (excluding
premium to the producer) to marketing costs of nonbiotech corn from country
elevator to export elevator. Segregation of nonbiotech soybeans at these
elevators could add $0.54/bushel, on average, excluding the nonbiotech
producer premium. These estimates reflect costs at these elevators and may not
represent costs incurred by any one elevator or other elevators in general. In
addition, it is important to note that these cost estimates do not take into
account any additional costs that could be associated with segregation at the
farm level and shipment expenses beyond export elevators to foreign markets. 

These cost estimates reflect a scenario analysis under the following
assumptions: 1) risk management cost is not greater for nonbiotech corn than
for HOC (i.e., assuming a high tolerance level for biotech content); 2)
two-tier segregation is needed to safeguard against commingling (some
elevators have already adopted this practice); and 3) a multiple trait ELISA
test kit will be introduced to detect biotech content for Roundup Ready and
Liberty Link corn varieties.

In developing this scenario, ERS makes two important adjustments to the
Illinois cost estimates. First, the cost estimate for corn at the country
elevator is adjusted to reflect a two-tier segregation requirement--to
segregate biotech from nonbiotech varieties, and to separate biotech varieties
into those approved for shipment to the European Union from EU-unapproved
varieties, because most country elevators lack complete knowledge about the
destination of corn shipments. For shipments to domestic markets, two-tier
segregation might be necessary because some processors (such as Archer Daniels
Midland and A.E. Staley) accept only EU-approved corn varieties. Similarly,
for shipments to the EU, no commingling with EU-unapproved varieties is
permitted. To the extent that producers channel their corn to market outlets
that accept EU-unapproved varieties (such as domestic feedlots), handling
costs at local elevators could be lower.

Adjusting for two-tier segregation is estimated to increase handling costs for
nonbiotech corn at country elevators to $0.03/bushel--higher than the
$0.02/bushel reported in the Illinois study. Biotech segregation imposed no
additional handling cost above the $0.02/bushel incurred at subterminals and
export elevators for segregating specialty corn, because operators know the
destination of their grain shipments at those facilities. No adjustment was
necessary to the cost estimate of handling soybeans, at $0.06/bushel, since
biotech soybeans commercially grown in the U.S. are EU-approved.

The adjustment for testing costs reflects the higher cost of testing for
biotech content, which is more complicated than testing for physical
characteristics such as oil content for high-oil corn. Grains handlers
commonly use two testing methods--the DNA-based PCR (polymerase chain
reaction) and the protein-based ELISA (enzyme-linked immunosorbent assay). PCR
takes 2-10 days at a cost of $200-$450 per test--higher than most country
elevators can afford because of the small volume per truck load. In contrast,
an on-site ELISA microwell test takes 2 hours and costs up to $10 per test. A
faster and simpler ELISA dipstick test to provide a "yes-no" result takes 5-10
minutes and costs just $3.50 per test. At a 99-percent purity level, a typical
ELISA test uses a sample of 50-60 kernels out of close to 1,000 bushels in a
truck load. A smaller sample size (40-50 kernels) would be used for testing at
a 95-percent purity level. 

The additional cost of testing biotech content using ELISA test kits is
estimated at $0.01/bushel for one specific new trait (e.g., Bt corn) at
country elevators. However, since current ELISA testing methods require a
separate test for detection of each unique trait, several tests may be
required to determine if a truck load of corn is free of biotech material. The
ERS analysis assumes four separate ELISA tests for five biotech corn varieties
at country elevators--3 Bt varieties, plus Liberty Link and Roundup Ready.
While biotech content in the 3 Bt varieties can be detected technically in one
test, multiple tests (usually two) are a common practice adopted by local
elevators. This increases the cost of analysis and testing for nonbiotech corn
to $0.04/bushel from the $0.01/bushel reported in the Illinois study. 

At subterminals and export elevators, PCR testing is more common than ELISA
because it is very sensitive and can be used to detect the presence of several
gene modifications in one set of tests. However, PCR tests are generally
conducted in commercial labs. In addition, it becomes more economical with the
larger volume of grains being handled, remaining just $0.01/bushel as
estimated by the Illinois study. The cost of testing soybeans is the same as
for corn, at $0.01/bushel. A typical sample size for testing is about 80
pounds of grain in a river subterminal, which handles about 50,000-55,000
bushels of grain in a barge.

Risk management costs for segregating grain into biotech and nonbiotech
conceivably could be greater than for handling high-oil corn or STS soybeans,
because producers face significantly different risks. For example, a 1-percent
lower oil content might reduce price premiums paid to HOC producers. However,
a 1-percent biotech content in a grain shipment could cause rejection, which
has much more serious consequences for U.S. grain exporters. Because there is
no way to quantify this extra cost, ERS assumes the risk management cost is
the same as for HOC in the Illinois study, $0.01 per bushel or $0.03 from
country elevator to export elevator.

No adjustment was necessary to marketing costs--$0.03 per bushel for corn and
$0.06 per bushel for soybeans--or to storage costs--$0.03 per bushel for corn
and $0.06 per bushel for soybeans--as these costs are the same for value-
enhanced and nonbiotech commodities across the three elevator points.

In considering segregation costs from production through marketing, ERS
excludes purchasing premiums to producers because the gain to producers
offsets the loss to the country elevator. However, the common range for
purchasing premiums currently offered by a few elevators is $0.05 to $0.10 per
bushel for nonbiotech corn and $0.10 to $0.15 per bushel for nonbiotech
soybeans, according to industry sources.

Some U.S. grain handlers are already segregating grain for certain export
markets.  For example, Cargill is segregating nonbiotech corn for Japan,
although without guaranteeing a specific tolerance level for biotech material. 
Patterning corn segregation after handling procedures for HOC methods can
usually meet the nonbiotech requirements of Japanese buyers. To avoid
commingling in shipments, grain handlers may also contract with producers to
plant only certain corn varieties (e.g., nonbiotech or EU-approved) and
require adoption of specific production and harvesting practices.

These cost estimates are meant to indicate general magnitudes and are likely
to change as adjustments occur in the marketing system for specialized
commodities. For example, segregation costs could be lower if the volume of
segregated commodities expands and the grain handling industry realizes
economies of size. Handling costs at country elevators could be lower if
EU-unapproved corn varieties were channeled by producers only to market
outlets that accept them. Development of more cost-effective test kits could
also decrease costs. Actual expenses associated with risk management, such as
liability and risk of commingling for growers and handlers of nonbiotech
commodities, could be different from those for specialty grains. Finally,
segregation costs for nonbiotech soybeans could be considerably lower (perhaps
dropping from the estimated $0.54/bushel to $0.18/bushel, on average) if
handling is patterned after the less stringent HOC procedures instead of STS
soybeans.

END_OF_FILE
