AGRICULTURAL OUTLOOK                                        May 24, 2000
June-July 2000, ERS-AO-272
               Approved by the World Agricultural Outlook Board
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CONTENTS

In This Issue

Briefs
Field Crops: Large Field Crop Supplies Expected Again in 2000/01
Field Crops: Planting Progress Enhances 2000 Corn Yield Prospects
Livestock, Dairy & Poultry: Meat & Poultry Production to Continue Record-
Setting Pace
Specialty Crops: Stone Fruit Supplies Likely to Rise in 2000

Commodity Spotlight
Garlic: Flavor of the Ages

Food & Marketing
Organic Foods: Niche Marketers Venture into the Mainstream

Resources & Environment
Environmental Payments to Farmers: Issues of Program Design

Farm & Rural Communities
Farming's Role in the Rural Economy

Special Article
Consolidation in Meatpacking: Causes & Concerns

IN THIS ISSUE

Farm Commodity Abundance to Continue

Large supplies of major U.S. field crops, along with low prices, are expected
again in 2000/01, according to USDA's first forecast for the season.  While
domestic consumption of most major oilseeds and grains is anticipated to
remain strong because of low prices, export prospects will vary by crop, and
ending stocks in 2000/01 will build for soybeans, corn, rice, and cotton.

Red meat and poultry production in 2001 is forecast at around 83 billion
pounds, up less than 1 percent from this year's expected record.  Increased
poultry output and a turnaround in pork production will more than offset a
modest decline in beef production.  Despite plentiful meat supplies, strong
consumer demand is likely to maintain hog prices that have risen in 2000,
while poultry prices are expected to decline only slightly in 2001.  Prices
for both fed and feeder cattle will post modest gains as supplies continue to
decline.  Leland Southard (202) 694-5187; southard@ers.usda.gov

Garlic Demand Soars

U.S. garlic use has soared, hitting a record-high 3.1 pounds per person in
1999, three times the level in 1989.  Despite impressive growth for vegetables
such as broccoli, bell peppers, and carrots, no other vegetable has
experienced stronger growth in demand over the past 10 years.  The strong
surge in use during the 1990's likely reflects: rising popularity of ethnic
foods and restaurants, persistent publicity about the health benefits of
garlic, and demand from the health supplements industry.

Vigorous demand has resulted in a doubling of U.S. garlic production over each
of the last two decades.  Output was record large in 1999, and wholesale
garlic prices this spring are a third lower than a year earlier. Farm value of
the U.S. garlic crop is about $200 million. Gary Lucier (202) 694-5253;
glucier@ers.usda.gov

Consolidation in Meatpacking: Causes & Concerns

The U.S. meatpacking industry consolidated rapidly in the last two decades. 
Following the emergence of new and extensive scale economies in meatpacking,
intense price competition led to the exit of higher-cost smaller plants, their
rapid replacement by larger and more efficient plants, and significant
increases in concentration and reductions in costs.    

Meatpacking concentration raises important policy issues.  If larger packers
realize lower costs, then concentration, by reducing industry costs, can lead
to improved prices for consumers and for livestock producers.  However, with
fewer competitors, meatpackers could reduce prices paid to livestock producers
and may be able to raise meat prices charged to wholesalers and retailers. The
policy challenge is to ensure that a highly concentrated industry--a result of
consolidation--does not limit price competition among packers.  James M.
MacDonald (202) 694-5391; macdonal@ers.usda.gov

Rewarding Environmentally Friendly Farming

Interest is growing in broadening the array of government programs that would
improve the environmental performance of agriculture and at the same time
provide income support to agricultural producers.  Government "agri-
environmental" payments programs compensate producers for maintaining
beneficial impacts of agriculture or mitigating adverse environmental impacts. 
Net benefits of agri-environmental payments programs will be greater if
policymakers, in designing the programs, assign higher priority to activities
and practices that are more valued and/or less costly. The cost-effectiveness
of such programs can also be enhanced by building in flexibility--i.e., giving
farmers latitude in selecting or developing practices tailored to their own
farming operations.  Roger Claassen (202) 694-5473; claassen@ers.usda.gov

Marketing Organic Foods

The organic industry has grown at a remarkable rate during the past several
years. Average annual growth in organic food sales is expected to continue at
20-24 percent into the next decade.  Rapid growth in demand presents the
organic industry with a major challenge--to ensure an adequate supply while
maintaining product integrity as commodities move along the marketing chain
from growers to retailers.  Assurance of organic integrity may require 1)
certification that the commodity was grown organically, 2) marketing and
manufacturing techniques that preserve the organic identity of the product,
and 3) implementation of a national standard that defines exactly what
"certified organic" means. USDA's proposed national organic standards,
expected to be finalized this year, will provide a national definition of
organic production.  Carolyn Dimitri (202) 694-5252; cdimitri@ers.usda.gov

Farming's Role in the Rural Economy

The U.S. rural economy remains strong, largely unaffected by low farm prices
of recent years. While many view "rural" and "agriculture" as virtually
synonymous, the ability of the rural economy to shake off downturns in the
farm sector is a reminder that agriculture (including ag-related industries
such as input suppliers and food retailing) is not the primary economic engine
of rural America.  Rural America's nonagricultural economy has grown steadily,
outpacing growth in agriculture, so that agriculture's relative importance as
a source of jobs and income has declined.  In general, it is the strength of
the overall economy that has sustained the rural economy.  The growing service
orientation of the U.S. economy suggests that the key to survival and growth
for rural communities is developing and attracting service-sector businesses. 
Fred Gale (202) 694-5349; fgale@ers.usda.gov

BRIEFS

Field Crops
Large Field Crop Supplies Expected Again in 2000/01

Large supplies of major U.S. field crops are expected again in 2000/01,
keeping downward pressure on season-average farm prices for the fourth
consecutive year, according to USDA's first forecast of production and prices
for next year. Wheat deviates from the general output projection, with
production expected to decline 3 percent and season-average farm price to rise
6 percent (midpoint of forecast range). While domestic consumption of most
major oilseeds and grains is anticipated to remain strong because of low
prices, export prospects will vary by crop, and ending stocks in 2000/01 will
build for soybeans, corn, rice, and cotton. 

U.S. soybean supplies for 2000/01 are expected to be large, exceeding 3
billion bushels for the first time. Plantings will increase for the 8th
consecutive season, partly because the soybean loan rate supports higher
expected returns relative to alternative crops. Planted acreage in 2000 is
forecast at 74.9 million acres, up 1.5 percent from last year and the largest
on record. Assuming trend yields, domestic soybean production is anticipated
to leap 12 percent to an historic 2,955 million bushels. With large U.S. and
foreign supplies, the season-average farm price will weaken for the fourth
year in a row to $4-$5 per bushel, with the midpoint down from an expected
$4.65 in 1999/2000.

A modest gain is projected for domestic crush, based on improved crush
earnings. USDA expects strong U.S. soybean exports at 970 million bushels in
2000/01, supported by a larger U.S. crop and low prices, a slowdown in foreign
oilseed supply growth, and expanding foreign import demand. However, a weak
Euro and anticipated large Chinese oilseed crops will limit U.S. export gains.
With expected large gains in domestic production, ending soybean stocks are
projected to be the largest since 1985/86, despite a smaller carry-in and
increasing world demand. 

U.S. corn production in 2000 is projected to be the fifth consecutive crop to
surpass the 9-billion-bushel mark, up over 300 million bushels from last year.
Producers are expected to raise corn acreage slightly, and yields are forecast
above trend (see box). Total domestic supplies are anticipated to increase by
almost 3 percent with marginally lower carry-in stocks. The U.S. average farm
price is pegged at $1.60-$2 per bushel, compared with a $1.90 midpoint for
1999/2000.

Domestic use of corn in 2000/01 is expected to increase less than 1 percent,
with higher food, seed, and industrial (FSI) uses accounting for a  majority
of the gain. Feed and residual use of corn is projected to rise, partially
offsetting lower feed and residual use for sorghum and barley. U.S. corn
exports are anticipated to be slightly higher next season due to reduced
competition from China.

U.S. wheat plantings for the 2000 crop are expected to decline for the fourth
consecutive year as producers continue to favor planting oilseeds in many
parts of the Corn Belt and Northern Plains states. As a result, production is
projected to fall nearly 3 percent, but large carry-in stocks will keep
supplies relatively plentiful. With higher wheat imports anticipated next
year, the total U.S. wheat supply is expected to be down less than 2 percent
from 1999. 

Total use of wheat is projected to rise slightly as gains in food use and
exports offset a decline in feed use--reflecting competition from weak corn
prices. The U.S. is expected to capture a share of this year's expanding
global import market, a result of production decreases in North Africa and
Iran (due to drought) and in China. Given relatively flat total use, smaller
U.S. supplies will likely lead to lower ending stocks, and the U.S. average
wheat price for 2000/01 is expected to rise $0.15 per bushel to $2.65
(midpoint of forecast). 

U.S. rice plantings are expected to be 3.4 million acres in 2000, a 5-percent
decline from last season when prices were considerably higher. Production is
also projected to fall 5 percent from last year's record harvest of 210.5
million cwt, but huge beginning stocks will more than make up for the
shortfall. While medium and short grain rice production will likely rise, a
significant anticipated reduction in long grain rice production will be
responsible for the overall decline. With total use expected to increase only
marginally, ending stocks are anticipated to total 44 million cwt, the largest
level since 1986/87. Enormous domestic and foreign supplies will weigh heavily
on prices next season. The season-average farm price is expected to fall to
$4.75-$5.75 per cwt, down from $6.05-$6.15 in 1999/2000.

Total domestic use of rice (including food, seed, industrial, and residual) is
projected to expand nearly 2.5 percent to a record level. Exports of milled
and rough rice are anticipated to be the same as last year, with strong
competition among major exporters for limited import markets. U.S. imports,
mainly aromatic varieties from India and Pakistan, will likely continue to
increase in 2000/01. A 2-percent rise in rice imports is forecast for next
season.

Cotton production is projected to soar next season due to a nearly 5-percent
increase in both planted acreage and yields. Production is forecast at 19
million bales (a 12-percent gain) in 2000, the largest crop since 1994. A
second consecutive annual rise in area is attributable to higher expected net
returns for cotton versus competing crops. In addition, ending stocks are
projected to increase 800,000 bales, boosting the stocks-to-use ratio to 28
percent.

Domestic mill use is anticipated marginally higher in 2000/01. The modest
increase will be due to strong retail demand as well as larger textile
exports. Moreover, U.S. exports of raw cotton in 2000/01 are projected near
the mid-1990's levels at 8 million bales. U.S. share of world trade is
expected to increase from 25 percent to 29 percent because of greater domestic
production, lower foreign production, record foreign demand, and continuation
of USDA's Step 2 program (a mechanism for keeping U.S. cotton competitive on
the world export market).  
Gregory K. Price (202) 694-5315 
gprice@ers.usda.gov

BOX - FIELD CROPS

Planted area for field crops, excluding winter wheat, is based on USDA's
Prospective Plantings report for 2000, released on March 31. Harvested area is
based on historical averages for harvested-to-planted ratios. Yields are
derived from historical trends or averages, except for winter wheat where
survey results are used and for corn where a statistical model is used based
on trend, July weather, and planting progress (see next article). With
planting still underway and harvest several months away for most crops,
growing conditions could alter final production levels. U.S. crop prices are
influenced not only by weather domestically and in other countries, but also
by changing U.S. and global demand conditions.

BRIEFS

Planting Progress Enhances 2000 Corn Yield Prospects

USDA's initial projection for U.S. corn yields in 2000 is 137 bushels per
acre, about 3 bushels higher than the long-term, straight-line trend would
indicate. The above-trend yield projection reflects earlier-than-average
planting of this year's corn crop. A crop planted earlier tends to have
greater yield potential because it allows for more of the critical stages of
crop development, especially pollination, to occur under typically more
favorable weather conditions, avoiding the hotter and drier periods later in
the summer. Through May 14, planting progress for 18 major corn production
states reached more than 90 percent completion, compared with a 5-year average
of 62 percent by mid-May. 

To assess potential yield gains resulting from early plantings, a corn yield
model was used, based on trend, weather, and planting progress. The model,
developed by USDA's Economic Research Service, uses July weather
(precipitation and average temperature) and mid-May plantings data for the
five-state Corn Belt (Iowa, Illinois, Indiana, Ohio, and Missouri), which
typically accounts for about half of U.S. corn production. The estimated
regression equation explains about 90 percent of the variation in national
corn yields in 1975-99.

The effects of mid-May planting progress and July temperatures on corn yield
are each linear in the model--i.e., for these variables, each unit of change
has a constant effect on yield. The effect of Corn Belt precipitation for
July, however, is nonlinear because the response of corn yields to different
amounts of precipitation is asymmetric. That is, reductions in corn yields
when rainfall is below average are larger than gains in corn yields when
rainfall is above average.

If planting progress by mid-May this year had been average--and assuming
weather in July is average--the model suggests a corn yield of about 134
bushels per acre in 2000. However, a weighted average of corn yield estimates
for alternative July weather outcomes, including both favorable and adverse
weather, lowers the mean (average) expected corn yields to 131 bushels per
acre, reflecting the asymmetric response to different amounts of rainfall. The
mean expectation analyzed here accounts for most of the likely outcomes in
July weather (95 percent of the statistical distribution of the weather
variables). 

Advanced planting progress this year adds to this average yield expectation.
For every 10-percentage-point increase in planting progress above average,
corn yield expectations are raised by 2.6 bushels per acre. So with 95 percent
of the Corn Belt corn crop planted by mid-May (compared with the 1975-99 Corn
Belt average of 71 percent by that date), mean expectations are raised to
about 137 bushels per acre.

As the growing season for corn progresses, and actual data for July weather
become available, the model can be used to update projections of this year's
corn yield. Higher yields could result if July weather is more favorable than
average, while a hotter and drier July could reduce corn yields.
USDA's first survey-based estimate of corn yields for this year will be
released by the National Agricultural Statistics Service in the August 11 Crop
Production report.  
Paul Westcott (202) 694-5335
westcott@ers.usda.gov

BRIEFS

Livestock, Dairy, & Poultry
Meat & Poultry Production To Continue Record-Setting Pace

Red meat and poultry production in 2001 is forecast at around 83 billion
pounds, up less than 1 percent from this year's expected record. Increased
poultry output and a turnaround in pork production, bolstered by profitability
and relatively low corn and soybean prices, will more than offset a modest
decline in beef production. Due to poor returns in recent years, beef
producers have reduced breeding herds.

Although red meat and poultry supplies are record large, the robust economy is
fueling demand and maintaining prices. Hog prices in 2001 are expected to
average in the mid-$40's, about the same as in 2000, and broiler and turkey
prices are expected to decline only slightly. Prices for both fed and feeder
cattle are expected to post modest gains as supplies continue to decline. 

Beef production is expected to decline 4-5 percent in 2001 as producers begin
to retain heifers for the breeding herd rather than placing them on feed.
Also, due to the declining cattle inventory, steer and cow slaughter will
continue to decline.

Heifer slaughter has remained large in early 2000, and many of the heifers
that might have been bred this spring and summer to calve and enter the
breeding herd have already been placed on feed. These additional heifers on
feed are keeping beef production near the record reached last year.

Cattle inventories have been declining since 1996. Continuing decline in the
breeding herd has resulted in what will likely be the smallest calf crop since
at least the early 1990's in 2000, and the 2001 calf crop is likely to drop
even further, possibly to the lowest since the early 1950's.

Cattle prices, in the face of large supplies of competing meats at relatively
low prices, have rebounded from the lows reached in the mid-1990's. The robust
U.S. economy underlies the current strength in meat demand, which has shored
up prices despite large supplies. With expectations of higher prices,
especially for cattle that will grade Choice, increased heifer retention for
breeding following this year's calf crop is expected in 2001 provided adequate
forage is available. The retention will further reduce an already much lower
feeder cattle supply, which was 8 percent below a year ago on April 1. The
feeder cattle supply is expected to continue to decline over the next couple
of years until herd expansion begins. 

Fed-cattle prices are expected to average in the lower $70's per cwt in 2001,
up from near $70 this year. Lower feeder cattle supplies are boosting feeder
cattle prices at a faster rate. Feeder cattle prices are expected to average
in the high $80's per cwt in 2001, up about $3 after a $9 gain in 2000 and the
highest price since the early 1990's. Retail beef prices are expected to rise
only 1-3 percent in the face of large competing meat supplies.

Pork production in 2001 is forecast to be less than 1 percent above the 18.8
billion pounds expected this year. With greatly improved returns--hog prices
have risen to about $50 per cwt from the high $30's earlier this
year--producers are expected to begin an expansion phase in late 2000. 

Poor returns from fall 1997 to spring 2000 have prompted producers to reduce
the number kept for breeding during the last 18 months. The March Hogs and
Pigs report indicates that the number of animals kept for breeding was down 5
percent from the same period a year ago. Also, producers indicated intentions
to reduce the number of sows farrowing during March-August by 3 percent from
actual farrowings a year earlier. Pigs farrowed during this period reach
slaughter weight in late 2000 and early 2001. 

Hog prices are expected to average in the mid-$40's per cwt in 2001, about the
same as this year and up over 30 percent from 1999. Competing meat supplies
will continue to be large. In addition, some uncertainty remains about the
continuing demand boost from the robust economy. If Federal Reserve actions
cool the economy, meat demand will likely slow somewhat.

Retail pork prices are expected to climb 1-2 percent in 2001, following an
expected rise of 5-6 percent in 2000. The projected rises follow 2 years of
declining prices.

Poultry output is expected to remain strong in 2001, with increases forecast
for broilers, turkeys, and eggs. Net returns for processors in all three
sectors are relatively attractive in 2000, although prices for soybean meal--a
major component of poultry feed--are above year-earlier levels. Returns will
likely be dampened in 2001 as poultry prices decline somewhat.

Broiler production is expected to rise about 5 percent in 2001, near the
5-year average. Wholesale broiler prices are expected to decline slightly but
average in the mid-50-cent-per-pound range. The export market remains the key
to broiler prices. In recent years, robust export growth was dampened by
economic problems in Asia and Russia. Economic conditions appear to be
improving in those countries, and as broiler exports edge higher, prices will
likely hold in the mid-50-cent range.

Turkey production is expected to increase about 1 percent in 2001, with prices
expected to average slightly lower. Turkey processor returns were quite high
in 1999, as soybean meal prices plummeted. But rising meal prices and slightly
lower turkey prices have eroded returns in 2000.  
For further information, contact: Leland Southard, coordinator; Ron Gustafson,
cattle; Leland Southard, hogs; Mildred Haley, world pork; Jim Miller, dairy;
David Harvey, poultry and aquaculture. All are at (202) 694-5180.

BRIEFS

Specialty Crops
Stone Fruit Supplies Likely to Rise in 2000

Favorable spring weather has led to what will likely be a strong crop of
California stone fruits (peaches, nectarines, and plums) in 2000. California's
stone fruit orchards--which account for most of U.S. stone fruit
production--have received above-average rainfall, especially in February, the
wettest on record with rainfall more than double the normal amount. Breaks in
the rainfall, combined with good winds, allowed the blooms and orchard grounds
to dry. Hence, fungicide application was not disrupted and blooms remained
undamaged by the wet weather. Warm and sunny spring days during March allowed
growers to work orchards with minimal disruption.

Winter 1999/2000 was milder than a year ago. In order for stone fruit trees to
achieve dormancy during winter, they must have a sufficient number of chill
hours (when the temperature remains below 45 degrees Fahrenheit). Trees that
go through a full dormant stage usually produce strong fruit that is less
susceptible to pests and diseases, less prone to bruising, and capable of a
longer shelf life. According to the California Tree Fruit Agreement--a
grower-funded organization that promotes fresh-market stone fruit--chill hours
during the 1999/2000 winter totaled 897 compared with 1,331 chill hours the
previous year, but still sufficient for the trees to achieve dormancy.

Timing of this season's California stone fruit development is ahead of normal
compared with last season's late starts. Early varieties of nectarines, Mayglo
in particular, were in full bloom by February 7, followed by Red Beaut plums
on February 13. By late February, orchards were in full bloom, indicating a
full crop for the year, and by the end of March, stone fruit trees were
leafing out. Sunny weather toward the end of April has enabled growers to
harvest some early-variety peaches and nectarines.

Favorable spring weather in California will lead to an increase in peach
production. USDA forecasts total production of peaches in California (both
freestone and cling varieties) to increase by 5 percent to 1.9 billion pounds
in 2000. Total peach production was 1.8 billion pounds in 1999 and 1.7 billion
in 1998.

Figures from the California Tree Fruit Agreement indicate that packout (number
of 25-pound boxes harvested) of California stone fruit will be greater this
year than last. Packout of peaches--both yellow- and whiteflesh varieties--is
projected to rise by 2 percent over last year. Packouts of nectarines and
plums are projected up by 4 percent and 5 percent from 1999.

Peaches account for over 80 percent of combined U.S. production of the three
stone fruits. South Carolina and Georgia follow California's 73-percent share
of peach production at a far distance, averaging about 6 and 5 percent of the
U.S. total over the last 5 years. In 1999, a favorable growing season brought
production in the two states to 160 and 110 million pounds, respectively. By
the end of April 2000, 82 percent of South Carolina's peach crop and 79
percent of Georgia's peach crop appeared to be in good or excellent condition.

Grower prices for plums and nectarines were down in 1999 following recovery in
production from 1998's heavy winter rains and spring hailstorms. Grower prices
for peaches remained relatively stable. According to the Bureau of Labor
Statistics, 1999 summer retail prices for peaches averaged 2 percent below
1998 but 11 percent above the average of the last 5 years (1994-98). During
2000, prices for fresh-market stone fruit will likely be about average, given
increased supplies and good quality from this year's California harvest.  
Thomas Worth (202) 694-5262
tworth@ers.usda.gov 

COMMODITY SPOTLIGHT

Garlic: Flavor of the Ages

The famous French chef, X. Marcel Boulestin (1878-1943), is reputed to have
said, "It is not really an exaggeration to say that peace and happiness begin,
geographically, where garlic is used in cooking." Garlic has a long and
colorful history, with references in the Bible, in ancient Chinese writings,
and in literary works by such luminaries as Shakespeare, Dante, and Sir
Francis Bacon. Although used primarily today as a food flavoring agent and
condiment, garlic has a history as a remedy for a wide variety of conditions
and diseases.

Thought to have originated in central Asia around Siberia, garlic was revered
by both the ancient Egyptians and the Chinese. In the U.S., garlic is grown
for its strong-scented, pungent bulbs, although in some countries, the green
tops are used in a manner similar to scallions

Garlic (Allium sativum) is a member of the Amaryllis (lily) family and is
related to onions, shallots, chives, and leeks. In the U.S., garlic
consumption has soared, especially in the 1990's. Per capita garlic use was a
record-high 3.1 pounds in 1999, three times the level of 1989. To satisfy this
burgeoning demand, U.S. garlic production occupied more than 64 square miles
(41,000 acres) in 1999, up from 25 square miles (16,000 acres) in 1989, and
imports rose to more than 20 percent of domestic use in the 1990's. The number
of farms reporting garlic acreage between 1987 and 1997 jumped 150 percent to
1,121. At the farm level, the U.S. garlic crop is valued at about $200
million.

Garlic Production
Is Concentrated
 
Garlic production is concentrated both internationally and domestically. With
13 billion pounds annually, China is the leading producer, accounting for 66
percent of world output. The majority comes from the Shandong Province--a
prime agricultural area located southeast of Beijing. South Korea and India
are second and third with 5 percent each, and the U.S. ranks fourth with 3
percent of world production.

According to the 1997 Census of Agriculture, California harvests 84 percent of
U.S. commercial garlic acreage. Most of the domestic garlic that enters the
fresh and dehydrated product markets is grown in California. Only four other
states harvest more than 100 acres of garlic--Nevada, Oregon, Washington, and
New York. Nevada and Oregon, producing largely seed garlic under contract with
California firms, each account for about 7 percent of U.S. acreage, with
smaller amounts scattered throughout 30 other states. As the garlic market has
expanded, so too has acreage in these three contiguous states. Between 1992
and 1997, garlic area increased 50 percent in California, 295 percent in
Nevada, and 153 percent in Oregon. 

Three California counties provide the majority of garlic production--Fresno
(82 percent of the crop), Kern (11 percent), and Monterey (5 percent). The
community of Gilroy in Santa Clara County is billed as garlic capital of the
world because a significant volume of California's fresh-market garlic is
shipped from there. 

U.S. garlic production doubled over each of the last two decades. No other
vegetable, including high flyers like onions, broccoli, and carrots, has
exhibited such strong sustained growth. Since the 1950's, California has been
the only state for which USDA's National Agricultural Statistics Service has
estimated garlic production. In 1999, California's garlic crop jumped 20
percent to a record 660 million pounds, recovering from a 2-percent decline in
1998. Shippers and processors had intended to increase production in 1998, but
unusually cool, wet California weather triggered the most severe outbreak of
garlic rust disease in many years, cutting yields by 15 percent. 

Garlic falls into three broad product segments--fresh-market, dehydrating, and
seed stock--with each differentiated by the way the crop is grown, handled,
and used. About a fourth of all U.S. garlic is sold as fresh-market produce.
The remainder is sold as various dehydrated products or for certified seed.
Under average market conditions, there is little overlap among these three
markets, although some lower grade fresh-market garlic is occasionally sold to
dehydrators. Changes in relative market prices and stock levels can prompt
some shifting of sales between the segments, particularly between fresh and
processing markets. 

While seed and dehydrating garlic are mechanically harvested, fresh-market
garlic is hand-harvested. Fresh product is carefully handled to preserve
appearance (including sizing, grading, and storing) and is shipped and sold in
the same manner as fresh produce. Fresh garlic can be marketed for up to 3
months from the time of harvest with standard warehouse storage, up to 6
months if kept in cold storage, and up to a year under controlled-atmosphere
storage. Fresh garlic is used to manufacture crushed, chopped, peeled, and
pureed garlic products.

Depending on variety and location, most garlic in California is planted during
the fall (October-November) and harvested in summer (June-August). Virtually
all major commercial garlic is grown under contract. The garlic industry is
fairly concentrated in both the fresh and dehydration markets. Several large
shippers account for the majority of fresh-market volume, while three or four
firms process nearly all of the dehydrated product.
 
Demand Soars

Garlic was introduced into North America sometime in the 1700's, but adoption
was slow to catch on. In 1919, when the first estimates were made, per capita
garlic use was less than 0.05 pounds, edging up during the 1920's to average
about 0.12 pounds. Garlic use rose 25 percent in the 1930's and continued to
accelerate to a 2-pound average in the 1990's, a 115-percent leap over the
1980's. One theory for the steady rise in garlic's culinary stature throughout
the mid-1900's is that soldiers and world travelers experiencing
garlic-enhanced foods in places such as southern Europe, North Africa, and
Asia brought a taste for it back to the U.S.

The trend in garlic use is unique among vegetables in that demand has not only
increased steadily over many decades but has grown at an increasing rate.
Also, despite impressive growth for vegetables such as broccoli, bell peppers,
and carrots, no vegetable has experienced stronger growth in demand over the
past 10 years. The strong surge in use during the 1990's likely reflects
several factors:

*   rising popularity of ethnic foods and restaurants;
*   persistent health messages circulating in the press about garlic;
*   demand from the health supplements industry; and
*   the never-ending quest by consumers for new taste experiences.

These demand factors reflect a broadening view of garlic as a "functional
food"--one that imparts both the usual taste and nutritional attributes of
food, plus certain perceived health-enhancing benefits (broccoli is another
example of such a food). Used primarily in cooking to flavor a wide variety of
foods, garlic provides vitamin C, potassium, phosphorous, selenium, several
amino acids, and a variety of sulfur compounds, including allicin--a naturally
occurring compound whose promising health effects are now being studied at
several major universities.

For centuries garlic was valued as a medicinal herb by such cultures as the
Chinese and the Egyptians. Adding to the recent surge in U.S. demand for
garlic (especially in the 1990's) has been a large and growing body of
nutritional and medical research, which points to a wide variety of actual and
potential health benefits ascribed to garlic. This research has spawned
renewed interest in garlic as a health-enhancing supplement. Although this use
is said to be small relative to food use, it has been rising. Various garlic
powder pills and garlic oil pills are now commonly available.

During the 1990's, U.S. imports furnished about 23 percent of all garlic used
domestically (fresh and processed), up from 17 percent in the 1980's. While
the domestic market is primary to U.S. garlic marketers, the export market has
also been slowly gaining in importance over the past two decades. During the
1990's, the U.S. exported 12 percent of its total garlic supply--up slightly
from the 1980's share and double the share of the 1970's.

Annual garlic prices gained an average 2.7 percent (90 cents per cwt) a year
between 1970 and 1996. The season-average price declined about 20 percent in
1998 and 1999 after peaking at $47.90 per cwt in 1997 with reduced production
and increasing demand. During the 1990's, few vegetable prices were able to
keep pace with inflation, despite stronger demand and lower price inflation in
the economy, with most declining 13 to 24 percent. After adjusting for
inflation, constant-dollar garlic prices have increased or remained steady for
8 of the past 11 years and actually increased 18 percent during the 1990's, in
contrast to a 10-percent decline in the 1980's. This spring, however, nominal
wholesale garlic prices were as much as one-third lower than a year earlier,
following the record-large 1999 crop.

Segmenting the Garlic Market

On any given day, 18 percent of Americans consume at least one food containing
garlic, according to data derived from USDA's 1994-96 Continuing Survey of
Food Intakes by Individuals. This is relatively high compared with such
popular foods as french fries (13 percent), catsup (16 percent), and
fresh-market tomatoes (28 percent). This level of daily consumption, which may
be even higher today than during the survey period, reflects the breadth of
foods for which garlic is used as a seasoning--meat dishes, sauces, stews,
soups, casseroles, dressings, catsup, pickles, salsas, oils, breads, etc. In
some of these foods, of course, garlic is a minor ingredient and may not be
readily apparent. 

Dehydrated garlic accounts for about three-fourths of the garlic consumed in
this country, and is an ingredient  in a wide variety of processed foods.
Other forms of garlic include whole bulk garlic, garlic in oil, garlic puree,
garlic in vinegar, dehydrated garlic powder, garlic salt, garlic bread,
chopped garlic, garlic juice and concentrate, garlic dill mustard, garlic
dressing, garlic spread, garlic toast, and garlic braids (garlic cloves with
tops braided into strips). 

The majority of garlic, like most foods, is consumed at home (56 percent).
This partly reflects the increasing use of garlic by food manufacturers,
rather than simply its use in home cooking. In the away-from-home market, fast
food accounts for 19 percent of garlic consumption, with standard "white table
cloth" restaurants accounting for another 15 percent. Many ethnic restaurants
(e.g., Italian, Chinese, Lebanese, Korean, and Indian) provide consumers a
healthy dose of garlic in their cuisine. 

Garlic is most favored by consumers in the western states (a 13-state region
defined by the Census Bureau). With 22 percent of the nation's population,
this region accounts for 31 percent of all garlic consumption. While the
Northeast region consumes garlic in proportion to its share of the nation's
population (20 percent), the South and Midwest consume less than their share.
Some of this may be explained by the fact that Hispanics (of Mexican origin)
and Asians, two groups more numerous in the West than the Midwest, consume
proportionally more garlic than non-Hispanic white and black consumers.
Hispanics, who make up 11 percent of the U.S. population, account for 20
percent of all U.S. garlic consumption.

Low-income Americans appear to use garlic proportionally more than other
income groups. Households with income less than 130 percent of the poverty
level (the cut-off point for food stamp eligibility) represent 19 percent of
the U.S. population but consume 25 percent of all garlic. This is the only
defined income class that consumes proportionally more, although individuals
in the higher income bracket (above 300 percent of the poverty level) come
close, with 49 percent of the population consuming 47 percent of garlic. 

Garlic appears to be more popular among men than women, with men consuming 62
percent of all garlic. Men aged 20-59 account for 27 percent of the population
but consumed 41 percent of all garlic. Teenaged boys (and girls to a slight
extent) also consumed proportionally more garlic (6 percent of the population,
11 percent of garlic consumption).

Garlic has proven itself as a popular food and nutrition item, and is gaining
scientific credibility as a significant contributor to good health. Garlic and
its benefits are solidly launched, and U.S. production and consumption are
likely to continue to grow in the next few years.  
Gary Lucier (202) 694-5253 and Biing-Hwan Lin (202) 694-5458
glucier@ers.usda.gov
blin@ers.usda.gov

BOX - COMMODITY SPOTLIGHT

Elephant garlic, a vegetable that appears to be gaining in popularity, is not
true garlic, but a type of leek that is a close relative of garlic and onions.
Much larger than true garlic, elephant garlic tends to have a milder flavor,
which makes it well-suited for roasting and spreading on crackers and breads.
In California, area devoted to elephant garlic is said to be small relative to
regular garlic, and USDA combines the acreages in its estimates. Another
vegetable, garlic chives (also called ku chai and Chinese chives), also
imparts the classic garlic flavor and can be used fresh or in cooking.

BOX - COMMODITY SPOTLIGHT

To Your Health
 
For thousands of years, garlic has been recognized for both its culinary
qualities and a variety of medicinal properties. Garlic cloves, for example,
were reportedly applied to the feet of smallpox victims as "treatment" for the
disease. In today's more science-oriented world, research has shown garlic to
have a host of positive health effects, including antiseptic qualities that
have been credited to sulfur compounds in the cloves. The Chinese have long
used garlic to reduce blood pressure and treat cardiovascular disease a few
of the many medicinal effects under study in the U.S. 

Despite a flurry of research on garlic in the 1990's, much remains to be
learned. Scientific and medical research continues worldwide on the health
properties of various forms of garlic and garlic supplements. Health benefits
ascribed to garlic and garlic supplements include:
*  antibiotic/antifungal effects; 
*  antiseptic properties useful in fighting infections and dysentery-causing
amoebas;
*  antioxidant effects, protecting cells from free-radical damage and cancer;
*  cholesterol reduction, lowering LDL and increasing HDL;
*  natural anticoagulant properties, preventing blood clots and strokes; and
*  anti-hypertensive effects, reducing blood pressure.

Documented medical research studies supporting the presence of these health
benefits are numerous. A 1993 study at Pennsylvania State University found
that garlic reduces triglycerides and cholesterol in livers and blood of
laboratory rats. The Mayo Clinic reports that garlic is an effective blood
thinner, reducing platelet-clotting action. The clinic also states that garlic
may reduce hypertension and help fight infection. Further, in a study
involving more than 100,000 people, research released this year at the
University of North Carolina found that eating one clove of raw or cooked
garlic each day may reduce colon and stomach cancer. Allylic sulfides (found
in garlic and onions) are considered by many researchers to be among the most
potent of all nutrients from plants and may prevent some cancers and coronary
disease. 

Further research is underway in institutions such as the Mayo Clinic, the
Harvard Medical School, and the Cornell University Medical Center (which has a
toll-free garlic hotline). In addition, the National Cancer Institute is
funding research at Queen's University in Ontario on garlic's ability to
shield lungs against chemical toxicants and potential carcinogens.

Whole raw garlic in its natural state produces very little odor. The familiar
smell of garlic is produced when garlic cloves are chopped, sliced, or
crushed. This action releases an enzyme that reacts with another compound to
form allicin, the active sulfur-containing molecule that produces the classic
garlic aroma. 

Although it is uncertain how allicin and other garlic compounds work in the
body, it is apparently one of many biologically active compounds that may one
day be proven to provide a host of beneficial health effects. Some of these
health-enhancing features of garlic may have been "known" for centuries, but
only recently has modern science begun addressing the subject, slowly adding
credence to long-held folklore. 

FOOD & MARKETING

Organic Foods: Niche Marketers Venture into the Mainstream

The organic foods industry has been growing at a remarkable rate during the
past several years. Sales of organic commodities in natural foods stores
approached $3.3 billion in 1998, compared with $2.08 billion in 1995,
according to industry sources. Sales of organic products in conventional
supermarkets are also rising. Industry experts expect the current average
annual growth rate of 20-24 percent for organic food sales to continue into
the next decade.

Such growth continues to transform the organic foods industry. Firms that have
been in the industry for many years face pressure to expand, and some struggle
to keep up with demand for their products even as they confront competition
from new entrants.

Some established firms may welcome industry growth because they expect to
benefit from increasing numbers of organic growers, manufacturers,
wholesalers, and distributors serving a larger national and international
market. They see an expanded market as an opportunity to modify marketing
approaches and bring organic products to a broader range of consumers. In
contrast, other established organic foods businesses maintain that organic
foods should be produced and marketed on a local or regional scale, in part to
preserve opportunities for small family farms and ranches in rural areas. 

Rapid growth in demand presents the organic industry with a major
challenge--to ensure an adequate supply while maintaining product integrity.
Firms seek to meet rising demand by developing more efficient ways to bring
larger quantities of organic products to the market. At the same time, the
industry seeks to combat the potential for fraud--i.e., marketing
conventionally grown products as organically grown. Implementation of USDA's
proposed national organic program should facilitate this effort.

Maintaining Integrity
Of Organic Products

A unique aspect of the organic market is that it does not rely solely on
economic factors to differentiate its products. Buyers of organic food
products, both businesses and consumers, make purchasing decisions by
considering not only price and quality, but also the perceived social and
environmental benefits that organic production represents. Buyers expect that
the organic characteristics for which they pay premium prices will be
preserved as the commodity moves along the marketing chain. Ensuring integrity
of the product may require 1) certifying to provide credible assurance that
the commodity was grown organically, 2) utilizing marketing and manufacturing
techniques that preserve the organic identity of the product, and 3)
implementing a national standard that defines exactly what "certified organic"
means.

From the industry's inception, a key problem has been lack of a universally
accepted definition for "organic," making it difficult for buyers to know what
they are getting when they pay higher prices for so-called organic foods. In
1973, a group of 50 California farmers was the first to address the issue.
They formed the California Certified Organic Farmers (CCOF), which defined
standards for organically grown food and created a certification system. The
CCOF standards were used as a model for the California Organic Foods Act
passed in 1990.

Since formation of the CCOF, there has been a proliferation of attempts to
develop organic standards and certification. In the U.S, there are currently
13 states with certification programs and at least 36 private certifiers.
Several certifiers assess providers of organic handling services, such as
distributors, packers and re-packers, and processors, to ensure that organic
food does not become commingled or contaminated during processing. Other
countries, such as the European Union, Canada, and Japan, have their own
standards for organic foods, and many are different from those in the U.S.

In the absence of a uniform definition, rising demand combined with a premium
price for most organic products provides a powerful incentive to fraudulently
label conventionally grown products as organic or to compromise organic
production practices. The Organic Farming Research Foundation reports that
several firms were recently fined for violating the California Organic Foods
Act.

In an effort to resolve these kinds of problems, Congress included the Organic
Food Production Act in the 1990 farm legislation. The Act led to the creation
of the National Organic Program (NOP) within USDA's Agricultural Marketing
Service (AMS) and the National Organic Standards Board (NOSB). NOSB, an
advisory board which includes food industry, consumer, and environmental
representatives, provides recommendations to the NOP, which is charged with
writing regulations to implement the Act. In March 2000, USDA released a
proposed regulation that incorporates recommendations of the NOSB and responds
to numerous comments from the public that emphasized the need to tighten
regulations for practices permitted in organic production (AO April 2000).
Based on comments received so far, the proposal appears to have moved a
national definition of organic production closer to consensus among views of
consumers, the organic industry, and USDA.

Links in the Marketing Chain
 
As the quest for a uniform national standard nears resolution, the organic
food industry continues to focus on how to move ever larger quantities of
quality products from farm gate to consumer. Maintaining quality at each step
along the marketing chain presents challenges for each agent. Although premium
prices at the farm gate give farmers a strong incentive to grow a high quality
commodity, food products pass through a number of intermediaries as they
travel from producer to retailer. Producers who use organic farming methods
want to be sure the food they grow will be handled and processed according to
standards that allow consumers to buy with confidence, especially since the
products usually command a price premium for qualities that are often
unobservable. Maintaining quality from grower to retailer assures that all who
participate in providing organic foods have an opportunity to realize the
profit potential from this market.

Moving the product quickly to the next agent is key to maintaining the value
that underlies the organic price differential, particularly for products to be
sold as fresh, but also for those destined for processing. Food processors
often specify their own organic standards, along with freshness and other
required characteristics such as shape and size. Transmitting accurate demand
information back through the industry's marketing chain from consumers to
retailers, then to wholesalers, manufacturers, and farmers, enables the
industry to offer what consumers wish to purchase.

Farmers using organic agricultural methods to produce food commodities face a
market that has become significantly larger and more complex. To succeed in
this market, farmers must grow the right product and be able to ensure the
quality of their output. Some organic farmers market their products through
direct sales--e.g., at farmers' markets and onfarm stands, or to local
restaurants and grocery stores--but most market through wholesalers.
Commercial buyers (manufacturers, distributors, and retailers) often have the
best knowledge of what consumers want and what they are willing to pay for
organic foods. Farmers are often able to get accurate and timely information
about prices and market opportunities by listening carefully to buyers.

Even with access to information about what consumers want, organic farmers
often face major challenges in finding markets, negotiating prices, and
delivering food commodities while maintaining product integrity. Marketing
agreements and strategic alliances among various combinations of farmers and
shippers--organic or conventional--are designed to enable participants to draw
on each other's inventories and distribution networks, thereby increasing
their ability to service a larger market share. For example, in 1999, the
country's second-largest conventional lettuce grower (Tanimura and Antle) and
the nation's largest organic vegetable shipper (Natural Selection Foods,
marketer of the Earthbound Farm brand) became partners in supplying organic
lettuce to large, mass-market supermarkets. Strategically allied farmers and
shippers gain an advantage by providing a wider range of crops and varieties
than each could supply independently.

From grower case studies:
Pavich Family Farms is the world's largest grower of certified organic table
grapes, as well as a marketer of more than 100 products from a network of
other organic farmers. Like conventional produce shippers, Pavich strives to
provide year-round supplies of fresh produce by working with certified organic
fruit growers in Chile, Costa Rica, El Salvador, and South Africa.
Flickerville Mountain Farm and Groundhog Ranch is a small, highly diversified
farming operation located in south central Pennsylvania. The operators handle
most of the marketing themselves, selling most of their products through
farmers' markets and direct sales to restaurants in Washington, DC. 

Manufacturers of both conventional and organic foods face problems associated
with buying adequate amounts of ingredients at reasonable prices, producing a
uniformly consistent product, and securing shelf space in the supermarket.
However, manufacturers of organic products have added challenges in dealing
with organic ingredients: locating sufficiently large supplies, verifying they
are organic, and maintaining organic integrity of the commodities during
processing.

Some large organic food manufacturers have recently begun to follow the lead
of conventional food processors to overcome the sourcing problem by working
closely with farmers to provide guidelines for the kinds of products they
require, or by entering into formal contract agreements. 

Organic foods have traditionally been manufactured by small businesses that
fit into a profitable niche market in a region. Their success, like many other
organic food businesses, can be attributed in many cases to buyers ascribing
quality, taste, safety, and environmental characteristics to organic products,
and consumers' partiality toward local production. However, the market for
organic foods was fairly small and very specialized when many of these
businesses first opened their doors. That market is much larger now, and as
mass-market food businesses enter, many long-time organic foods manufacturers
are realizing they must expand and/or merge in order to stay competitive.

Rising demand presents opportunities for traditional organic manufacturers
that have been able to increase their scale of operations, although increased
market size and competition may erode the market premium that their product
once commanded. Survival for these manufacturers depends in large part on
whether they can carve out a niche for themselves and maintain market share
through quality and price competitiveness.

Until recently, most organic products were sold in "natural foods" markets. As
the organic market grows, manufacturers of organic foods are increasingly
interested in selling in mass-market venues. Many lack the expertise and
experience of their competition (mass-market distributors) when it comes to
gauging customer preferences. They have been slow to adopt supply-chain
management techniques, which can be invaluable in streamlining and minimizing
the costs incurred on the path from assembly line to shopping cart. In fact,
many organic foods manufacturers that have been growing swiftly without
well-defined management plans have run into severe logistical problems such as
matching the flow of inputs to consumer purchasing patterns.

From manufacturer case studies:
Cascadian Farm, the world's largest organic foods company, produces,
manufactures, distributes, and markets a wide variety of organic products. The
company directly contracts with farmers and helps them to make the transition
from conventional to organic farming. Following the lead of most conventional
dairy producers, Wisconsin-based Coulee Region Organic Produce Pool (CROPP)
Cooperative represents small and mid-sized farmers from Maine to Oregon to
manufacture and sell a line of organic dairy products, as well as meat,
poultry, and produce. CROPP's gross revenue topped $30 million in 1999.

Distributors of organic foods sit between producers (for foods sold as fresh)
or manufacturers (for processed foods), and retailers in the marketing chain.
Distributors warehouse food products from manufacturers and deliver them to
retailers. Ten years ago, these distributors were specialized, regional
businesses that served small, regional health food stores. Now, changes in the
natural foods business environment (which includes but is not limited to
organic foods) have made it possible for a few of these distributors to become
nationally recognized corporations.

Whether large or small, however, today's natural foods distributors are
operating in an increasingly competitive business environment that in some
respects is more risky than for distributors in the well-established mass
market. Organic foods distributors may have to develop working relationships
with unfamiliar mass-market retailers whose buyers are new to the natural
foods industry. Mass-market buyers may use a different type of language when
ordering and lack familiarity with some of the constraints of organic product
marketing--e.g., timing product purchases to accommodate seasonal variation or
dealing with occasional shortages. At the same time, organic foods
distributors continue to do business with traditional organic buyers, quite
often small and sometimes uninformed about current industry pricing practices.
In addition, new competition emerges as many mass-market distributors begin to
carry organic products.

Margins in the natural foods distribution field are shrinking by most
accounts. The Natural Foods Merchandiser, a trade journal, estimates that
margins for distributors of natural products (the difference between
acquisition cost and selling price) were 19-21 percent in 1995, down from 33
percent in previous years, although still higher than the 12 percent or less
realized by their mass-market counterparts. As competition increases, natural
foods distributors may respond by adding new products, carrying brand-name
commodities, or simply becoming larger.

From distributor case studies:
A large national publicly held organic distributor, United Natural Foods,
indicates that the company uses many techniques employed by mass-market
distributors such as offering a range of products (e.g., food, general
merchandise, and personal care products), streamlining administrative
functions, consolidating systems applications between physical locations and
between regions, and reducing geographic overlap of the regions. Rootabaga
Enterprises, a regional Washington state distributor, specializes in
distributing transitional (grower moving toward organic production) and
organic apples, pears, fruit, vegetables, jams, jellies, and apple juices, and
emphasizes customer service and personal relationships in business dealings.

Retailers in the organic and natural foods industry behave much like their
mass-market counterparts by working to choose the optimal product mix and
price structure. To meet these goals, retailers attempt to provide customers
with a wide variety of high-quality foods. Traditional purveyors of natural
products have functioned in this fashion since the inception of the organic
movement. However, as consumer demand for organic products increases, a
growing number of mass-market retailers has become interested in selling
organic foods. Organic foods are usually clustered together in "natural" food
sections, but they may be integrated with nonorganic foods on supermarket
shelves.

All retailers of organic foods want consistent supplies of products, and want
assurances that the foods they sell as organic will generally meet purchasers'
expectations. Consequently, retailers work to establish long-term
relationships with wholesalers, who keep the retailers' needs in mind when
purchasing commodities. More recently, however, a significant number of
mass-market retailers have begun purchasing directly from organic growers or
manufacturers. Most of these retailers have their own warehouses and
distribution centers.

From retailer case studies:
Marketing strategies used by Whole Foods, the nation's largest natural foods
supermarket chain (gross sales $8.4 billion in 1997), are similar to those
used by mass-market stores, and include in-store advertising, cooking
demonstrations, food samples, private labels, and handling much of its own
distribution. My Organic Market is a regional, relatively small natural foods
retailer (sales over $100,000 per week in 1998) in the suburbs of Washington,
DC, that has focused primarily on providing personally selected, high-quality
organic produce and personalized customer service, in addition to product
demonstrations and samples.

Looking Ahead

Trends in the organic foods industry indicate the organic market is growing
and that the market structure from farmer to retailer is shifting as it
adjusts to change. However, definitive statistics describing market changes
are currently unavailable. USDA has measured some segments of organic
production (e.g., acreage devoted to organic production and livestock produced
organically), although for most commodities, the market appears too small to
warrant separate farm-to-retail tracking. Several private firms track the
organic foods industry, but their data are not comprehensive and are not
readily available.

Despite shortcomings in the data, it is possible to point to some next steps
for the growing organic foods market. Traditional small local or regional
firms that have been in the organic foods industry for decades will
increasingly share the market with large, corporate firms that are just
beginning to enter. Producers and manufacturers will likely expand product
lines. A greater variety of organic commodities will be sold in a widening
array of retail outlets as the organic industry remains specialized but
becomes more mainstream.

Participants would benefit from a national organic regulation, and from using
procedures to maintain the integrity of their products until they reach the
consumer. Purchasers would then be able to rely on uniform and consistent
national standards for defining the term "organic." USDA's proposed national
organic standards are expected to be finalized this year. Operations that grow
or process organic foods would be certified by USDA-accredited certifying
agents.

If the industry addresses the challenges of adjustment to an expanding market
in a timely fashion, and participants have the benefit of detailed information
to guide decisionmaking, the future of the organic foods industry looks
bright.  
Carolyn Dimitri (202) 694-5252 and Nessa J. Richman (Henry A. Wallace Center
for Agricultural & Environmental Policy, Winrock International)
cdimitri@ers.usda.gov
nrichman@winrock.org

BOX - FOOD & MARKETING

This article is based on results of research partially funded by USDA's Fund
for Rural America. The research project uses survey data, case studies, and
industry analysis. The case studies generally include one large national firm
and one smaller regional firm for each stage along the marketing chain
(although both manufacturers are large national firms). The full report,
Organic Food Markets in Transition, is published by the Henry A. Wallace
Center for Agricultural & Environmental Policy, Winrock International. Copies
are available from the authors.

BOX - FOOD & MARKETING

What Do Consumers Look For in Organic Foods?

Consumers shopping for organic foods look for many of the same qualities that
are valued in nonorganic products. Taste, appearance, and freshness top the
list, followed by convenience and price, and then certain critical qualities
unique to organic foods. In a 1994 survey commissioned by The Food Alliance in
Portland, Oregon, 600 consumers--all of whom had indicated an interest in
environmental issues--rated possible considerations in their organic food
choices. Eight qualities rated as "extremely important" by at least 50 percent
of the sample were:

*  absence of 1) synthetic pesticides, 2) synthetic herbicides, 3) e-coli or
other harmful bacteria, 4) artificial ingredients or preservatives, and 5)
synthetic fertilizers;
*  production facilities 6) in compliance with their environmental permits, 7)
using only earth-sustainable techniques, and 8) using techniques that protect
water resources.

In addition, well over half of survey respondents reported they preferred
organic foods to be "certified by an independent testing laboratory" and that
they were willing to "pay more for an eco-labeled product."

BOX - FOOD & MARKETING

Use of the Term "Natural" in Food Marketing

In the 1970's, the Federal Trade Commission determined that food to be
advertised as "natural" could not contain synthetic or artificial ingredients,
and could not be more than minimally processed--i.e., processed with a
technique that could not be used in a home kitchen. In 1982, USDA's Food
Safety and Inspection Service issued a policy for labeling meat and poultry
products, stating that the term "natural may be applied only to products that
contain no artificial ingredients, coloring ingredients, or chemical
preservatives; and the product and its ingredients are not more than minimally
processed."

The term "natural" is still used rather loosely in the food industry. For
example, "natural" may used to describe organic foods, meat or poultry meeting
USDA's conditions for "natural" labeling, or vitamins and other food
supplements. Natural foods markets frequently specialize in selling organic
foods, but characteristics of these markets and the products they stock vary
greatly. Therefore, a natural foods store cannot be defined as one that sells
only organic products.

RESOURCES & ENVIRONMENT

Environmental Payments to Farmers: Issues of Program Design

Interest is growing in broadening the array of government programs that would
help to improve the environmental performance of agriculture and at the same
time provide some income support to agricultural producers. Associated with
agricultural production are beneficial environmental impacts--e.g., rural
landscape amenities, habitat for plants and wildlife, and cleaner air from
emissions-absorbing land sinks--as well as adverse impacts--e.g., soil erosion,
runoff from nutrients and pesticides, and loss of wetlands and other natural
habitats. In a competitive economy, agricultural producers have few, if any,
financial incentives to provide environmental services--i.e., maintain
beneficial impacts--or mitigate adverse environmental impacts without
government involvement. Government "agri-environmental" payments programs pay
producers to provide environmental services. 

Existing agri-environmental payments programs include the Conservation Reserve
Program (CRP), the Wetlands Reserve Program (WRP), and the Environmental
Quality Incentives Program (EQIP). Efforts undertaken under these programs
have significantly reduced erosion of farmland, restored over 900,000 acres of
wetland previously converted to crop production, and generally improved
wildlife habitat on agricultural land. Nevertheless, agriculture continues to
confront environmental problems, particularly water pollution from runoff that
carries nitrogen and phosphorous from fertilizer and animal waste. Government
efforts to help reach environmental goals as well as to supplement farm income
could include a program of payments to farmers who are "certified" as
environmentally sound or could resemble a recently proposed "conservation
security program" to provide payments to farmers based on their adoption of
designated conservation practices. 

This article explores some common but complex features of agri-environmental
relationships that will affect the design of agri-environmental payments
programs. While not critiquing current or proposed policies, the discussion
highlights some program design features necessary for an agri-environmental
payments program that is environmentally cost-effective.
 
Agri-Environmental Problems
Are Complex

Many of the ways that agriculture affects environmental quality appear quite
obvious. For example, farmers may use nutrient management practices to help
prevent water pollution, which in turn enhances opportunities for water-based
recreation. However, relationships among management practices on specific
farms, effects on environmental services, and benefits derived from these
services are often complex and not completely understood. The interactions,
along with a number of characteristics common to many agri-environmental
problems, complicate the design of any potential agri-environmental payments
program. These characteristics include the following: 

Multiple contributors to problems. A large share of agri-environmental
problems are the result of the accumulation of small effects from a large
number of farms. Under most circumstances, reducing sediment flows from a
single farm or restoring a single area as wetland has no noticeable impact on
water quality or on populations of wetland-dependent wildlife. However, the
collective impact of many actors who reduce sediment flows or restore wetlands
may result in significant improvements in water quality or wildlife
populations.

Difficulty in observing and/or measuring impacts. A particular contribution to
agri-environmental impacts is often difficult to observe and measure, and the
more numerous the contributors to the problem, the more difficult monitoring
becomes. For example, erosion and nutrient runoff do not originate at any
fixed point, unlike emissions from industrial sources of pollution. Instead,
these so-called "nonpoint" emissions occur diffusely over broad land areas,
and sediment and nutrients leave multiple fields in many places, making
accurate monitoring too costly under current technologies.

Even where certain positive environmental outcomes might be easy to observe,
the full flow of environmental services often cannot be directly measured. For
example, it may be easy to observe the creation of suitable habitat for
migrating waterfowl, measure the size of the area, and identify improvements
in overall habitat quality. However, it may be difficult to quantify the
impact of this new and improved habitat on bird populations.

Heterogeneity in underlying conditions. Agriculture is extremely diverse.
Crops and production management practices vary widely among regions.
Management skills, preferences, and attitudes regarding environmental
protection, as well as the costs of protection, vary widely among agricultural
producers. And environmental impacts of agricultural production depend on the
mix of fixed, site-specific characteristics such as climate, soil type,
topography, and location in relation to affected resources (e.g., rivers and
lakes). This diversity in production conditions implies that one-size-fits-all
agri-environmental policies are unlikely to be environmentally cost-effective
nationwide. A specific conservation practice may be a good fit in one farming
operation and provide significant environmental services, but in another
setting may be either inappropriate or ineffective. 

Unpredictability of natural events. Many agri-environmental problems are
subject to significant year-to-year variation in weather conditions as well as
variation across farms and regions. For example, erosion and polluted runoff
(including transport to water or other resources) can vary greatly due to
weather-related events and other environmental conditions outside producers'
control. Encouraging practices that reduce the average level of erosion or
polluted runoff may not prevent excessive erosion or runoff during
particularly large or intense weather "events," although such events may have
the greatest overall impact on the environment. If payments are made
contingent on actual positive environmental impacts (to the extent that these
can be measured), producers could see fluctuations in their payments due to
unpredictable factors outside their control.

Zeroing in on
Cost-Effectiveness

A cost-effective agri-environmental payments program aims to achieve the
greatest possible environmental benefit for the level of resources committed
to the program. Such a program would:
 
*  assign greater priority to providing agri-environmental services that are
more highly valued and/or that can be provided at lower cost;  
*  target or direct program payments to producers and activities to reflect
these priorities; 
*  incorporate sufficient flexibility to allow producers, when possible, to
select the lowest cost method of producing environmental services.; and
*  consider the feasibility and cost of ensuring that promised activities to
improve environmental performance are effectively implemented.

Net benefits stemming from a agri-environmental payments program will be
larger if higher priority is assigned to agri-environmental services that are
more valued and/or less costly. Priorities could be assigned taking into
consideration a spread of agri-environmental issues and goals (e.g., cutting
nutrient loads to a coastal zone vs. enhancing wildlife habitat) across
various regions of the country (e.g., Northern Crescent vs. the Heartland).
Priorities could also take into consideration whether providing environmental
services adds value to agricultural activities or mitigates damages.
Unfortunately, a measure of benefits from "non-market" items (e.g., enhanced
recreation) is necessary for prioritization but often difficult to value.

Even with limited information on the value of benefits, it may still be
possible to prioritize environmental services. The Environmental Benefits
Index (EBI)--which USDA uses to determine acreage to accept in the CRP--is a
good example of environmental targeting that makes the most of available
information (AO June-July 1999). USDA estimates an EBI environmental score for
proposed CRP contracts based on weighted values for environmental services
likely to be derived, and ranks contracts by the EBI score (sum of the
environmental score and the proposed cost, i.e., the landowner's bid).

Although the EBI is a less-than-comprehensive benefit measure--it is limited
to six environmental factors plus rental cost--a study by USDA's Economic
Research Service (ERS) indicates that use of the EBI has doubled CRP-related
benefits from freshwater-based recreation and wildlife viewing. The study also
shows that the EBI can be improved. For example, ERS research suggests that
wildlife recreation benefits are generally greater than benefits from enhanced
freshwater-based recreation, but they receive equal weight in the current EBI.
Also, the EBI could more fully reflect the likelihood of higher value of
benefits when environmental improvements are located near populated areas,
where more people have relatively easy access to recreational amenities.

Once priorities for environmental services have been established, the focus
turns to administration of payments to farmers providing the services. Program
requirements will generally be realistic only if payments are based on farming
practices or environmental outcomes that are controllable by the producer and
are observable. Environmental cost-effectiveness is maximized when 1)
subsidized actions are linked as directly as possible to provision of
high-priority environmental services, and 2) producers who take these actions
are given greater incentive to participate or higher priority in the programs'
selection process. In other words, if payments are targeted, program goals may
be achieved with relatively lower outlays.

Linking changes in specific practices on specific farms to the provision of
environmental services is crucial to designing an environmentally
cost-effective agri-environmental payments program. These links can sometimes
be described using physical process models that estimate the effects of
management practice changes on soil erosion or nutrient runoff. Other models
can sometimes be used to trace the flow of sediment, nutrients, or pesticides
downstream or to ground water.

A major barrier to broad use of physical process models to link practices to
performance is the level of information and technical assistance necessary for
implementation. Some physical process models, such as the Universal Soil Loss
Equation (USLE) and Wind Erosion Equation (WEE) are comparatively simple,
requiring a total of six variables (e.g., soil characteristics, topography,
climate, and farming practices) to estimate average annual erosion. In
contrast, physical process models of nutrient and pesticide runoff are far
more complex, often requiring dozens of variables and substantial training for
successful use.

In prioritizing environmental services and targeting agricultural practices,
policymakers could also consider patterns in the occurrence of natural events.
For example, since nutrient loads (quantity of water-borne nutrients such as
nitrogen and phosphorus) to a body of water often vary with weather
conditions, degree of variability instead of average load may be key to
assessing recreation potential of a water resource and to targeting desired
practices for prevention of excess loadings. Such a situation might occur if
infrequent but severe flooding increased estuarine nutrient loadings and
caused massive fish kills, which could ruin recreation and commercial fishing
for several seasons. In such circumstances, assigning greater priority to
practices that tend to mitigate runoff due to large storm events may be more
environmentally cost-effective than encouraging practices that reduce average
loads over a period of years.

Another element for identifying the size of producer actions or practices
eligible for an agri-environmental payment is determination of an appropriate
"baseline."  Baselines represent the level of practice adoption, input use, or
other indicators of environmental performance from which changes can be
measured for the purpose of calculating payments. Baselines may be
farm-specific or may be specific only to geographic areas and/or specific soil
types, because information on farm-specific crop mixes, management and
production practices, and input use is often limited. For example, a soil
erosion baseline could be defined by the average annual erosion rate for a
production system involving a predominant crop rotation and conventional
tillage practices. If producers adopt or have previously adopted a less
erosive crop rotation or a reduced tillage practice, they could receive
payments proportional to the erosion reduction achieved (as measured by the
USLE).

Establishing appropriate baseline levels may help avoid unintended negative
consequences. In the erosion example, if baselines are set too high, an
agri-environmental payments program may serve to maintain or even to expand
production on marginal farmland to take advantage of agri-environmental
payments, perhaps rewarding inefficiency and limiting the program's
environmental effectiveness. Limiting eligibility to land that has previously
been in production may be an effective restriction, and enforcing swampbuster
and sodbuster regulations--which deny government program benefits to farmers
who convert land--designated as wetlands to crop production, or who fail to
implement approved soil conservation systems on highly erodible land may
provide a strong disincentive to convert environmentally sensitive land to
crop production. 

Once policymakers have determined standards for farms that should be eligible
for payments and have delineated the associated program requirements, they
must decide the size of the payments. Producers will participate only if
payments cover the full cost of program participation, or if the program
generates some private benefit beyond program payments (e.g., if controlling
soil erosion also enhances soil productivity). 

Environmental cost-effectiveness may be increased by providing larger payments
to producers and actions most directly associated with environmental
priorities of the program, so long as payments are commensurate with ensuing
benefits. Larger payments could serve as an inducement to farmers whose
actions can produce greater environmental services, particularly those who can
produce those services at a relatively low cost. 

A second way to prioritize expenditure of program funds is to solicit bids
from producers for their application of management practices. In the CRP, for
example, producer bids for rental payments are factored in with EBI
environmental scores to determine which contracts will be accepted. Producers
who exhibit high environmental scores relative to costs can proffer bids that
are more likely to be accepted, highlighting the complementarity of potential
environmental services and cost of producing those services.

Suppose, for example, that reducing nutrient loads to coastal estuaries is a
priority. If actions taken to reduce nutrient loads to coastal estuaries are
twice as effective on farm A as on farm B, farm A would be eligible for a
larger payment because its potential contribution to reducing nutrient loads
is larger. However, the environmental cost-effectiveness of subsidizing a
specific action taken by a given producer also depends on the cost of taking
the action. Using the same example, if the cost of actions to reduce nutrient
loads are much lower on farm B than on farm A, farm B may actually be able to
reduce estuarine nutrient loadings more cost-effectively.

Customized Plans
For Common Goals

Once the link is established between environmental services, farms, and
management practices, there is often more than one farm and resource
management strategy a producer could use to achieve a conservation or
environmental objective. A flexible, environmentally cost-effective
agri-environmental payments program would give producers an opportunity to
design conservation plans that minimize their cost of meeting environmental
objectives.

For example, EQIP--which provides technical and financial assistance for
improved irrigation, cropping and grazing systems, wildlife habitat, sediment
control, and manure, nutrient, and pest management--is a flexible program that
allows potential participants a great deal of latitude in selecting practices
tailored to their own farming operation. Producers who enter into 5- to
10-year contracts implementing EQIP conservation plans receive technical
assistance, education, cost-sharing, and incentive payments. In contrast, the
CRP requires a single fixed action (retire land for a period of 10 years) in
return for annual rental payments, and some producers may be reluctant to
relinquish control of land use for such a long period of time. However, since
most agricultural activity ceases on land enrolled in the CRP, the program is
relatively easy to enforce and therefore likely to produce expected
environmental improvements. 

Another relatively flexible agri-environmental payments mechanism would be a
per-unit subsidy for increases in environmental services or actions likely to
improve environmental services. For example, a fixed payment could be made for
each pound of reduced fertilizer inputs. Producers would be free to vary
fertilizer use, weighing tradeoffs between the amount of the
agri-environmental payment and the net cost of changing fertilizer use, which
will fluctuate with economic conditions.

When links between agricultural practices and environmental services are
strong, conservation plans can be designed with performance objectives in
mind, allowing producers to devise individualized farm plans to meet
conservation and environmental objectives. For example, USDA's Conservation
Compliance Program requires producers who farm highly erodible land to
implement soil conservation plans in order to remain eligible for farm program
payments. USDA determines whether proposed plans meet erosion reduction
requirements by using the Universal Soil Loss Equation and/or the Wind Erosion
Equation.

A 1997 USDA review of conservation compliance plans found 1,674 different sets
of practices in approved conservation plans. Plans involving conservation
cropping sequences, conservation tillage, crop residue use, or some
combination of these three practices were applied on 54 percent of land
subject to Conservation Compliance Program regulations. Nonetheless,
individual plans vary widely among regions, based on cropping patterns,
production systems, climate, and soils, demonstrating that producers do take
advantage of flexibility in national programs.

Effects Beyond the Environment

Agri-environmental payments is a policy instrument that could be used more
extensively to reduce environmental damages and increase environmental
benefits associated with agricultural production. But an agri-environmental
payments program may also affect commodity markets and farm income. Farm
income could be affected through 1) payment size and distribution; 2) changes
in direct farm costs resulting from changes in production practices and
enterprise mix, cropping patterns, or crop yields; and 3) swings in commodity
market prices resulting from shifts in production. An extensive
agri-environmental payments program could also affect commodity trade flows
(AO May 2000). If agri-environmental payments from programs designed to
bolster farm income and produce environmental amenities are large, they could
become a foreign trade issue because of World Trade Organization rules on
trade-distorting domestic policies. Research is under way at ERS that will
help to determine whether and how a more extensive program of
agri-environmental payments could affect commodity markets and trade.

In a sense, an agri-environmental payments program provides a market for
environmental services that are produced along with agricultural commodities.
Those who can produce environmental services at a low cost can reap the
benefits of the "agri-environmental" market by participating in the program.
Non-participating producers may also feel some effects from agri-environmental
payments programs if shifts from production of commodities to production of
environmental services cause movement in commodity prices.  
Roger Claassen (202) 694-5473 and Richard D. Horan (Michigan State University)
claassen@ers.usda.gov

FARM & RURAL COMMUNITIES

Farming's Role in the Rural Economy

The U.S. rural economy remains strong, despite low commodity prices that have
besieged the farm sector in recent years. In most rural communities, problems
in the farm sector have not spilled over to cause a general rural downturn. In
fact, the unemployment rate in nonmetropolitan counties decreased as crop
prices were falling, dropping to 4.25 percent in 1999. In general, the
strength of the overall economy has sustained the rural economy.

While many view "rural" and "agriculture" as virtually synonymous, the ability
of the rural economy to shake off severe problems in the agricultural sector
is a reminder that agriculture is no longer the primary economic engine of
rural America. Growth in other rural industries combined with structural
changes in the farm sector have reduced farming's relative importance and
altered traditional perceptions of farms. 

This article, based on a forthcoming Economic Research Service (ERS) report,
examines the changing role of agriculture in the rural economy and highlights
two changes. First, the nonagricultural economy in rural America has grown
steadily, outpacing growth in agriculture, so that agriculture's relative
importance as a source of jobs and income has declined. Second, the growing
service orientation of the U.S. economy suggests that the key to survival and
growth for rural communities    is to develop and attract service-sector
businesses. 

Agriculture's Share of the 
Economy Shrinks

Over the past two centuries, the U.S. has evolved from a rural society, with
most of the population engaged in farming, to a predominantly urban society.
The urban share of U.S. population, less than 10 percent in 1820, rose to
about 75 percent in 1990, while the farm share of population fell from about
70 to 2 percent over the same period. The loss in farm population pulled down
the overall share of the rural (nonmetropolitan) population until the late
1960's, when rural nonfarm job growth exceeded the decline in farm employment.
While growth in population and income created new demand for food and fiber as
the nation expanded, agriculture's growth was limited because, as incomes
rise, demand for food advances more slowly than demand for other goods and
services. Consequently, other sectors expanded much more rapidly than
agriculture. Furthermore, farm productivity (output per unit of input)
outpaced the demand for food and fiber, releasing labor and capital to be put
to work in other industries. 

Thus, the farm population did not have to grow as rapidly as the population it
was supplying with food. While growth in farm productivity accelerated in the
20th century, the farm population actually declined in absolute numbers after
the 1930's. ERS research has found that farm productivity rose an average of
1.9 percent annually from 1948 to 1996 (AO May 1998). Productivity of all farm
inputs rose, but increase in labor productivity was particularly rapid as
farms mechanized and more efficient practices were adopted. While farm labor
use fell over 70 percent between 1948 and 1996, the farm sector's output more
than doubled, making it one of the fastest-growing sectors.

Jobs in farming are expected to continue declining during the coming decade.
The Bureau of Labor Statistics (BLS) projects a 13-percent decline in farmers
and farm managers between 1998 and 2008, the largest projected decline of any
occupational category in the U.S. economy. Employment of hired farm workers is
projected to decline 6.6 percent. By comparison, nonfarm employment is
projected to grow 14 percent between 1998 and 2008. Agricultural output is
expected to grow, but at a slower rate than that of most other industries.

Increased farm productivity brings benefits to the economy as a whole.
Consumers benefit from high farm productivity, which ensures an abundant
supply of food at low prices. Other sectors (and ultimately consumers) benefit
from farming's efficient use of resources, which frees up labor and capital
for other industries (initially for manufacturing in the 1940's to 1960's and
more recently for service industries). Agricultural exports also make a
positive contribution to the balance of trade. While agriculture's share of
the economy and the number of people that depend on it for income and jobs is
shrinking, both nationally and in rural areas, its role in the economy is
important.

Movement of farm labor into other sectors is reflected in the declining farm
population. What is less well known is that the rural nonfarm share of the
nation's population has remained remarkably stable at around 20 percent since
the early 1800's. While farming is perhaps the most visible rural activity, it
is clearly not the major economic activity in rural America. There is enough
activity in rural America to employ and provide economic support for over
one-fifth of the nation's population, but farming supports only about 2-3
percent. 

In other words, rural areas have created enough new economic opportunities to
maintain a constant rural nonfarm share of population. Until the late 1960's,
rural nonfarm jobs were not created fast enough to absorb most of the labor
released from the farm sector, and consequently the overall rural share of
population fell. But the rural share of population stabilized during the last
part of the 20th century, as the loss of farm population slowed and rural
areas continued to create new nonfarm jobs. Today, manufacturing and services,
rather than farming, characterize the economic landscape of rural America.
 
Fewer Communities 
Rely on Farming

U.S. economic expansion during the 1990's appears to have reduced the number
of farming-dependent counties (those that derive at least 20 percent of their
income from farming) by adding jobs in manufacturing and services. But farming
is still a primary source of income and jobs in some areas, notably the
sparsely populated areas of the nation's heartland. Counties that remained in
the farming-dependent category shared in the nation's economic growth during
the 1990's, although to a lesser extent than other rural counties.

Of course, agriculture's economic influence extends well beyond the farm gate.
To gauge this, ERS produces two measures of employment in the more broadly
defined agriculture sector that includes  businesses that manufacture,
transport, and market food and fiber products: Food and Fiber System and Farm
and Farm-Related Employment. Both data series tell a similar story about
agricultural jobs over the last two decades. While jobs in farming have
declined steadily, jobs in food retail and wholesale sectors have grown. 

But food retail and wholesale activities tend to locate close to consumers, so
that much of the growth in agriculture-related employment has occurred in more
urbanized areas. Sparsely populated states, including those heavily
represented in the farming-dependent category, have gained relatively few
retail and wholesale jobs to offset their loss of farm jobs.

Faced with continuous loss of farm jobs, many rural areas have pursued
value-added development strategies that encourage agriculture-related
businesses (e.g., food processing and marketing) to choose rural locations.
This strategy may be successful for some communities, but food processing does
not appear to be a universal engine for rural job growth. Many types of food
processors do not use raw farm commodities, and they choose urban locations to
gain access to suppliers of other inputs and distribution networks. 

Participation in the 
Service Economy a Key 

Farming, food processing, and other manufacturing industries face competitive
pressures to cut unit production costs by raising worker productivity (output
per worker). This means employment will be stagnant or declining in all but
the most rapidly growing industries. Thus, even though the BLS projects annual
growth of 1.2 percent in food manufacturing output between 1998 and 2008, it
projects only 0.2 percent growth in food manufacturing employment. BLS
projects a 1-percent decline in overall employment in agriculture (including
ag-related industries such as input suppliers and food retailing), with the
decline in farm jobs pulling down the total. Projected output growth exceeds
projected job growth for nearly all goods-producing industries. 

The growing service orientation of the U.S. economy suggests that the key to
survival and growth for rural communities is to develop and attract
service-sector businesses. During the coming decade, jobs are projected to
grow fastest in service-producing industries: transportation, communications,
public utilities; wholesale and retail trade; finance, insurance, and real
estate; and personal, business, and health services. Between 1991 and 1996,
service-producing sectors created about 70 percent of new nonmetro jobs, and
BLS expects these industries to account for nearly all of U.S. job growth
between 1998 and 2008. Nearly all growth in agriculture-related employment
from 1975 to 1996 was in service-oriented food retail and wholesale
activities. 

Rural communities that can attract service jobs will be the best positioned to
grow. Many rural areas are participating in the service economy, especially
those enjoying the spillover effects of prosperity in urban communities and
amenity-rich areas that attract retirees, telecommuters, vacationers, and
others. However, for many rural communities, prospects for participating in
the service economy seem less promising because service and trade industries
have a greater tendency than other activities to concentrate in cities where
there is access to large numbers of consumers, transportation nodes, related
industries, and business service firms. 

The increasing service orientation of the economy holds lessons for planners
and policymakers. For example, contracting and supply-chain arrangements in
agriculture have become more prevalent in recent years, partly because
consumers are demanding food products with specific attributes. 

Businesses and communities have taken advantage of these emerging consumer
preferences to create brands associated with their particular region,
production practice, or some other attribute that can command a premium price.
This can give local farming industries a competitive edge in the marketplace
and can create opportunities to "add value" to their products by processing
and packaging distinctive products for niche markets, selling directly to
consumers, or attracting people to farm or vineyard tours or festivals. In
recent years, many farms have broadened the scope of their business to offer
entertainment and recreation in the form of agricultural tourism,
theme-oriented farm visits, fee-based fishing and hunting access, and other
services. Advances in information technology also make it possible for
businesses in remote areas to communicate with consumers and sell directly to
them. 

In today's service-oriented economy, it is this type of consumer-savvy search
for new market niches that is likely to lead to development. This will be a
particularly challenging task for rural communities that are highly dependent
on agriculture and other goods-producing industries.  
Fred Gale (202) 694-5349
fgale@ers.usda.gov
  
BOX - FARM & RURAL COMMUNITIES

This article draws from a forthcoming Rural Conditions and Trends (Vol. 10,
No. 2), which examines the changing role of agriculture in the rural economy.
For more information, visit the Economic Research Service's rural development
briefing room at http://www.ers.usda.gov/briefing/rural/

SPECIAL ARTICLE

Consolidation in Meatpacking: Causes & Concerns

The U.S. meatpacking industry consolidated rapidly in the last two decades, as
today's leading firms built very large plants and many independent packers
disappeared. Today, four firms handle nearly 80 percent of all steer and
heifer slaughter; just two decades ago, concentration was less than half as
high. Concentration in hog slaughter has also increased, although not to the
same extent, and today four firms handle over half of all slaughter. 

Meatpacking concentration raises important policy issues. If larger packers
realize lower costs, then concentration, by reducing industry costs, can lead
to improved prices for consumers and livestock producers. However, because
they face fewer competitors, meatpackers could reduce prices paid to livestock
producers, and they may be able to raise meat prices charged to wholesalers
and retailers. 

Based on a recent report by USDA's Economic Research Service (ERS), this
article assesses the factors behind concentration by analyzing packing plant
costs and examining several developments that have reduced slaughter costs and
promoted industry consolidation.

The Path to Concentration & Consolidation 

Recent concentration trends in meatpacking can be defined in terms of
livestock procurement--the share of steers and heifers purchased by the four
largest steer and heifer packers, and the share of slaughter hogs purchased by
the four largest hog packers. These measures are known as four-firm
concentration ratios, or CR4. 

CR4 in steers and heifers is quite high--four firms account for nearly 80
percent of purchases, in contrast to the average CR4 of 40 percent across all
U.S. manufacturing industries. Moreover, local market concentration may be
higher, because slaughter cattle usually are not shipped far and many
producers may only see buyers from two or three nearby packers. The other
striking feature of steer and heifer CR4 is the increase--from 36 percent in
1980 to 72 in 1990 and 78 in 1997. No other manufacturing industry shows as
rapid and dramatic an increase since the U.S. Census Bureau began regularly
publishing concentration data in 1947.

Hog slaughter is less concentrated--the top four hog packers handled 54
percent of slaughter in 1997. But CR4 in hog slaughter has increased sharply,
from 32 percent just 12 years earlier. Like other livestock, hogs are not
transported far to market, and as a result many producers may have more
limited options locally, with a choice of buyers from only two or three
packers. 

Meatpacking has also shifted sharply toward larger plants that annually
slaughter at least 1 million hogs or 500,000 steers and heifers. Such large
plants, which handled less than a fourth of steer and heifer slaughter in
1980, accounted for over three-fourths just 15 years later. In 1980, large
plants handled 63 percent of all hog slaughter, but that share increased to 88
percent by 1997.
Shifts in plant size suggest that there may be economies of scale in
slaughter, and that scale economies and the resultant shift to large plants
may account in part for the increase in concentration. If there are scale
economies, then increasing meatpacker concentration may lead to lower meat
prices for consumers.

Costs & Plant Size in Meatpacking

Total plant costs include costs of purchasing livestock and expenses incurred
in obtaining materials, capital, and labor to produce meat in slaughter
plants. Because livestock prices can fluctuate sharply over short periods of
time, analysts frequently distinguish between total costs and slaughter costs,
which are the plant's costs exclusive of livestock purchase expenses. 

Plants can reduce average slaughter costs per head in three ways. First, some
plants may be able to lower prices paid for production workers, energy,
transportation, or packaging. Second, plants perform different operations;
those that do less in-plant processing (e.g., ship whole carcasses instead of
cut-up carcasses or retail packages) have lower costs. Third, plants may
reorganize their processes to use inputs more intensively, thereby using fewer
inputs per pound of meat produced. 

Data for this analysis contain information on plant sizes, input prices, and
product mix, which allow for identifying the separate effects of these
different factors on plant costs. To ensure confidentiality regarding costs,
index numbers for costs are reported, rather than dollars per head. This also
allows for a focus on how costs vary as plant size changes, since dollar costs
per head will vary up and down as input prices change from year to year, but
scale relations (i.e., unit costs according to firm size) change more slowly.
For this article, data are reported separately for hog plants and cattle
plants; for each plant type, indexes are reported based on per-head slaughter
costs and per-head total costs (slaughter costs plus livestock purchase
expenses). The cost indexes are based on the 1992 Census of Manufactures, when
the industry's consolidation was completed.

Slaughter costs per head at a large hog plant (four million head per year) are
more than 25 percent lower than costs per head at a mid-size plant (one
million head), and nearly 40 percent lower than costs in a small commercial
plant (400,000 head). For cattle, a large plant (1.35 million head) realizes
slaughter costs per head that are over 20 percent lower than a plant
slaughtering 425,000 head, and 40 percent lower than slaughter costs in a
small commercial plant (175,000 head per year). Because the analysis accounts
for varying input prices and levels of processing, cost differences reflect
differing intensity of input use--larger plants realize substantial scale
economies in slaughter because they are able to use labor, energy, materials,
and equipment more intensively.

Costs discussed so far include slaughter costs only, exclusive of livestock
purchase expenses. Livestock purchase expenses account for very large shares
of total costs--90 percent of the total at large cattle plants and 80 percent
at large hog plants. Because slaughter costs are a small part of total costs,
large scale economies in slaughter should translate into small scale economies
in total costs. This, in fact, is the case. Total costs per head at a
4-million-head hog plant are 6.5 percent lower than at a million-head plant,
while the largest cattle plant realizes total costs of delivering meat to
buyers that are only 3 percent below those at a 425,000-head plant, compared
with slaughter cost differences of 25 and 20 percent, respectively.

Large plants had much smaller costs advantages over small plants in the
1970's. Large plant cost advantages widened noticeably after the early 1980's,
for two reasons. First, scale economies related to intensity of input use
expanded. The largest hog plant's relative cost advantage over smaller plants
was about twice as large in 1992 as in 1982, and the largest cattle plant's
1992 cost advantage was half again larger than its 1982 index value. Scale
economies grew more important with time.

Second, large plants in the 1970's and early 1980's faced an important input
price disadvantage they paid much higher wages than smaller plants. For
example, in 1982, average hourly production worker wages at a 1-million-head
hog slaughter plant in the western Corn Belt were about 10-12 percent higher
than wages at a smaller western Corn Belt plant. Firms were not building
4-million-head plants then, but an estimated size-wage relation suggests that
wages at those plants would have been another 15-18 percent higher than wages
at the 1-million-head plant. (Similar but somewhat smaller effects existed at
cattle plants.) In addition, there was a striking regional pattern--wages at
southeastern hog slaughter plants were about one-third lower than in the
western Corn Belt.

Labor relations in meatpacking have undergone key changes since the early
1980's when half the workers in the meat products industry were union members
(meat products, in the broad survey that captures unionization data, includes
red meat and poultry slaughter and processing). Most unionized workers
belonged to the United Food and Commercial Workers union, whose base wage rate
was $10.69 an hour in 1982. In that year, many unionized firms began to press
for large reductions in base wages, to $8.25 an hour, consistent with what was
being offered in non-union plants. Between 1983 and 1986, 158 work stoppages
involving 40,000 workers occurred in cattle and hog slaughter plants, followed
by widespread plant closings and deunionization. 

By 1987, union membership in meatpacking had fallen to a fifth of the
workforce, where it has remained. Average wages fell sharply at slaughter
plants of all sizes after 1982, and regional and size differentials virtually
disappeared (in fact, preliminary 1997 data show no size or regional
differentials).

The 1982 wage differential had provided a 1-million-head-hog-plant with a
slaughter cost advantage of 6 percent per head over a 4-million-head plant
(assuming that production worker pay accounts for one-third of slaughter
costs), and provided a 400,000-head-plant with a 10-percent cost advantage
over the largest plant, thereby attenuating large plants' advantages in the
intensity of input use. After 1982, disappearing wage differentials reinforced
expanding scale economies to provide large plants with substantial slaughter
cost advantages.

Did Packers Pass on Scale Economy Gains?

As larger plants realized lower slaughter costs in the 1980's and 1990's,
production shifted rapidly toward them. As a result, industry-wide average
meatpacking costs fell, and the industry (particularly steer and heifer
slaughter) became far more concentrated as a small number of firms each
operated several very large plants. In highly competitive industries, cost
declines should be quickly passed through, either as lower prices to buyers or
as higher prices paid to livestock producers. But in an industry that has
become highly concentrated, large firms may be able to retain the cost
advantage as profits. 

ERS data on farm-to-wholesale price spreads for Choice beef provide some
evidence on the effects of the industry's consolidation (beef is examined here
because of the striking CR4 increase). Price spread is the dollar difference
between what packers receive for beef and the price they pay for animals; it
includes costs of slaughter, transportation expenses for moving animals from
feedlot to packing plant, and packer profits. Slaughter and transportation
costs reflect the prices and quantities of inputs used in those functions.
Because the price spread is deflated with an index of packer input prices, the
resulting real spread measures changes in packer profits and input quantities
per retail pound of beef, holding input prices constant. The data are
expressed as annual averages of cents per retail pound, which smooths the
sharp fluctuations in monthly data.

Real spreads fell in the 1970's, reflecting meatpacking productivity growth.
The trend continued during the period of rapid concentration increase, through
1992, as cost declines realized through scale economies were passed through to
meat buyers and livestock producers. From 1993-98, spreads fluctuated much
more widely, but showed no long-term increase. The picture tells a strong
story: if large increases in concentration had important effects on packer
pricing and profits, they don't show up in the price-spread statistics.
Sufficient competition apparently prevailed, such that packer cost declines
were passed on to consumers or producers. 

Although spreads fell while the industry concentrated, there has been a
noticeable increase in the real farm-to-wholesale spread at the end of the
period, a rise of 40 percent in 1997-99. To put the change in context, the
packers' spread rose by 9.4 cents per retail pound of beef during 1997-99 (in
nominal terms; the real spread rose by 7.1 cents per pound since input prices
rose 2.3 cents). During the period, average retail prices for choice beef rose
from $2.80 to $2.94 a pound and cattle producers' prices increased from $1.37
to $1.47 per retail pound. The spread's increase should largely reflect higher
packer profits since there's no evidence of productivity deterioration. 

Short-term spikes in the farm-to-wholesale spread have occurred before, but
previous sharp increases in 1980, 1991, and 1995 didn't last long. Short-term
fluctuations usually result from sharp changes in livestock supplies or meat
demand, and the spikes quickly fell as packers, buyers, and producers
adjusted. Such spikes don't necessarily indicate any significant change in the
nature of competition in an industry.

Nevertheless, a long-term increase would be troubling. Increasing
concentration in other sectors of the economy has often reflected intense
competition and frequently led to falling costs and prices for the
concentrating firms. But after an industry consolidates, when few firms face
each other in a stable environment, competition may often become less intense.

Following the emergence of new and extensive scale economies in meatpacking,
intense price competition led to the exit of high-cost smaller plants, their
rapid replacement by larger and more efficient plants, and significant
increases in concentration and reductions in costs. As consolidation is
completed, will packers successfully limit price competition among themselves
and maintain 1999's high spreads?  Or will they continue to compete
aggressively, thereby ensuring that cost reductions in meatpacking are passed
through? 

Spreads have remained high through the first quarter of 2000, and the coming
months will tell whether the spike is short-term, to be eroded by continuing
competition. The policy challenge for the future is to ensure that a highly
concentrated industry--a result of consolidation--does not limit price
competition among packers.
James M. MacDonald (202) 694-5391 and Michael E. Ollinger (202) 694-5454
macdonal@ers.usda.gov
ollinger@ers.usda.gov

BOX - SPECIAL ARTICLE

Data Sources

Data on concentration and large plant livestock purchases are gathered in
annual surveys of meatpackers carried out by USDA's Grain Inspection, Packers
and Stockyards Administration (GIPSA). 

The primary data source for the analyses of plant costs is the U.S. Census
Bureau's Longitudinal Research Database (LRD). The LRD details the records of
individual establishments reported in the Census of Manufactures. Since 1967,
the Economic Censuses have been taken in every year ending in "2" or "7" (the
most recent data available for this study was from the 1992 Census; data from
the 1997 Census are not yet available for use in the LRD). The file also
includes establishment records from a census taken in 1963. The data provide
detailed information on the mix of products, quantities and prices of material
inputs, employment and average wages, and ownership and location for each
establishment. 

Because the LRD contains data on individual plants over several censuses,
researchers can make comparisons across plants at a point in time, and can
also trace changes in product and input mixes, costs, and concentration over
time. While researchers have access to individual establishment records for
research purposes, they may not divulge information on any individual plant or
firm, and may only publish aggregated information.

BOX - SPECIAL ARTICLE

For more information, see Consolidation in U.S. Meatpacking, Agricultural
Economics Report No. 785, February, 2000. 
Access it on the ERS website at www.ers.usda.gov/epubs/pdf/aer785/index.htm.  
Printed copies may be purchased by calling 1 (800) 999-6779.
 
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