AGRICULTURAL OUTLOOK                                       July 21, 2000
August 2000, ERS-AO-273
               Approved by the World Agricultural Outlook Board
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CONTENTS
In This Issue
 
BRIEFS
Field Crops: U.S. Acreage Expands
Livestock, Dairy & Poultry: Slow Growth Persists for U.S. Meat Exports
Ag Trade: U.S. Agricultural Imports Head Higher
 
COMMODITY SPOTLIGHT                                         
Forces Shaping the U.S. Wheat Economy
Sidebar: Exporters' Wheat Stocks Remain Large
 
RESOURCES & ENVIRONMENT
Genetically Engineered Crops: Has Adoption Reduced Pesticide Use?
          
SPECIAL ARTICLE
Consolidation in Food Retailing: Prospects for Consumers & Grocery Suppliers
 

IN THIS ISSUE
 
U.S. Wheat Economy Confronts Challenges
The U.S. wheat sector enters the new century facing many challenges, despite
a strong domestic market for wheat products. U.S. wheat area is trending down
because of declining returns relative to other crops, due partly to continued
sharp competition from abroad.  U.S. share of the world wheat market has
eroded for more than two decades, with exports holding fairly steady while
global wheat trade increased.  During the past quarter century, U.S. per
capita consumption of wheat as food products shows an upward trend, and the
rise has benefited the U.S. wheat processing industry, although foreign
producers have captured a share of the expanded domestic market.  Gary Vocke
(202) 694-5285; vocke@ers.usda.gov
 
Global wheat consumption will outpace production for a third year, causing
worldwide wheat stocks to drop 10 percent in 2000/01.  But exporters' stocks
remain large, and U.S. prices are forecast little changed from a year
earlier.  The extent of an increase in world wheat trade--forecast to reach
its highest level in nearly 10 years--is likely to be crucial for wheat
prices in 2000/01.   Edward W. Allen (202) 694-5288; ewallen@ers.usda.gov
 
U.S. Field Crop Acreage Expands 
 
Planted area for the eight major U.S. field crops totals 254.9 million acres
in 2000, up more than 3 million acres from last year when prices were lower
for most crops at planting time.  According to USDA's June 30 Acreage report,
increases in soybean, corn, barley, wheat, and cotton area more than offset
declines in sorghum, oats, and rice.  U.S. farmers have planted a record 74.5
million acres of soybeans in 2000, 1 percent over last year's record.  Corn
plantings increased to an estimated 79.6 million acres, up 3 percent. Normal
weather in the coming months would result in large output and stable or
declining farm prices for most U.S. field crops in 2000/2001.  Robert A.
Skinner (202) 694-5313; rskinner@ers.usda.gov
 
Slow Growth Persists for U.S. Meat Exports 
 
Growth in overall U.S. red meat and poultry exports is expected to continue
on a slow course this year and actually flatten in 2001, as increases in pork
and broilers are offset by declines in beef and turkey.  Sluggish growth in
total meat exports in recent years can be traced to a healthy economy in the
U.S., where strong domestic demand has bid up prices of meat products.  At
the same time, buying power of some major importers of red meats and poultry
(e.g., in Russia and Asia) dropped as incomes fell and currencies collapsed. 
Leland Southard (202) 694-5187; southard@ers.usda.gov
 
U.S. Agricultural Imports Head Higher
 
U.S. imports of agricultural commodities and products are projected to reach
$39 billion in fiscal 2000, a 72-percent increase from 1990. This astonishing
growth results in part from exceptional U.S. economic expansion during the
decade.  In the last half of the decade, the strong U.S. dollar and sluggish
growth or recessions elsewhere in the world have also contributed to the
surge in U.S. imports.  Continued strong U.S. economic growth, the dollar's
high purchasing power, and relatively low global commodity prices point
toward higher imports in 2001. Alberto Jerardo (202) 694-5323;
ajerardo@ers.usda.gov
 
Consolidation in Food Retailing
 
The U.S. food retailing industry has undergone unprecedented consolidation
and structural change in recent years.  Driven by expected efficiency gains
from economies of size, large retailers have since 1996 purchased almost
3,500 supermarkets, representing annual grocery store sales of more than $67
billion.  The nationwide share of sales for the four largest retailers rose
from nearly 16 percent in 1992 to almost 29 percent in 1998.
 
Widespread consolidation in the grocery industry raises questions about the
implications for consumers and food market suppliers such as grower-shippers,
food processors, and wholesalers.  Some consumers fear that fewer food
retailers will eventually mean higher grocery prices and less variety. 
Grocery suppliers worry that fewer but larger buyers could force prices lower
for products and services that food retailers purchase.  Retailers are likely
to continue consolidating in order to maintain profitability as competition
for the consumer food dollar heightens. Phil R. Kaufman (202) 694-5376;
pkaufman@ers.usda.gov
 
Does Genetic Engineering Reduce Crop Pesticide Use?
 
Planting genetically engineered (GE) crops appeals to producers because of
the potential to simplify pest management, reduce pesticide use, and help
control costs.  Analysis by USDA's Economic Research Service indicates that
adoption of GE corn, soybeans, and cotton is associated with a decrease in
the number of acre-treatments of pesticides (number of acres treated
multiplied by number of pesticide treatments).  Reduction in volume of active
ingredients applied is less consistent, since adoption alters the mix of
pesticides used in the cropping system, as well as the amounts used. 
Comparison of different mixes of pesticides involves evaluating tradeoffs
between the amounts used and the environmental characteristics, primarily
toxicity and persistence.  For example, the herbicide-tolerance trait in
soybeans allows substitution of glyphosate herbicides for other synthetic
herbicides that are at least three times as toxic as glyphosate and that
persist in the environment nearly twice as long. Ralph E. Heimlich (202)
694-5504; heimlich@ers.usda.gov
 

BRIEFS
Field Crops: U.S. Acreage Expands
 
Planted area for the eight major U.S. field crops (corn, soybeans, wheat,
barley, sorghum, oats, cotton, and rice) totals 254.9 million acres in 2000,
up more than 3 million acres from last year when prices were lower for most
crops at planting time. Increases in corn, soybean, barley, wheat, and cotton
area more than offset declines in sorghum, oats, and rice.
 
Estimates of planted and harvested acreage in USDA's Acreage report were
based on surveys conducted during the first 2 weeks of June. Compared with
USDA's March 31 Prospective Plantings report, which indicated farmers' crop
intentions for spring plantings in 2000, planted area is 2 percent higher for
corn and wheat but 0.5 percent lower for soybeans. 
 
Actual harvested acreage and yield for spring planted crops will be
influenced strongly by weather conditions through the growing season. Normal
weather would result in large output and stable or declining farm prices for
most U.S. field crops in 2000/2001 compared with a year earlier (see AO
June-July 2000). However, crop potential could be reduced in the Southeast
(especially from eastern Louisiana to the Southern Atlantic coast) if
additional rainfall does not alleviate dry weather conditions in the region.
 
Planting and fieldwork were ahead of normal this spring as drier-than-normal
weather occurred over large portions of the Southeast, Southwest, Great
Plains, and Corn Belt. By mid-May, over 90 percent of U.S. corn acreage had
been planted, and as corn planting neared completion, soybean planting
accelerated. By the end of May, 85 percent of soybean acreage was planted,
and progress was nearly 2 weeks ahead of normal. 
 
U.S. farmers have planted a record 74.5 million acres of soybeans in 2000, a
1-percent increase over last year's record. Planted acreage has increased
steadily since 1990 when the soybean planted area totaled 57.8 million acres.
Farmers are expected to harvest 73.5 million acres, up 1 percent from the
1999 record harvested acreage. Several factors are behind the rise in soybean
plantings, including a soybean loan rate (under the government nonrecourse
marketing assistance loan and loan deficiency payment program) that is
favorable relative to other crops.
 
For the third consecutive year, estimated soybean acreage increased in the
Great Plains and declined in most of the Midwest, South, Southeast, and
mid-Atlantic states. The largest acreage increases were in North Dakota,
Nebraska, and Michigan. Farmers in the largest producing states, Iowa and
Illinois, decreased soybean area this spring. Other states with large
reductions included Mississippi, Missouri, and Ohio. 
 
Corn plantings also increased in 2000 to an estimated 79.6 million acres, up
3 percent from last year due to stronger futures prices at planting and
favorable spring weather. Corn acreage to be harvested for grain is estimated
to increase to 73.1 million acres, also up 3 percent. Total corn acreage for
Corn Belt states, at 48.5 million acres, increased 2 percent from last year,
due in part to reduced soybean plantings (AO May 2000). Illinois, Iowa, and
Ohio increased planted acreage from last year. Outside the Corn Belt, in
South Dakota, Missouri, North Dakota, and Kansas, corn acreage increased
sharply from last year's high levels. USDA reported that 75 percent of the
crop was in good or excellent condition as of July 16.
 
Sorghum plantings dropped again in 2000 to an estimated 8.8 million acres,
down 5 percent from 1999, as acreage declined in most of the major producing
states due to weak feedgrain prices. This is the lowest planted acreage on
record. Texas, with 2.94 million acres, reports the largest reduction, a
decrease of 8 percent from 1999. Kansas, the largest sorghum producing state,
decreased plantings 6 percent to 3.4 million acres. Acreage expected for
grain harvest in 2000, at 8.1 million acres, is down 5 percent from the 1999
grain acreage and is the lowest since 1953. 
 
Barley plantings increased in 2000 to an estimated 5.7 million acres, up 9
percent from last year's record low. The largest increases were in North
Dakota, South Dakota, and Minnesota. Favorable weather this spring and higher
premiums for malting barley encouraged farmers to increase plantings. Most of
the 1999 barley crop was planted by late May. 
 
Total wheat planted acreage for harvest in 2000 is estimated at 62.9 million
acres, fractionally higher than last year. Compared with intentions in the
March Prospective Plantings report, plantings are up 2 percent for total
wheat, up 12 percent for durum wheat, and up 5 percent for other spring
wheat. Producers plan to harvest about 54.4 million acres, up 0.5 million
from last year. (See upcoming September AO for outlook for U.S. durum
market.)
 
Cotton plantings for 2000 are estimated at 15.6 million acres, 5 percent
above 1999 and unchanged from the March Prospective Plantings report. All
major producing states except Arkansas, Florida, Georgia, and South Carolina
increased area. Although planting-time prices were about the same as a year
earlier, expected returns were higher for cotton than for competing crops
such as corn and soybeans.
 
Texas, the largest cotton producing state, completed most plantings by late
June, although some replanting was necessary in the Texas High Plains on
fields damaged by rain, wind, and hail. In mid-July, 54 percent of the Texas
crop was rated in good or excellent condition, and 29 percent was rated in
fair condition. In California, ideal weather in early April allowed plantings
to proceed ahead of normal. The hot weather California has been experiencing
has been beneficial for cotton development, with the crop maturing at a very
good rate. In early July, 60 percent of the California crop was noted in good
or excellent condition. Prospects for a large U.S. crop led to a fall in
cotton prices from May to June, but recent hot and dry weather has added
uncertainty to the market 
 
Rice plantings for 2000 are estimated at almost 3.3 million acres, down
nearly 9 percent from 1999, with long grain acreage down 12 percent. Weaker
prices for long grain rice and some weather problems, primarily in Louisiana,
are responsible for much of the contraction in rice acreage. In contrast,
combined short and medium grain plantings are up more than 2 percent-with
California accounting for the bulk of the increase-due to tight stocks and
relatively robust prices in 1999.  
Robert A. Skinner (202) 694-5313
rskinner@ers.usda.gov
 
For further information, contact: 
Mack Leath, domestic wheat; Ed Allen, world wheat and feed grains; Allen
Baker, domestic feed grains; Nathan Childs, rice; Mark Ash, oilseeds; Steve
MacDonald, world cotton; Les Meyer, domestic cotton. All are at (202)
694-5300. 
 
BRIEFS
Livestock, Dairy & Poultry: Slow Growth Persists for U.S. Meat Exports 
 
Growth in overall U.S. red meat and poultry exports is expected to continue
on a slow course this year and actually flatten in 2001, as increases in pork
and broiler exports are offset by declines in beef and turkey exports.
However, forecasters see a significant rise in exports this year of turkey
meat and live cattle. 
 
Since 1997, U.S. meat exports have increased at an average rate of only about
3 percent, in contrast to double-digits of the previous 10 years. During that
boom period, trade agreements made several markets more accessible, leading
to immediate sharp increases in exports.
 
Sluggish growth in total meat exports can be traced to a healthy U.S. economy
combined with economic weakness in importing markets (e.g., Russia and Asia).
In recent years, U.S. domestic demand has bid up prices of meat products. At
the same time, buying power of some major importers of red meats and poultry
dropped as incomes fell and currencies collapsed.
 
Beef exports are forecast up 4 percent this year to 2.5 billion pounds, a
rise expected to be offset by a 3-percent drop in 2001. Contributing to the
increase in 2000 are generally strong economies and reduced herds in major
beef-importing countries. Behind next year's decline is an expected 5-percent
drop in U.S. beef production due to declining cattle inventory since 1996,
along with continuing strength in the U.S. economy, which is generating
strong domestic demand. In the higher-priced fed beef segment of the world
market, which serves restaurants and hotels, the U.S. has little competition
and should remain the dominant supplier. 
 
Beef imports, up 5 percent over last year, should reach at least 3 billion
pounds in 2000 but increase close to 1 percent in 2001. Most of this year's
anticipated rise came in the first quarter, as U.S. supplies of processing
meat dropped and imports from Australia and New Zealand (major exporters of
manufacturing-grade beef) rose to meet demand. Lower cow slaughter and pork
production in the U.S. accounted for the decline in U.S. processing-meat
supplies. Also contributing to this year's upward swing in imports was a rise
in U.S. beef prices, making the U.S. beef market more attractive for world
beef exporters.
 
In 2001, strong U.S. beef prices will continue to pull in beef. A predicted
ongoing fall in U.S. cow slaughter should drive up lean beef prices and draw
in manufacturing-grade beef from New Zealand, Australia, and South America.
In processed meats (e.g., sausage products), however, greater availability of
both pork and poultry should substitute in part for this more expensive beef.
 
Live cattle exports are predicted to move against the overall current this
year, reaching a record high of about 360,000 head, up 9 percent. Imports are
expected to drop 4 percent from 1999, to 1.875 million head, coming from
Mexico and Canada. Variations in U.S. trade with Canada account for most of
the changing trade numbers. The sharp rise in exports results from the
success of the Northwest Cattle Project, which simplifies the procedure for
exporting cattle to Canada from certain northwestern states. Canada's demand
for these cattle is due to more cattle-feeding, rising slaughter capacity,
and a lower cattle inventory in that country-factors that also lie behind the
forecast drop in live cattle imports from Canada.
 
In 2001, live cattle imports are expected to dip about 5 percent, as Canada
and Mexico will have significantly smaller herds. Mexico will turn to herd
rebuilding, assuming normal weather conditions. Canada will likely keep more
cattle in-country to meet excess slaughtering capacity.
 
Turkey meat exports in 2000 should see a 14-percent rise to 434 million
pounds. Higher energy prices early this year boosted the economies of both
Russia and Mexico (the largest market for turkey), which should show up in
higher U.S. turkey exports in 2000. (Fallout from earlier Mexican economic
problems caused last year's turkey exports to drop 15 percent.)  Shipments to
Asian markets are also expected to continue growing, but these will face
strong competition from chicken products. 
 
Broiler exports should continue to expand, although slowly-about 3 percent in
2000 and less than 1 percent in 2001. Supporting the growth in exports is
economic recovery and growth in Russia and China (including Hong Kong)-both
major markets, 
 
Pork exports are expected to continue to outweigh imports in 2000 and 2001.
This year, exports are forecast at 1.275 billion pounds (down slightly from
last year), rising to 1.305 billion pounds in 2001. Imports are forecast up
22 percent this year and unchanged next, reaching more than a billion pounds
each year. Exports to Mexico and Asia-specifically, Hong Kong, Taiwan, and
Japan-are likely to continue their gradual rise, reflecting the increasingly
healthy economies in these regions.
 
While U.S. pork production falls (following low returns in recent years) and
with the dollar relatively strong, pork exporters, particularly Canada and
Denmark, will find the U.S. an attractive market. The expanding, restructured
Canadian pork industry is expected to continue to supply large quantities of
pork and hogs to the U.S. 
 
Hog imports from Canada are forecast at about 3.7 million head in 2000
(essentially the U.S. total) and 3.475 million in 2001. As long as Canada's
hog and pig production goes on outstripping the country's finishing and
slaughter capacity, Canadian feeder pigs are expected to continue to comprise
more than half of total U.S. hog imports.  
For further information, contact: 
Leland Southard, coordinator; Ron Gustafson, cattle; Leland Southard, hogs;
Mildred Haley, world pork; Dale Leuck, world beef; David Harvey, poultry. All
are at (202) 694-5180.
 
Livestock, Dairy & Poultry BOX
 
Estimates of U.S. meat supply and use for 1999 and 2000 have been adjusted to
reflect volumes of meat shipped during 1999 as part of the Russian Food Aid
package. Official Census Bureau data report this meat as having been shipped
in 2000. Census revisions to the official trade number will be adopted when
available. Current USDA trade figures are available in the supply and
utilization tables found at http://www.ers.usda.gov/briefing/animal
 
BRIEFS
Ag Trade: U.S. Agricultural Imports Head Higher 
 
U.S. imports of agricultural commodities and products are projected to reach
$39 billion in fiscal 2000, a 72-percent increase from 1990. This astonishing
growth results in part from exceptional U.S. economic expansion during the
decade (averaging 3 percent from 1990 to 1999). Also contributing to the
surge in U.S. import demand in the last half of the decade have been low
commodity prices, the strong U.S. dollar, recessions in Asia and Latin
America, sluggish growth in Europe, and effects of trade agreements,
particularly in North America. 
 
Continued strong U.S. economic growth, the dollar's high purchasing power,
and relatively low commodity prices point toward higher imports in 2001.
Growth in high-value imports is expected to continue to push up overall
import value.
 
The forecast $39-billion ag import tally for fiscal year 2000 is only $11
billion lower than projected U.S. agricultural exports, resulting in the
lowest agricultural trade surplus since 1987. The expected share of imports
in total U.S. agricultural trade (exports plus imports) is 44 percent for
2000, compared with 35 percent just 4 years ago. 
 
Among the fastest-growing U.S. imports are high-value products, such as red
meats, dairy products (mainly cheese), fruits and juices, vegetables, and
wine and malt beverages, each increasing significantly since 1995. Even
imports of processed grain products grew substantially. Noncompetitive
imports-coffee, cocoa, rubber, etc.-have risen in volume, but because of low
world prices, have declined in value in 1999 (22 percent of total
agricultural imports). Import values of bulk commodities-feed grains,
soybeans, tobacco, and sugar-are also smaller due to lower prices, although
imports have remained relatively flat in volume. 
 
Low prices from abundant supplies, weak foreign demand, and foreign economic
downturns have made foreign goods more affordable to U.S. consumers. Prices
of U.S. food imports are about 12 percent lower than in 1995, based on an
index of import prices calculated by the Bureau of Labor Statistics. Among
imports with the steepest price declines are coffee, cocoa, sugar products,
and other prepared foods. On average, prices of meat, fruits, and vegetables
fell 5-10 percent between 1995 and 1999, and prices as of second quarter 2000
were below 1995 prices, except for wine and malt beverages. If the U.S.
dollar maintains its high exchange value, domestic food price inflation based
on high import costs is likely to be small, even if world commodity prices
start to recover.
 
Along with low world prices, the dollar's relatively strong foreign exchange
value in recent years helps explain the pattern of U.S. agricultural imports,
particularly for high-value imports. For total U.S. imports from 1995 to
early 2000, the dollar increased by 15 percent in real value against
currencies of source countries. For noncompetitive imports, the dollar has
risen by 24 percent.
 
The dollar's increased purchasing power, combined with strong U.S. income
growth, drives the import surge of higher-value products like red meats,
dairy products, fruits and vegetables, oilseed products, sugar products, and
beverages. For vegetables, imports jumped 60 percent in value from 1995 to
1999 while the real exchange-rate index rose by only 2.4 percent. The index
gain was modest because the Mexican peso actually appreciated in real terms
against the dollar during that period, and Mexico is the source of more than
40 percent of U.S. vegetable imports. 
 
Another influence on U.S. import growth is lower trade barriers, most notably
under the North American Free Trade Agreement. Imports from Canada and Mexico
are projected to reach $13.2 billion in fiscal 2000, up from $5.7 billion in
1990.
 
The U.S. depends on relatively few sources for its ag imports. Only 20
countries supplied an average 90 percent of total U.S. imports from 1996 to
1998, with Canada, Mexico, and the EU supplying half of U.S. imports.
One-third of U.S. imports in fiscal 2000 is expected to come from Latin
America (13 percent from Mexico alone), 21 percent each from Canada and the
EU, and 14 percent from Asia. This pattern gives credence to the "gravity"
theory, which explains high trade levels as a product of close geographic
proximity. Canada, Mexico, and Chile show growing shares of the U.S. import
market in the past two decades, while others such as Australia exhibit
declining shares. 
 
U.S. net imports of high-value products in fiscal 2000 are expected to be
double the 1995 value. More than $6 billion in net imports of animals, dairy
products, fruits, fruit juices, vegetables, sugar and products, and beverages
are projected, versus $3 billion in 1995. While domestic producers face
competition as a result of growing imports, lower prices and larger supplies
benefit consumers. 
 
The sharp growth in horticulture imports reflects an increasing dependence on
imported food, although the total import share remains below 10 percent,
based on estimates by USDA's Economic Research Service. In 1999, 16 percent
of U.S. consumption of fruits, fruit juices, and tree nuts was imported,
increasing from 13 percent in 1989. The import share of vegetable consumption
was 12 percent in 1999, rising from 7 percent in 1989. Some of these gains
results from expanded year-round availability when U.S. supplies are low or
unavailable. The import share is 24 percent for cane and beet sugar, and 7
percent for beef. U.S. consumption of these foods continues to climb faster
than domestic production, and per capita consumption also continues to rise.  
Alberto Jerardo (202) 694-5323
ajerardo@ers.usda.gov 
 
COMMODITY SPOTLIGHT                                         
Forces Shaping the U.S. Wheat Economy
 
The U.S. wheat sector enters the new century facing many challenges, despite
a strong domestic market for wheat products. U.S. wheat area is dropping off
because of declining returns relative to other crops, stemming in large part
from continued sharp competition from abroad and structural changes in world
markets. U.S. wheat exports have held fairly steady since the mid-1990's,
even as global trade has trended up. In the wake of trade liberalization
under the North America Free Trade Agreement (NAFTA), the U.S. has emerged
during the 1990's as a steady importer of wheat and as a significant market
for Canadian wheat exports.
 
The share of domestic wheat production milled for food use has grown, as the
share for animal feed and exports has declined. During the past quarter
century, U.S. per capita consumption of wheat as food products has risen,
although foreign producers have captured a share of the expanded domestic
market. In the 1998/99 crop year, domestic per capita wheat consumption
dropped off. The expected rebound during 2000/01 will still fall short of the
1997 peak.
 
Consumption Rebound 
Benefits Processing Industry
 
The rise in U.S. per capita wheat consumption (measured as flour and the
flour equivalent in food products such as bread, cookies, and pasta) is the
extension of an historic turnaround that occurred in the 1970's. For nearly
100 years, per capita wheat consumption had declined in the U.S., as physical
labor declined and diets diversified. Wheat consumption had dropped from over
225 pounds per person in 1879 to 180 pounds in 1925, bottoming out at 110
pounds in 1972.
 
By 1997, U.S. per capita wheat consumption was back up to 149.5 pounds, the
highest since the 1940's. The rebound in consumption was surprising to some,
because wheat products were not considered preferred foodstuffs for consumers
with rising incomes. But the overall growth in per capita consumption that
occurred between 1973 and 1997 reflected some changes that included the boom
in away-from-home eating, the desire of consumers for greater variety and
more convenience in food products, promotion of wheat flour and pasta
products by industry organizations, and wider recognition of health benefits
stemming from eating high-fiber grain-based foods.
 
Canadian wheat producers reaped part of the gains from this increased demand.
Before the 1990's, the U.S. had generally imported only small amounts of
wheat and wheat products, mostly from Canada. In the early 1990's, however,
imports began to climb rapidly, and by 1993/94, wheat imports from Canada
reached a record 2.4 million tons, although much of that was damaged grain to
be used for feed. Recently, however, most imports from Canada are
high-quality grain to be used in bread and pasta. Imports of durum and hard
red spring (HRS) wheat from Canada are equivalent to about 20 percent of U.S.
consumption of those wheat classes.
 
Imports are not likely to decline to pre-1990 levels in the near future.
NAFTA has ended tariffs and eliminated quotas for wheat trade between the
U.S. and Canada. The 1995 elimination of transportation subsidies to Canadian
growers for moving grain to ocean export terminals in Vancouver and Thunder
Bay has rendered shipping to the U.S. relatively less costly than to overseas
markets
 
The rise in per capita consumption has benefited the U.S. wheat processing
industry. Over the last 25 years, the industry has been able to operate near
full capacity while expanding and modernizing. Existing mills at traditional
milling centers such as Kansas City, Minneapolis, and Buffalo have been
enlarged, while new mills have been built near major population centers in
California and other states.
 
Prior to the 1960's, mills were typically built near major wheat producing
regions because rail rates for shipping wheat (an easily storable item) and
wheat flour (a more perishable product) were equalized under a rail transit
rate structure, regardless of where the mill was located between the grain
origination point and destination of the flour. When use of this rate
structure ended and railroad companies began to adopt cost-saving hopper-cart
technology and multi-car discount rates-suitable for shipping large
quantities of bulk grain headed for mills but not for smaller quantities of
flour on the way to bakers-costs for transporting wheat fell relative to
flour. As a result, mills producing bulk flour were often built closer to
population centers that supported production of highly perishable products
such as bread. Siting their facilities near purchasers, bulk-flour millers
could directly supply bakers and avoid the need for a local flour storage
facility or a local distributor.
 
In contrast, wheat products that are less perishable need not be manufactured
in close proximity to purchasers. For example, bagged flour and pasta
products are produced and distributed over a very wide market area because
they can easily be transported a considerable distance to customers. Millers
supplying bagged wheat flour or semolina for pasta (milled from durum wheat)
may choose to locate mills at sites with access to national transportation
facilities central to several urban centers.
 
Total growth in the domestic market is not just a function of food use. Wheat
is also fed to livestock, but this component is volatile, with year-to-year
changes stemming mainly from the availability of substantial quantities of
low-quality wheat. Demand for wheat as feed depends largely on the price of
wheat relative to corn and other feed grains. However, in general, the price
of feed wheat is not high enough to provide an incentive for producers to
grow wheat just for feeding.
 
U.S. Export Lead Narrows
 
In the 1990's, world wheat production and consumption have continued to
expand in response to rising population and incomes, and the volume of world
wheat trade has gained slightly. Distribution of global wheat trade has
broadened as smaller purchases by a larger number of importing countries-in
Southeast Asia, North Africa, and the Middle East-have become more important
than the very large purchases by the former Soviet Union and China.
 
The breakup of the Soviet Union led to a reduction of  wheat imports into the
region. Initially, it appeared that import growth elsewhere would outweigh
this loss. Later, however, China, another major importer, also cut wheat
imports, because of large domestic production and a flattening in per capita
wheat consumption. Aggregate world trade has continued growing, albeit slowly
in recent years, but the U.S. has lost market share, narrowing its lead over
other exporting countries.
 
Loss of U.S. market share during the 1990's was attributable partially to an
agricultural boom in Argentina that began in the mid-1990's following the
country's agricultural reforms. Australia and Canada also gained on U.S.
market share. Erosion of U.S. share continues a trend from losses incurred in
the 1970's and 1980's due to rapidly rising exports from the European Union
(EU). Protected trade among EU member countries soared in the 1970's and
1980's, remaining competitive with outside suppliers in the 1990's. EU
exports to nonmember countries also jumped during the 1980's. But reforms
have helped curtail EU wheat exports in the 1990's. 
 
Emerging structural changes in buying patterns and in quality preferences
could pose a further threat to the U.S. share of world wheat trade. The
importance of quality (characteristics related to end use) varies among
markets, with high-income, nonsubsidized markets generally more sensitive to
quality in making wheat import decisions. In high-income countries, end-use
characteristics are often more important than price.
 
In many countries where purchasing decisions are made largely by government
entities, the goal is generally to buy the cheapest wheat available. Soft red
wheat (SRW) varieties grown in the U.S were developed for making flour for
cookies, cakes, biscuits, and crackers. However, because of the abundant
supply of SRW worldwide and its relatively low price, governments of lower
income foreign countries often purchase SRW to be used in other products,
such as breads. Movement toward privatization in recent years has elevated
the role of smaller, nongovernment buyers, such as millers, whose wheat
purchases tend to reflect the most desirable characteristics for the intended
end use rather than primarily price.
 
Increased attention to various qualities of wheat could put some U.S. wheat,
such as SRW, at a disadvantage relative to other wheat types. SRW fits nicely
into some U.S. farm operations, particularly in much of the South and
Midwest, because it can be doublecropped with soybeans or other crops.
 
Export competition will not abate in the foreseeable future, and low real
prices (prices adjusted for inflation) will continue to pressure U.S. wheat
producers. Agricultural policy reforms included in the EU's Agenda 2000 (AO
May 1999 and October 1999) are expected to promote wheat production over
other crops. EU wheat exports have become more price-competitive because of
declining support prices and a weak currency, and the EU recently exported
some wheat without subsidies.
 
In addition, traditional exporters (Argentina, Australia, and Canada) are
expected to continue to be very competitive. Other suppliers such as Eastern
Europe and parts of the former Soviet Union (now the New Independent States)
may also provide more export competition, especially if their infrastructure
improves and they can upgrade the quality of wheat output while holding down
costs.
 
Production Gains & Stocks
Pressure Prices
 
The historical long-term downward trend in real grain prices reflects the
successful development and dissemination of high-yielding varieties, as well
as use of yield-enhancing agricultural chemicals and mechanical technology.
In the early 1980's, the trend in U.S. wheat yields flattened out after
steady gains since mid-century, but at the end of the 1990's, U.S. wheat
yields spiked up. Nevertheless, over the past 25 years, gains in wheat
yields, on average, trail gains for corn and soybeans. 
 
Harvested wheat area in the U.S. has trended down since its peak in the early
1980's, in part because of declining returns relative to other crops.
Implementation of the Conservation Reserve Program in 1986 also took wheat
acreage out of production.
 
The 1996 Farm Act further contributed to the fall-off in wheat acreage by
eliminating the requirement to maintain base acreage of program crops in
order to qualify for deficiency payments. Increased planting flexibility
facilitated expansion of soybeans and corn into more traditional wheat areas,
with little or no corresponding push of wheat into nontraditional growing
areas. And more wheat land went into minor oilseeds such as canola. Loss of
wheat acreage to row crops also reflects strong genetic improvements in corn
and soybeans varieties that could be planted further west and north-areas
with drier conditions or shorter growing seasons.
 
In the 1990's, some farmers in the dryland Plains areas switched to multicrop
rotations that have decreased the frequency of wheat planting. For example,
in Kansas, a typical wheat-fallow rotation is most commonly replaced by a
wheat-grain sorghum-fallow rotation, so that wheat is planted 1 year out of 3
instead of 1 out of 2. Studies from Kansas State University indicate that
multicrop rotations produce markedly higher net returns, primarily because of
the inclusion of higher-value but riskier crops in the enterprise mix.
 
Also influencing planting decisions in the 1990's was concern about
widespread wheat disease problems, which may stem in part from switches to
the more profitable activities of corn plantings and minimum tillage in
traditional wheat areas in the Northern Plains. Both activities provide hosts
for disease organisms.
 
Although low prices have affected most agricultural commodities, higher
productivity gains for crops like corn and soybeans, and cost reductions for
soybeans and cotton, have partly offset sagging prices. Moreover, under the
1996 Farm Act, soybeans emerged with some additional program incentives-
i.e., loan rates that afforded more revenue protection for soybeans than
other crops when commodity prices went down in the late 1990's.
 
The pace of genetic improvement has been slower for wheat than for many other
field crops, not only because of technical reasons and genetic complexity,
but also because lower potential returns to commercial seed companies
discourage investment in research. In the corn sector, for example, where
hybrids are used, farmers generally buy seed from dealers every year.
However, many wheat farmers-particularly in the Plains states-plant "bin run"
or saved seed instead of buying from dealers.
 
Since potential returns from development and sale of new wheat varieties are
relatively small, private firms limit their involvement in wheat breeding
research. Therefore, the wheat sector is largely dependent on public
research.
 
Innovation in cultural practices, moreover, may be less aggressive for wheat.
For example, growth in soybean yields started to advance above trend in the
late 1980's and early 1990's as farmers adopted narrow-row and
drilled-planting methods to increase the number of plants per acre. In
contrast, practices used in growing wheat have remained largely unchanged,
although wheat planting equipment has improved.
 
Domestic wheat prices respond not only to production levels, but also to
holdings of U.S. and world stocks. When stocks are ample and prices start to
rise, stocks may enter the marketplace, keeping prices from rising further.
While government stockholding is aimed at supporting farm prices by
withdrawing wheat from the market, private stockholding is motivated by the
prospect of profiting from price fluctuations-i.e., withholding wheat from
the market when prices are low and selling later when prices rise.
 
Farm legislation plays a role in U.S. stockholding patterns. For example,
U.S. wheat stocks declined dramatically during the late 1980's following
passage of the 1985 Farm Act which included provisions for generic
certificates-to distribute government-held commodities in lieu of cash
payments-and the Export Enhancement Program (EEP)-to subsidize sales of
commodities abroad. A lower loan rate provided to farmers also helped slow
the accumulation of government-held stocks. Drawdown of government-held
stocks accelerated as droughts in 1988 (affecting spring wheat) and in 1989
(winter wheat) reduced production.
 
Commercially-held stocks accounted for a relatively small share of total U.S.
stockholdings,  so when government stockholdings dropped substantially from
the 1980's, total stocks declined sharply. By the early 1990's, the U.S.
stocks-to-use ratio had fallen to near the world level.
 
Recently, however, U.S. wheat stocks held by the commercial sector have
sharply expanded, and now make up an increasing share of U.S. stocks. The
world stocks-to-use ratio has remained relatively stable, while the U.S.
ratio rose at the end of the 1990's as wheat stockholders awaited a price
rise.
 
World wheat stocks are forecast for the 2000/01 crop year at their lowest
level since the mid-1990's. Yet with sizeable U.S. and EU wheat stocks, U.S.
real wheat prices remain very low relative to that period. If global trade
strengthens, domestic prices can rise as U.S. stocks are exported to meet the
demand.
 
Longer-term price movement depends on balancing global demand with supply
growth. For example, when the global stocks-to-use ratio reached a low during
the 1994/95 crop year and prices spiked, wheat producers around the world
responded strongly by increasing production. Then global demand weakened in
some important markets as consumption growth slowed from the deepening Asian
financial crisis. The result was low prices.
 
Challenges for the U.S. wheat sector will not abate in the foreseeable
future. Other crops will continue competing with wheat for production
resources, including land. Although wheat products have proven to be
competitive with other foodstuffs for consumer dollars in recent years, low
real prices due to foreign competition will continue to pressure U.S. wheat
producers. Prices will also remain weak if global supply response outpaces
development of broad-based global demand growth.
 
Research to develop new varieties and new growing methods may improve market
competitiveness and increase the cost efficiency of wheat production.
Improved varieties of U.S. hard white winter wheat, for example, were
developed using traditional methods, and these hard whites may open new
market prospects to U.S. producers by allowing them to challenge the
dominance of Australian white wheat in world trade. Development of wheat with
a herbicide-tolerant trait promises significant benefits to spring wheat
growers, but may also introduce some uncertainty in marketing. However,
introduction of genetically modified varieties of wheat is still 2-3 years
away, and the pace of seed supply expansion will limit the adoption rate.  
Gary Vocke (202) 694-5285
gvocke@ers.usda.gov
 
COMMODITY SPOTLIGHT SIDEBAR
Exporters' Wheat Stocks Remain Large
 
Global wheat consumption will outpace production for a third year, causing
worldwide wheat stocks to fall, according to USDA forecasts. Foreign wheat
stocks in 2000/01 are projected down more than 12 million tons from the
previous year, and are the smallest since 1981/82. Exporters' stocks
nevertheless remain large, keeping a lid on prices. The extent of an expected
increase in world wheat trade is likely to be crucial for wheat prices in
2000/01. 
 
World wheat production in 2000/01 is predicted to fall 4 million tons from
1999/2000, mainly the result of low prices and drought, while wheat
consumption is forecast down 3 million tons. An expected drop of 12 million
tons in China, the world's largest wheat producer, accounts for most of the
projected 1 percent downturn in global production. Reduced government support
and declining wheat prices caused a reduction in area. Drought in crucial
wheat-producing areas of the North China Plain during the spring growing
season accelerated the growth cycle and led to an early-maturing crop, but
heavy rains in the southern part of the Plain during the first days of June
delayed harvest and reduced quality. China's production is forecast at 102
million tons, the lowest in 6 years. 
 
Further, drought in Eastern Europe and across North Africa (e.g., Morocco and
Tunisia) and parts of the Middle East (e.g., Iran) is lowering production.
These declines more than offset record highs in the European Union (EU) and
South Asia, and increased production in Russia and Turkey. In addition,
neither Canada nor Australia is expected to match last year's exceptional
yields, and U.S. output is forecast lower as average yield declines.
 
In Eastern Europe a year ago, it was flooding that cut production. This
year's crop was reduced by drought in April and May, a crucial time for wheat
growth in Central and Eastern Europe. Reductions are forecast for Austria,
Poland, the Czech Republic, Slovakia, Hungary, the former Yugoslavia,
Bulgaria, and Romania, as well as Moldova. 
 
Partly offsetting these forecast reductions, Pakistan and India are reporting
record wheat crops. A serious lack of rainfall across key South Asia growing
areas, particularly in Pakistan and western India, had little effect, because
most of the crop is irrigated. In addition, Pakistan increased its wheat
area, boosting production to a record 21 million tons. Although India reduced
its wheat area slightly, favorable weather in the eastern growing areas is
expected to contribute to a record crop of 74 million tons.
 
Worldwide wheat consumption is still outstripping production by almost 13
million tons, but consumption in 2000/01 is projected at almost 3 million
tons below that forecast for the previous year. Most of the decline is in
feed use, with reduced wheat feeding in China and the U.S. more than
offsetting greater feed use in Europe. 
 
Lower production or tight wheat supplies are expected to reduce nonfeed
consumption (mostly food use) in a number of regions, including Eastern
Europe, the former Soviet Union, the Middle East, and Sub-Saharan Africa.
Nonfeed wheat consumption is also expected to decline slightly or to stagnate
in China, Japan, South Korea, Thailand, and Taiwan. Sluggish wheat demand in
2000/01 is coinciding with improved economic conditions-in many countries
incomes are high enough that consumption of a staple food like wheat is
influenced more by population growth and tastes and preferences than by
fluctuations in price or income.
 
Global stocks are expected to decline for the third straight year in 2000/01.
China's stocks are expected to decline most, projected to be down over 35
percent. Reportedly, however, the country's stocks of wheat are still quite
large, albeit of questionable quality. (Because China does not publish any
direct estimates of its wheat stocks, the amount of wheat being stored by the
millions of wheat producers in that country is not known.)  Large stocks of
wheat, corn, and rice are straining grain storage capacity. 
 
Levels of wheat imports by major purchasers and levels of stocks in major
exporting countries, are key to market prospects this year. The largest
importers-Iran, Brazil, and Egypt-are expected to boost imports, largely
because of their own tight supplies. Lower wheat supplies in China are
expected to lead to higher imports-projected at 3.5 million tons, up from 1
million in 1999/2000-mainly for quality-conscious markets in the south.
Largely offsetting these increases is a drop in Pakistan's imports from 2.5
million tons to only 50,000. 
 
Major exporters' wheat stocks are forecast to decline in 2000/01, including
forecast drops of 2 million tons in Canada and Australia combined and a
slight decline in the U.S. But total production by the five major exporters
should reach 233 million tons, up 7 million tons. Record production is
expected to boost stocks almost 2 million tons in the EU, largely offsetting
the declines in other exporting countries, 
 
Although world wheat stocks in 2000/01 are forecast to drop 10 percent to 114
million tons, U.S. prices are forecast little changed from a year earlier.
Exporters' supplies, despite some tightening, appear adequate to meet import
demand at prevailing prices. However, world wheat trade in 2000/01 is
expected to reach its highest level in nearly 10 years, and further increases
would likely reduce exporters' stocks, with a resultant price rise.  
Edward W. Allen (202) 694-5288
ewallen@ers.usda.gov
 
RESOURCES & ENVIRONMENT 
Genetically Engineered Crops: Has Adoption Reduced Pesticide Use?
 
Development of new crop varieties through genetic engineering offers a broad
spectrum of potential benefits, including reduced production costs, enhanced
yields, and enhanced nutritional or other characteristics that add to value.
Among the first developments on the market were changes in the genetic makeup
of common field crops that made them tolerant to commonly used glyphosate
herbicides, or that incorporated genes of the natural pesticide Bacillus
thuringiensis (Bt), so that plants produce a protein toxic to specific insect
pests.
 
These varieties appealed to producers because they promised to simplify pest
management and reduce pesticide use, while helping to control costs, enhance
effectiveness of pesticides (both herbicides and insecticides), and increase
flexibility in field operations. Evidence of that appeal lies in the rapid
adoption of genetically engineered crops, beginning with very little U.S.
acreage in 1996 and reaching 41 percent of major crop acreage in 2000, down
from 49 percent in 1999.
 
The potential to reduce pesticide use through genetic engineering, or
biotechnology, could also appeal to consumers. A Farm Bureau/Phillip Morris
poll of farmers and consumers in August 1999, for example, indicates that 73
percent of consumers were willing to accept genetic engineering as a means of
reducing chemical pesticides used in food production. The poll also found
that 68 percent considered farm chemicals entering ground and surface water
to be a major problem.
 
The question remains: does adopting genetically engineered (GE) crops for
pest management reduce use of chemical pesticides? As with most simple
questions, the answer is far from simple.
 
Estimating Effects
On Pesticide Use
 
Data exist on pesticide use by producers who did and did not adopt
genetically engineered crops. But characteristics that affect the adoption
decision may influence pesticide use decisions as well, making simple
comparisons suspect. In addition, the changing mix of pesticides that
accompanies adoption complicates the analysis, because characteristics like
toxicity and persistence in the environment vary across pesticides used.
 
To offer several perspectives on estimating changes in pesticide use
associated with adoption of GE crops, this analysis uses three statistical
methods.
 
*Same-year differences. Compares mean pesticide use between adopters and
nonadopters within 1997 and within 1998 for a given technology, crop, and
region, and applies that average to total acres producing each crop in each
year. 
 
*Year-to-year differences. Estimates aggregate differences in pesticide use
between 1997 and 1998, based on increased adoption of GE crops between those
2 years and average total pesticide use by both adopters and nonadopters. 
 
*Regression analysis. Estimates differences in pesticide use between 1997 and
1998, with an econometric model controlling for factors other than GE crop
adoption that may affect pesticide use.
 
Data for the study are from the national Agricultural Resource Management
Study (ARMS) for 1996-98, conducted by USDA's National Agricultural
Statistics Service and Economic Research Service. The dataset includes
information on adoption of GE varieties of corn, soybeans, and cotton, as
well as number of applications and amounts of specific conventional pesticide
applied. Only statistically significant differences in pesticide use were
included in the estimates of change, so results are conservative. For
insecticides, only those used to control the target pests of GE crops-i.e.,
those that could substitute for the Bt trait-were analyzed.
 
Same-year differences between average pesticide use of adopters and
nonadopters revealed that adopters of GE corn, soybeans, and cotton combined
used 7.6 million fewer acre-treatments (2.5 percent) of pesticides than
nonadopters in 1997. (An acre-treatment is the number of acres treated
multiplied by the number of pesticide treatments.)  The difference rose to
nearly 17 million fewer acre-treatments (4.4 percent) by adopters in 1998.
 
In 1998, adopters of herbicide-tolerant soybeans accounted for the largest
share of the difference in acre-treatments (54 percent), with most of the
reduction occurring in the Heartland region. Seven percent of the difference
in acre-treatments for target pests occurred with adoption of Bt cotton, with
most of the reduction in the Southern Seaboard. 
 
In terms of active ingredients applied, however, adopters used only 331,000
pounds fewer than nonadopters (less than 0.1 percent of total pounds applied)
in 1997. The difference narrowed to 153,000 fewer pounds in 1998. Reductions
in active ingredients applied in 1997 were related to Bt cotton and
herbicide-tolerant soybeans in the Southern Seaboard, while in 1998
herbicide-tolerant cotton and Bt corn accounted for most of the decreases
nationally.
 
Year-to-year differences in total pesticide use between 1997 and 1998,
adjusted for change in acres planted but including both adopters and
nonadopters, amounted to 9 million fewer pesticide acre-treatments (a
2.9-percent reduction). Although GE adoption leads to less pesticide use,
acre-treatments by GE adopters as a group increased by 49 million between
1997 and 1998, while acre-treatments by the shrinking number of nonadopters
dropped by 58 million. This resulted in 8.2 million fewer pounds of active
ingredients applied (3.5 percent)-the growing number of GE adopters used 39.3
million more pounds in 1998 than in 1997, but the declining number of
nonadopters used 47.5 million fewer pounds.
 
Most of the decrease was in soybeans in the Heartland region, and in cotton.
For corn, acre-treatments and pounds of active ingredient increased because
GE adopters used 13.6 million more acre-treatments, while nonadopters
decreased acre-treatments by only 11.8 million. The increasing number of
producers who planted herbicide-tolerant corn used 17.5 million more pounds
of active ingredients as they switched from other herbicides to glyphosate,
but the fewer nonadopters reduced pesticide use by only 15.1 million pounds.
 
Year-to-year changes in total pesticide use result from sometimes dramatic
increases in GE acreage. These increases lead to increases in total pesticide
use by adopters, despite lower average per-acre rates. Corresponding
decreases in nonadopter acreage lead to decreases in total pesticide use by
nonadopters, but, except for corn, GE adopter increases are less than
nonadopter decreases, resulting in a net decline in total pesticide use.
 
These comparisons do not account for year-to-year changes in weather
conditions, pest pressures, and other factors that may affect pesticide use,
so it is inappropriate to attribute the results solely to adoption of GE
crops. Still, the overall downward trend in pesticide application rates on
major U.S. crops from 1996 to 1998 appears to confirm the pesticide-reducing
effect of GE crops. For example, as adoption of herbicide-tolerant soybean
varieties increased from 7 to 45 percent, the average annual rate of
glyphosate application increased from 0.17 pounds per acre in 1996 to 0.43
pounds per acre in 1998, while all other herbicides combined dropped from
about 1 pound per acre to 0.57 pounds per acre. That translates into a
decline of nearly 10 percent in the overall rate of herbicide use on soybeans
during the period.
 
The regression analysis approach controlled for differences between adopters
and nonadopters, allowing estimation of changes in pesticide use associated
with increases in GE adoption between 1997 and 1998. Regression models are
usually used to estimate small adjustments from small changes in conditions.
Normally, changes in use of a technology would be small over a single year.
However, between 1997 and 1998, spectacular growth in genetically engineered
crop use led to adoption rate increases of 160 percent for herbicide-tolerant
soybeans, 150 percent for herbicide-tolerant cotton, 12 percent for Bt
cotton, and 43 percent for herbicide-tolerant corn. These large changes may
be beyond the model's predictive scope.
 
The analysis estimated that pesticide reductions related to increased GE
adoption between 1997 and 1998 were 19.1 million acre-treatments (6.2 percent
of total 1997 treatments), excluding Bt corn. These estimates reflect
reductions in other insecticides used on cotton, acetamide herbicides used on
corn, other synthetic herbicides used on soybeans, and offsetting increases
in glyphosate herbicides used on soybeans 
 
Assuming application rates of each active ingredient (pounds per
acre-treatment) are the same for adopters and nonadopters, changes in the
number of acre-treatments would imply proportional changes in pounds of
active ingredients used. However, since average application rates vary across
pesticide active ingredients, the net effect of substituting one for another
may be an increase or a decrease in total pounds used. Thus, changing the mix
of products used while decreasing acre-treatments may actually increase total
pounds of active ingredients applied. Estimating the change in total pounds
of active ingredients under the assumption of average application rates for
each active ingredient indicates that total pesticide use on corn, soybeans,
and cotton decreased 2.5 million pounds (1 percent) in 1998 compared with
1997.
 
Using average application rates gives conservative results. For example,
using average application rates, the net effect of adopting
herbicide-tolerant soybeans is a reduction in acre-treatments but a slight
increase in pesticide use (pounds of active ingredients). However, direct
econometric estimation shows a 1.76-million-pound reduction in herbicide use
associated with increased adoption of herbicide-tolerant soybeans in 1998
relative to 1997, the net result of a 7.2-million-pound decrease from use of
"other" herbicides and a 5.44-million-pound increase from use of glyphosate.
When producers adopt GE crops, they shift the mix of pesticides they use and
can use them at lower-than-average application rates. Thus, the actual
reduction in pounds of active ingredients may be larger than that estimated
by multiplying average rates by the reduction in acre-treatments.
 
Changing Pesticide Use:
Impact Also Matters
 
Changes in pesticide acre-treatments resulting from the adoption decision
range from -6.8 million acre-treatments to -19 million across the three
estimation methods. Reductions in pounds of active ingredients vary more
widely, from a net drop of just 0.3 million pounds in 1997 (using the
same-year method to compare adopters and nonadopters) to a net
8.2-million-pound decrease (using the year-to-year method to compare changes
in total pesticide use between 1997 and 1998). Because the results include
only statistically significant differences in pesticide use by adopters and
nonadopters, many relatively small differences in particular regions were not
included, thus underestimating overall differences.
 
Assessing the impact of the herbicide-tolerance trait (which enables use of
glyphosate herbicides) requires more than simply calculating whether more or
less pesticide will be used. Adoption of this technology changes the mix of
pesticides used in the cropping system, as well as the amounts used. In
addition, effectiveness of the insect-resistant trait is limited-i.e.,
Bt-enhanced seed only targets certain pests-and some amount of conventional
pesticide will still be used to control those not affected by the Bt toxin.
 
When pesticide mixes are changing, comparing the total number of
acre-treatments or pounds of active ingredients of different pesticide
compounds is like adding the proverbial apples and oranges. Measuring
pesticide use in pounds of active ingredient implicitly assumes that a pound
of any two ingredients has equal impact on human health and/or the
environment. However, the more than 350 active ingredients in use in
pesticides over the last 40 years vary widely in toxicity per unit of weight
and in persistence in the environment. Scaling (weighting) pounds of
pesticides applied by measures of their "toxicity/persistence"
characteristics can provide an indication or index of pesticide impact or
potential risk.
 
Data indicate that adoption of herbicide-tolerant crops leads to substitution
of glyphosate herbicides for previously used herbicides. Based on regression
results for soybeans, an estimated 5.4 million pounds of glyphosate is
substituted for 7.2 million pounds of other synthetic herbicides, such as
imazethapyr, pendimethalin, and trifluralin.
 
Glyphosate has a half-life in the environment of 47 days, compared with 60-90
days for the herbicides it commonly replaces. The herbicides that glyphosate
replaces are 3.4 to 16.8 times more toxic, according to a chronic risk
indicator based on the EPA reference dose for humans. Thus, the substitution
enabled by genetic modifications conferring herbicide tolerance on soybeans
results in glyphosate replacing other synthetic herbicides that are at least
3 times as toxic and that persist in the environment nearly twice as long as
glyphosate. 
 
Assessing change in pesticide use associated with adoption of GE crops is
confounded by the same difficulties associated with pesticide use generally.
Comparison of different mixes of pesticides involves evaluating tradeoffs
between the amounts used and the environmental characteristics, primarily
toxicity and persistence. The answer to the simple question, "Does adopting
genetically engineered crops for pest management reduce pesticide use?" lies
not just in more or less but in more or less of what.  
Ralph E. Heimlich (202) 694-5504, Jorge Fernandez-Cornejo (202) 694-5537,
William McBride (202) 694-5577, Cassandra Klotz-Ingram, Sharon Jans, and Nora
Brooks
heimlich@ers.usda.gov
jorgef@ers.usda.gov
wmcbride@ers.usda.gov
 
This article is an extension of research presented in Genetically Engineered
Crops for Pest Management in U.S. Agriculture, AER-786, April 2000.
http://www.ers.usda.gov/epubs/pdf/aer786/
 
RESOURCES & ENVIORNMENT BOX
Regression Model Controls for Differences Between Adopters & Nonadopters
 
Comparison of means is sometimes used to analyze results from experiments in
which factors other than the item of interest are "controlled" by making them
as similar as possible. For example, to compare mean yield or pesticide use
for two groups of soybean plots-one group that receives a "treatment" such as
genetically engineered crops, and another that does not-the groups would
ideally be equal in soil type, rainfall, sunlight, and all other respects. An
alternative to a controlled experiment would be randomly selecting subjects
that receive treatment and those that don't.
 
In "uncontrolled experiments" such as the analysis which compares means from
observations in farm survey data, interpretation of the results requires
caution. Conditions other than the "treatment" are not equal in farm surveys.
Factors that affect estimation results but cannot be controlled may include,
for example, irrigation, weather, soils, nutrient and pest management
practices, other cropping practices, operator characteristics, and pest
pressures. Therefore, estimated differences cannot necessarily be attributed
solely to use of the "treatment," i.e., genetic engineering technology.
 
Moreover, farmers are not assigned randomly to the two groups (adopters and
nonadopters), but make the adoption choices themselves. Therefore, adopters
and nonadopters may be systematically different, and these differences may
manifest themselves in farm performance that could be confounded with
differences due purely to adoption. This situation, called self-selection,
would bias the statistical results unless it is corrected.
 
The impacts of adopting genetically engineered (GE) crops are assessed by
using an econometric model that statistically controls for other factors that
affect pesticide use. Variables (factors) controlled for include output and
input prices, infestation levels, farm size, and management practices such as
rotation and tillage. In addition, the econometric model corrects for
self-selection to prevent biasing the results, and takes into consideration
that farmers' adoption and pesticide use decisions may be simultaneous, due
to unmeasured variables correlated with both adoption and pesticide demand,
such as the size of the pest population, pest resistance, farm location, and
grower perceptions. Finally, the model ensures that pesticide demand
functions (mathematical representations of pesticide use) are consistent with
farmers' optimization (e.g., profit-maximizing) behavior.
 
A two-stage model was developed to account for simultaneity and
self-selectivity. The first stage consists of the adoption decision model, to
examine the adoption of GE crops as well as other pest management practices
that might affect pesticide use. The adoption decision model allows
estimation of predicted probabilities of adoption, to be used as in the
second stage to account for simultaneity, as well as for correction factors
for self-selection. The second stage estimates the impact of using GE crops
on yields, farm net returns, and pesticide use. 
 

SPECIAL ARTICLE
Consolidation in Food Retailing: Prospects for Consumers & Grocery Suppliers
 
In recent years, the U.S. food retailing industry has undergone unprecedented
consolidation and structural change through mergers, acquisitions,
divestitures, internal growth, and new competitors. Since 1996, almost 3,500
supermarkets have been purchased, representing annual grocery store sales of
more than $67 billion (including food and non-food sales by supermarkets,
superettes, and convenience stores). Two of the largest food retailing
combinations in history were announced in 1998: the merger of Albertson's
(the nation's fourth-largest food retailer) with American Stores (the
second-largest), and the acquisition of sixth-largest Fred Meyer by
first-ranked Kroger Company. 
 
The recent consolidation wave has brought together food retailers operating
within and across regions. While many food retailers operate in multiple
regions, none is considered truly nationwide in scope. Of the consolidations,
the Albertson's-American Stores merger, which resulted in common ownership of
supermarkets reaching coast to coast (but not all regions), comes closest to
creating a nationwide food retailer. 
 
Widespread consolidation in the grocery industry-driven by expected
efficiency gains from economies of size-has had a significant effect on the
share of total grocery store sales accounted for by the largest food
retailers. It also raises questions about long-term trends driving these
changes and the implications for consumers and for food market suppliers such
as grower-shippers, food processors, and wholesalers. Some consumers fear
that fewer food retailers will eventually mean higher grocery prices and less
variety. Grocery suppliers worry that fewer but larger buyers could force
prices lower for products and services that food retailers purchase.
Retailers are likely to continue consolidating in order to maintain
profitability as competition for the consumer food dollar heightens. Whether
or not the current pace of consolidation continues depends, in part, on
resulting efficiency gains for large food retailers.
 
Long-Term Trends 
Drive Consolidation
 
A number of long-term trends are prompting food retailers to consolidate:
changing patterns in overall grocery sales, increased spending for prepared
foods and meals away from home, and growth of food sales by nontraditional
retailers. These trends make for a very competitive food retailing industry,
and with low inflation rates in the general economy, retailers' ability to
raise grocery store prices is limited. 
 
Food retailing is a relatively slow-growth industry, as measured by sales.
Grocery store sales, after adjusting for inflation, grew about 1 percent
annually over the 1988-98 decade-about equivalent to population growth. Over
the 6-year period 1992-98, nominal supermarket sales growth averaged 2.2
percent annually, based on research by USDA's Economic Research Service
(ERS). 
 
The share of consumers' income spent for food-at-home, purchased from food
stores and other retail outlets, continued to fall. From 1992 to 1998, the
share of disposable income devoted to food-at-home fell from 7.8 percent to
7.6 percent, continuing a long-term trend. With rising incomes, consumers
exercised their preference for convenience and time savings by purchasing
more prepared foods and meals away-from-home. Of total spending for all food,
almost 47 percent was in the away-from-home food service/restaurant sector in
1998 compared with 44.8 percent in 1992 and 40.5 percent in 1982. Growth in
food-service is somewhat underestimated in recent years because sales of
similar prepared foods sold in food stores are excluded from the tally.
 
Expansion of retail food sales by discount mass-merchandise and warehouse
club stores has provided additional sources of competition in the traditional
food retailing business. Mass merchandisers such as Wal-Mart, Kmart, and
Target, and warehouse club store operators such as Costco, Sam's (a division
of Wal-Mart), and BJ's have increased their share of retail food sales from
4.8 percent in 1992 to 7.7 percent in 1998. At the same time, traditional
food stores' share of retail food sales fell-from 84.6 to 80.1 percent of
sales. The remainder of retail food sales was accounted for by other retail
stores, mail-order outlets, and direct sales by farmers and processors.
 
The effect of slow growth in real grocery store sales (net sales growth after
adjusting for inflation) and competition from nontraditional retailer rivals
motivated grocery retailers to seek a larger share of consumers' food
dollars. In the 1980's, retailers developed new store formats to better
address the needs of specific consumer segments, ranging from warehouse
stores serving economy-minded shoppers, to organic and natural foods
supermarkets aimed at less price-conscious but more health-oriented
consumers. To address time-pressured shoppers' need for convenience, grocery
retailers introduced salad bars and prepared foods. Although many
supermarkets contained a service meat counter in the 1980's offering
sliced-to-order items, there were few prepared hot or heat-and-serve
offerings. By 1997, fully 83.6 percent of supermarkets sold prepared foods,
such as sandwiches, pizza, and pasta dishes, accounting for 4 percent of
store sales, on average. 
 
Retailers have added new products (food and nonfood) as well as services, and
have built larger stores in order to offer consumers "one-stop shopping"
convenience. At the same time, though, they have incurred increased
procurement, labor, and capital investment costs. 
 
Retailers Seek Lower Costs
 
Large grocery retailers, strongly motivated to offset the higher costs of
serving consumers, are seeking efficiency gains and lower capital investment
costs. Many of them, counting on the economies of size that come with
consolidation, have apparently opted to pursue mergers and acquisitions.
 
Consolidating food retailers often cite the potential for lower costs as an
incentive for becoming larger. These retailers believe they can decrease
costs through supply-chain management practices-coordinated activities that
generate operating, procurement, marketing, and distribution efficiencies.
Expected efficiency gains and lower investment requirements will allow them
to maintain profitability while keeping prices competitive with
mass-merchandisers, warehouse club stores, and other emerging and potential
rivals. 
 
To reduce operating costs, large retailers are centralizing management and
control at corporate headquarters. New information technologies such as
companywide satellite and Internet communication systems, and store checkout
scanner data, allow for centralization of many management activities that
previously were the responsibility of store managers. The availability of
timely and detailed information at headquarters also allows for effective
control of operations over relatively large geographic areas.
 
Consolidation of retail grocers also allows for greater efficiencies in
purchasing retail products from suppliers. When retailers can buy higher
volume from individual suppliers and distributors, they can negotiate lower
wholesale prices and in turn lower per-unit prices at the retail level while
maintaining store margins. In return, retailers are able to offer exclusive
procurement agreements, with potential benefits to suppliers and distributors
such as partnering, long-term agreements, and other strategic alliances.
Retailers also gain a more reliable source of supply and, over time, can work
to develop a higher quality and more uniform product, especially for
perishable products such as fresh meat and produce.
 
Merging retailers also credit exclusive partnerships with suppliers for
reducing costs associated with the marketing and selling functions of retail
goods. Suppliers and distributors, as a condition of the partnership, provide
additional marketing services that formerly were the responsibility of
retailers. These include in-store promotion and point-of-purchase materials,
sales-event planning and advertising, and special packaging. Some retailers
then share checkout scanner sales data with suppliers and distributors in
order to better evaluate promotions, seasonal sales differences, price
responses, and other factors of consumer demand. 
 
Consolidating retailers can also enjoy cost savings by streamlining product
distribution functions. Large retailers typically are self-distributing,
i.e., they perform wholesaling activities such as purchasing goods from
suppliers, arranging for shipment to distribution warehouses, and
replenishing store-level inventory. These large retailers can operate fewer
distribution centers and use remaining warehouses more intensively. To reduce
costs, large retailers use supply-chain management practices such as: 
 
* continuous inventory replenishment, with more frequent deliveries from
suppliers reducing retailers' storage and inventory costs;
* use of cross-docking facilities (where suppliers' single-load truck
shipments transfer directly to mixed-load trucks for shipment to stores,
bypassing warehousing;
* direct store delivery to supermarkets by suppliers; and
* selective use of specialized wholesalers. 
 
Another factor in the growth of mergers and acquisitions is the higher
capital investment costs of building new stores and establishing a customer
base, compared with purchasing existing ones through merger and acquisition.
Today's larger supermarkets and supercenters call for much higher sales
volume in order to achieve profitability. As long as 2 years may be required
to develop sales volume sufficient to achieve store profitability. But most
existing stores have already reached minimum sales requirements for
profitability, while unprofitable stores can be sold. 
 
Market Share of Key Players Increases
 
A sharp increase in the number of mergers and acquisitions, particularly
since 1996, brings increasing national concentration levels, as measured by
the share of grocery store sales accounted for by the largest 4, 8, and 20
retailers ranked nationally. Between 1992 and 1998 the share of sales for the
four largest retailers rose from 15.9 percent in 1992, to 28.8 percent in
1998. Similarly, the eight-largest retailers' share increased to 39.4 percent
in 1998, up from 24.9 percent in 1992. The largest 20 retailers' sales share
reached 48.2 percent of total grocery store sales in 1998, compared with 37
percent in 1992. 
 
Internal growth may also have contributed to increased national
concentration, most likely among the 9th- through 20th-ranked retailers that
have increased sales by opening new stores. Despite the gains in national
market shares, to date, none of the largest 20 retailers operates in all
regions of the U.S. 
 
The degree of concentration in food retailing is low when compared with other
categories of retailers and manufacturers. A number of food processing
industries are far more concentrated at the national level, with the leading
four firms accounting for higher shares of sales-e.g., 85 percent of
breakfast cereal sales, 75 percent of chocolate and cocoa product sales, 66
percent of roasted coffee product sales, and 56 percent of cookie and cracker
product sales in 1992. The leading food processors sell in national markets,
while retailers serve customers in local markets, making national market
shares less relevant. Nevertheless, year-to-year changes in national
concentration provide a measure of the net effect of internal growth, firm
consolidation, and divestitures among the largest food retailers over time.
 
Local Markets Matter to Consumers
 
While many recent consolidations shared one or more market regions, food
retailers actually compete directly within smaller geographic markets, such
as a city or town. As a result, the effect of consolidation on consumers is
related primarily to increases in local market concentration-the combined
sales of the largest firms expressed as a share of the total local market
sales. With a merger of two large supermarket firms operating in the same
local market, local sales concentrate, creating concerns about the potential
for higher prices and reduced variety. Empirical evidence relating increased
concentration to rising grocery prices is inconsistent. But in the extreme, a
single retailer in a local market would constitute a monopoly and could set
prices above a competitive norm. 
 
To study the effects of recent consolidation on consumers, ERS analyzed
changes in local market concentration for the 100 largest cities, defined by
the Census Bureau as Metropolitan Statistical Areas (MSA's). An MSA
geographic area contains a population center of 50,000 or more and typically
consists of a city and its adjacent counties. These MSA's accounted for 166.7
million people, almost 62 percent of the U.S. population in 1998. Individual
market-share data in each MSA were used to calculate the share of total
supermarket sales accounted for by the combined sales of the largest four and
eight food retailers. The study compared MSA sales concentration in 1992 and
in 1998 to capture changes in market concentration during widespread mergers
and acquisitions among large food retailers. Both four- and eight-firm
concentration shares were calculated. 
 
Four-firm concentration in 1992 ranged from 29.8 percent in
Allentown-Bethlehem-Easton, Pennsylvania, to 92.5 percent in West Palm
Beach-Boca Raton, Florida. Similarly, in 1998, least and most concentrated
MSA's were New York City (30.6 percent) and West Palm Beach-Boca Raton (95
percent). Overall, the 100 largest cities had an average four-firm
concentration of 68.6 percent in 1992, while in 1998, the four-firm share had
increased to an average 72.3 percent of MSA supermarket sales. In comparison,
the eight largest supermarket retailers held a share of sales averaging 80.8
percent in 1992, increasing to 85 percent in 1998. 
 
These results indicate only modest increases in local market concentration
compared with the sharp rise in national concentration-3.7 percentage points
in the average four-firm MSA concentration over the 6-year period, and 4.2
percentage points among the eight-firm share average between 1992 and 1998.
Most recent mergers have had little impact on local consumer markets because
there were relatively few instances of overlapping markets among the merging
or acquired firms.
 
Among safeguards protecting consumers is public policy designed to preserve
competition. Following merger guidelines and other criteria, antitrust
agencies (the Federal Trade Commission or the Department of Justice) have
required divestiture of stores in overlapping markets that would otherwise
have the effect of raising market concentration or substantially eroding
competition. 
 
The FTC consent agreement in the Albertson's-American Stores merger required
the divestiture of 104 Albertson's supermarkets and 40 American Stores
supermarkets operating in 57 cities and towns located in California, Nevada,
and New Mexico. Sale of these stores provided opportunities for smaller
competitors to purchase the divested supermarkets and compete in those
markets. 
 
Such extensive government intervention is not always needed, however. The
merger of Kroger and Yucaipa/Fred Meyer, for example, resulted in very few
divestitures, because of the minimal number of overlapping regions and local
markets involved. 
 
Product Suppliers Adjust to Consolidation
 
Large, self-distributing retailers accounted for about half of the $458
billion in retail sales by food stores and mass-merchandiser supercenters in
1998. These large firms operate their own warehouses, trucking fleets, and
buying offices, enabling them to negotiate directly with grocery suppliers.
Consolidation among these retailers, as they become fewer but make
higher-volume purchases, has concentrated direct procurement of food and
nonfood products. 
 
As more retailers adopt supply-chain management practices for product
procurement and distribution, concerns arise that competition may diminish
substantially. Grocery product suppliers may face fewer but larger volume
buyers of their products and commodities as consolidated food retailers
reduce the number of buying offices and combine orders in order to obtain
price concessions and other procurement efficiencies. Grocery suppliers have
cited new marketing and trade promotion practices, such as slotting
allowances (lump sum payments to a retailer as a precondition for sale) and
performance requirements and fees such as charges for special advertising and
promotions, as evidence that suppliers may be disadvantaged in bargaining
with large retailers. Suppliers of branded products may justify such fees and
allowances as necessary to compete with similar brands for retailers'
valuable shelf space. 
 
Grocery suppliers will be challenged to meet the needs of retailers that
adopt supply-chain management practices. Many smaller grocery suppliers may
conclude that by forming joint ventures and cooperatives of their own, they
are better able to meet the procurement and marketing demands of large
retailers. Other small supplier firms are seeking niche markets for a limited
range of product offerings, such as specialty fruits and vegetables, or
organically grown products, in order to meet the procurement needs of all
sizes of retailers. 
 
Through growth of the Internet and proliferation of online services, smaller
suppliers are now able to locate buyers through a growing number of virtual
marketplaces. These online marketplaces offer access to buyers that
previously were difficult and costly to identify. Virtual sites such as
Buyproduce.com are open to all buyers and sellers, while producer groups such
as Farmconnect.com, a Minnesota-based farm cooperative, offer value-added
commodities to all types of buyers. In the future, Internet-based
marketplaces will provide more alternatives to grocery products suppliers
that are too small or otherwise unable to meet the requirements of large
retail buyers.  
Phil R. Kaufman (202) 694-5376
pkaufman@ers.usda.gov
 
     
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