AGRICULTURAL OUTLOOK                                   September 21, 2000
October 2000, ERS-AO-275
               Approved by the World Agricultural Outlook Board
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CONTENTS

IN THIS ISSUE 

BRIEFS
Livestock, Dairy, & Poultry: Decline in Cattle Inventory to Continue
Food Marketing: Food Price Inflation to Remain Low

COMMODITY SPOTLIGHT
Corn Production & Use to Hit Record Highs 

WORLD AG & TRADE
U.S. Ag Exports to Edge Higher in Fiscal 2001

POLICY
U.S. Farm Program Benefits: Links to Planting Decisions & Agricultural
Markets

How Important Are Farm Payments to the Rural Economy?

Current Tax Policy vs. a Flat Tax:  Effects on U.S. Agriculture

SPECIAL ARTICLE 
Taiwan's Hog Industry--3 Years After Disease Outbreak


IN THIS ISSUE

Corn Production & Use to Hit Record Highs 

Record U.S. corn production is forecast for 2000, with higher acreage
planted and record yields. Anticipated record-high domestic demand and
bright prospects for exports will limit the stocks gain. Nevertheless,
ending stocks are expected to be the highest since 1987/88, and market
prices will remain weak. Expanding world corn trade (to the highest level
in over a decade), combined with low U.S. corn prices and reduced
competition from China and Eastern Europe, is expected to result in a sharp
increase in U.S. share of world exports. Allen Baker (202) 694-5290;
albaker@ers.usda.gov 

U.S. Ag Exports to Edge Higher in Fiscal 2001

The value of U.S. agricultural exports will climb in fiscal 2001, for the
second year in a row, according to USDA projections. Exports should
increase to $51.5 billion--2 percent over revised estimates for fiscal
2000--marking a continuing upswing since the Asian financial setbacks of
1997--99. A rise in volume (quantity) accounts for much of this gain, as
large global supplies of many commodities are expected to keep prices
relatively low. Exports of high-value products (HVP's)--that is, all
agricultural exports other than bulk commodities--are projected up just 0.6
percent to $33 billion, reflecting projected gains in horticultural
products and soybean oil.  Increased demand for U.S. agricultural exports
reflects favorable economic conditions worldwide. Also, the dollar is
expected to depreciate against the euro, yen, and Canadian dollar, making
U.S. exports more competitive in developed country markets. Carol Whitton
(202) 694-5287; cwhitton@ers.usda.gov

Food Price Inflation to Remain Low in 2000 & 2001 

Consumers continue to see only modest increases in food prices, with the
Consumer Price Index (CPI) for all food forecast to rise 2.3 percent in
2000 and 2-2.5 percent in 2001.  This follows increases of 2.2 percent in
1998 and 2.1 percent in 1999. In 2000, generally lower prices for fruits,
due in part to a rebound in citrus output, are offsetting higher prices for
red meat that result from strong demand. Modest increases are forecast for
most food categories next year.  Annette L. Clauson (202) 694-5389;
aclauson@ers.usda.gov

Farm Program Benefits Affect Planting Decisions & Ag Markets

Direct government payments, topping $20 billion in 1999 and forecast even
higher in 2000, have boosted farm income during the last 2 years, but
effects on resource allocation and agricultural markets vary across
programs. USDA's Economic Research Service analyzed four farm programs--
production flexibility contracts, crop insurance, marketing loans, and
disaster assistance--to explore effects on agricultural markets of program-
related economic incentives that may alter production decisions. Among the
findings was that production flexibility contract payments create a small
incentive to increase aggregate production, with the mix of crops planted
based on market signals. Crop insurance and marketing loans create direct
incentives to expand production of specific commodities by increasing
expected returns. Ad hoc disaster assistance may have some influence on
production decisions if producers have expectations of future assistance
based on past government actions. Paul C. Westcott (202) 694-5335;
westcott@ers.usda.gov

Farm Payments & the Rural Economy

Government support for the farm sector is frequently linked by advocates of
farm program payments to survival of rural communities. In the past decade,
about 8 of every 10 dollars in Federal direct farm payments went to farms
in nonmetropolitan (nonmetro) counties. The payments smooth farm income
fluctuations resulting from swings in commodity prices, and inject cash
that supports other rural businesses.  But farm program payments are a
small fraction of what the Federal government spends in rural areas. In
1998, per capita Federal spending in nonmetro counties totaled $4,725,
including only $182 for farm payments. Nevertheless, government payments
may play a significant role in some local economies, particularly the 556
nonmetro counties identified as "farm-dependent" because of the importance
of farm income there. In farm-dependent counties, farm payments were much
higher--$937 per capita--but still less than one-fifth of $5,369 in per
capita Federal spending. Fred Gale (202) 694-5349; fgale@ers.usda.gov 

Taiwan's Hog Industry--3 Years After Disease Outbreak

The highly contagious foot-and-mouth disease (FMD) that hit Taiwan's
densely packed hog farms in 1997 is under control. The outbreak ravaged
Taiwan's hog industry, eliminating Japan's single largest source of
imported pork, and creating a marketing opportunity for other exporters,
including the U.S. Taiwan's authorities have taken advantage of the FMD
crisis to address generally the problems of hog farming on the island. Even
before the FMD outbreak, official policy aimed to reduce the number of
hogs, because raising hogs posed a serious environmental hazard to this
land of limited water resources and more than 20 million people. Taiwan's
hog farmers are not expected to reclaim their lucrative pork export market
in the near future, mainly because Taiwan remains a listed FMD-infected
area. Another fundamental problem for Taiwan's hog industry is the high
cost of production--in part because all feed ingredients must be imported--
that makes Taiwan vulnerable to import competition. Sophia Huang (202) 694-
5225; shuang@ers.usda.gov

BRIEFS
Livestock, Dairy, & Poultry: Decline in Cattle Inventory to Continue

The decline in cattle inventories that began in 1996 is likely to continue
at least through 2001. Cattle and beef cow inventories were both down 1
percent from a year earlier on July 1, with beef cow replacement heifers
down 2 percent. Although beef cow slaughter is down, the number of heifers
retained for breeding and the number of heifers calving and entering the
cow herd continue to decline. Large numbers of heifers were placed on feed
rather than retained for the breeding herd in 1999 and were slaughtered in
first-half 2000. Although cattle prices are attractive, drought has
resulted in producers continuing to place many heifers in feedlots, which
will add to beef supplies early next year. Before the cattle inventory can
start to stabilize, heifer retention has to begin--a process that will not
be underway until 2001.

Poor pasture-range conditions due to drought in the South and West have
been forcing lighter weight cattle into feedlots since early summer. During
August, drought conditions worsened in these areas and spread into the
Central Plains. From early August to mid-September, the share of pasture
and range conditions rated (poor) (very poor) increased dramatically in
several states: Arkansas (from 13 percent to 78), Kansas (from 27 percent
to 64), Missouri (from 16 percent to 56), and Oklahoma (from 6 percent to
51). In Texas, which has the largest beef cow inventory, the share
increased from 51 percent to 76.

Feeder cattle supplies outside feedlots and available for grazing programs
and placement on feed continue to decline--supplies outside feedlots on
July 1 were down nearly 3 percent from a year earlier. Dry pasture
conditions forced early weaning of this year's calf crop, and many were
placed on feed given the attractive grain prices. Prices for feeder cattle
(600-650 pounds) averaged $94 per cwt in August, $12 above a year earlier,
while corn prices averaged $1.48 per bushel, down $0.27.

Cattle-on-feed inventories for feedlots with over 1,000 head of capacity on
September 1 in the historic seven-states were up 10 percent from a year
earlier and 16 percent above 2 years ago. Feedlot placements during August
remained record large, while feedlot marketings rose 8 percent. The largest
increases were in the under-700-pound category as drought forced early
weaning of calves. In July, many cattle weighing over 800 pounds may have
been heifers that producers had originally intended to retain for the
breeding herd. Large numbers of lightweight stocker cattle have been
imported from Mexico to supplement declining U.S. inventory of feeder
calves.

Beef production will set another record in 2000 as slaughter weights are
sharply above last year's record and continued large numbers of feedlot
placements of 800+ pound cattle add to already large supplies. Production
will likely rise 1-2 percent this year from the 1999 record. Cow slaughter
continues to decline, but steer and heifer slaughter remains large.

Production in first-half 2001 continues to be revised upward as more cattle
are forced into feedlots, but second-half production estimates for next
year are pulled back to compensate for larger first-half marketings. Fewer
calves are likely to be placed on fall-winter grazing programs unless
forage conditions improve quickly. Low grain prices and continued strong
fed-cattle prices (though declining seasonally) are encouraging large
feedlot placements. Fed-cattle marketings may decline very little until
second-half 2001 and only then if grazing conditions this fall begin to
improve. First-half beef production is likely to decline 2-3 percent from a
year earlier, while second-half production may decline 5-9 percent.
Improved forage conditions and stronger heifer retention for breeding could
pull 2001 production down even more. 

Fed-cattle prices began to stabilize in late August through mid-September
following early August lows as the market began absorbing larger supplies
of higher quality beef. The price spread between Choice and Select beef
declined from near $15 per cwt in May-June to $4 in August. The market is
now testing just how much additional demand exists for higher quality beef
in the hotel-restaurant-export market and how much could be sold through
typical retail outlets as supplies become available. The Choice-Select
spread widened to $6 in early September. Fed-cattle prices averaged in the
mid-$60's this summer, and are expected to rise to the upper $60's this
fall and into the $70's in 2001.  Ron Gustafson (202) 694-5174
ronaldg@ers.usda.gov


BRIEFS
Food Marketing: Food Price Inflation to Remain Low

Consumers continue to see only modest increases in food prices. The
Consumer Price Index (CPI) for all food is forecast to increase 2.3 percent
in 2000 and 2-2.5 percent in 2001. This follows increases of 2.2 percent in
1998 and 2.1 percent in 1999. With 8 months of CPI data already collected
in 2000, the annual average food CPI is 2.1 percent above the first 8
months of 1999. The inflation rate for the all-items CPI is forecast to be
3.2 percent in 2000, after increasing 2.2 percent in 1999.

Higher energy prices have not yet translated into higher food prices in
2000. This is largely due to the fact that transportation and energy costs
are fairly small components of the total food marketing bill, which is 80
cents for every dollar spent by consumers on food. Transportation costs are
4 cents and energy costs are 3.5 cents of the marketing bill. However, if
higher energy costs persist for the remainder of the year and the inflation
rate remains over 3 percent, the forecast increase of 2.1 percent for all
food could inch up another 0.2 percentage point. 

The at-home component of the food CPI is forecast up 2.2 percent in 2000
and 2-2.5 percent in 2001. The away-from-home component is expected to
increase 2.3 percent in 2000 and 2.5-3 percent in 2001. Gains in this
component are held down by competition among restaurants, fast-food
establishments, and take-home meals offered by supermarkets.

Food price changes are key in determining what proportion of income
consumers spend for food. In 1999, 10.4 percent of household disposable
income went for food with 6.2 percent for food at home and 4.2 percent for
food away from home--down from 10.5 percent in 1998. This downward trend is
expected to continue in 2000 and 2001.

Meats. Total red meat supplies are expected to be 51.3 billion pounds in
2000, slightly above the1999 level. In 2001, red meat supplies will be down
to an estimated 50.2 billion pounds, with beef supplies expected to fall to
29 billion pounds and pork to increase slightly to 20.6 billion pounds.
Poultry producers have benefited from low feed costs, and record poultry
supplies (38.8 billion pounds) are expected next year. A booming economy
continues to fuel demand for meat products, and overall meat prices are up
5.6 percent in 2000. Large meat supplies will limit the gain to 1-2 percent
next year.

Beef and veal. The CPI for beef is expected to increase 1-2 percent in
2001, after increasing a forecast 5.6 percent in 2000. The 2000 increase
will be the largest annual increase since 1990, when the beef CPI increased
nearly 8 percent. Domestic beef supplies are likely remain large in the
fourth quarter of 2000, but will tighten over the next couple of years. The
cattle inventory has been declining since 1996. With smaller supplies and
higher prices, consumption is expected to decline to 66 pounds per capita
in 2001. 

Pork. Following two consecutive record years, pork production is expected
to fall to 18.9 billion pounds in 2000. With pork production down about 3
percent, retail pork prices are forecast up about 7.1 percent in 2000. Hog
producer returns are more favorable than in 1998 and 1999, and with
continued positive returns in the coming months, pork production is
expected to increase to 19.1 billion pounds in 2001, up about 1 percent in
2001. Retail pork prices are expected to increase 1-2 percent.

Poultry. The CPI for poultry is forecast up 1.3 percent in 2000, with
another small increase of up to 1 percent expected in 2001. Broiler meat
production is expected to increase 5 percent to 32 billion pounds in 2001,
and turkey production is forecast up 1 percent. Large supplies of red meat
have been an important factor in overall meat prices in 2000, as broiler
production increases slowed down in the second half of 2000. Also, exports
in the fourth quarter are expected to be lower than a year ago.

Fish and seafood. The CPI for fish and seafood is forecast up 3 percent in
2000, with an expected 2-3 percent gain in 2001. A strong domestic economy
is boosting sales in the restaurant and foodservice sectors in 2000. Higher
away-from-home sales are especially beneficial to seafood demand, as a
growing share of total seafood sales is made in this sector. More than 50
percent of the fish and seafood consumed in the U.S. is imported, with
another 20-25 percent from U.S. farm-raised production.

Eggs. The CPI for eggs is forecast to fall 0.3 percent in 2000,but rise as
much as 1 percent in 2001. Egg production is forecast to increase more than
2 percent in 2000, lowering both wholesale and retail egg prices. Growth in
table egg production is expected to slow to 1 percent in 2001. Higher
production levels and slower growth in exports have led to lower retail
prices the past 4 years. Per capita consumption is expected to reach 260
eggs in 2000 and 2001, up from 256 eggs per person in 1999. 

Dairy products. Strength of the general economy and higher consumer incomes
(a 5.6-percent increase in 1999) continues to push demand for dairy
products, but growth in milk production (3-percent projected rise) is
limiting gains in retail prices for milk and dairy products in 2000. The
CPI for dairy products is expected to increase 0.9 percent in 2000 and 1-2
percent in 2001. Milk production is expected to be up less than 1 percent
in 2001, although milk cow numbers are expected to decline slightly. Strong
consumer demand for dairy items, especially gourmet ice cream, cheese, and
butterfat products, is expected to continue into 2001. Other key demand
factors include increased spending for away-from-home eating and the
willingness to pay for convenience and other forms of commercial food
preparation.

Fresh fruits. A December 1998 freeze in California resulted in higher
retail prices in 1999 for navel oranges (up 49 percent) and Valencia
oranges (up 44 percent), and contributed to an 8-percent gain in the fresh
fruit index for the year. The 1999/2000 crop rebounded in California, and
the CPI for fresh fruits is forecast down 3.7 percent in 2000. For the
first 8 months of 2000, retail prices are lower for navel oranges (down 32
percent), Valencia oranges (down 30 percent), grapes (down 8 percent),
peaches (down 11 percent), and strawberries (down 8 percent). With
continued U.S. consumer demand for fresh fruits and normal production
levels for major fruits in the U.S., the fresh fruit CPI is forecast to
increase 2-3 percent in 2001.

Fresh vegetables. Fresh-market production will likely decline about 1
percent in 2000 as growers have reduced acreage in response to financial
losses caused by lower grower prices the year before. California,
accounting for 50 percent of this year's summer-season area, reduced
acreage 3 percent. New York, the second leading summer-season producer,
with 11 percent of acreage, expects to harvest 10 percent less than a year
ago due to an unusually cool, wet spring. Prospective U.S. summer area was
the same or lower for many vegetables, except for carrots (up 11 percent),
cabbage (up 6 percent), cauliflower (up 5 percent), honeydew melons (up 3
percent), and tomatoes (up 2 percent). But market volume may not be down
much from a year earlier due to higher yields expected in California and
the likelihood of improved yields in the eastern U.S. With production down
slightly and strong demand for fresh vegetables, the fresh vegetable index
is forecast up 4.4 percent in 2000. Assuming normal production levels for
major fresh vegetables in 2001, the fresh vegetable CPI is forecast to
increase 2-3 percent in 2001. 

Processed fruits and vegetables. Adequate supplies of most fruits and
vegetables for processing is expected to limit the CPI increase for
processed fruits and vegetables to 1.1 percent in 2000 and 2-3 percent in
2001. 

Sugar and sweets. Domestic sugar production for 1999/2000 is estimated at a
record 9.1 million tons, more than 700,000 tons larger than production the
previous fiscal year. Low prices for soybeans, corn, wheat, barley, and
rice have reduced producer returns for these alternative crops, leading to
increases in acreage for sugar crops. Large supplies are also expected in
2000/01. Relatively low inflation, along with increased production and
lower retail prices for selected sugar-related food items is expected to
limit the sugar and sweets index increase to only 1.6 percent in 2000 and
1.5-2.5 percent in 2001.

Demand for sugar and sugar-related products continues to increase. Per
capita consumption of caloric sweeteners is expected to increase almost 20
pounds per person from 1990 to 2000, due in part to a dramatic drop in
inflation-adjusted retail prices, from 33 cents per pound to 26 cents.
During this 10-year period, the retail price for white sugar stayed almost
constant, averaging about 43 cents per pound.

Cereal and bakery products account for a large portion of the at-home food
CPI--almost 16 percent. With grain prices lower this year and inflation-
related processing costs modest, the CPI for cereals and bakery products is
forecast to increase 2 percent in 2000. Most of the costs to produce cereal
and bread products--more than 90 percent in most cases--are for processing
and marketing, with grain and other farm ingredients accounting for a
fraction of the total cost. With competition among producers and consumer
demand for bakery products expected to remain fairly strong, the CPI is
forecast up 2-3 percent in 2001.

Nonalcoholic beverages. The CPI for nonalcoholic beverages is forecast up
2.7 percent in 2000 and is forecast to increase another 2-3 percent in
2001. Coffee and carbonated beverages are the two major components,
accounting for 28 and 38 percent of the nonalcoholic beverages index.
Retail prices have been higher in 2000 for ground roast coffee (up 3
percent) and soft drinks (up 4 percent). World coffee production in 2000/01
is a forecast record 108.7 million 60-kilogram bags, nearly 2 percent above
last year's level and 570,000 bags above the previous record coffee crop in
1998/99. Up to 80 percent of U.S. imports are arabica beans along with 15-
20 percent robustas, which go mainly to soluble (instant) coffee or are
blended with arabicas. Recent near-record production in Brazil, the largest
producer of arabica beans, should lead to larger U.S. stocks and continued
moderate consumer prices.  
Annette L. Clauson (202) 694-5389
aclauson@ers.usda.gov


COMMODITY SPOTLIGHT
Corn Production & Use to Hit Record Highs 

Record U.S. corn production is in the forecast for 2000, with higher
acreage planted and record yields. Anticipated record-high domestic demand
and bright prospects for exports will limit the stocks gain. Nevertheless,
ending stocks are expected to be the highest since 1987/88, and market
prices will remain weak.

Ideal spring weather encouraged U.S. farmers not only to plant corn earlier
than usual, but also to seed more acres than they had anticipated in March.
(In much of the corn-producing area, though, soils were dryer than usual
early this spring, which had caused concern.) By mid-May, farmers had
planted 91 percent of the crop, compared with 70 percent last year and a
62-percent average over the previous 5 years. The 79.6 million acres
estimated in the June 2000 Acreage report was up 1.7 million acres from the
March Prospective Plantings report and 2.1 million acres above 1999. 

Favorable weather conditions prevailed through the summer in most major
producing areas, and average yield in 2000 is forecast at a record 141.8
bushels per acre, up from 133.8 bushels last year and from 1994's previous
record of 138.6 bushels. Total corn production in 2000 is forecast at 10.4
billion bushels, up from 9.4 billion in 1999. With more stocks on hand at
the beginning of the period, total supply in 2000/01 is expected to exceed
1999/2000 by 8 percent. 

Demand Remains Strong

For 2000/01, USDA forecasts an all-time high of 7.7 billion bushels for
domestic use of corn as livestock feed and for food, seed, and industrial
use--up 2 percent from that expected in 1999/2000 (the season begins
September 1).

Grain-consuming animal units in 2000/01 are projected to increase 1 percent
from the 89 million units in 1999/2000. Dairy, poultry, and hog numbers are
expected to rise slightly from a year earlier, but cattle on feed may
decline in 2001. 

Corn use by the poultry and hog industries should remain strong in 2000/01,
given their prospective increases in production. Compared with projections
for this year, production in 2001 is expected to rise 4 percent for
broilers, 1 percent for turkeys, and 1 percent for eggs. Pork production is
projected up 1 percent.

Milk producers, encouraged by weak corn prices, are expected to maintain
heavy grain feeding and keep demand for corn strong, even though milk
prices may be weaker in 2001. Milk production is projected at 167.5 billion
pounds in 2001, down slightly from 2000. 

Projected beef production for 2001 is 25.5 billion pounds, down 5 percent
from 2000. The expected decrease suggests that need for feed by beef
feedlots may weaken in 2001.

With long-term demand based on a growing U.S. population, corn demand for
food, seed, and industrial uses will remain strong, up 3 percent from
1999/2000 to 2 billion bushels. In foods, corn products are used mainly in
corn syrup and other sweeteners, cornstarch, corn chips, and cereals.
Industrially, corn is used to produce ethanol, starch for home-building
products, and alcohol for external use.

In 1999/2000, total use of corn in sweeteners is projected up 2 percent
from 1998/99. High-fructose corn syrup (HFCS)--used principally in soft
drinks--is expected to rise 2 percent in 1999/2000 (up from 530.5 million
bushels in 1998/99) and another 2 percent in 2000/01. Weaker sugar prices
and a decline in HFCS exports may have limited this year's increase. Net
corn sweetener exports in corn equivalents for September 1999--June 2000
were down 1 percent from the same period a year earlier, partly because of
ongoing negotiations with Mexico over U.S. HFCS shipments--recently subject
to increased tariffs--and U.S. sugar imports. 

Corn used to make glucose and dextrose in 1999/2000 is projected up 3
percent from 219 million bushels in 1998/99 and is expected to rise 2
percent in 2000/01. Glucose and dextrose use has bounced back from a
decline in 1998/99, as these sweeteners have found their way into more
foods.

Ethanol use, contrary to normal seasonal declines, remained strong in the
summer of 2000 because of the high price of gasoline and of methyl tertiary
butyl ether (MTBE), another oxygenate used in motor vehicle fuels to make
them burn more cleanly. Consequently, corn used to make ethanol is expected
to rise 8 percent in 1999/2000 (up from 525 million bushels in 1998/99),
and 5 percent in 2000/01 (up from an expected 570 million bushels in
1999/2000). MTBE competes with ethanol/alcohol use in reformulated
gasoline, as both alcohol and MTBE enhance octane. In fact, processing
plants are being built or planned in anticipation of a substantially
greater demand for ethanol. 

Corn used to make alcohol for beverages and for manufacturing purposes was
up 2 percent in 1999/2000 from the 127 million bushels in 1998/99 and is
predicted to rise slightly in 2000/01. Low corn prices have kept the cost
of producing alcohol (used in rubbing alcohol and aftershave, for example)
competitive with alternatives, and population growth should increase
demand. Corn for cereals and other food products is expected to rise 3
percent in 2000/01, up from 185 million bushels in 1999/2000.

Corn used in producing starch in 1999/2000 rose 4 percent (up from 240
million bushels in 1998/99). The use of starch to make products such as
paper and wallboard generally increases when the economy is strong, as it
is now. Even though home construction is slowing in response to higher
interest rates, corn use for starch products is projected to rise 2 percent
in 2000/01. 

Loan Deficiency Payments 
To Offset Corn Price Drop

Even though corn use should reach record highs in 2000/01, corn prices are
likely to be weak as a result of large U.S. stocks. Farmers can expect to
sell their corn for  $1.50 to $1.90 per bushel, compared with an expected
$1.80 in 1999/2000. This contrasts with an average of $2.52 per bushel in
the previous 5 years. It was for just such a contingency that assistance
programs were written into the 1996 Farm Act. 
Key provisions are nonrecourse marketing assistance loans and loan
deficiency payments (LDP's), both available to producers who entered into
production flexibility contracts with USDA.

Nonrecourse marketing assistance loans provide interim financing to
eligible producers of feed grains and other commodities covered by the
program and provide income support when prices are low. Corn used as
collateral may be forfeited to USDA's Commodity Credit Corporation at
maturity, or loans may be repaid at the lesser of the loan rate plus
accrued interest or at the local price (referred to as the posted county
price). As of September 20, 2000, feed grain producers had outstanding
loans on 20 million bushels of 2000-crop corn as collateral and 244 million
bushels on 1999-crop. The value of the outstanding loans totaled $40
million for 2000, and $441 million for 1999.

If local prices (as calculated by USDA's Farm Service Agency) are below the
county loan rate, eligible producers may opt for an LDP in lieu of a loan.
As of September 20, 2000, eligible producers had collected $94 million in
LDP's for 2000-crop corn (including silage), covering 217 million bushels
or about 2 percent of the crop; the average payment rate was 44 cents per
bushel. For the 1999 crop, eligible producers collected nearly $2 billion
in LDP's, covering about 77 percent of the crop; the average payment rate
was 27 cents per bushel. 

U.S. Corn Exports 
To Rise Sharply in 2000/01 

U.S. corn exports are forecast up 250 million bushels in 2000/01, to 2.175
billion. Expanding world corn trade (to the highest level in over a
decade), combined with low U.S. corn prices and reduced competition from
China and Eastern Europe, is expected to result in a sharp increase in U.S.
market share. Increases in corn exports from the two other major exporters,
Argentina and South Africa, are expected to be relatively 
small.
 
Reduced export competition for the U.S. stems partially from drought damage
in the critical growing areas of northeastern China and from a prolonged
period of dry conditions and very high temperatures in Eastern Europe,
which reduced that area's corn production by 36 percent. The main corn
growing areas of Romania, Hungary, Bulgaria, and the former Yugoslavia were
particularly hard hit. The amount of planted area in China also declined,
the result of reduced price supports and strong prices for soybeans.
China's corn production is forecast down 10 percent from a year ago.

The jump in the U.S. corn crop is largely offset by sharp drops in China
and Eastern Europe. Nevertheless, world corn production in 2000/01 is
forecast to reach a record 607 million tons because of gains in the
European Union (EU) and Brazil. Generally favorable growing conditions are
expected to generate record yields in the EU, while strong prices expand
area in Brazil. 

In 2000/01, world corn consumption is projected at a record 607 million
tons, growing at the same rate as production (1 percent) but well under the
3 percent seen in 1999/2000. 

Where national economies are sluggish and where country-specific adverse
conditions exist, declines in corn use are predicted. In Japan, the world's
largest importer of corn, a decline in corn use is expected to continue as
meat imports rise, and use is also expected to drop in South Korea, where
disease problems will limit hog production. Stumbling economies in Sub-
Saharan Africa and the former Soviet Union are expected to keep growth in
corn use stagnant. In Eastern Europe, predictions are for foreign exchange
constraints and sharply reduced grain production to cut short a nascent
rebound in the livestock sector, reducing corn consumption.

In Latin America, after 4 years of stagnation, corn consumption will resume
its normal upward trend as the economy improves. Economic growth is also
expected to boost corn feed use in South Asia, Southeast Asia, and China.
EU corn consumption is expected to expand--exceeding 40 million tons for
the first time in 20 years--despite large supplies of feed wheat. Drought
in North Africa and parts of the Middle East is anticipated to combine with
high barley prices to push corn imports and consumption up in these
regions. Now that several years have passed since Taiwan's swine herd was
decimated by foot-and-mouth disease (see Special Article), Taiwan's corn
consumption has risen in 1999/2000 and is expected to continue to grow
slowly in 2000/01. 

World corn ending stocks are expected to remain nearly unchanged in
2000/01, at 128 million tons--the largest volume since the 1985-87 period
when U.S. government stocks were huge. More of the global corn stocks in
2000/01 will be concentrated in the U.S., as foreign corn stocks drop by 12
million tons (to 71 million), mostly the result of reduced stocks in China,
compounded by lower stocks in Eastern Europe. At projected levels, large
U.S. stocks will continue to put downward pressure on U.S. corn prices in
2000/01.  
Allen Baker (202) 694-5290 and Edward Allen (202) 694-5288 
albaker@ers.usda.gov 
ewallen@ers.usda.gov 

COMMODITY SPOTLIGHT BOX
New Estimates for China's Corn Stocks & Use

In August, USDA revised China's supply-and-use balances for corn,
significantly lifting estimates of the country's ending stocks for the
period 1995/96 through 2000/01, based on statements by various Chinese
officials. (China does not publish official grain stocks data.) In
addition, price levels in China indicate stocks are not as tight as USDA
data previously indicated. Historical production and trade data are
official Chinese data and were not revised, but USDA's estimates of use
have been reduced. Revised estimates reflect strong but slower growth in
China's corn feed use from 1995/96 to 2000/01, averaging 3.9 percent per
year.


WORLD AG & TRADE
U.S. Ag Exports to Edge Higher in Fiscal 2001

In 2001, for the second year in a row, the value of U.S. agricultural
exports will climb, according to USDA projections. Exports should increase
2 percent over revised estimates for fiscal 2000, to $51.5 billion, marking
a continuing upswing since the Asian financial setbacks of 1997--99. A rise
in volume (quantity) accounts for much of this gain, as large global
supplies of many commodities are expected to keep prices relatively low,
especially for bulk commodities (with the exception of cotton).

Continued strong world economic growth and resultant higher global demand
for U.S. agricultural products should help boost export volume overall,
with most of this gain in corn and wheat shipments. USDA anticipates the
largest export volume of bulk commodities since fiscal 1995--121.9 million
tons. A predicted 4.5-percent gain in the dollar value of bulk exports in
fiscal 2001 over 2000--to $18.5 billion--mainly reflects the anticipated
increase of 9.5 million tons in the volume of bulk commodities exported. 

Exports of high-value products (HVP's)--that is, all agricultural exports
other than bulk commodities--are projected up just 0.6 percent to $33
billion. Horticultural products and soybean oil are projected up,
offsetting a reduction in livestock, poultry, and dairy products. The share
of HVP's in total U.S. agricultural exports is likely to drop 1 percent
from 2000, to 64 percent. 

Demand for U.S. agricultural exports is expected to increase, reflecting
favorable economic conditions worldwide. Expansion of gross domestic
product (GDP) in the European Union (EU) will likely slow but should remain
healthy in 2001, at above 3 percent. The rate of GDP growth in Japan, a
country still experiencing poor financial-sector performance, is projected
to reach 2 percent in 2001, a gain from 2000. Even though the rate of GDP
growth in the U.S. will likely slow from its 2000 pace, it should still
register at the relatively high rate of 3.5 percent.

The dollar is expected to appreciate against currencies of most developing
countries in 2001, including the Mexican peso. The dollar is expected to
depreciate against the euro, the yen, and the Canadian dollar, which would
make U.S. exports more competitive in developed country markets. An overall
trade-weighted decline in the dollar exchange rate, together with continued
low domestic commodity prices, should boost U.S. trade competitiveness in
2001.

Fiscal 2001 U.S. agricultural imports are expected to rise to $39.5
billion. Although more modest in magnitude than in recent years, this is
the fourteenth consecutive projected import gain. Reining in import
increases will be slower U.S. economic growth in fiscal 2001 and a buildup
of domestic supplies. Most of the gain in imports is projected to occur in
horticultural products--fruits, vegetables, and wine and malt beverages--
which should see higher import volume as well as higher import prices. A
small gain in animal product imports is also forecast. These commodities
tend to respond to U.S. economic growth which, while slowing, will still be
strong in 2001. With larger growth in exports than in imports, the U.S.
agricultural trade surplus will advance 4 percent to $12 billion--a fairly
low trade surplus for the U.S. and well below the fiscal 1996 record. 

Gains in Volume 
Push Up Bulk Value 

Bulk commodities will account for 36 percent of total U.S. agricultural
exports, up from 35 percent in 2000. Export volume of corn, wheat,
soybeans, and cotton is projected to rise, pushing up the export value of
each commodity except soybeans (soybean prices are forecast lower). 

Corn will account for two-thirds of the projected gain in export volume for
2001. But exports of other coarse grains, particularly sorghum, are
expected to decline, holding down overall volume growth in coarse grain
exports. Corn exports will be buoyed by reduced export competition from
China and Eastern Europe and by stronger global demand. China's 2001 corn
production is forecast down 10 percent, and its prospective exports have
been cut by more than half. 

Much of the increase in wheat export value will also result from gains in
volume, as U.S. wheat stocks are expected to remain high and thus to
depress prices. Export volume is forecast up as drought reduces output in
North Africa and as production falls in Iran and China. Also boosting U.S.
wheat exports is an expected decline in export competition from Eastern
Europe. 

U.S. rice exports are projected slightly below both the volume and value of
2000. Strong export competition will limit U.S. export volume, while large
exportable global supplies will keep prices low and hold down export value.
All the major Asian exporters--China, Thailand, Vietnam, India, and
Pakistan--are expected to increase exports in 2001. An expected smaller,
but still large, 2000/2001 U.S. rice crop will also tend to lower U.S.
exports.

China's rising demand for soybean imports will play a major role in pushing
up fiscal 2001 U.S. soybean exports. However, rising global soybean
supplies from the record production projected for the U.S., Argentina, and
Brazil will weaken prices, and U.S. soybean export value is expected to
fall. Both Brazil and Argentina, however, continue to export mainly soybean
meal rather than soybeans, so export competition will not rise
substantially.

Projections are for U.S. cotton exports in 2001 to continue recovering from
the dismal 1998/99 season. Higher U.S. production should contribute to
gains in both export volume and export value. Strong global demand for
cotton will be a major factor in 2001, as world economies continue to
recover. Imports are expected to rise in several major U.S. cotton markets
whose economic growth prospects are particularly attractive--China, Mexico,
Southeast Asia, Turkey, and the EU. Additionally, a decline in export
competition is anticipated, as reduced exports are forecast for China,
Pakistan, and Central Asia.

Slower Growth in 
HVP Exports Projected 

USDA forecasts total U.S. exports of high-value products in 2001 at $33
billion, compared with $32.8 billion in 2000 (aggregate HVP volume is not
measured). Exports of U.S. horticultural products should be up 3 percent,
just offsetting a 2-percent decline in exports of livestock, poultry, and
dairy products. Exports of soybean oil are also expected to rise. 

Exports of fruits and vegetables will account for most of the increase in
U.S. horticultural shipments. Factors expected to contribute to a 3-percent
rise in U.S. fruit exports are the opening of China's citrus market;
continued strong economic expansion in major importing countries of Canada,
Mexico, and Asia; and continued large U.S. orange supplies. Canada, Mexico,
and Asia are major markets for U.S. vegetable exports as well, and U.S.
vegetable exports are predicted up 3 percent. No change is forecast for
exports of tree nuts; even with lower output predicted, world tree nut
supplies remain sizable.

The record U.S. soybean crop and continued gains in demand for soybean meal
will be partly offset by greater export competition from Brazil and
Argentina in the soybean meal market. U.S. soybean meal exports are
projected up 5 percent in volume to 6.7 million tons. Export value should
hold at its 2000 level, as larger global supplies reduce prices. Slowing
growth of Malaysian palm oil production is expected to reduce competition
from other edible oils and increase U.S. soybean oil exports by one-third,
to 800,000 tons and $400 million. 

Continued strength in beef and pork prices should raise meat export value
in 2001, while tighter U.S. supplies should lower export volume about 5
percent. U.S. poultry will face increased competition in Asian markets, and
export value and volume are forecast to slip slightly in 2001. Export value
of U.S. dairy products is expected to fall because of a decrease in
products moving under Dairy Export Incentive Program contracts.  
Carol Whitton (202) 694-5287 
cwhitton@ers.usda.gov

WORLD AG & TRADE BOX
This is the initial forecast of agricultural exports for 2001 (released
August 30, 2000). Bulk commodities include wheat, rice, feed grains,
soybeans, cotton, and tobacco. High-value products (HVP's) comprise total
exports minus bulk commodities. HVP's include semiprocessed and processed
grains and oilseeds (e.g., soybean meal and oil), animals and animal
products, horticultural products, and sugar and tropical products. 


POLICY
U.S. Farm Program Benefits: Links to Planting Decisions & Agricultural
Markets

Direct government payments to the U.S. farm sector topped $20 billion in
1999 and are forecast to exceed $20 billion again in 2000. Nearly 40
percent of these direct payments have been disbursed as emergency
assistance under three supplemental legislative packages enacted since
October 1998, partly in response to low agricultural commodity prices. The
supplemental assistance augmented direct payments from existing farm
programs such as production flexibility contract payments and loan
deficiency payments, and payments from conservation programs such as the
Conservation Reserve Program. Besides direct payments, support to the
sector comes from crop insurance premium subsidies, marketing loan gains,
and price supports for selected commodities (dairy, peanuts, sugar, and
tobacco).

Direct payments and indirect benefits have boosted farm income during the
last 2 years. But analyses of links between U.S. farm programs and
agricultural production indicates that effects on resource allocation and
agricultural markets vary across programs. Analyses by USDA's Economic
Research Service (ERS) of four farm programs production flexibility
contracts, crop insurance, marketing loans, and disaster assistance focus
on how agricultural markets can be affected through program-related
economic incentives that may alter production decisions. Subsequent impacts
on prices, domestic use, and exports largely reflect market adjustments to
production changes.

Ag Programs Affect
Land Use & Crop Mix

Some farm programs primarily influence aggregate land use, with less effect
on the mix of crops planted. For example, transfers that are not commodity-
specific can increase the overall level of agricultural production by
increasing the wealth (financial well-being) of farmers, thereby expanding
agricultural investment and boosting use of land and other inputs. Greater
wealth does not affect the relative returns from producing alternative
crops, so in general, allocation of the additional acreage among competing
uses is still determined by market signals. However, potential financial
risk may be perceived differently by people who have different levels of
wealth, and changes in farmers' wealth levels may affect their response to
risk.

Programs more closely linked to production of specific crops may not only
affect total land use but also distort the mix of crops planted. Program
benefits that are directly linked (coupled) to production of specific crops
increase expected returns to those commodities. Therefore, production
decisions for those commodities are based on expected returns from both the
marketplace and government payments.

Government program payments for one commodity may also influence decisions
to produce others (cross-commodity effects), since relative net returns
change. Farmers with land constraints would likely respond to a coupled
payment by altering the mix of crops planted, switching toward program
crops or to crops with higher benefits. Farmers who could expand land use
would likely increase acres planted and also shift the mix of crops toward
those with relatively high benefits.

In addition, changes in agricultural production can arise from programs
that influence expectations. For example, programs that reduce risk can
lead to production impacts by raising the lowest level of expected returns,
thereby reducing financial risk. Expectations about the nature of future
programs may also affect current production decisions. For example, if
farmers expect future payments to be based on current plantings, they may
be induced to increase plantings of those crops.

Four Farm Programs
That Factor into Planting Decisions

Production flexibility contracts authorized under the 1996 Farm
Act fundamentally changed agricultural income support programs by
replacing crop deficiency payments (related to commodity-specific plantings
and farm prices) with production flexibility contract (PFC) payments (based
on enrolled acreage and generally not related to current production and
prices). Land eligible for PFC payments includes acreage enrolled in annual
farm programs for any year from 1991 through 1995, and total PFC outlays
are capped at slightly over $36 billion for 7 years, 1996-2002. To be
eligible for payments, farmers entered into production flexibility
contracts that require them to comply with conservation, wetland, and
planting flexibility provisions, as well as to keep enrolled land in
agricultural uses or idle. 

Because PFC payments do not depend on current production or prices, it can
be argued that they have no influence on farmers' production decisions.
However, since PFC payments raise farmers' income and financial well-being,
they can potentially affect agricultural investment and thereby enhance
production. Lenders are more willing to make loans to farmers with higher
guaranteed incomes and lower risk of default. Greater loan availability
facilitates additional agricultural production. Increased income from PFC
payments also allows farmers, particularly those constrained by debt or
limited liquidity, to more easily invest in their farm operation. The
resulting increased investment in farming operations contributes to higher
agricultural production in the long run.

The increase in wealth resulting from PFC payments also can change farmers'
views of the financial costs associated with risk, and the change in risk
attitude may affect the mix of crops produced. The guaranteed income stream
from PFC payments may make farmers more willing to undertake production of
riskier crops that provide the possibility of higher expected returns. 

Initially, the effect of a decoupled payment is the same as a lump-sum
payment i.e., revenue rises, but output is unaffected because per-unit net
returns do not change. The increase in revenue raises farmers' consumption,
investment, and savings, with the largest share typically going to
consumption. Thus, the potential for PFC payments to influence production
decisions depends largely on savings and investment decisions and on the
strength of the wealth effect. Acreage impacts are relatively small across
a range of assumptions for these factors. Even if it is assumed that
savings and investment are increased by as much as one-fourth of PFC
payments, and applying a range of acreage responses to changes in
producers' wealth, estimates of the possible increases in aggregate
plantings range from 225,000 acres to 725,000, a small portion of total
cropland (less than 0.3 percent).

Farmers allocate the increased acreage across crops by expected market
returns. However, lower prices that result from the increased production
would lead to some moderation of production effects and other market
impacts.

PFC payments may also affect crop production decisions by requiring land to
"remain in agricultural uses."  While this requirement permits cropland to
be idled, the PFC payments may be sufficient incentive to prevent some land
from being converted to permanent nonagricultural uses. Once the decision
is made not to convert, the farmer then may decide to produce on that land
if expected revenue exceeds production costs. Even if the land is idled, it
is available to return to agricultural production if economic conditions
warrant.

Crop and revenue insurance play a prominent role in U.S. agricultural
policy as part of the farm safety net. The 1994 Crop Insurance Reform Act
provided low-cost (government-subsidized) catastrophic coverage for crop
producers and instituted restrictive legislative procedures for enacting
disaster assistance. Crop insurance coverage and premium subsidy levels
have increased dramatically in the intervening years. The Agricultural Risk
Protection Act of 2000 recently expanded crop insurance funding by more
than 80 percent.

Insurance changes the distribution of expected revenues by reducing
financial risk associated with crop production variability. Government crop
insurance subsidies are likely to alter producer behavior because they
lower the cost of purchasing coverage. The cost reduction represents a
benefit to producers that raises expected returns per acre and provides an
incentive to expand area in crop production.

Crop insurance subsidies are calculated as a percentage of the total
premium, and premiums vary across crops and farms to reflect different
risks of loss associated with each crop and each insurable acre. As a
result, the premium subsidy is higher for coverage of production of riskier
crops and for production on riskier land. This structure for premium
subsidies favors production on acreage with higher yield variability and
may encourage production on land that might not otherwise be planted. Crop
insurance subsidies also tend to increase plantings in regions with riskier
production environments e.g., prone to extreme weather conditions such as
drought or flooding.

ERS recently conducted a preliminary assessment of the impact of Federal
crop insurance subsidies on crop production. To estimate changes in
production attributable to crop insurance subsidies, regional, crop-
specific, premium subsidies were added to expected net returns and
incorporated into a regional supply response model. The model allows intra-
and inter-regional acreage shifts and cross-commodity price effects in a
simulation of multiyear impacts on acreage and production. 

The analysis suggests that when the new crop insurance premium subsidies
are in place in 2001, the combined effect of all insurance premium
subsidies will add approximately 900,000 acres (0.4 percent) annually to
aggregate plantings of eight major field crops. Wheat and cotton account
for most of the increase, together accounting for about two-thirds of the
increased area. Cotton acreage shows the largest relative increase (almost
2 percent). Premium subsidies raise planted acreage relatively more in the
Southern Plains than in other regions.

Marketing loans are the current version of commodity loan programs that
have been among the primary domestic support programs in the U.S. since the
1930's. Over the past 15 years, loan programs for major field crops have
moved away from supporting prices and have switched to marketing loans that
provide income support but do not support prices. While costs of marketing
loan programs through 1997 were generally quite small, program costs have
jumped significantly in the last few years because of low commodity prices.
Total marketing loan benefits rose from less than $200 million for 1997
crops to more than $3.8 billion for 1998 and over $7 billion for 1999
crops. 

Producers can receive marketing loan benefits either by participating in
the marketing assistance loan program (borrowing against a commodity used
as collateral) or by opting to receive a loan deficiency payment. By
pledging and storing some of their production as collateral for a loan,
farmers can receive a per-unit loan rate for the crop. Loans may be repaid
at the loan repayment rate that is based on local, posted county prices for
wheat, feed grains, and oilseeds (for rice and upland cotton, at the
prevailing world market price). When the loan repayment rate is below the
per-unit commodity loan rate, the difference represents a cost to the
government and a program benefit (marketing loan gain) to the producer.

Instead of placing the crop under loan, farmers may choose to receive
marketing loan benefits through direct loan deficiency payments (LDP's)
when loan repayment rates are lower than commodity loan rates. The LDP rate
is the amount by which the current loan rate exceeds the posted county
price or the prevailing world market price and, thus, is equivalent to the
marketing loan gain that could alternatively be obtained for crops under
loan.

Assuming that the sales price for the crop is equal to the posted county
price, the marketing loan program provides producers with an effective per-
unit revenue floor at the loan rate. In practice, however, because of the
seasonal movement of crop prices within a year, the marketing loan program
has resulted in national average per-unit revenues received by farmers that
exceed commodity loan rates (AO December 1999). Farmers take the marketing
loan benefit (LDP or marketing loan gain) when prices are seasonally low
and then sell the crop later in the year when market prices have risen.

Marketing loan benefits (marketing loan gains and loan deficiency payments)
are estimated to have added 4-5 million acres to total U.S. acreage planted
to the eight major field crops for 2000. This estimate uses an ERS acreage
response model that incorporates current loan rates as well as the higher
effective per-unit revenues realized by combining marketing loan benefits
with crop-price seasonality.

The magnitude of this estimated acreage impact is specific to the 2000
crop-year situation, with results dependent on the size of expected
marketing loan benefits that year. In years of higher prices, impacts of
marketing loans on production would be smaller because program benefits
would be lower. Conversely, in years of lower prices, impacts would
increase.

Within the aggregate increase in plantings estimated for 2000, acreage
changes for individual crops reflect relative impacts of marketing loan
benefits on net returns among competing crops as well as relative
magnitudes of crop-specific acreage responses to those net returns. Wheat
acreage gains almost 2 million acres because of its own marketing loan
benefits and relatively less competition from other crops. Soybean and
cotton acreage are each up about 1 million acres, and corn plantings are up
about 500,000 acres.

In each case, the acreage impacts of the crop's own marketing loan benefits
are partly offset by acreage effects of marketing loan benefits for other
crops, reflecting the competition among crops for plantings. This land-use
competition is particularly strong between corn and soybeans, where the mix
of plantings is quite responsive to changes in relative prices and relative
program benefits.

Disaster assistance programs have had a prominent role in support to U.S.
agriculture, addressing, for example, the effects of crop losses from
severe weather or pests. Crop insurance reform legislation in 1994 included
language intended to eliminate ad hoc disaster assistance, in part because
such payments were viewed as partly displacing use of insurance programs.
More recently, however, legislation has provided emergency financial
assistance to producers for crop losses incurred due to disasters.

Disaster payments are typically dispensed after production decisions have
been made, and it can therefore be argued that such assistance does not
distort production. On the other hand, if producers have expectations of
future assistance based on past government actions, then the prospect of
disaster payments may influence production decisions. With three emergency
assistance packages enacted in less than 2 years, farmers may now expect
this type of government assistance to be more likely when prices or
production are low.

Expectations of disaster assistance when prices or production fall to low
levels increase expected producer returns and may lead to higher production
than would otherwise occur. Thus, disaster assistance may encourage
producers to keep riskier land in production.

The more that disaster aid is viewed as effectively linked to specific
production activities, the greater the influence of expected future
benefits on production choices. Disaster assistance that addresses crop-
specific production problems, for example, can be viewed as similar to crop
insurance, affecting planting decisions by reducing risk and likely leading
to expanded production of those crops. In contrast, less specific disaster
assistance payments would impact aggregate production more generally.

Program Impacts May Overlap

Each of these four U.S. agricultural programs increases U.S. production
somewhat by affecting planting decisions in the aggregate and/or in acreage
of specific crops. As a consequence, each program exerts some effects on
market prices, domestic use, and exports. Production impacts of these
programs may overlap somewhat, reflecting the potential for some
substitution between the programs, such as expectations of disaster
assistance displacing use of crop insurance. 

Increased production resulting from these programs will also tend to lower
prices, and price declines, along with planting flexibility provided by the
1996 Farm Act, can cause partly offsetting reductions in production.
Nonetheless, production remains higher as a result of these programs,
although except for marketing loans, aggregate acreage impacts appear to be
small.

Crop insurance and marketing loans create direct incentives to expand
production of specific commodities by increasing expected returns per unit
of production. Crop insurance changes the distribution of expected income
at low yields, with premium subsidies that encourage production of riskier
crops and in riskier regions. Marketing loans truncate the distribution of
expected per-unit revenues, with program benefits creating an incentive to
produce specific crops when prices are near or below loan rates.

If ad hoc disaster assistance is not expected by the recipients at planting
time and occurs after production decisions are made, this type of
assistance may have little or no impact on current production. However, if
producers of specific crops or in specific regions expect periodic disaster
assistance based on past payments, these expectations can influence
production. 

Production flexibility contract payments create a small incentive to
increase aggregate production, with the mix of crops planted based on
market signals. Among the four programs, however, market effects per dollar
of outlay may be smallest for PFC payments because these program benefits
do not depend on market conditions and are less directly linked to farmers'
production decisions.  
Paul C. Westcott (202) 694-5335 and C. Edwin Young (202) 694-5336
westcott@ers.usda.gov
ceyoung@ers.usda.gov


POLICY
How Important Are Farm Payments to the Rural Economy?

Advocates of farm program payments frequently assert that support for the
farm sector is necessary for the survival of rural communities. They might
draw on several facts about Federal farm payments to back up their case.
For example, most government payments to agriculture go to rural areas, and
they have a positive effect on incomes. Government payments smooth
fluctuations in farm income caused by swings in commodity prices, and they
also inject cash into the rural economy, providing farm businesses and
households with income to support other rural businesses.

During the 1990's, about 8 of every 10 dollars in Federal direct farm
payments went to farms in nonmetropolitan (nonmetro) counties. (About
three-fourths of the more than 3,000 U.S. counties qualify as nonmetro
because they have no population center of 50,000 persons or more.) Of the
$20.6 billion in Federal direct government payments to farms in 1999, an
estimated $16.7 billion went to farms in nonmetro counties. 

In 1999, a dramatic fall in crop prices plunged estimated nonmetro gross
farm receipts down $17.8 billion from their 1997 level. Farm aid to
nonmetro areas increased by an estimated $10.6 billion between 1997 and
1999, offsetting 60 percent of the decline in gross receipts. Without the
increase in government payments, the impact of falling commodity prices on
farm income in nonmetro areas would have been more severe. 

Incomes of other rural businesses would have been affected as well.
Purchases of farm inputs and equipment, as well as consumer spending by
farm households, would have fallen without the cash flow provided by
government payments, dragging down sales of farm supply businesses, farm
equipment dealers and manufacturers, retailers, and other rural businesses
that depend on farm spending. Without government payments, some farms may
have lacked sufficient cash to make mortgage and other loan payments to
financial institutions.

-----
NOTE: Nonmetro counties are those that have no population center of 50,000
persons or more. Farm-dependent counties are those that receive 20 percent
or more of labor and proprietors' income from farming.
-----

Farm Share of Rural Economy Shrinks 

Farm payments have important impacts on farm income, planting decisions,
and the allocation of resources to the farm sector, but they play a minor
role in the economies of most rural communities. Over the seven decades
since the first price support legislation was passed, most rural
communities have reduced their reliance on agriculture as additional
nonfarm jobs and businesses supplemented their economies.

While government payments have been important to farms and related rural
businesses, the rural nonfarm economy has grown to such an extent that a
strong downturn in the farm sector is barely noticeable in the statistics
for the rural economy as a whole. What is more, other government programs
have grown over the years so that today Federal income security payments
and other types of programs play a much larger role in the rural economy
than do farm program payments.

Today, net farm income amounts to only 2-3 percent of total nonmetro
personal income. In most years of the 1990's, less than 1 percent of total
nonmetro personal income came from government payments to nonmetro farmers.


Despite financial troubles in the farm sector during 1998 and 1999, total
nonmetro personal income surged ahead by an estimated $103 billion between
1997 and 1999. Most rural communities would have grown strongly even
without the cushion provided by increased government farm payments. Sectors
that have little to do with agriculture, such as service industries and
manufacturing, provided most of the growth in rural income. Some rural
industries, notably food processors that buy agricultural commodities,
likely benefited from the low commodity prices that buffeted the farm
sector. 

 But Farming Remains Important in Some Areas

Is this too broad-brush an approach? While most of rural America has
experienced substantial nonfarm growth over the past few decades, some
areas remain highly dependent on agriculture. However, only a fraction of
government farm payments go to those areas where farming is a key source of
income and jobs, and aggregate statistics may mask serious problems in
isolated areas.

USDA's Economic Research Service (ERS) identified 556 nonmetro counties as
"farm-dependent," with at least 20 percent of labor and proprietors' income
derived from farming during 1987-89. These counties are concentrated
primarily in the Great Plains from North Dakota to the Texas and Oklahoma
Panhandles, in Iowa, and in parts of the Northwest, South, and Midwest.
These are some of the least densely populated places in the U.S., where the
dominance of farming often reflects the absence of other major industries.
(Due to revisions in farm income accounting by the Bureau of Economic
Analysis and the growth in nonfarm income, many of the 556 counties
identified as farm-dependent would no longer be included in an updated
list.) 

Income growth in farm-dependent counties has lagged behind that of other
nonmetro counties during the 1990's. Inflation-adjusted total personal
income in farm-dependent counties grew 13 percent between 1990 and 1998,
compared with 21 percent growth in other nonmetro counties. This probably
reflects farm-dependent counties' reliance on the relatively slow-growing
farm sector.

Income growth also is more volatile from year to year in farming counties
than in other nonmetro counties. For example, real total personal income in
farm-dependent counties fell 0.6 percent between 1994 and 1995, then rose a
dramatic 5.3 percent in 1996 before slowing to a modest 0.9 percent in
1997. In other nonmetro counties, growth was fairly steady at 2-3 percent
annually during 1991-98.

Farm-dependent local economies are like an investment portfolio loaded up
with shares of a single company whose earnings bounce around from year to
year. Farming is one of the more unstable industries, subject to vagaries
of weather, disease, and world markets. The experience of the 1990's
indicates that volatility of farm income is reflected in variability in
total income growth of farm-dependent counties. The 1994-95 decline in real
personal income for the 556 farm-dependent counties coincided with a 22-
percent fall in farm income. The 5.3-percent income rise during 1995-96
likely reflected a large increase in farm income during 1996, a year of
high crop prices. The slowing of farm-dependent county personal income
growth during 1996-97 to 0.9 percent corresponded with a 20-percent decline
in farm income during that year. 

This apparent link between farm income volatility and variability in total
income growth suggests that cash-flow fluctuations for farmers can
reverberate more strongly in those counties that rely on the farm sector
and that offer fewer alternative income sources. In these local economies,
government payments may play a more important role in smoothing out
cyclical fluctuations. 

Government payments may also keep some farms in operation that would
otherwise not be in business. In most areas where there are promising
alternative uses for the land, labor, and capital, farm payments may
encourage an inefficient allocation of resources. However, in a farming-
dependent region where opportunities for alternative uses of these
resources are lacking, a payment that keeps land, labor, and capital in
farming may boost the local economy. Removal of farm program payments would
lead to faster loss of population, decline in land values, and failure of
local businesses that rely on farm spending.

It is very difficult to gauge the actual effect of farm payments on rural
economies. However, simulations using economic models have predicted that
removing farm payments would reduce output and employment in the rural
economy while benefiting the urban areas of the U.S. 

Government programs that provide payments to farmers can benefit some rural
areas. But as economic development policy they perform poorly. A large part
of government farm payments go to areas where they are barely a blip in the
local economy. Farming-dependent counties--where government payments to
farmers play a significant role in the local economy--received only 37
percent of farm program payments in 1998, while 19 percent went to metro
counties and 44 percent went to non-farm-dependent nonmetro counties.

In metro and non-farm-dependent nonmetro counties, government payments to
farms have no noticeable effect on the local economy because they account
for such a small share of income. In communities with healthy growth
prospects, government payments to farms may slow the growth of other
economic sectors by driving up land prices and diverting capital away from
other local businesses.

Farm Payments a Small Part
Of Federal Assistance in Rural Areas

Program payments to farmers are a small fraction of what the Federal
government spends in rural areas today, as other Federal government
programs that provide assistance to individuals, businesses, and state and
local governments have grown over the years. In 1998, per capita Federal
spending in nonmetro counties totaled $4,725, including only $182 for farm
payments. In farm-dependent counties, farm payments were much higher--$937
per capita--but still less than one-fifth of $5,369 in per capita Federal
spending. Higher levels of government payments in 1999 brought per capita
farm payments to an estimated $300 in nonmetro counties and $1,575 in farm-
dependent nonmetro counties, still a small share of all Federal spending in
those counties.

Most Federal funds received by nonmetro counties are for income security, 
including Social Security, disability payments, other retirement benefits,
medical and hospital benefits, public assistance, and unemployment
compensation. Income security payments have a large impact on the rural
economy. In 1998, nonmetro income security payments averaged $3,143 per
capita--two-thirds of total per capita Federal funds received--and
accounted over 12 percent of nonmetro total personal income.

Income security payments support spending by the large share of rural
residents that are retired, including the substantial proportion of farmers
who receive Social Security and other Federal retirement income. The
payments also provide disposable income to disabled and unemployed persons,
as well as funds for maintenance of rural medical services.

In nonmetro counties as a group, the 1998 per capita direct payments to
farmers ($182) were outweighed by 1) per capita community resource funding
($406 per person), which includes business assistance, community
facilities, regional development, environmental protection, housing, Native
American programs, and transportation; 2) defense and space programs ($305
per person); and 3) national functions ($508 per person), which include law
enforcement, energy, higher education, and research and other programs. The
average $1,219 per capita disbursed under these programs affects rural
economies by providing infrastructure, stimulating construction projects,
and providing salaries for Federal government employees.

In nonmetro counties, per capita funding for farm programs in 1998 exceeded
per capita Federal funding for other agricultural and natural resource
programs--agricultural research and services, forest and land management,
water and recreation services--and for human resources programs--elementary
and secondary education, food and nutrition, health services, social
services, training and employment. Federal grants also support many of the
larger human resources programs, but local area funding amounts are not
known because the funds are distributed by state governments.

In 1998, total per capita Federal funding for metro counties ($5,212)
outpaced nonmetro counties ($4,725), but funding was higher for farm-
dependent counties ($5,369), because of their relatively high per capita
agricultural payments. Nonmetro counties received more funding per capita
for income security programs--$3,143 versus $2,864 per capita for metro
counties--due mainly to retirement benefits received by the somewhat older
population in rural areas. Higher per capita agricultural and income
security funding in nonmetro counties partly makes up for the smaller
nonmetro share of funding for community resource, defense and space
programs, and national functions in rural areas. 

Changes in farm programs, or even a discontinuation of commodity programs,
would not have major impacts on most rural communities. Only a minority of
rural counties appear vulnerable to the loss of farm payments, and the
number appears to be shrinking; a recent study of data from the mid-1990's
indicates that many fewer counties meet the farm-dependent criterion than a
decade ago. In most rural communities, farm payments will continue to play
a minor role in the economic landscape, a role that is overshadowed by the
impact of Federal retirement payments, medical payments, and other nonfarm
programs.
Fred Gale (202) 694-5349
fgale@ers.usda.gov  

For more information on Federal funds data, 
see S.D. Calhoun, R.J. Reeder, and F.S. Bagi, "Federal Funds in the Black
Belt," Rural America Vol. 15, No.1 (January 2000): pp. 20-27;
<http://www.ers.usda.gov/epubs/pdf/ruralamerica/
ra151/contents.htm>.

POLICY BOX
How Government Farm Payments Affect the Local Economy

Farms and farm households affect local economies primarily through business
and consumer spending. When farmers purchase seed, livestock, fertilizer,
equipment, insurance, and fuel, and when they hire workers, make mortgage
payments, spend their profits on household items, or pay local taxes, they
inject money into the local economy, supporting local businesses and
creating jobs. Government farm program payments may affect local economies
indirectly by providing income to farmers that generates spending.

The effect on the rural economy depends on where money is spent. If a check
from the government induces a farmer (or landlord) to increase spending
locally, it will benefit the local economy. For example, a government farm
payment used to purchase seed from a local farm supply store or to pay
property taxes provides a boost to the rural economy. But if the payment is
spent on a truck made in Detroit and purchased in Chicago, there will be
little local impact. 

The impact of farm program payments also depends on whether resources are
fully employed in the local economy. If there is full employment locally,
increased farm spending induced by government aid will simply bid workers
and land away from other sectors, resulting in higher farm income at the
expense of taxpayers, artificially inflated agricultural land prices, and a
misallocation of resources. However, in a region with less than full
employment and underemployed resources, agricultural program payments could
strengthen the local economy. 

Whether government payments induce farmers to increase spending depends on
the type of program with which the payment is associated. Disaster payments
to compensate for natural disasters or unusually low prices may prop up
farmers' cash flow and encourage spending, protecting businesses that rely
on farm spending from a disaster-induced slump.

However, payments that require farmers to idle land may have little net
effect on the local economy. Farmers will still spend at least part of
their government checks at their local grocery store or auto dealer,
providing a boon to those businesses. But at the same time, they reduce
their production expenditures on the idled land to comply with the program,
hurting farm supply businesses. Also, some farm payments are in the form of
loans that are paid back to the government. A loan has less local impact
than a nonloan payment of equal amount.


POLICY
Current Tax Policy vs. a Flat Tax:  Effects on U.S. Agriculture

Federal tax policy has far-reaching effects on the farm economy overall,
but regional variations exist partly because state tax policy can offset or
intensify the effects of Federal taxation. USDA's Economic Research Service
uses an economic model to simulate tax reform and to measure the effects of
tax policies on farm markets by comparing current economic conditions in
the farm economy with conditions that might exist under a single-rate
(flat) income tax. In the analysis, the flat tax rate--one nationwide rate
for Federal taxes but different flat rates for each state--applies to all
income from any source.

Current Federal and state tax codes have graduated rate schedules, and
provide for numerous exemptions, deductions, deferrals, and other special
provisions that shelter certain types of income from taxation. Federal tax
policy is favorable to farmers, but states, unlike the Federal government,
tax real property, and farmers hold a disproportionate share of such
assets.

Provisions incorporated in current Federal tax policies increase average
net farm income and average farm household income by lowering the tax
burden. According to USDA, the average U.S. farm household in 1997 earned
almost $6,000 in net farm income (before income taxes) and around $46,000
from other income sources. After applying tax accounting provisions to farm
business income, the average farm household filing a Federal Form 1040,
Schedule F (profit or loss from farming) declared around $3,000 in net farm
losses, offsetting household income that would otherwise be taxable. Thus,
farmers, on average, realize positive net income from farming activities,
but adjustments to that income under the current tax code result in lower
household tax liability.

Current tax policies generally push up farm-level prices relative to prices
under a flat tax. At the current level of farm production, prices of farm
products reflect a tax rate on farm income that averages 29 percent
(excluding tax rates for publicly-held corporations). This combined average
tax rate includes about 21 percent for Federal tax and 8 percent for states
(although there is significant regional variation). A flat tax rate that
raises the same amount of Federal and state tax revenues would be a
combined 20.3 percent. Thus, adding a dollar of farm income to average farm
household income lowers the average farm loss by a dollar and adds 29 cents
to the household's tax bill under the current system compared with about 20
cents under a flat tax.

For food manufacturers--the primary customer of agricultural producers--
product prices reflect an average combined tax rate of 39 percent, compared
with an average 34.5 percent for all nonfarm businesses. Under the current
tax system, this heavier-than-average tax burden--primarily reflecting high
tax rates on corporate profits--causes food manufacturing businesses to
scale back production and demand less farm output than under a flat-tax
system. In turn, farm prices decline until farmers sell all they produce.

In the longer run, farm and nonfarm producers adjust to the effects of
taxation. Over time, some labor and capital displaced by the scaling back
of food manufacturing and other highly taxed industries become available
for farm production at reduced costs. Overall, the lower pre-tax cost of
labor and capital in farm production nearly offsets the higher tax rate
under the current tax system, leading to after-tax costs of only 0.2
percent above a flat-tax scenario.

Even though production costs are about the same, lower demand for farm
output by food manufacturers leads to lower farm output (less than 1
percent) under the current system than under a flat-tax system. However, in
several regions, farm output increases for reasons that involve regional
variation in farmers' ability to take advantage of specific tax provisions.

Farm industries in most U.S. regions attract less investment under current
tax policies than they would under a flat tax. On average, capital per
worker in farming is 3.7 percent lower under current Federal and state tax
policy than it would be under a flat tax. This result reverses findings
from other USDA analyses of Federal tax policies alone, and reflects the
negative effects of state property tax policy on direct farm investment.
Regional disparities in changes in farm markets--e.g., in producer prices
and farm output--also add potential for shifts in agricultural resources
among states.
Pat Canning (202) 694-5341 and Marinos Tsigas (202) 694-5382
pcanning@ers.usda.gov
mtsigas@ers.usda.gov


SPECIAL ARTICLE 
Taiwan's Hog Industry--3 Years After Disease Outbreak

It has been 3 years since the highly contagious foot-and-mouth disease
(FMD) hit Taiwan's densely packed hog farms. The outbreak ravaged Taiwan's
hog industry and eliminated Japan's largest single source of imported pork.
The severity and duration of the epidemic and the ways that the Taiwan
authorities have handled the industry during and since the crisis have set
the future course of Taiwan's hog industry, with substantial implications
for production and trade of most major pork trading countries.

In Taiwan, pork is traditionally the leading meat produced and consumed.
For years before the outbreak of FMD, pork--exported almost exclusively to
Japan--had been Taiwan's most valuable agricultural export. In 1996, the
last full year before the outbreak, Taiwan had a total yearend sow
population of about 1.4 million, with 14.3 million hogs slaughtered and
about one-third of these for the Japanese market. According to Japanese
customs data, Taiwan supplied 41 percent of Japan's pork imports in 1996;
the U.S. was next in line, supplying 23 percent, Denmark 18 percent, and
Canada 5 percent.

In 1996, hog population density in Taiwan was high--the ratio of hogs to
land area was second only to the Netherlands. Many small, inefficient hog
farms packed in crowded areas coexisted with Taiwan's large, modern
operations. Nearly two-thirds of Taiwan's hog farms had fewer than 200 hogs
each, and these farms accounted for less than 8 percent of the total hog
inventory. 

For years before the outbreak of FMD, the hog industry had been lucrative;
pork sales were highly profitable both off and on the island. For live-
weight hogs, the 10-year-average auction price in U.S. dollars per 100 kg
was about $183 (NT$4,980--New Taiwan dollars), against an estimated
production cost of about $147 (NT$ 4,000). Exports of hog products,
primarily pork exports to Japan, totaled $1.6 billion in 1996. 

While Taiwan exported prime meat cuts, offal and other cuts were sold on
the local market. Many of these products commanded high prices locally, not
only because they were favored menu items among consumers but because the
market was protected from imports. Taiwan had banned pork offal imports
since 1975 and had effectively banned low-value pork cuts (cuts other than
hams, shoulders, tenderloins, and loins) through discretionary licensing
since 1989. Yearly domestic consumption of pork per capita was, at 40 kg,
among the world's highest.

Battling the Disease

On March 20, 1997, Taiwan announced an export ban on its pork because of an
outbreak of FMD on its hog farms. By the time of the announcement, 3,828
hogs were infected on 28 farms, and 1,440 were dead. The number of farms
affected by this highly contagious disease soared. By the end of March,
235,114 hogs were infected on 1,300 farms, and 56,127 hogs were dead.

Taiwan authorities, along with the island's hog industry, faced a dilemma.
Farmers and meat processors wanted to kill all the hogs and start over. But
for several reasons, the Council of Agriculture (COA)--Taiwan's equivalent
of the U.S. Department of Agriculture--recommended controlling the disease
by vaccinating healthy hogs at disease-free farms. First, with about
100,000 people raising hogs and 700,000 in related businesses, and with 11
million hogs in stock before the outbreak, destroying the entire hog
population would seriously impact the island economically, socially, and
politically, and carry a substantial environmental cost of disposal.
Second, given that the last recorded FMD outbreak had occurred in 1918, it
seemed highly possible that the disease had come from abroad. If that were
true, destroying the domestic hog population might not prevent a
reinfection. Taiwan's legislature on March 25 adopted COA's recommendation:
exterminate all hogs at FMD-contaminated farms and inoculate uninfected
animals.

Since late March 1997, it has been compulsory for each of Taiwan's hogs to
be vaccinated twice in its life for FMD. In addition, since September 1997,
FMD surveillance regulations require farmers to submit a monthly veterinary
report on vaccination of their hogs.

As the vaccinations began to take effect, the FMD epidemic slowed. In less
than 3 months, it was basically under control. Only a handful of new cases
were reported after early June 1997, and the COA relaxed its policy. Rather
than destroying all hogs raised on farms where disease was present, only
the diseased hogs had to be destroyed. After a case of FMD turned up on
July 16, 5 months passed with no new cases reported. Taiwan optimistically
targeted being FMD-free by June 2001.

Between March 20 and July 16, 1997, FMD had cost Taiwan more than 4 million
of the island's nearly 11 million hogs. Of these, 185,000 died from the
disease, and 3.85 million on infected farms had to be destroyed. In the
course of 4 months, the epidemic had contaminated 6,147 of the island's
25,357 farms. 

The virus, called O/Taiwan/97 by the International Epizootics Office (OIE)-
-the international body that monitors disease outbreaks among livestock--
apparently affected only hog farms, bypassing Taiwan's small dairy, beef,
water buffalo, and sheep operations. Testing indicated that O/Taiwan/97 was
a strain of virus also present in China. 

FMD appeared again in Taiwan in December 1997. A handful of FMD cases
cropped up until April 29, 1999, the last time that infected hogs have been
reported there. Although the more recent instances were few, they indicated
that Taiwan's FMD surveillance regulations were not fully effective. For
example, many of the 1998 cases were discovered at auctions, as farmers
tried to unload sick hogs to avoid losses. Thus, effective August 1, 1998,
hogs vaccinated against FMD had to display eartags, and untagged hogs could
not be sold at auction or to slaughterhouses. In addition, farmers who did
not vaccinate their hogs were fined from $300 to $1,500 (NT$10,000 to
NT$50,000).

Still, it has been difficult to ensure islandwide vaccination because many
small-scale farms do not sell hogs at auction and easily evade the
authorities' supervision. The 12 hogs involved in the April 1999 case, for
instance, and killed after they tested positive for FMD, were found
deserted in a mountain area in northern Taiwan. In December 1999, the COA
was able to report that Taiwan's hog FMD vaccination rate had reached 92
percent.

But in June 1999, FMD had turned up in cattle farms in Kinmen, a small
island associated with Taiwan and a few kilometers off the shore of
mainland China--Taiwan's first reported case in cattle in five decades.
Later in June and in July 1999, FMD was found on nine beef cattle farms on
the island of Taiwan; all cattle on these farms--several hundred head--were
destroyed or died of the disease. 

In January 2000, additional cases of FMD, this time in dairy cattle, were
reported in central Taiwan. Authorities decided on January 10 to try
across-the-board vaccination for all cloven-hoofed animals, including hogs.
Since then, only two outbreaks of FMD have occurred, both in February on
sheep farms in southern Taiwan. 

Testing indicated that the FMD virus on Taiwan's cattle and sheep farms,
called O/Taiwan/99 by OIE, was 99 percent identical to the virus on Kinmen,
where widespread smuggling of agricultural and livestock products from
mainland China was suspected.

Restructuring the Hog Industry:
Downsizing & Rebuilding

Taiwan's authorities have taken advantage of the FMD crisis to address
generally the problems of hog farming on the island. Even before the FMD
outbreak, official policy aimed to reduce the number of hogs, because
raising hogs posed a serious environmental hazard to this land of limited
water resources and more than 20 million people. 

The need to reshape the hog industry intensified after the U.S. and Taiwan
concluded the Bilateral Market Access Agreement on February 20, 1998, a
precondition for Taiwan to join the World Trade Organization (WTO). Since
the agreement, Taiwan has allowed a pre-accession annual import quota for
pork bellies and offal (fresh and frozen). This year, Taiwan raised the
quota to the level agreed upon for year one of its WTO access--6,160 tons
of pork bellies and 10,000 tons of pork offal. As a result, parts, such as
hearts and kidneys, will face import competition, reducing the
profitability of hog raising. 

To chart a new course for the hog industry, in July 1997 Taiwan implemented
the 4-year Hog Industry Sustainable Management Plan, which remains in place
today. New standards for water discharged from hog farms have been
implemented on schedule since January 1, 1998 (for the new Chemical Oxygen
Demand standard, farms had a 2-year grace period). Today, any farm with
more than 20 hogs is subject to these new waste water regulations. In
addition, after December 31, 2000, strict limits will apply to hog farming
in the watershed of rivers used as sources of drinking water.

The authorities published the first Hog Industry White Paper in April 1998.
A new Livestock Law passed in June of that year required all farms with
more than 20 hogs to register by June 30, 2000, and thereby become subject
to its various regulations. Fines for those who fail to register range from
about $930 to $4,650 (NT$30,000 to NT$150,000). In addition, a buyout
program with a budget of more than $54 million (NT$ 17.5 billion) targeted
small livestock and poultry farms from October 1998 until June 1999. 

In the course of this radical restructuring, Taiwan's hog industry has
downsized substantially since the outbreak of FMD was announced in March
1997. Hog prices dropped immediately and dramatically with the loss of the
Japanese market and because of consumers' fear of the disease (although FMD
poses no threat to human health). The hog industry started to rebuild when
authorities allowed hog farms to resume operation in August 1997. But by
the end of that year, Taiwan had 19 percent fewer hog farms than in 1996
(20,454 in 1997) and 26 percent fewer hogs (less than 8 million in 1997).
Although pork consumption picked up, hog prices remained generally low
until mid-1998. 

In 1998, the hog industry downsized still further--down 16.5 percent from
1997 in hog farms and 17.9 percent in hogs. With no large and lucrative
Japanese pork market and with new import competition that followed the
U.S.-Taiwan bilateral WTO agreement, farmers in 1998 cut hog production. In
addition, stringent wastewater standards and authorities' hog buyout
program have caused many hog farmers to exit the industry, resulting in a
short supply of pork products since late 1998. 

In fact, since mid-1998, hog prices have been relatively high. As a result,
although the number of hog farms dropped another 6 percent in 1999, to
16,016, the year-end hog inventory rose 11 percent, to 7.24 million.
Compared with pre-FMD levels (1996), the number of hog farms in 1999 had
fallen nearly 37 percent, while the number of hogs had declined more than
32 percent.

Along with industry downsizing, the ratio of large to small hog farms has
changed. Recent restrictions imposed by the Livestock Law and the new
environmental regulations are relatively expensive for small hog-farm
operations, and the 1998-99 buyout program gave substantial incentive to
many small farm operators to quit the industry permanently. Of the 5,070
hog farms that took advantage of the buyout program, 45 percent had fewer
than 200 hogs, and nearly 90 percent had fewer than 1,000. The upshot has
been a rise in the percentage of farms that raise more than 1,000 hogs,
from 9.5 percent in 1996 to 11.4 percent in 1999, as farms that raise fewer
than 200 hogs dropped from 62.2 percent to 59.9 percent. 

Industry Prospects Revised Down

Taiwan's hog farmers will not reclaim their lucrative pork export market in
the near future. Although the FMD outbreaks have been controlled, Taiwan
still is listed as an FMD-infected area. According to OIE, a country must
meet at least two important criteria to be recognized as FMD-free: No
disease outbreaks in the preceding 24 months, and no FMD vaccination for
the preceding 12 months.

The reoccurrence of FMD also means that neither Taiwan nor its hog industry
can relax its guard. Although Taiwan authorities have imposed stricter
regulations and harsher penalties to deter smuggling and to make farmers
inoculate hogs regularly and report any animal infections, there is room
for improvement, particularly in being better prepared to handle an
epidemic such as FMD. In addition, the tenacity of the FMD virus is a
serious challenge to regulatory authorities. The virus can survive for long
periods in the air, in food, or in garbage, and even in hides, hair, and
wool. Given the nature of FMD, no matter how carefully laid the plans for
confining and eradicating the disease, anything can happen.

Ongoing fundamental problems for Taiwan's hog industry include high prices
and production costs, and the harmful practices of some small hog
operations. The high prices that hogs and pork commanded in Taiwan appeared
to be part of the undoing of the industry because they encouraged smuggling
of live piglets or meat products that are thought to have brought the
disease to the island. High prices also made Taiwan vulnerable to import
competition, particularly since the signing of the U.S.-Taiwan Bilateral
Market Access Agreement. 

Production costs are high in Taiwan because all feed ingredients must be
imported and because land and labor are relatively expensive. With
relatively modest import quotas in place now, current imports of pork
products have not had much impact on Taiwan's hog industry. But with the
gradual relaxation of trade barriers in the future, it is likely that only
the best-managed farms will survive and that small farmers will be squeezed
out by relatively high production costs. 

On top of high prices and high production costs, other challenges facing
authorities charged with supervising hog operations are liable to limit the
hog industry's comeback. For example, inadequate vaccination practices at
some smaller farms not only make it difficult for Taiwan to eradicate FMD
but also jeopardize the stocks of other hog farms and increase their
operational risks. In addition, these small hog farms are likely to ignore
or attend less to environmental protection. Given Taiwan's limited space
and large population, coupled with growing opposition from residents to
environmental pollution caused by hog raising, the industry has long been a
major environmental concern on the island.

Now, 3 years after the outbreak of FMD, the debate over whether Taiwan's
once lucrative hog industry can or even should reach its former peak
production level has died down. Such speculation has given way in most
quarters to the belief that Taiwan may never regain its status as the
world's leading pork exporter to Japan. Many larger farm operators are
pessimistic about the prospects for Taiwan's pork exports to Japan, and a
large share of the population believes that environmental risks outweigh
the economic benefits to be derived from the hog industry. The Taiwan
authorities' goal for the industry in the short run is to eradicate FMD.
Their long-range goal is to make the industry sustainable, environmentally
safe, and competitive with imports. Finally, however, the market, not the
authorities, will determine whether or not Taiwan can re-enter the pork
export market.  
Sophia Huang (202) 694-5225
shuang@ers.usda.gov


SPECIAL ARTICLE NOTE

Foot and mouth disease (FMD) is highly contagious, affecting primarily
cloven-hoofed animals (e.g., cattle, sheep, goats, hogs). The disease is
characterized by the formation of blisters on tissues of the mouth
(reducing appetite and hindering food conversion) and on the skin above the
claws of the feet. The disease cause is a virus, which can be found in the
blood and other body secretions (e.g., saliva, milk). The virus can be
spread by many different carriers, including humans, flies, ticks, most
meat products, manure, semen, feeds, water, and soil. Although deaths of
adult animals are not ordinarily high from FMD, infected animals are
usually destroyed. To avoid infecting their own herds, nations ban imports
of live cloven-hoofed animals and fresh, chilled, and frozen meats of those
animals, from areas experiencing outbreaks of FMD. Under these bans, only
canned and cured meats from susceptible animals may be imported from FMD-
affected countries.

SPECIAL ARTICLE BOX
Replacing Taiwan's Pork in Japan's Import Market 

The sudden end of Taiwan's exports to Japan, the world's largest pork
importer, offered a potentially large opportunity for meat exporters.
However, Japan's total pork imports in fiscal 1997 fell by 146,000 tons--
over half of Taiwan's trade was not replaced by imports from other sources.
Instead, Japan increased production in 1997 and 1998, for the first time in
the 1990's, and drew down stocks. Consumption fell by over 2 percent. 

Japan's imports from the U.S. rose 7,000 tons (5 percent) from 1996 (the
last pre-FMD year) to 1997, and imports from Canada grew by almost 20,000
tons (49 percent). The major immediate beneficiary of Taiwan's lost trade
was South Korea, with imports rising 27,000 tons (79 percent). Since then,
imports have rebounded almost to the 1996 peak level, with Denmark, Canada,
the U.S., and South Korea all sharing in the gains. The outbreak of FMD
among South Korean cattle in 2000 has shut down that country's ability to
export pork, so that the FMD-free regions in North America and Europe will
likely supply virtually all of Japan's imports in the near future. 

The aftermath of Taiwan's FMD epidemic showed that Taiwan's pork exports
were not easy to replace. Taiwan's consistent supply of pork was highly
valued in Japan. Another development after the FMD outbreak was an outward
flow of investment and production information from Taiwan's pork industry.
Taiwan's large pork-exporting firms made investments in North American
farms and plants that could export to Japan, and experts from Taiwan taught
production and marketing techniques to suppliers in South Korea and North
America.  
John Dyck (202) 694-5221
jdyck@ers.usda.gov


END_OF_FILE