AGRICULTURAL OUTLOOK                      August 21, 2001
September 2001, ERS-AO-284
             Approved by the World Agricultural Outlook Board
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CONTENTS

IN THIS ISSUE

BRIEFS
New Law Cuts Income Tax Rates & Repeals Estate Tax
Financial Prospects for Hog Producers Generally Favorable
Mandatory Price Reporting for Livestock Industry

COMMODITY SPOTLIGHT 
Strong U.S. Soybean Demand Keeps Pace with Record Supply

WORLD AGRICULTURE & TRADE
Economic Reforms Remain Critical for Argentina and Brazil
China's Grain Policy at a Crossroads

RESEARCH & TECHNOLOGY
Livestock Drugs: More Questions Than Answers?

RESOURCES & ENVIRONMENT
USDA Conservation Programs: A Look at the Record
EQIP: Conserving While Farming

SPECIAL ARTICLE
Argentina & Brazil Sharpen Their Competitive Edge

IN THIS ISSUE

Competitiveness of Argentine & Brazilian Agriculture 
Argentina and Brazil have become increasingly strong competitors with the 
U.S. in grain and soybean trade. U.S. market share of global soybean and 
soybean product exports, for example, shrank from 80 percent during the 1960s 
to just 35 percent in 1998-2000. Over that period, the combined share for 
Argentina and Brazil grew from less than 10 to nearly 50 percent. Combining 
abundant land and favorable climates, Argentina and Brazil are naturally low-
cost producers of soybeans. A primary catalyst in Brazil and Argentina's 
surge in agricultural production and exports in the past decade was the 
economic and political reform undertaken by both countries, including 
deregulation and privatization of domestic marketing systems, restraining 
inflation and interest rates, and easing of trade rules. These reforms opened 
the door to more open trade, strengthened market signals, rapidly expanded 
foreign investment, and increased utilization of agricultural inputs and 
technology. Randy Schnepf (202) 694-5293; rschnepf@ers.usda.gov

Economic Reforms Remain Critical for Argentina 
Argentina's reforms in the early 1990s, despite initial successes, left many 
significant problems untouched. Excessive regulation and labor market 
problems still burden the economy, and the country is now in the midst of a 
3-year recession. Argentina's government recently announced a package of 
policy measures, including a dual exchange-rate system that continues the 
one-peso-to-one-dollar arrangement while providing an indirect devaluation 
for commodity exporters. If successful, the plan could mean potential gains 
in Argentina's share of trade in international commodity markets, by lowering 
export prices. However, of greater concern is the risk of a deeper recession 
and the possibility of a regional spillover of economic difficulties into 
Brazil and beyond.  Randy Schnepf (202) 694-5293; rschnepf@ers.usda.gov

Strong U.S. Soybean Demand Keeps Pace with Record Supply
Strong soybean demand is warding off burdensome surpluses, despite the large 
potential harvest this fall. U.S. soybean production is forecast at nearly 
2.9 billion bushels, exceeding last year's record by almost 100 million 
bushels. Domestic levels of soybean crushing will be supported in 2001/02 by 
good prospects for soybean product exports and favorable hog values that 
should expand domestic soybean meal consumption. Robust soybean imports by 
China and the European Union have continued to support foreign demand for 
U.S. exports. Nevertheless, record U.S. supplies and large foreign stocks 
(particularly in China and Brazil) are expected to limit price increases.  
Mark Ash (202) 694-5289; mash@ers.usda.gov

China's Grain Policy at a Crossroads
China's grain sector and policymakers are adjusting to internal and external 
pressures that could reshape the industry. As consumers diversify their 
diets, they are demanding less grain but of higher quality. Government 
policymakers and the grain marketing system have been slow to respond to 
changing consumer preferences. As a result, large stocks of low-quality grain 
accumulated in the 1990s. Government policy emphasis is now shifting from 
grain quantity to quality. China's accession to the World Trade Organization 
may introduce external competition for both farmers and grain traders that 
will hasten the shift.  Fred Gale (202) 694-5215; fgale@ers.usda.gov

New Tax Law Includes Savings for Farmers
The Economic Growth and Tax Relief Reconciliation Act of 2001, signed into 
law on June 7, 2001, reduces both income and estate taxes for most taxpayers, 
including most farmers. For farm sole proprietors, savings over the entire 
10-year phase-in period total $19 billion in Federal income taxes and $3 
billion in Federal estate taxes. James Monke (202) 694-5358; 
jmonke@ers.usda.gov

Mandatory Price Reporting for Livestock Industry
Livestock packers and importers whose operations exceed certain levels must 
now report frequent and detailed information to USDA on price, quantity, and 
characteristics of livestock they buy and sell. The purpose of USDA's 
Mandatory Price Reporting system is twofold: to provide all livestock 
producers with timely market information that will enable them to operate 
successfully in a changing marketing environment, while also meeting consumer 
demand for meat and meat products.  Mildred Haley (202) 694-5176; 
mhaley@ers.usda.gov

USDA Conservation Programs: A Look at the Record
Government spending on agricultural conservation programs has nearly tripled 
since the mid-1980s, responding to public demand that farm programs offset 
some of agriculture's environmental impacts. The greatest portion of spending 
has gone to support land retirement through the Conservation Reserve Program 
(CRP). This program has significantly reduced erosion and enlarged wildlife 
habitat. Recent USDA studies examine the CRP and other major conservation 
programs of the past 15 years and point to significant benefits from soil 
conservation and wildlife restoration.  LeRoy Hansen (202) 694-5612; 
lhansen@ers.usda.gov

Interest by policymakers in the Environmental Quality Incentives Program 
(EQIP) is linked to recognition that many environmental problems can be 
addressed only through improved performance on working farmland rather than 
through land retirement. EQIP provides technical, financial, and educational 
assistance to farmers who improve soil, land, water, and nutrient management 
on farmland. Applications to participate in the program have exceeded annual 
funding, but some farmers, after signing contracts, have opted to cancel out 
entirely or withdraw some of the practices specified in their conservation 
plans. This could have implications for program design and funding.  Andrea 
Cattaneo (202) 694-5474; cattaneo@ers.usda.gov


BRIEFS
New Law Cuts Income Tax Rates & Repeals Estate Tax

The Economic Growth and Tax Relief Reconciliation Act of 2001, signed into 
law on June 7, 2001, makes significant changes to U.S. tax law. Most of the 
law's provisions apply to farmers as general taxpayers.

The law reduces Federal income taxes in several ways, with the largest cut 
being an across-the-board reduction in marginal income tax rates. It 
increases income tax benefits for families with children, primarily by 
expanding the child tax credit. It also addresses the "marriage penalty" that 
has resulted in some couples paying more tax than if they were single. It 
increases education incentives and allows higher contributions and greater 
flexibility for individual retirement accounts and pensions. Federal estate 
taxes will be reduced and eventually repealed, a cut advocated to help 
farmers and small businesses.

The law creates a new 10-percent income tax bracket for the first $12,000 of 
taxable income on a joint return ($6,000 for singles). Marginal tax rates 
also are reduced for the 28-, 31-, 36- and 39.6-percent income tax brackets 
(the 15-percent bracket rate remains unchanged). The reductions are gradual 
and become fully effective in 2006 when the rates will be 25, 28, 33 and 35 
percent, respectively. 

The new 10-percent bracket for a portion of taxpayers' income is the basis 
for the special refund checks currently being mailed by the Internal Revenue 
Service between July and the end of September. The checks are a one-time 
advance payment of some of the 2001 tax savings. Nearly two-thirds of farmers 
are expected to receive the maximum refund, which for a joint return is $600.

About 85 percent of farmers will benefit from the income tax reductions 
specified in the new law. Prior to passage, farmers were expected to pay a 
total of $26 billion in Federal income taxes in 2001 on farm and nonfarm 
income. Under the new law, farmers are likely to save $1.2 billion in income 
taxes during 2001. The present value--the value of money received in the 
future, discounted for inflation into today's dollars--of projected tax 
savings for farmers in the year 2010, when all provisions will be in force, 
is $2.1 billion.

The present value of Federal income tax savings over the entire 10-year 
phase-in period is expected to be about $19 billion for all farmers. The 
savings would be even greater without the offsetting effect of the 
alternative minimum tax (AMT). AMT was designed to reduce the ability of 
higher income individuals to escape taxes by using certain deductions. It 
applies a parallel tax system on a broader base of income, and taxpayers pay 
the greater amount of their regular tax or the AMT. The AMT already was 
expected to rise significantly prior to the law's passage, primarily because 
its exemption is not indexed for inflation.

Income tax rate reductions accelerate the growth in the total amount paid 
under AMT since AMT rates remain unchanged, although the new law temporarily 
increases the amount of income not subject to AMT through 2004. Currently 
only 2 percent of farmers pay AMT, but that number is expected to rise to 33 
percent by 2010 without further AMT relief. If AMT were held at 2001 levels, 
the 10-year sum of the income tax cut for farmers would be $26 billion. 
Therefore, the rising incidence of AMT reduces farmers' income tax cut by 
more than one-fourth over the decade to $19 billion.

The law also makes changes that will greatly reduce the number of farm 
estates affected by the Federal estate tax. Before repeal of the estate tax 
in 2010, the most significant change is to increase the dollar amount of 
property exempted from tax from the current $675,000 to $3.5 million by 
raising the unified credit. The unified credit allows each estate to transfer 
a certain lifetime amount of property free of estate and gift taxes. The new 
law also gradually reduces the maximum estate tax rates from 55 to 45 percent 
and expands the availability of deductions for donating conservation 
easements. The law repeals the family business deduction when exemption from 
the unified credit reaches $1.5 million, exceeding the $1.3 million currently 
allowed under the family business deduction and unified credit.

While these changes will reduce the amount of Federal estate taxes owed, the 
most dramatic effect will be a sharp drop in the number of farm estates 
required to file an estate tax return. By 2004, when the amount exempted by 
the unified credit reaches $1.5 million, only about a third of those farm 
estates that currently are required to file would need to file an estate tax 
return. This represents large cost savings for farm estates that are no 
longer required to file. However, because of the extended phase-in, larger 
estates may still face considerable complexity, since they may still owe tax 
and be required to file, depending on date of death of the property owner.

The number of estates owing taxes and the amount of estate taxes owed will 
decline more gradually, with both falling about 10 percent in 2002. Over the 
next decade, farmers are expected to save about $3 billion in Federal estate 
taxes.

The new law reduces both income and estate taxes for most taxpayers, 
including most farmers. While savings begin in 2001, many reductions are 
implemented gradually. Without future action, however, the law expires in 
2011, and provisions revert to prereform levels.  

James Monke (202) 694-5358 and Ron Durst (202) 694-5347
jmonke@ers.usda.gov 
rdurst@ers.usda.gov

BRIEFS
Financial Prospects for Hog Producers Generally Favorable

The national hog inventory this year has remained at 59.1 million head, about 
the same as last year, despite relatively favorable returns. Over the last 18 
months, hog prices have averaged in the mid-$40s per cwt, topping producers' 
mid-$30s breakeven (cash) costs. Producers have signaled intentions to 
increase the number of sows farrowing over the next 6 months, according to 
the USDA's June Hogs and Pigs report. Producers plan to have 1 percent more 
sows farrow in June-August and 2 percent more in September-November than 
actual farrowings in these periods a year earlier.

The changing structure of hog production and the industry's financial 
problems in late 1998 and most of 1999 have muted hog producers' response to 
prospects of favorable returns. Many smaller producers exited the industry in 
the late 1990s. Smaller producers that remain may still be recovering from 
financial problems. Lenders are also likely to be more cautious about 
financing hog operations.

If producers follow through with their farrowing intentions, and if only a 
small increase in pigs per litter occurs as expected, the June-August pig 
crop should be up about 1 percent from a year ago and the September-November 
number up 2 percent. These projections imply a January-March 2002 hog 
slaughter of nearly 25 million head and second-quarter slaughter of nearly 24 
million head. With dressed weights increasing slightly, first-half 2002 pork 
production is expected to be 2-3 percent higher than a year earlier.

With expectations of continued positive returns for hog producers in the 
coming months, the December 2001-May 2002 pig crop should increase nearly 3 
percent over a year earlier. Feed costs are expected to remain unchanged into 
2002 as a large corn crop and record soybean crop move to market. Although 
hog prices are expected to moderate in the coming months, producers' returns 
should remain positive. The larger expected pig crop and slightly heavier 
dressed weights should boost pork production in the second half of 2002 by 3-
4 percent. 

Hog prices climbed into the mid-$50s per cwt in late spring and early summer 
as slaughter rates declined seasonally. Also contributing to the rise were 
strong exports, brisk demand for bacon, especially in the fastfood industry, 
record retail beef prices (which make pork more attractive to consumers), and 
a slight decline in broiler supplies. As slaughter increases seasonally in 
late summer, prices are expected to moderate. In the late fall, when 
slaughter reaches a seasonal peak, hog prices are expected to drop into the 
low-$40s. Prices are expected to average $46-$47 per cwt in 2001, compared 
with $44.70 in 2000.

With only modest changes in pork production and trade in 2002, hog prices are 
expected to average in the mid-$40s next year. However, some uncertainty 
exists about how the imposition of Japan's import safeguard will affect U.S. 
exports to that market. (The safeguard is a World Trade Organization-
sanctioned mechanism for protecting Japanese pork producers from import 
surges.) Exports to other markets are expected to remain strong. 

Retail demand continues to be strong as composite retail pork prices averaged 
4 percent higher in second quarter 2001 than a year ago. Average retail pork 
prices are expected to rise 3-4 percent in calendar 2001 and to be unchanged 
in calendar 2002. 

U.S. pork exports are forecast at a record 1.54 billion pounds this year and 
slightly less in 2002 (1.42 billion pounds). U.S. pork exports in the first 
half of 2001 ran 33 percent ahead of last year, due primarily to very large 
shipments of fresh and frozen pork cuts to Japan. For a variety of reasons--
high U.S. beef prices, foot-and-mouth disease outbreaks in Europe, lower 
domestic hog slaughter--Japanese importers contracted for such large 
quantities of pork from the U.S., Denmark, and Canada that the safeguard 
threshold of 183,850 metric tons (product-weight equivalent) was exceeded in 
June. On August 1, the Japanese Government imposed the safeguard, which 
increased the minimum price of all pork cuts imported into Japan by 24.6 
percent. The safeguard will remain in place until March 31, 2002, the end of 
the Japanese fiscal year.

The last time the safeguard was in place--July 1996 through June 1997--
Japanese imports slowed dramatically, particularly frozen pork cuts. This 
time, however, its effect on Japan's pork imports is uncertain. 

U.S. pork imports are forecast at 916 million pounds in 2001 and 960 million 
in 2002, compared with 967 in 2000. Imports in the first 6 months of 2001 
dropped 12 percent from a year ago because Canada and Denmark appear to have 
diverted pork products to Japan that were originally destined for the U.S. 
The extent to which Japanese pork imports slow as a result of the safeguard 
will strongly influence the amount these countries ship to the U.S. in the 
second half of 2001.

Live hog imports into the U.S. are forecast at 5.3 million head for both 2001 
and 2002, compared with 4.36 million head in 2000. The rapid evolution of 
both a feeder-pig export sector in Canada and a hog-finishing sector in the 
Corn Belt states that was traditionally run as farrow-to-finish operations, 
is stimulating imports. Continued expectations for low feed prices are also 
contributing to higher imports. Live hog imports from Canada during the first 
half of 2001 were almost 2.5 million head. Canadian hog imports now account 
for about 57 percent of U.S. commercial slaughter.  

Leland Southard (202) 694-5687
Mildred Haley (202) 694-5176
southard@ers.usda.gov

BRIEF BOX
Structural Changes in the Hog Industry

The structure of hog production has changed dramatically in recent years, 
affecting the national average of pigs per litter as well as the production 
cycle (contraction and expansion). Large producers--those with inventories of 
5,000 head and over--now account for nearly 75 percent of the nation's hogs, 
compared with 27 percent in 1994. 

As the proportion of the industry consisting of larger producers has 
increased, gains from economies of size have largely been realized, and the 
overall rate of increase in pigs per litter has slowed. During 1996-97, pigs 
per litter rose over 2 percent per year but has since moderated to less than 
1 percent per year. Future increases in pigs per litter could slow even more 
because the hog production industry is already dominated by large operations. 

Pigs per litter in larger operations was 8.96 in 2000, compared with 8.74 in 
1994, less than a 3 percent increase. The rate for operations with less than 
5,000 head increased from 8 pigs in 1994 to 8.48 pigs in 2000, a 6 percent 
increase. The greater increase for smaller operations was likely because less 
efficient operations were going out of business and a larger proportion of 
the pig crop was coming from operations with 1,000 to 5,000 head. The U.S. 
average for pigs per litter is now only 0.13 less than for larger producers, 
compared with 0.55 in 1994.

Production expansion for larger and mid-sized producers is more complicated 
than in the recent past. The expansion process now includes securing 
financing, obtaining building and waste management permits from state and 
local authorities, and hiring and training staff. Also, vertical coordination 
through either marketing or production contracts is now prevalent, rather 
than spot-market sales. These factors likely mute the peaks and valleys of 
the hog cycle. 

In contrast, many producers 15 to 20 years ago maintained multi-use buildings 
for rapid repopulation of a hog herd when returns turned favorable. Necessary 
construction was accomplished without administrative procedures for securing 
waste permits. Thus, producer responses to positive or negative returns 
tended to be more rapid and often sharper in the aggregate.


BRIEF
Mandatory Price Reporting for Livestock Industry

Livestock packers and importers whose operations exceed certain levels must 
now report detailed information to USDA on price, quantity, and 
characteristics of livestock they buy and sell. April 2, 2001 marked the 
first day of implementation of USDA's Mandatory Price Reporting (MPR) system, 
mandated by the Livestock Mandatory Price Reporting Act of 1999. 

The law was a government response to demand by livestock producers for more 
information on meat industry prices. The purpose of MPR is twofold: to 
provide all livestock producers with timely market information to enable them 
to operate successfully in a recently changed economic environment, while 
also meeting consumer demand for meat and meat products.
MPR applies to packer purchases of cattle, hogs, and sheep, as well as to 
prices of boxed beef, boxed lamb, and carcass lamb. USDA requires federally 
inspected processing facilities to comply with the MPR reporting schedule if 
average annual slaughter over the preceding 5 years reached 125,000 head for 
cattle, 100,000 head for hogs, or 75,000 head for lambs. The MPR system 
requires cattle packers to report specific price and quantity information 
twice daily. Hog packers must report three times per day; lamb processors 
report once daily. All livestock packers supply a weekly summary.

USDA had been reporting market price information through its Market News 
system, but MPR differs in several important ways. Participation in the 
Market News system was voluntary; MPR is not. MPR also requires reporting of 
price and quantity information in much greater detail. Under MPR, packers 
must report the terms of sales made through markets other than traditional 
public markets. In keeping with recent structural changes in the U.S. 
meat/livestock industry, MPR focuses on negotiated private purchases and 
formula and contract sales. Packers must report specific terms of formula and 
contract purchases, thereby revealing information previously treated as 
proprietary.

Livestock marketing has evolved from pricing on the basis of live animals to 
a basis of quality incentives assigned to the characteristics of carcasses, 
as well as to specific carcass measurements. MPR takes account of this 
evolution, and requires packers to report full schedules of quality premiums 
and discounts paid for carcasses according to their quality characteristics, 
such as age, fat content, and marbling. 

The meat/livestock industry itself has evolved over the past 20 years and is 
characterized by fewer, larger packers and fewer, larger producers. 
Vertically coordinated/integrated production by contractual arrangements 
enables steady supplies of uniform animals. This, in turn, facilitates the 
supply of meat products bearing specific characteristics desired by 
consumers. 

Many small independent livestock producers, who continue to market small 
numbers of animals through spot markets, point to the restructured industry 
as a justification for MPR. In fact, the Mandatory Price Reporting Act of 
1999 was conceived when small producers successfully argued that proprietary 
price information contained in production and marketing contracts was not 
publicly available and therefore did not fully provide transparency in the 
market place.

After several startup delays, USDA implemented a schedule of 56 daily and 35 
weekly livestock and meat reports covering national and regional prices and 
quantities. Six weeks after startup, an understating of cutout values for 
beef carcasses and primals (the major components of carcasses) became 
apparent. The cause of the under-pricing was identified as a software 
programming error, and has been rectified. 

Frequent interruptions have also occurred in the MPR reporting schedule, 
reflecting the difficulty of protecting respondent confidentiality in an 
industry dominated by a few large firms. The Livestock Mandatory Reporting 
Act requires that information obtained by the MPR program be released to the 
public only if the identity of a respondent is not disclosed and the 
information conforms to aggregation guidelines established by the Secretary 
of Agriculture. In implementing the new law, USDA first adopted a set of 
standards used widely by government data collection agencies to ensure 
respondent confidentiality. The guideline, often termed the "3/60 Rule," 
states:

"Submitted information will only be published by USDA if: (1) It is obtained 
from no fewer than 3 packers. representing a minimum of three companies; (2) 
the information from any one packer. represents not more than 60 percent of 
the information to be published.."

Because the structure of the U.S livestock/meat industry has evolved toward 
fewer, larger packing firms, and data are collected for transactions 
conducted during a very short time period, the provisions of the 3/60 Rule 
are frequently not met. A finding of the USDA review of the MPR system was 
that the confidentiality rule constrained the amount of information released. 

To replace the 3/60 Rule, the Agricultural Marketing Service (AMS) developed 
a "3/70/20" confidentiality guideline that focuses on reporting patterns over 
time rather than at a single point in time.

The 3/70/20 guideline specifies that 

  for each type of report (national or regional), at least three companies 
would have to submit data 50 percent of the time or more over a 60-day 
period;

  cumulative market volume for any individual report over a 60-day period; 
and

  in cases where only one company submits data for individual reports, this 
company can not be the sole reporting entity more than 20 percent of the 
time during a 60-day period.

AMS compared the two rules and determined that, under the 3/60 Rule, 30 
percent of all scheduled daily cattle and swine reports were withheld from 
publication. In contrast, fewer than 2 percent of these same reports would 
have been withheld from publication using the 3/70/20 guidelines.

The Livestock Mandatory Price Reporting Act of 1999 also contains 
requirements for enhanced reporting of U.S. retail prices, and monthly rather 
than quarterly releases of the USDA Hogs and Pigs report. As a package, the 
law aims to increase the quantity and quality of timely public market 
information to help all producers make better production and marketing 
decisions in order to meet consumer demand for quality meat products.  

Mildred Haley (202) 694-5176
mhaley@ers.usda.gov


COMMODITY SPOTLIGHT
Strong U.S. Soybean Demand Keeps Pace with Record Supply

U.S. farmers planted an estimated 75.2 million acres of soybeans in 2001, 
surpassing last year's record of 74.5 million. The momentum for increased 
soybean acreage this year stems largely from changes in relative crop 
production costs. Expenses for anhydrous ammonia, the most commonly used 
nitrogen fertilizer for corn, increased sharply last spring. Soybean plants 
can fix most of their own nitrogen requirements from the atmosphere, so the 
crop needs comparatively little application of this input. Planting delays 
for corn in the upper Midwest and favorable marketing loan benefits also 
added more soybean area.

The national average yield for soybeans is forecast at 38.7 bushels per acre. 
This yield would be a recovery from last year's below-trend yield of 38.1 
bushels, when a severe late summer drought hurt yields across the western 
Corn Belt. U.S. soybean production is forecast at nearly 2.9 billion bushels. 
A crop this size would exceed last year's record by 97 million bushels.

Despite the large potential harvest, strong soybean demand is warding off 
even more burdensome surpluses. Carryover stocks are expected to drop from 
290 million bushels last year to 250 million bushels this fall. Domestic 
soybean crushing will be supported in 2001/02 by good prospects for soybean 
product exports. Soybean processors are expected to crush an all-time high of 
1.66 billion bushels in 2001/02, up 25 million from the previous crop year. 
However, with ample South American soybean stocks left over this fall, 
2001/02 U.S. soybean exports are projected to only match the record 2000/01 
estimate of 995 million. Robust soybean imports by China and the European 
Union have continued to support foreign demand for U.S. exports.

Combined with a stronger demand outlook, 2001/02 ending stocks of soybeans 
are forecast at 300 million bushels. Record U.S. supplies and large foreign 
stocks (particularly in China and Brazil) are expected to limit price 
increases. USDA forecasts the 2001/02 average farm price for soybeans at 
$4.35-$5.35 per bushel, compared with $4.55 in 2000/01. If the forecast were 
realized, it would be the fourth consecutive year with farm prices below the 
U.S. soybean loan rate of $5.26 per bushel. Marketing loan gains and loan 
deficiency payments (which help U.S. farmers cover the difference between 
market prices and the loan rate) may total about $2.5 billion for the 2000 
soybean crop but may decline as market prices rise this crop year.

After several years of very low prices, demand growth in the soybean oil 
market should strengthen prices in the coming year. Very large U.S. stocks 
weighed on soybean oil prices last season, but much larger foreign imports 
are expected in 2001/02. Shrinkage of other vegetable oil supplies throughout 
the world is expected to swell U.S. soybean oil exports by two-thirds in 
2001/02 to 2.5 billion pounds. Domestic disappearance of soybean oil should 
rise moderately and the large stock carryover would be trimmed somewhat. The 
season-average price would rise to 16.5-19.5 cents per pound, from 14.25 
cents in 2000/01. Soybean oil prices at this level would still be 
comparatively low, in historical terms.

A stronger world market for soybean oil would begin to favor crushing more 
soybeans for their oil value, which sank near historic lows in 2000/01. The 
corresponding growth of soybean meal supplies will maintain pressure on the 
2001/02 average meal price, which is forecast at $155-$180 per ton, compared 
with $175 in 2000/01. An expected recovery in South American soybean crushing 
will make gains in U.S. meal exports more difficult in 2001/02. However, 
affordable prices are anticipated to keep U.S. soybean meal exports 
competitive into next year, slipping only from 7.75 million tons in 2000/01 
to 7.6 million tons in 2001/02. U.S. soybean meal exports were larger last 
season because Indonesia banned imports from South America temporarily. The 
ban was imposed because of fear that soybean meal from the region could 
transmit foot and mouth disease. U.S. soybean meal exports to Indonesia 
surged more than 0.5 million tons in 2000/01 partly in response to the ban 
and availability of the U.S. export credit program.

Favorable hog values should promote a steady expansion of domestic soybean 
meal consumption over the next year. Domestic feed consumption by hogs rose 
last season partly because an outbreak of foot-and-mouth disease in Europe 
benefited U.S. pork exports. The profitability of broiler chicken production 
has also improved and the flock size is gradually expanding. U.S. 
disappearance of soybean meal is forecast rising nearly 2 percent to 32.1 
million short tons in 2001/02. 

Foreign Soybean Consumption 
Remains Brisk

The bumper soybean crops produced in the U.S. and South America have 
depressed prices, making large purchases quite affordable for the world's 
major importers.

European Union (EU) consumption of soybean meal increased 3 percent in 
2000/01 based on its continued substitution for meat and bone meal, which has 
been indefinitely banned from all livestock feeds following the fall 2000 BSE 
outbreak in the region. Prior to the ban, soybean imports had been expected 
to increase only marginally in 2000/01, but they increased 8 percent 
following the prohibition. Growth in Eastern Europe soybean meal demand, 
which is also affected by the loss of meat and bone meal supplies, has been 
just as strong. EU demand growth for soybean meal is forecast up 4 percent 
for 2001/02 to 27.8 million metric tons. Tighter domestic oilseed supplies 
should improve crush margins and slightly favor EU soybean imports, which are 
forecast up 4 percent to 17.7 million tons. EU soybean meal imports may 
increase 4 percent to 21.1 million tons. 

In China, corn prices were comparatively attractive last spring, which is 
estimated to have reduced China's 2001 soybean area 7 percent. Rains have 
also been deficient in the top soybean-producing region. Soybean production 
by China is forecast to decline to 15 million tons from 15.4 million in 2000. 

In recent years, China has preferred to import soybeans for crushing rather 
than to import soybean meal. Soybean imports by China swelled 31 percent in 
2000/01 to 13.2 million tons, encouraged by a robust 18-percent increase in 
soybean meal consumption. The lower expected domestic soybean output would 
require another increase in China's already massive imports, which are 
forecast rising to 14.5 million tons in 2001/02. With a comparable expansion 
of livestock feed use next year, China would account for more than 40 percent 
of the world's expected growth in soybean meal consumption. 

Competition Increases 
for Soybean Exports 

Record area and nearly ideal weather swelled the South American soybean 
harvest 15 percent last season, while U.S. output increased just 4 percent. 
In 2001/02, global soybean production is forecast to rise only 3 percent to 
176.8 million tons. The U.S. could account for most of the world's projected 
output gain, although about half of that would add to U.S. soybean stocks. 
Despite smaller prospective increases in Argentine and Brazilian output, both 
countries should accrue much of the gains in world soybean and soybean meal 
trade next season.

For Brazilian farmers, soybeans have been a very good hedge against currency 
fluctuations. Despite relatively low soybean prices in dollar terms, Brazil's 
exchange rate (which has depreciated by one-fourth against the dollar this 
year) is boosting internal soybean prices and expected plantings in 2001. 
Firmer U.S. prices will also encourage an expanded soybean area, while corn 
prices in Brazil are not as attractive as they were a year ago because of a 
bumper crop. Although a repeat of this year's record soybean yields in Brazil 
is not expected, an 8-percent expansion of area may push next year's harvest 
to a record 39 million tons.

Larger soybean supplies and an easing of the country's electrical power 
shortage by next year should spark an upswing in Brazilian crushing. Low 
reservoir levels are reducing hydroelectric power generation in Brazil this 
year, so the government has imposed nationwide rationing. Better crush 
margins would help revive Brazil's soybean meal exports next year. Yet, 
value-added taxes between Brazilian states are still handicapping domestic 
processors relative to foreign buyers. So, a bigger than usual soybean 
carryover should promote an even greater expansion of Brazilian soybean 
exports in 2001/02.

Foreign exchange rates are also affecting production incentives in Argentina. 
Because of weak exports, Argentina's government implemented a package of 
policy measures that alters the effective exchange rates for traders (see 
World Agriculture & Trade, p. 11). Although the effective depreciation in 
Argentina has been less acute than what Brazil has experienced with its 
floating exchange rate, agricultural commodity prices have increased.

Stronger prices would help Argentine soybean area edge higher but slightly 
lower forecast yields would flatten projected 2001/02 soybean output around 
26 million tons. Yet, supplies from the last harvest are quite large. 
Argentine soybean crush and exports should increase to 18.6 million and 7.5 
million tons, respectively. Solid growth in soybean meal exports, from 13.7 
million to 14.5 million tons, would follow.

Tightening World Vegetable Oil 
Market Enhances Soy Oil Trade

Counter to soybean output, slowing output of the high-oil oilseeds will 
weaken gains in global vegetable oil output next year. World sunflowerseed 
production in 2001/02 is expected to decline slightly to 22.8 million tons, 
which would make it the smallest since 1993/94. A negligible increase in 
world rapeseed output in 2001/02 to 36.7 million tons is also expected to 
firm vegetable oil and oilseed prices. 

Palm oil is the world's most traded vegetable oil and production trends often 
determine market direction for all oils. Last year, very low prices prompted 
Malaysia and Indonesia (the world's top palm oil producers and exporters) to 
try boosting prices by replanting older trees (thereby curtailing production) 
and encouraging greater domestic use. Based on slower area expansion and 
lower yields, world palm oil production in 2001/02 is projected up just 4 
percent to 24.7 million tons. By comparison, palm oil output in 2000/01 grew 
an estimated 9 percent. 

International trade in soybean oil is the most likely beneficiary from 
tighter supplies of competing oils, and is projected to rise 8 percent to 8.1 
million tons in 2001/02. Price premiums for sunflowerseed and rapeseed oils 
over soybean oil have widened in the last year and should get even larger. 
Huge existing stocks of soybean oil will help the United States capture the 
majority of the trade expansion, although Argentine and Brazilian exports 
will also gain. Crop threats that develop in any of these countries could 
rally soybean oil prices well above levels seen the last 2 years.

Importer trade policies are likely to improve opportunities for soybean oil 
imports, also. India is the world's largest vegetable oil importer and 
fluctuations in its foreign trade have a great impact on market prices. In 
recent years, insufficient domestic vegetable oil production and robust 
consumption growth have created a vast import demand by India. Total Indian 
vegetable oil imports surged 29 percent last season. However, Indian imports 
are expected to moderate in 2001/02 because of better domestic oilseed 
harvests.

The Indian government has attempted to support oilseed prices for domestic 
farmers by raising tariffs on imported vegetable oils. However, India's 
import duty for soybean oil is currently at its World Trade Organization 
(WTO)-established maximum and all quantity barriers were eliminated in 1994. 
Soybean oil has now secured a price advantage in India over other vegetable 
oils that have much higher tariffs. If duties on these competing oils are not 
reduced, the preferential access should support another record volume of 
Indian soybean oil imports in 2001/02. India typically imports soybean oil 
between May and September, so Argentina and Brazil usually provide most of 
what India needs from their more recent harvests. While U.S. soybean oil 
exporters will get a small share of this trade, they should benefit 
competitively in other foreign markets as India siphons off more supplies 
from South America.

China trails only India in the quantity of vegetable oil imported. In the 
coming year, domestic production and imports of oilseeds will limit China's 
soybean oil imports. China's trade policies also favor imports of oilseeds 
over vegetable oils. However, the date of China's accession to the WTO (which 
may be as soon as late 2001/early 2002) could make a major difference to this 
outlook. In the first year of accession, the terms would expand access to 
China's domestic market for soybean oil by replacing absolute quotas with a 
tariff rate quota (TRQ) of up to 1.72 million tons. By comparison, minimal 
soybean oil quotas limited imports to just 80,000 tons in 2000/01. The 
within-quota duty would be lowered from 13 percent to 9 percent. 

When China's TRQ is implemented, it could substantially increase soybean oil 
imports. China's domestic vegetable oil prices, which are about double world 
levels because of the quota, could fall sharply. The corresponding reduction 
in oilseed processing margins would stall the recent expansion in crushing 
and revive China's imports of soybean meal, as well. Yet, China has added 
quite a lot of modern oilseed crushing capacity in the last 2 years, so fewer 
oil imports may be needed than if the TRQ had been implemented earlier. Per 
capita consumption of vegetable oils in both China and India is well below 
levels of Western nations. Therefore, just as lower prices have inspired 
Indian consumption, liberalization of the Chinese market could substantially 
accelerate world vegetable oil demand.  

Mark Ash (202) 694-5289
mash@ers.usda.gov

AGRICULTURE & TRADE
Economic Reforms Remain Critical for Argentina & Brazil

The agricultural sectors of Argentina and Brazil have traditionally suffered 
from economic instability and a high degree of government intervention in 
their economies. Both countries enacted major economic reforms in the early 
1990s. The initial plan was to eliminate the suffocating hyperinflation of 
the late 1980s and early 1990s by stabilizing currency values. In Argentina, 
the peso was pegged one-to-one with the U.S. dollar. Brazil's real was also 
closely linked to the U.S. dollar. 

These currency linkages held through much of the 1990s. Unfortunately for 
both Argentina and Brazil, timing of the pegging coincided with a 5-year 
rally in the U.S. dollar in the late 1990s. As a result, peso- and real-
priced commodities were uncompetitive in international markets. By late 1998, 
problems had magnified for the real, creating fears among international 
investors of a spillover effect following the Russian financial crisis of 
August 1998. In January 1999, Brazil's government removed the real's link to 
the U.S. dollar and allowed it to float freely. The real depreciated 32 
percent in the first month. 

Depreciation of the real helped the country's export sectors by effectively 
lowering the price of Brazil's export products in world markets. For Brazil's 
soybean producers, depreciation raised farm prices and continued to boost 
soybean plantings. However, depreciation also raised costs of imported 
agricultural inputs--e.g., fertilizer, herbicides, and machinery. Producers 
and input suppliers have at least temporarily sidestepped this problem by 
creating a barter-type market for many agricultural inputs that prices most 
inputs in terms of bags of soybeans.

Brazil's export sector continues to benefit from the currency depreciation. 
Since January 1999, the real has lost over 50 percent of its value relative 
to the U.S. dollar. Continual currency depreciation has partially cushioned 
Brazilian soybean producers from the drop in international commodity prices 
of the past 4 years. Brazil's export competitiveness during the next decade 
will depend, in part, on the value of the real relative to the currencies of 
its major trading partners and competitors. 

Many burdensome costs and policy distortions are still in effect in Brazil. 
These include inefficient transportation and marketing systems which raise 
marketing costs, high interest rates which discourage investment, and state-
level taxes on the movement of goods and services. Nevertheless, the 
Brazilian economy continues to improve, with strong gross domestic product 
(GDP) growth in 2000 and a slight decline in the current government debt. A 
recent International Monetary Fund (IMF) report concluded that Brazil is now 
better placed than in the early 1990s to withstand external economic shocks 
and that strong money management by the government should help the Brazilian 
economy to continue growing by encouraging growth in the private sector.

The interdependence of trade between Brazil and Argentina connects the 
countries' economic fortunes and makes each country vulnerable to the others' 
economic problems.

Argentina's Post-Reform 
Economy. Losing Stability?

Argentina's reform programs of the 1990s laid the groundwork for a stable 
investment climate for agriculture by controlling inflation and establishing 
confidence in the peso. Reduction of export taxes, import tariffs, and quotas 
allowed farmers to capture a larger share of international market prices, and 
allowed for more of Argentina's surplus agricultural production to flow into 
export markets. Argentina's economy performed well throughout much of the 
1990s--annual GDP growth averaged 8 percent during 1991-98, and inflation has 
hovered near zero since 1996. Despite three major international financial 
crises--the 1995 Mexican peso crisis, the 1997 Asian crisis, and the 1999 
Brazilian crisis--Argentina has managed to maintain its currency peg to the 
U.S. dollar. 

Despite initial successes, the reforms of the early 1990s left many 
significant problems untouched, and Argentina is now in the midst of a 3-year 
recession. The economy is still burdened by excessive regulation and labor 
market problems. Employers have little flexibility in firing employees, 
lowering wages, or hiring part-time labor. As a result, high payroll costs 
make many Argentine goods too expensive to compete in international markets. 
Although many sectors of the Argentine economy changed from public to private 
control under the reforms, in many cases it simply resulted in substituting a 
privately owned monopoly for a government monopoly with little improvement in 
competition or efficiency.

The Government of Argentina (GOA) employs nearly one-third of the Argentine 
labor force. Despite some initial cuts, government payrolls remain large in 
2001, and government expenditures have exceeded revenues since 1995. Rather 
than cutting expenditures, the GOA has raised taxes in an attempt to close 
the gap, which has raised business costs. The mounting public debt--$130 
billion in June 2001--undermines investor confidence in the country's ability 
to manage its economy and poses a serious threat to economic stability as 
much of the debt is financed through short-term credit from international 
financial markets. 

These economic problems are finally catching up with Argentina. The economy 
has been mired in recession since 1998 with no sign of recovery in the near 
future, and unemployment has been running at about 15 percent. Significant 
currency depreciation in Brazil and currency weakness in the European Union 
(both major trading partners) suggest that the value of the peso has become 
too high. The U.S. dollar's trade-weighted value--weighting the exchange 
rates of major U.S. trading partners by their share of trade with the U.S.--
is at near-record levels.

The current economic outlook in Argentina favors another round of inflation. 
After negligible inflation during the 1996-2000 period, private forecasters 
project inflation will rise by 6 to 10 percent during 2002-03. As inflation 
in Argentina outpaces that in the U.S., the peso becomes even more 
overvalued. The Argentine government has been under pressure both politically 
and economically to consider changing back to a pegged-float or possibly a 
free-float exchange rate. Although the likelihood of such an event is 
difficult to predict, devaluation of the peso would clearly improve 
Argentina's competitiveness in international markets.

Partial Devaluation 
Of the Peso?

On June 15, 2001, Argentina's economy minister, Domingo Cavallo, announced a 
package of policy measures referred to as the "convergence factor." This 
package included a dual exchange-rate system with an indirect devaluation for 
commodity exporters through implementation of a set of trade-policy tools. 
Cavallo's plan also includes an austerity program designed to eliminate the 
government debt. The overall package of measures is intended to boost 
international competitiveness and revive growth, while avoiding a potentially 
disastrous default on government debt. 

Currency devaluation has always been an obvious remedy for Argentina, but has 
been avoided due to the country's enormous government debt. As long as the 
peso is pegged one-to-one with the dollar, the $130 billion debt can be 
repaid with 130 billion pesos. A 10-percent devaluation would raise that 
price to 143 billion pesos. Cavallo's "enhanced convertibility law" tries to 
have it both ways by cutting the impact of currency overvaluation on 
exporters while retaining the ability to repay international debt with the 
overvalued peso. 

Under the new plan, international finance operates under the usual one-peso-
to-one-dollar arrangement, but exporters receive an adjustable reimbursement 
by the GOA in amounts equal to the difference between the current peso-dollar 
peg and a peso exchange rate based on a 50-50 mix of the euro and the dollar. 
For example, during July, the euro traded at about 14 percent below the 
dollar (1 euro = US$0.86), which is roughly equivalent to a 7-percent 
devaluation for exporters. On the other hand, importers face what amounts to 
an implicit tariff of equal magnitude under the new system. The devaluation-
induced export gains are to be partially offset by elimination of export tax 
rebates, while the devaluation-induced higher import costs are to be 
partially offset by lower tariffs on imports.

If successful, Cavallo's exchange-rate adjustment plan could mean potential 
gains in Argentina's share of trade in international commodity markets, due 
to lower priced exports. However, of greater concern is the risk of causing a 
deeper recession and the possibility of a regional spillover of economic 
difficulties into Brazil and beyond. 

MERCOSUR--a regional customs union between Argentina, Brazil, Paraguay, and 
Uruguay--has increased economic ties among member countries by establishing 
essentially duty-free trade within the union. The interdependence of trade 
among members has made each country vulnerable to each others' economic 
problems. For example, depreciation of Brazil's currency has made many of 
Argentina's commodity exports relatively less competitive. In addition, high 
common external tariffs have sheltered inefficient industries from 
competition abroad.

Argentina's farmers are less optimistic about the new policies even though 
there are some positive aspects for agriculture. For example, taxes on 
interest payments on credit are to be eliminated, payment of a banking 
transaction tax and fuel transfer tax are to be deductible against farmers' 
value-added tax liabilities, and the government announced an up-to-60-percent 
lowering of costly highway road tolls. However, diesel fuel prices are to be 
raised by over 15 percent. According to Argentine sources, every centavo 
(1/100 peso) increase in the price of diesel fuel costs farmers an additional 
US$45 million. In addition, farmers are dependent on imports of many critical 
agricultural inputs such as farm chemicals and machinery. Import costs would 
increase under the dual exchange-rate system. In the end, the proposed 
exchange rate could simply accelerate the process of squeezing out less 
efficient or less well-financed operators which has been underway in 
Argentina for most of the past decade.

The bottom line for international commodity markets is that Argentina's 
wheat, corn, soybeans, soymeal, and soyoil could potentially cost less 
relative to competitors under the new exchange-rate mechanism. This could 
mean potential market share gains for Argentina and greater pressure on 
international commodity prices in general. If the GOA decided to let the peso 
float freely (as in Brazil), there would likely be a drop of 25 to 30 
percent, perhaps temporarily overshooting to as much as 50 percent in the 
beginning. 

What's Ahead for 
Argentina's Economy?  

Some commodity markets are still recovering from the last global crisis--the 
1997 Asian crisis. Argentina's continuing ability to finance its debt is an 
important issue for global financial stability because more than 20 percent 
of all tradable emerging debt has its origins in Argentina. However, the ties 
between Argentina and the other emerging countries are not tight, except for 
Brazil. Although the possibility of impacts in Latin America exists, the 
overall risk of spillover is relatively low. If there were spillover, Asia 
appears to be far more vulnerable than Latin America, in large part because 
most of the Asian countries affected by the 1997 crisis have failed to make 
necessary economic reforms. 

Concerns have been raised in international money markets that Cavallo's 
announcement merely signals the possibility of even larger currency 
devaluation and further enlargement of Argentina's debt crisis. Much of 
Argentina's government debt is short-term credit that will need to be repaid 
or refinanced soon. Cavallo's policy package is only part of a recent series 
of measures taken to avoid economic crisis similar to the 1980s, which was 
due to the inability of the government to repay or refinance its debt. In 
December 2000, the GOA received a $40-billion rescue package from the IMF and 
other sources to temporarily hold off its mounting debt crisis. In May 2001, 
the GOA traded $30 billion in short-term credit for long-term bonds to defer 
repayment and ease the immediate burden. 

Argentina's debt problems will not disappear anytime soon. The country will 
need to raise about $12 billion in 2002 to repay or refinance more short-term 
debt coming due. This dilemma is compounded by the likelihood of deepening 
the current recession. However, if Cavallo's austerity plan with labor market 
reforms were rigidly followed by the provincial governors, it would go a long 
way toward restoring investor confidence and building the foundation for 
future economic growth.  

Randy Schnepf (202) 694-5293 and Dave Torgerson (202) 694-5334
rschnepf@ers.usda.gov 
dtorg@ers.usda.gov


WORLD AGRICULTURE & TRADE
China's Grain Policy at a Crossroads

China's grain sector and its policymakers are adjusting to internal and 
external pressures that could reshape the industry. As consumers diversify 
their diets, they are demanding less grain but of higher quality. Government 
policymakers and the grain marketing system have been slow to adjust to 
changing consumer preferences. As a result, large stocks of low-quality grain 
accumulated in the 1990s. Government policy emphasis is now shifting from 
grain quantity to quality. China's pending accession to the World Trade 
Organization (WTO) may introduce external competition for both farmers and 
grain traders that will hasten the shift. 

USDA estimates that China's production of wheat, corn, and rice fell by a 
combined 44 million tons in 2000/01. Grain production is likely to be lower 
again in 2001/02, as sown area in grain fell further and a second straight 
year of drought cut into corn and wheat yields. 

With apparent tightening of domestic supplies, many observers have been 
puzzled by China's apparent lack of interest in grain imports. China has 
historically been a major importer of wheat, with annual imports of 4-15 
million metric tons earlier in the 1990s. But over the past several years, 
wheat imports have been at minimal levels of 1 million tons or less, and are 
projected to remain near that level in 2001/02. China also clamped down on 
corn imports and exported corn at near-record rates during calendar year 
2000. Corn exports in the first half of 2001 continued, although at a reduced 
pace.

China's grain sector is emerging from a huge burst of grain production in the 
mid-1990s, arising from the government's historical approach to food policy 
that emphasized massive grain production. After five decades of grain policy 
had focused on ensuring adequate domestic supply, China is now learning to 
cope with a new problem: too much grain. What's more, the grain on hand often 
lacks the quality attributes sought by increasingly affluent and 
discriminating Chinese consumers. With China's accession to the WTO expected 
in late 2001 or early 2002, the Chinese grain sector faces pressure from both 
external competition and internal shifts in consumer preferences which could 
reshape the industry.

Mid-1990s Policy 
Boosted Grain Production

Historically, the problem of producing enough grain to feed China's massive 
population was a high national priority. Seed technologies, expansion of 
irrigated areas, adoption of chemical and other modern inputs, and rural 
reforms such as the household production responsibility system begun in the 
late 1970s, combined to keep grain production on an upward trend over the 
past four decades. Combined production of corn, wheat, and rice (the three 
most important grains in China) grew from about 100 million tons after the 
disastrous famine of the early 1960s to 200 million tons in the late 1970s, 
due mostly to devoting ever-greater quantities of labor and land to grain 
production. After the introduction of market-oriented reforms in 1978, total 
grain production grew even more rapidly to 390 million tons in the late 
1990s, an increase of 90 percent in 20 years. 

After years of growth, China's policymakers became concerned when grain 
production hit a plateau in the early 1990s. Food prices rose, and localized 
grain shortages occurred, as land was taken out of grain production in areas 
surrounding booming coastal cities. To ease the mounting pressure of food 
security concerns, the government initiated the "Governor's Grain Bag" policy 
in 1994-95 to boost grain production. The government increased procurement 
prices and mandated that minimum grain production and reserve levels be met 
by provincial governments. In response, combined wheat, rice, and corn 
production rose from 322 million tons in 1994/95 to 375 million tons in 
1996/97. Production remained at high levels through 1999.

The "grain bag" policy reflected the government's traditional approach to 
food policy of setting quotas and targets and marshalling inputs to ensure 
that grain production is sufficient to feed the population. This retrenchment 
from market-oriented policies in the early 1990s achieved an increase in 
grain output by inducing farmers to shift land and other agricultural inputs 
to grain. By contrast, gains in the 1970s and 1980s resulted from rising 
productivity and efficiency as market signals brought about a more efficient 
allocation of resources.

The "grain bag" policy, aided by favorable weather and imports, yielded more 
grain than China could handle. Imports in 1994 and 1995 added to the flood of 
grain. By all accounts, grain storage facilities were filled beyond capacity 
in the late 1990s. The actual size of China's grain stocks is unknown, since 
it is considered a state secret, but estimates were as high as 500 million 
tons (including both commercial and onfarm stocks) at the end of calendar 
year 2000.

The surge in grain production in the mid-1990s occurred at the same time 
grain consumption growth was slowing. Demand for food grains stagnated in the 
1990s, as rising incomes allowed more consumers to diversify their diets to 
include more meat, fish, fruits, vegetables, and edible oils--and less grain. 
Chinese statistics indicate that at-home per capita food grain consumption 
(rice and wheat) fell 13 percent between 1990 and 2000. Population grew by 
about 11 percent over the same period, but not enough to offset the decline 
in per capita consumption. Rising use of grain in processed foods and 
restaurant meals may have offset the decline in at-home consumption to some 
degree, but the overall trend in food-grain consumption appears to have been 
flat or declining in the 1990s. 

On a per capita basis, China's production of rice and wheat dipped to 186 
kilograms in 1994 (prior to the "grain bag" policy) before rising sharply to 
213 kilograms in 1997. At the same time, per capita home consumption was 
falling as measured by China's household expenditure surveys. This suggests a 
widening gap between production and consumption during the mid-1990s. (These 
figures are not precise measures of supply and demand since they do not 
account for trade, feed, industrial use, or food away from home). In this 
context, the drop in production in 2000 appears to be a needed correction to 
align production with consumption. Per capita production of rice and wheat 
dropped from 200 to 183 kilograms between 1999 and 2000, narrowing the 
difference between per capita production and at-home consumption from 32 to 
15 kilograms.

Large grain supplies pushed down prices in 1999 and 2000, discouraging 
farmers from planting grain. Many diverted acreage to cotton, oilseeds, 
vegetables, fruits, and fish ponds. Elimination of procurement quotas for 
several kinds of low-quality wheat and rice also contributed. Reports of 
grain being rejected by procurement stations for failing to meet quality 
standards may also have discouraged the planting of some types of grains in 
recent years.

From 1999 to 2001, the government has focused on reducing its huge stocks of 
grain. That is why, for example, China had record corn exports (aided by 
government subsidies) of nearly 10 million tons during 1999/2000, a year of 
severe drought in corn growing areas. In the past year, both USDA and the 
United Nations Food and Agriculture Organization revised their estimates of 
Chinese grain stocks upward by a substantial amount to more accurately 
reflect the situation. In 2001, indications are that while stocks have come 
down quite a bit, they are still substantial. 

Emphasis Shifting From 
Quantity to Quality

China's millers and bakers are now seeking grain with specific attributes 
sought by increasingly affluent Chinese consumers. Wheat must be suitable for 
breads, baked goods, and instant noodles. Bread makers demand high-protein 
and high-gluten wheat, while makers of cakes and crackers demand low-protein 
wheat. Most of China's wheat is between these two extremes. Rice must be high 
in quality, with a precise taste, texture, and stickiness when cooked.

Demand for high-quality wheat and rice is often met by imports. While China 
has been a net exporter of rice in recent years, southern residents have 
developed a taste for imported quality fragrant rice, mostly from Thailand. 
Millers are reportedly willing to pay premium prices for quality imported 
wheat to supply China's booming baking industry. Some types of imported wheat 
have been unavailable at any price in recent years as the government 
maintained very low import quotas in order to draw down its excessive grain 
stocks. China restricts imports of grain through unannounced quotas and 
administrative decisions (AO June-July 1999). Millers have had to make do 
with domestic wheat, the price of which is significantly above world levels.

China's goal is to supply high-quality grain from domestic sources, but 
reliance on administrative methods rather than market-based price signals has 
failed to adequately transmit changing consumer preferences to producers. New 
national grading standards for rice were introduced in 1999, but many farmers 
do not know how to interpret the standards. 

Three new premium rice grades were established in 2000. New wheat grades were 
established with specific end uses in mind. "Quality" wheat includes both 
high-gluten varieties that are suitable for western-style bread and bakery 
products and low-gluten/low-protein varieties for cookies, cake mixes, and 
crackers. High-gluten wheat is further classified into two grades based on 
gluten and protein content. "Regular" wheat is classified into five grades on 
the basis of weight, percentage of imperfect grains, and foreign materials. 
There are also minimum standards for foreign materials, moisture, color, and 
smell that all wheat grades must meet. 

The government has identified areas that produce "high-quality" wheat, and 
pays an apparently arbitrary 10-percent premium for this wheat. According to 
grain bureau analysts, "high-quality-special use" wheat constituted 16 
percent of wheat area in 2000/01, up from less than 5 percent in 1998. The 
Ministry of Agriculture set a target of 20 million tons of "high-quality" 
wheat production by 2005. It is not clear, however, whether these statistics 
accurately reflect the pace of improvement in China's wheat quality. The 
statistics indicate the quantity of wheat grown in areas declared as "high 
quality," but they do not necessarily reflect the actual quality of the 
output. A common complaint of millers is the lack of homogeneity in wheat 
delivered to them. 

The lack of adequate price incentives offered by the government-sponsored 
grain bureau has slowed the response of producers to changing consumer 
preferences. The government sets prices for grain purchased to fulfill 
mandatory quotas, and for sales above the quota. These prices only dimly 
reflect market forces. Until 1999, the government made little distinction 
between prices it paid for indica and japonica rice varieties, even though 
low-quality early indica rice commanded a lower market price. The government 
also procured large quantities of low-quality spring wheat from northeastern 
provinces. As a result, grain bureaus accumulated large stocks of low-quality 
grain for which there is almost no demand. 

Reportedly, a rising proportion of food grains has been sold or exported to 
neighboring countries such as South Korea as animal feed or lost to spoilage 
as prospects for marketing these low-quality grains have dimmed. Carrying 
costs of these mounting surpluses have been a financial burden to the grain 
bureau system. 

The grain bureau is slowly responding to the changing market. In 2000, 
procurement prices were eliminated for low-quality spring wheat grown in 
China's northeast, all wheat grown south of the Yangtze River, and low-
quality indica rice grown in southeastern coastal provinces. Without the 
incentive of the procurement price, spring wheat production in the northeast 
(including Jilin, Liaoning, Heilongjiang, and Inner Mongolia) dropped by 59 
percent in 2000, according to estimates from within China. Some local grain 
procurement stations have also reportedly rejected grain that failed to meet 
quality standards. While this is a step toward meeting consumer preferences, 
better transmission of market-based price signals to producers and greater 
attention to grading standards will be needed to ensure that the type of 
wheat grown by producers is in line with consumer demand.

Increased competition in grain marketing may improve the economy's ability to 
transmit market signals from the changing consumer market to the producer. A 
substantial private trade already exists, and contracting with mills and 
processors is also emerging, but the government grain bureau system remains 
dominant. A major grain marketing reform in 1998 aimed to separate the grain 
bureau's previously intertwined food policy and commercial functions. 

The government intends to spin off entities from the grain bureau system that 
would become commercial grain trading operations to promote competition in 
grain marketing. Remaining government entities would focus on maintaining 
policy-oriented grain reserves. The separation of policy and commercial 
operations and the increase in competition is likely to give commercial grain 
traders incentives to pay prices that more closely reflect final consumer 
demand. 

WTO Accession 
Will Increase Competition

China's long-anticipated WTO accession, now expected in late 2001/early 2002, 
will also introduce more competition. Currently, foreign trade in grains is 
dominated by state entities and is carefully controlled by the central 
government. After entering the WTO, China will establish tariff-rate quotas 
for wheat, corn, and rice. Imports up to the annual quota amount for each 
commodity will be allowed at low tariff rates of 1 percent, and imports above 
the quota will be assessed high tariffs of 80 percent for rice and corn and 
77 percent for wheat. Over the 5 years following accession (beginning 
probably in 2002), the quotas will increase and above-quota tariffs will 
decline yearly. 

WTO accession is expected to weaken the monopoly of state trading entities in 
China's grain trade. A share of each year's tariff-rate quota will be 
reserved for nonstate trade entities in order to encourage private-sector 
participation. Half of the long grain rice quota will be reserved for private 
traders, and for corn the private share will be set initially at 25 percent, 
rising to 40 percent over 5 years. Wheat and short grain rice trade will 
still be dominated by government entities, as private shares are set at just 
10 percent. The greater role of nonstate traders following WTO accession has 
considerable potential to increase competition in China's grain trade, though 
the licensing procedure and quota allocation process are largely unknown to 
traders.

It is widely recognized that WTO accession will increase competition for 
Chinese farmers by allowing more wheat imports and reducing corn exports 
(corn export subsidies will end after WTO accession). China's rice, which is 
more competitive internationally, will not feel much direct effect. As 
China's meat and dairy consumption rise, derived demand for corn to feed 
growing livestock herds will shift grain area away from food grains to corn 
and other feed grains. China is expected to become a net importer of corn 
within the next decade, a trend that may be hastened by WTO accession.  

Fred Gale (202) 694-5215, Hsin-Hui Hsu (202) 694-5224, 
Bryan Lohmar (202) 694-5214, and Francis Tuan (202) 694-5238
fgale@ers.usda.gov 
hhsu@ers.usda.gov 
blohmar@ers.usda.gov 


WORLD AGRICULTURE & TRADE BOX
More Detailed China Report Will Be Available

The information in this article is drawn from the annual China International 
Agriculture and Trade Report, which will be published by ERS in late 2001. 
Among the conclusions in the broader report are:

China's huge appetite for soybeans to feed its emerging livestock and edible 
oils industries continues to grow, with soybean imports expected to reach a 
record 13.2 million tons in 2000/01.
The report explains China's grain reserve policies and provides background 
information on how USDA produced its new grain reserve estimates in May 2001.

Surging textile and apparel exports boosted demand for cotton and encouraged 
farmers to increase cotton acreage in 2001, but China remained a net exporter 
of cotton in 2000/01 as imports were restrained at minimal levels.

China's livestock sector is internationally competitive in terms of 
production costs, but sanitary issues limit export potential. Meanwhile, the 
grain sector's competitiveness has eroded. 

In the long run, continued rapid growth and openness to trade in China will 
stimulate demand for food and fiber, but stagnant rural incomes and growing 
regional inequality temper optimism.

Entrenched rural policies and institutions impede efficient resource 
allocation in rural China, dampening agricultural productivity and income 
growth.

Following China's WTO accession, imports of wheat, cotton, soybeans, edible 
oils, and soymeal are likely to rise. China's rice exports are expected to 
rise, and its corn exports will likely fall.


RESEARCH & TECHNOLOGY
Livestock Drugs: More Questions Than Answers?

The use of antimicrobial (antibiotics and other) drugs in livestock 
production has been surrounded by controversy since the practice began in the 
1940s. Antimicrobial drugs are designed to weaken or kill pathogens, which 
are disease-causing microorganisms such as bacteria and fungi. At high 
levels, these drugs are used to cure or contain livestock diseases. At low 
levels, antimicrobial drugs are used in livestock production to enhance feed 
efficiency and promote growth, fight infections not usually detectable 
without clinical examination, and prevent diseases. The selection of 
effective and reliable antimicrobial drugs is limited, and the same or 
related drugs are often used for both animals and humans. It is this dual 
human-livestock use that has generated concern. 

It is primarily the low-level use of these drugs for livestock that come 
under fire, particularly those used to promote growth. Administering low 
levels of antimicrobial drugs to food-producing animals has been postulated 
to threaten human health in two ways. 

First, some fear that livestock drug residues may remain in final food 
products and cause human illness. According to the joint Committee on Drug 
Use in Food Animals, which has members from both the National Research 
Council and from the Institute of Medicine, the generally rapid breakdown of 
active ingredients in drugs, combined with Food and Drug Administration 
(FDA)-specified periods between the last administration of the drug and 
slaughter, have limited this threat in the U.S.

Second, scientists have found that some microorganisms (particularly 
bacteria) are becoming resistant to antimicrobial drugs. This raises concerns 
about the role that livestock drug use plays in the emergence of drug-
resistant bacteria and the ability of health-care practitioners to cope with 
them. Some microorganisms are naturally resistant to some antimicrobial 
drugs. Other microorganisms become resistant by mutation or by incorporating 
genetic material for resistance from other microorganisms, either by 
ingestion or by cellular contact. 

Scientific Understanding of 
Resistance Falls Short

There is considerable uncertainty about many aspects of antimicrobial 
resistance. The U.S. General Accounting Office (GAO) has confirmed that the 
data on the public health threat of antimicrobial resistant bacteria are 
limited. Furthermore, they have confirmed that within the government there 
are differences of opinion among various branches about the risk to public 
health posed by antimicrobial use in animals and the best course of action. 
The GAO has encouraged various branches of the government to work together to 
address these critical information gaps and develop science-based decisions.

Any use of antimicrobial drugs in humans or animals can result in the 
appearance of drug resistance in some bacteria. The Committee on Drug Use in 
Food Animals estimated that as few as 10 percent of the incidences of 
antimicrobial resistance originate with livestock health practices, and 
concluded that not all instances of such resistance are clinically 
significant, involve resistance in disease-causing microorganisms, or cause 
an actual illness. Other instances of resistance stem from human use.

Farm animals carry many species of microorganisms, including some foodborne 
pathogens, like Salmonella and Campylobacter. Some microorganisms may 
contaminate carcasses and food products during processing, and, if this food 
is inadequately cooked or improperly handled, the pathogens can make people 
ill. If drug-resistant strains of these microorganisms cause human illnesses 
that require medical care, doctors may be limited in the antibiotics 
available for an effective cure. 

In 1969, the first formal statement of the hypothesis that drug-resistant 
bacteria may be transmitted to humans through food and cause human illness 
was issued in London in the "Report of Joint Committee on the Use of 
Antibiotics in Animal Husbandry and Veterinary Medicine." In a later report, 
scientists at the U.S. Centers for Disease Control and Prevention (CDC) state 
that the actual transmission of antimicrobial-resistant diseases between 
animals and humans is difficult to establish and involves documenting each of 
the following steps: 

  the selection for and persistence of resistant bacteria in animals from 
low-level doses of antimicrobial drugs, 

  the presence of resistant pathogens in animal products, 

  transmission of these pathogens to humans, and 

  diagnosis of human diseases caused by these pathogens. 

Studies that positively trace drug-resistant, foodborne human illnesses back 
through the food chain to a resistant livestock source are not common. Much 
of the other evidence is circumstantial, but enough evidence has accumulated 
that CDC and FDA scientists are concerned that drug-resistant varieties of 
Salmonella and Campylobacter have passed from livestock to humans and caused 
human illnesses. 

Advances in medical technology, such as DNA fingerprinting, are helping to 
make these connections, and data to address these issues are becoming 
available. In 1996, the FDA, the CDC, and the USDA established the National 
Antimicrobial Resistance Monitoring System: Enteric Bacteria (NARMS). NARMS 
monitors changes in antimicrobial susceptibilities of intestinal pathogens 
that affect both humans and animals from human and animal clinical specimens, 
from healthy farm animals, from retail food, and from carcasses of food-
producing animals at slaughter. Animal-isolate testing is conducted at the 
USDA Agricultural Research Service Russell Research Center. Human-isolate 
testing is conducted at the CDC National Center for Infectious Diseases 
Foodborne Disease Laboratory. Retail food testing is conducted at the FDA 
Center for Veterinary Medicine Office of Research Laboratories. All 
laboratories use comparable isolation, identification, and susceptibility 
testing procedures.

There is also uncertainty about drug levels needed to cause resistance. 
Studies by the CDC have found relatively high correlations between feeding of 
low levels of antimicrobial drugs to livestock and the presence of drug-
resistant bacteria in animals. However, in a 1986 paper, a member of the 
University of Liverpool's veterinary faculty suggested that some critical 
threshold or level of antibiotics is needed to cause microorganisms to become 
resistant and that this threshold may not be reached by low levels of 
livestock drug use.

Another difficulty with establishing the extent of livestock-sourced, 
resistant foodborne illness is that only about ten percent of people who 
become ill from a foodborne pathogen seek medical care. This results in 
uncertainty about how many of the estimated 76 million annual foodborne 
illnesses in humans involve an organism that is resistant to antimicrobials 
and where that resistance has impacted the health care or the outcome for the 
patient. Furthermore, the contribution of antimicrobial drug use in livestock 
cases is unknown.

The Effect of Human Use 
of Antimicrobial Drugs 

The development of antimicrobial drug resistance in bacteria and fungi also 
occurs through the use of these drugs by people, particularly any long-term 
use of these drugs. Microbial resistance to antimicrobial drugs in humans is 
believed to stem largely from over-reliance on antimicrobial drugs in human 
medicine, failure to adhere to prescriptions for the full duration of 
treatment, and increased clustering of people in institutions such as 
hospitals and day care centers. The U.S. Congress, Office of Technology 
Assessment, and the Committee on Drug Use in Food Animals found that the two 
greatest sources of drug-resistant pathogens observed in humans are misuse of 
antibiotics by both doctors and patients, and the emergence of drug-resistant 
pathogens in hospitals.

Nearly 2 million people each year have hospital-acquired infections, many of 
which are difficult to treat because they are caused by pathogens which are 
resistant to the drugs commonly used to treat them. The Committee on Drug Use 
in Food Animals stated in a 1998 report that the risk of these hospital-
acquired infections might more likely be considered life threatening than 
illnesses potentially caused by antimicrobial resistance originating in 
animals, because hospital-acquired infections occur in patients who are 
already medically stressed.

Bans against using antimicrobial drugs in livestock are often discussed as a 
precaution to protect the effectiveness of antimicrobial drugs in human 
health care. The question then becomes: "Would the development of bacterial 
resistance actually decline in livestock if low-level use of these drugs was 
stopped?" 

Studies that compare use versus nonuse of livestock antimicrobial drugs as 
growth promotants are inconclusive--some find reduced resistance in pathogens 
in livestock when drugs are withdrawn, while others find no change or 
increased resistance. Studies from Europe since the ban on antimicrobial 
growth promoters have demonstrated lower percentages of resistant bacteria 
from livestock where use of antimicrobial drugs for growth promotion was 
stopped.

Economic Effects 
Difficult to Measure

The economic consequences of resistance to antimicrobial and other drugs are 
difficult to measure precisely. Issues include changes in costs of 
production, effects of drug bans on trade, losses associated with resistant 
foodborne illness including medical expenses, productivity losses, and 
deaths. 

There are very little data on the economic costs associated with human 
illness caused by antimicrobial-resistant microorganisms, much less illness 
involving resistant pathogens directly related to livestock drug use. 
According to CDC, one study estimated that drug-resistance to Staphylococcus 
aureus (a pathogen associated with hospitals rather than livestock) had an 
annual cost of $122 million.

Effects on livestock from resistant microbes and their associated costs can 
range from virtually none (no impact on animal health) to costs that exceed 
the value of an animal. Economic analyses based on limited data generally 
demonstrate short-run increases in production costs and prices for livestock 
and livestock products in the U.S. in the aggregate.

For producers who currently use low levels of antimicrobial drugs in 
livestock feed, it is possible that costs of treating livestock diseases 
could increase if pathogens were resistant and if producers had to resort to 
more expensive or less effective drugs to cure or contain the disease. There 
are currently no data to suggest this is occurring. On the other hand, 
producers not currently feeding antimicrobial drugs may be able to use less 
expensive antimicrobial drugs to treat disease outbreaks caused by 
susceptible pathogens.

One effect from using antimicrobial drugs in livestock is a change in the 
balance of the intestinal microbes in livestock. Currently there are no data 
to suggest that such shifts result in increased carriage or shedding of 
potential foodborne pathogens.

In the 1970s and 1980s, studies were conducted on bans or limits on using low 
levels of antimicrobial drugs in livestock feeds. Estimated annual net losses 
to producers and/or consumers ranged from just under $1 billion to about $12 
billion. More recent studies are needed. Further, the perceived benefits from 
a livestock drug ban might not offset the higher food costs to consumers.

Research Needs 
& Implications

There are voids in basic data about many aspects of antimicrobial drug use in 
U.S. livestock production. The probabilities of humans becoming ill due to 
drug-resistant bacteria are thought to be quite low, although they remain 
unknown. Precise estimates of these probabilities are needed to evaluate 
risks of resistant foodborne illnesses in humans associated with livestock 
drug use. 

In addition, production practices in the U.S. differ from those in Europe, so 
data and research specific to the U.S. are needed to estimate the biological 
and economic effects of bans against antimicrobial drugs used in U.S. 
livestock production. Long-term effects of livestock drug bans have not been 
adequately demonstrated or studied. Some European studies suggest that long-
term benefits might outweigh short-term costs to producers and consumers. 
Much of the livestock research in the U.S. is geared toward demonstrating the 
benefits of antimicrobial drugs in terms of improved productive performance 
in livestock, with little focus on pathogen characteristics, such as 
resistance, or economic considerations such as associated drug and feed 
costs.

The possibility of resistant livestock pathogens affecting humans has 
heightened concerns about livestock drug use and motivated regulatory actions 
in the U.S. and abroad. In early 1999, the Center for Science in the Public 
Interest, representing 37 health and consumer groups, petitioned the FDA to 
ban the use of seven antimicrobial drugs in livestock production (bacitracin, 
erythromycin, lincomycin, penicillin, tetracycline, tylosin, and 
virginiamycin). A bill banning low-level feeding of these seven 
antimicrobials (unless the sponsors could demonstrate no adverse effects 
within two years) was introduced into the House of Representatives in 
November 1999 (H.R. 3266). FDA has also proposed a framework for evaluating 
and assuring the human safety of new antimicrobial drugs intended for use in 
food animals. The proposed guidelines classify antimicrobial drugs according 
to the extent to which they are useful in human health care, the propensity 
for resistance to develop, and effects on pathogen load in animal products. 
The new guidelines also propose setting predetermined thresholds for when 
actions should be taken to stem the emergence of resistant pathogens.

Many European countries have already banned low-level feeding of specific 
antimicrobial drugs used to enhance livestock growth or feed efficiency. In 
May 1999, the Scientific Steering Committee of the European Commission 
concluded that action should be taken promptly to reduce overall use of 
antimicrobial drugs used in livestock production. 

On the basis of ongoing work of this committee and other available 
information, the Agriculture Ministers in the European Union (EU) in 1999 
banned four antimicrobial drugs widely used at low levels to promote animal 
growth (bacitracin zinc, spiramycin, tylosin, and virginiamycin). In June 
2001, the Agriculture Ministers banned the remaining growth-promoting 
livestock drugs that are also used for humans. A ban against low-level use of 
antimicrobial drugs in U.S. livestock production would likely raise costs to 
producers and consumers in the short run; long-term impacts are still 
unknown.  

Kenneth H. Mathews, Jr. (202) 694-5183 and Jean C. Buzby (202) 694-5370, ERS; 
Linda R. Tollefson, Food and Drug Administration, and 
David A. Dargatz, Animal and Plant Health Inspection Service. 
Kmathews@ers.usda.gov 
Jbuzby@ers.usda.gov


RESOURCES & ENVIRONMENT
USDA Conservation Programs: A Look at the Record

As the public has become more conscious of agriculture's impacts on 
environmental ecosystems, they have come to demand that farm programs offset 
more of those impacts. 

Policymakers have responded in three ways. 

  Conservation spending for agriculture has nearly tripled since the mid-
1980s. The greatest portion of this spending has gone to support land 
retirement through the Conservation Reserve Program (CRP). 

  Conservation compliance--which requires farmers to meet specific 
conservation standards or face potential loss of a range of farm program 
benefits--has helped increase conservation practices on highly erodible 
land (HEL) in production and reduced conversion of wetlands for 
agricultural purposes. 

  Programs such as the Environmental Quality Incentive Program (EQIP) are 
addressing new environmental problems. Half of the EQIP budget has been 
allocated to reduce livestock impacts on ecosystems, a growing concern. 
(See following article on EQIP.) 

In the current farm bill discussions, policymakers are debating the future 
structure of USDA agri-environmental programs and the role of conservation 
programs in addressing emerging environmental concerns, such as unwanted 
nutrients in surface water and excess animal waste. Recent USDA studies 
examine major conservation programs of the past 15 years. These studies, in 
general, point to significant environmental benefits from soil conservation 
and wildlife restoration. 

Soil Erosion 
Is Down . . .

Between 1982 and 1997, soil erosion on U.S. cropland fell nearly 40 percent 
to 1.89 billion tons per year. Federal programs--largely conservation 
compliance and CRP--can be credited with much of the decline. Other likely 
contributors are farmers' greater awareness of conservation practices, 
increased regulation by states, and technological advances in farm machinery, 
such as better and lower cost no-till seeders. 

Highly erodible cropland subject to conservation compliance requirements 
makes up a quarter of all cropland. In 1997 approved conservation systems 
were in effect for more than 95 percent of this land. Conservation compliance 
has contributed significantly to the estimated reduction in soil erosion 
between 1982 and 1997 of 323 million-tons-per-year on highly erodible 
cropland. 

While farmers learned conservation skills and invested in conservation-
friendly equipment to meet conservation compliance requirements on HEL, they 
also may have used these practices on their cropland not designated as highly 
erodible (about three-quarters of U.S. cropland). Although the extent of this 
side effect is uncertain, soil erosion on cropland not considered highly 
erodible dropped an estimated 319 million tons per year between 1982 and 
1997. Annual average per-acre erosion reductions on non-highly erodible 
cropland were only one-fourth of the average erosion reduction on HEL. 

On land with planted crops in 1982 but enrolled in CRP in 1997, erosion was 
reduced by approximately 384 million tons per year. Many acres enrolled in 
CRP are highly erodible and program enrollment led to significant per-acre 
reductions. 

The CRP also has motivated changes in two other land-use and management 
practices, which, in turn, have affected erosion. First, cropland retirement 
through CRP may have caused farmers to intensify production on other acreage. 
This expanded production, or `slippage,' increased erosion and, therefore, 
offset some of CRP's erosion reduction. 

Second, conservation compliance and better conservation technologies helped 
lower cropland erosion rates between 1982 and 1997. Thus, the 1982 erosion 
rates of CRP land would likely have been lower in 1997 even if the land had 
continued in crop production. 

Recent research suggests that public benefits from erosion reduction 
attributable to conservation compliance are conservatively estimated at about 
$1.4 billion annually and $694 million for reductions attributable to the 
CRP.

. . . & Wildlife Habitat 
Has Improved

Wildlife habitat has improved substantially in some parts of the country, due 
primarily to enrollment of approximately 34 million acres of land in CRP. 
With this land retirement program, many wildlife species gain a year-round 
food source as well as cover for raising young and winter protection. The 
Wetlands Reserve Program and Swampbuster--see sidebar--also contribute 
significantly to wildlife gains. Wetlands and their surrounding areas provide 
habitat to a wide variety of fish, birds, mammals, reptiles, insects, and 
plants.

Public benefits delivered by the effects of these programs on wildlife vary. 
Local recreational activities--such as bird watching, fishing, and hunting--
are perhaps most apparent. However, the programs can affect similar 
activities in areas far from the protected acres. For example, many bird 
species that nest in CRP and wetland acres of northern states migrate 
throughout the country, and downstream fish habitat is improved by distant 
reductions in upstream erosion.

Because of the extensive and diverse nature of CRP's impacts on ecosystems, a 
full assessment is difficult. However, available case studies do provide some 
perspective on the program's accomplishments. Duck populations of the prairie 
pothole region were estimated to have increased 30 percent, thanks to CRP 
habitat. Populations of various grassland bird species in North Dakota were 
estimated to be nearly 18 percent higher with current CRP enrollment. Nest 
density in Midwest CRP land was estimated to be nearly 15 times higher than 
in row-crop acreage. 

Economic analyses provide some perspective of the value of wildlife impacts. 
Recent studies have estimated in monetary terms CRP's benefits to bird 
watchers and pheasant hunters. The findings suggest that these two groups 
combined would be willing to pay a total of $704 million per year for 
additional wildlife they see due to CRP. 

Estimated environmental benefits from both programs described here--
conservation compliance (benefits estimated from soil erosion reduction) and 
CRP (benefits estimated from soil erosion reduction and additional wildlife)-
-are $2.8 billion per year. This estimate is very conservative for two 
reasons. 

First, while many of the benefits from erosion reduction and improved 
wildlife habitat are included--such as recreational fishing, bird watching, 
and cost savings due to less dredging--many other benefits are not included, 
such as better waterfowl hunting and improved commercial fishing.

Second, each included benefit may be underestimated. For example, in 
measuring navigation benefits, the savings in dredging costs associated with 
reduced erosion are counted, but not the cost savings from fewer ships 
running aground, fewer shipping delays, and less need for smaller vessels.

Wetlands Are 
Protected, Restored

Wetland programs are currently assessed in relation to the goal of "no net 
loss." Agriculture has contributed significantly to achieving that goal 
through both wetland preservation and restoration.

Average annual wetland conversion for agricultural use dropped from 235,000 
acres in 1974-82, and 31,000 acres in 1982-92 to less than 27,000 in 1992-97. 
The decline in the rate of agricultural wetland conversion is attributed to 
several factors. 

  First, since roughly half of all wetlands in the U.S. have been drained, 
the remaining wetlands may be more difficult and expensive to convert to 
crop production. 

  Second, long-term declines in agricultural commodity prices may have 
reduced farmers' desire to convert wetlands to agricultural production. 

  Finally, policy changes have reduced wetland conversion incentives and 
introduced wetland conversion penalties. For agriculture, the key changes 
have been the elimination of lucrative tax breaks for wetland conversion 
(Tax Reform Act of 1986), and introduction of the Swampbuster provision 
(Food Security Act of 1985). The latter provision denies farm program 
payments to producers who drain wetlands for crop production.

Evidence is mixed on whether or not these wetland policy changes have reduced 
wetland conversion. Some analysts have concluded that wetland conversion for 
crop production is no longer profitable. However, recent research using more 
detailed data indicates that Swampbuster provisions could be preserving 
between 1.5 million and 3.3 million acres of wetland, depending on commodity 
prices.

Wetland restoration under the Wetlands Reserve Program (WRP), including its 
emergency counterparts, has been significant with approximately 1.05 million 
acres enrolled through 5,774 contracts with landowners. In most cases, the 
Federal government purchases a long-term (30-year) or permanent easement and 
provides cost-sharing and technical assistance for wetland restoration. 
Permanent easements are particularly popular, accounting for roughly 70 
percent of recently enrolled acres. Landowners also may opt for a 10-year 
cost-share agreement in which USDA shares restoration costs and provides the 
landowner with technical assistance, but with no easement purchase involved. 
Nearly 20 percent of recently enrolled acres came in under 10-year 
agreements. In both easement and cost-share agreements, landowners retain 
land ownership and the rights to hunting, fishing, and other recreational 
activities.

The WRP easements may be particularly important in wetland restoration 
because ecosystem recovery generally requires 15 to 20 years. Hardwood 
wetland forests can require decades for substantial recovery. Conversely, 
cattail swamps tend to regenerate more quickly. Recovery is considered "very 
rapid" if significant gains are made in 5 years. Even wetlands within the 
same region improve at varying rates due to factors such as size of the 
wetland, the method by which the wetland was drained, and the abundance of 
surrounding wetlands. 

Current WRP authority, specified in the Food Security Act of 1985 as amended, 
caps enrollment at 1.075 million acres, a limit that will be reached by 
October 1, 2001. However, program demand is strong. At present, USDA has WRP 
applications on hand from 3,150 landowners proposing to restore more than 
560,000 acres beyond the current acreage cap.

Future 
Challenges

Despite environmental gains the public has seen, past agri-environmental 
problems remain. In addition, changes in agricultural technologies, 
practices, and structure continue to increase the significance and number of 
agri-environmental impacts. Recent studies provide some perspective on the 
impacts of today's agriculture. 

  Suspended sediment, due in part to agriculture, is still the largest 
contaminant of waterways by weight and by volume. 

  Dissolved nitrogen in waters continues to cause significant problems. 
Recent research found that 40 percent of major U.S. estuaries exhibited 
highly eutrophic conditions--where water is rich in plant nutrients but 
often deficient in oxygen--due to nitrogen loadings. Eutrophication and 
hypoxia--where low oxygen levels threaten aquatic life--in the northern 
Gulf of Mexico are due to nitrogen inflows from the Mississippi River.

  Animal wastes, primarily from confined feeding operations but also from 
animal grazing areas along streams, may be responsible for outbreaks of 
waterborne pathogens, including Pfiesteria piscicida, Cryptosporidium, and 
E. coli. The protozoan parasites Cryptosporidium and Giardia may cause 
gastrointestinal illness, and Cryptosporidium may lead to death in persons 
with weak immune systems. Both these parasites have been found in beef 
herds, and Cryptosporidium in dairy operations. Blooms of the microorganism 
Pfiesteria piscicida have killed fish in certain Maryland and Virginia 
tributaries to the Chesapeake Bay and in the Neuse River in North Carolina. 
There is evidence that Pfiesteria can also affect human health. Excessive 
levels of nutrients are believed to be among the conditions for these 
blooms to occur, and animal agriculture is a major source of nutrients in 
these regions.

On the plus side, agriculture has demonstrated an ability to reduce carbon 
dioxide loadings, and thus may help reduce mankind's impact on global climate 
change. For example, 1 CRP acre in the Great Plains is estimated to sequester 
(i.e., retrieve and store) 0.85 metric tons of carbon per year. Soil 
conservation efforts such as conservation tillage systems and winter cover 
are also credited with reducing atmospheric carbon loads. However, the 
sequestered carbon is released with termination of conservation activity, 
such as if the land returns to production after the contract term ends.

While future agri-environmental policy will need to address a broad array of 
environmental impacts, the soil erosion reductions and wildlife gains of 
major agri-environmental programs to date have been significant. As the scope 
of agri-environmental problems broadens, a wide array of policies may be 
needed. In an increasingly diverse farm sector, addressing agri-environmental 
concerns will require programs that meet the needs of many different farm 
types. Significant effort may also be required to sustain environmental gains 
in soil erosion, wetlands, and wildlife habitat. In short, a portfolio of 
policy mechanisms may be needed, including land retirement, incentives for 
improving conservation on land in production, and ongoing use of compliance 
mechanisms.  

LeRoy Hansen (202) 694-5612 and Roger Claassen (202) 694-5473
lhansen@ers.usda.gov
claassen@ers.usda.gov

For more information see:

Claassen, Roger, and others (2001) "Agri-Environmental Policy at the 
Crossroads: Guideposts on a Changing Landscape," AER-794, .U.S. Dept. of 
Agr., Econ. Res. Serv., Jan. [www.ers.usda.gov/publications/aer794]

Feather, P., D. Hellerstein, and L. Hansen.(1999). "Economic Valuation of 
Environmental Benefits and the Targeting of Conservation Programs: The Case 
of the CRP," AER-778, U.S. Dept. of Agr., Econ. Res. Serv., April. 
[www.ers.usda.gov/publications/aer778]

www.ers.usda.gov/publications/arei
www.ers.usda.gov/briefing/ConservationandEnvironment
www.fsa.usda.gov/dafp/cepd/default.htm
www.nrcs.usda.gov


RESOURCES & ENVIRONMENT BOX
Major Conservation Tools For Agriculture

The Conservation Reserve Program (CRP) relies on annual government rental 
payments and cost-sharing as incentive tools. Farmland owners sign contracts 
of 10-15 years to retire agricultural land from production and establish a 
long term or permanent cover on the soil (e.g., trees or grass) in return for 
annual rental payments. When enacted through the Food Security Act of 1985, 
the CRP set erosion reduction as its primary goal. However, the Food, 
Agriculture, Conservation, and Trade Act of 1990 expanded the program's 
environmental goals to include water quality and wildlife. Annual program 
expenditures, over the last decade, averaging around $1.5 billion, have 
amounted to more than twice that of all other Federal conservation programs 
combined. Enrollment, at 33.6 million acres as of July 2001, has ranged 
between 30 and 36 million acres since 1999, and has a cap of 36.4 million-
acres. 

The Wetlands Reserve Program (WRP) relies on government cost-sharing and 
easement payments as incentive tools. The WRP currently offers landowners the 
opportunity to sell permanent or 30-year easements, or to enter into a 10-
year cost-share agreement. In return, farmland owners maintain land ownership 
and hunting, fishing, and similar rights. The WRP is primarily a habitat 
restoration program but also helps improve water quality, recharges 
groundwater, and provides environmental benefits. Since authorization under 
the Food, Agriculture, Conservation, and Trade Act of 1990, WRP has enrolled 
mostly marginal high-risk flood-prone agricultural lands. Projects with 
easements or contracts are located in all states, except Alaska. The average 
project is approximately 185 acres, and the average Federal cost per acre is 
approximately $1,175. Current WRP authority caps enrollment at 1.075 million 
acres.

Conservation compliance, Sodbuster, and Swampbuster rely on the threat of 
losing eligibility for other farm programs, such as production flexibility 
contract payments, CRP payments, farm-storage-facility and operating loans, 
and disaster payments. 

  Conservation compliance requires those who farm highly erodible land to 
implement an approved soil conservation plan. 

  Sodbuster requires that any highly erodible pasture, range, or hayland 
converted to cropland meet the soil loss tolerance level, which is a higher 
standard than conservation compliance. 

  Swampbuster compliance requires that a farmer not convert a wetland for 
crop production. 

Enacted through the Food Security Act of 1985, all three programs provide 
water quality benefits. Conservation compliance and Sodbuster also increase 
soil productivity and improve air quality, while Swampbuster preserves the 
many benefits delivered by wetlands.


RESOURCES & ENVIRONMENT
EQIP: Conserving While Farming

Incentive payments to farmers for natural resource conservation have received 
growing attention in the debate surrounding the upcoming farm bill. The 
Environmental Quality Incentives Program (EQIP), which provides technical, 
financial, and educational assistance for a wide range of agri-environmental 
activities, has attracted particular interest. Conservation practices 
implemented under the program have improved soil, land, water, and nutrient 
management on working farmland. 

Farmers' applications each year for participation in EQIP have exceeded 
available funding. However, some farmers signing multi-practice participation 
contracts have subsequently withdrawn from the program or have chosen not to 
implement some of the planned practices. This is among the issues that have 
implications for program design and funding.

Interest in EQIP by policymakers is linked to increasing recognition that 
many agri-environmental problems can be addressed only through improved 
performance on working farmland (rather than through land retirement). 
Another consideration is that financial support under EQIP is not constrained 
by World Trade Organization rules regarding production subsidies, since 
payments are not linked to production or price of a commodity. 

Established in the 1996 Farm Act, EQIP provides a voluntary conservation 
program for farmers and ranchers facing threats to their natural resource 
base or whose production activities contribute to environmental degradation. 
EQIP is attractive to producers given the program's flexibility in addressing 
natural resource concerns while maintaining land in productive agricultural 
use. The program, administered by USDA's Natural Resources Conservation 
Service, provides technical, financial, and educational assistance to farmers 
adopting conservation practices, primarily in designated priority areas. The 
objective of the program is to maximize the environmental benefits per dollar 
of program expenditure. 

Priority areas are areas of special environmental sensitivity or significant 
natural resource concerns as identified through a State level conservation 
process. At least 65 percent of EQIP funds are to be used in these designated 
priority areas. Remaining funds may be allocated to agricultural producers 
not located in priority areas if their conservation plan addresses statewide 
environmental concerns. Overall, half of all EQIP funds is earmarked for 
practices or systems relating to livestock production. 

All EQIP-funded activities must be carried out according to an approved 
conservation plan for each participating farm, specifying the conservation 
practices to be implemented and how these practices address primary natural 
resource concerns in the area. An "offer index" is calculated for each 
proposal that is a ratio of the environmental benefits and the total cost-
share request. Conservation plans with the most favorable offer index are 
approved up to the point where the funds are exhausted for a priority area or 
for statewide concerns.

In the 1997-2000 period, farmers submitted nearly 250,000 applications for 
EQIP contracts. Of these applications, only about one-third were accepted and 
EQIP contracts signed by the end of the period. However, the contracts 
covered nearly 35 million acres of farmland, already close to the 37.5-
million-acre anticipated coverage of the 7-year funded program. And this 
near-achievement of the anticipated acreage tied up about $600 million in 
contracts, less than half the $1.3 billion authorized for the initial 7 
years. The remaining authorized funds will allow additional EQIP applications 
to be approved. 

Water management and soil and land management have predominated among the 
practices contracted under EQIP, making up 56 percent of planned practices 
and accounting for a slightly higher percentage of the allocated funds. 
Livestock nutrient management, with 6 percent of the practices, required 18 
percent of the allocated funds because of the higher cost structural measures 
undertaken. Just over 7 percent of the contracts included wildlife habitat 
improvement, with 6 percent of the funds allocated to this measure.

Most farmers entering into EQIP contracts have fully implemented the 
practices specified in their conservation plans, or are expected to do so. 
However, some farmers withdrew entirely from the signed contracts or chose 
not to implement certain practices. By so doing they forgo cost-share 
payments for practices not implemented and risk payment of penalties 
stipulated in the contract. However, USDA allows farmers to substitute among 
practices and not be penalized if no reduction occurs in the contract's offer 
index.

During the 1997-2000 period, farmers withdrew 3,697 or about 5 percent of the 
contracts in their entirety. On 6,800 other contracts, about 8 percent of the 
total signed, farmers opted not to implement one or more practices. On over 
half these latter contracts, farmers canceled only one practice. The few 
farmers withdrawing four or more practices accounted for about half of the 
practices not implemented. Among the contracted practices, the highest 
withdrawal rate, 15 percent, occurred for wildlife habitat improvement and 
the lowest, 8 percent, for crop nutrient management.

Farmers with greater numbers of practices in their contracts withdrew 
relatively more practices than did farmers with fewer practices in their 
contracts. A possible explanation is that farmers with more practices in 
their contracts may feel less pressure to implement all of them than do 
farmers with few contacted practices. Also in larger contracts, some 
producers may be including practices with no perceived private benefit, in 
order to increase the probability of approval of their conservation plan. 
Certain types of practices that do not provide direct benefits to producers, 
such as wildlife and habitat related practices, are logically the ones most 
frequently withdrawn. Also part of the withdrawals may be a transitory effect 
linked to learning the innovative aspects of the program.

The withdrawals may be lowering the benefits expected from the program, but 
likely not enough to reverse the positive net benefits. Even so, the 
difference between the expected social benefits as approved in the 
conservation plans and those arising from the practices actually being 
implemented needs to be assessed and considered in the overall evaluation of 
EQIP. Increasing the enforcement of penalties for withdrawals may reduce 
applications and participation in areas of real conservation need and could 
reduce net social benefits more than what occurs from the withdrawals.

Reducing withdrawals is important when considering that the funds allocated 
to withdrawn contracts are often lost to the program if they can't be 
reallocated before the end of the fiscal year. An alternative program design 
that would maintain the flexibility of EQIP's approach to conservation might 
consider the introduction of incentives for smaller contracts and a mechanism 
for the reutilization of funds allocated to withdrawn contracts and 
practices. Furthermore, the differences in withdrawal rates among different 
types of conservation practices suggest that some of the program's goals may 
be achieved through other programs targeted to specific natural resource 
concerns. For example, habitat and wildlife conservation practices may be 
better addressed by the Wildlife and Habitat Incentives Program (WHIP) that 
is tailored exclusively to that end, rather than being included as part of a 
single EQIP contract.  

Andrea Cattaneo (202) 694-5474
Cattaneo@ers.usda.gov


RESOURCES & ENVIRONMENT BOX
Examples of Conservation Practices in EQIP Contracts

CategoryExamples of practices

Habitat preservationBrush management, filter strips, riparian buffers
Crop nutrient managementNutrient management (soil testing, application 
timing) 
Livestock waste managementWaste facility, waste management (manure 
testing, application timing)
Soil and land conservationResidue management, conservation crop rotation, 
cover crop
Water conservationIrrigation sprinkler, pipeline, irrigation water 
management
Other conservationFence, stream crossing, planned grazing system


SPECIAL ARTICLE
Argentina & Brazil Sharpen Their Competitive Edge

The U.S. has been the world's leading exporter of corn, soybeans, and wheat 
for the past 40 years, but Argentina and Brazil have become increasingly 
strong competitors to the U.S. in field crop production and trade. U.S. 
market share of global soybean and soybean product exports shrank from 80 
percent during the 1960s to only 35 percent in 1998-2000. Over that same 
period, the combined share for Argentina and Brazil has grown from less than 
10 to nearly 50 percent. A less dramatic U.S. trade share decline in the 
global corn market has also coincided with gains by Argentina. The continued 
decline of the U.S. share of soybean trade since the mid-1990s is 
particularly remarkable since the U.S. had record-large soybean plantings in 
every year since 1998. 

Both Argentina and Brazil have yet to fully develop their tremendous 
agricultural resources, despite great strides to date. With improvement of 
their transportation systems and with a more stable economic environment (see 
accompanying article on Argentina's and Brazil's economic situations), the 
two countries could see further production and market share gains for a 
number of commodities. 

Since the early 1990s, grain and oilseed producers in Argentina and Brazil 
have made impressive gains in agricultural output. Brazil's soybean 
production doubled from an average of 18.5 million metric tons during 1989-91 
to 37.5 million tons in 2000, while Argentina's production grew from 11.1 
million tons to 26 million tons over the same period. Similarly, Argentina's 
corn and wheat production were up 151 and 58 percent, rebounding from a 
severe decline in the late 1980s. In contrast, U.S. soybean and corn 
production expanded by 40 and 39 percent, while wheat production was up only 
11 percent.

The resulting trade gains are equally impressive. Since 1990, Argentina's 
shares of global trade for corn and wheat have nearly doubled to 13 and 8 
percent. Brazil, traditionally a net importer of wheat, corn, cotton, and 
rice, has been expanding its capacity to produce field crops other than 
soybeans. Brazil has been the world's third-leading corn producer for the 
past 40 years, and has expanded its production by over 60 percent since 1990. 
Brazil's corn trade is projected to switch from average net imports of almost 
1 million tons per year during the 1990s to projected net exports of nearly 
3.3 million tons in 2000/01. 

However, it appears that Brazil's recent corn export surge is just a 
temporary phenomenon. The feasibility of future corn production and trade 
growth will likely hinge on the development of economically viable tropical 
corn varieties, and on the pace of development of Brazil's rapidly growing 
pork and poultry sectors.

In contrast to soybeans, corn, and more recently cotton, Brazil's 
predominantly tropical setting has prevented the expansion of most small 
grain production beyond the southern-most states. Brazil's wheat industry has 
been in steady decline since government production subsidies and import 
protection were removed in the early 1990s. Continued population and gross 
domestic product (GDP) growth have bolstered demand for wheat products. As a 
result, Brazil is projected to be the world's leading importer of wheat in 
2000/01 at 7.3 million tons.

Resources in Argentina 
& Brazil

The combined total land area of 1.1 billion hectares for Argentina and Brazil 
is 22 percent larger than U.S. area. Yet they are almost identical to the 
U.S. in area involved in agricultural activities--about 419 million hectares 
in 1998 (one hectare equals 2.47 acres). A major difference is that only 78 
million hectares are involved in field crop production in these two countries 
compared with 177 million in the U.S. Both Brazil and Argentina instead have 
huge areas under permanent pasture, supporting large, predominantly grass-
fed, cattle sectors. 

Pasture is an important component of crop rotations in Argentina and Brazil, 
and significant portions of the pasture lie within their major field-crop 
regions. In contrast, cattle in the U.S. are fed primarily concentrated 
cereal rations once they go to feedlots, and permanent pasture is limited to 
highly marginal land not easily converted to crops. As a result, Brazil and 
Argentina may have more scope to convert pasture to field crop production 
than the U.S. Most significantly, Brazil's vast Cerrado savanna, an area of 
over 200 million hectares in the interior Center-West region, has enormous 
potential for further agricultural development. Much of the Cerrado savanna 
is still scrubland covered with brush and small trees, but is easily 
converted to agricultural use. 

Argentina is the world's top exporter of soyoil and soymeal, and ranks third 
as both producer and exporter of soybeans, trailing the U.S. and Brazil. 
Argentina also produces many of the other field crops grown in the U.S., and 
ranks among the world's leading exporters of corn, wheat, sorghum, sunflower, 
and peanuts. With an historic lack of government support, crop and livestock 
decisions are based principally on relative returns, rotational 
considerations, and longer run investment plans. As a result, market 
conditions and weather have strongly influenced the evolution of field 
cropping patterns in Argentina.

Nearly all field crop production and most livestock production occur in the 
northeastern third of Argentina. This is a humid, warm temperate zone similar 
in climate to the U.S. Southeast, but with more fertile soils. A secondary 
pocket of crop production has also been developing in Argentina's 
northwestern provinces. This development is being spurred by improvements in 
transportation and better access to export markets.

In Brazil, agricultural production is focused in the South and the Center-
West. Brazil's South lies principally within the same humid, warm temperate 
latitudes as the northern portions of Argentina's agricultural region, and 
these two regions produce many of the same livestock and crops (such as rice, 
corn, soybeans, and wheat). Field crop production has traditionally been 
centered in the South's densely populated coastal states. Close proximity to 
major urban centers, as well as to the country's three major ports, give 
producers in this region easy access to both domestic and export markets. 

Today, the Center-West rivals the South as the principal region of 
agricultural production within Brazil. The most distinguishing features 
between Brazil's South and Center-West are the temperate versus tropical 
setting and the tremendous potential for continued growth of cultivated land 
area onto the Cerrado soils. In 1990, the Brazilian institute for 
agricultural research, EMBRAPA, estimated that 136 million hectares of the 
Cerrado savanna were suitable for large-scale mechanized agriculture based on 
a rotation system of improved pasture, grains, and oilseeds. About 47 million 
hectares were in production agriculture in 1990, leaving nearly 90 million 
hectares available for development as farmland since. Unfortunately, the pace 
of conversion has been difficult to judge and ranges from conservative 
official Brazilian government estimates, to sensational reports from U.S. 
travelers to the region.

Most newly cleared land is initially converted to rangeland. Cropping 
alternatives become viable with infrastructure development. As passable roads 
become available and the decision is made to convert pastureland to crops, 
one or two years of upland rice cultivation are usually undertaken before 
soybeans or other crops are planted. Not all Cerrado is converted to 
agriculture. State and Federal regulations require landowners to permanently 
conserve a portion of their property, ranging from 20 percent in the drier 
southern Cerrado, up to 80 percent toward the Amazon rainforests near the 
northern Cerrado. Much of the Cerrado cropland is planted to soybeans, but 
cotton area has been on the rise the past 5 years. In addition, most farms 
keep some pasture, and rotate corn every fourth or fifth year. Occasionally 
coffee, rubber, and other perennial crops along with sugar cane, rice, and 
food crops are grown in various parts of the Cerrado.

Soybean area in Brazil is nearly evenly divided between the two regions. 
However, the Center-West's soybean area is expanding, while the South's area 
has stagnated. Farms in the Center-West are much larger, in part because 
Cerrado land is capable of supporting the full suit of modern production 
technology. Two-thirds of Cerrado land is in farms that are larger than 1,000 
hectares. The combination of rapid technology adoption and significant 
economies of scale in field crop production have pushed crop yields in the 
Center-West to near parity with the U.S. 

Argentina & Brazil Have Some 
Natural Advantages Over the U.S.

Several important differences distinguish agriculture in Argentina and Brazil 
from the U.S. First, the southern hemisphere location means that their crop 
production cycles are nearly counter-seasonal to the U.S.--the primary field-
crop growing period in Argentina and Brazil's South extends from October 
through March, compared with a May-September growing period in the U.S. Corn 
Belt. U.S. and international prices generally reach their lows at U.S. 
harvest time (September-October) when supplies are most plentiful. Prices 
then gradually rise into the spring with carrying charges and accumulating 
demand. Argentine and Brazilian producers and exporters benefit from this 
price recovery during February to April, their traditional harvest period.

Second, the production zones of Argentina and Brazil all lie at lower 
latitudes and, therefore, these countries have significantly longer frost-
free growing seasons and more double-cropping opportunities. Brazil's Center-
West lies entirely within the frost-free tropics and can technically produce 
three crops per year.

Third, while Argentina's growing-season temperature and precipitation levels 
are similar to U.S. Corn Belt averages, Brazil's agricultural regions are 
generally milder and wetter.

Fourth, the U.S. Corn Belt is famous for its deep, rich soils, but 
Argentina's Pampas soils are equally as fertile and have produced bountiful 
grain and oilseed crops for decades with relatively low fertilizer-use rates. 
However, most of Argentina's cereal yield gains of the 1990s have resulted 
from increased use of chemical inputs and improved seeds. While highly 
fertile soils also allow for a wide range of intensive crop and livestock 
activities in Brazil's South, soils in Brazil's Center-West are not naturally 
fertile. However, proper soil management techniques have helped them become 
very productive.

On the other hand, U.S. transportation and marketing systems are vastly more 
developed. Despite considerably shorter average distances to ports from the 
Argentine Pampas and Brazil's South, transportation and marketing costs for 
bulk agricultural product exports have historically been much higher than in 
the U.S. The higher transportation costs for Argentina and Brazil are due to 
inefficient or underdeveloped barge and railroad transportation systems, and 
heavy reliance on more expensive truck hauling operations. 

Economic Policy Reforms 
Spur Growth

A primary catalyst in Brazil and Argentina's surge in agricultural production 
in the past decade were the economic and political reforms undertaken by 
Argentina in the early 1990s and by Brazil in the mid-1990s. The reforms in 
the two countries shared many common elements, including deregulation and 
privatization of domestic marketing systems, restraining inflation, and 
easing of trade rules--i.e., decreasing and/or removing export taxes, import 
tariffs, and restrictive quotas and licenses.

These reforms opened the door to rapidly expanding foreign investment, 
leading to increased competition and efficiency in the agricultural sectors 
of both countries. Argentina, where reforms occurred first, has undergone 
significant modernization following heavy domestic and foreign investment in 
the agricultural sector and the storage and transportation systems that 
support it. Similar developments are underway in Brazil, helping to lower 
production and marketing costs, to raise farm-gate prices, and to help 
producers respond to international market signals.

With more open trade and strengthened market signals, imports and utilization 
of agricultural inputs and technology have increased markedly through the 
1990s. For example, the combined value of Brazilian and Argentine imports of 
agricultural machinery rose from less than $40 million per year in the early 
1990s, to $140 million in Argentina and over $200 million in Brazil by 1998. 
Production and marketing processes are now applying cutting-edge technologies 
as strong international commodity prices in the mid-1990s provided a powerful 
incentive to invest in agriculture and expand production. 

Argentine soybean growers have rapidly adopted herbicide-tolerant soybeans to 
reduce costs, raise yields, and remain competitive in the face of lower 
international prices. Expanded plantings of biotech soybeans in Argentina, an 
estimated 90 percent of plantings in 2000/01, have helped lower costs and 
increase yields by boosting weed control in rotations. In addition, varietal 
improvements and gradually increasing fertilizer-usage rates helped raise 
Argentina's corn yields recently. Brazil has not approved commercial planting 
of biotech varieties. Development and adoption of improved non-biotech 
soybean varieties and cultural practices suitable to the Center-West's poor 
natural soil fertility and tropical conditions were also critical to the 
expansion of large-scale mechanized agriculture into the vast interior 
regions. 

Soybean Cost Structure 
Favors Argentina & Brazil 

Combining abundant land and favorable climates, Argentina and Brazil are 
naturally low-cost producers of soybeans. Lower production costs have 
provided a competitive edge in international markets for Argentine and 
Brazilian soybeans. Comparison of 1998 farm-level soybean production costs 
indicates that total per-bushel costs are about one-quarter lower in 
Argentina and Brazil's Mato Grosso, and about 20 percent lower in Brazil's 
Parana than in the U.S. Heartland. Variable input costs per acre are lowest 
in the U.S., but yearly land costs are as much as $80 per acre higher in the 
U.S. Heartland than in Brazil's Mato Grosso and about $25 per acre higher 
than for prime land in Argentina. In fact, land costs in Mato Grosso are less 
than one-tenth of those in the U.S.

Also favoring soybean farms in Argentina and Brazil's Mato Grosso is their 
much larger size (averaging over 1,000 hectares) relative to soybean farms in 
the U.S. Heartland (120-150 hectares) or in Brazil's Parana (about 30 
hectares). Large farm size permits economies of scale by spreading overhead 
costs over more acres, resulting in much lower per-unit costs. As a result, 
average machinery costs are relatively low in Mato Grosso and Argentina.

On the other hand, internal marketing and transportation costs are sharply 
higher for producers in Argentina and Brazil than in the U.S. The average 
U.S. soybean producer-to-f.o.b. port price spread (an indication of internal 
marketing and transportation costs) has remained relatively constant since 
the mid-1980s at about $17 per ton ($0.46 per bushel), or about one-half to 
one-third the current costs in Brazil and Argentina. As a result, differences 
in port prices for soybeans from the U.S., Argentina, and Brazil are 
substantially smaller than cost-of-production differences. Port price 
differences narrow even further when compared at Rotterdam (the major 
destination).

In Argentina, reduced export taxes and the improvement of port facilities has 
narrowed the margin between the terminal cash price at Rosario and the f.o.b. 
price of soybeans at Argentine ports from an average of $68 per metric ton 
during the 1980-91 period, to just $11 per ton since 1991. Significant 
improvements have also been made to Argentina's principal internal waterway, 
the Parana-Paraguay River system. But average per-kilometer transportation 
costs still remain high due to continued heavy reliance on trucks to move 
crops to market.

In Brazil, similar cost reductions have resulted from improvements to the 
transportation system and from elimination of a value-added tax on soybean 
exports in 1996. For producers in Mato Grosso, whose soybeans must travel 
roughly 1,500 kilometers to port, the producer-to-f.o.b. price spread 
averaged $76 per ton from 1983 to 1997. Since 1997 they have averaged an 
estimated $47 per ton. Compared with Brazil's Mato Grosso, Argentina's 
relatively low average transport costs are due to the fact that most of its 
soybean production takes place within 250-300 kilometers of ports. In 
Brazil's Parana, where soybeans have a much shorter distance to port, the 
producer-f.o.b. price spread has fallen from a $52-per-ton average during 
1983 to 1997, to $29 since 1997.

Lower transportation costs for the U.S. reflect, in part, its efficient barge 
system, which can transport grain long distances at low cost. Thus, while 
Brazil and Argentina have an edge over the U.S. in farm-level costs of 
production, their advantage is somewhat offset by the higher marketing and 
transportation costs. 

In Brazil, significant potential remains to lower commodity export prices 
through improvements of road, rail, and waterway. Development of 
transportation on the Amazon River and its many tributaries is just beginning 
to open Brazil's Center-West growing areas to this ocean portal, but offers 
tremendous potential. 

What Will 
Drive Future Growth?

In the future, the pace of agricultural growth in Brazil and Argentina will 
likely hinge primarily on improvement in the marketing and transportation 
systems, livestock sector dynamics, and economic stability. 

Although Brazilian agricultural producers and exporters have benefited from 
the 50-percent depreciation of the Brazilian real since January 1999, the low 
international soybean prices of the past 3 years have likely slowed the pace 
of land conversion in the Center-West. Nevertheless, several factors suggest 
that investment in land expansion for soybean production in the Center-West 
will continue.

 First, the costs associated with bringing new land under production are 
very low. 

 Second, the promise of an improved marketing and transportation system in 
the Center-West suggests higher land prices in the future, making land 
investment appear profitable.

 Third, investment in land remains a useful hedge against the threat of 
inflation which, although greatly reduced from past levels, has not 
entirely disappeared.

 Finally, strong internal demand for soymeal and feed grains looms as 
Brazil's large poultry and pork industries respond to surging domestic and 
international demand. 

Marketing and transportation system development will remain a critical 
determinant of the pace at which Brazil's land resources move into productive 
use. Most agricultural land in the interior states is far removed from 
markets, and compared with the U.S., transportation costs still represent a 
very large portion of the export price. Several major development projects 
are currently underway or planned that are designed to connect Brazil's 
Center-West with major ports on the Amazon and the east coast. Their 
completion will likely continue to lower transportation and input costs and 
raise farm-gate prices for Brazilian farmers. However, completion hinges on 
continued strong inflow of foreign and domestic investment and a stable 
economy.

Continued cropland expansion in Brazil's Center-West is also expected to 
raise national average yields. Large farm sizes, large-scale mechanization, 
and innovative management practices have helped generate rapid adoption of 
new technologies in the region, and have helped produce acceptable returns 
even in the face of low international commodity prices. Crop yields for 
soybeans and cotton in the Center-West are already at or above average U.S. 
yields, and research is underway to improve corn and rice yields. In 
Argentina, crop area growth is less likely, but yield-growth potential for 
several field crops, particularly corn, appears to be significant. Although 
Argentina's corn yields rose 46 percent between 1990/91 and 2000/01 they are 
still only two-thirds of average U.S. yields. Future corn yield growth 
depends strongly on further increases in fertilizer usage rates.

The tradeoff between livestock and field crops is likely to drive 
developments in Argentina's agricultural sector. Nearly 90 percent of 
Argentina's beef production is entirely grass fed. While Argentina leads the 
world in per capita consumption of beef, the rate has been declining over the 
past 15 years. This may shift the focus to international markets which, in 
turn, may eventually encourage greater investment in feedlots and grain 
feeding in Argentina to produce high-valued beef demanded by international 
markets. Greater use of feedlots would free some pasture for increased field 
crop production. Feeding of concentrates could also increase domestic use of 
grains and high-protein meals. However, the April 2001 confirmation of a 
widespread outbreak of foot-and-mouth disease in Argentina will limit most 
unprocessed meat exports in the immediate future. 

Many growth bottlenecks in Argentina and Brazil remain. Lack of domestic 
credit institutions limits the farm sector's ability to acquire new capital 
directly. Both countries are vulnerable to energy price fluctuations as they 
continue to rely heavily on diesel-powered vehicles for both crop production 
and transportation to market. In Brazil, interstate value-added taxes 
continue to distort prices throughout the production and marketing systems. 
In Argentina, high usage tolls on privately owned highways keep domestic 
transportation costs high. Large government debt in both countries could 
quickly undermine economic progress. Currency valuation and government 
deficit levels remain critical to economic stability and foreign investment 
in both countries, and will likely play a major role in future agricultural 
export competitiveness. 

Clearly, the potential for further growth of South American field crop 
output, if realized, could have profound implications for global trade and 
U.S. farm exports, prices, and incomes. The effect on future U.S. payments 
under current farm programs and on policy could also be profound.  

Randy Schnepf (202) 694-5293, Erik Dohlman (202) 694-5308, and 
Chris Bolling (202) 694-5212
Rschnepf@ers.usda.gov
edohlman@ers.usda.gov
hbolling@ers.usda.gov


SPECIAL ARTICLE BOX 1
Forthcoming ERS Agriculture & Trade Report

A forthcoming Agriculture and Trade Report examines factors underlying the 
recent surge in agricultural production in Argentina and Brazil. 
"Agricultural Developments in Argentina and Brazil: A Focus on Soybeans," 
provides an overview of the potential for Argentina and Brazil's agricultural 
sectors, and includes discussions of: 

  Trade shares in international soybean markets

  Key differences in the underlying agro-climatic setting, land and 
infrastructure resource base, and economic and policy environments that 
underlie agricultural production in Argentina, Brazil, and the U.S. 

  How economic and policy reforms contributed to greater market orientation 
and a more stable macro-economic environment for investment and decision 
making in Argentina and Brazil 

  An analysis of future crop growth potential

  and Brazil

SPECIAL ARTICLE BOX 2
Producer Adoption of Biotech Crops Could Have Market Implications

Biotechnology, specifically genetic engineering, has launched speculation 
about the effects of the new technology on producer and consumer demand for 
genetically-modified crops. Some biotech crops possess traits (e.g., insect 
resistance or herbicide tolerance) that can significantly reduce costs and 
risks for producers. However, consumer acceptance remains uncertain, 
particularly in some major importing markets--e.g., the European Union (EU), 
Japan, and Korea--where consumer and political groups have called for greater 
scrutiny over the use of biotech crops in the food chain.

While Argentine producers are aware of the restrictions on biotech products 
in some importing markets, such concerns have not deterred them from adopting 
biotech varieties. Approximately 90 percent of Argentina's soybean production 
is from biotech varieties, and producers are clearly motivated by the savings 
generated by herbicide-tolerant soybean varieties as well as environmental 
benefits from using less-damaging chemicals. Cost savings attributable to 
biotech soybeans are estimated at about $40 per metric ton, significantly 
larger than the $8-per-ton premium received by producers for non-biotech 
soybeans in Argentine markets.

In contrast to the U.S., herbicide-tolerant soybeans have not been patented 
in Argentina. As a result, Argentine producers are not charged technology 
fees to use the seed, and farmers are allowed to save seeds from one year to 
the next. Consequently, seed costs for biotech soybeans are significantly 
lower in Argentina than in the U.S.

Argentine farmers have been slower to adopt biotech corn hybrids. An 
estimated 20 percent of the 2001 corn crop is planted to insect resistant 
(Bt) corn hybrids, all of which are approved by the EU. Since 1998, Argentina 
has approved only new corn hybrids that are accepted in major export markets. 

Given Argentina's present adoption rates of both corn and soybean biotech 
varieties, and a lack of sufficient storage capacity under the identity 
preservation (IP) system, the additional costs incurred in implementing an IP 
system would limit the potential for Argentina to capture a market niche for 
non-biotech corn or soybeans. However, the situation is quite different in 
Brazil, with respect to soybeans, where the isolated Center-West region can 
make a much stronger claim to biotech-free status.

In Brazil, the government currently prohibits commercial planting of 
genetically modified crops. However, the strong incentive to benefit from the 
cost savings available to biotech soybeans likely contributes to a 
significant "illicit" flow of biotech seeds from Argentina into Brazil's 
South, where climatic conditions are fairly similar. The share of biotech 
soybean plantings in the South has been estimated by various trade sources at 
between 20 to 40 percent. Although Brazil's corn crop appears to be 
predominantly non-biotech, other non-biotech producers such as South Africa 
and Eastern Europe would likely provide stiff competition for any future 
market niche.

END_OF_FILE
