AGRICULTURAL OUTLOOK                                      March 20, 2001
April 2001, ERS-AO-280
                  Approved by the World Agricultural Outlook Board
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CONTENTS

IN THIS ISSUE

AGRICULTURAL ECONOMY
U.S. Farm Economy in 2001
Trade-Generated Gains Strengthens Agricultural Sector in Long Run

BRIEFS
Modest Rise in Food Prices This Year
Sheep & Lamb Inventory Continues to Decline

COMMODITY SPOTLIGHT
Lettuce: In & Out of the Bag

WORLD AGRICULTURE & TRADE
Japan's Changing Agricultural Policies

POLICY
Recommendations of the Commission on 21st Century Production Agriculture

RESOURCES & ENVIRONMENT
Smart Growth: Implications for Agriculture in Urban Fringe Areas


IN THIS ISSUE

U.S. Farm Economy in 2001

While the general weakness in agricultural markets of the past couple of years
continues, early signs of recovery are evident. Many farm sector indicators
continue to remain favorable, including asset values and debt levels, due in
large part to record government payments. Global stocks of major crops are not
excessive compared with use, farm prices are generally up from a year ago, and
reduced plantings in 2001 could lead to a further drawdown of stocks.  However,
the next couple of years are unlikely to see a strong rebound in farm prices and
market income for major crops, unless global crop production drops
significantly. In the longer term, continuing improvement in global economic
growth will lead to stronger U.S. exports, further gains in agricultural
commodity prices, and rising farm income.

Modest Rise in Food Prices This Year

Consumers can expect modest increases in food prices for the fourth year in a
row, with the Consumer Price Index (CPI) for all food projected up 2 to 2.5
percent in 2001. For food prepared at home, the CPI in 2001 is projected to rise
2 to 2.5 percent while food away from home is expected up 2.5 to 3 percent. The
downward trend in share of household disposable personal income spent on food
should continue.

Continuing large meat production, lackluster growth in exports, and a slowing
domestic economy may pressure meat prices downward. A combination of reduced
winter acreage in first-quarter 2001 and several bouts of sub-freezing weather
in Florida have reduced supplies of fresh-market vegetables and raised produce
prices. Annette L. Clauson (202) 694-5389; clauson@ers.usda.gov

Commission on 21st Century Production Agriculture: Recommendations

The Commission on 21st Century Production Agriculture, established under the
1996 Farm Act, released its report on January 31, 2001, concluding that the
Federal government should develop policies and programs promoting global
competitiveness of U.S. agricultural products. The Commission recommended
specific legislative approaches to assure an income safety net for producers,
enhance risk management options, support conservation and environmentally
beneficial practices, improve agricultural trade opportunities, revise
individual commodity policies, and assist small and limited-resource farms. 
Edwin Young (202) 694-5336; ceyoung@ers.usda.gov

Japan's Changing Agricultural Policies

Japan's government is revising its agricultural policies and programs to stem
the decline in self-sufficiency in food production, and to ensure that its farm
program expenditures will be exempt from reductions required under World Trade
Organization rules. In July 1999, Japan adopted the Basic Law on Food,
Agriculture, and Rural Policy, to review postwar agricultural policies and set
up a policymaking scheme based on four basic principles: securing a stable food
supply, fulfilling the multiple functions of agriculture (e.g., use of rice
paddies to control flooding), sustainable development of agriculture, and
promotion of rural areas. Major initiatives are underway to change the structure
of farming and to make it more efficient. Japan's new policy stance explicitly
recognizes that food security depends on continued imports and available stocks,
as well as on maintaining domestic production capability. John Dyck (202)
694-5221; jdyck@ers.usda.gov

Lettuce:  In and Out of the Bag 

Lettuce has never been more popular in the U.S.  The average American consumed
33 pounds of lettuce in 2000--an all-time high. In response to growing consumer
demand for variety, freshness, and convenience, and as a result of technological
innovations in packaging materials, lettuce shippers now offer their customers
everything from heads of iceberg to ready-to-eat salads. They have also adopted
various business strategies to manage buyer demand for greater volume, broader
product lines, and year-round availability.  Lewrene Glaser (202) 694-5246;
lkglaser@ers.usda.gov

Smart Growth:  Implications for Agriculture in Urban Fringe Areas

"Smart growth" is a catch-all phrase to describe a number of land use policies
to influence the pattern and density of new development. Smart growth directs
development to designated areas (cities and older suburbs) through incentives
and disincentives, without actually prohibiting development outside them or
threatening individual property rights. Among the strategies that could have
important implications for local agriculture are the concentration of growth in
selected areas within specific boundaries and permanent preservation of
farmland.

While smart growth policies have implications for farmland outside as well as
inside designated growth areas, landowners most likely to experience the effects
are those in close proximity to existing population centers or planned growth
areas. One of the greatest impacts of smart growth policies on local agriculture
will be changes in farmland values because farm real estate dominates total farm
assets. Cynthia Nickerson (202) 694-5626; cynthian@ers.usda.gov 

Sheep & Lamb Inventory Continues to Decline

The U.S. sheep industry continues a long-term trend of negative growth that has
seen the inventory shrink from a 1942 peak of 56 million head to 6.92 million
head on January 1, 2001. This year's inventory is 2 percent below the level on
January 1, 2000, and 50 percent below 1975, reflecting decreasing U.S. demand
for wool and for lamb and mutton, and rising competition from Australia and New
Zealand.  Keithly Jones (202) 694-5172; kjones@ers.usda.gov


AGRICULTURAL ECONOMY
U.S. Farm Economy in 2001

While the general weakness in agricultural markets of the past couple of years
continues, early signs of recovery are evident. Many indicators continue to
remain favorable, including farm asset values and debt levels, due in large part
to record government payments. Global stocks of major crops are not excessive
compared with use, farm prices are generally up from a year ago, and reduced
plantings in 2001 could lead to a further drawdown of stocks. 

However, the next couple of years are unlikely to see a strong rebound in farm
prices and market income for major crops, unless global crop production drops
significantly. Under current farm legislation and programs, assuming no
supplemental payments, net cash income in 2001 is projected to be the lowest
since 1994 and about $4 billion below the average of the 1990s. 

Commodity Markets 
Edge Up...

The U.S. economy continues to enjoy its longest expansion in history (although
slowing considerably in recent months), characterized by strong income growth,
low unemployment, surging productivity, and low inflation and interest rates.
Production agriculture, while bolstered by the expansion, has been particularly
vulnerable to foreign competition, a strong dollar, economic recession in
foreign countries, and increases in energy costs. 

Prices of many agricultural commodities are beginning to pick up. In February,
the index of prices received for all crops was up 5 percent from a year earlier
and the index of prices for livestock was up 9 percent. Nevertheless, the
commodity price recovery is generally from relatively low levels. For the
1999/2000 marketing year, the average price of soybeans was the lowest since
1972/73, the prices of corn and wheat the lowest since 1986/87, the price of
rice the lowest since 1992/93, and the price of cotton the lowest since 1974/75.
Cattle and hog prices were also relatively weak in 1999 but recovered more
sharply than major crop prices in 2000. Milk prices were relatively strong in
1999 but fell to a 9-year low in 2000.

In addition to facing low agricultural commodity prices, many producers in the
last several years have been confronted with weather-related problems and, more
recently, with increases in prices for energy-related inputs. Sierra snowpack
levels, which California's reservoirs depend on for electricity generation and
farmland irrigation, continue below normal although improving. 

In the past 3 years, Congress responded to potential sharp declines in farm
income and adverse weather by providing nearly $25 billion in supplemental
assistance to farmers and ranchers, greatly limiting the farm financial stress
they would have otherwise faced. These payments, plus payments authorized under
the 1996 Farm Act, pushed government payments to a record-high $22 billion in
calendar 2000 and Commodity Credit Corporation (CCC) outlays to a record $32
billion in fiscal 2000. In fiscal 2001, lower government payments are projected
to reduce CCC outlays to slightly over $20 billion. Had Congress not provided
nearly $9 billion in supplemental assistance in 2000, net cash income would
likely have fallen to $47.5 billion in calendar 2000, the lowest since the farm
financial crisis of the mid-1980s. Instead, net cash income reached $56.4
billion in 2000, nearly $2 billion above the average of the 1990s. 

...As Do 
U.S. Ag Exports 

During the mid-1990s, a confluence of factors boosted agricultural exports: 
world gross domestic product (GDP) grew at an annual rate of 3 percent compared
with less than 2 percent during the early 1990s, and global grain and oilseed
production fell about 4 percent. In the mid-1990s, the value of U.S.
agricultural exports rose sharply, as record-high grain prices pushed the value
to a record $60 billion in fiscal 1996, up by more than one-third from just 2
years earlier.

The surge in exports led many to conclude that U.S. agriculture was entering a
period of long-term prosperity--continued and steady increases in world economic
activity would be enough to keep farm prices strong even with normal weather.
However, benign weather and strong prices led to an abrupt turnaround in world
crop production, which increased sharply in 1996/97. In 1998, world economic
growth, excluding the U.S., fell to a paltry 1.3 percent. The growth slowdown
combined with continued strong crop production caused crop prices to decline
sharply.

For bulk products such as feed grains, wheat, soybeans, cotton, and rice, export
value declined one-third from 1996 to 2000. Accounting for nearly all of the
drop in export value of bulk commodities were lower export prices, with export
volume falling only slightly. In contrast, the export value of high-value
agricultural products (total ag exports minus bulk commodities) remained nearly
steady at about $32 billion during 1996-2000. 

In 2001, the value of bulk exports is forecast to increase $0.5 billion to $18.3
billion, remaining well below 1996's $28 billion, while volume is expected to be
just under 1996's 119.4 million tons. The export value of high-value
agricultural products is forecast to increase to $34.7 billion in 2001, bringing
total export value to $53 billion this year. This is up from the recent low of
$49 billion 2 years ago, but still well below the 1996 record. 

The turnaround in several key macroeconomic indicators makes the outlook for
higher exports more positive than it has been in some time. World GDP excluding
the U.S. grew nearly 4 percent in 2000, the largest growth rate in more than a
decade. In 2001, with the economic slowdown in Japan, world GDP excluding the
U.S. is expected to slow from last year's high rate. However, many countries
that were in recession in 1998 and 1999 are now registering strong growth rates.
Following the 1997/98 Asian financial crisis, South Korea's economy grew nearly
11 percent in 1999 and over 9 percent in 2000, and economic growth in Southeast
Asian countries rose to 3.6 percent in 1999 and to almost 6 percent last year.
In addition, several Latin American countries registered positive growth in 2000
after being in recession in 1999. 

Another key factor for U.S. exports is the U.S. exchange rate. The value of the
dollar has increased sharply in the last several years, raising the cost of U.S.
farm products to foreign buyers and the cost of U.S. agricultural products
relative to those of competitors. Between April 1995 and September 2000, the
U.S. dollar appreciated by 25 percent against currencies of countries purchasing
U.S. agricultural products, reversing about a decade in which the value of the
dollar declined relative to other currencies. Over the same period, the U.S.
dollar appreciated 42 percent relative to currencies of U.S. agricultural
competitors. Declining interest rates and a slowing economy should weaken the
dollar in 2001, making U.S. agricultural products moderately more attractive to
foreign buyers. 

Farm Income 
To Drop 

Farm cash receipts are forecast to reach $200 billion in 2001, up $4 billion
from last year. This would be the second-highest level of farm cash receipts,
surpassed only by the 1997 record (nearly $208 billion). Crop receipts in 2001
are projected to be down $11 billion from 1997, while livestock receipts are
forecast to be up about $3 billion. Compared with last year, crop receipts are
forecast to increase by $3.6 billion to slightly over $100 billion, while
livestock receipts are projected to be about unchanged at slightly under $100
billion. 

These aggregate figures mask steep declines in cash receipts and income for
major crops. Cash receipts for grains, soybeans, and cotton, projected to
increase slightly to $45 billion in 2001, will be down from a record $57 billion
in 1997. Dairy receipts are forecast to be up from last year. 

Assuming no supplemental assistance for 2001 crops, net cash income is projected
to decline from $56.4 billion last year to under $51 billion in 2001, as
production expenses continue to rise and government payments decline. Increases
in petroleum prices and interest rates along with higher prices for other
production inputs, including hired labor, increased farmers' production expenses
by 4 percent or $7.6 billion in 2000, with higher fuel and oil prices accounting
for over one-third of the increase. In contrast, farm production expenses rose
only 1 percent from 1997 to 1999. 

In 2001, farmers' total cash production expenses are forecast to increase $1.5
billion to a record $179.5 billion. Even though total planted acreage is
expected to fall in 2001, higher natural gas prices will raise expenses for
nitrogen fertilizer. Expenses for hired labor, repairs, and marketing could also
continue to trend up in 2001. Fuel expenses are expected to be about unchanged
from last year, as petroleum prices moderate later this year. Despite recent
interest rate reductions by the Federal Reserve, farm business interest expenses
are projected to remain about steady in 2001. About two-thirds of bank nonreal
estate loans made in 2000 are variable-rate loans, but these loans adjust at
regularly scheduled intervals and lag the Federal Reserve rate.

Government payments have offset much of the decline in cash receipts for major
crops in the past few years, helping to maintain producers' cash flow. Direct
government payments to farmers rose from under $8 billion in 1997 to a record
$22 billion last year. In 1997, farmers received $6 billion in production
flexibility contract (PFC) payments and about $2 billion in conservation program
payments. In 2000, direct government payments included nearly $9 billion in
supplemental assistance, nearly $5 billion in PFC payments, $6.4 billion in loan
deficiency payments, and $2 billion in conservation program payments. Loan
deficiency payments are available to producers whenever the prevailing market
price (world price for cotton and rice) for a particular commodity falls below
the price support loan rate. Producers received no loan deficiency payments in
1997 because prevailing prices exceeded the announced loan rates for program
crops (feed grains, wheat, upland cotton, and rice) and oilseeds. 

Because government payments are tied to both historical and current production
of major crops, the largest farming operations receive most of the payments.
(PFC payments are based on historical production, while loan deficiency payments
and gains on marketing assistance loans are based on current production). In
1999, the 16 percent of farming operations with annual sales above $100,000
received nearly three-fourths of farm program payments. 

In calendar 2001, government payments are projected to decline about $8 billion
to slightly over $14 billion. This forecast includes no supplemental aid for
2001 crops, since legislation authorizing supplemental assistance for 2001 crops
has not been enacted by Congress. Scheduled annual reductions in PFC payments
under the 1996 Farm Act, as well as lower loan deficiency payments reflecting
improving prices for major crops, are forecast to reduce government payments by
$2.5-$3 billion in 2001. In addition, with no supplemental aid legislation in
place for the 2001 crops, emergency assistance to farmers and ranchers is
projected to fall from nearly $9 billion last year to about $3.5 billion in
2001. The $3.5 billion in emergency assistance was authorized by Congress last
year to offset crop and market losses in 2000 and will be dispersed in 2001. The
farm income situation in 2001 is not unlike that in recent years; this year some
of the drop in government payments is expected to occur through lower loan
deficiency payments that will be made up in greater returns from the market. 

Absent new legislation, the regions and crops that have been most dependent on
government payments are likely to see the greatest decline in farm income in
2001. The major field crops have had particular market difficulty in the past
few years. Net cash income (excluding government payments) on a crop-year basis
for the major field crops--wheat, rice, corn, sorghum, oats, barley, cotton, and
soybeans--was low for the 1999-2000 crops and projected to remain low for the
2001 crops. Direct government payments accounted for three-fourths of net cash
income for major field crops in 1999 and more than two-thirds in 2000. For 2001,
net cash income for major field crops is projected to fall by over $5 billion,
declining from over $25 billion for the 2000 crop to less than $20 billion. The
decline is slightly less than the amount of market loss assistance Congress
authorized last year for major field crops. 

Farm Finance Situation 
Remains Relatively Strong

A national farm financial crisis has not occurred, in large part because of
record government payments and increased off-farm income. Farm numbers have been
fairly stable in recent years. The proportion of nonperforming farm loans has
risen only slightly, the debt-to-asset ratio remains at about 16 percent (down
from 23 percent during the mid-1980s farm financial crisis), and farm real
estate values and land rental rates generally continue to rise. In 1999, U.S.
farmland values rose 3 percent nationally and were up in 42 states, and cash
rents paid for 2000 were up in 40 states. Bankers in the Chicago Federal Reserve
District, for example, reported that land values in the district rose 7 percent
over the 12-month period ending on October 1 of last year. 

While the national picture appears secure, regional and sectoral problems
persist. The combination of low prices and structural change have caused the
number of dairy and hog operations to decline, and adverse weather in the
Southeast, Southern Plains, and elsewhere has helped create regional pockets of
farm financial stress.

Farm debt rose 2.4 percent in 2000, surpassing $180 billion for the first time
since 1984. In 2001, farm debt is forecast to increase to slightly under $183
billion. Even though farmers' balance sheets are much improved from the
mid-1980s, the projected drop in farm income lessens farmers' ability to repay
existing debt.

A useful indicator of financial stress is debt held by farms as a percentage of
the maximum feasible debt that farms can take on, which is referred to as debt
repayment capacity utilization (DRCU). Maximum feasible debt is a calculation
based on net farm income, the interest rate, an assumed 7-year average repayment
period for debt, and bankers' guidelines on the maximum level of income that
should be used for principal and interest. In 2000, U.S. farmers, on average,
used a little over 60 percent of their maximum feasible debt, and this figure is
forecast to increase to 65 percent in 2001. 

The DRCU analysis may be taken a step further by looking at how this measure of
debt stress is distributed among farming operations. Of the 2.2 million U.S.
farms, about one-quarter (512,000 operations) are commercial farm businesses,
selling at least $50,000 of output per year. These farms account for 90 percent
of total U.S. production. 

Commercial farms that cannot service their debt and that stop performing on
their loans usually have debt equal to at least 240 percent of maximum feasible
debt. In 1998, the number of farming operations in this category rose, but the
number fell in 1999. Weak markets probably led producers to use government
payments to pay down debt. In both 1999 and 2000, about 50,000 of the nation's
512,000 commercial farm businesses had DRCU of 240 percent or more. In 2001, the
number is forecast to increase to 70,000. 

Record-high government assistance to farmers is the most obvious reason farm
financial stress has been limited. Another reason is the strong nonfarm economy,
which has helped expand off-farm income opportunities for farm households.
Earnings of farm operator households from off-farm sources averaged an estimated
$60,000 in 2000, up from less than $36,000 in 1992. In recent years, about 90
percent of total income of the average farm household comes from off-farm
sources, and the average income of farm operator households, including income
from off-farm sources, has been above the average for all U.S. households.
Off-farm jobs in rural areas are a major reason why the number of farms
stabilized at 2.2 million in the 1990s.

Major Crop Markets Show 
Signs of Improvement

Prices of major crops for the 2000/01 season are expected to register modest
improvement from last year's 15- to 25-year lows, reflecting another year of
large global production of major crops and ample stocks. Given no major weather
disruptions in the world's major crop growing regions in 2001/02, further
expansion in global demand for agricultural products--e.g., corn in Asia--is
expected to lead to continued increases in major crop prices over the next
several months and into the 2001/02 marketing year. 

While it is too early to predict a substantial recovery in major crop prices in
2001, global stock levels going into the 2001 season are projected to be down
sharply from a year earlier. At the end of this season, global grain stocks are
projected to be down 10 percent from a year earlier and the lowest since
1996/97. As a result, world prices could move up sharply if weather adversely
affects global crop production over the next several months. 

U.S. winter wheat plantings last fall were down 5 percent from a year earlier
and the lowest since 1971. While late plantings could reduce winter wheat
yields, weather conditions this spring will be the major factor in determining
wheat yields. Reduced wheat supplies in 2001/02 are expected to lead to the
second consecutive year of reduced carryover and rising farm prices. 

In 2001, higher natural gas prices will increase corn producers' fertilizer and
irrigation costs. These higher costs are expected to lower corn plantings in
2001. Assuming normal weather, lower acreage coupled with expanding ethanol use
and another year of strong export opportunities supported by continued global
economic growth could tighten ending stocks, strengthening market prospects for
corn in 2001/02. 

Less fall-planted wheat, higher fertilizer prices, planting flexibility, and the
benefits of the soybean marketing loan program provide an incentive for further
expanding soybean plantings in 2001. Assuming normal weather, higher acreage
could lead to another year of record soybean production and of rising carryover,
even though total use could also reach another record in 2001/02. The European
Union's ban on the use of meat and bone meal in animal feeds could raise soybean
meal exports, but foreign competition is likely to remain intense. Under
pressure of rising stocks, soybean prices could decline in 2001/02.

U.S. red meat and poultry production posted a 1-percent gain in 2000. Despite
last year's record in total red meat and poultry production, cattle and hog
prices were up as demand for meat was strong. 

In 2001, meat production is expected to be unchanged--gains in pork and poultry
production are offset by declines in beef following several years of heavy
heifer slaughter. Declining beef production is expected to push cattle prices
higher, while increasing pork production could pressure hog prices, especially
in the last quarter of 2001. Broiler producers, in response to continued low
prices through most of 2000, have begun to reduce their rate of expansion, and
broiler prices in 2001 are projected to be about unchanged from last year after
falling 3 percent in 2000. Some recovery in milk prices is also expected as the
surge in milk production over the past 2 years dissipates. Livestock, poultry,
and dairy producers should benefit from another year of low feed costs. 

The outlook for horticultural crops is very uneven. Cash receipts for these
crops as a group are projected to be up in 2001, and the value of exports is
forecast to reach a record $11 billion in fiscal 2001. However, prices for some
horticultural crops are being adversely affected by large supplies. For
instance, prices of apples, pears, and potatoes were down at least 15 percent,
and prices of lemons and grapefruit were off more than 50 percent in February,
compared with a year ago.

Over the next several years, the agricultural sector is expected to continue to
recover from the current weak market situation. Increases in exports and
domestic use are expected to boost farm cash receipts, but farm income could
fall below recent levels during the next few years, as gains in cash receipts
fail to offset lower government payments (assuming no additional supplemental
assistance).  

Keith Collins
Chief Economist, USDA

AGRICULTURAL ECONOMY BOX
Trade-Generated Gains Strengthen Agricultural Sector in Long Run

USDA's new longrun (10-year) baseline projections indicate continuing recovery
in the agricultural sector over the next several years from the market situation
in the late 1990s that resulted in generally weak agricultural commodity prices.
For the remainder of the period, continuing improvement in global economic
growth leads to stronger U.S. exports, further gains in agricultural commodity
prices, and rising farm incomes.

For several years in the late 1990s, farmers in the U.S. and abroad harvested
large crops, while the global financial crisis weakened world agricultural
demand. Strong foreign competition in a weakened global trade setting reduced
the value of U.S. agricultural exports and market cash receipts to U.S. farmers.
Net farm income was maintained at levels near the average of the 1990s only
through large government marketing loan benefits and by additional funds
provided to the sector through emergency and disaster assistance legislation.

Although some lingering effects of the global economic crisis remain, the
general recovery underway in crisis countries has strengthened global demand and
trade, and U.S. agricultural exports have risen. Nonetheless, the buildup of
global supplies in the late 1990s keeps agricultural prices under pressure over
the next several years, with marketing loan benefits continuing to have an
important role in the U.S. farm sector. U.S. farm income declines in the initial
years of the baseline, largely reflecting an assumption of a reduction in direct
government payments to the sector from high levels of the past several years.

Longer run developments in the agricultural sector reflect continuing
macroeconomic improvement. Structural reform in countries most affected by the
global financial crisis of the late 1990s leads to strengthening world economic
growth, particularly in developing countries, providing a foundation for further
gains in trade and U.S. agricultural exports. Expanding production in a number
of foreign countries (e.g., Brazil and Argentina), however, results in continued
strong export competition throughout the baseline period. Nonetheless, growth in
trade leads to rising market prices, increases in farm income, and improvement
in the financial condition of the U.S. agricultural sector. 

Consumer food prices are projected to continue a long-term trend of rising less
than the general inflation rate. The trend in consumer food expenditures toward
a larger share for meals eaten away from home is expected to continue.

Paul Westcott (202) 694-5335
westcott@ers.usda.gov

NOTE ON BASELINE

The USDA baseline provides longrun projections for the agricultural sector
through 2010. Projections cover agricultural commodities, agricultural trade,
and aggregate indicators of the sector such as farm income and food prices. The
projections are based on specific assumptions regarding macroeconomic
conditions, policy, weather, and international developments. The baseline
assumes no shocks due to abnormal weather or other factors affecting global
supply and demand. The 10-year baseline scenario assumes continuation of current
agricultural law of the 1996 Farm Act. The baseline also assumes no further ad
hoc emergency and disaster assistance.
The baseline projections are one representative scenario for the agricultural
sector for the next decade. As such, the baseline provides a point of departure
for discussion of alternative farm-sector outcomes that could result under
different assumptions. The projections in the USDA baseline report, which
reflect a composite of model results and judgmental analysis, were prepared in
September through November 2000.

USDA's complete 2001 baseline projections are available at:
http://www.ers.usda.gov/briefing/baseline/


BRIEFS

Modest Rise in Food Prices This Year

Consumers can expect modest increases in food prices for the fourth year in a
row, with the Consumer Price Index (CPI) for all food projected to be up 2 to
2.5 percent in 2001, compared with 2.3 percent in 2000. This continues a
long-term trend of food prices rising slightly less than the general inflation
rate, forecast at 3 percent in 2001. For food prepared at home, the CPI in 2001
is projected to rise 2 to 2.5 percent, with food away from home up 2.5 to 3
percent.

In 2000, sales of food at home are forecast to increase 5.1 percent, while
food-away-from-home sales are forecast to increase 9.7 percent in 2000. As a
result, expenditures for all food in 2000 could increase to $842.7 billion from
$788.6 billion in 1999. Rising incomes are chiefly responsible for the increased
spending on food away from home, which could amount to 48 percent of total food
expenditures in 2000. Higher energy prices did not translate into higher food
prices in 2000, largely because transportation and energy costs together are
less than 10 percent of the total food marketing bill (which constitutes 80
cents of every dollar of consumers' food expenditures, compared with 20 cents
that goes to the farmer).

Food price changes are key to shifts in the proportion of income consumers spend
for food. In 1999, this proportion was 10.4 percent of household disposable
personal income, with 6.2 percent for food at home and 4.2 percent for food away
from home. The downward trend in the share of household disposable personal
income spent on food should continue into 2000 and 2001. In 2001, consumer
spending is expected to grow by 3 percent but will be held in check by a tight
labor market, more limited credit, and higher energy prices.

Meats. U.S. red meat and poultry production posted nearly a 1-percent gain in
2000, and retail prices were higher for all meats, especially beef and pork. In
2001, meat output is expected to be unchanged, with poultry, hog, and turkey
producer prices remaining steady or declining. Continuing large meat production,
lackluster export growth, and a slowing domestic economy may pressure wholesale
and retail prices downward.

Beef and veal. Beef production was up 1.5 percent in 2000, with prices for
retail Choice beef setting a record $3.06 a pound. The CPI for beef rose 6.4
percent in 2000 and is expected to increase 3 to 4 percent in 2001. First-half
2001 beef production is likely to decline 3 to 4 percent from a year earlier,
while second-half production may decline 5 to 6 percent. The slowing economy is
expected to dampen demand for higher quality cuts of beef, which led to the
record-setting retail prices in 2000.

Pork. Retail pork prices rose a sharp 7.3 percent in 2000, with the 2001 CPI
expected to increase 2 to 3 percent. Commercial pork production in 2001 is
forecast at 19.3 billion pounds, up almost 2 percent from 2000, and, if
realized, would be just above the 1999 record. Per capita pork and competing
meat consumption should stay about the same in 2001. The slowing economy and
sharply higher energy costs may temper consumer demand for beef and pork this
season.

Poultry. The CPI for poultry increased 1.2 percent in 2000, with a rise of 1 to
2 percent expected in 2001. Broiler production in 2001 is forecast at 31 billion
pounds, up about 1.5 percent from 2000. Responding to low prices through most of
2000, broiler producers have indicated that they will slow production growth in
2001. With strong exports to the three largest markets (Russia, Mexico, and
China/Hong Kong) and a number of smaller markets, U.S. broiler exports surged to
over 5.5 billion pounds in 2000 and are expected to be 5.7 billion pounds in
2001. Competition in export markets is expected to continue driving the poultry
industry's ability to efficiently convert feed to meat, lowering its cost
relative to beef and pork.

Fish and seafood. The CPI for fish and seafood was up 2.8 percent in 2000, with
an expected increase of 2 to 3 percent in 2001. U.S. per capita seafood
consumption has remained flat, between 14.8 and 15.2 pounds of edible meat per
year, with population growth accounting for increases in total domestic seafood
consumption. A strong U.S. economy in 2000 boosted away-from-home food demand as
people traveled and ate out more. This was especially important for seafood, as
a large percentage is consumed at restaurants. More than 50 percent of fish and
seafood consumed in the U.S. in 2000 came from imports, with another 20 to 25
percent from U.S. farm-raised production.

Eggs. Retail egg prices increased 3 percent in 2000, with an increase of 6 to 7
percent expected in 2001. Table-egg production rose 2 percent in 2000, while
hatching-egg production was flat. Retail egg prices were highest during the
fourth quarter, reflecting seasonal demand as well as supplies that were only 2
percent above third-quarter supplies. Per capita consumption is expected to
reach 258 eggs in 2001, down slightly from 2000. 

Dairy and related products. Prices increased 0.7 percent in 2000, following a
5.8-percent increase in 1999. Strong consumer demand for dairy items, especially
gourmet ice cream, cheese, and butterfat products, is expected to continue this
year, with the CPI for dairy products expected to increase 1 to 3 percent.
Growth in milk output is expected to ease slightly in 2001, after consumer
demand outstripped supplies in 1998 and 1999. Most fluid milk is still sold at
retail, but cheese and butter are used mostly by away-from-home eating
establishments or by manufacturers of processed foods. Greater away-from-home
dining has reduced fluid milk sales because people tend to order other beverages
in restaurants.

Fats and oils. Prices fell 0.6 percent in 2000, but are expected to increase 1
to 2 percent in 2001. The decrease in the 2000 index was due largely to lower
retail prices for butter, which accounts for 31 percent of the fats and oils
index. The remaining items in the fats-and-oils index are highly processed
foods, with price changes influenced by the general inflation rate in addition
to U.S. and world supplies of vegetable oils.

Fresh fruits. The 1999/2000 citrus crop rebounded in California, leading to a
3-percent decrease in the fresh fruit price index in 2000. Large supplies of
other major fruits also contributed to a decrease in the fresh fruits CPI. With
the 2000/01 citrus crop and supplies of noncitrus fruits expected to be about
the same as last year, and with continued strong U.S. consumer demand for fresh
fruits, the fresh fruits CPI is expected to increase only 1 to 2 percent in
2001.

Fresh vegetables. The CPI for fresh vegetables increased 4.8 percent in 2000 due
to lower production and strong demand for fresh vegetables. Fresh-market
vegetable harvested area was estimated down about 1 percent from 1999 in
response to lower grower prices. 

A combination of reduced winter acreage in first-quarter 2001 and several bouts
of sub-freezing weather in Florida have reduced supplies of fresh-market
vegetables--particularly green peppers, snap beans, squash, eggplant, tomatoes,
and cucumbers. Low prices for leafy green and other cool-season vegetables from
California have helped offset higher prices for Florida vegetables. Retail
prices for potatoes, the most heavily weighted item in the fresh vegetable CPI,
are low this year due to a record-large fall crop. Although imports will help
fill some of the supply gaps, the impact of the Florida freeze on vegetable
prices may continue until April 2001. However, vegetable growers have indicated
they expect harvested acreage to be down 2 percent in winter 2000/01. Combined
with the Florida freeze, this should increase the fresh vegetable index another
4 to 6 percent in 2001.

Processed fruits and vegetables. Adequate supplies of most fruits and vegetables
for processing limited the CPI increase for processed fruits and vegetables to
1.1 percent in 2000. With lower supplies of processed vegetables and adequate
supplies of frozen concentrate orange juice and other fruit expected in 2001,
the CPI for processed fruits and vegetables is expected up 1 to 2 percent. 

Sugar and sweets. Domestic sugar production for 1999/2000 was a record 9 million
tons, more than 600,000 tons above the previous marketing year. Low prices for
soybeans, corn, wheat, barley, and rice led farmers to shift acreage to sugar.
With relatively low inflation and increased output, the CPI for sugar and sweets
increased only 1.1 percent in 2000.

While demand for sugar and sugar-related products continues to rise, large U.S.
sugar supplies are outpacing demand. Per capita consumption of caloric
sweeteners increased almost 20 pounds per person from 1990 to 2000, partly
because inflation-adjusted retail prices dropped dramatically--from 33 cents/lb.
in 1990 to 26 cents/lb. in 2000--and also because of increased spending for
away-from-home eating and consumers' willingness to treat themselves. With large
sugar supplies expected again in 2000/01, the CPI for sugar and sweets is
expected to increase a moderate 1 to 2 percent in 2001.

Cereal and bakery products. These items account for almost 16 percent of the
at-home food CPI. With grain prices lower and inflation-related processing costs
modest, the CPI for cereals and bakery products increased 1.8 percent in 2000.
Most of the costs to produce cereal and bread products are for processing and
marketing--more than 90 percent in most cases--so farm ingredients are a
relatively minor cost consideration. With competition among producers and
consumer demand for bakery products expected to remain fairly strong, the CPI is
forecast up 2 to 3 percent in 2001.

Nonalcoholic beverages. The CPI for nonalcoholic beverages increased 2.6 percent
in 2000 and is forecast to increase another 2 to 3 percent in 2001. Coffee and
carbonated beverages are the two major components, accounting for 28 and 38
percent of the index. In 2000, retail prices were 1 percent higher for ground
roast coffee and up 4 percent for soft drinks.

World coffee production in 2000/01 is forecast record-high, nearly 2 percent
above last year. Up to 80 percent of U.S. imports are arabica beans, and 15 to
20 percent are robustas--mainly for soluble (instant) coffee. Recent near-record
production in Brazil, the largest producer of arabica, should lead to larger
U.S. stocks and continued moderate consumer prices.  

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

For more information, see the Economic Research Service food price briefing room
http://www.ers.usda.gov/briefing/CPIFoodAndExpenditures/


BRIEFS
Sheep & Lamb Inventory Continues to Decline

The U.S. sheep industry continues a long-term trend of negative growth that has
seen the inventory shrink from a 1942 peak of 56 million head to 6.92 million
head on January 1, 2001. This year's inventory is 2 percent below the level on
January 1, 2000, and 50 percent below 1975, reflecting decreasing U.S. demand
for wool and for lamb and mutton and rising competition from Australia and New
Zealand.

Texas, the largest sheep-producing state, saw an 8-percent drop in inventory
during 2000, while Wyoming (third largest) saw a 7-percent decline. Several
states did register gains, including California, Oregon, Nebraska, and Indiana.
But drought conditions in the Southern Plains and western states contributed to
a relatively large decline (5 percent) in national breeding stock. 

Commercial production of lamb and mutton has mirrored the long-term decline in
inventory. In calendar 2001, production of lamb and mutton is expected to total
about 217 million pounds, down 7 percent from 2000 and 46 percent from 1975.
With production down, farm prices of lambs are expected to average in the low
$80's per cwt this year, up about $1 from 2000. Based on seasonal price
patterns, market lamb prices are expected to peak during the Easter/Passover
season, averaging $81-$85 in the second quarter. 

In recent years, rising U.S. imports have offset declining lamb and mutton
production, keeping per capita consumption stable. Imports, which account for
about one-third of U.S. consumption, are nearly all from Australia (59 percent)
and New Zealand (39 percent). Mutton and lamb enjoy a niche market, with regular
consumption concentrated in ethnic groups of Middle Eastern, African, Latin
American, and Caribbean descent.

Following the import rise in the mid-1990s, the U.S. established in July 1999 a
3-year tariff-rate quota (TRQ). The ad valorem duty for in-quota amounts (up to
70.2 million pounds) was 9 percent in the first year (July 1999-June 2000) and
is reduced by 3 percentage points for each subsequent year. The over-quota duty
was 40 percent in the first year. In the second and third years, in-quota import
levels will rise to about 72.1 million pounds and about 74 million pounds,
respectively, with over-quota tariffs at 32 percent and 24 percent. In 2001,
U.S. lamb and mutton imports are expected to be up about 5 percent from 2000 to
135 million pounds as import restrictions are reduced.

In October 1999, New Zealand and Australia filed complaints against the U.S. to
the World Trade Organization (WTO). A WTO panel ruled in favor of New Zealand
and Australia in December 2000, recommending that the U.S. bring its import
safeguard measures on lamb meat (the TRQ) into conformity with its WTO
obligations concerning safeguards. The U.S. has since appealed the ruling, and
the results of the appeal are pending.  

Keithly Jones (202) 694-5172
kjones@ers.usda.gov


COMMODITY SPOTLIGHT
Lettuce: In & Out of the Bag

Lettuce has never been more popular in the U.S. The average American consumed 33
pounds of lettuce in 2000--an all-time high. This growing market has spurred the
U.S. lettuce industry to reinvent itself over the past decade. In response to
consumer demand for variety, freshness, and convenience, and as a result of
technological innovations in packaging materials, lettuce shippers now offer
customers everything from heads of iceberg to ready-to-eat salads.

Today's lettuce shippers market their wares through a variety of outlets: 
grocery stores, foodservice operations, produce wholesalers, mass merchandisers,
and exporters. While some firms specialize, others consciously diversify across
marketing channels. Their operations range in scope from firms that simply wash,
core, and wrap lettuce to large, sophisticated processing plants that bag salad
blends and salad kits in special, patented films.

California & Arizona 
Dominate the Market

The U.S. produces more lettuce than any other country except China. Nearly all
(more than 99 percent) of the lettuce consumed in the U.S. is produced
domestically. Just two states, California and Arizona, produce 96 percent of the
country's commercial iceberg (also known as crisphead or head) and romaine
lettuce and 98 percent of its leaf lettuce. 

Overall, U.S. lettuce production has risen 16 percent since 1992. The soaring
popularity of romaine lettuce, a staple of Caesar salads and bagged salad mixes,
has led to a huge increase in production:  162 percent since 1992. Production of
leaf lettuce (up 37 percent) has also been strong, due largely to the enduring
popularity of salad bars and bagged salad blends. Iceberg lettuce has
experienced a relative fall from favor, with production increasing only 2
percent since 1992. As the popularity of other varieties has risen, iceberg's
share of U.S. lettuce production has declined from 84 percent in 1992 to 73
percent in 2000.

A relatively small number of firms coordinate the growing, processing, and
transport of lettuce. Nearly all the major lettuce shippers have headquarters
and year-round sales offices in the Salinas, California area. By organizing
lettuce production in precise sequences, these firms have ensured that lettuce
can be grown domestically throughout the year. Iceberg lettuce, for instance, is
produced in the Salinas Valley from April through October, then briefly in
Huron, California, before a new growing season begins in the desert areas of
Yuma, Arizona, and California's Imperial Valley, running from November through
March. Huron provides another brief production bridge between the desert and the
Salinas Valley in March and April. Leaf lettuce can follow a slightly different
sequence, which can include planting in California's Santa Maria and Coachella
valleys.

Most shippers of iceberg, leaf, and romaine lettuce handle other vegetables as
well--sometimes as many as 75 different types, including broccoli, cauliflower,
celery, green onions, radishes, and spinach--so that they can offer their
customers one-stop shopping. Some of these shippers also specialize in crops
that have smaller markets, such as artichokes, asparagus, cactus pears, rapini,
and organic vegetables.

Iceberg, still the most widely used variety of lettuce in the U.S. (24.9 pounds
consumed per capita in 2000), is second only to the potato (51 pounds consumed
per capita last year) as the most popular fresh vegetable in the U.S. But while
Americans used nearly 6.9 billion pounds of iceberg in 2000, per capita use has
declined 13 percent since the1989 peak. Decline in the iceberg market has been
more than offset by increased demand for romaine and leaf lettuce. As Americans
have tried to improve their diets, they have become more open to trying new
varieties of lettuce (red leaf, bib, butterhead, and others) and more interested
in buying conveniently bagged salad blends and kits. The result:  per capita use
of leaf and romaine lettuce has more than doubled since the beginning of the
1990s, culminating in a record 8.3 pounds in 2000.

From Farm to Market: 
The Processing Picture

Most shippers process their lettuce in one of three ways. Lettuce sold as a
commodity undergoes virtually no processing; value-added lettuce is typically
washed, bagged, and sold ready-to-serve; and fresh-cut (also known as
fresh-processed) lettuce appears in bagged salad blends or kits. Lettuce
marketed as a commodity is generally sold in bulk and under brands not widely
recognized by consumers.

A commodity such as bulk spring mix--created by combining several different
kinds of leaf lettuce--is not considered to be a "value-added" product. True
value-added products require more processing. For instance, although broccoli
crowns or leaf lettuce sold in bulk are considered commodity products, broccoli
florets that are washed and sold in 16-ounce packages, ready to serve or cook,
are value-added, as are hearts of romaine. Most value-added products come bagged
in simple cellophane, not in the sophisticated films used to protect salad mixes
and kits. Although some value-added products may not bear universal product
codes (UPCs), they will often sport PLU (price lookup) codes that are not
scanned but are entered by hand at the cash register.

Value-added products require a small amount of processing, and thus require
relatively little in the way of capital investment. Many value-added processing
operations can be performed in modified packing sheds, with a modest amount of
equipment. However, makers of fresh-cut products such as bagged salads must make
substantial capital investments in plants and specialized machinery. 

Because of these high capital costs--more than $20 million for a central or
regional processing plant--smaller producers may have difficulty entering the
market. Other costs include special packaging films that manage transpiration
and respiration rates and extend shelf life; research and development of new
films; and sophisticated merchandising. Producers of fresh-cut lettuce products
must follow specific procedures in the "cold chain" that extends from the
processing plant to the retail display case, and always be on the lookout for
ways to reduce delivery times from regional processing plants. Fresh-cut
products are marketed using consumer-recognized brand names and have UPC codes
that are scanned by supermarket cashiers.

In 1993, 55 firms sold 197 fresh-cut salad items (lettuce-based salad blends and
salad kits) in mainstream U.S. supermarkets. Sales totaled $197 million,
according to scanner data from Information Resources, Inc. By 1999, 54 firms
were selling 459 items, and sales had skyrocketed to $1.3 billion. However,
largely because of barriers to entry in the bagged salad market (e.g., high
capital requirements and brand recognition), only a few firms have vied for a
major share of the national retail market. Competition for regional and national
market shares has been intense. From 1993 to 1999, the top two firms increased
their joint market share from about two-thirds to three-quarters of national
sales. The remaining top national and regional firms saw their collective market
share drop from 27 percent of national sales in 1993 to 14 percent in 1999. Some
of these firms have apparently shifted from producing branded products to
private-label products (retailers' house brands), which accounted for 5 percent
of national sales in 1993 but had jumped to 10 percent by 1999. The number of
competitors outside the top 10 peaked at 53 in 1994 and declined to 43 in 1999,
while their combined market share shrank to less than 1 percent of total dollar
sales.

Processors and shippers of fresh-cut salads have a more complex relationship
with retailers than firms that sell only commodities, primarily because salads
resemble packaged goods more than they do conventional produce--a uniform
quality product that is available year round. The amount of fresh-cut salad
shipped to retailers is more consistent from week to week than that of much
fresh produce, although, according to university research, consumer demand for
fresh-cut salads does fluctuate seasonally. Producers of fresh-cut products are
concerned about capacity utilization, and process raw ingredients continuously
despite fluctuations in yields and production throughout the year. 

Although short supplies of produce resulting from bad weather would ordinarily
translate into higher prices for retail buyers, fresh-cut salad shippers tend to
absorb those increases and keep prices stable. By doing this, they ensure that
weather conditions usually do not affect retail prices. In all of these ways,
the fresh-processing business is more a manufacturing than an agricultural
enterprise--a key indication of how much the U.S. lettuce industry has changed
in recent years.

Product Mix & Marketing 
Channels Are Diverse

In conjunction with a team of university researchers, USDA's Economic Research
Service interviewed 15 lettuce shippers in California and Arizona as part of a
larger study on changes in produce marketing. Eight of the 15 shippers sold
lettuce as a commodity, as well as (on average) 24 other kinds of fresh
vegetables. The shippers sold mostly iceberg lettuce, followed by romaine and
green and red leaf lettuce. Five of the eight firms sold lettuce only as a
commodity; three offered a few fresh-cut and value-added items, such as broccoli
and cauliflower florets. Seven of the 15 shippers interviewed either
concentrated exclusively on bagged salads or offered an extensive line of bagged
salads and other value-added products in addition to their commodity sales. The
combinations of fresh-cut, value-added, and commodity items varied significantly
from firm to firm.

Most shippers use a variety of outlets for selling their lettuce. Ten of the
firms interviewed provided information on where they marketed their lettuce in
1999. Grocery retailers were the most frequent marketing outlet, followed by
food service, produce wholesalers, mass merchandisers, brokers, and exporters.
In contrast, firms selling bagged salads and value-added products sold almost
exclusively to retailers and foodservice firms.

Sales and marketing arrangements will continue to change as markets for lettuce
and fresh-cut produce evolve. For example, the relationships between shippers
and their customers are becoming more formalized. Buyers are developing
preferred supplier arrangements with shippers, written contracts are more
common, mass merchandisers are making shippers responsible for tracking sales
and replenishing inventory, and shippers are providing category management to
retailers (AO March 2001).

Lettuce shippers have adopted various business strategies to manage buyer
demands for greater volumes, broader product lines, and year-round availability.
Some firms have changed their internal focus to concentrate on certain market
channels or commodities. Some have made external arrangements with other
vegetable shippers--such as co-packing arrangements, alliances, and consolidated
marketing offices--to bolster their product lines and sales. In addition,
product innovation has brought new fresh-cut items to grocery store shelves.
Fresh-cut fruit and potato products are now on the market and may become more
widely available as processing plants are built in more locations around the
country.  

Lewrene Glaser (202) 694-5246, Gary Lucier (202) 694-5253, and Gary Thompson
(University of Arizona) 
lkglaser@ers.usda.gov
glucier@ers.usda.gov

COMMODITY SPOTLIGHT BOX
Emerging Trade Practices & Trends in Produce Marketing

The Economic Research Service (ERS) is working with industry experts to
undertake descriptive and analytical research studies on the changing nature of
produce markets and market channels and their implications for competition. The
major objective of a recently completed study was to identify and characterize
types of marketing and trade practices used in the produce industry, focusing on
the relationship between shippers and retailers.

Because there are no public data on transactions between produce shippers and
their customers, ERS and university researchers conducted a small number of
personal interviews with fresh fruit and vegetable shippers to better understand
these practices and the changing nature of shippers-buyer relations. The study
focused on California grapes, oranges, and tomatoes; California and Arizona
lettuce and bagged salads; and Florida tomatoes and grapefruit. The interviews
concentrated on two main aspects of the business relationship between shippers
and retailers:  the types and characteristics of sales and marketing
arrangements, and the types of fees and services that shippers are being asked
to provide, or are offering, to retailers and mass merchandisers.

For more information on the produce marketing study, see AO March 2001. More
details on the findings for lettuce and bagged salads will be available in the
forthcoming publication, Recent Changes in Marketing and Trade Practices in the
U.S. Lettuce and Fresh-Cut Vegetable Industries, on the ERS
website--www.ers.usda.gov.


WORLD AGRICULTURE & TRADE

Japan's Changing Agricultural Policies

The high cost of farming and increased openness to world trade have put Japan's
agricultural producers under constant competitive pressure. As a result, the
number of farms in Japan dropped by 14 percent from 1990 to 1998, and Japan is
increasingly dependent on food imports to meet consumers' nutritional needs.
Japan is the world's largest importer of agricultural products ($33 billion in
1999).

The government is revising its agricultural policies and programs in an attempt
to stem the decline in self-sufficiency in food production. Japan also seeks to
ensure that its farm program expenditures will be exempt from reductions
required under current and proposed rules of the World Trade Organization (WTO).
In its February 2001 notification to the WTO, Japan contended that major
programs that were subject to reduction have been replaced by new programs that
are less trade-distorting and therefore exempt from cutbacks.

New National 
Food Policy

In July 1999, Japan adopted the Basic Law on Food, Agriculture and Rural Policy,
which "thoroughly reviews the postwar agricultural policies...and sets up a new
policy-making scheme under...four basic principles," which include securing a
stable food supply, fulfillment of the multiple functions of agriculture,
sustainable development of agriculture, and promotion of rural areas. These
principles reflect two themes stressed by Japan's government: 1) national food
security requires that domestic agriculture produce some minimal level of
output, and 2) agriculture is multifunctional, not only producing food and
fiber, but also serving, for example, an environmental purpose.

Major initiatives are underway to change the structure of farming and to make it
more efficient. Under its current structure, Japan's agriculture has such high
producer costs that without protection it could not compete with most imported
products. Without barriers to trade, Japan's consumers could rely almost
completely on imports to satisfy their food needs--and save money.

Japan is raising economic and political arguments that even with its current
uncompetitive structure, agriculture's functions beyond producing food for the
market make it worth preserving. For instance, Japan cites the value of rice
paddies in controlling flooding and the need to maintain agriculture in order to
preserve the economic health of rural villages.

Japan's new policy stance explicitly recognizes that food security depends on
continued imports and stocks, as well as on maintaining domestic production
capability. During the current WTO discussions to continue the agricultural
reform process, Japan is arguing that greater dependence on imported food
(currently supplying 60 percent of caloric intake) could be dangerous if extreme
events, such as war, cut trade links.

The goal of the Basic Law is preserving Japan's current level of domestic food
production and not allowing the rate of food self-sufficiency (the share of
consumption produced domestically) to decline further. Given this objective, the
Basic Law encourages greater use of market mechanisms to increase the efficiency
of the farm sector. In the last 3 years, a series of commodity-specific laws has
changed the way the government supports agriculture. In general, the new
policies set up programs to provide income support and income insurance for
production of specific commodities instead of intervening to support market
prices.

The Rice Farming Income Stabilization Program, which began in 1998, is a major
example of the new commodity policies. Rice farmers receive some compensation if
market prices fall below a "standard" price, calculated as the average market
price of the preceding 3-year period. In the event of below-average prices,
producers can collect 80 percent of the difference between the current-year
price and the standard price, multiplied by the farmer's current-year
production. Payment comes from the Rice Farming Income Stabilization Fund,
supported by contributions from participating farmers (2 percent of the standard
rice price per unit of the farmer's output ) and the government (6 percent of
the standard rice price per unit of total domestic production) each year.
Participation in the Income Stabilization Program is voluntary.

Because rice surpluses are a chronic problem, production-limiting rice diversion
programs have a long history in Japan. Farmers choosing to participate in the
Rice Farming Income Stabilization Program are required to participate in the
Rice Supply-Demand Stabilization Program, which diverts some of their land away
from rice. Japan asserts that the program linkage between government assistance
and limitations on rice production puts rice policy into the WTO "blue-box"
category--i.e., the programs are exempt from domestic support limits because
they involve limits on production. Some rice farmers with efficient operations
have chosen not to participate in the rice programs because they do not wish to
divert any land from rice production or to contribute to the rice fund.

Diversion can be to crops, fruit trees, vegetables, or fodder, or to
conservation (fallow status) or other uses (e.g., landscape enhancement).
Government payments per hectare (revised annually) vary according to the use
made of diverted land and reflect government preferences for growing alternative
commodities.

A farmer could divert a rice field to another crop, receive the revenue from
selling that crop plus the diversion payment, and still participate in the
income stabilization program to receive payments from rice farming on other
fields. Surpluses are also a problem for milk, fruits, and vegetables at times,
and programs for those commodities include setting maximums for production and
rewarding those farmers who limit their production. 

For other commodities, the concern is declining production, not overproduction.
For example, the new soybean program that was introduced in 2000 works like the
rice income program described above, but has no requirement to limit or divert
soybean area. Instead, diversion from rice to soybeans is encouraged. Farmers
participating in the Soybean Farming Stabilization Program receive compensation
for 80 percent of a price drop when prices fall below the standard price. Annual
payments into the Fund are 3 percent of the standard price from farmers and 9
percent of the standard price from the government. And farmers growing soybeans
on a diverted rice field also get a direct payment from the diversion program
for not planting rice. The same type of income program is to be introduced for
wheat. 

The new income stabilization programs for rice and soybeans are typical of most
policies for agricultural commodities in Japan. The programs rely more on
competitive market pricing than did Japan's old policies. For example, the old
soybean deficiency payment was based on a fixed target price based partly on
estimates of average costs of production. The program paid 100 percent of the
difference between the target price and the actual market price received, so
farmers had no strong incentive to raise quality or to produce for a niche
market.

Under the new system, farmers participating in the income stabilization program
get only 80 percent of the calculated price differential and thus bear a
20-percent share of the risk of revenue loss from a drop in prices. Because the
standard price is an average of previous actual market prices rather than a
support price based on costs, farmers today have a greater incentive to keep
costs low and to achieve high sales prices--e.g., through their choice of
product mix or through development of a marketing strategy.

For other agricultural products, administered prices set by the government were
intended to guide market prices, and the government sometimes stepped in to buy
up output when market prices fell below a designated level, raising prices to
buyers as well as to sellers. In theory, Japan's commodity markets are supposed
to see less of this kind of intervention in the future.

Changes in Japan's 
Import Policies

Japan has an extensive set of trade policies to regulate imports of agricultural
commodities. When the Uruguay Round Agreement on Agriculture (URAA) was
ratified, Japan agreed to replace quantitative restrictions with tariffs and
tariff-rate quotas (except for rice), and to reduce the level of protection
afforded by the tariffs and quotas during 1995-2000. Since the URAA went into
effect, Japan has made further changes in its trade rules, including:

--a reduced role for the Food Agency, the state-trading arm of the Ministry of
Agriculture, Forestry, and Fisheries;
--establishment of a tariff-rate quota for rice;
--extensive use of URAA safeguard mechanisms to raise tariffs; and
--reduction of phytosanitary barriers against some horticultural imports.

Domestic wheat production is now sold in private-sector transactions instead of
being sold to the Food Agency. Imports of some rice and of wheat and barley for
feed use have been increasingly conducted through a "simultaneous buy and sell"
(SBS) process, which allows foreign exporters and domestic buyers to work
together to submit bids. The Food Agency chooses bids that provide the highest
margin between the import price paid to sellers and the higher (marked up)
domestic resale prices charged in Japan, with the Food Agency keeping the
markup. However, the margin cannot exceed the maximum markup levels that Japan
agreed to in the URAA. The list of designated grain suppliers to the Food Agency
in its traditional (non-SBS) purchases of rice, wheat, and barley within the
quotas has broadened in the 1990s to include foreign-controlled firms. These
changes reduce the Food Agency's role in determining what is brought into Japan,
and where it comes from.

Japan's rice trade was treated as a special case in the URAA, and Japan did not
convert nontariff barriers into an equivalent tariff for rice. Instead, it
agreed to implement a quota which was to reach about 8 percent of domestic
consumption in 2000 compared with zero in most years before 1995. However, Japan
changed its policies and decided to "tariffy" its rice trade beginning in 1999
(AO April 1999). It established a rice tariff-rate quota and an overquota tariff
based on the tariff equivalent of its former nontariff barriers. The overquota
tariff is so high that it effectively prohibits additional rice imports, and the
change, while ending the special treatment of Japan's rice trade, did not open
the door to new trade. 

Japan has used the Special Safeguard mechanisms established in the URAA
extensively since 1995. They allow a temporary increase in duties to one-third
higher than the normal tariff if a surge in import volume or a steep decline in
import prices occurs, and if the right to use safeguards had been reserved for a
product in the URAA. Japan used such safeguards 28 times in the 5 years prior to
April 2000, chiefly for starches, livestock products, and dried legumes.

In addition, Japan negotiated a side agreement to the URAA to establish another
kind of safeguard mechanism for its pork and beef markets. At the end of 2000,
Japan began proceedings to use measures under the UR Agreement on Safeguards to
protect domestic dried shiitake mushroom and welsh onion production. Such
safeguard measures could involve imposing a quota on imports for up to 4 years.
Japan has announced that other commodities are under consideration for such
protection. 

Japan's phytosanitary barriers have blocked imports of some vegetables and
fruits. After prolonged negotiations, Japan agreed in 1999-2000 to use one set
of criteria for all varieties of apples, tomatoes, and nectarines from a given
growing region. If phytosanitary acceptance were obtained for a growing regime
for one variety in an exporting country or region of a country, it could thus be
extended to other varieties from that area, saving time and expense for farmers
growing products for export. Despite this advance, Japan's phytosanitary
regulations on imported fruit and vegetables remain very stringent and costly to
satisfy.

Implications of 
The New Policies

Japan is the world's largest importer (by value) of pork, beef, corn, and a
number of other commodities. Imports of eight commodities--pork, beef, corn,
soybeans, poultry meat, coffee, wheat, and wine--each averaged near $1 billion
or more per year during 1997-99. Japan is also the largest export destination
for U.S. agricultural products--a $9-billion market in 2000.

The condition of Japan's domestic agricultural production is of interest to many
suppliers in global commodity markets. Consumption of basic commodities in Japan
is relatively stable and not likely to grow in the future because of a
population growth rate near zero and the lower food needs of an aging
population. In general, increases in imports of basic commodities into Japan
will occur only if Japan's production decreases. The current structure of
production survives in the shelter of government policies. 

Japan's policies are aimed at making farms more efficient in order to preserve
the existing level of agricultural production. Together with heavy support for
farm consolidation, mechanization, and efficient packing, distribution,
processing, and marketing, the new commodity programs encourage a smaller number
of professional farmers to compete against imports in satisfying Japanese
consumers. To the extent that this new set of programs succeeds, imports will
not grow.

The new programs face severe hurdles. Market prices have been declining in Japan
for most years in the last decade. Participating farmers will be compensated for
80 percent of a drop from previous years' average prices for many commodities.
Competition from imports and from more efficient Japanese farmers not
participating in the stabilization schemes will be intense. Unless farmers
receive additional forms of support, so much land may exit farming that output
will fall. Japan has already begun direct per-hectare payments to farmers in
mountainous areas where consolidation is difficult, basing payments on
multifunctionality arguments. Spending on the program in 2000, the first year,
was over $300 million.

Although Japan's federal and local governments spend more in support of
agriculture than the gross value of agricultural output, Japan's spending to
maintain production is constrained by WTO rules. In formulating its new
policies, Japan seeks to move its policies out of the "amber box" of policies
that are subject to reduction because they distort trade, and to develop
policies that fit in the "blue" or "green" boxes. Unlike blue box policies,
green box policies are not tied to current production or price of a commodity. 

Japan's URAA commitment to cut amber-box spending involved scaling back programs
that set administered prices for domestic output. These prices were usually high
enough to cover most farmers' costs, and the government managed some markets to
make consumers bear the costs. Now, administered prices have been eliminated,
but two related questions are still not answered:

--How will the WTO classify the new policies under existing rules--i.e., amber,
blue, or green box? 

--How will the new policies fit within a set of international rules that might
emerge in ongoing WTO negotiations over a new agreement on agricultural trade?

Japan's proposal for the WTO negotiations includes calls to allow policies to
maintain domestic food production for food security and for functions other than
efficient food production. Japan favors retention of the WTO blue box category
and expansion of the green box category to accommodate such policies. Japan did
not have policies that fit in the blue box at the time the URAA was ratified,
but in its February 2001 notification to the WTO, Japan contended that its new
rice programs belong in the blue box (beginning with the 1998 crop) and thus
expenditures are exempt from reduction. However, many other countries are
calling for elimination of the blue box category in the future. Within and
outside Japan, the actual operation of the new policies, their impacts on
production and trade, and their interaction with Japan's negotiating position
will be watched with interest.  

John Dyck (202) 694-5221
jdyck@ers.usda.gov

WORLD AGRICULTURE & TRADE BOX #1
Japan's Pork-Sector Policies

Japan's pork market illustrates the role of both import and domestic measures in
protecting commodity markets, and also the very rapid restructuring of
agriculture that is occurring as market prices decline. Japan's pork
imports--the world's largest--grew steadily until 1997, replacing domestic
production. Since then, production declines in Japan have been insignificant and
imports have been erratic. Probably the key factor in shifting import levels is
that Taiwan, once the largest source of Japan's pork imports, has been absent
from the trade arena since the sudden appearance of foot-and-mouth disease there
in 1997 (AO October 2000). Imports from Korea ceased in 2000 for the same
reason. However, Japan's use of the gate price system, safeguards under the
Uruguay Round Agreement on Agriculture (URAA), and programs supporting pork
producer revenues have strengthened domestic production at the expense of
imports.

Japan's gate price system strongly resembles the variable levy on pork that it
replaced in 1995. The gate price system is triggered when the actual price of
imported pork is below the government-set standard import price. If the unit
price of the imported pork (based on the price of a shipping container of meat)
is less than the standard import price, the duty charged is equivalent to the
differential between them plus the usual 4.3 percent ad valorem tariff. This
raises the price of cheaper pork cuts in Japan. To avoid the duty, importers mix
cuts of different values in containers until the container's average value is at
or above the standard import price. The gate price system distorts trade because
traders import cuts that they ordinarily would not buy. 

In addition to the Special Safeguards of the main URAA text, Japan negotiated an
additional set of safeguards for pork and beef in a side agreement. The pork
safeguard is triggered when cumulative quarterly imports rise 19 percent or more
over the average import volume during the same period in the previous 3 years.
If Japan chooses to invoke the safeguards, it can raise the gate price to any
level not exceeding an upper bound specified in its URAA commitment for the
remainder of the year (or the first quarter of the following year if the trigger
occurs during the fourth quarter), instead of applying the lower gate prices
negotiated in the URAA.

Japan invoked both kinds of safeguards at times in 1996 and early 1997. In
response, importers stockpiled frozen pork inside and outside Japan, taking it
through customs in a quarter when the safeguard did not apply. The surge of
frozen stocks avoiding higher duty in place under the safeguard, however,
increased the likelihood that import volumes would trigger the safeguard again
in the following quarters, launching a cycle that was ended by the sudden
withdrawal of Taiwan from the market.

Support for Japan's 11,700 hog farms--down from 36,000 in 1991--is through the
Regional Pork Price Stabilization Fund, begun in 1995, which pays farmers the
difference between the market price and a floor price that is specific to each
prefecture. The market price was below floor prices ($3.50-$4.00/kg) in 2000 for
about 3 million hogs sold in the first half of 2000, and the fund paid out about
$85 million during the period. Check-off fees from farmers go into the fund, but
most support comes from the government.

WORLD AGRICULTURE & TRADE BOX #2
Agriculture in Japan

Overall, agriculture is big business in Japan. In 1998, the latest year of
available data, the gross value of agricultural output was $76 billion. However,
much of Japan's agriculture is carried on by relatively small farms with high
labor costs. Over 2.5 million households met one of two criteria for commercial
farming: selling over $4,000 of farm output in a year or farming over
three-fourths of an acre. In 1998, 11.3 million people--almost 9 percent of
Japan's population--resided in households engaged in commercial farming. The
large number of farm households reflects the very small scale of landownership
in Japan that results in a large number of people with a stake in farming. 

Japan's government devotes large sums to supporting agriculture. In 1998, Japan
spent over $82 billion (about 6 percent of national government expenditures) on
agriculture, in such projects as improving irrigation, reshaping fields,
building processing plants, and providing production subsidies. On average,
Japan's consumers spend considerably more on food than U.S. consumers and the
food share of living expenditures is larger--18 percent in Japan in 1994 vs.
8-10 percent in the U.S. The Organization for Economic Cooperation and
Development (OECD) estimates that in 1999, consumers spent an extra $68 billion
(about 1.5 percent of GDP) as a result of just some of Japan's agricultural
policies.


POLICY
Recommendations of the Commission on 21st Century Production Agriculture

Debate on the future direction of U.S. farm policy is underway. This is the
first in a series of articles on current farm policy topics. It describes the
recommendations of a commission established under the 1996 Farm Act. In upcoming
issues, AO will address other policy proposals and will examine how current farm
policy is affecting the agricultural sector.

The Commission on 21st Century Production Agriculture, whose final report was
released on January 31, 2001, was charged in the 1996 Farm Act with developing
recommendations for legislation to "achieve the appropriate future relationship
of the Federal government with production agriculture." In its report,
Directions for Future Farm Policy: The Role of Government in Support of
Production Agriculture, the Commission outlined four goals for U.S. agricultural
policy, based on testimony gathered at a series of listening sessions:

--production of an abundant supply of high-quality agricultural products at
reasonable prices;

--maintenance of a prosperous and productive economic climate for the farmer
producers;

--maintenance of the family farm organization as a dominant part of the
--production system;

--realization of a high quality of life for all individuals living in rural
areas.

The Commission concluded that the government should pursue policies and programs
promoting nine key outcomes:

--ensure a competitive agricultural economy through monitoring of concentration,
enforcement of antitrust laws and related regulatory authority, ensuring
transparency of market behavior, including contracting;

--develop policies and programs that enhance the competitiveness of U.S.
agricultural products, reduce trade barriers, open markets, and enhance the
ability of producers to maximize value-added opportunities;

--base all policy on sound science and insist that foreign competitors do
likewise;

--promote and enhance food safety and a clean environment;

--promote and enhance animal and plant health and safety;

--provide support for agricultural research and education;

--enhance the development and use of risk management tools;

--develop and fund programs that meet the special needs of small and
limited-resource farmers;

--provide an effective and adequate income safety net for farmers, with minimal
market distortion.

In pursuit of these key concepts, the Commission recommended specific
legislative approaches in the areas of assuring an income safety net for
producers, enhancing risk management options, supporting conservation and
environmentally beneficial practices, improving agricultural trade
opportunities, revising individual commodity policies, and assisting small and
limited-resource farms.

Assuring an Income Safety Net 
For Producers

The Commission's proposals for an income safety net endorsed the idea of
countercyclical payments to producers at times of low prices, in place of ad hoc
emergency spending. At the same time, the Commission recommended the
continuation of planting flexibility as introduced by the 1996 Farm Act. The
recommendations specified a two-part system of payments: 1) continuation of the
current Agricultural Market Transition Act (AMTA) payments at baseline
allocations of about $4 billion per year, and 2) development of a Supplemental
Income Support (SIS) program. 

Although the Commission left the details of the SIS program to congressional
debate, it made several suggestions for program design. Payments should be
triggered when, due to either production or price disasters, farmers' national
or regional aggregate gross income from program crops (wheat, corn, soybeans,
sorghum, rice, upland cotton, oats, and barley) fails to meet a set percentage
of an historical average based on a fixed-base reference period. As with current
AMTA payments, eligibility would be based on historical production levels of
program crops during the reference period. Because the program would be
"decoupled" from current prices and yields for specific commodities, the
Commission believes it could be defined as a "green box" payment (i.e., minimal
effects on trade) under current World Trade Organization (WTO) commitments,
exempting it from WTO disciplines limiting domestic support.

The Commission acknowledged potential difficulties with such a plan and a number
of possible alternative approaches Congress might consider in determining income
averages, payment triggers, eligibility, and payment levels. Using a
national-level aggregate income, for example, could lead to cases in which the
national trigger level for SIS payments is not reached, even though particular
localities or crops produce average incomes below the trigger. Use of an
aggregate income measure for a region or crop area could address this problem.
Another difficulty may be choosing the appropriate reference period on which to
base the trigger; the implications of various fixed-base periods require
analysis, and a moving average may also need to be considered. Other
difficulties include determining the appropriate percentage of average income to
be compensated, whether the aggregate measure of income should be based on gross
crop income or net cash income, and whether the mix of program crops should be
extended to include other commodities.

In addition to maintaining the base AMTA payments and developing a SIS program,
the Commission recommended continuing the marketing assistance loan program,
with both loan deficiency payments and marketing loan gains. While suggesting
that any increases in loan rates could lead to market distortions, the
Commission did recommend ending limits on payments and rebalancing the loan
rates to better reflect historical market prices.

Enhancing Risk 
Management Options

The Commission noted that a wide array of risk management tools were available
to U.S. producers, including planting flexibility, diversification, production
and marketing contracts, hedging and futures options contracts, labor
outsourcing and input leasing, vertical integration, altering production and
cultural practices, and off-farm income. The recommendations, however, focused
on only two categories of risk management: insurance policies and savings
account programs. 

In the area of crop and revenue insurance, the Commission called for a study of
the possibility of making these programs actuarially sound and based on products
provided by private companies, with the Federal government no longer
underwriting insurance company risk, but rather providing vouchers for producers
that offset their premium costs. In making this recommendation, the Commission
expressed concerns about the effect of current crop insurance programs on
farmland rental rates, the level of loss acceptance by insurers in areas with
high loss ratios, the inducement by crop insurance to continue production on
marginal lands, the effect of crop insurance provisions on planting decisions,
and the fiscal accountability of the insurance industry.

Among alternative savings account proposals currently under discussion, the
Commission favored the Farm and Ranch Risk Management (FARRM) account. Producers
who owe Federal tax on a positive net farm income would be permitted to deposit
20 percent of that net farm income into an interest-bearing savings account.
Interest on the account would be taxed annually, but the principal would be
taxed only on withdrawal. Although previous FARRM account proposals have limited
to 5 years the time deposits may remain in the account, the Commission
recommended no time limit be included so that the accounts could function both
as cash reserves and as retirement savings.

Supporting Conservation & 
Environmentally Beneficial Practices

The Commission focused its attention on two conservation programs--the
Conservation Reserve Program (CRP) and several conservation cost-share programs.
Citing significant reductions in average erosion rates since 1986 under the CRP,
the Commission recommended its continuation. To enhance benefits to water
quality, it further recommended dedicating any increases in program acreage to
partial field enrollments along riparian areas, such as buffer strips, filter
strips, wetlands, and grass waterways.

Among conservation cost-share programs, the Commission recommended particularly
the continuation of the Environmental Quality Incentives Program (EQIP), which
provides incentive payments and cost sharing under a 5- to 10-year contract for
conservation practices outlined in a site-specific plan. Producers may enroll
cropland, rangeland, pasture, and forestland, but 50 percent of the program is
dedicated to conservation practices on livestock operations. Payments are
limited to $10,000 per person per year and $50,000 over the length of the
contract. To enhance the value of EQIP, the Commission recommended it be funded
at the $200 million annually authorized in the 1996 Farm Act, with additional
funds dedicated to administration of the program by UDSA's Natural Resources
Conservation Service (NRCS). Program levels have been limited to $174 million in
fiscal years 1999, 2000, and 2001.

The Commission further recommended that research be conducted on ways to provide
incentive payments to farmers for the positive contributions of agricultural
practices to air and water quality--practices which might include alternative
fuels, manure management, and carbon sequestration.

Improving Agricultural 
Trade Opportunities

Addressing trade, the Commission endorsed the U.S. position presented to the WTO
in June 2000, particularly the commitment to a comprehensive negotiation of all
economic sectors, including comprehensive negotiation of issues within the
agricultural sector. The agricultural sector issues include tariffs and
tariff-rate quotas; import and export state trading enterprises; new
technologies; export subsidies, taxes, and credit programs; domestic support to
agriculture; and treatment of developing countries. The Commission further
recommended granting trade negotiating authority to the President, noting that,
except for the recent lapse in the 1990s, such an authority has been in place
since 1934.

Finally, the Commission expressed its belief that negotiations over
environmental and labor standards are better handled through the United Nations
Environment Program and the International Labor Organization than through the
WTO.

Revising Individual 
Commodity Policies

The Commission considered four commodities--dairy, peanuts, sugar, and
tobacco--unique enough to warrant review and recommendations regarding their
individual programs. 

Dairy policy, according to the Commission, must address the issues of Federal
marketing orders, dairy compacts, Federal price support, and international
market opportunities and challenges. Milk marketing orders require
simplification and greater transparency, even after implementation of reforms
required by the 1996 Farm Act. Regional dairy compacts have attracted increasing
interest as a means of raising minimum price levels. The Federal price support
program has been extended annually, despite its scheduled elimination in 1999.
And dairy import controls and export enhancements continue to face scrutiny in
trade negotiations.

The Commission recommended examination of several dairy policy options that
might help curb expansion of milk production and reduce dependence on regional
support strategies in the face of new technologies facilitating national and
international milk marketing. Among these options are 1) alternative price
support mechanisms, including the possibility of a marketing loan program for
dairy products; 2) some form of direct payment for dairy producers; 3) supply
controls; 4) forward contracting options; 5) extension of dairy compacts beyond
the current regional models; and 6) revenue and gross margin insurance options.

In the view of the Commission, peanut producers face pressures from expanding
trade commitments and from falling domestic demand. Current peanut policy keeps
the U.S. domestic peanut price higher than the world price through a system of
marketing quotas and price supports. Critics have voiced concern about
production and consumption inefficiencies created by this policy. The Commission
recommended examination of several policy options that might continue support
for the domestic peanut industry while stimulating stronger demand and
competition: 1) phased reduction of the peanut quota system, including
compensating current quota holders and allowing sale or lease of quotas across
state lines; 2) subsidies to manufacturers for purchase of domestic peanuts,
similar to the Cotton Step 2 program; 3) a peanut marketing loan; 4) a direct
payment program for peanut quota holders; and 5) incentives to increase
competition in the industry.

The Commission recommended reconsideration of sugar policy in view of rising
stocks and slowing demand growth. The program supports producers through a
system of nonrecourse loans that act as a guarantee of minimum price levels for
beet and cane sugar. Sugar is imported at a minimum annual level through a
low-duty tariff-rate quota allocated among importing countries, with additional
access granted to Mexican sugar through the North American Free Trade Agreement
(NAFTA). Increasing domestic production, the result of acreage expansion and
yield improvements, and increasing access for imports, the result of recent
trade commitments, has led to downward pressure on prices and forfeitures under
the nonrecourse loan program. 

To avoid the likelihood of continued stress from increasing supplies on
producers and the sugar program, the Commission suggested evaluating a series of
alternative policies, individually or in combination: 1) a sugar marketing loan
program; 2) domestic marketing and/or production controls; and 3) a direct
payment program for producers. The Commission stressed that these alternatives
should be considered within the context of international sugar trade
commitments.

The Commission called for rethinking tobacco policy because of rapidly changing
domestic conditions and increasing foreign competition. The current policy is
based on a system of marketing quotas that allot a portion of annually
determined tobacco demand to growers owning or renting eligible land. The
program also provides nonrecourse loans that support prices for tobacco grown
under quota at an annually determined loan rate. Increased international
competition from higher imports under negotiated tariff-rate quotas and reduced
export demand are dampening demand for domestic tobacco leaf. At the same time,
domestic cigarette consumption is being affected by the settlement between the
tobacco industry and state's attorneys general over health care costs for
tobacco-related illnesses. Tobacco-use control programs funded through the
settlement are expected to reduce demand, and tobacco producing states are
eligible for funding from the cigarette industry to compensate tobacco farmers
and quota holders for anticipated losses from reduced demand.

Given the complicated future of tobacco production and tobacco programs, and the
attention being paid to tobacco issues by a number of other entities, the
Commission decided only to suggest possible program changes for consideration by
other groups charged with examining these issues, rather than making a formal
recommendation. The suggestions include 1) increasing transferability of quotas,
particularly across county or state borders; 2) a phase-out of the marketing
quota program through a buyout; and 3) a marketing loan program for tobacco that
could increase export competitiveness by allowing domestic prices to fall.

Assisting Small & 
Limited-Resource Farms

The Commission acknowledged the value of small family farms as agricultural
producers and as significant components of rural communities. It further
recognized the impact of government policy on the success of small family farms,
recommending programs be designed specifically for small and limited-resource
farms. To that end, the Commission recommended that the USDA Small Farms
Advisory Committee, successor to the National Commission on Small Farms, receive
formal authorization as part of USDA, with permanent staff and funding. 

Although deferring to the Small Farms Advisory Committee as the lead group in
designing programs for small and limited-resource farmers, the Commission
recommended four areas for consideration: 1) assistance for beginning farmers,
2) conservation-based safety net programs, 3) risk management programs, and 4)
programs to enhance small-farm competitiveness. The Commission suggested that a
program of matching grants might allow beginning farmers to become established
without taking on burdensome debt. Programs could also be devised to encourage
established farmers to assist beginning farmers. Conservation safety net
programs could include enhanced technical assistance and timely reimbursement to
small and limited-resource farms to establish conservation practices, perhaps
with higher cost-share levels for installation of required conservation and
environmental practices. Small farms might also be targeted for participation in
the conservation and wetland reserve programs or for special programs to
preserve green space and viewsheds.

Risk management programs for small farms might include targeting pilot insurance
programs to small and limited-resource producers for crops previously not
covered and providing specialized educational programs addressing use of
sustainable agricultural practices to manage risk. The Commission suggested
fully funding already authorized programs intended to enhance small and
limited-resource farm competitiveness, such as the Outreach and Technical
Assistance Program for Socially Disadvantaged and Minority Farmers (2501)
program and farm ownership and operating loan programs. It also suggested
increasing appropriations for the Sustainable Agriculture Research and Education
(SARE) program and the Rural Technology and Cooperative Development Center Grant
program, and providing financial assistance to develop small-producer
cooperatives. 

As a way of identifying small and limited-resource farms in need of special
assistance, the Commission also supported establishment of a voluntary minority
small farms registry.

Minority Views 
Diverge

Not all commissioners shared the majority views presented in the Commission's
report. Minority views in the areas of Farm Income Support Policy, Agricultural
Trade Policy, and Antitrust and Industry Concentration appear within the main
report. These dissents represent essentially two viewpoints that diverged from
the majority report in opposite directions. One side cautioned against moving
away from a fundamentally market-oriented policy and recommended maintaining
programs primarily to provide catastrophic risk protection, to help farmers make
the transition to more profitable sizes or enterprises, and to focus on
environmental stewardship. The other side called for production-based safety net
programs with benefits targeted to family-scale operations, voluntary supply
management, expanded land retirement for conservation, trade reforms that
consider the needs of domestic agricultural production and consumers, and
revitalization of antitrust policies and enforcement. 

Further details of these minority views will be presented next month in an
article on the diversity of current farm policy proposals, the second in this
series on current farm policy topics.  

Contacts: Edwin Young (202) 694-5336 and Anne Effland (202) 694-5319
ceyoung@ers.usda.gov
aeffland@ers.usda.gov

Readers interested in reviewing the full report of the Commission on 21st
Century Production Agriculture or in learning more about the Commission may
visit its website at http://www.agcommission.org/.


RESOURCES & ENVIRONMENT
Smart Growth: Implications for Agriculture in Urban Fringe Areas

The last two decades have witnessed increased state-level involvement in growth
management to counter the negative impacts of land development. Recently,
several states have begun shifting from state-imposed requirements for local
compliance with state planning goals toward incentive-based, voluntary
mechanisms known as "smart growth" strategies. Although still in their infancy,
smart growth strategies are becoming increasingly widespread, with implications
for agriculture in urban fringe areas.

Local governments have been delegated authority for land use planning and zoning
in all 50 states, and historically have relied upon zoning regulations and
subdivision requirements that date back to the 1920's to manage the character
and density of new development. During the 1970's, local and state governments
in rapidly urbanizing areas recognized that these traditional techniques for
controlling land use were inadequate in influencing the character of
growth--namely, in preventing "sprawl" development. Local officials also learned
that a popular land use tool, assessing farmland at its use value for property
tax purposes, was contributing little to slowing losses of farmland to developed
uses. Need for more effective techniques spurred state interest in adopting new
approaches.

What is "Smart" Growth?

"Smart growth" is a catch-all phrase to describe a number of land use policies
to influence the pattern and density of new development. Smart growth principles
favor:
--locating new development in center cities and older suburbs rather than in
fringe areas;

--supporting mass transit and pedestrian-friendly development;

--encouraging mixed-use development (e.g., housing, retail, industrial); and

--preserving farmland, open space, and environmental resources.

Smart growth directs development to designated areas (cities and older suburbs)
through incentives and disincentives, without actually prohibiting development
outside them or threatening individual property rights.

States implementing smart growth strategies look at overall growth and attempt
to marshal the state's resources to direct growth. Smart growth strategies
generally receive a broad spectrum of support because they include incentives
for voluntary adoption and usually involve a variety of stakeholders in the
planning process (e.g., multiple levels of government, nongovernment
organizations, and special interest groups).

Specific smart growth strategies vary by location but often share common
elements. Three strategies in particular could have important implications for
local agriculture: concentrating growth in selected areas, coordination of
transportation infrastructure to support growth, and permanently preserving
farmland.

A centerpiece of smart growth legislation is the designation of urban growth
boundaries or growth areas. States will typically remove state-level financial
incentives (including Federal incentives controlled by the state) that directly
or indirectly encourage development outside growth areas and will instead
concentrate these incentives within growth areas. Incentives include state
funding for infrastructure, economic development, housing, and other programs.
At the same time, states will remove barriers that hinder higher density
development within existing urbanized areas. Although states may specify minimum
requirements for designating growth areas (e.g., only areas currently or
expected to be served by water and sewer systems within a given number of years
may qualify), it is local governments that define the actual boundaries,
particularly where future developments are planned.

States coordinate transportation investments with development by prioritizing
funding for transportation infrastructure within designated urban growth areas.
States also favor investments in upgrades to existing transportation routes and
in funding for mass transit alternatives to reduce the need for automobile
travel rather than investments that contribute to new roads. Also, minimizing
the number of ramps for access to highways that connect growth areas helps
reduce pressure to develop land adjacent to an expanded road system. Similarly,
the Federal government coordinates infrastructure investment with state and
local government to minimize adverse development impacts.

Establishing programs to preserve farmland and environmental resources
complements urban growth areas and is expected to help maintain a viable local
farm economy. These programs separate the right to develop land from the right
to own and use land. Landowners may voluntarily agree to sell their development
rights 1) to the government through a purchase of development rights (PDR)
program (permanently retiring the development rights), or 2) to developers
through a transfer of development rights (TDR) program (allowing developers to
build on other land in certain county-designated areas at higher densities than
allowed by the underlying zoning).

When development rights are sold through a PDR or TDR program, landowners retain
ownership and use of the land, but are restricted from developing it or using it
for nonfarm commercial activity. Even though the land remains private and is not
accessible to the public, residents of urbanizing areas are in large part
willing to support spending for these programs because farmland provides scenic
views, open space, and environmental amenities.

Agriculture in 
Metropolitan Areas

Farmland owners most likely to experience the effects of smart growth
legislation are those in close proximity to existing population centers or
planned growth areas. Combining Census of Population data on population density
and daily commuting patterns with a measure of urban influence developed by
USDA's Economic Research Service (ERS), ERS researchers identified regions
subject to the pressures of urbanization. Urban influence increases with
proximity of the land to populated areas and with the size of the population.
Areas within the regions may be subject to low, medium, or high degrees of urban
influence. Of 3,077 U.S. counties, 1,062 have land subject to some degree of
urban influence. Many of these counties also contain significant amounts of crop
and pastureland.

Farms in metro areas are an increasingly important component of U.S. agriculture
in terms of their numbers. A Metropolitan Statistical Area (MSA), as defined by
the Office of Management and Budget, includes a core county (or counties) that
either 1) contains a city of 50,000 or more people, or 2) contains an urbanized
area of 50,000 or more and total area population of at least 100,000. Additional
contiguous counties are included in the MSA if they are economically integrated
with the core county or counties.

Data from the 1997 Census of Agriculture indicate that one-third of all farms
are located in metro areas and that they control 39 percent of farm assets.
Agriculture in metro areas includes a relatively large group of farmers who
operate small-scale farms and earn a large share of household income from
off-farm sources; a smaller group of farmers who are more focused on high-value
production (e.g., fresh fruits and vegetables); and a residual group of larger
scale livestock and crop farmers. Metro area farms tend to be smaller, on
average, than farms in rural areas, and most U.S. farmland operated in 1997--82
percent--was located outside metropolitan areas.

Implications for 
Agriculture

Farmland owners in urbanizing areas are making land use and production decisions
against the backdrop of a changing landscape and economic environment. In urban
fringe areas, significant population growth can arise from immigration or from
relocation from cities. Coupled with rising incomes and land values, population
growth can lead to rapid increases in demand for developable land. This can also
increase demand for agricultural products to meet urban needs (e.g., nursery or
greenhouse products and locally grown fresh produce). A farmer may adapt to the
pressure by switching to higher value production enterprises or may sell the
farm for development as the costs of forgoing this opportunity rise. Because
farm real estate dominates total farm assets and land values are a factor in
land use changes, one of the greatest impacts of smart growth policies on local
agriculture will be the effects on farmland values.

In understanding the effect of smart growth policies on agriculture in states
that have adopted or plan to adopt smart growth strategies, an underlying
question is "How do the new or proposed smart growth policies differ from
existing policies?"  This is particularly important since land use authority
remains vested in local, not state, governments. If smart growth policies are
primarily a repackaging of existing policies, or if incentives to adopt new
strategies are insufficient, responses of developers, landowners, and local
governments may be minimal.

For example, if removing state funding for projects outside growth areas results
in little additional cost to developers, they have little incentive to redirect
their development plans. In this case, local farmland owners may experience
little change in the high rate of appreciation of land values, pressures to
convert land, and incentives to switch enterprises. However, if the relative
cost of building outside the boundaries is large enough to deter projects there,
developers are more likely to focus their demand for land inside growth areas.
This might be accomplished through additional local impact fees imposed to
offset infrastructure costs associated with new development outside growth
areas.

Assuming smart growth policies represent a significant departure from the status
quo, effects on farming operations will depend partly on their location relative
to growth areas. Outside growth areas, as development becomes relatively more
expensive due to the redirecting of state infrastructure funding, demand for
developable land is likely to decline. This in turn is likely to dampen the
growth of agricultural land values, to slow the conversion of agricultural land
outside growth areas, and to minimize additional (but not existing) road
congestion on secondary roads as well as problems stemming from proximity to
nonfarm neighbors (e.g., trespassing and nuisance complaints). Conversely,
agricultural land values within growth areas are likely to rise more
rapidly--and the conversion dates to occur sooner--in response to the increased
demand for developable land.

In addition to changing the relative cost of developing outside vs. within
growth areas, smart growth policies have the potential to affect agricultural
land values by altering developers' and farmland owners' expectations about
where local governments are likely to approve new development. Any change in
local government policies in response to smart growth legislation could affect
perceptions about the ease (or difficulty) of obtaining variances or zoning
changes to allow more development within or outside growth areas. Landowners and
developers will also form expectations--reflected in land values--about the
location of local government projects that occur without state funding and that
stimulate demand for housing, commercial, or industrial uses.

Establishing growth areas may benefit the local agricultural economy if
landowners outside the boundaries keep land in a productive agricultural use and
can gain added income by marketing their output to the urbanized areas. However,
not all farmland owners will welcome policies that reduce development
pressures--e.g., farmers who view their investment in land and its appreciation
in value over time as their "retirement fund."  These farmers may not benefit
financially from smart growth policies unless their land is located within an
existing or planned growth area.

Despite smart growth policies, substantial development can still occur at lower
densities in outlying rural areas, where allocations of state funding for
housing programs are historically minimal. To address this problem, governments
may rely on farmland preservation programs to counter losses of local farmland
and open space. The American Farmland Trust reports that 19 states already have
state-level farmland preservation programs in place and that 11 of these also
have locally sponsored programs. Some of these programs have existed since the
1970's, permanently preserving hundreds or thousands of acres annually. 

The most significant effect of these preservation programs on local agriculture
is that by restricting development on enrolled parcels, preserved land remains
available for farming uses. Also, the use of ranking or bonus schemes in PDR
programs gives governments some ability to influence which types of farms and
agricultural land are preserved first. This targeting is possible when interest
in selling development rights is high and governments operating PDR programs
have limited budgets. For example, prioritizing development rights purchases on
land that is most threatened with development may focus preservation on farms
specializing in high-value enterprises or small-scale, part-time operations;
prioritizing PDR purchases on parcels with important processing facilities or
prime soils for row crops may focus on acreage in larger crop and livestock
operations.

Because the sale of development rights essentially removes the development
potential from enrolled parcels, preservation program administrators expect that
land values of these parcels will be lower than land values of unrestricted
parcels. This is expected to benefit the local farm economy because it can
reduce land acquisition costs for new farm entrants. However, buyers of
preserved land who are part-time farmers with substantial nonfarm income and
sufficient financial resources may outbid full-time farmers for the land, beyond
its farm use value. A study of preserved farmland values in Maryland suggests
the downward price effect may not be as significant as hoped. Programs that
specify a minimum acreage requirement may limit upward price pressures (e.g.,
requiring parcels to be at least 100 acres) if they do not also permit
subdivision into smaller (e.g., 25-acre) parcels.

Farmland preservation programs also have important implications for landowners.
Current landowners who might otherwise sell the entire farm for development now
have the option to sell only the development rights through a PDR or TDR program
and to sell the land itself in a separate transaction--minus the development
potential. For landowners who stay in farming, the ability to liquidate part of
their investment in farm real estate, i.e., the development rights, provides a
means for paying down farm debt or financing farm operations. It can also ease
estate planning and transferring assets to future generations by allowing
landowners to liquidate and/or distribute part of the real estate asset and
lower the estate tax bill.

Although farmland preservation programs are generally designed to preserve land
into perpetuity, enabling legislation often contains an escape clause. For
example, a farm may be withdrawn from the program after a specified number of
years if the land can no longer be profitably farmed. While this may appear to
reduce the financial risk of owning restricted-use land for current and future
landowners, withdrawal may not be an economically advantageous option if the
landowner is required to repay the value of the development rights based on
current appraisals. 

Permanent preservation of farmland also affects the market value of adjacent
land. Some evidence suggests that homebuyers are willing to pay more to live in
close proximity to open space, so it is possible that permanent preservation
could attract development. This could invite conflict between farmers and
nonfarm neighbors that program administrators hope to avoid. The answer to this
dilemma may be additional development policies in rural areas, such as requiring
clustering of houses and strong right-to-farm laws (e.g., to protect farmers
from nuisance suits), which could be coupled with preservation programs.

States with pre-existing land preservation programs have used new programs
established as a part of a smart growth legislative package to further direct
preservation efforts to parcels with unique characteristics or in particular
locations. States may also partner with the Federal and local governments or
land trusts to preserve large blocks of land instead of just individual farms.
These programs can result in lands being preserved for agriculture and, if the
landowners agree, providing additional restrictions on use that preserve
wildlife habitat, ecosystems, or other unique resources.

Smart growth policies have the potential to direct some development toward
designated growth areas and to preserve farmland and other environmental
resources. However, smart growth policies could represent a "mixed bag" for some
landowners. Clearly defined growth areas could reduce development pressures on
farmland and growth in farmland values outside the boundaries. This could
benefit local agriculture by slowing the rate of farmland conversion. But
farmland owners outside growth area boundaries may not gain from policies that
slow a rise in land values. Nevertheless, an ability to sell development rights
would give them an alternative for increasing liquidity (e.g., for servicing
debt) without having to sell housing lots or the entire farm.

Farmland preservation programs may benefit the local agricultural economy more
directly, but the effects will depend on program eligibility criteria and
targeting mechanisms used to prioritize purchases of development rights. The
impacts of growth boundaries as well as farmland preservation programs will
depend largely on whether farmland remains in an active agricultural use.  

Cynthia Nickerson (202) 694-5626
cynthian@ers.usda.gov

RESOURCES & ENVIRONMENT BOX
Examples of "Smart" Growth Policies

Urban growth boundaries. Oregon pioneered this strategy in the 1970's to
discourage urban sprawl. Oregon's statewide plan mandated the designation of
urban growth boundaries within which urban development would take place.
Although this policy has not entirely curtailed development outside the
boundaries, Oregon is recognized as the most successful in separating rural and
urban uses geographically. In Washington state, cities and counties exceeding a
certain size or experiencing rapid population increases are required to
designate urban growth areas.

Designation of priority funding areas. Maryland requires counties to designate
priority areas for receiving state funds. Eligibility is limited to areas
meeting guidelines for residential densities, for intended use, and for
availability of plans for sewer and water systems.

Coordinating transportation systems and development. In 1998, Tennessee passed a
law directing that funding under the Federal Transportation Equity Act for the
21st Century (TEA-21) be reserved exclusively for localities that have growth
plans identifying urban growth boundaries for cities, planned growth areas, and
rural areas.

Farmland/environmental resource preservation. Maryland is one of several states
with a well-established state-level farmland preservation program. In addition,
Maryland's 1997 smart growth initiative included the Rural Legacy Program. The
program has identified 23 areas where it is focusing efforts to preserve large,
contiguous blocks of parcels and strategic areas that contain multiple resources
of value such as prime farmland and wildlife habitat. Through this program, the
state partners with local governments and land trusts (public and private
nonprofit) to purchase development rights (called easements) from willing
landowners.

Multijurisdictional planning. Wisconsin gives state funding priority to local
governments that address the needs of adjacent communities in their development
plans instead of just pursuing their own interests.

Brownfields redevelopment. In 1998, New Jersey enacted the Brownfield and
Contaminated Site Remediation Act which, in addition to limiting liability for
redevelopers, provides financial incentives for remediation and redevelopment of
"brownfields"--i.e., areas contaminated with toxic materials. Other states and
localities have also developed brownfield programs to facilitate revitalization
and redevelopment of land and resources in targeted urban areas. 

Neighborhood business development. Consistent with state planning goals, a task
force in South Providence, Rhode Island, adopted a program that provides
state-funded assistance to new small businesses locating in one of its 10
state-designated enterprise zones. Maryland's program provides income tax
credits as incentives for small businesses to locate in its priority funding
areas.

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