AGRICULTURAL OUTLOOK                November 20, 2001 
December  2001, ERS-AO-287
             Approved by the World Agricultural Outlook Board
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IN THIS ISSUE

BRIEFS
Specialty Crops: Forecast for Citrus--A Mixed Bag for Growers
Specialty Crops: Consumers Face Higher Prices for Fresh-Market Grapes
Livestock, Dairy, & Poultry: Dairy Industry to Encounter Uncertain 
Climate of Demand in 2002

COMMODITY SPOTLIGHT
Cotton Production Up, Demand Down
Sweet Peppers: Saved by the Bell

WORLD AGRICULTURE & TRADE
EU Preferential Trading Agreements: Heightened Competition for U.S.

RISK MANAGEMENT
U.S. Crop Insurance: Premiums, Subsidies, & Participation


IN THIS ISSUE
Cotton Production Up, Demand Down

Cotton is experiencing greater weakness in world prices than grains and 
other crops.  World cotton prices, down 39 percent from a year earlier 
as of October 2001, have suffered from slackening demand, coinciding 
with rebounding world production.  Larger crops of cotton in the world's 
major producing countries in 2001/02 have resulted from favorable 
weather and government policies, among other factors.  The largest 
production gains occurred in China, up 3.5 million bales, and in the 
U.S., up 3 million bales.  The global economy is forecast to rebound in 
2002/03 and foreign cotton mill use to expand.  With the largest share 
of world stocks in a decade, the U.S. will be in a unique position to 
supply the growing need for cotton fiber around the globe. Leslie Meyer 
(202) 694-5307; lmeyer@ers.usda.gov

Sweet Peppers: Saved by the Bell

Over the past two decades, consumption of sweet bell peppers has been on 
the rise in the U.S.  Given continued strong demand, U.S. growers 
harvested 12 percent more bell pepper acreage in 2000 than a year 
earlier. Bell peppers are produced and marketed year-round, with 
domestic shipments peaking during May and June and import shipments 
highest during winter months (20 percent of fresh-market demand is 
satisfied by imports). Grown commercially in most states, bell peppers 
are shipped by 6,271 farms into the fresh and processing markets.  From 
1998 to 2000, annual farm cash receipts for sweet bell peppers averaged 
$535 million--with an estimated retail value of over $1.7 billion. Gary 
Lucier (202) 694-5253; glucier@ers.usda.gov

EU Preferential Trading Agreements:
Heightened Competition for U.S.

Although the European Union (EU) has pursued global multilateral trade 
negotiations within the World Trade Organization (WTO) and extends most-
favored-nation treatment to the U.S. and other WTO members, it also 
participates in more nonglobal preferential trading agreements (PTAs) 
than any other WTO member.  Over two-thirds of EU imports come from 
countries with such agreements, which do not include the U.S.  PTAs 
provide lower tariffs and other more favorable terms for imports from 
preferred trading partners, and recent reciprocal agreements also 
provide advantages for EU exports. For the EU, preferential agreements 
provide enhanced control over imports and are a tool to maintain 
domestic commodity prices. The EU is the worlds largest agricultural 
importer and the second-largest exporter, making it an important market 
for the U.S. as well as a competitor. EU PTAs disadvantage U.S. exports 
to EU markets while providing advantages to EU exports in the markets of 
EU preferred partners. Gene Hasha (202) 694-5193; ghasha@ers.usda.gov

U. S. Crop Insurance:
Premiums, Subsidies, & Participation

U.S. crop insurance programs, which have traditionally been limited to 
yield insurance products, now include a variety of insurance products. 
The type of insurance and the coverage level that producers choose, as 
well as the riskiness of producing a particular crop in a particular 
area, determine the premium.  Since the early 1980s, the Federal 
government has been subsidizing premiums, effectively lowering the cost 
of crop yield and revenue insurance coverage to producers. Producers pay 
only a portion of the actuarial or risk-based premium plus a small 
administrative fee, while the U.S. government pays the balance. 
Increases in premium subsidies in 2001 and the addition of premium 
discounts in 1999 and 2000 have increased participation in insurance 
programs, and producers have moved to higher coverage levels.  Robert 
Dismukes (202) 694-5294; dismukes@ers.usda.gov

Dairy Industry to Encounter 
Uncertain Climate of Demand in 2002 

Recent years have seen strong demand for dairy products; prices were 
generally robust except when rapid expansion in milk production 
temporarily overcame demand.  But in 2002, softening economic conditions 
probably will result in less vigorous demand growth for cheese, butter, 
and dairy products overall. Milk production is expected to grow by 
almost 3 percent in 2002, more than projected growth in demand. A price 
drop seems certain, with the extent of the fall highly uncertain and 
largely related to softness of demand. James Miller (202) 694-5184; 
jjmiller@ers.usda.gov

BRIEFS
Specialty Crops: Forecast for Citrus--A Mixed Bag for Growers

The first estimates for the 2001/02 citrus crop, released October 12, 
are more sweet than tart; more oranges, grapefruit, and tangerines 
should be available for harvesting, but fewer lemons. The crop estimate 
indicates a bigger U.S. citrus crop than last year although smaller than 
2 years ago. 

Not only will the most prolific citrus producing state, Florida, 
contribute 77 percent of this years crop--mostly oranges for 
processing, grapefruit, and tangerines--but its crop will also be 
larger. An increase of 4 percent over last season is projected, 
accounting for nearly all the expected increase in the U.S. citrus crop. 

Together, California and Arizona produce 20 percent of the U.S. citrus 
crop. These two states account for most of the fresh market oranges, all 
the lemons, and some grapefruit and tangerines. The Texas citrus crop is 
small relative to that of Florida or California/Arizona, but it 
continues to grow, producing mostly grapefruit. Louisiana grows citrus 
for sale in local markets, but production is so minor that USDAs 
National Agricultural Statistics Service (NASS) does not include it in 
its citrus data. 

Fewer Oranges & Lemons
From California & Arizona

California and Arizonas citrus crop is forecast to be 6 percent smaller 
than last season. The orange crop, which is expected to account for 61 
percent of the states citrus, is forecast down 9 percent from last 
season and 16 percent below that of two seasons ago. The size of the 
fruit is the largest on record for September. Barring adverse weather 
conditions such as a severe freeze, this years orange crop should reach 
2.1 million tons, of which 59 percent are expected to be navel oranges, 
with Valencia oranges accounting for the remainder. 

The record fruit size and reported high quality of this years oranges 
should command favorable prices for growers. These attributes should 
pique both domestic and international demand for fresh oranges this 
season. Given the smaller crop, the average price for fresh oranges 
could top $8 per 75-pound box. Prices should not, however, be nearly as 
high as during the 1998/1999 season, when a severe winter freeze 
drastically reduced the crop, pushing prices to an average of $17.97 per 
box.

The California/Arizona lemon crop is estimated to total 992,000 tons, 
about 1 percent smaller than last years very large crop. It would be 
the second-largest crop since the 1995/96 season. Typically 50 to 60 
percent of the crop goes to the fresh market, with the remainder 
processed, mostly into juice. 

Last season, growers received an average of $5 per 76-pound box of 
lemons, the lowest since 1986/87. The reduction in the crop this year 
should help boost prices. While as of September, California lemons were 
reported to be smaller than average--which can put downward pressure on 
prices--cooler weather since then should help increase size. Arizona 
lemons, which are harvested early in the season, are reported to be 
large, which should strengthen prices early on. Both states crops are 
reported to be of good quality.

Florida Crop Up Despite 
Drought & Low Temperatures

Floridas citrus crop is projected to total 12.9 million tons, up 4 
percent from last season. The orange crop comprises about 80 percent of 
the states total citrus crop; grapefruit is 16 percent; tangerines, 
tangelos, Temples, and K-early citrus make up the remaining 4 percent. 
Lime production is not projected until April 2002.

Orange production is estimated to increase 3 percent over last season, 
but to be slightly lower than 1999/2000. As always, about 95 percent of 
Florida oranges will go to making juice. The 2001/02 crop experienced 
freezing temperatures during the past winter, with general winter 
temperatures colder than normal. Very dry conditions persisted 
throughout much of the winter and spring. Most groves are irrigated, 
however, minimizing the effects of the dry conditions. 

Early-to mid-season oranges will account for 57 percent of the crop this 
year, estimated at 5.9 million tons. Not only was the crop large, but it 
matured on time, permitting harvesting to begin in early October. These 
ample, timely supplies are likely to slake demand for imported orange 
juice to supplement domestic production. The Valencia crop, which is 
harvested after the early- to mid-season varieties are nearly finished, 
should be about 5 percent larger than last season.

Yields of frozen concentrated orange juice (FCOJ) for Florida oranges 
are projected to be 1.55 gallons per 90-pound box, 2 percent lower than 
last season. Based on the early projections for fruit production and 
yields, estimates for orange juice production for the 2001/02 season 
will increase 2 percent to 1.4 million gallons. With record beginning 
stocks of juice, supplies this season should reach 2.3 million gallons. 
Consumption is projected to rise almost 8 percent to 5.6 gallons per 
person. 

In 2000/01, about 58 percent of Floridas processing oranges went to 
making FCOJ, according to Florida Citrus Processor Association data. The 
remaining 42 percent was processed into not-from-concentrate orange 
juice (NFC). Demand for NFC grew rapidly throughout the second half of 
the 1990s, as consumers demonstrated that they are willing to pay a 
premium for the perceived higher quality of NFC. 

The current economic tightening will be the first real test of public 
loyalty to the product. Tightening consumer budgets could result in a 
switch back to FCOJ, which averaged about $2.12 a gallon lower at the 
retail level in 2000/01. However, Coca-Cola reentered the NFC market in 
2001 with its new product, Simply Orange. The two major NFC brands 
already in the market--PepsiCos Tropicana and Florida Natural from the 
cooperative with the same name--are competing for market share with the 
new product, with market promotions that include lower prices. As a 
result of the competition, consumers are benefiting from lower retail 
prices for NFC. This could, in turn, keep demand up despite the weaker 
economy.

Brazil is the worlds largest orange and orange juice producer--and the 
worlds largest FCOJ exporter. While U.S. processors mostly market their 
own juice in the U.S., they often mix Brazilian FCOJ with Florida juice 
to maintain the products consistency as well as to boost supplies at 
times of low U.S. production. Brazilian FCOJ is also shipped directly to 
major northeastern U.S. ports, where it is usually reconstituted and 
marketed. As a result, Brazilian orange juice is the major competition 
for the U.S. industry.

The 2001/02 Brazilian orange crop is estimated to be 10 percent smaller 
than last season. With less fruit per tree and with bearing acreage down 
from a year ago in Brazil, world prices of orange juice may be higher 
this year. Since Florida is expected to produce more orange juice and 
need fewer imports, the effect of the expected higher price of Brazilian 
juice could help Florida growers with increased demand for their 
oranges.

Bigger Crops of 
Grapefruit & Tangerine

The Florida grapefruit crop, which is 77 percent of the U.S. grapefruit 
crop, is projected to increase 4 percent to 2 million tons this season. 
If realized, the crop would be 10 percent smaller than in 1999/2000. The 
crop is broken down into 850,000 tons of white grapefruit and 1.2 
million tons of red and pink grapefruit (excluding 127,500 tons 
projected to be abandoned due to lack of demand). Including grapefruit 
production in California, Arizona, and Texas, this seasons crop is 
expected to reach 2.6 million tons, 4 percent larger than last year.

In recent years, lack of demand has made it difficult for Florida 
growers to get favorable prices for their grapefruit. In 2000/01, 
Florida growers received an average $4.97 per 85-pound box of grapefruit 
for the fresh market, the lowest since 1997/98. While fresh-market 
grapefruit prices were down this past season, growers received negative 
returns for their processing grapefruit, meaning they did not cover 
their costs of production. With slightly over half of last years 
production going to processing, overall prices averaged $2.13 per box.

Grapefruit juice beginning stocks coming into the new marketing year are 
30 percent lower than last year. This could foreshadow strong demand for 
processing fruit, boosting grower prices. 

Demand for the new crop looks strong. Floridas industry is introducing 
new promotional programs to stimulate domestic demand. International 
demand may also increase this season. Production in Cuba, the U.S. 
industrys major competition, was greatly reduced this fall because of 
Hurricane Michelle. As a result, Florida grapefruit may be replacing 
Cuban grapefruit. With the higher demand, growers are likely to see 
higher prices this year.

While total demand for grapefruit juice was down last season, exports 
were higher--19 percent over the previous season. Exports to the number-
one export market, Canada, were higher, but shipments to the number-two 
market, Mexico, were down. Exports to the third-largest market, 
Barbados, grew substantially, bringing the shipments it received back in 
line with previous years. Caribbean countries are important markets for 
U.S. grapefruit juice, much of which is consumed by tourists. Reduced 
travel this year by Americans could reduce foreign demand for grapefruit 
juice. If export demand should fall and domestic demand does not pick up 
this year, growers may abandon picking before this years harvest is 
completed because of low returns.

The new-season tangerine crop is estimated to be 449,000 tons, up 22 
percent from last season. Florida production, which accounts for 74 
percent of the U.S. crop, is tied with its 1999/00 record. While 
California is also expected to be the same as 1999/2000, Arizonas crop 
is expected to be down 8 percent from last year and 29 percent lower 
than two seasons ago. 

Early varieties of tangerines are expected to comprise 69 percent of 
Floridas crop. Early varieties consist of Sunburst, Fallglo, Robinson, 
and Dancy. Sunburst tangerines make up about 80 percent of the early 
varieties produced in Florida. The number of trees producing Sunburst 
and Fallglo declined this season; however, the number of fruit per tree 
for both varieties is higher, generating expectations for the second-
largest crop on record. Unlike Floridas oranges and grapefruit, this 
seasons early tangerines are average to below average in size so far.
 
Honey tangerines are Floridas dominant late variety. Production is 
forecast to increase 7 percent this season. The number of bearing trees 
increased slightly, but fruit set declined 13 percent from last season. 
Honey tangerines are expected to be large this season, with fewer 
numbers needed to fill a 95-pound box. 

While this seasons larger crop may be expected to put downward pressure 
on grower prices, the expected smaller U.S. fresh orange crop could be a 
plus for tangerine growers, keeping prices in line with last season. A 
deciding factor in tangerine movement in the U.S. market is the 
availability and quality of imported Spanish clementines this winter. If 
Spain has a large crop this season, more Spanish clementines will reach 
the U.S. market, competing directly with the U.S. tangerine crop and 
affecting grower prices.  

Susan Pollack (202) 694-5251
Pollack@ers.usda.gov

BRIEFS
Specialty Crops: Consumers Face Higher Prices for Fresh-Market Grapes

U.S. grape growers are producing a smaller crop in 2001 but consumer 
demand for high-quality fresh-market grapes is still being met--at 
slightly higher prices. USDA forecasts a 16-percent decline in this 
years grape production over the record-large crop in 2000. Harvests are 
down in most grape-producing states, including California, which 
continues to lead the U.S. in grape production with 91 percent of the 
total crop. The production forecast of 12.9 billion pounds for this 
year, if realized, will be 11 larger than in 1998 and 4 percent larger 
than in 1999.

Californias production is expected to decline 16 percent from the 
record 14.1 billion pounds harvested last year. In the rest of the 
country, the total crop has dropped 9 percent, reflecting reduced 
production in all the other grape-producing states except Washington, 
Oregon, and Arkansas. Grape crops in Washington and Oregon are forecast 
4 percent and 24 percent larger, whereas output in Arkansas is expected 
to be unchanged. 

Reduced production this year, the high quality of the crop, and lessened 
competition from smaller 2001 crops of citrus and stone fruit (peaches, 
plums, and nectarines) have plumped up the prices of fresh-market grapes 
for both growers and retailers. Grower prices for fresh-market grapes 
from May through October averaged $708 per ton, up 19 percent from the 
same period a year ago. In the same token, retail prices for fresh 
Thompson seedless grapes from June to September averaged 25 percent 
higher than the same period last year.

Grapes continue to be the fourth in popularity with U.S. consumers among 
fresh fruits. During the 1990s, approximately 85 percent of U.S. fresh-
market consumption was domestically produced. Influenced mostly by the 
lower production and higher prices, domestic consumption of U.S. fresh 
grapes is expected lower during the 2001/02 season (May to April) 
compared with a year ago. U.S. consumption--estimated at 7.5 pounds per 
capita in 2000/01--should decline approximately 4 percent in 2001/02. 

Continued strong international demand for U.S. fresh grapes, 
particularly in Asian markets, is also contributing to the decline in 
domestic consumption. Despite reduced production, the high quality of 
this years crop have kept exports of fresh grapes for the 2001/02 
season thus far up 15 percent over the same period a year ago (May to 
August). U.S. export prospects in many Asian markets appear strong as 
these markets continue to recover from the economic crisis that began in 
1998. Shipments thus far to many of these markets are higher than a year 
earlier. Because of the smaller U.S. crop, imports of fresh grapes will 
likely increase during 2001/02 to help meet consumer demand, especially 
if no major problems arise to curtail this years grape production in 
Chile, the dominant foreign supplier to the U.S. market. Imports are 
heaviest during January through April, when domestic production is in 
its off-season.

About 87 percent of the nations grape crop is processed--more than half 
for wine, more than a fourth for raisins, and the remainder for juice 
and canning. In California, where production is expected to be down for 
wine and raisin varieties but up for table varieties, 52 percent are 
wine varieties, 34 percent are raisin varieties, and only 14 percent are 
table varieties. In Washington, where the grape crop is a far-distant 
second to California, all of the grapes are processed--about two-thirds 
for juice and one-third for wine.
 
In California, the nations largest producer of domestic wines, wine 
varieties accounted for well over half the states total grape acreage 
last year. Nonbearing acreage for wine grapes during 2000 declined 15 
percent from the previous year to 110,000 acres as more acreage reached 
its productive stage. Bearing acreage for wine grapes rose 8 percent to 
458,000 acres. California vineyards can expect to harvest a crop of wine 
grapes in 2001 that is 8 percent below a year ago, at 6.2 billion 
pounds. Similar to last year, the most popular wine grape varieties are 
Chardonnay and French Colombard for white wine and Cabernet Sauvignon, 
Zinfandel, and Merlot for red wine. 

Among these popular varieties, increases in bearing acreage last year 
were most significant for Cabernet Sauvignon (up 21 percent), Merlot (up 
15 percent), and Chardonnay (up 10 percent). Bearing acreage in 
California for French Colombard declined 5 percent. Rapid increases in 
acreage for wine grapes during the 1990s reflect a boost in U.S. wine 
demand, heightened by publicity associating moderate wine consumption, 
particularly red wine, with health benefits. 

The wine sector in Washington also grew rapidly during the 1990stotal 
wine grape acreage more than doubled between 1993 and 1999 (from 11,100 
acres to 24,000) and bearing acreage grew 67 percent (from 10,200 acres 
to 17,000). Into the new decade, expansion continues in the states wine 
sector, with bearing acreage rising 18 percent in 2000 from a year ago 
to 20,000 acres. Although bearing acreage numbers are not yet reported 
for 2001, wine grape growers in the state expect to harvest a larger 
crop this year as new acreage comes into production.

U.S. wine exports rose 6 percent in 2000 to a record 73.9 million 
gallons, with the United Kingdom, Canada, Japan, the Netherlands, and 
Switzerland accounting for 72 percent of shipments. While more U.S. 
grapes were crushed for wine last year, continued strong domestic demand 
helped generate a 10-percent rise in imports over 1999. Import shipments 
came mainly from Italy, France, Australia, Chile, and Spain. Shipments 
from these main suppliers, except from Spain, were up. During the first 
8 months of 2001, U.S. wine imports and exports were up 7 percent and 12 
percent, indicating a continuing strong market for wine both here and 
abroad.

The supply of raisins in the U.S. during 2000/01 increased despite a 31 
percent downturn in imports last year, because domestic shipments were 
higher and carry-in stocks were large. Boosted by increased supplies and 
lower grower prices, U.S. raisin exports returned to more normal levels 
during 2000/01 following a sharp drop the previous season when export 
volume was at its lowest since 1986/87. Far larger than the increase in 
supplies, exports rose 39 percent from the previous season and combined 
with again large ending stocks, domestic consumption of raisins declined 
by 4 percent during 2000/01. The large ending stocks in 2000/01, along 
with depressed prices, are expected to lower production in 2001/02. In 
August and September of this year, the mild temperatures in California 
provided good drying conditions for sun-dried raisins. As of September, 
more than 80 percent of the raisin crop, reportedly of generally good 
quality, had been harvested. While domestic supplies are still likely to 
remain large in 2001/02 even with the lower production, exports are 
likely to decline due to large world surplus of cheaper raisins entering 
the new season.  

Agnes Perez (202) 694-5255
Acperez@ers.usda.gov

BRIEFS
Livestock, Dairy, & Poultry: Dairy Industry to Encounter Uncertain 
Climate of Demand in 2002

The dairy industry experience next year will likely be considerably 
different from 1998-2001. Recent years have seen strong demand for dairy 
products. Prices were generally robust except when rapid expansion in 
milk production temporarily overcame demand. In 2002, softening economic 
conditions probably will result in less robust demand growth for cheese, 
butter, and dairy products overall. Meanwhile, production growth could 
be strong if some of the problems of 2001 are not repeated.

Not only has commercial use of both milkfat and skim solids set records 
every year during 1998-2001, but the strength of recent demand growth 
has been extraordinary. Farm milk prices averaged the highest ever in 
1998, were very close to that record in 2001, and were the fourth 
highest ever in 1999. In the face of these generally high prices, 
commercial use of milkfat grew about 2.2 percent a year during the last 
4 years, a rate much faster than population growth and than most earlier 
years. Sales of skim rose less rapidly, but still managed very 
respectable growth of about 1.8 percent per year.

Cheese, butter, and fluid cream, products used heavily by restaurants, 
were the leading lights among dairy products; consumer expenditures for 
eating away from home rose briskly during this period. Meanwhile, sales 
of fluid milk, ice cream, and other perishable products showed little 
growth. Most of these products are primarily used at home, and their 
demand may have been hurt as consumers dined out more often.

Demand in 2002 is uncertain. Consumer reaction to a weakening economy 
following the exuberance of the last couple of years is particularly 
difficult to gauge, because the economic expansion was unprecedented in 
terms of both strength and length. 

Some of the food spending patterns of recent years are likely to 
persist, at least through 2002. In particular, restaurant spending will 
probably stay heavier than during earlier periods of economic weakness. 
But spending at eating establishments is unlikely to grow as much as in 
recent years. Most adjustments probably will be in the average 
expenditure on a meal eaten away from home rather than in the number of 
such meals. As consumers become more sensitive to menu prices, 
restaurants likely will respond with tighter controls on the amounts of 
ingredients used in dishes. They also may halt the growth in portion 
size or offer smaller alternatives. However, large portions will remain 
a relatively inexpensive way of generating perceptions of value. 

Cheese demand in 2002 probably will be only modestly affected by 
adjustments in the restaurant sector. Cheese is used heavily by all 
segments of the industry, so shifts among eating places do not 
necessarily have much effect. Only gradual erosion in total restaurant 
use is likely. Weakness in retail sales also is likely to develop only 
slowly. Consumer belt-tightening probably will consist of both 
eliminating at-home "treats" and replacing away-from-home treats with 
less costly at-home treats.

Demand for butter and fluid cream may be affected more than cheese 
demand. Table use of these products is spread across a diverse group of 
restaurants. But kitchen use is much heavier in upper tier 
establishments--the types that may be affected most. In addition, retail 
sales may be trimmed by a more sedate consumer attitude.

Ice cream demand may actually improve because of ice creams unusual 
image as an inexpensive luxury. Similarly, fluid milk demand probably 
would benefit from any shift to eating more meals at home. However, 
these gains are unlikely to offset weakening demand for other products. 
Overall, dairy demand is expected to grow next year, but the increase 
probably will be smaller than in recent years.

Milk production could rebound next year from 2001s drop of about 1 
percent if some of the pitfalls experienced this year can be avoided. 
Milk per cow was hit by stressful winter weather and by more-than-normal 
heat stress in summer. 

While 2001 forage quality was not bad overall, supplies of top forage 
were tight. Forage quality also contributed to less milk per cow. 
Supplies of high quality alfalfa hay were very tight by the second half 
of the 2000-01 forage season. Alfalfa production is forecast to rise a 
bit in 2001, but the increase is less than 2 percent and most areas had 
widespread quality problems with some cuttings. Silage quality also 
reportedly is mixed. 

Milk-feed price ratios will favor increased use of concentrate feeds in 
2002. This incentive should support considerable recovery in milk per 
cow if weather and forage quality cooperate. Milk per cow is projected 
to rise about 3 percent in 2002. Even with this recovery, milk per cow 
would remain slightly below the longrun trend.

Milk cow numbers will end 2001 just slightly below the start of the 
year. Cow numbers probably would have been stronger in 2001 if expanding 
farms had not faced some key problems. Uncertainty about adequate forage 
supplies played a role, but obtaining replacement animals to fill the 
new barns was a major stumbling block. Prices of replacement heifers and 
cows were very high, if adequate numbers could even be found when 
wanted. 

Because of the replacement situation, some new facilities probably are 
operating somewhat below capacity, and construction of others has been 
delayed. Next year, these facilities are likely to fill, strengthening 
cow numbers. Cow numbers are projected to slip fractionally in 2002, 
compared with a 1-percent decline in 2001.

The delayed effects of relatively low returns in 2000 increased the 
number of farms leaving dairying in late 2000 and early 2001, but the 
jumps in milk prices last spring quickly slowed the rate again. Possibly 
the biggest incentive to leave dairying in recent months has been the 
very high prices for replacement cows. The 2002 exit rate probably will 
be relatively modest, as reductions in returns will be cushioned by 
savings from 2001 returns.

Milk production is expected to grow by almost 3 percent in 2002, more 
than projected growth in demand. A price drop seems certain, with the 
extent of the fall highly uncertain and largely related to softness of 
demand. Farm milk prices are projected to decline about $2 per cwt from 
this years average $15.35-$15.45.  

James Miller (202) 694-5184
jjmiller@ers.usda.gov

DAIRY SIDEBAR
Heifer Math & the Western Dairy Industry

The very high recent prices for replacement heifers and cows resulted 
from a combination of shortrun incentives to expand dairy herds and the 
longrun growth of the western dairy industry. Replacement prices are 
likely to remain relatively high for the foreseeable future because of 
the difficulty in increasing the number of good replacement heifers from 
current levels. Very high heifer prices are forcing management changes 
on at least some western dairy operations.

Information from the 1995 dairy management study of the National Animal 
Health Monitoring System (NAHMS) provides insight on replacement heifer 
supplies. From 100 cows, just over 93 calves will generally be born 
alive, half of them heifers. About 8 of these 47 heifers will die before 
reaching 26 months--the average age of calving and entering the milking 
herd. Of the 39 potential replacement heifers, some will not be kept 
because of inferior genetic potential and others will be culled because 
of poor performance, reproductive or health problems, or other reasons. 
Conservative assumptions of 10 percent culled for inferior genetics and 
10 percent for other factors imply that 32 or fewer replacement heifers 
could be available from the 100 cows.

A supply of 30 to 32 heifers per year is adequate the replace the 24 
cows that NAHMS said were culled on average and the 4 that died, while 
allowing a few extra to increase the total cow herd. However, that 
heifer supply cannot easily support some traditional western patterns. 
Individual western dairy herds with replacement rates of 35 to 40 
percent were not uncommon. Similarly, a significant number of western 
operations chose not to save many of their heifers for the replacement 
herd. Although 2002s lower milk prices probably will lessen demand for 
heifers somewhat, longrun adjustments likely will require some changes 
in the way some western dairy herds are managed. 

In 1975, the Pacific and Mountain regions held less than 14 percent of 
the U. S. milk cows. Supplying western areas with enough heifers from 
other regions to make up for the local deficit and to fuel their 
expansion was not a major strain. But this was not the case 25 years 
later, when these regions accounted for almost 31 percent of milk cows.

Large western dairy farms typically have had relatively high variable 
costs per cow, particularly cash variable costs. High costs per cow were 
not a problem because very high milk production per cow lowered costs 
per cwt of milk to very competitive levels. However, this need for high 
milk per cow dominated western management philosophy. One major aspect 
of this emphasis was very strict cow culling, with cows often given 
little chance to recover from an adverse event before being sent to 
slaughter. This management technique has kept average milk per cow high 
at the cost of sometimes needlessly losing the difference in a cows 
value as a milk cow and as a slaughter animal.

The emphasis on milk per cow also meant keeping a cows interval between 
calvings as short as possible. With short calving intervals, cows spend 
a larger share of their productive life at peak or near-peak milk 
production. In order to keep a tight calving interval, many western 
farms gave a cow only one (or sometimes no) opportunity to be bred with 
artificial insemination before being turned in with a bull. A much 
larger share of the heifers from natural service bulls will not have the 
genetic potential to be good replacements.

Another common practice of western dairy management was single-minded 
attention to the milking herd. Raising crops, raising calves, or 
managing a sophisticated breeding program were considered distractions 
from producing milk. A significant number of these farms simply did not 
engage in these activities.

The western dairy industry is now too big to continue having such a 
large proportional gap between heifers used and heifers produced. 
Western management will continue to evolve. The pace of ongoing 
management adjustments undoubtedly has been spurred by very high recent 
prices for replacement heifers. However, such fundamental management 
changes do not come easily or quickly, and heifer prices probably will 
stay relatively high for years to come.

COMMODITY SPOTLIGHT
Cotton Production Up, Demand Down

Cotton is experiencing greater weakness in world prices than grains and 
other crops. World cotton prices have fallen 39 percent from a year 
earlier as of October 2001, while comparable measures for wheat, corn, 
and soybeans range from a drop of 6 percent to a rise of 11 percent. 
Cotton prices, like other commodities, have suffered from global 
slackening of demand for commodities since the mid-1990s, but the 
current slowing of the world economy has coincided with rebounding world 
production, driving world cotton prices toward historic lows.

Demand Hurt by 
Economic Downturn

While a slowing world economy curbed expansion in global consumer demand 
for clothing, larger crops of cotton in the worlds six major producing 
countries in 2001/02 resulted from favorable weather, government 
policies, and imperfectly integrated markets. Planted area in the 
Northern Hemisphere rose 9 percent from the year before, and with 
generally favorable weather contributing to yields, Northern Hemisphere 
production climbed 12 percent.

As cottons problems have become apparent during this falls Northern 
Hemisphere harvest, Southern Hemisphere farmers are now expected to cut 
cotton plantings by 11 percent in 2001/02. But since Southern Hemisphere 
countries account for little more than 10 percent of world production, 
their drop will not offset expansion in the North. Global cotton 
production is expected to rise 8.5 million bales in 2001/02, to its 
highest ever at 96.9 million bales.  Meanwhile, consumption is forecast 
to decline slightly to 91.6 million bales, and world stocks outside 
China are expected to grow to their largest share of consumption since 
the mid-1980s.

A major source of cottons current difficulty lies in the shifting world 
macro-economic outlook. During 1994-97, world GDP growth recovered from 
earlier weakness to range from 3.7 percent to 4.2 percent (International 
Monetary Fund estimates), and world cotton consumption resumed normal 
growth after a 6-year hiatus. The Asian financial crisis and its 
aftershocks in Brazil and Russia again deflected cotton consumption 
downward, but world economic growth only dipped to 2.8 percent in 1998. 
By 2000, world GDP growth had grown to nearly 5 percent as a surging 
U.S. economy played its traditional role as the global "locomotive." 
This role was particularly evident in cotton consumption: 80 percent of 
the rise in world cotton consumption between 1995 and 1999 reflected 
increased purchases by U.S. consumers.

In part, expanding U.S. cotton consumption represented a long-term trend 
where a long-standing consumer and technical promotion program unique to 
the U.S. stimulated a growing preference for cotton. During the last 20 
years, U.S. households were responsible for almost half of the 29-
million-bale increase in world cotton consumption. There was also a 
short-term stimulus to U.S. consumption as U.S. economic expansion 
outpaced the rest of the world in the years leading up to 2000. In 2001, 
U.S. expansion has stalled, and U.S. end-use of cotton dropped for the 
first time since 1996. With no replacement for U.S. demand in a slowing 
world economy, world cotton consumption fell in 2000/01 and is expected 
to fall again in 2001/02.

U.S. Cotton Production
Jumps to New Record

Unfortunately for the worlds cotton producers, the recent economic 
slowdown was largely unanticipated by economic forecasters. A year ago, 
prospects seemed relatively bright for cotton prices and production with 
another year of strong U.S. and world economic growth generally 
anticipated for 2001. Textile spinning capacity had been growing in 
recent years in China, Pakistan, India, Thailand, Brazil, and Central 
Asia, in some cases after a long hiatus, as textile exporters sought to 
capitalize on expanding demand. With these favorable prospects for 
cotton and with grain prices languishing well below their highs of a few 
years earlier, cotton production expanded in a number of countries in 
2001/02.

Also, circumstances peculiar to the worlds largest producers added to 
local incentives to produce cotton, with one of the largest gains, a 3-
million-bale increase, occurring in the U.S. Although U.S. cotton prices 
were declining during planting time this spring, so were prices for 
other commodities, limiting the outlook for profitable alternatives. 
Furthermore, the U.S. marketing loan and crop insurance programs 
provided further incentives to plant cotton rather than other crops. As 
a result, U.S. cotton acreage in 2001 rose 4 percent to 16.2 million 
acres, the second highest in nearly 4 decades.

While drought occurred in parts of the Southwest in 2001, generally 
favorable growing conditions for other cotton producing regions likely 
provided a record U.S. cotton crop this season. The latest USDA 
production estimate is 20.2 million bales, 17 percent above 2000 and 3 
percent above the previous record set in 1994.

During the last decade cotton production shifted back to the eastern 
half of the U.S. as boll-weevil eradication improved the profitability 
of growing cotton in the region. In 2001, the Delta and Southeast 
regions likely produced 60 percent of U.S. cotton, up from about 50 
percent just 10 years ago. In fact, the Delta is expected to produce a 
6.8-million-bale cotton crop this season, the second largest on record 
behind the regions 1994 crop of 6.9 million. Similarly in the 
Southeast, production is forecast to surpass 5 million bales for the 
first time since the 1937 season. In contrast, the Southwest (4.7 
million bales) and the West (3.3 million bales) have been relatively 
stable over the past decade.

Foreign Cotton 
Production Also Up 

China, with the largest increase of any country in 2001/02, is expected 
to produce a 23.5-million-bale crop, up 3.2 million from a year earlier. 
Like the U.S., China is experiencing a return of cotton to the area (the 
eastern provinces) that dominated its industry until the 1990s. Factors 
contributing to this second-largest increase ever include:
*  rebounding prices as Chinas cotton market reform passed through its 
initial shock,
*  the introduction of Bt cotton to Chinas eastern provinces, and
*  Chinas continued prohibition of imports combined with an effort to 
restrain grain output. 

Chinas cotton area plummeted to a 37-year low in 1999/2000 as 
guaranteed government procurement was formally rescinded and an 
aggressive government effort to reduce textile capacity suggested 
continued sluggish demand. However, textile exports and cotton 
consumption began soaring in China during 1999/2000 and producers began 
receiving higher prices through both legal and illegal marketing 
channels. At the same time, the cost savings of Bt cotton were becoming 
apparent in eastern provinces like Shandong, Henan, and Hebei. In 
2001/02, Chinas cotton area is estimated 29 percent higher than 2 years 
earlier, and with favorable weather, yields are forecast at their second 
highest ever. 

Indias cotton producers, in response to higher prices for cotton and 
price depressing supplies of Indian rice, planted 618,000-additional 
hectares to cotton. With the return this year of a favorable monsoon to 
Gujarat, the largest cotton producing state, yields are expected to be 
their highest since 1996/97, and Indias production is expected to 
increase 1.3 million bales to 12.2 million. 

In Pakistan, although a prolonged drought has entered its third year, 
cotton production is expected to increase as planted area shifts from 
rice to cotton, a less water-intensive crop. An increase of only 100,000 
bales from the year before is foreseen in Pakistans cotton crop, to 8.3 
million bales.

In Central Asia, yields appear to have increased in 2001/02 despite the 
continued drought. Last year Uzbekistans westernmost districts suffered 
from poor irrigation supplies, so area shifted closer to irrigation 
sources in 2001/02, and output is forecast 300,000 bales higher at 4.7 
million. Larger crops have also been realized in Kazakstan, Tajikistan, 
and Turkmenistan. Cotton production in Central Asia has stabilized since 
1996, following a 50-percent reduction over the preceding 8 years. Area 
has actually trended upward in the region despite the steady decline in 
world prices, as state monopolies determine producer payments 
independent of world events. 

West Africas Franc Zone has also seen increasing area since the mid-
1990s, but largely because of a 1994 exchange rate correction. In 
2001/02, area is estimated up 19 percent from the year before and record 
output is expected. Last year saw one of the sharpest declines in the 
regions output ever, in part due to poor weather, and in part due to a 
strike by producers in Mali, the largest Franc Zone producer. World 
prices rose slightly last year, and producers and marketing boards in 
the region pursued increased output. 

Ironically, many of Malis producers refused to plant cotton in 2000/01 
due to low prices, but returned in force to the crop in 2001/02. Malis 
area is estimated up 89 percent from the year before and, with favorable 
rains and yields, West Africas largest cotton producer is expected to 
harvest 620,000 bales, or 129 percent more than the year before. 
Overall, Africas Franc Zone is expected to produce 1.2 million bales 
more cotton in 2001/02 than during the year before, and the regions 
exports are expected to overtake Uzbekistans for the first time ever.

U.S. Cotton Mill Use Declines
As Textile Imports Expand

The buildup of foreign cotton supplies and foreign textile capacity has 
come at a particularly inopportune time for the U.S. textile industry. 
Cotton mill use in the U.S. is expected to decrease 9 percent in 
2001/02. While the U.S. spinning industry has declined in general over 
the last 4 years, the bulk of the reduction is attributable to cotton. 
In calendar year 2000, for example, cotton accounted for 29 percent of 
total fiber spun in the U.S., down from about 33 percent just 5 years 
earlier.

Increases during the last 5 years in domestic cotton consumption--which 
includes mill use plus the net trade of cotton products--have been 
satisfied mainly by imported products. U.S. cotton textile and apparel 
imports in calendar year 2000 rose for the 12th consecutive year to 7.5 
billion pounds, a new record. On a per capita basis, imports amounted to 
over 27 pounds per person in 2000, double the level of just 7 years ago. 

During the last several years, domestic mills have been under tremendous 
price pressure from imports as the U.S. dollar has reached heights not 
seen in over a decade. As a result of the dollars strength, many U.S. 
mills have had to restructure their businesses by limiting their output, 
relocating their operations, or closing plants. In 2001 for example, an 
unprecedented number of textile industry participants shuttered their 
doors as financial losses mounted and improved prospects seemed limited. 

While U.S. imports and exports of cotton products have been rising for 
over a decade, only part of the increase can be attributable to trade 
agreements such as the Caribbean Basin Initiative and the North American 
Free Trade Agreement--which encourage extensive use of U.S. raw fiber or 
semi-processed products. About 80 percent of the U.S. trade deficit in 
textiles and apparel is with countries not covered by these agreements, 
and liberalization under the World Trade Organization (WTO) has expanded 
the access of other countries in recent years. 

Based on estimates by the International Textiles and Clothing Bureau, 
the U.S. has increased the size of its import quotas by about 35 percent 
since 1995 in order to meet its WTO obligations. However, imports from 
other countries increased more than 50 percent. With the strong U.S. 
economy, soaring value of the U.S. dollar on foreign exchange markets, 
and expansion of developing country exports into new products, calendar 
year 2000 was the first year in which net imports of cotton products 
exceeded U.S. mill use of cotton. In addition, preliminary 2001 data 
suggest that the gap between U.S. mill use and net imports will widen 
further. 

Future Cotton
Prospects Uncertain

Although U.S. mill use of cotton is trending lower, foreign mill use is 
expected to rise for the third consecutive year in 2001/02, albeit at a 
0.7-percent rate compared with the 1.7-percent rate of the preceding 25 
years. Cotton consumption is expected to decline slightly in India, the 
worlds second-largest industrial user, but higher mill use is expected 
in Pakistan and Southeast Asia. Brazils consumption of cotton is 
expected to decline due to electricity rationing, and no change is 
foreseen for China, home of the worlds largest textile industry.

As for further into the future, current low cotton prices could bode 
well for reduced world cotton output in 2002/03, although the magnitude 
may depend on the level of government support around the world. 
Similarly, low prices and forecasts for a rebounding global economy in 
2002 and 2003 suggest world consumption could return to more normal 
growth, but considerable uncertainty remains about the economic outlook. 

In the U.S., raw cotton exports will become increasingly more important 
if U.S. mill use continues its recent downward trend that has resulted 
in a buildup in U.S. stocks. With the U.S. holding a larger share of 
global stocks than at any time during the past decade, U.S. cotton 
exports could approach shipment levels attained in only a handful of 
prior years. And if the global economy rebounds in 2002/03 as forecast 
and world cotton mill use expands, the U.S. will be in a unique position 
to supply the growing need for cotton fiber around the globe.  

Leslie Meyer (202) 694-5307 lmeyer@ers.usda.gov
Stephen MacDonald (202) 694-5305 stephenm@ers.usda.gov

For more information:
www.ers.usda.gov/publications/agoutlook/dec2000/ao277c.pdf
www.ers.usda.gov/briefing/cotton

COMMODITY SPOTLIGHT
Sweet Peppers: Saved by the Bell
 
On any given day, 24 percent of Americans consume at least one food 
containing bell peppers. This compares with such popular foods as french 
fries (13 percent), catsup (16 percent), and fresh-market tomatoes (28 
percent), according to data from USDAs 1994-96 Continuing Survey of 
Food Intakes by Individuals. Daily consumption may be even higher today 
than during the survey period a reflection of the popularity of the 
foods in which bell peppers are used. Fresh-market bell peppers are used 
on any given day by 10 percent of consumers while processed peppers 
(frozen, canned, dried) appear on the plates of 16 percent of U.S. 
consumers daily.

Over the past two decades, consumption of most types of peppers has been 
on the rise in the U.S. However, after an apparent peak in the mid-
1990s, the use of pungent chile peppers in America leveled off, while 
demand for their mild cousins, sweet peppers, climbed to a record high 
in 2000.

Bell peppers (green, red, purple, and yellow) are the most common sweet 
pepper and can be found in virtually every retail produce department and 
in many backyard gardens. Rapid growth in consumption of sweet bell 
peppers has benefited both consumers (peppers contain a healthy dose of 
vitamin C) and producers (gross receipts from bell peppers have risen 32 
percent over the past 5 years). From 1998 to 2000, annual farm cash 
receipts for sweet bell peppers averaged $535 million--with an estimated 
retail value of over $1.7 billion. 

The genus Capsicum and species annuum includes most peppers grown in the 
U.S. These can be further grouped into two broad categories--chile 
peppers, which are pungent (hot), and sweet peppers, which are 
nonpungent (mild). The U.S. produces 4 percent of the worlds capsicum 
peppers (sweet and hot), ranking sixth behind China, Mexico, Turkey, 
Spain, and Nigeria. Bell (sweet) peppers are a leading commercial and 
home garden vegetable in the U.S. Given continued strong demand, U.S. 
growers harvested 12 percent more bell pepper acreage in 2000 than a 
year earlier. Bell peppers, grown commercially in most states, are 
shipped by 6,271 farms (1997 Census of Agriculture) into the fresh and 
processing markets. 

Although bell peppers are grown in 48 States, the U.S. industry is 
largely concentrated in California and Florida, together accounting for 
78 percent of output in 2000. New Jersey, Georgia, and North Carolina 
round out the top five producing states. According to the 1997 Census, 
about 4 percent of farms that produced sweet bell peppers accounted for 
74 percent of the pepper area harvested. Each of these farms harvested 
at least 50 acres of sweet peppers. Concentration of output was up from 
1992, when the top 4 percent of sweet pepper farms harvested 69 percent 
of pepper area.

Nonpungent types like bell peppers contain no capsaicin--the compound 
that gives the kick to chile peppers. Red bell peppers are actually the 
mature stage of green bell peppers that have been allowed to ripen on 
the vine. Pimento peppers, also sweet, are grown mostly for use in 
various processed products. Brighter colored peppers tend to be sweeter 
than green peppers because the sugar content increases as the pepper 
matures. As with onions, cooking (especially sauting) green bell 
peppers releases stored sugars, making them sweet and removing 
bitterness.

Most Bell Peppers
Picked Green, Sold Fresh 

The U.S. produced 1.7 billion pounds of bell peppers for all uses during 
1998-2000. There are no data specifically detailing fresh and processed 
production, but ERS estimates suggest less than 10 percent of production 
is earmarked for processed products. Bell pepper production has been 
trending higher, reaching a record high in 2000. Peppers are produced 
and marketed year-round, with domestic shipments peaking during May and 
June and import shipments highest during the winter months.

Although the majority of chile peppers such as jalapeno and Anaheim are 
processed, most bell peppers are sold commercially in the fresh market. 
A typical field of fresh-market peppers is harvested by hand every week 
or so over the course of about a month. Most of the crop is sold as 
mature green peppers, but growers receive a premium for a limited amount 
of other colors. The premium reflects the fact that bright colored bell 
peppers are more costly to produce (field losses are higher and yields 
are lower) than those harvested at the green stage. Shippers apply a 
food-grade wax to the majority of commercially produced peppers to 
reduce moisture loss and scuffing during marketing. This can also extend 
storage life, which under ideal conditions can range up to 3 weeks. 

The major processing uses of sweet peppers include dehydrated products 
(such as paprika), jarred pickled bell peppers, sweet banana peppers, 
cherry peppers; and sliced or diced, red or green bell peppers for use 
in pizzas and other frozen foods. Use of processed peppers by pizza 
chains has declined over the last several years; most chains currently 
prefer to top pizzas with fresh vegetables, including fresh bell 
peppers. 

For the most part, bell pepper varieties used in processing are 
identical to those entering the fresh-market. As such, the bell pepper 
market can be considered a dual-use market, with the same product able 
to move into either market. According to industry data, about 50 million 
pounds of frozen sweet bell peppers are packed annually. But data for 
canned and dehydrated bell peppers are very limited.

California Is 
Top Supplier 

According to the 1997 Census of Agriculture, 460 farms produced sweet 
bell peppers in California--up 16 percent from 1992. During 1998-2000, 
the Golden State produced 46 percent of the nations bell peppers, and 
the states production is now 89 percent higher than in 1988-90. 
Although output is substantial in many counties, about 41 percent of 
Californias bell peppers are shipped from San Benito, Riverside, and 
San Joaquin Counties. Californias shipping season runs from April to 
December, with peak volume hitting the market May through July.

Florida follows California in bell pepper production, with 36 percent of 
the nations output during 1998-2000. In 1997, there were 128 farms 
reported to be growing bell peppers in Florida, 36 percent fewer farms 
than in 1992. During this time, bell pepper acreage remained constant, 
with more than half of output coming from Palm Beach and Collier 
Counties. Floridas shipments run from October through the following 
July, with peak volume occurring during March and April. During the 
winter season, imports, largely from Mexico, provide the only other 
source of field-grown bell peppers. Small volumes of both domestically 
produced and imported hothouse peppers are also available during the 
winter months (at higher prices). 

New Jersey, with 6 percent of production, is a distant third in bell 
pepper production. Two-thirds of output comes from Gloucester, Salem, 
and Cumberland Counties. The 537 New Jersey farms that ship bell peppers 
market them July through early November, with peak volume in August. 
During  summer and early fall, New Jersey is an important supplier of 
peppers to New York City. Farms growing bell peppers in that state have 
declined 10 percent since 1992, but output has more than doubled since 
1988-90.

With 5 percent of U.S. production, Georgia is a fall and late-spring 
bell pepper supplier that helps fill market gaps. Georgias bell pepper 
shipments are greatest in June, when it shares the national market with 
California. Production is dispersed over several counties, led by 
Atkinson (15 percent) and Colquitt (13 percent).

Like Georgia, North Carolina markets bell peppers during June, when 
Floridas crop is waning and Californias summer production has not yet 
begun. Some 174 farms in North Carolina account for 4 percent of 
national bell pepper output, with Sampson County producing nearly half 
the states crop. Although North Carolinas season stretches from June 
to September, most volume is shipped during June and July.  

U.S. Trade:
Peppers In, Peppers Out
  
Trade plays a key role in the U.S. fresh bell pepper market. About 7 
percent of U.S. fresh-market supplies are exported, and 20 percent of 
fresh-market demand is satisfied by imports. Canada accounts for 98 
percent of U.S. fresh-market export volume. The U.S. supplies about 79 
percent of all fresh-market bell peppers imported by Canada, with Mexico 
supplying another 14 percent.

Until recently, U.S. imports of fresh-market bell peppers came primarily 
from Mexico. Two-thirds of all imports enter the country during 
December-April, with volume lightest in July and October (3 percent each 
month). About 45 percent of all fresh bell pepper imports enter through 
the land port of Nogales, Arizona. Most of the import volume during the 
summer and early fall likely consists of hothouse product from the 
Netherlands and Canada.

U.S. fresh-market exports and imports have both been trending upward in 
the past two decades. Average export volume during the 1990s rose 74 
percent over the 1980s, while average imports were up 67 percent. The 
most opportune time for Mexican exports to the U.S. is January through 
April, when Mexican production is greatest. For Mexico, this market 
window is covered by a small tariff (1.1 cents per kg in 2001), which is 
being phased out over 10 years, starting in 1994. Imports from Canada 
enter duty-free, while the general tariff rate faced by many other U.S. 
trade partners, such as the Netherlands, is 4.7 cents per kg.

Given the well-supplied U.S. market and generally low tariffs, the North 
American Free Trade Agreement offered little additional economic 
incentive for Mexican bell pepper exporters following implementation of 
the agreement on January 1, 1994. However, the steep peso devaluation 
that began in December 1994 and the dollars strength throughout the 
1990s altered the balance of trade and likely provided part of the 
impetus for increased fresh-market bell pepper exports to the U.S. The 
rest of the incentive for rising imports of fresh bell peppers was 
demand-related as U.S. consumers generally began to favor high-quality 
(and higher priced) hothouse vegetables like peppers, tomatoes, and 
cucumbers. 

The U.S. imported almost $13 million in dried (nonground) bell peppers 
in 2000, mainly from Chile ($7 million) and China ($3 million). In 
volume, this was over 7 million pounds of dried peppers the equivalent 
of over 140 million pounds of fresh bell peppers. The U.S. also imported 
$2 million in canned sweet bell pepper products in 2000 at a volume of 5 
million pounds (fresh-weight equivalent of 12 million pounds). Most 
canned bell pepper imports come from Turkey, Egypt, and Spain. 

Market Price
Trends Are Up

Between 1960 and 2000, season-average bell pepper shipping-point prices 
(unadjusted for inflation) gained an average 67 cents per cwt a year. 
The price of bell peppers averaged $31.50 per cwt (f.o.b. shipping 
point) during the 2000 season, up 1 percent from 1999 but 28 percent 
above 1990 as consumption continued to trend higher in the 1990s. During 
the mid-1980s, pepper prices hit a lull, reflecting excess production as 
growers overreacted to increasing demand. However, demand soon "caught 
up" with the increasing supply and prices resumed their long-term upward 
trend. In 2001, nominal shipping-point prices for bell peppers have 
averaged 10-20 percent below a year earlier since the first quarter--
weather-related reductions in supply caused prices to double during the 
first 3 months of the year.

Like prices of many agricultural crops, constant-dollar bell pepper 
prices (after adjusting for inflation) have trended lower over the last 
several decades. However, with rising demand keeping up with supplies 
recently, constant-dollar prices have risen 7 percent between 1988-1990 
and 1998-2000.

The U.S. retail price for fresh-market bell peppers averaged $1.41 per 
pound in 1999. This was the last full year that national bell pepper 
retail prices were reported by the U.S. Department of Labor. Largely 
reflecting continued strong demand, the retail price for fresh-market 
peppers rose 25 percent between 1994 and 1999. The marketing price 
spread--the difference between farm and retail price--for fresh-market 
bell peppers is very similar to that of tomatoes and onions. On average, 
grower/shippers received 34 percent of the retail value of bell peppers 
during the 1990s, up from 32 percent during the 1980s. The remaining 
portion of retail value covers marketing costs such as transportation, 
retail labor, and other selling costs.

Per Capita Use of 
Bell Pepper Rises

Americans consumed an estimated 2.2 billion pounds of bell peppers in 
2000. On a per capita basis, this works out to about 8 pounds--80 
percent higher than in 1990 and nearly 4 times the 1960 level. This 
level of consumption is similar to broccoli and snap beans. Since the 
early 1970s, per capita bell pepper use has gradually moved upward, 
reaching a record high in 2000. Consumer attraction to bell peppers 
likely reflects:

*   the wider range of foods that include bell peppers as an ingredient; 
*   wider availability of high-quality hothouse and colored peppers;
*   the economic prosperity of the nation over the past decade;
*   increased away-from-home dining; 
*  consumer recognition of the nutritional qualities of vegetables; and
*   increased diversity in the nations population.

The best known main dish featuring bell peppers is perhaps stuffed 
peppers. However, bell peppers are used in a wide variety of foods such 
as green salads, pizza toppings, casseroles, pasta sauces, plate 
garnishes, dipping vegetables, salsas, relish trays, sauted vegetable 
medleys, soups and stews, stir fry, and even as fried rings (a la onion 
rings). Some peppers are sliced, seeded, and bagged and sold in bulk, 
primarily to the food-service industry. In canned (glass-pack) form, 
such items as pickled sweet red bell peppers and sweet golden pickled 
banana peppers can be found in most retail stores.

The 1990s also saw the popularity of hothouse vegetables explode. 
Initially, a wide range of colored bell peppers was imported from the 
Netherlands. Other countries then entered the market, followed by 
several domestic hothouse producers. While some domestic producers have 
since left the hothouse pepper market to concentrate on other 
vegetables, imports remain popular, with volume from Canada surging at 
double-digit rates since 1997. Import volume from Canada was 4 times 
greater in 2000 than in 1996 and was up 43 percent from a year earlier 
during the first 7 months of 2001.

High U.S. employment rates and low price inflation of the past 10 years 
have encouraged consumer spending on a wide range of foods. This 
includes both food away from home and higher priced retail items such as 
imported and domestically grown hothouse peppers. The continued increase 
in meals away from home boosted consumption of foods such as pizza, 
pasta, mild salsas, and other ethnic foods containing bell peppers. 
Consumers procure some of these foods much more commonly from eating 
establishments (e.g. pizza) than make them at home--a boon to 
commodities like peppers which are rarely served as major plate 
vegetables. 

Although many consumers may not know of the specific nutritional 
attributes of bell peppers, they may eat more simply because of an 
increased awareness over the past decade of the dietary value of 
vegetables in general. Bell peppers are high in vitamin C (one medium 
green bell pepper contains 177 percent of the RDA for vitamin C), and as 
they mature and sweeten (turn color), the vitamin A content rises by a 
factor of 9 while the vitamin C content doubles. Peppers are also 
excellent sources of dietary fiber and provide small amounts of several 
other vitamins and minerals.

Over the past two decades, immigration trends may have boosted the 
popularity of bell peppers. A more diverse population has helped broaden 
the American dining experience by providing cuisine new to many and 
adding new flavors to the restaurant industry. U.S. consumers have been 
exposed to the cuisines of the world over the past 20 years, with many 
now represented in new restaurants and new retail foods, many of which 
feature vegetable-rich recipes, including bell peppers.

Who Eats 
Bell Peppers?

Bell peppers, like most foods, are largely consumed at home (63 
percent). This partly reflects stepped up use of bell peppers as 
ingredients in processed foods, rather than simply their use in home 
cooking. In the away-from-home market, fast food accounts for 13 percent 
of bell pepper consumption, with other restaurants using another 18 
percent. Many ethnic restaurants (e.g., Italian, Chinese, Lebanese, 
Korean, and Indian) use some form of bell peppers in their cuisine. 

With the exception of the southern region, bell peppers are relatively 
popular in most of the country. Consumers in the East, West, and Midwest 
eat the most on a per capita basis. However, consumers residing in the 
South eat 28 percent fewer bell peppers per person than those in the 
East, where bell peppers are most popular. As defined by the U.S. 
Census, the South, with 35 percent of the nations population, is the 
most populous region, yet this region accounted for only 29 percent of 
all bell pepper consumption.

The USDA food-intake survey also gauged bell pepper consumption by 
racial group. Consumption figures revealed some interesting variations 
by race, with white and Hispanic consumers generally exhibiting a 
greater preference for bell peppers than other races. According to the 
survey, black consumers eat considerably fewer bell peppers than other 
races. Black consumers, who make up 13 percent of the U.S. population, 
accounted for less than 9 percent of U.S. bell pepper consumption--
consuming fully one-third less per capita than other groups. This may 
partly explain the lower consumption in the South, where more than 50 
percent of U.S. blacks reside.

Wealthier consumers appear to favor bell peppers most. While households 
with incomes at least 3.5 times greater than poverty level represent 39 
percent of the U.S. population, they consume 44 percent of fresh and 48 
percent of processed bell peppers. The 19 percent of the population 
earning the lowest incomes consume much less than their share of 
processed bell peppers but consume fresh bell peppers in proportion to 
their share of the population. 

Bell peppers appear to be slightly more popular among men than women, 
with men consuming 53 percent of all bell peppers. Men aged 20-39, 
accounting for 16 percent of the population, consumed 24 percent of all 
bell peppers, with only minor differences between consumption levels of 
fresh and processed products. Children aged 2-11 eat very few fresh or 
processed bell peppers, and teenaged boys and girls also consumed 
proportionally fewer peppers. This suggests that a taste for bell 
peppers is acquired with maturity. 

Although bell peppers were domesticated in the Americas before Columbus 
helped to make them popular in Europe, it has only been over the past 30 
years that consumption in the U.S. has become widespread. Bell peppers 
are proving to be both a popular vegetable and a versatile seasoning. 
With a more diverse population, the enduring popularity of favorite 
foods such as pizza and pasta, and a strong trend toward away-from-home 
meals, production and consumption of bell peppers are expected to 
continue expanding over the next few years.  

Gary Lucier (202) 694-5253 and Biing-Hwan Lin (202) 694-5458
glucier@ers.usda.gov
blin@ers.usda.gov



WORLD AGRICULTURE & TRADE

EU Preferential Trading Agreements: Heightened Competition for U.S.

[NOTE: Sidebar describing specific trading arrangements is found below.]

The European Union (EU) is the worlds largest agricultural importer and 
the second-largest exporter, making it an important market for the U.S. 
as well as a competitor. Although the EU has pursued global multilateral 
trade negotiations within the World Trade Organization (WTO) and extends 
most-favored-nation (MFN) treatment to WTO members, it also participates 
in more nonglobal preferential trading agreements than does any other 
WTO member. Over two-thirds of EU imports come from countries with such 
agreements. The only countries having no preferential access to EU 
markets are the U.S. and nine others: Australia, Canada, Hong Kong, 
Japan, the Republic of Korea, New Zealand, Singapore, China and Taiwan. 

Preferential trading agreements (PTAs) provide lower tariffs and other 
more favorable terms for imports from preferred trading partners. The 
EUs many preferential agreements create a mosaic of tariffs, quotas, 
and other import restrictions that vary considerably even among 
preferred partners. EU preferential agreements disadvantage U.S. exports 
to EU markets while providing advantages to EU exports in the markets of 
their preferred partners. 

In what is called trade diversion, exporters without preferences may see 
their exports displaced by exports from higher cost preferred partners. 
Some preferred partners also may be displaced by other preferred 
partners benefiting from even lower tariffs and fewer restrictions. 
Preferential agreements, while advantageous to participants, can limit 
competition through trade diversion and could detract from global 
multilateral trade negotiations. 

Recent Changes & 
The Implications

Recent EU trading arrangements have departed from historical practices, 
and further changes are likely. Since March 2001, the EUs "Everything 
But Arms" (EBA) policy provides free entrance to the EU market for 42 
least developed countries (LDCs): no tariffs, quotas, or other 
restrictions are applied to agricultural products. Although some EU 
agricultural producers consider the EBA a threat, preliminary analyses 
by the EU Commission indicate that export potential from the least 
developed countries is low except for rice, sugar, and bananas, for 
which 7 years of gradual transition give time for necessary adjustments. 

Other changes in EU preferential agreements could have negative impacts 
on U.S. agricultural exports. Unlike early agreements beyond Europe with 
former colonies and developing countries, which provided no reciprocal 
advantages to EU exports, the more recent agreements do provide such 
advantages. The potential for displacement of low-cost exports from the 
U.S. by EU exports has increased. 

Recent and proposed conversions from nonreciprocal to reciprocal 
arrangements with Mediterranean and African, Caribbean, and Pacific 
countries are partially motivated by legal challenges to nonreciprocal 
agreements. Nonetheless, recently negotiated preferences for EU exports 
have been significant, including olive oil, wines, and spirits to 
Mexico, and 800,000 tons of wheat annually to Mediterranean countries. 
Additional free trade agreements with Chile and MERCOSUR (Argentina, 
Paraguay, Uruguay, and Brazil) are under negotiation and could provide 
preferences to EU products. 

Also a concern for the U.S. is the impact of expanding EU preferential 
agreements on prospects for liberalizing trade through multilateral 
trade negotiations. As a huge market, the EU has enormous bargaining 
power in bilateral negotiations, allowing EU preferential agreements 
generally to continue strong protection for EU agriculture. The EU is 
pursuing freer nonagricultural trade while avoiding liberalization of 
its highly protected agricultural markets. In multilateral trade 
negotiations, however, the EU finds it harder to resist the collective 
influence of countries seeking liberalized world agricultural trade. 

The Special Case of 
EU Agricultural Trade

The EU is largely an open market for nonagricultural products (except 
for textiles and clothing), with an average tariff of only 4.2 percent 
in 1999. EU agricultural markets, however, are restricted and highly 
managed. Starting in the 1960s, the EU chose to protect domestic 
producers by restricting trade through the Common Agricultural Policy 
(CAP). 

CAP support for EU producers includes the maintenance of prices of 
domestically produced or "sensitive" agricultural products considerably 
above world prices (sometimes more than double). The CAP also isolates 
many domestic prices from movements in world prices. Sensitive products 
include grains, sugar beets, nontropical fruit, vegetables, wine, 
olives, poultry, eggs, pork and pasture-based livestock, including dairy 
products, beef, and sheep meat. Also sensitive are processed forms of 
these products, such as flour, starch, pasta, and preserved fruit and 
vegetables. 

The EU does not support prices of agricultural  products for which EU 
production is inadequate including tropical products, oilseeds and their 
products, and cotton and numerous nongrain feed ingredients--allowing 
these to be imported close to world prices. Reductions in EU grain 
support prices during the 1990s and a weak euro also have brought EU 
grain prices much closer to world prices, and EU grain imports have 
increased in recent years. 

The CAP focuses principally on management of supplies to achieve 
targeted price levels. Export subsidies facilitate the disposal of 
surpluses. When domestic supplies of CAP products are insufficient, the 
CAP carefully controls the quantity and pricing of imports to be 
consistent with price targets. Control mechanisms employed include high 
and variable applied tariffs, quotas (mostly negotiated within 
preferential agreements), minimum import price requirements, and 
seasonal restrictions. Preferential agreements are integral to CAP 
import management. 

GATT Reforms--
What Has Been the Result?

The General Agreement on Tariffs and Trade (GATT), adopted in 1947 and 
administered by the WTO since 1995, provides rules that govern most 
world trade. The foremost GATT principle is most-favored-nation (MFN) 
treatment, which requires WTO members to accord to all members the best 
trading conditions provided to any country. Implicitly, the MFN 
principle requires that all trading arrangements be global, precluding 
trade diversion. However, GATT rules provide two exemptions to MFN 
obligations.

One exception allows for free trade agreements (FTAs) among "adjacent 
countries" to "recognize the desirability of increasing freedom of 
trade."  Trade barriers cannot be increased for any country, however, 
and all barriers within a free trade area must be eliminated on 
"substantially all trade" and "within a reasonable amount of time."  But 
the EU has excluded sensitive high-priced CAP products by interpreting 
"substantially all trade" to mean substantially all historical trade, 
effectively allowing continuation of past trade restrictions and 
precluding increased trade. 

The GATT provides a second exemption from MFN obligations which allows 
developed countries to provide a Generalized System of Preferences (GSP) 
for imports from developing countries, including special measures for 
the least developed countries. The GSP differs from free trade 
agreements in that concessions are provided unilaterally, without 
reciprocal concessions, and are nonbinding and revocable. 

All nonglobal trading arrangements must conform to GATT requirements for 
FTAs or the GSP, unless three-fourths of WTO members consent to a 
waiver. The EU has established numerous trading arrangements under WTO 
waivers, including the agreement with African, Caribbean, and Pacific 
countries. 

In the Uruguay Round of the GATT, disciplines were imposed on export 
subsidies and domestic support to agriculture, while quantitative 
restrictions and other nontariff barriers were eliminated, in principle. 
Tariffs, once bound at agreed MFN levels, cannot be increased without 
compensation to all affected countries. Throughout eight rounds of 
multilateral trade negotiations, however, the EU has maintained very 
high MFN tariffs on many agricultural products. In practice, GATT 
reforms have so far little affected EU management of agricultural 
imports. 

Operating the CAP: 
Mechanisms to Manage Trade

Provisions of EU preferential agreements, except for "Everything But 
Arms," carefully accommodate the CAP, even providing for subsequent CAP 
changes. Maintenance of high CAP prices depends fundamentally on high 
MFN tariffs to restrict trade, allowing other CAP mechanisms to 
effectively facilitate and control desired imports. The value of 
preferences and the impacts on trade depend on the CAP mechanisms 
discussed below and the provisions of preferential agreements. 

High MFN tariffs. The GATT requirement that imports be allowed at bound 
MFN tariffs means that high prices must be protected from cheap imports 
by tariffs at least as large as the gap between EU and world prices. 
Otherwise, lower priced imports would pour in, undermining domestic 
prices. Because EU agricultural prices are very high, EU agricultural 
tariffs also are high. The average maximum MFN tariff is 30 percent, 7 
times the nonagricultural average, and for sensitive products subject to 
WTO quotas, the average is 78 percent. Eight percent of agricultural 
tariffs are over 100 percent. EU MFN tariffs for sensitive products 
often are greater than the normal gaps between EU and world prices and 
are mostly prohibitive. 

Largely prohibitive MFN tariffs mean that little trade occurs without 
alternative arrangements. Tariffs actually applied on sensitive EU 
imports often are considerably less than MFN rates. EU price targets 
still can be achieved because many MFN tariffs are considerably larger 
than the gap between EU and world prices. The amount of MFN tariff in 
excess of the price gap, often referred to as "water" in the tariff, 
insures that other measures, including quotas and minimum import price 
requirements, can be employed to manage trade effectively. Adequate 
"water" also allows applied tariffs (and possibly also export subsidies) 
to be varied inversely with world prices, insulating EU prices from 
world market influences. Such price stabilization requires that MFN 
tariffs be at least as large as the price gap even when world prices are 
very low.

Tariff-rate quotas. EU imports of sensitive products commonly occur 
within tariff-rate quotas (TRQ), which allow some amount of imports at a 
tariff far enough below the MFN rate to facilitate trade. On additional 
imports, a tariff up to the MFN rate may be applied. Although the GATT 
bans absolute quotas, the EUs prohibitive MFN tariffs still effectively 
limit trade to the TRQ amount, achieving the same result. While the EUs 
commitments to GATT required the EU to establish 87 TRQs, WTO data 
indicate that the EU actually has some 3,000 TRQs in operation, mostly 
for agricultural and fishery products negotiated within preferential 
agreements.

Serious controversies surround the administration of TRQs. Most EU TRQs 
allocate market access to specific suppliers. EU banana quota 
allocations have been highly controversial because WTO dispute panels 
deemed them discriminatory and contrary to GATT requirements. For 
agricultural products, TRQ allocations have been the principal 
determinant of who supplies EU imports of many products. 

Minimum import price (MIP) requirements. The EU directly manages some 
domestic prices by requiring that prices for imports, including 
applicable tariffs, be no lower than CAP prices--competition from cheap 
imports simply is not allowed. MIP requirements are applied to many 
fruit and vegetable imports. Imports observing MIP requirements may face 
relatively low tariffs. Again, the potential application of high MFN 
tariffs compels importers to observe MIP requirements. A few PTAs 
provide for some reduced MIPs. 

Seasonal restrictions. The EU varies applied tariffs and tariff 
reductions, quota amounts, and MIP requirements during the year for 
seasonal and perishable commodities such as fruits and vegetables. 
Seasonal restrictions protect producers during harvesting but allow for 
off-season imports. Some PTAs contain less seasonally restrictive 
conditions than others. 

Product exclusion. The EUs ultimate protection for sensitive products 
has been simply to exclude them from PTAs, providing no import 
concessions. Although the Europe Agreements (EA) provide for imports of 
some sensitive products from Eastern European countries within quotas, 
the EU provides no tariff concessions for grains, grain products, or the 
main meat and dairy products in the GSP. Sensitive products also are 
excluded in the PTAs with Mediterranean countries, South Africa, and 
Mexico. 

How Valuable Are 
Tariff Reductions?

All EU preferential agreements impose reduced tariffs below MFN levels 
for all imports of some products. However, the EU often provides much 
larger tariff reductions or even zero duties on imports within the 
tariff-rate quotas of particular PTAs. Zero tariffs are accorded the 
least developed countries (LDCs). Tariff concessions to former African, 
Caribbean and Pacific colonies also are significant, particularly for 
fruits and vegetables. Special quotas for 52,000 tons of beef for 6 
former colonies and 1.2 million tons of sugar for 13 other former 
colonies are provided with minimal duties, making them among the most 
valuable of all concessions provided by any EU preferential agreement. 

Tariff concessions for FTAs outside quotas are limited. The GSP provides 
average reductions of only 2 percent or less for sensitive and very 
sensitive products and perhaps 4 percent for semi- and nonsensitive 
products. No GSP reductions are provided for the most sensitive 
products. EU agreements also generally provide reductions for ad valorem 
tariffs only, leaving potentially prohibitive specific tariffs. Tariffs 
outside of special quotas are particularly high for meat, dairy, and 
cereals, remaining above 25 percent for all trading arrangements except 
for the LDCs. 

The value of EU tariff reductions is difficult to assess. For sensitive 
products with prohibitive MFN tariffs, a limited tariff reduction may 
not be enough to increase trade. Significant tariff reductions within 
quotas may guarantee access, but only for the limited quota amounts. MIP 
requirements force suppliers to compete on quality rather than price and 
also impose quantity restrictions indirectly, because excessive imports 
would suppress EU prices, making imports at minimum prices unattractive. 

The potential value of a tariff reduction is the amount by which the gap 
between EU and world prices exceeds the applicable tariff. Reduced 
tariffs potentially provide two options to preferred partners. They may 
capture some portion of the potential value as profit, or they may sell 
at a lower price and increase market share. The exporters ability to 
capture the value of preferences is not assured, however. The EU often 
allocates import licenses to EU companies, leaving outside exporters to 
compete for importers. In the process, suppliers may bid away to 
importers some or all of the value of preferences. 

The Impacts on Trade

Consumers benefit when lower priced imports displace domestically 
produced products. Despite consumer benefits, governments do restrict 
trade, usually because potentially displaced producers organize 
politically, and agricultural trade is among the most restricted. In the 
EU case, very high MFN tariffs clearly allow GATT-legal policy 
mechanisms to restrict and control trade. 

Ultimately, EU preferential trading arrangements cannot be said either 
to create trade or to restrict trade. The basic objective of EU 
agricultural policy--the maintenance of targeted domestic price levels--
determines the appropriate level of imports and has not been affected by 
the various EU preferential agreements. Preferential agreements are 
extensions of the CAP, allowing trade or restricting it depending on 
current policy objectives. 

If EU preferential agreements do not generate trade, then what value are 
they to the preferred partners?  EU preferential trading agreements do 
divert trade, and the preferred partners are the beneficiaries. They 
probably also capture some part of the value of the reduced tariff. 
Their advantage over less preferred partners helps assure some access to 
the worlds largest market even if preferred partners bid away the value 
of preferences to importers.

Trade diversion is limited to some extent because large supplies of some 
products not produced by the EU can be obtained only from dominant world 
producers, who may not have preferential arrangements. Countries having 
no agricultural preferences still account for almost one-third of EU 
imports, while GSP countries, the least preferred of preferred partners, 
account for another 40 percent of EU imports. The U.S. is a major 
producer and thus a natural supplier of soybeans, tobacco, and almonds. 
The EU also depends heavily on imports for tropical products, cotton, 
and counter-seasonal fruits, nuts, and vegetables. The trade, therefore, 
is somewhat inevitable.

For the EU, preferential agreements provide enhanced control over the 
sources of imports. Recent reciprocal agreements also provide advantages 
for EU exports. The impacts of the "Everything But Arms" policy remain 
to be seen.  

Gene Hasha (202) 694-5193
ghasha@ers.usda.gov

TRADE SIDEBAR 
EU Trading Arrangements

EU trading arrangements include multilateral most-favored-nation (MFN) 
treatment, which the EU extends to all World Trade Organization (WTO) 
members, and preferential trading agreements with specific countries or 
blocks of countries. Products from MFN countries, including the U.S., 
made up about one-third of EUs imports in 1998-2000, while products 
from countries with preferential agreements accounted for the other two-
thirds. 

1. Multilateral most-favored-nation (MFN) treatment.  Bound maximum 
tariffs and other trading conditions apply to imports from all WTO 
members.  EU tariffs are prohibitively high on many sensitive 
agricultural products, while low or zero tariffs are applied to many 
agricultural products in short supply.  Despite the nomenclature, MFN 
treatment generally is the least favorable treatment provided imports.

A. Preferential trade agreements (nonreciprocal). Preferential tariffs 
below MFN tariffs and other trading conditions are provided unilaterally 
by the EU without reciprocal preferences for EU exports. Nonreciprocal 
trade agreements or preferences include:

B. Generalized System of Preferences (GSP). Reduced tariffs are provided 
on selected products to 146 developing countries. The GSP provides 
reductions in ad valorem tariffs of 15 percent for "very sensitive" 
products and reductions of 30, 65, and 100 percent for "sensitive," 
"semi-sensitive," and "non-sensitive" products. No quotas are imposed. 
Many agricultural products are more than "very sensitive," however, i.e. 
no reductions are provided. 

C. Least-developed-country (LDC) preferences. The GSP always has 
provided the LDCs with larger tariff reductions on a larger set of 
products. Since March 2001, the "Everything But Arms" (EBA) policy 
provides 42 LDCs duty-free access to EU markets without quota or other 
restrictions for all agricultural primary and processed products. EU 
imports of sugar, bananas, and rice are subject to transition 
arrangements until 2009. 

D. Africa, Caribbean, and Pacific (ACP) preferences. Tariff reductions 
are provided to 77 former EU colonies that are larger and for more 
products than those of the GSP or those provided for the LDC before the 
EBA. Many larger tariff reductions are available only within quotas. 
Special protocols provide for EU imports of sugar, beef and veal, and 
bananas from a few ACP countries at high EU prices. The WTO waiver for 
ACP preferences expired in 2000. A new waiver has been requested but has 
been controversial and remains pending. The EU intends to negotiate new 
reciprocal ACP arrangements by 2008. 

2. Preferential trade agreements (reciprocal). Bilateral agreements, 
referred to in the General Agreement on Tariffs and Trade (GATT) as free 
trade agreements (FTA), provide preferential tariffs below MFN tariffs 
and other preferential treatment for the exports of the EU as well as 
for the preferred partner. The provisions of these agreements, including 
agricultural product coverage, vary considerably, but most provide 
significant tariff reductions although only within quotas. FTAs with 
neighboring countries extend the EU internal market throughout Western 
Europe for industrial products, but exclude agriculture. EUs FTAs 
include: 

A. Europe Agreements with Hungary, Poland, the Czech Republic, the 
Slovak Republic, Bulgaria, Romania, Estonia, Latvia, Lithuania, and 
Slovenia, provide for reciprocal free trade (zero tariffs) in industrial 
goods in preparation for EU membership. "Double zero" provisions 
eliminate export subsidies in bilateral trade and provide duty-free 
access for some products within quotas. Similar agreements provide some 
agricultural preferences to countries in southeast Europe, but without 
the prospect of membership. Sensitive agricultural products are 
excluded. 

B. Euro-Mediterranean Agreements (EMA) are FTAs with the Palestinian 
Liberation Organization (1997), Tunisia (1998), and Israel and Morocco 
(2000). Agreements with Jordan and Egypt await implementation. The EMAs 
provide for free trade in nonagricultural products, while agricultural 
trade is limited by quotas largely to historical flows. The EMA replace 
nonreciprocal agreements from the 1970s, which remain in force for 
Algeria, Lebanon, and Syria pending EMA negotiations. The EU envisions a 
Euro-Mediterranean free-trade area by 2010. 

C. Other agreements include bilateral FTAs with South Africa (1999) and 
Mexico (2000) that provide for free trade in nonagricultural goods.  
Some agricultural concessions are provided within quotas, but sensitive 
products are excluded.  The FTA with Mexico covers 62 percent of 
historical agricultural trade.  FTAs are under negotiation with Chile 
and MERCOSUR (Brazil, Argentina, Paraguay, and Uruguay).

RISK MANAGEMENT
U.S. Crop Insurance: 
Participation, Premiums, & Subsidies

Premium subsidies, a prominent feature of the U.S. crop insurance 
program since the early 1980s, have increased recently, lowering the 
cost of crop yield and revenue insurance coverage to producers. Premium 
discounts were added to existing premium subsidies in 1999 and again in 
2000, and the Agricultural Risk Protection Act of 2000 (ARPA) revised 
subsidy rates and increased government funding of premium subsidies for 
2001-05. These increases in premium subsidies were preceded by an 
expansion in recent years in the variety of insurance coverage available 
to producers and the maximum insurance guarantee levels. How have 
producers responded to the changes in available coverage and to the 
reduction in insurance prices? 

Crop insurance programs, traditionally yield-based, added products in 
the mid-1990s that insure revenue rather than yields, broadening 
producers choice of insurance options. The premium discounts of 1999 
and 2000 and the revised premium subsidy rates reduced producer costs of 
both crop yield and revenue insurance products at "buy-up" coverage 
levels. Buy-up coverage levels are greater than the basic, fully 
subsidized catastrophic (or CAT) coverage level, which is 50 percent of 
expected yield, indemnified at 55 percent of expected price. 

Buy-up coverage guarantees up to 75, or in some cases 85 percent, of 
expected yield or revenue. Producers choose the level of insurance 
protection, which, along with riskiness of a producers situation, 
determines the premium. Producers pay only a portion of the actuarial or 
risk-based premium plus a small administrative fee.  The U.S. 
government, through the Federal Crop Insurance Corporation, pays the 
balance of the premium.  Premium subsidy rates specify the percentages 
of total premium paid by the government.  These percentages vary by 
coverage level, and decline as coverage levels increase.

The premium discount instituted in 1999, an additional subsidy that 
reduced producer costs of buy-up coverage by 30 percent that year, led 
to an increase in producer purchases of crop insurance. Buy-up 
participation rates--the shares of planted acres insured at buy-up 
levels--for each of the top four insured crops (corn, soybeans, wheat 
and cotton) increased in 1999, reaching about 50 percent of the planted 
acres of corn and soybeans and about 60 percent of the planted acres of 
wheat and cotton. Total acres insured at buy-up levels increased by 19 
percent from 1998 to 1999 despite fewer planted acres of corn and wheat.   

The premium discount had a greater effect on costs at higher coverage 
levels, which led many producers to increase their coverage from 1998 to 
1999.  Total buy-up insurance coverage--yield and revenue insurance--
measured by liability, increased 13 percent, despite declines in prices 
in 1999 at which indemnities would be paid for many major field crops.  
Moreover, the proportion of acres insured at coverage levels above 65 
percent increased from 9 percent in 1998 to 24 percent in 1999. This 
includes about 2 percent of acres insured at the 80- and 85-percent 
coverage levels, which were first offered in 1999.

The increase in buy-up participation continued in 2000, despite a 
decrease in the premium discount rate from 30 percent in 1999 to 25 
percent in 2000. Overall buy-up acres increased 9 percent from 1999 to 
2000, reflecting moderate increases in planted acres of corn and cotton 
(3 percent and 5 percent, respectively) as well as increases in buy-up 
participation rates. The buy-up participation rate for cotton increased 
from 60 to 65 percent of planted acres, due in part to a reduction in 
premium rates for cotton insurance in many counties. The soybean 
participation rate also increased, from 49 to 56 percent of planted 
acres.  For wheat, the buy-up participation rate changed little from 
1999 to 2000, while a decline in planted acres reduced the number of 
acres insured.

Buy-up liability increased 15 percent from 1999 to 2000, reflecting a 
move to higher coverage levels and revenue products. The effects of the 
Agriculture Risk Protection Act of 2000 (ARPA), which raised subsidy 
rates in general and narrowed the difference between available coverage 
levels, reinforced this trend. Preliminary data for 2001 from USDAs 
Risk Management Agency (RMA) suggest a continued increase in buy-up 
participation and movement to higher coverage levels.  RMA forecasts a 
6-percent increase in insured acres and a 9-percent increase in 
liability.  Also, the proportion of acreage at coverage levels of 70, 
75, 80, and 85 percent continues to increase. 

Participation in Revenue 
Insurance is Growing

Since the introduction of revenue insurance pilot programs for some 
crops in the 1996 crop year, participation has grown steadily, 
representing more than 60 percent of buy-up insured corn and wheat acres 
in 2001 and more than 36 percent of buy-up insured soybean acres. What 
can explain the significant growth of revenue insurance participation in 
such a short time?  

First, the availability of revenue insurance has expanded rapidly since 
its introduction.  In 1996, revenue insurance was available only in a 
limited number of counties in 8 states.  Availability greatly increased 
in 1997 when Crop Revenue Coverage (CRC) was offered in 22 states.  
However, availability alone cannot explain the large shift in coverage, 
since some widely available insurance products experience low 
participation.  What other factors have led so many producers to select 
revenue insurance? 

The most obvious explanation is the fact that revenue coverage insures 
revenue rather than yield.  Farmers are ultimately interested in 
dollars, not bushels, and revenue coverage guarantees a specific revenue 
level, regardless of whether low revenue results from low yields or from 
low crop prices. 

CRC, by far the most widely available and popular form of revenue 
insurance, offers a feature that actually increases the revenue 
guarantee if the harvest price is higher than the "base price," the 
price used to establish coverage prior to planting.  Farmers who believe 
prices are likely to rise in years when they have yield losses may find 
this feature appealing.  Revenue Assurance with the "harvest price 
option" (RA-HPO) provides very similar coverage.  Income Protection 
(IP), another revenue insurance product, does not have this feature. 
Each revenue insurance product has its own terminology for the various 
components of its coverage.  The expected price (similar to price 
election for yield insurance) established prior to planting in order to 
determine coverage is called the "base price" for CRC and the "projected 
price" for both IP and RA. 

Another possible explanation for the popularity of revenue insurance is 
that the price used to establish the coverage level of CRC has often 
been higher than the crop prices used to establish the value of the crop 
under Actual Production History (APH) coverage, which is RMAs 
traditional yield insurance product.  For revenue insurance, this higher 
price results in higher revenue coverage.  

CRC, RA, and IP establish their coverage using futures market prices, 
which have tended to be higher than the maximum price elections 
established by the RMA for yield-based coverage. For corn, the CRC price 
has consistently been higher than the APH price, but the situation has 
varied over the years for wheat and soybeans.

Insurance sign-up levels for soybeans in 2001 provide some evidence that 
the crop price component of coverage can play a role in farmers choice 
of insurance product.  In 2000, the maximum price election for soybean 
APH coverage was $5.16 per bushel, while the CRC base price (an average 
of prices for the November soybean futures during February) was $5.32 
per bushel. That year, APH buy-up covered 34 percent of insured soybean 
acres, while CRC, RA, and IP covered 39 percent of insured acres.  

In 2001 the APH price for soybeans was set at $5.26, equal to the 
government loan rate, which is the price farmers would effectively 
receive for any bushel they produce if they claim a government loan 
deficiency payment or marketing loan gain.  In contrast, the CRC base 
price in 2001 was $4.67 per bushel, reflecting lower market prices. The 
share of soybean acres insured under CRC, RA, and IP dropped to 36 
percent, while the share for APH buy-up coverage increased to 42 
percent.

This shift away from revenue coverage in 2001 occurred despite changes 
in the premium subsidy structure by ARPA, which made subsidy rates for 
all revenue plans equal to subsidy rates for APH buy-up coverage. Prior 
to ARPA, premium subsidies applied only to the yield component of 
revenue insurance, but now the subsidy rate applies to the entire 
premium.  Prior to ARPA, at the popular 65-percent coverage level the 
effective premium subsidy rates for CRC and RA-HPO policies were 7 to 10 
percentage points lower than those for yield coverage and other revenue 
policies. 

Even with premium subsidy rates equalized, CRC coverage is more 
expensive than yield-based coverage. Though it varies by crop and by 
year, CRC often costs 15 to 20 percent more than APH coverage with the 
same guarantee level.  One reason for the higher cost is that CRC must 
cover losses for some situations in which yield insurance does not pay, 
notably where revenue guarantee levels rise due to higher harvest 
prices--the feature offered by CRC and RA-HPO.  When CRC uses a higher 
price, as often occurs, premiums are also higher.  IP and RA use 
different premium rating methods, and their premiums may differ from 
those of CRC.

The popularity of revenue coverage does not appear to be due to any 
actuarial advantage favoring farmers. During the relatively short period 
during which revenue products have been offered, indemnity payments for 
revenue insurance products have been roughly equal to total premium. 
Moreover, in those counties where both revenue and yield insurance have 
been sold for the same crops in 1996-2000, the loss ratio (indemnities 
divided by total premium) for CRC has been slightly below that of APH 
buy-up yield coverage in each of these years.  

However, this is a very short time period from an actuarial perspective. 
In particular, none of these years experienced a widespread catastrophe 
large enough to result in significant price increases, a case where CRC 
and RA-HPO may pay significantly higher indemnities than yield 
insurance.  

As Are Government Costs

While increases in premium subsidy rates and the addition of premium 
discounts have reduced producer costs and increased participation, they 
have increased government expenditures.   As producers have moved to 
higher coverage levels and to products with higher premiums, subsidies 
have increased both as a total dollar amount and a proportion of total 
premium.

Between crop years 1995 and 1998, premium subsidy rates were constant, 
and subsidies accounted for 50-57 percent of total premium.  Shifts in 
participation and crop prices, however, changed premium subsidy amounts.  
In 1995, the first year after enactment of the crop insurance reform 
that introduced CAT coverage (premium entirely subsidized), premium 
subsidy expenditures were about $890 million.  The annual premium 
subsidy amount rose to $980 million in 1996 as increased buy-up 
participation and increased crop prices lifted total premium, even 
though CAT participation declined.  In 1997, premium subsidies dropped 
to about $900 million as crop prices fell and as CAT participation 
continued to decline while buy-up participation held steady.  In 1998, 
total premium subsidies increased with a rise in buy-up insured acres. 

In 1999 and 2000, premium discounts boosted the governments share of 
total premium.  The 1999 premium discount of 30 percent added $440 
million in premium subsidies, resulting in a total of about $1.4 billion 
in government expenditures on insurance premiums.  In 2000, the 25-
percent discount added $390 million in premium subsidies for a total of 
$1.3 billion.  

At the time of its passage, ARPA was estimated to increase spending on 
premium subsidies by $8.2 billion during the 2001-05 period, compared 
with the estimated spending level for that period under previous 
legislation (not counting the emergency premium discounts in 1999 and 
2000).

Aggregate premium subsidies (including discounts) have reached 60 
percent of total premium.  Although the proportion of total premium paid 
by producers has declined, producer-paid premiums have gone up, and 
producers are obtaining more insurance.  Buy-up acreage will likely 
represent just over 80 percent of insured acres in 2001, up from 64 
percent in 1997.

Robert Dismukes (202) 694-5294 and Monte Vandeveer (202) 694-5271
dismukes@ers.,usda.gov
montev@ers.usda.gov

RISK MANAGEMENT SIDEBAR
How Much Do Yield & Revenue 
Insurance Cost?

Premiums are the prices of crop insurance coverage.  They are based on 
the expected loss or indemnity of crop yield or revenue for an insured 
producer.  Premiums are expressed as rates, which are percentages of the 
total amount of insurance, called liability.

Premium rates vary with riskiness of a producers situation.  Most crop 
yield and revenue insurance plans classify a producers risk by crop 
grown, location, expected yield (based on recent history), and 
production practice (irrigated or dryland).  Premium rates for crop 
insurance vary considerably across the U.S., ranging from as low as 2 or 
3 percent for producers with above-average yield expectations in low-
risk areas to as high as 25 or 30 percent for producers with below-
average yield expectations in high-risk areas.  In 2000, the average 
premium rate for all crop insurance policies was about 7 percent. 

To calculate dollars of premium, the premium rate is multiplied by 
dollars of coverage or liability.  For a crop insurance policy, 
liability is determined by the expected yield or revenue multiplied by 
the percent coverage level.  Because expected yields are in units of 
crop (i.e., bushels) they are converted to dollars by multiplying by the 
price at which an insurance indemnity would be paid, called the price 
election.  If a producer has averaged 150 bushels per acre of corn over 
the previous 4 years and the producer selects 65-percent coverage for a 
crop yield insurance policy, the producers yield guarantee would be 
97.5 bushels.  If the producer chooses the maximum price, say $2 per 
bushel, then liability would be $195 per acre.  Suppose that the premium 
rate for 65-percent coverage for this producer is 6 percent, then the 
total premium would be $11.70 per acre.  

The price paid by producers is the total premium minus the premium 
subsidy.  The dollar amount of the premium subsidy is calculated by 
multiplying the subsidy rate times the total premium. The premium 
subsidy rate for 65-percent coverage is 59 percent in 2001; following 
the above example, the dollar amount of the subsidy is $6.90; the 
producer would pay $4.80 of the $11.70 total premium.

Increases in subsidy rates, including premium discounts, and large 
increases in subsidy rates at higher coverage levels, have reduced 
producers insurance costs, especially on higher coverage levels.  For 
example, prior to 1999 the typical premium subsidy on 65-percent APH 
yield insurance coverage was about 42 percent; in 1999 when premium 
discounts were added, the effective subsidy rate was 59 percent.  For 
the producer in the above example, the cost of 65-percent coverage would 
have been reduced from $6.79 to $4.80 per acre.  

The typical premium subsidy rate for 75-percent APH yield coverage was 
about 24 percent prior to 1999.  In 1999, premium discounts increased it 
to 47 percent.  In 2001, under the ARPA subsidy structure, the premium 
subsidy rate on 75-percent coverage increased to 55 percent.   Since the 
liability and premium rate at the 75-percent coverage level would be 
higher than at the 65-percent level, total premium would be higher.  To 
illustrate, if the liability is $225 and the premium rate is 9 percent, 
then total premium would be $20.25.  Under the 24-percent premium 
subsidy, the producer would pay $15.39, and under the 55-percent subsidy 
the producer would pay $9.11 for 75-percent coverage. 

Actual costs to a producer depend on particular features of crop 
insurance coverage--for example, whether crop acreage is divided into 
optional units (with different portions of the operation insured 
separately) and whether features such as prevented-planting coverage or 
hail and fire coverage are included. To obtain exact price information a 
producer should contact a crop insurance agent.

END_OF_FILE
