AGRICULTURAL OUTLOOK                                      April 19, 2001
May 2001, ERS-AO-281
                  Approved by the World Agricultural Outlook Board
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CONTENTS

IN THIS ISSUE

BRIEFS
Poor Winter Weather Reduces Beef Supply
Farm Policy for the 21st Century: A Diversity of Visions 
for the Future

COMMODITY SPOTLIGHT
Expanded Soybean Plantings in 2001 to Match Corn Levels

WORLD AGRICULTURE & TRADE
Forces Shaping Global Food Demand and Agricultural 
Trade

Canada’s Agriculture: 5 Years After Transportation 
Subsidies End

FARM FINANCE
Farm Credit Use Expected to Rise Slightly

Interest Rates on Farm Loans Likely to Fall Throughout 
2001

RESOURCES & ENVIRONMENT
Agri-Environmental Payments to Farmers: Rewarding 
Environmental Performance

The Change to Conservation: Moving Farmers Toward New 
Production Practices


IN THIS ISSUE

Poor Winter Weather Reduces Beef Supply 

Cold, wet conditions have limited cattle weight gain in 
feedlots since late November, resulting in lower 
marketing weights, delayed marketings, and a very tight 
supply of market-ready animals. With buyer demand 
strong, competition for the reduced supply of beef, 
particularly higher quality beef, has pressed retail 
prices toward the record levels of the early 1990s. Ron 
Gustafson (202) 694-5174; ronaldg@ers.usda.gov

U.S. Field Crop Planting Intentions Decline in 2001

Planting intentions in 2001 for the eight major U.S. 
field crops (corn, soybeans, wheat, barley, sorghum, 
oats, cotton, and rice) total 251.5 million acres, down 
1.3 percent from last year's planted area.  Expansion 
in hay area will more than offset the decrease.  While 
lower expected prices and higher fertilizer and fuel 
costs pulled down corn planting intentions by 4 
percent, benefits from the government marketing loan 
program upheld producer incentives (per-unit returns) 
for soybeans and cotton. Farmers intend to plant a 
record 76.7 million acres of soybeans and the largest 
cotton area (15.6 million acres) since 1995.  Despite 
higher expected prices for wheat, planting intentions 
are down 4 percent to 60.3 million acres as dry soil 
conditions last fall delayed and reduced seeding in the 
Southern Plains. William Lin (202) 694-5303; 
wwlin@ers.usda.gov


Forces Shaping Global Food Demand & Agricultural Trade

Recent shifts in trade patterns reveal dramatic changes 
in global food demand that will likely continue well 
into the future. Bulk commodities (primarily grains and 
oilseeds) now make up less than 30 percent of the value 
of world agricultural trade, compared with 41 percent 
in 1985, and processed consumer-oriented products such 
as meat, beverages, bakery products, and snack foods 
make up a growing share. Driving these shifts are 
changes taking place in both developing and developed 
countries, particularly income growth. Food purchasing 
power has increased for most consumers in the world as 
average real per capita income levels doubled from 1960 
through 1998. Growth in urbanization, interest in food 
quality, and concerns about food safety standards are 
also shaping demand and influencing future prospects 
for food consumption and international trade. Anita 
Regmi (202) 694-5161; aregmi@ers.usda.gov

Canada's Agriculture: 5 Years After Transportation 
Subsidies End

The 1995 repeal of Canada’s Western Grain 
Transportation Act (WGTA) ended government support that 
had lowered producers’ cost of transporting grain to 
export ports from the Prairie Provinces--Alberta, 
Manitoba, and Saskatchewan. Subsidized freight rates 
had helped encourage grain exports and diverted grains 
away from domestic enterprises. The elimination of 
freight subsidies has reduced returns for traditional 
grains such as wheat and caused shifts to relatively 
minor nontraditional crops such as dry peas, which have 
become an important part of successful low-cost 
livestock operations. Rising transportation costs for 
producers have also led to retention of feed in the 
Prairie region to support the expanding livestock 
sector. Suchada Langley (202) 694-5227; 
slangley@ers.usda.gov

Farm Credit Use Expected to Rise Slightly

Total farm business debt will rise just 1.2 percent to 
$182.8 billion in 2001, the smallest projected increase 
since debt dipped slightly in 1992. With limited 
potential gains in farm prices this year following 
relatively low levels in 2000, farmers remain cautious 
about debt expansion. High levels of direct government 
payments to farmers (including emergency assistance) 
and adequate levels of working capital and off-farm 
earnings are limiting farmers’ demand for credit. 
Farmers have been maintaining or improving their 
balance sheets by applying some of the additional 
government payments to existing debt. Jerome Stam (202) 
694-5365; jstam@ers.usda.gov
 
Average interest rates for farm loans from commercial 
banks should dip below 9 percent by midyear and may 
drift slightly lower in the second half of 2001, 
following the Federal Reserve’s easing of monetary 
policy this year. Should U.S. economic growth in the 
second half of 2001 and the first half of 2002 
strengthen as expected, interest rates on agricultural 
loans are likely to rise slightly in the winter or 
spring of 2002. Paul Sundell (202) 694-5333; 
psundell@ers.usda.gov

Agri-Environmental Payments to Farmers: Rewarding 
Environmental Performance

Initiating a program to provide agri-environmental 
payments to producers could help maintain past agri-
environmental gains, address emerging environmental 
problems (e.g., nutrient runoff), and perhaps support 
farm income. Such a program, based on use of 
environmentally sound practices, could reward high 
levels of environmental performance on agricultural 
land or improvement over past performance. To explore 
issues of program design, USDA’s Economic Research 
Service linked farm-level data from the Agricultural 
Resource Management Study with several indicators of 
potential for environmental damage. The analysis 
indicates that designing a conservation program to 
focus on a specific farm type (e.g., large family 
farms) is not likely to solve a particular agri-
environmental problem. Likewise, focusing a farm 
program on a particular environmental issue is not 
likely to solve farm income problems nationally or for 
specific categories of farms. Roger Claassen (202) 694-
5473; claassen@ers.usda.gov 

Moving Farmers Toward New Production Practices 

What motivates U.S. farmers to adopt environmentally 
beneficial production practices? USDA's Economic 
Research Service examined the impact of a range of 
factors, including government programs, farmers' 
technical knowledge, land tenure, and natural resource 
characteristics of farms (e.g., soil type and climate), 
using survey data from farmers in 10 watersheds spread 
throughout the country.  Among the findings is that 
education has a significantly positive effect on 
farmers' willingness to adopt practices that require 
specialized knowledge (such as biological pest 
control).  Regional resources proved to be a frequent 
factor in decisions to adopt certain practices, 
confirming that site-specific information on resources 
is vital in explaining the success or failure of 
conservation efforts and programs. Margriet Caswell 
(202) 694-5540; mcaswell@ers.usda.gov


BRIEFS
Poor Winter Weather Reduces Beef Supply

Cold, wet conditions have limited cattle weight gain in 
feedlots since late November, resulting in lower 
marketing weights, delayed marketings, and a very tight 
supply of market-ready animals. With buyer demand 
strong, competition for the reduced supply of beef, 
particularly higher quality beef, has pressed retail 
prices above the record levels of the early 1990s. 

Poor weather conditions in recent months have given 
prices an extra boost and the market a view of the next 
couple of years. Overall cattle numbers continue to 
decline, putting a long-term squeeze on production. The 
total cattle inventory dipped slightly for the fifth 
straight year in 2000. Beef cows declined less than 1 
percent from 1999, while dairy cows rose less than 1 
percent. The total cow inventory was down 5 percent 
from the 1996 peak, and the downturn is unlikely to be 
reversed for at least the next several years.

The downward trend has been exacerbated by a sharp 
increase in cow slaughter this past winter and near-
record number of heifers slaughtered in 2000. 
Consequently, the number of beef cow replacement 
heifers calving and entering the herd is expected to be 
down this year. In addition, on January 1, 2001, the 
number of heifers on feed (and thus not entering the 
breeding herd) in the seven states that report monthly 
was up from the large numbers recorded in 2000 and 1999 
by 4 and 15 percent, respectively.

Total cattle-on-feed inventories on March 1 were up 3 
percent from a year earlier as the poor feeding 
conditions (plus one less slaughter day) resulted in 
the marketing pace declining 16 percent in February. 
The sharp slowdown in the slaughter pace has been 
partially offset by a spike in cow slaughter in the 
first quarter, after poor weather conditions forced 
producers to use rapidly tightening hay stocks. 
Although annual cow slaughter is expected to decline 
for the fifth consecutive year, first-quarter slaughter 
rose 9 percent above a year earlier. For the year, 
steer and heifer slaughter is expected to decline about 
4 to 5 percent, while cow slaughter drops 7 percent. 

Slaughter weights for federally inspected beef declined 
in December after running well above year-earlier 
levels since mid-spring 2000. With continued poor 
weather and feedlot conditions, weights in March were 
sharply lower. This past winter (2000/01) will likely 
go down as the worst feeding year since 1992/93 when 
feedlot conditions remained poor until well into 
spring.

Beef production declined nearly 7 percent in the first 
quarter (January-March) compared with first-quarter 
2000. Production in the second quarter (April-June) 
will be about unchanged from a year earlier as more 
production is pushed into the second quarter. Second-
half production will begin to fall well under year-
earlier levels, a result of the declining cattle 
inventory. For the year, beef production is forecast 
down 4 percent from 2000. 

With demand strong and total slaughter running well 
below expectations given record on-feed inventories, 
first-quarter fed cattle prices averaged $79 per cwt, 
up from $69 a year earlier. Prices averaged near $80 in 
early April, compared with $73.52 a year earlier. 
Prices are expected to remain strong in 2001, 
reflecting the reduced supplies, but the present price 
premiums will erode somewhat as feedlot conditions 
improve and marketings increase. 

Retail prices for USDA Choice beef soared in January 
and February, reflecting strong domestic and export 
demand and tight supplies. January’s average $3.21 per 
pound, up from the monthly record $3.13 set in 
September 2000, rose to $3.34 in February and March, 
the result of even tighter supplies. Prices will 
moderate from this high but should remain 5 to 10 cents 
above the 2000 annual record of $3.07 per pound. Both 
the farm-retail spread and cattle prices, which rose in 
January, will likely moderate as beef supplies increase 
this spring. Prices for Choice boxed beef in January 
eclipsed the December 1990 record of $129.48 per cwt 
and approached $135 in late February. First-quarter 
prices averaged $129.41. With seasonal moderation of 
feeding conditions, prices this spring are expected to 
decline. However, prices remained strong in April as 
feeding conditions remained poor.  
Ron Gustafson (202) 694-5174
ronaldg@ers.usda.gov

BEEF BOX

The current outbreak of foot and mouth disease (FMD) in 
the European Union (EU) and elsewhere is creating 
uncertainty in international meat trade. Officials have 
confirmed FMD cases in the United Kingdom, France, 
Netherlands, Ireland, and Argentina, as well as a 
number of other countries. 

FMD is a highly contagious and economically devastating 
disease of cattle and swine. It also affects sheep, 
goats, deer, and other cloven-hooved ruminants. 
Although many affected animals recover, the disease 
leaves them debilitated, causing severe losses in 
production of meat and milk. The disease does not 
affect humans or the safety of food. The virus can be 
spread by many different carriers, including humans, 
most uncooked meat products, manure, flies, water, and 
soil. To prevent FMD from entering the U.S., USDA in 
March intensified scrutiny and inspections at ports of 
entry and implemented a temporary import prohibition of 
swine, ruminants, and products that could potentially 
carry the virus from the EU and other countries that 
have confirmed cases of this animal disease.

As of mid-April, the U.S., Japan, and Russia (major red 
meat importers) continue to temporarily ban imports of 
live animals, frozen and chilled red meats, and other 
red meats from the EU and Argentina if the products do 
not meet certain processing standards to kill the FMD 
virus. 

The U.S. ban affects a relatively small share (10 
percent) of the U.S. red meat import market. In 2000, 
the U.S. imported $3.8 billion of red meat and 
products, including $278 million from the EU (pork) and 
$113 million from Argentina (mostly beef). Leading 
suppliers include Canada (beef and pork), Australia 
(beef and lamb), and New Zealand (beef and lamb). Beef 
from the EU was already banned due to concerns about 
bovine spongiform encephalopathy (BSE)--so-called “mad 
cow disease.” For more information, see the USDA 
website on FMD:
http://www.usda.gov/special/fmd/fmd.html


BRIEFS 
Farm Policy for the 21st Century: A Diversity of Visions 
for the Future

As the debate over the future of U.S. farm policy 
gathers momentum, a wide range of ideas has emerged 
regarding how to address the needs of farmers and other 
stakeholders in a new farm bill. The House of 
Representatives’ Committee on Agriculture began hearing 
testimony in mid-February from agricultural economists, 
commodity groups, and farm organizations on specific 
options and program designs for a new farm policy. The 
testimony has reflected a diversity of views on the 
shape farm policy should take in the future.

Most of these views have been fleshed out with 
significant detail regarding program design, and 
generally fall into three positions. One favors a 
continuation of traditional support programs with no 
supply controls, the second favors a return to supply 
controls, and the third favors a continued transition 
to a more market-oriented policy.

Proponents of Traditional Support
Focus on Economic Security

Continuation of traditional support programs has been 
advocated in testimony by most commodity groups and 
farm organizations before the House Agriculture 
Committee and characterized most of the views reported 
by the 21st Century Commission on Production 
Agriculture (AO April 2001). Those holding this 
position base their recommendations for new farm policy 
on agricultural market conditions since enactment of 
the 1996 Farm Act. In their view, the promise of 
increased market access and rising exports for U.S. 
commodities has not been realized and risk management 
programs were inadequate to address the price and 
production losses over the past several years, 
resulting in emergency assistance.

Proposals from these groups have all recommended some 
type of countercyclical income support program, 
although the details vary regarding trigger mechanisms 
and payment formulas. Proposals for triggers have 
included farm income, aggregate price, gross revenue, 
gross return per acre, gross cash receipts, or 
percentage of production cost, calculated at national 
levels, though some recommended state, regional, or 
county triggers.

Payments would be the difference between the current 
levels of the measure and the measure during some 
historical base period--generally mid-1990s to 2000--
multiplied by an eligibility factor, which varies among 
proposals. For this factor, some suggest historical 
area and yields, others propose average recent 
production, and some suggest the same eligibility as 
current production flexibility contract (PFC) payments 
(also called Agricultural Market Transition Act--AMTA--
payments). Some proposals recommend including 
government payments in calculating target income or 
price levels, but most do not. Nearly all proposals 
recommend covering the traditional program crops and 
adding oilseeds. 

Most proponents of traditional support programs have 
favored continuing the current PFC payments. About half 
have proposed increasing the amounts paid out through 
that program, and most, though not all, have 
recommended including additional crops, particularly 
oilseeds. 

Most also favor maintaining the current marketing loan 
program, although most recommend adjusting commodity 
loan rates upward to rebalance price relationships 
among covered crops with the level currently set for 
soybeans. Many suggest changes to increase flexibility 
in the operation of the marketing loan and loan 
deficiency payment programs, including allowing for 
pre-harvest lock-in of loan deficiency payment (LDP) 
rates, allowance for payments on grazed-out wheat 
acreage, ending the requirement of PFC payment 
eligibility to receive loan deficiency payments, and 
extending sign-ups and final dates for requesting loan 
deficiency payments through the marketing year.

All proponents of traditional support recommend 
eliminating payment limitations for the loan programs, 
and most advocate no means testing for participation in 
income support programs. At least one proposal, 
however, favored targeting of benefits to family-scale 
operations, both to secure public support for farm 
income assistance and to guard against further 
concentration of production.

Virtually all advocates of traditional support programs 
have recommended continuing the planting flexibility 
introduced in the 1996 Farm Act; however a small but 
vocal group recommends adoption of supply control 
programs to manage surpluses. They believe trade 
forecasts had been too optimistic when the 1996 Farm 
Act was enacted, overstating access to international 
markets as outlets for surplus domestic production. 
Their proposals included a voluntary supply management 
program that would provide higher marketing loan rates 
in return for fallowing land, as well as 
reauthorization of farmer-owned reserves, to assure 
adequate stocks and to provide a risk management tool 
for farmers. Other proposals suggest increasing 
humanitarian food aid donations and creating a farm 
storage program for government-owned surplus stocks 
designated for food aid and use as renewable fuels.

Market-Oriented Farm Policy
Focuses on Ag Sector Diversity

A more market-oriented view, presented both to the 
House Agriculture Committee and as a minority view 
within the 21st Century Commission report, was 
advocated by only a few, but is representative of a 
view that has surfaced in other farm policy 
discussions. Some of the details vary among groups and 
individuals who hold this position, but in most cases 
the view is based on the idea that the U.S. 
agricultural sector is diverse and therefore in need of 
a range of programs that will meet the needs of most 
groups without damaging the interests of others. The 
strongest proponents of a market-oriented farm policy 
broadly suggest that income support programs are not 
needed, since large farms produce adequate income; 
small farms depend on off-farm income, not farm 
programs; and mid-size farms need assistance to 
transition either to more profitable sizes or out of 
farming into more profitable enterprises. Others, 
particularly among some of the livestock commodity 
groups, favor more market-oriented programs because 
they are less likely to help one sector of the industry 
at the expense of another.

The strongest proponents have recommended converting 
spending now dedicated to direct payment programs 
toward two new sets of programs. For larger commercial 
farms, they recommend efforts focused on risk 
management, trade expansion, and a safety net for 
catastrophic market- or weather-related risk--a farmer-
run actuarially sound crop insurance system, coupled 
with a legislated automatic (not emergency) disaster 
payment, for example. For smaller farms, they suggest 
rural development programs and technical assistance in 
adopting new technologies and developing greater 
economies of scale. 

Those holding the stronger position oppose establishing 
a new countercyclical income support payment, arguing 
it would be absorbed into land prices and rents and 
thereby provide incentives for farm operations to grow 
larger in order to afford the cost of land. Most also 
recommend ending the decoupled PFC payment, 
particularly if a new countercyclical program is 
adopted, since the purpose of fixed payments--to ensure 
farmers the benefits (and costs) of market price 
changes--would be undermined by countercyclical support 
payments that flattened out income across high- and 
low-price years. 

All proponents of a market oriented policy oppose 
acreage set-asides and on-farm storage programs, 
because of their tendency to distort market prices.

Proposals Address Trade, 
Concentration, & Environment

Although recent House hearings have been focused 
primarily on commodity price and income support policy, 
most groups submitting testimony have called for 
expanded trade. Proponents of both the market-oriented 
and traditional support approaches favor improved 
access to foreign markets and the exclusion of food 
from unilateral sanctions, but many who propose more 
traditional support programs also suggest stronger 
export promotion programs. Some have also advocated 
negotiating allowances in trade agreements for measures 
to offset the negative effects of exchange rate 
fluctuations, to protect against competitive advantages 
based on lower regulatory standards, and to address 
unique incidents such as weather disasters or import 
surges. A few have suggested that global solutions be 
developed for supply, demand, and price issues common 
to all farmers.

Of particular concern to a number of groups favoring 
traditional support was increasing concentration, 
particularly in the input and processing sectors. Those 
sharing this concern recommended vigorous enforcement 
of current antitrust regulations, as well as enhanced 
government, particularly USDA, authority to investigate 
and regulate business organizations and alliances, to 
review the concentration implications of government 
research and patenting procedures, and to provide 
relief and damages for anticompetitive and market 
distorting practices. They further recommended efforts 
to secure international cooperation in addressing 
anticompetitive behavior on a global basis.

All of the groups have been in agreement in their 
recommendations for continuing public expenditures on 
research and technical assistance. Proposals have been 
made for increased research in the areas of food 
safety; new technologies, including biotechnology; 
disease prevention; and environmental quality. Some 
have recommended increased research into the 
implications of structural change, particularly 
increased concentration.

Virtually all agree on the need for programs designed 
to assist farmers in meeting conservation goals and 
environmental mandates. Recommendations include 
increased technical assistance, cost-share programs, 
and incentive payments for adoption of environmentally 
beneficial practices. Many also favor expanding land 
retirement for conservation, although there was more 
disagreement on this kind of conservation proposal 
because of its production reducing effect.

Supporters of the market-oriented view have recommended 
that farm payment programs focus more attention on 
environmental stewardship, given growing concern among 
the nonfarming public about environmental impacts of 
agriculture and the safety of food production.

As debate continues, new policy ideas and program 
designs will undoubtedly emerge. But most will likely 
fall within the general positions outlined here, 
leaving the details of these diverse proposals 
increasingly the focus of discussion. 

As the detail already presented in testimony to the 
House Committee reveals, balancing competing demands 
and differing views will be challenging. Add to that 
the need to meet commitments within the World Trade 
Organization and to remain within limits on Federal 
spending, and the difficulty of the task becomes even 
more apparent.

Further articles in this series will consider a number 
of these policy ideas and program designs in greater 
detail and will consider the diversity of underlying 
goals for farm policy that have generated the range of 
proposals entered thus far in the debate.  
Contacts: Anne B. W. Effland (202) 694-5319 and Edwin 
Young (202) 694-5336
aeffland@ers.usda.gov; ceyoung@ers.usda.gov

NOTE: Testimony presented to the U.S. House Committee 
on Agriculture is available on the Committee’s website: 
www.agriculture.house.gov/comdty.htm


COMMODITY SPOTLIGHT
Expanded Soybean Plantings in 2001 to Match Corn Levels

U.S. farmers encountered varying price signals among 
major field crops as spring planting time approached 
this year. Prices increased about 10 percent from last 
year for winter wheat and 3 percent for spring wheat 
(including durum), but declined 5 percent for corn, 15 
percent for soybeans, and 16 percent for cotton. These 
expected farm price changes were based on new crop 
futures quotes for harvest time delivery in mid-March 
for spring crops and mid-October for winter wheat.

Benefits from marketing loans continue to be important 
for planting decisions, particularly in upholding 
producer incentives (per-unit returns) for soybeans and 
cotton. Higher fertilizer and fuel costs also affected 
planting intentions. 

Producers’ net response was a 3-million-acre decrease 
in planting intentions for the eight major U.S. field 
crops (corn, soybeans, wheat, barley, sorghum, oats, 
cotton, and rice) from last year’s planted acreage. 
However, acres harvested for hay crops are expected to 
expand by almost 4 million, more than offsetting the 
decrease for the major field crops.

Planting intentions for the eight major field crops 
total 251.5 million acres in 2001, down 1.3 percent 
from last year’s planted area and 3.6 percent below the 
most recent peak in 1996. Farmers intend to plant a 
record 76.7 million acres of soybeans, 3 percent higher 
than in 2000 and the tenth straight increase. Corn 
plantings are down 4 percent to 76.7 million, wheat 
plantings down by 4 percent to 60.3 million, and cotton 
area, 15.6 million acres, is the largest since 1995. 

Trend yields, along with planting intentions, suggest a 
corn crop about 5 percent smaller than last year and a 
record U.S. soybean crop in 2001. For wheat, production 
prospects hinge on how much of the late-planted wheat 
in the Southern Plains is harvested for grain and on 
the magnitude of yields for the surviving wheat. 

Farmers’ planting intentions continue to show the 
effects of the 1996 Farm Act, which has allowed farmers 
more flexibility to respond to market signals by 
changing their enterprise mix. For example, with 
producers’ participation in farm programs no longer 
tied to base acreage planting requirements and acreage 
reduction restrictions, farmers are free to pursue 
soybeans’ relatively high net returns that are due 
largely to higher expected loan deficiency payments 
(LDPs) compared with other crops. Soybean plantings 
grew by more than 12 million acres between 1996 and 
2001 (assuming 2001 intentions are realized), and for 
the first time since 1983, match intended corn 
plantings. 

Soybean acreage has expanded in the wheat-dominated 
Central and Northern Plains. Some wheat acreage in the 
Central and Northern Plains was also switched to minor 
oilseeds, such as canola and flaxseed. Sunflower 
plantings are expected down again this year to 2.7 
million acres to make way for higher-net-return canola 
and flaxseed. As a result, U.S. farmers intend to plant 
a record 1.9 million acres of canola this year (nearly 
double the 1999 level), reflecting higher per-unit 
returns than sunflower and fewer disease problems in 
canola production.

Soybeans. Intended soybean acreage for 2001 is 76.7 
million acres--3 percent above last year’s acreage. The 
key factor enticing producers to grow soybeans this 
year is the relatively high expected marketing loan 
benefits for soybeans compared with other crops. 
Soybean acreage in Iowa and Illinois--the two leading 
soybean producing states--is expected to increase 2-3 
percent over last year’s levels.

Unlike last year, the increase in intended soybean 
plantings in the Corn Belt outpaces gains in the 
Central and Northern Plains this year. Soybean 
plantings in the Corn Belt are expected to expand 1.5 
million acres, with advances concentrated mostly in 
Minnesota (0.3 million), Iowa (0.3 million), Wisconsin 
(0.25 million), Illinois (0.2 million), and Ohio (0.2 
million). Soybean plantings in the Central and Northern 
Plains are expected to be up 1.1 million acres (up 0.5 
million in North Dakota, 0.3 million in South Dakota, 
and 0.2 million in Nebraska) as wheat acreage switches 
to soybeans. 

In contrast, farmers in the Delta and Southeast intend 
to decrease soybean plantings for the fourth year after 
a spike in 1997, especially in Mississippi (200,000 
acres), Tennessee (130,000 acres), and Louisiana 
(110,000 acres). Poor soybean yields in these areas 
over the last few years have made cotton a more 
attractive alternative. Partially offsetting the 
decreases are increases in soybean plantings in 
Kentucky (50,000 acres) and South Carolina (30,000 
acres). 

Marketing loan provisions make soybean production 
attractive to many producers across the U.S. The 
relatively high loan rate and the potential for 
marketing loan gains (repayment of government loans 
below the original loan rate) and LDPs are expected to 
provide a higher per-bushel net return than for 
competing commodities when the market price falls below 
the commodity loan rate. Other factors in the record 
expansion of soybean acreage since 1996 include: 1) 
planting flexibility under the 1996 farm legislation; 
2) adoption of the popular biotech herbicide-tolerant 
soybeans--reaching a 63-percent adoption rate (up from 
54 percent last year), which reduces input costs for 
many farmers and increases profit potential; and 3) 
higher per-acre costs of fertilizer and energy inputs 
in corn production (see sidebar).

Corn. Corn growers intend to plant 76.7 million acres 
in 2001, down nearly 4 percent from last year’s planted 
acreage mainly because of 1) higher per-acre costs of 
fertilizer and fuel in corn production, and 2) a 5-
percent-lower expected corn price as reflected in the 
new crop December futures price in mid-March, right 
after the intentions survey was taken by USDA’s 
National Agricultural Statistics Service.

To many producers in Illinois and Iowa, corn net 
returns anticipated for the new crop appear less 
attractive than returns for soybeans. Like last year, 
marketing loan provisions entice producers to grow 
soybeans. In addition, higher fertilizer and fuel costs 
this year in corn production (relative to soybeans) 
induce more soybean plantings. These two factors 
combine to boost the soybeans-to-corn price ratio at 
active planting decision times (around mid-March) to 
around 2.62 to 1. This ratio suggests that soybeans 
will be more profitable than corn in these two states 
and others in the Corn Belt. Most of the 0.4-million-
acre decline in corn plantings in Iowa, for example, 
probably indicates a switch from corn to soybeans--a 
pattern that is widespread throughout the entire Corn 
Belt region.

Intended corn plantings in the Corn Belt this year are 
down 1.5 million acres across the entire region. Iowa 
leads the decline (0.4 million), followed by Minnesota 
(0.3 million), and Ohio (0.2 million), Indiana (0.2 
million), and Illinois (0.2 million). Intended corn 
acreage is down throughout the Central and Northern 
Plains as well, a decrease of 0.8 million acres. Key 
states showing the largest decline are Colorado (0.2 
million), South Dakota (0.2 million), Nebraska (0.2 
million), and North Dakota (0.1 million). The expansion 
in soybean plantings in North Dakota--an increase of 
0.5 million acres--is a shift not only from corn but 
also from durum wheat and sunflowers. 

Intended corn acreage is also down throughout the 
entire South (the Delta, Southeast, and Southern Plains 
regions). Texas leads the decline (0.2 million) as 
planting was hampered by frequent rains during the 
spring, followed by Louisiana (0.1 million) and Georgia 
(0.1 million). In all, intended corn plantings are down 
0.7 million acres in the South. Most of the land not 
being planted to corn in Texas will probably be 
switched to hay or other competing crops.

Intended adoption of biotech corn varieties is about 24 
percent this year, down slightly from 25 percent last 
year. Plantings of insect-resistant (Bt) corn varieties 
(excluding stacked-gene varieties) are expected to 
reach 16 percent of all corn acres, down from 18 
percent last year.

Other feed grains. Among other feed grains, only 
sorghum planting intentions show an increase--2 percent 
above last year’s planted acreage. Intended sorghum 
plantings are up 100,000 acres in Kansas, the largest 
producing state, followed by New Mexico (35,000), 
Colorado (20,000), Louisiana (20,000), and Oklahoma 
(20,000). Sorghum production requires less water 
relative to corn and thus saves on irrigation costs, 
which become a concern because of higher energy prices 
this year. The relatively strong sorghum prices also 
promote added acres from last year. In contrast, 
intended sorghum plantings in Texas are expected to be 
down 100,000 acres.

Intended barley plantings are down 300,000 acres in 
North Dakota, the leading barley-producing state, due 
to lower expected prices. Much of the cropland not 
planted to barley could be switched to more profitable 
competing crops, such as soybeans and canola. Other 
states showing large declines are Washington (100,000 
acres) and Montana (50,000 acres). Intended oat acreage 
is down 2 percent from last year’s planted acreage, 
with most of the decline in North Dakota (50,000), 
Wisconsin (50,000), and Iowa (40,000). In contrast, oat 
plantings in Texas are expected to be up 100,000 acres.

Wheat. Wheat area intentions for 2001 total 60.3 
million acres--down about 4 percent from last year’s 
planted area. USDA’s Winter Wheat Seedings report 
indicated in January that farmers had planted 41.3 
million acres of winter wheat for harvest in 2001, down 
5 percent from last year and the lowest since 1971. The 
March planting intentions survey confirms this level of 
winter wheat plantings.

The expected price of winter wheat facing producers at 
planting time last fall actually showed a 10-percent 
increase over a year earlier, based on new-crop futures 
prices at harvest time. The higher expected price would 
have induced more winter wheat plantings, under 
favorable weather conditions. However, dry soil 
conditions followed by prolonged wet conditions delayed 
and reduced seeding progress and even slowed emergence, 
leading to a decline in winter wheat plantings, mostly 
in the Southern Plains. Oklahoma and Texas led the 
decline, down 700,000 and 300,000 acres. In these two 
states, dry conditions were followed by excessive 
rainfall, which further hindered seeding progress. Much 
of the unseeded winter wheat acres in Texas are 
probably switched to hay. Area harvested for hay in 
Texas is expected to be up almost 2 million acres, 
nearly half of the increase in hay acres nationwide.

In Montana, winter wheat acreage was down 0.3 million 
acres from last year, chiefly due to dry conditions. 
Most of the unseeded winter wheat acres in this state 
will apparently be switched to hay, not spring wheat. 
Areas harvested for hay are expected to be up 0.5 
million acres. Similarly, soft red winter (SRW) wheat 
area is down 6 percent from last year, at about 8.9 
million acres, with declines mostly in Illinois (0.15 
million), Missouri (0.15 million), and Kentucky (0.12 
million). Excessive soil moisture in southern Illinois 
and dry conditions across most of the Southeast slowed 
planting progress. 

In 2001, U.S. farmers intend to plant only 2 percent 
more of other spring wheat than last year. The expected 
price for hard red spring (HRS) in mid-March was only 1 
percent higher than last year, suggesting not much 
increase in HRS plantings this year. Intended plantings 
for durum wheat showed a 12-percent decrease from last 
year, reflecting cancellation of the durum Crop Revenue 
Coverage (CRC) program due to administrative 
difficulties. Anecdotal evidence suggests that final 
durum wheat plantings could differ from intentions 
because some farmers had returned their intention 
survey questionnaires before USDA announced the CRC 
cancellation midway through the survey period. Durum 
plantings were particularly high last year due to the 
CRC revenue guarantee. Prospective durum wheat 
plantings are down 0.5 million acres, mostly in North 
Dakota, the leading durum-producing state. In North 
Dakota, hard red spring (HRS) wheat intended plantings 
are up 0.3 million acres, continuing last year’s shift 
from durum to HRS wheat. Some unseeded durum wheat 
acres will probably be switched to hay, contributing to 
an increase of 0.25 million acres in hay plantings, or 
soybeans. 

Cotton. Planting intentions for cotton total 15.6 
million acres, similar to last year’s planted acreage. 
The expected producer incentive price (after accounting 
for marketing loan benefits) for growing cotton 
probably was down somewhat in mid-March from a year 
earlier. With the expected per-unit return down by 
about 2 percent in 2001 (after adjusting for marketing 
loan gains and LDPs), cotton plantings are still 
attractive relative to competing crops such as corn, 
wheat, and sorghum. 

Recent changes in the crop insurance program that have 
improved cotton’s financial viability also help explain 
farmers’ planting intentions. In some Southern and 
Delta counties of Mississippi, producer’s net premium 
for 75 percent cotton insurance coverage dropped by as 
much as 20 percent for the 2001 crop year as a result 
of a general re-rating of the cotton program. Also, the 
Agricultural Risk Protection Act of 2000 (ARPA) made 
permanent the ad hoc premium subsidy increases of the 
past 2 years. Because the participation rate of cotton 
producers in the crop insurance program is already 
high, there is little room for growth. However, it is 
likely that growers will purchase higher coverage 
levels, which are now more affordable as a result of 
ARPA’s increased subsidies for higher coverage levels.

With total cotton area anticipated marginally higher in 
2001, offsetting changes were reported. The bulk of the 
increases are expected in four states: Mississippi, 
North Carolina, Arkansas, and Louisiana. However, high 
irrigation and fertilizer costs as well as uncertain 
water supplies have reduced incentives for growing 
cotton in Texas (down 400,000 acres) and California 
(down 70,000 acres).

The adoption of biotech cotton varieties increased to 
64 percent of all cotton acres, up from 61 percent last 
year. Both herbicide-tolerant and stacked-gene 
varieties show increases of 2-3 percentage points over 
last year. In contrast, Bt cotton is expected to 
account for 13 percent of total area, down from 15 
percent last year.

Rice. Rice growers indicated plantings of nearly 3.1 
million acres in 2001, up about 1 percent from a year 
earlier, with long grain plantings up 8 percent and 
combined medium/short plantings down 17 percent. 
Reduced plantings of medium grain rice in Arkansas, 
California, and Louisiana account for almost all of the 
intended reduction in U.S. rice acreage in 2001, a 
result of extremely low prices for medium grain rice 
this year. In contrast, growers across the South intend 
to expand long grain rice acreage, with Arkansas and 
Louisiana accounting for most of the acreage. Long 
grain prices have been supported by expectations of 
extremely tight supplies by the end of the 2000/01 
marketing year, a result of a more than 13-percent drop 
in long grain production in 2000. Drought and 
salination problems reduced Louisiana’s 2000 plantings.

Hay. U.S. farmers intended to greatly expand the area 
harvested for hay crops this year, up 7 percent from 
last year. This 4-million-acre increase in hay area 
would more than offset the 3-million-acre decrease in 
planting intentions for the eight major field crops. 
Key states showing the largest increases are Texas (up 
1.8 million acres), Montana (up 0.5 million acres), 
North Dakota (up 0.35 million acres), as well as 
Colorado, Minnesota, South Dakota, Missouri, Oklahoma, 
Wyoming, and Kansas. Drought in the Southern Plains 
last year drew down hay stocks, which are important 
feedstuffs for beef cattle and dairy operations, and 
raised hay prices. Much of the unseeded winter wheat 
acres in Texas and Montana and some corn acres in Texas 
will probably be switched to hay.  
William Lin (202) 694-5303
wwlin@ers.usda.gov

For further information, contact: Gary Vocke, domestic 
wheat; Ed Allen, world wheat and feed grains; Allen 
Baker, domestic feed grains; Nathan Childs, rice; Mark 
Ash, oilseeds; Steve MacDonald, world cotton; Les 
Meyer, domestic cotton. All may be reached at (202) 
694-5300.

NOTE: 
These estimates are based on farmer surveys conducted 
by USDA’s National Agricultural Statistics Service 
during the first 2 weeks of March. USDA’s Prospective 
Plantings report for 2001, released on March 30, 
provides the first indication of farmers’ spring 
planting intentions for major field crops. With adverse 
weather or significant changes in crop prices, actual 
plantings could vary from intentions. For example, 
persistent wet conditions this spring could delay corn 
plantings and cause an even greater switch from corn to 
soybeans. USDA will release acreage estimates in its 
June 30 Acreage report, after crops have been planted 
or when planting intentions are more definite. The 
March Prospective Plantings report is available at 
http://usda.mannlib.cornell.edu/ and the June Acreage 
report will be available at 
http://usda.mannlib.cornell.edu/reports/nassr/field/pcp
-bba/

COMMODITY SPOTLIGHT BOX
How Did Soybean Plantings Catch up with Corn?

U.S. farmers this year intend to grow 76.7 million 
acres of soybeans, matching the level of corn planting 
intentions for the first time since 1983 when soybean 
plantings exceeded corn due to drought and the payment-
in-kind program. This analysis illustrates how soybean 
planting intentions changed from last year as a result 
of changes this year in price-related factors, 
including benefits from marketing loans, prices of 
competing crops, and higher fertilizer and fuel costs 
in corn production. 

Farmers can receive marketing loan benefits through 
loan deficiency payments and through marketing loan 
gains. Whenever the market price for an eligible field 
crop drops below its applicable commodity loan rate, 
farmers may opt for revenue-boosting loan deficiency 
payments (LDPs) in lieu of securing a commodity loan. 
(Commodity loans provide interim financing to producers 
of eligible commodities, regardless of market price 
levels--farmers pledge crops as collateral and receive 
loans at a specified rate--the loan rate--per unit of 
commodity.) The loan deficiency payment rate equals the 
difference between the commodity loan rate and the 
local, posted county price (PCP). Alternatively, 
eligible farmers realize a marketing loan gain by 
repaying outstanding commodity loans at a per-unit 
rate--the posted county price--when the PCP is below 
the loan rate. 

During 1999-2000, marketing loan benefits (LDPs and 
marketing loan gains) raised expected soybean per-unit 
returns by an average 4.8 percent over an average farm 
price of $5.14 per bushel based on November new crop 
futures prices in mid-March. Benefits are based on the 
announced loan rate of $5.26 per bushel. As a result, 
the program raised the soybeans-to-corn price ratio 
from an average of 2.33 in 1999 and 2000 to 2.38 during 
the same period. In 2001, marketing loan benefits 
raised per-unit returns by 28 percent over the expected 
farm price, thereby raising the soybeans-to-corn price 
ratio from 1.98 (based on market prices) to 2.53. Thus, 
marketing loan benefits are a major factor enticing 
producers to grow soybeans this year, but with per-unit 
soybean returns (price plus LDP) unchanged from last 
year, the benefits do not cause soybean planting 
intentions to deviate from last year’s levels. 

Among prices of competing crops, change in the expected 
farm price of corn had a larger effect on soybean 
plantings this year. Based on new crop December futures 
prices, the expected farm price of corn is estimated at 
$2.178 per bushel, which is 5 percent lower than last 
year’s level. According to estimates by USDA’s Economic 
Research Service (ERS), a 1-percent decrease in the 
expected corn price would lead to a 0.145-percent 
increase in soybean plantings. ERS estimates that this 
increase would expand soybean plantings by 0.73 percent 
or 500,000 acres.

Higher fertilizer and fuel costs in corn production, 
reflecting the effect of higher natural gas prices over 
the last year or so, represent another important factor 
in the expansion of soybean plantings this year, 
because corn production uses significantly more 
nitrogen fertilizer relative to soybeans. In March 
2000, prices of natural gas averaged about $6.82 per 
thousand cubic feet, up from $6 in March 1999. By 
December 2000, natural gas prices climbed almost 50 
percent to nearly $10 per thousand cubic feet. Because 
natural gas accounts for up to 90 percent of the cost 
of producing fertilizer, higher natural gas prices have 
had a significant effect on commercial fertilizer 
prices, particularly nitrogen.

According to a cost budget prepared by the University 
of Illinois Extension Service, nitrogen costs in corn 
production will increase by $7 per acre this year 
because of higher nitrogen fertilizer prices. In 
addition, higher fuel prices would increase fuel cost 
by about $3 per acre. In contrast, higher nitrogen 
fertilizer and fuel prices have either no or very 
little impact on the costs of soybean production. 
Assuming an increase of $10 per acre in the cost of 
corn production (relative to soybeans) in Illinois is 
the same as in other major producing states, this per-
acre cost increase is equivalent to a decrease of 
$0.0735 per bushel. in the farm price of corn (assuming 
a trend yield of about 136 bushels per acre), which is 
about 4.59 percent of the expected corn farm price 
($2.178 per bushel.) based on new crop December futures 
prices in mid-March. An equivalent decrease in the corn 
price would lead to an increase in the soybeans-to-corn 
price ratio from 2.53 (adjusted for the marketing loan 
program) to 2.62. Given the response of soybean 
plantings to a 1-percent change in the corn farm price 
estimated at -0.145 percent, the equivalent price 
effect increases soybean plantings by 0.67 percent, or 
500,000 acres of corn land that could be switched to 
soybean plantings. 

Thus, both the lower expected corn price and higher 
per-acre costs of fertilizer and fuel in corn 
production appear to have a large effect in explaining 
the change in soybean planting intentions from last 
year’s 74.9 million acres to this year’s 76.7 million. 
Higher soybean plantings also result from shifts out of 
other crops. For example, soybeans replaced SRW wheat 
areas in the Corn Belt, durum wheat and sunflower acres 
in North Dakota, and barley and oats in the northern-
tier states. Crop rotation considerations and the 
limited supply of quality soybean seed (due to 
germination problems) may constrain a further switch 
from corn to soybeans in 2001.


WORLD AGRICULTURE & TRADE
Forces Shaping Global Food Demand and Agricultural 
Trade

Recent shifts in trade patterns reveal dramatic changes 
in global food demand that will likely continue well 
into the future. Driving these shifts are changes 
taking place in both developing and developed 
countries, particularly income growth. Food purchasing 
power has increased for most consumers in the world as 
average real per capita income levels doubled from 1960 
through 1998. In some countries with limited natural 
resources, food imports have helped lower domestic 
prices and thereby increased purchasing power. Growth 
in urbanization, interest in food quality, and concerns 
about food safety standards are also shaping demand and 
influencing future prospects for food consumption and 
international trade.

Changing Composition
Of Agricultural Trade

The composition of world agricultural trade by 
commodity has been evolving over the last two decades. 
Bulk commodities (primarily grains and oilseeds) now 
make up less than 30 percent of the value of world 
agricultural trade, compared with 41 percent in 1985. 
Trade in intermediate processed products (semiprocessed 
bulk commodities like vegetable oils, meals, and 
flours) has kept pace with the overall level of world 
agricultural trade. Processed consumer-oriented 
products such as meat, beverages, bakery products, and 
snack foods make up a growing share of global food 
trade. Fresh horticultural products, because of their 
perishability, remain a small share of trade despite 
technological advances that preserve quality during 
transit and extend shelf life. 

Import demand for bulk commodities is tied more closely 
to increased caloric intake and population growth than 
is demand for processed consumer products. Developed 
countries’ value of bulk commodity imports is stagnant, 
but bulk imports by developing countries are growing, 
rising to over 50 percent of world bulk trade in 1995 
from near 40 percent in the 1980s. Imports of both food 
grains and feed grains by developing countries have 
grown steadily, while growth in nonbulk imports by 
developing and developed countries (4.5 percent and 4.6 
percent) has remained nearly constant over the last two 
decades.

Sustained import growth of nonbulk commodities by 
developed countries raises the question of whether 
population growth and increasing food consumption are 
the sole drivers of trade in processed products. Growth 
in two-way trade of high-value food products has 
boosted global food trade as individual countries 
export and import similar and competing products. Given 
this phenomenon, trade can expand without growth in 
consumption. An example of growth in intra-industry 
trade between high-income countries is the U.S. 
exporting high-quality beef at the same time it imports 
a greater volume of lower quality beef. Similarly, the 
U.S. imports high-value dairy products--mainly in the 
form of cheese--but exports lower valued dairy products 
such as powdered milk and whey products. And demand for 
foreign brands of packaged or bottled products has made 
beverages one of the faster growing categories in world 
food trade.

Shifts in the composition of U.S. agricultural exports 
have been particularly dramatic. In 1980, bulk exports 
accounted for nearly 70 percent of the value of total 
U.S. agricultural exports but the share declined 
steadily to less than 40 percent in 1998. With 
relatively low bulk prices in the late 1990s and with 
slow volume growth, the value of U.S. bulk trade in 
1998 was below the value in 1980. As world demand for 
meat expanded, U.S. meat and meat product exports 
multiplied sevenfold--from $900 million in 1980 to $6.5 
billion in 1998, and the meat share of total U.S. 
agricultural exports grew from 2.1 percent to 12.6 
percent. 

Income & 
Food Consumption

Income growth and subsequent changes in food 
consumption are key elements of shifts in global food 
demand and trade patterns. Real per capita income grew 
by almost 100 percent, on average, among most countries 
during the last four decades. Although real per capita 
income in 1998 was just over US$500 for low-income 
countries compared with almost US$28,000 for high-
income countries, income growth among developing 
countries between 1961 and 1998 (221 percent for lower 
income developing countries) has generally surpassed 
that for the developed countries (173 percent for 
higher-income developed countries). Large gains in per 
capita income have resulted in significant changes in 
food consumption patterns, especially for higher income 
developing countries.

Often the best available measure of food consumption is 
the supply or availability of food in a market. Per 
capita global food availability has increased from 
about 2,255 calories per day in 1961 to 2,792 in 1998. 
In addition to a general increase in total available 
foodstuffs, the basic sources of calories are changing, 
with animal and horticultural products accounting for a 
growing share of total calories consumed. Per capita 
global availability of meat and of fruits and 
vegetables increased by more than 60 percent between 
1961 and 1998, while the supply of roots and tubers 
decreased by over 21 percent. World cereal supply also 
increased by almost 17 percent during the same period.

Shifts in food consumption patterns tend to vary among 
countries based on their level of economic development. 
At the highest income levels, per capita consumption 
(as indicated by food availability) of both cereals and 
roots and tubers decreased between 1961 and 1998, while 
consumption of meat and produce increased 
substantially. In low-income countries, where food 
security remains a concern despite recent economic 
gains, decreases in root and tuber availability were 
more than offset by dramatic increases in per capita 
supply of all other food types.

Despite these gains, per capita availability of meat 
and fruit and vegetables in low-income countries 
remains far below availability in middle- and high-
income countries. With the exception of roots and 
tubers, food supply substantially increased in middle-
income countries. In contrast to high-income countries, 
consumption of cereals in all developing countries 
continued to increase during 1961-98, by almost 32 
percent in low-income and 12 percent in middle-income 
countries. Demand for livestock feed resulting from 
rising demand for meat accounted for part of the 
increase.

Differences in total food availability between 
developed and developing countries are also reflected 
in their respective food budget shares. In low-income 
countries, food accounts for a greater portion (47 
percent) of consumers’ total budget than in wealthier 
countries where, on average, food expenditures account 
for only about 13 percent. Staple food products such as 
cereals, fats and oils, and fruits and vegetables 
account for larger shares of the total food budget in 
low-income countries than in high-income countries. 
(Because data for fruits and vegetables include roots 
and tubers--cereal substitutes in poorer countries--
they are categorized here as staples.) Meat and dairy 
account for a greater share of the food budget in high-
income countries.

Estimates of countries’ responses to income shocks can 
be used to assess future global food needs. Forecasts 
of food demand, trade, and demand for associated 
transportation and infrastructure facilities assist 
policymakers in allocating resources. Income elasticity 
of food items--a measure of responsiveness of quantity 
of food demanded to a unit change in income--is greater 
in poorer countries than in wealthier ones. This means 
that when income rises, increases in food consumption 
expenditures are greater in poorer countries than in 
wealthier countries, and the consumption changes are 
not distributed evenly across all food groups. With 
income gains, low-income countries increase food 
consumption spending most on higher value items such as 
fish and dairy and least on cereal consumption.

Urbanization & 
Food Consumption

Food preferences change as populations become more 
urbanized. Because of urban/rural differences in 
lifestyles, demands on time, food availability, and 
disposable income, the diets of urban and rural 
residents generally differ significantly. Consumers in 
urban areas have better marketing facilities and a 
greater supply of products from domestic and foreign 
producers than consumers in rural areas. Urban 
occupations are often associated with higher pay scales 
than rural areas, which are often highly dependent on 
low-paid agriculture. 

Moreover, given the subsistence nature of agriculture 
in many developing countries, food consumption choices 
in rural areas are often constrained by residents’ 
ability to sell their output because the income is used 
to purchase other food. With economic opportunities in 
urban areas more numerous than in rural areas and a 
greater percentage of women in the labor force, studies 
indicate that the increased opportunity cost of meal 
preparation increases demand for nontraditional fast 
food in many countries. 

The effects of urbanization on diet differ from country 
to country. For poorer countries, urbanization may 
initially lead to substitution of marketed staple 
cereals and processed foods for basic rural staples 
such as rice and cassava. For example, FAO data for the 
1970s and 1980s indicate significant increases in wheat 
consumption in urban China and India along with 
decreases in coarse grain and rice consumption. 
Further, wheat consumption increased somewhat in rural 
areas while rice consumption remained stable. With 
further gains in income levels, food consumption 
expenditures may rise and shift toward increasingly 
expensive sources of nutrients such as meat, fruit, and 
vegetables, instead of staples such as cereals prepared 
at home.

Alternate demands for time in dual-income households 
have resulted in increased preferences for higher 
value, more processed products in many higher income 
countries. In addition, demand for quality and 
increased awareness of health and safety issues have 
significantly changed food consumption patterns in 
wealthier countries. For example, due partly to health 
concerns and to relative prices, the red meat share of 
total U.S. meat consumption declined from 79 percent in 
1970 to 62 percent 30 years later, while the poultry 
share increased from 21 to 38 percent. Similarly per 
capita fruit and vegetable consumption in the U.S. 
increased 25 percent between 1977 and 1999.

Future growth in the urban population is particularly 
important in developing countries. In 1960, developed 
countries accounted for about one-third of the world’s 
urban population. However, by 1998, developed countries 
accounted for only about one-fifth of the 3.4 billion 
global urban population. Assuming continuation of 
growth rates seen in the 1990s, urban population in 
developing countries can be expected to double to 
nearly 4 billion by 2020. Therefore, the effects of 
future dietary changes associated with urbanization 
will be most evident in developing countries.

Demand for Food
Quality & Safety

Increased affluence and education are changing 
consumers’ choices of food products in developed 
countries, and standards for quality and safer food 
products increase with a nation’s wealth. Countries 
vary in how they perceive and handle risks from 
disease-causing organisms, based generally on access to 
and use of advances in science, detection technology, 
and mitigation methods. Accordingly, wealthier 
countries with more information about food safety risks 
tend to establish more stringent food safety standards 
for both domestically produced and imported food. And 
lower income countries are more concerned with 
sufficient food availability.

Major incidents of illness associated with food 
consumption have greatly increased consumer concern 
about food safety in recent years, leading to lasting 
changes in consumer perceptions and food purchasing 
patterns in certain developed countries. For example, 
recent outbreaks in Europe of bovine spongiform 
encephalopathy (BSE)--known as mad cow disease--have 
led to dramatic declines in beef consumption there and 
significant economic losses for associated industries. 
In the first year of the crisis, the UK’s total 
economic loss from BSE was estimated at US$1.2-1.6 
billion. 

Disease outbreaks have also fostered consumer interest 
in purchasing organically produced foods, supporting 
production processes that are environmentally 
friendly, and encouraging farming operations that take 
animal welfare concerns into consideration, though 
these activities may not necessarily factor into 
protection from disease transmission. Worldwide markets 
for organic foods--though small--are expanding, and 
interest in organic foods is greatest in higher income, 
better educated population segments in nearly every 
country. As many as 20 to 30 percent of consumers 
surveyed in Europe, North America, and Japan report 
purchasing organic foods regularly. Sales of organic 
foods have risen 15 to 30 percent in Europe, the U.S., 
and Japan for more than 5 years. Animal welfare 
concerns have led to changes in food production and 
marketing. For example, in most Western European 
countries, new regulations impose restrictions on 
livestock and dairy producers and processors, besides 
detailing conditions under which farm animals may be 
raised, fed, and slaughtered. 

The public and private sectors are responding to 
consumer demand for quality and other attributes by 
developing and implementing mandatory and voluntary 
schemes for quality control management and assurance. 
These schemes--adopted at the national or regional 
level--are causing changes in the way food items are 
produced, marketed, and traded in Europe, and to some 
extent in the U.S. Quality assurance schemes, besides 
developing standards for production, processing, and 
transport, may include standards for environmental 
management practices. 

Among the potential outcomes of imposing standards is 
an increase in agricultural production costs. For 
example, a standard requiring producers to limit the 
number of animals in a given area means either that 
additional land must be purchased or that fewer animals 
may be kept, and the associated increase in per-unit 
cost may result in higher prices for the consumer. Many 
consumers may value the added benefits to society from 
production process standards and may be willing to pay 
for these benefits. But some consumers may prefer to 
purchase a cheaper foreign product that is not subject 
to the same standards and thus costs less to produce.

In general, any policy that imposes costs on domestic 
firms that foreign firms do not face can potentially 
put the domestic firms at a disadvantage. Domestic 
firms understand the consequences of differences in 
regulation among countries, and sometimes apply 
political pressure on legislators to block imports from 
countries that do not have similar regulations or to at 
least take some policy action to reduce the competitive 
advantage of less regulated foreign suppliers. 

What’s Ahead for Global
Food Consumption & Trade?

As food consumption reaches a state of maturity in 
developed countries, developing countries will no doubt 
play a more important role in world agricultural trade. 
This trend is already evident in bulk trade. Population 
and income growth will create additional demand for 
food in developing countries, but limited resources 
will likely constrain food production in some of them. 
Unless agricultural productivity growth accelerates, 
developing countries will have to rely partly on 
imports in the foreseeable future to satisfy their 
growing food demands. What is less certain is exactly 
how the composition of world trade is likely to change. 

Developing countries will represent a larger share of 
the world market and will be the major force driving 
trade in bulk grains. Nevertheless, it is unlikely that 
growth in bulk trade will exceed growth in nonbulk 
trade. Rising per capita incomes in developing 
countries over the coming decade will lead to greater 
demand for high-value products and less demand for 
basic products. For example, livestock product 
consumption is likely to grow faster than food grain 
consumption. USDA’s baseline projections indicate that 
world wheat trade will grow by only 1.7 percent 
annually during 2000-10 compared with about 2.5 percent 
per year for world meat imports.

In wealthier countries, consumer access to adequate 
quantities of food is generally not an issue, and 
consumers are increasingly turning their attention to 
the quality of food--i.e., a greater variety of foods 
made with certain production techniques, meeting 
established safety standards, or complying with 
regulations. Differences in food production and 
processing regulations among countries and acceptance 
or recognition of standards among trading partners can 
create challenges in global food trade. Recognizing 
these challenges, many countries are currently working 
toward multilateral solutions. Consumer quality 
concerns and multilateral rules governing quality 
issues will likely be among the key factors shaping 
future agricultural trade.  
Anita Regmi (202) 694-5161 and Mark Gehlhar 
aregmi@ers.usda.gov
mgehlhar@ers.usda.gov


WORLD AGRICULTURE & TRADE
Canada’s Agriculture: 5 Years After Transportation 
Subsidies End

Significant changes in domestic and trade policies in 
the 1990s have had a longlasting effect on Canada’s 
agriculture. In 1995, Canada repealed the Western Grain 
Transportation Act (WGTA), ending government support 
that had lowered producers’ cost of transporting grain 
to export ports from the Prairie Provinces--Alberta, 
Manitoba, and Saskatchewan. Elimination of freight 
subsidies reduced returns for traditional grains such 
as wheat, causing farmers to shift some wheat land to 
nontraditional crops. Rising transportation costs for 
producers also led to retention of feed in the region 
to support an expanded livestock sector. As the 
transportation subsidy ended, the Feed Freight 
Assistance Program also ended, stopping payments to 
livestock producers in feed-deficit areas and leading 
to rising feed grain production in Eastern provinces.

Changes in trade policies have also played a role in 
transforming Canada’s agriculture. In 1989, Canada and 
the U.S. established a free trade area, adding Mexico 
in the North American Free Trade Agreement (NAFTA) in 
1994. And in 1995, the multilateral Uruguay Round 
Agreement on Agriculture under the World Trade 
Organization (WTO) committed Canada and other countries 
to a reduction in export subsidies for agriculture. 
While 1989 free trade area and NAFTA have removed most 
of the border trade policies in agriculture between the 
U.S. and Canada, differences in domestic policies and 
other agricultural marketing structures remain.

History of Canada’s
Freight Subsidies

Canada’s regulation of freight rates for grains and 
oilseeds began with the 1897 Crow’s Nest Pass 
Agreement. During the past few decades, the railroads 
were badly in need of additional income from higher 
rates in order to maintain the transportation network 
in good working condition. The WGTA--passed in 1984--
required shippers of grains and oilseeds to pay only a 
portion of transportation costs while the government 
compensated railways for hauling grains from Western 
Canada to export ports. Low shipping costs encouraged 
farmers to produce crops destined for export markets, 
skewing agricultural production toward commodities such 
as wheat and barley.

The government repealed the WGTA in 1995 as part of the 
Budget Implementation Act. Termination of 
transportation subsidies for grains and oilseeds in 
western Canada allowed a reduction in the budget 
burden, saving the Federal government an estimated 
C$561 million and helping to fulfill the WTO commitment 
on export subsidy reduction. Repeal of the WGTA also 
allowed railways to charge higher rates (although still 
subject to legislated freight rate caps) and some of 
the additional funds could be channeled toward 
improvement in the rail system.

The end of the WGTA program resulted in elimination of 
the Feed Freight Assistance Program (FFA) for feed-
deficit provinces. The FFA, created in 1941, helped 
lower feed costs for livestock producers in Atlantic 
Canada, British Columbia, eastern Quebec, northern 
Ontario, the Northwest Territories, and Yukon. The FFA 
ceased to operate as a transportation subsidy on 
October 1, 1995, and FFA funds--about C$72.7 million--
were available to aid feed-deficit livestock producers 
during an adjustment period. Producers in those 
provinces would also receive supplemental import 
permits for feed wheat and barley, if necessary. Losing 
feed subsidies has slowed grain movement from the 
Prairie to the eastern region and encouraged feed grain 
production in eastern Canada.

The immediate effects of repeal of the WGTA were 
cushioned in 1995/96 by high grain prices and the new 
Federal compensation to farmers for the value of the 
lost subsidy. To deal with the loss of the 
transportation subsidy in the longer term, Canada 
established two transitional programs that ended in 
1997--the Western Grain Transition Payments Program 
(C$1.6 billion) and the Western Grain Transition 
Adjustment Fund (C$300 million). Besides lower returns 
from higher freight costs, farmers’ problems were 
further compounded by serious disruptions along the 
rail system in winter 1996-97, prompting the government 
to initiate an independent review of the transportation 
system.

Although transportation subsidies have been eliminated, 
new transportation legislation passed last year has 
introduced a policy to cap railroad revenues at levels 
below the true cost of transportation but still higher 
than the costs under the WGTA. Debate continues on the 
role of the Canadian Wheat Board (CWB) in commercial 
railcar tendering (contract bidding) and railcar 
allocation. Further decisions on transportation reform 
and freight rates will be announced later this year.

Other government efforts geared to helping farmers cope 
with higher freight costs include: changes in the CWB’s 
pooling policy to reflect anticipated higher 
transportation costs in the eastern Prairies; an 
additional C$1 billion of export credit guarantees to 
foreign buyers of Canadian bulk grain and other 
agricultural export sales; infrastructure and road 
upgrades; and the Dehydrated Alfalfa and Compressed Hay 
Assistance Program. In addition, the Federal government 
and provincial governments of Saskatchewan and Manitoba 
announced early last year that grain and oilseed 
producers in those provinces would receive a one-time 
payment of C$400 million to absorb some of the end-of-
the-WGTA impact. The Alberta provincial government 
offered a similar program for its producers.

Prairie Agriculture
In the Post-WGTA Era

Eliminating transportation subsidies has transformed 
Canadian agricultural production, marketing, and 
exports of grains, oilseeds, and livestock. Changes in 
Canada’s agriculture have been spurred by other factors 
such as NAFTA and the WTO, and ending freight subsidies 
in particular has strengthened the effects of 
establishing a free trade area and provided a stronger 
foundation for Canada’s agricultural sector to compete 
under the WTO rules.

Subsidized freight rates had helped encourage grain 
exports and diverted grains away from domestic 
activities. In the Prairies, the farm value of grain 
was determined by the price at port after deducting 
freight costs. The WGTA kept the cost of transporting 
grains and oilseeds from Prairie producers to export 
position in Thunder Bay or Vancouver about C$17 (about 
US$12) per metric ton below costs that prevailed during 
post-WGTA. Removing the subsidies raised producer 
shipping costs by 40-50 percent, on average, for 
transport from local elevators to export position, and 
lowered rates of return for Prairie grain and oilseed 
producers.

With elimination of freight subsidies lowering 
government support and raising costs, Prairie farmers 
moved away from production of freight-subsidized 
grains. Those farmers also developed a different mix of 
land, labor, and other inputs to stay profitable. 
Production in the Prairies shifted from grains to 
commodities such as specialty crops and livestock. The 
lower value for feed grains in the Prairies fostered 
expansion of cattle and hog production throughout the 
1990s.

Processed food has become an integral part of the 
Prairie economy. In Alberta, for example, the post-WGTA 
annual growth rate for value of manufacturing shipments 
of meat and meat products, fruits and vegetables, and 
potato products was nearly 9 percent, exceeding the 6-
percent growth rate for all food and beverage 
industries. Before repeal of the WGTA, Alberta’s food 
and beverage industries had grown about 5 percent 
annually.

The most successful story is perhaps Manitoba’s 
livestock industry. Manitoba has an advantage of 
affordable and low-cost supply of pasture. With no 
freight subsidies, it is expensive to export grain from 
Manitoba, due to the long distances to ports. Feed 
grains, particularly, stay in Manitoba.

It was estimated that about 5.8 tons of forage per 
animal is necessary for low-cost livestock enterprises. 
Grains can be bought locally or imported to feed 
livestock. A survey by Manitoba Agriculture and Food 
shows that the average rental rate for private pasture 
in 1997 was C$6.73 per animal unit month (AUM), 
compared with C$11.37 in Saskatchewan and about C$12 in 
Alberta. (An AUM is the equivalent amount of forage 
needed by one mature 1000-pound cow and her suckling 
calf grazing for one month--i.e., 26 pounds of dry 
matter per day as forage or 997 pounds for one AUM.).

Manitoba also has the advantage of having a large share 
of government-owned land--about 41 percent or 1.7 
million acres of unimproved Crown land--available for 
low lease rates. With successful livestock expansion, 
the livestock share of total cash receipts has 
increased to nearly 43 percent (from 35.5 percent in 
1994), compared with 26 percent in Saskatchewan and 60 
percent in Alberta (from 20 percent and 53 percent in 
1994).

Hog Sector Leads
Livestock Expansion

The free trade agreement with the U.S. helped spur 
expansion of livestock production in Canada, and the 
WGTA repeal sustained it. Repeal occurred at a time 
when global meat demand was high, but livestock 
inventories during this period were also high. Canada’s 
onfarm cattle inventory was up 14 percent, and the 
increase in the Prairie Provinces reached 20-25 percent 
during the post-WGTA period (from average 1989-94 to 
average 1995-99), with Manitoba leading.

The hog story was more telling. While Canadian hog 
inventories were up 12 percent after WGTA repeal, the 
expansion in Manitoba--the province furthest from 
overseas export position--was much more impressive, a 
37-percent increase. Manitoba’s hog production ranks 
third after Quebec and Ontario.

Both cattle and hog production have been viable options 
for farmers in the Prairies, particularly in Manitoba. 
Most cattle and hogs from Manitoba have been sold as 
slaughter animals to the U.S. or to other Provinces for 
feeding, continuing a trend that started in the early 
1990s after the free trade agreement was implemented. 
For hogs, the movement to the south could slow down in 
the wake of expansion of hog processing facilities in 
1999 in Manitoba (Brandon and Winnipeg). This could 
increase Canadian hog processing capacity.

With livestock expansion continuing in the Prairies, 
the need for feed increases. Most feed barley now 
remains in Canada. The feed share of total domestic 
barley use increased about 13 percent during post-WGTA. 
Feed use of other grains such as corn, dry peas, canola 
meal, and soymeal has also increased.

Dry peas, a nontraditional crop not grown much during 
the pre-repeal WGTA period, became an important part of 
successful low-cost livestock enterprises during the 
post-WGTA era. Crop rotations to enhance nitrogen 
fixation during the last 10 years have boosted planted 
area of dry peas in the Prairies. Although the trend 
started in the early 1990s, post-WGTA growth was 
significant, with farmers increasing area planted to 
dry peas by 221 percent in Saskatchewan and 105 percent 
in Alberta. Higher output of dry peas went to hog 
feeding, exports (up 107 percent during post-WGTA), and 
some food use.

Wheat Still Dominates
Canada’s Prairie Provinces

Historically, wheat has dominated Canadian grain 
production, and most of it is produced in the Western 
Prairie Provinces. Wheat remains Canada’s major grain 
planted in the post-WGTA era, but its share of crop 
area has slowly declined since the mid-1990s. In 
1999/2000, about 42 percent of total area harvested for 
grains and oilseeds was devoted to wheat (durum and 
nondurum), compared with 52 percent in 1982. The 
largest wheat province is Saskatchewan, which harvested 
more than half of total wheat area in Canada. Alberta 
ranked second and Manitoba third.

After WGTA repeal, Canada’s wheat area dropped 16 
percent from the 1989-94 average. Wheat area harvested 
declined in all three Prairie Provinces, down about 25 
percent in Manitoba, 17 percent in Saskatchewan, and 8 
percent in Alberta. In the Prairies, nontraditional 
crops such as potatoes, soybeans, and edible beans have 
become popular, and area planted to corn has started to 
take off again. 

While western wheat area declined through the 1990s, 
the second half of the 1990s marked a turning point for 
eastern provincial wheat. Increased demand for grains 
following elimination of WGTA freight subsidies led to 
increased production of wheat, corn, and soybeans in 
the East. Eastern Canada wheat area increased 2 percent 
after the WGTA period, reversing the declining trend 
set earlier. Ontario wheat area increased 10 percent, 
with winter wheat up 8 percent and spring wheat up 39 
percent.

The Manitoba agricultural landscape has changed the 
most. Manitoba’s domestic wheat shipments of flour, 
cereal, and feed have increased 132 percent from 1990. 
With most Prairie grains exported through Western 
Pacific ports, the long distance to these ports caused 
Manitoba freight costs to increase the most after WGTA 
repeal. However, effective August 1, 2000, Manitoba 
farmers who had freight costs deducted from their CWB 
payments for grain shipments through the western ports 
of Thunder Bay or Vancouver also received a rebate from 
the CWB based on the proportion of wheat shipped 
through Manitoba’s Port of Churchill in the East.

Wheat for processing use picked up after the WGTA. 
Although Canadian wheat area and production were down, 
wheat ground for flour increased about 15 percent 
during 1995-98, from the 1989-94 level. Flour 
production during the same period also increased about 
16 percent. With less wheat production after WGTA 
repeal, Canada’s wheat exports were down 15 percent 
overall though durum wheat exports were up.

Although canola had been a freight-subsidized 
commodity, higher freight costs after WGTA repeal have 
not diminished growth in canola production and use. In 
the late 1990s, Manitoba’s canola area was up about 51 
percent from 1989-94, followed by Saskatchewan (up 44 
percent) and Alberta (up 24 percent). With higher 
investment after repeal, domestic crushing capacity for 
canola increased about 60 percent during 1995-98, 
compared with the 1989-94 period. Cargill, CanAmera, 
and Archer-Daniels-Midland (ADM) all operate oilseed 
processing plants in Western Canada. (ADM recently 
announced a plant closing, although it is expected to 
be temporary.) Canola, canola oil, and canola meal 
exports were up about 15 percent.

While the WGTA repeal has caused shifts in agricultural 
production throughout Canada, the primary impact has 
been diversification of agriculture in the Prairie 
Provinces. Output is moving away from traditional 
grains for export and toward more nontraditional grains 
and oilseeds. In addition, more feed production is 
staying within the Prairie to supply expanding 
livestock operations, and more land is utilized for 
livestock-related activities such as hay production and 
pasture. With expanding livestock and processing 
activities, livestock’s share of farm income has 
increased as well.  
Suchada Langley (202) 694-5227
slangley@ers.usda.gov
Allen Baker also contributed to this article.


FARM FINANCE
Farm Credit Use Expected to Rise Slightly

Total farm business debt will rise just 1.2 percent to 
$182.8 billion in 2001, the smallest projected increase 
since debt dipped slightly in 1992. With limited 
potential gains in farm prices this year following the 
relatively low levels in 2000, farmers remain cautious 
about debt expansion. Also, the sector has evidently 
learned from the farm financial crisis of the 1980s 
that borrowing cannot substitute for adequate cash flow 
and profits.

Slow debt growth partially reflects moderate levels of 
expected new capital investments. In addition, adequate 
levels of working capital and off-farm earnings are 
helping farmers hold down new borrowing.

High levels of direct government payments to farmers 
(including emergency assistance) are also limiting 
demand for credit and helping to maintain farmland 
values. Farmers received an annual average of $17.3 
billion per year in direct payments for 1998-2001, up 
from $8.8 billion for the 1990-97 period. Farmers have 
been maintaining or improving their balance sheets by 
applying some of their additional government payments 
to existing debt.

Nevertheless, continued low prices for many key 
agricultural commodities, coupled with weather problems 
in some regions, have generated concerns about the 
ability of farmers to repay new or existing loans. Many 
of the concerns focus on producers’ ability to obtain 
and retain production credit. Net cash farm income, 
which measures cash available from sales after paying 
cash operating costs, declined from an annual average 
of $58.1 billion in the favorable years of 1996-97 to 
$55.5 billion in 1999-2000, even with sizable 
government assistance. Without additional emergency 
farm payments this year, farm lenders will be dealing 
with a farm sector whose net cash income is forecast to 
decline 10 percent to $50.7 billion.

Although farm sector equity by the end of the year will 
be almost $9 billion more than in 2000, a higher 
proportion of debt service capacity will be used, 
reducing farmers’ credit reserves and exposing a larger 
share of farms to potential debt repayment problems. 
Farmers’ use of net repayment capacity (debt held by 
farms as a share of the maximum feasible debt that 
farms can take on) is forecast to rise to 65 percent in 
2001 (the highest level since 1985), compared with just 
under 60 percent in 2000. About 24 percent of farm 
businesses with annual gross sales of $50,000 or more 
are forecast to have debt repayment problems in 2001, 
up from about 21 percent the previous year.

Demand for Credit 
Is Moderate

The four traditional categories of institutional farm 
lenders are commercial banks, the Farm Credit System or 
FCS (a collection of federally chartered borrower-owned 
credit cooperatives that lend primarily to 
agriculture), USDA’s Farm Service Agency or FSA (the 
government farm lender of last resort), and life 
insurance companies. Together these four classes of 
lenders accounted for 78.1 percent of all farm loans 
outstanding in 2000. The remaining share of farm credit 
comes from individuals and from nontraditional lenders, 
primarily input and machinery suppliers, cooperatives, 
and processors. 

In calendar 2000, total farm business debt edged up 2.4 
percent, and outstanding loan volume increased for all 
farm lenders except FSA. Commercial banks, with the 
largest share and fastest growth in loan volume, 
accounted for more than half the growth in total debt 
last year. Loan volume at commercial banks grew 3.3 
percent to $74.2 billion, followed by FCS at 3 percent 
to $47.6 billion, and life insurance companies at 2.8 
percent to $11.8 billion. FSA’s total direct loans 
outstanding decreased 5.8 percent in calendar 2000 to 
$7.4 billion. The decrease resulted because large 
Federal program payments were substituted for credit 
needs and thus reduced the demand for FSA direct farm 
loans. At the same time FSA direct loan repayments 
continued at a significant rate.

The expected $2.2-billion increase in total debt by the 
end of 2001 continues a prolonged expansion where farm 
debt rose $5.2 billion per year, on average, between 
1992 and 2000. About 40 percent of the overall increase 
in debt during this period occurred in 1997-98 when 
farmers were optimistic about business prospects 
following the planting flexibility provided under the 
1996 Farm Act and relatively high commodity prices of 
1996-97.

Farm real estate loan balances in 2001 are expected to 
rise slightly faster than nonreal estate debt, as they 
did last year, due partially to lender’s requirement 
that loans for purposes other than mortgages be secured 
by farmland. In 2000, real estate and nonreal estate 
outstanding loan volume increased 3.3 and 1.3 percent, 
respectively.

Nonreal estate business loan volume outstanding is 
expected to increase about 1.2 percent to $84.2 billion 
in 2001. Total planted acres for principal field crops 
in 2001 are forecast to decline, and even with some 
acreage shifts among crops, total production expenses 
are forecast to rise only modestly. Projections for 
planted acreage in 2001 for the eight major crops 
(corn, sorghum, barley, oats, wheat, rice, upland 
cotton, and soybeans) are for a decrease of 1 percent 
to 251.5 million acres. While farmers are expected to 
spend about $201.7 billion for agricultural production 
expenses in 2001, up only 1 percent from 2000, there is 
concern about future oil and gas prices, which affect a 
variety of farm inputs. Expenditures for seeds, 
fertilizer, and agricultural chemicals, at $26.7 
billion, are forecast up slightly from 2000.

Unit sales of farm tractors, combines, and other farm 
machinery have not recovered from the 1998 malaise, 
when the farm sector economic slowdown took effect. In 
2000, sales of large two-wheel drive tractors (100 
horsepower and over), four-wheel drive tractors, and 
combines were down 35, 49, and 45 percent, 
respectively, from their highs in 1997 (large two-wheel 
drive and four-wheel drive tractors) and 1998 
(combines). For 2001, the Equipment Manufacturers 
Institute (EMI) projects a nearly 4-percent decline for 
two-wheel drive tractors, a 3-percent drop for four-
wheel drive tractors, and a 7-percent decrease for 
self-propelled combines. EMI projects year-2000 
increases for 12 of the 16 equipment categories other 
than tractors and combines, so optimism exists for 
sales of certain equipment lines.

On balance, sluggish sales for big ticket items such 
as tractors and combines are likely to overshadow sales 
strength for other machinery lines in 2001 and moderate 
demand for short- and intermediate-term farm loans. 
Captive finance companies owned by or subsidiary to 
machinery companies, rather than the more traditional 
institutional lenders, now meet a larger share of this 
demand for big-ticket items. 

Despite expected lower economywide interest rates in 
2001 (see following article), total farm sector 
interest expenses (excluding households) are forecast 
to grow from $13.8 billion in 2000 to $14.3 billion in 
2001. The anticipated 1.2-percent rise in total farm 
sector debt, accompanied by a lag in lowering of 
interest rates on the existing farm loan portfolio, 
will contribute to the rise in interest expenses.

Farm real estate loan volume outstanding--loans secured 
by farm real estate--is forecast to increase 1.3 
percent to $99 billion in 2001. Mortgage loan volume 
growth is generally affected by changes in farmland 
values. Total U.S. farmland values as reported in 
USDA’s farm sector balance sheet increased an estimated 
0.5 percent in 2000 and are expected to advance about 1 
percent in 2001--the 15th consecutive annual increase. 
The outlook for 2001 is tempered by the scheduled 
reduction in government payments. 

While recent farmland value growth rates are down, they 
have been buoyed by government payments, off-farm 
employment, and urban influences in many areas. It 
remains unclear if recent gains in farmland value have 
led to corresponding increases in demand for farm 
mortgage credit, even in the most favorable years. 
There are reports that a significant portion of the 
price gains were driven by nonfarm investors and not by 
farmers. Moreover, a good share of the farmer buyers 
were reportedly larger operators who were able to pay 
wholly or in large part with cash and not via 
borrowing. For midsize to smaller farms, off-farm 
earnings have been strong in recent years, allowing 
farmers to bid higher on farmland tracts than 
agricultural-use values would indicate. Today, wide 
areas are subject to urban pressures that tend to 
override the component of farmland value that is driven 
primarily by the land’s value in agricultural use (AO 
April 2001).

Can Lenders Supply 
Adequate Credit?

Availability of funds is not a current concern since 
lenders have access to more money than they can 
profitably lend. As always, agricultural lenders will 
be looking closely at the profit margin of farmers’ 
operations when making loan decisions. If borrowers 
cannot show repayment ability even with government 
assistance in 2001, chances are they will have to 
curtail operations, restructure, or exit from farming.

The recent growth in farm loan demand experienced by 
commercial banks is reflected in higher loan-to-deposit 
ratios. Average loan-to-deposit ratios grew to 76.6 
percent for agricultural banks in the year ending 
September 30, 2000, up from 73.5 percent a year earlier 
and from 57 percent 8 years earlier. Average loan-to-
deposit ratios reported by the Federal Reserve System 
for agricultural banks increased during the year ending 
September 30, 2000, for all of the eight reporting 
Federal Reserve districts. 

In the past, high loan-to-deposit ratios could 
constrain new loan origination. But today, commercial 
banks have many nondeposit sources of funds, such as 
the Federal Home Loan Bank System, and may sell farm 
mortgage loans to Farmer Mac. The recent jump in loan-
to-deposit ratios may indicate larger reliance on these 
funding sources, plus sluggish growth in deposits. 
Thus, profitable, well-managed agricultural banks often 
have very high loan-to-deposit ratios. Although rural 
banks make considerably less use of nondeposit funds 
than banks headquartered in metro areas, most rural 
banking markets are served by banks that use nonlocal 
sources of funds to some extent. 

Overall, adequate funds are available from banks for 
agricultural loans, with few banks reporting a shortage 
of loanable funds. Commercial bank total farm loans are 
projected to increase 1.8 percent in 2001, compared 
with 3.3 percent in 2000.

The FCS is in excellent financial condition and is thus 
well-positioned to supply farmers’ credit needs in 
2001. In recent years, the FCS has undergone massive 
restructuring of its organization and procedures. As a 
result, FCS gained farm loan market share 5 of the past 
6 years after a gradual loss in 9 of the 10 previous 
years. Because of perceived government backing, the FCS 
can access national money markets and provide needed 
credit at very competitive rates. 

In 2001, FCS farm business debt is forecast to increase 
0.2 percent following a 3-percent rise in 2000. FCS 
mortgage debt is expected to increase less than 1.2 
percent in 2001, and FCS nonreal estate loans are 
forecast to decline about 1.8 percent.

Farm Service Agency loans serve family-size farmers 
unable to obtain credit elsewhere. For fiscal 2001, FSA 
has $4 billion in new lending authority. In fiscal 
2000, FSA obligated $3.7 billion in its direct and 
guaranteed farm loan programs. Through the first 6 
months of the current fiscal year, it appears that the 
funding level will be sufficient to meet 2001 demand. 
The exception might be the direct farm ownership 
program that is restricted to funding farm mortgage 
loans and which has less lending authority for fiscal 
2001 than was obligated in fiscal 2000. Another 
possible shortfall could occur for guaranteed operating 
loans made with interest rate assistance. Demand for 
the program is high because FSA provides a 4-
percentage-point reduction in the borrower’s loan 
interest rate. The 2001 appropriations bill gave FSA 
authority to transfer funds between the farm ownership 
and operating loan programs if funding shortfalls occur 
late in the year in a particular program.

Life insurance companies report adequate funds for the 
deals that meet their quality standards, and farm 
lending activity by life insurance companies is 
forecast up 2.4 percent in 2001 compared with 2.7 
percent in 2000. During 1982-92, total industry farm 
mortgage holdings declined in 8 of the 11 years for an 
overall drop of 27.9 percent. Since then, holdings have 
increased each year for a total gain of 34.7 percent.

In the coming months, lenders will likely remain 
cautious in extending agricultural credit, due largely 
to uncertainty about farm commodity prices and the 
level of government payments. Lenders were able to 
manage most farm loan repayment problems last year, 
given the relatively healthy recent farm incomes 
bolstered by the additional Federal financial 
assistance. 

The 2001 farm financial situation is unlikely to lead 
to unmanageable deterioration in lenders’ portfolios. 
But if the conditions that materialized in the 
agricultural sector starting in 1998 persist, lenders 
will increasingly face renewal requests for substandard 
loans and attract new customers that are less 
creditworthy, particularly if the level of Federal 
assistance packages declines. In this scenario, some 
farmers also would need to reconsider and reformulate 
their plans to use additional loans to finance 
operations. The year 2001 may prove to be more 
indicative than 2000 of the proper course of action for 
lenders and borrowers. 

Today, despite relatively low prices, lenders appear 
confident about the bulk of their farm customers given 
the level of Federal assistance. Most farmers are not 
as heavily leveraged as a decade ago. Veteran lenders 
cite significant differences from the 1980s, including 
lower interest rates, more owner equity, better credit 
analysis and monitoring methods, and improved 
management ability of their producer-customers. Lenders 
thus will work with most of their customers to 
restructure debt and will continue to provide credit 
for operating expenses. 
Some of the favorable prospects in farm lending likely 
stem from two hard-earned lessons from the 1980s: 1) 
credit cannot be used as a replacement for lost 
earnings, and 2) lenders must insist on earnings, not 
asset inflation, to assure repayment. The 1980s made it 
clear that farm businesses need to be profitable to 
successfully manage debt obligations.

The financial position of commercial agricultural 
lenders in 2001 is generally healthy. Farm lending 
institutions have been able to continue to build 
capital and maintain favorable credit quality levels in 
their loan portfolios. Lenders have benefited from 
improved management, higher loan standards, and better 
regulator oversight compared with the 1980s. All major 
lender categories continue to experience historically 
low levels of delinquencies, foreclosures, loan 
chargeoffs, and loan restructuring. Farm financial 
stress would not have a significant impact on aggregate 
national farm lender indicators such as loan 
delinquency rates unless the stress was sustained. The 
duration of relative price weakness for several major 
farm commodities is unclear, but the data indicate no 
significant problems in national lender performance to 
date.
Jerome Stam (202) 694-5365, Steven Koenig, James Ryan, 
and Dan Milkove
jstam@ers.usda.gov

For more information on the demand for farm credit and 
the farm lender situation, see the latest issue of 
Agricultural Income and Finance at 
http://www.ers.usda.gov/publications/so/view.asp?f=econ
omics/ais-bb/

FARM FINANCE
Interest Rates on Farm Loans Likely to Fall Throughout 
2001

In a development that may provide some relief for 
farmers nationwide, interest rates on agricultural 
loans are expected to fall throughout most of 2001. 
Average interest rates on farm loans from commercial 
banks should dip below 9 percent by midyear and may 
drift slightly lower in the second half of 2001.

Interest rates on agricultural loans are determined 
largely by factors outside the agriculture sector, 
although factors such as default risk, quality of loan 
collateral, loan size, and loan liquidity are also 
important in determining agricultural loan rates. 
Should U.S. economic growth in the second half of 2001 
and the first half of 2002 strengthen as expected, 
interest rates on agricultural loans are likely to rise 
slightly in the winter or spring of 2002.

Overall, U.S. interest rates fell in the second half of 
2000, reflecting slower economic growth and demand for 
credit. Growing foreign capital inflows, a stronger 
dollar, and larger Federal Government surpluses all 
served to push interest rates lower in the second half 
of 2000 by increasing the overall supply of funds 
available for lending. In January-April 2001, the 
Federal Reserve Board sharply eased monetary policy in 
response to a pronounced drop in economic growth. These 
developments put immediate downward pressure on 
interest rates by lowering interest rate expectations 
for 2001 and 2002.

By April 18, the Federal Reserve had eased monetary 
policy by lowering its Federal funds interest rate 
target (the interest rate on deposits held at Federal 
Reserve banks primarily by depository institutions) by 
200 basis points (2 percentage points). Lowering of the 
Federal funds target brought other interest rates down 
by lowering the expected Federal funds rate for 2001 
and 2002 and by encouraging more rapid expansion in the 
supply of money and credit by depository institutions. 
Interest rates--especially short-term interest rates--
should continue to fall through the first half of 2001. 
Sluggish economic growth in the first half of 2001 
should slow the growth in the demand for money and 
credit, thereby encouraging additional easing of 
monetary policy.

Interest rates, especially short-term rates, should 
continue to fall through the first half of 2001, and in 
general, credit growth should slow further. As 
manufacturers decrease production to slow the growth in 
business inventories, short-term business credit growth 
will slow. In addition, the supply of funds entering 
credit markets directly or indirectly from the 
household sector will rise if consumers, as expected, 
save more of their disposable income. However, economic 
growth is likely to increase significantly in the 
second half of 2001 and 2002 due to an easing of 
monetary policy and the accompanying sharply lower 
interest rates, reduction of excess inventories, 
gradually increasing stability in equity markets, and 
gradual improvement in business credit availability, in 
addition to an expected mild depreciation in the 
dollar.

Since 1999, short-term inflationary expectations have 
been quite consistent. Short-term median inflationary 
expectations (1 year ahead) have varied only by about 
0.5 percent, while long-term median inflationary 
expectations (10 years ahead) have remained virtually 
unchanged at 2.5 percent, according to the Survey of 
Professional Forecasters. More stable overall 
inflationary expectations have resulted largely from 
stronger productivity growth, a strong U.S. dollar, and 
credible monetary policy designed to maintain low 
inflation.

Little change in underlying inflation or inflationary 
expectations in 2001 or 2002 relative to 2000 is likely 
as continued tightness in labor markets is largely 
offset by persistent excess capacity in manufacturing 
and somewhat lower energy prices. Continued strong, but 
slower, productivity growth and robust domestic and 
foreign competition will further moderate upward 
pressure on inflation.

Given the stability of inflationary expectations, the 
decline in both short- and long-term nominal interest 
rates since the first half of 2000 is due almost 
entirely to falling real interest rates (the nominal 
rate minus the inflation rate). Consequently, the dip 
in interest rates since the first half of 2000 
represents a decrease in the real cost of money and 
over time should encourage more borrowing.

Real interest rates in the first half of 2001 will be 
under downward pressure from both an easing of monetary 
policy and an expected increase in the rate of consumer 
saving out of personal disposable income. A higher 
personal savings rate will lower interest rates by 
increasing the supply of funds available in credit 
markets.

While the consumer savings rate was 2.2 percent in 
1998, it fell to -0.1 for 2000. The consumer savings 
rate should rise to positive levels in 2001 in response 
to lower consumer wealth (caused by falling equity 
values), the large drop in consumer confidence since 
the third quarter of 2000, and rising consumer debt 
burdens. Consumer debt burdens--defined as principal 
and interest payments as a percentage of disposable 
personal income--rose appreciably in 1999 and 2000. 
Higher debt burdens, by reducing consumers’ overall 
liquidity and ability to acquire additional debt, 
should be significant in raising the consumer savings 
rate in 2001 and 2002.

Both farm and nonfarm loan rates are expected to fall 
appreciably in the first half of 2001. Rates charged on 
farm loans in the long term must earn competitive risk-
adjusted returns for lenders that are comparable to 
risk-adjusted returns from nonfarm loans and other 
financial assets. Therefore, the fall in real interest 
rates in the general economy will continue to place 
downward pressure on farm loan rates charged by private 
lenders. However, rates on farm loans will fall less 
than most interest rates in the general economy for a 
number of reasons.

First, rural banks are heavily dependent on consumer 
deposits (checking and savings accounts, plus time 
deposits of less than $100,000) for the bulk of their 
loan funds. Interest rates paid on these deposits 
typically respond sluggishly to changes in open market 
interest rates.

Second, changes in deposit interest rates typically 
affect loan rates at rural banks relatively slowly. 
Banks generally prefer to keep their small business 
loan rates more stable by determining their loan funds 
costs on an average cost-of-funds basis, thus keeping 
the interest rate margin fairly stable between the 
expected return from lending (expected interest rate 
paid by borrowers) and the expected average interest 
rate paid to depositors. Finally, given the overall 
weaker farm income outlook for 2001 and tighter credit 
standards and terms for business lending in general, 
some increase in risk premiums on agricultural loans 
are likely for 2001.

Default premiums on farm loans have been relatively low 
by historical standards. Furthermore, the charge-off 
rate (share of loans removed from a bank’s portfolio as 
uncollectable) has been lower for farm loans in recent 
years than for general business loans. The relatively 
low charge-off rate for agricultural loans in the l990s 
reflected agriculture’s diverse and expanding domestic 
and foreign customer base as well as government 
payments to agriculture that help support and reduce 
variability in farm income. A mild increase in the 
charge-off rate for agricultural loans in 2001 is 
likely.

With net farm income expected to decline in 2001 (due 
in large part to lower expected government payments to 
agriculture), overall farm interest expense as a share 
of farm income is expected to decline, making farm 
loans somewhat riskier. Furthermore, delinquency rates 
on nonreal estate farm loans rose slightly in the 
second half of 2000. Given the somewhat higher 
perceived risk in agricultural lending, the spread 
between interest rates charged on agricultural loans 
not secured by real estate and on those secured by real 
estate will likely widen slightly in 2001.

In summary, weaker overall growth in demand for credit, 
and increased overall supply of credit in the 
macroeconomy, will place downward pressure on farm 
interest rates in 2001. The fall in interest rates on 
farm loans will be less than for interest rates in 
general, due to rural banks’ generally sluggish 
adjustment in consumer deposit interest rates, the 
desire of these banks to keep small business loan rates 
more stable, and an expected mild increase in risk 
premiums on farm loans.
Paul Sundell (202) 694-5333
psundell@ers.usda.gov


RESOURCES & ENVIRONMENT
Agri-Environmental Payments to Farmers: Rewarding 
Environmental Performance

Environmental issues are increasingly prominent in farm 
policy debates. There is growing interest in developing 
a program of agri-environmental payments to producers 
based on use of environmentally sound practices or 
achievement of a high level of environmental 
performance on land in agricultural production. Such a 
program could help to maintain past agri-environmental 
gains, to address emerging environmental problems 
(e.g., nutrient runoff), and perhaps to support farm 
income.

A program to offer environmental payments to farmers is 
not a new idea. For more than 60 years, the Federal 
government has offered cost sharing for adoption of 
conservation practices that have beneficial effects on 
the environment. (For more on farmers’ adoption of 
conservation practices, see following article). 
Periodically, the government has paid for retiring land 
from crop production--e.g., the Conservation Reserve 
Program. But unlike current programs, agri-
environmental payments could reward producers who 
already have reached a high level of environmental 
performance--so-called good actors. Payments could be 
set to exceed producer costs for installing or adopting 
conservation management systems or technical practices, 
and could add directly to farm income. Senator Tom 
Harkin (D-IA) has introduced legislation--the 
Conservation Security Act (CSA)--that proposes a type 
of agri-environmental payment program.

This article addresses the role of explicit objectives 
in assuring success of an agri-environmental payment 
program, the potential for unintended consequences in a 
subsidy program, and the value of coordination among 
all types of agricultural programs. While no specific 
legislative proposal is analyzed, the discussion 
applies broadly to agri-environmental program design. A 
number of insights are gleaned from past programs as 
well as from analysis of three hypothetical agri-
environmental payment program scenarios: 1) pay farmers 
who reach a high level of environmental performance but 
impose a penalty for bringing highly erodible land 
(HEL) into production; 2) same as #1 but no penalty for 
adding HEL to planted area; and 3) pay farmers for 
improving environmental performance.

Designing an 
Effective Program

An agri-environmental payment program could entail a 
wide range of environmental and farm income objectives. 
Once objectives are established, program design and 
implementation will largely determine how the program 
performs in terms of environmental gains, costs of 
achieving the gains, and distribution of costs (or 
benefits) among farmers, taxpayers, and consumers. More 
specifically, performance depends largely on how much 
is paid to whom and for taking what action.

Guidelines for designing an effective agri-
environmental payments program include the following:
--explicitly address each program objective in 
eligibility criteria;
--minimize incentives for cropland expansion;
--coordinate agri-environmental payments with other 
farm programs; and
--coordinate land retirement with payments to reward 
good environmental performance on land in agricultural 
production.

Explicitly address each program objective in 
eligibility criteria--Suppose that the explicit program 
objective is to reduce erosion and the expectation is 
that payments from an erosion reduction program will 
support farm income. Unless producer eligibility is 
determined according to criteria related to both 
objectives--i.e., making both objectives explicit--
program performance with respect to the implicit 
objective (supporting farm income) may not be fully 
satisfactory. Focusing on one objective alone might 
exclude either farms that could contribute to the 
environmental goal or farms that are in need of farm 
income support. While eligibility does not guarantee 
that farmers will participate in an agri-environmental 
payment program, excluding farms that could contribute 
virtually ensures that both program objectives cannot 
be fully achieved.

For example, consider conservation compliance 
requirements that are part of existing farm policy. 
Producers must apply government-approved conservation 
systems on highly erodible cropland to be eligible for 
payments under price and income support programs. 
Although conservation compliance has leveraged better 
conservation on the share of highly erodible cropland 
controlled by participating producers, not all 
producers participate in USDA programs so not all 
highly erodible cropland is covered. As a result, 
conservation compliance cannot fully address erosion on 
highly erodible land.

To explore these issues more generally, farm-level data 
from USDA’s Agricultural Resource Management Study 
(ARMS) were linked with a number of environmental 
indicators. The farms were then grouped according to 
the farm typology developed by USDA’s Economic Research 
Service (ERS) (AO November 1999). Analysis shows that 
focusing a conservation program on a specific farm type 
(e.g., large family farms) is not likely to solve a 
particular agri-environmental problem. No single group 
of farms delineated in the ERS typology accounts for 
more than 20 percent of the acres identified by 
rainfall erosion, wind erosion, or nitrogen runoff 
indicators.

Likewise, focusing an agri-environmental program on a 
particular environmental issue is not likely to solve 
farm income problems, particularly if policymakers want 
to direct support to specific groups. For example, 
nearly 70 percent of small family farms (annual gross 
sales under $250,000) would qualify for payments by the 
rainfall erosion indicator, but only about 22 percent 
would be eligible for payments under the wind erosion 
indicator.

Minimize incentives for cropland expansion--If subsidy 
rates are high enough for specific levels of 
environmental performance (e.g., soil conservation) or 
use of environmentally sound practices (such as 
conservation tillage), producers might be encouraged to 
plant land not previously used as cropland. For 
example, cropland acreage may expand if: 
--payments are made for relatively good performance but 
do not require improvement;
--payments exceed the cost of required conservation 
systems; and 
--payment eligibility is extended to previously 
uncropped land.

When improvement in environmental performance is not 
required to receive agri-environmental payments, 
overall environmental performance may worsen because of 
additions to cropland. Increased environmental damage 
on land not previously in crop production will offset, 
at least partially, environmental gains on other 
cropland. Even if producers use good environmental and 
conservation practices, converting land from grass or 
trees to crop production will almost surely increase 
soil erosion, nutrient runoff, or other environmental 
damage.

Despite the potential for unintended consequences, 
implementation of a program with this latitude is not 
unrealistic. Payment for good performance can reward 
good actors for past environmental improvements--
often achieved without subsidies--and can help maintain 
both privately and publicly funded conservation 
investments. Moreover, measuring environmental 
improvement may not be possible. Unless the field-by-
field practices and environmental conditions existing 
before the program are known to the government, 
environmental improvement cannot be measured. For 
example, if the timing and rate of the existing 
nutrient application are unknown to the government, 
improvement from implementation of a new nutrient 
management plan is impossible to assess. In many cases, 
potential environmental benefits to society may be 
larger than the cost of conservation systems to 
farmers, providing a rationale for payments that exceed 
costs. Payments must be larger than farmers’ costs if 
the program is to provide direct farm income support.

When payments exceed producer costs and environmental 
improvement is not required, the status of previously 
uncropped land is critical. Consider two alternative 
program design scenarios. In both, producers are paid 
on the basis of good performance, and payments can 
exceed producers’ costs for achieving that level of 
performance. However, in one good performance program 
scenario, producers are severely penalized by loss of 
USDA farm program benefits for expanding cropland acres 
by planting on previously uncropped highly erodible 
land. 
In this scenario, erosion reduction ranges from 20 
million tons to 40 million tons per year as total 
payments to producers range from $1 billion to $3 
billion.

In the second good performance program scenario, 
producers are not penalized for expanding crop 
production onto previously uncropped highly erodible 
land. Producers can receive an agri-environmental 
payment on this land if they use a conservation system 
that achieves a good performance, even if overall soil 
erosion for all the farm’s cropland increases from 
previous levels. In this program scenario, the increase 
in soil erosion caused by production on previously 
uncropped land more than offsets erosion reduction from 
improved conservation practices on existing cropland.

Coordinate agri-environmental payments with other farm 
programs--Coordination of environmental programs with 
other farm programs can help to achieve all 
agricultural policy objectives at minimum cost to 
society or, conversely, the greatest possible 
environmental or farm income gain within a given cost 
constraint, such as Federal budget limitations. One 
objective of coordination is to avoid conflicts that 
reduce the effectiveness of individual programs. For 
example, the swampbuster provision of farm legislation, 
in order to eliminate program incentives to expand crop 
production onto wetland, penalized farmers who did so. 
Producers who drain wetlands for crop production become 
ineligible for farm program payments. 

Coordinate land retirement with payments to reward good 
environmental performance on working land--In pursuing 
agri-environmental objectives, it may be best to 
coordinate land retirement programs for environmentally 
sensitive land with programs to encourage improved 
conservation/environmental practices on less sensitive 
land. To illustrate this point, ERS estimated the 
effects of making agri-environmental payments for 
improved environmental performance only (e.g., reducing 
soil erosion from previous levels). While this scenario 
is not particularly realistic because of the difficulty 
of measuring improvement, a retirement/improvement 
program is a good standard of comparison because it 
focuses resources on erosion reduction and subsidizes 
the widest possible range of strategies for soil 
erosion reduction, helping to identify strategies for 
environmental improvement that are not encouraged by 
other approaches.

Net erosion reduction per dollar of producer payment is 
much larger in the improved performance scenario than 
in the good performance scenarios. One reason for this 
difference is that a significant share of payments in 
the good performance scenario is devoted to rewarding 
producers who have already achieved a high level of 
environmental performance. Thus, only a portion of 
payments funds further erosion reduction. A second key 
reason for this difference is that land retirement is 
encouraged by the improved performance scenario but not 
by the good performance scenario. When program payments 
are $1 billion, producers in the improved performance 
scenario retire 8 million acres of highly erodible land 
from crop production. Even if land retirement achieves 
only a 10-ton-per-acre reduction in soil erosion, it 
would bring about 80 million tons in soil erosion 
reduction. In contrast, HEL cropland acreage is 
unchanged in the good performance scenario. Thus, if 
agri-environmental payments are extended for good 
performance on land in crop production, policymakers 
may want to coordinate these payments with a land 
retirement program to capture additional environmental 
gains.

Farm Income & 
Welfare Effects

The three policy scenarios simulated by ERS do not have 
a farm income objective, but they do have farm income 
effects. Because the environmental objective is narrow 
(reduce sediment damage to water quality), cross-
analysis of farm characteristics with environmental 
indicators suggests that farm income gains may not be 
widely shared. Nonetheless, a number of insights can be 
derived by examining gains in farm income and consumer 
welfare relative to producer payments (a cost to 
taxpayers).

Because an agri-environmental payment program would be 
voluntary, producers would participate only if payments 
exceed their participation costs. Consequently, farm 
income would increase even if producers were prompted 
to retire land or to adopt practices that are less 
productive as well as less erosive. Crop producers can 
also benefit from higher crop prices that could result 
from a decline in overall production. While crop 
producers gain, however, livestock producers and 
consumers would experience a downside as feed and other 
crop products rise in price.

The good performance and improved performance scenarios 
all support farm income, but in different ways. In the 
good performance scenario with a penalty for expanding 
production on HEL, most payments reward producers who 
have already achieved good performance. Erosion 
reduction and associated costs are modest, so payments 
pass through to farm income almost on a dollar-for-
dollar basis. Because there is little adjustment in the 
farm sector with the good performance scenario, 
commodity price effects are quite small and consumers 
are largely unaffected. 

In contrast, the improved performance scenario results 
in much greater erosion reduction and larger commodity 
price effects as producers change production practices 
or retire land to reduce erosion. In aggregate, farm 
income rises due to receipt of payments and higher crop 
prices, even though livestock producers pay higher feed 
grain prices. Consumers bear some of the cost of higher 
farm income through steeper prices for products made 
with crop commodities, while taxpayers shoulder a 
smaller burden than in the good performance scenario 
for given level of benefits. 

As noted above, however, because of lack of meaningful 
measurements it is not practical to base payments on 
improved performance. Moreover, development of such a 
measurement system would increase program delivery 
costs. If policymakers develop payments based on good 
performance coordinated with land retirement (a more 
realistic scenario), taxpayers will bear the cost both 
of compensation to producers who have already achieved 
a high level of environmental performance and of 
payments for land retirement.

Agri-environmental payments are a potentially important 
part of the agricultural policy toolbox. These payments 
may allow policymakers to zero in on agri-environmental 
issues while providing income support to agricultural 
producers. Program performance, however, depends 
largely on the details of program design and 
implementation. In devising a practical program, 
policymakers may want to consider each objective 
explicitly; exercise caution to avoid unintended 
consequences; coordinate with other agricultural 
programs; and consider whether environmental issues on 
a specific field are best addressed through land 
retirement or improved conservation/environmental 
practices.

These principles, together with efforts to target 
payments to producers who can achieve the greatest 
environmental gain per dollar of cost and to allow 
individual producers the flexibility to select least-
cost alternatives for achieving environmental goals (AO 
June-July 2000), can help to ensure that environmental 
and other objectives are achieved at a minimum cost to 
society.
Roger Claassen (202) 694-5473, Mark Peters, LeRoy 
Hansen, and Mitch Morehart
claassen@ers.usda.gov 

A more complete discussion of agri-environmental 
programs can be found in Agri-Environmental Policy at 
the Crossroads: Guideposts on a Changing Landscape, 
AER-794, January 2001. The publication is available 
online at www.ers.usda.gov/publications/aer794.

RESOURCES & ENVIRONMENT BOX #1

ERS Farm Typology Groups

Small Family Farms (sales less than $250,000)
Limited-resource. Any small farm with gross sales less 
than $100,000, total farm assets less than $150,000, 
and total operator household income less than $20,000. 
Limited-resource farmers may report farming, a nonfarm 
occupation, or retirement as their major occupation. 

Retirement. Small farms whose operators report they are 
retired (excludes limited-resource farms operated by 
retired farmers).

Residential/lifestyle. Small farms whose operators 
report a major occupation other than farming (excludes 
limited-resource farms with operators reporting a 
nonfarm major occupation).

Farming occupation, lower-sales. Small farms with sales 
less than $100,000 whose operators report farming as 
their major occupation (excludes limited-resource farms 
whose operators report farming as their major 
occupation). 

Farming occupation, higher-sales. Small farms with 
sales between $100,000 and $249,999 whose operators 
report farming as their major occupation.

Other Farms
Large family farms. Farms with sales between $250,000 
and $499,999.
Very large family farms. Farms with sales of $500,000 
or more.

Nonfamily farms. Farms organized as nonfamily 
corporations or cooperatives, as well as farms operated 
by hired managers.

RESOURCES & ENVIRONMENT BOX #2
ERS Cross-Analysis of Farm Characteristics and 
Environmental Indicators

Agriculture affects a wide range of environmental 
resources (e.g., water quality), which provide many 
environmental amenities (e.g., water-based recreation). 
Data on environmental indicators are from a county-
level geographic information system that assigns an 
indicator value to each farm included in USDA’s 
Agricultural Resource Management Study (ARMS). The ARMS 
conducted annually by the Economic Research Service 
(ERS) and the National Agricultural Statistics Service 
(NASS) collects data on characteristics of U.S. farms. 
The ARMS is designed to capture the physical, 
financial, demographic, and managerial attributes of 
farm businesses and people engaged in farming. 
Information from the ARMS is used to classify farms 
into categories of the ERS farm typology. 

Many indicators of potential environmental damage could 
be used to determine eligibility of land for agri-
environmental payments. Three indicators used for 
illustrative purposes are: 
--Rainfall erosion acreage--non-highly erodible 
cropland with rainfall erosion rates greater than the 
soil loss tolerance--i.e., the rate of erosion a soil 
can withstand without long-term productivity damage;
--Wind erosion acreage--non-highly erodible cropland 
with wind erosion rates greater than the soil loss 
tolerance;
--Nitrogen runoff acreage--cropland acreage where 
nitrogen runoff to surface water is estimated to exceed 
1,000 kg/km2/year (classified as high by U.S. 
Geological Survey (USGS) researchers).

Soil erosion indicators are based on non-highly 
erodible cropland because it is not currently subject 
to the conservation compliance requirements that apply 
to highly erodible land. The erosion indicators are 
calculated from National Resources Inventory data, and 
the nitrogen runoff indicator is calculated from USGS 
estimates.


RESOURCES & ENVIRONMENT BOX #3
Agri-Environmental Payment Programs: Simulation 
Analysis

To illustrate the effects of program design on program 
performance, ERS simulated the environmental and 
economic effects of three agri-environmental payment 
program scenarios. 

Scenario I: Good performance. A producer receives a 
payment if the estimated rate of soil erosion on the 
farm is below a benchmark rate for similar soils in the 
same region. This benchmark is the estimated erosion 
rate using predominant crop rotations (e.g., corn-
soybeans in the Corn Belt) and conventional tillage 
systems. Producers are paid only if erosion rates are 
below the benchmark rate. Although erosion rates are 
often low on pasture and woodland, non-cropland is 
excluded because of the large acreage and potentially 
prohibitive expense. Previously uncropped land can be 
eligible for payments. However, producers are penalized 
if additional highly erodible land is brought into crop 
production. Magnitude of the penalty is approximately 
the amount of farm price and income support benefits 
and similar to the potential penalty for violation of 
conservation compliance. 

Scenario II: Good performance, no penalty for adding 
highly erodible cropland. Same as good performance 
scenario but no penalty is assessed for bringing 
additional highly erodible land into crop production.

Scenario III: Improved performance. Producers receive 
payment for taking any action that reduces soil erosion 
from a pre-program baseline, no matter how good or bad 
the pre-program performance. 

The objective of each scenario is to increase water 
quality by reducing sediment loads from cropland. The 
scenarios are hypothetical and illustrative only. They 
do not represent analysis of any specific policy 
proposal, although insights gained are relevant. 
Payments depend on a producer’s soil conservation 
performance. The payment rate ranges roughly from $1 to 
$16 per ton of soil conserved and varies regionally 
depending on potential water quality benefits. These 
benefit estimates are likely to be a lower bound to 
actual benefits because some water quality benefits 
have not been measured. 

Economic and environmental effects of alternative agri-
environmental payment program scenarios were analyzed 
using the U.S. Regional Agricultural Sector Model 
(USMP) developed by USDA’s Economic Research Service. 
With its linkage to the Erosion/Productivity Impact 
Calculator (EPIC), USMP can estimate how changes in 
environmental or other policies affect U.S. production, 
demand, trade, input use, environmental indicators, and 
commodity prices. USMP includes 44 agricultural 
commodities and processed products as well as 23 
inputs, and the model is disaggregated into 45 
geographic regions within the U.S.


RESOURCES & ENVIRONMENT
The Change to Conservation: Moving Farmers Toward New 
Production Practices

How much do government conservation programs actually 
influence farmers’ decisions to adopt production 
practices that conserve natural resources? USDA has a 
number of programs that encourage farmers to use 
environmentally beneficial production practices and 
technologies on their farms. Most of these programs are 
voluntary, involving offers of technical assistance, 
education, demonstrations, and cost sharing. But what 
really motivates farmers to operate in a manner that 
enhances conservation efforts? 

The department’s Economic Research Service (ERS) 
examined over the last decade why America’s farmers 
choose to adopt--or not adopt--nutrient (e.g., 
nitrogen), pest, soil, and water management practices 
beneficial to the environment. In particular, the ERS-
led study--called the Area Studies Project--assessed 
how government policies, resources, and education 
influence farmers to use such practices, and how 
differences in kinds of crops, types of technology, and 
particularly geographic regions can further affect 
those decisions. Specific characteristics of the local 
landscape and climate, for instance, may make certain 
practices impossible to implement, and will ultimately 
determine an area’s vulnerability to various kinds of 
agricultural pollution.

Variations in land and climate, by shaping farmers’ 
decisions about the practices they can implement, also 
determine the ultimate efficacy of government 
conservation policies--just as changes in policies 
determine which practices farmers choose to implement 
and the environmental impacts stemming from those 
practices. Understanding these forces and how they 
interrelate is crucial to determining which production 
practices are likely to be attractive to farmers, and 
how effectively they will be employed. 

New Ways of 
Doing Business

Like most people operating a business, farmers want to 
use production methods that maximize profits, given 
existing prices, policies, personal preferences, and 
available resources. If farmers choose not to adopt new 
conservation practices, it is generally because 1) 
adopting those practices is less, or no more, 
profitable than continuing with traditional practices, 
or 2) other considerations interfere--even if adopting 
the new practices would lead to larger profits. 
Consequently, policies designed to encourage farmers to 
adopt certain practices must take into account these 
different orientations.

When a new conservation practice is introduced, it is 
natural for farmers to be uncertain about whether it 
will work in their area. In fact, the practice may have 
to be modified significantly before it can be 
successfully employed in a particular region or on a 
particular farm. As interested local farmers adopt and 
gain more experience with the new practice--and as 
their fellow farmers learn more about the practice from 
them, from the extension service, or from the media--
the associated uncertainties and costs recede. 

Nonetheless, some farmers may still choose not to adopt 
a practice for a variety of reasons. The practice may 
not suit environmental conditions on their farms, the 
size of their farms, or the types of operations they 
run; it may interfere with other practices they 
customarily employ; or skills levels needed for 
successful implementation may vary among farmers. To be 
fully effective, then, government policies designed to 
promote the adoption of conservation technologies and 
management strategies depend on a clear understanding 
of how and why farmers choose certain production 
practices. (For more on designing effective government 
conservation programs, see previous article.)

The Area Studies 
Project Survey

In an effort to determine how farmers make decisions to 
adopt or reject new practices, ERS launched the Area 
Studies Project in 1991, in collaboration with USDA’s 
National Agricultural Statistics Service and Natural 
Resources Conservation Service. The U.S. Geological 
Survey and the U.S. Environmental Protection Agency 
were also extensively involved. For the next 3 years 
(1991-93), a survey team collected data from farmers 
operating in 10 U.S. watersheds, spread throughout the 
country. All these areas were under study by the U.S. 
Geological Survey’s National Water Quality Assessment 
Program, which was initiating an extensive effort to 
monitor water quality. 

In each watershed, the Area Studies team designed the 
survey that was conducted through extensive personal 
interviews with farmers to determine the kinds of 
operations they ran and their agricultural production 
practices. The team gathered a wealth of information on 
farmers (e.g., age and education level) and on how they 
work: kinds of crops and animals they raised; cropping, 
tillage, and soil conservation practices they had 
employed for the past 3 years; biological and chemical 
pest control methods they used in individual fields and 
on the farm as a whole; and how they tested soil, 
applied manure, sought information about fertilizer, 
and actually used fertilizer. The farmers were asked 
about a wide range of practices used to manage 
nutrients, pests, soil, and water, along with 
participation in government programs and use of crop 
insurance. The survey sample was chosen to correspond 
to sample points from the National Resources Inventory 
(NRI).
 
After collecting all the information from the farmers, 
the Area Studies researchers matched it with 
information from the NRI about environmental 
characteristics such as soil erosion potential, 
leaching potential, and productivity, as well as 
regional temperature and rainfall. Researchers then 
looked at the relationship of these factors to various 
technologies, cropping systems, and watersheds to 
identify the principal factors discouraging farmers 
from adopting certain conservation practices. Area 
Studies researchers analyzed the adoption of soil 
conservation and sediment reduction practices (e.g., 
conservation tillage and filter strips), pest 
management practices (e.g., rotations and professional 
scouting), and modern nutrient management practices 
(e.g., N-testing and split nitrogen applications). 

Each analysis used the same set of variables to compare 
the influences of knowledge, government policy, and 
farm and natural resource characteristics on a farmer’s 
decision to adopt a specific practice. Data from all 
the watersheds were initially combined for each 
analysis. Analysis was then conducted on selected 
individual areas to determine whether the conclusions 
were similar, or whether combining the data for all the 
watersheds had skewed the results.

The Will to 
Change

The sheer amount and richness of the Area Studies 
survey data offered researchers a unique opportunity to 
perform a wide range of analyses that would assess 
farmers’ receptivity to new production practices. 
Clearly, for the 10-watershed area as a whole, 
education had a significantly positive effect on 
farmers’ willingness to adopt practices that require 
specialized knowledge such as biological pest control 
or split nitrogen applications. This means that 
government agencies or other technology providers will 
need to consider the increasing complexity of new 
practices when targeting certain groups of farmers. 
Technical assistance, demonstrations, or consulting 
services may be the keys to encouraging farmers to 
adopt these practices. Interestingly, experienced 
farmers are less likely to adopt information-intensive 
practices than novices.

Researchers had initially hypothesized that farmers who 
owned their land would be more likely to invest in new 
practices than farmers who simply rented. However, 
ownership was less of a factor than expected, perhaps 
in part because most of the practices included in the 
study did not require a major financial outlay.

Farmers who owned their land were indeed more likely 
than renters to invest in new irrigation technologies, 
which are initially quite expensive, but the difference 
between the two groups was small. Farmers who chose to 
invest in irrigation were also considerably more likely 
to adopt the pest and nutrient management practices 
considered in the study. That result is not surprising: 
because water is the primary conduit for chemicals that 
end up in ground or surface water, water and chemical 
management naturally go together. Managing water is 
harder for farmers who rely exclusively on rain to 
water their crops, and so their chemical management 
strategies may be less effective.

Farmers who participated in government programs and 
benefited from expert advice were much more likely to 
use virtually all the preferred practices to conserve 
soil, deal with pests, and manage nutrients. At the 
time the Area Studies survey was conducted, farmers who 
received benefits from a number of USDA programs were 
required to use conservation practices: for instance, 
farmers whose farms had potentially critical erosion 
problems had to adopt relevant conservation practices 
in order to participate in the programs. However, the 
study findings suggest that the availability and use of 
technical assistance would in any case have helped 
determine the choices they made to use specific 
practices. Extension and education efforts are both 
important tools for promoting the adoption of new 
production practices--especially with regard to 
practices that require specialized knowledge and 
practices designed to protect the environment beyond 
the farm gate.

When considering specific regions, certain resources 
(e.g., soil characteristics and climate) often proved 
to be a significant factor in farmers’ decisions to 
adopt some of the practices--confirming the idea that 
site-specific information about resources is vital to 
examining and explaining success or failure of 
conservation efforts. Accordingly, it is important to 
remember that the results above represent an 
aggregation of data gathered from 10 distinct 
watersheds, and that important information can be lost 
in the process of combining such data. From a policy 
perspective, it means that incentives developed to 
address environmental concerns identified in an 
analysis of several regions may actually be appropriate 
for only one region and counterproductive if used in 
others. Also, results from individual watersheds can be 
useful in addressing issues such as water quality, 
specific to that particular watershed or site.
Margriet Caswell (202) 694-5540
mcaswell@ers.usda.gov

NOTE: The 10 watersheds included in the Area Studies 
Project are: 1) Central Nebraska River Basins, 2) the 
White River Basin in Indiana, 3) the Lower Susquehanna 
River Basin in Pennsylvania, and 4) the Mid-Columbia 
River Basin in Washington (all surveyed in 1991); 5) 
the Albemarle-Pamlico Drainage in Virginia, 6) the 
Georgia Coastal Plain, 7) Illinois/Iowa Basin, and 8) 
the Upper Snake River Basin in Idaho (1992); and 9) the 
Southern High Plains in Texas, and 10) the Mississippi 
Embayment, which includes parts of Arkansas, Kentucky, 
Louisiana, Mississippi, Missouri, and Tennessee (1993).

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