AGRICULTURAL OUTLOOK                                        July 20, 2001
August 2001, ERS-AO-283
               Approved by the World Agricultural Outlook Board
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CONTENTS

IN THIS ISSUE

BRIEFS
U.S. Corn & Wheat Acreage Declines, While Soybean & Cotton Rise
U.S. Meat Exports To Grow Modestly
Dissecting the Challenges of Mad Cow & Foot-and-Mouth Disease

COMMODITY SPOTLIGHT
U.S. Wheat Supplies To Drop In 2001/02
How Sweet It Is:  Fresh Sweet Corn

RESOURCES & ENVIRONMENT
Development at & Beyond the Urban Fringe: Impacts on Agriculture

SPECIAL ARTICLE
Canada's Subsidized Dairy Exports: The Issue of WTO Compliance

IN THIS ISSUE

U.S. Corn & Wheat Acreage Declines, While Soybean & Cotton Rise
Planted area for eight major U.S. field crops (corn, soybeans, wheat,
barley, sorghum, oats, cotton, and rice) is expected to total 249.9 million
acres in 2001, an overall decline of nearly 5 million acres from last year,
when prices were higher for most crops at planting time.  U.S. farmers--
responding to planting delays for corn, relatively high soybean loan rates,
and full planting flexibility under the 1996 Farm Act--planted an estimated
record 75.4 million acres of soybeans in 2001.  Higher expected returns and
changes in crop insurance are making cotton more attractive than competing
crops.  For corn, weaker price expectations and rising input costs may have
reduced plantings in 2001 to an estimated 76.1 million acres.  Robert A.
Skinner (202) 694-5313; rskinner@ers.usda.gov

Canada's Subsidized Dairy Exports: The Issue of WTO Compliance
A World Trade Organization (WTO) compliance panel ruled against Canada in
July in a dispute over the country's subsidized dairy exports.  The ruling
represents the third time since May 1999 that the WTO, in response to
complaints from the U.S. and New Zealand, has found Canada's dairy export
subsidies to be inconsistent with its WTO commitments.  Under the WTO
Agreement on Agriculture, countries agreed to hold the volume of subsidized
exports to specific levels.  Canada's dairy exports have exceeded those
limits.  Canada has announced its intention to appeal the July decision. 
John Wainio (613) 759-7452; jwainio@ers.usda.gov

U.S. Wheat Supplies To Drop in 2001/02

Despite a strong domestic market for wheat products, U.S. wheat harvested
area continues to drop, down more than one-third from its peak in 1981. 
Adverse weather is expected to push winter wheat harvested area in 2001 to
its lowest level since 1988.  Sharply reduced wheat production in 2001,
combined with lower carryin stocks and only slightly higher projected
imports, will likely drop total wheat supplies to a 5-year low for the
2001/02 marketing year.  Low returns relative to other crops, combined with
planting flexibility provided under current government programs, have led
to the substitution of competing crops for wheat.  The low returns to wheat
are due largely to lackluster export performance.  Gary Vocke (202) 694-
5285; gvocke@ers.usda.gov

How Sweet It Is: Fresh Sweet Corn
Corn-on-the-cob is back.  After more than a decade of nibbling, Americans
enthusiastically embraced fresh-market sweet corn during the 1990s.  U.S.
sweet corn demand has trended higher over the past decade, due largely to
improved quality, consistency, and marketability.  Consumption reached
record highs in the 1990s, enticed by new sweeter varieties and value-added
packaging.  The strong demand, along with rising production and higher
shipping-point prices, pushed average crop value up to $456 million.  Among
the developments supporting further growth in fresh sweet corn consumption
will be an increase in off-season demand and the general upward trend in
fresh vegetable use.  Gary Lucier (202) 694-5253; glucier@ers.usda.gov

Development At and Beyond the Urban Fringe: Impacts on Agriculture
Urbanization and development are affecting the nature of U.S. agriculture,
particularly at the urban fringe.  Development at and beyond the urban
fringe is following two routes: incremental expansion of urban areas, and
scattered large-lot residential development in rural areas (greater than 1
acre per house).  These patterns of development are creating conditions in
which a variety of metro farm types coexists, reflecting different
adaptations to urban influence. Farms in metro areas are an increasingly
important segment of U.S. agriculture, making up 33 percent of all farms
and 18 percent of farmland.  While low-density, fragmented settlement
patterns can disrupt traditional agricultural landscapes, they do leave
room for some agricultural production to continue.  However, to adapt to
the accompanying rise in land values and the increasing contact with new
residents, metro-area farmers may have to alter their operations to
emphasize higher value products, more intensive production, and urban
marketing savvy. Ralph Heimlich (202) 694-5504; heimlich@ers.usda.gov

Dissecting the Challenges of Mad Cow & Foot-and-Mouth Disease
Two animal diseases currently affecting European agriculture--foot-and-
mouth disease (FMD) and bovine spongiform encephalopathy (BSE)--have made
headlines throughout the world.  Simultaneous occurrence of these diseases
in Britain earlier this year caused confusion and concern among consumers
worldwide.  The combined costs to the country's economy have been shared by
agriculture, consumers, tourism, and trade.  Both diseases affect producers
and consumers through changes in livestock product prices, availability of
goods, and costs of production.  Trade is also affected as governments
restrict imports from infected countries.  Kenneth Mathews, Jr. (202) 694-
5183; kmathews@ers.usda.gov

BRIEFS
U.S. Corn & Wheat Acreage Declines, While Soybean & Cotton Rise

Planted area for the eight major U.S. field crops (corn, soybeans, wheat,
barley, sorghum, oats, cotton, and rice) is expected to total 249.9 million
acres in 2001, an overall decline of nearly 5 million acres from last year,
when prices were higher for most crops at planting time. Decreases in corn,
oats, barley, and wheat area more than offset increases in sorghum,
soybean, cotton, and rice. Acreage harvested for hay crops is expected to
expand by almost 4 million, nearly balancing the decline for the major
field crops.

Estimates of planted and harvested acreage in USDA's Acreage report are
based on surveys conducted during the first 2 weeks of June. Compared with
USDA's March 31 Prospective Plantings report, which indicated farmers' crop
intentions for spring plantings in 2001, planted area is 4 percent higher
for cotton and 5 percent higher for rice, but 2 percent lower for soybeans
and 1 percent for corn. 

Yield and harvested acreage for spring-planted crops will be influenced
strongly by weather throughout the growing season. Normal weather would
result in large output and weak farm prices for most U.S. field crops in
2001/02 (AO June-July 2001). However, if additional rainfall does not
alleviate dry-weather conditions, crop potential could be reduced in the
Plains states, the Gulf Coast region, and the southern Atlantic region.

Planting and fieldwork were ahead of normal this spring in the eastern Corn
Belt as drier than usual weather occurred, while rain frequently
interrupted progress in the northern and western Corn Belt. Row crop
planting in the Upper Mississippi Valley and the northern Great Plains was
also delayed this spring. Dry weather prevailed in the Southeast during
most of the spring, allowing farmers to complete planting without delay. By
mid-May, over 90 percent of U.S. corn acreage had been planted and, as corn
planting neared completion, soybean planting accelerated. By the end of
May, 80 percent of soybean acreage was planted, compared with 89 percent
last year. However, persistent wetness in parts of Minnesota and Iowa
prevented farmers from sowing all their intended acreage.

Several factors are behind the rise in soybean plantings this year,
including planting delays for corn and a soybean loan rate (under the
government nonrecourse marketing-assistance loan and loan deficiency
payment program) that is favorable relative to other crops. Full planting
flexibility under the 1996 Farm Act also has allowed U.S. soybean acreage
to expand in response to strengthening demand over the last 5 years. U.S.
farmers are expected to plant a record 75.4 million acres of soybeans in
2001, a 1-percent increase over last year's record. Planted acreage has
increased steadily since 1990 when soybean planted area totaled 57.8
million acres. Farmers are likely to harvest 74.3 million acres, up 2
percent from 2000's record harvested acreage. 

Estimated soybean acreage is likely to expand in the Great Plains, Upper
Mississippi Valley, Great Lakes states, and Northeast, while declining
across the south and southeast states. The largest acreage increases are
expected in Illinois, North Dakota, and Iowa. States with large expected
reductions include Mississippi, Arkansas, and Louisiana, which are likely
to see more cotton acreage. 

For corn, weaker price expectations and rising input costs are expected to
reduce plantings in 2001 to an estimated 76.1 million acres, down 4 percent
from last year. Corn acreage to be harvested for grain is estimated to
decrease 5 percent to 69.3 million acres. Total corn acreage of the major
producing states (IL, IN, IA, MN, NE, OH, WI), at 50.6 million acres, is
expected to be 2 percent lower than last year, due in part to increased
soybean plantings (AO May 2000). Of these states, Indiana will likely be
the only one to boost planted acreage from last year. Outside the Corn
Belt, in South Dakota and Texas, corn acreage is expected to drop sharply
from last year's high levels. USDA reported that 65 percent of the U.S.
crop was in good or excellent condition as of July 16.

Sorghum plantings are expected to rise in 2001 to an estimated 9.7 million
acres, up 6 percent from last year's record-low planted acreage. Kansas,
the largest sorghum-producing state, will likely increase plantings 14
percent to 4 million acres, due in part to plantings on abandoned winter
wheat land. Texas, with 2.9 million acres, is expected to report the
largest reduction, a drop of 100,000 acres from 2000. Sorghum acreage
harvested for grain in 2001, at an expected 8.9 million acres, will likely
be up 15 percent from 2000.

Barley plantings will likely be the smallest planted acreage since records
began in 1926, decreasing 13 percent in 2001 to an estimated 5.1 million
acres. The largest declines are expected in North Dakota and Montana
because of extremely dry conditions. Most of the 2001 barley crop was
planted by late May. As of mid-July, 57 percent of the crop was in good or
excellent condition.

Total wheat acreage planted for harvest in 2001 is estimated at 59.6
million acres, 5 percent lower than last year. Compared with intentions in
the March Prospective Plantings report, plantings are down 1 percent for
total wheat, 12 percent for durum wheat, and 2 percent for other spring
wheat. Producers plan to harvest about 49.3 million acres, a decline of 3.7
million from last year. 

For cotton, higher expected returns and changes in crop insurance are
making the crop more attractive than competing corn and soybeans. Cotton
plantings for 2001 are estimated at 16.3 million acres, up an expected 5
percent from 2000 and 4 percent above the March Prospective Plantings
report. Larger expected acreage in the Delta and southeastern states should
more than offset declines in the southwest and western states. Prospects
for a large U.S. crop have contributed to the recent rapid decline in
cotton prices.

Texas, the largest cotton-producing state, completed most plantings by late
June. In mid-July, 33 percent of the Texas crop was rated in good or
excellent condition and 30 percent in fair condition. California's planting
began in mid-March but was slowed by cool, wet weather in early April.
Although some fields had to be replanted because of April storms, cotton
development in California is near normal, with 100 percent of the crop in
good or excellent condition as of mid-July.

Higher expected prices for long-grain rice are responsible for much of the
anticipated increase in rice acreage. Rice plantings for 2001 are estimated
at almost 3.3 million acres, likely up 6 percent from 2000, with long-grain
acreage up an estimated 19 percent. In contrast, combined short- and
medium-grain plantings are expected down nearly 7 percent--with Arkansas
likely accounting for the bulk of the decrease--due to weaker prices in
2000. 

Robert A. Skinner (202) 694-5313
rskinner@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 are at (202) 694-
5300.

BRIEFS
U.S. Meat Exports To Grow Modestly

Modest growth in overall red meat and poultry exports is expected this year
and in 2002. Beef and pork exports are likely to exhibit a mixed pattern,
while broiler exports are expected to increase. Disease problems--bovine
spongiform encephalopathy (BSE) and foot-and-mouth-disease (FMD)--in the
European Union (EU) disrupted meat trade this year, but some EU countries
have recently been designated FMD-free by major meat importers. 

Since 1997, U.S. meat exports have grown at an average annual rate of about
4 percent, compared with double-digit growth in the previous 10 years.
During the boom of the early 1990s, trade agreements made several meat
markets more accessible--such as Korea, Japan, Mexico, and Canada--and many
countries experienced increased income growth. Also, growth rates in the
early 1990s were particularly noteworthy because they followed years of low
exports. 

Recent slower growth in meat exports can be traced to a healthy U.S.
economy with consumers bidding to keep meat in the U.S., increased
competition from other meat exporting countries, and economic uncertainties
in some key importing markets (Russia and Asia). 

Despite a 2-percent decline in U.S. beef supplies and marginally higher
prices, U.S. beef exports (primarily fed beef) are expected to rise about 4
percent in 2002, compared with a 5-percent decline in 2001. The increase is
based on two factors: economic growth stimulating demand in major beef
markets, and limited supplies from South America and the EU because of FMD
and BSE considerations. Of the major exporting countries, only Canada is
expected to have substantially higher supplies available for export next
year. 

U.S. beef imports (primarily processing beef) are on track to be up about 1
percent in 2001 and 2002 as cow slaughter continues to decline. Higher beef
prices and the strong dollar will provide incentives for Australia and New
Zealand to export to the U.S. Exports from Argentina and Uruguay will be
limited due to FMD problems that preclude shipments of fresh/chilled and
frozen beef. 

Live cattle exports are expected to drop from the record 481,000 head in
2000 to 410,000 in 2001. Exports are expected to decline another 9 percent
in 2002 as lower U.S. feeder cattle supplies and record high U.S. prices
limit Canadian imports of feeder cattle. Canada, as a result of changes to
the protocol of the Restricted Feeder Cattle Project (RFCP), has surpassed
Mexico as the dominant market for exports of live cattle. RFCP was designed
to allow export of U.S. feeder cattle from designated states to Canadian
feedlots from mid-October through mid-March without unacceptable risk of
carrying bluetongue and anaplasmosis.

After reaching the highest level in 5 years in 2000, cattle imports are
likely to rise to 2.325 million head in 2001 and drop back to 2.175 million
in 2002. Cattle imports have been quite variable historically, but
increased 11 percent between 1996 and 2000. Growing imports from Mexico
more than offset declining imports from Canada. Imports from Mexico are up
because of increasingly attractive feeder cattle prices in the U.S. and
genetic improvements in Mexican feeder cattle. Live cattle imports from
Canada are down as changes in Canadian policy have encouraged cattle
feeding, slaughter capacity has expanded, and Canada began rebuilding
herds. 

U.S. pork exports are forecast at roughly 1.44 billion pounds for this year
and drop to 1.4 billion in 2002. Major U.S. export markets will continue to
be Japan (50 percent), Mexico (20 percent), and Canada (10 percent). 

The 2001 forecast for pork imports is 956 million pounds, down from 2000
because of  the 10-week ban on imports from the EU due to the FMD outbreak.
Resumption in imports from Denmark likely will boost imports in the second
half of the year. U.S. pork imports are forecast at about 1 billion pounds
in 2002.

The trend toward higher U.S. imports over the past 5 years is a reflection
of the expanding Canadian pork industry and its growing integration with
the U.S. industry. The integration is likely to continue, with Canada's
share of U.S. imports eroding Denmark's share. In 2000, Canada accounted
for 76 percent of U.S. pork imports, Denmark 15 percent. By comparison,
Canada's share of U.S. imports was 49 percent in 1990, while Denmark's
share was 30 percent.

Integration of the North American pork industry is also apparent from the
Canadian perspective. Last year, the U.S. accounted for 90 percent of
Canadian pork imports; in 1990, the U.S share was 80 percent. However,
Canada remains a net pork exporter to the U.S. In 2000, the U.S. imported
595 million pounds more pork on a carcass-weight basis than it exported to
Canada.

U.S. live hog imports are forecast at 4.7 million head for both 2001 and
2002, compared with 4.36 million head in 2000. Canada's feeder pig export
sector is growing while a hog-finishing sector has been developing in U.S.
Corn Belt states. Continuing expectations for low feed prices also are
contributing to the higher forecast. First-quarter 2001 live hog imports
from Canada were over 1.2 million head, 58 percent of which were feeder
animals.

The increase in broiler exports to Russia and Hong Kong in 2000 and the
first quarter of 2001 will likely continue into 2002. In 2002, U.S. broiler
exports are expected to be about 6.2 billion pounds, up nearly 5 percent
from the projected exports for 2001. If the 2002 production and export
forecasts are realized, exports will account for about 20 percent of
domestic broiler production.

U.S. turkey exports in 2002 are expected to total 495 million pounds, up
slightly from 2001. The largest customers (Mexico and Russia) are expected
to have continuing economic growth. 

For further information, contact: 
Leland Southard, coordinator; Ron Gustafson, cattle; Leland Southard, hogs;
Mildred Haley, world pork; Dale Leuck, world beef; David Harvey, poultry.
All are at (202) 694-5180.

BRIEFS
Dissecting the Challenges of Mad Cow & Foot-and-Mouth Disease

Two animal diseases currently affecting European agriculture--foot-and-
mouth disease (FMD) and bovine spongiform encephalopathy (BSE)--have made
headlines throughout the world. Simultaneous occurrence of these diseases
in Britain earlier this year caused confusion among consumers worldwide
about the issues and interrelationships, and the combined costs to the UK
economy have been shared by agriculture, consumers, tourism, and trade. 

Both diseases affect producers and consumers through changes in livestock
product prices, availability of goods, and costs of production. Trade is
also affected as governments restrict imports from FMD- and BSE-infected
countries to protect human health, animal health, and domestic livestock
industries. The U.S. has a vested interest in the trade aspects of animal
health issues worldwide, as U.S. exports of cattle, sheep, hogs, and their
products account for about $6-$10 billion, or roughly 10 percent of the
value of U.S. farm-level cash receipts for these species.

Bovine Spongiform 
Encephalopathy

BSE, also called mad cow disease, is a neurological disease in cattle that
was first discovered in Britain in 1986. BSE peaked in British cattle in
1993, and initially it was thought BSE affected only cattle. However, in
1996, the British government announced a possible link between BSE and a
new human variant of Cruetzfield-Jacob Disease (nvCJD), and BSE also became
a human health/food safety issue. 

BSE and its human form, nvCJD, are always fatal. The human version of BSE
is thought to be acquired by consuming certain beef or other products from
infected cattle. Because nvCJD appears to have an incubation period
spanning several years, it is not known if its incidence has peaked in
humans. 

The United Kingdom (UK)--of which Britain is a part--has been disposing of
BSE-infected cattle since 1986, with indemnity payments to farmers and
adverse effects on beef production, consumption, and market prices. Cow
herds infected with BSE are quarantined and killed, but neighboring farms
are not at risk unless their cattle are also fed infected feed. The 1996
outbreak was followed by an immediate 40-percent drop in sales of beef
products and a 26-percent drop in household consumption of beef and veal.
Total first-year losses to BSE were estimated at 740-980 million
(US$1.07-$1.4 billion). The long-run effect on shares of expenditures on
beef and veal in the UK are estimated to be a 4.5 percent drop.

Since its discovery in 1986, over 30 hypotheses have been offered for BSE's
origin, but the exact cause remains unknown. The lead hypothesis points to
rogue proteins (prions) in meat and bone meal produced from sheep infected
with scrapie, a related neurological disease. The prions are then thought
to be passed on to cows fed this infected meal, causing BSE in cows, and
the disease is spread by feeding other cattle prion-infected meat and bone
meal produced from infected cows. There is no evidence that BSE spreads
through contact between unrelated adult cattle or with other species.

BSE has been confirmed in native cattle in over a dozen other countries,
although over 95 percent of all BSE cases have occurred in the UK. There
have been no confirmed cases of BSE or nvCJD in the U.S.

Foot-and-Mouth 
Disease

In February 2001, FMD, a highly contagious viral livestock disease, broke
out in the UK. The outbreak added to the economic burden of BSE by setting
off an additional series of livestock dispositions, indemnities, and
effects not only in the agricultural sector, but in tourism and other
sectors as well, because of restrictions on travel and animal movement. FMD
primarily affects cloven-hoofed animals, such as cattle, sheep, elk, and
deer, and can significantly reduce meat and milk production. 

Unlike BSE, FMD is not usually fatal to livestock and consumption of meat
from infected animals is not considered a food safety issue. There have
only been around 40 documented cases of FMD infection in humans worldwide
to date--none in the current outbreak. All human cases have been mild and
are thought to be due to ingesting unpasteurized infected milk, contact
with the airborne virus, or direct contact with infected animals.

Meat from FMD-infected livestock does not pose food safety risks because
biochemical changes during processing and cooking destroy the virus. FMD
does, however, affect meat and dairy supplies and trade status. Infected or
exposed livestock are quarantined and killed, reducing supplies of
livestock products. As of July 9, 2001, more than 91 million (US$63
million) in claims had been paid to UK producers. Livestock on farms within
the quarantine areas that have not been infected can still be consumed
within the quarantine area. Domestic supplies of livestock and livestock
products in countries with FMD may even increase as international trading
partners ban importation of these products. However, local shortages may
appear due to restrictions on animal movement. Only live animals and fresh
meat products are banned. Cooked, sealed meat products are not included in
the ban.

FMD is very difficult to control. It has occurred in almost every country
of the world at some point in history and is endemic in Africa, Asia, and
most of South America.  Vaccination can help stem an outbreak, but it is
not totally effective and jeopardizes export markets--vaccinated animals
can be FMD carriers and are thus banned from international commerce.
Whether or not to vaccinate susceptible animals against FMD is a key policy
issue faced by countries with FMD and by their trading partners. 

Impacts & 
Implications

BSE and FMD vary in their potential as threats to producers and consumers
and in their reach regarding the number of animals and people each affects.
Around the world, FMD has affected more animals than BSE.

Both FMD and BSE affect livestock product prices in producing and consuming
countries because of the effect of disease-response policies on supplies
and trade. Prices for livestock and livestock products have declined in the
short run in the UK because of BSE and FMD. 

Unlike FMD, BSE has very serious implications for human health and food
safety. In terms of numbers, nvCJD is known to have caused about 100 human
deaths (97 in the UK, 2 [possibly 3] in France, and 1 in the Republic of
Ireland as of March 30, 2001). About 40 FMD infections in humans have been
documented worldwide, though none have been confirmed in the current
outbreak and none were serious illnesses. BSE is a more severe animal
illness than FMD, as it is invariably fatal. 

The economic impact of these two animal diseases varies considerably. The
UK Department for Environmental, Food, and Rural Affairs (formerly the
Ministry of Agriculture, Fisheries, and Food) estimates costs of BSE to the
UK at over $5 billion to date. Economic effects of the recent FMD outbreaks
on the British economy and its European Union neighbors have affected
agriculture, food consumption, trade, and tourism all over Europe.
PricewaterhouseCoopers estimates the range of economic impacts to the UK
from 2.5 to 8 billion (US$3.6 to $11.6 billion), or between 0.3 and 0.8
percent of GDP. 

Surveillance programs and strict import restrictions are in place to
prevent FMD and BSE from entering the U.S. Surveillance costs in the U.S.
for all agricultural products are reflected in budgets for the Agriculture
Quarantine Inspection Program amounting to $278 million for FY 2001 and
$296 million for FY2002. However, it is difficult to separate surveillance
costs for BSE and FMD from costs for other diseases. 

Measures to prevent occurrence of BSE include regulations limiting the type
of feed that can be fed to ruminants, like cattle and sheep. Ruminant feed
cannot contain animal protein derived from mammalian tissues. U.S.
production of meat and bone meal was just under 4.2 billion pounds in 2000,
which was worth about $360 million. Prices for substitute protein
supplements, such as soybean meal, are likely to increase as producers
reduce feeding of meat and bone meal. Other uses will have to be found for
meat and bone meal not used for feed, or disposal methods will need to be
devised.

The U.S. has been free of FMD since 1929, when the last of nine outbreaks
was eradicated. BSE has never been detected in the U.S. On May 24, 2001,
the President signed into law the Animal Disease Risk Assessment,
Prevention, and Control Act of 2001 (PL107-9). The Act calls for
establishment of a Federal interagency task force to coordinate actions
among Federal agencies to prevent the outbreak of BSE and FMD in the U.S.
The task force will report to Congress on coordination of interagency
activities. It will also report publicly available sources of Federal
government information on the diseases, and any immediate needs for
additional legislation to prevent the introduction of BSE and FMD.  

Kenneth Mathews, Jr. (202) 694-5183 and Jean Buzby (202) 694-5370
kmathews@ers.usda.gov
jbuzby@ers.usda.gov

COMMODITY SPOTLIGHT
U.S. Wheat Supplies To Drop In 2001/2002

Despite a strong domestic market for wheat products, U.S. wheat harvested
area continues to drop, down more than one-third from its peak in 1981.
Moreover, adverse weather is expected to push winter wheat harvested area
in 2001 to its lowest level since 1988. Low returns relative to other
crops, combined with the planting flexibility provided under current
government programs, have led to the substitution of competing crops for
wheat. The low returns to wheat are due largely to lackluster export
performance. U.S. wheat exports have shown little increase since 1996/97,
as U.S. share of the global wheat market continues to erode, dipping in
1999/2000 to the lowest in three decades, and barely increasing in 2000/01
and 2001/02.

2001/02 Production To 
Fall Below Last Year

U.S. wheat harvested area for 2001 is projected at 49.3 million acres, down
3.7 million acres from last year. Wheat yields are also projected to be
down from last year because of adverse weather in some areas--40 bushels
per acre compared with 41.9 bushels. Total U.S. wheat production is
projected at only 1,974 million bushels, the lowest since 1978.

Sharply reduced wheat production, combined with lower carryin stocks and
only slightly higher projected imports, will likely drop total wheat
supplies to a 5-year low of 2,942 million bushels for the 2001/02 marketing
year. Domestic use is projected to be down 43 million bushels from last
year's 1,325 million bushels, as projected feed and residual use declines
more than food use increases. Feed and residual use is 60 million bushels
lower, with weak corn prices and large corn supplies expected to keep wheat
feeding in check. Population growth is expected to increase food use by 10
million bushels.

Because total projected use (including exports) exceeds projected
production plus imports, ending stocks are forecast to drop to 610 million
bushels for the 2001/02 marketing year. This represents a decline of 263
million bushels from 2000/01 and 340 million bushels from the recent peak
in 1999/2000. Consequently, the farm-gate price is projected to rise in
2001/02, ending up in the range of $2.70 to $3.30 per bushel. By
comparison, the season-average prices for the 2000/01 and 1999/00 marketing
years were an estimated $2.62 and $2.48. Higher prices will allow a larger
percentage of the nation's wheat producers to cover their costs (see box).

With reduced U.S. wheat supplies and expected higher U.S. wheat prices,
exports are projected to decline. Wheat exports in 2001/02 are projected to
be 1.05 billion bushels, compared with 1.065 billion bushels a year
earlier. 

Both Winter & Spring 
Wheat Production Down

U.S. winter wheat production, forecast at 1,366 million bushels in 2001, is
197 million bushels or 13 percent below 2000 and the lowest since 1978. The
U.S. winter wheat yield is forecast at 43.2 bushels per acre, down 1.4
bushels from last year's 44.6. Harvested area totals 31.7 million acres,
down 10 percent from 2000. This harvested area is the lowest since 1933.

Winter wheat production in most states will decline from a year ago. The
largest projected declines are in Kansas, Oklahoma, South Dakota, and
Washington. Texas is an exception, with production projected to recover
from last year's poor crop due to both higher harvested area and yields.

Hard red winter (HRW) is the largest U.S. wheat class. HRW harvested area
is projected to be 21.4 million acres, down 9 percent from a year earlier.
Dry conditions, which delayed seeding and slowed emergence last fall, was
the leading cause of lower acreage. In Texas and Oklahoma, excessive
rainfall followed dry conditions and further hindered planting. Summer
drought in Montana continued into the fall, leading many farmers to reduce
their planted acreage. Despite the weather, yield is forecast up 0.8 bushel per
acre nationally. However, because of the acreage decline, total production will
likely be down 62 million bushels in 2001.

Soft red winter (SRW) harvested area is down 13 percent from last year to 7
million acres. Nationally, various weather problems have reduced estimated
SRW yields 7 percent below last year, even though Missouri, Kentucky, and
Tennessee now expect record yields. SRW production is forecast at 380
million bushels, 91 million below a year ago.

Projected white winter (WW) wheat harvested area totals 3.3 million acres,
down just 2 percent from 2000. Yields, however, are estimated to be down 16
percent because of dry conditions in the Pacific Northwest. WW production
is forecast at 204 million bushels, 44 million bushels lower than last
year.

Spring wheat production, excluding durum, is forecast at 513 million
bushels, down 37 million bushels from 2000. Harvested area is up slightly,
but yields are down 9 percent overall and off sharply in Idaho, Minnesota,
and the Pacific Northwest states.

U.S. durum production is forecast at 94 million bushels, down 16 million
bushels from last year. Continued disease problems and the cancellation of
a lucrative crop insurance option help explain the reduced area. Durum
yields are projected to average 31.6 bushels per acre, down slightly from
last year. 

World Wheat Production 
To Drop 

Global wheat production is forecast down almost 11 million tons to 568
million in 2001/02. However, most of the drop is in the U.S., with foreign
production down less than 4 million tons. Wheat crops in many countries
have critical growing stages still ahead, so weather and other factors are
likely to modify production estimates. 

Production by major competing exporters is expected to be lower, mostly
because European Union (EU) prospects are down 9 million tons from a year
earlier. Excessive rains across parts of Spain, France, and the entire
United Kingdom (UK) prevented normal wheat planting in the fall of 2000. UK
wheat area is forecast down 19 percent, with smaller but significant
declines in France and Spain. Adverse weather conditions continued into the
early summer in some areas, and EU yields are forecast down 3 percent from
last year.

Increased production prospects in Argentina and Australia will offset about
one-fifth of the EU drop. Dryness in some parts of Australia limited
planted area, and wheat production is forecast up only 0.3 million tons as
yields in some regions return to trend after last year's drought. Larger
planted area is expected to raise Argentina's wheat production 1.5 million
tons. 

Canada is expected to expand area slightly, as indicated in official
planting surveys, despite weather problems. Late spring dryness hampered
early growth in western Saskatchewan and Alberta, while excessive rainfall
plagued Manitoba and parts of eastern Saskatchewan. Canada's 2001/02 wheat
production is projected down nearly 2 million tons compared with last year. 

In China, May was the hottest and driest in the last 20 years across much
of the North China Plain. Wheat was mostly in the filling stage and
suffered, although irrigation limited losses. Also, relatively low wheat
price supports led farmers to plant smaller area. The adverse conditions
are expected to drop China's production to 96 million tons, down almost 4
million tons from a year earlier and the lowest in 10 years. 

India and Pakistan are not expected to match the previous year's record
production because of dryness and limited irrigation supplies. India's
production is forecast down 10 percent, or nearly 8 million tons in
2001/02, while production in Pakistan is expected to drop over 2 million
tons. Wheat production in the Middle East is forecast to increase only
slightly from last year's drought-reduced level. While some countries, like
Syria, received more rain than a year earlier, others, like Turkey, saw
conditions worsen. Drought persisted in parts of North Africa as well,
while some parts of the region, like northern Morocco, received better
rains. North Africa is forecast to increase production by more than 2
million tons from last year's low level. 

Countries of the former Soviet Union are expected to harvest a wheat crop
of over 75 million tons, which is up more than 11 million tons from the
previous year. Much of the increase is due to expanded plantings and
improved growing conditions in Ukraine, but also to increased production in
Russia. Eastern Europe has more moisture in some countries, especially in
the North, while drought persisted in parts of Romania and Bulgaria. The
drought limited Eastern Europe's rebound to 4 million tons from last year's
drought-induced level of 28 million tons.

Foreign Use Grows & 
World Ending Stocks Decline

Foreign wheat consumption is projected to increase more than 5 million tons
to 558 million tons in 2001/02. Foreign food use is expected to increase
over 1 percent, but less than population growth. Total wheat consumption is
expected to expand the most in India and the former Soviet Union, while
declining in the EU, China, and Canada. Wheat consumption in North Africa
and the Middle East is forecast to change little. 

Slow consumption growth combined with continued reductions in production
are expected to reduce global wheat stocks by almost 25 million tons in
2001/02. This is the largest decline (16 percent) in global wheat stocks
since 1986/87, when U.S. stocks plummeted with implementation of the 1985
Farm Act. In 2001/02, foreign wheat stocks are projected down 18 million
tons, with most of the drop in China. Competing major exporters' stocks are
forecast down over 2 tons. India's stocks are forecast down 3 million tons
as production drops, consumption increases, and subsidized exports
continue. However, Indian Government stocks are expected to remain above
target levels.

China's Government does not publish estimates of grain stocks. In the past,
USDA's independent estimates of stocks performed well as an indicator of
conditions in China's grain market. Recently, however, new information from
China's first agricultural census, official statements, and evidence from
trade and price patterns indicate that stocks are larger than USDA
previously estimated. There is little indication of tightness in China's
wheat market, even though output and stocks have declined. The stock
estimates have been revised to more accurately reflect grain supply and use
in China.

World Wheat Trade Forecast Up, 
U.S. Exports Down in 2001/02

World wheat trade in 2001/02 is projected to reach 107 million tons
(excluding intra-EU trade), up 4 million tons from the previous year's
level, but 5 million less than in 1999/2000.

Many of the largest importers are not expected to increase purchases.
Brazil's imports are forecast to decline 0.3 million tons to 7.3 million,
because of increased production and stagnant demand. Iran is projected to
maintain imports at 7 million tons despite a modest increase in production,
as stocks are low after several years of drought. Egypt's wheat imports are
expected to increase slightly to 6 million tons, but remain well below the
1998/99 peak of 7.4 million tons because of increased production and flat
consumption. Japan's imports are also forecast down slightly to 5.8 million
tons, with consumption declining slightly. Eastern Europe and the former
Soviet Union are forecast to reduce imports by 1 million tons and 0.4
million tons, respectively, because of increased production.

Many importers are expected to increase imports by a small amount in
2001/02. China is projected to increase imports by 1.5 million tons because
of reduced production, lower stocks, and a preference for imported wheat
for blending. Pakistan is likely to increase imports 0.5 million tons as
production drops. Lower production will help boost Mexico's imports by a
forecast 0.4 million tons. More use of wheat for feed is expected to boost
imports by South Korea and the Philippines by 0.5 million tons each, and
Israel by 0.2 million tons. The EU is forecast to import 0.3 million tons
more for blending. Indonesia is expected to boost imports 0.3 million tons
because of expanding consumption. 

Exporters' Supplies To Keep 
a Lid on Prices

Exporters are forecast to have sufficient supplies to satisfy increased
demand, but prices are expected to rise as supplies are less abundant.
Large production in Canada, Australia, and Argentina is expected to boost
their 2001/02 wheat exports by a combined 2.5 million tons. India, Ukraine,
and Eastern Europe are expected to boost exports of relatively low-quality
wheat by nearly 4 million tons. 

The EU is expected to reduce exports 1.5 million tons because of lower
production. The Grain Management Committee of the European Commission is
likely to be concerned with ensuring stable internal prices, and thus will
limit exports. Exports by Turkey and Pakistan are also expected to decline
because of reduced production. 

U.S. exports are forecast up 0.5 million tons to 29 million in 2001/02.
Tight wheat supplies are expected to keep U.S. prices relatively high,
shifting importers' purchases to other sources and reducing the U.S. share
of world wheat trade to 27 percent (excluding intra-EU trade), the second
lowest in three decades.  

Gary Vocke (202) 694-5285 
and Ed Allen (202) 694-5288
gvocke@ers.usda.gov
ewallen@ers.usda.gov

COMMODITY SPOTLIGHT BOX
Production Costs Vary Widely

Farmers who grow annual field crops, such as wheat, decide each year what
mix of crops to plant. Annual production decisions are usually based on
whether the grower expects the price received for the crop to cover
operating costs, including seed, fertilizer, chemicals, fuel, custom
operations, repairs, and interest on operating inputs. Longer term
decisions on continuing to raise the crop will consider whether or not
expected prices over several years will cover both operating and ownership
costs. Ownership costs are mainly the costs of maintaining the capital
stock used in production, including costs for asset depreciation, interest,
taxes, and insurance.

Production costs for wheat vary considerably across the nation. A
cumulative distribution of operating costs for 1998 reveals, for example,
that farmers produced 50 percent of the wheat crop at $1.20 per bushel or
less; 75 percent at $1.60 per bushel or less; and 90 percent at $2.25 per
bushel or less. For operating and ownership costs, the cumulative
distribution indicates that 50 percent of the 1998 wheat was produced at
$2.25 per bushel or less; 75 percent at $3 per bushel or less; and 90
percent at $3.90 per bushel or less.

The fact that 90 percent of wheat was produced at an operating cost of
$2.25 per bushel or less in 1998 helps to explain why U.S. wheat growers
continue to plant wheat despite the low prices of recent years. During the
past four crop years, the farm-level price for all wheat averaged $2.79 per
bushel, ranging from a low of $2.48 in 1999/2000 to a high of $3.38 in
1997/98. However, for many farmers, prices do not cover both operating and
ownership costs. Farmers cannot continue to grow wheat over several years
if they cannot cover ownership costs and thus replace capital stock as it
deteriorates. Also, these costs do not include opportunity costs for owned
resources, which may also affect the longrun decision about producing wheat
(opportunity costs include foregone earnings from alternative uses of land
and farmers' labor).

Many producers have continued to grow wheat despite low farm-level prices
because of the impact of government payments. Loan deficiency payments and
marketing loan gains added about $0.19 per bushel to gross returns for the
1998 wheat crop. Also, many wheat producers received flexibility contract
payments and emergency assistance that may have helped cover some of
wheat's production costs.

For further information on commodity costs and returns, contact Mir Ali
(202) 694-5558 or William McBride (202) 694-5577 or visit the ERS web site
at http://www.ers.usda.gov/Data/CostsAndReturns.

COMMODITY SPOTLIGHT
How Sweet It Is: Fresh Sweet Corn

Corn-on-the-cob is back. After more than a decade of nibbling, Americans
enthusiastically embraced fresh-market sweet corn during the 1990s.
Consumption reached record highs in the 1990s enticed by new sweeter
varieties and value-added packaging. This strong demand, combined with
rising production and higher shipping-point prices, pushed average crop
value up 81 percent between 1988-90 and 1998-2000 to $456 million. 

Sweet corn is a member of the Gramineae (grass) family (as are wheat,
barley, and rice) and a native of the tropical Americas. It is a subspecies
of the genus Zea (species mays) that has been a staple crop in Central and
South America for thousands of years. Sweet corn is actually a genetic
mutation of field corn and was reportedly first grown in Pennsylvania in
the mid-1700s, with the first commercial variety introduced there in 1779.
The natural mutation in sweet corn causes the kernel to store more sugars
than field corn. Ironically, this mutation may have been considered a
nuisance for centuries as it interfered with the storability of field corn.

Sweet corn is harvested before it matures, while the sugar content is still
high. Most varieties of sweet corn feature kernels that are yellow (most
popular), white, or bicolor (a combination resulting from cross-
pollination). Florida growers favor yellow varieties (due to buyer demand)
while California growers are increasingly favoring white varieties.
Although there may be regional consumer preferences for corn color,
sweetness is not related to color. 

Today, most sweet corn varieties fall into one of three genetic types--
normal sugary, sugary-enhanced, and supersweet. The sugary enhanced hybrids
are sweeter than the older cultivars, but the supersweets, which now
predominate, are even sweeter and offer extended shelf life. Because sugar
content is maintained longer, sweet corn can be more easily shipped long
distances while maintaining peak marketability. The supersweet varieties
introduced (and refined) over the past 15 years allow corn to hold optimal
quality for at least 10 days, twice that of other types. Supersweets have
been around for several decades, but until the late 1980s failed to catch
on with most growers because of poor germination and very low yields in
varieties available at that time. 

In the U.S., sweet corn is produced for three distinct markets--fresh,
canning, and freezing. These markets largely operate independently, with
separate supply, demand, and price characteristics. The canning market is
the largest in terms of total acreage and production, accounting for 37
percent of each. However, like broccoli, carrots, and other dual-use (fresh
and processing) vegetables, the fresh market accounts for the majority
(two-thirds) of total sweet corn crop value. 

Fresh Market 
Is Seasonal

In 2000, area harvested for fresh-market sweet corn reached a record high
246,900 acres and production was second only to the 1998 high. During 1998-
2000, Florida was the leading producer of fresh-market sweet corn with 22
percent of the U.S. crop. California (17 percent), Georgia (13 percent),
and New York (11 percent) are also leading producers. Sweet corn for
processing is grown primarily in Wisconsin, Minnesota, Washington, and
Oregon. 

Production of fresh-market sweet corn is highly seasonal, reflecting both
past production trends and consumption habits. Peak volume occurs during
July, with 60 percent of total marketings in May-August. Although shipments
peak around July 4, they are also strong around the Memorial Day holiday--
typically the start of the picnic and vacation season.

Movement during the winter quarter (January-March) accounts for only about
10 percent of annual volume, with the majority supplied by Florida and
supplemented by imports from Mexico. Increased winter movement during the
1990s largely reflects both better marketing (largely pre-packaged ears of
corn) and the adoption of newer varieties with longer shelf life. These
varieties have proven popular with consumers and retailers and could help
further expand the domestic market by fostering off-season demand. 

In addition to using varieties that maintain tenderness and sweetness over
an extended period, fresh-market growers and shippers have taken other
steps to enhance product quality and marketability. Because sugar in the
kernel is converted to starch as corn matures, harvest timing is critical.
The conversion of sugar to starch is more rapid at higher temperatures, so
corn is moved quickly from fields to special coolers where field heat is
removed by vacuum (cold air) cooling, hydrocooling (cold water), and/or
package icing. 

Once harvested (mostly by hand), fresh sweet corn has a relatively narrow
market window, which varies greatly with variety and the temperature at
which it is held. Sweet corn must be shipped to market in refrigerated
transports soon after harvest. If harvested too late or left uncooled for a
couple of days, it can be bland, tough, and tasteless. 

Fresh-Market Prices
Trending Higher

Shipping-point prices for fresh-market sweet corn (unadjusted for
inflation) tied the 1995 record high of $18.30 per cwt during the 2000
season, up 22 percent from 1990. After adjusting for inflation, the season-
average price received by growers in 2000 was about the same as in 1990 and
in the early 1960s. Unlike the canning and freezing corn markets, which
almost exclusively feature contract pricing between growers and processors,
most fresh sweet corn is priced on the daily spot market. 

During the 1990s, monthly fresh sweet corn shipping-point prices trended
upward until mid-1996 when prices slumped slightly. This pause in the price
trend, which continued until 2000, was likely the result of uneven
increases in supplies as shippers sought to meet an expansion of market
demand. As supply and demand evened out in late 1999 and into 2000, market
prices resumed their upward trend. Retail prices are not reported for sweet
corn.

Despite recent increases in production and imports during the cooler months
of the year, interseasonal price patterns have been constant for the past
two decades. Prices begin to decline in March before falling off sharply in
April when production in central Florida begins to flow to market. Prices
continue to decline through the seasonal low in June before July 4 holiday
demand slightly increases average prices. As supplies become available from
more states during the summer, prices settle at low levels through
September. Then as cool weather and frost ends production in all but
southern states, prices climb and fluctuate through the end of the year.

Trade Increasing,
But Still Small

World trade has traditionally been a minor part of the U.S. fresh sweet
corn market. The U.S. leads the world in sweet corn exports and is a net
exporter of fresh sweet corn, shipping twice the volume imported. During
1998-2000, the U.S. exported 4 percent of production while importing just 2
percent of the sweet corn consumed domestically. 

With the strong dollar, higher consumption of fresh vegetables, and lower
(or phased out) import tariffs, import volume averaged 180 percent higher
in the 1990s than during the 1980s. Sweet corn imports have continued to
grow, with 2000 volume more than double the average of the 1990s. Mexico
provided 92 percent of fresh sweet corn imports during 1998-2000, with the
majority arriving during the winter (December to April). 

On the export side, growth has slowed over the past two decades. Volume
during the 1990s averaged 77 percent higher than in the 1980s, but 2000
exports were just 14 percent above the 1990s average. Canada received 84
percent of U.S. fresh sweet corn exports during 1998-2000, with the United
Kingdom a distant second at 5 percent. The majority of exports occur before
the Canadian crop is harvested (between April and July), with peak volume
in May and June.

Consumption Trend 
Sweetens

U.S. sweet corn demand has trended higher over the past decade due largely
to improved quality, consistency, and marketability. According to Fresh
Trends, 2001 (Vance Publishing), 87 percent of surveyed consumers rate
taste as the top attribute in purchasing fresh produce. Product appearance
is also important. Therefore, the late 1980s introduction of husked and
trimmed ears in attractive tray packs (many microwaveable) may have boosted
the appeal of sweet corn. Retailers may also be more interested in sweet
corn, given the extended shelf life of supersweet varieties and more
sophisticated handling and packaging at the shipping point, each of which
help to reduce retail shrinkage and improve customer satisfaction.

Rising consumption over the past decade is due in large part to the success
of the fresh sweet corn industry in providing an improved product. Domestic
consumption of fresh sweet corn averaged 2.6 billion pounds during 1998-
2000--up 62 percent from 1988-90. In fact, consumption of sweet corn has
been rising since the early 1920s. Per capita use of fresh sweet corn
trended up from the early 1920s to the late 1940s before flattening out at
around 8 pounds into the mid-1970s. Demand then began to wane and bottomed
out at about 6 pounds in the mid-1980s as inconsistent quality, increased
away-from-home eating, and the desire for more convenient foods chipped
away at demand. 

Meanwhile, demand for frozen sweet corn accelerated in the 1980s and into
the 1990s as consumers found frozen corn faster and more convenient to
prepare (especially in the microwave). Frozen corn also held important
advantages in consistent quality and taste. The fresh sweet corn industry
responded to this challenge in the late 1980s and 1990s. Shippers began
offering convenience and "curb appeal" in the form of tray-pack corn. At
the same time, seed companies released new supersweet hybrids that
dramatically boosted quality. During 1998-2000, per capita use of fresh
sweet corn averaged 9.3 pounds--up 48 percent since 1988-90 and the highest
since records began in 1919.

On a fresh-equivalent basis, sweet corn consumption is divided equally
among fresh, frozen, and canned. According to USDA's 1994-96 Continuing
Survey of Food Intakes by Individuals, fresh sweet corn, like most other
foods, is largely purchased at retail for home consumption (87 percent).
The small percentage used in foodservice may largely reflect the difficulty
and labor intensity of handling and preparing fresh sweet corn in a
restaurant environment. Labor is the single largest expense in most
foodservice operations, and that alone heavily favors the use of prepared
frozen and canned corn products. 

Relative to onions, peppers, and celery, sweet corn in fresh form offers
somewhat limited culinary options. Most fresh-market corn-on-the cob is
boiled, steamed, baked, or grilled. Canned and frozen sweet corn is less
labor intensive and offers a wider range of culinary options, including
soups, chowders, fritters, casseroles, relishes, salads, and succotash.

In the away-from-home market, U.S. consumers most often eat sweet corn in
standard "white tablecloth" restaurants. Shippers of both fresh and
processed sweet corn have been unable to find a substantial niche in the
expanding fast-food market, which is responsible for less than 4 percent of
fresh sweet corn consumption and less than 2 percent of canned and frozen
corn. 

Regionally, people in the Northeast and Midwest eat more fresh-market sweet
corn than do consumers in other areas of the country. Northeasterners
consumed twice as much per capita as did people in the West in 1994-96.
Lower sweet corn consumption in the West may reflect both the influence of
the Hispanic population (who eat fresh sweet corn sparingly) and the West's
status as the national leader in fast food and other restaurant spending--
places where sweet corn is not well represented. 

Consumers in suburban areas, where 47 percent of the U.S. population
resided at the time of the 1990 Census, consumed nearly 60 percent of all
fresh sweet corn. About a third of all Americans resided in metro areas,
but they consumed only about one-fifth of fresh sweet corn. Preferences
along racial lines indicate that 86 percent of all fresh-market sweet corn
was eaten by non-Hispanic White consumers (who accounted for 73 percent of
the population in the 1990 Census). 

The survey results also suggest a positive correlation between income and
fresh sweet corn use. Consumers in the survey's top income bracket reported
the highest per capita consumption and those in the lowest bracket reported
the lowest consumption. 

Men age 40-59 (12 percent of the population) consumed the largest share of
fresh sweet corn (21 percent), while women of the same age also consumed
slightly more fresh sweet corn than their share of the population.
Surprisingly, people under age 20 account for 29 percent of the population
but consumed only 20 percent of fresh sweet corn.

Many consumers equate corn-on-the-cob with outdoor barbecues and casual
warm-weather dining. However, these perceptions could be changing as
consumers vary their diets during cooler months to include summer favorites
like sweet corn. A combination of increasing off-season demand, the general
upward trend in fresh vegetable use, and industry interest in assembling a
research and promotion program should help support further growth in fresh
sweet corn consumption.  

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

COMMODITY SPOTLIGHT BOX 1
Corn by Any Other Name, Not as Sweet

The words "sweet corn" or "corn-on-the-cob" summon images ranging from a
festive summer barbecue to Yankee pot roast or clam bakes. Sweet corn is
one of several types of corn, which also includes flint corn, dent corn
(yellow and white), popcorn, flour corn, and pod corn. 

White (dent) corn is largely used to make foods such as grits and various
breakfast cereals. Blue corn, popular in Mexican foods and health food
stores, is a type of flour corn used for colorful tortillas, corn chips,
and cereals. Baby corn--a processed product largely imported due to
extensive hand harvest requirements--consists of immature field or sweet
corn varieties (some developed specifically for baby corn production)
harvested a day or two after the silks appear on the ear, while the cob is
small and tender. 

Flint corn, also called Indian corn, can be very colorful and is largely
ornamental in the U.S. Some colorful ornamental corn cultivars are produced
from miniature popcorn varieties, which may even sport colorful leaves and
stalks. Although used mostly for livestock feed, yellow (dent) corn in the
milk stage has a sweet flavor and can be consumed like sweet corn. Through
the mid-1900s, this sweet "green corn" was marketed as "roasting ears" in
parts of the country, while traditional sweet corn was marketed as sugar
corn.

COMMODITY SPOTLIGHT BOX 2
Corn Smut: A Profitable Delicacy

Corn smut is a common fungus found largely on sweet corn throughout the
world. In most areas of the U.S., smut is not a major threat to the
viability of the corn crop. Some U.S. sweet corn growers actually hope to
find smut in their fields. In Mexico, immature smut galls are consumed as
an edible delicacy known as cuitlacoche. Especially prized in fresh form
(it is largely sold canned), sweet corn smut galls have reportedly become a
money-making product for a few sweet corn growers who sell them to Mexican
restaurants.

RESOURCES & ENVIRONMENT
Development at & Beyond The Urban Fringe: Impacts on Agriculture

Land development in the U.S. is generally following two routes: expansion
of urban areas and large-lot development (greater than 1 acre per house) in
rural areas. In the past decade, this proliferating development has been
tagged with the unflattering epithet of "urban sprawl."  

Both kinds of growth affect the amount and productivity of U.S.
agricultural land. They also create problems due to greater costs for
infrastructure like roads and sewers, as well as increased traffic
congestion and energy used for transportation. Sprawl can impose higher
costs on local communities for services, degrade the environment, clutter
landscapes, interrupt open space, and erode the sense of community in
formerly rural areas. Concerns about development around urban areas are not
new, having arisen periodically during most of the last century, and
certainly since automobile ownership became widespread after World War II. 

Land-use changes flow from population growth, household formation, and
economic development. Metro areas (see box) have expanded as rural people
moved off farms and residents of densely populated central cities dispersed
to surrounding suburbs. Growth has spilled out of urban areas as population
disperses to rural parts of metro counties and previously rural nonmetro
counties. Investments in infrastructure--such as roads, sewers, and water
supplies--have enabled this dispersion. New retail, office, warehouse, and
other commercial development follows in the wake of new housing
development, to serve the new population and to employ the relocated labor
force.

Urban area, as measured by the Census Bureau, despite doubling since 1960,
still made up less than 3 percent of U.S. land area in 1990 (excluding
Alaska). Developed area--which includes urban area and land used for
transportation--made up 5 percent in 1997, as measured by USDA's National
Resources Inventory (NRI). While the increase in urban area poses no
immediate threat to overall U.S. food and fiber production, some crops in
some areas are particularly vulnerable to development. For example, 61
percent of U.S. vegetable production is located in metro areas. Land used
for winter vegetables in Florida, California, and Arizona could be
developed because the climate in those states also attracts population.

U.S. agriculture can adapt to urban development by changing the products
and services offered. While low-density, fragmented settlement patterns can
disrupt traditional agricultural landscapes, they do leave room for some
agriculture production to continue. Farms in metro areas are an
increasingly important segment of U.S. agriculture, making up 33 percent of
all farms, 18 percent of farmland, and a third of the value of U.S.
agricultural output. However, to adapt to rising land values and increasing
contact with new residents, metro-area farmers may have to change their
operations to emphasize higher value products, more intensive production,
and urban marketing savvy.

What Is 
Sprawl?

The U.S. General Accounting Office has concluded that there is no widely
accepted definition of sprawl. Definitions range from the expansive 

"When you cannot tell where the country ends and a community begins, that
is sprawl. Small towns sprawl, suburbs sprawl, big cities sprawl, and metro
areas stretch into giant megalopolises--formless webs of urban development
like Swiss cheeses with more holes than cheese." (U.S. House of
Representatives, 1980)

to the prescriptive 

" a spreading, low-density, automobile-dependent development pattern of
housing, shopping centers, and business parks that wastes land needlessly."
(Pennsylvania 21st Century Environment Commission).

Most definitions have some common elements, including:

     low-density development that is dispersed and uses a lot of land; 

     geographic separation of essential places such as work, homes,
schools, and shopping; and

     almost complete dependence on automobiles for travel.

Without a consensus definition, any growth in suburban areas may be accused
of sprawling. Short of a return to dense urban living not widely seen since
before World War II, it is not clear how growth can be accommodated without
incurring the worst features of sprawl.

Two Kinds 
of Growth

Regardless of how sprawl is defined, government officials, housing
consumers, farmers, and other interest groups appear concerned about two
kinds of growth:

At the urban fringe. The urban "fringe" is that part of metro counties not
settled densely enough to be called "urban." New roads, commercial
buildings, and low-density housing (two or fewer houses per acre) cause
urban areas to grow farther out into the countryside, increasing the
density of settlement in formerly rural areas.

Beyond the urban fringe. Another kind of development occurs farther out in
the rural countryside, beyond the edge of existing urban areas in metro
counties and often in adjacent nonmetro counties. Instead of relatively
dense development of four to six houses per acre, exurban development
consists of scattered single houses on large parcels (often 10 acres or
more). This type of development is more likely to remove land from
agricultural production and changes the nature of open space, but is not
"urban."  

Growth at the edge of existing developed areas gradually changes into more
fragmented developments farther into the countryside, so there is no clear
geographic dividing line between the two kinds of growth. While related,
these two forms of growth have different causes and consequences,
especially for agriculture and the environment.

Total "urban area," as defined by the Census Bureau, has more than doubled
over the last 40 years from 25.5 million acres in 1960 to 55.9 million
acres in 1990. Urbanized areas alone increased by a factor of 2.5, from
15.9 million acres in 1960 to 39 million acres in 1990. The next estimate
of urban area will be issued by the Census Bureau next year, based on the
2000 population census. 

"Urban and built-up areas" in USDA's NRI include those measured by the
Census Bureau, as well as developed areas as small as 0.25 acre outside
urban areas encompassing some, but not all, large-lot development. NRI
urban and built-up area increased from 51.9 million acres in 1982 to 76.5
million acres in 1997, averaging 2.2 million acres per year. "Developed
land" defined by NRI also includes the area in rural roads, railroad
corridors, and other transportation-related parcels. By this definition,
developed area grew from 73.2 million acres in 1982 to 98.3 million acres
in 1997 (roughly the size of Ohio).

Growth in area used for housing has risen steadily throughout the last
century, driven by large-lot development. Since at least 1970, growth in
large-lot development appears to have accelerated in periods of prosperity
and declined during recession. Houses on lots greater than 1 acre accounted
for 35 percent of new housing construction in 1994-97, but occupied 88
percent of new area devoted to housing. Lots greater than 10 acres were
only 5 percent of new construction, but comprised 60 percent of the land in
new housing constructed between 1994 and 1997. 

In addition to the trend toward larger lots for individual houses, much of
the land for newly constructed housing in recent years is in nonmetro
areas. Only about 16 percent of the acreage used by houses built between
1994 and 1997 is in existing urban areas within metro areas, as defined by
the Census Bureau. An additional 5 percent is on farms in nonmetro areas.
Thus, nearly 80 percent of the acreage used for recently constructed
housing--about 2 million acres--is nonmetro land that is not part of
existing farms. Almost all of this land (94 percent) is in lots of 1 acre
or larger, with 57 percent on lots 10 acres or larger.

Farming in the 
City's Shadow

Growing areas of U.S. agriculture are influenced by urbanization and
development. Metro areas contain 20 percent of U.S. land area and 80
percent of the U.S. population. In 1997, farms in metro areas made up a
third of all farms and controlled 39 percent of farm assets. (Excluded from
the farm count are service firms, such as horse boarders and landscape
services that are not directly involved in agricultural production but that
also contribute to open space and economic activity.) Metro farms are
generally smaller than nonmetro farms, produce more per acre, have more
diverse enterprises, and are more focused on high-value production.

Growth and development create conditions in which a variety of metro farm
types coexist, reflecting different adaptations to urban influence. Change
occurs not only in product and input markets where farmers buy and sell,
but also in the actions of local government institutions, which by law and
tradition exercise control over property taxes and land use. 

As urbanization proceeds, farmers may seek enterprises and markets that
offer returns to land that approach returns from development, in part to
offset higher property taxes that reflect the potential for nonagricultural
development. Initially, this may involve new crops and innovative marketing
techniques. High-value crops--such as fresh fruits, vegetables, herbs, and
dairy products--can be sold through restaurants and gourmet grocery outlets
or directly to consumers in farmers' markets, roadside stands, or U-pick
operations. At some point, successfully adaptive farmers may become more
general rural entrepreneurs, expanding their activities beyond farming.
Some may sell off less productive woodlots and pastureland, concentrating
on more intensive production on remaining cropland. Other, more traditional
farmers may attempt to maintain traditional crops and practices, some
merely waiting for the perceived inevitable sale for development. And some
farms will go out of business, with the land remaining idle or divided and
sold to developers or recreational (hobby and part-time) farmers, whose
primary use of the land is as a residence. 

In the 1990s, traditional farms accounted for a third of metro farms,
operated 71-77 percent of metro farm acreage, and controlled more than 40
percent of assets, sales, and net cash farm income. Recreational farms made
up about half of metro farms, controlled 30 percent of farm-sector assets
and equity, and operated 14-17 percent of the land. Recreational farms have
little viability as economic enterprises. Adaptive farms accounted for 13-
14 percent of metro farms and operated 9-12 percent of metro farm acreage,
but they controlled more than their proportional share of metro farm sales,
assets, and net cash farm income. These are the farms that have the best
chance of continuing under urbanization. 

Farm Survival 
in Metro Areas

Longitudinal data from Censuses of Agriculture (1978-97) were used to
follow metro farms existing in 1978 through time. Virtually all metro farms
classified as recreational in 1978 were out of business (ceased having
sales or sold to another farmer) by 1997, regardless of geographic
location. Likewise, more than three-fourths of the 1978 traditional farms
had left the business by 1997. 

Adaptive farms were much more likely than either recreational or
traditional farms to survive the two decades. In the case of adaptive
farms, the percentage leaving business varied substantially by geographic
area, with farms further from the metro core less likely to go out of
business. Thus, adaptive farms generally have a survival advantage over
recreational or traditional farms in urban or metro areas, but they survive
better where there is less development. 

Although the 20-year survival rates were fairly low for all farm categories
in metro counties, they were similar to those for businesses in general.
Furthermore, the fact that individual farms may go out of business does not
mean that farms and their land disappear into subdivisions. Metro areas
also saw many new farm businesses, utilizing existing agricultural land,
during the period.

Working Landscapes 
& Rural Amenities

The different types of metro farms and their turnover rates have
implications for programs to preserve open space held by farms. While
purchase of development rights, "smart growth" policies (AO April 2001),
and other efforts to preserve farm land from development may succeed,
keeping the land in active farming enterprises may be more difficult. Some
farmers are selling development rights to federal, state, local, and non-
governmental farmland protection programs. As of April 2001, state and local
farmland protection programs have purchased development rights on over 1.06
million acres of farmland.

At the extreme, urbanization brings about the local extinction of farming
as an economic activity and as a working landscape. However, some farming
activities benefit from greater proximity to urban population--fruit,
vegetable, and nursery operations, for example, where transportation costs
are high and products are perishable. Unplanned growth makes the rural-to-
urban transition more difficult than it might otherwise be because the
pattern of development is more haphazard and less certain than development
guided through planned growth.

Farming activities adapted to urbanizing areas can provide rural amenities
that are profitable for farmers and attractive to the surrounding
population. Inevitably, these activities differ from those that went
before, and may involve changes in ownership as traditional farmers may not
embrace the transition. Different kinds of products and services are
produced, in different ways, for markets that are suited to an urbanizing
environment. How permanent these adaptations can be in the face of
development and how much and in what ways public support for these
amenities should be provided are questions yet to be answered.  

Ralph Heimlich (202) 694-5504 and William Anderson
heimlich@ers.usda.gov 

RESOURCES & ENVIRONMENT BOX 1
Metro, Urban, & Rural Geography

Statistics describing trends in land use are based on geographic entities
defined by the Census Bureau or the USDA National Resource Inventory (NRI).

Metro area (Census)--a core area containing a large population nucleus,
together with adjacent communities that have a high degree of economic and
social integration with that core. Metro areas are defined in terms of
entire counties (except in New England, where towns are used) and contain a
mix of land uses, ranging from the densest urban core to suburban
landscapes to deserts, farms, and forests.

Urban area (Census) comprises all territory, population, and housing units
located in "urbanized areas" (continuously built-up areas with a population
of 50,000 or more with a central core), defined in terms of Census tracts
(not counties), and in "urbanized places" (places of 2,500 or more
inhabitants outside urbanized areas). Places not classified as urban are
rural.

Urban fringe consists of rural areas in metro counties. The part of the
fringe existing nearest to existing urban areas is likely to grow the
fastest and eventually be absorbed when densities rise to urban levels.

Urban and built-up areas (NRI) consists of residential, industrial,
commercial, and institutional land; construction and public administrative
sites; railroad yards, cemeteries, airports, golf courses, sanitary
landfills, sewage plants, water control structures, small parks, and
transportation facilities with urban areas. Due to differences in data
collection techniques and definitions, NRI estimates of "urban and built-up
areas" are usually higher than Census "urban area" estimates for nearly all
states. 

Developed land (NRI) consists of urban and built-up areas and land devoted
to rural transportation, which includes highways, roads, railroads, and
right-of-way outside urban and built-up areas.

RESOURCES & ENVIRONMENT BOX 2
Want To Know More?

Development at the Urban Fringe and Beyond: Impacts on Agriculture and
Rural Land

Contains details on:
forces driving urbanization and development, local responses
to growth, and consequences of growth for farming, potential Federal role.
costs of growth in rural areas,

Read it on the Economic Research Service website,
www.ers.usda/publications/aer803, or call 
1-800-999-6779 to order hard copies (stock number AER-803).

SPECIAL ARTICLE
Canada's Subsidized Dairy Exports: The Issue of WTO Compliance

A World Trade Organization (WTO) compliance panel ruled against Canada in
July in a dispute over the country's subsidized dairy exports--the first
case before a WTO panel involving export subsidy provisions under the WTO
administered Agreement on Agriculture. Canada has already announced its
intention to appeal the decision. 

Under the Agreement on Agriculture, countries that employed agricultural
export subsidies agreed to hold the volume of subsidized exports to
specific levels. If Canada loses its appeal, a WTO arbitrator will
determine the annual level of harm to the economies of the U.S. and New
Zealand caused by the subsidized exports. Following that determination,
both countries could increase tariffs on Canadian imports. 

The panel's ruling was the latest development in a longstanding dispute.
The ruling represents the third time since May 1999 that the WTO, in
response to complaints from the U.S. and New Zealand, has found Canada's
dairy export subsidies to be inconsistent with its WTO commitments. 

Changes in Canadian 
Dairy Policy 

The Canadian dairy sector has functioned under a complex supply management
framework since the early 1970s. This framework consists of four elements:
domestic production and marketing controls, import controls, administered
pricing, and direct government payments to producers. Direct government
payments are being gradually reduced and will be eliminated in 2002 in
favor of higher administered prices.

Domestic production and marketing controls are intended to match supply
with estimated demand at the administered price. Milk production is
classified as either fluid (for table milk and cream) or industrial (for
butter, cheese, milk powders, ice cream, yogurt, etc.). Fluid milk is
generally consumed within the producing province, while industrial milk
products move across provincial boundaries or are exported. Provincial
marketing boards govern the production and marketing of fluid milk within
their own borders. Marketing of industrial milk, on the other hand, is
carried out under concurrent Federal and Provincial legislation.

Each year, the Canadian Milk Supply Management Committee forecasts demand
for industrial milk and sets the national production target or Market
Sharing Quota (MSQ). It then assigns a portion of the MSQ to each province
based largely on historical shares. In contrast, each province sets its own
production target or quota for fluid milk based on local demand. The two
quotas--industrial and fluid--are then allocated by each provincial
marketing board to its respective producers, according to its own policies
and regional pooling agreements. Dairy quotas, which were initially
distributed at no cost, are now auctioned on the open market and have
become an extremely valuable asset for producers. 

Dairy imports are restricted through a system of tariff-rate quotas (TRQs).
These allow imports of up to 5 percent of total domestic consumption to
enter Canada at a low duty. Imports above these limits are subject to
prohibitively high duties: as much as 299 percent for butter, 246 percent
for cheese, and 202 percent for skim milk powder. These compare with duty
levels in the U.S. ranging from 42 to 69 percent. 

Milk production quotas combined with import restrictions allow Canada to
maintain a protected domestic market and a system of administered prices.
For industrial milk, the Canadian Dairy Commission (CDC) annually sets a
target price based on cost-of-production surveys and other market
considerations. The CDC supports the target price when necessary by
purchasing butter and skim milk powder. Actual prices paid for industrial
milk by processors are determined by provincial agreements, with reference
to the target price, and depend on end use. The price paid by processors
for fluid milk is generally higher than the price for industrial milk.
Fluid milk prices are based on provincial cost-of-production estimates,
subject to adjustments negotiated between marketing boards and processors
to reflect market factors in addition to production costs. 

Following implementation of the Agreement on Agriculture in 1995, Canada
was not expected to increase dairy exports since its domestic prices were
above world prices and its WTO commitments constrained the quantity of
dairy products it could export with subsidies. However, in August 1995,
Canada adjusted its national dairy policy by replacing export levies
collected from producers with a new permit system that allowed Canadian
processors to purchase surplus milk at discount for the exclusive use of
manufacturing dairy products for export. Canada claimed the discount sales
did not provide export subsidies and thus were acceptable under the
Agreement on Agriculture. The U.S., joined by New Zealand, disagreed.

Canada's permit system provided for pricing five classes of milk based on
processors' end use of the milk. Classes 1-4 covered milk used exclusively
in the domestic market. Class 5 contained five "Special Milk Classes"
(SMC). SMC 5(a) to 5(c) comprised milk used in dairy products used as
ingredients in other products mostly sold domestically. SMC 5(d) was
primarily for milk used in dairy product exports to traditional markets.
These traditional exports were included in determining national production
quotas. SMC 5(e) was surplus milk not needed domestically and available for
use in dairy products for export above the quantities destined for
traditional markets. 

 The prices of 5(d) and 5(e) were negotiated between the CDC and processors
on a transaction-by-transaction basis. Revenues from within-quota milk used
for export were pooled across provinces with revenue from domestic sales.
However, returns for milk produced in excess of quota and sold through 5(e)
at discounted prices were not pooled with domestic market returns before
being paid to individual producers. 

Under the Agreement on Agriculture, Canada, like the U.S. and the European
Union, had agreed to limit its subsidized exports. However, the permit
system led to rapid expansion of exports of some dairy products, in excess
of Canada's export subsidy limits. Butter exports grew from less than 1,000
tons in 1994/95 (August to July marketing year) to nearly14,000 tons in
1995/96, the first year under the new program. In 1996/97 and 1997/98,
butter exports averaged about 11,000 tons. Cheese exports increased
steadily from about 12,000  tons in 1994/95 to 30,000 tons in 1998/99.
Unlike butter and cheese, skim milk powder exports did not increase, nor
did they exceed the permitted subsidy limits. Exports of other milk
products from 1995/96 to 1999/00 were well above the agreed to limits. For
2000/01, Canada is limited to export subsidies on 3,500 tons of butter,
9,076 tons of cheese, 44,953 tons of skim milk powder, and 30,282 tons of
other milk products.

What Constitutes 
an Export Subsidy?

In February 1998, after unsuccessful discussions with Canada to resolve the
subsidy issue, the U.S. and New Zealand requested that a WTO compliance
panel investigate Canada's dairy export practices. The U.S. maintained that
Canada's system of special milk classes, which provided surplus milk at
discounted prices to exporters, constituted an export subsidy and a
violation of Canada's commitments under the Agreement on Agriculture. The
U.S. also requested WTO review of Canada's restriction on commercial
imports under its tariff-rate quota of 64,500 tons of fluid milk, claiming
this also was a violation of its WTO commitment. Canada asserted that
cross-border shoppers were already bringing in that amount, and that the
commitment was thus being met without commercial imports.

In May 1999, a WTO compliance panel found that SMC 5(d) and 5(e) were
financed by virtue of government action and constituted export subsidies
within the Agreement on Agriculture definition. The panel noted the
significant government involvement in the provision of milk to dairy
product exporters at prices substantially below the levels otherwise
available in Canada. While producers played an important role in the
provincial marketing boards, the panel found the boards acted under the
explicit authority delegated to them by either the Federal or a provincial
government. Accordingly, the panel presumed the boards to be an "agency" of
one or more of Canada's governments. The panel also found that Canada's
restriction on access to its tariff quota on fluid milk was inconsistent
with the Agreement on Agriculture and recommended Canada open the quota to
commercial imports. 

Canada disputed the conclusions of the compliance panel and sought an
Appellate Body review of the findings. The Appellate Body upheld the
panel's determination that SMC 5(d) and 5(e) were export subsidies and thus
contributed to a violation of Canada's export subsidy commitments. However,
the Appellate Body overruled the panel's finding in the case of fluid milk
and allowed Canada to continue restricting commercial imports of fluid milk
in light of cross-border purchases by Canadian consumers. In October 1999,
the WTO Dispute Settlement Body (DSB) adopted the Appellate Body report and
requested Canada to bring its export subsidy practices into compliance with
its WTO obligations.

Canada's Export Practices 
Remain in Dispute

After the Appellate Body ruling in 1999, the Canadian government consulted
with its dairy industry and explored alternatives for complying with the
WTO ruling. Some members of the industry interpreted the WTO decision as a
narrow one that precluded government involvement in the export of dairy
products, but permitted a two-tiered price system of higher milk prices for
domestic use and discounted prices for export. 

By August 2000, Canada began implementing revised procedures which it felt
would comply with the panel's recommendations. While the revised procedures
differed in many ways from the old, they still provided milk at discounted
prices to processors, contingent on the verified export of the manufactured
product.

Under the revised system, Canada retained and continued to export dairy
products through SMC 5(d), while replacing the SMC 5(e) export subsidies
with a procedure that encourages exporters to contract directly with
producers. In several provinces, including Ontario and Quebec, an "auction"
system was organized, administered by third-party companies appointed by
the marketing boards. Exporters or processors post proposals on an
electronic bulletin board with terms such as price, volume, and contract
period. Producers bid on these contracts to supply milk. In British
Columbia, Alberta, and Saskatchewan, provincial marketing boards provide
processors or exporters with names of producers with whom they can
negotiate directly for surplus milk. 

In February 2001, Canada informed the DSB of its compliance with WTO rules.
Shortly thereafter, the U.S. and New Zealand challenged Canada's revised
system on the grounds that the changes did not go far enough in bringing
its export subsidies into compliance with its WTO obligations. The U.S.
maintained that Canada had simply replaced the SMC 5(e) export subsidies
with a new export subsidy program offering discounted milk to exporters.
The U.S. believed that the new program continued to provide a subsidy to
exporters roughly equal to the difference between the domestic market price
and the discounted price.

In February 2001, the U.S. and New Zealand requested that a WTO compliance
panel be convened to rule on the issue. Both countries also requested
authorization to increase tariffs on Canadian agricultural products if the
panel determines that Canada has not complied. Each agreed, however, to
hold off on tariff increases until a WTO arbitrator confirms the level of
trade harm suffered. Both the U.S. and New Zealand assert that their trade
has been impaired by up to $35 million annually. In July 2001, the
compliance panel determined that Canada is subsidizing dairy exports at
levels exceeding its committed to limits. Canada has indicated its
intention to appeal the panel's decision.

What the Future 
Holds

The next step in this longstanding dispute will involve Canada's appeal of
the compliance panel's ruling. Canada will have 60 days from July 11 to
prepare its appeal. The appeal, however, could delay the final outcome of
the case until early 2002. While a ruling on the appeal is expected by
November, a finding against Canada will have to be followed by a WTO
arbitrator ruling on the level of harm suffered by each complainant's
economy. The U.S. and New Zealand could then increase tariffs on Canadian
imports until such time as the WTO confirms that Canada has made its dairy
exports compliant with it's WTO commitments. 

For Canada's milk producers and dairy processors, the export market is
crucial for expanding production and sales. With initiation of the
Agreement on Agriculture, the Canadian dairy industry found itself in a
potential supply/demand squeeze. Imports were set to increase as a result
of expanding tariff-rate quotas, while the ability to subsidize exports was
being curtailed. At the same time, the domestic market for dairy products
was largely mature, with little growth expected. Unless the dairy industry
could succeed in increasing "nonsubsidized" exports, production might have
to be reduced or stocks left to accumulate. Considered essential was a two-
tier price scheme that distinguishes between domestic and export markets,
allowing milk producers to expand production or dispose of surplus milk
without having to purchase additional quota, while permitting processors to
compete on the world market. 

The dairy panel case is significant not only as the first case brought
before a WTO panel involving provisions of the Agreement on Agriculture
related to export subsidies, but also because of its potential implications
beyond trade in dairy products. With discussions underway in the WTO on
further disciplining government policies regulating agricultural trade, the
U.S. and New Zealand did not want a perceived circumvention of already
existing disciplines to go unchallenged. Perhaps more importantly, if
Canada loses its appeal, this case could discourage other countries from
fashioning identical policies, while leaving countries with similar
policies vulnerable to future WTO challenges.  

John Wainio (613) 759-7452
jwainio@ers.usda.gov

The WTO panel reports can be found at
www.wto.org/english/tratop_e/dispu_e/distab_e.htm. For more information on
the WTO and URAA, see ERS's WTO briefing room at www.ers.gov/briefing/WTO.

Special Article Box 1
Canada's Dairy Industry at a Glance

In the1999/00 marketing year (August to July), Canada had 20,600 dairy
farms, producing 17.8 billion pounds of milk, compared with 84,260 farms
producing 17.1 billion pounds in 1974/75. The average Canadian dairy farm
has 54 cows, compared with 82 in the U.S. 

Total Canadian milk production in 1999/00 was down about 1 percent from the
previous year. About 40 percent of milk production, or 7.1 billion pounds,
was processed into table milk and cream, an increase of almost 1 percent
over the previous year. The remaining 60 percent, or 10.7 billion pounds,
was used in the production of dairy products, which decreased about 2.3
percent. 

Processing at 270 plants across Canada resulted in $8.5 billion (all
currency in Canadian dollars: $1US = $1.5 Can.) of processed dairy products
in 1999. An estimated $365 million of this production was exported, down
from the 1998 peak of $414 million. Exports in 2000 fell again to an
estimated $285 million. 

Per capita milk consumption in Canada averaged 197 pounds in 1999, down
from 215 pounds in 1990. Lower fat varieties such as skim and 1-percent
milk continued to gain market share, accounting for 28.6 percent of all
milk consumed in 1999, compared with 12.8 percent in 1990. Butter
consumption closed the decade at 6.2 pounds per person, down from 11.8
pounds in 1990 but above the record-low 5.7 pounds in 1997. Ice cream
consumption also decreased from 26.0 pounds to 22.6 pounds during the same
period. 

Canadian consumers did not abandon higher fat products entirely. Cheese
consumption closed the decade at 23.8 lbs. per person, up 8 percent from
1990. Cream also enjoyed a surge in popularity, as consumption in 1999
reached 13.6 lbs. per person, up from 11.8 lbs. in 1990.

Dairy farming is the third-largest source of revenue in the Canadian
agricultural sector, behind grains and red meats. In general, profitability
of Canadian dairy farms was higher than for farms in other commodity
sectors, with an operating margin of $0.26 per dollar of revenue, up 1.1
cent from 1998. Dairy farm cash receipts increased about 2.6 percent in
2000, reaching $4 billion, breaking the record set in the previous year.
(In contrast, crop producers' receipts fell in 2000 for the third
consecutive year, hitting a 6-year low.)
  
While Canadian dairy farmers have benefited from the comparative price and
income stability associated with supply management, a portion of these
gains has been capitalized in the value of the quota. As a result, the
benefits of supply management tend to be greatest for those who were
producing at the time the quotas were introduced in the early 1970s. During
2000, the market-clearing price for quota in Quebec (Canada's leading milk-
producing province) ranged between $24,000 and $27,450 for the right to
sell one kg (2.2 lbs.) of butterfat daily on the domestic market.

SPECIAL ARTICLE BOX 2
Economics of Supply Management & Two-Tiered Price Schemes

In addition to being administratively complex, supply management tends to
decrease incentives for farmers to improve technology and expand scale in
order to reduce costs. It prevents efficient distribution of production and
processing across countries, or across regions within a country. By
introducing a wedge between domestic and world prices, supply management
raises consumer prices, while requiring import restrictions to prevent an
influx of lower priced foreign goods. Were it not for production quotas,
surplus stocks would likely accumulate in the face of high domestic price
supports. Occasional and inevitable surpluses still occur, but under pure
supply management these are controlled through quota or stock adjustments
or by subsidizing exports. 

When a country is a net importer at the world price, supply management
results in trade distortion. If supply management imposes no controls over
the amount farmers produce, and if over-quota production is exported at a
lower price, trade distortion increases. High domestic prices from supply
management distort trade both by reducing consumption and providing some
producers a solid base on which to expand output. Trade distortion
continues whether or not the government is directly involved in allocating
product between the domestic and export markets. 

How do two-tiered price schemes--based on parallel markets for domestic
consumption and export at differentiated prices--result in expanded output? 
Under supply management, there will always be some producers with unused
capacity. When high domestic prices cover producers' average total cost,
those with the capacity to produce in excess of their quota limits will
expand output as long as the export price covers the extra, or marginal,
cost of additional production (primarily feed). If producers were not
receiving sufficient revenue from domestic sales to cover their fixed costs
(land, buildings, equipment, animals, etc.), the export price alone would
have to cover the producer's average total cost (both fixed and variable
costs) or eventually producers would go out of business. 

Producers who can maximize their profits by selling their excess production
into the commercial export market would probably not be producing for
export but for the domestic returns they receive from the government policy
of supply management. While some producers with quota and excess production
capacity may view the export market as an attractive source of additional
profits, it is unlikely to be attractive to producers who would have to
take on additional fixed costs, such as a building, in order to increase
production for export.

END_OF_FILE