AGRICULTURAL OUTLOOK               September 24, 2001
October 2001, ERS-AO-285
             Approved by the World Agricultural Outlook Board
---------------------------------------------------------------------------
AGRICULTURAL OUTLOOK is published ten times a year by the Economic 
Research Service, U.S. Department of Agriculture, Washington, DC 20036-
5831.  Please note that this release contains only the text of 
AGRICULTURAL OUTLOOK -- tables and graphics are not included. 

Subscriptions to the printed version of this report are available from 
the USDA order desk.  Call toll-free, 1-800-999-6779 and ask for stock 
# SUB-AGO 4001, $78/year.  ERS accepts MasterCard and Visa.
---------------------------------------------------------------------------
CONTENTS

IN THIS ISSUE

AG ECONOMY
Sluggish U.S. & World Growth Mutually Reinforcing

BRIEFS
Drought Delays Cattle Herd Expansion
2001 U.S. Apple Crop Smaller, Prices Likely to Rise
Tracking Wholesale Prices for Organic Produce

COMMODITY SPOTLIGHT
Corn Market to Strengthen in 2001/02

WORLD AGRICULTURE & TRADE
U.S. Agricultural Exports Forecast to Rise in Fiscal 2002
Turkeys Financial Crisis: How Will It Shake Out?
APECs Open Food System: Opportunities for U.S. Agriculture

FOOD & MARKETING
Food Price Inflation Should Moderate in 2002

RESEARCH & TECHNOLOGY
Production of Value-Added Crops: The Case of High-Oil Corn

IN THIS ISSUE

Sluggish U.S. & World Growth Mutually Reinforcing
Global economic growth this year will be the slowest since 1993, 
and any rebound during 2002 is expected to be modest. The U.S. 
economy, the locomotive that pulled the world economy out of the 
1997-98 financial crisis, is now stalled. Until recently, most 
analysts expected Europe to drive world growth, through rising 
imports from Asia and Latin America. But, given the effects of 
the U.S. slowdown, Europe in 2001 is now expected to be a drag on 
global economic growth. Lacking a developed-country engine, Asian 
growth is expected to be slower than during 1998, the low point 
of the Asian financial crisis. David Torgerson (202) 694-5334; 
dtorg@ers.usda.gov

Food Price Inflation to Moderate in 2002
Consumers demand for beef, dairy products, and fresh fruits and 
vegetables coupled with reduced production of these food items 
have generated a larger increase in 2001 food prices than 
forecast earlier this year. Price increases in 2002, for these 
items and for food in general, are forecast to be moderate as 
supplies recover. The consumer price index for all food is 
forecast to increase 3.2 percent in 2001 and 2.5 to 3 percent in 
2002. Total sales of food to consumers rose 7.4 percent in 2000, 
the largest increase since 1990. With slower economic growth in 
2001 and perhaps in 2002, food sales are expected to return to 
the trend of 3- to 5-percent annual increases. Annette L. Clauson 
(202)694-5389; aclauson@ers.usda.gov

U.S. Agricultural Exports Forecast to Rise in Fiscal 2002 
U.S. agricultural exports are projected to increase in value for 
the third consecutive year in fiscal 2002. Much of the gain is 
expected to be from sales of the major bulk commodities--corn, 
wheat, soybeans, and cotton. Record exports of horticultural 
products, such as fruits and vegetables, also are projected. 
Higher prices of wheat, corn, and soybeans would account for much 
of the gain in export value. Carol Whitton (202) 694-5287; 
cwhitton@ers.usda.gov

APECs Open Food System: Opportunities for U.S. Agriculture
In October, the Asia-Pacific Economic Cooperation (APEC) forum 
will hold its 13th Ministerial in Shanghai, China. An initiative 
of rising significance on APECs agenda is the APEC Food System 
(AFS). AFS focuses not only on the importance of trade 
liberalization to the regions food systems, but also on the need 
for rural development. The U.S. stake in this initiative is large 
because it could affect many significant U.S. markets. In fiscal 
2001, the APEC economies accounted for more than 60 percent of 
U.S. agricultural and food exports and 50 percent of imports. 
William Coyle (202) 694-5216; wcoyle@ers.usda.gov

Turkeys Financial Crisis: How Will It Shake Out?
Turkey joins Brazil and Argentina in a state of economic crisis 
at a time of global uncertainty. Because Turkey is a sizable 
market for certain U.S. agricultural goods, the ongoing financial 
crisis may affect U.S exports. In the short run, U.S. exports to 
Turkey should decline as the crisis shrinks demand, with the 
liras drastic fall making imports relatively more expensive. 
Longrun impacts of Turkeys problems may be mixed, depending not 
only on whether its economy recovers, but also on whether needed 
structural reforms in agriculture are implemented. Stefan Osborne 
(202) 694-5154; sosborne@ers.usda.gov

Corn Market to Strengthen in 2001/02
Corn prices are expected to strengthen in 2001/02 as ending 
stocks decline to the lowest level since 1997/98. U.S. corn 
production in 2001 is expected to drop 7 percent, pulled down by 
lower acreage and yields. Meanwhile, domestic use is forecast to 
reach a record high, and exports are expected to rise 2 percent 
as global use expands. The average farm price is forecast at 
$1.95-$2.35 per bushel, up from $1.85 in 2000/01. Allen Baker 
(202) 694-5290; albaker@ers.usda.gov 

Production of Value-Added Crops: The Case of High-Oil Corn
U.S. corn producers have been relatively slow to devote 
significant acreage to the production of high-oil corn and other 
varieties with specialized traits that add value. This reluctance 
contrasts with the relatively rapid adoption of corn hybrids with 
specialized input traits such as herbicide tolerance. Producers 
cite falling premiums for high-oil corn relative to conventional 
corn as a major discouraging factor, the result of low prices for 
substitute products in feed rations. Other factors that have 
impeded planting include risks related to price, yield, quality, 
and market forces. Jorge Fernandez-Cornejo (202) 694-5537; 
jorgef@ers.usda.gov 

Tracking Wholesale Prices for Organic Produce
Organic agriculture is one of the fastest growing segments of the 
U.S. food sector. However, collection of data (e.g., on prices) 
for this component of U.S. agriculture has lagged the industrys 
growth. Market News, published by USDAs Agricultural Marketing 
Service, has occasionally included wholesale prices for organic 
produce in its daily wholesale fruit and vegetable reports, which 
cover terminal markets in 15 U.S. cities, including Atlanta, 
Dallas, and Seattle. Boston is the only city for which Market 
News consistently reports organic prices. A more complete picture 
of industry price patterns will emerge if and when data become 
available for other terminal wholesale markets. Emy Sok (202) 
694-5257; esok@ers.usda.gov
AG ECONOMY

Sluggish U.S. & World Growth Mutually Reinforcing

Global economic growth this year will be the slowest since the 
world recession of 1993, and any rebound during 2002 is expected 
to be modest. Agricultural exports may continue to grow but not 
as much as they might have if world macroeconomic conditions had 
been more favorable to global agricultural demand. Manufacturing 
exports may continue falling through at least mid 2002, due to 
the strong dollar and weak global growth.

The U.S. economy, the locomotive that pulled the world economy 
out of the 1997-98 financial crisis, is now stalled. The dollar, 
while weakening somewhat since the start of 2001, will continue 
to be strong relative to other major currencies. The combination 
of a strong dollar and sluggish global growth will exert negative 
impact on U.S. farm and manufacturing exports in 2001 and into 
the first half of 2002. Commodity prices and the value of farm 
exports are up, but not by as much as they would have been with 
faster world growth and a lower value of the dollar. The dollar 
is expected to fall modestly through the rest of 2001 and 2002. 
Nevertheless, the real value of the dollar will average very 
close to the post-World War II peak. While the U.S. economy will 
likely avoid a recession (defined as a decline in output lasting 
6 months) in 2001, the world as a whole is less likely to avoid 
one. (A world recession is global output growth below an 
annualized 1.5 percent for 6 months or longer.)

During 1996-2000, the North American economy achieved strong 
growth, with Canada and the U.S. growing 4.7 and 4.1 percent in 
2000, leading the G-7 economies. Growth in Mexican gross domestic 
product (GDP) of 6.9 percent in 2000 was higher than most 
developing countries. 

But North American performance since late 2000 has been less than 
stellar. The U.S. economy is expected to grow a relatively modest 
rate in 2001, while the manufacturing sector has declined in 
size. The slump in manufacturing is expected to continue until 
the last half of 2002. High energy prices, a decline in business 
equipment spending (especially technology-related equipment), and 
slow growth in demand for consumer durables have hurt earnings in 
the manufacturing sector across the board and have cost jobs. In 
June, as overall employment stabilized, loss of manufacturing 
jobs continued. In August compared to June, employment fell by 
over 100,000 jobs with over 200,000 jobs lost from manufacturing. 
The unemployment rise to 4.9 percent in August will likely turn 
around in later months with December unemployment forecast at 4.8 
percent, which is 0.8 percent higher than December 2000. The 
levels of decline in manufacturing output and employment since 
late 2000 are normally not seen except during a recession.

Weakness in the U.S. manufacturing sector has spread across the 
borders. Canadas economy is expected to achieve only 2-percent 
growth in 2001, with unemployment exceeding 7 percent in 
December. Prospects for slower growth in Canada have been 
mitigated by higher natural gas and oil prices on Albertas 
economy, partly neutralizing higher crude oil prices in the rest 
of Canada. 

Mexico, although benefiting from higher natural gas and oil 
prices, has experienced declining demand for exports of 
manufactured goods for the last 9 months. The worldwide recession 
in the manufacturing sector has hit Mexico much harder than the 
rest of North America. Mexico depends more on trade than the 
U.S., and manufacturing is a far larger share of total economic 
output. Moreover, Argentinas financial problems have kept long-
term interest rates and the value of both the dollar and the 
Mexican peso relatively high, slowing the pace of foreign direct 
investment in Mexico. With three consecutive quarters of slow 
growth, Mexico is near a recession, even as revenues from oil and 
gas exports rise and farm exports to the U.S. surge. 

The recent lackluster economic performance in North America has 
been cited as the reason for the recent modest decline in the 
dollar. Lower short-term interest rates engineered by the Federal 
Reserve Board (Fed) did not immediately cause the dollar to fall, 
as long-term U.S. bond yields remained relatively high. 
Foreigners, fearing weakness in their own economies and expecting 
higher U.S. stock market returns, continued investing in U.S. 
financial instruments, keeping the demand for dollars strong 
through early 2001. The large number of corporate earnings 
disappointments slowed the flow of funds into the U.S. and 
weakened the dollar against the euro, in late-summer 2001. 
Despite this recent modest decline, the dollar remains strong by 
historical standards.

New Locomotive 
Low on Steam

Despite the sluggishness of North American growth, most analysts 
had expected Europe to become the new growth engine for the world 
through rising imports from Asia and Latin America. But most 
analysts have now lowered 2001 growth forecasts for Europe, after 
weak German growth in the first quarter of 2001. The 4-percent 
inflation in the Netherlands and Spain has prevented the European 
central bank from significantly lowering short-term interest 
rates to stimulate their economy. The slowdown in North America 
was reflected in lower European corporate export earnings which, 
in turn, depressed capital spending and compounded weakness in 
European consumer spending. As a result, growth in the European 
Union will be below 2 percent in 2001.

European growth in 2001 is expected to be a drag on global 
economic growth, given the effects of the American slowdown. 
Lacking a developed-country growth engine, world growth is 
expected to be 1.5 percent below world growth rates since 1993--
and slower than global growth during the 1998 Asian financial 
crisis. 

Prospects for Growth in 
Asia & Latin America

The Argentine financial crisis (AO September 2001) has the 
potential to spill over into countries of Asia that have not 
undertaken serious financial reforms. Most analysts do not expect 
such a spillover in 2001 or 2002, but other factors will probably 
slow Asian GDP growth. 

Asian growth will drop to 2 percent in 2001 as the recession in 
Japan continues, despite strong growth in India and China. Growth 
rates in Taiwan, Singapore, and Malaysia are likely to fall from 
2000 rates due to weak semiconductor and specialty chip export 
gains. China and India will roar ahead with over 5-percent 
growth, preventing the Asian outlook for 2001 and 2002 from being 
as weak as the performance in 1998. 

Sluggish Asian growth was a key factor in the recent decline in 
crude oil, gasoline, and diesel fuel prices. A rise in Asian GDP 
growth requires two to three times as much energy as a 1-
percentage point U.S. GDP growth. So, slowing Asian growth has 
had a larger impact in curbing oil price rises than a slowing of 
U.S. growth. As a result of slowing Asian growth, and despite 
tightening oil supplies, oil prices came down sharply from the 
peak in late spring 2001. The recent increase in U.S. gasoline 
prices reflects a modest expected rise in third-quarter growth in 
the U.S. and Asia.

Latin American growth rates will slow to less than 2 percent--
about half of its 2000 growth rate. As almost half of the 
emerging bond market index consists of Argentine and Brazilian 
bonds, the impact of Argentinas financial situation is 
potentially large. The 2-percent growth projection assumes the 
Argentina situation does not spill over into the rest of the 
world.

Slowdown Is Contagious 
In Integrated World Economy 

More than ever before, finance and trade integrate the world 
economy. Intervention of the Fed will show up in stronger U.S. 
growth in early- to mid-2002, with some decline in long-term bond 
interest rates. The tight international bond market and active 
U.S. corporate bond issuance have kept long-term bond rates high. 

Actions by the Fed in lowering short-term interest rates resulted 
in the largest corporate bond financing in U.S. history. This 
provides a solid base for strong future capital spending as 
inventories are cleared and capacity utilization tightens in late 
2001. The housing sector has shown remarkable strength due to 
lower mortgage interest rates, induced by both the Feds easing 
of interest rates, and low unemployment. 

Until recently, the dollar had been extraordinarily strong, 
rising by some indexes to the highest real (inflation-adjusted) 
level since the U.S. dollar started floating in the early 1970s. 
The resulting growth in imports makes it likely that 2001 will 
have a near-record trade deficit--second only to 2000. 

When U.S. companies experienced declining sales, earnings, and 
cash-flow, they laid off workers in Europe and Asia, not only in 
the U.S. headquarters. Similarly, European corporations with weak 
earnings and sluggish sales in the U.S. laid off workers in U.S. 
affiliates. These connections amplified the impact of the slowing 
U.S. economy and spread the slowdown to Europe, despite modest 
direct trade links. Inability of the European central bank to 
lower short-term interest rates contributed to depressed 
investment growth and exacerbated the European slowdown.

For the world economy to recover quickly, the U.S. economy must 
return at least to a GDP growth trend of 3.2 percent in mid-2002. 
As this occurs, the world economy would likely recover fully. 

U.S. recovery is likely, as consumer confidence is still high and 
housing continues to be strong. Growth in real wages, declining 
oil prices, low interest rates, lower utility prices, and recent 
tax rebates would further stimulate consumer spending in the 
second half of 2001. Robust growth in retail sales clearing 
inventories, tightening capacity utilization in late 2001, and 
the funds from recent corporate bond issues would boost business 
equipment spending in early 2002 and help get the U.S. economy 
back on track. 

The U.S. slowdown was essentially due to production cutbacks to 
work off excessive inventory accumulation through the first 3 
quarters of 2001. Based on current trends, the excessive 
inventories will be worked off so the growth seen in final demand 
will be reflected in GDP growth by early 2002. The manufacturing 
sector will recover by late 2001. By mid-2002, given the 
favorable interest rate, both consumer and producer spending will 
improve so GDP growth will be in the 3-percent range--with growth 
averaging 2.6 percent in 2002.

Impact of Slowdown on 
Farm & Rural Sectors 

The world growth slowdown comes with a notable decline in exports 
in 2001 and 2002. The higher value of the dollar relative to the 
yen and euro compared with 2000 will amplify the effect of 
sluggish world growth on U.S. exports. Thus, manufacturing and 
agricultural exports will be weak through 2001 and 2002. Nonmetro 
employment will continue to decline through 2001 and early 2002. 
Nonmetro manufacturing, heavily dependent on export markets, is 
not likely to recover until late 2002, as the economies of major 
U.S. trading partners recover and U.S. exports rise sharply. Off-
farm income prospects, particularly for small operators, will be 
quite weak through 2002. 

The rise in energy-related expenses in 2001 will be smaller than 
previously expected. First, diesel fuel prices have been falling 
since May 2001, and dropped below January levels in the late 
summer. Also, although nitrogen-based fertilizer prices surged by 
over 50 percent, an expected fertilizer shortage never emerged. 
Domestic fertilizer production dropped despite higher demand, as 
some producers faced with higher natural gas and electricity 
prices did not produce any fertilizer in the early part of 2001. 
In fact, some western fertilizer plants sold electricity that was 
available to them rather than produce fertilizer. Fertilizer 
imports from Saudi Arabia induced by high U.S. fertilizer prices 
made up for the domestic fertilizer production shortfall and 
mitigated the expected price increases. 

As natural gas price increases subside and diesel fuel prices 
stabilize, energy-related farm expenses will decline in 2002. 
Further, lower long-term interest rates will pull down farm 
interest rates. Average interest rates charged on farm loans from 
commercial banks have fallen well below 9 percent and are likely 
to drift lower through the first half of 2002. Through the first 
half of 2002, the combined effect of continued mild domestic and 
foreign economic growth, slightly lower inflation, and the 
continued easing of monetary policy will push farm interest rates 
moderately lower and increase the overall availability of farm 
loans. 

While the full impact of recent events is unknown, many factors 
will influence near-term growth. Consumers kept the domestic 
economy out of recession during the first half of 2001, but 
consumer confidence began dropping in mid-summer and downside 
effects of recent events may negatively affect consumer spending. 

Should a recession emerge in the U.S. in 2002, with Europe and 
Asia in decent shape, the dollar will likely weaken and long-term 
interest rates will fall even more than expected. This will 
modestly aid farm income prospects, but off-farm farm household 
income would be adversely affected--reducing farm household 
income prospects. 

David Torgerson (202) 694-5334
dtorg@ers.usda.gov

BRIEFS

Drought Delays Cattle Herd Expansion

Drought since 2000 in many areas, particularly the Southern Great 
Plains and Pacific Northwest, combined with the harshest winter 
since 1992/93, have delayed cattle herd expansion until 2004, 
despite relatively strong prices that normally result in heifer 
retention for breeding. The additional heifers in feedlots have 
increased beef production in the near term.

Poor weather conditions curtailed beef supplies this past winter 
and spring, resulting in sharply higher fed-cattle prices and 
record retail beef prices. Although the cattle-on-feed inventory 
at the beginning of the year was 3 percent above a year earlier, 
first-half beef production was 5 percent lower as both marketings 
and slaughter weights declined. Steer and heifer slaughter 
weights were on a record-setting path until December when harsh 
weather conditions began affecting feedlot performance. Compared 
with a year earlier, average weights in March were down 17 pounds 
to 771 pounds for steers and down 16 pounds to 715 pounds for 
heifers.

With poor grazing conditions in 2001, many heifers have been 
placed on feed for marketing rather than entering the breeding 
herd, a pattern repeated from last year when moisture conditions 
were similar. On July 1, nearly 3.9 million heifers were on feed, 
41 percent of on-feed inventories. This is up sharply from 2.1-
2.5 million head in 1992-94, only 34 percent of on-feed 
inventories when producers were most recently rebuilding their 
herds. Large numbers of this years calf crop are entering 
feedlots rather than remaining on pastures due to poor forage 
prospects. 

Feedlot placements in June were 20 percent above a year earlier, 
while July placements were up 4 percent. Poor moisture conditions 
through most of August resulted in another month of large 
placements, leaving total cattle-on-feed inventories on September 
1 up from a year earlier. Many of these cattle normally would not 
have been placed on feed until this fall or as light yearlings in 
late winter. Several factors will likely reduce placements in 
late summer through fall--declining total cattle inventories 
since 1996, another smaller calf crop this year, and a large 
proportion of this years calf crop already placed on feed.

Based on large on-feed inventories and a slow marketing pace 
through August, marketings in late summer through fall should 
rise above year-earlier levels. With higher marketings and a 
return to record slaughter weights under much-improved feedlot 
conditions, beef production has been revised upward for the 
second half of 2001 from earlier estimates. 

Large supplies of fed beef and seasonally large pork supplies 
likely will result in declining beef prices through late fall, 
although prices are expected to remain well above last years 
$3.11 per pound second-half average for Choice retail beef. 
Prices for Choice retail beef peaked in June at a record $3.48 a 
pound, before declining to $3.45 in July and $3.39 in August. 
Declining prices and larger supplies of higher quality beef in 
late summer through fall are likely to support stronger exports 
in the second half of 2001. Second-quarter beef exports were 16 
percent below a year earlier as domestic buyers outbid soft 
international demand for higher quality beef. 

Assuming normal weather conditions this fall-winter and modest 
heifer retention, total beef production is expected to decline 
nearly 4 percent in calendar year 2002, with the largest declines 
occurring in the second half of the year. 

Fed-cattle prices are likely to average near $80 per 
hundredweight in 2002, up from the mid-$70s this year. Feeder-
cattle prices are expected to continue strong over the next 
several years as supplies decline. However, larger supplies of 
competing meats in 2002 will hold down beef price gains and, 
consequently, feeder-cattle price gains.

Late summer and fall forage availability will determine the 
extent of decline in beef supplies in 2002 and affect the timing 
of herd rebuilding. Todays large on-feed inventories and record 
weight trends will support supplies only through the first 
quarter of 2002. Moisture conditions began to improve in some 
areas in late August, and improving fall-winter grazing 
prospects, combined with already higher calf prices, could 
trigger strong heifer retention from the 2002 calf crop and herd 
expansion in 2004. This reduction in heifers available for the 
feeder-cattle supply would reduce beef supplies beginning in the 
second half of 2002, beyond the amount resulting from the 
expected downtrend in feedlot placements through fall 2001. 

Normal rainfall and the resulting favorable pasture conditions 
for fall and winter grazing would also stabilize cow inventories 
and slow expected declines in beef production beginning next 
year. Poor weather conditions in recent months and concerns for 
forage supplies this winter have led to sharply higher beef cow 
slaughter.

The market is entering a cyclical period when cattle feeders and 
stocker operators usually lose money as costs rise for purchases 
from this years calf crop. At the same time, cow-calf producers 
usually turn a profit and, weather permitting, can begin to 
retain heifers for expansion. 

Ron Gustafson (202) 694-5174
ronaldg@ers.usda.gov 

BRIEFS

2001 U.S. Apple Crop Smaller, Prices Likely to Rise

According to USDA forecasts, U.S. apple production in 2001 is 9.6 
billion pounds, down 10 percent from a year ago and the smallest 
crop since 1988. Production is down both in the Western and 
Eastern regions (16 percent and 3 percent, respectively), 
offsetting increased production in the Central region (up 12 
percent). Because of the smaller apple crop this year, and less 
competition from a smaller pear crop this fall, apple prices in 
2001/02 will likely increase. Reduced supplies and higher prices 
will limit both domestic and export demand for U.S. apples, 
especially in the fresh-market sector. Domestic consumption of 
fresh apples is expected to decline from last years estimate of 
17.9 pounds per person.

All Western apple-producing states, except California, are 
expected to harvest smaller crops of apples this fall with the 
region producing a total of 5.9 billion pounds. Washington, which 
produces over half the nations apples and is the largest 
producer for both the fresh and processing markets, is expected 
to produce only 4.9 billion pounds, down 17 percent from 2000. 

Besides being in its off  production year (Washington produced 
a near-record large crop in 2000), weather-related issues and a 
drop in bearing acres have contributed to the states anticipated 
smaller crop this fall. In addition to the stress on trees 
resulting from below-average rainfall during the spring, the 
combination of heavy winds and hail from a storm in June caused 
severe damage to orchards in the Yakima Valley. Hailstorms and 
unfavorable weather during bloom also reduced production in the 
Wenatchee area. 

In California, the second-largest apple-producing state in the 
region, weather was generally favorable and was conducive to 
increased production. Meanwhile, decreased production in other 
Western states can be attributed partly to crop damage caused by 
hail, early-season frost, and late-season drought. Weather 
problems also affected apple production in many Eastern states, 
but generally favorable weather improved apple crops in most 
Central states except Ohio.

As of July 1, 2001, U.S. apple holdings as reported by the U.S. 
Apple Association totaled 21.3 million bushels, up 9 percent from 
the same time last year and 26 percent higher than the 5-year 
average. Fresh apple holdings (mostly Washington apples in 
controlled atmosphere storage) were up 16 percent, while total 
processing holdings were 8 percent lower. 

Some of the 2000 fresh-market storage apple stocks were diverted 
to the processing sector and other uses (such as the school lunch 
and domestic feeding programs). This and the expected smaller 
2001 crop, particularly in Washington, will help ease any supply 
pressure in the 2001/02 (August-July) season. Fresh-market 
supplies in 2001/02 are anticipated to be below last years and 
will likely result in higher prices, increased fresh apple 
imports, and reduced fresh apple exports. During 2000/01, fresh-
market supplies were up 4 percent from the previous year, and the 
season-average farm price for fresh-market apples declined 16 
percent to 17.9 cents per pound. Retail prices for Red Delicious 
apples mirrored the pattern in grower prices during 2000/01 and 
averaged 66.1 cents per pound, down 30 percent from the previous 
season.

U.S. production of apples for the processing sector in 2001 will 
also likely be limited. Many Eastern states, where a large 
proportion of production is used for processing, are expected to 
harvest smaller crops. In addition, although combined production 
in the Central and Eastern states is expected to be 2 percent 
higher than a year ago, the much smaller crop in Washington will 
likely bring overall production of processing apples down from 
last year. Washington accounts for over one-third of processing 
apple production. 

Reduced supplies and lower stocks of processing apples will help 
boost grower prices for processing apples. However, stocks of 
2000 fresh-market apples being diverted to the processing sector 
and other uses will likely mitigate some of the upward pressure 
on prices. Production of processing apples was down in 2000 from 
the year before, but large carryover stocks from the 1999/2000 
season, along with increased imports of apple juice and cider, 
contributed to lower grower prices. The 2000/01 season-average 
grower price for processing apples was $103 per ton, down 20 
percent from the previous season. 

Increased production in the fall of 2000 reduced imports of fresh 
apples during the 2000/01 season. U.S. imports from August 2000 
through June 2001 totaled 301.5 million pounds, down 5 percent 
from the same period the year before. About 94 percent of this 
volume came from the three largest suppliers of U.S. fresh-market 
apples. Among these top suppliers, imports were down 19 percent 
from Canada and 11 percent from New Zealand, but were up 23 
percent from Chile. 

During the same period, U.S. exports of fresh apples increased 44 
percent to 1.6 billion pounds. Exports were up to all major 
markets, including Mexico, Taiwan, Canada, Hong Kong, Indonesia, 
and the United Kingdom.

U.S. imports of apple juice and cider from August 2000 through 
June 2001 totaled 286.1 million gallons, up 2 percent from the 
same period a year earlier. Although smaller volumes were shipped 
from large suppliers such as Argentina and Chile, imports were up 
sharply from China, Italy, Germany, Hungary, and New Zealand. 
During the same period, U.S. apple juice exports declined. At 
nearly 7 million gallons, exports were down 21 percent, 
reflecting reduced shipments to Japan and Canada, the two leading 
export markets. 

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

BRIEF

Tracking Wholesale Prices for Organic Produce

Organic agriculture is one of the fastest growing segments of the 
U.S. food sector. However, collection of data (e.g, on prices) 
for this component of U.S. agriculture has lagged the industrys 
growth.

Industry sources estimate that retail sales of organic products 
grew from $847 million in 1991 to $1.95 billion in 1996, reaching 
$7.8 billion in 2000. Produce accounted for 42 percent of U.S. 
organic food sales in 2000, according to the market research firm 
Packaged Facts. Trailing produce were packaged groceries (15 
percent), dairy products (11 percent), bulk and frozen foods (8 
percent each), soy-based products (6 percent), beverages (5 
percent), meat (3 percent), and snacks and candy (2 percent).

Limited data on acreage, retail sales, and farm and wholesale 
prices for organic products are available from USDA and private 
sources. For example, USDAs Agricultural Marketing Servicing 
(AMS) and Economic Research Service (ERS) have periodically 
collected and published data on certified organic acreage during 
the 1990s (AO April 2000). 

For organic produce, AMS Market News has occasionally included 
wholesale prices for organic items in its daily wholesale fruit 
and vegetable reports, which cover terminal markets in 15 U.S. 
cities, including Atlanta, Dallas, and Seattle. Organic produce 
prices first appeared in the Boston and Philadelphia Wholesale 
Fruit and Vegetable Report in 1992. Since then, Market News has 
occasionally reported organic prices in six other wholesale 
markets.

Reported prices reflect transactions by wholesalers for sales of 
less than a carload or truckload and for products that are of 
good quality and condition, unless otherwise noted. Market News 
staff strive to report prices on the full range of produce 
available at the market facilities they are covering, except when 
volume is extremely low.

A Snapshot of Bostons 
Wholesale Market

Boston is the only city for which Market News consistently 
reports organic prices. The wholesale facility there lends itself 
to the reporting process. It is relatively small with all produce 
gathered in a fairly compact area, while other markets move more 
volume and are larger and less centralized. For example, several 
wholesale facilities in New York handle a greater volume, with 
mainstream produce sold through Hunts Point and specialty 
commodities sold in Brooklyn or at other off-market sites.

Since January 2000, the Boston Wholesale Fruit and Vegetable 
Report has included prices for organic items over 85 percent of 
the time. The report typically contains prices on about 10 types 
of organic vegetables and fruit, such as potatoes, mushrooms, and 
bananas. Although the number and type of commodities reported 
varies widely from day to day, the report routinely contains 
prices for organically grown broccoli, carrots, and mesclun mix 
(a blend of baby lettuces). 

In the Boston wholesale market, each of the three vegetables had 
its own price pattern and a different price relationship with its 
conventional counterpart during 2000-01. Organic broccoli 
followed a wholesale price pattern similar to conventional 
broccoli. Organic carrots carried higher price premiums during 
the first half of 2000 than the last half. And organic mesclun 
prices followed those for conventional mesclun closely, 
occasionally falling below conventional prices. 

Organic broccoli wholesale prices during 2000-01 showed the 
highest volatility of the three organic commodities routinely 
reported in Boston. Conventional and organic prices showed a 
cyclical pattern and peaked during May and November 2000 and July 
2001. Organic prices started their peaks before conventional 
prices rose, dropping off after prices for conventional broccoli 
returned to normal price levels. During 2000-01, premiums for 
organic broccoli averaged over $13 for a 14-count bunch, or 130 
percent of the conventional price. 

While price premiums for organic carrots were clearly present in 
the Boston market in 2000-01, price patterns did not necessarily 
follow those of conventional carrots. Conventional carrots 
remained more or less stable, with prices ranging from $9.50 to 
$14 per container (sacks of 24-count 2-lb. film bags) and 
averaging $11.27 since January 2000. Prices for organic 
varieties, on the other hand, were comparatively volatile, 
varying between $17.50 and $35 during 2000-01. Price premiums for 
organic carrots averaged over $14 per container, or more than 125 
percent of conventional prices.

Organic mesclun, sourced from California, did not carry as high a 
price premium as its carrot and broccoli counterparts during 
2000-01. Prices for 3-pound bags of organic mesclun mix were 
sometimes actually below levels of the conventional variety. 
(Since the greens are harvested when they are young, they are not 
in the ground long enough to be prone to insects and diseases. 
Therefore, pest management costs for organic varieties are 
similar to those of conventional mesclun.)  Prices for both 
varieties showed no particular pattern, with peaks in November 
and December reflecting the end of the California mesclun season. 
The average price premium for 3-lb. bags of organic mesclun was 
$0.68, or just over 10 percent of conventional mesclun prices 
during the previous 17 months.

Limited Organic Reporting for 
Other Wholesale Markets 

In contrast to its Boston coverage, Market News has only 
occasionally reported organic prices for seven other wholesale 
markets. For example, Market News published daily prices for 
organic romaine hearts and mesclun mix for the Baltimore market 
during 2 to 3 months in 1996 and 2000.

Organic prices have been reported by Market News for a wider 
variety of commodities in the San Francisco market, but only for 
1 to 2 months during the last year and a half. Organic vegetable 
prices--including those for garlic, cabbage, and mesclun lettuce-
-generally appeared in the San Francisco report between early 
spring and late summer. Organic fruit listings appeared 
occasionally throughout the year and mainly covered bananas, 
strawberries, grapes, and several varieties of apples. For the 
New York, Chicago, Detroit, Pittsburgh, and Philadelphia markets, 
wholesale organic prices have been reported, but only for a few 
commodities for a few days. 

The limited organic prices contained in these and other market 
reports do not reflect an intentional under-reporting of 
wholesale organic prices. Since Market News reporters do not set 
out specifically to record organic prices, reports of organic 
produce prices are usually issued on a hit-and-miss basis.

While prices for organic broccoli, carrots, and mesclun in 
Bostons wholesale market differed from the price patterns of 
their conventional counterparts, these conclusions do not 
necessarily reflect the entire industry. The price relationships 
between organic and conventional products reflect price movements 
of only three vegetables in one wholesale market, and for a 
relatively short period of time. If and when more organic produce 
moves through terminal markets, the data may provide a better 
indication of industry trends. 

Emy Sok (202) 694-5257 and Lewrene Glaser (202) 694-5637
esok@ers.usda.gov
lkglaser@ers.usda.gov

For more information on U.S. organic agriculture, see ERSs 
organic farming and marketing briefing room, 
www.ers.usda.gov/briefing/organic. Tables containing monthly 
averages of the organic wholesale prices, by market and 
commodity, will be posted in the briefing room later this fall. 

For more information on organic wholesale produce prices, contact 
Terry Long, Chief, Market News Branch, Fruit and Vegetable 
Programs, AMS, (202) 720-2745, Terry.Long@usda.gov. 

BRIEF BOX 

What Is Organic? 

Organic farming systems rely on ecologically based cultural 
practices such as biological pest management, virtually exclude 
the use of synthetic chemicals in crop production, and prohibit 
the use of antibiotics and hormones in livestock production. 
Congress passed the Organic Foods Production Act of 1990 to 
establish national standards for organically produced 
commodities, and USDA promulgated final rules for implementing 
this legislation in December 2000. These regulations require all 
except the smallest organic growers to be certified by a state or 
private agency accredited under the uniform standards developed 
by USDA.

USDA is currently implementing the organic regulations. All 
agricultural products that are sold, labeled, or represented as 
organic must be in compliance with the regulations by the end of 
an 18-month transition period ending in late 2002. For further 
information, visit the website of USDAs Agricultural Marketing 
Service, National Organic Program at www.ams.usda.gov/nop.

COMMODITY SPOTLIGHT

Corn Market to Strengthen in 2001/02

Corn prices are expected to strengthen in 2001/02 as ending 
stocks decline to the lowest level since 1997/98. U.S. corn 
production in 2001 is expected to drop 7 percent, pulled down by 
lower acreage and yields. Despite higher beginning stocks, total 
supplies in 2001/02 will drop 4 percent from a year earlier. 
Meanwhile, domestic use is forecast to reach a record high, and 
exports are expected to rise 2 percent to the highest level since 
1998/99 as global use expands. The average farm price is forecast 
at $1.95-$2.35 per bushel, up from $1.85 in 2000/01.

Several factors are behind the reduced acreage: high cost of 
inputs (fertilizer prices were up sharply), low price prospects 
at planting, and excessive precipitation in the spring. Planted 
area is estimated at 76 million acres, down 584,000 acres from 
the March Prospective Plantings report and down 3.4 million from 
2000.

Corn planting progressed at a near-record pace in Illinois, 
Indiana, Kentucky, and Ohio, but frequent precipitation hindered 
progress in Minnesota, Iowa, Missouri, Nebraska, South Dakota, 
and Wisconsin. Moisture shortages hindered germination and 
emergence in parts of the eastern Corn Belt, but warm weather 
aided growth where moisture supplies were adequate. In mid-May, a 
period of wet weather over the eastern Corn Belt erased most 
moisture shortages, and many fields showed signs of excessive 
moisture. In the western Corn Belt, excessive moisture and a 
period of below-normal temperatures in late May hampered 
germination and early growth. This years U.S. planted area is 
the lowest since 1995, when excessive rainfall also limited 
plantings. 

Overall, crop and weather conditions throughout the growing 
season were highly variable again this year. Crop conditions 
deteriorated after mid-July, but rebounded somewhat near the end 
of the month when widespread precipitation eased localized 
moisture shortages in most areas of the Corn Belt. Corn yields in 
2001 are forecast at 133.5 bushels per acre, down 3.6 bushels 
from last years near record. Production in 2001 is forecast at 
9.2 billion bushels, down from nearly 10 billion in 2000. 

Domestic Use Forecast 
Record High

Domestic use in 2001/02 is expected to total a record 7.8 billion 
bushels, up 35 million bushels from 2000/01, bolstered by gains 
in food, seed, and industrial use.

Food, seed, and industrial uses are projected to remain strong, 
up 4 percent from 2000/01 to 2,050 million bushels. Use at this 
level would represent 18 percent of total corn supply, up from 17 
percent in the previous 2 marketing years.

Total sweetener use of corn is projected up 2 percent in 2001/02 
from a year earlier as corn sweetener use continues to trend 
upward and appear in a wide variety of food products. In 2000/01, 
corn use for high fructose corn syrup (HFCS) is expected to be up 
1 percent from the 539.5 million bushels used in 1999/2000. HFCS 
prices have been increasing and the number of soft drink specials 
have been reduced, slowing use. In addition, exports of HFCS in 
September 2000-July 2001 were down 12 percent from the same 
period a year earlier, partly because of higher tariffs imposed 
by Mexico in the ongoing dispute over U.S. sugar imports and HFCS 
exports. In 2001/02, corn used to make HFCS is expected to resume 
its long-term upward trend and rise 2 percent. 

After holding nearly steady in 2000/01, corn use for glucose and 
dextrose (sometimes used in nonfat  products, for example) is 
also expected to resume its upward trend, reaching 225 million 
bushels in 2001/02.

In 2001/02, beverage alcohol and manufacturing use of corn is 
expected to rise 1 million bushels to 131 million, mainly in 
conjunction with population growth. Corn used in cereals and 
other food products in 2001/02 is expected to be up 3.4 million 
bushels to 184 million.

Corn used to make starch in 2000/01 (for products such as paper 
and wallboard) is projected down 1 million bushels from the 251 
million used in 1999/2000. With modest economic growth in 2002, 
corn used for starch production is projected to be up 2 percent 
in 2001/02.

Corn used to make ethanol is also rising. Ethanol use, contrary 
to normal seasonal declines, remained strong in the summer of 
2001 because of the high prices of gasoline and of methyl 
tertiary butyl ether (MTBE). Consequently, corn used to make 
ethanol is expected to rise nearly 10 percent in 2000/01. Ethanol 
is a substitute for MTBE both as an oxygenate additive, and with 
an octane rating of 113, can enhance the gasolines octane 
rating.

In 1999, Californias governor issued an executive order to ban 
the use of MTBE effective January 2003 because of its adverse 
impact on groundwater quality (AO October 1999). 

Use of ethanol in place of MTBE in California and other 
reformulated gasoline areas (see sidebar) would generate greatly 
increased demand, and plants are being built, or planned and 
existing ethanol plants are expanding their capacity in 
anticipation of this stronger demand. Several plants have 
announced they will increase production, and USDA has granted 
funds for new alcohol plants. As a result, corn use in ethanol 
plants will be up in 2001/02. Further increases will likely occur 
in 2002/03. In 2001/02, corn used for ethanol production is 
expected to be up 10 percent from the projected 620 million 
bushels used in 2000/01. Bills have been introduced in Congress 
that mandate ethanol use by the gasoline industry and are 
awaiting consideration.

Feed and residual use is projected down 1 percent in 2001/02 as 
the number of cattle on feed declines. Corn is the principal feed 
grain in the U.S. and accounts for 90 percent of the total feed 
and residual use of the four feed grains plus wheat. For 2001/02, 
the index of animal numbers is expected to be up 1 percent from 
2000/01, with pork and poultry components up a little from a year 
earlier and dairy and beef down slightly. 

Beef production in 2001 is projected to be down 3 percent from 
the 26.8 billion pounds produced in 2000. Projected beef 
production for 2002 is 25.2 billion pounds, down 4 percent from 
2001. These projections suggest weaker feed needs by the beef-
feeding industry in 2002 than in 2001. 

In 2002, pork production is expected to increase 4 percent from 
the projected 2001 level. Given these expectations, feed needs by 
the pork industry will continue strong.

Feed use by the poultry industry is also expected to remain 
strong. Projected broiler production is expected to rise 2 
percent in 2002, while turkey production is projected to be up 3 
percent from 2001. 

In 2002, milk production is expected to total 170 billion pounds, 
up 3 percent from 2001. With strengthening milk prices and 
relatively low corn prices, producers are expected to maintain 
heavy grain feeding and keep corn demand strong.

Global Corn 
Stocks to Shrink

With lower U.S. production, world corn output in 2001/02 is 
expected to decline to 579 million tons, down 7 million from a 
year earlier and 28 million less than the 1999/2000 record. 
However, foreign production is expected to increase 11 million 
tons in 2001/02. Eastern Europe is recovering from drought (up 10 
million tons); growing conditions in the European Union (EU) have 
been favorable (up 2 million tons to record levels); and expanded 
area and a rebound in yields will raise Sub-Saharan Africa output 
(up 3 million tons). 

Partly offsetting these increases is a drop of nearly 5 million 
tons in Latin America, where Brazils exchange rate favors 
increased soybean area over corn. Also, Brazil in 2001/02 is not 
expected to match the previous years record yield. 

The generally weak global economy is expected to limit growth in 
world corn use to 2 percent in 2001/02. This modest growth is 
slightly higher than world population growth and is a rebound 
from declining use the previous year. Most regions are expected 
to experience slow growth, with increased production boosting use 
somewhat in Eastern Europe and the EU. However, corn consumption 
in several of the largest importers is expected to stagnate or 
decline. In Japan, feed use is gradually declining as meat 
production is reduced and meat imports increase. Meat imports and 
increased feed wheat imports are expected to reduce corn feeding 
in South Korea. In Taiwan, corn use is forecast the same as a 
year earlier. In Iran, corn use is expected to decline because of 
economic woes and a second year of drought-reduced production. 

Global corn trade in 2001/02 is expected to decline slightly to 
over 73 million tons. Sluggish demand in Japan and South Korea 
will more than offset stronger growth in markets like Mexico. 
Increased shipments of corn and feed wheat from Black Sea ports 
will partly offset reduced corn exports by China and Argentina. 
U.S. market share is expected to increase, but only modestly.

The combination of reduced U.S. production, increased global use, 
and reduced world beginning stocks is expected to drop global 
corn stocks by nearly 37 million tons, the largest decline since 
1988/89. Despite sharply lower prospective global ending stocks, 
several developments this marketing year will limit gains in corn 
prices. First, drawing on large stocks, China is expected to 
continue to export corn early in the marketing year, despite a 
smaller crop. Second, Eastern Europe is expected to more than 
triple corn exports because of a larger crop. Third, Eastern 
Europe and the former Soviet Union will increase feed wheat 
exports in 2001/02. Finally, given relatively large U.S. stocks, 
there is little reason to expect that stronger use will drive up 
prices. 

Allen Baker (202) 694-5290 and Edward Allen (202) 694-5288 
albaker@ers.usda.gov 
ewallen@ers.usda.gov

COMMODITY SPOTLIGHT BOX 

Ethanol/MTBE Update

Under the Clean Air Act Amendments of 1990, Federal law requires 
a 2-percent minimum level of oxygen in reformulated gasoline 
(RFG) sold in nonattainment  areas (generally metro areas where 
ozone levels exceed Federal standards). RFG is gasoline that is 
blended such that it significantly reduces volatile organic 
compounds and toxic emissions relative to conventional gasolines.

Methyl tertiary butyl ether (MTBE) competes with ethanol use in 
RFG and winter-oxygenated gasoline. Both ethanol and MTBE add 
oxygen to the gasoline and can be used to enhance the octane 
rating. 

In April 1999, Californias state government requested a waiver 
from the 2-percent oxygenate requirement in order to reduce costs 
associated with the statewide ban of MTBE, which was issued as an 
executive order by Californias governor because of its link to 
water contamination. The Environmental Protection Agency (EPA) 
denied the request in July 2001, and California has filed suit in 
Federal court to reverse the EPA ruling. The governor could also 
reverse the ban or change the starting time, since he simply 
issued an executive order and is not legally bound to ban MTBE. 
In a separate action, Californias congressional delegation 
attempted and failed to get a bill passed through Congress that 
would exempt the state from the oxygenate requirement. 

Reformulated gasoline using ethanol as the oxygenate is generally 
more expensive because the gasoline used to blend with ethanol 
must be refined to have a low RVP (Reid vapor pressure, a measure 
of ease of evaporation). However, the price of ethanol is 
generally about the same or below the price of MTBE, after 
subtracting the blender tax credit of $0.53 per gallon for 
ethanol.

A second factor affecting the price of gasoline using ethanol is 
the proportion of oxygenate required. MTBE is blended at 11 
percent to get 2 percent oxygen, while alcohol (ethanol) requires 
only 5-7 percent because of the higher oxygen content. (Ethanol 
has twice the oxygen by weight, so one gallon of ethanol will 
replace 2 gallons of MTBE.) California tends to have a very tight 
supply/demand balance for gasoline. A switch from MTBE to ethanol 
would likely cut gasoline supplies about 6 percent, as the 
proportion of gas in the RFG-with-ethanol mix has to be higher. 
Gasoline prices would climb as short supplies increased the need 
for crude oil. 

More than 12 states are trying to ban MTBE by 2004, but 
California is the largest gasoline user and will generate the 
most ethanol demand. Also, RFG is not required in summer for most 
of the other states. For example, Kansas and Maine are not 
required to use RFG during the summer, so if MTBE is used, it is 
not required for oxygen.

Several federal government programs promote ethanol production.

--The blender credit of 53 cents per gallon provides income tax 
credits for ethanol produced from renewable sources. This credit 
is now set to expire in 2007. 

--Federal grants are available to help build ethanol plants, 
through USDAs Value-Added Agricultural Product Market 
Development Grant program. In June 2001, USDA announced approval 
of $2.4 million in grants to six firms (cooperatives and 
companies).

--USDAs Commodity Credit Corporation funds the Bioenergy Program 
(up to $150 million in fiscal 2002), which makes payments to 
bioenergy companies that increase their purchases of corn, 
soybeans, and other commodities to expand production of ethanol, 
biodiesel, or other biofuels. 

--USDA has sold surplus sugar to some ethanol producers in order 
to boost ethanol production. 

--The U.S. Department of Energy has also provided grants for 
producing ethanol from biomass.

Current ethanol production capacity is 1.95 billion gallons per 
year. In July, the Energy Information Administration reported 
daily production of 4.7 million gallons. The best estimate is 
that by the end of 2002, ethanol capacity will increase to 2.5 
billion gallon per year. Most of the increase in ethanol 
production will be from existing plants or plants already under 
construction, although other plants are in the planning stage.

WORLD AGRICULTURE & TRADE

U.S. Agricultural Exports Forecast to Rise in Fiscal 2002

U.S. agricultural exports will increase in value for the third 
consecutive year in fiscal 2002, according to USDA projections. 
Exports are expected to rise to $57 billion, 6.5 percent above 
fiscal 2001. Much of the gain is from exports of corn (up $1.4 
billion), wheat (up $700 million), soybeans (up $400 million), 
and cotton (up $200 million), the major bulk commodities. Record 
exports of horticultural products, such as fruits and vegetables, 
also are projected. Higher prices of wheat, corn, and soybeans 
account for much of the gain in export value. However, prices of 
cotton have declined sharply since early 2001.

Substantial gains are forecast in bulk commodity export volume, 
which will rise 9 million tons to 119.3 million tons, the highest 
since fiscal year 1996. Corn volume is projected up 5.5 million 
tons, wheat volume up 2.9 million tons, and cotton volume up 
400,000 tons. Forecast soybean volume is unchanged from the 
record level of 2001.

U.S. agricultural imports also are expected to rise to $39 
billion, $500 million above the downturn in 2001. But this gain 
is much more modest than increases in recent years, as the 
slowdown in U.S. economic growth continues to affect import 
growth in 2002. Most of the increase in imports is projected to 
be in horticultural products, such as malt beverages, nuts, and 
vegetables. Both volume and value is forecast to increase for 
these commodities, which tend to respond to growth in per capita 
U.S. incomes. Most U.S. horticultural imports come from Canada 
and Mexico.

The U.S. agricultural export surplus is forecast at $18 billion, 
20 percent above 2001, and the largest since fiscal 1997. 
Nevertheless, it is still well below the record surplus of $27.4 
billion in fiscal 1996. 

Exports of bulk commodities--wheat, rice, coarse grains, 
soybeans, cotton, and tobacco--are projected to account for 36 
percent of total U.S. agricultural exports, compared with 33 
percent in 2001. The share of high-value product (HVP) exports is 
expected to contract to 64 percent from 67 percent in 2001, 
despite gains in HVP exports. In 2001, HVPs again accounted for 
all the gain in exports over 2000, but a greater recovery is 
forecast for bulk product exports in 2002. 

Global economic growth in 2001 has been slowed substantially by 
the economic downturn in the U.S. A gradual recovery in both 
world and U.S. growth is anticipated for 2002. Among developed 
economies, the U.S. and the European Union (EU) each expect gross 
domestic product (GDP) growth of about 2.5 percent in 2002; this 
contrasts with the 1.5 and 1.8 percent growth expected in 2001. 
GDP growth in Japan may remain below 1 percent in 2002. Stronger 
growth is projected in developing countries in 2002, increasing 
to 4.5 percent from 3.6 percent in 2001. Growth in Asia will 
reflect mainly the strength of the economies in China and India, 
although some gain is expected in other countries. In Latin 
America, Argentina and Mexico are likely to be the most dependent 
on U.S. recovery because the Argentine exchange rate is pegged to 
the U.S. dollar and most of Mexicos trade is with the U.S. A 
deceleration also occurred in growth in the economies of 
transition countries in 2001, but these countries are expected to 
rebound in 2002 as they continue recovering from a decade of 
faltering and negative growth. 

The short-term outlook for the dollar remains strong, despite 
significantly lower U.S. interest rates. The strong dollar 
encouraged U.S. import growth and made U.S. agricultural exports 
less competitive in 2001. With the general slowdown in the U.S. 
economy in 2001, and continued low domestic inflation expected in 
2002, U.S. real interest rates are likely to remain high, slowing 
export growth and strengthening imports in 2002. 

Bulk Exports Gain in 
Both Volume & Value

Bulk commodity exports are projected at $20.4 billion and 119.3 
million tons for 2002, well above 2001 levels. The gain in value 
reflects higher prices for wheat, corn, and soybeans. Higher 
prices are supported by expectations for smaller U.S. crops of 
wheat and corn and strengthening global demand. 

Corn accounts for about 60 percent of the projected gain in bulk 
export volume. Exports of other coarse grains are expected to 
remain about the same as in 2001. Less corn export competition, 
particularly from China, is anticipated in 2002 due to current 
drought conditions there. China is likely to produce its second 
consecutive smaller corn harvest. Global consumption is expected 
to outpace production, as U.S. use expands. U.S. corn exports are 
projected at $5.7 billion and 51.5 million tons.

The smaller U.S. wheat crop will raise wheat prices. Wheat and 
flour exports are projected at $4.2 billion, up $700 million. 
But, U.S. wheat export volume will also rise, reflecting smaller 
exportable supplies from Canada, the EU, and Australia and global 
consumption that will exceed production for the third consecutive 
year.

U.S. rice exports are projected at about $700 million and 3.1 
million tons, up slightly in volume from 2001. A larger U.S. crop 
reduces U.S. prices, making U.S. exports more competitive. 
Substantial global supplies also are expected to weaken world 
prices and keep export competition relatively strong. 

China continues to be a major factor behind expected gains in 
soybean exports in 2002. Chinas 2002 soybean imports are 
forecast up another 1.3 million tons or 10 percent. The U.S. will 
be able to take advantage of the gain because U.S. soybean 
production is projected to expand by 2.66 million tons, exceeding 
the expected production growth in South America. U.S. soybean 
export volume is unchanged from 2001s record 27.1 million tons. 
These exports are valued at $5.6 billion, up $400 million as 
prices also rise slightly, due to strengthening demand.

U.S. exports of cotton are forecast to increase in volume, but 
weak prices will hold down gains in value in 2002. Prices already 
are off sharply from 2001, reflecting record forecasts for U.S. 
and world production and prospects for larger ending stocks. 
Global demand is expected to strengthen somewhat, as world 
economic growth rebounds from the 2001 slowdown. 

Growth in HVP 
Exports Slows in 2002

U.S. HVP exports in 2002 are projected to rise $500 million to 
$36.6 billion. However, expected growth in HVP exports is modest 
compared to bulk exports. Horticultural products will reach a 
record $11.6 billion, up $300 million from 2001, while soybean 
oil exports will rise $200 million to $500 million, and projected 
livestock, dairy, and poultry exports will remain unchanged from 
2001s record $12.8 billion.

The increase in horticultural product exports comes from gains--
of $100 million each--projected for exports of fruits, 
vegetables, and tree nuts. Continued strong demand in Canada, 
Mexico, and some Asian countries, reflecting expected economic 
expansion, is responsible for the growth of fruit and vegetable 
exports. Large gains in walnut and almond production, along with 
demand growth in Asia and the Middle East, support expansion of 
nut exports.

The $200-million boost in 2002 U.S. soybean oil exports reflects 
expanding soybean oil demand, slowing growth of foreign vegetable 
oil supplies, and large U.S. stocks. World production of major 
competing oils--rapeseed oil and sunflowerseed oil--is expected 
to decline in 2002. Although still growing, growth in palm oil 
production is forecast to be only half as large as in recent 
years. Consequently, a larger share of the still-expanding global 
demand for vegetable oils will be met by soybean oil exports next 
year. 

Expected expansion in 2002 U.S. beef exports reflects prospects 
for slightly higher prices, as well as slightly larger shipments. 
Asian and North American markets both are likely to continue 
strong demand for U.S. beef. Pork exports, however, are forecast 
to decline slightly, as competition from Canada and the EU rises. 
An expected drop in cattle slaughter will push hide exports down 
slightly, as well. Exports of poultry meat are forecast unchanged 
from 2001, as demand in Russia, China, and Mexico remains strong. 

Carol Whitton (202) 694-5287 
cwhitton@ers.usda.gov

WORLD AGRICULTURE & TRADE BOX  (EXPORTS)

This is the initial forecast of agricultural exports for 2002 
(released August 31, 2001). Bulk commodities include wheat, rice, 
feed grains, soybeans, cotton, and tobacco. High-value products 
(HVP's) comprise total exports minus bulk commodities. HVP's 
include semiprocessed and processed grains and oilseeds (e.g., 
soybean meal and oil), animals and animal products, horticultural 
products, and sugar and tropical products. A breakout of U.S. 
agricultural exports and imports by major commodity group--both 
volume and value--for 1999-2002 is included in the appendix.

WORLD AGRICULTURE & TRADE

Turkeys Financial Crisis: How Will It Shake Out?

Prospects for the Turkish economy, which has been in crisis since 
November 1999, are hostage to a host of contingencies. Turkey 
joins Brazil and Argentina in a state of economic crisis at a 
time of global uncertainty. If these crises signal the beginning 
of an extended downturn in the world economy, the outlook for 
Turkeys economy is bleak. On the other hand, if the world 
economy turns around and Turkeys economy recovers, the crisis 
may provide policy makers with the political capital to make key 
structural reforms that would benefit the economy in the long 
run.

The situation in Turkey raises some important issues and concerns 
regarding short- and long-term implications for U.S. agricultural 
exporters. Because Turkey is a sizable market for certain U.S. 
agricultural goods, the ongoing financial crisis may affect U.S 
exports. In the short run, U.S. exports should decline as the 
crisis shrinks demand, while the liras drastic fall makes 
imports relatively more expensive. Longrun impacts of Turkeys 
problems may be mixed, depending not only on whether its economy 
recovers, but also on whether needed structural reforms in 
agriculture are implemented.

The U.S. is a major player here. In 2000, the U.S. exported $585 
million in agricultural products to Turkey. Major U.S. 
agricultural exports include cotton, corn, soybean products, and 
rice, which together amount to between 2 and 11 percent of total 
U.S. exports for those commodities, generating up to $200 million 
in revenue. U.S. products accounted for the second-largest share 
of total agricultural imports into the country, behind the 
European Union (EU).

Cereals were Turkeys largest agricultural import in 2001 
(approximately $418 million), 30 percent of which came from the 
U.S. ($113 million). 

Turkey occupies a strategic location in the Middle East; keeping 
its economy afloat is a high priority for the U.S. and the EU. 
Because the strategic stakes are high, some doubt whether the 
International Monetary Fund (IMF) can persuade Turkey to 
implement a carrot-and-stick rescue plan that ties IMF assistance 
to a program of reform. There are fears the IMF will ultimately 
rescue Turkey, whether or not Turkey follows through with reform. 
However, if the IMF reforms are successfully adopted, Turkeys 
agricultural sector will see measurable structural changes. 

Crisis Rattles the Financial Sector

Since November, the Turkish economy has been hit twice by 
economic crises, each triggered by financial rumors and political 
concerns. The first crisis, sparked in November 2000 when the 
government announced plans to investigate 10 banks, significantly 
reduced investor confidence, driving up interest rates to an 
annualized 2,000 percent in December. Investors switched out of 
lira-based assets, causing a severe shortage of short-term 
credit, exacerbating the situation. 

Just as recovery seemed imminent, a crisis yet more damaging 
swept through the nations troubled financial markets. In 
February, a public rift between Prime Minister Ecevit and 
President Sezer unnerved sensitive financial markets, triggering 
a second short-term credit crunch and the loss of billions of 
dollars in foreign exchange reserves (generally used by the 
central bank to defend the lira). Turkey was forced to abandon 
its crawling peg currency regime (where the liras value was 
allowed to fluctuate between a pre-determined band that grew with 
inflation) and float the lira. Since then, the Turkish lira has 
been floating freely, and has lost over 80 percent of its value.

The recent problems in Argentina (AO September 2001), as well as 
political squabbling over reforms suggested by the IMF, have 
generated further instability in Turkeys financial markets. 
Nevertheless, recovery is still possible; some crucial reforms 
have already been implemented, and, with the promise of emergency 
loans from the IMF, foreign exchange reserves have begun to 
recover.

The overall effects of the financial crisis on agricultural trade 
will result from devaluation of the Turkish lira, the short-term 
contraction of the economy, and potential structural and trade 
policy reforms that the international community may attach to 
offers of multi- and bilateral bailout packages. Currency 
devaluation and reduced income levels will combine to shift 
Turkeys trade balance in favor of exports rather than imports. 
Domestic prices for imports will rise at the same time the 
economic contraction reduces purchasing power. Meanwhile, 
currency depreciation will stimulate domestic agricultural output 
as Turkeys prices drop relative to those of trade competitors. 
This stimulus to Turkeys agricultural exports, which include 
fruits and vegetables, tobacco and wheat, should absorb some or 
all of the drop in demand due to the fall in incomes.

The incentive driving Turkeys reform program is a new $15.7-
billion IMF rescue package, designed to help service Turkeys 
debt and restructure its financial sector. The IMF support 
requires Turkey to cut spending, accelerate privatization, and 
totally overhaul the financial services sectors. Whether the 
reform program, entitled Turkeys Transition Plan to a Strong 
Economy,  will actually be implemented is questionable, given 
that the government has failed to implement IMF-sponsored reform 
programs on two previous occasions. However, in a show of good 
faith, Turkey recently pushed several banking-sector reforms 
through the legislature. The IMF rewarded the move by releasing 
$1.5 billion of the rescue package. 

Longer term structural changes that will accompany the IMF/World 
Bank stabilization program may feature significant reforms of the 
agriculture sector. If implemented, these reforms may spawn two 
fundamental changes in Turkish agriculture: the levels and types 
of agricultural products consumed and produced in Turkey, and 
import and export tariffs associated with agricultural goods. 
Both changes could positively affect U.S. producers, particularly 
producers of tobacco, feed grains, oilseeds and meal, cotton and 
rice. How quickly Turkey is able to recover from the crisis, as 
well as to effectively implement the longer term reforms, will 
largely determine if and how the impact will be felt in U.S. 
markets. 

Optimism in the Long Term?


Despite near-term gloom, structural changes in Turkeys 
agricultural sector could still have a positive effect on future 
U.S. agricultural exports to Turkey. These changes, embedded in 
the IMF/World Bank stabilization program for Turkey, will in part 
focus on the costly system of agricultural support policies. 

Turkeys farm subsidies presently amount to 2.5 percent of the 
economy, a large share when compared with the United States, 
where farm subsidies amount to approximately 0.27 percent of GDP, 
or with Russia, where farm supports are about 0.28 percent of 
GDP. Turkeys burdensome subsidization of agriculture has led the 
IMF and World Bank to push for a reform policy to accompany the 
economic stabilization program. 

Until now, costly government intervention measures in the 
agricultural sector have included high import and export tariffs, 
nontariff barriers, export subsidies, high support prices, and a 
large role for state trading enterprises. High price supports 
exist principally for several varieties of wheat, rye, and 
barley. But livestock, meat, dairy, poultry and eggs, and certain 
grains are all subject to significant support or protection by 
the Turkish government. Measures of trade protection include high 
tariffs on imports that compete with domestic production; strict 
interpretation of sanitary and phytosanitary requirements; 
various restrictions on, or refusal to grant, import licenses; 
and preferences for imports from countries with bilateral trade 
agreements. The U.S. has no bilateral agreements with Turkey for 
agricultural products. 

A condition of the IMFs rescue package is to implement a number 
of structural reforms under the guidance and funding of the World 
Bank. These policy changes will accompany a specific $600-million 
agricultural reform loan to support the World Banks Agricultural 
Reform Implementation Project (ARIP). The objective of the 
project is to help the government reduce artificial incentives, 
government subsidies, and the states role in marketing 
agricultural products. 

The project also calls for direct income support for producers, 
including funds to help producers make the transition to new 
sources of agricultural revenue as governmental support is 
reduced. This means that the government will allocate a one-time 
payment to farmers who move away from crops that are currently in 
oversupply because of high support prices. Farmers who instead 
begin production of more marketable crops will be reimbursed for 
input costs associated with planting new crops. Some recommended 
replacement crops include maize, soybean, sunflower, beans and 
vegetables, and medicinal plants. It is hoped that the ARIP will 
encourage producers to increase productivity in response to 
market signals rather than artificial support prices and 
subsidies--which are expected to be gradually phased out.

Conditions attached to the World Bank loan will introduce a link 
between support prices and relevant world market prices and will 
initiate a phaseout of government subsidies for support prices by 
2002. In theory, support prices for grains will be linked to 
appropriate world reference prices and will be set at levels that 
reduce the premium over these world prices to no more than 35 
percent. Import tariffs on grains may be reduced as well, 
including a potential reduction on import duties for corn from 50 
to 25 percent. Turkey may also reduce the premium paid on 
oilseeds and cotton, as well as reform the pricing mechanisms for 
sugar beets. There are no indications, at the moment, that 
nontariff border measures supporting the livestock sector (mainly 
veterinary restrictions) will be reduced. 

If implemented as agreed upon with the IMF and other lenders, 
these structural changes would liberalize trade to some degree in 
the longer term, allowing U.S. agricultural products--
particularly grain imports--more market access. However, Turkeys 
political barriers to liberalizing trade and removing key 
agricultural sector supports appear formidable. 

While the IMF and World Bank continue to pressure Turkey to 
decrease subsidies such as support prices for grain, Turkeys 
ongoing financial problems this year have delayed the 
agricultural reform efforts. In fact, a recent decision of 
Turkeys Council of Ministers will extend many of the low-
interest agricultural loans and other subsidies at least through 
the end of 2001, and possibly beyond. In July, the Minister of 
Agriculture rejected IMF recommendations that import duties be 
substantially lowered. Furthermore, while support prices for 
grains were lowered in May, they were about 15 percent higher 
than the IMFs recommended targets as of August. 

Consumer expectations in Turkey are low. Only 15 percent of Turks 
feel that the crisis will be over in the next 6 months, 
signifying that consumer caution is likely to last longer than 
many observers expect.

Because the government will need to undertake costly and socially 
unpopular debt restructuring programs, the economic projections 
for 2002 are not overly optimistic--and the risks of political 
instability are rising. The most recent economic turmoil is also 
likely to cause considerable delay in Turkeys accession into EU 
membership. 

However, given Turkeys geopolitical significance as a member of 
NATO--and its location at the crossroads of Europe and the oil-
rich Middle East and southern flank of the former Soviet Union--
the strategic interests of both the EU and the U.S. dictate that 
its economy cannot be allowed to collapse. The new IMF $15.7-
billion international rescue package for Turkey and a $16-billion 
pledge from the U.S. made in December 2000, together represents a 
significant commitment on the part of the international financial 
community to support Turkeys economic recovery. 

Mehnaz S. Safavian (202) 694-5142; Stefan Osborne (202) 694-5154
sosborne@ers.usda.gov
msafavian@ers.usda.gov

WORLD AGRICULTURE & TRADE

APECs Open Food System: Opportunities for U.S. Agriculture

In October, the Asia-Pacific Economic Cooperation (APEC) forum 
will hold its 13th Ministerial meeting in Shanghai, China. APEC 
has acquired a more visible role in encouraging regional 
integration since the 1994 Bogor Declaration, in which it 
announced plans to work toward free and open trade and investment 
for developed members by 2010 and for other members by 2020. The 
Declaration called for comprehensive treatment for all sectors, 
including controversial sectors like agriculture, and flexibility 
for individual members in the scheduling of trade reforms in 
various sectors. 

At the time, APEC members pledged to pursue this regional free 
trade arrangement through open regionalism,  which called for 
reduced barriers not only among member economies but also between 
member and nonmember economies. This unique approach, it was 
argued, would not only promote economic benefits for APEC members 
but could also provide a platform for achieving global free 
trade.

An initiative of rising significance on APECs agenda, known as 
the APEC Food System (AFS) is an extension of the Bogor 
Declaration. AFS focuses not only on the importance of trade 
liberalization, but also on the importance of rural development 
to the regions food system. AFS was initially proposed in 1998 
by APECs Business Advisory Council (ABAC) to tailor the economic 
precepts of open regionalism to the specific dynamics of 
agriculture and food supply. The APEC leaders formally endorsed 
the AFS when they met in Auckland, New Zealand, in 1999. 

Central to AFS is the view that trade liberalization will provide 
consumers with a lower cost, more secure supply of food. But 
eliminating impediments to trade is only part of the regions 
food system agenda, which also aspires to optimize gains from 
trade liberalization by integrating rural areas with national and 
international markets. Key objectives include the following.

Trade liberalization. The AFS initiative accepts APECs Bogor 
Declaration, including the schedule for liberalization of tariffs 
and nontariff trade barriers and the open regionalism  concept. 
It argues that trade impediments in food products distort the 
allocation of land, water, labor, and capital resources. 
Efficient resource allocation will be urgently needed in the 
coming decades as industrialization and larger, more affluent 
urban populations compete for the same resources as rural 
populations. It makes little sense, for example, for an economy 
with scarce land and water resources to export land- and water-
intensive food products. 

Food security. The AFS recognizes that with the promise of trade 
liberalization must come a commitment that restrictions on food 
exports will not be made, except in the case of national security 
concerns in the direst of circumstances. If markets are to be 
open and exporters are to expect greater access to import 
markets, importers must expect free access to reliable export 
supplies. 

Rural development. AFS addresses not only trade liberalization 
itself but its socioeconomic effects. While trade liberalization 
tends to increase agricultural productivity, thus stimulating 
output growth, it also reduces the labor input required per unit 
of production. Economic opportunities must be created in rural 
areas to stem outmigration to already densely populated cities in 
the regions. More than half of the worlds cities with 
populations greater than 10 million are located in APEC member 
economies. 

Creating economic opportunities in rural areas requires:

oinvestment in infrastructure;

orural education and health care comparable to urban areas;

opartnerships between government and private-sector agents to 
attract investments into rural areas and create greater off-farm 
employment opportunities;

orealistic rural development plans that can be funded and 
executed by the private sector in conjunction with the World 
Bank, Asian Development Bank, and Inter-American Development 
Bank.

Technology diffusion: AFS aims to cultivate a food technology 
culture  facilitating the diffusion of useful recent 
developments in food production, storage, shipping, packaging, 
and processing. Improved access to technology is expected to 
accelerate gains in productivity through information technology 
and biotechnology, spurring growth in those economies that are 
less developed and thus contributing to faster and more balanced 
economic growth across all of the regions economies.

Whats at Stake 
For the United States?

The U.S. stake in APECs food system initiative is large because 
it would individually affect many significant U.S. food markets. 
The top five U.S. export markets are APEC members (Japan, Canada, 
Mexico, Korea, and Taiwan). In FY 2001, APEC economies accounted 
for more than 60 percent of U.S. agricultural and food exports 
and 50 percent of imports. Moreover, practically all growth in 
U.S. consumer-oriented exports over the last 10 years has 
occurred in the APEC region.

Liberalization of the APEC food system would lead to sizable 
export and overall welfare gains for the U.S. This is because 
agriculture is a major sector of unfinished business from the 
Uruguay Round. With the freer play of comparative advantage after 
APEC trade liberalization, more efficient resource allocation 
across the region would lead to significant increases in import 
demand for food and agricultural products, particularly in East 
Asia. Since protection levels in the region are generally much 
higher for food and agricultural products than other categories 
of trade, achieving a more open food system will play a 
disproportionately large role in meeting APECs overall Bogor 
goals.

The U.S. stands to gain from APECs food security and rural 
development objectives. A more open food system will be a more 
secure system because market adjustment will be spread across 
more market players; thus agricultural commodity prices will be 
more stable. Another important AFS provision is governments 
commitments not to intervene in markets for economic or political 
reasons except in dire circumstances. Benefits to exporters like 
the U.S. include less uncertainty and price volatility and better 
positioning as a reliable supplier rather than as a residual 
supplier in times of shortage. 

APECs focus on enhancing rural infrastructure and technology 
dissemination also corresponds to the interest of the U.S., since 
it will take large amounts of goods and services to achieve these 
goals. Some potential outcomes affecting the U.S. include:

Sale of capital-intensive material goods such as construction 
machinery, power generating and water supply facilities, and 
communication and transportation equipment, as well as 
engineering, architectural and other advisory services, will 
create opportunities for U.S. firms. 

Improvement of rural infrastructure will increase rural labor 
productivity and non-farm employment opportunities, which in turn 
will improve rural household income and create more potential 
customers for autos, computers, software, food, and other 
products from the U.S.

Diffusion of food technologies via AFS will lead to more 
standardized use of technologies across the region, facilitating 
trade and investment opportunities.

Trade Liberalization That 
Fosters Rural Development

Like open regionalism, AFS is a unique APEC concept. A key 
feature of AFS is that it does not focus simply on production 
agriculture but takes into account the whole complex of economic 
relationships and linkages that tie the regions food consumers 
to producers. 

Virtually throughout the APEC region, agricultural trade 
impediments are more costly than nonagricultural trade barriers, 
underscoring an urgent need for reform where the greatest 
distortions exist. The importance of food in household budgets 
also underscores the importance of food-system reform as the 
basis for economic development across the region. By steadily 
expanding food trade among the APEC members based on comparative 
advantage, food costs should decline and economic prosperity 
increase. Furthermore, the goal of food security appears to be 
more attainable through a concerted effort by all members than 
through the efforts of individual nations pursuing separate 
programs aimed at food self-sufficiency. 

William Coyle (202) 694-5216 and Zhi Wang (202) 694-5242
Wcoyle@ers.usda.gov
Zwang@ers.usda.gov

WORLD AGRICULTURE & TRADE BOX 1 (APEC)

What is APEC?

APEC began in 1989 as an informal grouping of 12 market-oriented 
Asia-Pacific economies sharing goals of managing the growing 
interdependence in the Pacific region and sustaining its economic 
growth. APEC provides a forum for ministerial-level discussions 
and cooperation on a range of economic issues, including trade 
promotion and liberalization, investment and technology transfer, 
human resource development, energy, telecommunications, 
transportation, and others. 

APEC Member                                    Date joined
Australia, Brunei, Canada, Indonesia, Japan,       1989
  Malaysia, New Zealand, Philippines, Singapore,
  South Korea, Thailand, United States 
China, (Hong Kong/China), Taiwan                    1991
Mexico, Papua New Guinea                              1993
Chile                                             1994
Peru, Vietnam, Russia                              1998

WORLD AGRICULTURE & TRADE BOX 2 (APEC)

Achieving the APEC Food System: APECs Agenda

oRenounce food embargoes.

oRequire members to undertake self-assessments of internal 
and external impediments to food trade.

oReport specific measures to help implement the APEC food 
system in the economys annual Individual Action Plans (IAP), 
which specifies annual commitments to meet the Bogor goals.

oPromote rural development through linkages with the private 
sector and international financial institutions, and policies 
that integrate rural areas with national and international 
markets.

oEncourage diffusion of food-system technology.

WORLD AGRICULTURE & TRADE BOX 3 (APEC)

Tracing Trade to Its (Re)source

An economys comparative advantage in producing food and 
agricultural products is determined in large part by its resource 
endowment. In looking at four broad categories of food and 
agricultural products, the relationship between land intensity 
and net trade is generally straightforward. 

Land-abundant economies such as the U.S., Canada, and Australia 
are net exporters of food and agricultural products, especially 
land-intensive products such as grains, cotton, and oilseeds. 
Land-abundant Russia offers the only exception, importing large 
quantities of meat and processed products, although it is also a 
net exporter of land-intensive products. Japan, Korea, Singapore, 
Hong Kong, and Taiwan--land-scarce and densely populated 
economies, are net importers of all four categories of food and 
agricultural products. 

The economies of Western Europe and Mexico, with intermediate 
land endowments, are net exporters and net importers of different 
agricultural products. Mexico, with a relatively abundant labor 
endowment, is a net exporter of nongrain crops and processed 
food, which are relatively labor-intensive. At the same time, it 
is a net importer of land-intensive crops, dairy, and meat 
products. Peru, Malaysia, Indonesia, the Philippines and China, 
as land-scarce and labor-abundant economies, also follow this 
pattern. An important exception because of the slow development 
of its manufacturing sectors is Vietnam, a net exporter of rice.

In terms of economic size, income level, population density, 
resource mix, agricultural labor productivity, and trade 
dependency for agricultural supply, the economies in the APEC 
region are highly diverse. APEC includes the worlds most 
populous economy (China) and the worlds wealthiest in terms of 
GDP (the U.S.), as well as tiny economies like Brunei and Papua-
New Guinea. Huge contrasts in both income and resource endowments 
for food production are also represented. Densely populated 
economies in the region (Japan, Korea, Hong Kong, Singapore, 
China, Taiwan, Philippines and Indonesia) face rapidly rising 
food demand with less and less per capita arable land and water 
resources. On the other hand, less densely populated and more 
developed APEC economies (Australia, Canada and the U.S.) enjoy 
abundant food production resources but prospects for growth in 
domestic demand are limited.

FOOD & MARKETING

Food Price Inflation Should Moderate in 2002

Consumers' demand for beef, dairy products, and fresh fruits and 
vegetables contributed to a larger increase in 2001 food prices 
than forecast earlier this year. The Consumer Price Index (CPI) 
for all food is forecast up 3.2 percent in 2001, following 
smaller increases of 2.1 percent in 1999 and 2.3 percent in 2000. 
The food CPI is expected to moderate in 2002, rising 2.5 to 3.0 
percent. For the all-items CPI in 2001, the inflation rate is 
forecast at 3 percent, the same as in 2000.

The CPI, which measures changes in prices only, increased 2.5 
percent for full-service meals and snacks (restaurants) in 2000, 
while the CPI for limited-service meals and snacks (fast-food 
establishments) increased 2.7 percent. In 2001, the increases 
have been higher, with restaurants increasing 3.1 percent and 
fast-food establishments increasing 2.9 percent. Restaurants and 
fast-food establishments competed vigorously with food-at-home 
sales and take-home meals offered by supermarkets. The three main 
sources of takeout food are fast-food establishments (33 
percent), restaurants (23 percent), and supermarkets (20 
percent).

Total sales of food purchased by consumers increased 7.4 percent 
in 2000, with food-at-home sales increasing 8.5 percent and food-
away-from-home sales (restaurants and fast-food establishments) 
increasing 6.2 percent. These increases were the largest since 
1990, indicating greater consumer purchases of luxury or 
convenience food items and willingness to pay higher retail 
prices for Choice beef, dairy products, and fresh fruits and 
vegetables. With an unsettled economy in 2001 and perhaps 2002, 
food sales are expected to return to the trend of 3- to 5- 
percent annual increases. 

Total food expenditures (sales plus home production, donations, 
and supplied foods) are forecast to increase 3.4 percent to 887 
billion dollars in 2001. Food price changes are key in 
determining the proportion of income consumers spend for food. In 
2000, 10.7 percent of household disposable personal income went 
to food expenditures, with consumers expected to spend a smaller 
share of their income, 10.5-10.6 percent, in 2001 and 2002. While 
the proportion of household disposable personal income spent on 
food generally trends downward, it rose in 2000 because 
disposable personal income grew at a slower rate (5.3 percent) 
than food sales (7.4 percent).

Beef and veal. Weather-reduced beef supplies this past winter and 
spring resulted in sharply higher fed-cattle prices and record 
retail beef prices, as competition for the reduced supply of beef 
increased. During the first half of 2001, beef production was 
down 5 percent as both marketings and slaughter weights declined. 
During the second half of 2001, drought conditions throughout 
much of the southern Great Plains and Pacific Northwest have 
resulted in large numbers of cattle being pushed into feedlots, 
with fewer heifers being retained for breeding than expected. 
Beef cow slaughter has risen sharply over the past couple of 
months and will increase further if rains don't begin soon enough 
to generate pasture for fall and winter grazing. Any additional 
increase in beef cow slaughter in 2001 will produce even sharper 
declines in beef production in the future.

Larger supplies of fed beef and seasonally large pork supplies 
will likely mean declining retail beef prices through late fall. 
However, with record retail prices during the summer, the beef 
CPI for 2001 is expected to be up 8.4 percent. A further increase 
of 2 to 3 percent is projected for 2002, as supplies drop sharply 
in the second half of the year. The smaller supplies could lower 
consumption in 2002 to 65.0 pounds per capita. The smaller beef 
supplies and the rise in U.S. beef prices will make the U.S. beef 
market more attractive to imports.

Pork. Pork production is forecast down 1 percent in 2001, and 
increasing exports and declining imports will drop available 
supplies for domestic consumption even further. Pork products 
from Canada and Denmark that typically would have been destined 
for the U.S. were instead exported to Japan because of strong 
demand there. U.S. imports are expected to decline to 915 million 
pounds this year, then increase to 960 million pounds in 2002. 
U.S. pork exports in the first half of 2001 ran 33 percent ahead 
of last year, primarily due to very large shipments of fresh and 
frozen pork cuts to Japan.

Retail demand continues strong for pork, and with continued 
positive returns for hog producers in 2001, commercial pork 
production is expected to increase to 19.6 billion pounds in 
2002. Per capita consumption is expected to decline to 51 pounds 
per person in 2001 and increase to 53.1 pounds in 2002. Record 
2001 retail beef prices have made pork more attractive to 
consumers, with retail pork prices expected to increase 3.5 
percent in 2001. Although pork production is forecast up in 2002, 
competing beef supplies are expected to be lower, which will help 
support pork demand. The CPI for pork is expected to increase 1 
to 2 percent in 2002.

Poultry. The CPI for poultry is forecast to increase 2.5 percent 
in 2001, with an increase of 2 to 3 percent expected in 2002. 
Competing supplies of red meat are influencing overall meat 
prices in 2001, as broiler production is expected to increase 
only about 1 percent this year. Broiler meat production for 2001 
could equal 30.9 billion pounds, and is expected to increase 2 
percent in 2002. Turkey production will likely total 5.5 billion 
pounds in 2001 and is forecast to increase to 5.7 billion pounds 
in 2002. Broiler exports were strong through the first half of 
2001, with increases in exports to the two largest markets 
(Russia and Hong Kong/China) plus increases in Central and 
Eastern Europe and Asian countries such as Korea and Taiwan. The 
discovery of Avian influenza in Chinese shipments of poultry 
products to Korea boosted broiler exports from the U.S., Brazil, 
and Thailand. In 2001, U.S. turkey exports have increased to 
Eastern Europe and Asia, but shipments to Mexico, the largest 
market, are expected down 16 percent.

Fish and seafood. The CPI for fish and seafood is forecast up 0.5 
percent in 2001, with an expected 1 to 2 percent increase in 
2002. A strong domestic economy boosted sales in the restaurant 
and food service sectors in 2000 and thus far in 2001, although 
seafood is facing strong competition from beef in restaurants. 
Higher away-from-home sales especially benefit seafood marketers, 
as a large percentage of total seafood sales are in this sector. 
More than 50 percent of the fish and seafood consumed in the U.S. 
is imported, with another 20 to 25 percent from U.S. farm-raised 
production.

Eggs. Retail egg prices could increase 4.6 percent in 2001, with 
the CPI index expected to increase 2 to 3 percent in 2002. Egg 
production is expected to increase 1.6 percent in 2001 and 1.7 
percent in 2002. Wholesale, farm, and retail prices have all 
increased in 2001, partly due to increased costs resulting from 
adoption of guidelines from the fast-food industry regarding 
larger space recommendations in poultry houses and elimination of 
forced moulting. U.S. per capita consumption is expected to be 
slightly above 260 eggs in 2001 and 263 eggs in 2002. 

Dairy products. Demand for dairy products remains brisk and will 
probably remain strong for the rest of 2001, especially for 
gourmet ice cream, cheese, and other butterfat products. With 
milk production expected to decline about 1 percent in 2001, the 
CPI for dairy products is forecast up 4.5 percent. When the 
upward trend in milk per cow resumes, milk output could increase 
almost 3 percent in 2002, slowing the rate of price acceleration 
and leading to a 2 to 3 percent increase in the dairy products 
CPI in 2002.

Fats and oils. The CPI for fats and oils is forecast up 4.7 
percent in 2001, largely due to higher retail prices for butter, 
which accounts for 31 percent of the fats and oils index. The 
index is expected to increase 2 to 3 percent in 2002. The 
remaining items contained in the index are highly processed food 
items, with their price changes primarily influenced by the 
general inflation rate and global supplies of vegetable oils.

Fresh fruits. Higher retail prices for grapefruit, lemons, 
bananas, peaches, strawberries, and Thompson seedless grapes have 
boosted retail prices for fresh fruit in 2001. Higher retail 
prices are also expected for apples and pears during the fall of 
this year, leading to an expected CPI increase of 2.8 percent for 
2001. With continued U.S. consumer demand for fresh fruits and a 
return to normal production levels for major fruits in the U.S., 
the fresh fruit CPI is forecast to increase 2 to 3 percent in 
2002. U.S. production of citrus, apples, pears, grapes, apricots, 
California plums, strawberries, blueberries, and cranberries are 
all expected down in 2001 from a year ago. The decreases range 
from 10 percent for apples to 1 percent for cranberries. Higher 
prices for fresh fruit will encourage imports and discourage 
exports.

The major fresh fruits consumed continue to be bananas (18 
percent), apples (17 percent), citrus fruits (23 percent), and 
other fresh fruits (42 percent) including grapes, peaches, pears, 
and strawberries. Imports provide most of the tropical fruit 
supplies in the U.S., with bananas, mangoes, pineapples, and 
papayas the most popular. Demand for fresh tropical fruit in the 
U.S. has been on the rise, a trend influenced by the nation's 
growing immigrant population. Bananas are the most important 
tropical fruit imported, accounting for over 85 percent of the 
total import volume. 

Fresh vegetables. In 2001, the CPI for fresh vegetables is 
expected to increase 5 percent, with the increase for 2002 
projected to be 2 to 3 percent. Adverse weather reduced vegetable 
growth and marketable supplies during the first half of 2001. 
Summer fresh-market production is forecast to rise 2 percent in 
2001, with increased area planted for 10 of the 15 major crops. 
Snap beans (up 9 percent), cabbage and sweet corn (both up 6 
percent), and watermelon and cauliflower (both up 5 percent) 
gained the most. Planted areas were down for carrots (16 
percent), honeydew melons (4 percent), and tomatoes (2 percent). 
The outlook for the remainder of 2001 will depend largely on fall 
acreage and weather. Given the strong producer prices of last 
fall, fresh vegetable and melon acreage for fall harvest is 
likely to rise.

California, accounting for about half of the summer vegetable 
area, is expected to harvest 2 percent less area in 2001 due to 
adverse effects of cool temperatures early in the growing season 
(including frost and hail damage in April) and then very hot 
temperatures in May. This decline is primarily in carrot and 
tomato acres. In Florida, several freezes at the start of the 
year reduced supplies and slowed growth. In contrast, New York, 
the second leading summer-season producer with 13 percent of 
total acreage, has had favorable weather and is expected to 
harvest 11 percent more area than a year ago. 

Processed fruits and vegetables. The combined supply of the five 
major processing vegetables (tomatoes, sweet corn, snap beans, 
green peas, and cucumbers) is expected to be down 10 percent in 
2001 due to fewer contracted acres combined with hot, dry weather 
in the upper Midwest that lowered yields. Fruit supplies for 
processing are also expected to be smaller in 2001. With reduced 
supplies of both fruits and vegetables, the CPI for processed 
fruits and vegetables is expected to increase 2.9 percent in 2001 
and an additional 3 to 4 percent in 2002.

Sugar and sweets. Domestic sugar production for 2000/01 is 
expected to total nearly 8.5 million tons, with cane sugar 
estimated at 4.3 million tons and beet sugar at nearly 4.2 
million tons. While lower prices for soybeans, corn, wheat, 
barley, and rice have encouraged increased beet production in the 
past, the recent closure of several sugarbeet processing plants 
led to a 13-percent reduction in acres planted in 2001. Although 
the demand for sugar and sugar-related products has continued to 
increase, lower retail prices for selected sugar-related food 
items is expected to keep the increase in the 2001 CPI index for 
sugar and sweets to only 1.1 percent. The CPI is projected to 
increase a moderate 1.5 to 2.5 percent in 2002.

Cereal and bakery products account for a large portion of the 
food-at-home CPI--almost 16 percent. Breakfast cereals and bread 
are the two largest components, each accounting for about 20 
percent of the cereal and bakery products index. With grain 
prices lower in the earlier part of this year and inflation-
related processing costs remaining at modest levels, the CPI for 
cereals and bakery products is expected to increase only 3 
percent in 2001. With consumer demand for bakery products 
expected to remain fairly strong, the CPI is forecast to increase 
2 to 3 percent in 2002.

Nonalcoholic beverages. The CPI for nonalcoholic beverages will 
increase an expected 1.1 percent in 2001 and is forecast to 
increase another 1 to 2 percent in 2002. Carbonated drinks, 
nonfrozen noncarbonated juices and drinks, and coffee are the 
three major components of this category, accounting for 39, 30, 
and 13 percent of the index. Retail prices are higher in 2001 for 
carbonated drinks (up 2 percent) and nonfrozen noncarbonated 
juices and drinks (up 1 percent), but significantly lower for 
coffee, which is down almost 4 percent. Near-record production in 
Brazil contributed to lower consumer prices for coffee in 2001. 

Other foods. The CPI for other foods is expected to increase 2.1 
percent in 2001 and 2 to 3 percent in 2002. Price trends for 
other foods--which include soups, frozen and freeze-dried 
prepared foods, pizzas, snacks, spices, seasonings, sauces, and 
baby foods--are largely affected by changes in the all-items CPI. 
Competition among these products should continue to dampen retail 
price increases.

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

RESEARCH & TECHNOLOGY

Production of Value-Added Crops: The Case of High-Oil Corn

U.S. corn producers have so far been relatively slow to devote 
significant acreage to the production of high-oil corn and other 
varieties with specialized traits that add value to the commodity 
output. This reluctance contrasts with the relatively rapid 
adoption of corn hybrids with specialized input traits. 

High-oil corn was expected to serve as a model for how the grain 
sector would move from bulk commodity-based production to onfarm 
value-added production. But production involves a number of risks 
and uncertainties that may have hindered more planting. Further, 
the returns to high-oil corn appear to be positively correlated 
with returns to commodity corn and soybeans, suggesting that 
value-added production may not always insulate producers from the 
risks associated with commodity agriculture. Producers cite 
falling high-oil corn premiums relative to conventional corn as a 
major factor in deciding against growing high-oil corn.

High-oil corn is a variety developed through traditional breeding 
that contains 6-8 percent oil, compared with about 3.5-4 percent 
for conventional corn. The higher oil content provides more 
energy (the energy content of oil is more than twice that of the 
starch) and can reduce expenditures for fat supplements in 
livestock feed. High-oil corn has higher average levels of amino 
acids and crude protein and may improve feed palatability. These 
attributes contribute added value for livestock feeding.

Production of high-oil corn has expanded since its commercial 
introduction in 1992, reaching 1 million acres or 1.3 percent of 
total corn acreage in 1999. Since then, indications are that 
acreage has leveled out or even declined. But adoption has been 
substantially less than the herbicide tolerant and Bt corn 
varieties introduced in 1996 that rose by 1999 to 8 and 19 
percent of planted corn acreage, respectively.

In 1998, about half of high-oil corn production was exported and 
the balance fed to domestic livestock. Production for export 
occurred primarily under contract. Special arrangements with 
major grain companies segregated the product and coordinated its 
movement from farm to elevator, barge, etc. So far, high-oil corn 
has been used mostly in hog feed. An even greater potential use 
is in poultry feed, if major companies decide to consider the 
product and invest in or contract for its production.

Farmers report decreasing returns over time for high-oil corn. 
One reason has been low prices in commodity markets for 
substitute products that have reduced what livestock feeders are 
willing to pay for high-oil corn. A second reason for decreasing 
returns has been the additional risks of value-added production, 
such as the need to meet specialized production requirements, and 
the variable returns based on product attributes achieved. 
Contrary to many agricultural policy prescriptions, moving into 
differentiated production may be relatively less attractive 
during times of farm financial stress due to increased risks and 
price uncertainties. Fundamentally, a differentiated product must 
create sufficient expected added value to compensate producers 
for any additional costs of producing the product. This may not 
currently be the case for high-oil corn.

Itemizing the Limits and Risks

While industry groups have generally supported innovations such 
as high-oil corn, farmers experiences with its production have 
been mixed. Recent focus group sessions and interviews with Iowa 
producers have identified a number of factors that may be 
discouraging plantings of high-oil corn. 

Limit on hog feed use--While some high-oil corn in a hog ration 
improves performance, hog feeders have found that too much high-
oil corn causes PSE (pale soft exudative) pork in carcasses, 
damaging their marketability. This sets an upper limit on the 
demand for high-oil corn for feed per hog. 

Yield risk is greater with high-oil corn because of its 
pollination method. Unlike most conventional corn, production of 
high-oil corn requires the intermixed seeding of non-bearing corn 
pollinators that provide pollen with high-oil genes for the male-
sterile corn hybrids. This makes the pollination process riskier 
than for conventional corn, being more dependent on favorable 
weather and the performance of the pollinator. Poor pollination 
results in reduced yields. Further, the addition of the 
pollinator seeds increases the total seeds planted per acre by 
about 10 percent so that seed and seeding costs increase relative 
to those of conventional corn. 

Quality risk arises in producing and maintaining the quality of 
the product so that a price premium may be obtained. To retain 
quality, high-oil corn must often be dried at a lower temperature 
than conventional corn, increasing drying costs. Uncertainty is 
also associated with producing the desired quality. Even if a 
producer follows recommended production practices, the harvested 
grain may not meet the buyers quality standards. In that event, 
the producer will have to sell the crop as conventional corn 
despite higher production costs. High-oil corn premiums are 
usually paid on a sliding scale based on oil content. Hence, 
variability in oil content translates directly into greater 
variability in returns compared with conventional corn.

Maintaining the quality of high-oil corn also requires the crops 
segregation and separate handling to prevent contamination or 
mixing with conventional corn. While costs of identity 
preservation may decline slightly over time as producers learn 
how to accomplish this task effectively, the time and money 
necessary to clean grain-handling equipment and segregate the 
crop are factors producers must consider.

Price risk is associated with poor performance of the associated 
commodity markets, especially corn, soybeans, and hogs. Low hog 
prices reduce the value of high-oil corn in livestock production, 
so users are willing to pay less of a premium for it. Similarly, 
the lower the price of white grease and soybean meal, the less 
expensive it is to substitute conventional corn plus white grease 
and soybean meal for high-oil corn in feed to achieve a given 
amount of weight gain. Users then reduce the premium they are 
willing to pay for high-oil corn. Producers can hedge against 
such relative price risk, but hedging involves transaction costs 
and does not address yield risk or quality risk. 

Another aspect of price risk is that quality deductions, such as 
those for excessive moisture, are on a fixed cents per bushel 
basis, rather than as a percentage of value. Per bushel 
deductions mean that both expected deductions and the variability 
of deductions are higher as a percentage of total expected 
revenues when the oil premium or the price of conventional corn 
is lower.

Market risk due to natural adjustments within a relatively new 
market may be another cause of the declining premiums received 
for high-oil corn. Buyers may be seeking to learn about the 
supply situation. As they reduce the premiums, they determine the 
acres of high-oil corn that producers are willing to plant for a 
given premium schedule. Provided that the supply at a given price 
meets or exceeds demand, buyers have an incentive to further 
reduce the premium the following crop year. This behavior could 
occur whether or not market power is present on the purchasing 
side. As more producers plant high-oil corn and supply increases, 
premiums are likely to fall. If a producer invests in learning to 
grow high-oil corn, the returns to this investment may decline 
over time. 

Relationship risk is involved in identifying and maintaining a 
buyer for the value-added product. While some producers may grow 
high-oil corn for use in their own livestock operations, others 
must identify a buyer for their product. A producer who plants 
high-oil corn without first identifying a buyer risks having a 
crop with no sales outlet. When a producer does identify a buyer 
in advance, there is risk that the buyer will renege on the 
agreement by refusing delivery or failing to pay for the crop in 
a timely manner.

Formal contracts can partially mitigate relationship or buyer 
risks, but they raise other considerations affecting risks and 
returns. For example, the precise legal nature of the 
relationship between producer and contractor may affect the 
producers tax liability. Contractual specification of the 
circumstances under which the contractor may terminate the 
relationship may be extremely broad, and the contract may require 
the producer to waive the right to pursue legal action as part of 
the contract. Regardless of whether a formal contract is signed, 
producing a value-added crop such as high-oil corn requires 
investment in learning about production specifics and identity 
preservation practices, in addition to any specific capital 
investments that are required. If a producer invests in order to 
produce for a specific buyer, there is the risk that the buyer 
will not continue to purchase the product over a long enough 
period for the farmer to recoup the investment.

Lessons From Adoption 
Of High-Oil Corn

Under the economic conditions of the past few years, the value 
added by high-oil corn has decreased, while costs have not. 
Production of high-oil corn poses additional sources of revenue 
risk for growers. The case of high-oil corn suggests that the 
returns for value-added products may be quite closely tied to the 
performance of the conventional commodity markets when the 
products are substitutes. Thus, differentiated markets may add 
risks to those found in commodity markets. These conditions may 
discourage producers from rapidly expanding acreage in 
differentiated products, particularly during times of farm 
financial stress.
 
Corinne Alexander (University of California, Davis), Jorge 
Fernandez-Cornejo (ERS) 
(202) 694-5537 jorgef@ers.usda.gov, and Rachael E. Goodhue 
(University of California, Davis)

For more information: 
http://www.ers.usda.gov/publications/aib762/
http://www.ers.usda.gov/publications/agoutlook/mar1999/ao259e.pdf
http://www.ers.usda.gov/publications/agoutlook/apr2000/ao270h.pdf
College of Agricultural, Consumer, and Environmental Sciences of 
the University of Illinois: 
http://web.aces.uiuc.edu/value/factsheets/framehigh_oil_corn.htm
http://web.aces.uiuc.edu/value/factsheets/corn.htm
http://web.aces.uiuc.edu/value/factsheets/soy.htm
National Corn Growers Association
http://www.ncga.com/03world/main/biotechnology.html

END_OF_FILE
