AGRICULTURAL OUTLOOK                  October 24, 2001
November 2001, ERS-AO-286
             Approved by the World Agricultural Outlook Board
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CONTENTS

IN THIS ISSUE

BRIEFS
Livestock, Dairy, & Poultry:  U.S. Poultry exports Maintain Star Billing
Specialty Crops:  Smaller 20001 U.S. Pear Crop to Boost Prices
Agricultural Trade:  Taiwans trade Barriers to recede with WTO Accession 
in Sight

COMMODITY SPOTLIGHT
World Rice Glut Keeps Lid on U.S. Prices

WORLD AGRICULTURE & TRADE
Water Supply in the APEC Region: Scarcity or Abundance?

RESEARCH & TECHNOLOGY
Farms, the Internet, & E-Commerce: Adoption & Implications

RESOURCES & ENVIRONMENT
Organophosphate Insecticides Being Scrutinized, Restricted

SPECIAL ARTICLE
Higher Cropland Value from farm Program Payments: Who Gains?


IN THIS ISSUE

Higher Cropland Values from Farm Program Payments: Who Gains?
Government commodity program payments are estimated to have added nearly 
$62 billion to U.S. farmland values, as farmland value depends largely on 
expected future earnings, including program payments. From the perspective 
of many farm operators who own land, farmland value increases are 
favorable. Farmland value underlies the financial stability of many farm 
businesses, and farmland is often the principal source of collateral for 
farm loans. But for operators who pay more to buy land, appreciated values 
add to the fixed cost of production, largely related to higher financing 
costs and/or real estate taxes. Additionally, operators who lease farmland 
may pay higher rents that reflect their receipt of some of the government 
payments. The added farmland value is particularly high in the Heartland 
region, where farm commodity payments have added $40 billion to the market 
value of cropland, nearly two-thirds of the effect nationwide. Much of the 
added value nationally, over 60 percent, accrues to nonoperator landlords 
who lease out their land. Charles Barnard (202) 694-5602; 
cbarnard@ers.usda.gov

Water Supply in the APEC Region: Scarcity or Abundance?
Roughly 70 percent of the earths surface is covered by water, but less 
than 1 percent of the earths water is fresh, and access to fresh water is 
critical to the food system. In the Asia-Pacific Economic Cooperation 
(APEC) region, projected population growth in its cities, particularly in 
China and developing economies, will put huge stress on the regions 
capacity to provide basic services, including water supply. Unless water 
control facilities are expanded and/or efficiencies in water use are 
achieved, there is potential for water shortages in Korea, Chinese Taipei, 
Japan, China, Mexico, and the U.S. Large investments in water 
infrastructure, dams, and diversion channels to expand the water supply are 
becoming increasingly unaffordable, both economically and environmentally. 
Where water is scarce, creation of market mechanisms will assure more 
efficient and sustainable use of water resources. Bill Coyle (202) 694-
5216; wcoyle@ers.usda.gov

World Rice Glut Keeps Lid on U.S. Prices 
With record supplies at home and extremely low prices in the global market, 
the 2001/02 U.S. season-average farm price for rice is projected to be the 
lowest in 15 years. Nonetheless, U.S. rice exports are projected to 
increase just 3 percent in 2001/02, as large exportable supplies in major 
exporting countries and low international prices limit U.S. export gains. 
Low prices for alternative crops, plus expectations of marketing loan 
payments, were behind this year's expanded rice acreage. Long grain, which 
typically accounts for more than 70 percent of U.S. rice acreage, made up 
all of this years area expansion. Nathan Childs (202) 694-5292; 
nchilds@ers.usda.gov

Organophosphate Insecticides Being Scrutinized, Restricted
The U.S. Environmental Protection Agency (EPA) is reviewing the risks of 
organophosphate (OP) pesticides, which are widely used in agriculture.  So 
far, more of these have been identified with worker safety, ecosystem, and 
nonoccupational exposure risks than with dietary or drinking water risks.  
Most regulatory actions resulting from the initial assessment have affected 
OP use on fruits and vegetables.  Preliminary results of EPAs cumulative 
assessment, which examines the risks of OPs as a group, are to be released 
December 1 and may result in additional use restrictions. Craig Osteen 
(202) 694-5547; costeen@ers.usda.gov

Farms, the Internet, & E-Commerce: Adoption & Implications
Internet use by U.S. farmers has grown rapidly, as advances in computer and 
other communication and information technology make the Internet more 
accessible.  Use of computers on farms has grown from 38 percent of all 
farms to 55 percent since 1997, while Internet use has grown from 13 
percent of all farms to 43 percent. In 2000, 24 percent of farms used the 
Internet as a management tool in their farming operation, including $665 
million in online buying and selling. Most farms appear to be using the 
Internet for only a portion of their overall farm business. Internet use by 
farm businesses seems to be equally attractive to those specializing in 
crop or in livestock production, and the extent of use by different types 
and sizes of farms is generally not far from the average for all farm 
Internet users. Jeff Hopkins (202) 694-5584; jhopkins@ers.usda.gov
 
Taiwans Trade Barriers to Recede with WTO Accession in Sight
Taiwan, under recently negotiated provisions of its pending membership in 
the World Trade Organization (WTO), has committed to market access terms 
with implications for agricultural trade, particularly for the U.S. Taiwan 
agreed to concessions and commitments equivalent to those made in the WTO 
Agreement on Agriculture by developed-country members. Taiwans 
agricultural tariffs will be reduced; the simple average rate across all 
tariff lines for agricultural products will fall from the current level of 
20.02 percent to 14.01 percent in 2002 and to 12.86 percent in 2004. Taiwan 
will also lift its ban on imports of rice and a range of other items. 
Sophia Huang (202) 694-5225; sshuang@ers.usda.gov

U.S. Poultry Exports Maintain Star Billing
In 2001, broiler stocks tightened as production slowed and exports rose.  
Slow production growth thus far this year, in tandem with a strong export 
market, has lowered stocks and increased the prices of most broiler 
products.  Broiler parts have seen the strongest price growth, while prices 
of products such as breast meat have remained relatively steady. Turkey 
production over the first 8 months of 2001 was 2.4 percent higher than for 
the same period in 2000. Turkey exports have also increased this year. 
David Harvey (202) 694-5177; djharvey@ers.usda.gov

BRIEFS

U.S. Poultry Exports Maintain Star Billing

U.S. poultry producers currently receive the benefits of relatively low-
cost feed and are increasingly significant players in global export 
markets. In 2001, broiler stocks tightened as production slowed and exports 
rose, whereas large stocks of whole turkeys have accumulated.

Broilers. Slow production growth thus far this year, in tandem with a 
strong export market, has lowered stocks and increased the prices of most 
broiler products. Broiler parts that are popular in foreign markets have 
seen the strongest price growth, while the price of products such as breast 
meat, which are sold primarily in the domestic market, have remained 
relatively steady. 

This years combination of slower production growth and a strong export 
market have had a noticeable effect on the level of broiler stocks in cold 
storage. Total cold storage supplies at the end of August were down 23 
percent from the previous year. Stocks of whole birds declined the most--40 
percent lower in August than in the previous year--while broiler parts were 
reported down 22 percent.

With prices for many broiler products well above year-earlier levels, 
stocks of whole birds and parts much lower than a year earlier, and feed 
costs expected to remain low, broiler integrators have recently begun to 
increase their weekly chick placements. Over the 5-week period ending 
September 22, chick placements increased 2.8 percent from the same period a 
year ago. With this level of chick placement, broiler production in October 
through the middle of November is expected to average 2 to 3 percent higher 
than the previous year. 

During the first quarter of 2001, a slowdown in production, an increase in 
export shipments, and a reduction in broiler stocks teamed together in a 
predictable upward price thrust. In September, the average price for 
broiler leg quarters was 34 cents a pound, 22 percent higher than a year 
earlier. This is an increase of 116 percent from its low in April 1999, 
following the rubles devaluation in the wake of Russias economic 
collapse. Wing prices have also been strongly affected by the robust export 
market and lower domestic production. Between September 2000 and September 
2001, wing prices rose by 58 percent to $1.10 a pound.

Banking on current prices for broiler parts, combined with lower stock 
levels and the expectation for continued low feed grain prices, broiler 
processors are expected to expand production to 31.8 billion pounds in 
2002. These developments normally would spur the U.S. broiler industry to 
increase production more strongly, but concerns for domestic and foreign 
economic slowdowns will temper producers optimism.

Turkey. Turkey production over the first 8 months of 2001 has totaled 3.7 
billion pounds, 2.4 percent higher than the same period in 2000. The 
increase, chiefly the result of an increase in the average bird weight at 
slaughter, is expected to continue at about this rate during the second 
half of 2001. 

Over the first 5 months of 2001, total frozen stocks of turkey were lower 
than the previous years, as smaller holdings of turkey parts offset higher 
holdings of whole turkey. However, at the end of August, cold storage 
holdings were 3 percent higher than in the previous year with stocks of 
whole birds up 9 percent. These higher stocks of whole birds, combined with 
the higher turkey slaughter over the first 8 months of 2001, exerted 
downward pressure on whole bird prices. Wholesale whole-bird prices 
averaged 66 cents a pound in August, down 10 percent from the previous 
year. 

The supply-and-demand scenario for turkey parts was somewhat different. 
While there is no breakout of the types of turkey parts held in cold 
storage, prices for a number of turkey parts have risen strongly during the 
past year. Prices for turkey drumsticks and wings in August were up 13 and 
33 percent, respectively, from a year earlier. Turkey breast prices, on the 
other hand, declined 5 percent from the previous year.

For 2002, the economic slowdown has cast doubt on production and export 
increases. While turkey production is forecast to reach 5.7 billion pounds 
in 2002--a 3.4-percent increase from the previous year. Exports are 
expected to be just under 500 million pounds in 2002, about even with 2001.  

David Harvey (202) 694-5177
djharvey@ers.usda.gov

BRIEFS BOX 

U.S. Poultry Hatching Strong Sales In Russia, Mexico

Enormous strides in broiler exports during the last decade have linked the 
U.S. domestic industry to the fortunes of its major importing countries. In 
2001, exports are expected to total almost 6.2 billion pounds, 20 percent 
of total domestic production. And, while the domestic turkey industry is 
not as dependent on exports as the broiler industry--in 2000, only 9 
percent of domestic turkey production was exported--a substantial slowdown 
in exports would be expected to put downward pressure on turkey prices. 

With a substantial percentage of total production moving into the export 
market, the U.S. broiler industry has become very sensitive to changes in 
export volume. Even though broiler exports go out to a large number of 
countries, changes in shipments to the two main markets--Russia and China--
are especially important. During the first 7 months of 2001, broiler 
shipments to Russia and China totaled 2.2 billion pounds. The Russian total 
includes shipments to Latvia and Estonia, and exports to China include 
shipments to Hong Kong.

The largest factor in the growth of overall broiler exports has been the 
increase in shipments to Russia. Through July, shipments have totaled over 
1.3 billion pounds, up over 100 percent from the previous year. This has 
more than offset the decline in exports to Latvia and Estonia. Shipments to 
countries such as Poland and Georgia have also been much higher. Closer to 
home, Mexico continues to be the third-largest U.S. market. However, 
exports have not increased to all countries; shipments to China are 
currently 2.4 percent below the previous year. 

For 2002, broiler exports are forecast at 6.35 billion pounds, an increase 
of around 150 million pounds from the previous year. Exports to Russia and 
its surrounding countries are expected to grow, as these countries have 
been less affected by the economic slowdown that has occurred elsewhere. 
Demand continues to flourish in Russia, where livestock production is still 
very low compared with levels achieved before devaluation of the ruble. 
Furthermore, broiler meat is still relatively less expensive and in greater 
supply than competing beef and pork products. 

Turkey exports have also increased this year, in many ways mirroring the 
growth in broiler exports. Over the first 7 months of 2001, turkey exports 
totaled 272 million pounds, 14 percent more than in the same period in 
2000. Most of the rise is from greater shipments to Russia and surrounding 
countries. Russia is the second largest market for U.S. turkey exports, 
with shipments totaling nearly 53 million pounds through July. Partially 
offsetting these increases, shipments to Mexico, by far the largest market, 
dropped 2 percent. The pace of turkey exports is expected to slow in the 
remainder of 2001 due to economic uncertainties throughout the globe.

The current forecast is for essentially no growth in U.S. turkey exports in 
2002. The largest uncertainty lies with the Mexican market (54 percent of 
total U.S. turkey exports in 2000), where the economy is expected to weaken 
in response to a slowing U.S. economy. However, considerable turkey exports 
to Mexico are in the form of ground or mechanically deboned turkey meat 
that is combined with beef or pork products for sausage production. If the 
Mexican consumer responds to harder times by scaling back purchases of 
other meat products in favor of less expensive sausages, any negative 
impact on turkey exports may be tempered. 

BRIEFS

Smaller 2001 U.S. Pear Crop To Boost Prices

An overall slump in pear production this year, coinciding with decreased 
supplies of domestically grown apples, points to higher grower prices for 
fresh-market pears in 2001/02. Total U.S. pear production for 2001 is 
forecast down 5 percent from 2000 to 1.8 billion pounds. 

For the second consecutive year, the harvest of Bartlett pears is projected 
to decline, and at 946 million pounds would be 9 percent smaller than a 
year ago and 19 percent below 1999. Combined production of other U.S. pear 
varieties is forecast at 885 million pounds, down 1 percent. 

Nearly all the Bartlett pears in the U.S. are grown in California, Oregon, 
and Washington. Production of Bartlett pears, used mostly for processing, 
is expected to fall 18 percent in California and by 3 percent in Oregon. 
Frost and hail affected Californias production during the early spring, 
while Oregons production experienced mild frost damage. In Washington, 
where production rose 5 percent, growing conditions were generally 
favorable--although below-average rainfall concerned growers. 

U.S. production of other-than-Bartlett pears declined only slightly. 
Downturns for other-than-Bartlett production are reported in minor pear-
producing states--Colorado (down 33 percent), Connecticut (down 68 
percent), and New York (down 31 percent). Although production declines are 
sharp in these three states, other-than Bartlett crops were unchanged in 
each of the three major Pacific Coast states that account for over 90 
percent of the Nations other-than-Bartlett production. 

The overall decline in production this year, combined with depletion of 
carry-in stocks, will help boost grower prices during the 2001/02 marketing 
season. As of June 30, 2001--the end of the 2000/01 marketing season--
stocks of both Bartlett and other pear varieties were already exhausted. 
For the new season thus far (July-August), grower prices for fresh pears 
averaged $552 per ton, compared with $242 per ton during the same period a 
year ago. 

Although overall production slid last year, more pears were sent to the 
fresh market, including some processing pears that were diverted into fresh 
use. Increased fresh-market supplies have put downward pressure on fresh-
market grower prices. Fresh pear prices were lower through most of the 
2000/01 season. However, seasonal supply decreases and smaller crops of 
summer fruit such as peaches, strawberries, and most citrus boosted end-of-
season prices. The 2000 season-average grower price for fresh pears dipped 
19 percent from the previous year, to 15.9 cents per pound, the lowest over 
the last 6 years. Meanwhile, diversion of some processing pears to the 
fresh-market sector aided in strengthening prices of processing pears. The 
total quantity of processed pears was down 16 percent last year, to 804.1 
million pounds. The 2000 season-average grower price for processing pears 
averaged $190 per ton, 3 percent higher than the previous year.

Returns to growers in 2000 were lower than the previous year, but foreign 
demand for U.S. pears has fluctuated, due to increased fresh-market 
supplies, lower fresh pear prices, and high quality of the fruit. Exports 
have become increasingly important to the U.S. pear industry; over the last 
5 years, an average 18 percent of the U.S. pear crop was shipped to foreign 
markets, compared with about 8 percent during the mid- to late 1980s. In 
the fresh-market sector alone, export share of production has doubled in 
recent years compared with the mid- to late 1980s, to over 30 percent. U.S. 
exports of fresh pears during 2000/01 (July-June) rose 10 percent from the 
previous season, while imports declined 6 percent. Fresh export shipments 
to most primary markets rose, especially to Mexico, Brazil, and Venezuela, 
although shipments to Canada declined. Exports are also benefiting from 
improving Asian economies and continued U.S. promotion efforts. Exports to 
the three largest U.S. fresh pear markets in Asia--Taiwan, Hong Kong, and 
Singapore--were strong.

In July 2001, exports of fresh pears totaled 11.9 million pounds, down 49 
percent from July 2000. While further supplies of high-quality fruit as 
well as market promotion efforts should continue to boost U.S. pear sales 
in foreign markets, lower U.S. fresh-market supplies anticipated this year, 
along with expectations of higher prices, will likely limit U.S. export 
prospects during 2001/02.  

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

BRIEFS

Taiwans Trade Barriers to Recede With WTO Accession in Sight

Taiwan, under the recently negotiated provisions of its pending membership 
in the World Trade Organization (WTO), has committed to market access terms 
with implications for agricultural trade with all WTO member nations--
particularly the U.S. On September 18, just one day after the WTO approved 
the terms for Chinas entry, it concluded negotiations on the terms of 
membership for Chinese Taipei (the WTOs working name for Taiwan). This 
paved the way for formal endorsement of the accession package by the 142 
member governments of the WTO, which is expected to hold its 4th 
Ministerial Conference in Qatar, November 9-13, 2001.

The U.S. has for decades been the leading supplier for Taiwans 
agricultural imports, with a market share of about one-third. Taiwan, long 
a top-ten market for overall U.S. farm exports, was the fifth-largest 
single market for U.S. exports of crop and livestock products in 2000, 
purchasing $2 billion.

To enter the WTO, Taiwan agreed to concessions and commitments that are 
equivalent to those made in the WTO Agreement on Agriculture by developed-
country members. Taiwans agricultural tariffs will be reduced. The simple 
average of rates across all tariff lines for agricultural products will 
fall from the current level of 20.02 percent to 14.01 percent in 2002 and 
to 12.86 percent in 2004. This can be achieved in many ways, with deeper 
cuts for some tariff lines and smaller (or even zero) cuts on other tariff 
lines, as long as the average meets the target. As for the 41 agricultural 
items currently subject to various forms of nontariff barriers, Taiwan will 
lift its ban on rice imports, establish tariff-rate quotas (TRQs) for 
another 22 items, and allow imports of the remaining 18 agricultural items 
without restriction (except for tariffs). 

These 18 products include apples, grapefruit, potatoes, plums, whole ducks, 
duck parts, turkey parts, peaches, and citrus fruits. Currently, imports of 
many products in this category are subject to preferential access by 
country of origin, particularly favoring the U.S. During Taiwans lengthy 
WTO membership negotiations, which started in 1992, major points of 
controversy were market access for rice and for the 22 items with newly 
assigned TRQs.

Upon WTO accession, Taiwan will allow rice imports through a minimum market 
access quota set at 144,720 tons (brown rice basis and tariff-free), which 
is about 8 percent of domestic consumption in the base-year period 1990-92; 
the final terms of rice imports will depend on the outcome of future WTO 
negotiations. 

The 22 TRQ products include pork bellies, chicken meat, animal offal (pork 
and poultry), fluid milk, peanuts, red beans, garlic bulbs, and some fruits 
and vegetables (mostly subtropical and tropical). A schedule of reductions 
in the in-quota tariffs and the increases in the size of quotas has been 
stipulated up to 2004. In addition, TRQs will be eliminated by January 1, 
2005 for some products, including chicken meat, pork bellies and other pork 
cuts, and animal offal. The TRQs will be replaced by simple tariffs of 20 
percent for chicken meat, 12.5 percent for pork bellies and other pork 
cuts, 15 percent for pork offal, and 25 percent for poultry offal. 

In February 1998, Taiwan signed a market access agreement with the U.S. 
that included both immediate and phased-in commitments. Immediate 
commitments included provisions for tariff reduction on many consumer-ready 
products and the importation of U.S. potatoes, chicken meat, beef offal, 
pork offal, and pork bellies under so-called down-payment quotas that went 
into effect in June 1998. In July 1999, Taiwan granted additional quotas of 
the four meat categories to non-U.S. WTO members. Then, in 2000, Taiwan 
merged these U.S. and non-U.S. quotas into a global quota open to all WTO 
members. The total global quotas, totaling 19,163 tons for chicken meat, 
6,160 tons for pork bellies, and 10,000 tons for pork offal, are the level 
agreed upon for year one of Taiwans WTO accession. Beef offal imports will 
be liberalized upon accession.

Imports to Increase For 
Consumer-Ready Farm Products

These trade commitments will force Taiwan to open its highly protected 
agriculture sector wider than ever before, providing a new market 
opportunity for exporters. The effects of Taiwans WTO accession on global 
trade, however, will be mainly on consumer-ready agricultural items. 

Except for rice shipments, Taiwan is basically a mature market for most 
bulk and intermediate imports, with low tariffs and generally minimal 
nontariff barriers. The current tariffs are zero percent for both cotton 
and soybeans, 0.5 percent for corn, and 6.5 percent for wheat. In contrast, 
the tariff rate for wheat flour is 20 percent, while many consumer-ready 
agricultural products such as fresh fruits and processed products often 
face import duties of up to 50 percent ad valorem.

The full effect of Taiwans WTO accession will not be felt until at least 
after 2004, when some products that are under TRQs will be fully 
liberalized. In the short run, quotas on many products will restrict their 
import growth potential. 

For example, the quota for chicken meat starts at 19,163 tons upon 
accession, rising to 45,990 tons in 2004 before being fully liberalized on 
January 1, 2005. The quota accounts for only 5 to 12 percent of domestic 
consumption in the 1990-92 base-year period. Because Taiwan depends almost 
totally on imports of feedstuff for its livestock and poultry production, 
any gains to exporters from increased meats and animal offal trade would be 
offset to some degree by a drop in exports of corn and soybeans to Taiwan. 

U.S. Exports to Gain, 
But Challenges Ahead

As Taiwan opens its market further for agricultural imports, it has the 
potential to continue as one of the fastest growing markets for U.S. farm 
products, and consumer-oriented agricultural items should benefit the most. 

With Taiwans WTO accession, however, new challenges arise for the U.S. 
Upon WTO accession, Taiwan will end the formal preferential treatment given 
to several categories of U.S. agricultural exports. For example, Taiwan 
currently allows fresh fruit from the U.S. to enter without any 
quantitative restriction, while fresh fruit from most other countries is 
either banned or subject to quotas. Upon WTO accession, Taiwan will grant 
these countries import permission as long as their products meet Taiwans 
phytosanitary and other rules. These "new-to-market" competitors will pose 
a potential major challenge to U.S. dominance in Taiwan.

Among those potential newcomers, one country stands out--China. Thus far, 
for political reasons, Taiwan permits only a limited number of agricultural 
products to be imported from China, and then only by first passing through 
Hong Kong or third-country ports. Generally these products have not 
competed directly with Taiwans domestic products or U.S. exports. Without 
a ban on imports, many Chinese products, particularly fruits and 
vegetables, would be highly competitive because of Chinas low production 
costs, geographic proximity to Taiwan (separated only by a 130 km-wide 
strait), and similarity in food tastes on both sides. Although the WTO will 
open up new horizons in cross-strait relations, it will take time to sort 
out the implications for trade. 

Taiwan, already a major food importer with little arable land, will import 
even more as domestic agriculture declines, trade policies are relaxed, and 
demand from the islands affluent consumers intensifies. In addition to its 
importance as a destination for primary bulk and processed intermediate 
commodities, Taiwan will be an even more dynamic market for a whole range 
of high-value consumer products. With Taiwans import demand growing, the 
short- and long-term prospects for U.S. agricultural exports to Taiwan 
remain favorable.  

Sophia Huang (202) 694-5225
sshuang@ers.usda.gov

BRIEFS BOX

Taiwan: A Major Market for U.S. Farm Exports

Taiwan, 22 million people on a mountainous island slightly smaller than 
Maryland and Delaware combined, has been an important market for U.S. 
agricultural exports since the 1970s. A minor importer before the 1970s, 
Taiwan broke the $1 billion mark in imports from the U.S. for the first 
time in 1979, and the $2 billion mark in 1993, reaching nearly $3 billion 
in 1996 before dropping to an average of $2.1 billion during 1997-2000. 

The lingering effects of the sudden outbreak of foot-and-mouth disease in 
Taiwans huge hog industry in early 1997 (AO October 2000) substantially 
reduced Taiwans import demand for feedstuff such as corn and soybeans. 
Taiwan, however, was the fifth-largest U.S. overseas farm market in 2000, 
after Japan, Canada, Mexico, and South Korea, purchasing $2 billion.

Taiwans agricultural imports are mainly bulk commodities and processed 
intermediate products--used mostly as raw materials for the domestic 
livestock, wheat flour, and export-oriented textile and leather goods 
industries. Over the years, however, the role of these bulk and 
intermediate products in Taiwans agricultural import mix has declined, 
while the proportion of imports for consumer-ready products has increased. 

Consumer-ready products such as apples and meats accounted for less than 3 
percent of U.S. farm exports to Taiwan before 1978 but increased their 
share to 19 percent in 1990-96, and reached 27 percent during 1997-2000. 

Taiwans agricultural imports, despite their increasing diversity, continue 
to be dominated by bulk and intermediate agricultural products. In 2000, 
coarse grains, soybeans, feeds and fodders, hides and skins, wheat, and 
cotton accounted for $1.3 billion, or more than two-thirds of U.S. farm 
exports to Taiwan.

COMMODITY SPOTLIGHT

World Rice Glut Keeps Lid On U.S. Prices

With record supplies at home and extremely low prices in the global market, 
the 2001/02 U.S. season-average farm price for rice is projected to be the 
lowest in 15 years. Despite a bearish price outlook last spring, U.S. rice 
producers boosted plantings more than 8 percent. At planting, producers 
estimated returns to rice production--including benefits under the 
marketing loan program--to be higher than returns from other planting 
alternatives. 

Because the U.S. exports more than 40 percent of its rice crop annually, 
the global rice market has a major effect on U.S. prices. Although 
accounting for only 1 to 2 percent of global rice production, the U.S. is a 
major exporter, accounting for about 12 percent of global rice exports. 
U.S. rice export volumes are very sensitive to the price difference over 
major competitors, especially Thailand, the worlds largest rice exporter. 

Crop Rotations, Loan Payments
Influence Planting Decisions

Last spring, U.S. farmers planted an estimated 3.3 million acres of rice, 
up more than 8 percent from a year earlier. The primary rotation crop in 
the Mississippi Delta--where the bulk of the U.S. rice crop is produced--is 
soybeans, with cotton and feed grains competing on a much smaller scale. 
Along the Gulf Coast and in northern California--where the bulk of the 
remainder of the U.S. crop is produced--such economically viable crop 
rotation is more difficult. 

Long grain, which typically accounts for more than 70 percent of U.S. rice 
acreage, made up all of this years area expansion. Long grain plantings 
are estimated at almost 2.7 million acres, a 22-percent increase from a 
year earlier and fractionally below the 1999 record. A 12-percent drop in 
long grain supplies in 2000/01 gave prices a slight boost last year. 
Slightly higher prices, plus expectations of substantial marketing loan 
payments, were behind this years expanding acreage. Virtually all long 
grain rice is produced in the South, with Arkansas, Louisiana, Mississippi, 
Missouri, and Texas accounting for more than 99 percent of southern rice 
acreage.

In contrast, combined medium/short grain plantings are estimated at 630,000 
acres this year, down 26 percent from 2000/01. Last year, medium/short 
grain supplies were up 18 percent from 1999/2000, a result of a record crop 
in California and larger production in the South. Medium/short grain 
accounts for 95 percent of Californias rice area; the state produces about 
two-thirds of the U.S. medium/short grain crop. Arkansas and Louisiana 
account for nearly all southern medium/short grain production.
 
Last winter, when final planting decisions were made for the 2001 crop, 
payments to rice producers under the government marketing loan program 
exceeded $3 per cwt, more than half the reported farm price at that time. 
Under the marketing loan program, when world prices are below the commodity 
loan rate, eligible producers are entitled to payments equal to the 
difference between the announced world rice price (as calculated by USDA) 
and the national average loan rate for rough rice, which is fixed at $6.50 
per cwt. By August, marketing loan payments exceeded $3.50 per cwt for all 
classes of rice. With little price strength expected in the world rice 
market, marketing loan payments will remain a major component of producer 
returns in the near future.

The combination of a record crop, higher carry-in, and larger imports is 
forecast to boost total rice supplies in 2001/02 to a record 247.6 million, 
up 8 percent from a year earlier. Total U.S. rice production is projected 
at a record 208.2 million cwt in 2001/02, up 9 percent from a year earlier. 
The larger crop is the product of both expanded acreage and a higher yield. 
The average yield, estimated at a record 6,328 pounds per acre, is almost 1 
percent above a year earlier.

Long grain accounts for all of the production increase. Long grain 
production is projected at a record 161 million cwt, up 25 percent from a 
year earlier. In contrast, combined medium/short grain production is 
projected at 47 million cwt, down 24 percent from a year earlier. 

Beginning stocks of all rice, estimated at 28.4 million cwt, are up almost 
4 percent from a year earlier. Imports, projected at a record 11 million 
cwt, are up more than 1 percent from 2000/01. 

Long grain supplies are projected at almost 182 million cwt, a record and 
up 19 percent from 2000/01. Long grain prices are likely to be under 
substantial price pressure this year. In contrast, medium/short grain 
supplies are projected to drop almost 14 percent to less than 65 million 
cwt.

Long-Term General Contraction 
In U.S. Rice Prices

U.S. rice prices, primarily for long grain (the dominant U.S.-grown class), 
had begun to drop early in the 1997/98 (August-July) market year, a result 
of both larger supplies at home and tumbling global prices. International 
rice prices were under severe pressure from the fallout of the Asian 
financial crisis that began in June 1997. In the U.S., milled prices 
reported the sharpest drop in the second half of 1997, while rough prices 
were supported by strong shipments to regular buyers, primarily Mexico and 
Central America.  

In 1998, the collapse of global trading prices was cushioned--and at times 
even reversed--by record world trade, the result of severe crop damage from 
El Nio in Southeast Asia and South America. While the U.S. accounted for 
only a small share of Southeast Asia's record imports, it was the primary 
supplier of South America's record rice imports in 1998. However, for the 
U.S., the price-cushioning effect was stronger for rough rice, which 
accounted for the bulk of South America's rice imports from the U.S. that 
year.  

For both the U.S. and global rice markets, the support for prices was 
brief. In the global market, prices began to drop at a faster pace early in 
1999 because trade contracted as production recovered in major importing 
countries and exporters harvested bumper crops. With the last of the U.S. 
El Nio exports shipped by the start of 1999 and with U.S. producers 
indicating 1999 plantings at more than 3.5 million acres--second only to 
the 1981 record of 3.8 million--both rough and milled U.S. rice prices 
began to drop sharply by spring 1999.

For U.S. medium grain rice--grown mostly in California--the situation in 
1998/99 was quite different, as California's production dropped 26 percent 
from a year earlier.  Prices for both rough and milled medium grain rice 
rose throughout the 1998/99 market year. By July 1999, California medium 
grain milled rice was quoted at $518 per ton, up more than $115 from a year 
earlier and more than $185 per ton higher than southern long grain. By 
September 1999, California medium grain prices began to drop in response to 
a larger crop, weaker global prices, and steady drop in U.S. long grain 
prices.

In 1999/2000, U.S rough and milled prices for both long and medium grain 
rice declined, a result of then-record U.S. supplies and a continued drop 
in global prices. In fact, the U.S. season-average farm price (rough rice) 
dropped more than a third in 1999/2000, the largest percentage decline 
since 1986/87. Global prices remained under pressure from weaker trade.

In 2000/01, despite a smaller crop and tighter domestic supplies, U.S. 
prices for all classes of rice continued to drop as global prices collapsed 
to a 15-year low by the spring of 2001 and California harvested a record 
crop. Global prices remained under pressure from weakening trade and bumper 
crops in major exporting countries. Last April, Thai 100-percent grade B 
averaged $170 per ton, the lowest monthly price in almost 28 years. From 
May through October 2001, global prices rose only fractionally--the longest 
period of sustained prices below $180 per ton since the early 1970s.  

This year, U.S. prices are under even more pressure. In 2001/02, U.S. rice 
supplies are projected at a record 248 million cwt. And despite rising 
domestic use and larger exports, U.S. ending stocks are projected to 
increase 43 percent to nearly 41 million cwt, the largest since 1986/87. 
Barring a major weather problem somewhere, there is little expectation of 
any price strength this year or next in the U.S. or global rice markets.

Prices for U.S. milled rice have declined as well in 2001/02. High-quality 
Texas long grain was quoted at $243 per ton in mid-October, down $30 from a 
year earlier and the lowest in more than 14 years. Medium grain prices have 
dropped even further. In early September, high-quality California medium 
grain milled rice was quoted at $220 per ton, down 50 percent from June 
2000 and the lowest in more than 25 years. However, by early October medium 
grain prices had risen to $287 per ton in response to expectation of a 
smaller California crop. 

U.S. Faces Stiff Competition
In Global Rice Market

Despite record supplies and lower prices, U.S. rice exports are projected 
to increase just 3 percent in 2001/02 to 86 million cwt (rough basis). 
Large exportable supplies in major exporting countries and extremely low 
international prices will limit the U.S. export gain. Rough rice exports 
are projected at 23 million cwt, virtually unchanged from 2000/01, and 
milled rice (including brown rice) at 63 million, up almost 3 million from 
a year earlier. The U.S. is the only major exporter that ships rough rice. 
The top Asian exporters do not allow rough rice exports, preferring to 
capture the added value from milling.

Long grain exports are projected at 70 million cwt, up more than 7 percent 
from a year earlier. Driving that forecast are much larger supplies and 
lower prices. The top markets for U.S. long grain rice are Mexico, Central 
America, the European Union (EU), Canada, South Africa, and Saudi Arabia. 
The U.S. currently faces little competition from Asian exporters in Mexico 
and Central America; both take mostly rough rice and bar Asian rice for 
phytosanitary reasons. However, in the milled and brown rice markets--the 
EU, South Africa, Saudi Arabia, and Canada--the U.S. faces stiff 
competition from Asian exporters. 

Medium/short grain exports are projected to drop 11 percent to 16 million 
cwt. Japan, Turkey, and Jordan are the top markets for U.S. medium/short 
grain rice. While Japan and Jordan take milled and brown rice, Turkey 
imports mostly rough rice from the U.S. Australia, Egypt, China, and Italy 
are major competitors in the global medium/short market. 

Global rice trade has dropped every year since 1998, a major factor in 
declining prices, and is projected to be flat in 2002. From its record 27.7 
million tons in 1998, global rice trade dropped 10 percent in 1999 to 24.9 
million tons. By 2001, global rice trade had declined to 22.4 million tons, 
19 percent below 1998. Weaker import demand has accounted for all of the 
decline. Major exporters, except for China, have produced record or near-
record crops every year since 1998/99. 

In 1998, record imports by several countries whose crops were severely 
damaged by El Nio pushed global trade up 47 percent from a year earlier. 
Indonesia imported 5.8 million tons (the largest amount of rice imported by 
one country), the Philippines 2.2 million, Bangladesh 2.5 million, and 
Brazil almost 1.6 million. These four countries were the largest rice 
importers in 1998, accounting for almost 44 percent of global imports. 
Record imports led to substantial stock buildups in each country. 

Most major rice exporting countries have harvested record and near-record 
crops since 1998/99, a major factor behind the steady decline in global 
rice prices after the 1997/98 El Nio. The only exception is China, where 
production dropped sharply in 2000/01 and 2001/02, a result of policies 
aimed at reducing production of lower quality rice. Even with smaller 
production, China has more than enough rice to remain a significant 
exporter.

Thailand and Vietnam are the worlds two largest rice exporting countries, 
shipping primarily indica or long grain rice. Thailand accounts for almost 
30 percent of global rice trade, Vietnam 18 to 20 percent. Production in 
both countries has risen sharply since 1998/99, with record crops projected 
for each in 2001/02. Thailand is considered a major U.S. competitor in the 
EU, the Middle East, and South Africa. Vietnam exports primarily medium- 
and low-quality rice to the Middle East, Africa, and Southeast Asia.

India and Pakistan export both low-quality long grain rice and their 
premium basmati rice--a popular aromatic--to the EU, Middle East, and U.S. 
India currently accounts for less than 5 percent of global trade, as 
Indias internal pricing policy makes non-basmati rice uncompetitive in 
most markets. However, since late May, India has provided subsidies on 
exports of certain grades of rice, making India competitive in these 
markets, primarily parboiled rice to West Africa. In addition, India has 
more than ample supplies and could export substantially more if global 
prices were to rise above its support levels. Except for 2000/01, India has 
produced back-to-back record crops since 1996/97. 

Although drought cut Pakistans 2000/01 and 2001/02 production, its 2001 
exports are projected to be a record. Pakistan accounts for 8 to 9 percent 
of global trade.

China and the U.S. are the only two major exporters, shipping both indica 
and japonica (medium/short grain) rice. China accounts for about 8 to 9 
percent of global rice exports, shipping high-quality medium/short grain to 
Japan and low-quality long grain to Africa, Southeast Asia, and Cuba. China 
has more than ample supplies of rice to substantially expand exports, if 
global prices were higher. However, much of this rice is low quality. The 
U.S. accounts for about 12 percent of global exports, down from 24 percent 
two decades ago. Despite record supplies, a substantial price difference 
over Asian exporters severely limits U.S. export levels. U.S. rice is 
typically competitive if the price difference over Thai rice is $50 per ton 
or less. In September the difference was $65 per ton.

Except for parts of the Middle East, nearly all major importing countries 
have harvested record or near-record crops since 1999/2000. This has been 
especially true for some of the biggest importers: Indonesia, the 
Philippines, Bangladesh, and Brazil. The combination of large stocks and 
successive bumper crops has been responsible for a steady decline in 
imports by these top buyers. While total imports by these four was more 
than 12 million tons in 1998, their combined imports are projected at a 
mere 3.1 million tons this year, just 14 percent of global imports. 

The decline in global trade since 1999 has been limited by record imports 
by Iran and Iraq. Both countries have experienced severe drought since 
1999/2000, cutting production more than 40 percent in each country. Imports 
have averaged more than a million tons a year for each country since 1999, 
putting Iran and Iraq behind only Indonesia as rice importers since 2000. 
Nigeria, averaging almost a million tons of rice imports a year, is the 
next largest import market for rice. Rice production is stagnant in 
Nigeria, the largest rice consuming country in Sub-Saharan Africa.

Over the long term, with large and growing populations and high per capita 
rice consumption, Indonesia, the Philippines, and Bangladesh are projected 
to increase rice imports as stock levels decline. Imports by Iraq, Iran, 
and Nigeria are expected to continue rising over the next decade as well, 
as production gains fail to match rising consumption. In Brazil, however, 
barring a major weather problem, declining per capita rice consumption will 
limit future import growth. On balance, global rice trade is expected to 
slowly expand over the next decade, eventually adding price strength to the 
international market.  

Nathan Childs (202) 694-5292
nchilds@ers.usda.gov

COMMODITY SPOTLIGHT BOX 1

Program Payments Critical to U.S. Rice Producers
 
In market year 2000/01, direct government payments to rice producers 
totaled almost $1.5 billion, more than 40 percent larger than the total 
market value of rice production that year. Under the 1996 Farm Act, the 
primary government programs affecting rice producers are production 
flexibility contract payments and marketing loans. Rice farmers also 
benefit from subsidized crop and revenue insurance as well as from trade 
promotion programs, food aid, and export credit guarantees. 

An important feature of the 1996 Farm Act was planting flexibility, which 
allows farmers to plant almost any crop on their contract acreage without 
losing benefits. For the 1996-2002 crops, producers who participate in the 
production flexibility contract (PFC) program receive specified payments 
that are not linked to current production or prices of the contract 
commodity. In 2000/01, PFC payments to rice contract holders totaled $443 
million, yielding a $2.60-per-cwt payment rate. 

The marketing loan program is designed to provide assistance to producers 
when world prices are low. The program uses the difference between the 
announced weekly world rice price (as calculated by USDA) and the national 
average per-unit commodity loan rate for rough rice, which is fixed at 
$6.50 per cwt. To achieve this national average rate, separate loan rates 
are calculated for each grain type, based on historic average milling 
yields. Government payments are available to producers when the world price 
falls below the loan rate. These payments are referred to as marketing loan 
benefits. By the end of the 2000/01 market year, the marketing loan payment 
rate exceeded $3.50 per cwt for all classes of rice. This compares with a 
season-average farm price of $5.56 per cwt.

As a result of low commodity prices, in 1998 Congress authorized 
supplemental payments for individuals eligible for PFC payments, which have 
been termed "market loss assistance" (MLA) payments. For the 1998 crop, PFC 
contract holders received additional payments equal to approximately 50 
percent of that years PFC payment rate of $2.92 per cwt. In 1999 and 2000, 
contract holders received supplemental payments equal to the 1999 PFC 
payment rate. This year, the payment rate is 85 percent of last years.

COMMODITY SPOTLIGHT BOX 2

Boiling Down Rice Terminology

Rice is traded in many forms, according to stage of milling, quality, and 
type. 

Stage of Milling:  Rough rice--sometimes referred to as paddy rice--is 
harvested rice as it comes from the field with both the outer hull (or 
shell) and bran layer still attached. The hull accounts for about 20 
percent of the weight of rough rice while the bran layer accounts for 
around 10 percent. Once the hull is removed the rice is referred to as 
brown rice. Brown rice has a nutty flavor and takes longer to cook than 
fully milled rice. Once the bran layer is removed the rice is referred to 
as fully milled or white rice or polished rice. 

The bulk of global rice trade is milled or brown rice. The U.S. is the only 
major exporter of rough rice. None of the major Asian exporters ship 
significant quantities of rough rice, preferring to profit from the value 
added by milling. South American exporters often ship small amounts of 
rough rice, mostly within Latin America.

Quality: Quality refers to many aspects of rice including:  percent 
brokens, uniformity of appearance, and degree of milling. When rice is 
milled, some of the kernels break, and these kernels are referred to as 
brokens. Generally, the higher the percentage brokens (or conversely, the 
smaller the percentage head--or unbroken--rice), the lower the price. For 
example, Thai 5-percent brokens sells at a higher price than Thai 35-
percent brokens. The more uniform the appearance of rice, the higher the 
price. In other words, rice is discounted for damaged kernels, chalkiness, 
and inclusion of foreign matter. Finally, the higher the degree of milling-
-i.e. the more of the bran layer removed--typically the higher the price. 

Type: Four basic types of rice are produced and traded globally. 

* Indica rice accounts for more than 75 percent of global trade and is 
grown mostly in tropical and subtropical regions. Indica rice cooks dry and 
separate. 

* Japonica rice, typically grown in regions with cooler climates, accounts 
for about 12 percent of global rice trade. Japonica cooks moist and sticky.

* Aromatic rice, primarily jasmine from Thailand and basmati from India and 
Pakistan, accounts for almost 12 percent of global trade and typically 
sells at a premium in world markets. 

* Glutinous rice, grown mostly in Southeast Asia and typically used in 
desserts and ceremonial dishes, accounts for most of the remainder. 

In the U.S., long grain is typically indica rice while the medium and short 
grains are typically japonica. Long grain rice, grown almost exclusively in 
the South, accounts for two-thirds to three-fourths of U.S. production. 
Medium grain, grown both in California and the South, accounts for 20 to 30 
percent of total U.S. production. California grows more than two-thirds of 
the U.S. medium grain crop, while Arkansas and Louisiana account for almost 
all southern medium grain production. Short grain rice, grown mostly in 
California, accounts for about 1 percent of total U.S. production.


WORLD AGRICULTURE & TRADE

Water Supply in the APEC Region: Scarcity or Abundance?

NOTE: This article is based on The Pacific Food System Outlook, 2001-02, a 
report released at the 13th APEC Ministerial Meeting in Shanghai, China, 
October 17-18, 2001. USDAs Economic Research Service is a sponsor of this 
annual report, which focuses on the outlook for the Pacific food system.

Roughly 70 percent of the earths surface is covered by water, but less 
than 1 percent of the earths water is fresh, and access to fresh water is 
critical to the food system. In the Asia-Pacific Economic Cooperation 
(APEC) region, the urban population is projected to grow from 1.1 billion 
to 2.0 billion by 2025, with most of the increase in China and developing 
economies of Southeast Asia. Such population growth in its cities will put 
huge stress on the regions capacity to provide basic services, including 
water supply. Unless water control facilities are expanded and/or 
efficiencies in water use are achieved, there is potential for water 
shortages in Korea, Chinese Taipei, Japan, China, Mexico, and the U.S.

Throughout history, increased water demand in water-deficit areas has been 
met by expanding available water supplies. Dam construction, groundwater 
pumping, and interbasin canals have provided the water to meet growing 
urban and agricultural needs. However, future opportunities for large-scale 
expansion of supplies in many parts of the region will be more limited. As 
a result, meeting future water demands will require some reallocation of 
existing supplies, better management of water resources, more efficient use 
of water for irrigation, greater recycling of water, and other measures 
that will increase efficient use.

Agriculture is the largest user, but a greater share of water withdrawals 
in the APEC region is allocated to industrial uses than in the rest of the 
world--25 percent compared with 14 percent. This is due to the regions 
rapid pace of economic growth and urbanization. Production agriculture in 
the APEC region accounts for 64 percent of water use. Nevertheless, it is 
still lower than the average 79 percent for the rest of the world. The 
share varies across the region, tending to be lower in the U.S., New 
Zealand, Japan, and Canada. Canadian agriculture uses only 7 percent, due 
to the dominance of rain-fed agriculture. Withdrawals are higher in Asia, 
where irrigated rice production is a large water user. 

The role of water as an input in agriculture, industry, and the household, 
as well as its role as aquatic habitat and transportation medium, makes 
allocation decisions difficult. Applying market principles that price water 
use relative to its supply depends on unique local values and 
circumstances, but will become more common in areas where competition for 
water is most intense.

Water supply comes from net inflows of water from rivers and underground 
sources minus outflows; changes in stocks such as reservoirs or aquifers; 
runoff (precipitation minus evaporation); and desalination. Few major river 
systems cross into the APEC region. Six of the economies are islands: 
Australia, New Zealand, the Philippines, Indonesia, Chinese Taipei 
(Taiwan), and Japan. The Mekong is the largest river system in the APEC 
region that is shared by several economies (China, Vietnam, Thailand, Laos, 
and Cambodia).

The single most important source of water in the region is runoff from 
precipitation, which varies from 700 millimeters per year in Mexico to 
3,000 millimeters per year in tropical Papua-New Guinea and Malaysia. 
Aquifers--underground reservoirs that are fed by infiltrating water from 
the surface--are also important. For example, the aquifer beneath the 
Huang-Huai-Hai plain in eastern China supplies drinking water for nearly 
160 million people. Some of the largest cities in the APEC region, 
including Jakarta, Lima, and Mexico City, depend on aquifers for much of 
their water supply. Aquifers also supply a significant share of water for 
the irrigated areas in the U.S. and China. The Ogallala aquifer (which is 
under parts of eight states in the central U.S.) still suffers from water 
depletion, but use of more efficient irrigation methods has slowed this 
trend. 

A minor water source is desalination--conversion of salt water to fresh 
water. Desalination capacity in the APEC region represents about one-
quarter of the global total, with the U.S., Japan, and Korea leaders in the 
region. However, this potentially meets the water needs of just a few 
million people.

Driven by income growth, a dietary shift away from rice in Asia has been 
rapid in recent years, except during the 1997-99 financial crisis. As 
incomes rise and consumers diversify their diets, they consume less rice 
and more meat and other products. On a per-calorie basis, wheat requires 
less water than rice to produce, raising meat animals requires much more. 
Thus, the impact of westernizing diets in East and Southeast Asia has had a 
mixed impact on water consumption, to the extent that foods are produced 
locally. The water intensity of diets in East and Southeast Asia will 
likely increase, despite lower rice production. On the other hand, the diet 
in North America is likely to become less water-intensive, as meat 
consumption levels off and consumers substitute chicken, a relatively 
efficient water user, for beef.

Water Resource Management:
Institutional Frameworks

In many APEC economies, leaders and administrators have recognized that 
water is the most important resource and, in some economies, a scarce 
resource. Yet in their efforts to make the resource accessible to all, they 
have priced it as though it were in abundance. Rather than promoting 
efficiency and establishing priorities for water use, water policy 
typically encourages exploitation and exacerbates shortages. 

Empirical work suggests that there are environmental payoffs when prices 
for water use are tied to the volume used, or when prices are applied in 
incremental tiers. Cost-conscious farmers are then less liable to overuse 
water, reducing the risk of water erosion, salination, and waterlogging. 
Underpricing water has led to exploitation of aquifers and overapplication 
of irrigation water in a number of APEC economies, including Australia, 
Canada, China, Mexico, and the U.S. As a result, some of the aquifers and 
water systems in question could soon pass the point of no return, and in 
other areas, problems with salination have become extreme. For example, 10 
percent of the irrigated land in Mexico is damaged by salinity, as is more 
than 20 percent in China and the U.S.

Assuming significant improvements in irrigation efficiency, water demand in 
the APEC region could be met by a 10-percent increase in supply by 2025, 
according to projections by the International Water Management Institute 
(IWMI) in Sri Lanka. Without those efficiency gains, the increase in supply 
needed would be closer to 40 percent. The more efficient scenario in the 
IWMI study assumes sharp increases in irrigation efficiency by the U.S. and 
China as well as other heavy irrigators like Mexico, Thailand, Indonesia, 
and the Philippines. 

A key factor in raising irrigation efficiency is the development of market 
institutions (such as a system of water rights, tradable water 
entitlements, and prices reflecting the marginal cost of supplying water). 
These market institutions create greater incentives for adoption of 
efficient storage, delivery, and application systems. In some economies, 
water resources are being privatized and turned over to local irrigation 
associations and to other entities that tend to be more efficient in 
managing water resources. 

Around the Pacific Rim, the development of water markets has been slow, 
with a few exceptions. Chile enacted legislation 20 years ago to create a 
market system in which water rights could be traded freely under a 
regulatory framework, a unique system for a developing economy. 
According to the World Resources Institute (WRI), price reforms in Chile 
have reduced the use of irrigated water by as much as 26 percent and saved 
$400 million in new water infrastructure. 

In Mexico, water resources are in the public domain. Legislation allows 
transmission of water-use rights, which can be transferred independently of 
land. Irrigated areas are generally grouped into rural development 
districts (i.e. Distritos de Desarrollo Rural), which are geographic areas 
surrounding water infrastructure. The beneficiaries are responsible for 
operating, maintaining, and collecting fees for the irrigation system. 

Canada and New Zealand have the highest per capita water supplies in the 
region, and have little incentive to develop water markets. Both countries 
have legal systems that define and protect water rights as well as a 
variety of fee systems. Most Canadians pay water rates that do not promote 
conservation; only 4 percent of users were charged a progressively higher 
price with greater volumes. Water metering in New Zealand occurs only in 
the Auckland Region, where it began in the early 1990s. 

In Australia, national and state governments have introduced a more market-
oriented system of water allocation. The catalyst for reform was a 1994 
agreement by the Council of Australian Governments. This reform included 
commitments to:

* consumption-based pricing and full cost recovery for water delivery 
services, 

* clearly specified water property rights separated from the land, 

* formal determination of water allocations to the environment, and 

* introduction of water trade to maximize economic returns from water use.

While some water trading is taking place in California and Colorado, water 
costs in the U.S. still do not reflect their full economic cost; 
infrastructure development for delivering off-farm surface water is 
generally publicly subsidized. 

Privatization of Malaysias water supply is expected to increase, along 
with pressure to improve efficiency. Water tariffs will undoubtedly rise, 
as current rates do not cover costs of production. 

In Peru, the agriculture sector rarely pays for water, despite the fact 
that 42 percent of all cropland is irrigated. As a result, water costs are 
estimated to make up less than 1 percent of total agricultural production 
costs, contributing to poor irrigation practices and low water-use 
efficiency. 

Japanese irrigation development and water management are stipulated in the 
countrys Agricultural Land Improvement Law. While controlled locally, both 
the central and local governments heavily subsidize construction of these 
systems because of the perceived broader societal benefits associated with 
paddy rice cultivation. 

Increasing Water 
Supplies 

Measures to augment area water supplies in various economies to meet 
projected demand are proceeding in some parts of the region. The demand for 
water resources by Chiles hydroelectric sector in the next 40 years is 
expected to increase six times, prompting a need to build some 100 new 
hydroelectric plants. The demand for industrial and mining uses of water 
will likely more than double. 

These large increases in demand for water will be met by a combination of 
public and private resources. Chile has announced plans to invest US$320 
million in the coming years, with financial support from the World Bank and 
cost recovery from beneficiaries. Public funding generally focuses on 
smaller projects. In 2001, for the first time, a water project will be 
offered for investment by the private sector, following the policy of 
concessions to private entities already in use for highways and ports. 

In the central region of Chinese Taipei, the government has approved 
construction of the Hushan Reservoir, having a total budget of US$700 
million and scheduled for completion in 2008. This reservoir will satisfy 
the water needs of the industrial sector in that region until 2021. 

The Philippines expects to increase irrigated area from 1.55 million to 
1.64 million hectares by 2004. In Malaysia, interbasin and interstate 
transfers of water like the Pahang-Selangor Raw Water Transfer scheme will 
become more common in the future. For some time, there has been discussion 
regarding the export of Canadian water to the western U.S. 

China faces massive economic challenges, with more than 20 percent of the 
worlds population, limited land area, and rapid economic growth. Its 
annual water supply ranks fifth--behind Brazil, Russia, Canada, and 
Indonesia--but per capita supplies are among the lowest in the region and 
world. In the APEC region, only Korea has a lower per capita water level. 

China, which is plagued with flooding in the south and drought in the 
north, hopes to optimize the allocation of its water resources by 
developing water control facilities, like The Three Gorges (Yangtze River) 
and Xiaolangdi (Yellow River) Dams. China is also planning to undertake the 
largest water diversion project in its history--channeling water from the 
Yangtze River to the north. The dams are multipurpose projects for flood 
control, industrial and municipal water supply, and hydroelectric power. 

Taking Steps to 
Increase Efficiency

Different countries use a variety of approaches to increase efficiency of 
water use. 

In 2000, China undertook some major water-saving measures, including more 
intensive management of water use, water rationing, and charges for excess 
consumption. Some cities installed newly developed water-saving taps, both 
in homes and in public places. 

New Zealand has concentrated on raising water quality over the past 20 
years and has achieved considerable success by treating wastewater at 
specific pollution points. Over the next 20 years, attention will shift to 
methods of reducing non-point pollution. Governmental and private efforts 
in the water industry will focus on continuing to improve water quality and 
reducing per capita consumption, rather than on expanding the amount of 
water available.

In Mexico, leakage in the water distribution system (e.g., evaporation) 
accounts for a loss of 30 to 50 percent, mostly from agricultural 
activities. Some 1.2 million hectares is cultivated with modern, efficient 
technology, but it is only a small proportion of the total. 

Another way of using water more efficiently is to apply it to the 
production of higher value  commodities. In Java, Indonesia, brackish water 
ponds for shrimp are being developed in formerly irrigated coastal lands or 
in new locations in the outer islands. Aquaculture in Java is still modest 
in its use of water, about 2 percent of total agricultural withdrawals. 

In the coastal areas of Chinese Taipei, freshwater and brackish-water 
fishponds use large amounts of groundwater, about 10 times the amount used 
by paddy fields, to regulate salinity, oxygen, and temperature. 
Nevertheless, aquacultural farming has proved to be more profitable than 
crops. The government has begun to impose restrictions on expansion of 
aquaculture, however, since land settling is a growing problem in some 
coastal areas because of falling water tables. 

Conservation of water, reducing pollution, and recycling increase water 
basin efficiency and thus overall water availability. The U.S. has 
increased the efficiency of water use in the economys principal irrigated 
areas: the Central Valley of California, the Snake River Valley in Idaho, 
the High Plains from Texas to Nebraska, the Mississippi Delta in Arkansas 
and adjoining states, and south central Florida. 

Although irrigated agriculture remains the dominant user of fresh water in 
the U.S., its share of freshwater consumption has declined since 1970. 
While irrigated cropland area has expanded by about 30 percent since 1969, 
field water application rates per acre have declined about 15 percent. 
Increased use of sprinkler systems and other more efficient means of 
irrigation have resulted in only a 12 percent increase in total irrigation 
water applications. 

The 1972 U.S. Clean Water Act defines quality standards for drinking water, 
for recreational uses, and for support of aquatic life. Since passage of 
the legislation, surface water quality has improved, largely through 
reductions in toxic and organic chemical loadings from point sources. 
Discharges of toxic pollutants have been reduced by an estimated billion 
pounds per year. Rivers affected by sewage treatment plants show a 
consistent reduction in ammonia between 1970 and 1992. 

Opportunities & 
Challenges

Making more efficient use of water requires complex and multifaceted 
strategies that must take the communal nature of water into account. This 
includes the interdependence of users within a water basin, as well as the 
competing roles of water as an input in agriculture, industry, and 
households; as a habitat and medium for aquatic life; and as a medium for 
transportation, including waste disposal. 

Where water is scarce, creation of market mechanisms will assure more 
efficient and sustainable use of water resources in the region. The 
alternative is to raise the supply of water with costly investments in 
water infrastructure, dams, and diversion channels, which are becoming 
increasingly unaffordable, from both economic and environmental 
perspectives.  

Bill Coyle (202) 694-5216
Brad Gilmour (Agriculture and Agrifood Canada).
wcoyle@ers.usda.gov 

This article is based on contributions by economists from 17 Pacific Rim 
economies. Views expressed are those of the authors and do not necessarily 
reflect those of USDAs Economic Research Service or Agriculture and Agri-
Food Canada. Economy-by-economy profiles are at www.pecc.org/food.

WORLD AGRICULTURE & TRADE BOX 1

Who Belongs to APEC?

APEC is an informal grouping of market-oriented Asia-Pacific economies 
sharing goals of managing the growing interdependence in the Pacific region 
and sustaining its economic growth. Started in 1989, 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. 

Members:

Australia, Brunei, Canada, Chile, China, Hong Kong/China, Indonesia, Japan, 
South Korea, Malaysia, Mexico, New Zealand, Peru, Philippines, Russia, 
Singpore, Taiwan (Chinese Taipei), Thailand, U.S., Vietnam, and Papua-New 
Guinea. 

WORLD AGRICULTURE & TRADE BOX 2

Putting Water Scarcity in Perspective

Analyses of global and regional water resources are hampered by inadequate 
data and methodological issues. Measuring stocks and flows of water is 
difficult. For example, data for water use seldom include direct 
agricultural use of rainwater--an essential water source for farming in 
many economies of the APEC region, even in heavily irrigated areas. 
Globally, about 60 percent of food is produced using rainwater, 40 percent 
using irrigation. The rain-fed crop area in the region varies from 37 
percent in Japan to 98 percent in Canada. The APEC region accounts for 40 
percent of global irrigated acreage.

An economys aggregate data tend to mask many concerns about water 
resources. The common use of national and annual data disguises significant 
regional and inter-annual variations. The most reliable data and 
information are at the basin level, since that is the level at which water 
scarcity or abundance can truly be measured and efforts to save water can 
be evaluated. It may also be the level at which water resources are best 
managed. It may even be that water is scarce within a particular city or 
locality in a basin. Also, water can be scarce for certain groups within a 
relatively water-rich area, even if it is in abundance for others within 
the same area.

Using the ratio of water withdrawal (a measure of demand) to annual water 
resources (a measure of supply) as a relative measure of scarcity, the APEC 
region uses 9 percent of its annual water resources, compared with 6 
percent in the rest of the world, according to the International Water 
Management Institute in Sri Lanka. In six of the APEC economies, water use 
is nearly 20 percent or more of available supplies: Korea (36 percent), 
Chinese Taipei (23 percent), Japan (21 percent), China (19 percent), Mexico 
(19 percent), and the U.S. (19 percent).

RESEARCH & TECHNOLOGY

Farms, the Internet, & E-Commerce: Adoption & Implications

Internet use by U.S. farmers has grown rapidly, as advances in computer and 
other communication and information technology (CIT) make the Internet more 
accessible. USDA recently reported that the use of computers on farms has 
grown from 38 to 55 percent since 1997, while Internet use has grown from 
13 to 43 percent. In 2000 (the most recent year available), 24 percent of 
farms used the Internet as a management tool in their farming operation 
according to USDAs annual Agricultural Resource Management Study (ARMS) 
survey. 

CIT is a tool that makes information more accessible and therefore improves 
the quality of decisions by managers. Some farmers are long-time users of 
many variants of CIT, including cell phones and other hand-held electronic 
devices, computers, and most recently, global positioning system 
technology. 

As a technology, the Internet has the additional benefit of minimizing some 
constraints on a farmers ability to receive and manage information, 
regardless of where the farm is located or when the information is used. 
Moreover, because the costs of Internet-provided communication and 
information gathering services can be substantially lower, the commercial 
opportunities of the Internet may afford farmers new ways to build business 
partnerships, including opportunities to purchase inputs and sell products.

Which Internet Services 
For Agriculture?

At the time when publicity about the potential of business-to-business 
electronic commerce was greatest, many firms sprang up to compete for farm-
sector transactions. To assess the success of these efforts, the ARMS 
survey asked farmers to report all types of financial, communication, and 
information-gathering activities as well as their online buying and 
selling. In 2000, farmers were particularly interested in information-
gathering activities, online financial activities, online purchases, and 
crop and livestock sales. 

During 2000, producers reported $665 million in online buying and selling, 
equal to 0.33 percent of all purchases and sales by U.S. farms. Online 
purchases totaled $378 million, covering machinery and equipment, farm 
supplies, crop inputs, livestock inputs, and office and computer equipment. 
Purchases of crop and livestock input together were 35 percent of total 
online purchases, and each was smaller than machinery and equipment 
purchases and general farm supply purchases. Online sales by farmers 
totaled $287 million--$191 million in livestock sales and $96 million in 
crop sales. 

Farms using the Internet reported implementing the technology for a number 
of different reasons: 

* price tracking, 82 percent of Internet users 

* agricultural information services, 56 percent 

* accessing information from USDA, 33 percent  

* communication with:

* other farmers, 31 percent of Internet users 

* crop advisors, 28 percent of Internet users 

* online record keeping and data transmission to clients and service 
providers, 31 percent.

Demand for financial services in agriculture is usually quite strong, as 40 
percent of all farm households maintain some amount of business debt, and 
many more use financial institutions extensively. Three percent of all 
farms used the Internet to help manage some facet of their business 
finances. 

* online banking, 10 percent of Internet users

* paying bills, 7 percent 

* obtaining loans, 2 percent 

Although only 1 percent of farm operators report that security in general 
keeps them from using the Internet in their business, security concerns 
likely contribute to low use of the Internet for financial transactions. 

Which Farms Are Likely
To Use the Internet?

Technological change has long been a staple of the agricultural economy. In 
general, adopters have characteristics that distinguish them from 
nonadopters. In the past, farms with younger, more educated managers and 
with larger sized operations were quickest to adopt any new technologies. 
Adoption of the Internet is apparently following the same pattern, as more 
educated operators and larger sized farms had higher rates of use than did 
others. Adoption was more uniform for all farmers under 55, declining for 
upper age groups. Groups reporting higher adoption are those that share 
both the abilities and the need to find strategies to improve management 
decisionmaking, including increasingly complicated purchasing, production, 
and marketing decisions. 

Farm typology. To examine Internet use by various types of farms, the ARMS 
data were analyzed using the farm typology constructed by USDAs Economic 
Research Service (ERS). The ERS farm typology classifies farm households by 
principal occupation of the farm manager, amount of sales generated by the 
farm, and economic resources available to the household. 

Comparing the population of Internet users and all farms, differences in 
population share for each category of the farm typology were examined. If 
the share in the "all farms" population exceeds the share in the "Internet 
users" population, then farms making up the category have lower-than-
average Internet adoption. If the share in the "Internet users" population 
exceeds the share in the "all farm" population, farms in that category have 
higher-than-average adoption. 

In 2000, farms with more than $100,000 in sales had higher-than-average 
Internet adoption. The farming occupation, low sales small farm category 
(those farms with less than $100,000 in sales for 2000), had lower-than-
average Internet adoption, while residential-lifestyle farms had slightly 
higher-than-average Internet adoption. Retirement and limited-resource farm 
households had slightly lower-than-average Internet adoption. 

Overall, Internet adoption by the various types of farms is not far from 
average, indicating that Internet use among farms is not disproportionately 
weighted toward any particular type of farm. Internet adopters are 
distributed roughly proportionally to their representation within the 
agricultural sector. This may also reflect that while adopters are younger, 
have more formal education, and generally higher sales, farmers with some 
of these characteristics can come from a rather broad cross-section of the 
agricultural sector. 

Commodity type. Technologies introduced in the past, such as new planting 
technology, precision agriculture, and selective breeding to improve 
livestock herds, were designed for an obvious and singular purpose, with 
"spinoff" technologies the primary source of benefits for other farms. Most 
often, the new technology was tied to an individual enterprise, so that 
farms that did not engage in that enterprise were only affected indirectly, 
if at all. 

This does not appear to be the case with Internet use. Internet use by farm 
businesses seems to be equally attractive to those specializing in crop or 
livestock production. Internet users appear to follow the same 59-41 
percent split between livestock and crop specialization that is 
representative of the farming sector as a whole. 

The Rural-Urban
Digital Divide

In general, adoption of information technologies follows a pattern similar 
to adoption of other production technologies. But, adoption may be more an 
issue of "willingness to adopt" than of whether the technology is somehow 
inappropriate for particular kinds of farms. Concerns have been raised that 
lack of adoption has more to do with inadequate infrastructure and other 
barriers to access than with farmer interest in using CIT. 

The "digital divide" relates to the relative economic disadvantage of lack 
of access to the Internet. It is the term normally used to discuss a 
variety of concerns that spring from a gap between Internet users and 
nonusers that threatens the current or future economic power of a group. 
Rural households as a group have traditionally had low rates of Internet 
use. Among the reasons cited are their older, more isolated populations, 
generally low rates of employment in high-tech sectors, and lack of 
Internet service providers in some rural areas. 

The most recent empirical assessment of the digital divide was contained in 
the 2000 Current Population Survey, indicating that rural households had 
demonstrated rapid gains in Internet use, thereby reducing the rural-urban 
digital divide. ARMS data indicate that 43 percent of farms reported that 
they did not use the Internet because they did not own a computer while 
only 4 percent report inadequate Internet service as the reason they did 
not use the Internet in their business. 

To address changes in Internet use along a rural-urban continuum, ARMS data 
were analyzed using an index developed at ERS that classifies all U.S. 
counties by their degree of urbanization and proximity to a metropolitan 
area. A digital divide, where it exists, can be detected by spotting large 
differences between the groups share among all farms and the groups share 
among Internet users. The results show that as the degree of urbanization 
and proximity to a metropolitan area declines, Internet use also tends to 
decrease slightly. This supports the idea that a farms likelihood of using 
the Internet decreases with distance from an urban area. 

About 85 percent of all farms are located in counties that contain a 
metropolitan area or have an urban population of at least 2,500 people. The 
digital divide lessens at the rural extreme, where the remaining 15 percent 
of farms are located. Farms located in totally rural counties have the same 
representation in the "all farm" population as in the "Internet user" 
population, indicating that their Internet adoption is the same as the 
national average. While Internet use for totally rural counties may be more 
costly, because toll calls are sometimes required, the benefits may be 
higher. For example, for a relatively remote farm, time and location 
constraints are potentially the greatest, while a less remote farm may have 
other options nearby that lessen the advantage of using the Internet. 

Future of 
Farm CIT

In 2000, business use of the Internet was reported on almost a quarter of 
all farms. Use was similar across many different types of farms, which 
indicates that CIT potentially has general appeal, and is not necessarily 
the domain of only a portion of the farm population. Because most types of 
farms seem to be adopting the Internet at similar rates, CIT does not 
appear to be associated more with any particular type of farm. Continued 
cost reductions for CIT use will likely increase the number of farms using 
the Internet, while farms that used the Internet in 2000 will likely 
further integrate CIT into their business. Nearly all farms using the 
Internet in 2000 to purchase inputs indicated that they are likely to 
maintain or increase purchases in the future. 

The analysis of adoption of Internet technology for management decision-
making demonstrates that diffusion has been rapid and relatively widespread 
across the agricultural sector. There was no attempt to quantify the net 
economic benefits enjoyed by adopters of CIT relative to nonadopters, 
although these are the subject of continued study. Most farms appear to be 
using the Internet for only a portion of their overall farm business, 
suggesting that they are still discovering for themselves how to best take 
advantage of the technology. 

We draw three implications of Internet adoption for farmers and those who 
do business with them. First, nonadopting farms may want to periodically 
reexamine the technologys applicability to their operations. Although some 
analysts expected the Internet to fundamentally change the structure of 
agriculture, it appears that those farmers who are using the Internet are 
currently simply substituting one technology for another. While much of 
what is done on the Internet can be done by telephone, fax, mail, or in 
person, there is little evidence that any one of these technologies is 
superior to another. 

Second, because experimentation may lead to different uses of the 
technology that go beyond substitution for older technologies, tracking 
further developments on the impacts of the Internet on farm performance is 
warranted. 

Third, ignoring the capabilities of the Internet for information 
dissemination and maintaining contact with farmer clients could be a costly 
mistake for those who serve farmers, as adopters in general appear willing 
to use the Internet in a variety of ways.  

Jeff Hopkins (202) 694-5584
Mitch Morehart (202) 694-5581
jhopkins@ers.usda.gov
morehart@ers.usda.gov

RESEARCH & TECHNOLOGY BOX 1

ERS Farm Typology Groups

Small Family Farms (sales less than $250,000)

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

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

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

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

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

Other Farms

Large family. Farms with sales between $250,000 and $499,999.

Very large family. Farms with sales of $500,000 or more.

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

RESEARCH & TECHNOLOGY BOX 2

Farm Businesses: Digital Leaders or Followers?

How does Internet use by farmers compare with other parts of the economy?  
In general, farm household use is comparable to that of nonfarm households. 
Use of the Internet within the farm business is similar to use by small 
manufacturing firms, but is less than use by larger manufacturing firms. 
The share of total electronic business transactions in agriculture is less 
than the overall rate of electronic transactions at both the retail and 
nonagricultural firm levels.

RESOURCES & ENVIRONMENT

Organophosphate Insecticides Being Scrutinized, Restricted

The U.S. Environmental Protection Agency (EPA) is reviewing all pesticides 
that had residue tolerances (legally defined upper limits) for food in 
1996, comparing assessment results with new safety standards, and taking 
regulatory actions when necessary to meet the standards. So far, 
preliminary results for 38 organophosphate (OP) pesticides have been 
announced, and numerous regulatory actions proposed or taken. A more 
comprehensive cumulative assessment is nearing completion, with preliminary 
results to be published December 1, 2001 and a revision by August 2002. 
This assessment may result in further regulatory actions.

OP pesticides were among the first reviewed, due to concerns about human 
health risks. OPs have been widely used in agriculture, making up over half 
the total acre-treatments of insecticides during the late 1990s to several 
major field crops and many fruits and vegetables. So far, most actions 
resulting from the review have affected OP use on fruit and vegetables, 
with such crops as apples and pears affected by more than one regulatory 
action.

The EPA review of pesticides, called for in the Food Quality Protection Act 
of 1996 (FQPA), is twofold. First, an aggregate assessment considers the 
risks from dietary, drinking water (which contributes to dietary), and 
nonoccupational exposure across all uses of specific pesticide ingredients. 
Second, a cumulative assessment considers these same risks across all 
pesticides in a group, such as OPs, that have a common mechanism of 
toxicity. In addition under the ongoing reregistration process, EPA is 
simultaneously examining the same pesticides for ecosystem and worker 
safety risks. 

Pesticides contribute to increased productivity in agriculture, but their 
use is associated with potential risks to human health, wildlife, and the 
environment. Of the 38 OPs reviewed so far, EPA has preliminarily 
identified more concerns with worker safety, ecosystem, and nonoccupational 
exposure risks than with dietary or drinking water risks.

Regulatory actions can include:

* cancellation of use registration, which would prohibit further use, and 

* use restrictions, such as application rate reductions; limitations on 
where, when, or how pesticides can be used; worker protection requirements; 
and production caps that limit the quantity of the pesticide that can be 
produced or sold. 

Some actions can severely restrict the use of pesticides and cause 
increases in pest control costs or yield losses, while others have little 
effect. Although EPA makes all regulatory decisions, the registrants, in 
response to risk assessments, often propose voluntary mitigating actions to 
avoid the time and legal costs of administrative hearings and procedures.

Restrictions on OPs 
Are Increasing

So far, regulatory actions on agricultural uses of OPs to meet new 
standards for individual materials have been limited primarily to fruit and 
vegetable crops. Use on many extensively treated crops continues, but some 
major actions have affected residential and other nonagricultural uses 
rather than agricultural uses. However, some cancellations of agricultural 
uses have been proposed, and the cumulative assessment could result in 
further cancellations or use restrictions. Actions on food crops have 
primarily affected fruit and vegetables, in some cases to reduce dietary 
risks to children. Many fruits and vegetables are more extensively treated 
with OPs than are large acreage crops, such as corn, soybeans, cotton, and 
wheat. 

In 1999 EPAs aggregate assessment identified three widely used OPs--
azinphos methyl, chlorpyrifos, and methyl parathion--as having dietary, 
drinking water, or nonoccupational exposure risks in excess of standards. 
In some cases, ecosystem or occupational (worker) safety risks were noted. 
With EPA approval, registrants of these three insecticides took voluntary 
actions to reduce the risks identified by the review. Another widely used 
OP, diazinon, was identified with nonoccupational exposure, occupational, 
and ecosystem risks; regulatory actions have been proposed.

Azinphos methyl. Actions taken on this insecticide include rate 
restrictions on pome fruits (apples, pears, crabapples, and quinces) to 
reduce dietary risk, cancellation of use on cotton east of the Mississippi 
River and on sugarcane nationally to reduce drinking water exposure and 
risks to aquatic organisms, and an overall cap on the amount produced. 
Prior to the actions, apples and pears ranked first and third among major 
fruit and vegetable crops in proportion of acres treated, with 81 and 72 
percent, respectively, and ranked second and fourth in percentage of 
insecticide treatments, with 27 and 20 percent (all data are multiyear 
averages during 1994-99). However, the use restrictions (maximum annual 
application rates of 4.5 pounds active ingredient per acre) reduced the 
affected acreage and treatments of apples and pears. Before the action, 
about 8 percent of apple and pear acres were treated at rates that exceeded 
the restriction, accounting for 5 percent of insecticide treatments on each 
crop.

About 5 percent of cotton acres were treated with azinphos methyl but the 
cancellation affected only the 1 percent treated east of the Mississippi 
River. Actions on other extensively-treated fruit crops were not needed to 
meet the aggregate risk standard. However, the production cap on the 
insecticide could limit the amount available for use. Also, although not an 
FQPA issue, actions may be needed to reduce worker exposure to the 
insecticide, which may further restrict use on apples, pears, and other 
crops.

Chlorpyrifos. To reduce dietary risk, use of chlorpyrifos on tomatoes was 
cancelled, use on apples restricted to prebloom applications, and residue 
tolerances reduced on grapes. Of these crops, chlorpyrifos was used most 
extensively on apples, with 70 percent of apple acres treated and 12 
percent of total insecticide treatments. Since USDA surveys do not record 
application timing for fruit and vegetable crops, the proportion of acres 
and treatments affected by the prebloom restriction is unknown. 

Chlorpyrifos was used on 4 percent of grape-bearing acreage and 16 percent 
of fresh-market tomatoes. Use on tomatoes was concentrated in the Southeast 
(represented by Florida, Georgia, North Carolina), with 30 percent of the 
acreage treated, accounting for 5 percent of treatments, but less than 1 
percent treated elsewhere. USDA surveys reported no acreage of processing 
tomatoes treated. Use of the insecticide on many extensively treated fruit 
and vegetable crops was not affected by the actions, such as use on 46 
percent of acres planted to cauliflower.

Chlorpyrifos was one of the two most widely used insecticides for treating 
nonagricultural and residential pests. Use was cancelled in buildings, 
homes, and gardens in order to reduce nonoccupational exposure risks, 
including those to children.

Methyl parathion. To reduce dietary risk, use was cancelled on more than 20 
fruits and vegetables. The most affected included peaches (44 percent of 
acres treated), plums, apples, processing snap beans, nectarines, pears, 
and tart cherries (13 percent of acres treated). Use was also cancelled on 
succulent peas and beans, tomatoes, and some nonfood crops to reduce 
ecosystem and worker safety risks. Use on cotton, with 15 percent of 
acreage treated, was not affected. Other treated crops not affected were 
fresh sweet corn, onions, and processing sweet corn.

Diazinon. The proposed diazinon use cancellations to reduce worker and 
ecosystem risks will affect over 20 crops. Among these crops the most 
extensively treated with the insecticide have been 24 percent of fresh 
market spinach; 15 percent of bell pepper; and 10 percent or less of 
strawberry, celery, processing tomato, processing spinach, fresh market 
cucumber, and processing cucumber acres. However, use of the insecticide 
continues on some fruit and vegetable crops, ranging from over half the 
acres in raspberries to lesser proportions of nectarines, apricots, head 
lettuce, other lettuce, prunes, plums, blackberries, peaches, sweet 
cherries, carrots, onions, fresh market cabbage, and blueberries. EPA 
cancelled the products use in buildings, homes, and gardens and by 
residents to reduce nonoccupational exposure risks, including those to 
children.

Some crops were affected by two or three of the actions on major OP 
insecticides: apples (azinphos, chlorpyrifos, methyl parathion), pears 
(azinphos, methyl parathion), tomatoes (chlorpyrifos, methyl parathion, 
diazinon), and cotton (azinphos, diazinon). About 10 percent of apple acres 
and 3 percent of pear acres were in orchards using two or three materials 
subject to actions on some acreage. The acreage affected by multiple 
actions has declined over time. Adoption of new pesticides, such as mating 
disrupters for codling moth management, may reduce OP use. Growers treated 
about 12 percent of Washington apple and pear acres with the new pesticides 
in 1999.

Besides the above four widely used OPs, EPA issued interim decisions for 
many other OPs to reduce nonoccupational exposure, worker, and ecosystem 
risks. These actions would affect relatively small crop acreages.

Cumulative Review May 
Bring More Restrictions

While the results of the cumulative assessment have not been announced, 
additional risk reduction measures may be required to meet the standard for 
OPs. There could be major modifications in insect control practices for 
crops relying heavily on OPs. Use of OPs on fruits and vegetables that 
comprise a high proportion of infants and childrens diets, which have a 
stricter safety standard, could be an important concern. 

Some fruits and vegetables rank high both in extent (percent of acres 
treated) and intensity (average number of treatments per planted acre) of 
OP use across all planted acres. Extent and intensity are indicators of the 
crop area and insecticide treatments potentially affected if all food crop 
uses of OPs were to be cancelled. However, less disruptive actions might 
meet the cumulative standard.

Of major fruits and vegetables, apples rank highest by both indicators: 95 
percent of acres treated and an average of five treatments per planted 
acre. OPs were applied to more than 50 percent of acres and averaged more 
than 1 treatment per planted acre for 22 other major fruit or vegetable 
crops. In comparison, OPs are used on smaller proportions of acres for the 
two largest markets for these materials: cotton, with 50 percent treated 
and 2.2 treatments per planted acre, and field corn, with 18 percent 
treated. Some fruit and vegetable crops are particularly reliant on OPs; 
these materials account for more than 50 percent of insecticide treatments 
for apples, tart cherries, blueberries, sweet cherries, broccoli, snap 
beans for processing, and lima beans for processing. 

The actions on OPs affected a substantial portion of treatments on some 
intensively treated fruit and vegetable crops. The actions on azinphos 
methyl, chlorpyrifos, and methyl parathion affected between 15 and 50 
percent of OP treatments on apples, nectarines, peaches, processing snap 
beans, plums, pears, and fresh tomatoes. In addition, the proposed diazinon 
action would affect 10 to 12 percent of OP treatments on bell peppers, 
plums, and strawberries. The resulting risk reductions could influence 
further actions needed to meet the cumulative standard, and the crops and 
pesticides affected. EPA could cancel or restrict any remaining crop uses 
of OPs, including the previously restricted use of chlorpyrifos on apples 
and azinphos methyl on pome fruits, which would be more severe and affect 
larger proportions of acres and treatments than did the earlier 
restrictions. 

The FQPA review process, and especially the cumulative review, is 
complicated when pesticides are alternatives to each other. The economic 
and risk effects of a regulation depend upon which alternatives farmers use 
and how those alternatives were previously regulated. Conceivably, a 
regulation could increase health or environmental risks if an alternative 
has higher risks than the regulated pesticide. For example, the purpose of 
the production cap on azinphos methyl was to prevent unacceptable risks if 
growers used it instead of other regulated materials, such as methyl 
parathion. 

The FQPA review works toward an overall reduction in risk since pesticides 
with the greatest risks to public health are reviewed first. Society may 
gain if relatively high risks are mitigated earlier in the process.

Most actions resulting from the OP assessment so far have affected fruits 
and vegetables; the effects of the cumulative assessment remain to be seen. 
Ultimately, the economic effects will depend on the actions taken on 
specific pesticides and crops, how restrictive they are, the potential for 
pest damage, and the availability and cost effectiveness of alternatives. 
While EPA may have options to reduce the disruption of pest management 
practices and economic effects, the process could have the greatest 
implications for fruit and vegetable crops.  

Craig Osteen (202) 694-5547
costeen@ers.usda.gov

For more information:
ERSs web site: www.ers.usda.gov/Briefing/AgChemicals
EPAs web site: www.epa.gov/pesticides

RESOURCES & ENVIRONMENT BOX 1

Provisions of the Food Quality Protection Act (FQPA) of 1996 

The FQPA amended the Federal Insecticide, Fungicide, and Rodenticide Act 
and the Federal Food Drug and Cosmetic Act. It defined a uniform safety 
standard for pesticide-related risks in raw and processed foods as "a 
reasonable certainty of no harm from aggregate exposure to the pesticide 
chemical residue."

EPA must consider the aggregate risks from dietary, drinking water (which 
contributes to dietary), and nonoccupational exposure (such as homeowner 
use of a pesticide for lawn care) for all uses of a pesticide, when 
establishing residue limits (tolerances) in foods. FQPA requires EPA to 
consider increased susceptibility of infants, children, or other sensitive 
subpopulations and directs the use of an additional margin of safety of up 
to tenfold in setting residue tolerances. EPA must also consider the 
cumulative effects from other substances with a "common mechanism of 
toxicity," which occurs if two or more pesticides cause a common toxic 
effect to human health by the same, or essentially the same, sequence of 
major biochemical events. 

The law required an assessment against the new standard to be completed by 
2006 of all pesticide residue tolerances (legally defined upper limits) 
existing in 1996. If aggregate risk of a pesticide exceeds the standard, 
EPA will reduce or revoke residue tolerances or modify or cancel use 
registrations to meet the standard.

RESOURCES & ENVIRONMENT BOX 2

Understanding Pesticide Use Estimates

The estimates of percent of acres treated, treatments per acre, and percent 
of total insecticide treatments are 1994-99 averages of USDA pesticide data 
for 60 crops. Almonds, walnuts, hazelnuts, pistachios, peanuts, and 
sunflowers were excluded because they were surveyed in only 1 year. Also 
excluded was use on livestock. "Acres treated" measures the area receiving 
a pesticide, while a "treatment" is a single application of one pesticide 
on one acre. Some acres treated receive multiple treatments. Total 
treatments are acres treated times the average number of treatments per 
acre. 

Multiyear averages were computed to reduce the effects of variable crop and 
pest conditions. Field crops were averaged from 1994-99; vegetable crops 
for 1994, 1996, and 1998; and fruit crops for 1995, 1997, and 1999. Acres 
treated, treatments, and surveyed acres were averaged for each state in 
each surveyed year before summation of the reported estimates. A state 
surveyed for fruit or vegetable crop was excluded if surveyed in only one 
year. A state surveyed for a field crop was excluded if surveyed in only 1 
or 2 years.

RESOURCES & ENVIRONMENT BOX 3

Risk Concerns Identified During Organophosphate Assessment

EPAs review to date of 38 organophosphate pesticides identified the 
following with risks of concern:

* 29 with worker safety risks

* 25 with ecosystem risks 

* 12 with nonoccupational exposure risks of which 7 involved risk to 
children (in italics): acephate, bensulide, chlorpyrifos, diazinon, 
ethoprop, fenthion, malathion, naled, phosmet, propetamphos, 
tetrachlorvinphos, and trichlorfon 

* 11 with drinking water risks, of which 3 involved risk to children (in 
italics):  acephate, azinphos methyl, chlorpyrifos, diazinon, coumaphos, 
dicrotophos, ethoprop, fenamiphos, methamidophos, methyl parathion, and 
terbufos

* 5 with dietary risks, all of which involved risk to children: azinphos 
methyl, chlorpyrifos, fenthion, methamidophos, methyl parathion. (the 
dietary risk from methamidophos also considers acephate, which degrades 
into methamidophos) 

* 3 with aggregate risk (even though no individual dietary, drinking water, 
and nonoccupational risk trigger was exceeded): disulfoton, ethion, phorate


SPECIAL ARTICLE

Higher Cropland Value from Farm Program Payments: Who Gains?

Real estate accounts for more than three-quarters of total U.S. farm 
assets. Portions of that value are increasingly attributable to two 
factors: direct government payments and urban influence. While some regions 
and farmland owners benefit more than others from higher farmland values, 
renters and new purchasers of land pay higher land costs.

Direct government payments went to about 43 percent of the nation's farms 
in 2000. Urban influence affects the value of an estimated 17 percent of 
U.S farmland. Through appreciated land values, both factors may increase 
the fixed cost of agricultural production without any corresponding 
increase in productivity and, in many cases, without directly increasing 
the wealth of currently active farmers. Persons or entities that do not 
operate the land (i.e., nonoperator owners) own substantial proportions of 
farm real estate and gain if the value increases. On the other hand, 
operators who lease farmland may end up having to pay higher rental costs 
which largely reflect their receiving some government payments. 

Direct Payments Augment Farm 
Income & Cropland Values

The value of agricultural land depends largely on expected future earnings. 
Like the value of any income-earning asset, land value increases as 
expected long-term earnings increase. In land markets, farmland buyers pay 
a higher price to acquire land that is expected to yield a larger stream of 
income, regardless of whether the source of that income is market-based 
agricultural production, nonagricultural use, or government payments. 
Although the principal goal of agricultural commodity programs is to 
augment the income of farm operators, economists have widely recognized an 
important side effect--that direct government payments increase farmland 
values. 

The effect on farmland values is particularly strong when the right to 
receive farm commodity program payments is attached to specific land, with 
the right to receive payments transferring with ownership of that land. To 
the extent that expectations of receiving farm commodity program payments 
are bid into the price of land, current owners of land on which payments 
are made capture a portion of all future program benefits through land 
value appreciation. These benefits accrue both to farm operators who own 
all or part of the cropland they operate (owner-operators) and to 
nonoperators who own cropland (nonoperator owners). To realize the full 
benefits of higher land values, however, landowners must sell the land.

Direct government payments to agriculture totaled $22.9 billion in 2000, 
rising to nearly 40 percent of net cash farm income from less than 4 
percent in 1980. About 8 percent of these payments occurred under 
conservation and miscellaneous programs, while 92 percent related to 
commodity programs and disaster relief. Most current farm commodity related 
payments are tied to cropland that has a history of previous enrollment in 
annual commodity programs. 

Government commodity program payments to farmland owners and operators 
during 2000 came primarily through four sources:

*  production flexibility contracts (PFCs) authorized under the 1996 Farm 
Act

* market loss assistance (MLA)

*  disaster or emergency payments  

* marketing loan benefits in the form of loan deficiency payments (LDPs) 
and marketing loan gains from commodities placed under Market Assistance 
Loan programs 

In 2000, only about one-third of all farms (730,000 out of 2,136,865) 
received government payments through these four commodity related sources. 

Historically, these commodity related payments go primarily to owners and 
operators of land that produce or produced one or more of eight crops: 
wheat, corn, soybeans, sorghum, cotton, rice, barley, and oats. Most 
increases in land value due to direct program payments will be associated 
with cropland previously or currently planted to these eight major program 
crops. 
The degree to which farm commodity program payments affect cropland values 
depends partly upon the form in which the payments are made. For instance, 
production flexibility contract payments (PFCPs) are tied to ownership of 
cropland with a history of enrollment in commodity programs. As a 
consequence, landowners may be able to capture relatively larger 
proportions of PFCP benefits. LDPs, on the other hand, depend on current 
production and commodity market prices. Because LDPs are paid on each unit 
produced, farm operators have an incentive to increase production through 
greater use of fertilizer, herbicides, and other production inputs. As a 
result, input suppliers capture a share of LDP benefits, and consequently, 
LDPs may have a lesser effect on cropland values than PFCPs and other 
decoupled, lump-sum payments.

Government payments made under environmental programs such as the 
Conservation Reserve Program and Wetlands Reserve Program also affect 
farmland values, but through a fundamentally different process, and are not 
included in this discussion.

Various Factors Affect 
Capitalization Process

Various factors determine the ultimate effect of farm commodity payments on 
cropland values. First, farm commodity program payments per acre vary 
geographically, depending on program differences among dominant crops and 
relative productivity of the land (historic base program yield and/or 
current yield). A number of counties do not produce any eligible crops, and 
thus do not receive any farm commodity payments. Regions receiving the 
largest amount of such payments in 2000 were the Heartland, Prairie 
Gateway, Northern Crescent, Northern Great Plains, and Mississippi Portal. 
These five regions together received approximately 85 percent of farm 
commodity related payments. 

Second, a dollar of farm commodity program payments does not increase 
cropland values by the same amount as a dollar of market-based earnings. 
Landowners' and buyers' expectations about the certainty and stability of 
each income source will directly affect the degree to which that income is 
translated into cropland value through the capitalization process. If 
uncertainty exists as to whether farm commodity program payments will 
endure, the current value of expected future payments (the basis of 
farmland value attributable to commodity program payments) will be 
significantly discounted. This means that associated cropland values will 
be lower than if there were complete assurance that programs would continue 
indefinitely. The long-term existence of farm commodity programs (over 50 
years) has created expectations among landowners that programs will persist 
in some form and level.

The effect of farm commodity program payments on the capitalized values of 
associated cropland also depends on the agronomic flexibility of producers 
in specific regions to grow alternative crops (the ability of producers to 
adjust output in response to changes in government programs), and on the 
region's relative economic advantages in production of program commodities.

Another factor that affects the impact of commodity program payments on 
cropland value is that only the portion of payments that landowners 
"capture" will be capitalized. Many government program payments are 
distributed among landlords and tenants in accordance with the terms of the 
rental arrangement. For instance, surveys conducted in South Dakota and 
Nebraska for USDA's Economic Research Service during the mid-1980s 
indicated that the bulk of share rental arrangements was 33-66 or 25-75, 
meaning that landlords received just one-third or one-quarter of gross 
receipts. 

The split between landlords and tenants varies by crop grown and region of 
the country. However, these relative shares are often traditional, having 
been worked out and established over long periods of time. Though relative 
shares change over time, they do so infrequently, and most likely do not 
move substantially up and down with the vagaries of farm commodity program 
payments. Nonetheless, in some cases, a landlord may adjust his net return 
by changing his relative contribution to inputs while leaving revenue 
shares unchanged. Also anecdotal evidence indicates that some landowners 
have increased the share of farm commodity payments they "capture" by 
converting share rental arrangements to cash rent leases in which they can 
more easily adjust the rental rate. In some cases, landowners have 
discontinued share rental arrangements, themselves becoming the operator, 
in order to directly receive the program payments. These "farm operators" 
then hire their previous share rental tenants to plant, cultivate, and 
harvest the crops as custom operators.

Cash rental arrangements exceed share rentals in many areas. Under cash 
rental arrangements, farm commodity program payments are distributed 
directly to the farm operator. Landlords can capture a share of those 
payments by raising the annual cash rent. However, even cash rents are 
considered "sticky upward," as well as "sticky downward," meaning that cash 
rental rates often change proportionately less than do net returns from 
sales and from commodity program payments. The implication, again, is that 
landowners are unlikely to capture all the value of future commodity 
program payments through appreciation in the value of cropland.

Farm commodity program payments in 2000 included an unusually large share 
of LDPs (34 percent). As a consequence, the year 2000 set of farm commodity 
related payments may have less effect on cropland values than previous 
payment sets. As mentioned earlier, LDPs would be expected to have 
relatively less effect on cropland values than other payments, particularly 
in the near-term.

Gainers from Cropland 
Appreciation 

Farm commodity program payments have the highest proportional effect in the 
Heartland, accounting for 24 percent of the market value of farmland. The 
effect is similar in the Prairie Gateway region (23 percent) and the 
Northern Great Plains (22 percent). Farm commodity program payments 
accounted for 16 percent of market value for the Mississippi Portal region, 
and 8 percent for the Northern Crescent. 

An estimated $62 billion of the market value of cropland in program crops 
is attributable to the effect of farm commodity payments enhancing land 
prices. The Heartland accounts for $40 billion, or nearly two-thirds of the 
enhanced market value, due to the large acreage of program crops, the 
relatively high agricultural value of Heartland cropland, and the 
relatively high proportional effect of farm commodity payments on farmland 
values in the region. 
For comparison, the estimated total market value of U.S. cropland (from 
which one of the eight principal program crops was harvested) was $312 
billion as of January 1, 2001. The Heartland accounted for $167 billion, 
followed by the Prairie Gateway at $42 billion.

Regardless of whether cropland value increases are due to increased farm 
commodity program payments, urban influence, or some other factor, not all 
farm operators benefit from the increased wealth associated with higher 
cropland values. Since potential capital gains, whether from commodity 
program payments or urban influence, would accrue to farmland owners, farm 
operators will not benefit from increased cropland values unless they own 
all or part of the land they operate. 

In 1999, only about 58 percent of farmers owned all of the land they 
operated (full owners). For the other 42 percent of farmers, renting 
cropland was a key means of gaining access to a necessary input into the 
agricultural production process. On average for these latter farmers, 
rented farmland accounted for about 45 percent of total land operated per 
farm. About 18 percent of operators rented more than three-fourths of the 
land they farmed. Seven percent of farm operators were full tenants, 
meaning that they owned none of the land they operated. Full tenants do not 
benefit at all from the capital gains generated by increased farmland 
values, and part-owners benefit only in proportion to the land they own. 

Who are the nonoperator-owners that benefit from farmland value 
appreciation?  While the characteristics of farm operators are well 
documented, much less is known about the characteristics of nonoperator 
landlords. Landowner responses to USDA's 1999 Agricultural Economics and 
Land Ownership Survey provide some clues. As a group, nonoperator-owners 
are older than owner-operators. More than 55 percent of nonoperator-owners 
are age 65 or older, compared with 29 percent of owner-operators. From the 
other end of the age spectrum, 16 percent of nonoperator-owners are under 
age 50, while 33 percent of owner-operators are under age 50. 

Though it is not possible to determine definitively, it also appears that 
many nonoperator-owners are retired farmers, their survivors, or others 
formerly directly associated with agricultural production. In 1999, 29 
percent of all nonoperator-owners lived on the farm they rented out or on 
another farm, and another 28 percent lived within 5 miles. Only 10 percent 
lived 150 or more miles away. The vast majority (85 percent) lived within 
50 miles of the land they rented out. 

The strong association with active agriculture is even more pronounced for 
nonoperator-owners 65 years or older. In 1999, 31 percent of these still 
lived on a farm. Forty-four percent lived within 5 miles of the land they 
rented out, while only 15 percent lived 150 or miles away. Nearly 38 
percent described themselves as retired from farming. About 36 percent were 
female, compared with 24 percent male and 40 percent couples with joint 
ownership.

Among owner operators, those who gain the most from cropland value 
appreciation are likely the same as those that receive the largest 
commodity-related government payments. The General Accounting Office (GAO), 
in a June 2001 report drawing on USDA data, concluded that "large wheat and 
corn farms run by older operators tend to receive larger farm payments."  
Over 85 percent of farm payments in recent years have gone to farms with 
gross agricultural sales of over $50,000. More than half of that amount 
went to the largest farms--those with sales of $250,000 or more. The 
emphasis of major farm program payments on historic or current levels of 
production and the abundance of acres planted to corn and wheat mean that 
operators planting these crops generally have received larger payments. 

Similarly, older farm operators have generally received larger payments 
than younger ones. Younger operators tend to have smaller farms and produce 
less of the crops for which payments are generally made. Farmers age 55 and 
older, who operate more of the larger farms and who are the largest 
demographic group, received 38 percent of the payments, compared with 6 
percent going to operators under age 35.

Policy 
Considerations

Appreciated farmland values are a double-edged sword for American farmers. 
From the perspective of many farm operators, farmland value increases are 
favorable. Farm real estate value contributes to financial stability. In 
addition, farm real estate is often the principal source of collateral for 
farm loans, enabling many farm operators to finance the purchase of 
additional farmland and equipment or to finance current operating expenses. 
Some 53 percent of the total farm-sector debt of $183.6 billion at the end 
of 2000 was farm real estate debt--either mortgages for purchase of 
farmland or short- or intermediate-term debt secured by farmland. Many farm 
operators consider farmland as a retirement instrument, funded by the 
capital gains that may accrue upon sale. 

But from another perspective, those same increases in cropland value reduce 
the ability of beginning farmers to buy cropland. If cropland is purchased 
after expectations of a stream of commodity program payments are already 
bid into its price, the purchaser, whether a beginning farmer or an 
expansion buyer, will not (economically speaking) receive the benefits of 
future commodity program payments (even though they will directly receive 
payments). The new purchasers will have "paid" for the right to receive 
those future government payments through the elevated market price of the 
cropland. Or, from the other perspective, the seller will have captured the 
present value of future expected commodity program payments through the 
appreciated market price received for the cropland. In addition, the new 
buyer will incur additional financing costs because of the higher price of 
the cropland. Such increases in the costs of acquiring cropland, which are 
unrelated to the inherent productivity of cropland, may increase the fixed 
cost of agricultural production and offset some of the benefits of higher 
government payments.

Program payments and their impact are part of the current debate on the 
next farm bill. Part of this debate focuses on the implications of recent 
increases in cropland values and what might happen to these values if 
direct payments are reduced or dropped. The current set of farm commodity 
program payments has added nearly $62 billion to U.S. farmland values. This 
added value is unrelated to inherent agricultural productivity, yet adds to 
the fixed cost of agricultural production for some producers. The effect is 
particularly strong in the Heartland, where farm commodity payments add $40 
billion to the market value of cropland, nearly two-thirds of the effect 
nationwide. However, owner-operators own only about 40 percent of farmland. 
Nonoperator landlords own more than $38 billion in land value attributable 
to commodity program payments nationwide, with more than $25 billion or 
nearly two-thirds concentrated in the Heartland.  

Charles Barnard (202) 694-5602; Richard Nehring; James Ryan 
Robert Collender; Bill Quinby also contributing 
cbarnard@ers.usda.gov

For more information:
www.ers.usda.gov/publications/AgOutlook/june2001/AO282h.pdf
www.ers.usda.gov/Briefing/LandUse/Questions/Rvalqa5.htm
www.ers.usda.gov/publications/ah712/AH7121-4.PDF

SPECIAL ARTICLE BOX

Procedures Used to Derive Cropland Values

The value of farmland attributable to farm commodity program payments was 
derived from statistical analysis of farmland value data (excluding the 
value of buildings) obtained from the 2000 Agricultural Resource Management 
Study. The farmland values used were average value per acre of farms that 
received government payments from the principal farm commodity programs. 
County average farmland values were combined with county-level information 
on factors influencing farmland values. Hedonic land price regressions 
permitted the calculation of the average amount that county farmland values 
increased for each additional dollar of farm commodity program payment 
received by farm operators in that county, while simultaneously accounting 
for differences in soil quality, urban influence, availability of 
irrigation, and other factors. The analysis was conducted separately for 
the five production regions receiving the largest total amounts of 
commodity program payments. The resulting coefficients were applied to 
commodity program payments received in each county to estimate the 
percentage of the total farmland value in each region attributable to the 
payments. To get a ball park estimate for the U.S., lesser effects of 10 
percent of the market value of farmland were assumed for the remaining 
regions, based on research indicating that commodity program payments in 
these regions were not a principal determinant of cropland value.

END_OF_FILE
