AGRICULTURAL OUTLOOK                                       February 26, 1997
             Approved by the World Agricultural Outlook Board
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CONTENTS

Summary
Commodity Briefs
     Field Crops: 1997/98 Winter Wheat Seedings Down Sharply ... Exports Spur
       Rally in Soybean Prices
     Livestock, Dairy, & Poultry: Lower Hog Inventory to Strengthen Prices in
       1997 ... Beef Herd Liquidation Tightens Feeder Cattle Supplies
     Specialty Crops: Florida Freeze Reducing Supplies of Fresh Vegetables
       Commodity Spotlight
     U.S. Sugar Consumption Continues to Grow
World Agriculture & Trade
     Food-Aid Grain Needs Are Down--In the Short Run
     Egypt's Poultry Industry Under Pressure
Resources & Environment
     Incentives for Sustainable Agriculture
Special Article
     China: A Retreat from Ag Reforms


IN THIS ISSUE

Florida Freeze Heats Up Vegetable Prices

Mother Nature delivered the latest in a series of setbacks for growers of
Florida winter vegetables, with a devastating freeze the mornings of January
18 and 19.  The freeze caused substantial damage to U.S. supplies of tender
warm-season winter vegetables (e.g., squash, snap beans, green peppers,
eggplant, and tomatoes).  Losses in Dade County alone were estimated close to
$100 million.  Florida accounts for about one-third of fresh-market supplies
of warm-season vegetables between late fall and early spring. 

The freeze impact on retail prices is likely to last until late April.  Before
the winter damage, USDA had forecast a 2- to 3-percent increase in consumer
prices for fresh vegetables in first-half 1997 compared with a year earlier. 
The revised forecast indicates a rise of 6-7 percent for that period.  The CPI
rise is moderated by stable prices for a number of fresh vegetables largely
unaffected by the freeze.



U.S. Sugar Consumption Continues to Grow

U.S. sugar consumption is forecast at 9.8 million short tons (raw value) in
1996/97, up from 9.6 million last year.  If the forecast is realized, sugar
consumption will have risen by about 1 million tons in 6 years, implying a per
capita increase of 2.5 pounds.  Continued growth in domestic sugar consumption
has become more important for domestic producers since passage of last year's
Farm Act, which suspended USDA's authority to restrict marketings of domestic
sugar when supplies were depressing prices.  With this policy lever removed,
and with changes to the price support loan program, prices could drop if
production outpaces consumption.  

U.S. sugar production for 1996/97 is projected at 7.29 million tons (raw
value) down about 80,000 tons from last year.  Beet sugar production is
projected to be 55 percent of the total, at 4 million tons, well below the
record 4.5 million tons 2 years earlier.  Overall, conditions in early 1997
indicate that total U.S. sugar beet acreage is likely to rise in 1997/98, with
prices at planting time higher than the previous year.  The Prospective
Plantings report, scheduled for release on March 31, will provide the first
USDA survey of sugar beet acreage for the 1997/98 crop. 

China: A Retreat From Ag Reforms?

While market forces have become increasingly important in China's economy, the
government since 1994 has intensified its role in the markets for several
basic agricultural commodities.  This policy reversal--which has boosted grain
production and reduced imports--was a response to higher inflation, concerns
for food self-sufficiency, and a decline in grain acreage.

The drive toward grain self-sufficiency undermines China's participation in
the Asia-Pacific Economic Cooperation and weakens its case to join the World
Trade Organization.  With the success of China's policy turn at boosting grain
production, world demand for these crops may dampen in the short run.  But
based on projected gains in population and grain demand for the next decade,
China's demand for grain will outpace production, requiring expanded imports.  

Incentives for Sustainable Agriculture 

The concept of sustainable agriculture integrates technologies and practices
that are as profitable as conventional farming methods but more
environmentally responsible.  The 1996 Farm Act created new programs (e.g.,
Environmental Quality Incentives Program) and extended existing ones (e.g.,
Conservation Reserve Program)--providing incentives to farmers to adopt
sustainable practices.  Several other policy options could also bolster
incentives.  For example, a more sustainable technology (e.g., integrated pest
management) might be adopted more quickly if farmers could purchase insurance
to offset any risks that accompany its application to particular sites.  Or,
farm credit policies could be restructured so that farmers could finance the
costs of switching to a new technology regime (e.g., precision agriculture).  

Egypt's Poultry Industry Drives Feed Imports

Egypt is the Middle East's fastest growing and largest market for U.S.
agricultural exports, with purchases of $1.5 billion in fiscal 1996, up from
$613 million in fiscal 1994.  The substantial increase is due partially to
higher international prices of wheat and feed grains, but also to increased
shipments of feed grains and oilseeds and products.  Egypt imports most feed
ingredients because land and water use constraints limit domestic production,
and import demand has grown as Egypt's poultry industry has expanded in the
1990's.  

Egypt's per capita poultry consumption (5.8 kilograms in 1996) has been
climbing steadily the past 5 years, driven by rising incomes, but is still
well below the high of 9.2 kilograms in 1985, before a government feed subsidy
program was removed.  Egypt's feed import requirements may decline on or
before 2000 when Egypt is expected to lift a ban on poultry imports--a
commitment under the country's acceptance into the World Trade Organization. 
The U.S. is likely to continue to supply much of Egypt's feed grain needs and
be in a good position to share in the poultry meat market when the ban is
lifted. 

Food Aid Grain Needs Are Down

Sixty-five developing countries would need 9 million tons of grain food aid in
1996/97 to maintain per capita consumption at the previous 5-year average. 
But that figure is down 5 million tons from 1995/96 aggregate needs.  In a
study of 65 major food-aid recipient countries, USDA's Economic Research
Service also found that the "grain deficit" is down in all eight regions
covered by the study.

Favorable weather and expanded plantings allowed most low-income countries to
maintain recent consumption levels while reducing imports and avoiding the
high prices in international grain markets in 1996.  Concomitantly, several
donor countries have recently reduced their food aid commitments, due mostly
to tight budgets. 


COMMODITY BRIEFS

Field Crops 

1997/98 Winter Wheat
Seedings Down Sharply

Winter wheat plantings for the 1997/98 crop fell to 48.2 million acres, the
lowest since 1978 and well below market expectations, according to USDA's
January 10 Winter Wheat and Rye Seedings report.  Winter wheat acreage
normally accounts for more than 70 percent of U.S. wheat planted area, with
spring wheat comprising the remainder.  The January 10 report  represents the
first indication of planted winter wheat acreage, and therefore gives the
first clue to the size of the 1997/98 U.S. wheat crop.

Despite the 7-percent drop in winter wheat planted acreage, the year-to-year
decline in harvested acreage is not expected to be as severe as a year
earlier, assuming normal weather conditions in coming months.  In 1996,
drought and winterkill prevented an unusually large portion of the planted
crop from being harvested.  

Among the factors in the decline in winter wheat seedings are the late soybean
harvest, adverse weather at planting, and disease concerns in the eastern Corn
Belt; the late sorghum harvest in Kansas; dry soil conditions at planting in
Montana and Washington; and increased planting flexibility in the 1996 farm
legislation for farm program participants.  Also, in contrast to the fall of
1995 when wheat prices were rising, cash prices in the autumn of 1996 were
falling rapidly, and new-crop futures prices indicated sharply lower
harvest-time prices than in 1996.  Most states that had expanded winter wheat
acreage in 1995 in response to rising wheat prices in the fall, scaled back
wheat plantings in 1996.

The U.S. winter wheat crop includes three principal classes: Hard Red Winter
(HRW) grown mainly in the Southern Plains; Soft Red Winter (SRW) grown across
the Delta, Midwest, East, and Southeast; and white winter, grown mainly in the
Pacific Northwest and Michigan.

HRW wheat plantings are estimated down 5 percent to 34.1 million acres.  The
1996 farm legislation freed producers from base acreage restrictions, allowing
them to plant other crops.  In addition, growing demand for feed grains in the
Southern Plains, the late sorghum harvest in Kansas, and dry soil conditions
in Montana contributed to the drop in HRW plantings.   

Feed grain acreage has been expanding in the Central and Southern Plains in
recent years, and increased planting flexibility is likely to hasten the
shift.  Relative net returns favor corn over wheat in many areas.  Favorable
returns from sorghum in 1996 and the new planting flexibility will encourage
producers in dryland areas to incorporate sorghum into crop rotations in 1997. 
Sunflowers will also be an attractive rotation crop in northwestern Kansas.  

Wet weather delayed planting in the Southern Plains.  The resulting favorable
soil moisture meant that planting conditions were much improved over a year
ago when drought hindered planting and germination.  However, farmers in
Kansas (the largest wheat producing state in most years) planted only 11.4
million acres, 3 percent less than a year earlier and the lowest since 1988
when 3.4 million acres were idled under annual programs.

Producers in Oklahoma reduced winter wheat acreage 3 percent to the lowest
since 1973.  In Texas, winter wheat plantings remained unchanged from a year
earlier.  Nebraska winter wheat area continues to trend downward, and HRW
plantings in Montana dropped 23 percent because of dry weather.  Plantings in
South Dakota are down 17 percent to a more normal level after unusually large
HRW plantings last year.   

SRW plantings are estimated down 15 percent (1.8 million acres) to 9.97
million acres, the lowest since the 1994 crop.  Wet, cool weather at planting
in the fall of 1996 explains much of the decline, particularly in Arkansas and
Missouri, where wheat planted area is estimated down more than 30 percent from
a year earlier.  By the time the fields had dried out enough to plant,
temperatures were too cold.  

Wet weather was also a factor in the acreage decline in the three largest SRW
producing states: Illinois (down 30 percent), Indiana (18 percent),  and Ohio
(11 percent).  The late row-crop harvest prevented some producers from getting
into their fields in time to plant wheat, and disease outbreaks in those
states in recent years likely discouraged some producers from planting wheat
again.  Spot shortages of seed were also reported.  Some SRW area increases
occurred in the southeastern states, but the declines in the Corn Belt
overwhelm these small gains.  

In the eastern Corn Belt, corn and soybeans were likely attractive
alternatives to wheat, with higher expected net returns, although by September
the prices of all three crops were clearly in decline.  Producers' experience
with low wheat yields in 3 out of the last 5 years may have been a deciding
factor in the shift away from wheat.  

In the fall of 1995, planting conditions had generally been favorable, prices
were rising, and total SRW wheat area increased 11 percent.  But in 1996,
harvested yields plunged, and this, together with declining wheat prices,
likely prompted some farmers to scale back wheat acreage in favor of planting
corn and soybeans next spring.

White winter wheat planted acres are estimated down 5 percent to 4.19 million. 
Most of the drop was in Washington (down 6 percent), where dry weather in the
fall hindered planting.

For all wheat, the surprisingly low level of  winter seedings was expected to
be bullish for new-crop prices, but the projected increase in beginning stocks
was largely offsetting.  Average monthly farm prices are expected to continue
declining as they have since May.  Weather over the rest of the winter and
spring will be critical to the development of the 1997 crop, and given the
small planted area estimate, new-crop futures prices could become more
volatile in reaction to weather developments or unexpected changes in demand.
[Sara Schwartz (202-219-0768); schwartz@econ.ag.gov ] 

Exports Spur Rally 
In Soybean Prices

U.S. cash soybean prices rallied in January, despite the second-largest
harvest in history, owing to a robust increase in demand and a slow delivery
pace from farmers.  Thriving U.S. soybean and soybean meal exports are largely
responsible for the rally.  However, soybean prices may soften by spring with
an expected increase in farm-level sales.

China has substantially increased its soybean meal purchases this year.  Total
Chinese production of oilseeds is down more than 4 million tons from a year
ago, while consumption continues to expand.  China's 1996/97 soybean meal
imports are projected at 2.1 million metric tons, up from 0.9 million in
1995/96.  A half-million-ton reduction in European Union (EU) oilseed
harvests, and firmer wheat prices compared with corn, are also encouraging the
EU to import more soybean meal.  To date, U.S. export commitments of soybean
meal to the EU are 260 percent above a year earlier. 

In spite of an improved price-to-feed-cost ratio, the lower U.S. hog and pigs
inventory will restrain 1996/97 domestic use of soybean meal to only 1 percent
more than last season's level.  It is the strong export trade that is
supporting year-to-date prices for soybean meal.  USDA forecasts an average
price range of $230-$245 per short ton, little changed from $236 last year.  

Firm protein meal prices have pushed monthly gross crush margins to the
highest since early 1995.  Projected 1996/97 U.S. soybean crush is 1,410
million bushels, slightly more than the 1994/95 record.  U.S. soybean exports
this fall and winter have also been very strong, running over 100 million
bushels ahead of the pace a year earlier.  

Based on USDA's Grain Stocks report, the rapid first-quarter
(September-November) disappearance has drawn down December 1 soybean stocks to
1,823 million bushels, about 11 million below a year earlier.  The increase in
crush and exports, with the downward revision in the final soybean production
estimate in January, would cut 1996/97 ending stocks to 140 million bushels,
which represents the lowest stocks-to-use ratio since 1972/73.

Within weeks, importers will begin to purchase supplies to meet their near-term
requirements and start switching to South American origins as Southern
Hemisphere supplies begin to reach the market.  There should be an unusually
abrupt shift in seasonal exports this year as competing foreign supplies surge
from a very slim amount.  In spite of the recent dry spell in southern Brazil,
the large planted area and recent rainfall  is expected to produce a record
harvest.  This, coupled with tight U.S. supplies, should sharply curtail U.S.
soybean export potential in the last half of 1996/97. 

Adding to the competitive pressure is new Brazilian legislation that exempts
exports of raw materials and semi-manufactured products from state sales
taxes.  Previously, the differential export taxes--which included maximum
taxes of 13 percent on soybeans, 11.1 percent on soybean meal, and 8 percent
on soybean oil--favored Brazilian exports of soybean products and provided
Brazilian farmers a great incentive to sell soybeans to domestic crushers
rather than to export.  These reforms now make Brazil more competitive with
the U.S. in the world soybean market.

The heavy domestic and foreign demand for U.S. soybeans and soybean products
has kept farm prices steady so far.  The combination of a large harvest and
strong prices will propel soybean crop value to a record $16.76 billion in
1996/97 for U.S. farmers.  USDA forecasts a 1996/97 season-average farm price
range of $6.75-$7.25 per bushel, compared with the 1995/96 average of $6.77
per bushel.  Current prices should persist as long as meal demand and
anticipated oil demand from China hold up.

However, farm sales should soon accelerate and weaken prices somewhat by
spring.  A later-than-usual U.S. harvest combined with a withholding of sales
for tax deferment, slowed farm marketings last fall.  More than half of the
December 1 soybean stocks was held on farms, the highest proportion in a
decade.  Some slippage in corn prices may yet occur, which would add to
downward pressure on soybean prices.  Rising expectations for large U.S.
soybean plantings and improving yields again in 1997, could also put pressure
on producers to market the remainder of the 1996 crop.

Soybean oil prices remain soft, dampened by a large inventory from last season
that threatens the profitability of crushing.  A below-average oil yield is
also affecting U.S. crushers.  Current prices for soybean oil (around 22 cents
per pound) are very competitive, which is attracting substantial export trade. 


The projected average price range of 22.75-24.25 cents per pound suggests that
USDA anticipates significantly higher prices in coming months.  Futures prices
also indicate that a stronger soybean oil market may be imminent, as growth in
oil supplies slows and export demand accelerates.

Several factors are behind this outlook.  This year's smaller supplies of
competing Northern Hemisphere vegetable oils are quickly disappearing.  China,
the world's largest vegetable oil importer, is forecast to expand purchases
from last year's 2.8 million metric tons to 3.7 million in 1996/97.  Robust
world demand has drawn down palm oil inventories faster than they can be
replaced, further enhancing opportunities for U.S. soybean oil exports.
[Mark Ash (202) 219-0712; mash@econ.ag.gov] 

For further information, contact: Sara Schwartz, domestic wheat; Ed Allen,
world wheat and feed grains; Allen Baker and Pete Riley, domestic feed grains;
Nathan Childs, rice; Scott Sanford and Mark Ash, oilseeds; Steve MacDonald,
world cotton; Bob Skinner and Les Meyer, domestic cotton.  All are at (202)
219-0840. 


COMMODITY BRIEFS

Livestock, Dairy & Poultry

Lower Hog Inventory to 
Strengthen Prices in 1997

Hog producers continue to reduce their herds despite relatively favorable
returns in 1996.  The December 1, 1996, hogs and pigs inventory totaled 56.2
million head, the lowest December inventory since 1990.  The market hog
inventory, at 49.5 million head, was 4 percent below last year and the
previous quarter.  Breeding hog numbers plunged to the lowest December on
record.  While June-November sow and boar slaughter declined sharply from a
year earlier, it was not enough to offset a slowdown in additions to the
breeding herd.  The March 1 Hogs and Pigs report will be released on March 28. 
This report will provide indications of pork production for the remainder of
the year.
 
Based on the market hog inventory, pig crops, and farrowing intentions
reported in December, pork production should be about 17.1 billion pounds in
1997, about the same as in 1996.  Lower per capita supplies (from population
gains), along with continued moderate economic growth and an expected sharp
increase in exports, are expected to boost average hog prices to $55-56 per
cwt, about $2 higher than last year's average.  Retail composite pork prices
are expected to average 2-4 percent above last year's average of $2.21 per
pound.  The farm-retail spread widened to $1.36 per pound in 1996, compared
with $1.28 in 1995.  Spreads are expected to widen 3-4 percent further in
1997.

Total U.S. exports are expected to rise about 20 percent to 1.1 billion pounds
in 1997, due largely to expected increases in shipments to Japan, Korea, Hong
Kong, Mexico, and Russia.  This follows a hefty gain in 1996.  The U.S.
exported 868 million pounds of pork during January-November 1996, 22 percent

more than a year earlier, with Japan accounting for more than 80 percent of
the increase.  

Japan remains the preeminent U.S. customer, accounting for almost 55 percent
of total U.S. pork shipments.  The pattern of exports to Japan in 1996 was
driven largely by WTO-sanctioned Safeguard (SG) mechanisms imposed by Japan. 
U.S. exports to Japan were up dramatically in the first half of 1996, in
anticipation of the SG, and then receded after the SG was in place.  The SG
mechanisms will continue to be major factors in trade with Japan this year.

Japan protects domestic pork producers from significant import surges by using
SG mechanisms to raise the minimum price of imported pork (AO June 1996). 
When the quarterly and/or annual SG is imposed, the minimum price of imported
pork increases by 24 percent.  Under certain conditions, the "Special" SG
(SSG) can be imposed, which increases the existing import tariff on pork cuts
from 4.8 percent to 6.4 percent. 

Since the SG was imposed on July 1, 1996, U.S. pork exports to Japan have
averaged about 32 million pounds (carcass weight) per month, compared with 51
million pounds per month in first-half 1996.  Total pork shipments are
expected to begin climbing again this spring when the SSG expires in April
(after being in effect for 3 months) and shippers begin to anticipate the
lifting of the annual SG on July 1.  The SG will likely be re-imposed in
October.

U.S. imports of Canadian hogs surged to a record 280,000 head in October,
impelled by relatively high U.S. prices.  Following established seasonal
declines, live hog imports were almost 226,000 head in November.  Seventy-five
percent of Canadian hogs imported are slaughter animals, while feeder pigs
make up the balance.  

Total U.S. imports were likely more than 2.8 million hogs in 1996, over 1
million above 1995.  Relatively strong U.S. prices, favorable exchange rates,
and low countervailing duties continue to provide strong incentives to trade. 
Imports from Canada are expected to climb higher this year.

COMMODITY BRIEFS

Livestock, Dairy & Poultry

Beef Herd Liquidation 
Tightens Feeder Cattle Supplies

The January 1997 cattle inventory was down 2 percent from last year to 101.2
million head.  The current cattle cycle began with 95.8 million head of cattle
and calves in inventory on January 1, 1990, peaking in January 1996 at 103.5
million head.  The cattle cycle typically is 7 to 10 years from one high point
to the next.  Cow slaughter is expected to drop sharply as spring grazing
season approaches and to remain low for the next couple of years, setting the
stage for yet another cattle cycle likely beginning about the turn of the
century.

Cow and heifer herd downsizing started in mid-1995, with about 16 percent of
the total cow herd slaughtered last year.  Beef cow slaughter was up 24
percent, while dairy cow slaughter rose 6 percent.  Steer slaughter in 1996
declined more than 2 percent, while heifer slaughter rose over 3 percent.  The
strong slaughter numbers suggest fewer heifers have been bred to calve in
1997.  Heifer slaughter will remain large through winter, the result of 15
percent more heifers on feed on January 1, 1997 in the seven monthly reporting
states.  Steers on feed were down 3 percent. 

Poor fall pastures and declining grain prices led to large feedlot placements
this past fall.  The increased placements and continued large calf slaughter
(up 24 percent) will cause feeder cattle supplies to tighten and likely create
very strong demand for feeder cattle this spring.  The impact of tightening
feeder cattle supplies will affect beef production in late 1997 and over the
next couple of years.  Tighter feeder cattle supplies should result in
fed-cattle prices averaging above $70 per cwt by late 1997 and well into 1998.  

Even as feeder cattle prices rise, fewer cattle will be available from Mexico,
where drought over the past several years has sharply reduced the cattle
inventory.  Mexican producers are expected to rebuild their herds and retain
steer calves for more weight gain before exporting them.  Larger grain
supplies at lower prices in Canada will result in continued expansion of
cattle feeding activities there, and likely continued large shipments of
slaughter cattle to the U.S.

Cattle slaughter continues to increase following the large second-half 1996
feedlot placements and seasonally large cow slaughter, but weights remain well
below a year earlier.  Many cattle are likely being marketed ahead of
schedule, and light slaughter weights suggest supplies of Choice beef likely
remain tight.  Larger fed-cattle inventories will hold down prices near the
mid-$60's per cwt in the first half of the year, about $2-$5 higher than a
year earlier.  

Export demand will hold an important key to fed-cattle price strength this
spring.  Exports to Japan are likely to remain sluggish until April 1 when the
Japanese import tariff declines.  In addition, overcoming the E. coli problem
in Japan's food sector would help return U.S. beef exports to the strong
levels that existed prior to mid-1996.

LIVESTOCK, DAIRY, & POULTRY BOX

Winter Storms Hit 
Western Milk Production 

The December-January storms that hit the West could have a significant effect
on U.S. milk production through most of 1997, although the disruptions could
be short-lived and local.  The potential impact is substantial because the
areas most affected produce 15 to 20 percent of the national milk supply.  The
extent of damage to western milk production is unlikely to be known for
several months.  

Heavy precipitation occurred in Washington, Idaho, and Oregon in late
December, causing mud problems, flooding, and snow-blocked roads.  Some milk
had to be dumped because of closed roads, and a number of cows were stressed. 
However, precipitation was normal in January and the episode passed with
probably few persistent effects.

Many California milk producers may not be as fortunate as their northern
counterparts.  A series of heavy January rains covered most of central and
northern California, causing flooding along rivers, and mud problems
everywhere.  Cows that were moved away from flooded farms probably were
stressed considerably, but they represented less than 2 percent of the state's
cow herd.

Widespread muddy conditions represent the greatest likely threat to milk
production.  Mud increases mastitis and other diseases and disrupts milking
routines, as well as directly stressing cows.  If the stress on the cows has
been severe, the effects on milk production may last 6 to 12 months, leading
to increased culling and lost milk per cow.  

Flooding will also aggravate an already tight supply of dairy quality alfalfa. 
Stored feed was destroyed, established alfalfa stands were damaged or
destroyed, and reseeding probably will be delayed.  Under normal conditions,
the extent of the damage initially estimated would not have much effect on the
regional feed situation.  However, because supplies of good hay had been
stretched even before the rains, some farmers may have to shift to lower
quality hay. 

For further information, contact:  Leland Southard coordinator; Ron Gustafson,
cattle; Leland Southard, hogs; Milton Madison, poultry; Jim Miller, dairy;
David Harvey, aquaculture.  All are at (202) 219-0713.


COMMODITY BRIEFS

Specialty Crops

Florida Freeze
Reducing Supplies of
Fresh Vegetables

Mother Nature delivered the latest in a series of setbacks for growers of
Florida winter vegetables, with a devastating freeze the mornings of January
18 and 19.  The freeze caused substantial damage to U.S. supplies of tender
warm-season winter vegetables (e.g., squash, snap beans, bell peppers,
eggplant, and tomatoes).  Florida accounts for about one-third of fresh-market
supplies of warm-season vegetables during the late-fall to early-spring
period.  U.S. supplies of cool-season crops (e.g., lettuce, broccoli, and
cauliflower) were largely unaffected, since these are produced mainly in
California and Arizona.

Few areas of Florida were spared, as below-freezing temperatures occurred as
far south as Dade County at the southern tip.  Temperatures sank lower and
damages were reportedly far more severe in Gulf Coast areas of the state than
in eastern areas.  The cold temperatures caused some excess fruit drop in
low-lying citrus groves, especially in southwest Florida, but not enough to
significantly affect the 1996/97 citrus crops (now midway through this
season's harvest). 

Although Florida winter-season vegetable growers historically face a high risk
of freeze damage, this freeze apparently caught many growers by surprise since
it was not predicted in weather forecasts.  There was little time to implement
frost protection strategies like running irrigation systems and spreading
plastic covering over fields. 

Grower prices for tomatoes and other tender fresh vegetables grown in Florida
will be generally up from February through April, spiking as supply gaps
develop following the Florida freeze as well as the unusually cold
temperatures that struck Mexico's major vegetable area in Sinaloa.  Although
plants across the border generally received little damage, bloom drop was
prevalent for most tender vegetables.  This eventually showed up as reduced
volume in mid-February and is leading to further increases in market prices. 

Before the winter damage, USDA had forecast a 2- to 3-percent increase in
consumer prices for fresh vegetables during January-June 1997 compared with a
year earlier.  The revised forecast indicates the fresh-vegetable consumer
price index (CPI) is likely to increase 6-7 percent during the 6-month period. 
The rise in the CPI is being moderated by stable prices for a number of fresh
vegetables largely unaffected by the freeze, including potatoes, lettuce,
onions, celery, broccoli, cauliflower, spinach, and cabbage.  The
fresh-vegetable CPI accounts for only about 4 percent of the CPI for food, so
the impact on the all-food CPI is minimal. 

The freeze impact on retail prices for fresh-market vegetables is expected to
end by late April, with the largest year-over-year rise expected during
February.  Changes in retail prices for fresh-market vegetables typically lag
changes in grower prices by 1 to 2 months.  The year-over-year increase will
appear small in March, since prices were very high in March 1996 (following a
February freeze in southwestern Florida).  If growers replant lost acreage, a
supply glut could develop in April and May, forcing grower prices to very low
levels.

Tender Vegetables
Bear the Brunt

The freeze caused shipping-point prices for most tender warm-season crops in
Florida to increase substantially, as fields in the large producing area in
the southwest (Ft. Myers/Immokalee) and the Homestead area in Dade County
received heavy damage.  Losses in Dade County alone were estimated at close to
$100 million for vegetables and tropical fruits.  In addition, many vegetables
and melons had just been transplanted from greenhouses for early spring-season
production in this area and areas to the north.  Growers had to repeat the
process.  The east coast area around Palm Beach was not hit as hard by the
cold and reported less damage. 

Snap beans and squash reportedly suffered the greatest losses, with all
acreage reported destroyed in the southwest areas of the state and 80 percent
or more destroyed in Dade County.  Dade County accounts for the majority of
snap bean production in the state, with Palm Beach County in the east coast
area accounting for a smaller percentage.  About half of Florida's snap bean
production is marketed during the January-March (winter) season.

Florida accounts for about two-thirds of the volume of fresh snap beans during
the winter months, so price impacts from reduced Florida output are
substantial.  About 40 percent of Florida's combined squash and snap bean
output is sold during the winter season, with most of the volume coming from
Dade County and the southwestern areas of Florida.  However, for squash, the
price impact has been less severe since three-quarters of the squash marketed
during the winter season is imported (largely from Mexico).  The annual farm
value of the Florida squash crop is about $50 million, while the state's
fresh-market snap bean crop is valued at about $64 million.

Peppers also sustained heavy damage.  Bell peppers, which have an annual farm
value of $195 million in Florida, suffered a reported 60- to 80-percent loss
in both Dade County and the southwestern counties.  The southwest area
accounts for close to half of the state's bell pepper crop, followed by the
east coast area with about a third.  Dade County reported a loss of $1 million
in bell peppers and $12 million in chile peppers.  In recent years, 60 to 70
percent of U.S. bell pepper volume has been imported during the winter season,
so the impact on pepper prices, as with squash, is less severe than on snap
beans.  

Fresh-Market Tomatoes
Also Hit Hard

About half of Florida's fresh-market tomatoes suffered frost damage, ranging
from complete defoliation to loss of blooms on plants.  Bloom loss affects the
market about a month later, as supplies are delayed while plants produce new
blooms and set fruit.  Dade County, where vegetable acreage has been under
pressure from urban growth and where tomato acreage has been in a long-term
decline, had about 3,100 acres of tomatoes growing in good condition at the
time of the freeze.  About 25 percent was being harvested or close to being
harvested.  An estimated 40 percent of all acreage was damaged.

Southwestern Florida now accounts for almost three-fourths of Florida's tomato
acreage during the winter months.  Over 13,000 acres of tomatoes were in the
ground, with about 8,000 acres being harvested or within 2 weeks of harvest. 
Damage was severe in this area, as loss estimates exceeded 50 percent.  In the
Palm Beach area on the east coast, about 2,800 acres of tomatoes were planted,
with about a third being harvested at the time of the freeze.  Minimal damage
was reported in this area. 

Although tomato plants may have been severely damaged, a portion of the fruit
was salvaged for sale.  With this volume on the market, tomato prices
initially did not rise as much as might be anticipated following such a severe
weather event.  However, after the salvage volume moves through the market, a
gap exists during the time these vegetables would normally be marketed.  Thus,
the largest rise in market prices has been delayed until late February or
March.  

By April, most of the impact from the January freeze will be over as
production recovers.  By May, other states (California, South Carolina,
Georgia) will supplement Florida produce in the market.

The Florida fresh-market tomato crop has an average annual farm value of about
$420 million, with the winter season accounting for roughly one-third.  Due to
poor weather in Florida and recent changes in tomato trade (AO June 1996),
around two-thirds of fresh-market tomatoes are now sourced from Mexico during
the winter months (Florida used to command half of the market).  A majority of
the fresh-market tomatoes now shipped from Florida reportedly go to the
food-service industry, with Mexico and other importers now supplying the bulk
of the retail markets.  

In addition, the small but expanding domestic greenhouse/hydroponic tomato
industry is shipping increasing retail volume.  Because of a generally cooler
climate, California raises only greenhouse tomatoes during the winter.  
[Gary Lucier (202) 219-0117 and John Love (202) 219-1268; glucier@econ.ag.gov;
jlove@econ.ag.gov]  

SPECIALTY CROPS BOX--1 

Where Are Vegetables
Grown in Winter?

U.S. consumers have come to appreciate--and expect--a wide range of top-quality
choices in supermarket produce sections throughout the year. Providing a
consistent array of vegetables is sometimes a challenge, especially during the
winter.  U.S. vegetable suppliers are geographically concentrated during the
winter season.  The primary sources are California, Mexico, Florida, Arizona,
and Texas, with smaller volumes imported from several other countries.  

When an event such as a freeze in Florida or a swarm of white flies in
California reduces supplies, the alternative sources of supply are fewer than
during the summer when most states produce vegetables.  As a result, vegetable
prices tend to be higher and more variable during the winter months than
during any other season.  The lack of alternatives is most apparent when there
is a problem in California, because imports of the kinds of fruits and
vegetables grown in California are generally small.  In the case of Florida,
Mexico can sometimes help limit price increases by stepping up shipments to
the U.S.

Within the U.S., the states of California, Florida, Arizona, and Texas tend to
concentrate on commodities that grow best in their respective winter
environments.  Florida, which tends to be the warmest state during the winter,
generally grows tender warm-season crops like tomatoes and peppers. 
California, Arizona, and Texas grow the cool-season crops (e.g., cabbage,
carrots, and spinach).  Although the freeze in Florida crippled supplies of
tender vegetables like snap beans, squash, and peppers, the supplies of
lettuce, broccoli, and cauliflower remain ample since these are produced
largely in southern California and Arizona.  

During the winter, between one-half and two-thirds of the U.S. supply of
tender fresh vegetables is imported, largely from Mexico.  Supplies of fresh
potatoes and onions are shipped from storage (produced during the fall) from
states like Idaho, Colorado, and New York (which also ships cabbage).

SPECIALTY CROPS BOX--2

Why Did Forecasters
Miss the Florida Freeze?

When the National Weather Service (NWS) terminated all operational
agricultural weather programs in 1996, it saved taxpayers approximately $2.3
million (annual cost).  It accomplished this by discontinuing a national
program of agricultural forecasts, eliminating agricultural weather
advisories, and curtailing interactions between NWS and several Federal and
state agencies.  Four NWS agricultural weather centers closed down, four NWS
weather service offices were consolidated, all district frost monitoring
offices were eliminated, and staff dedicated to agriculture was downsized at
four other weather offices. 

Despite the downsizing, NWS intended to continue to collect weather
observations in agricultural areas.  However, a reduction in data was
unavoidable--hourly data from agricultural areas, for example, are no longer
available.  The subsequent data losses have not been recovered by the private
sector.

During the Florida freeze, NWS forecasters and private weather forecasters
used available information to monitor the situation--observations from urban
areas and airports.  City and airport-site temperatures are generally higher
than rural areas, but this relationship was not taken into account since NWS
no longer places an emphasis on specialized service (e.g., agricultural
forecasts).  In addition, forecasters' reliance on computer-generated guidance
cannot capture local temperature effects that are crucial in forecasting
regional freezes.

Throughout the night of January 18, the temperatures from city and airport
sites in south Florida remained in the mid- to upper 30's.  Temperatures in
the outlying agricultural areas were significantly lower.  By the time NWS
forecasters realized the considerable difference and updated the forecasts, it
was too late for many growers to respond to the warning.
[Albert Peterlin, USDA Chief Meteorologist (202) 720-8651;
apeterlin@oce.usda.gov] 

For further information, contact: Linda Calvin, noncitrus fruit; Susan
Pollack, citrus fruit; Gary Lucier, vegetables; Ron Lord, sweeteners; Doyle
Johnson, tree nuts and greenhouse/nursery; Tom Capehart, tobacco; Lewrene
Glaser, industrial crops.  All are at (202) 219-0840. 


COMMODITY SPOTLIGHT

U.S. Sugar Consumption 
Continues to Grow

The U.S. sweetener market is the largest and most diverse in the world.  The
U.S. produces more sugar than all but three other countries--Brazil, India,
and China--and is one of the few countries with significant production of both
sugar beets and sugarcane.  Since 1995, U.S. production of high-fructose corn
syrup has outstripped sugar, and the U.S. also produces and consumes large
amounts of high-intensity (low-calorie) sweeteners.  

Sugar consumption has been rising at over 1.7 percent a year for the last
decade, higher than the U.S. population growth rate of about 0.8 percent.  For
1996/97, U.S. sugar consumption is currently forecast at 9.8 million short
tons, raw value, up from 9.6 million last year.  If the forecast is realized,

sugar consumption will have risen by about 1 million tons in 6 years, implying
a per capita increase of 2.5 pounds.  

Consumers' concerns in recent years to avoid fat has benefited sugar, which is
often a key ingredient in products promoted as "fat-free."  Sugar also appears
to have a more positive image than was the case a decade or two ago. 

The annual increase in U.S. sugar consumption over the past decade is slightly
more than the output of an average U.S. sugar beet factory in 1996.  USDA
projects that sugar consumption will continue to rise in the next few years,
but at rates slightly lower than the trend of 160,000 tons a year achieved in
the last 10 years.

Changes in the 
U.S. Sugar Program

Continued growth in domestic sugar consumption has become more important for
domestic producers since passage of last year's Farm Act, which suspended
USDA's authority to implement domestic sugar marketing allotments.  The
marketing allotments were used in some years to restrict marketings of
domestic sugar when supplies were depressing prices.  With this policy lever
removed, and with changes to the loan program, prices could drop if domestic
sugar production increases more rapidly than consumption. 

Price-supporting policy mechanisms now consist only of the loan program and
restrictive import tariff-rate quotas (TRQ's).  Under the raw sugar TRQ, 40
quota-holding countries are each allocated a fixed amount which they may ship
to the U.S. in a fiscal year (October-September) at a zero or low duty.  Any
sugar which enters the U.S. above the quota pays a duty of just under 17 cents
per pound--high enough to be generally prohibitive.  (Another TRQ--currently
set at 24,251 short tons, raw value, the minimum level agreed to in the
Uruguay Round--applies to refined and specialty sugars, currently operated on
a global first-come, first-served basis.)  U.S. sugar imports have trended
downward since the early 1980's, but have risen in the last 2 years as U.S.
production declined while consumption grew.  

As a result of the Uruguay Round of trade negotiations, the U.S. is committed
to allowing low-duty sugar imports of a minimum 1.256 million short tons, raw
value, each fiscal year.  While the TRQ in both 1996 and 1997 has been above 2
million tons, for the 3 previous years it averaged about 1.3 million tons, and
in the late 1980's was below 1 million (before the minimum access agreed to in
the multilateral trade agreement). 

The total TRQ (for raw and specialty/refined sugar) is established annually
(and sometimes adjusted within a given year) to control supply.  First, an
estimate is made of the gap between the forecast of domestic utilization and
production for the coming year.  The TRQ is set to fill that gap.   If it is
set too high, U.S. prices could decline below the price support level.  If it
is set too low, prices could rise to unacceptably high levels.

The level of price support is based on loan rates legislated in the 1996 Farm
Act.  Sugar processors (not farmers, whose crop can't be stored) can take out
price support loans from the government, with sugar as collateral.  The loan
rate borrowers receive for raw cane sugar is 18 cents a pound (national
average), and for refined beet sugar the rate is 22.9 cents a pound (national
average).  

The Farm Act stipulates that when the TRQ is higher than 1.5 million short
tons, the loans are nonrecourse--the processor may forfeit the collateral in
lieu of repaying the loan, and the government has no recourse but to accept
the sugar as full payment.  Nonrecourse loans can, in theory at least, help
support the sugar price, since forfeited sugar is effectively taken off the
market in the near term.  But if the TRQ is less than 1.5 million tons, the
loans will be recourse, which like ordinary loans are repayable in cash only. 
Under the previous Farm Act, all sugar loans were nonrecourse.

The current program virtually eliminates the risk of Treasury costs.  If the
TRQ is set closer to the minimum level as oversupply threatens, sugar loans
must be repaid even if the price falls.  The TRQ's price support function is
effective only so long as the gap between U.S. sugar utilization and
production remains higher than 1.5 million tons.  Although, imports seem
likely to remain well above the minimum WTO level of 1.256 million tons and
the nonrecourse loan trigger of 1.5 million tons for at least the next several
years, the likelihood of lower prices is greater under the current program
than before.

Lower Output
In 1996/97

U.S. sugar production for 1996/97 is projected at 7.29 million tons, raw
value, down about 80,000 tons from last year and well below the 1994/95 record
of 7.93 million.  The share of U.S. sugar consumption provided by domestic
production rose from 55 percent in the early 1970's to about 85 percent in the
early 1990's, dropping to about 75 percent the last 2 years as bad weather and
lower acreage cut U.S. output. 

Beet sugar production is projected to be 55 percent of the total, at 4 million
tons, well below the record 4.5 million tons 2 years earlier.  In 1996/97,
harvested sugar beet area was only 1.32 million acres, with much of the
100,000-acre decline due to farmers switching to corn, wheat, and other
commodities that commanded high prices in 1996.  Sugar beet acreage expanded
from about 1 million acres in the early 1980's to the 1994/95 peak of 1.44
million acres, as the U.S. sugar program provided relatively stable prices
while productivity gains lowered costs and raised yields. 

The average sugar beet yield is forecast at 20.2 tons per acre in 1996/97,
comparable to the longrun average.  Although wet weather hampered field work
last spring and some planting was as late as any year on record, favorable
weather in the fall allowed yields to recover. 

Sugar beets can be grown in many climates, but are most often found in
temperate zones in 14 states, from Michigan and Ohio in the east, across the
Northern and Central Plains to the Northwest, California, and Texas.  The
leading sugar beet producing states are Minnesota, North Dakota, Idaho,
Michigan, and California. 
 
Sugarcane can grow only where the climate is tropical or subtropical, and in
the U.S. grows in Florida, Louisiana, Texas, Hawaii, and Puerto Rico.  Cane
sugar production in 1996/97 is forecast at 3.29 million tons, raw value, down
from 3.45 million last year.  U.S. acreage is forecast at 846,000 acres, down
6 percent from last year.

Florida, the largest cane producing state, is forecast to produce 1.76 million
tons, about the same as last year and similar to the 5-year average.  This
level of output would be about 54 percent of total cane sugar output. 
Although Florida's sugarcane yield is projected to be 34 tons per acre, down
from 34.6 tons per acre last year, sucrose content of the cane is reported to
be higher than last year, yielding a similar volume of sugar per acre.  The
area harvested for sugar in Florida is forecast at 420,000 acres, up slightly
from a year earlier.  

Sugarcane acreage in Florida expanded from 300,000 acres in 1978/79 to a peak
of 428,000 acres in 1991/92, and since then has varied little.  Freezes in
January this year put some of the crop at risk, but it appears that most of
the cane will be harvested and production is not likely to be affected. 
However, freeze damage to sugarcane plants needed for planting new fields may
have been more extensive, which could affect next year's crop.  Florida plans
to finish harvesting by mid-March.

Louisiana is the second-largest cane sugar producing state, and usually
harvests during a short season between October and December.  This year's
harvest continued into the first week of January, and total production was
1.045 million tons, not far from last year's record 1.06 million tons.  

A freeze in Louisiana in early 1996 damaged many acres which had to be
abandoned, and early forecasts assumed a lower crop.  But fall weather was
excellent, the sugarcane was able to continue adding sugar, and the abandoned
fields were the lowest yielding, so that average cane yields were 27 tons per
acre, 2 tons higher than expected earlier in the fall.  Two new varieties were
helpful, with some fields getting over 50 tons per acre.  

Total harvested area was 335,000 acres in Louisiana, down from the previous
year's record 368,000 acres, with much of the decline due to abandonment of
freeze-damaged fields.  Sugar yield per acre was a record 3.12 tons, far above
the previous high of 2.9 tons per acre in 1994/95.  The fields intended for
harvest in 1997 have survived the freezes up to the middle of February and
look promising for a good crop.

Sugar production in Hawaii has been declining, from over 1 million tons in
1985/86 to a forecast 370,000 tons in 1996/97.  Costs for labor,
transportation of sugar to the mainland,  and environmental compliance are
high.  Six of 12 mills have closed since 1992, with 2 mills closing in 1996. 
Some of the remaining mills have been losing money in recent years.  

Unlike sugarcane crops on the mainland, Hawaii's are grown for almost 2 years
before being harvested.  Thus, Hawaii's cane yields--forecast at 87 tons per
acre this year--are among the highest in the world.  Hawaii's sugar yield is
forecast at 10.9 tons per acre, up slightly from recent years but lower than
the yields of over 12 tons of sugar per acre achieved in the mid 1980's. 

In Texas, irrigation water has been very short for the 1996/97 season, and
even with recent rains, there was not enough moisture for a good crop.  Sugar
production in 1996/97 is forecast at 85,000 tons from 34,000 harvested acres. 
Texas has one sugar mill in the southern Rio Grande Valley, a cooperative
which for the last 5 years has produced over 100,000 tons of sugar, with a
record 146,000 tons in 1994/95.  Puerto Rico, which has two mills, is forecast
to produce 30,000 tons of sugar.

Sugar Processors 
Consolidate

The number of companies producing and selling refined sugar in the U.S.
continued to decline in the 1980's and 1990's.  Twenty years ago, 28 companies
produced and sold refined sugar, but by 1996 there were only 9.  Consolidation
has included the merger of cane refiners with beet processors, and currently 3
of the 4 largest sugar sellers are companies with both beet and cane refining
facilities.  

The number of beet processing facilities has declined, but the 30 beet
factories in 1996 could slice more beets in a day than the 36 factories that
were operating in 1992.  On the farm, improved genetics and cultural practices
allow for more extractable sugar in the sugarcane and sugar beet plants, and
factories are using new technology to extract more sugar.

In early 1997, a Florida cane processing company, U.S. Sugar Corporation,
announced that it will build a sugar refining factory adjacent to an existing
raw sugar processing mill.  This will mark the first new entrant into the
refined cane sugar market in many years, and will raise the number of U.S.
cane refining companies to seven (three of these also process and sell refined
beet sugar).  The facility is expected to be operational in 1998.

The beet sugar processing industry is also gaining a new plant.  A sugar beet
factory being constructed in Washington will be the first new sugar beet
factory built in the U.S. since 1974.  It is also expected to be producing
sugar next year. 

One of the biggest risks facing a sugar beet processing company is whether or
not there will be an adequate supply of beets each year.  But when the farmers
own the processing company, the risk of inadequate supply of sugar beets is
very low, since the farmers themselves suffer when the factory is not
operating efficiently.  Acreage could grow in Idaho and Oregon in the next few
years where a grower-cooperative just purchased four factories from the
Amalgamated Sugar Company.  In North Dakota, a cooperative is in the second
year of a 3-year expansion that will add about 10,000 acres of sugar beets
next year.  

Sugar beet acreage has been down in California, Michigan, Ohio, and some
Western and Northern Plains states in recent years, well below factory
capacity in many areas.  But if sugar prices remain strong relative to
alternative crops this year, farmers could return to sugar beets and increase
production in the coming year.  With the recent excess rains in northern
California, however, there is concern that moisture might still be too high in
the spring for good sugar beet planting.

Overall, conditions in early 1997 indicate that total U.S. sugar beet acreage
is likely to rise in 1997/98.  The 1996/97 decline in sugar beet harvested
acreage was due in part to the high prices of alternative crops such as wheat
and corn, and reduced sugar beet prices in the previous year.  By spring,
wholesale refined beet sugar prices will have been 29 cents per pound or
higher for over a year, and the most recent sugar beet payments for many
farmers were higher than the previous year.  The Prospective Plantings report,
scheduled for release on March 31, will provide the first USDA survey of sugar
beet acreage for the 1997/98 crop. 

Sugarcane acreage may rise in Louisiana, remain stable in Florida, and fall
marginally in Hawaii and Texas. 
[Ron Lord (202) 219-0888; rlord@econ.ag.gov] 

COMMODITY SPOTLIGHT BOX

Sweet Competition

U.S. sugar consumption declined between 1974 and 1986 as high-fructose corn
syrup (HFCS) replaced sugar in most sweetened liquid products.  Since then,
the growth of HFCS consumption has not let up, expanding an average of 3.5
percent a year, or almost twice the growth rate of sugar.  U.S. consumption of
all caloric sweeteners has risen from 127 pounds per capita in 1986, to 153
pounds in 1996, a 20-percent increase in 10 years. 

Crystalline fructose is another potential substitute for sugar in some uses
and has been commercially available for at least 10 years.  It is slightly
sweeter than sugar.  However, crystalline fructose behaves differently from
sugar in most baking and other manufactured food uses, limiting its use as a
sugar substitute.  While little information is available about the price of
crystalline fructose, it is likely still more expensive than sugar.  

High-intensity noncaloric sweeteners, such as aspartame, tend to boost overall
use of sweeteners, although they also have drawn market share from the caloric
sweeteners, especially HFCS.  At present saccharin and aspartame are widely
used in the U.S.  Acesulfame-K is allowed in many, but not all foods, and is
awaiting Food and Drug Administration (FDA) approval for use in soft drinks. 
Cyclamates are banned.  Sucralose is a high-intensity sweetener which has been
approved in Canada and some other countries, but is awaiting FDA approval. 
Alitame is also awaiting FDA approval but is already used in Australia,
Mexico, and several other countries.  

An interesting industry development is the blending of different sweeteners
(caloric and/or noncaloric), which becomes more feasible as more high-intensity
sweeteners are approved for general use.  Blends of different sweeteners often
have synergistic effects, which means the sweetness of the blend is higher than
either sweetener by itself.  These synergies can allow the manufacturer to cut
costs.  As new products are introduced, some will likely contain blends of
sweeteners.  Blends may be particularly effective in soft drinks and other
beverages.  If so, the greatest impact of increased blending would be on HFCS,
since almost no sugar is used in beverages. 





WORLD AGRICULTURE & TRADE 

Food-Aid Grain Needs 
Are Down--In the Short Run 

Sixty-five developing countries would need 9 million tons of grain food aid in
1996/97 to maintain per capita consumption at the previous 5-year average. 
But that figure is down 5 million tons from 1995/96 aggregate needs.  In a
study of 65 major food-aid recipient countries, USDA's Economic Research
Service also found that the "grain deficit" is down in all eight regions
covered by the study.

Favorable weather and expanded plantings allowed low-income countries to
maintain recent consumption levels while reducing imports and avoiding the
high prices in  international grain markets in 1996.  Concomitantly, several
donor countries have recently reduced their food aid commitments, due mostly
to tight budgets.

Despite narrower grain deficits, the magnitude of some regional grain deficits
remains high.  In 1996/97, the greatest aggregate deficit (reflecting the
amount of grain needed to maintain per capita cereal consumption at the recent
5-year average) is expected in Asia at an estimated 3.5 million tons.  This is
down from 4.6 million tons a year earlier, due to strong economic growth,
favorable agricultural policies, and good weather.  Sub-Saharan Africa's
estimated grain gap of 3.4 million tons is down sharply from last year's 6.2
million tons due to a record grain harvest, particularly in southern Africa,
and to the end of civil strife and the re-emergence of agricultural production
in Ethiopia and Mozambique.  

The expected grain gap for Latin America and the Caribbean countries is down
from 1.4 to 0.8 million tons, reflecting strong economic growth and the
growing ability to import food on a commercial basis.  North Africa is not
expected to have a grain deficit this year, due primarily to a large recovery
in grain production, which increased from 18.4 to 31.2 million tons. 

Assessing the Problem

Despite the widespread reduction in grain deficit, many low-income countries
remain highly vulnerable to food shortages, in both the long- and short-term,
indicated by low and often declining per capita grain consumption and high
consumption variability.  Although aggregate consumption from 1980 to 1995
grew steadily in all the study countries except those experiencing civil
disorder (e.g., Burundi, Rwanda, and Afghanistan), per capita consumption of
cereals fell in nearly half (30) of the countries. 

Falling per capita grain consumption is primarily a result of rapid population
growth outpacing the growth in aggregate supply, due in part to slow or
declining growth in agricultural productivity and poor economic growth.  In
the short run, declining per capita consumption likely indicates that a
country lacks the resources to cope with shortages caused by temporary
declines in domestic production or increases in world grain prices.  As a
result, aggregate grain consumption can vary considerably.  

Another measure of a country's vulnerability to food shortages is the
estimated grain gap expressed as a percent of the grain required to maintain
per capita cereal consumption.  A high percentage indicates that a country's
domestic cereal supply (including commercial imports) is insufficient to
maintain recent consumption levels.  The higher the percent, the more
vulnerable the country, and the more likely it is to require external
assistance to maintain recent consumption levels.  Nearly three-fourths (48)
of the 65 study countries had a grain gap in 1996/97.  Of these, 13 countries
have a grain-gap-to-consumption ratio greater than 25 percent, indicating
significant vulnerability to a food shortage.  

The grain gap of many low-income countries varies from one year to the next,
reflecting high consumption instability.  During 1960-95, grain consumption
instability tended to be highest among the countries of Sub-Saharan Africa--
where countries experiencing declines in per capita cereal consumption are also
concentrated--followed by the countries in North Africa, Latin America and the
Caribbean, and Asia.  Several factors, such as declines in domestic production
which lead to a combination of declining growth and high variability in grain
consumption, make Sub-Saharan Africa highly vulnerable to food shortages.  In
Lesotho, for example, annual per capita grain consumption is expected to fall
from 141 kg in 1995/96 to 116 kg in 1996/97.  However, the high degree of
variability in consumption could cause it to fall by as much as 30 percent once
every 6 years.

Production variability is a major factor in the instability in cereal
consumption in most low-income countries.  Production variability (via swings
in both yield and cultivated area) is the result of weather variability, civil
strife, and/or shortage of important inputs such as fertilizer.  Large and
frequent below-trend deviations in cereal production pose a significant
problem, especially for countries with a history of chronic food deficit and
where cereals comprise a large share of the average diet.

Over the 1980-95 period, production variability was highest in North and
Sub-Saharan Africa, followed by Latin America and the Caribbean, and Asia. 
Asia's relatively lower production variability can be attributed in part to
more widespread use of irrigation.  In 1992, 38 percent of arable land in Asia
was irrigated, while in Latin America and Africa the proportions were only 12
and 7 percent. 

Variability of production increases the vulnerability of countries that are
already experiencing a declining per capita consumption trend.  For example,
Somalia's high variability in production can be expected to cause its grain
gap to range from 3 to 59 percent of the amount of grain needed to maintain
average consumption.  The problem is often complicated by lack of resources
and infrastructure needed to deal with large grain shipments.  

Shortfalls in domestic production can be offset by commercial food imports,
when viable, thereby easing the effect on food consumption.  For example, a
rise in export earnings from 1990-94 has permitted Indonesia to increase
imports and raise grain consumption by 5 percent per year despite declining
domestic grain production. 

However, many developing countries lack the financial capacity to undertake
needed commercial imports, with export earnings low relative to import
expenditures.  Export earnings by Sub-Saharan Africa declined by 0.4 percent
per year from 1990 to 1994.  During this period, for example, Rwanda's export
earnings declined by 10 percent per year, severely reducing its import
capacity at a time when domestic food production was contracting.  As a
result, Rwanda's dependency on food aid to meet its grain gap grew
substantially.  By 1994, food aid receipts accounted for nearly 84 percent of
Rwanda's grain supply, up sharply from only 5 percent in 1990.

Food Aid Funding Declines

In many low-income countries, food aid assistance is often needed to cushion a
decline in consumption caused by food shortages and to help bridge the
estimated grain gap.  While food aid plays an important role in reducing food
insecurity in developing countries, it often remains inadequate to offset the
full magnitude of need.  In 1995/96, grain shipments received as food aid
accounted for only 47 percent of the estimated grain required to maintain per
capita grain consumption. 

Production in many of the historical food-aid-recipient countries rebounded at
the time when import prices increased sharply and food aid budgets were being
reduced.  The U.S. and the European Union historically have supplied about 75
to 85 percent of the world's grain food aid--grain generally accounts for more
than 80 percent of total food aid.  Japan has supplied nearly 10 percent,
while Canada accounts for less than 5 percent, and Australia ships around 2
percent.  

Budgetary pressures in the major donor countries have been evident in the
steadily declining food aid shipments over the past 3 years.  In the U.S.,
funding for the P.L. 480 program in fiscal 1996 was about $1.2 billion, down
by 8 percent from 1995.  In fiscal 1997, appropriations are down another 7
percent to $1.1 billion.  Other major food aid donors have also reduced their
food aid budgets. 

The declining trend in food aid funding is aggravated by price spikes that
result from unexpected production shortfalls.  Price increases imply a smaller
volume of food aid shipments.  It is relatively easier for donors to provide
food aid when international commodity prices are lower than their domestic
support prices, as was the case with the U.S. in the early 1980's and the EU
in most years.  When international commodity prices increase and stocks are
low, food aid becomes more costly for the donors.  

The most recent increase in international grain prices (1995/96) was caused by
a combination of unexpectedly lower production--largely a result of removing a
substantial share of 1995 acreage from production, shifts in acres to other
crops, and poor weather conditions in several of the major grain exporting
countries--and a sharp reduction in global grain stocks.  The hike in
international grain prices coincided with favorable grain production
performance in most of the 65 countries in the study.  However, in eight
countries the high food prices coincided with production shortfalls, causing
greater food insecurity and raising the grain deficit.

Despite fiscal constraints and tightened commodity availability, the U.S.
continues to give high priority to its food aid program and is expected to
meet its commitment of 2.5 million tons in 1996/97 under the Food Aid
Convention.  Food aid donors are focusing their efforts on improving the
cost-effectiveness of food aid by targeting the neediest groups and by looking
for ways to reduce distribution costs so that a larger share of the budget can
go toward purchasing food.  Recipient countries will benefit most if food aid
is specifically targeted to vulnerable segments of the population.  
[May Mercado Peters (202) 219-0608 and Michael Trueblood (202) 219-0652;
mayp@econ.ag.gov; trueb@econ.ag.gov]

WORLD AGRICULTURE & TRADE BOX 1--

Measuring the Grain Gap 

The grain gap, or grain deficit, is calculated as the difference between
target grain consumption--based on the most recent 5-year average per capita
consumption--and available grain supplies.  Grain supplies combine the current
year's domestic production and a country's financial ability to import on a
commercial basis after adjusting for stock changes and nonfood use.  

In a series of food aid needs assessments, USDA's Economic Research Service
(ERS) provides estimates of the grain deficits of 65 selected historical food
aid recipient countries, in eight regions: Central Africa (3 countries), East
Africa (9), North Africa (4), Southern Africa (8), West Africa (17), Asia (9),
Latin America (10), and the Newly Independent States of the former Soviet
Union (5).

The estimates include only the major grains (i.e., barley, corn, millet, oats,
rice, rye, sorghum, wheat, and other minor coarse grains), referred to as
"grains" or "cereals," for which data are readily available.  Thus, only the
major cereals' share of a country's diet is evaluated for changes.  Accurate
estimates of the supplies of noncereal foods such as grain legumes (or
pulses), roots and tubers, vegetable oils, milk, and other animal products
frequently are not available for many countries.  However, these commodities
play a crucial role in the average household diet in many less developed
countries, particularly in the lower income strata that are generally the most
vulnerable to food shortages.

The grain deficits are reported by ERS as the assessed shortrun food needs of
the 65 study countries.  Since noncereal foods are excluded, the grain deficit
serves as an indicator of the potential food needs of a country, but falls
short of measuring the actual food needs and may overstate or understate the
magnitude of food shortfalls.  However, in many low-income countries cereals
account for at least 50 percent of all calories consumed.  In addition, the
bulk of food imports by the countries, as well as international food aid, is
in the form of cereals. 


WORLD AGRICULTURE & TRADE 

Egypt's Poultry Industry 
Under Pressure

Egypt's highly protected poultry industry will face stiff international
competition when the country lifts a ban on poultry imports on or before
2000--a commitment under the country's acceptance into the World Trade
Organization (WTO).  The ban has protected the poultry industry since a subsidy
on imported corn was removed in 1988.  

The subsidy removal caused an almost immediate jump in the price of imported
yellow corn (the main component of poultry feed) from LE180 to LE500 per ton
($53 to $147 per ton) on the free market.  Egypt imports most feedstuffs
because land constraints and inefficient water use limit domestic production.  

A large shake-out followed the sharp rise in imported feed costs--50 percent
of all broiler operation capacity shut down, the poultry feed milling industry
collapsed, and the government initiated a privatization program to sell
publicly held poultry operations.  Retail prices for poultry meat rose, and
per capita consumption dropped sharply.

In line with the country's continuing privatization and trade liberalization,
the government freed up cotton and wheat planting requirements in 1994, and
began a partial elimination of procurement policies which had forced farmers
to sell output to the government at artificial prices.  Farmers are now able
to more closely follow market incentives to shift acreage to crops with
relatively high returns, such as cotton and wheat, at the expense of corn and
soybeans, making the poultry industry even more dependent upon feed imports.

The U.S. is likely to supply much of Egypt's feed grain needs, and should be
in a good position to share in the poultry meat market when the ban is lifted.

Poultry Is a Major
Protein Source

According to the latest household expenditure survey for Egypt, over half of
per capita income is spent on food.  Poultry products account for nearly a
third of expenditures on animal protein products, which represent 31 percent
of the total food bill.  The other 69 percent is for items such as cereals,
fats and oils, vegetables, and fruits.  

Consumption of animal protein in low-income families is restricted by their
budgets, and protein is provided mostly by lower cost items such as eggs,
cheese, grains, and pulses.  Popular Egyptian dishes such as falafel, foul
modames, and khoshari are prepared from protein-rich legumes, including faba
beans, chick peas, and lentils.

Per capita consumption of poultry meat has fluctuated widely during the last
20 years, increasing from 3.2 kilograms in 1975 to 9.2 kilograms in 1985.  A
sharp increase in the early 1980's was due mainly to the government's large
feed subsidy program, which increased poultry production and reduced poultry
prices to consumers.  However, when the subsidy was phased out and poultry
meat prices rose, per capita consumption dropped sharply in the late 1980's. 
It bottomed out at just 4.4 kilograms in 1991 and climbed to 5.8 kilograms in
1996, as incomes rose and demand strengthened.

Egyptians have a preference for live birds--slaughtered immediately at the
market or at home--over frozen meats.  In 1996, about 280,000 tons of poultry
meat (carcass weight) was sold live and only 80,000 tons sold processed
(chilled or frozen).  Demand for processed poultry is limited to some extent
by the lack of storage facilities needed to maintain products at proper
temperatures.

The preference for live birds is apparent in market price differentials.  In
1995 the average retail price was LE5.2 ($1.53) per kilogram for live
broilers, or LE8 ($2.35) dressed weight, compared with LE7 ($2.06) for frozen
whole birds.  Prices for competing poultry are similar.  Live-weight prices
for turkey, ducks, and geese were about LE1-1.5 higher than frozen birds.

Commercial Firms 
Dominate Broiler Sector

Approximately 70 percent of all broilers are produced by medium- to large-scale
commercial enterprises.  The rest is produced by small-scale,
essentially noncommercial, village farms.  More than one-third of Egypt's
farmers keep a flock of about 20 birds.  Farmers raise local chicken breeds
which are well adapted to low nutritional standards, summer heat, and harsh
environment.  

But the small-scale operators apply little technical know-how and add
supplemental feed as needed.  As a result, yields are low  (i.e., meat per
bird) and feed conversion is poor.  Chickens are kept mainly for egg
production, and meat is produced as a secondary product.  In addition, ducks,
geese, and pigeons are kept for their meat, scavenging for food. 

Forty years ago, village production was enough for the country's local
consumption of poultry and eggs, and allowed for export of surplus eggs to
neighboring countries.  But village production has decreased over the years,
and its contribution to Egypt's total production is declining to the point
where most rural areas are now net importers of poultry. 

The medium- and large-scale commercial production comprises some 8,000
operations with an average of 5,000 birds each per cycle.  The firms usually
run 4-5 cycles per year, with 6-7 weeks per cycle.  In addition to broiler
operations, Egypt has 10 large duck operations, with annual production of
20,000 tons, and 50 turkey enterprises producing 20,000 tons annually.  

Grower returns for poultry are reduced by high overhead costs due to expensive
housing and low bird numbers per cage.  The industry has a high average bird
mortality rate due to diseases (between 3-10 percent compared with 2 percent
in the U.S.).  

Finally, feed conversion rates are relatively high (about 2.6 pounds of feed
per pound of gain compared with about 2 pounds in the U.S.), due to primitive
feed storage facilities that allow feed deterioration and vitamin loss.  Feed
costs make up about two-thirds of the total production costs.  Because most
commercial poultry farmers are not equipped with bulk receiving equipment,
bulk storage, or automatic feeders, a substantial amount of manual labor is
necessary.  A study by Winrock International in 1992 on Egypt's poultry
industry indicated that inefficiencies were responsible for about 30-40
percent of total production costs in Egypt.  Some efficiency gains have likely
occurred, however, since the 1992 study.

Some large-scale companies have highly mechanized feeding, watering, and
heating facilities, and apply high-technology production inputs such as
superior chicks, feed additives, vitamins, vaccines, protein concentrates, and
premixes.  They raise 10,000 birds in a cycle and have their own feed mills,
slaughterhouses, processing, cooling, packaging, and marketing facilities.

Egypt's total annual commercial poultry meat capacity is 450,000 tons, but
actual production levels have never exceeded 70 percent of capacity over the
last 10 years.  Total capacity of slaughterhouses has remained at about 110
million birds per year.  Plant capacity has never been fully utilized because
consumers prefer live birds.  Size has also been a problem as many poultry
farms do not produce birds of uniform size--due in large part to low-quality
feed and unbalanced feed rations--that would facilitate processing. 

The lack of production and marketing integration is perhaps the biggest
constraint on the industry's competitiveness.  Vertical integration can
incorporate several stages, including hatcheries through processing and
distribution.  Increased vertical integration tends to reduce cost margins
along the processing and distribution chain.

The Impacts of
Policy Changes

By 1995, only 10 poultry feed mills (with an annual capacity of 1.4 million
tons) had survived the removal of corn import subsidies, down from 50 mills
(4.9 million tons) during the early 1990's.  The collapse was due in part to
declining demand for poultry meat as prices rose, but mostly to large
commercial poultry producers cutting costs by preparing their own feed mixes. 
Feed plants that survived the industry consolidation use modern technology,
including fat-adding units, premixing systems for microingredients, and
facilities to produce both mash and pellets.  However, there is still much
room for improving the quality of their feed.

Following the gradual liberalization of cropland allocations and the partial
elimination of price controls and producer subsidies between 1986 and 1995, a
new pattern of land and crop use is expected to emerge.  Exposure to
international prices after the elimination of government subsidies resulted in
some crop acreage shifts that are based more on the relative profitability of
each crop.  The recent policy reforms in the crop sector favor the production
of field crops with relatively high returns (e.g., cotton, rice, and wheat),
making the poultry industry even more dependent on feed imports.

Very little additional land can be brought into cultivation because of water
constraints.  Short-term yield gains are expected to be minimal because yields
are already high.  Cropping intensity is already almost two crops per year. 
Consequently, Egypt is expected to continue to be an increasingly large
importer of feedstuffs.  

Opportunities for 
U.S. Exporters

Egypt is a large importer of agricultural commodities ($5.34 billion in 1996). 
It is the Middle East's fastest growing and largest market for U.S.
agricultural exports, rising to $1.53 billion in fiscal 1996 from $613 million
in fiscal 1994.  Nearly one-third of total U.S. agricultural exports to the
Middle East went to Egypt in fiscal 1996.  


The substantial increase has been due partially to higher international prices
of wheat and feed grains, but also to increased shipments of feed grains and
oilseeds and products.  Import demand has grown as the poultry industry has
expanded in the 1990's.  In volume terms, U.S. feed grain shipments increased
from 1.43 million tons in 1994 to 2.6 million in 1995, but declined to 2.1
million in 1996 as prices rose sharply.  Likewise, oilseeds and products
shipments increased from 176,000 tons in 1994 to 310,000 tons in 1995 and
dipped to 165,000 tons in 1996.  The U.S. dominates the Egyptian import market
for wheat and yellow corn, with shares ranging between 70 and 100 percent, and
25 percent of soymeal in recent years.

During the 1980's, Egypt imported between 40,000 and 130,000 tons of poultry
annually--whole birds and parts.  The peak was reached in 1984 and accounted
for 34 percent of the country's total consumption.   During this period, U.S.
poultry shipments dominated Egypt's import market.  Most U.S. poultry exports
to Egypt were subsidized sales under the Export Enhancement Program (EEP),
which was instrumental in keeping U.S. poultry competitive with subsidized
European Union sales.  After the 1988 ban, shipments gradually declined to
only 5,000 tons by 1996, mostly serving the institutional market (e.g., hotels
and military).

The poultry sector is expected to reduce production costs and become more
efficient as management improves in the private sector (about 80 percent of
the industry) and as the rest of the public sector is gradually privatized. 
Experts from international poultry companies are providing management
expertise or working directly with joint venture investors to provide the
know-how in integrating poultry operations from production through marketing.  

USDA projects that by 2005, Egypt's poultry production will increase by 35
percent from its 1996 level of 360,000 tons, while consumption rises 46
percent as population and incomes rise.  Egypt will likely need to import
50,000 tons, or 9 percent of total consumption in 2005.   As a low-cost
producer of poultry, the U.S. is in a good position to capture part of that
growing import market.  And with imports of corn and soybeans expected to
continue to rise, the U.S. share of Egypt's agricultural imports will likely
remain high.
[Fawzi A. Taha (202) 501-8451; ftaha@ econ.ag.gov] 


RESOURCES & ENVIRONMENT

Incentives for  
Sustainable Agriculture

The concept of sustainable agriculture--which integrates technologies and
practices that are as profitable as conventional farming methods but more
environmentally responsible--has maintained its place at the policy table
since the term became a catchphrase in the early 1990's.  Three major goals
are consistent with the range of strategies falling under the broad umbrella
of sustainability: ensure the productivity and profitability of agriculture;
conserve natural resources and the environment; and maintain economically
viable rural communities. 


Production agriculture is a major user of natural resources and environmental
assets.  A sustainable path of economic development for agriculture is one
that will, at a minimum, balance use of these assets over time to meet the
food and fiber needs of the present and all future generations and supply
environmental services to a growing population (e.g., access to clean water
and reduced pesticides on food). 

Historically, new technologies have served as an engine of output growth in
U.S. agriculture, sometimes at the expense of eroding the environment and
natural resource base.  Today it is possible that the food and fiber needs of
a growing population can be met by adopting new, output-enhancing,
technologies that concurrently protect environmental quality and efficiently
utilize natural resources.
  
Agricultural productivity growth in the U.S. has been impressive.  During
1948-93, U.S. agricultural output grew at an annual average rate of 1.7
percent.  A slight decline in input use accompanied this output growth,
resulting in an annual productivity growth rate of 1.8 percent.  By
comparison, the annual productivity growth rate for the nonfarm sector was
substantially smaller, at 1.1 percent over the same period.

For major U.S. field crops, yield growth paralleled this observed pattern of
productivity growth.  Yields for major field crops grew rapidly, ranging from
1 to 3 percent annually, with corn, sorghum, and potatoes exhibiting the most
rapid growth.  Since 1939, corn yields have grown at an impressive 3 percent
per year while wheat yields have climbed approximately 1.8 percent.  There is
no strong evidence favoring the presumption of a plateau in overall field crop
yields, although U.S. wheat yields have been relatively flat for 10-15 years. 

Agricultural research and development (R&D) is perhaps the most important
factor in the steady growth in U.S. agricultural productivity.  Public
research expenditures rose by 3-4 percent in real terms until approximately
1980; since then, growth has slowed to 0.7 percent per year.  While Federal
expenditures have remained flat since 1976, expenditures by the private sector
have grown rapidly.  

Most of the post-1980 growth has resulted from increased contributions from
the private sector.  The private sector now accounts for more than 50 percent
of all agricultural research funds.  A continuation of past patterns of R&D
will contribute to an increased availability of food and fiber to future
generations.

Environmental Damage
Is Slowing

The inputs of agricultural commodity production include synthetic products
(e.g., fertilizers and pesticides), natural resources (e.g., soil and water),
and environmental assets (e.g., wetlands and water quality).  Depleting
environmental assets and natural resource inputs can reduce the availability
of both food and fiber as well as environmental services to future
generations.  Data suggest that agriculture has made significant strides in
reducing the rate of depletion of environmental assets.


Soil erosion has decreased substantially since the Dust Bowl period.  Since
1938, soil erosion has declined by an estimated 40 percent, and most of the
decline has occurred since 1982.  This trend of reduced soil erosion resulted,
in large part, from the 1985 Food Security Act, which established the
Conservation Reserve Program and the conservation compliance provisions for
farm program participants. 

Due to this trend, threats of reduced farm productivity from excessive soil
erosion do not appear to be significant.  New programs place a greater
emphasis on the off-site effects of soil erosion and seek to minimize the
offsite damages to rivers, lakes, and estuaries.  Given the time lag in
sediment transport and biological response, the benefits of any soil erosion
reduction programs may start accruing well after implementation of the
program.

Wetlands supply critical environmental services, such as wildlife habitat,
flood control, and water filtration.  The lower 48 states have lost almost
one-half of all wetlands since 1780, but the rate of wetland losses associated
with agricultural production has decreased significantly.  The rates of
wetland loss from agriculture since 1980 are dramatically lower than in
earlier decades. 

Improvements in the agricultural sector's environmental performance can be
attributed partially to activities of environmental interest groups and
partially to a willingness of farmers to address food safety and environmental
concerns.  While agricultural production has improved its environmental
performance without major effects on output, continued growth in the demand
for food and fiber as well as for environmental goods and services will likely
place additional competing pressures on environmental protection.   

Demand for environmental services (e.g., access to pesticide-free food and
clean water) can be inferred from a number of recent patterns.  First, a small
portion of the market enables some individuals to pay price premiums in
exchange for organic products free of pesticide residue.  The willingness to
pay more for such products demonstrates demand for foods that are perceived to
reduce health risks and/or even greater water quality protection.  Second,
many individuals express their value of the environment by contributing to
nonprofit environmental organizations.  Since 1987, the percentage of U.S.
households contributing to such organizations has fluctuated from 11 to 16
percent.  Average annual contributions have ranged between $87 and $99 per
household.  

Such studies typically provide some indication of demand for many
environmental services affected by agriculture, including the protection of
ground water quality, wetlands, surface water quality, wildlife habitat, and
open space.

Technology 
& Sustainability

New technologies have the potential to reduce the loss of environmental and
natural resource assets as well as improve agricultural productivity.  Two key
issues are the availability of new technologies (which depends on the extent
and quality of investment) and their adoption in the market.

Underinvestment in sustainable technology can occur for two reasons.  First,
firms cannot fully capture the benefits of developing and implementing a new
technique, given that competitors can often mimic a successful new technology. 
Second, new technology development, while addressing issues of cost and yield,
is less concerned with objectives that are commonly associated with more
sustainable practices (e.g., environmental quality and food safety).

Private-sector R&D usually focuses on practices that conserve scarce
production inputs and that push down costs or improve returns by capturing a
market niche.  For example, if labor in agriculture is scarce, and hence a
relatively expensive input, private sector R&D will focus on practices that
are labor saving.  Similarly, because fertilizer has a market price, the
private sector has some incentive to conduct R&D to reduce use of fertilizer
and thus reduce costs.  On the other hand, the private sector has had little
economic incentive to conduct R&D on practices that produce improved habitat
for wildlife, or a more scenic landscape, because these goods have usually
lacked market prices or other mechanisms to provide returns.  The private
sector will invest in R&D on the efficient use of natural resources only to
the extent that it is profitable.

The lack of market incentives can also slow adoption of more sustainable
practices by farmers. Until farmers have an economic incentive to use more
sustainable practices, the agricultural sector will not provide a mix of food
and environmental services which reflects public preferences.  The lack of
private market incentives both for the development of more sustainable
practices (the supply side) and for the adoption of more sustainable practices
(the demand side) suggests a positive role for government.

A number of  management practices often considered to be more sustainable than
many conventional agricultural practices are already available to producers. 
These practices include, among others, conservation tillage (AO August 1996),
precision agriculture (AO May 1995), integrated pest management (AO May 1994),
enhanced nutrient management, and rotational grazing.  However, barriers exist
that slow the adoption of available technologies. 

Risks associated with alternative production technology can be a primary
deterrent.  A more sustainable technology that carries higher risks than a
conventional technology may not be adopted because farmers often take actions
to minimize these risks. 

For example, a farmer may find it economically optimal to "over-apply"
nitrogen prior to planting, a practice which increases as it becomes more
likely that inclement weather will preclude access to the field during the
growing season.  Nitrogen applied in advance of the growing season is more
susceptible to runoff and poses a more serious environmental threat than when
applied during the growing season.  In cases like these, farmers may not
realize the profit and environmental quality gains expected for a sustainable
technology.  

Site specificity of many environmental problems, as well as the diversity of
the resource base, has implications for technology adoption--and for policy
implementation.  Research results from USDA's Economic Research Service
indicate that for vegetable growers, for example, farm location--a proxy for
climate and soils--has a significant effect on pesticide demand, yields, and
farm profits.  Soil fertility, rainfall, and temperature also influence
profitability among farms.  The physical environment of the farm may affect
profitability directly through greater fertility, and indirectly through its
influence on pests.  

All else being equal, a farm located in a dry, infertile area is less likely
to adopt IPM than one located in an adequately wet, fertile area.  Similarly,
conservation tillage practices may not perform well in areas with poorly
drained soils, short growing seasons, and high rainfall.  As soil becomes
finer and denser, adoption of no-till may decrease.  Although many ares of
commonality do exist, there is clearly no "one-size-fits-all" solution to the
issue of sustainability, and policies must be flexible enough to recognize the
diversity of the natural resource base as well as region-specific
environmental issues.

Restructuring Incentives 
for Sustainability

The 1996 Farm Act created new programs that advance the goals of
sustainability, such as the Environmental Quality Incentives Program, the
Wildlife Habitat Incentives Program, and the Farmland Protection Program (AO
November 1996).  The act also extended programs such as the Conservation
Reserve Program and the Wetlands Reserve Program.  A number of other policy
options, in various stages of adoption, that would further promote
agricultural sustainability.

Insurance could encourage the adoption of sustainable practices. An impediment
to adoption of more sustainable practices is the risk associated with
switching from time-tested conventional modes of production.  Further analysis
of the feasibility of providing insurance against such risks is needed. 

Access to credit can also be a factor in farmers' willingness to adopt
sustainable production practices.  Policy could be restructured so that
farmers could finance the costs of switching to a new technology regime (e.g.,
precision agriculture).

Market development for more environmentally safe crop production is a key to
moving towards a more sustainable agriculture.  The development of nationally
accepted organic standards, for example, will spur markets for fruits and
vegetables produced using techniques that optimize agro-ecosystem health.  By
developing markets, especially for specialty products, producers who utilize
sustainable production practices can obtain a premium for choosing to exercise
environmental stewardship.  

Local flexibility in the implementation of Federal programs is needed to
target specific environmental problems, because the nation's natural resource
base is so diverse.  A "one-size-fits-all" approach to sustainability will not
work, because there is a need to customize programs to match locally diverse
needs.  The 1996 Farm Act, which allowed greater planting flexibility to
farmers, sets an example for tailoring programs to the real needs of farmers.

Research and development could focus on problems faced by producers who adopt
sustainable technologies.  Greater emphasis could be placed on
interdisciplinary research and on evaluating tradeoffs between environmental
quality and profitability in both conventional and alternative technologies. 
[Utpal Vasavada (202) 219-0773, Jim Hrubovcak (202) 219-0657, and Joe Aldy
(202) 219-0408; vasavada@econ.ag.gov; jimhru@econ.ag.gov; jaldy@econ.ag.gov]

RESOURCES & ENVIRONMENT BOX #1--

This article summarizes a workshop entitled "Economics of Sustainable
Agriculture," held in Washington, D.C. on October 21-22, 1996 and cosponsored
by USDA's Economic Research Service (ERS) and the Farm Foundation.  The goal
was to solicit input on the complex issue of sustainable agriculture from a
diverse group of individuals that included farmers, public interest
organizations, academic and government economists, and current and former
policy makers.  A forthcoming ERS report, "Green Technologies for a More
Sustainable Agriculture," will provide a detailed overview of the workshop.

RESOURCES & ENVIRONMENT BOX #2

Sustainable Agricultural Practices

Enhanced nutrient management involves the efficient use of plant nutrients
from commercial fertilizers, animal wastes, and municipal wastes.  The primary
goal is to sustain an increase in agricultural production and to minimize the
environmental damage from residual nutrients.  Enhanced nutrient management
includes a broad set of agricultural practices.

Farmers can more effectively manage the nutrients on their farm by developing
a better understanding of nutrient inputs, outputs, storage, and crop uptake. 
For example, with a better understanding of a field's nutrient requirements
through soil testing, a farmer can match fertilizer and manure applications to
the crops' needs and decrease the amount of residual nutrients lost to the
environment.  Further, matching the timing of applications to particular
stages in the growing season decreases nutrient escape.  More efficient and
location-specific applications of nutrients can reduce farmers' fertilizer
costs as well. 

Better management of nutrients serves to ensure the quality of downstream
waters and to prevent the mining of nutrients in the field.  For the farmer,
improved applications can decrease the time and energy expended on crop
management by reducing the number of trips across fields.  
[Wen-Yuan Huang (202) 501 8289; whuang@econ.ag.gov]


Integrated pest management (IPM) includes an assortment of techniques designed
to maintain pest infestation at an economically acceptable level rather than
attempting to completely eradicate all pests.  IPM monitoring methods include
scouting or regular and systematic field sampling to estimate pest infestation
levels; soil testing for pests such as nematodes; the use of pheromone odors
and visual stimuli to attract target pests to traps; and recording
environmental data (e.g., temperature and rainfall) associated with the
development of some pests.  Pest management practices include biological
controls such as natural enemies and biopesticides; cultural controls such as
hand hoeing, mulching, and crop rotation; strategic controls such as planting
dates and timing of application and harvest; and use of crops developed to be
resistant to certain pests.  

While IPM does not exclude the use of synthetic pesticides, the pesticides
used in IPM often differ from those used on a preventative or routine
schedule.  Where possible, IPM uses pesticides that target specific pests and
are less toxic to beneficial organisms.  To the extent IPM decreases pesticide
use, reduces toxicity, and optimizes timing, gains in environmental benefits
can occur in terms of improved water quality, decreased probability of
wildlife poisonings, and decreased probability of negative health effects for
applicators.

In some cases, IPM increases crop yields.  But even when yields remain
unchanged, farmers can still profit if a decrease in pesticide expenditures is
larger than the increase in expenditures on other inputs (e.g., labor). 
[Jorge Fernandez-Cornejo (202) 219 0463; jorgef@econ.ag.gov]

Rotational grazing involves the management of livestock on a series of
pastures.  Farmers effectively rotate herds across these pastures throughout
the year to maximize production.  A key component to the success of rotational
grazing is planting forage crops that mature at different times throughout the
year.  Both dairy and beef cattle farmers have employed rotational grazing.  

Pastures that are on rotational grazing tend to have rapid regrowth and
recovery potential, generally higher quality forage, decreased weed and
erosion problems, and more uniform soil fertility levels.  A well-managed
rotational pasture system allows a farmer to reduce labor and purchased feeds
by substituting forage crops for feed.  Assuming the farmer moves the herd
from field to field, this substitution can be sustainable if grazing does not
exceed a field's rate of regrowth.  Several researchers have experimented with
rotational grazing as an alternative to row-crop agriculture on erosion-prone
land, finding that rotational grazing ensures soil cover and that in some
locations, it yields greater profits than row crops.  In this way,
erosion-prone land could return to active agricultural production while
providing environmental benefits of erosion control.
[Joe Aldy (202) 219-0408; jaldy@econ.ag.gov]


SPECIAL ARTICLE

China: A Retreat
From Ag Reforms? 

China's leaders are transforming their centrally planned economy into a
"socialist market economy," allowing markets to guide producer and consumer
decisions while the central government retains political control and manages
the general economy.  In the agricultural economy, markets and market forces
have become increasingly important, but the government's role has intensified
since 1994 in the markets for several basic commodities.  This policy
reversal--intended to boost grain production--is a response to higher
inflation, concerns for food self-sufficiency, and a decline in area sown to
grains.

In a retreat from the relative liberalization of a few years ago, the
government now restricts grain market operations.  Its policies emphasize
self-sufficiency, control of the grain economy, and urban food security.  A
return to the old policy of greater intervention in agriculture also indicates
China will purchase less grain in world markets, at least in the short term.  

China is the world's largest producer and consumer of grain and the largest
consumer of cotton.  As a result, any major change in its supply and demand
situation can significantly affect world markets for corn, wheat, barley,
oilseeds, rice, and cotton. 

Policies Change,
Objectives Remain

While China has liberalized much of its economy--including agriculture--since
the early 1980's, its food policy objectives have changed little over the past
40 years.  The objectives are to insure adequate urban food supplies (food
security), accumulate sufficient grain reserves, stabilize food prices,
promote food self-sufficiency, participate in world trade, and improve farm
income.

Like the food policy objectives of many countries, some of China's are
difficult to accomplish simultaneously.  At various times over the past 40
years, the central government has emphasized the achievement of certain goals
while neglecting others.  And changes in policies have sometimes had dramatic
effects on China's agricultural economy and on agricultural imports and
exports.

From the mid-1950's to the early 1980's, China's rural economy was organized
into people's communes that controlled all aspects of rural life. 
Government-owned institutions managed the circulation of agricultural products
from farm
gate to consumers, ending the century-old free market system.  The
government's Grain Bureau purchased, transported, stored, milled, and retailed
all grain leaving the farm, primarily to feed urban residents.   

In the early 1980's, the government disbanded the commune system and
instituted reforms, giving markets a greater role in the rural economy.  By
the end of 1993, these market reforms accelerated, as 28 out of 31 provinces
began to phase out the Grain Bureau's grain ration system that allowed urban
consumers to purchase grain at low fixed prices.  To many observers it
appeared that China would steadily pursue an economic course based on free
markets.  However, this has not occurred.

Three factors are likely to have pushed China's leaders to reassert government
control over grain markets since 1994, veering away from a policy of letting
the market allocate the country's resources to the most efficient uses.  

First, inflationary pressures in late 1993 to early 1994, and a sharp rise in
grain prices in 1994, undermined the government's resolve to carry out market
reforms.  A driving force in the general rise in prices was the large increase
in the money supply, when the Ministry of Finance issued more money to bail
out inefficient state-owned enterprises and to increase wages and bonuses,
largely to urban workers.  In 1994 and 1995, anti-inflationary measures were
instituted, including price controls. 



Price stability has always been important to China's central leaders, many of
whom recall the devastation of hyperinflation at the end of World War II and
are wary of civil unrest that rising prices might invoke.  When the objective
of price stability came into conflict with raising farm incomes, China's
leaders exhibited their traditional urban bias of pursuing price stability.

The second factor in the reassertion of central control was that the
relatively rapid increases in grain production that followed rural reforms in
the 1980's began to slow in the 1990's.  Leaders became concerned about the
decrease in area sown to grains.

Third, in 1994 and 1995, analysts within and outside China questioned the
country's capacity to produce enough grain to meet growing consumption
requirements.  It is possible that these reports had a sobering effect on the
central leaders, pushing them to limit market reforms and initiate the
"governors' grain bag responsibility system," a policy designed to promote
adequate supplies of domestic grain at provincial levels.  Even so, China has
publicly announced that it has the ability to meet all of the country's
consumption needs.

"Grain Bag" Policy 
Aims at Self-Sufficiency

In early 1995, the central government initiated a new grain policy giving
provincial governors the responsibility of maintaining the "grain bag."  The
policy applies to all grain crops (wheat, corn, and rice) and some oilseed
crops.  

Governors are responsible for: a) stabilizing area sown to grains, b)
guaranteeing investment in inputs like chemical fertilizer to stimulate grain
production, c) guaranteeing that certain quantities of grain are put into
stocks, d) insuring that scheduled transfers of grain in and out of a province
are completed, e) allaying urban residents' concerns by supplying grains and
edible oils, and f) stabilizing grain and edible oil prices.  Additional
responsibilities include developing a means to control grain markets,
controlling 70 to 80 percent of commercial grain sales, controlling grain
imports and exports, and raising the level of grain self-sufficiency.

Provincial governors implement the policy by drawing up a grain
output-and-demand balance sheet for each county.  The county balance sheets are
sent to
the provincial Grain Bureau office, which estimates and plans grain transfers
between deficit and surplus counties within the province.  The governor then
estimates the province's total grain output and demand and determines its
surplus or deficit.  These balance sheets are sent to the Ministry of Internal
Trade, which organizes a national grain balance sheet to estimate potential
grain transfers between provinces and to calculate potential grain exports and
imports.

If a province is grain-deficit, the governor must first attempt to increase
supplies by stabilizing or increasing the area sown to grain, increasing
inputs to raise yields, and/or providing subsidies to grain producers. 
Second, the province provides a list of the amounts and kinds of grains to be
purchased domestically or to be imported.  Third, the governor purchases
domestic grain through wholesale markets or receives imported grain from the
central government.  If the province succeeds in producing a grain surplus,
the governor maintains surplus production to support sales to grain-deficit
provinces.  

The financial responsibility for managing grain and edible oil supply and
demand balances has been transferred from the central government to the
provincial level.  In the case of natural disasters, local resources should be
used first to offset any grain losses.  The central government chose this
course of action to reduce its financial exposure.  If a local government
cannot handle a disaster situation, the State Administration for Grain
Reserves provides assistance. 

To carry out their new responsibilities, governors use their provincial Grain
Bureaus, which perform both state and commercial operations.  State operations
consist of forcing farmers to sell grains and oilseeds at fixed quota prices
(below market prices) and transporting, storing, milling, transferring, and
retailing the grain.  Losses incurred by the Grain Bureau while performing
these operations are subsidized by the central government.  For 1996, the
central government planned to purchase 50 million tons of grain via this
operation. 

Once a local state quota has been met, grain markets can function. 
Government-owned commercial grain companies (county and provincial level),
feed mills, and private grain traders purchase grain from farmers and
participate in local village and township grain markets.  These firms compete
with one another once the government quotas are filled and can participate in
county, provincial, wholesale, cash, and futures markets.

The central government's planned purchases account for about 10 percent of
China's grain output.  Another 10 percent is purchased at market prices by the
government-owned commercial grain companies.  Farmers sell the rest in local
urban and rural markets or consume it on-farm.

Under the old system of rationing grain and edible oil--in operation from 1953
to 1993--urban families were issued coupon books that entitled them to
purchase fixed quantities of grain and edible oils at low fixed prices from
government-operated grain stores.  In 1995, various provinces used different
systems, such as grain books, grain coupons, or controlled markets, to help
low-income families obtain low-priced grains in government-owned grain stores. 
In making these purchases, low-income families have few consumption
choices--they buy whatever is on the shelf--and the grain tends to be older and
of
lower quality than grain sold elsewhere.  Higher income urban residents shop
in open markets where the grain is fresher and of better quality.

"Grain Bag" Policy
Appears to Meet Objectives

Because the "Grain Bag" policy has been in effect for less than 2 years,
little information has been published as a basis for evaluating its success. 
However, initial observations indicate that the policy appears to be
accomplishing what it set out to do.

The policy stimulated provincial governors to use financial and administrative
means to push farmers to expand area sown to grain crops.  At the same time,
the governors used their political and administrative powers to insure that
appropriate quantities of inputs were available to farm families to grow grain
crops.  Chemical fertilizer supplies, for example, increased by 8 percent from
1994 to 1995, and increased again in 1996, boosting output prospects. 
Favorable weather conditions led to excellent grain crops in 1995 and 1996. 

Provincial governors insured that financial assets were available for their
state-owned Grain Bureaus to purchase grain and edible oil seeds from farmers. 
Both on-farm and state-owned grain stocks rose.  The implementation of the
"grain bag" policy created conditions that raised China's self-sufficiency
rate.  

Through administrative measures, local government authorities were able to
halt the downward trend of area sown to grains.  Plantings for all grains
increased from 109.5 million hectares in 1994 to 110.1 million in 1995.  Local
leaders were encouraged to pay increased attention to grain production in 1995
and 1996, which led to greater government investment in the grain economy. 
Total grain production increased from 445 million tons in 1994 to 467 million
in 1995 and to a projected record of more than 480 million in 1996.  

China's Vice Premier made a rare comment on China's grain stock situation in
January 1997, noting that at year-end China's state grain reserves totaled a
record 148.5 million tons, up 34.4 million from year-end 1995.   (In 1991,
state grain reserves were reported to be around 120 million tons.)  The total
grain stock report gave no breakdown of wheat, rice, and corn, the primary
grains held in state stocks.  The increase in state-owned wheat and corn
stocks, which are primarily used to meet consumption requirements in urban
areas, probably was one factor for the downturn in China's wheat and corn
imports for 1996/97.

In 1996, world corn prices soared, and China's corn producing provinces wanted
to export corn to capture profits from the international market.  Officials in
Beijing, however, placed a ban on corn exports and promoted the shipment of
corn from Manchuria to feed deficit provinces in central and south China to
meet their grain security requirements.  China is now exporting some corn, but
missed a major market opportunity.

Based on visits to urban areas by USDA's Economic Research Service analysts in
1995 and 1996 and on reports in China's domestic press, grain and edible oil
supplies for urban residents appear to have stabilized.  Through
administrative measures, government authorities were able to halt increases in
grain prices and stabilize grain markets. 

One of the big concerns in China last summer was whether or not the
government-managed grain procurement system would purchase all the wheat that
it had contracted with farmers.  Authorities worried that if the central
government failed to allocate sufficient funds to support wheat purchases, or
if the Grain Bureaus offered lower prices, issued IOU's to farmers, or voided
contracts, then farmers would be less responsive to directives in planting
wheat for the 1997 harvest.  


From available evidence, it appears that at least for the wheat crop, Grain
Bureaus were able to purchase all the wheat that was contracted (purchases for
other crops are not yet known).  Given the fact that the 1996 crop was a
record, purchases likely were greater than consumption, which means that some
of this year's wheat crop very likely ended up boosting government-owned and
-controlled wheat stocks.   

The government now has control over wholesale grain markets as well as local
grain marketing.  The central government continues to maintain a tight grip on
grain imports and grain exports through its state trading corporation, COFCO
(China National Cereal, Oils, and Foodstuffs Import and Export Corporation). 
The state is in the process of strengthening its control over state-owned
grain stocks through the State Administration for Grain Reserves.

The end result of the policy change has been to raise the level of grain
self-sufficiency and reduce imports.  China's participation in international
grain trade decreased in the last 2 years.  In 1994/95, China imported 18.78
million tons of grain and exported 1.66 million.  In 1995/96, China imported
15.95 million tons and exported 860,000 tons.  In 1996/97 China is projected to
import only 7.2 million tons and export 1 million.

The drive to increase self-sufficiency has been costly.  Considerable
resources were expended by government administrative entities to implement the
policy.  Large sums of money were required to underwrite the grain storage
system.   Some of the grain stored on-farm or in state-owned bins is damaged
each year and continues to be an economic loss for consumers and producers.  
Moreover, land that could have been planted with more competitive crops such
as fruits and vegetables, spices, and nuts, ended up in grain, delaying
China's transition to producing a mix of agricultural products in which it has
a comparative advantage.  By overallocating resources to grain production,
China foregoes an opportunity to produce other goods (including labor-intensive
manufacturing goods) that could be sold in the world market.  The
drive toward grain self-sufficiency, to the extent that it distorts market
forces, reduces China's gains from international trade, undermines its
participation in organizations like the Asia-Pacific Economic Cooperation
(APEC), and weakens China's case to join the World Trade Organization (WTO).

With the success of China's policy turn to boost grain production, world
demand for these crops may dampen somewhat in the short run.  But based on
projected gains in population and grain demand for the next decade, China's
demand for grain will outpace its production, requiring it to import a
projected 28 million tons of grain annually by 2005.
[Frederick W. Crook (202) 219-0002; fwcrook@econ.ag.gov]

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