AGRICULTURAL OUTLOOK                                         September 26, 1997
October 1997, AO-245
               Approved by the World Agricultural Outlook Board
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AGRICULTURAL OUTLOOK
OCTOBER 1997   
AO-245

CONTENTS

In This Issue

Commodity Briefs-- 
Livestock, Dairy & Poultry: Large Stocks Limit Dairy Price Recovery
Specialty Crops: Dry Bean Production Up As Demand Grows Steadily

Commodity Spotlight--
Corn Output Stable, Demand Prospects Strong

World Agriculture & Trade--
U.S. Ag Exports in Fiscal  98 to Surpass  97

Farm Finance--
Farm Households to Benefit from New Tax Law

Resources & Environment--
New CRP Criteria Enhance Environmental Gains
New Standards for Food Pesticide Levels

Food & Marketing--
Food Prices for 1998 Maintain Slow Rise

Special Article--
U.S. Ag Policy--Well Below WTO Ceilings on Domestic Support


OUTYEAR PROJECTIONS FOR U.S. AG TRADE AND FOOD CPI          

Corn Output Stable, 
Demand Prospects Strong

The corn market this fall is relatively calm, with supplies more abundant than
a year ago and prices fairly stable. Last year, in contrast, corn supplies
were virtually exhausted across most of the country, and users were paying
hefty premiums to procure the first new-crop corn coming out of the southern
states. Corn production in 1997, forecast at 9.27 billion bushels, is down
fractionally from 1996 but would be the fourth-highest crop on record. With
much larger carryin stocks, corn supplies in 1997/98 are expected to increase
5 percent, but with strong prospective domestic demand and increased exports,
the supply outlook is relatively tight and ending stocks are projected to
shrink.

The season-average price of corn received by farmers is forecast at 
$2.45-$2.85 per bushel in 1997/98. The midpoint forecast is only slightly 
below the 1996/97 price, despite a tighter outlook.

U.S. Ag Exports 
To Rise In Fiscal  98 

Fiscal 1998 U.S. agricultural exports are projected at $58.5 billion, up $2
billion from the 1997 forecast and second only to the 1996 record of $59.8
billion. At $38 billion, agricultural imports are also projected up $2
billion, so the agricultural trade surplus will remain unchanged from the 1997
forecast of $20.5 billion. The export value of both bulk and high-value
products (HVP's) is expected to rise--HVP value is projected up $1.5 billion
over fiscal 1997 and bulk exports are expected up $500 million.

Meat and horticultural products account for much of the increase expected in
HVP export value in 1998. The volume of bulk exports will be pushed up by
larger U.S. exportable supplies of wheat, declining export competition for
wheat and corn, and strong foreign demand for soybeans. 

Food Prices 
Maintain Slow Rise

The Consumer Price Index (CPI) for food in 1998 is forecast to rise 
2.5-3 percent, close to the 2.8-percent rise forecast for 1997. The 
at-home component of the CPI is forecast to increase 2.5 percent in 1997 and
between 2.5 and 3 percent in 1998, and the away-from-home component is expected
up 2.9 percent in 1997 and 2.5-3 percent in 1998. Food prices have held to
moderate gains of 3 percent annually since 1992 for several reasons. General
inflationary pressure has remained stable, keeping in check the costs of food
production and marketing. Because the farm value proportion of the U.S. food
dollar has been declining, retail prices are determined less by farm commodity
prices, and more by food processing and marketing costs. 

New CRP Criteria Enhance 
Environmental Benefits

The 1996 Farm Act continued the Conservation Reserve Program (CRP) up to a
maximum of 36.4 million acres through the year 2002. The 15th CRP signup,
conducted in March 1997, was the largest CRP signup ever--USDA accepted 16.1
million acres of the 23.3 million offered. Acceptance was based on the ranking
of offers using an environmental benefits index (EBI). Early results suggest
that the farmland acres accepted in the 15th signup, the first major CRP
signup under the 1996 Farm Act, will provide greater environmental benefits
and cost 22 percent less compared with CRP historically.

USDA will hold a 16th signup during October and November 1997. Modifications
to the EBI to further enhance environment effectiveness are in place for the
16th signup.

U.S. Is Well Below 
WTO Domestic Farm 
Support Ceilings

The U.S. will be able to meet World Trade Organization commitments to reduce
domestic support to agriculture without making any further changes in domestic
programs through the final year of the WTO implementation period--2000. The
1994 Uruguay Round (UR) Agreement on Agriculture requires WTO member-countries
to reduce the total amount of trade-distorting domestic support for
agriculture by 20 percent from a base period level (1986-88). In addition to
the UR's limitations on export subsidies and import barriers, the agreement
provided for restrictions on domestic support because of general concern that
those policies have significant indirect effects on trade. 

The ability of the U.S. to meet its WTO domestic support reduction commitments
stems from two main factors, which greatly reduce current and future U.S.
domestic support levels relative to the 1986-88 base value of support. The
first involves WTO provisions that specified how domestic support reduction
objectives would be defined and implemented. Second is the shift in U.S. farm
programs after 1985 toward increased market orientation and reduced subsidies.

The New Tax Law: 
How Farmers Benefit

Most farmers will pay less Federal income tax, and farm families will find it
easier to transfer family farms across generations, under the Taxpayer Relief
Act of 1997. Farmers are expected to save over $1.6 billion per year in
Federal income taxes and between $150 and $200 million in Federal estate taxes
through a number of general and targeted tax relief provisions. 

Education incentives, retirement accounts, new tax credits for households with
children, increased deductions for health insurance payments by self-employed
taxpayers, and lower capital gains taxes will help reduce income taxes.
Farmers will also benefit from several provisions that address income
fluctuations across several tax years. Finally, the estate tax provisions
reduce the likelihood that a farm or its assets will need to be sold to pay
estate taxes.

New Standards for 
Pesticide Residues in Food

The Food Quality Protection Act of 1996 (FQPA) creates a new, uniform, 
health-based standard for allowable pesticide-related risks in food. Under
FQPA, a
new safety standard for residues applies to all foods--raw and processed. FQPA
establishes a new risk assessment process and requires the U.S. Environmental
Protection Agency (EPA) to review all residue tolerances against the new
standard within 10 years. EPA must also consider any special susceptibility of
infants and children to pesticide effects. Additional provisions address
registration of minor-use pesticides; uniformity between state, Federal, and
international standards; improved data collection to support implementation of
the law; and Federal communication with consumers about the risks and benefits
of pesticide use.


COMMODITY BRIEFS

Livestock, Dairy, & Poultry

Large Stocks Limit
Dairy Price Recovery

Large U.S. commercial dairy stocks, particularly of nonfat dry milk and
American cheese, loom as the greatest constraint to additional recovery in
prices of milk and dairy products. The August 1 total dairy holdings were more
than 1 billion pounds, milk equivalent, above a year earlier. Any further
seasonal price rises probably will be quite modest unless stocks can be
reduced sharply and quickly.

Weak movement of cheese in the spring was the most important contributor to
the stock buildup. Sluggish sales increased cheese inventories and also
eliminated the need for normal growth in cheese production. As use of milk
powder for cheese production plummeted and more milk went into butter and
nonfat dry milk manufacture, stocks of nonfat dry milk soared.

August 1 stocks of American cheese varieties amounted to 469 million pounds,
18 percent higher than a year earlier, far outweighing the small decline in
holdings of other cheese varieties. Although cheese stocks were large, they
were still at a level where a rebound in sales could bring them back into
balance fairly quickly.

Cheese prices rose sharply during July and August as cheese wholesale movement
recovered and milk production gains stabilized. Early September cheese prices
on the Chicago Mercantile Exchange were 20-24 cents per pound above the early
May lows. Surpluses of nonfat dry milk are available to boost cheese
production, and any additional cheese price rises could trigger a movement of
powder into cheese production. Exports under the Dairy Export Incentive
Program (DEIP) and even significant sales to the government under the support
program have yet to bring the heavy stocks of nonfat dry milk under control.

Manufacturers' stocks of nonfat dry milk on August 1 were 159 million pounds,
more than double those of a year earlier. Commercial stocks of butter on
August 1 were 62 million pounds, nearly twice the level reported for a year
earlier. However, most of this noted rise was due to this year's improved
coverage, as warehouses are now reporting butter stocks that had not been
reported earlier. Butter stocks did not appear to be out of line with seasonal
needs. Similarly, stocks of canned and dry whole milk were moderate.

Exports under the Dairy Export Incentive Program (DEIP) will reduce stocks
somewhat in coming months, but additional large sales for quick shipment would
be needed to have a significant effect on 1997 prices. A large portion of the
recent surge in DEIP business is for shipment in late 1997 or early 1998.
Allocations under DEIP for nonfat dry milk total about 92,000 metric tons,
down from 100,000 tons a year earlier. 

Price support purchases of 27 million pounds of nonfat dry milk since May were
the largest since 1994, although hardly large by the standards of most earlier
years. 

Dairy product demand is expected to be modest during the rest of 1997, as the
economy continues to grow. However, commercial use is not expected to be
enough to absorb the increase in milk output, pull down stocks, and generate
much further price strength. Although DEIP sales certainly will buttress
prices during autumn, the international market is not expected to generate a
flurry of additional sales for autumn shipment. 

Prices of nonfat dry milk are not projected to post much seasonal rise, and
cheese prices and manufacturing milk values may slip after an early-autumn
peak. Butter prices will be unsettled but may gain slightly as the yearend
holidays approach. Average prices of all milk are projected to be about $14
per cwt, significantly higher than during spring and summer but far below a
year earlier.
Jim Miller (202) 219-0834
jjmiller@econ.ag.gov

For further information, contact:  Leland Southard coordinator; Ron Gustafson,
cattle; Shayle Shagam, beef trade; Leland Southard, hogs; Mildred Haley, pork
trade; Jim Miller, domestic dairy; Richard Stillman, world dairy; Milton
Madison, domestic poultry and eggs; David Harvey, poultry and egg trade,
aquaculture. All are at (202) 219-0713.


COMMODITY BRIEFS

Specialty Crops

Dry Bean Production Up
As Demand Grows Steadily

The U.S. is the fifth-largest producer of dry edible beans in the
world--following 
India, China, Brazil, and Mexico. In 1997, U.S. dry bean growers
will produce an estimated 29 million cwt 7 percent more than a year earlier
and 3 percent above the annual average for the 1990's. Acreage and yields have
been trending higher over time, and both rose in 1997.

This season, yield and production have increased despite early weather-related
problems in the Red River Valley of North Dakota and Minnesota--the largest dry
bean producing region in the U.S. Excessive rains in July flooded some fields
in the valley, causing crop damage and greater-than-normal acreage
abandonment. In North Dakota, an estimated 16 percent of acreage could be
abandoned, compared with 10 percent during the previous 3 years. However,
increased acreage and high yields in most other states outweighed lower
production in North Dakota and Minnesota.

Based on acres planted, lower production is expected for pinto, garbanzo, and
Great Northern beans in 1997, and higher output is likely for lima beans,
small reds, blacks, and light-red kidneys. Larger overall production will
raise stocks and likely result in lower prices into early 1998. Given lower
dry bean prices next spring, a modest reduction in dry bean acreage is likely
for the 1998 season.

Dry bean production is expected to remain on its slow growth trend into the
year 2000, sustained by steady domestic and export market demand. Exports are
important to the U.S. dry bean industry. The U.S. is a net exporter and a
major player in the world dry bean market, ranking third in export volume
behind China and Burma. In 1996, U.S. dry bean exports were valued at $202
million (imports were $28 million). The top U.S. export markets include the
United Kingdom, Japan, Algeria, and Mexico.

Over the past 5 years, an average of 18 percent of U.S. dry bean supplies has
been exported, and estimates suggest that this could rise to nearly 20 percent
in 1997. An export share of production of 18 percent is relatively high when
compared with other sectors of the vegetable industry, such as fresh
vegetables (8 percent), frozen vegetables (7 percent), and canned vegetables
(6 percent). Colored beans, such as pintos and kidneys, accounted for 64
percent of U.S. dry bean export value in 1996.

On the domestic front, per capita dry bean use has been rising since the early
1980's, particularly for kidneys, blacks, and pintos. Major factors in this
trend include the growth of the Hispanic population in the U.S., the
popularity of Mexican/Southwest foods, and the rising nutritional awareness of
consumers. The proportion of Hispanics in the U.S. population increased 53
percent during the 1980's and is expected to increase 36 percent in the
1990's. Today, people of Hispanic origin account for 10 percent of the U.S.
population up from 6 percent in 1980. The Census Bureau estimates that by the
year 2020, Hispanics will account for about 15 percent of the U.S. population.

Domestic per capita consumption of dry beans had peaked during World War II,
at 11 pounds per person. Per capita consumption then underwent a long-term
steady decline that bottomed out in the early 1980's at 5.1 pounds. Since
then, U.S. per capita consumption of dry beans has risen to an estimated 7.8
pounds in 1997. However, annual gains in recent years have been smaller, and
growth in domestic per capita use may be losing steam.

Several factors in this recent apparent slowdown include the expanding
economy, and rising incomes that have encouraged consumers to switch to more
expensive sources of protein. Another could be the maturing of the
Mexican/Southwest food phenomenon, as a similar stabilizing trend is occurring
with chile pepper use.

Despite the apparent slowdown in dry bean consumption, the fundamentals of
future market growth--population trends, health consciousness, low product
cost--still suggest increases in the coming years. However, new promotions or
new products that capture and hold the attention of the American consumer will
have to be developed to continue expansion of the domestic market. Without
significant gains in the domestic market, future growth in the industry will
fall squarely on developing export markets in an increasingly competitive
world arena.
Charles Plummer (202) 219-0717 and Gary Lucier (202) 219-0117
cplummer@econ.ag.gov 
glucier@econ.ag.gov

Specialty Crops Brief--BOX

Acreage Abandonment Up

In 1997, 9 percent of dry bean acreage in the U.S. was abandoned, compared
with a 6-percent average since 1970. The largest acreage abandonment during
this period was in 1993, when 13 percent of dry bean acreage was lost due to
various weather anomalies. Since 1980, dry bean acreage abandonment has
trended upward. Average abandonment during this period has been 7 percent,
compared with the 1970's average of 4 percent. 

One reason for the upward trend in acreage abandonment may be the rising use
of Federal crop insurance. Since 1980, the amount of insured dry bean acreage
has steadily increased. This has allowed growers to occasionally cut losses
during crop disasters by abandoning insured fields they may have previously
harvested when the crop was uninsured. A producer's decision to abandon the
crop would be based on the expected indemnity payments relative to market
returns minus harvesting costs (assuming that no other variable costs are
outstanding). If the expected indemnity payments were higher, the producer
would generally prefer not to harvest and market the crop.

If a dry bean crop is insured, the decision to abandon does not rest solely
with the producer. Approval must be received from an adjuster with the
insurance company. The adjuster's incentive is to see that as much of a crop
as possible is harvested, because harvested product would reduce the amount of
the indemnity paid out. In certain situations the grower might choose not to
abandon the crop because an abandoned crop results in zero yield for that
year. This would diminish insurance coverage in future years because the
previous years' yields are used to determine premium costs and eligibility to
receive insurance.

For further information, contact: Linda Calvin, Susan Pollack, and Agnes
Perez, 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

Corn Output Stable, 
Demand Prospects Strong

The 1997 corn harvest is heading into high gear, with the crop size pegged
close to last year's but in a dramatically different market setting. Last year
at this time, corn supplies were virtually exhausted across most of the
country, and users were paying hefty premiums to procure the first new-crop
corn coming out of the southern states. In contrast, the market this fall is
relatively calm, with supplies more abundant and prices fairly stable. Supply
concerns are beginning to fade, and attention in the months ahead will
increasingly focus on demand developments.

Over the course of the 1996/97 marketing year, which concluded at the end of
August, a large U.S. corn crop eased the extremely tight domestic supply
situation that had pushed prices to record highs, and large foreign crops
provided additional relief. The limelight shifted largely to the soybean
market, where strong demand and tight supplies, as with corn in the previous
year, boosted prices. 

Very strong soybean prices relative to corn presented tremendous incentives
this past spring to plant soybeans--the principal crop competing with 
corn--and farmers responded by raising soybean acreage 10 percent. Despite this
strong competition, corn acreage inched up from the year before to the highest
level since 1985, setting the stage for a good 1997 crop.

With much larger carryin stocks, corn supplies in 1997/98 are expected to
increase 5 percent. Corn production is forecast at 9.268 billion bushels,
based on crop conditions as of September 1. This is down fractionally from
1996 but, if realized, would be the fourth-highest crop on record. Because of
strong prospective demand and yields slightly below trend, the 1997/98 supply
outlook is relatively tight. Solid gains are expected in domestic use and
exports, and ending stocks are projected to shrink, providing underlying price
support. 

Corn Production
More Stable This Year

Farmers planted more than 80.2 million acres of corn this spring, up more than
700,000 acres from the previous year. The sharp gains of 1996, when corn
plantings rose more than 8 million acres, were sustained on a national level,
although with small shifts in the state pattern. Corn acreage outside the main
Corn Belt in the southern and Delta states slipped a bit from the strong gains
of 1996 but remains comparatively large.

The large acreage partly reflects the impact of the 1996 Farm Act which
eliminated annual set-aside programs and enhanced farmers' ability to respond
to market signals. The effects are quite dramatic for combined corn and
soybean plantings, which reached 151.1 million acres this year, the highest
since 1982 when combined plantings totaled 152.7 million, and compared with an
average of 136.3 million for 1991-95.

The average corn yield is forecast at 125.2 bushels per acre, compared with
the long-term trend of about 128 bushels and just below the 1996 yield of
127.1 bushels. The 1997 crop got off to a very promising start, with early
plantings that are typically associated with good yield potential. Crop
conditions were very favorable through June during the early stages of the
crop. At that point, most traders optimistically expected a bumper crop of 10
billion bushels or more that would challenge the record high. Futures prices
sank steadily, effectively taking out most of the risk premium typically
attached to prices early in the summer and low prices carried over into cash
markets.

However, by mid-July, just prior to the critical reproductive stage
(pollination), conditions began to deteriorate, especially in Illinois, the
second-largest producing state. Corn prices began to rebound as a weather
market developed, like in many other years, with traders skittishly reacting
to changes in weather forecasts as well as actual events. Nationally, crop
conditions worsened through most of the summer before beginning to stabilize
in late August.

Over the past several years, U.S. corn production has been characterized by
sharp fluctuations. In the last decade (1987-96), the annual swing in corn
production has averaged more than 2 billion bushels per year, split equally
between increases or declines. Extreme weather patterns such as excessive
moisture or drought were common, with a few seasons such as 1994 when
conditions were near-perfect. Despite a strong underlying upward trend in
yields, reflecting gains from genetic improvements and better management,
there is very strong annual variability around that trend. This year's crop
stands out because the output will be so close to the previous year, and this
stability is contributing to the relative calm market atmosphere this fall.
The explanation for the recent stability lies largely in a break over the past
2 years from weather extremes.

Domestic Use Pegged
at Record High for 1997/98

Domestic demand for corn is expected to be strong over the next year, with use
projected at 7.3 billion bushels, about 100 million bushels above the 1994/95
record and topping 1996/97 by more than 300 million.

Feed and residual use of corn is projected to increase 5 percent to 5.55
billion bushels. Production and supplies of other feed grains will be down in
1997/98, particularly sorghum, reinforcing strong demand for corn. Strong meat
exports will again support increases in meat production and feed demand. Hogs
and broilers are expected to account for most growth. The cattle sector is
moving towards the end of the liquidation phase caused by high feed and forage
costs in late 1995 and 1996.

Food, seed, and industrial (FSI) use of corn is also projected to rise 5
percent in 1997/98 to 1.78 billion bushels. Continued recovery in corn used
for fuel alcohol (ethanol) will lead growth. Although corn for ethanol use is
forecast to increase 11 percent to 485 million bushels, it will not rebound to
the peak level of 533 million reached in 1994/95. 

Some new ethanol plants have opened in recent months, but a few plants were
permanently shut during 1995/96, when industry margins were sharply squeezed.
While the outlook for corn prices is fairly stable, ethanol industry margins
are also dependent on product prices largely influenced by the petroleum
market, along with returns generated by sales of co-products such as corn oil
and corn gluten feed. Prospects for beverage alcohol have been improving,
reflecting a dynamic export market. Production of beverage alcohol from corn
has increased recently as some ethanol producers have added equipment to
diversify their production mix.

Other segments of food and industrial use are forecast to continue growth in
1997/98. Use for sweeteners accounts for the largest share of FSI use. Corn
demand for these other uses tends to be inelastic, and expansion has been
relatively steady over the past several years, except for a small downturn in
corn used for starch in 1995/96. 

U.S. corn exports are projected to increase nearly 13 percent in 1997/98
because of increases in world corn imports and gains in the U.S. market share
as competitor shipments decline. Exports are likely to increase, but the
magnitude of the gain is subject to some doubt, due mainly to uncertainty
about China's role. Despite a major drought that overlapped important corn
producing areas, China has continued to sell corn in recent weeks, mainly in
neighboring Asian markets, reflecting huge stockpiles.

Importers have shown little urgency to buy from the U.S., not only because of
exports from China but also in anticipation of a relatively good U.S. harvest.
Buyers typically try to hit harvest-time lows in prices. Corn prices generally
strengthen seasonally after November, but they could increase considerably
depending on whether or not China curtails export sales.

Although corn supply is projected to be the highest in 3 years, strong use is
expected to keep stocks relatively low. Ending stocks in 1995/96 fell to the
lowest since the 1940's, at 426 million bushels, and have recovered only
partially. In 1997/98, ending stocks are projected at 864 million bushels,
down 77 million from the previous year, and the third straight year below 1
billion.

Given increasing use, this provides only a small cushion against
contingencies. The ratio of stocks-to-use is projected at 9.2 percent in
1997/98, down from 10.7 forecast in 1996/97, but up from the recent low of 5
percent in 1995/96.

Although shortages and soaring prices were very disruptive for many users in
1995/96, it is not clear if many will try to hold larger inventories for their
operations in the future. As in other industries, "just-in time" deliveries
can hold down costs. Most corn processing plants are located in the heart of
the Corn Belt, especially in Iowa and Illinois, facilitating this approach. 

However, most of the growth in livestock and poultry production in the last
decade has been outside the Corn Belt. The broiler industry is concentrated in
corn deficit areas of the South and Southeast. The hog industry has expanded
dramatically in North Carolina, and recently has started to grow in some
western states that also produce relatively small quantities of corn. In each
case, operations are critically dependent on regular shipments from the Corn
Belt, making them vulnerable to any transportation delays. It is unclear
whether or not the operations outside the Corn Belt will try to rely on
just-in-time 
deliveries or to hold inventories.
 
Corn Prices Expected to 
Show Little Change

The season-average price of corn received by farmers is forecast at 
$2.45-$2.85 per bushel in 1997/98. The midpoint of the forecast is slightly
below the 1996/97 price of $2.70, despite a tighter outlook. This is because
the 1996/97 average was pulled up by very high prices at the onset of the
marketing year, before supplies were replenished. While down from the 1995/96
record of $3.24 per bushel, corn prices will still be relatively strong
compared with the $2.30 average of the 1990/91-1994/95 period.

Have we moved to a higher price plateau?  Growers are hopeful of a repeat of
the experience of the early 1970's, when corn prices advanced from a range
under $1.50 per bushel to over $2 as world grain demand took off. Although the
1997/98 forecast is again above recent averages, it is probably unrealistic to
think that prices could not fall back substantially. More favorable weather
this year could have brought the price down significantly. For example, early
this summer--when many expected a corn crop in excess of 10 billion 
bushels--new-crop elevator bids in many parts of the Corn Belt were skidding
toward $2per bushel. Lacking program alternatives such as set-aside, corn
acreage is unlikely to shrink much in the next few years.
 
Regardless of the final price outcome this year, corn sector income will be
bolstered by production flexibility contract payments authorized by the 1996
Farm Act, which will total $3.4 billion in fiscal 1997. These payments are
intended to ease the transition to the new environment that excludes most of
the government "safety net" programs. Given the nearly complete participation
by corn growers, the payment rate will work out to about 49 cents per bushel
for eligible 1997 production, the peak year of support. Payments will decline
over the remaining 5-year period.

Even without the transition payments, market-generated strength in corn prices
has minimized adjustments to the new farm legislation. New approaches to risk
management have attracted increasing attention in the last 2 years, but as yet
there is little conclusive evidence of any major change in farmers' marketing
behavior. 

The fact that many corn farmers missed the record market highs of 1995/96 is
likely to influence corn marketings in 1997/98. Nearly two-thirds of the
1995/96 crop was marketed by the end of January, mostly under $3 per bushel,
before huge price spikes pushed farm prices well above $4 in the spring. As a
result, many farmers may be more inclined to delay a larger portion of sales
to later in the marketing year, despite added storage costs, to avoid missing
out on potential price rallies. 
Pete Riley (202) 501-8512
pariley@econ.ag.gov

COMMODITY SPOTLIGHT BOX 1

Reduced Foreign Production
Boosts U.S. Export Prospects

U.S. corn export prospects in 1997/98 are improved because of lower expected
production in several key competing exporting countries, especially Argentina
and China. U.S. coarse grain exports are forecast at nearly 58 million tons,
with the U.S. global market share rebounding to about 63 percent. U.S. exports
of corn in 1997/98 are forecast at 51.5 million tons, up 13 percent from a
year earlier. Corn supplies are forecast up 5 percent, mostly because of
increased carryover stocks, leaving competitively priced U.S. corn readily
available for export.

World coarse grain production in 1997/98 is forecast at 882 million tons, down
2 percent from a year earlier, but larger carryin stocks have left world
supplies unchanged. As a result, coarse grain prices are expected to be
generally stable.

World coarse grain trade in 1997/98 is expected to exceed 91 million tons,
virtually unchanged from the previous year. Most major importers are expected
to maintain or increase coarse grain purchases, with the exception of
Taiwan--where foot-and-mouth disease problems in the livestock sector are
expected to reduce imports.

China's 1997/98 corn production has been reduced by drought and high
temperatures in many major growing areas. China is forecast to produce 110
million tons of corn, nearly 14 percent less than a year ago. Because China is
the world's second-largest corn producer, a drop of this magnitude can
dominate the year-to-year change in world production.

China plays a key role in world corn markets as both exporter and importer.
For example, in 1993/94 China exported nearly 12 million tons of corn, but 
imported 4 million the next year. In 1996/97, China produced a bin-buster corn
crop of 127 million tons, boosted exports, and built huge stocks.

China's corn supplies in 1997/98 are projected at 151 million tons, down from
last year but higher than any other year. Despite reduced production, China
has continued to export old-crop stocks in 1997/98 to clear excess supplies in
north China. However, corn exports are expected to fall to 40 percent of last
year's level.

Argentina and South Africa, normally major corn exporters, are expected to
have reduced export supplies in 1997/98. Trend yields are assumed at this
time, but production prospects are down due to reduced acreage.

With higher coarse grain production and supplies, the European Union and
Eastern Europe are the only U.S. competitors expected to increased exports in
1997/98. In addition, heavy rain during wheat harvests in some regions from
the United Kingdom to the Ukraine will boost the amount of wheat in Europe
that is not of milling quality and may be fed to livestock. However, it is
unclear how much will be exported, consumed internally, or stocked.

The forecast of increased U.S. corn exports in 1997/98 is based on 
supply-and-demand fundamentals, not on the pace of preseason sales. At the 
start of the marketing year, on September 4, according to U.S. Export Sales, 
outstanding corn sales were only 7.7 million tons, about half the level of a
year ago,
when sales were unusually high.

Contributing to the slower start of corn sales is more early-season
competition and less concern on the part of importers about supply
availability. Last summer, U.S. corn supplies were critically tight because of
the short 1995 crop. Corn prices were high, and importers were worried that
not enough corn would be available, so they purchased more than usual in
advance. It is more reasonable to compare this year's early sales to the
1990-95 
average of 7.5 million than to last year's exceptional sales. 

Moreover, China and Argentina have been marketing old-crop supplies this
summer, cutting into demand for U.S. corn. This competition is expected to
wane as old-crop supplies are used up, and U.S. export sales are expected to
increase. 
Ed Allen (202) 219-0831
ewallen@econ.ag.gov

COMMODITY SPOTLIGHT BOX 2

Caution on El Nino

USDA is carefully monitoring the current El Nino weather phenomenon
--a periodic, large-scale warming of the tropical Pacific Ocean. When an El
Nino develops, it can disrupt weather patterns across the globe due to the
significant ocean-atmosphere interaction. 

Despite indications that the current El Nino is very strong, the implications
for agricultural production are far from certain. The timing of the onset,
severity, and duration of the event all contribute to its impact on
agriculture. In forecasting crop production, USDA incorporates the impact of
weather to date into its assessments. Given the uncertainty of weather, the
forecasts assume normal weather in the period ahead. However, USDA carefully
monitors weather events such as the El Nino phenomenon as they unfold. 

There are some general tendencies associated with El Nino, but the intensity
and timing of the effects are not perfectly predictable. The case of Australia
is illustrative. Australia typically experiences severe drought in an El Nino
event, cutting output of its wheat and barley crops, which are mainly
harvested in the southeast in November and December. Although Australian
authorities reduced production forecasts substantially this spring,
anticipating heavy drought damage, rains in eastern crop areas in recent weeks
were substantial enough to improve crop prospects.

So far, there are clear indications of reduced output in Southeast Asia,
especially in Indonesia. Some analysts interpret a widespread drought in China
over the last several months as evidence of El Nino impact, but correlations
are weak. There has also been much concern about India, where crops are also
historically subject to El Nino-related drought damage, but rainfall this past
summer has been adequate to forestall serious crop reductions.

For the corn market, the most critical effects are generally felt in southern
Africa, where South Africa, Zimbabwe, and other countries often experience
intense drought during El Nino. Corn is the region's staple food, and
authorities in the region are preparing for the worst. Planting of corn is
just getting underway in these regions at this time. Crop outturn in southern
Africa will not be known with certainty until early 1998.
Pete Riley (202) 501-8512 and Ray Motha (202) 720-5716
pariley@econ.ag.gov


WORLD AGRICULTURE & TRADE

U.S. Ag Exports In 
Fiscal  98 To Surpass  97

Fiscal 1998 U.S. agricultural exports are projected at $58.5 billion, up $2
billion from the 1997 forecast and second only to the 1996 record of $59.8
billion. At $38 billion, agricultural imports also are projected up $2
billion, so the agricultural trade surplus will remain unchanged from the 1997
forecast of $20.5 billion. The export value of both bulk and high
-value products (HVP's) is expected to rise--HVP value is projected up $1.5
billion over fiscal 1997, and bulk exports are expected up $500 million.

Meat and horticultural products account for much of the increase expected in
HVP exports in 1998. Another record in horticultural exports is projected,
reflecting continued strong economic growth, particularly in Mexico, Asia, and
South America. Larger meat exports to Japan are anticipated as Japanese
consumer concern over beef safety dissipates and the emergence of
foot-and-mouth 
disease and swine fever in Taiwan limits its exports of pork to Japan. 

Bulk export volume will be pushed up by larger U.S. exportable supplies of
wheat, declining export competition for wheat and corn, and strong foreign
demand for soybeans. But while corn prices remain firm, wheat prices will
weaken. And for soybeans, larger crops in major soybean exporting countries
will raise competition and reduce prices.

U.S. agricultural imports have set records every year since 1975. The forecast
for fiscal 1998 continues this trend as agricultural imports, at a record $38
billion, are projected 6 percent above 1997's forecast. The rate of growth in
imports in 1998, however, is expected to slow from the high levels of recent
seasons as prices for coffee and other tropical products stabilize or fall
from their 1997 levels. 

High-Value Exports 
Expand Again

U.S. exports of high-value products are projected up 4 percent to $35 billion
in fiscal 1998. As expected for 1997, most of the increase in 1998 will be in
consumer-ready food items such as meat, fruits, vegetables, and tree nuts. But
strong gains are also expected in soybean oil, an intermediate product, and
some growth is expected in other intermediate products such as hides and
skins. 

World income growth continues to favor expanded exports of HVP. Projected
growth in gross domestic product (GDP) in 1998 in countries other than the
U.S. is 3.3 percent, a slight gain from the 3-percent growth estimated for
1997. Modest growth is projected for the EU and Japan, but the strongest
growth continues to be in Latin America and Asia. Expansion of GDP in China,
which has been the most rapid for several consecutive years, still leads the
way and is projected to exceed 8 percent, down slightly from its forecast 1997
growth.

Income growth is largely responsible for the recent expanding consumer demand
for meats and thus for the rapidly rising global demand for livestock feeds.
This trend is expected not only to buoy demand for bulk commodities in 1998,
but also to contribute to expanding exports of commodities such as soybean
meal, a major feed ingredient. U.S. exports of soybean meal are projected up
500,000 tons to 6.6 million in 1998. However, soybean meal value is projected
lower due to the price-weakening record U.S. crop and strong international
competition. The EU continues to be the largest importer consumer of soybean
meal, and strong gains continue to be expected there. But the percentage gains
projected for Asia are larger, led by expanding demand in China.

U.S. soybean oil exports in 1998 are also expected to expand markedly, rising
to 1 million tons and $600 million compared with  1997's forecast of 800,000
tons and $500 million. Mexico and other Latin American countries will account
for much of the growth, although demand for vegetable oils also continues to
expand rapidly in China.

The $600-million gain projected for 1998 exports of beef, pork, and variety
meats reflects the strong growth expected in export volume to 1.6 million tons
from the 1997 forecast of 1.4 million. Japan continues to be the major
importer of U.S. beef and pork, although exports to Mexico have been rising
rapidly. Gains projected for Japan in 1998 reflect fading concerns about beef
safety which reduced exports in 1997, and the outbreak of foot-and-mouth
disease and swine fever in Taiwan which will curtail Taiwan's pork exports.

Poultry meat exports are projected to rise 100,000 tons to 2.6 million in
1998. But the export value of poultry and poultry products likely will remain
relatively unchanged at $3 billion, since exports are dominated by lower
-priced parts. Russia, a big growth market for poultry exports in recent years,
is expected to continue levying import duties on poultry in 1998, limiting
future gains there. Gains in poultry exports to Latin America, particularly
Mexico, have been significant and are expected to continue in 1998. 

Record U.S. exports of horticultural products are projected for 1998 at $11.2
billion, up 6 percent. Gains of $100 million each are expected for fruits,
vegetables, and tree nuts, which will reach $3.5 billion, $2.7 billion, and
$1.4 billion. Growth in 1998 is expected to equal the 1997 gain. 

In 1997, oranges and apples are leading the fruit export growth. Orange
exports are expanding to Hong Kong and South Korea, while increased apple
exports are going to South America, the Middle East, and Southeast Asia.
Tomatoes and lettuce, particularly to Canada, show the largest growth among
the vegetables exported so far in 1997. Wine and essential oils account for
much of the remaining growth estimated for both 1997 and 1998. HVP sales to
Canada have benefited from the progressive lowering of duties, while growth in
sales to Asia and Latin America reflects demand growth driven by economic
development and expanding incomes.

Bulk Export Volume 
To Rebound in 1998

Initial forecasts for fiscal 1998 place the volume of  bulk commodity exports
(wheat, rice, coarse grains, soybeans, and cotton) at 118.5 million tons, a
14-percent or 15-million-ton gain from the 1997 forecast. The value of fiscal
1998 bulk exports is projected at $23.5 billion, up 2 percent. Gains in bulk
exports are a shift from the declines of last 2 years. In fiscal 1997, bulk
export volume is expected to reach only 103.5 million tons, 13 percent below
1996. And in 1996 bulk exports were 6 percent below 1995, when a large surge
in bulk product shipments had catapulted total volume figures to a record
169.7 million tons.

Wheat, corn, and soybeans account for much of the gain expected in bulk
exports in fiscal 1998. U.S. wheat and flour exports are projected at 30.5
million tons and $4.6 billion, a 28-percent increase in volume and a 
15-percent gain in value from 1997's forecast. U.S. exports will benefit from
smaller exportable supplies of major export competitors--Canada, Australia,
and Argentina--where production will drop in 1997/98 in response to poorer
growing conditions and the recently lower prices. And reduced production in
Morocco, Algeria, and Tunisia in 1997/98 will raise import demand in these
countries again. 

Rice export volume is also projected to rise nearly 8 percent to 2.7 million
tons on the strength of a larger 1997/98 U.S. crop. But the increased rice
production will likely reduce prices, leaving the forecast of export value
unchanged at $1 billion. Rice import demand is projected to rise in 1998 in
Indonesia, China, Brazil, and Iran, all large importers. Drought in parts of
Southeast Asia and Central America, as well as torrential rains in
northwestern South America, may enable the U.S. to capture additional market
share in both South America and Southeast Asia.

Coarse grain exports are projected up 6 million tons and $600 million to 58.2
million tons valued at $7.5 billion. Corn accounts for all the increase, as
little change is expected for the other coarse grains. China increasingly
consumes a growing share of its own production, exporting less and reducing
international export competition. A smaller 1997/98 corn crop in Argentina,
along with lower barley production in Canada and Australia, may also help
reduce export competition. And strong global feed demand, as livestock
industries expand worldwide, continues to support coarse grain exports.

Soybean exports also are benefiting from the strength of global feed demand.
U.S. soybean exports in fiscal 1998 are projected up 2.3 million tons to 26
million. But large crops in Argentina and Brazil, as well as the U.S., are
expected to push prices down, lowering export value by $800 million to $6.1
billion for fiscal 1998. However, despite larger production, South American
soybean export competition is expected to be about unchanged. Argentina
continues to promote exports of soybean meal rather than soybeans, so its 1998
exports of beans are expected to show only modest gains. And although Brazil
is estimated to have more than doubled soybean exports in 1996/97 due to
elimination of an export duty on raw commodities, it is projected to shift
back toward greater exports of meal and less of beans again in 1997/98.

Fiscal 1998 U.S. cotton exports are forecast at 1.6 million tons, the same as
in 1997, reflecting fairly flat U.S. supplies. But continued strong global
demand, coupled with declining U.S. and foreign stocks, is expected to push
export value up to $2.8 billion. Mexico and other Latin American countries are
likely to continue as important destinations for U.S. cotton. And U.S. exports
to Southeast Asia could rebound in 1998 as the region's imports increase; but
exports to China are likely to decline as China relies increasingly on its own
supplies.
Carol Whitton (202) 219-0825
cwhitton@econ.ag.gov

WORLD AG & TRADE BOX

Bulk commodities include wheat, rice, feed grains, soybeans, cotton, and
tobacco. High-value products comprise total exports minus the bulk
commodities. HVP includes semiprocessed and processed grains and oilseeds
(e.g., soybean meal and oil), animals and products, horticultural products,
and sugar and tropical products. Appendix table 27 presents a breakout of U.S.
agricultural exports and imports by major commodity group for 1996-98
--both volume and value. 


FARM FINANCE

Farm Households
To Benefit from
New Tax Law

Most farmers will pay less Federal income tax, and farm families will find it
easier to transfer the family farm across generations, under the Taxpayer
Relief Act of 1997. The new law--the tax portion of recent legislation to
balance the Federal budget by 2002--emerges from years of debate on proposals
for tax simplification, broad tax reduction, and targeted capital gains and
estate tax relief. The result should be a net tax reduction for all Americans
of $95 billion over 5 years.

A number of general and targeted tax relief provisions will significantly
reduce Federal taxes for farmers and other rural residents. Farmers are
expected to save over $1.6 billion per year in Federal income taxes and
between $150 and $200 million in Federal estate taxes. 

New tax credits for households with children, incentives for education and
retirement savings,  and lower capital gains taxes will help reduce income
taxes for many families--farm and nonfarm alike. Farmers will also benefit
from several provisions for dealing with income fluctuations across several
tax years. Capital gains provisions are expected to expand agricultural
investment and increase farmland prices. Federal estate tax provisions will be
especially important for farmers and other small business owners who hold
significant amounts of their wealth in business assets. By substantially
increasing the size of farms or other businesses that can be transferred tax
free, the new tax law reduces the likelihood that a farm or its assets will
need to be sold to pay estate taxes

Provisions for 
Income Tax Relief

A variety of targeted income tax relief provisions included in the Taxpayer
Relief Act will affect many farmers and their households. General provisions
providing tax relief for households with children, education, and health
insurance for the self-employed will have the most widespread effect. One
-third of all farm families will qualify for a new tax credit for households
with children that allows taxpayers to directly reduce their income tax by
$500 ($400 in 1998) for each qualifying, dependent child under the age of 17.
While the credit is generally nonrefundable, taxpayers with three or more
children may receive a refund. On joint returns, the credit is reduced if
income exceeds $110,000. In the aggregate, qualifying farm families will
receive an estimated $600 million per year in benefits, about $800 on average.

Two new nonrefundable tax credits provide incentives for higher education
--a Hope Scholarship Credit of up to $1,500 during each student's first 2 years
of college, and a 20-percent Lifetime Learning Credit up to $2,000 annually (by
2003) for each taxpayer. Up to $2,500 of student loan interest ($1,000 in
1998) becomes deductible, and new Education IRA's will allow $500 in
contributions per child. Although the contributions are nondeductible, 
tax-free distributions from those IRA's will be allowed for qualified education
expenses.

All of these education incentives are reduced or eliminated for high
-income taxpayers. But farm families with incomes under the limits, especially
those with children at or near college age, will benefit along with other
qualifying taxpayers.

Of particular benefit to farmers are the changes in the health insurance
deduction for the self-employed, intended to bring small business owners into
line with employees receiving employer-deductible health insurance. Nearly 40
percent of those whose primary occupation is farming, and 20 percent of all
farmers, use the self-employed health insurance deduction. 

In 1997, self-employed taxpayers may deduct 40 percent of family health
insurance costs. The new law gradually increases the deduction to 100 percent
by 2007, an increase from the 80 percent scheduled under prior law. About
400,000 farmers will be able to deduct more of the $1.2 billion they currently
pay for health insurance. As a result, farmers' net annual cost of buying
health insurance will eventually be reduced an additional 10 percent.

The Taxpayer Relief Act provides some new opportunities for retirement savers
that may be of value to farm households, particularly those who already take
advantage of IRA provisions. The act creates "Roth IRA's," which allow tax
-free distributions after 5 years if the holder reaches age 59«, dies, or
becomes disabled. Contributions to these IRA's are nondeductible and are
reduced for couples with more than $150,000 in income and individuals with
over $95,000. Nearly all farms will qualify under these income limits.

An estimated 300,000 more farm households will become eligible to make
deductible IRA contributions, as the income limits that restrict deductible
contributions by taxpayers also participating in employer-sponsored pensions
will double by 2007. Limits for spouses of active participants are even
higher. The $2,000 annual contribution limit remains, but penalty
-free distributions are allowed for higher education and first-time home
buyers. Despite broad eligibility, however, only about 9 percent of farmers
contribute anually, so these new provisions may not significantly increase
retirement savings for many farm households.

In any year, 35 percent of all farm sole proprietors report capital gains,
about three times the frequency for all taxpayers. Capital gains, including
the profits from selling farm assets such as livestock and land, accounted for
13 percent of farmers' total taxable income in 1993. Provisions in the
Taxpayer Relief Act reduce capital gains taxes.

For capital assets owned at least 18 months, the former 28-percent maximum
rate is reduced to 20 percent and the 15-percent rate to 10 percent. For
assets acquired beginning in 2001 and held at least 5 years, the maximum tax
rate will be reduced to 18 percent. For individuals taxed in the 15-percent
bracket, the maximum falls to 8 percent in 2001, regardless of the purchase
date. When fully implemented, reduced capital gains tax rates are expected to
save farmers an estimated $725 million each year.

The act also allows a taxpayer to exclude up to $250,000 ($500,000 if filing a
joint return) of gain on the sale of a principal residence, replacing the
provision that allowed the rollover of capital gain into the purchase of a new
residence and the $125,000 exclusion for taxpayers over 55. Farm residences
represent 12 percent of total farm value and will qualify for the principal
residence exclusion.

Economic incentives to buy and manage assets that generate capital gains have
important implications for asset prices and farm output. With lower capital
gains tax rates, both farm and nonfarm investors will likely increase
agricultural investment, especially in livestock and land. A temporary
increase in the availability of land for sale may occur as owners who had been
waiting for reduced capital gains tax rates release their land for sale. In
the long term, farmland values are expected to increase from such additional
investment, and some farm product prices may fall if greater investment
increases production.

Provisions in the new tax law that reduce tax burdens when income fluctuates
from year to year will benefit some farmers. The 1997 act restores farmers'
ability to use deferred payment contracts without being subject to alternative
minimum tax (AMT), a tax designed to prevent high-income taxpayers from
avoiding taxes by using exclusions, deductions, and credits. Farmers are
allowed to reduce current income taxes by selling assets in one year and
waiting until another year to receive income. But the Tax Reform Act of 1986
did not permit farmers to defer such income when computing AMT. As a result,
up to 5 percent of all farms, many of them large cash grain farms, faced
higher taxes. The 1997 change relieves about 200,000 farms from tax
preparation complexities involved in determining whether they were subject to
the AMT, and reduces taxes by $150 million annually.

Selling livestock because of weather disasters can also create problems by
inflating farm income in the current tax year. The Taxpayer Relief Act expands
existing special treatment of livestock sales due to drought to include floods
and other weather-related conditions. Farmers who prematurely sell livestock
because of weather conditions may defer declaring such income for taxes until
the following year. The farmer must show that under normal business practices
the sale would not have occurred until the following tax year and that weather
conditions caused the area to be eligible for Federal assistance. Gain from
selling more breeding or dairy livestock than would have been sold can also be
deferred by purchasing similar livestock within 2 years. Because the change is
retroactive to the beginning of 1997, it will be available to farmers affected
by flooding early in the year. 

Income averaging for all taxpayers ended after the Tax Reform Act of 1986, but
the 1997 act allows farmers to average income during tax years 1998-2000. A
farmer may elect to shift an amount of farm income, including gain on the sale
of farm assets except land, to the preceding 3 years, one-third to each year,
and pay tax at the rate applicable in each year. If the marginal tax rate was
lower during one or more of the preceding years, a farmer may pay less tax.
Because the current tax rate structure is flatter and the provision applies
only to income from farming, fewer farmers will benefit from this provision
than from the averaging provision available prior to 1986. Farmers, mostly
those who rely on farming as their primary source of income, are expected to
save about $50 million per year.

Estate Tax 
Changes May Ease 
Farm Inheritance

Over the years, increasing farm size and appreciating land values have
increased farm estate values and taxes. In the 1970's, Congress enacted two
special provisions out of concern that Federal estate taxes might force some
family farms to liquidate: special use valuation, which allows farmland to be
valued at its farm value rather than its fair market value, and installment
payment of estate taxes, which permits tax payments over a 14-year period
rather than in full within 9 months of a death.

Despite the availability of special use valuation, a relatively large share of
farmers continues to owe estate tax--an estimated 6 percent of farm estates
owe Federal estate taxes compared with just over 1 percent of all estates.
Changes to Federal estate and gift tax laws in the 1997 act were targeted
primarily to farms and small businesses.

Whether an estate is required to file a return and pay Federal estate taxes is
determined largely by the unified credit provision, which sets the basic level
of estate value exempt from taxation. Prior to the 1997 act, the credit was
sufficient to offset the tax on the first $600,000 of an individual's estate.
Since the credit has not been changed since 1987, its real value  has declined
by about one-third. The 1997 act gradually increases the credit to shield $1
million from estate taxes by 2006, although most of the increase occurs in the
last 3 years. Increasing the unified credit will reduce both the number of
farm estates required to file an estate tax return and the number that owe
Federal estate tax. 

Beginning in 1998, the Taxpayer Relief Act creates an additional exclusion for
farms and other family-held businesses that will exempt from estate taxes
$675,000 of value in a qualified family-owned business. Although the exclusion
is in addition to any benefits from special use valuation and the unified
credit, the total amount excluded by this provision and the unified credit is
limited to $1.3 million. 

The new exclusion will reduce the number of taxable farm estates by about 40
percent and reduce Federal estate taxes due on farm estates by about
one-third--between $150 and $200 million.  Combined with other 1997 changes to
Federal estate tax provisions, the new exclusion should reduce, if not
eliminate, the need to sell farm assets to pay Federal estate taxes. 

The act also directly addresses the liquidity problem often faced by farms and
other small businesses that hold significant amounts of their wealth in the
form of business assets by making changes to the installment payment
provision. The installment payment provision of the tax code allows a
qualifying farm or business to pay estate taxes over a period of 14 years,
with only interest due for the first 4 years. The 1997 act reduces the
interest rate due on the first $1 million in qualifying assets from 4 to 2
percent, and no longer includes the value of assets shielded from tax in
determining the first $1 million. The act also reduces the interest due on
amounts above $1 million to only 45 percent of the rate assessed for
underpayments of tax. Interest is no longer deductible for either estate or
income tax purposes. 

Beginning in 1999, the $1 million value will be indexed for inflation. These
changes, combined with the increase in the amount of property that can be
transferred tax-free, should greatly reduce the liquidity problem that some
farm heirs might otherwise experience as a result of Federal estate taxes.

Also changed is the special use valuation provision. Beginning in 1999, the
$750,000 cap on the reduction in value for tax purposes allowed by this
provision will be indexed for inflation.  The cap has not been changed since
1981. Only about 10 percent of farms electing special use valuation are
affected by the cap, primarily larger farms near urban areas where development
pressure is greatest. Adjusting the cap for inflation will ensure that most
farms continue to be unaffected by the cap.

The 1997 act also refines the requirement that farmland benefiting from the
special use provision be used in farming by the heir for a period of 10 years.
Under previous law, the cash rental of specially valued property other than
from a surviving spouse to a family member did not qualify as continued
farming by the heir since the heir no longer bore the financial risk of
farming the property.  Under the amended law, a lineal descendant of the
decedent will be allowed to rent specially valued property for cash to a
family member as long as that family member continues to operate the farm.
This will provide greater flexibility for heirs under the special use value
provision yet remain consistent with the objective of restricting benefits to
families that continue to farm.

Finally, the act expands the estate tax benefits available to landowners who
donate a conservation easement. A Federal estate and gift tax deduction was
already allowed for the donation of a permanent restriction or easement on the
use of real property to a charity or other qualifying organization exclusively
for conservation purposes. A conservation purpose includes preservation of
land for the general public's outdoor recreation or education, preservation of
a natural habitat, and preservation of open space for the scenic enjoyment of
the general public or in support of a governmental conservation policy. The
Taxpayer Relief Act allows an additional exclusion from estate and gift taxes
of up to 40 percent of the value of the land on which the easement is donated
if it is located within 25 miles of a metropolitan area or a national park or
wilderness area, or within 10 miles of an Urban National Forest.

To qualify for the new exclusion, land must have been owned by the decedent or
a member of the decedent's family for at least 3 years prior to the date of
death, and the contribution must have been made by the decedent or the
decedent's family. The exclusion is based on the value of the property after
the conservation easement is placed and does not include any retained
development rights to use the land for any commercial purpose other than
farming. The maximum exclusion is limited to $100,000 in 1998 and increases to
$500,000 in 2002 and thereafter. 

This new exclusion will provide additional incentives for landowners to donate
a conservation easement within designated areas. However, given the increase
in the amount of property that can be transferred tax-free to heirs under the
1997 act, the number of landowners who could benefit from the additional
exclusion may be relatively small. In addition, geographic targeting that
limits this additional benefit will also limit the pool of potential donors.
Ron Durst (202) 219-0896 and Jim Monke (202) 219-0343
rdurst@econ.ag.gov
jmonke@econ.ag.gov


RESOURCES & ENVIRONMENT

New CRP Criteria Enhance
Environmental Gains

Among its many provisions, the Federal Agriculture Improvement and Reform Act
of 1996 (1996 Farm Act) continued the Conservation Reserve Program (CRP) up to
a maximum of 36.4 million acres through the year 2002. Results suggest that
the farmland acres accepted in the 15th signup, the first major CRP signup
under the 1996 Farm Act, will provide greater environmental benefits and cost
22 percent less than CRP historically.

As a voluntary agricultural land retirement program, CRP provides participants
with an annual per-acre rent and half the cost of establishing a conserving
land cover--usually grass or trees--in exchange for retiring highly erodible
and/or environmentally sensitive land from production for 10-15 years. The
15th signup, conducted in March 1997, was the largest CRP signup ever.
Landowners and operators offered 23.3 million acres for enrollment, and USDA
accepted 16.1 million. Acceptance was based on the ranking of offers using an
environmental benefits index (EBI). 

USDA will hold a 16th signup during October 14-November 14, 1997. Among the
lands eligible are most of the approximately 10 million acres of existing CRP
contracts not enrolled in signup 15 and scheduled to expire in 1997, 4.8
million existing CRP acres expiring in 1998, and other eligible acres not
currently in CRP. As in the 15th signup, EBI rankings will determine which
offers will be accepted. However, in response to comments about the EBI,
certain factors have been modified by an interagency task force consisting of
several USDA agencies, the Environmental Protection Agency, and the U.S. Fish
and Wildlife Service.

15th Signup Rules
Expanded Eligible Acres

In early 1997, USDA finalized rules for the long-term future of the CRP "to
cost-effectively target the CRP to more environmentally sensitive acreage"
(Federal Register, February 19, 1997). The new rules expanded the universe of
eligible lands to more than 240 million acres, approximately 65 percent of
U.S. cultivated cropland, compared with about 100 million acres of highly
erodible cropland eligible in 1985 when the CRP began. The additional eligible
lands were mostly cropland in national and state environmental priority areas,
cropland adjacent to water bodies, cropped wetlands and adjacent upland, and
cropland subject to conservation compliance but not formerly eligible under
CRP erodibility criteria. 

Producers who wished to enroll eligible land into the CRP, including eligible
acres from the 21.4 million acres under CRP contracts then scheduled to expire
in 1997, were given the opportunity to submit offers in the 15th signup. As in
earlier signups held since 1991, offers were competitively ranked using an
EBI. The EBI for the 15th signup was the sum of six environmental factors and
a government cost factor.

Taking into account the 36.4-million-acre statutory enrollment limit, the 32.8
million acres remaining in the program at that time, and the then-impending
expiration of 21.4 million acres later in 1997, USDA was authorized to enroll
up to nearly 25 million acres. On May 22, USDA announced acceptance of 16.1
million acres of the approximately 23.3 million offered by producers for the
15th signup. To help determine overall acreage acceptance, USDA compared the
EBI scores of the 15th signup offers to EBI scores of eligible acres likely to
be bid over the next several years, and analyzed the costs and environmental
benefits of progressive enrollment increments.

The establishment of 259 as an EBI cutoff for the 15th signup resulted in the
acceptance of 16.1 million acres, which met the statutory 25-percent-per
-county enrollment limitation. Changes in the EBI (discussed below) will likely
result in a different EBI cutoff value for acceptance in future signups.

Of the acres accepted in the 15th signup, 4.4 million represented new acres
not formerly enrolled in the program, and 11.7 million represented acres in
CRP contracts then scheduled to expire in 1997. About 55 percent of existing
CRP acres expiring in 1997 were re-enrolled, typically with planned
improvements in vegetative cover for wildlife and reduced annual rental costs.
The regional distribution of accepted acres was similar to the historic CRP
except for small reductions in the Lake States and Pacific regions, and small
increases in the Mountain and Northern Plains regions. 

The average EBI score was 307 for the acres enrolled in the 15th signup, 46
percent greater than the 210-average EBI of the historic CRP, owing mainly to
improved wildlife habitat and water quality benefits, and decreased rental
costs due to lower bids by participants. Approximately 84 percent of accepted
acres were in highly erodible fields, and nearly half of these acres had an
erodibility index greater than 15. The average erodibility index for accepted
acres was 16. Approximately 1.1 million of the accepted acres was devoted to
new or existing trees, while most of the remainder will be covered with
various grasses.

Included in the acres accepted in the 15th signup were over 790,000 acres of
cropped wetland and associated acreage that will be restored and over 652,000
acres that were enrolled in state water quality areas. Due to revised soil bid
caps (the maximum annual rental amount USDA will pay a producer) and enhanced
program competition, annual rental costs were reduced from an average of $50
per acre under the historic CRP to $39 on 15th-signup accepted acres. In
addition, over 60 percent of rental payments requested by producers was below
established USDA soil bid caps by an average of $3 per acre.

EBI Modified for
16th Signup 

Taking into account the 36.4-million-acre CRP statutory enrollment limit, the
27-28 million acres in the program as of October--including lands enrolled in
the 15th signup--and the 4.8 million acres that will expire in 1998, USDA has
authority to enroll up to 13-14 million acres in the 16th signup. However, as
in the 15th signup, actual acceptance likely will be less as program managers
reserve space for the continuous CRP signup and other considerations. 

In response to review of the EBI used to rank offers for acceptance in the
15th signup, modifications to increase environmental effectiveness to the EBI
wildlife habitat and air quality, as well as cost factors were made by an
interagency task force and will be in effect for the 16th signup. 

Modifications to the wildlife habitat factor primarily involve adjustments to
point values reflecting the wildlife benefits of different vegetative covers.
In addition, a new practice (CP25) that rehabilitates degraded ecosystems
--has been added to encourage the restoration of rare and declining habitats.

The air quality factor has been redesigned to better reflect the offsite
damages caused by cropland wind erosion. Previously the maximum score for this
factor was 25 points. The maximum air quality factor score will now be 35
points. Five of the additional points are for soils formed in volcanic or
organic material that can play a large role in air quality problems in some
regions. The other 5 additional points are for offers near Federal Class 1 Air
Quality Areas (for example, national parks), or offers near areas that exceed
EPA's regulations on particulate matter concentrations--PM-10 nonattainment
areas. These changes are expected to result in somewhat higher EBI scores in
states such as Washington, Texas, and Colorado. 

Previously, the cost factor awarded greater points to offers with lower
absolute government cost (e.g., rental payments and cover establishment cost
share). Now, in addition, producers will receive one additional point, up to a
total of 15, for every dollar their bid is below USDA's maximum soil payment
rate for their land. This could benefit producers in higher cost areas such as
the Corn Belt and the Lake States regions.
Tim Osborn (202) 219-1030
tosborn@econ.ag.gov

RESOURCES & ENVIRONMENT BOX 1: 

The CRP 15th Signup 
Environmental Benefits Index

A national environmental benefits index (EBI) has been used to prioritize and
rank CRP offers since the 10th signup in 1991. The EBI was developed
consistent with section 1234(c)(3) of the Food Security Act of 1985 which
provided that "in determining the acceptability of offers the Secretary may
take into consideration the extent to which enrollment of the land that is the
subject of the contract offer would improve soil resources, water quality,
wildlife habitat, or provide other environmental benefits."  

The EBI, which is currently the sum of six ranked environment factors plus a
cost factor, was developed by an interagency task force consisting of several
USDA agencies, the Environmental Protection Agency, and the U.S. Fish and
Wildlife Service. The EBI is not meant to be a rigid index over time, but may
be adjusted and improved depending on the progress of signups, perceived
deficiencies, and/or changed priorities.

When a CRP offer is submitted, USDA's Natural Resources Conservation Service
provides objective data for each of the EBI factors for the associated land.
At the close of a signup, the data for each offer are centralized and the EBI
for each offer is consistently calculated. Each is then nationally ranked in
comparison with all other offers, and those with the highest EBI's are
accepted. States also have the option of developing their own ranking factors
to address particular concerns. In this case, the state receives an acreage
allocation based on the national EBI ranking process, but actual acceptance
within the state is based on how offers rank using the state ranking factors.

In the 15th signup, held in March 1997, the theoretical maximum EBI score was
600 points, based on the sum of the following six environmental factors and a
200-point cost factor:

--N1:  Wildlife habitat benefits (100 points maximum). This factor was based
on the formula (N1A / 50) * (N1A + N1B + N1C + N1D + N1E + N1F). N1A (0-50
points) corresponds to how beneficial the vegetative cover proposed by the
landowner or operator is for wildlife; N1B (0-15 points) relates to whether
the offered land benefits reproduction, staging, or wintering of a Federal or
state threatened, endangered, or candidate species; N1C (0-10 points)
evaluates the proximity of the offer to wetlands; N1D (0-10 points) evaluates
the proximity of the offer to other protected wildlife habitat; N1E (0-5
points) corresponds to the size of the offer (larger contiguous blocks of land
are generally more beneficial for wildlife); and N1F (0-10 points) evaluates
the ratio of upland acres to restored wetlands within the offer.

--N2:  Water quality benefits from reduced water erosion, runoff, and leaching
(100 points maximum). This factor was based on the formula N2A + N2B + N2C +
N2D. N2A (0-30 points) relates to whether the offered acres are located in a
Federal or state-identified area where crop production contributes to ground
water or surface water quality impairment; N2B (0-20 points) evaluates the
offer's contribution to ground water quality protection based on soil
leachability, county pesticide and nitrogen leaching potential, and county
population obtaining drinking water from wells; N2C (0 to 40 points) evaluates
the offer's contribution to surface water quality protection based on the
site's sediment potential, county excess nitrogen levels, and watershed
population; and N2D ( 0-10 points) is based on water quality improvements
associated with wetland enrollment in the offer.

--N3:  On-farm benefits of reduced wind or water erosion (100 points maximum).
This factor was proportional to the higher of the wind or water erodibility of
the soils in the offer. The higher the erodibility, the higher the potential
for erosion that can reduce soil productivity.

--N4:  Long-term benefits of certain practices, such as tree cover, that will
likely extend beyond the contract period (50 points maximum). This factor
recognized that certain practices are likely to remain on the land beyond the
10-15 years of the CRP contract. Practices with the longest expected
retention, such as new hardwood trees, received the most points.

--N5:  Air quality benefits from reduced wind erosion (25 points maximum).
This factor  was proportional to the wind erodibility of the soils in the
offer and the distance-weighted population that could be most affected by
wind-blown dust from the land offered.

--N6:  Benefits from enrollment in conservation priority areas when the offer
significantly contributes to the priority area concern (25 points maximum).
This factor awarded points to offers that were located within national or
state CRP conservation priority areas established for wildlife, water quality,
or air quality purposes, providing the points achieved for the corresponding
national ranking factor (e.g. N1, N2, or N5) were at least 40 percent of the
total possible points for that factor.

--N7:  Government cost of the contract (200 points maximum). The scoring for
this factor is not determined by the Secretary until after the conclusion of
each signup. For the 15th signup, the cost factor was set at a 200-point
maximum. Greater points were awarded to offers requesting lower annual rent.
In addition, up to 10 points were awarded to offers with existing cover where
no Federal outlay for vegetative cover establishment was required.

RESOURCES & ENVIRONMENT BOX 2: 

The Continuous CRP Signup

Under authority of the 1996 Farm Act, USDA on September 4, 1996 began a
continuous CRP signup (referred to as the 14th signup in fiscal 1997) of
acreage devoted to specific practices designated by the Environmental
Protection Agency. These includes filter strips, riparian buffers, grassed
waterways, field windbreaks, shelterbelts, living snow fences, salt-tolerant
vegetation, shallow water areas for wildlife, and wellhead protection areas.
These partial-field practices involve a relatively small amount of acreage,
but provide disproportionately large environmental benefits over the 
10-15 year contract length.

Producers wishing to enroll eligible acres devoted to these practices may do
so at any time, avoiding the need to wait for an announced CRP signup period.
If the producer is willing to accept no more than a maximum
productivity-adjusted payment rate calculated by USDA's Farm Service Agency,
these acres will automatically be accepted. In addition, special bonus
payments may also be available to attract certain high-priority practices. As
of April 1997, partial reporting indicated that approximately 78,000 acres had
been enrolled in the continuous signup. Nearly 66 percent of these acres was
filter strips or riparian buffers. 

Enrollment in the continuous signup is expected to increase as attention is
focused on this option through the USDA Conservation Initiative. The private
sector and many state conservation agencies, in partnership with USDA, are
taking steps to communicate the environmental protection benefits and producer
advantages of filter strips and other practices that qualify for the
continuous signup.


RESOURCES & ENVIRONMENT

New Standards
For Food
Pesticide Levels

The Food Quality Protection Act of 1996 (FQPA) creates a new, uniform, 
health-based standard for allowable pesticide-related risks in food. In passing
the act unanimously, Congress aimed at reducing dietary risks from pesticide
residues and providing special protection to infants and children.

The act amends the two major laws regulating pesticides in the U.S.
--the Federal Insecticide, Fungicide, and Rodenticide Act (FIFRA) and the
Federal Food, Drug, and Cosmetic Act (FFDCA). The law also establishes a new
risk assessment process and requires the U.S. Environmental Protection Agency
(EPA)to review all residue tolerances against the new safety standard within 10
years. Additional provisions define and streamline the registration of
minor-use pesticides; address uniformity between state, Federal, and
international residue standards; require improved data collection to support
implementation of the law; and establish a program of Federal communication to
consumers about the risks and benefits of pesticide use.

For a pesticide to be registered for food or feed use, a residue tolerance
--the maximum allowable level for a pesticide on a specific food or feed
--must be established or a tolerance exemption granted. Before FQPA, pesticide
residue tolerances in raw and processed foods were set according to different
rules.

Pesticide residues in processed foods came under the jurisdiction of the
Delaney Clause of FFDCA, which prohibited any food additives, including
residues of any pesticides, "found to induce cancer when ingested by man or
animal"--essentially a zero-risk cancer standard. Pesticide residues on raw
foods, on the other hand, were regulated under a different section of FFDCA,
and the Delaney Clause did not apply. Residue tolerances for raw commodities
were set at levels to protect public health. Benefits of pesticide use could
be considered in setting residue tolerance levels for raw commodities, but not
for processed commodities.

If residues of a pesticide used on a raw commodity appeared in a processed
food product, the Delaney Clause applied only if the residue concentration in
the processed food exceeded the raw commodity tolerance. In the latter case,
EPA would deny (or revoke) the tolerance for the processed food, and would not
register the pesticide for use (or would cancel the existing registered use)
on the raw commodity.

A 1992 Federal court decision requiring EPA to strictly enforce these
provisions of the Delaney Clause precipitated a tolerance review by EPA. As a
result, new rules revoked some pesticide residue tolerances on some food and
feed products, leading to cancellation of those registered uses under FIFRA.
But EPA withdrew all actions revoking tolerances under the Delaney Clause that
were not final the day FQPA was signed into law, allowing those tolerances to
be assessed under the new review process. 
    
New Safety Standards
For Residue Assessments

Parties to the debate that preceded FQPA over appropriate tolerance standards
for pesticide residue in foods generally agreed that a uniform standard should
apply to both raw commodities and processed products. But disagreement
continued over whether the standard should be zero risk or negligible risk for
cancer. Some scientists questioned the human cancer risk of residues found at
very low levels--parts per billion or trillion.

A 1987 National Academy of Sciences (NAS) report contended that a uniform
negligible risk standard would eliminate most existing dietary carcinogenic
risk, while allowing low-risk chemicals to be used. The NAS report argued that
strict enforcement of the Delaney Clause zero-risk standard would leave
several major fruit and vegetable crops without adequate pest control options.
Moreover, strict enforcement would also constrain EPA's ability to reduce
dietary risks, prohibiting tolerances for pesticides with a slight cancer risk
that might displace more hazardous, but not carcinogenic, materials. Required
enforcement of the Delaney Clause standards, the NAS report argued, also
diverted EPA resources that might address more significant public-health and
environmental risks.

The FQPA defined a new safety standard for residue tolerances that would apply
to both raw and processed foods. The standard is based on "a reasonable
certainty that no harm will result from aggregate exposure to the pesticide
chemical residue, including all anticipated dietary exposures and all other
exposures for which there is reliable information."  In setting tolerances,
EPA must consider dietary exposures to a pesticide from all food uses and from
drinking water, as well as from nonoccupational exposure, such as homeowner
use of the pesticide for lawn care. If total risk from all currently
registered uses of a pesticide exceeds the safety standard, one or more uses
will have to be canceled or residue tolerances reduced, and no new uses of the
pesticide registered, unless new information shows the risks to be within the
standard. 

Cumulative effects from other substances with a "common mechanism of
toxicity"--substances which create toxic effects through similar chemical
processes--are to be considered when evaluating total risk. The effects of
these other substances, whether or not they are pesticides themselves, can
reduce the allowable risk for a pesticide under review and result in more uses
being canceled or residue tolerances reduced. EPA is in the process of
defining criteria to group such substances for use in risk evaluations.

The new standard is applied differently for threshold and nonthreshold effects
of pesticide residues. For threshold effects--those with an identified level
of no known or anticipated harm to human health (no-effect level)--tolerances
are set so that aggregate exposure to the residue will be 100 times lower than
at the no-effect level. For nonthreshold effects, for which no-effect levels
cannot be identified, including many carcinogenic effects, FQPA allows
negligible increases in lifetime risk--currently interpreted as an increased
cancer risk of less than 1 in a million over a 70-year lifetime.

As a result of a 1993 NAS study of the risks of pesticide exposure in the
diets of infants and children, FQPA also requires EPA to ensure, with
reasonable certainty, that no harm will result to infants and children from
aggregate exposure. EPA must consider food consumption patterns of infants and
children; any special susceptibility to pesticide exposure, including the
effects of in utero exposure; and the cumulative effects on infants and
children of pesticide residues and substances with a common mechanism of
toxicity.  For threshold effects, an additional ten-fold margin of safety will
be applied to protect infants and children, which EPA may alter only if
reliable data indicate a lower margin of safety will fully protect infants and
children.

EPA must review all residue tolerances--more than 9,000--against these new
criteria within 10 years of FQPA enactment, giving priority to those that may
pose the greatest risk. The timetable specifies 33 percent within 3 years, 66
percent within 6 years, and the remainder within 10 years.

EPA had been reviewing pesticide residue tolerances through its established
reregistration process, but FQPA changed the EPA pesticide reregistration
process from a one-time review to an ongoing program of periodic reviews of
registered uses. EPA will coordinate the new tolerance reviews with
registration reviews to the extent possible. Factors to be considered in
tolerance reviews include reliability and completeness of data, the nature of
any toxic effect, dietary consumption patterns of consumers and major
identifiable subgroups, cumulative effects and aggregate exposure levels of
consumers, and variable sensitivities of subgroups.

Prior to FQPA, the benefits of a pesticide's use (including such factors as
potential changes in production, costs, and consumer prices) could be
considered in residue tolerance decisions on raw commodities. Benefits of use
can no longer be considered in setting new  tolerances, but can be considered
when evaluating existing tolerances on raw commodities or processed foods for
pesticides classified as carcinogens. Carcinogenic risks from existing
tolerances may be slightly higher than negligible, if use of the pesticide
protects consumers from greater health risks or prevents a significant
disruption in domestic food production. If necessary, these tolerances may
have time limits to meet risk standards defined in FQPA.

The effects of the new limits on benefit considerations in setting tolerance
levels for raw commodities should be minimal, since EPA rarely considered
benefits in setting tolerances before FQPA. Many observers anticipate that
few, if any, existing tolerances will be justified or modified due to
benefits, because the tolerances would be identified in FQPA-mandated annual
EPA consumer pesticide information pamphlets, and grower and food industry
groups would be concerned about public reaction. However, benefits may serve a
role in evaluating how to meet a safety standard in a cost-effective manner.

Other Provisions Address
Array of Issues

Because the costs of meeting EPA's pesticide registration data requirements
have caused voluntary cancellations of some existing minor-use registrations
and discouraged new ones,  FQPA contains provisions to streamline regulatory
procedures for minor uses of pesticides. FQPA defined a minor use as the use
of a pesticide on a crop of  less than 300,000 acres in total, use on an
animal or crop to protect public health from diseases carried by insects or
animals, or a use that provides insufficient financial incentive for
registration.

In the case of insufficient financial incentive, the pesticide must play a
significant role in managing pest resistance or in an integrated pest
management (IPM) program, or have insufficient effective alternatives in order
for the new procedures to apply. EPA has extended the deadline for data
submissions to support a minor-use registration and can waive data
requirements, if the waiver does not prevent a risk determination or allow
potential adverse effects on the environment. To further assist in
registration of pesticides for minor uses, USDA is required to establish a
matching-grant program to develop data needed for registration and
reregistration of minor-use pesticides.

FQPA also included provisions affecting uniformity of safety standards within
the U.S. and internationally. FQPA generally prohibits states from setting
tolerances that differ from EPA tolerances, unless they are justified by
compelling local conditions and would cause no food residue levels to be in
violation of Federal law. States still may require that foods containing a
pesticide residue carry a warning. Supporters of such flexibility, including
some environmental groups, argued it is justified by the unique demographic or
consumption characteristics of some states. However, many industry
representatives voiced concerns about states setting regulatory standards
stricter than Federal ones, maintaining such standards could burden interstate
commerce; add compliance, testing, and product reformulation costs; expose
firms to expensive litigation; and create international trade barriers.

To avoid constraints on international food trade, FQPA requires EPA to
consider international Codex Alimentarius standards when determining U.S.
tolerances. The international Codex Alimentarius Commission, sponsored by the
United Nations Food and Agriculture Organization and the World Health
Organization, establishes maximum residue levels for many chemicals on foods.
EPA must publish a notice for  public comment when departing from a Codex
standard.

A number of FQPA provisions require interagency cooperation on IPM adoption
and collection of data related to pesticide use and risk estimation. FQPA
directs all Federal agencies to promote IPM, and in particular, directs USDA
to work with EPA on research, demonstration, and education programs to support
IPM adoption. In consultation with EPA and the Department of Health and Human
Services (HHS), USDA must conduct surveys to document food consumption by
infants and children and to improve collection of pesticide residue data. USDA
must also collect state or regional pesticide use data for all major crops and
for crops of dietary significance. 

By August 1998, EPA, in consultation with USDA and HHS, must develop and
annually distribute a pamphlet discussing, in nontechnical terms, the risks
and benefits of pesticide residues in food. The pamphlet must cover
recommendations for reducing exposure to pesticide residues while maintaining
a healthy diet, EPA actions that may result in higher residue risks from
certain foods, and a list of reasonable substitutes for these foods. EPA will
distribute the pamphlets to large retail grocers, who may determine how to
display them.

Also by August 1998, EPA, in consultation with HHS, must develop a screening
program to determine if pesticides or other environmental contaminants produce
estrogenic or other endocrine effects in humans. If a substance is found to
have such an effect, EPA must take action to protect the public. The program
must be implemented by August 1999 and reported to Congress by August 2000. 

Effect on Availability 
Of Pesticides

With passage of the FQPA, Congress clearly expressed its concern for reducing
health risks associated with pesticides. However, the implications of FQPA for
the availability of agricultural pesticides, especially for minor uses, are
potentially profound.

The pesticide industry and grower groups are concerned that many registered
uses of pesticides will be canceled and that new uses will not be registered.
In particular, they fear registrants may cancel uses for small-market crops,
such as fruits, nuts, or vegetables, in order to minimize impacts on returns
to the registrant.

Reductions in pest control options could ultimately lower yields or increase
production costs per acre, unless new options are found. Substantial yield
reductions or cost increases would result in reduced U.S. acreage and
production, and thus higher prices, of affected crops, as well as regional
production shifts and increased imports of those crops, and increased
production of crops less affected by the FQPA. The consumer information
provisions could shift demand away from "high-risk" foods, lowering their
prices and raising prices of substitutes.

The overall balance between negative and positive effects of implementing FQPA
is unclear, since some provisions work to increase the number of pesticide
registrations, while others reduce them. Certainly, pesticide tolerances and
registrations that were subject to the Delaney Clause but meet safety
standards under FQPA will be retained, so that producers will not be forced to
find alternatives. On the other hand, the consideration of aggregate exposure,
substances with a common mechanism of toxicity, risks to infants and children,
estrogenic effects, and other risk assessment provisions could result in
tolerance revocations and registration cancellations. 

New risk provisions for infants and children, in particular, could focus
regulatory concerns on fruits and vegetables that are common in children's
diets, such as apples, grapes, and corn, disproportionately reducing the
number of registered materials for such crops. Moreover, the new, limited role
for considering pesticide benefits in the setting of residue tolerances could
increase tolerance revocations for raw commodities, although the effects
should be minimal, since EPA rarely used its previous broader authority to
consider benefits when setting tolerances. 

The minor use provisions of FQPA lower the costs of registering minor use
pesticides and lessen the possibility that important uses will not be
registered. But this might not offset the loss of uses due to the new safety
standard's aggregate exposure and other risk assessment provisions.

Currently, organophosphate insecticides, carbamate insecticides, and probable
and possible carcinogens are high priorities for tolerance review. EPA and
USDA will be assembling information for computing exposure, such as dietary
consumption of foods, pesticide residues on food, and pesticide use
information (e.g., extent of use, application rates, and timing and method of
application). Such information may allow reduction of risk estimates from the
worst-case level and reduce the number of registered uses lost. But
development of cost-effective pest control options, including registration of
new pesticides to replace those lost, will ultimately be necessary to minimize
the economic impact.
Craig Osteen (202) 501-8282 and Erica S. Mintzer (202) 326-2719
costeen@econ.ag.gov


FOOD & MARKETING

Food Prices for 1998
Maintain Slow Rise

The Consumer Price Index (CPI) for food in 1998 is forecast to rise 
2.5-3 percent, below the 3.3-percent increase in 1996 but close to the
2.8-percent rise forecast for 1997. The at-home component of the CPI, which
increased 3.7 percent in 1996, is forecast to increase 2.5 percent in 1997 and
2.5-3 percent
in 1998. The away-from-home component of the CPI, which increased 2.5 percent
in 1996, is expected to increase 2.9 percent in 1997, and 2.5-3 percent in
1998. 

The higher Federal minimum wage, which went into effect in fall 1996, had only
a small effect on the away-from-home index in 1996, but placed some upward
pressure on prices in early 1997. Another increase on September 1, 1997 of 40
cents per hour in the Federal minimum wage may place additional pressure on
away-from-home prices through next year. 

Competition among restaurants and fast-food establishments remained strong in
1997 and held down the full pass-through of higher wage and raw materials
costs to consumers, but additional pass-through may occur in 1998. At-home
food price increases have been moderated by lower grain prices, adequate
supplies of fresh fruits and vegetables, increased sugar production, and
strong competition in the soft drink and prepared foods industries.

The CPI for food remained relatively flat during the first 8 months of 1997,
with month-to-month increases of only 0.1 percent in both January and March,
0.3 percent in July, and 0.4 percent in August. February, April, May, and June
saw no increases in the all-food price index. If these small monthly increases
were annualized for 1997, food inflation would be around 1 percent for the
entire year, but the month-to-month index increases for the first half of 1997
followed strong increases in the last half of 1996. For the first 8 months of
1997, the price index for all food increased 3 percent. The all-food index is
forecast to increase 2.5 percent in the remaining 4 months of 1997, for an
annual increase of 2.8 percent.

Food prices are among the most volatile consumer goods tracked by Federal
agencies. General economic factors as well as the relationship between farm
and marketing costs influence retail food price changes. Since 1992, food
prices have held to fairly stable gains of 3 percent annually. Four major
trends account for this stability and are expected to continue to moderate
price increases in 1997 and 1998.

General inflationary pressure has remained stable at about 3 percent, with
expected increases in 1997 and 1998 of 2.5 and 2.8 percent, keeping in check
the costs of food production as well as marketing costs--e.g., labor,
packaging, transportation, and advertising--which together account for over 75
percent of retail food costs. Because the farm value proportion of the U.S.
food dollar has generally been declining--expected to average about 22 cents
in 1997 and 1998--retail prices are determined less by farm commodity prices
and more by these food production and marketing costs. At the same time,
increasing economies of size in the agricultural sector are expected to
continue, particularly in the livestock and poultry industries, leading to
slower growth in per-unit production costs. 

Finally, continued growth in the portion of the food dollar spent on food away
from home brings food prices more under the influence of developments in the
nonfarm economy and of competition among restaurants and fast-food
establishments. Currently, those influences are slowing the pace of food price
increases. Growing numbers of two-income households, with less time to prepare
food at home and more income to purchase food away from home, have resulted in
faster growth in purchases of food away from home than in purchases for home
consumption. Away-from-home purchases are expected to account for 
46-47 percent of total food dollars spent in 1997 and 1998.

Price forecasts by USDA's Economic Research Service for food consumed at 
home--the at-home food CPI--cover meats, poultry, fish and seafood, eggs, dairy
products, fats and oils, fruits and vegetables, sugar and sweets, cereals and
bakery products, nonalcoholic beverages, and other prepared foods. 

Total meat production is expected to increase about 4 percent in 1998,
compared with 1 percent this year. Next year's increase is based on recovery
in pork production and continued expansion in the poultry industry. The CPI
for meats is forecast to rise 2-4 percent in 1998, compared with about a
3-percent rise in 1997.

In terms of value, beef remains the largest single meat item purchased for
at-home consumption,
due to its normally higher price per pound. Although poultry
has surpassed beef in total production and pounds-per-capita consumption, beef
accounts for 9.5 percent of the at-home retail food dollar while poultry
accounts for only 4.5 percent. Beef prices are expected to increase 2-4
percent in 1998, after an increase of over 2 percent expected in 1997. Beef
supplies in 1998 are expected to decline, with 1998 production projected down
nearly 2 percent from the output of 25.3 billion pounds forecast for 1997.
Cattle inventories are beginning to stabilize and shift toward expansion, but
the shift is likely to be slow and will not be fully implemented at least
until 1999.

The CPI for pork, which accounts for over 6 percent of the at-home food
dollar, is expected to rise over 5 percent in 1997, compared with a
9.8-percent gain in 1996. The 1998 forecast calls for an even smaller 
(0-2 percent) increase. Pork production is expected to rise 8 percent in 1998,
with demand for bacon in the fast-food industry expected to continue. In 1998,
production gains are expected to be partially offset by an increase in
exports, about 10 percent higher than 1997 levels, with Japan likely to be the
main buyer.

The 1997 food price index for poultry, 4.5 percent of the at-home CPI, is
expected to increase about 2.5 percent, followed by a 2-4 percent increase in
1998. With demand still booming and feed costs about 15 percent lower in 1997,
broiler production is forecast to total about 27.2 billion pounds this year,
up 4 percent over 1996, and is expected to grow another 6-7 percent in 1998 to
around 29 billion pounds.

Fish and seafood account for less than 4 percent of the at-home food CPI.
Prices for major fish items increased slightly in 1997, after remaining flat
in 1996. The CPI for fish and seafood is expected to register an increase of
2.9 percent for 1997, followed by a 2-4-percent rise in 1998.

Retail egg prices have been fairly stable in 1997, compared with last year's
volatile retail prices. The CPI for eggs, less than 2 percent of the 
at-home food dollar, is expected to be down 1.5 percent for 1997, after
increasing 18 percent in 1996. Some rebound in egg prices is expected in 1998,
pointing to a forecast CPI increase of 6-8 percent.

Dairy products account for over 12 percent of the at-home CPI. Lower prices
for milk, cheese, butter, and ice cream have combined to produce a smaller CPI
increase for dairy products in 1997--1.9 percent--compared with the 
7-percent increase of 1996. Total 1997 milk production is expected to be up
about 1percent from a year earlier, and 1998 production is also expected to
grow moderately. As milk production has increased, 1997 retail price increases
have been smaller than the 1996 price gain. With moderate production growth
expected in 1998, the dairy products CPI is forecast to increase 1-3 percent.

Price change for fats and oils, both highly processed foods, are influenced
more by the general inflation rate than by the cost of the raw commodities
from which they are produced. The CPI for fats and oils, which account for
only 2.5 percent of the at-home CPI, is expected to increase less than the
general inflation rate, 1 percent in 1997 and 1-3 percent in 1998.

Fresh fruits and vegetables account for a combined 13.5 percent of the 
at-home food CPI, while processed fruits and vegetables account for about 6
percent. Retail prices for a number of fresh fruits and vegetables are flat or
lower this year, responding to adequate supplies of major items. No change is
expected in the fresh fruit CPI in 1997, following a 7.1-percent increase in
1996. The fresh vegetable index is expected to increase by a slight 0.8
percent this year, after falling 2 percent in 1996. In 1998, both the fresh
fruit and the fresh vegetable food price indices are expected to rise 
3-5 percent. 

Summer fruits were in abundant supply in 1997, bringing about generally lower
prices and expanded export opportunities for the U.S. fruit industry.
California, the largest producer of peaches in the U.S., is expected to
produce another large crop in 1997. Supplies of nectarines, plums, apricots,
and sweet cherries were abundant in 1997. California's 1996/97 orange and
grapefruit production, sold mainly for fresh use, was larger than the previous
year. Three countries--Mexico, China, and Chile--have agreed to open their
markets to specific U.S. fruits beginning in 1997, which may boost demand and
prices.

With stable grower prices for fresh-market vegetables, overall summer 1997
acreage was about the same as the year before. In spite of a January freeze in
Florida and direct crop losses from heavy spring rains in Texas, consumers saw
only small increases in retail prices for fresh vegetables and melons in 1997.
The relatively stable price pattern for fresh vegetables is expected to
continue into fall 1997. The overall fresh vegetable CPI decline in 1996 and
very small increase 1997 was due partly to low prices for potatoes. However,
the possibility of a serious potato blight in Idaho may significantly reduce
potato production in 1997 and start moving consumer prices upward in 1998.

Contract acreage for the five leading processing vegetables (tomatoes, sweet
corn, snap beans, green peas, and cucumbers) was down 3 percent, to 1.35
million acres in 1997. This drop came after a 9-percent decline in planted
acreage a year earlier. However, processed vegetable prices are expected to
increase only a modest 2.6 percent in 1997 and 1-3 percent in 1998. The ready
availability of fruit supplies to meet processing needs is keeping the
expected CPI increase for processed fruits to 2.8 percent in 1997 and 
2-4 percent in 1998.

The CPI for sugar and sweets--3.3 percent of the at-home CPI--is expected to
advance 2.9 percent in 1997, with gains of 2-4 percent in 1998. Domestic sugar
production is expected to increase 3.4 percent in 1997, keeping the price
increase to a modest 2-4 percent in 1998. Sugar beet acreage was up 7 percent
in 1997, the result of lower returns to alternative crops, relatively strong
sugar prices earlier in 1997, and increases in factory beet slicing capacity
(AO July 1997).

Cereals and bakery products account for the largest single portion of the
at-home 
food CPI--almost 15 percent. While stronger grain prices led to higher
prices for selected bakery products in 1996 and a CPI increase of 3.9 percent,
lower grain prices this year have held the  increase to 2.2 percent. In 1998,
cereals and bakery products are expected to increase 2-4 percent. Cereal
prices, which account for a fifth of the cereals and bakery products index,
fell 1.2 percent in 1996, and in the first 8 months of 1997 have fallen an
additional 2.8 percent compared with the first 8 months of 1996. 

Since only a small portion--less than 10 percent--of the retail price for most
processed food items stems from the cost of ingredients--including flour,
sugar, and oil--most of the retail price changes are the result of general
inflation and competition. Competition for market share among the three
leading breakfast cereal manufacturers led to retail price cuts in 1996. A
recent announcement of cereal price increases by a leading manufacturer has
not yet led to any significant monthly price increases in 1997. 

Nonalcoholic beverages account for over 7 percent of the at-home food CPI,
with coffee and carbonated beverages the two major components--32 and 50
percent of the nonalcoholic beverages index. The nonalcoholic beverage CPI
fell 2.4 percent in 1996 due to lower coffee prices, and is expected to
increase 7.7 percent in 1997 in the wake of higher coffee prices. During the
first 8 months of 1997, retail coffee prices were up 9 percent from the same
period last year. Carbonated drinks, on the other hand, fell 1.4 percent in
the first 8 months of 1997, compared with the same period in 1996, due to
competition in the soft drink industry during peak consumption months. In
1998, the nonalcoholic index is forecast to return to a trend increase of 
2-4 percent. 

Speculation about a lower 1997/98 crop in Brazil (the largest Arabica coffee
producer) and an uncertain labor situation in Colombia were responsible for
the sharp increases in green coffee costs (mostly for Arabica used primarily
in gourmet coffee blends) on the world market in spring and summer 1997. These
price increases combined with low U.S. and Mexican coffee stocks to produce
wholesale price fluctuations that led to higher retail prices. However, prices
of Robusta coffee beans, the primary ingredient in retail store coffee blends,
have not increased as sharply as Arabica prices. Since the CPI for coffee
reflects only coffee purchased in retail stores, smaller increases in Robusta
prices have held down what might have been an even larger increase in the
nonalcoholic beverages price index.

Other miscellaneous prepared foods, accounting for over 10 percent of the 
at-home food CPI, are highly processed and are affected primarily by changes in
the all-items CPI. These products include frozen dinners, pizzas, and
precooked frozen meats. Competition among these products and from the 
away-from-home food market should continue to dampen retail price increases for
this category of items. An increase of 3.6 percent in the CPI for the category
is expected in 1997, followed by 2-4 percent in 1998. 
Annette Clauson (202) 501-6552
aclauson@econ.ag.gov

FOOD & MARKETING BOX

What's Behind the Numbers?

Food price forecasts by USDA's Economic Research Service (ERS) are developed
through a three-step process.  Analysts begin with USDA's 10-year baseline
projections.  The baseline, published annually in February, is the product of
model results and the judgments of analysts from several USDA agencies. The
baseline is based on a conditional scenario with specific assumptions
regarding the macroeconomy, weather, and international developments (AO April
1997). No economic shocks are assumed in baseline projections.

In the second step, ERS analysts develop short-term forecasts (12-18 months)
that incorporate the most recent baseline assumptions and current information
on market conditions and expectations, weather patterns, commodity prices and
supplies, and expected consumer demand for specific foods. Finally, these
short-term forecasts are checked using a computer model (ARIMA forecast),
which determines whether the ERS short-term forecast falls within an expected
statistical range limit (a 95-percent confidence level).

Food price forecasts for 1997 and 1998, developed using this three-step
process, may still be revised if the conditions on which they are based should
change significantly. Projections could be affected if changes occur, for
example, in the feed-grain crop outlook; in the export market, especially for
meat items; in nonfarm markets; or in weather-related crop conditions in major
fresh fruit and vegetable growing areas. Historical retail price data indicate
fresh fruit and vegetable prices and egg prices are the most volatile food
prices ERS tracks. 

Historical data also indicate grain price changes have affected the price of
meats, poultry, eggs, dairy products, and cereals and bakery products. Since
these items account for more than half of the at-home food dollar, price
changes for these categories can have a significant impact on the at-home food
CPI.


SPECIAL ARTICLE

U.S. Ag Policy--
Well Below WTO Ceilings
on Domestic Support

The U.S. will be able to meet commitments with the World Trade Organization to
reduce domestic support to agriculture without making any further changes in
domestic programs through 2000, the final year of the implementation period.
The ability of the U.S. to meet its WTO domestic support reduction commitments
stems from two main factors that greatly reduce its current and future
domestic support levels relative to the 1986-88 base period level of support:  
--WTO provisions that specified how domestic support reduction objectives
would be defined and implemented, particularly the provisions regarding base
period, deficiency payments, and aggregate market price support measures; and 

--shifts in U.S. farm programs after 1985 toward increased market orientation
and reduced subsidies.

The 1994 Uruguay Round (UR) Agreement on Agriculture requires World Trade
Organization (WTO) member-countries to reduce the total amount of 
trade-distorting domestic support for agriculture by 20 percent from a base
period
(1986-88) level by the year 2000. In addition to limitations on export
subsidies and import barriers, the UR trade agreement provided for
restrictions on domestic support because of general concern that domestic
support policies have significant indirect effects on trade. 

The value of domestic or "internal" support is measured using an annual
indicator--the Aggregate Measure of Support (AMS)--that was negotiated during
the UR. The AMS is a specially defined measure of the monetary value of
government support to agriculture. It was derived from another, more broadly
defined measure of support--the Producer Subsidy Equivalent (PSE)
--which provided important monitoring information about the overall level of
agricultural support during the decade preceding completion of the UR. 

The AMS is not designed to replace the PSE as an annual measure of support,
but instead to facilitate implementation of UR domestic support reduction
commitments. The AMS measures domestic support policies that include direct
payments to producers financed by budgetary outlays, as well as revenue
transfers from consumers to producers as a result of policies that distort
market prices. 

Domestic reduction commitments for each country, in the form of declining AMS
ceiling levels, are phased in over a 6-year period, 1995-2000. During the
initial year of the support reduction phase-in--1995--the AMS could not exceed
96.7 percent of the 1986-88 base AMS. This percentage limitation declines
until the final phase-in year--2000--when the AMS cannot exceed 80 percent of
the base value. 

An AMS is calculated for each commodity and domestic policy instrument
affecting agriculture, whether commodity or noncommodity related. However, WTO
reduction commitments apply only to the aggregate of the component AMS's.
Therefore, countries have considerable flexibility in deciding which domestic
programs to alter in meeting aggregate commitments to reduce domestic support. 

The U.S. AMS combines several component measures that are also included in the
PSE concept in some form. These components are actual or calculated amounts
of:  1) direct payments to producers (e.g., deficiency payments), 2) input
subsidies (on irrigation water, for example), 3) the estimated value of
revenue transferred from consumers to producers as a result of domestic
policies that distort market prices (market price supports), and 4) interest
subsidies on commodity loan programs.

One of the most significant aspects of the AMS's construction was the
inclusion of deficiency payments in the base period AMS and the exemption of
these same payments from the AMS calculated for the 1995-2000 implementation
period. This had the effect of establishing high commitment ceilings for the
AMS--since the ceilings were derived from the base year AMS--and then
virtually guaranteeing that the future AMS levels would be below the ceilings
by excluding deficiency payments from the current measures. Such payments were
worth $9.7 billion in the 1986-88 base and $7 billion in 1995.

Excluded from the AMS, but included in the PSE, are trade-oriented policies
that restrict imports or encourage more exports, and some noncommodity
-specific policies covered by the PSE concept that were considered by trade
negotiators to be non-trade distorting (i.e., green box policies) such as
research and inspection activities and environmental programs.

The general criteria for exempt status as a green box policy (specified under
Annex 2 of the UR Agreement on Agriculture) include policies that have no, or
very minor, trade or production distorting effects; are financed entirely by
the country's budget and not by the consumer; and do not act as a price
support. These policies are excluded from the AMS, even though they may
support domestic policy objectives. 

One significant green box policy category is called "decoupled payments"
--payments that are not based on current prices or current production levels.
The most notable example are the production flexibility contract payments
(PFCP's) that replaced deficiency payments under the 1996 Farm Act. 

Explicit trade-oriented policies--e.g., export subsidies and tariff
-rate quotas--are excluded from the AMS since they are dealt with separately in
the UR, most of them commodity-specific. To the extent that such trade policies
reduce import supplies and/or increase exports and domestic prices, they can
also affect the operation and costs of domestic programs (such as those for
dairy or sugar). These supply and price effects would result from use of such
trade programs even if there were no domestic support policies. As a result of
the methodology used, the AMS could be very modest and decline over time, even
while producers receive substantial support as a result of trade barriers or
decoupled payments. 

Factors Putting the 
U.S. In Compliance

The choice of 1986-88 as the "base period" for defining AMS reduction
commitments provided a way to take the revolutionary step of disciplining
domestic support programs without immediately imposing large adjustments on
major players in the agreement such as the U.S. and the European Union (EU).
The base-period choice corresponded to the start of UR trade negotiations.
U.S. direct payments and aggregate market price support benefits were
abnormally high during 1986 and 1987, so the 20-percent reduction in support
called for by the final 1994 trade agreement was an easy target to meet. The
3-year average was used to smooth out year-to-year variations in prices,
production, consumption, and trade, providing more even treatment for
different commodities and countries. 

Exemption of deficiency payments. Further increasing U.S. ability to meet its
ceiling-level commitments was the WTO provision that allowed deficiency
payments to farmers for 1995-2000 to be excluded from a current-year total
AMS, even though such payments were included in the base-period AMS. Article 6
of the UR Agreement on Agriculture instructs that direct payments under
"production-limiting programmes" shall not be included in the current total
AMS if such payments are based on fixed area and yields, or if they are made
on 85 percent or less of the base level of production. U.S. deficiency
payments were based on 85 percent of base acreage, and individual farm program
yields had been held constant since 1986. 

This special provision for deficiency payments, referred to as the blue
-box provision, benefited primarily the U.S. and the EU, and may be an issue in
the next round of trade talks. However, this provision was relevant for the
U.S. only for 1995, since 1996 farm legislation eliminated the deficiency
payment program for all years after 1995. 

The production flexibility contract payments initiated by the 1996 Farm Act
increased the actual amount of support to agriculture since they replaced
deficiency payments that would have been much lower during 1996-2002 based on
current USDA long-run price projections. The PFCP's are excluded from the AMS
because they are considered to be decoupled payments and qualify as AMS-exempt
green box policies. The PFCP's meet the definition of "decoupled" since they
are financed by the budget and have essentially been predetermined for the
entire period 1996-2002--they do not depend on prices or production levels.

With changes in U.S. commodity programs after 1985, the level of aggregate
domestic support had, by the early 1990's, already declined to less than the
specified WTO-ceiling level for the year 2000. Reductions in target prices,
rates paid to farmers on commodity loans, and government dairy product
purchase prices decreased the level of aggregate support from deficiency
payments, commodity loan forfeitures and interest subsidies, and dairy market
price supports. A 15-percent reduction in the number of acres eligible for
deficiency payments under 1990 farm legislation led to a further lowering of
deficiency payments during 1991-95. These savings were only partially offset
by new spending under marketing loan and loan deficiency payment provisions
begun under 1985 farm legislation. 

Meeting support reduction commitments would have been relatively certain even
if the domestic support provisions of 1990 farm legislation had been continued
after 1995. However, the Federal Agriculture Improvement and Reform Act of
1996 (1996 Farm Act) made significant changes in commodity programs for 
1996-2002 that further increased the U.S.'s ability to meet WTO commitments. 

The future U.S. AMS will be greatly influenced by the phase-out of the current
dairy price support program under the 1996 Farm Act, which reduces per
-unit dairy price supports (effectuated by government purchases) from 1996
through 1999, and eliminates them after December 31, 1999. A recourse loan
program for dairy products will then replace the current program of price
supports and government purchases. The Federal Milk Marketing Order system
(FMMO) will continue, as revised by the 1996 Farm Act, although its effect on
market prices is not accounted for by the AMS. The FMMO probably increases
market prices, but no consensus exists on the magnitude of the price changes,
which vary among the different regions and market orders. There is no
observable WTO-administered price associated with the FMMO, but current
benefits rely heavily on the price floor established by national dairy price
supports.

The 1996 Farm Act also eliminated the farmer-owned reserve loan program and
the honey and rye price support programs. Wool and mohair payments were
already phased out by 1996, following a law signed in November 1993. The 1996
Farm Act also reduced somewhat the price support levels for sugar and peanuts
through administration of penalties and marketing assessments, decreased
peanut support rates, and elimination of minimum marketing quotas for peanuts.
And the interest subsidy on all commodity loans was decreased--producers now
pay a higher interest rate. Further, most commodity loan rates are now subject
to upper limits, which will limit the amount of the interest subsidy.  

Domestic Support
Still Declining

The U.S. is not only in compliance with WTO commitments but is well below the
commitment ceilings. The U.S.'s AMS level is anticipated to average only about
20 percent of the established AMS ceilings during 1995-2000. By 1995, the
total AMS for the U.S. had already fallen to only $6.2 billion--just one
-fourth the size of the 1986-88 average base-year value and well below the AMS
limit of $23.1 billion. USDA's Economic Research Service projects that by
2000, support will be only $1.2 billion, compared with the $19.1-billion
limitation, or "ceiling," on U.S. support.

Among the factors helping to put AMS levels so low relative to the base year
values are not only the subtraction of deficiency payments as explained above,
but also the WTO de minimis rule that exempts individual component AMS's if
they are less than 5 percent of their respective values of production.

Currently, the principal components remaining in the U.S. AMS are the
production levels and per-unit price supports for dairy, sugar, and peanuts,
which were only partially modified under the 1996 Farm Act. Wool and mohair
AMS's also are included in the 1995 AMS, but the programs no longer exist
after 1995. Other commodity AMS's drop out of the 1995-2000 aggregate AMS
because of the de minimis rule. 

The dairy AMS, which accounted for over 75 percent of the total AMS in 1995,
will likely fall to zero in 2000 with the phasing out of the "administered"
price support level for dairy products. As a result of the dairy program
phaseout, the U.S.'s total AMS level is expected to decline from about 27
percent of the WTO commitment ceiling during 1995-98 to only 12 percent of the
ceiling in 1999, and finally to 6 percent in 2000. 

Dairy's contribution to the AMS depends largely on the difference between the
"administered price" for dairy products (per-unit price support, in
milk-equivalent terms) and the observed level of an international dairy price
in the base period. The market price support for dairy is defined for the AMS
as this price difference(price gap), multiplied by the quantity of production.
Thus, the elimination of the dairy price support and purchase program implies
elimination of the dairy "administered price."  This, in turn, implies
elimination of the dairy AMS market price support measure which can no longer
be calculated as originally defined. 

Because the dairy price support program based on government purchases of dairy
products will end after December 31, 1999, it was assumed that the marketing
year 1999/2000 (October-September) dairy AMS should reflect market price
support calculations only for October through December. The dairy market price
support would be at the level of $9.90 per cwt for one-fourth of the 1999
marketing year--and zero thereafter. Consequently, the dairy AMS declines from
$4.3 billion in 1998 to $1.1 billion in 1999, and to zero in 2000. 

A recourse loan program for dairy products will replace the current program of
price supports and government purchases. However, since loans under the new
recourse loan program for dairy will have to be paid back (producers cannot
forfeit the commodity in lieu of payment), the loans will not establish a
price floor for the marketing season as the current purchase price program is
intended to do. 

Future AMS calculations will account for the changes in dairy policy. But the
dairy AMS will be virtually eliminated under current interpretation of the WTO
rules. There may still be some as-yet-unknown amount of support from interest
subsidies on the recourse loans and from the current dairy indemnity program,
but these will probably not be very important in the overall AMS. The Federal
Milk Marketing Order programs for dairy will continue, but any remaining
benefits of this program are not part of the AMS, as explained above. And the
price support currently provided through the FMMO because of the national
dairy price support purchase program will no longer exist after 1999.

The sugar AMS is 6 percent lower in 1996-2000 than in 1995 because of the
assumed effect of the 1-cent-per-pound penalty for forfeiting sugar in lieu of
payment under the price support loan program. This penalty, mandated under the
1996 Farm Act, reduces the effective support level from 18 cents per pound to
17 cents. 

The peanut AMS during 1996-2000 is one-third lower than the 1995 AMS. The
decrease is due to a 9.5-percent-lower level of production eligible for
quota-peanut 
support and a 10-percent-lower level of support for quota peanuts, as
mandated by 1996 farm legislation. A fixed minimum marketing quota is not
authorized by the 1996 Farm Act.

There is virtually no chance that the U.S. AMS will exceed its commitment
ceilings any time during 1995-2000. Under the existing commodity programs and
AMS definitions, any significant increases in the AMS would probably come from
increased eligible production of dairy, sugar, or peanuts, from marketing loan
or loan deficiency payments, or from increases in subsidies of programs for
irrigation, livestock grazing, state credit, or crop insurance. 

Marketing loan program benefits and loan deficiency payments, under current
programs, could occasionally occur for some individual commodities, as market
prices fluctuate around the presumed long-term projections. Producers who
participate in government programs are eligible to receive marketing loan
benefits or loan deficiency payments when announced commodity loan repayment
rates are less than the original per-unit loan rate (i.e., the amount loaned
to producers) plus accrued interest. Under these conditions, a marketing loan
benefit is realized when a producer who has entered an eligible commodity
under loan, repays the loan at the lower repayment rate and retains the
difference. A loan deficiency payment is realized when a producer forgoes
putting a commodity under loan and claims the difference (loan level minus
repayment level) in the form of a direct payment. 

Actual benefits from these loan-related payments, however, are not likely to
significantly affect the ability of the U.S. to meet its support reduction
commitments during 1996-2000. Repayment rates for cotton and rice are based on
prevailing world prices, and repayment rates for wheat, feed grains, and
oilseeds are based on prices identified by the Secretary of Agriculture
(currently "posted country prices"). The Secretary is required by the 1996
Farm Act to establish loan repayment rates that will minimize government stock
accumulations and program costs, and that will allow U.S. commodities to be
marketed competitively in domestic and international markets.

The baseline methodology used for the AMS projections assumes no shocks in the
supply-demand environment that would set the stage for marketing loan or loan
deficiency payments--so the projections assume zero values for these payments.
Past experience with these programs suggests that producers of rice, cotton,
sunflowerseed, or flaxseed would be the most likely candidates for enough
marketing loan or loan deficiency payments to make their commodity's
contribution to the U.S. AMS's non-zero, based on the UR provisions
--the individual AMS's would have to be greater than 5 percent of their value
of production to be included. 

During 1986-95, the largest annual payment for these commodities totaled $1.2
billion, an amount equal to the U.S.'s projected total AMS in 2000, using
baseline assumptions (the totals for dairy, sugar, and peanuts)--well below
the UR limit of $19.1 billion in 2000. Thus, there would be no problem meeting
U.S. commitments even if marketing loan and loan deficiency payments were to
reach historic highs.
Frederick Nelson (202) 219-0643
fjnelson@econ.ag.gov

SPECIAL ARTICLE BOX

The AMS & the Producer 
Subsidy Equivalent

The Aggregate Measure of Support (AMS) is a combination of various 
commodity-specific program benefits or costs (e.g., market price support,
deficiency
payments, and commodity loan interest subsidies) and noncommodity-specific
values (e.g., water subsidies, net crop insurance proceeds, and net livestock
grazing program costs). The total value of the commodity- plus noncommodity
-specific parts of the AMS is adjusted according to WTO rules by subtracting
exempt deficiency payments and individual component AMS's equal to less than 5
percent of their respective values of production.

According to ERS analysis, dairy, sugar, and peanuts are the only commodities
with AMS's large enough to be counted in the total U.S. AMS during 1996-2000.
Individual commodity AMS's must each have a value of at least 5 percent of
their respective values of production before they are counted as part of the
AMS--the de minimis provision of the Uruguay Round (UR). For purposes of
applying the de minimis provision, the value of the noncommodity-specific AMS
must be at least 5 percent of the total value of production of all
agricultural commodities.

The AMS concept was derived from a different aggregate support measure
--the Producer Subsidy Equivalent (PSE). The more broadly defined PSE provided
important monitoring information about overall levels of support for different
commodities and different countries during the decade preceding completion of
the UR. 

Although the two measures are similar in basic concept, the PSE includes
support (or costs) of some policies that are left out of the AMS--such as
trade policies and certain green box policies assumed by negotiators to be
non-trade distorting. Consequently, the value of the PSE for the U.S. exceeds
that of the unadjusted AMS in the 1986-88 base period by 46 percent. 

Both the PSE and the AMS exclude certain "nonagricultural" programs related to
natural resources (such as forestry and fishery), and rural development
programs (such as for housing, communities, and public utilities). While the
AMS serves a useful purpose for the trade agreement, it does not provide a
meaningful alternative to the PSE as an overall, comprehensive measure of
agricultural support levels. 

AMS includes only domestic policies. Unlike the PSE, the AMS excludes support
related to trade policies, such as the export enhancement program, valued at
$1.7 billion in the 1986-88 PSE. Such trade policies have their own separate,
unique restrictions and commitments under the UR. Market price supports are
considered domestic policies in the AMS, because they are implemented using
announced "administered prices"--e.g., dairy, peanut, and sugar support
prices. However, import restrictions--considered to be trade policies--can and
usually do support market prices by reducing supplies. Such import
restrictions, when effective, reduce the cost of domestic price support
programs. Further, any benefit from trade policies due to market prices
exceeding administered prices is excluded from the AMS concept.

AMS excludes non-trade distorting policies. The AMS only covers policies
negotiators agreed to identify as "trade distorting" policies. Non-trade
distorting policies related to agriculture must nevertheless be summarized and
reported to the WTO in the so-called "green box" table. Some of the green box
policies are covered in the PSE, such as research and extension, inspection
services, and disease control programs ("general services" in the green box);
"disaster programs" (excluding crop insurance); Federal farm credit programs
("investment aids" in the green box); "environmental and conservation
programs;" and the Conservation Reserve Program ("resource retirement
programs" in the green box).  Non-trade distorting policies included in both
the green box and the PSE amounted to $5.2 billion in 1986-88. 

U.S. outlays for all non-trade distorting, green box policies amounted to $46
billion in 1995, 76 percent more than in 1986-88. Most of this increase
resulted from a 96-percent increase in domestic food program outlays
--e.g., food stamps, which are excluded from both the AMS and PSE--which make 
up four-fifths of the total amount of green box outlays. Nearly all of the
green box outlays not in the PSE are related to domestic food programs.

AMS measures are independent of market prices. The AMS, unlike the PSE, is not
a measure of current support to agriculture because current market prices are
not used to calculate the current level of market price support for dairy,
sugar, and peanuts, or to calculate the level of support from deficiency
payments. Instead, the AMS uses a fixed 1986-88 average world price in its
calculation. Thus, the AMS reflects only the effects of changes in program
variables under the direct control of the program administrators, and not the
subsequent effect of changes in current market prices. 

Payments related to production-limiting programs are excluded from AMS.
Deficiency payments worth $9.7 billion were included in the 1986-88 base year
AMS. However, such payments were excluded from the 1995-2000 AMS's under
special blue box provisions of the UR. 

More commodities are included in the AMS than in the PSE. Commodities covered
by the AMS, but not the PSE, include cotton, peanuts, oats, barley, mohair,
honey, minor oilseeds, rye, and tobacco. The AMS's for these commodities in
1986-88 amounted to $2.5 billion, or 11 percent of the total unadjusted AMS.

SPECIAL ARTICLE BOX

Glossary of Trade Terms

Agreement on Agriculture. Part of the Uruguay Round agreement covering four
major areas related to agriculture: market access, export subsidies, internal
support, and sanitary and phytosanitary rules. The Agreement on Agriculture is
one of the 29 individual legal texts included under an umbrella agreement
establishing the WTO. The agreement is implemented over a 6-year period,
1995-2000.

Aggregate Measure of Support (AMS). A specially defined measure of the
monetary value of the extent of government support to agriculture negotiated
in the Uruguay Round of trade negotiations that includes actual or calculated
direct payments to producers (e.g., deficiency payments); input subsidies (on
irrigation water, for example); the estimated value of revenue transferred
from consumers to producers as a result of domestic policies that distort
market prices (market price supports); and interest subsidies on commodity
loan programs. The AMS forms the basis of computing and implementing domestic
support reduction commitments under the UR. The AMS differs from another,
broader concept of agricultural support called the Producer Subsidy Equivalent
(PSE), because certain PSE policies are excluded from the AMS, and because of
the methodology used to compute direct payments and market price support
benefits.

Bound tariff rates. Tariff rates resulting from WTO negotiations or accessions
that are incorporated as part of a country's schedule of concessions. Bound
rates are enforceable under Article II of GATT. If a WTO contracting party
raises a tariff above the bound rate, the affected countries have the right to
retaliate against an equivalent value of the offending country's exports or
receive compensation, usually in the form of reduced tariffs on other products
they export to the offending country.

Blue box policies. A popular expression to represent the set of provisions in
the Agreement on Agriculture that exempts from reduction commitments, those
program payments received under production limiting programs--if they are
based on fixed area and yields or a fixed number of head of livestock, or if
they are made on 85 percent or less of base level of production. Deficiency
payments were exempt under this provision, since compliance with acreage
reduction programs was required for eligibility, payments were made on no more
than 85 percent of established base acreage, and individual farm yields had
been fixed since 1986.

Country schedules. The official schedules of subsidy commitments and tariff
bindings as agreed to under WTO for member countries.

De minimis provision. The total AMS includes a specific commodity support only
if it equals more than 5 percent of its value of production, and noncommodity
-specific support only if it exceeds 5 percent of the value of total
agricultural output.

Deficiency payment. A direct government payment made to farmers who
participated in wheat, feed grain, rice, or cotton programs prior to 1996. The
payment rate was based on the difference between the target price and the
higher of the loan rate or the national average market price during a
specified time. The total payment to a farmer was equal to the payment rate,
multiplied by a farm's eligible payment acreage and the program yield
established for the particular farm. Farmers could  receive up to one-half of
their projected deficiency payment at the time of program enrollment. If
actual deficiency payments, which were determined after harvest, were less
than the advance deficiency payment, a farmer had to reimburse the government
for the difference.

Final Act. Formally called the "Final Act Embodying the Results of the Uruguay
Round of Multilateral Trade Negotiations," the Final Act is the legal document
containing the texts of all provisions agreed upon during the UR. The signing
and adoption of the Final Act initiated the transition from the GATT to the
WTO.

GATT (General Agreement on Tariffs and Trade). An agreement originally
negotiated in Geneva, Switzerland in 1947 among 23 countries, including the
U.S., to increase international trade by reducing tariffs and other trade
barriers. The agreement provides a code of conduct for international commerce
and a framework for periodic multilateral negotiations on trade liberalization
and expansion.

Green box policies. A colloquial term that describes domestic support policies
that are not subject to reduction commitments under the Uruguay Round's
Agreement on Agriculture. These policies are assumed to affect trade
minimally, and include policies related to such activities as research,
extension, food security stocks, disaster payments, the environment, and
structural adjustment programs.

Loan deficiency payments. A provision begun in the Food Security Act of 1985
giving the Secretary of Agriculture the discretion to provide equivalent
direct payments to producers who, although eligible to receive marketing loan
program benefits or to obtain price support loans for wheat, feed grains,
upland cotton, rice, or oilseeds, agree instead not to obtain loans. 

Market access. The extent to which a country permits imports. A variety of
tariff and nontariff trade barriers can be used to limit the entry of foreign
products.

Marketing loan program. Allows producers to repay nonrecourse price support
loans at less than the announced loan rates plus interest whenever the world
market price or posted county price for the commodity is less than the
commodity loan rate plus interest. This results in the producer receiving a
marketing loan benefit equal to the difference between the original loan rate
(plus interest) and the repayment rate.

Nonrecourse loans. The major government price support instrument, providing
operating capital to producers of wheat, feed grains, cotton, peanuts,
tobacco, rice, and oilseeds. Sugar processors are also eligible for
nonrecourse loans. Farmers or processors who agree to comply with each
commodity program provision may pledge a quantity of a commodity as collateral
and obtain a loan from the CCC. The borrower may repay the loan with interest
within a specified period and regain control of the commodity. Or, the
borrower may forfeit the commodity to the CCC to settle the loan without
paying any of the accrued interest. (The government has no recourse but to
accept the commodity as payment in full.)  For those commodities eligible for
marketing loan benefits, producers may repay the loan at the world price (rice
and upland cotton) or posted county price (wheat, feed grains, and oilseeds). 

Nontariff trade barriers. Regulations used by governments to restrict imports
from, and/or exports to, other countries, including embargoes, import quotas,
and technical barriers to trade.

Notification process. The annual process by which member countries report to
the WTO information on commitments, changes in policies, and other related
matters as required by the various agreements.

Producer Subsidy Equivalent (PSE). A broadly defined aggregate measure of
support to agriculture that combines into one total value aggregate, direct
payments to producers financed by budgetary outlays (such as deficiency
payments), budgetary outlays for certain other programs assumed to provide
benefits to agriculture (such as research and inspection and environmental
programs), and the estimated value of revenue transfers from consumers to
producers as a result of policies that distort market prices.

Production flexibility contract payments. Direct payments to farmers for
contract crops through 2002 under the 1996 Farm Act. Payments for each crop
are allocated each fiscal year based on fixed percentage shares specified in
the Act. The percentages were based on the Congressional Budget Office's March
1995 forecast of what deficiency payments would have been for 1996 to 2002
under 1990 farm legislation.

Sanitary and phytosanitary (SPS) measures. Technical barriers designed for the
protection of human health or the control of animal and plant pests and
diseases.

Uruguay Round (UR). The Uruguay Round of Multilateral Trade Negotiations under
the auspices of the GATT; a trade agreement designed to open world
agricultural markets and reduce trade distorting effects of domestic and trade
policies. The negotiation began at Punta del Este, Uruguay in September 1986
and concluded in Marrakesh, Morocco in April 1994.

World Trade Organization (WTO). Established on January 1, 1995 as a result of
the Uruguay Round, the WTO replaces GATT as the legal and institutional
foundation of the multilateral trading system of member countries. It provides
the principal contractual obligations determining how governments frame and
implement domestic trade legislation and regulations. And it is the platform
on which trade relations among countries evolve through collective debate,
negotiation, and adjudication.
END_OF_FILE

