AGRICULTURAL OUTLOOK                                    November 24, 1997
DECEMBER 1997, AO-247
               Approved by the World Agricultural Outlook Board
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AGRICULTURAL OUTLOOK is published monthly (except January) by the Economic
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NOTICE:  Publication of the January-February 1998 issue of AGRICULTURAL
OUTLOOK is being rescheduled. The next issue will be published in early
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by January 26, 1998. 
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CONTENTS

BRIEFS
Livestock, Dairy & Poultry: Cattle Cycle Unlikely to Turn Before 2000
Specialty Crops: Wood & Paper Products Lead Industrial Uses of 
Agricultural Materials

COMMODITY SPOTLIGHT
World Beef & Cattle Trade: Evolving & Expanding

FOOD & MARKETING
Meat Industry Price Spreads: What Do They Indicate?

RESOURCES & ENVIRONMENT
Value of Farm Real Estate Up Again in 1997

SPECIAL ARTICLE
As U.S. Pork Industry Changes, Consumer Stand to Benefit


WORLD BEEF TRADE EXPANDING WITH RISING INCOMES 
& TRADE LIBERALIZATION

What Is Influencing World Beef Trade Patterns?

Increases in global incomes and a more liberalized trading
environment have contributed to substantial growth in
international beef trade over the past 15 years.  Beef exports
among the major traders are projected at 4.8 million tons in
1997, up 45 percent from 1980.  Although beef is produced and
consumed worldwide, large-scale beef trade is limited to a
relatively small number of countries and represents a small but
growing proportion of total consumption.  

Changing production, marketing, and political conditions have
played an important role in the evolution of beef markets.  In
addition, health and sanitary trade barriers predicated on fear
of spreading virulent cattle diseases have, at least for now,
limited the international marketing opportunities of surplus beef
producing regions.  Sales in certain markets are affected by
differences in the type or quality of beef produced (e.g., grain-
vs. grass-fed), and by cultural factors such as consumer
perceptions of healthfulness, and preferences for color or size
of cuts.  Changes in meat processing and shipping technology have
helped to facilitate trade expansion by directing specific cuts
of meat to particular markets and by increasing shelf life,
permitting fresh product to be shipped a greater distance.

These factors are likely to continue to exert a strong influence
on meat production and trade patterns as meat trade continues to
expand through the next decade.  Global per capita consumption of
beef is projected to increase through 2005 as meat demand rises
in countries with rapidly industrializing and transition
economies. 

Cattle Cycle Unlikely to Turn Before 2000

The much-anticipated turn in the cattle cycle--when the nation's
cattle herd will again begin to expand--appears unlikely to occur
before 2000.  For the second year in a row, disappointing pasture
and range conditions and record-high hay prices led producers to
retain fewer heifers for summer breeding than they had
anticipated at the start of the year.  Heifer slaughter for the
first 9 months of 1997 was at a near-record pace.  Although beef
cow slaughter has been down since spring and is expected to
decline even further over the next couple of years, without
retention and breeding of larger numbers of heifers, beef cow
numbers--and calf crops--will continue to decline at least
through 1998, delaying expansion in the cattle herd until after
the turn of the century. 

Interpreting Meat Industry Price Spreads

The farm-to-retail price spread for pork reached a record $1.62
per pound in October, attracting renewed attention to the
difference between farm and retail meat prices.  Current price
spreads for Choice beef and broilers, although not at record
levels, are also relatively high.  Over time, nominal price
spreads tend to widen as inflation increases the costs of
marketing, processing, and retailing.  Yet the most compelling
feature of meat price spreads for Choice beef, pork, and broilers
is that, when adjusted for inflation, they have remained fairly
constant or even decreased slightly over the past three decades.

By examining price spreads and their components, the timeliness
and completeness of price adjustments among marketing levels, as
well as variations in marketing spreads, can be monitored over
time.  For beef and pork, the farm-to-retail spread has two main
components: farm to wholesale and wholesale to retail.  The
deflated pork farm-to-retail spread is essentially flat, or
decreases slightly, over the past three decades, while the
deflated farm-to-retail spread for Choice beef declines slowly
over the past three decades.  Deflated farm-to-retail spreads for
both pork and Choice beef are driven by strong downward-trending
farm-to-wholesale spreads, which more than offset changes in
wholesale-to-retail spreads.

Value of Farm Real Estate Up Again in 1997

Agricultural real estate values in the U.S. continued to climb
during 1996.  USDA's estimate for the national average value of
all agricultural real estate (land and buildings) as of January
1, 1997 is $942 per acre, up 5.8 percent from a year earlier--3.8
percent in inflation-adjusted terms.  Several states showed
double-digit growth.  The increase in agricultural real estate
values during 1996 marks the 10th consecutive year that values
have risen since the national average bottomed out in 1987.
USDA's Economic Research Service (ERS) has been studying
agricultural land values in order to determine the influences of
agricultural and nonagricultural factors.  Among the most
influential agricultural factors are growing conditions and
capital investments, including irrigation.  Among nonfarm
factors, the demand for farmland in urban and urbanizing areas,
generated by residential, commercial, and industrial development,
is the predominant influence on farmland values.  Demand for land
for recreational purposes has also been found to contribute to
land values, but this is a much less important value determinant
in most areas.  Not surprisingly, the relative influences of
these factors vary among different regions of the country. 

Consumers May Benefit as Pork Industry Changes

How the hog industry is organized and how it does business
ultimately affects consumers through prices and product
selection.  Production for the open market is being replaced by
multi-year contracts and vertical integration (e.g., processors
owning hog production facilities).  These changing methods for
transferring hogs from producers to packers can reduce packing
costs and improve the quality of pork products for consumers. 
Packers may reduce costs by obtaining a large, stable flow of
hogs to minimize under- or overutilization of facilities, as well
as by increasing control over the quality of hogs.  Consumers
stand to benefit through lower prices and/or an increased supply
of higher quality pork products.  

ERS examined effects on consumers of changes in pork industry
organization.  ERS estimated potential benefits to consumers, in
terms of leaner meat at lower costs, ranging from $60 to $693
million over one year, depending on the extent of change in
industry organization and how much consumers were willing to pay
for leaner products.


BRIEFS

Livestock, Dairy & Poultry

Cattle Cycle Unlikely 
To Turn Before 2000

The much-anticipated turn in the cattle cycle--when the nation's
cattle herd will again begin to expand--appears unlikely to occur
before 2000.  The cattle cycle is caused by the biological time
lag in beef production, coupled with producers' decisions to
expand or liquidate their herds as economic forces dictate. 
During herd expansion, more heifers (young females that have
never calved) are shifted from the feedlot to the breeding herd. 
This lowers cattle slaughter, which raises prices, leading
producers to continue expanding their herds.  

For the second year in a row, producers retained fewer numbers of
heifers for summer breeding than indicated in USDA's January 1
cattle inventory report.  In both years feed or forage conditions
deteriorated, encouraging the marketing of heifers as feeder
animals rather than retention for breeding.  

Producers had indicated on January 1, 1997, that they were
retaining 2 percent fewer beef heifers than the previous year as
replacements for the late spring-early summer breeding season. 
However, in the July 1, 1997 inventory report, producers
indicated a reduction of 4 percent in the number of heifers
retained compared with a year earlier.  

Although feed grain prices were well below a year earlier in the
spring and summer of 1997, pasture and range conditions once
again were disappointing, and hay prices were at record levels,
reflecting very tight forage supplies and harsh winter conditions
in the northern states.  The October Cattle on Feed report found
21 percent more heifers were on feed than a year earlier.  In
addition, heifer slaughter for the first nine months of the year
was at a near-record pace, second only to the prime herd
liquidation years of the mid-1970's.

Beef cow slaughter remained near the high year-earlier level
during the first quarter of 1997, as continued tight forage
supplies led producers to cull less efficient cows.  Since
spring, however, beef cow slaughter has been down about 20
percent from a year earlier and is expected to decline even
further over the next couple of years.  But without retention and
breeding of larger numbers of heifers, beef cow numbers--and calf
crops--will continue to decline at least through 1998.

Supplies of feeder cattle outside feedlots and available for
placements this fall and in 1998 are already beginning to
tighten--supplies on October 1 were down 7 percent from a year
earlier, and feedlot placements in October were down 4 percent
from a year earlier.  Feeder cattle supplies will continue to
tighten over the next couple of years as the calf crops decline
and as more heifers are retained for the breeding herd.  Supplies
will drop through at least 1999, and the decrease will halt then
only if more heifers are retained for herd expansion this fall
and bred next summer to calve in 1999.  Tight feeder cattle
supplies, combined with reduced cow slaughter, will hold beef
production down. 

The current cattle cycle began in 1991, the first year of
expansion after a low point in 1990 of 95.8 million head of
cattle and calves, down from the previous cycle's 1982 peak of
115.4 million head.  The current cycle peaked in 1996 at 103.5
million head, the second consecutive cattle cycle to peak at a
lower level than the previous cycle.  The cattle and calf
inventory was down to 101.2 million head in 1997 and is likely to
continue to decline at least through early 1999.  

Since the collection of cattle inventory data began in 1867, each
successive cattle cycle peaked at a higher level through the
1968-79 cycle, when the cattle inventory peaked at an all-time
record 132 million head.  The decline from this peak began a
period of adjustments to increase efficiency and remain
competitive against the increasingly efficient pork and poultry
sectors.  The cattle sector experienced large income losses in
the mid-1980's as a result of providing overfinished cattle, with
more fat than desirable, leading to shifts toward a leaner
consumer product.  That trend, however, has likely moved toward
an excess emphasis on lean beef, at odds with the current
domestic and export markets, which are placing a premium on an
increasingly tight supply of high-quality marbled beef.

The current cycle entered the liquidation phase in late 1995,
which intensified in 1996 as grain prices set new records.  Corn
prices rose to well over $4 per bushel in late-spring to early-summer 
1996.  Conditions for cow-calf producers were exacerbated
by a severe drought that spread from the Southwest in late spring
into the Central Plains, the heart of the cattle-raising sector,
by mid-summer.  Drought sharply reduced grazing prospects and 
led to higher hay prices, forcing cattlemen to cull their herds
severely and retain fewer stocker cattle--those kept for
additional grazing before being placed in feedlots.  Reduced
forage also lowered demand for stocker cattle that are purchased
for pasture gain.  

At the same time, rapidly rising grain prices reduced the break-even 
price that feedlot owners could pay for cattle to be placed
on feed.  The value of feeder cattle weighing 750 to 800 pounds
declined from a range of $67-$74 per cwt in first-half 1995 to
$55-$59 in first-half 1996.  Even as feeder cattle prices
plummeted, feedlot owners reduced placements sharply in first-half 
1996 to under 7.6 million head, down 14 percent from a year
earlier.  

The end result was a year of large losses for feeder cattle
producers, leading to liquidation of the beef cow herd and
dramatic reduction in heifer retention.  Cow slaughter rose from
6.3 million head in 1995 to 7.3 million in 1996.  As a result,
beef production rose to 25.5 billion pounds, second only to the
25.7 billion pounds produced in 1976, when the cattle inventory
was 132 million head (compared with 1996's 103.5 million) and the
industry was experiencing the largest liquidation in history. 

Beef production in 1997 is projected to be down slightly from
1996 levels.  Production in 1998 is expected to decline about 2
percent, but declines in the second half of the year are likely
to be even greater if forage supplies and grain prices become
more favorable, encouraging retention of cows and heifers. 
Although these downward shifts in beef supplies are raising
cattle and retail beef prices, large and expanding supplies of
competing meats will limit price increases.  
Ron Gustafson (202) 694-5174 and 
Ken Mathews (202) 694-5183
ronaldg@econ.ag.gov
kmathews@econ.ag.gov

LDP-BRIEF BOX

The Cattle Cycle:
Biology as Destiny?

The cattle cycle is a 7-to-10-year period encompassing the
expansion and subsequent contraction of the country's beef cattle
herd.  A new cycle starts when the herd begins expanding again. 
Livestock producers' ability to expand or contract in response to
market signals is circumscribed by a biological factor--the
length of time required to produce new animals for the market.

The biological component of the poultry cycle is by far the
shortest, requiring only about 7 months from the time an egg is
fertilized and laid, the chick is old enough for breeding, and
her offspring reach slaughter weight.  Moreover, chicks retained
for the breeding flock comprise only a minuscule proportion of
the production potential; most chicks will be sold for food
before reaching breeding age.  As a result of this short
biological cycle and the small ratio of breeding animals to
slaughter animals, poultry producers can adjust very rapidly to
market conditions.

The biological hog cycle is somewhat longer than for poultry,
about 20 months from the time a sow is bred and farrows, a
retained gilt reaches breeding age, and her offspring reach
slaughter weight.  Unlike poultry, each gilt retained for
breeding has some impact in slowing pork production gains during
the 12-18 months before her first offspring are sold.  But that
impact is steadily decreasing with litter size approaching nine
pigs and most sows farrowing at least twice a year, allowing pork
producers considerable ability to respond to market
opportunities.

The biological cattle cycle is considerably longer than either
the poultry or hog cycle.  Fifty months can pass from the
breeding of a beef cow; the birth of her calf and its growth to
breeding age; and the birth of that offspring's calf, its
weaning, time in grazing and a feedlot, and finally,
slaughtering.  

Given this long biological cycle, cattle producers must make
decisions for future production nearly 4 years ahead, limiting
their ability to adjust quickly to market changes.  Moreover,
each heifer calf retained for the breeding herd has an almost
one-to-one bearing on reducing beef production in the 4 years it
takes for expansion, since cows generally produce a single
offspring annually.  Thus, the cattle cycle lasts from 7 to 10
years, as decisions on whether to breed more cattle or to
slaughter cows and heifers for beef production are impacted not
only by such factors as meat and feed prices and forage
conditions, but by the single births and the long biological
component of the cycle. 


BRIEFS

Specialty Crops

Wood & Paper Products
Lead Industrial Uses 
Of Agricultural Materials

The value of agricultural products used as raw materials in the
manufacture of industrial products (nonfood, nonfeed) has
surpassed $100 billion.  In 1992, the most recent year for which
data are available, the value amounted to an estimated $110
billion.  All major industry groups used agriculturally derived
materials in 1992.

Wood and paper accounted for more than 87 percent of the total. 
The second-largest category of agricultural materials used as
industrial inputs in 1992--other fibrous materials--reached a
total value of nearly $7 billion.  Raw cotton use accounted for
an estimated $3.1 billion of the total.  Other cotton products,
including cotton yarns, fabrics, felt, linters, and waste, added
another $3.3 billion.  Industry also used $370 million worth of
raw wool and wool materials in 1992. 

Animal products, the third-largest category of agricultural
material used by industry, totaled nearly $3.5 billion.  The
leather and leather products industries purchased $1.2 billion of
hides, skins, and pelts, while the leather products and apparel
industries used another $1.5 billion of finished leather. Nearly
$600 million worth of animal fats, oils, greases, and tallow went
into the production of perfumes, cosmetics, and chemical
preparations.  Manufacturers of medicinal chemicals and
pharmaceutical preparations purchased $51 million of
pharmaceutical-grade gelatin.  Finally, $16 million of dressed
hair, including horse hair, was used to make brooms and brushes.

Industry also used $69 billion of raw materials that are
partially derived from agricultural sources--intermediate goods
both from agricultural and petroleum sources. Materials in this
category include, for example, "knit fabrics," which may be made
of synthetic fabrics like polyester as well as of natural fabrics
like wool. 

An additional estimated $5.5 billion of raw materials derived
from petroleum sources may in the future come from agricultural
and forestry products.  This estimate offers researchers working
on new industrial uses for agricultural materials a rough
indication of potential market size for industry inputs.  

USDA and other researchers are actively exploring new processes
and procedures to expand industrial uses of agricultural
materials.  For example, a new technology, not yet employed
commercially, can turn cornstarch into propylene glycol,
glycerine, and ethylene glycol, with uses as varied as soap and
personal care products, and antifreeze.  Researchers are also
refining the use of soybean and other vegetable oils in
letterpress and lithographic printing inks.  For each new use,
however, agriculturally derived materials will have to compete
with their more well-established, petroleum-based counterparts.

The paper and allied products industry was the largest major
industry user of agricultural raw materials in 1992, spending
nearly $39 billion on agricultural inputs and $2.5 billion on
intermediate goods partially derived from agricultural sources. 
The lumber and wood products industry was second, using $23
billion of agriculturally derived and $0.6 billion of partially
agriculturally derived materials.  The chemicals and allied
products industry ranked as the third-largest industry group,
spending $5.5 billion on agriculturally derived materials and $16
billion on partially derived intermediate goods.

The importance of agricultural materials as inputs varied among
industries.  Nonfood manufacturing industries spent nearly $180
billion on agriculturally derived and partially  agriculturally
derived materials in 1992, nearly 8 percent of the total $2.3
trillion spent by industry on raw material inputs for production. 
Agricultural raw materials were most important to the leather and
leather products industry, accounting for 38 percent of all
inputs.  Agricultural raw materials were also important to the
paper and allied products and apparel industries, accounting for
32 and 31 percent of their inputs, although for the apparel
industry, most of the inputs came from partially derived
agricultural materials.
Jacqueline Salsgiver (202) 694-5258
jsalsgiv@econ.ag.gov

SPECIALTY CROPS BRIEF BOX

Deriving the Value of Agricultural 
Materials Used by Industry

In an attempt to produce a comprehensive estimate of industrial
uses of agricultural materials, researchers at USDA's Economic
Research Service (ERS) have focused on data from the 1992 Census
of Manufactures, one of a regular series of surveys conducted by
the U.S. Bureau of the Census at 5-year intervals.  The Census of
Manufactures uses a material code to report on materials used in
production by firms in various industries.  With the help of
chemists and chemical engineers, ERS analysts developed a list of
material codes that classify inputs as agriculturally derived,
partially agriculturally derived, or potentially derived from
agriculture.

The agriculturally derived category includes materials obtained
from agricultural, forestry, or natural-plant sources.  These
materials have received various amounts of processing, from goods
with little processing, like raw cotton, to finished products
used as intermediate goods in the manufacture of other products,
such as vegetable oils.  

The partially agriculturally derived category includes three
types of materials or chemicals: those that are partially derived
from agricultural sources, those that are agriculturally based
but are included by the census in an aggregated group containing
both agriculturally based and nonagriculturally based materials,
and those that can be derived from either agricultural or
petroleum sources for which information on the derivation is not
provided by the census.  The category of materials  potentially
derived from agriculture includes those that may in the future be
made of agricultural or forestry products, but are presently
obtained from petroleum sources.

The use of Census of Manufactures material codes as a basis for
estimating the value of agricultural materials used by industry
has some limitations.  When the use of agricultural materials in
the production processes of particular industries is minor or not
well known, or when the value of agricultural materials used is
low, the census is unlikely to capture information about the use
of those inputs.  As a result, the use of agricultural materials
as industrial inputs may be underestimated.  Underestimates may
also result from the withholding of some data by the Census--for
example, to avoid disclosing information about individual
companies. 

Use of these data may also result in some overestimation of the
value of agricultural materials used by industry, primarily from
double counting.  For example, the value of cotton as an input is
counted twice, once as an input into the manufacture of an
intermediate good--yarn--and again as an input (in the form of
yarn) in the manufacture of fabric.  


COMMODITY SPOTLIGHT

World Beef & Cattle Trade:
Evolving & Expanding

Increases in global incomes in a number of key regions and the
advent of a more liberalized trading environment have contributed
to substantial growth in international beef trade over the past
15 years.  Beef exports among the major traders is projected at
4.8 million tons in 1997, up 45 percent from 1980.  But certain
trade barriers--sanitary, quality, technological, and cultural--combined 
with changing production, marketing, and political
conditions have also played an important role in the evolution of
beef markets.  These will likely continue to exert a strong
influence as meat trade expands through the next decade.

Beef is produced and consumed worldwide, yet large-scale beef
trade is limited to a relatively small number of countries and
represents a small but growing proportion of total consumption. 
Among major producing and consuming countries, exports of beef
represent about 11 percent of production, compared with 7 percent
in 1980.  

Health and sanitary regulations predicated on fear of spreading
virulent cattle diseases such as brucelloses and foot-and-mouth
disease (FMD) have limited the marketing opportunities of surplus
beef producing regions and have effectively segmented
international trade in beef into two distinct markets.  Many
countries will not accept live animals or fresh, chilled, or
frozen meat from regions where cattle diseases are endemic.  

Trade in live cattle is significantly smaller than beef trade
(both in terms of value and volume), at less than 1 percent of
cattle inventories.  Trade in cattle tends to be limited to
countries that are geographically close, due to potential risks
in shipping live animals.  Examples include inter-NAFTA trade,
inter-EU (European Union) trade, and Australia-Southeast Asia
cattle trade.  However, some breeding animals may be traded long
distances when the animals' value outweighs the higher transport
costs.

Cattle production worldwide is differentiated by animal genetics
and feeding methods, resulting in differing quality  types. 
Cattle are basically residual claimants to crop or land
resources.  Those countries with excess or low-value land tend to
grass-feed their cattle herds, while those countries with excess
feed grains, such as the U.S. and Canada, finish cattle with a
grain ration.  Grain-fed cattle have more internal fat (i.e.,
marbling) which results in a more tender meat than forage-fed
cattle of a similar age.  In Japan, although not a grain surplus
country, tastes and preferences have encouraged feeding grain to
cattle, but at a high cost since the grain must be imported. 

In much of the world, cattle are producers of both milk and meat. 
Dairy cattle or dual-purpose animals tend to be less efficient at
producing beef.  Government policies however (such as in the EU),
may encourage beef production as an offshoot of support for dairy
production.

Differences in the type or quality of beef produced can influence
a country's trading patterns.  For instance, the U.S. is a major
exporter of grain-fed beef but a large importer of grass-fed beef
for the processing industry, primarily for hamburger.  

In addition to quality differences, changes in shipping
technology and meat processing have influenced production and
patterns in meat trade.  Changes in technology such as 
modified-atmosphere packaging (i.e., vacuum packaging using inert 
gases), containerized shipping, and refrigerated containers have
increased shelf life, permitting fresh product to be shipped a
greater distance. 

Cultural differences are also a factor in determining beef flows. 
Although there is only one major country where religious belief
limits the consumption of beef, other factors such as cooking
techniques (braising vs. stir frying vs. roasting), consumer
perceptions of healthfulness, and preferences in color or size of
cuts may determine sales in certain markets.  The move to
marketing meat cuts has allowed exporters to target specific
markets with the products that match consumer preferences. 
Examples include high-value table cuts destined for Japan, 
low-value cuts for sausage to Russia, and a mixture of cuts for
Mexican consumers. Those exporters who alter cutting
characteristics, or otherwise address consumer needs, have a
better chance of increasing sales.

Beef Production Expanding, 
Consumption Grows Steadily

Beef production in the major producing countries is projected to
reach 48 million tons in 1998.  Production has increased 20
percent from 1980 to 1996 and is expected to continue increasing
at about 1.5 percent per year through 2005.  (The Food and
Agricultural Organization of the U.N. provides a more
comprehensive set of production numbers than USDA's Foreign
Agricultural Service.  According to the FAO, world beef
production increased 18 percent between 1980 and 1996 and is
estimated at 55 million tons in 1997.)

Beef production tends to be concentrated, with the top six
producers--the U.S., the EU, Brazil, China, Argentina, and
Russia--accounting for about 60 percent of global production.  

Significant shifts among producers have occurred over time.  Due
to economic restructuring in Russia, production declined
precipitously, falling 45 percent or nearly 2 million tons since
1990.  Production in China, in contrast, has increased
dramatically.  Over the next 10 years China is expected to have
the world's fastest rate of production growth as booming internal
demand for beef, driven by strong income growth and rapid
urbanization, encourages expansion.  Increased demand in Russia
and Brazil is also expected to help stimulate their domestic
production. 

The U.S.--largest of the world's beef producers--is in the
contractionary phase of its cattle cycle.  Production peaked in
1996 at 25.5 billion pounds, and is expected to remain below that
level through 2005 as cattle inventories contract over the next 2
years.  U.S. beef production is expected to begin to increase
after 2000.  Argentina has suffered from declining production as
government policies encouraged a shift in resources to the grain
sector.  However, the recent declaration of Argentina as free of
FMD could encourage increased production to service international
markets.  

The EU has suffered from periodic market imbalances, particularly
oversupply, since the mid-1980's.  Prior to 1992, dairy policies
kept production relatively constant, and large stocks were
depleted through increased export activity.  However, reform of
the Common Agricultural Policy (CAP) in the early 1990's began
reducing dairy cattle and beef production.  Additional pressure
has been brought to bear by the bovine spongiform encephalopathy
(BSE) crisis (AO June 1996) and by GATT-mandated reductions in
export subsidies.  The BSE crisis, which came to a head in 1995-96, 
reduced domestic consumption and caused a sharp drop in
exports.  As stocks continue to accumulate and consumption
remains weak, it is likely that production in the EU will have to
fall further over the next 10 years. 

Global per capita consumption of beef is projected to increase
through 2005 as meat demand in countries with rapidly
industrializing or transition economies increases with income
growth.  Gains in per capita consumption are expected in most
Asian countries.  In China, South Korea, and Japan, the rise in
consumption should outpace population growth, while consumption
in other countries in the region should be about even with
population growth.  

Some growth is expected in Latin America, but gains in per capita
consumption due to income increases in Mexico and Brazil will be
largely offset by declines in Argentina's per capita beef
consumption.  While Argentina has one of the world's highest per
capita beef consumption rates, consumption is highest among the
lower classes, which have seen a decline in purchasing power in
recent years.  

Per capita beef consumption is expected to increase in a number
of Central and Eastern European countries after years of decline,
but countries that have delayed liberalizing their economies--e.g., 
Belarus and Uzbekistan--face a longer period of decline
before income growth stimulates beef demand.  In Russia, beef
consumption has fallen since 1985, due to economic restructuring
and loss of purchasing power.  As the Russian economy recovers,
beef demand is expected to increase gradually, but because of the
availability of relatively cheaper pork and poultry, demand for
those meats is expected to increase more rapidly.

Per capita beef consumption in the U.S. is expected to fall over
the next 3 years as production declines, and as relative prices
favor consumption of other meats.  EU beef consumption has
recovered slightly from the impact of the BSE crisis, but EU
demand for beef will likely remain weak for at least the next 5
years.  Any additional discoveries of BSE or any further
incidences of beef-related human illness could further reduce
demand and set back the recovery in consumption. 

Market Liberalization 
Boosts Trade

The world's five largest importers--the U.S., Japan, Russia, the
EU, and Canada--account for about 70-75 percent of global
imports.  Market liberalization has begun to increase demand for
imported beef in a number of Pacific Rim countries.  Although
currently small importers, South Korea, Taiwan, and Mexico are
expected to see substantial growth.  These countries tend to
demand grain-fed beef, which would benefit the beef industries in
the U.S., Canada, and potentially Argentina. 

The U.S. is the world's largest importer of beef, with projected
imports of nearly 1.1 million tons (carcass weight) in 1997 and
1.2 million in 1998.  In general, imported beef competes with
U.S. cull dairy and beef cows in the production of hamburger. 
Imports have averaged 9-10 percent of U.S. consumption since the
mid-1980's, but the actual level depends on the phase of the U.S.
cattle cycle.  During the liquidation phase of the cycle, U.S.
slaughter of cows from breeding herds increases and imports of
beef decline.  

Most U.S. imported beef comes from Canada, Australia, and New
Zealand--all FMD-free countries.  The U.S. restricts imports from
FMD-endemic regions to cooked product.  The U.S. is likely to see
increased levels of imports after 2000 as the U.S. enters a
cattle rebuilding phase and retains female stock (heifers and
cows) for breeding.  The U.S. is expected to remain the largest
importer of beef through the middle of the next decade. 

Japan trails only the U.S. in beef import volume with projected
1998 imports of 914,000 tons, and the gap has narrowed
considerably since Japan began liberalizing its market in the
mid-1980's.  However, Japan is the world's leading beef importer
in value terms due to imports of high-valued cuts.  Japan's
import volume climbed 317 percent between 1985 and 1996, and is
expected to increase 4 percent per year through 2005.  Japan is
committed to reducing its beef tariffs in accordance with World
Trade Organization (WTO) commitments, and imports are projected
to increase from 60 to almost 70 percent of consumption by 2000
as a result.  

Australia and the U.S. are the major suppliers of beef to Japan
and are likely to remain so for the foreseeable future.  The U.S.
provides the vast majority of Japan's grain-fed beef imports,
while Australia supplies grass-fed and some short-fed beef. 
Short-feeding, done to add some marbling, involves grain feeding
for less than 90 days, in contrast to 140-150 days of grain
feeding in the U.S.  Argentina could ship beef to Japan under its
new FMD-free status, but is not expected to challenge either the
U.S. or Australia for dominance.

Russia has been a substantial importer of beef, a fact which was
obscured by the large amount of internal trade in the Soviet
Union.  However, imports fell dramatically following the breakup
of the Soviet Union.  Declines in consumer incomes and the
economic restructuring of the livestock sector, including the
loss of production subsidies, has led to a sharp decline in beef
production, down 65 percent since the late 1980's.  As government
support for consumption was eliminated, per capita consumption
declined to levels more in keeping with countries at a similar
economic level.  Imports of low-value beef from other former
Soviet republics, other European countries, and the U.S. have
risen as production fell.  

In the next decade, Russia's beef production is expected to begin
increasing and will likely offset some imports.  However, by the
middle of the decade, imports could rise again as demand growth
due to income gains outstrips beef production growth.  

The EU currently ranks as the world's third-largest exporter and
fourth-largest importer (excluding intra-EU trade).  EU policy
had been geared to maintaining market balances by exporting beef
under subsidies and limiting imports.  Imports have traditionally
been supplied by the U.S., Argentina, and Brazil.  However, the
U.S. has been excluded from shipping product to the EU since 1989
because of the EU's ban on beef produced with growth-promoting
agents such as anabolics.  A recent WTO panel has overturned the
ban, but the EU plans to appeal the ruling and will likely
continue to try to prevent U.S. beef from entering.  

Over the past several years, EU beef imports have been dampened
by large internal stocks of beef as well as by consumer concerns
over the safety of beef consumption in reaction to the BSE
outbreaks in Europe.  Given large domestic beef supplies, it is
highly unlikely that EU government will favor expanding imports
beyond its WTO commitments.  It is also unlikely that these large
stocks can be marketed without use of export subsidies or a
substantial decline in the domestic market price to near world
levels.  Unless the EU violates its WTO commitments to limit the
use of export subsidies, it is left with the unpalatable choice
of either reducing production or carrying larger stocks.

Like the U.S., Canada imports fresh, chilled, and frozen beef
only from FMD-free countries and limits imports through a tariff-rate 
quota (TRQ).  However, the U.S. and Mexico are exempt from
TRQ's under the terms of the U.S.-Canada Free Trade Agreement and
its successor, the North American Free Trade Agreement (NAFTA). 
Under the terms of these two agreements, each nation exempted the
other from any quantitative limits and under the accelerated
schedule of tariff reductions, there are no tariffs remaining
among the three countries.  Consequently, the U.S. has become
Canada's primary source of imported beef.  

Canada is in the liquidation phase of its cattle cycle.  Imports
are projected to decline over the next several years as large
amounts of domestic beef compete with imported product, but will
then increase as the next inventory buildup begins.  The U.S. has
traditionally shipped higher-value, grain-fed beef to the
population centers of eastern Canada.  But there has been an
expansion of slaughter capacity in western Canada by U.S. firms
which are beginning to market more product in the East.  This
recent expansion, coupled with the potential for growth in
domestic cattle feeding due to changes in Canadian grain
policies, could place U.S. exports to Canada under increased
competition.

The world's five largest exporters--Australia, the U.S., the EU,
New Zealand, and Argentina--account for about 75-80 percent of
world beef trade.  However, since the mid-1980's a number of
shifts have occurred among major traders.  Brazil, for example,
the third-largest beef exporter in the mid-1980's, has fallen to
sixth due to several factors such as increasing domestic demand
absorbing a larger share of internal supplies, government policy
that continues to discourage meat production, and Brazil's
inability to achieve FMD-free status.  On the other hand, the
U.S. has seen its share of world beef exports expand sharply over
the past 15 years.

U.S. beef exports have grown from less than 1 percent of
production in 1980 to almost 8 percent in 1997, lifting the U.S.
from eighth-largest exporter to second.  U.S. beef exports are
projected up 2 percent at 870,000 tons in 1997 and another 9
percent in 1998 at 950,000.  The majority of the long-term growth
in U.S. exports can be tied to trade liberalizing agreements. 
Well-positioned as a producer of disease-free, well-marbled beef,
the U.S. has been able to capitalize on market liberalization in
the 1980's and 1990's.  

The Japan-U.S. Beef Citrus Agreement of 1988, and both the 
U.S.-Canada and North American Free Trade Agreements, have
helped to open substantial new marketing opportunities for U.S. beef 
exports.  Trade with these three countries--Canada, Mexico, and
Japan-- represented 80 percent of U.S. beef exports in 1996. 
These trade gains, coupled with an expanding market in Korea, are
expected to continue boosting U.S. exports through 2005 to about
12 percent of production.  The U.S. will likely become a net beef
exporter (volume terms) by the middle of the next decade.

Following the European BSE crisis, Australia has overtaken the EU
as the world's leading beef exporter, but is expected to come
under increasing competition from the U.S. for that position.  As
an FMD-free exporter, Australia has been a major supplier of
grass-fed beef for the processing industries in the U.S. and
Canada, and has been increasing its role as a supplier of meat to
a number of Pacific Rim markets, primarily Japan and South Korea. 


Since 1985, Australian exports have increased 60 percent. 
Australia is projected to export 1.095 million tons in 1997,
which will decline slightly to 1.075 million of exports in 1998
as herds are rebuilt.  Because Australia produces primarily
grass-fed beef, production and exports of beef have been subject
to the uncertainties of weather and its impact on the quality and
quantity of forage.  Australia has gone through several periods
of drought, which have often forced early liquidation of herds
and a near-term jump in production, followed by production
cutbacks as the herds are rebuilt.  

Although Australia has attempted to develop a feedlot industry
both to offset forage shortfalls and expand into the higher end
beef markets, feed-grain sufficiency remains a problem.  Feed-grain 
imports to Australia are effectively prohibited by
regulations preventing the incidental importation of unwanted
pests--i.e., insects, weeds, or plant diseases.  As long as
imports of feed grains are blocked by sanitary barriers, the
growth of Australia's feedlot industry will be limited.

New Zealand is the world's fourth-largest exporter, but exports
have shown little growth since the mid-1980's, hovering around
500,000 tons.  Like Australia, New Zealand is FMD-free and
produces grass-fed beef.  However, New Zealand beef production is
dominated by dairy operations.  New Zealand, which exports
manufacturing-grade beef to the U.S. and Canada, has shown less
interest than Australia in expanding into the growing Pacific Rim
markets.  Over the next 10 years, New Zealand's beef production
is expected to decline marginally as low beef prices and
weakening dairy prices encourage producers to look for more
profitable alternatives to beef and dairy production.  

Argentina remains the world's fifth-largest beef exporter,
despite a fall in its share of global exports from 13 percent in
1985 to 9 percent in 1996.  Traditionally, Argentina supplied the
EU with fresh beef and the U.S. with processing beef.  Recently
Argentina has taken advantage of increased market liberalization
under MERCOSUR--a customs union among Argentina, Brazil,
Paraguay, and Uruguay--to dramatically expand sales to Brazil. 
MERCOSUR imposes a common external tariff on members, and
internal tariffs that are small and declining, or already zero. 
Argentina's sales to the U.S. will be limited by the U.S.'s WTO
beef tariff-rate quota.  

In the past, Argentina's FMD status had prevented it from
expanding into the growth markets of the Pacific Rim.  Now that
Argentina has been successful in its FMD eradication program and
has received approval of regionalized FMD-free status, the door
could open to the rapidly growing beef import markets of Asia. 
Argentina could possibly compete better in Pacific Rim markets by
shifting production toward grain-fed beef, because large supplies
of FMD-free, grass-fed beef already exist in Australia and New
Zealand.  If Argentina adopts such a strategy, it is expected to
overtake New Zealand as the fourth-largest exporter early in the
next decade.
Shayle Shagam (202) 694-5186
sshagam@econ.ag.gov


FOOD & MARKETING
Meat Industry Price Spreads: 
What Do They Indicate?

In October 1997, the farm-to-retail price spread for pork reached
a record $1.62 per pound, attracting renewed attention to the
difference between farm and retail meat prices.  Current price
spreads for Choice beef and broilers, although not at record
levels, are also relatively high.  

Over time, nominal price spreads tend to widen as inflation
increases the costs of marketing, processing, and retailing.  Yet
the most compelling feature of meat price spreads for Choice
beef, pork, and broilers is that, when adjusted for inflation,
they have remained fairly constant or even decreased slightly
over the past three decades.

Beef and pork price spreads measure the total costs (including
profits or losses) for  slaughtering, processing, and performing
a multitude of marketing functions for a defined quantity and
quality of product.  Farm-to-retail price spreads usually widen
when retail prices are rising rapidly or farm prices are falling. 
Consumers become concerned with high prices, farmers are
concerned when prices are low, and both often look to the price
spread for evidence of who is profiting.  But price spreads alone
do not indicate whether an industry is efficient or inefficient,
or whether marketing, processing, and distribution costs are
reasonable.  Nor do they directly measure profitability.

Although the terms "spreads," "gross margin," and "profit margin"
are often incorrectly regarded as synonymous, spreads by
themselves do not indicate whether any segment of the marketing
chain (i.e., farm, wholesale, or retail) is enjoying profits or
suffering losses.  Price spreads generally are larger than meat
packer or retailer margins since they also include charges by
marketing firms for other functions, such as transportation.  

Gross margin is generally used by industry to mean the difference
between what a retailer or packer pays for a product (per unit
bought) versus what is obtained at the time of sale (per
equivalent unit sold).  Gross margin includes the costs of labor,
packaging, overhead, and any profit.  Profit margin refers to the
difference between the gross margin and costs, and is usually
expressed as a percentage of sales or of stockholders' equity. 
Price spreads reported by USDA are U.S. averages, whereas
industry sources often cite gross margins and profit margins of
individual firms. 

Price spreads simply indicate differences in calculated values
for a consistent equivalent quantity and quality of product as it
is successively measured at the farm, wholesale, and retail
levels.  Consistent means that the same product (for example, a
Choice steer's specific cuts) is measured each month and at each
marketing level.  Consistent price spreads provide an estimate of
the distribution of final retail dollars among the farm,
wholesale, and retail segments of the marketing chain and how the
distribution changes over time.  As such, price spreads provide a
breakout of the consumer food dollar into the farmer's share and
the marketing share for the measured product.  

Congress, researchers, policy makers, industry participants, and
the public are all interested in how the consumer's food dollar
is allocated between farmers and the marketing system.  By
examining price spreads and their components, the timeliness and
completeness of price adjustments among marketing levels, as well
as variations in marketing spreads (e.g., transportation,
processing, and distribution) can be monitored over time.  If the
spread is unchanged it implies that a price change at one level
of the marketing system is being fully transmitted to another
level.  But retail prices and price spreads are only one set of
information used in analyses of efficiency and performance of the
total product marketing system.  Additional information on costs
and investments are required for an accurate and complete
analysis.

However, the calculation and use of price spreads have some
limitations.  First, because of the difficulty in measuring price
equivalencies across marketing stages for different products, not
all price spreads are calculated.  As a result, the calculated
prices and price spreads do not reflect all livestock and meat
products.  For example, no Select grade or cow beef are included
in the Choice beef spread, nor is a price spread computed for
lamb.  (For beef, this has been partially addressed by
development of the "all fresh retail beef" price series.)

Second, the various product prices and spreads are equated to
carcass proportions even though retail food stores don't usually
sell Choice beef, pork, or broilers in carcass proportions, so
retail price estimates used in the calculation of spreads may not
match retail store sales.  The "all fresh retail beef" series
gives a heavier weight to ground beef, but the Choice and Select
portions of the all-beef calculations are still in carcass
proportions.  USDA's Economic Research Service (ERS) uses carcass
proportions because no comprehensive direct sales volume data are
available at the retail level.  Therefore retail cuts are assumed
to sell in carcass proportions.

Another limitation is that prices, and therefore spread
calculations, do not account for any "volume effect" of
promotional price specials.  The Bureau of Labor Statistics (BLS)
prices used to construct the product prices and spreads include
promotional sale prices that are in effect at the time the price
data are collected, but due to lack of pertinent data, no
adjustments are made to reflect any  increases in sale volumes
that often accompany lower promotional prices.

A fourth limitation is that price spreads do not indicate profit
levels of marketing firms.  Data used for price spreads are based
on published prices only and do not include direct estimates of
firm or industry costs.  A final limitation is that price spreads
do not account for time lags in physical movement of product. 

Price Spreads--
Short & Long Term

Long-term fluctuations.  Interpretation of meat price spread data
over the long term depends on whether nominal or deflated data
are used; and whether long or short time periods are considered. 
On a nominal basis, meat price spreads have increased
dramatically since the early 1970's.  But when deflated--i.e.,
adjusted for inflation--a different picture emerges.  Price
spread data indicate improvements in cost efficiency in
slaughtering and processing for Choice beef and pork over time.  

When deflated, the pork farm-to-retail spread is essentially
flat, or decreases slightly over the past three decades, and the
record spread of October 1997 is below many earlier price points. 
As for the component measures, the deflated pork farm-to-wholesale 
spread decreases over time, offsetting changes in the
pork wholesale-to-retail spread which increases from 1970 to 1978
before leveling off.  

The deflated farm-to-retail spread for Choice beef declines
slowly over the past three decades, also driven by the strong
downward-trending farm-to-wholesale spread.  The Choice beef
wholesale-to-retail spread, on the other hand, is fairly level
since 1980. 

The broiler wholesale-to-retail spread is fairly stable on a
nominal basis, but decreases when deflated.  Because the broiler
industry is integrated between broiler growers and processors, no
farm-level price or farm-to-wholesale spread is calculated.

The farm-value share of retail Choice beef and pork prices has
decreased over time, at least partly because marketing costs have
paralleled inflation while cattle and hog prices have lagged
behind.  Farm-value share has been decreasing for most
agricultural commodities.  The farm-value share for all U.S.
domestically raised foods has declined from 41 percent in 1950 to
23 percent in 1996.  

The fall in the farm-value share reflects the increase in
services provided by marketing firms over time, and in the cost
of those services.  The index of food marketing costs, which
measures price changes in marketing inputs such as labor,
packaging, transportation, and energy, rose 336 percent between
1968 and 1996.

Short-term fluctuations.  Given the longrun trend toward higher
marketing costs, one might expect price spreads to grow more or
less steadily over time.  But instead, substantial short-term
variation occurs.  

Short-term fluctuations in meat price spreads reflect the
tendency for retail price changes to lag behind farm price
changes.  If there is no lag--i.e., changes in the farm price are
immediately reflected in retail prices--the price spread would
rise only with inflation and other costs.  But with a lag in
price transmission, the price spread is non-constant, and at
times quite variable.

Two reasons are cited by the industry for the lag in price
transmission.  First, the delay in changes between farm and
retail prices is often attributed to the time it takes to move
products from farms to retail outlets, so that the prices of
products currently in stores reflect earlier farm prices.  In
addition, retailers set prices for advertising purposes a week or
more ahead, thus limiting rapid adjustment to sudden price
changes.  As a result, farm-to-retail price spreads frequently
narrow while farm prices are increasing, and widen while farm
prices decrease.  The lag tends to be shorter when farm prices
are rising.

The second reason for the lag in price transmission is fear of
negative consumer reaction to frequent price changes (especially
price increases) which motivates stores to "smooth out" such
changes.  In the long run, however, the marketing system cannot
keep the retail price of meat constant and still balance
production and consumption, so retail prices must eventually
adjust.

ERS research using monthly price data shows that price
adjustments at farm and wholesale are nearly concurrent.  The
retail price, however, follows price changes at the farm and
wholesale levels with a lag distributed over nearly a year. 
Research also reveals a distinct asymmetry in retail response to
farm-level price changes.  Upward movements in farm prices are
followed by retail price adjustments about 24 percent more
quickly than are downward farm-level price movements.  A partial
explanation may be that retailers expect downward movements to be
temporary and wish to avoid marking prices down and then back up
again. 

A recent example of the lag in price transmission occurred during
the July to August period of 1997 when the net farm value for
pork dropped 8 cents per retail pound, the wholesale price
remained about the same, and the retail price went up 3 cents. 
The farm price fell another 7 cents from August to September, the
wholesale price fell 6 cents, and the retail price decreased only
1 cent.  Then in October, the farm price decreased another 5
cents, while the retail price was flat.  As a result, the October
farm-to-retail pork price spread expanded an additional 5 cents.

Variation Evident in 
Wholesale-Retail Spreads

The absolute levels of spreads between the wholesale and retail
prices of beef and pork have increased irregularly over time. 
ERS based its recent research on the factors driving wholesale-to-retail 
price spreads for beef and pork on the concept that the
retail price is essentially the wholesale price plus a markup
that reflects grocery stores' costs of preparing and marketing
meat.  As such, inflation would tend to make costs, and
consequently the wholesale-retail spreads for beef and pork, rise
over time.  

One explanation advanced for the widening of spreads over time is
that, in addition to rising costs, increasing levels of service
are provided with meat sold at retail outlets.  Among the factors
driving demand for service is increasing consumer income. 
However, ERS research has found no relationship between price
spreads and consumer income.  Another set of factors driving
increasing service demands are the societal trends that have
decreased the amount of time available for food preparation. 
However, simple trend measurements--albeit an imperfect proxy for
this phenomenon--also failed to show any relationship with meat
price spreads.  The conclusion emerged that longrun price spreads
appear to follow inflation.

It is obvious, however, that in the short run, price spreads do
not track inflation closely.  Price spreads for beef and pork
fluctuate quite a bit from month to month.  Even after correcting
for inflation, wholesale-to-retail price spreads fluctuate, on
average, about 5 percent per month (in absolute terms).  One
factor in this volatility is that retail prices seem to lag
behind wholesale prices.  

ERS research showed that increased volumes of meat consumption
are associated with slight shortrun increases in the wholesale-to-retail 
spread.  However, the effect of higher sales volume is
only temporary, increasing nominal price spreads for only about 3
months.  In the typical month, the sales-volume effects cause
beef and pork spreads to vary by about 1 percent.  In the longer
term, sales volume has little impact on wholesale-to-retail
spreads. 

While wholesale-to-retail nominal price spreads have widened over
time, long-run price spreads, when adjusted for inflation, have
remained fairly constant.
Kenneth E. Nelson (202) 694-5185 and 
Lawrence A. Duewer (202) 694-5172
knelson@econ.ag.gov
lduewer@econ.ag.gov

FOOD & MARKETING BOX--1

What Are Price Spreads And
How Are They Calculated?

Meat price spreads are the differences in prices or imputed
values for a specified equivalent quantity and quality of product
at identified points in the marketing channel during a specified
time period.  Thus, a price spread incorporates marketing,
processing, and retailing costs.  For example, the farm-to-retail
price spread for Choice beef is the difference between the
average retail price per pound and the farm value of the quantity
of live animals equivalent to l pound of retail cuts.  In other
words, price spreads represent total marketing charges for
processing and distribution between farmer and grocer.  These
marketing charges are not measured directly; instead, prices are
observed and compared at successive points in the marketing
chain.

The price spreads for Choice beef are ERS's monthly estimates of
the differences among the values of a Choice Yield, Grade 3 steer
sold by the feedlot; the value of Choice boxed beef from that
steer as delivered to the city where it is consumed; and the
value of Choice meat from that steer in the retail food store. 
Spreads reflect the decrease in weight from diverted hide, fat,
bone, and other by-products, and the increase in value owing to
assembling, processing, transporting, and retailing charges
required to convert a farmer's Choice Yield Grade 3 steer into
retail cuts and hamburger sold to consumers.  The value of
variety meats and of by-products such as the hide are removed
from the calculations through a by-product allowance.  Currently
2.4 pounds of live animal are required to produce 1 pound of
composite retail Choice beef cuts.

For beef, the farm-to-retail spread has two main components: farm
to wholesale and wholesale to retail.  The farm-level calculation
is called the "net farm value," the wholesale level is the
"wholesale value," and the retail level is the "Choice retail
price."   The farm-to-wholesale figure encompasses approximate
charges for slaughtering and cutting cattle to primals and
transporting the beef to the city where consumed.  The wholesale-to-
retail spread, accordingly, includes not only the gross margin
for retailing, but also the charges for other intermediate
marketing services, such as cutting to retail portions,
wholesaling, local delivery to retail stores, and other
merchandising.

For pork, the farm-to-retail spread is also made up of the 
farm-to-wholesale spread and wholesale-to-retail spread.  The 
farm-to-wholesale spread covers approximate costs for slaughtering 
hogs, curing, smoking, and processing pork products, and shipping to
the major consumer centers.  The wholesale-to-retail spread
represents local delivery cost, wholesaling, and the retailer's
gross margin.  

For broilers, there are two price spreads.  One is called the
retailer-to-consumer spread, which reflects the difference
between the price retailers pay and the price at which they sell
whole birds.  It thus represents only the costs and profits or
losses of the retailer in merchandising the product.  The second
spread is the wholesale-to-retail spread which reflects wholesale
versus retail prices for a composite of whole bird and chicken
parts prices.  This spread represents not only retail
merchandising costs but also local delivery costs, warehouse
costs, and possibly some broker costs.  Because of the broiler
industry's vertical integration of growers and processors, no
farm-level price is calculated.

FOOD & MARKETING BOX--2

Price Spreads: 
A Brief History

Price spreads for meat have been computed since the early 1920's
when Congress asked USDA to undertake special studies of
marketing margins for livestock.  In 1934, at the request of
livestock producers, USDA developed a statistical series to
measure changes in marketing costs for a number of agricultural
commodities.   Farm-to-retail price spreads have been published
regularly since 1942.  

Enactment of the Research and Marketing Act of 1946 increased the
attention given to measurement and analysis of marketing spreads
and costs.  The 1946 Act directed USDA "to determine costs of
marketing agricultural products in their various forms and
through the various channels...."  

Within USDA, ERS has been responsible for calculating Choice beef
price spreads since 1962.  Meat is one of nine product groups of
U.S. farm-originated foods included in USDA's market basket.  Red
meat accounts for about one-third of the total market basket.

Between 1978 and 1981, ERS used data exclusively from its weekly
retail meat price survey for computing retail prices and price
spreads.  Since 1981, ERS retail meat price series have relied on
Bureau of Labor Statistics (BLS) retail price data for basic
information.  Currently price spreads for Choice beef, pork, and
broilers are calculated.  An "all fresh beef" retail price series
began in 1987 which included additional ground beef to carcass-weighted 
Choice and Select prices.  No live price or price spread
is calculated for the "all fresh beef" price because weighting
the many types of live beef animals represented would require
data not currently available.

Pork retail price weights were changed in 1978 to reflect changes
in carcass proportions.  The Choice beef retail price series
weights were changed in 1990 to reflect use of 50/50 trim in the
ground beef calculation, more boneless cuts, and closer trimming
of fat.  Broiler prices used only "fresh whole bird" retail
prices until 1992, when a composite of whole and parts prices was
added at retail.  Whole-bird prices continue to be published. 
Turkey prices are for a frozen whole bird. 

ERS is interested in improving the accuracy and availability of
data and information on retail prices and price spreads for
meats.  Suggestions for improving price spreads were obtained at
a USDA conference on price spreads held in Kansas City in
December 1996.  Future improvements under consideration include:

*  updating and revising the pork spreads using new price series
developed by USDA's Agricultural Marketing Service and other
sources; 

*  developing a volume-weighted all-pork retail price to
represent, as nearly as possible, the average price that
retailers receive for pork;

*  improving the volume-weighted all-beef retail price reflecting
the average price retailers receive for the fresh beef sold; 


*  developing an all-grades-for-beef price spread series and an
all-grades-for-pork price spread series by calculating all grade
price series at the live and wholesale levels;

*  adding more BLS retail prices if they become available for
beef, pork, and broilers; and 

*  monitoring scanning technology and data, and incorporating
these data as they become available.

In January 1998, BLS will make changes in the number and
composition of the retail meat cuts for which BLS will publish
average prices.  Meat retail prices and price spreads will be
adjusted to reflect these developments.

Farm-to-retail price spreads are currently published in
Agricultural Outlook; Livestock, Dairy, and Poultry Situation and
Outlook; and the Food Cost Review, and are released by ERS
AutoFAX and on the Internet. 


RESOURCES & ENVIRONMENT

Value of Farm Real Estate 
Up Again in 1997

Agricultural real estate values in the U.S. continued to climb
during 1996.  USDA's estimate for the national average value of
all agricultural real estate as of January 1, 1997 is $942 per
acre, up 5.8 percent from a year earlier.   The major factor in
the value of most agricultural land continues to be the longrun
returns expected from commodity production.  However, nonfarm
factors, such as pressure from residential and commercial
development, or the potential for recreational use, play an
increasingly important role.

The 1997 average per-acre agricultural real estate values (land
and buildings) was up 3.8 percent, in inflation-adjusted terms,
from 1996.  Several states showed double-digit growth, with the
largest increase estimated at 11 percent.  Average values for the
Lake States, Corn Belt, Mountain, and Pacific regions all
increased at rates that equaled or exceeded the national average. 
No states showed a decrease in average farm real estate value,
though several were steady or up only slightly over 1996.  

State average cash rents for cropland and pasture in 1997 were
generally up from 1996.  Only four states registered a decline in
irrigated or nonirrigated cropland.  The Appalachian region
reported the largest gains in cropland rents, followed by the
Lake States region. 

USDA surveys, based on information obtained from farm operators,
have generally been consistent with the results of regional
surveys which rely on alternative procedures and respondents. 
For example, recent information from regional Federal Reserve
surveys of agricultural lenders indicate that agricultural real
estate values have continued to increase in 1997.  Results from
the Florida Land Value Survey, conducted by the University of
Florida, note that the state has struggled recently with poor
market prices for citrus products and strong competition from
foreign vegetable producers, which has been reflected in a
leveling of average prices for farmland.  These conditions most
likely will continue to impede increases in average land values
in the southern and central parts of Florida. 

The increase in agricultural real estate values during 1996 marks
the 10th consecutive year that values have risen since the low
point in the national average in 1987 following the farm
financial crisis of the 1980's.  Since 1987, the national average
agricultural real estate value has risen 57 percent, which
translates into a 15-percent gain when adjusted for inflation.  

While the national average value bottomed out in 1987 at $599 per
acre, a number of states had reached their lows before then, and
many others, located mostly in the West, did not reach their
lowest levels until several years later.  Four states in the
Northeast never actually experienced a decline in agricultural
real estate values during the 1980's. 

Patterns of growth in farm real estate values reflect the diverse
nature of agriculture across the U.S.  States in the Northeast,
Lake States, Corn Belt, Northern Plains, Appalachian, and
Southeast regions all began their recoveries in 1987 or before. 
Since then, four of these regions have exhibited gains of 20
percent or greater, in inflation-adjusted terms, for the period. 
The other two, the Southeast and Northern Plains, showed growth
of 17 and 11 percent.

States in the western regions followed a different trend.  Texas,
Oklahoma, and several of the Mountain States did not reach their
low values until the early 1990's. Agricultural real estate
values in Texas in particular have tended to move in a
countercyclical pattern. Values in the state are currently 41
percent, in inflation-adjusted terms, below the high value of
1985, a year when most other states were already experiencing
falling values.  The inflation-adjusted value in 1997, however,
is 10 percent above the low set for the state in 1993, when most
other states had already shown significant recovery.

Farm and Nonfarm Factors
In Real Estate Values

The causes of differences in land values among states and regions
are as varied as agricultural land itself.  Some of the
difference is clearly the result of varying market and growing
conditions that favor certain commodities at given times, and
consequently the states and regions that produce them.  For
example, strong export markets for grains have contributed to
optimistic earnings expectations for land suited to growing
grains. 

While a major component of the value of farmland in many areas
reflects the returns expected from commodity production, nonfarm
factors play a primary role in other areas.  USDA's Economic
Research Service (ERS) has been studying agricultural land values
in order to determine the influences of agricultural and
nonagricultural factors on this critical asset.  New research
using hedonic analysis, a method for valuing the individual
attributes of one marketable asset or product, has helped to
determine the relative land value contributed by characteristics
such as soil properties, climate, and proximity to urban areas.  

Not surprisingly, the relative contributions of the various
agricultural and nonagricultural characteristics to overall value
varies significantly across the nation.  A mild climate,
plentiful precipitation, and productive soils tend to be
positively related to the value of the land.  The existence of
fruit or nut trees, and vineyards, contributes additional value
to a parcel.

The presence of an irrigation infrastructure on a parcel of
farmland is a strong contributor to the value of that parcel. 
This influence is especially strong in many western states, where
irrigation is vital to the viability of any agriculture
enterprise.  In the East, where irrigation is less essential, it
provides a means of reducing risk by limiting the impact of
fluctuations in precipitation that naturally occur.

The states with the greatest reliance on irrigation, and thus
where it has the largest impact on land values, can be found in
the Mountain region.  Irrigation is important but less vital to
production in the Pacific and Northern and Southern Plains
regions.  While land values in the Pacific region tend to be
higher on average than those in the Mountain region, the
proportion of the land value contributed by irrigation is much
greater in the Mountain States.  Irrigation is a factor in land
values in the Delta and Southeast regions, but relative to other
irrigated regions, its impact is weakest there.

The influence of direct government payments on land values, ERS
found, is strongest in the Northern Plains and the Corn Belt, as
well as in scattered areas of the Southern Plains, Northeast, and
Mountain regions.  These findings support the contention that
government payments, to the extent that they are stable and
predictable, contribute to expected returns and are therefore
capitalized into the value of the land.  As government payment
programs are phased down over the next 5 years, a commensurate
decapitalization of payments would be expected to occur,
contributing downward pressure on values.  However, observed
market values might not actually fall, because changes in other
value determinants may have an offsetting upward effect.

Among nonagricultural elements determining farmland values, ERS
has found that the influence of urban and urbanizing areas,
mainly through demand for farmland generated by residential,
commercial, and industrial development, is the predominant
influence.  The value of land that has development potential
tends to be much higher than its value in agricultural use. 

The impact of population is obviously important in heavily
populated areas of the Northeast, California, Illinois, Ohio,
Florida, and Texas, and to a lesser extent in the Appalachian
region and several of the Mountain States--notably Utah, Arizona,
and New Mexico.  These mountainous regions have seen growing
populations and attendant upward pressure on the value of limited
private land--particularly land with potential as residential
sites offering scenic mountain views or remoteness from heavily
populated areas.

Demand for land for recreational purposes has also been found to
contribute to land values, but this is a much less important
determinant of value in most areas of the country.  The farmland
itself may be jointly used for recreational activities such as
hunting or fishing.  Some farmland is also located near
facilities that provide recreation services, such as parks for
camping or boating, ski resorts, beaches, cultural amenities, and
historic sites.  

Development of recreational facilities, campgrounds, ski lodges,
beach houses, and the accompanying commercial enterprises (e.g.
recreational equipment suppliers, gas stations, and grocery
stores) require additional land.  ERS has found that while
recreational pressure is at work throughout the nation, it is
especially prevalent in the Mountain and Northeast regions.

The returns from commodity production are still the major
determinant of the value of most agricultural land.  However, as
the nation's population grows, nonfarm demands will increasingly
contribute to the value of agricultural land.
David Westenbarger (202) 694-5626
dwest@econ.ag.gov

RESOURCES & ENVIRONMENT BOX--1 

Hedonic Methods in Analysis 
Of Farmland Values

Hedonic analysis is a method of economic modeling especially
suited to valuing the various characteristics that are bundled in
one marketable asset or product.  This method is often used to
study house sales, since a house is sold as a bundled package of
individual characteristics (e.g. square footage, number of rooms,
proximity to schools).  Hedonic analysis facilitates the
determination of underlying implicit values (prices) that each
characteristic contributes to the overall value of the bundle
that makes up a particular good or service.

Application of hedonic methods to the analysis of farmland is
straightforward, as farmland also consists of bundled
characteristics that are valued and sold as a unit.  A parcel of
farmland consists of unique amounts of various characteristics
that contribute to agriculture-related returns, including soil
properties, climate, suitability for high-value crops, potential
for irrigation, and eligibility for enrollment in government
programs.  Farmland may also possess other characteristics that
are not agricultural in nature yet contribute to the value of the
land, such as proximity to urban areas, recreation sites, or
major highways, or location in a particularly scenic area.

RESOURCES & ENVIRONMENT BOX--2

Survey Design Facilitates Research

USDA's June Agricultural Survey (JAS), conducted by the National
Agricultural Statistics Service (NASS) and the source of farmland
values used in ERS research, is based on an area frame which
divides the U.S. into "segments" representative of land uses
across the nation.  This area frame design, coupled with NASS's
geo-referencing of sample segments with latitude and longitude
information, makes it possible to link farmland value data with
other geographically based data sets, notably the USDA's National
Resources Inventory (NRI) and the Census of Agriculture.  These
data sets contain considerable information on farm production
practices and site-specific environmental conditions. 

As a result, the JAS is not only a survey of crop acreage,
livestock inventories, and farmland values, but also provides the
material for a rich data set on resource use and production
practices for the entire nation.  These data will facilitate
research on land, resource, and environmental issues important to
the agricultural community.

This is the first year that NASS has produced the current-year
estimates of farm real estate value that update the USDA series
on agricultural real estate values.  Previously, ERS provided
USDA's state-level land value estimates using the Agricultural
Land Values Survey (1984-94) and the JAS (1995-97).  NASS was
primarily responsible for survey design and implementation, while
ERS participated in questionnaire design and prepared estimates. 
This year and in future years, NASS will prepare the estimates as
well as conduct the survey.  

State estimates for 1997 are available from NASS by calling the
order desk at (800) 999-6779 or the USDA autofax at (202) 720-2000.  
Estimates are also available on the NASS Home Page at
http://www.usda.gov/nass/.


SPECIAL ARTICLE

As U.S. Pork Industry Changes,
Consumers Stand to Benefit

The entire U.S. pork industry--from farmer to processor to store
or restaurant--is undergoing a transformation, in part because
consumers want high-quality products at reasonable prices.
Technological advances in production--including innovations in
genetics, housing, and handling equipment--provide opportunities
for hog producers to expand operations and to have more control
over the quality of hogs produced.  

Just 10 years ago, a third of all hogs were raised on farms that
had more than 1,000 animals.  Today, more than two-thirds of all
hogs are produced on farms with more than 1,000. 

Production for the open market is being replaced by multi-year
contracts and vertically integrated operations--many pork packers
and processors obtain a steady supply of high-quality hogs by
entering into contractual arrangements with independent producers
or by direct ownership of production facilities and breeding
operations.  In 1970, just 2 percent of hogs slaughtered were
obtained through contracts or integrated operations.  By 1993,
the proportion had increased to 11 percent, and packers expect to
obtain 29 percent of hogs through contracts or integrated
operations in 1998.

How the hog industry is organized and how it does business
affects consumers through price and product selection.  Today's
households want convenient food products with quality assurances,
as demands on their time increase.  These developments have
encouraged firms to seek greater control over product quantity
and quality.   With time pressures and incomes rising, more food
is prepared away from home and sales by restaurant chains and
other prepared-food retailers have increased.  Suppliers must
increasingly be able to provide large quantities of consistently
high-quality, uniform products on a regular schedule.  For
example, consumer demand for fast-food breakfast sandwiches
featuring bacon and sausage, and for bacon-topped fast-food
hamburgers has opened a new outlet for millions of pounds of pork
products.  

Health consciousness and ethnic diversity have also created new
opportunities for delivering pork products.  Pork producers and
packers are introducing new products such as Smithfield Foods'
"Lean Generation" branded line of fresh pork products.  Ethnic
niche markets are emerging for specialized pork products such as
chorizo Mexican-style sausage for Mexican restaurants and the
growing Hispanic population.

Increased Coordination
Affects Quality, Packer Costs . . .

Producers use selective breeding to produce hogs with desirable
characteristics such as disease resistance, high lean-to-fat
ratio, and fast growth.  These carefully selected hogs are fed to
market weight prior to sale to packers.  In the first processing
stage, packers slaughter the hogs and divide the meat into
wholesale pork cuts.  Three-fourths of pork is further processed
into sausage, hot dogs, bacon, and other products.  Finally, pork
products are sold to retailers and eating places.
 
New arrangements in vertical coordination of hog production and
packing stages can reduce the costs of pork production.  By
contracting or by integrating, packers may ensure a large, stable
flow of hogs into the packing plant, reducing average costs by
minimizing the under- and overutilization of plant facilities.  

Contracting or integrating can also reduce packer costs by
improving the quality of hogs slaughtered.  Quality affects
processing time and labor costs as well as the quantity of high-value 
fresh meat cuts per hog.  For example, hogs with excessive
fat require more trimming and produce less salable lean meat per
hog.  In contrast, fewer lean hogs are needed by the packer to
produce a given quantity of lean pork.  A 1992 study for the
National Pork Producers Council estimated that excessive fat
problems cost packers $6.32 for each hog slaughtered.  USDA's
Economic Research Service calculated that to achieve savings of
$6.32 per animal by eliminating excessive fat, each hog would
need to be 19 percent leaner than the average.  

Packers also incur costs from trimming and discarding damaged and
unusable meat, the result of other characteristics controlled by
the hog producer.  Consumers do not want pale, soft pork that has
low water-holding capacity.  When hogs are stressed by loading
and handling, their meat can have an unattractive appearance to
consumers and can be less juicy after cooking.  Pork with these
quality problems may have to be used in further processed
products, like sausage, rather than as higher value fresh pork.  

Quality-related packer costs are controlled by the hog producer
through the choice of genetic stock and through proper
management, such as reducing the incidence of improperly injected
medication and rough handling of hogs. Long-term contracts and
vertical integration can ensure consistent supplies of lean,
high-quality hogs to packers.  

The use of long-term contracts and vertical integration can also
reduce packer costs of acquiring hogs, such as operating buying
stations, paying salaried or commissioned buying agents, and
transporting hogs to packing facilities.  A meat processing
company, for example, recently engaged a livestock exchange to
manage buying stations and supply the quantity and quality of
hogs specified.  This added 48 cents to the cost of each hog
supplied to the processing firm, not counting the costs of
transportation and maintaining buying station facilities. 
Vertically integrated packers who produce their own hogs, and
packers who enter into long-term contracts with independent
producers, do not incur these additional management fees.

. . . & Retail Prices 

By lowering the costs of production and increasing the quality of
pork products, long-term contracting and vertical integration can
affect retail prices.  Changes in average prices will depend on
the proportion of hogs produced through these coordinating
arrangements,  affecting the level of cost reductions and the
degree of product quality improvements.  Price changes will also
depend on how highly consumers value the quality improvements.

ERS used an economic model of the U.S. pork industry to estimate the
potential effects on pork prices when some producers transfer
hogs to packers through contracts and vertical integration
instead of through the open market.  The model allows for
simultaneous shifts in supply and demand, and corresponding
adjustments in quantities and prices.  The model does not
consider costs of differentiating lean pork from standard pork,
such as label redesigning, or other costs such as monitoring and
enforcing contracts, nor does it consider competitive pressure on
prices from imports as supplies of leaner pork increase.

ERS estimated the change in retail pork prices that results from
increased vertical coordination under six scenarios.  The change
in the retail price of pork under each scenario depends on the
proportion of hogs obtained by packers through long-term
contracts and integration, and the value placed on leaner pork by
consumers.  

According to a survey conducted by Iowa State University
researchers for USDA's Packers and Stockyards Program, 11 percent
of hogs obtained from contracts and integration were produced
under these arrangements in 1993.  That percentage is expected to
increase to 29 percent by 1998.  The 11-percent level was adopted
as a low-proportion scenario for this analysis, while the 29-percent 
level was adopted as a high-proportion scenario.  

In this analysis, obtaining hogs through contracting or vertical
integration would lead to reduced packer costs in two ways.  ERS
assumed long-term contracts and vertical integration between
large hog producers and packers produced 19-percent leaner hogs,
which would reduce packer costs by $6.32 per hog (estimates of
the 1992 National Pork Producers Council study).  Packers were
also assumed to save an additional 48 cents per hog in
acquisition costs as a result of long-term contracting or
vertical integration, based on arrangements described above
between a meat processing company and a livestock exchange.

The amount consumers are willing to pay for 19-percent-leaner
pork is uncertain. Therefore, three alternatives were examined
for both low-proportion and high-proportion production scenarios. 
In the first alternative, consumers place no value on leaner
pork.  In the second, consumers place a low value on leaner pork
and are willing to pay an additional 8.2 percent of the average
retail price of all pork for the leaner fresh pork products.  The
8.2-percent figure was derived from a market survey by Indiana
State University and North Carolina State University researchers
of what consumers would pay for 10-percent-leaner pork.  Under
this alternative, willingness to pay for leaner pork was assumed
to apply only to fresh pork, because processors can adjust the
fat content of processed pork products without relying on changes
in hog production.  

In the third alternative, simulating a high value placed by
consumers on lean pork, the willingness to pay a premium for 
19-percent-leaner pork was also assumed to be 8.2 percent above the
average retail price of all pork.  The price premium, however,
was applied to both fresh and processed pork.  This expansion of
the quantity of pork for which consumers would pay a premium in
this scenario was intended to reflect improvements in pork
quality other than leanness that could be expected from increased
vertical coordination.  These other quality improvements would
impact processed products, as would greater availability of lean
pork for some processed products, such as reduced-fat bacon.

When 11 percent of hogs are obtained by contracting and
integration (the low-proportion scenario), changes in average
retail pork prices range from a reduction of 0.39 cent--slightly
over a third of a cent--per pound to an increase of 0.08 cent per
pound, depending on how consumers value leaner pork.  If 29
percent of hogs are obtained through contracts and integration
(the high-proportion scenario), prices change by a larger amount,
ranging from a reduction of 1.01 cent per pound to an increase of
0.19 cent per pound.

The largest reductions in retail price in these two examples
occur when consumers place no value on leaner pork.  In the 
low-proportion scenario (11 percent of hogs obtained through
contracting and integration),  retail prices fall by 0.39 cent
per pound as leaner meat reduces packers' costs, whereas in the
high-proportion scenario (29 percent of hogs obtained through
contracting and integration), retail prices drop by 1.01 cent per
pound.

When consumers place a low value on leaner pork, paying a premium
only for leaner fresh pork, the reduction in the retail price
resulting from lower packer costs is partially offset by
consumers' willingness to pay a higher price for leaner fresh
pork.  Prices still fall by 0.27 cent per pound for the low-proportion 
scenario and 0.7 cent per pound for the high-proportion scenario 
because of lower packer costs, but reductions
are less than those in the no-value scenario.

When consumers place a high value on leaner pork, valuing both
fresh and processed, the retail price increases because
consumers' willingness to pay a higher price for leaner pork more
than offsets price reductions due to lower packer costs.  The
average retail price of all pork increases 0.08 cent per pound in
the low-proportion scenario and 0.19 cent per pound in the 
high-proportion scenario.  Consumers demand more pork at the current
price because it is leaner, so the price increases induce
retailers to provide more pork.  Without the higher price,
consumers would not get the quantities of leaner pork that they
demand.  So, although the average retail price is higher,
consumers benefit because there is a larger quantity of higher
quality pork.  Without the reduction in packer costs, however,
prices would increase even more.

The model results suggest that changes in methods of vertical
coordination do affect average retail prices for pork.  The
direction and magnitude of the change depend on the extent of
change in industry organization and on how highly consumers value
the leaner pork that results.  In each scenario, the retail price
changes by less than a percent.  These changes may be
underestimated, however, because other pork quality attributes--such 
as moisture retention--and lower costs due to greater plant
utilization were not included in the analysis.  In addition, more
accurate assessments of health benefits from consuming leaner
pork may alter the changes in the retail price.  For example, new
information that supports or confirms the health benefits of
lower fat diets may cause consumers to pay more than the 8.2-percent 
price premium assumed in this analysis.

Under the six scenarios, the potential benefits for consumers
range from $60 to $693 million over a year from the combined
effects of lower costs of pork production and improved pork
quality.  These benefits are calculated using an economic measure
of consumer well-being that considers the quantity of pork
consumed, and the difference between the higher price consumers
would be willing to pay and the price actually paid.

Public Policy &
Vertical Coordination

As the pork industry continues to respond to new technology and
changes in consumer lifestyles, contractual arrangements and
vertical integration serve an economic function that can benefit
consumers.  Consumers have a significant interest in changes
occurring in vertical coordination in the pork industry, and in
other agricultural sectors, because of potential effects on
retail prices and on the availability of high-quality food
products.  But the public may also have concerns about such
issues as the effects of the size, location, and employment
patterns of pork producers and processors on rural communities,
and the impacts of new organizational methods on independent
producers and small family farms.

In addition, as the scale of pork production operations has
increased, so have public concerns about livestock waste.  Media
coverage has heightened public perceptions of problems such as
odor and water quality.  However, under current law, water
treatment and discharge on pork production facilities with more
than 2,500 hogs are governed by required permits.  Although
smaller operations typically adhere to similar treatment systems,
they are not required to have permits.  Moreover, increased scale
of operations typically reduces the per-unit costs of suitable
waste treatment.

The disposition of animal manures on cropland has received
particular attention as a result of concerns about runoff into
rivers and streams.  Many producers have responded to the waste
management problem with a combination of measures, including
nutrient management plans and conservation buffers such as
filterstrips, to guard against waste-related nutrients or other
contaminants entering water bodies.

Policymakers play a role in the types of vertical coordination
arrangements that develop, through antitrust legislation that can
directly affect organizational structure, and through policy-
supported research and market information services that play an
important role in the effectiveness of open-market exchange.  
The challenge for policymakers will be to facilitate coordination
across the stages of production in the most efficient way, while
at the same time discouraging anticompetitive behavior and any
other impacts potentially harmful both to consumers and
producers. 
Steve Martinez (202) 694-5378 
martinez@econ.ag.gov

SPECIAL ARTICLE BOX

What is Vertical Coordination?

A food marketing system consists of several stages of production
and distribution, where value is added to the product at each
stage.  In the pork industry, these stages include breeding,
where genetic stock is selected for hog producers; hog
production, where a breeding herd is maintained to produce pigs
that are nursed and grown to market weight; packing/processing,
where hogs are slaughtered and divided into wholesale pork cuts,
approximately 75 percent of which is further processed; and the
retail stage, including the operations of restaurants and grocery
stores.   

Vertical coordination refers to the systematic transfer of
product from one stage to the next in a "vertical" direction,
from production of the raw commodity to delivery of the finished
product to consumers.  Vertical coordination can be achieved in
many ways, including open market exchange, contractual
arrangements, and vertical integration.    

In open market exchange, no commitments are made for selling the
product before it is ready for sale.  The finished product is
taken to market and sold at the prevailing, or "spot," price. 
Producers, processors, and retailers rely on the market both to
deliver the quantity and quality of inputs they desire and to
provide an outlet for their own products.

Under contractual arrangements, purchasers have greater control
over production compared with open market exchange, because
commitments are made prior to the completion of production.  For
example, contracts between independent hog producers and packers
may specify the quantity and quality of hogs to be delivered per
day, per week, or on a certain date.  They may also specify the
genetic strains of hogs to be delivered. Although less common,
packers may own the hogs and contract with producers to feed and
house them until ready for slaughter.  Large packers and large
hog producers typically use long-term, or multi-year contracts,
usually 4 to 7 years.  

Vertical integration refers to ownership of successive stages of
production by a single firm.  Products are transferred from one
stage to another according to management decisions.  For example,
a single firm may own hog production operations and packing
facilities, so the quantity and quality of hogs available for
packing are under the direct control of the firm.  

Methods of achieving vertical coordination can be classified
based on the degree of control that firms have over production. 
At one end of the spectrum is open market exchange, which
represents the least control over production.  At the other end
of the spectrum is vertical integration, which represents the
most control.  Contracts fall between, representing varied,
intermediate degrees of control.

END_OF_FILE
