AGRICULTURAL OUTLOOK                                             May 27, 1997
                                                         Revised June 3, 1997
             Approved by the World Agricultural Outlook Board
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AGRICULTURAL OUTLOOK is published monthly (except January) by the Economic
Research Service, U.S. Department of Agriculture, Washington, DC 20005-4788. 
AO-241.  Please note that this release contains only the text of AGRICULTURAL
OUTLOOK--tables and graphics are not included.

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Note:  The text has been revised, mainly  to include some clarifications on the
article on state trading enterprises and to update data in the "Field Crops"
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CONTENTS:

In this issue...
Commodity Briefs
     Field Crops
     Livestock, Dairy & Poultry
     Specialty Crops
Commodity Spotlight
     U.S. Grape Industry Prospects Favorable
World Agriculture & Trade
     State Trading Enterprises: Their Role in World Markets
     USDA Lifts Import Ban on Mexican Avocados
Special Article
     Ag Trading Environment Under an Enlarged EU


 IN THIS ISSUE...

WILL A LARGER EU BENEFIT THE U.S.?

Ag Trade Prospects in an Enlarged EU

The prospective enlargement of the European Union (EU) into Central and
Eastern Europe (CEE) could add as many as 100 million new consumers to the EU
market and double the number of farmers, having potentially profound effects
on global and U.S. agricultural trade.  Ten CEE countries, including the
Baltic states, have applied for EU membership--Bulgaria, the Czech Republic,
Estonia, Hungary, Latvia, Lithuania, Poland, Romania, Slovakia, and Slovenia. 

Initial USDA analysis indicates that accession to the EU and subsequent
implementation of EU agricultural policies will raise CEE agricultural output,
particularly in the livestock sector, increasing demand for feedstuffs. 
Preferential CEE trade agreements with the EU, in addition to geographic ties,
could limit U.S. trade potential in this growing market.  But the expanding
CEE feed market will create opportunities for additional U.S. corn and oilseed
exports, and the region will be a strong magnet for U.S. investment in
ag-related enterprises. 

Import Ban Lifted on Mexican Avocados

The partial lifting of a longstanding ban on avocado imports to the
continental U.S. from Mexico is viewed in some quarters as an early indicator
of the U.S. approach to new disciplines on sanitary and phytosanitary (SPS)
measures under recent trade agreements.  The decision followed comprehensive
study of the pest risks and reflects USDA's commitment to basing phytosanitary
policy on sound science, and to adopting risk-reducing measures that are least
trade restrictive. 

Revision of Q56, the Fruit and Vegetables Quarantine, will allow shipments of
avocados from certified groves in Mexico to be exported to 19 northeastern
states and the District of Columbia from November through February, beginning
in 1997.  The opening amounts to less than 5 percent of the current U.S.
avocado market.  The regulatory change will likely have a limited impact on
California avocado producers for several reasons.  Mexican avocados will be
competing with foreign as well as domestic sources of supply, and while
California is the second-largest supplier in the northeast market, about 80 to
90 percent of California's production is typically shipped to states outside
the designated area.  Moreover, the November-February period falls outside the
peak harvesting and shipping season for California Hass avocados. [Donna
Roberts, Geneva, Switzerland 41-22-749-5245]  

Taiwan's Hog Disease: Ripple Effects

The recent outbreak of foot-and-mouth (FMD) disease in Taiwan has precipitated
bans on imports of Taiwanese pork by several FMD-free nations.  The FMD crisis
will also mean some reduction in U.S. corn exports as Taiwan's pork production
falls.  The U.S. supplies over 90 percent of the corn used as feed by Taiwan's
pork industry; 1995/96 U.S. corn exports to Taiwan reached 234 million
bushels.  

Reductions in U.S. corn exports are expected to be partially offset by a rise
in domestic feed use as hog production expands, enhanced by increased export
opportunities.  In the wake of the FMD problem, U.S. pork exports are expected
to rise, especially to Japan, Taiwan's largest market.  Taiwan's loss in
exports to Japan is expected to be about 705 million pounds of pork, and the
U.S. is expected to capture nearly 40 percent of the gap.  Taiwan's pork
industry should re-emerge following the FMD crisis with larger, more
coordinated production and processing units, but the industry is not expected
to recover its full pre-FMD share of the Japanese market. [Leland Southard,
hogs (202) 501-8553; Peter Riley, corn (202) 501-8512]

Grape Consumption Continues Strong

The U.S. is the world's third-largest grape producer, accounting for 10
percent of global output.  Domestically, the U.S. grape industry for the last
10 years has logged the highest farm value of all harvested fruits, nuts, and
vegetables.  Following production declines in 1996, grape industry sources
from the three major producing states (California, New York, and Washington)
indicate their 1997 crops appear to be in good condition.

Fresh grape consumption has been trending upward in the U.S. since the
mid-1970's.  Grape juice consumption and demand for American wines have also
increased, although per capita growth in domestic wine consumption in the
1990's has been limited, as increased demand combined with unfavorable weather
to push wine supplies below average.  The U.S. remains a net importer of
grapes for all uses except raisins, but the export share of domestic grape
production has risen steadily from a 9-percent average in the 1970's to 12
percent in the 1980's and 17 percent in the 1990's, with last year's export
value reaching $209 million.  The recently signed grape export agreement with
China should support that trend. [Susan Pollack (202) 219-0505, Agnes Perez
(202) 501-6779]

State Trading Enterprises & the WTO

Agricultural state trading enterprises (STE's) have been important players in
world trade for decades.  These entities (governmental or nongovernmental)
hold certain exclusive rights in the purchasing and/or marketing of specific
commodities, and thus have the potential to influence imports or exports. 
Over 30 member-countries have reported to the World Trade Organization (WTO)
the combined presence of nearly 100 STE's in their agricultural sectors, and
there is concern that some WTO member countries will use export-oriented STE's
to circumvent Uruguay Round commitments and engage in unfair trading
competition.  The lack of transparency which characterizes the operations of
STE's makes it difficult to determine whether they win sales because of true
competitive advantage or because of practices such as excessive price cutting. 

Among current WTO member countries, four STE's dominate the list of STE
exporters when ranked by value of major agricultural commodities shipped--the
Canadian Wheat Board, the New Zealand Dairy Board, the Australian Wheat Board,
and the Queensland Sugar Corporation.  Also sparking interest in STE's is the
number of countries seeking accession to the WTO--e.g., China, Taiwan, Russia,
and Vietnam--which use these enterprises to implement agricultural policies.
[Karen Ackerman (202) 501-8511, Praveen Dixit (202) 219-0654, Mark Simone
(202) 219-0823] 


COMMODITY BRIEFS

Field Crops

Mother Nature 
Stirs Up 
Wheat Market

The wheat market has been on a wild ride this spring, with wheat prices rising
sharply in mid-April following news of significant freeze damage in prime
winter wheat growing areas in the Southern Plains, then partially falling back
as crop prospects improved.  The freeze curtailed what many observers thought
would be blockbuster crops in Kansas, Oklahoma, and Texas.  Excellent crop
conditions in these states had pointed to a large boost in hard red winter
wheat output from last year's drought-afflicted crop.  Instead, USDA's first
forecast of winter wheat production is up just 6 percent from 1996 to 1.56
billion bushels.  

Also contributing to price fluctuation in recent months was delayed planting
in the Northern Plains, where a large portion of the U.S. spring wheat crop is
grown.  Chilly temperatures, along with the extremely wet field conditions
following spring storms and snowmelt, especially in the Red River Valley,
slowed spring wheat planting in the region.  Recent favorable weather has
allowed farmers to catch up.  As of May 25, farmers had planted 83 percent of
the spring wheat crop, in line with the 5-year average. 

With good planting conditions and warm weather, spring wheat plantings could
increase from earlier expectations, offsetting the slow start to the planting
season.  Recent price strength in the wheat market may encourage spring wheat
farmers in the Northern Plains to increase plantings. The first firm
indication of spring wheat plantings will be published on June 30, in USDA's
Acreage report.  The first production forecast for spring wheat (based on
surveyed yields and acreage) will be on July 11, 1997.

Assuming spring planting intentions (from USDA's Prospective Plantings
released in March), as well as 5-year average yields and harvest-to-planted
ratios for spring wheat, total U.S. wheat production is forecast at 2.26
billion bushes in 1997, down 1 percent from last year.  With larger beginning
stocks and steady year-over-year imports, the U.S. wheat supply in 1997/98 is
forecast to rise almost 3 percent.  Ending stocks will build from last year. 
A rise in stocks relative to use is expected to put downward pressure on farm
prices in the new marketing year that begins June 1.  The season-average farm
price of wheat is forecast between $3.60 and $4.20 per bushel in 1997/98, down
from $4.35 in 1996/97 and $4.55 in 1995/96.

Although the market has cooled since the freeze, prices are expected to be
supported in 1997/98 by a moderately tight world situation.  Combined
production by the five major wheat exporters--the U.S., Canada, the European
Union, Australia, and Argentina--is projected to drop 6 percent.  While gains
elsewhere in the world nearly offset the decline for major exporters, ending
stocks for the world will remain relatively low.
Dennis A. Shields (202) 219-0768 James Barnes (202) 219-0711
dshields@econ.ag.gov
jbarnes@econ.ag.gov

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


Livestock, Dairy & Poultry

Hog Disease in Taiwan
Affects U.S. Pork
& Corn Exports

The recent outbreak of foot and mouth disease (FMD) in Taiwan, which resulted
in a ban on imports of Taiwanese pork by several countries, has focused world
attention on Taiwan's pork industry.  Pork dominates both meat production and
consumption in Taiwan. 

Before the outbreak of FMD in early 1997, hogs were Taiwan's most important
agricultural commodity, accounting for 29 percent of the value of livestock
and crop production, and since the late 1980's the leading agricultural export
commodity.  Before the recent FMD bans, Taiwan was expected to export 360,000
metric tons of pork this year--28 percent of the country's production.

For centuries hog production was an integral part of farming in Taiwan,
absorbing family labor, waste foods, farm byproducts, and other surplus
resources, and in return, providing supplemental cash income and manure for
enriching the soil.  Since the late 1960's, Taiwan's hog industry has
undergone dramatic changes similar to those in the U.S. hog industry.  

In 1960, about 94 percent of Taiwan's farms raised hogs, but with an average
of only four head per farm.  By 1995, only 3 percent of Taiwanese farms raised
hogs, but the per-farm average had increased to 402 head.  Although about
two-thirds of Taiwan's hog operations had less than 200 head, larger farms with
herds of over 1,000 head accounted for 57 percent of the total inventory--close
to the 61 percent of inventory held in the U.S. by operations of that
size.

This rapid growth (about 600 percent from 1960 to 1995) and accompanying
structural transformation in the hog industry have brought significant changes
in procurement of inputs by hog producers, particularly feed.  Rather than
supplying their own feed, most producers have shifted to purchasing nutrient
and formula feeds, of which imported coarse grains and soybeans are key
ingredients.  Currently, Taiwan produces only about 5 percent of its coarse
grain requirements and less than 1 percent of its soybean needs.  As a result,
Taiwan has become a major market for feedstuffs.  

Hogs account for most of the country's feed needs, with poultry a distant
second.  Corn is the dominant feed grain, and nearly all corn--95 percent-- is
imported.  Corn imports increased fourfold in the 1970's, then doubled during
the 1980's.  By the early 1990's, Taiwan's corn imports surpassed 5 million
tons, hitting a record 6.3 million in the 1994/95 marketing year.

The U.S. is the leading supplier of coarse grain (mostly corn) and soybeans to
Taiwan, with market shares of over 90 percent for both commodities.  In 1996,
the U.S. exported 5.8 million tons of coarse grain and 2.6 million tons of
soybeans to Taiwan, each accounting for about a tenth of total U.S. exports of
those commodities.  U.S. corn exports to Taiwan have averaged 212 million
bushels per year in the 1990's, reaching 234 million bushels for the 1995/96
marketing year.

Growth in the hog industry has made Taiwan a major pork exporting country,
with virtually all exports going to Japan.  Exports of slaughter hogs began in
the 1950's, but Taiwan remained a small exporter through the 1970's.  After an
outbreak of FMD in Denmark in 1982, Taiwan made large gains in the Japanese
pork market, becoming the leading supplier with a 46-percent market share.  

Taiwan's export situation is complicated because of intense competition and
different marketing strategies among the many suppliers in Japan's lucrative
pork market--2.05 billion pounds of pork imports, fresh and chilled, in 1996. 
Taiwan supplies all six parts of the hog carcass--butt, picnic, loin,
tenderloin, belly, and ham--while the U.S. is primarily a supplier of major
parts products like loins.  

Taiwan has achieved growth in market share by becoming increasingly
sophisticated in meeting Japanese consumer specifications.  For example, some
Japanese consumers have demonstrated a preference for Taiwanese pork, which
tends to have a darker color and a sweeter taste compared with U.S. pork.
Improved technology has also helped the Taiwanese to increase exports of
higher valued fresh and chilled products.  During 1978-84, fresh and chilled
products accounted for only 8 percent of Taiwan's total pork exports.  By
1992-95, these products accounted for about a third. 

Because of recent declines in Japanese pork production, fresh and chilled
imports have increasingly substituted for domestic pork in Japan's retail
markets.  Taiwan's geographic advantage has contributed to its dominance in
supplying fresh and chilled products to Japan.  However, the U.S. has been
catching up by using improved technology and providing specific cuts for the
Japanese table market.  In 1996, Taiwan and the U.S. each supplied about half
of Japan's 162,000-metric-ton fresh and chilled pork import market.

By March 20, Taiwan had already exported 88 million pounds (carcass weight) of
the 794 million pounds it had been expected to ship to Japan in 1997.  The
imposition of bans on Taiwanese pork resulting from the FMD outbreak has left
a "gap" of approximately 705 million pounds in Japanese pork imports--roughly
235 million pounds of fresh and chilled, and 470 million pounds of frozen
pork, based on Taiwan's recent export shares.  USDA estimates that higher pork
prices in Japan, Japanese food safety concerns, and possibilities for
substitution will likely reduce fresh pork imports by 10 percent and frozen
pork imports by approximately 30 percent.  Thus, total Japanese imports for
1997 could be around 1.8 billion pounds, down 8 percent from the nearly 2
billion pounds forecast earlier this year.

Expectations are that the U.S. will gain up to 90 percent of the post-FMD 1997
fresh pork market in Japan, or up to 557 million pounds.  Canada and Korea
should account for most of the balance.  The U.S. is expected to take a
20-percent share of the frozen market, or about 241 million pounds, with Denmark
expected to take almost 50 percent and Canada and Korea sharing most of the
remainder.

The impact of FMD is likely to be felt most in 1997; FMD-free producing
countries are expected to increase supplies enough to stabilize prices in
1998.  Taiwan's pork industry should re-emerge with larger, more coordinated
production and processing units, but the industry is not expected to recover
its full pre-FMD share of the Japanese market.  Pork suppliers in competing
countries will likely forge relationships that will permanently capture market
share.  The U.S., in particular, should gain market share for fresh and
chilled pork.

Even before the outbreak of FMD, several factors challenged the future growth
of the hog industry in Taiwan.  With virtually all exports going to Japan, the
industry was vulnerable to fluctuations in the Japanese pork market. 
Moreover, after three decades of rapid growth, the industry was faced with
high land costs and labor shortages, as well as increasing domestic
environmental concerns brought on by densely packed hog farms and years of
environmental neglect.  In addition, demand has been mounting from Taiwan's
trading partners for agricultural trade liberalization before allowing Taiwan
to join the World Trade Organization.  Large commercial operations have
benefited from trade barriers against pork imports. Liberalization would
likely open up Taiwan's pork market to outside suppliers. 

Taiwan is a critical corn market for the U.S., and the effect of the FMD
outbreak on Taiwan's corn imports is a U.S. concern.  The FMD crisis in Taiwan
will mean some reduction in U.S. corn exports, but will be partially offset by
increased domestic feed use as U.S. hog production increases to fill part of
the export gap left by Taiwan.  Timing of the outbreak is also limiting its
impact on Taiwan's 1996/97 corn imports--half of the trade year
(October-September) was complete before the problem developed.  

USDA's forecast of Taiwan's corn imports for 1996/97, originally set at 6
million tons before the crisis, currently stands at 5.5 million.  Despite the
lower forecast--equivalent to 20 million bushels--Taiwan would still be the
world's third-largest importer this year, behind Japan and South Korea. 

Although Taiwan has canceled or delayed some corn shipments, it has continued
to make new purchases for future delivery.  Domestic pork consumption is high
in Taiwan, and even with some FMD-related decline should remain strong enough
in the 1997/98 marketing year to keep feed needs relatively high. 
Nevertheless, the trade impact is expected to be more apparent in 1997/98. 
USDA is projecting Taiwan's 1997/98 corn imports at 4.5 million tons, the
lowest since 1988/89, and down 22 percent from the 1993-95 average of 5.8
million tons.
Leland Southard, hogs (202) 501-8553; Pete Riley, corn (202) 501-8512
southard@econ.ag.gov
pariley@econ.ag.gov

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


LIVESTOCK, DAIRY & POULTRY BRIEFS BOX--1

The Nature of Foot & Mouth Disease

Foot and mouth disease (FMD) is highly contagious affecting primarily
cloven-hoofed animals (e.g., cattle, sheep, goats, hogs).  The disease is
characterized by the formation of blisters on the tongue, lips, cheeks,
palate, and other tissues of the mouth (reducing appetite and hindering food
conversion), and on the skin above the claws of the feet.  The disease cause
is a virus, which can be found in the blood and other body secretions, such as
saliva, milk, and urine.  The virus can be spread by many different carriers,
including humans, flies, ticks, most meat products, manure, semen, feeds,
water, and soil.  Although deaths of adult animals are not ordinarily high
from FMD, the infected animal are usually destroyed.   

To avoid infecting their own herds, nations ban imports of live cloven-hoofed
animals, and fresh, chilled, and frozen meats of those animals, from areas
experiencing outbreaks of FMD.  Under these bans, only canned and cured meats
from susceptible animals may be imported from FMD-affected countries.  Loss of
fresh and chilled meat markets causes economic losses for countries where
outbreaks occur.

Specialty Crops

Food Safety Concerns 
for U.S. Fruits 
& Vegetables

With growing awareness of food safety issues, the U.S. fruit and vegetable
industry, consumer organizations, and government are reviewing various options
to reduce the risks of foodborne illness from produce.  One option for
reducing risks is the adoption of a hazard analysis and critical control point
(HACCP) system.  Under HACCP, firms at various levels of the production and
marketing chain examine their operations and identify food safety hazards and
the specific steps or points that pose the greatest potential health risks. 
The firms then establish critical hazard limits and procedures for monitoring
and corrective action to ensure pathogen control.

Foodborne pathogens, mainly bacteria, parasites and viruses, can cause acute
and chronic illnesses ranging from mild digestive problems to serious food
poisoning, kidney failure, or even death.  Food safety concerns regarding
fruits and vegetables have been enhanced by recent highly publicized outbreaks
of foodborne illness, such as the hepatitis A virus among schoolchildren in
Michigan earlier this spring which was traced to frozen strawberries served in
school lunches.  An outbreak on the west coast last fall, involving the
bacteria E. coli in unpasteurized apple juice, resulted in over 60 illnesses
and one death.  Recently passed laws require the U.S. meat, poultry, and
seafood industries to adopt HACCP over the next several years (AO May 1996,
July 1996).

If regulations are adopted by the produce industry, HACCP could change
operating procedures at several levels in the fruit and vegetable production
and marketing chain--in the field, packinghouse, processing plant, and in
food-service and retail environments.  But the initial focus would likely be
on points where fruits and vegetables come into contact with soil (and hence,
potential harmful bacteria) during production or harvesting.  Also of concern
are foodborne viruses, such as hepatitis A, which are usually a result of
contamination by contact with an infected food handler or with sewage-
contaminated water or sludge.  Under HACCP, imported fruits and vegetables, a
substantial portion of which are supplied during the off-season, could also be
required to meet some equivalent type of food safety monitoring.

Although contamination of produce can occur all along the marketing channel,
it can often be traced to contact with soil and/or animal-manure fertilizer at
harvest or at the packinghouse.  While most fruits are normally harvested by
hand and do not come into direct contact with soil, workers may scoop up fruit
that has dropped to the ground before or during harvest.  Animal-manure
fertilizer has been cited as a source of bacterial contamination in
unpasteurized apple juice and cider.  Cider, considered the least profitable
use for apples, is often made from fruit that has dropped from trees
naturally.

Packinghouse operators (fresh market) and processors commonly rely on water
flotation baths to receive fruit.  Fruit that has inadvertently been
contaminated at harvest can pass through the system and potentially
contaminate other fruit if the bathwater is not sterilized and is used to
receive subsequent loads.  Adding chlorine to water for sanitation and/or
filtering the produce bathwater are techniques that reduce the risk of
cross-contamination.

Some fruits and vegetables, before going to the fresh market, are given a
cold-water shower or drench to remove field heat and thereby reduce
perishability.  Vegetables that may receive this cooling treatment include
green beans, spinach, and carrots.  The water used for cooling is often
recycled to save on refrigeration costs, which can raise the risk of cross-
contamination if previously rinsed produce was contaminated during harvest. 
Water sanitation procedures (e.g., chlorinated water) can lower the risk of
contamination by pathogens for most shower-drenched vegetable products. 

Some fresh-market fruits and vegetables, such as strawberries, raspberries,
blueberries, grapes, melons, sweet corn, lettuce, broccoli, and cauliflower,
are often packed in the field during harvest.  Because field packing does not
typically involve rinsing or washing produce before shipping to market, there
is risk of contaminants reaching the consumer.  As with most fresh produce,
careful harvesting methods and washing can minimize product damage as well as
contamination.

Improper treatment during marketing can also promote contamination of fresh
fruits and vegetables.  In the late 1980's, an outbreak of foodborne illness
was traced to Texas-grown melons which had been cut and stored improperly on
salad bars.  Melons are naturally in contact with soil until the time of
harvest.  The restaurants' temperature and the melons' high sugar content
encouraged high bacterial growth.  The result was an outbreak of salmonella
poisoning in several southern states.  Careful washing of the melons before
cutting is a critical control point for pathogen control.

The overall impact of HACCP on the fresh fruit and vegetable industries would
depend on the extent of any regulations or voluntary HACCP program adopted by
firms.  For many farm and packinghouse operations, standardized product
testing and documentation are likely the biggest changes that HACCP would
introduce.  However, regulations could also require produce washing and/or
water sanitation at packinghouse and/or field packing operations.  In the case
of field packing operations that do not already wash produce, such a
requirement could add considerable cost, which would likely be reflected in
retail prices for those products. 

HACCP would probably affect the processing industry less than the fresh
produce and nonpasteurized juice industries.  Pathogen control is less of an
issue in much of the processing sector because product sterilization is
already part of the production process to preserve quality and reduce risks of
foodborne diseases.

Fresh-cut produce--a rapidly growing segment of the fruit and vegetable
market--has received considerable food-safety attention.  Fresh-cut produce
includes salad vegetables like broccoli, cabbage, cauliflower, carrots, and
lettuce, and fruit such as oranges, grapefruit, and melons.  Because these
items are considered to be a "ready to eat" product, consumers are less likely
to wash the produce.  Proper sanitation during preparation (at centralized
distribution warehouses, food-service establishments, and produce departments
of retail food stores), along with adequate refrigeration to prevent bacterial
growth, reduces foodborne safety risks. 
Charles Plummer (cplummer@econ.ag.gov) and John Love (jlove@econ.ag.gov).

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


COMMODITY SPOTLIGHT

U.S. Grape Industry 
Prospects Favorable

The U.S. is one of the world's leading grape producers, accounting for 10
percent of the world's grape output--third largest after Italy and France. 
The U.S. grape industry is also a significant component of the domestic fruit
and vegetable sector, with its farm value registering highest among all
fruits, nuts, and vegetables harvested for the last 10 years. 

During 1996, U.S. growers produced 5.54 million tons of grapes valued at $2.2
billion, about 20 percent of the total farm value of fruit and nut production
and about 11 percent of fruit, nut, and vegetable production.  Orange
production ranked second, with a value of $1.9 billion, followed by apples,
valued at $1.8 billion.

USDA's National Agricultural Statistics Service surveys grape production in 13
states, but nearly 90 percent of the U.S. grape crop is produced in
California.  New York and Washington are the next-largest producers, each
harvesting  about 3 percent of all domestic grapes.  Grapes grown in these two
states are used mainly for juice and wine production.   

About 85 percent of domestic grape production is processed, nearly two-thirds
of which is used in manufacturing wine.  More than a quarter is dried for
raisin production, while less than 10 percent is used for juice.  Additional
small quantities go into other processing uses such as jams and jellies.  Less
than 1 percent of processed grape output is canned.  

Fresh grapes, although comprising a much smaller share of total production
acreage and output, remain a vital part of the U.S. grape industry.  For
grapes sold in the fresh market, maintaining consistently high quality is a
challenge.  Higher production costs and higher product value of fresh grapes
reflect production practices that are more intensive than for grapes grown for
processing.  In 1996, growers in California received $718 per ton for fresh
grapes, compared with $410 for grapes used for wine and $231 for those used
for raisins.  In 1996, 64 percent of the California grapes sold fresh were
table varieties and 31 percent were raisin varieties.  Wine-variety grapes
made up the rest of fresh use.

Large 1997 Crop 
Should Cool Prices 

U.S. grape production used for fresh and processing markets in 1996 was 5.53
million tons, down 6 percent from 1995 and down 8 percent from the record 1992
crop.  Lower yields resulting from unfavorable weather, primarily in
California and Washington, accounted for most of the decline.  U.S. fresh-
market grape production declined nearly 2 percent from 1995's record output of
852,900 tons.  

Reduced production, coupled with increased domestic and export demand in 1995
and 1996, helped strengthen fresh grape prices to growers, with the U.S.
average rising from $581 per ton in 1994 to $620 in 1995, reaching a record
$727 in 1996.  Prior to 1996, the highest price growers had received for
fresh-market grapes was $678 in 1992.   

Production of processing grapes also declined in 1996, leading to grower
prices 16 percent higher than in 1995, with the season average reaching $348
per ton, the highest on record.  Strong demand for U.S. wines also supported
grape prices as an 8-percent decline in California's wine-type grape output
led to some diversion of raisin, table, and juice-type grapes.  Wine
processors used 50 percent more raisin-type grapes and 3 percent more table-
type grapes in 1996 than the previous year, although total grape use for wine
rose only 1 percent.  

Despite increased use for wine, the smaller 1996 U.S. grape crop reduced total
processing use of grapes to 4.69 million tons, 7 percent below the previous
year and the lowest since 1987.  Although grape use for canning rose 3 percent
from 1995, use of grapes for juice (including small quantities used for
processing jams, jellies, etc.) declined 27 percent, and grapes used for raisins
fell 17 percent.

Grape industry sources from the three major producing states (California, New
York, and Washington) indicate that their 1997 crops appear to be in good
condition.  Weather has been relatively favorable for the new crop.  There is
strong potential for a larger California crop this year, while normal crops
are likely for Washington and New York.

California grapevines are generally reported to have high, and large, cluster
counts this season.  Last year's dry, mild fall induced some early winter bud
breaks, and the dry, mild weather this February and March was ideal for
pollination and has also supported early and vigorous vine growth.  Heavy
rains in early January 1997 caused only minor damage to some grape growing
areas in Napa Valley and San Joaquin Valley, while a frost in early April did
not result in any significant damage.  If the expected larger California crop
is realized, grower prices will likely see some downward pressure. 

Last year, grape production totaled 144,000 tons in Washington, down 44
percent from the state's 1995 crop.  In contrast, New York's output of 189,000
tons was up 14 percent from the previous year.  This year's relatively mild
winter brought very little injury to grape crops in either state.  Increased
demand for wine grapes has encouraged vineyard expansion and new plantings in
Washington.  Peak harvest in the state is expected by mid-September.  In New
York, no bud breaks were reported as of the end of April, but blooms are
expected to peak by mid-June.  Based on the bunches that have formed,
expectations are that the New York crop will be of average size. 

Fresh Grape Consumption 
On Upward Trend

Analysis indicates a long-term rise in per capita consumption of fresh grapes
in the U.S.  Part of this growth may be attributed to the heightened interest
in healthful diets among American consumers and to increases in real
disposable income.  Domestic consumption more than doubled from 3.61 pounds
per person in the marketing year 1975/76 to a record high of 7.94 pounds in
1989/90.  This upward trend reversed in the early 1990's, reflecting several
years of reduced production, but in 1995/96 a 5-percent increase in fresh
grape production outweighed continued growth in exports, increasing available
domestic table-grape supplies by 4 percent from the previous year.  Fresh
grape consumption recovered nearly 3 percent that season, and following a
similar recovery in 1994/95, brought consumption to 7.52 pounds per person. 

Trends in domestic consumption of processed grape products vary.  U.S. grape
juice consumption is generally up in the 1990's--consumption rose from 2.51
pounds per person (fresh-weight equivalent) in 1990/91 to 4.1 pounds in
1995/96.  Larger shares of imports going to juice production in the 1990's
compared with the past two decades helped meet both domestic and export demand
for juice.  

U.S. consumption of raisins, on the other hand, has remained relatively stable
in the 1990's at 8-9 pounds per person (fresh-weight equivalent).  The U.S.
has seen limited growth in per capita wine consumption in the 1990's, as
increased demand for American wines has combined with weather-induced
production declines of U.S. wine-type grapes, to push wine supplies below
average.  Canned grape consumption has declined. 

U.S. Exports
Gaining on Imports

Most grapes produced in the U.S. are used domestically, and the U.S. remains a
net importer of grapes for all uses except raisins.  The export share of
domestic grape supplies has risen, however, from an average of 9 percent in
the 1970's to 12 percent in the 1980's and 17 percent in the 1990's.  U.S.
grape exports (both fresh and processed) increased 18 percent in value between
1990 and 1996, with last year's total reaching $208.6 million, accounting for
9 percent of the value of domestic production. 

Imports have made fresh table grapes available year-round in the U.S., with
shipments mostly from Chile but also from Italy, New Zealand, Peru, and
Brazil.  Most of the U.S. domestic production is marketed from May through
December.  Beginning in December, as the U.S. supply begins to decline,
shipments start to arrive from Chile.  From January through April, Chilean
grapes dominate the market.  Since 1994, small shipments of grapes have also
arrived from South Africa during the winter months.  

In May and June, the U.S. fresh grape crop again becomes available in limited
supply from the Coachella Valley in southern California.  Grapes also are
imported from Mexico during these months.  Both grower and retail prices
generally move down after May as domestic and Mexican supplies arrive.  From
August to November, the U.S. market experiences the largest available supply
of fresh grapes, when central California grapes are harvested.   Prices
usually bottom in August when domestic production is highest, then peak in
November as supplies diminish.

U.S. imports of fresh table grapes rose 8 percent between 1994 and 1995, but
tighter supplies of Chilean grapes and a decline in Mexican production held
growth to 3 percent between 1995 and 1996.  With a large crop expected this
year in Mexico, U.S. imports of Mexican grapes could increase in 1997. 
Coupled with the large crop expected in Coachella, an abundance of fresh
grapes could be on the market this spring. 

Table-grape exports have been growing slowly throughout the nineties.  The
average annual growth rate of  less than 1 percent reflects the strong impact
of the Canadian market on total fresh grape exports.  Shipments to Canada, the
major U.S. market, fell an average of 6 percent per year between 1990 and
1996, as consumer demand reached saturation and began to decline.  While
shipments to Hong Kong, the second-largest U.S. grape export market in 1996,
are only 44 percent of the amount sent to Canada, the Hong Kong market has
been growing at 13 percent yearly and is expected to continue to grow.  

Taiwan and the Philippines, ranked third and fourth in 1996 among U.S. grape
export markets, have shown average annual growth rates of 6 percent and 29
percent since 1990 and are expected to continue strong.  Other Southeast Asian
markets, including Thailand, Malaysia, and Singapore, while currently small,
are expected to increase in importance for U.S. table-grape trade in the
future.  The recent opening of the Chinese market to California fresh grapes
will likely provide an important boost to exports.  The California Table Grape
Commission is targeting the region for its export promotion program.  

Latin America also offers potential growth for U.S. table-grape exports. 
Mexico slipped to become the fifth-largest market for U.S. table grapes in
1996 as it continued recovering from economic crisis.  However,  with U.S.
grape exports to Mexico at an annual average growth rate of 67 percent this
decade, exports should pick up as the country's economy improves.  Among U.S.
fresh fruit exports to Mexico in 1996, only apples and pears exceeded grapes. 

Phytosanitary issues are preventing some South American countries from
importing large amounts of U.S. fresh grapes.  In the last year, however,
Colombia, Argentina, and Chile have opened their markets.  The continuing
growth of South American economies in combination with the counterseasonality
of U.S. and South American grape production could create an increasing demand
for U.S. grapes.

The U.S. is the world's largest raisin producer and second only to Turkey in
raisin exports.  The United Kingdom (U.K.) has been the major market for U.S.
raisins, receiving over 20 percent of total U.S. raisin exports throughout the
first half of the 1990's.  

In 1996, however, raisin shipments to Japan exceeded those to the U.K.  If the
Japanese market continues to grow 6 percent annually, as it has since 1990, it
may become the major destination for U.S. raisins.  Other Asian destinations
have also shown rapid increases in demand for U.S. raisins, especially Hong
Kong, Taiwan, and Singapore--areas of strong promotional efforts under USDA's
Market Access Program.  The U.S. does not import many raisins, but most of its
imports come from Mexico and Chile.  

The U.S. is a net importer of grape juice, with most coming from Chile and
Argentina.  Grape juice imports soared between 1995 and 1996--rising by over
150 percent--for several reasons.  Supplies were reduced by poor grape crops
in Washington and Michigan, the major juice producing states, and by the
diversion of juice grapes to fill a shortage of grapes for wine production. 
At the same time, a decrease in the domestic supply of apple juice, a
substitute for grape juice, increased demand. 

The U.S. does export some grape juice, although it constitutes the smallest
component of U.S. grape product exports.  Grape juice exports, however, are
growing at a faster rate than both  fresh grape and raisin exports.  During
the 1990's, grape juice exports increased at an annual rate of 6 percent in
value and 4 percent in volume.  

Canada is the major destination for U.S. grape juice.  Unlike the Canadian
markets for fresh grapes and raisins, which appear to have reached a
saturation point, Canada's grape juice market is growing by 10 percent
annually. 

Japan is the second-largest market for U.S. grape juice exports, but following
a rise in exports to Japan early in the 1990's, the market there has declined
recently, reflecting the poor performance of Japan's economy during the last
few years.  U.S. grape juice exports to Japan in 1996 about equaled the amount
shipped in 1990.  Korean demand for U.S. grape juice, on the other hand, has
grown rapidly in the 1990's, accounting for 20 percent of shipments in 1996.
Susan Pollack (pollack@econ.ag.gov) and Agnes Perez (acperez@econ.ag.gov).


COMMODITY SPOTLIGHT BOX

U.S. Signs Grape Protocol with China

On May 14, 1997, the Secretary of Agriculture announced that China has agreed
to open its markets to California fresh table grapes.  California farmers can
sell grapes to China as early as this year's crop, which will begin harvest in
July.   Access of U.S. fresh fruits to the China market has previously been
limited to Red and Golden Delicious apples from Washington, Oregon, and Idaho,
and cherries from Washington.

The Chinese prohibition on California fresh grapes had been based primarily on
concerns about Mediterranean fruit fly.  Growers in California will be
implementing a program of trapping in vineyards to monitor for any fruit fly
problems.  Chinese inspectors will visit California in mid-June to inspect the
trapping program.  

Initially, only grapes from Kern, Tulare, Fresno, and Madera Counties will be
allowed into  China.  These four counties produce about 85 percent of
California's fresh grapes.  Kings county will probably soon be added to this
group.  Riverside County will be reconsidered for entry into the program in
1998.

Although phytosanitary issues have been resolved, California grapes will still
face a stiff Chinese tariff of 55 percent with a 13-percent value-added tax. 
Despite the high tariff and undeveloped nature of the market, the California
Table Grape Commission expects China to be an  important market for California
grape producers and plans to begin market development activities in China to
expand consumer demand.
Linda Calvin (lcalvin@econ.ag.gov).


WORLD AGRICULTURE & TRADE

State Trading Enterprises:
Their Role in World Markets

The Uruguay Round Agreement on Agriculture, completed in 1994, subjects member
countries to rules on market access, internal support, and export subsidies
(AO December 1996). .  However, the lack of transparency in the pricing and
operational activities of agricultural state trading enterprises (STE's) has
generated growing concern that some World Trade Organization (WTO) member
countries will use STE's to circumvent Uruguay Round commitments on export
subsidies,  market access, and domestic support.  

Also sparking interest in STE's is the number of countries seeking accession
to the WTO which use these enterprises to implement agricultural policies. 
Notable examples are China, Taiwan, Russia, and Vietnam.  Little is known
about the trading practices of STE's in these countries. 

Agricultural STE's have been important players in world trade for decades. 
The rules of the General Agreement on Tariffs and Trade (GATT), which govern
global trading in goods and services, have recognized state trading
enterprises as legitimate participants in international trade while
establishing guidelines on their behavior.  These guidelines--contained in
Article XVII of GATT 1947--require STE's to conduct their export or import
trading activities according to the principle of nondiscriminatory treatment
and "in accordance with commercial considerations."  The principle of
nondiscriminatory treatment requires WTO-member countries to extend the same
trading privileges to all member countries.

The Uruguay Round Agreement defines STE's as "governmental and non-governmental
enterprises, including marketing boards, which have been granted
exclusive rights or privileges, including statutory or constitutional powers,
in the exercise of which they influence, through their purchases or sales, the
level or direction of imports or exports."  

Membership in the WTO requires that member countries annually provide
information on commitments, changes in policies, and other related matters as
required by the various trade agreements to the WTO--a process called
"notification."  Based on the Uruguay Round's working definition of an STE,
over 30 member countries have reported to the WTO the combined presence of
nearly 100 STE's in their agricultural sectors.  Examples include the Canadian
Wheat Board (an exporter) and Indonesia's Badan Urusan Logistik or BULOG (an
importer).  In its notification to the WTO, the U.S. also reported the
Commodity Credit Corporation (CCC).  The number of reported STE's is likely to
grow as member countries adhere more closely to the WTO definition of an STE.

Export-oriented STE's, the subject of this article, differ greatly from import
STE's, especially in terms of related WTO rules.  The chief concern with
export-oriented STE's is whether they use their exclusive power of domestic
monopsony (operating as the sole purchaser of domestic production) and/or
export monopoly (operating as the sole exporter of domestic supply) to engage
in unfair trading competition.  The lack of transparency which characterizes
the operations of STE's makes it difficult to determine whether they win sales
because of true competitive advantage or because of practices such as
excessive price cutting.  This contrasts with the explicit export subsidies of
the U.S. and the European Union (EU), which will be reduced significantly by
2001 in accordance with provisions of the Uruguay Round.

Grains and dairy products are the chief exports of the agricultural STE's
reported to the WTO--16 STE's export wheat and 10 export dairy products.  Two
of the major export STE's--the Canadian and Australian Wheat Boards--accounted
for more than 30 percent of world wheat exports from 1992 to 1995.  By
comparison, the U.S. and EU share 50-60 percent of world wheat trade.

For dairy product exports, STE's reported to the WTO by Australia, Canada, New
Zealand, Poland, and the U.S. controlled 30-40 percent of world skim milk
powder exports and about 25 percent of world cheese exports in 1993.  The
chief world cheese exporter is the EU with a 50-percent share of the world
market in 1993.  The EU also accounts for about 30 percent of world skim milk
powder exports.

The Big Four 
Of STE Agricultural Exporters

Among current WTO member countries (excluding the U.S.), four STE's dominate
the list of STE exporters of agricultural commodities.  Ranked by value of
major commodities exported, the Canadian Wheat Board is the largest STE, with
exports averaging $3.2 billion annually (wheat and barley combined) during
1992-94.  The New Zealand Dairy Board is a distant second, with annual average
exports valued at $1.8 billion (1992-94), followed by the Australian Wheat
Board at $1.4 billion (1993-95), and the Queensland Sugar Corporation at $925
million (1993-95). 

The Canadian Wheat Board (CWB) was established under the Canadian Wheat Board
Act of 1935 to market Western Canadian grain.  The CWB currently ranks as the
fourth-largest exporting company in Canada.  The CWB handles 96-99 percent of
all Canadian milling and durum wheat exports, issues licenses for the
remainder, and exports all Canadian barley.  Canadian wheat and barley exports
accounted for 70 percent of Canadian wheat production and 25 percent of barley
production during 1992-94.

The CWB is mandated to achieve three main objectives through its operations:
to market as much grain as possible at the best price that can be obtained; to
provide price stability to grain producers; and to ensure that each producer
obtains an equitable share of the available grain market.  On behalf of its
producers, the CWB is authorized to buy, take delivery of, store, sell,
transfer, and ship wheat and barley produced in Alberta, Manitoba,
Saskatchewan, and the Peace River area of British Columbia. 

The New Zealand Dairy Board (NZDB) was established in 1925-27 and
reconstituted under the Dairy Board Act of 1961 to "maximize the income of New
Zealand dairy farmers through excellence in the global marketing of dairy
products."  The Board markets all major dairy products for its member
cooperatives, including butter, cheese, nonfat dry milk, whole milk powder,
and most minor dairy products.  Exports of these products averaged 85-90
percent of production during 1992-94.  The NZDB also advises the New Zealand
government on trade issues and works hand-in-hand with it to combat protection
in dairy import markets.

The Australian Wheat Board (AWB) was established under the National Security
Act of 1939 "to purchase, sell, and dispose of wheat and wheat products, and
handle, store, and ship wheat."  The AWB currently operates under authority of
the Wheat Marketing Act of 1989.  It is the sole exporter of Australian wheat
and flour.  Australian wheat exports averaged more than 70 percent of wheat
production in the 1993-95 marketing years.

The Queensland Sugar Corporation (QSC), a state-level marketing board,
operates under the authority of Australia's Queensland Sugar Industry Act of
1991, which took effect on July 15, 1991.  (The QSC was established initially
as the Queensland Sugar Board in 1923.)  The QSC is responsible for the
acquisition and storage of Queensland raw sugar, negotiating shipping
arrangements, overseeing the marketing of exports, distributing the proceeds
from sales, and coordinating production regulations.  

All raw sugar exports from Queensland are undertaken by the QSC.  Between 75
and 80 percent of Australia's raw sugar production is exported; the remainder
is refined primarily for domestic consumption, although private refiners now
export small amounts.

A large number of other STE's export agricultural products valued between $100
million and $500 million during 1992-95.  Commodities covered by these STE's
include flowers, fruits, and meats, as well as dairy products and grains, from
exporting countries as diverse as China, Israel, South Africa, and Turkey.  

An even larger group of STE's exports products valued on average at less than
$100 million per year (1992-95).  Many of the export STE's of Central European
countries such as the Czech Republic, Poland, and Slovakia use subsidies to
export agricultural products while allowing private traders to export
unsubsidized products.  The market stabilization agencies in these countries
purchase and sell specific agricultural commodities to stabilize domestic
commodity prices.

Comparing the  
Major Export STE's

What are the similarities and differences among the four largest STE
exporters?  Which STE's control domestic markets as well as exports?  Are
export, import, or domestic policy tools important means of reinforcing the
four STEs' control of export pricing?  How do the four STE's differ in terms
of products marketed and government ownership?  To what extent do they impact
international trade?  An examination of their respective market environments
as well as their institutional characteristics may address these questions.

Market regimes.  Market regime refers to an STE's control over four
activities: exports, domestic marketing, commodity procurement, and
processing.  If an STE regulates all these activities, its ability to impact
international markets is likely to be much greater than if it controlled a
portion, or none.  

The CWB, NZDB, AWB, and QSC are all single-desk exporters--i.e., they have
full control of exports of wheat (CWB and AWB), barley (CWB), dairy products
(NZDB), and Queensland raw sugar (QSC).  Some of these STE's do not handle
exports themselves, but contract with private firms for export.  For example,
the QSC contracts with a private company, CSR Limited, to conduct its exports
of Queensland raw sugar to all destinations except New Zealand.

Controlling domestic marketing may allow an export STE to price discriminate
between domestic and foreign consumers, while control of commodity procurement
for export enhances the STE's leverage in competing with domestic buyers for
production.  The CWB has exclusive authority to market wheat for human
consumption and for malting barley.  None of the other three major STE's is
authorized as the sole domestic marketer in its respective country.  All four
STE's procure their respective commodities for export, which may represent the
bulk of domestic production.

Of the top four export STE's, only the NZDB has some control over the
processing of agricultural commodities.  The NZDB controls the manufacturing
of dairy products by contracting with its member cooperatives in New Zealand
for specific quantities of products for export, by encouraging production of
preferred products through a system of premiums and discounts, and by
establishing joint ventures and subsidiaries in many countries to further
process products tailored to their specific markets.  The NZDB advocates this
system as a means of developing long-term relationships in foreign countries,
particularly countries that control import access such as the EU, Japan, and
the U.S. 
 
Policy regimes.  STE's have access to various policy tools--export subsidies,
pricing, supply controls, tariff-rate quotas, quantitative restrictions on
trade, and marketing arrangements--that enhance their ability to compete in
international markets.  All these instruments are permitted under the Uruguay
Round Agreement in one form or another, though some may have greater potential
than others to distort trade.  

Export subsidies allow STE's to price their products lower in export markets
than their cost of procurement.  None of the top four STE's uses explicit
export subsidies to enhance their exports, although such subsidies have been
used in the past.  The last such explicit subsidy reported to the WTO, the
Western Grain Transportation Act rail subsidy of Canada, was eliminated by the
Canadian government on August 1, 1995.  But questions persist about the
practices that potentially give a competitive advantage to export STE's in
world agricultural markets.

Secrecy in administering international market transactions coupled with
control of domestic and export markets gives STE's the power to price
discriminate--i.e., charge different prices in different markets for the same
commodity.  Price discrimination allows STE's to maximize returns on sales by
charging a higher price to countries that are less price-sensitive and a lower
price to countries that are more price-sensitive.  Price discrimination is
commonly practiced by commercial firms, although most commercial firms face
greater risk than some STE's in procuring commodities for export.

Under the various policy regimes, domestic price support programs guarantee
producers a price for their product. The Canadian, Australian, and New Zealand
governments do not operate domestic price support programs.  However, the
Canadian government's underwriting of the CWB's initial pool payments can be
considered a form of support to Western Canadian grain farmers.  

Domestic supply control policies allow an STE to maintain domestic market
power and control the level of product exported.  The CWB manages supplies
through a mixture of contract delivery calls (where producers under contract
may be called to deliver all or a portion of their contracts by specified
dates) and producers' delivery quotas.  

The QSC, prior to 1991, limited Queensland raw sugar supplies by establishing
a maximum amount of sugar that a cane mill could deliver to the QSC.  Any
additional sugar delivered to the QSC would receive a lower price.  The QSC's
control of raw sugar supplies no longer binds the quantity of raw sugar
produced, since the Queensland government expanded the amount of land assigned
to the production of raw sugar in Queensland and reduced the price
differential between raw sugar delivered under the quota and outside the
quota.  This price differential will be eliminated after the 1998-99 marketing
season.  Neither the NZDB nor the AWB controls domestic acreage or production.

Import tariffs and tariff-rate quotas reinforce an STE's domestic market
power, particularly when they are administered by an STE.  However, Canada,
New Zealand, and Australia have few import barriers to reinforce the authority
of the CWB, NZDB, AWB, and QSC .  

In Canada, the Department of Foreign Affairs and International Trade, not the
CWB, administers WTO tariff-rate quotas for wheat and wheat products as well
as for barley and barley products.  In addition, Canada's duties for imports
of U.S. or Mexican products have been lowered or eliminated under the North
American Free Trade Agreement.  New Zealand has no import barriers for dairy
products.  Australia maintains quarantine standards for import,
transportation, storage, and processing of grains.  Australia also has an
import tariff for sugar, although it will be removed on July 1, 1997.

Lastly, all four top STE's use either long-term supply agreements or export
credits and credit guarantees as export enhancement tools in international
markets.  For example, the CWB signs annual supply contracts with the Japan
Food Agency for wheat and barley, and has agreed to supply Indonesia with
1-1.5 million tons of wheat annually for 5 years starting in 1996.  The Canadian
government guarantees some portion of CWB loans to selected importers.  The
Australian Export Finance Insurance Corporation (EFIC, a semi-private agency)
also covers some portion of the loan principal or the export value of loans to
selected importing countries.  EFIC offers similar services to private
exporting firms.

Product regimes.  Product regime is another indicator of a firm's capacity to
control trade.  Presumably, if an STE has exclusive authority to trade in
several products, it has more leverage in manipulating markets through
cross-subsidization between products and in price discounting of selected
products.

The CWB, NZDB, and AWB each exports more than one product.  The CWB controls
exports of milling and durum wheat, feed barley, and malting barley, although
returns for each type of wheat and barley are averaged in separate pools.  The
AWB is the exclusive exporter of wheat, but competes with other exporters to
trade in other Australian grains.  The AWB also purchases other countries'
grains to maintain its standing as a consistent supplier during periods of
drought in Australia.  The NZDB exports a variety of brand-label and generic
dairy products.  Only the QSC exports a single product--raw sugar.

Ownership regimes.  The ownership structure of an STE can impact international
trade in several ways.   For instance, a government-owned agency or
corporation might be more concerned with price stabilization and producer
income support than with "commercial" objectives.  But government ownership is
fast fading for all four major export STE's, which will place more
responsibility for their financing in the hands of producers, and could
discontinue government underwriting of pool deficits to support farm prices. 
In some cases, producers who believe that they are not adequately served by
the STE's marketing systems are pressing for reform.  All four STE's, however,
have made clear the benefits of single-desk exporting and are unlikely to
relinquish their status.

The CWB,  incorporated in 1935 as a Crown Corporation, is governed by five
Commissioners who report to Parliament through Canada's Minister of
Agriculture and Agri-Food.  A farmer-elected CWB Advisory Committee advises
the Board on issues and policy matters dealing with its operations, but has no
control over the Board.  Legislation was introduced last year to replace the
CWB Commissioners with a producer-elected board of directors in order to
increase the CWB's accountability to western Canadian producers.  Before the
legislation was passed, however, new national elections were called for June
2.  All pending legislation was erased from the record and will need to be
reintroduced after the new Parliament is formed.

The ownership structure of the NZDB is changing rapidly in the wake of recent
mergers between the NZDB's member cooperatives.  Two of the NZDB's eleven
member cooperatives now account for more than 75 percent of the milk processed
for export.  In addition, the NZDB is now required under the Companies Act of
1993 to adhere to New Zealand's new laws for private firms.  

The AWB, a Commonwealth corporation directed by one government official and
eight wheat industry officials, is expected to be privatized on July 1, 1999,
when tradeable shares of the AWB's Wheat Industry Fund (currently financed by
assessments on Australian wheat growers) will be issued to Australian wheat
growers and nontradeable shares may be issued more broadly to the public.  The
QSC, incorporated in Queensland, is run by a board of nine private-sector
members.

Although the four major STE's are well established, a growing number of STE's
in prospective WTO member countries are likely to come under scrutiny through
the accession process.  With this in mind, several countries, including the
U.S., continue to express interest in greater transparency of the activities
of STE's.
Karen Ackerman (ackerman@econ.ag.gov), Praveen Dixit (pdixit@econ.ag.gov), and
Mark Simone (msimone@econ.ag.gov).


WORLD AG & TRADE BOX--1

Price Pooling--An STE Advantage

Price pooling allows an STE greater flexibility in export pricing relative to
private grain trading companies, particularly when pool payments are
underwritten by the government or the STE controls domestic supplies as well
as exports.  All four of the largest STE's practice some form of price pooling
to ensure price stability for their producers and to control the marketing of
their respective commodities.  

Under pooling, producers covered by the CWB, for example, receive an initial
payment equal to about 80 percent of the final projected price at or around
the time the commodity is delivered to the CWB elevator.  One or more
additional payments are made to producers at a later date after the pool of
agricultural product has been marketed, provided that the price received for
the commodity is greater than the initial payment plus handling and
administrative costs. 

The Canadian government guarantees the initial CWB pool payment.  If the
initial pool payment to producers exceeds the eventual pool receipts less
costs--a situation known as a "pool deficit"--the Canadian government is
obligated to underwrite pool losses.  The CWB deficit for its wheat pools
totaled $695 million in 1990/91, more than half the CWB deficit for its total
wheat and barley pools for the period 1968 to 1991.  The Australian government
guarantees a percentage of AWB borrowing for its operations, but does not
underwrite an initial price to growers, which can change throughout the
season.  The Australian government will discontinue the guarantees in 1999,
when the AWB will restructure its Wheat Industry Fund as a capital base for
commercial borrowing.

Under the pool system, prices to producers may be averaged across grades and
quality differences, time of year, and in some cases, freight charges.  The
degree to which pools are segmented by grade, quality, marketing period, and
location defines how much flexibility the STE has in pricing products for
export.  For example, the CWB averages prices for a wide range of marketing
periods, grain qualities, delivery locations, and marketing costs.  In
contrast, the AWB operates special pools for 45 specific grades and classes of
wheat, and discounts producer pool prices for freight and other marketing
costs.  

The NZDB bases its payments to member cooperatives on the manufacturing cost
of the products supplied to the Board and the forecast milkfat and protein
value of the products. NZDB member cooperatives may receive premiums for
production of highly demanded products, or their payments may be discounted if
the quality of the product delivered is below the contract specification.  The
QSC maintains two pools for raw sugar, which originally were intended to
discount prices of sugar deliveries that exceeded pre-established delivery
quotas.  When the price differential between the two QSC pools is phased out
after the 1998-99 marketing season, only one pool will remain.


WORLD AGRICULTURE & TRADE

USDA Lifts Import Ban 
on Mexican Avocados

The U.S. decision to partially lift a long-standing ban on avocado imports
from Mexico to the continental U.S. is viewed in some quarters as an early
indicator of the U.S. approach to new disciplines on sanitary and
phytosanitary measures under recent trade agreements.  After 6 years of
carefully evaluating the pest risks associated with importing Mexican
avocados, USDA's Animal and Plant Health Inspection Service (APHIS) announced
in February that it would allow entry of some Mexican avocados into the
continental U.S. for the first time in 83 years.  

Revision of Q56, the Fruit and Vegetables Quarantine, will allow shipments of
avocados from certified groves in Mexico to be exported to 19 northeastern
states and the District of Columbia from November through February, beginning
in 1997.  The public comment period that preceded the APHIS ruling yielded a
wide range of opinions from various stakeholders on the advisability of
revising Q56. 

California and Florida avocado growers vigorously opposed entry of Mexican
avocados.  Representatives from the avocado industry acknowledge that
wholesale prices for U.S. avocados are well above those for export-quality
avocados from Mexico, but argue that the ban shields them from risk of pest
infestation rather than competition.  

On the other hand, U.S. agricultural exporters expressed concern that failure
to revise Q56 would establish a stringent regulatory standard for risk
management that would subsequently be adopted by other countries restricting
access for U.S. exports of wheat, citrus, apples, peaches, cherries, and other
products to foreign markets.  Elected officials from some nonapproved states
have expressed disappointment that their constituents would not have access to
Mexican avocados, while brokers and shippers in border states have noted that
partially lifting the ban would benefit their operations.

The revision of Q56, with its geographic and seasonal restrictions on Mexican
avocado imports, will open less than 5 percent of the current national market
to Mexico.  Nonetheless, interest in this decision was heightened by the
perception that it was an important indicator of how the new sanitary and
phytosanitary (SPS) disciplines would guide U.S. import policy decisions.  

Along with other major agricultural exporting nations, the U.S. strongly
advocated international rules for the use of SPS measures in negotiations for
the North American Free Trade Agreement (NAFTA) and the Uruguay Round
Agreements (URA) of the General Agreement on Tariffs and Trade.  The eventual
decision to allow limited access to the U.S. market for some Mexican avocados
after comprehensive study of the pest risks reflects USDA's commitment to
basing phytosanitary policy on sound science, and to adopting risk-reducing
measures that are least trade restrictive.  These two principles are found in
both trade agreements.

The Scientific Basis 
For Revising Q56

U.S. phytosanitary officials originally banned entry of Mexican avocados in
1914 when seed weevils--pests that destroy the seed and contaminate the flesh--
were discovered in Mexican groves.  During the 1970's, the government of
Mexico twice petitioned USDA to lift the ban on avocados produced in certain
regions, but U.S. authorities were not persuaded that the fruit could be
safely imported.  

In 1990 Mexico renewed its request, following several years of an export
registration program administered by its plant quarantine authorities.  The
program had allowed participating Mexican growers to export avocados to Asian
and European markets.  In the view of Mexican phytosanitary officials, modern
pesticides and cultural practices used in the registered groves had eliminated
the rationale for total U.S. prohibition on Mexican avocados.

APHIS based its 1997 decision to modify Q56 on the results of research
undertaken by USDA's Agricultural Research Service, as well as the results of
its own quantitative risk assessment of nine "pests of quarantine
significance."  A quarantine pest is defined by the North American Plant
Protection Organization as "a pest of potential economic importance to the
area endangered thereby and not yet present there, or present but not widely
distributed and being officially controlled."  

APHIS studied the risks associated with the introduction of eight species of
pests which are not present in this country.  These included five species of 
"host specific" pests that attack only avocados, and three species of fruit
flies.  It also evaluated risks posed by a fourth species of fruit fly,
Anestrepha ludens or Mexican fruit fly, which is present in this country
(Federal or state authorities operate pest management programs in those areas
to mitigate the risks).
   
First, APHIS assessed the probability of infestations without any regulatory
controls beyond standard port-of-entry inspections.  It then evaluated the
efficacy of a "systems approach" to mitigate the risks of pest infestations. 
A systems approach comprises a sequential implementation of safeguards--e.g.,
a requirement to ship the fruit in sealed, refrigerated containers--which are
designed to progressively reduce the likelihood of introducing injurious pests
to an insignificant level.  Systems approaches are considered when an
exporting region does not qualify as a pest-free area, and when post-harvest
treatments to eradicate the pests degrade the fruit or leave unacceptable
chemical residues.  

The outcome of APHIS's quantitative risk assessment of a systems approach with
nine specific safeguards indicated that Mexican avocados imported under this
regulatory regime posed an insignificant pest risk.  The regime allows Mexico
to export the Hass variety of avocado--a variety which exhibits a natural
resistance to fruit fly infestation prior to harvest--if stringent criteria
are met for monitored insect population levels; for harvesting, packing, and
shipping practices; and for inspections.  

Geographic and temporal restrictions on shipments of Mexican avocados
constitute two other important safeguards that further diminish the likelihood
that quarantine pests could become established in the U.S.  A hitchhiking pest
which arrives in cold weather thousands of miles away from suitable host
material would be unlikely to survive and become established in the importing
region, which was an important factor in USDA's 1993 decision to allow Mexico
to ship Hass avocados to Alaska. 

The U.S. is not the only country willing to rely on a systems approach to
mitigate plant pest risk.  The U.S. exports citrus to Japan, plums to Mexico,
and apples and pears to Taiwan under protocols that specify different systems
approaches to minimize plant pest risk.  APHIS also uses systems approaches to
facilitate interstate commerce.  For example, citrus fruit grown in areas of
Texas that are seasonally infested with the Mexican fruit fly can be shipped
to markets throughout most of the continental U.S. under the terms of a
systems protocol (which identifies the requisite steps for mitigating risk).

Economic Impacts 
Of Revising Q56

Mexico's avocados are expected to be competitive in the U.S. market.  Mexico
is the world's leading avocado producer, accounting for about 40 percent of
the world's production.   Mexican growers typically produce between
700-800,000 tons of avocados each year, about four times the amount produced by
the U.S. industry.   However, most of Mexico's avocados are produced for the
domestic market: their size, appearance, and provenance (from areas where pest
risk cannot be satisfactorily mitigated) make them unsuitable for the
international market.  As a consequence, Mexican domestic avocado prices are
substantially lower than international market prices, and Mexicans consume
more than 95 percent of the domestic crop each year. 

Even so, Mexico is still the world's second-largest avocado exporter, trailing
Israel but ahead of the other four major exporters--South Africa, Spain,
Chile, and the U.S.  According to a study published by the American Farm
Bureau, Mexico's ability to compete in international markets stems from land,
labor, and water costs that are lower than its competitors' and substantially
lower than costs in California, which produces about 90 percent of the U.S.
avocado crop.  

The cost differentials are reflected in a comparison of the wholesale price
for California Hass avocados in New York City with the price of Mexican Hass
avocados in Montreal, the closest terminal market to New York City which
currently allows sales of Mexican avocados.  USDA's Agricultural Marketing
Service reports that the lowest quoted wholesale prices for Mexican Hass
avocados in Montreal in January, February, November, and December of 1995
ranged from $0.18 to $0.23 per pound, while the lowest quoted wholesale prices
for California Hass avocados ranged from $1.65 to $2 per pound.  

A USDA Economic Research Service study reports that U.S. avocado prices
fluctuate markedly between years.  Nonetheless, these price data suggest that
Mexican growers will be able to profitably export avocados to the northern
region of the U.S. even though they must pay a tariff of 3.58 cents a
pound--which under NAFTA will be gradually phased out by 2003.   

The segment of Mexico's industry that will be competing with U.S. growers is
located in Michoacn, a state in southwest Mexico.  Although Michoacn
accounts for two-thirds of Mexico's output, only a small fraction of the
industry there participates in the export registration program administered by
Mexico's plant protection agency.  These export-oriented Mexican growers have
chosen to incur the additional costs of sophisticated grove management,
packing, and shipping practices, in order to gain access to markets in Europe,
Canada, and Japan.  

This segment of the Mexican avocado industry planted new groves throughout the
1980's, principally with the Hass variety (the variety that accounts for 85
percent of Californian production).  These trees have reached full bearing
potential, heightening Mexico's interest in finding additional export markets.

The impact on the U.S. industry of allowing seasonal imports of  Mexican
avocados will be mitigated by the fact that Mexican growers will be competing
with foreign as well as domestic sources of supply in the northeastern avocado
market during the winter shipping season.  The U.S. is a net importer of
avocados, typically exporting approximately 5 percent of domestic production
while importing approximately 10 percent.  Chile exports more avocados to the
U.S. than any other country, and in recent years has been the dominant
supplier to the northeastern market during these four months.  

California is the second-largest supplier in this market, although its winter
shipments to northeastern markets never totaled 5 percent of California's
output during the 1990-94 period.  The Northeast is not the primary
destination for California Hass avocados; approximately 80 to 90 percent of
California's production is typically shipped to states outside the designated
area.  Moreover, the November-February period falls outside the peak
harvesting and shipping season for California Hass avocados--about 65 percent
of the crop is sold between March and August.

APHIS's analysis of the economic impact of the Q56 revision supports the view
that the regulatory change will have a limited impact on Californian avocado
producers.  APHIS analyzed the impact under different scenarios, varying the
quantity of avocados Mexican growers would divert from other foreign
destinations to the U.S. and the quantity of domestic avocados the U.S.
industry would divert from the northeastern region to the nonapproved states. 
For example, if Mexican producers redirected 30 percent of the annual average
of 1990-94 avocado exports to the approved states during November-February,
consumers would benefit since prices in the approved and nonapproved states
would fall by 25 and 2 percent.  Producer losses would total approximately
$3.9 million.  

APHIS's analysis indicated that estimated grower losses ranged from $1.4 to
$6.4 million under the different scenarios, which represented 0.5 to 5.4
percent of the farm value of the California Hass avocado crop during the 
1990-94 period.  APHIS's analysis also indicated that estimated consumer gains
could range from $3.3 to $19 million under different import scenarios.  Under
all scenarios, estimated consumer gains were larger than producer losses, with
net economic benefit estimates ranging from $1.9 to $12.5 million.

The revision of Q56 is expected to have an even smaller economic impact on
growers in Florida and Hawaii, which account for approximately 10 and less
than 1 percent of U.S. avocado output.  Florida growers are generally the
third-leading source of supply in northeastern markets between November and
February, but market statistics indicate there is little substitution in
consumption between the larger green-skinned avocado varieties produced in
Florida (and California) and the higher priced Hass avocado.  Consumer
willingness to pay a large price premium for Hass avocados has been observed
in terminal markets by analysts for numerous years, suggesting that consumers
have a strong preference for Hass avocados over other avocado varieties.  

High humidity levels in Florida prevent producers from growing the higher
priced Hass variety.  Instead, Florida primarily supplies a niche market of
Central American and Caribbean immigrants on the east coast who prefer the
larger green-skinned varieties.  

A phytosanitary quarantine prevents Hawaiian producers from shipping their
avocados to the mainland, so seasonal foreign shipments of Hass avocados to
the Northeast will have no effect on that segment of the domestic industry. 

New Disciplines on 
Sanitary & Phytosanitary Measures             

Following APHIS's proposal to revise Q56, the agency held a series of hearings
across the U.S. in 1995 to elicit comment from the public, which included risk
assessment experts and university entomologists as well as growers and
consumers.  APHIS also solicited written remarks during an extended 105-day
official comment period.  A number of respondents expressed concern that APHIS
appeared to have a "new mandate" under the recent trade liberalization
agreements to facilitate international trade, a departure from its historical
mandate to prevent the introduction and establishment of quarantine pests. 
Others posed a more direct question, asking if the Q56 revision "resulted
from" NAFTA.

Disciplines on the use of sanitary and phytosanitary (SPS) measures were
included in the URA and NAFTA to protect and extend the degree of agricultural
trade liberalization, at the insistence of major agricultural exporting
nations, including the U.S.  Exporting countries were concerned that, with the
trade agreements effectively disciplining the use of other tariff and
nontariff barriers to agricultural exports for the first time, importing
countries would resort to the disingenuous use of health and safety measures
to protect their producers from competition.  While recognizing that each
country has the sovereign right to adopt and enforce measures necessary to
protect human, animal, or plant life or health, the agreements require that
these measures adhere to certain principles.  

The principal SPS articles in the URA and NAFTA lay out specific requirements
for these measures to be:

(1) scientifically based--SPS measures should be based on an explicit
scientific assessment of risks; 

(2) nondiscriminatory--no variation should be applied among trading
partners or between domestic and foreign goods except as justified
by differences in assessed risks; 

(3) least trade restrictive--although each country has the sovereign
right to determine what level of SPS protection is acceptable, it
should take into account the objective of minimizing negative trade
effects; and 

(4) transparent--governments must notify other countries of SPS
measures which restrict trade and must respond to trading partners' requests
for additional information.  

Another article in the trade agreements provides for regionality--regulatory
authorities must allow imports from pest- or disease-free areas (or areas
where the prevalence of pests or diseases is so low as to pose insignificant
risk) within countries.  

If an exporting country successfully challenges an SPS measure that violates
one or more of these articles before a NAFTA dispute settlement panel, the
importing country must either rescind the measure or compensate the trading
partner for the amount of trade lost.

In the view of the U.S., codifying SPS principles and practices in the URA and
NAFTA requires U.S. trading partners to adhere to the same professional
standards as APHIS when formulating SPS policies.  Since Congress first
delegated the authority to USDA in 1912 to prohibit or restrict entry of
foreign products to guard against quarantine pests, SPS decisions by the
professional staff of APHIS (and its institutional predecessors) have always
been based on the latest available scientific evidence on the risks.  U.S.
quarantine policy has also always been guided by the principle of "least
drastic action" which instructs regulatory authorities to protect domestic
agriculture from pests while imposing the fewest possible barriers on commerce
and trade.

Because pest detection and eradication technology changes over time,
quarantine policies can also be expected to change.  The fact that a segment
of the Mexican avocado industry had adopted innovations in chemical controls
and cultural practices, combined with recent ARS research results about the
resistance of Hass avocados to fruit fly infestation, supported APHIS'
assessment that the risks associated with importing these avocados were lower
than when last reviewed in the 1970's.  The revision in Q56 reflected a change
in actual risk factors and the understanding of those risk factors--not a
change in APHIS' mandate to protect American agriculture.  

The partial lifting of the ban on Mexican avocados, although in conformity
with the new disciplines on the use of SPS measures, was not "caused" by
NAFTA, but rather reflected USDA's long tradition of basing quarantine policy
on sound science.  With the URA and NAFTA in place, the U.S. will now be able
to oblige its trading partners to do the same. 
Donna Roberts, USDA-ERS, Geneva, Switzerland, 41-22-749-5245,
(droberts@ustr.gov).


WORLD AG & TRADE BOX 1--

Will Pests Be Imported 
Along with Avocados?

APHIS's risk assessment results indicated that with no regulatory controls
except for standard port-of-entry inspections, a stem weevil outbreak might
occur every 7 months, a fruit fly outbreak might occur once every 72 years, a
seed weevil outbreak might occur every 95 years, and a seed moth outbreak
might occur every 355 years. 

The next step for APHIS was to evaluate the risks posed by importing Mexican
avocados under a systems approach which featured the following safeguards.

(1) Host resistance to fruit flies.  Fruit fly infestation of the Hass
avocado is not known to occur outside the laboratory.

(2) Field surveys for stem and seed weevils and fruit flies.  Orchards
will receive or be denied certification for export on the basis of
survey results.  Surveys must show municipalities to be free of
targeted seed pests at a 95-percent confidence level.  

(3) Trapping and field bait treatments for fruit flies.  

(4) Field sanitation practices, including routine removal of fallen
fruit, and pruning, to decrease the chances of weevil or fruit fly
establishment.

(5) Post-harvest safeguards, such as tarps to cover fruit and structural
requirements for packinghouses (e.g., screens and double doors) to
guard against fruit flies and other hitchhiking pests. 

(6) Winter shipping to decrease the probability of escape and survival
of hitchhiking pests.

(7) Packinghouse inspection and fruit cutting to detect weevils or fruit
flies.  If any pests are detected, the entire shipment will be
rejected.

(8) Port-of-arrival inspection of fruit and certification documents.

(9) Limited distribution to the District of Columbia and 19 northeastern
states: Maine, New Hampshire, Vermont, Massachusetts, Connecticut,
Rhode Island, New York, New Jersey, Pennsylvania, Delaware,
Maryland, West Virginia, Virginia, Ohio, Michigan, Wisconsin,
Illinois, Indiana, and Kentucky. This reduces the likelihood that
transported pests will survive, because of cold temperatures and the
lack of suitable hosts in these states between November and
February.  

APHIS's quantitative risk assessment indicated that the statistical
probability of avocados imported under this regulatory regime causing a seed
pest or fruit fly outbreak would be less than once every 1 million years.  A
stem weevil outbreak might occur once every 11,402 years under this regulatory
regime, according to APHIS's analysis.  

Critics of this systems approach argue that it will not provide sufficient
protection from the risk of pest infestation because of the economic
incentives for Mexican producers and U.S. shippers to deviate from this
regime, and because effectively monitoring compliance with the safeguards will
require increasingly scarce public-sector resources.  In response, USDA's
plant health officials point out that administrative details of the program
reduce or eliminate incentives to cut corners, while providing support for
effective surveillance.  

For example, the incentive to supplement shipments from approved orchards with
avocados from other groves is diminished by the fact that if a seed pest is
detected in a shipment, exports from the entire municipality will be cut off
until eradication efforts have been successfully completed.  Similarly, U.S.
shippers who might be tempted to transship Mexican avocados from the
northeastern states to points further west or south will find that in order to
escape detection by USDA's Agricultural Marketing Service inspectors at
terminal markets they would first have to remove a sticker from each
individual avocado that indicates the fruit's origin.  

In general, the fact that the Mexican industry is required to establish a
trust fund that pays for on-site monitoring by APHIS employees at each stage
of avocado production and distribution in Mexico will make it substantially
more difficult for growers, packers, or shippers who might want to circumvent
the safeguards.  


WORLD AG & TRADE 

U.S. & Mexican Avocado 
Sectors: A Comparison

Mexico is the world's largest avocado producer and second-largest exporter,
accounting for about 67 percent of global production and 24 percent of world
trade in 1995/96.  Mexico currently exports about 7 percent of total
production, mainly to Europe, Canada, and Japan.   The U.S. is the second-
largest producer of avocados (about 15 percent of world production) and the
sixth-largest exporter (5 percent of global trade).  The U.S. exports about 5
to 7 percent of production, with the EU, Japan, and Canada the most important
markets.

Mexican per capita consumption is about 7 kilograms per person, compared with
U.S. consumption of less than 1 kilogram.  U.S. per capita consumption more
than doubled between the early 1970's and the early 1980's, but has remained
fairly constant since then.  California has by far the highest per capita
avocado consumption in the U.S., for two principal reasons: it is the main
region of U.S. production and it has a large Hispanic population with an
established preference for avocados.  

The 19 northeastern states where Mexican avocados will be permitted under the
recent APHIS ruling are estimated to consume 10,000-15,000 tons of fresh
avocados annually and account for about 8 percent of domestic use.  Avocados
are used primarily in fresh salads, as toppings on soups, and as the main
ingredient in guacamole.  Avocados are rich in potassium and vitamin A and
free of cholesterol, but relatively high in fat and calories. 

In both countries, production is highly concentrated in one state and on one
variety.  Mexico produces mainly the Hass variety, with over 85 percent grown
in the state of Michoacn near Mexico City.  In the U.S. over 90 percent of
all avocado trees are in California, with roughly half of U.S. production
located in San Diego County.  California produces mostly the Hass variety,
which has a pebbly, dark green skin.  Most of the remaining U.S. output is
from Florida, mainly a variety of West Indian origin with a smooth, lighter
green skin.  Hawaii also grows a small amount of avocados. 

Avocado production requires a great deal of water.  In San Diego County,
avocado production relies on high-cost irrigation.  In Michoacn, where only
about half the orchards have irrigation systems, abundant rainfall gives
Mexican producers an advantage in lower water costs. 

At a national level, Mexican yields are typically 7 to 9 metric tons per
hectare, although a mature orchard with 8-year-old trees generally averages 15
tons per hectare.  California yields are slightly lower at about 5 metric tons
per hectare.

Production of avocados can fluctuate a great deal from one year to the next,
due to the crop's sensitivity to cold, leading to wide variations in price and
in consumption levels.  Some avocados also go through a bearing cycle that
varies the production over several years.  California is capable of producing
substantial volumes of avocados year-round, although the peak season is
usually from March to August, with the lowest levels from September to
December.  Florida markets about 90 percent of its harvest between August and
December.  

In Michoacn, the primary harvest season is October to February, although
production is year-round.  Therefore, there is some complementarity in the
Mexican and U.S. production cycles, although Mexico could pose new competition
during January and February, when California has been nearly the sole
supplier.

Mexico's avocado growers have been looking forward to the opportunity to
export to the U.S. for several years.  In fact, a number of new trees was
planted with this goal in mind in the late 1980's and early 1990's, and these
are now starting to bear fruit.  Producer organization has undergone a series
of changes, with the Michoacn Avocado Commission now the principal voice for
growers. 

In an effort to improve export promotion, the Mexican industry is reportedly
working with the Michoacn state government and the federal government to
develop standards for product quality and labeling.   Reportedly about 15
growers in Michoacn may eventually be able to ship avocados to the U.S., but
only 2 or 3 may be able to take advantage of the opening initially.  Michoacn
growers estimate that 13,000 hectares in four municipalities in the state,
capable of exporting 80,000 tons, could be approved by APHIS to export
avocados to the U.S.

Poor weather in Mexico reduced the 1996/97 crop by approximately 20 percent,
to 635,000 tons.  Heavy rainfall, hailstorms, and cool temperatures in
Michoacn during the flowering season caused fruit to fall early, and reduced
both yields per tree and size of the fruit.  For the 1997/98 season--the first
for which the recent APHIS ruling will apply--Mexican growers interviewed by
USDA's Foreign Agricultural Service expect output to bounce back 30 percent as
higher yields often follow a low-yield year.

The California Avocado Commission's March estimate for 1996/97 state output
was that the avocado crop would be up 3 percent.  Total California shipments
from November 1996 to March 1, 1997 were up 12 percent from the previous year,
with prices down 3 percent.  For the Hass variety, shipments were up 10
percent and prices down 5 percent.  The first official USDA production
estimate for 1996/97 will be released in July.

As with other seasonal crops, prices for Mexican avocados drop during the peak
harvest season--November to February.  However, these prices reflect the whole
crop as marketed in Mexico City's main wholesale market.  Export-quality fruit
commands a higher price for its appearance and the special handling required. 
Mexican prices remain low during March and April as the crop continues to be
marketed.  Mexican avocado producers have a great deal of flexibility in
timing of harvest because avocados can be stored on the tree, often for
several weeks or months.  Avocados ripen once they have been picked, softening
within 3 to 4 days for fruit picked late in the season and 3 to 4 weeks for
fruit picked early in the season.

Mexico's Competitiveness 
In the U.S. 

Under the new APHIS rules, Mexico and Chile will find themselves in direct
competition in the U.S. market during November and December.  The U.S.
imported 25,000 tons of fresh avocados worth $23 million from all sources
during calendar 1996, about 15 percent of domestic demand.  

In the past few years, Chile has been supplying about two-thirds of U.S.
avocado imports, mainly during September-December.  During the 1990's, Chile
exported an average of 13,000 tons of fresh avocados to the U.S., with 40
percent of that volume entering during November and December.  Chilean
avocados face a U.S. tariff of 12.9 cents per kilogram, as opposed to the 7.9
cents/kg tariff for Mexico, and Mexico's tariff will be phased out by 2003
under NAFTA.

Some Mexican fresh avocados have already been entering the U.S. in recent
years, coming by truck through Laredo, Texas.  However, these avocado imports,
which reached nearly 1,800 tons in 1996, have been bound by truck for Alaska
(where imports from Mexico have been permitted since 1993) or for Canada, or
headed to U.S. ports for other re-export destinations.  

In the last few years, while the partial lifting of the ban on fresh avocados
was being developed, Mexican exporters have relied on pre-export processing to
market their avocado products in the U.S.  Processed avocado products include
avocado pulp, avocado paste, and guacamole in consumer-ready packaging. 
Avocado pulp comes in tubs for use in restaurants and food processing. 

Imports of processed avocados from Mexico have grown strongly in the last few
years.  The U.S.'s phytosanitary ban does not apply to processed avocados, as
the husk and large seed have been removed.  In fact, the value of processed
avocado imports from Mexico is now equivalent to U.S. fresh avocado imports
from all sources.  Processed avocados face a 1997 tariff of 7.9 cents per kg,
which will be eliminated by 2003.  About 3 percent of Mexico's avocado crop
goes to processing outlets. 
Dan Plunkett (plunkett@econ.ag.gov). 



SPECIAL ARTICLE

Ag Trade Environment
With an Enlarged EU

The prospective enlargement of the European Union into Central and Eastern
Europe could add as many as 100 million new consumers to the EU market and
double the number of farmers, having potentially profound effects on global
and U.S. agricultural trade.  Initial USDA analysis indicates that accession
to the EU and subsequent implementation of EU agricultural policies will
increase agricultural output in Central and Eastern Europe (CEE), particularly
in the livestock sector, creating increased demand for feedstuffs, and
opportunities for additional U.S. corn and oilseed exports.  On the other
hand, CEE preferential trade agreements with the EU, in addition to geographic
ties, could limit U.S. trade potential in this growing market.

Ten CEE countries, including the Baltic states, have applied for membership in
the European Union and have signed Association Agreements (Europe Agreements)
with the EU.  These countries are Bulgaria, the Czech Republic, Estonia,
Hungary, Latvia, Lithuania, Poland, Romania, Slovakia, and Slovenia. 
Negotiations between the EU and the applicant countries are not expected to
begin before 1998.  European enlargement is likely to occur in a number of
stages, with the Czech Republic, Poland, and Hungary--the most market oriented
and reformed countries of the proposed group--favored to join first.  The
Europe Agreements provide a framework for preparing the CEE countries for
eventual membership, allowing them time to continue their economic and
political reforms. 

CEE countries will benefit from EU membership through unrestricted access to
EU markets and higher producer prices for their farmers.  However, membership
will not be without cost.  Higher expenditures by the EU will be required to
support CEE agriculture at current EU producer prices, completely open borders
will increase competition with Western Europe's agro-food sector, and consumer
expenditures on food, already a large proportion of CEE incomes, will rise,
having an inflationary impact.

A potential risk is that, with completely open borders between EU and CEE
countries, the CEE agro-food sector will find it difficult to compete with
Western European firms.  This is particularly true of the food processing
industry.  Some CEE food processors have modernized sufficiently to meet EU
product standards, but for most of the CEE food industry, considerable
investment is still needed.  Among raw agricultural products, CEE livestock
will have difficulty competing in the EU market, as most CEE meat and dairy
products do not meet EU quality standards.  

While CEE countries have made significant progress toward recovery from the
recession of the early transition period, considerable restructuring of their
agricultural sectors will be needed for successful integration into the EU. 
The remaining challenges include improvement of farm productivity, completion
of privatization of state farms and agro-industry, simplification of
government purchasing and market management practices, training in
agribusiness and quality control, and programs to encourage rural development
and structural adjustment.

Agencies created in many of these countries to administer minimum prices,
export subsidies, or other measures often operate in a nontransparent way,
leading to questions concerning compliance with World Trade Organization (WTO)
regulations on state trading.  State policies in Bulgaria and Romania, for
example, cause significant distortions in domestic markets. Procurement of
bulk commodities in these countries is still mainly in the hands of state-owned
companies that use their market power to hold down prices.  In addition,
these governments continue to exert some degree of control over retail prices
through limits on processing margins.

The EU has taken a multi-pronged approach in its preparations for enlargement. 
It has funded an extensive program of technical assistance for the CEE region,
designing projects to improve agricultural structures and market mechanisms,
food production, processing and distribution, and infrastructure.  In
addition, the 1996/97 EU Intergovernmental Conference is addressing
institutional preparations for enlargement.

Enlargement Could 
Trigger EU Ag Reforms

The EU is a global player in agricultural trade, and EU enlargement will
inevitably have implications for European agriculture.  The EU is one of the
world's largest and most competitive agricultural exporters and is a major
force in multilateral trade negotiations.  The prospect of adding 100 million
new consumers and doubling the number of EU farmers is a matter of keen
interest to U.S. agriculture because it is likely to be an impetus for major
changes.  

The CEE countries have huge agricultural sectors which, despite the advances
of recent years, are generally less developed than those of the EU.  The
application of current Common Agricultural Policy (CAP) mechanisms to CEE
would be very costly to the EU.  Extending the generous benefits provided to
EU producers would significantly increase EU agricultural spending.  

It is increasingly likely, therefore, that the enlargement will precipitate a
sweeping reform, further reducing price support to farmers and expanding upon
the limited reforms undertaken in 1992.  The U.S. views this prospect as an
opportunity for the EU to further liberalize its agricultural policies and
build on the accomplishments of the Uruguay Round agreements.  

The European Commission has examined different enlargement scenarios to
measure the economic implications, including implications for the CEE and EU
farm sectors.  One approach would continue the CAP reform efforts begun in
1992, which reduced producer support prices and compensated producers with
payments, and would extend these reforms to cover other sectors such as dairy,
in an effort to improve EU agricultural competitiveness.  Such an approach
implies greater use of direct compensatory payments to help maintain farm
revenues.    

USDA also conducted preliminary analysis on the impact of CEE accession to the
EU, under two extreme scenarios: in one, the current CAP applies to CEE, and
in the second, farmers in an enlarged EU-19 (including the Czech Republic,
Hungary, Poland, and Slovakia) face world prices.  The results in both cases
reveal that the agricultural economies of the current EU-15, and the CEE
countries, are likely to experience major adjustments.  

Agricultural commodity prices in the EU are typically above world prices,
while most CEE prices are currently below world prices.  The CEE countries
will be required to adopt EU prices after accession, which will likely
stimulate CEE agricultural production and hinder consumption.  If the EU-19
adopted world prices, CEE production gains would be smaller (than under the
higher EU-15 prices), while EU-15 production would decrease and EU-15
consumption would increase.  The effect would be greatest for those
commodities that currently have the largest world-to-CEE price differentials.

Under both scenarios, CEE meat prices would increase significantly, spurring
production and discouraging consumption.  Meat production would shift somewhat
from the EU-15 to CEE,  increasing the share of CEE production.  The EU-19
would continue to have some exportable surpluses of pork and poultry.  CEE
grain production would also increase under both scenarios, as CEE producers
respond to higher prices.  However, due to the EU's mandatory set-aside
program, the increase in CEE grain production would be very small under the
current CAP and would be dwarfed by the increase in consumption due to rising
feed use by the livestock sector. 

If the EU-19 adopted world prices and abolished the set-aside, the region
would become an even larger wheat exporter than the EU-15, while potentially
importing more corn.  It is likely that large increases in EU-19 agricultural
production would lead to lower world prices, dampening future production gains
slightly.  

Growing Market for 
U.S. Farm Exports

The U.S. has had a keen interest in the CEE countries from the beginning of
the region's transition process in 1989.  Many CEE countries have made
significant progress in their transition to market economies, and trade with
the West has boomed.  U.S. agricultural exports to the region were roughly
$400 million in fiscal 1996, making the region one of the fastest growing
markets for U.S. farm products.

The CEE countries represent a potentially large export market, with strong
growth potential.  Prospects are uncertain for U.S. trade, however, as EU
competition in the region presents a major obstacle to increased exports.  The
EU is the most important CEE trading partner and the source of about half of
all CEE agricultural imports.  The EU has benefited from natural advantages
conveyed by geographic proximity, lower transport costs, longstanding cultural
ties, ease of marketing servicing, and the opportunity for frequent direct
contact with customers. 

In 1996, U.S. agricultural exports to CEE countries represented only 5 to 10
percent of the CEE market and were not highly diversified, consisting
primarily of wheat, feed grains, and poultry meats.  Traditional U.S. exports
of bulk commodities, particularly grains, have declined since 1990 and
fluctuate considerably from year to year, depending on domestic CEE grain
production.  

On the other hand, the high-value-product (HVP) share of U.S. exports to CEE
has been rising.  Poultry claims the largest share of high-value exports,
although it has slumped in the last 2 years as CEE countries take increasingly
protectionist measures.  Exports of hides and skins and variety meats such as
fresh or frozen offal are beginning to recover, and U.S. companies are finding
markets for new products not traditionally imported by CEE.  These include
popcorn, other processed grain products (such as ready-to-eat cereals), and
horticultural products, especially nuts.

While the U.S. supports EU enlargement, it is also committed to furthering the
development of free trade in the global economy.  Therefore, the U.S. will
work to ensure that the terms of accession to the EU are consistent with the
Uruguay Round agreement.  

Prospects for U.S. agricultural exports to the region as it becomes more
integrated with the EU are favorable in the near term, particularly for high-
value products.  Rising income growth resulting from EU membership should
increase overall demand for agricultural products, and U.S. exports could rise
as total exports to the region expand.  U.S. exports of oilseeds, oilseed
products, and some feeds may benefit as the livestock sector expands. An
expanding and modernizing farm sector may also raise demand for U.S.
agricultural inputs.  

Opportunities for increased U.S. trade with CEE will likely be limited,
however, by CEE government intervention, increased protection, and stiff
competition from the EU.  As CEE countries come under the EU's import regime,
shipments to these countries will encounter the principle of community
preference, whereby the EU (like all customs unions) discriminates against
third-country imports in favor of products from member countries.  

As EU members, the CEE countries will adopt EU veterinary, sanitary, and
phytosanitary standards.  Restrictions on trade between the current EU-15 and
its trading partners will then also apply to imports into the new member
countries.  This could present problems for U.S. access to the CEE-10
countries.  After enlargement, longstanding U.S.-EU disputes over hormone-
treated meat, inspection standards for meat, and more recently, genetically
modified organisms, will have a greater impact, affecting nearly all of
Europe.

As increased protection and competition from the EU in the market for
agricultural goods render trade prospects uncertain, U.S. businesses may find
that investing in this region will allow them to take advantage of expanding
demand.  While the climate for investment by agricultural industry varies by
country, economic developments in the region overall are generally favorable
for investment.  The region's advantages include a highly educated, low-cost
workforce, rapidly growing economies with rising per capita incomes, and close
proximity to major markets in the EU and the newly independent states of the
former Soviet Union.  The recovering agricultural GDP will enhance investment
and joint-venture opportunities in the areas of farm inputs such as
fertilizers, feed, and agricultural machinery, as well as marketing and food
processing. 

Some obstacles to investment remain, however.  Political and economic
instability continue in the region.  During the transition process,
agricultural output has declined, fueling pressure for protectionism.  

Risk is an important consideration for potential investors in the region. 
Despite strong growth, per capita incomes are still low relative to developed
market economies, and unemployment is high.  Markets for land are not well
developed, which increases risks and transaction costs.  Some countries' legal
structures may not yet be developed for private business operations. 
Privatization is not complete, especially in the agro-industrial sector.  The
lagging reform of the processing and distribution sectors remains a major
bottleneck.  Infrastructure is frequently inadequate, particularly in rural
areas.

On the positive side, opportunities for profitable investment in agriculture
are linked to increased mechanization of the farm sector, demand for high-tech
inputs, and land consolidation.  Rising incomes offer opportunities in high-
value and processed products, and in oilseeds and other inputs for the
expanding livestock sector.  

Moreover, EU enlargement will expand the size of the market, with output of
most agricultural products expected to expand.  EU assistance to CEE countries
through structural funds will address some of the obstacles to investment that
are aggravated by an outdated agricultural infrastructure.  At the same time,
EU membership may address some of the problems attendant to economic and
political instability and lack of transparent economic and legal systems,
reducing risk to investors.  

The overall benefits to exporters and investors in an enlarged EU are not
without costs.  CEE agricultural sectors are rife with distortions resulting
from many years of a command-structured economy.  The EU's CAP, even if
"reformed," may simply replace one set of market distortions with another. 
Despite short-term improvement in the trade outlook, EU membership may limit
opportunities for U.S. agricultural exports to CEE countries.   The best
opportunities in the CEE region will remain in exports of HVP's, targeted bulk
commodities, and investment in certain sectors.  Higher agricultural prices
following CEE membership could reduce global competitiveness of businesses
based in CEE countries.  Despite such reservations, CEE will continue to be an
important region for U.S. agriculture, as it is an expanding market for U.S.
farm exports and a strong magnet for U.S. investment.  
Elizabeth Jones (eajones@econ.ag.gov) and Susan Leetmaa (sleetmaa@econ.ag.gov).

SPECIAL ARTICLE BOX

Europe Agreements Pave Way to EU Membership

The Europe Agreements form the basis for the gradual integration of CEE
countries with the EU.  The agreements cover five main areas: political
dialogue, economic cooperation, financial assistance, adoption of EU
legislation, and trade liberalization.  The first agreements were signed with
Poland, Hungary, and Czechoslovakia in 1991, with mutual trade provisions
taking effect the following year and the entire agreements taking effect in
1994.  The objective of all the agreements is membership of the CEE countries
in the EU.  All 10 CEE countries--Bulgaria, the Czech Republic, Estonia,
Hungary, Latvia, Lithuania, Poland, Romania, Slovakia, and Slovenia--have
formally applied for EU membership.

The bilateral trade and cooperation provisions of the Europe Agreements call
for most-favored nation (MFN) treatment and gradual elimination of selective
quantitative restrictions over a 10-year period, beginning when the agreements
go into effect.  Separate protocols cover "sensitive sectors," including
agricultural products, clothing, textiles, coal, and steel.  For agricultural
products, most concessions are phased in within 5 years and involve tariff
reductions and quota increases.  For example, beef, pork, mutton, poultry, and
dairy products are subject to a 20-percent tariff reduction over 3 years,
while import quotas will increase 10 percent per year for 5 years.  However,
trade in some commodity groups, such as grains, has not been liberalized.

The two-way preferences were structured to accelerate liberalization for CEE
exports to the EU.  Despite this, EU exports to the CEE have far outstripped
trade in the opposite direction.  In the first years of the agreements, lack
of information and familiarity with EU procedures prevented the CEE countries
from fully utilizing their allotted quotas.  The EU's quarterly administration
of preferential quotas, which hinders full utilization of annual quotas where
seasonal commodities are concerned, also limited CEE exports.  Finally, the
method of administering tariff-rate quotas places CEE countries at a
disadvantage--the quotas were allocated to EU importers rather than CEE
exporters.  Recently, the EU and the associated countries began renegotiating
their agricultural protocols to expand preferences in order to accommodate the
final WTO Agreement on Agriculture.  

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