AGRICULTURAL OUTLOOK                                           July 24, 1997
             Approved by the World Agricultural Outlook Board
----------------------------------------------------------------------------  
AGRICULTURAL OUTLOOK is published monthly (except January) by the Economic
Research Service, U.S. Department of Agriculture, Washington, DC 20005-4788. 
AO-243.  Please note that this release contains only the text of AGRICULTURAL
OUTLOOK--tables and graphics are not included.

Subscriptions to the printed version of this magazine are available from the
ERS-NASS order desk.  Call, toll-free, 1-800-999-6779 and ask for stock #AGO,
$42/year.  ERS-NASS accepts MasterCard and Visa.
-----------------------------------------------------------------------------

NOTICE: The special article listed in the magazine CONTENTS is not included in
this release.  The full report, including the special article, will be posted
following the announcement of a USDA report that assesses the impact of the
first 3 years of NAFTA on U.S. agriculture.  The special article is based on
the findings of the USDA report.  
 
------------------------------------------------------------------------------

CONTENTS

IN THIS ISSUE

COMMODITY BRIEFS
     Field Crops: Sharp Rise in U.S. Soybean Planted Acreage for 1997
     Livestock, Dairy & Poultry: Fall Grain Prices to Fuel Expansion in Meat    Supply
     Specialty Crops: Exports Bolster Sweet Cherry Prices
     COMMODITY SPOTLIGHT
     Seasonal Rise Ahead for Wheat Prices
     FARM ACT 96
     Managing Farm Resources in a New Policy Environment
FOOD & MARKETING
     Food Marketing Costs Rose Slightly in 1996
SPECIAL ARTICLE
     NAFTA's Impact on U.S. Agriculture: The First 3 Years


IN THIS ISSUE

Soybean Acreage Suggests Record

Planted Soybean Acreage Up Sharply in 1997

U.S. soybean acreage planted in 1997 is the largest in 15 years and the third
highest on record, according to USDA's Acreage report released June 30.  The
Acreage report--based on a survey of planted acreage conducted during the
first 2 weeks of June--represents the first estimate of U.S. planted and
harvested field crop acreage.  The estimate for 1997 soybean plantings is 70.9
million acres, 10 percent above last year.  The increase is a reaction to
robust soybean prices, favorable weather at planting, and the 1996 Farm Act
which eliminated most acreage restrictions for farm program participants. 
Farmers are expected to produce a record 2.69 billion bushels.

Corn plantings also increased in 1997, to an estimated 80.2 million acres, up
1 percent from last year and the highest planted corn acreage since 1985. 
Area planted to cotton, sorghum, and small grains was lower, with the
exception of rice, which increased by 9 percent in response to favorable
prices.

Seasonal Rise Ahead for Wheat Prices

The average price received by farmers for wheat in 1997/98 is forecast between
$3.10 and $3.70 per bushel, down from $4.35 in 1996/97.  Monthly-average 
wheat prices for 1997/98 are expected to hit seasonal lows from June through
September as U.S. wheat production, spurred by favorable weather in the
central Plains states, is forecast at 2.43 billion bushels, up 7 percent from
1996 and the highest level in 5 years.  In addition, large old-crop supplies
in Canada and Australia are expected to provide stiff export competition
during the U.S. harvest.  However, relatively strong demand--both domestic and
global--and an expected second-half slowdown in foreign export competition are
expected to support higher U.S. wheat prices as the season progresses.  

A Good Year for U.S. Wine

Booming demand coupled with limited supply has boosted U.S. grape and wine
prices recently, and imports are pouring in to fill supply gaps created by
several years of limited U.S. wine-type grape production.  In addition,
exports have jumped in the last 18 months as improvements in quality and
marketing have increased the competitiveness of U.S. wine in Northern Europe.

In 1997, producer prices for U.S. wine have continued rising despite a
forecast 16-percent increase in California's grape crop.  But U.S. grape
growers are concerned that maturing vineyards in the next several years will
curtail the current boom, as increased production and imports pull down
prices.  In the years ahead, the U.S. wine industry hopes to take advantage of
expanding foreign markets, free of trade barriers.

Managing Farm Resources Under New Farm Act

The 1996 Farm Act quickly and dramatically changed the decision-making
environment for farm operators, landowners, and managers.  Early indications
of the act's impact are reflected in a study funded by USDA's Economic
Research Service, which brought together farm operators and managers on eight
regional panels.  Participants reported on changes they had made or might make
in their farm management decisions following implementation of the farm act. 

Panelists' responses disclosed that farm operators and managers have taken
advantage of the elimination of acreage limitations to adjust their crop
mixes.  The value of now-predictable program payments (production flexibility
contract payments) showed up in panelists' reports of higher land prices,
higher rental rates, and changes in the provisions of leasing arrangements. 
Panelists expressed a high level of interest in strategies for marketing and
for managing price risk.  

Rise in Food Marketing Costs Slower Than Usual

Food marketing costs accounted for 77 cents of every dollar U.S. consumers
spent on food in 1996, down marginally from last year.  Food marketing
includes expenses associated with processing, wholesaling, distributing, and
retailing of foods produced by U.S. farmers.  It is the difference between the
value farmers receive for food commodities and the amount consumers spend on
food.  Food marketing costs rose only about 2 percent in 1996, substantially
below the average annual increase of almost 5 percent during the last decade. 
Higher farm prices and flat consumer expenditures reduced the marketing growth
rate in 1996, with the food industry absorbing much of the farm price
increase. 


COMMODITY BRIEFS

Field Crops

Sharp Rise in U.S. Soybean 
Planted Acreage for 1997

U.S. soybean acreage planted in 1997 is the largest in 15 years and the third
highest on record, according to USDA's Acreage report released June 30. 
Moreover, it marks the first time that U.S. soybean planted acreage has
surpassed wheat plantings.  The estimate for 1997 soybean plantings is 70.9
million acres, 10 percent above last year.  Farmers are expected to harvest
69.8 million acres of soybeans and produce a record 2.69 billion bushels.

The Acreage report--based on a survey of planted acreage conducted during the
first 2 weeks of June--represents the first estimate of U.S. planted and
harvested field crop acreage.  It provides a more accurate estimate of crop
plantings than the March 31 Prospective Plantings report, which was based on a
survey of farmers' spring planting intentions rather than on actual plantings. 


Of the 29 soybean producing states, all but one had higher estimated acreage
than last year.  Iowa expanded soybean plantings by an estimated 1 million
acres, while Minnesota followed closely with an 850,000-acre, year-to-year
increase.

Favorable weather at planting allowed midwestern farmers to complete corn
seedings ahead of normal and thereby plant soybeans sooner.  The acreage
increase was also facilitated by the 1996 Farm Act, which eliminated most
acreage restrictions--producers participating in farm programs are no longer
tied to base requirements for a specific program crop or limited by annual
acreage reduction program requirements. 

The new soybean planting estimate is 3 percent higher than the Prospective
Plantings level and is a reaction to robust soybean prices.  Soybean prices
rose for several months, before release of the June 30 Acreage report which
indicated the potential for a record U.S. crop.  New-crop soybean futures
prices then dropped precipitously.  New-crop prices between now and harvest
will depend on weather and crop conditions.  In contrast, prices for old-crop
soybeans are higher, reflecting strength in domestic and foreign demand and a
tightening of stocks.  Ending stocks for the 1996/97 September-August crop
year are projected at 125 million bushels, with a 5.1-percent stocks-to-use
ratio, the lowest ratio since 1972/73.  As a result of short supplies, some
soybean imports from Brazil are expected. 

Corn plantings also increased in 1997, to an estimated 80.2 million acres, up
1 percent from last year and the highest planted corn acreage since 1985. 
Corn acres harvested for grain are expected to increase to an estimated 74
million, also up 1 percent from 1996.  The Prospective Plantings report had
indicated corn plantings of 81.4 million acres in 1997; the lower actual
acreage is likely due to larger soybean plantings.  

Among Corn Belt states, Ohio showed the largest increase in  1997 corn
acreage--700,000 acres--as farmers returned to normal planting levels. 
Substantial switching of corn acres to soybeans had occurred in 1995 and 1996
because of excessive spring moisture that delayed planting.  In both Iowa and
Minnesota, corn plantings declined by an estimated 500,000 acres in 1997, and
by lesser amounts in several southern states as farmers shifted from corn to
soybeans.  

Despite a cool spring that delayed plant development, warmer weather in June
has boosted corn growth throughout the Corn Belt.  At the end of June, USDA
reported that 74 percent of the nation's corn crop was in good or excellent
condition.

Sorghum plantings dropped significantly in 1997 to an estimated 10.3 million
acres, down 22 percent from 1996.  Acreage is down in every state except North
Carolina, South Dakota, Oklahoma, and Georgia.  The largest declines occurred
in Kansas and Texas, following a large rise in sorghum acres last year as
sorghum was planted on wheat and cotton acres that had failed because of
drought in the Southern Plains.  In South Dakota, plantings were up 17 percent
from 1996, as sorghum was planted on winter wheat acres abandoned due to
winterkill.  

Barley acreage also declined in 1997--to an estimated 6.8 million acres,
second-lowest planted acreage on record.  The steepest decline was in North
Dakota, the largest producing state.  Barley plantings were down from March
planting intentions, due partly to higher spring wheat prices, as well as to
extreme weather conditions this past winter and spring, including below-normal
temperatures and flooding.  

Durum and other spring wheat acreage for 1997 was down 5 percent from last
year's very high level to 21.9 million acres, with North Dakota showing the
largest decline for both crops.  North Dakota is usually the largest producer
of durum and other spring wheat in the U.S.   Although flooding in that state
in the early part of this year raised fears of planting delays, extremely dry
conditions since May have returned crop planting progress to normal.  But with
higher relative returns for oilseeds expected in 1997, some North Dakota
farmers have shifted away from barley, spring wheat, and durum to soybeans and
sunflowers. 

Rice planted acreage is estimated at 3.07 million acres, 9 percent above 1996,
in response to favorable prices.  Five of the six major rice producing states
showed increases.  Texas was the exception as rice acreage continued its
long-term 
downward trend in that state.  Plantings in Texas this year were lower,
in part because cold, wet weather delayed rice planting this spring.   In
contrast, a warm, dry spring in California contributed to early completion of
plantings.  Early-planted rice tends to have less insect, weed, and disease
problems than later plantings.  

Area planted to cotton for 1997 is estimated at 14 million acres, 4 percent
below last year and 500,000 acres less than the March Prospective Plantings
report.  The largest estimated reductions in cotton acreage occurred in
Louisiana, Mississippi, and Tennessee, with the acreage going largely to
soybeans.  Above-normal precipitation and cool temperatures in the Delta
region also discouraged planting.  In Texas, the cotton acreage level is
similar to 1996 as farmers overcame wet conditions in May to finish plantings
on schedule by the end of June.  

Although 1997 planted acreage of cotton is down slightly in Arizona and
California, farmers finished planting well ahead of the 5-year average because
of warm, dry spring conditions.  In the Southeast, 1997 cotton acreage was
reduced as several states increased soybean plantings with the expectation of
higher relative returns; only Georgia showed higher planted cotton acreage.
Mark Simone (202) 219-0823
msimone@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; Les Meyer, domestic cotton.  All are
at (202) 219-0840.  See list of ERS subject-matter specialists on the ERS home
page for e-mail addresses. 


COMMODITY BRIEFS
Livestock, Dairy & Poultry

Falling Grain Prices To Fuel Expansion In Meat Supply 

Increased feed grain production this year is expected to lower 1998 feed costs
from the previous 2 years.  As grain and soybean meal prices decline, some
parts of the meat complex will resume expansion in 1998.  Poultry and pork
producers, with short production cycles, are expected to be able to take
advantage of feed cost savings to expand production in the upcoming year. 
Beef producers, on the other hand, with a production cycle of 7-10 years, will
take initial steps toward a long-term herd rebuilding process.

Expectations of continuing relatively high hog prices and lower feed costs, as
well as favorable returns over other variable expenses, are fueling an
expected 8-percent increase in pork production in 1998, the largest since
1992.  Before the current restructuring of the U.S. pork industry, such an
optimistic scenario would likely have led to an even larger short-term
increase in production, but the trend toward consolidation into fewer and
larger operations may be tempering producers' expansion plans--the size of
these operations requires a longer planning horizon.  Increased public concern
over waste management issues may also be constraining expansion plans.

The downward price pressure that might be expected from this production
increase will be largely offset by higher exports, declining beef supplies,
and continued rising personal income.  Hog prices in 1998 are expected to
average in the low- to mid-$50's per cwt, $2-$3 lower than this year's
projected price.  Retail pork prices in 1998 are expected to be about
unchanged from this year, as farm-to-retail spreads remain wide.  In addition,
the all-fresh beef price is expected to rise relative to the composite retail
pork price, which would benefit pork as an alternative to beef.  Abundant
poultry supplies, on the other hand, could pressure pork prices downward.

Feed costs considerably below a year ago will keep broiler returns positive. 
Lower beef supplies should provide an opportunity for increased domestic sales
of chicken at prices little changed from 1997.  Wholesale broiler prices are
expected to average around 60 cents per pound in both 1997 and 1998.  

Broiler production in 1998 is expected to increase 6-7 percent, the highest
rate since 1994.  Increases in the hatchery supply flock appear ready to
support this growth.  The pullet chick hatch for the broiler hatchery supply
flock was 7 percent above last year in first-quarter 1997, following 1-percent
annual increases in both 1995 and 1996.

Table-egg production is expected to increase 2-3 percent in 1998 as lower feed
costs keep egg production profitable.  Strong net returns to egg producers
over the last year have encouraged increased production.   Placements for the
layer hatchery supply flock are down in first-half 1997, however, indicating
production expansion plans could be more conservative in the future.

Turkey production is expected to increase about 5 percent in 1998 as positive
net returns during fourth-quarter 1997 and lower feed costs encourage
producers to raise more birds.  Strong export demand should help turkey prices
average 66-69 cents per pound in 1997.  Prices will likely average lower in
1998 as production rises.

Expectations for beef production, unlike pork and poultry production, are for
continued declines over the next couple of years, particularly for processing
beef, as cow slaughter declines during the herd rebuilding phase of the cattle
cycle.  The cow herd was culled heavily during the last few years as the
previous cattle cycle ended.  The remaining cow herd will be in strong demand
for rebuilding over the next couple of years.  For the year, cow slaughter is
likely to decline 13-15 percent, and another 10-12 percent in 1998.   The
reduced cow numbers and weather extremes--the Northern Plains' harsh winter
and the Southwest's drought last summer--will produce a smaller calf crop in
1997, and possibly in 1998.

Beef prices are expected to rise later this fall and throughout 1998, as
supplies are reduced and export demand strengthens.  Retail Choice beef prices
are expected to average $2.84 per pound this year and reach near $2.90 a pound
by late fall.  Prices in 1998 are likely to average in the low $2.90's, near
the record 1993 average of $2.93 a pound.  However, the higher price of beef
relative to other meats and expected increases in pork and broiler production
will hold down further price gains.

Milk production is expected to grow slowly during the rest of 1997 and 1998. 
The slower decline in milk cow numbers and a recovery in increases in milk
output per cow following several years of low or no increases is expected to
lead to increased milk supplies.  Delayed effects of record 1996 milk prices
and expected late-1997 recovery from price declines earlier this year, should
spur renewed expansion by some producers, while the number of producers
leaving the industry may ease slightly.

Unlike other sectors of the livestock complex, dairy farmers are facing high
prices and tight supplies of feed, particularly dairy-quality forage, that may
substantially limit growth in milk production.  Supplies of dairy-quality hay
from the 1996 crop were tight, leading to record prices during the winter and
spring of 1997.  May 1 hay stocks were at a record low.  Forage problems, in
addition to precipitating a reduction in net returns to dairy farmers, have
discouraged individual herd expansion and have limited growth in milk per cow. 
Normal substitutions of concentrate feed to mitigate forage problems have not
been profitable because of high prices of concentrates.  

Cool spring weather in many areas both delayed and reduced the first cutting
of hay.  Unless later cuttings are at least average and the silage crop is
good, forage problems may eliminate the expected increase in milk production
during the rest of 1997 and much of 1998.

For further information, contact:  Leland Southard coordinator; Ron Gustafson,
cattle; Shayle Shagam, beef trade; Leland Southard, hogs; Mildred Haley, pork
trade; Jim Miller, domestic dairy; Richard Stillman, world dairy; Milton
Madison, domestic poultry and eggs; David Harvey, poultry and egg trade,
aquaculture.  All are at (202) 219-0713.  See ERS home page list of subject
matter specialists for e-mail addresses.


COMMODITY BRIEFS
Specialty Crops

Exports Bolster Sweet Cherry Prices

Favorable growing conditions in most U.S. sweet cherry producing regions this
year are expected to boost output and ensure high quality for the 1997 crop. 
For the last 2 years, rainy weather had made cherries extremely vulnerable to
skin cracking and fruit splitting, reducing quality and output.  USDA
forecasts this year's U.S. sweet cherry production to increase 24 percent from
1996 to 382.5 million pounds.  Production increases are anticipated in all
sweet cherry growing states, with significant gains in California, Washington,
and Oregon--where about 85 percent of U.S. sweet cherries are produced.

Tart cherry production, on the other hand, is expected to decline 10 percent
to 242.2 million pounds.  Cold spring weather damaged the crop in the major
growing states of Michigan, Utah, Washington, Oregon, New York, and
Pennsylvania.  Tart cherry production tends to be unpredictable, alternating
between "gluts" and "shortages" that make prices unstable and producer revenue
highly variable.  The unstable market prompted the establishment of a Federal
marketing order for tart cherries beginning with this season's production.

USDA's National Agricultural Statistics Service surveys sweet cherry
production in nine states and tart cherry production in eight states.  In
1997, 44 percent of the U.S. sweet cherry crop is expected to be produced in
Washington, 23 percent in Oregon, 18 percent in California, 13 percent in
Michigan, and the remaining 2 percent in Idaho, Montana, New York,
Pennsylvania, and Utah.  Michigan ranks first in tart cherry production,
supplying nearly three-quarters of the nation's output last year.  New York,
Utah, and Washington follow with 6 percent each, and Colorado, Oregon,
Pennsylvania, and Wisconsin account for the remainder.

About half of the U.S. sweet cherry crop is marketed for fresh use, while
almost all tart cherries are processed.  Washington and California supply
mainly dark, sweet Bing cherries for fresh use, while Oregon and Michigan
provide light-colored Royal Ann (Napoleon) cherries for the maraschino
process.  Nearly 70 percent of processed sweet cherries produced domestically
are brined and used in candies, ice cream, and fruit cakes, for example.  The
rest are canned, frozen, or processed into juice.  Nearly two-thirds of the
volume of processed tart cherries is frozen, and about one-third canned. 
Small quantities are also brined or processed into juice and wine.

While all sweet cherry producing states market their product domestically, the
state of Washington typically accounts for the bulk of export supplies. 
Cherries are marketed during the months of April through August, with the
heaviest shipments during June and July.  Early-season varieties are supplied
by California, and northwestern states follow in the summer months.  Tart
cherry harvesting begins in early July in most areas and extends into August,
with active harvesting lasting about 2 weeks in each area.

On average, Americans consume less than 1.5 pounds of fresh and processed
cherries per year, and consumption, especially of fresh cherries, varies
widely from year to year.  Fresh consumption is largely tied to the size of
the domestic crop, export demand, and prices.  Since 1987, per capita
consumption of fresh sweet cherries has ranged from a high of 0.7 pounds in
1987 to a low of 0.3 pounds in 1995.  This year's larger sweet cherry crop
could help boost domestic consumption again, as there should be adequate 
high-quality supplies for both the domestic and export markets.

Tart cherry consumption is more stable, as most are consumed in processed
form, allowing for longer storage than fresh product.  Americans typically
consume about three-quarters of a pound per person of tart cherries each year,
most in frozen product.

Grower prices for fresh sweet cherries are likely to average slightly lower
than last year's $1.06-per-pound average, given the larger crop.  However, the
high quality of the crop and continued strong demand, especially from overseas
markets, are expected to keep prices strong.  The season-average grower price
for sweet cherries reached a record $1.12 per pound in 1995, over one and a
half times the 1994 level, as fresh use supplies, which have the highest
value, decreased with a decline in overall output and larger export volume to
Japan.  Prices in 1996 held strong but averaged lower than the 1995 record
because of an increase in fresh-use supply and the overall lower quality of
the crop.

The higher grower prices of recent years have reflected rising export demand
for sweet cherries.  Between 1990 and 1996, the U.S. exported about 35 percent
of its fresh-use supply, compared with 25 percent in 1985-89 and 14 percent in
1980-84.  Japan is the largest market for U.S. fresh sweet cherries, importing
an average of 56 percent of U.S. export volume over the last 3 years.  Canada,
the European Union, Taiwan, and Hong Kong are also important export markets
for fresh cherries.  During January-May 1997, sweet cherry exports were up 27
percent from the same time a year ago.  

The recent opening of two significant markets could help keep export demand
strong.  In June of this year, Washington State growers sent the first-ever
shipment of U.S. fresh cherries directly to China.  This followed China's
agreement in April 1995 to grant access to U.S. cherries, with the trade
protocol finalized in June 1997.  Washington is currently the only cherry
producing state which has been allowed access to Chinese markets, but Idaho
and Oregon may soon follow.

The quantities shipped to China are likely to be small at first, as the market
for cherries develops.  China does not produce cherries domestically, so many
consumers will be unfamiliar with the product.  High tariffs imposed by the
Chinese government could be another barrier to entry of large quantities. 
Despite these obstacles, the cherry industry has a potentially large new
market for its product.

Mexico could become another important market for the U.S. sweet cherry
industry.  On February 27, 1997, an agreement was signed allowing unfumigated
U.S. sweet cherry exports from Washington, Oregon, and California to enter
Mexico.  Cherry exports to Mexico had virtually ended in 1991, when Mexican
plant and health officials determined that U.S. cherries posed a risk of
introducing pests, such as the apple maggot and plum curculio, into Mexican
orchards.  All imported cherries had to be fumigated with methyl bromide,
which causes the fruit to deteriorate rapidly and makes it virtually
unmarketable.

In 1995, the North American Free Trade Agreement's agricultural dispute panel
decided that unfumigated U.S. cherries posed no danger to Mexico.  Under the
new work plan, Sanidad Vegetal--Mexico's equivalent of USDA's Animal and Plant
Health Inspection Service (APHIS)-- conducted a pre-season inspection of
cherry orchards to assure that the agreed-upon systems approach to regulating
pests is adequate.  APHIS conducted the inspections for the remainder of the
season.
Charles Plummer (202) 219-0717, Agnes Perez (202) 501-6779, and Steve Haley
(202) 219-0666 
E-mail:  cplummer@econ.ag.gov, acperez@econ.ag.gov, shaley@econ.ag.gov

BOX--SPECIALTY CROPS

Federal Marketing Order for
Tart Cherries to Begin in 1997

Starting this year, production and marketing of tart cherries in the U.S. will
be covered under the terms of a Federal marketing order (Federal Register
61:186).  Unpredictable crop sizes and inelastic demand for the product have
translated into wide price swings.  The idea behind the marketing order is to
control the supply of tart cherries on the market, accomplished primarily
through an inventory reserve system--overproduction of processed cherries in
one year is stored and used during years of underproduction.  

If supply is successfully controlled, price swings will be moderated and the
market will gain a measure of stability.  Stability in the tart cherry market
is considered necessary to guarantee the survival of a large number of the
industry's small producers and handlers.

The Cherry Industry Administrative Board consists of 17 growers and handlers
and one public member elected by the marketing board.  The marketing board
will review actual production and set marketing and reserve tonnages no later
than September 15 of each year.  Additional considerations may include the
quality of the crop, likely export demand, supplies of competing commodities,
and the estimated tonnage already held in reserve.  If the marketing board
determines that reserve tonnage needs to be released, the release must take
place prior to November 1 of the same year.

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.  See the list of subject matter
specialists on the ERS home page for e-mail addresses.


COMMODITY SPOTLIGHT

Seasonal Rise Ahead For Wheat Prices

U.S. wheat production, spurred by favorable weather in the central Plains
states, is rebounding in 1997 to the highest level in 5 years.  U.S. exports
in 1997/98 are expected up, although growth will be slow, with early-season
competition from foreign exporters. 

Total U.S. wheat production is forecast at 2.43 billion bushels, up 7 percent
from 1996 and 8 percent above the first forecast in May.  With larger
beginning stocks and steady year-over-year imports, the U.S. wheat supply in
the 1997/98 June-May marketing year is forecast to rise 8 percent, marking the
first increase in 4 years.  

Under the weight of larger supplies and lackluster early-season demand,
futures prices for wheat sank to 3-year lows this summer after temporarily
spiking in April following a freeze in the Southern Plains and Kansas.  Cash
wheat prices in Kansas City dropped $1.08 per bushel during the last 3 weeks
of June as harvested area expanded and growing conditions improved in the
central Plains.  In addition, USDA's June 30 Acreage report confirmed what the
market suspected--that farmers had planted more spring wheat than first
anticipated.  

However, relatively strong demand--both domestic and global--is expected to
support U.S. wheat prices as the season progresses.  Domestic food use
continues to march steadily upward, while expanding global imports and reduced
competition are expected to push up U.S. exports by 6 percent.  

Unlike last season when prices peaked early, monthly-average prices received
by farmers are expected to follow a more normal seasonal pattern in 1997/98,
hitting seasonal lows from June through September as large old-crop supplies
in Canada and Australia provide stiff export competition during the U.S.
harvest.  

Last year (1996/97), U.S. winter wheat production problems and strong export
sales supported wheat prices early in the crop year.  Prices tumbled through
early fall as production prospects improved first for U.S. winter wheat and
then for spring wheat in both the U.S. and Canada.  Prices remained under
pressure during the rest of the season as wheat production rose to record
levels in the major Southern Hemisphere wheat exporting countries.  

Prices are likely to climb gradually through the rest of this season,
reflecting both the cost of storing grain and an expected slowdown in foreign
competition in the second half of 1997/98.  Spring wheat area intentions are
down in Canada, area planted is expected to decline in Argentina, and reduced
production is forecast in Australia. 

Domestic feed and residual use are projected to decline this season as
expected larger corn supplies will likely weigh on corn prices this summer,
making wheat feeding less attractive.  Ending stocks are forecast to hit 650
million bushels, the highest since 1990/91.

The average price received by farmers for wheat in 1997/98 is forecast between
$3.10 and $3.70 per bushel, down from $4.35 in 1996/97 and $4.55 in 1995/96. 
This would be the largest year-over-year drop since the $1.11-per-bushel
decline in 1990/91 when bumper yields in 1990 followed a 1989 drought in the
Southern Plains.

Output Rebounds In the Southern Plains

Weather conditions have been extremely favorable during the winter wheat
growing season, with the exception of a mid-April freeze that hit portions of
Texas, Oklahoma, and Kansas.  The freeze curtailed what many observers thought
would be extraordinarily large crops.  Although many fields sustained
considerable damage, especially where there was no snow cover for protection,
weather after the freeze was nearly ideal for the wheat plants to recover. 
Consequently, average yields and harvested areas are expected to be higher
than last year in each of the freeze-damaged states, which together account
for almost three-quarters of projected Hard Red Winter (HRW) wheat production
in 1997.  

The revival in this year's crop is testimony to the resilience of the wheat
plant.  Based on conditions as of July 1, 1997, the U.S. winter wheat yield is
forecast at a record 42.8 bushels per acre, up 3.5 bushels from the June 1
forecast, and up 5.6 bushels from last year.

Production prospects continued to improve through May and June, especially in
Kansas and Oklahoma, with yield forecasts based on July 1 conditions up 10
bushels and 7 bushels per acre, respectively, from the first forecasts made in
May.  Total HRW output is forecast at 1,062 million bushels, up a robust 18
percent from the May forecast and up 39 percent from last year's
drought-afflicted crop.  HRW is used in a wide variety of products,
particularly bread, and normally accounts for about 40 percent of the total
U.S. wheat crop.

The winter wheat harvest has lagged behind the average pace in both the
Southern and Northern Plains due to wet weather.  Yields have reportedly been
highly variable, reflecting pockets of freeze damage, but generally appear
above average.  However, protein content is reportedly below normal, so price
premiums for higher protein spring wheat are rising.  

Soft Red Winter (SRW) wheat production is forecast at 455 million bushels in
1997, up 33 million from last year.  Higher average yields are expected to
offset lower harvested acreage.  Crop prospects have been excellent in Ohio
and Illinois, two of the leading SRW producers.  Incidences of scab and other
diseases are reportedly much lower than last year.  SRW exports are forecast
to increase this year as a higher proportion of the crop is bid away from
domestic feed buyers.  SRW production normally accounts for about 18 percent
of the U.S. wheat crop, and is used primarily for cakes, cookies, and
pastries.

White Winter (WW) wheat production is forecast at 264 million bushels, down 10
percent from 1996 due to planting problems in both the Pacific Northwest and
Michigan.  Last fall, heavy rains in the Pacific Northwest slowed planting,
while late field crop harvests in Michigan limited winter wheat seedings.

WW harvested area is forecast down 6 percent, and yields are expected down
from last year's high levels in Washington, Oregon, and Idaho, which together
account for about 90 percent of WW production.  WW wheat, typically used for
noodles, cakes, and cereal, normally accounts for about 11 percent of the U.S.
crop. 

From December 1996 to May 1997, farm prices for winter wheat broke from their
historical pattern and rose above spring wheat prices as supplies of winter
wheat tightened relative to Hard Red Spring supplies.  This farm price
relationship is expected to return to the more normal spring wheat price
premium in 1997/98 as winter wheat output advances while spring wheat output
declines.  

Based on July 1, 1997 conditions, the spring wheat crop is forecast to decline
19 percent to 650 million bushels, despite higher-than-expected harvested
area.  Generally dry weather in the Northern Plains since mid-May resulted in
below-average yield prospects.  The first survey-based forecast indicates an
average yield of 30.4 bushels per acre for "other spring" wheat (i.e.,
excluding durum), down nearly 5 bushels from 1996 and the lowest since 1989.

The spring wheat crop is not expected to decline to the extent observers
expected earlier in the season.  According to the June 30 Acreage report,
farmers planted 22.4 million acres of spring wheat (including durum), up from
the March forecast of 21 million.  Area had been expected to drop back to the
1995 level after increasing sharply in 1996 due to strong spring wheat prices. 
 However, another spring price runup--this year due mostly to the mid-April
freeze in the Southern Plains and Kansas--apparently provided farmers
sufficient incentive to increase plantings above their March intentions. 

Delayed spring planting in the Northern Plains, where a large portion of the
U.S. spring wheat crop is grown, contributed to April-May price fluctuations. 
Chilly temperatures, along with extremely wet field conditions following
spring storms and snowmelt, especially in the Red River Valley, slowed spring
wheat planting in the region.  By May 11, farmers had planted only 33 percent
of the spring wheat crop, compared with the 5-year average of 56 percent.  But
by early June, planting progress pulled even with the 5-year average as dry
conditions persisted across the region beginning in mid-May. 

Yield Growth Prospects Improving?

Yield growth is a crucial factor in future U.S. wheat supplies.  A noticeable
slowdown in growth of overall U.S. yields--some would call it a stall--has
occurred in the last 15 years.  Weak prices contributed to a financial squeeze
for many wheat farmers during the 1980's.  This, in turn, led to lower
fertilizer expenditures and contributed to lackluster yield growth.  

Because market prices have been much stronger in recent years and prospects
for continued market strength are expected as world demand remains vibrant,
average yields may be poised to resume growth.  Although weather problems
prevented a rise in yields in 1995 and 1996, cash expenditures for fertilizer
on wheat ground have increased in recent years.

In 1997, the U.S. winter wheat yield is forecast at a record 42.8 bushels per
acre, surpassing the 1983 record of 41.8 bushels.  Wheat prices, while down
sharply from last year's highs, are forecast to remain above the levels of the
early 1990's through the turn of the century.  Favorable returns would be
expected to encourage increased fertilizer use, which could boost yields in
the coming years.
Dennis A. Shields (202) 219-0768 and James N. Barnes (202) 219-0711
E-mail dshields@econ.ag.gov/, jbarnes@econ.ag.gov/

U.S. Wheat Exports 
To Rise in 1997/98

U.S. wheat exports are expected to grow modestly in 1997/98, up 6 percent,
while world trade is expected to expand by 3 percent.  Unlike in 1996/97, U.S.
exports will face increased competition early in the year, easing in the
latter part of the year.  

In the summer of 1997, Canada, Australia, and to some extent Argentina, are
marketing larger old-crop supplies in competition with U.S. new-crop winter
wheat.  Transportation and logistical problems this past winter reduced
Canada's exports in 1996/97, leaving a large part of the 1996 bumper crop to
move later than usual, stretching into the new crop year.  However, as the
1997/98 season progresses, U.S. exports will likely face reduced competition
as production is expected down in all the major exporting countries. 
Increased U.S. wheat supplies and lower prices are expected to maintain the
pace of U.S. exports after the summer.  

Combined production in 1997/98 by the major foreign wheat exporters---Canada,
the European Union (EU), Australia, and Argentina--is projected to drop by 13
million tons or 8 percent.  Wheat prices have declined, especially compared
with oilseeds, and wheat area is expected to decline in Canada and Argentina. 
Australia may maintain wheat area following a very successful year in 1996/97,
but record yields are unlikely to be repeated, leaving production prospects
down 5 million tons.  

In the EU, wheat area is up because the set-aside area was reduced from 10
percent to 5 percent, and growing conditions in Northern Europe have been
generally favorable.  However, yields are down from last year's record levels,
and forecast EU production is down marginally.  

While the major foreign exporters are expected to reduce wheat production in
1997/98, the rest of the world is expected to boost production by 13 million
tons, offsetting the decline.  Production is forecast up sharply in China,
Eastern Europe, and the Newly Independent States (NIS--the former Soviet Union
minus the Baltic states), mainly because favorable growing conditions are
expected to boost yields in these areas.  However, other regions have had
problems.  Drought struck North Africa, devastating production prospects in
Morocco, Algeria, and Tunisia.  Unfavorable weather in the Middle East is
expected to reduce wheat production in Iran and Iraq.  

For the major importers, production prospects directly affect demand.  North
Africa and the Middle East will turn to world markets to maintain wheat
consumption, boosting import demand.  On the other hand, large wheat
production in China, NIS, and Eastern Europe will limit imports to some extent
while increasing stocks and consumption.  

World wheat consumption is forecast down fractionally in 1997/98, mostly
because of reduced wheat feed use, especially in the U.S., Canada, and South
Korea.  Wheat feeding is often the result of quality problems stemming from
weather-related damage to crops, usually occurring at harvest (for example, as
occurred in Canada in 1996/97 when late crop development delayed the harvest
and exposed the wheat to an early snowfall).  It is too early to quantify such
quality problems.  

Reduced world wheat consumption and increased beginning stocks more than
offset the slight decline in global production, and wheat ending stocks are
projected up almost 10 percent in 1997/98, with much of the stock buildup in
the U.S. and China.  While prospects for increased world wheat ending stocks
contribute to lower price prospects in 1997/98, the global stocks-to-use ratio
remains fairly tight at 21 percent, limiting price declines in the U.S. and
world markets.
Ed Allen (202) 219-0831, e-mail:  ewallen@econ.ag.gov/

BOX - WHEAT

CRP: A Potential 
Supply Factor

The Conservation Reserve Program (CRP) exerts a potentially significant effect
on land availability for wheat plantings.  About 9 million acres of land
currently in the CRP has a cropping history of wheat.  On October 1, 1997, CRP
contracts will expire on about 21.4 million acres (from all crops).  However,
about 11.7 million of these acres were accepted for new contracts during the
15th CRP sign-up in May, along with about 4.4 million acres of new land.  

In addition, a sign-up is planned for this fall in which producers can enroll
land for the 1998 crop year.  Small amounts of acreage can also be added to
the program on an ongoing basis under certain provisions--e.g., installation
of filter strips.  As a result, total CRP acreage is expected to decline by
several million less than the 5.3 million difference resulting from the 15th
sign-up.  Consequently, U.S. wheat production is not expected to be
substantially altered in the next few years. 

Excluding the additional enrollments expected to occur in this fall's sign-up,
land under CRP contract in the top 10 wheat states (based on harvested area)
would decline just 3 million acres this fall.  These states accounted for
nearly 80 percent of U.S. harvested wheat acreage during the last 5 years. 
Total CRP acreage in the top five wheat states will be essentially unchanged
at 11.3 million acres, with gains in North Dakota and South Dakota offsetting
reductions in Kansas, Montana, and Oklahoma.  Each of the remaining top 10
states will lose CRP area, especially Texas (down 1.02 million acres),
Minnesota (down 770,000 acres), and Washington (down 613,000 acres).

Another 740,000 acres of former CRP acreage would become available for
planting in the six next-highest states, which account for another 10 percent
of wheat production.  If the entire net CRP decline of 3.74 million acres is
planted to wheat (an extreme assumption) and average yields by state prevail,
additional U.S. wheat production would total about 150 million bushels (or 7
percent of 1996 output). 


COMMODITY SPOTLIGHT

The U.S. Wine Market Uncorked

Booming demand vying for limited supply has led U.S. wineries to raise prices
and search the globe for additional wine.  Since late 1996, producer prices
for U.S. wine have risen at double-digit rates.  Imports are pouring in to
fill supply gaps created by several years of limited production of U.S.
wine-type 
grapes.  But U.S. grape growers also worry that maturing vineyards in the
next several years will turn the current boom into a bust as increased
production and imports pull down prices.

Consumers began drinking more wine in the early 1990's, partly because of news
about the health benefits of moderate consumption, and partly because a strong
U.S. economy supported increased spending on wine at home and in restaurants. 
In addition, sales to foreign markets jumped in the last 18 months as
improvements in quality and marketing have increased the competitiveness of
U.S. wine in Northern Europe against traditional producers from France, Italy,
and Spain.

The U.S. wine industry is increasingly important to the economic performance
of U.S. agriculture.  Nearly 55 percent of the 1996 U.S. grape crop was used
for wine, and farm value was estimated at $1.25 billion, compared with $547
million in 1986.  Winemaking and distribution added another $12 billion in
value to 1996 retail sales of food and beverages, according to industry
sources.

In California, the largest agricultural state, with crop revenues of $14
billion in 1996, the value of the total grape harvest reached a record $2
billion.  California typically produces more than 95 percent of the grapes
crushed for U.S. wine.  New York, Washington, and Oregon provide most of the
remainder.

U.S. wine exports will likely reach a record $400 million in 1997, up 25
percent from 1996.  During 1985-95, the value of U.S. wine exports increased
22 percent annually, far outstripping the 6.5-percent trend for the rest of
U.S. agriculture.

While wine export growth has been impressive over the last decade, imports
have declined, until recently.  With limited domestic supplies in 1996, U.S.
producers and distributors boosted wine imports 25 percent to a record $1.4
billion, the first sharp increase since 1992.  Through May 1997, import growth
reached 23 percent above the same period last year.

Supply of Wine Grapes Trails Consumption

The last 10 years have seen a turnaround in the market for wine grapes. 
During the early 1980's, wine supplies outweighed demand, and grower prices
stagnated.  Growers responded by reducing vineyard area and replacing vines
with quality wine-type varieties, and grower prices paid by wineries increased
8.5 percent annually during 1985 to 1995.

California prices for wine-type grapes averaged $590 per metric ton in 1996,
26 percent higher than 1995.  U.S. wine is produced increasingly from four
high-valued international grape varieties:  cabernet sauvignon, merlot, pinot
noir, and chardonnay.  In California, wineries paid growers $1,260 per metric
ton on average for these four varieties in 1996, compared with $390 for other
wine-type varieties.

In 1997, producer prices for U.S. wines will continue well above 1996, as
domestic supplies are not sufficient to meet both domestic and export demand. 
January-June producer prices for domestic wines rose an average 10 percent in
1997, following 6 years of annual increases of 1-2 percent.

The current strong wine prices are the result of recent limited U.S. crops of
wine-type grapes and increased demand for quality wines.  A total of 2.45
million metric tons of U.S. grapes was used for wine in 1994, 8 percent less
than the previous 5-year average.  The impact of reduced wine production has
surfaced in 1997, as most wine sales lag behind the vintage year of grape
production by several months to several years.  Also, California's wine-type
grape crush in 1996 was the lowest in 9 years. 

While wine-type grape supplies are limited, U.S. consumption of wine increased
from 16.3 million hectoliters in 1992 to 21.8 million in 1995.  (One
hectoliter--100 liters--is slightly more than 11 cases of wine.)  Wine
consumption dipped 6 percent in 1996, but is likely to increase slightly in
1997.  Per capita consumption in the U.S. remains less than 1 case per person
annually.

U.S. wine inventories were well below what was needed to keep pace with demand
and to stabilize prices in 1997.  However, higher prices are allowing wineries
to rebuild inventories.  USDA's Economic Research Service (ERS) forecasts wine
inventories will be 22 million hectoliters entering 1998, about equal to the
1990-95 average and 15 percent above 1997.

The July 1 forecast of California's 1997 grape crop points to a 16-percent
increase in production to a record 5.26 million metric tons.  Wine-type grapes
are forecast up 21 percent to 2.45 million metric tons, but strong winery
demand for grapes is likely to keep grower prices even with last year.  U.S.
wine production in 1997 is estimated by ERS at near 23 million hectoliters, up
20 percent from 1996 and 1995, and 30 percent more than 1994.

U.S. Imports & Exports Of Wine Are Up

U.S. wine imports are likely to reach 4.5 million hectoliters in 1997, up from
3.6 million in 1996.  Imports could account for 21 percent of U.S. net
domestic use in 1997, up from about 13 percent in 1990.

Western European wine--mainly from Italy, France, Spain, and Germany--still
accounts for most U.S. imports, about a 70-percent share in 1997.  But, in the
1990's, U.S. wine imports from South America (mainly Chile, Brazil, and
Argentina), Australia, and South Africa have increased substantially.  These
"new world" producers are expected to capture a 30-percent share of U.S. wine
imports in 1997.

In 1985, Western Europe accounted for 96 percent of U.S. imports, declining to
88 percent in 1990.  Western Europe's competitive position in the U.S. market
weakened during the late 1980's as the U.S. dollar exchange rate declined
against Western European currencies.  Also, as U.S. consumers turned toward
quality wines, demand for low-priced wines--mainly from Italy--decreased.  As
consumers turned to higher valued wines, Italy's share of U.S. imports
decreased from 51 percent in 1985 to 36 percent in 1996.

With escalating land prices in prime U.S. wine-growing areas, U.S. firms are
increasingly investing directly in foreign wine production in order to meet
U.S. domestic and foreign demand.  U.S. foreign direct investment (FDI)
activity has concentrated mainly in Chile and southeastern France, but
increasing attention is focused on Argentina's large, unused land capacity. 
Rather than displace export potential--a common belief about FDI--firms appear
to be investing abroad to ship wine back to the U.S. market.

In 1997, 12 percent of U.S. wine production will be exported, up from 6
percent in 1990.  Despite high rates of U.S. export growth since the
mid-1980's, the U.S. share of world wine trade remains only about 3 percent. 
But foreign markets continue to look attractive to U.S. wine producers, even
while prices in the domestic market soar.

In 1996, 50 percent of U.S. wine exports went to Western Europe, mainly to the
United Kingdom (U.K.), Germany, Switzerland, and the Netherlands.  Canada
accounted for 20 percent, Japan 10 percent, and Caribbean countries most of
the remainder of 1996 exports.

U.S. wine exporters compete mainly with domestic producers in export markets
and with French, Italian, and Spanish exporters.  For example, in the U.K.
market, with its small domestic industry, the U.S. competes mainly with other
European Union (EU) countries.  However, non-EU exporters are gaining market
shares in the U.K., and U.S. exports have increased 23 percent annually over
the last 10 years, reaching 375,500 hectoliters in 1996.

Switzerland, importing nearly 60 percent of its wine consumption, is another
growing market for the U.S.  During the last decade, U.S. wine exports to
Switzerland increased 36 percent per year on average to reach 85,932
hectoliters in 1996.  Switzerland is likely to increase wine imports in 1997
because of changes in Swiss policy which will allow more imports of white
wine, a previously heavily protected domestic industry.

Although combined wine production for 1996 in Italy, France, Spain, Germany,
Switzerland, the U.S., Argentina, Chile, and South Africa--representing more
than 80 percent of the world total--increased over the preceding 2 years,
worldwide wine supplies are not sufficient to meet demand.  With the usual
period of more than a year before significant amounts of the 1996 vintage are
released, the current upward pressure on prices is likely to continue.

Emerging Issues

Imported wines are becoming more competitive in the U.S. market, cutting in on
marketing advances already made by U.S. wineries.  Until recently, higher
prices for French, Italian, and Spanish wines dampened U.S. demand for imports
from these traditional sources.  But now, U.S. prices are increasing faster
than European prices.  And based on statistical analysis, each 10-percent
increase in the U.S. price raises U.S. demand 15 percent for European wines
and even more for Southern Hemisphere wines.

For U.S. growers, the future points to sharply increasing domestic supplies of
wine-, raisin-, and table grapes.  California's 1996 area in new vineyards--
nonbearing, less than 4 years old--is estimated at 18 percent of the state's
total, but industry sources place it even higher than the statistics show. 
How will the markets absorb the burgeoning supply?  U.S. demand for raisin-
and table grapes in the fresh- and dried markets has been steady or declining
in the 1990's.  The domestic juice and wine markets are growing, but hopes
rest heavily on increasing access and demand in foreign markets.

The U.S. wine industry is concerned about foreign markets continuing to use
barriers against trade.  One sticking point in negotiations is the use of
semi-generic labels.  For example, the EU is actively seeking an end to U.S.
wines labeled as Chablis, Burgundy, and Champagne--all names of French
producing regions.  The Australian wine industry has recently agreed to cease
this practice and thus improved their trade relations with the EU.

Tariffs remain an obstacle, albeit declining under progress made in the World
Trade Organization (WTO).  Technical differences among producing nations
present special problems:  the EU's regulations put forth specific acceptable
winemaking practices, while U.S. guidelines prohibit practices mainly for food
safety reasons.

The EU purchases excess production and provides export refunds and aid for
acreage reduction which totaled $1.2 billion in 1996.  Moreover, individual
member states provide substantial marketing assistance to their wine
industries.  As part of its WTO commitments over a 6-year period, starting in
September 1995, the EU must reduce subsidized wine exports by 21 percent and
the value of wine production subsidies by 36 percent.  Also, the EU has agreed
to decrease its import duties by 20 percent and cease using reference prices
and import quotas.

Through greater access to foreign markets and market promotion, the U.S. wine
industry has sought to increase exports, while U.S. trade negotiators seek to
overcome trade barriers through lowering tariffs, breaking up governmental
distribution monopolies, and reducing producer subsidies.
John Love (202) 720-5912. E-mail:  jlove@oce.usda.gov

BOX - WINE

What's in a Label?

Most of the highest quality U.S. wines are marketed as varietals.  Cabernet
sauvignon, merlot, pinot noir, and zinfandel make up about two-thirds of
California's red-wine grapes and produce highly rated wines.  Chardonnay,
sauvignon blanc, and reisling account for about half of California's white-wine 
varieties.

To use a variety on a wine label, regulations by the U.S. Department of
Treasury's Bureau of Alcohol, Tobacco, and Firearms (BATF) require a minimum
content of 75 percent of the indicated grape variety.  As a marketing
strategy, varietal labeling may be viewed as increasing consumers' confidence
in consistency.  Breaking into the international market is also easier with
varietal labeling, because foreign consumers are more likely to experiment
with unfamiliar producers if the varieties are familiar.

European wines, in contrast, have a long tradition of labeling based on
origin.  Geographically based, the appellation of origin controllee (AOC) is
the principal designation for quality European wines.  Each region's distinct
quality is regulated by strict guidelines with respect to variety, yields,
irrigation, and other production practices.  Even though Burgundy is a 
well-known region in France producing quality red wines with pinot noir grapes,
"pinot noir" seldom appears with "AOC" on Burgundy labels.  Similarly,
France's Bordeaux wines seldom mention cabernet sauvignon, and Champagnes
seldom mention chardonnay, though these are the dominant grapes used in these
regions.

Wineries in the U.S. are turning more to geographic designations to
distinguish their wines.  American viticultural areas, or AVA's, are certified
by the BATF at the request of producers in a region.  The region must produce
grapes with distinctive character, based on terroir, which refers to the
combination of climate, soil, elevation and other factors known to have a
significant impact on varietal performance.  Examples of California AVA's are
Napa Valley, Sonoma, and North Coast.  In New York, an example is Finger
Lakes.  First introduced in 1982, AVA's have increased to well over 100 across
the U.S.


FARM ACT  96

Managing Farm Resources In a New Policy Environment


The 1996 Farm Act quickly and dramatically changed the decision-making
environment for farm operators, landowners, and managers.  The predictability
of the Farm Act's production flexibility contract payments (PFCP's) and its
almost complete elimination of planting restrictions challenged many farm
operators and managers to rethink the way they manage their resources.

Uncertainty about the impact of such a major change in policy fostered
interest in obtaining early indications of its effects on farm management
decisions.  A study funded by USDA's Economic Research Service brought
together farm operators and managers on eight regional panels to discuss
changes they had made or might make in farm management decisions following
implementation of  the 1996 Farm Act.

The swiftness of the program changes was of great significance to 
owner-operators, tenants, and landlords.  Panelists indicated the new
legislation's
increased planting flexibility was not fully incorporated into 1996 farming
decisions because of the late development of the farm bill.  In many regions
of the country, preliminary cropping plans, production financing, and even
some plantings for the 1996 crop year were necessarily made before the farm
bill was signed into law on April 4, 1996.

At the same time, the outlook for agriculture going into the 1996 crop year
was very positive, making farm producers less reliant on traditional Federal
farm programs.  World farm commodity inventories were low, demand was strong,
and prices were at decade-high levels for wheat, corn and other feed grains,
and soybeans.  The farm sector was more than a decade removed from the farm
financial crisis of the 1980's and was in good financial health.  

Yet in the limited number of decisions producers were called upon to make
after the new Farm Act provisions were announced, producers did, in fact,
respond to the new planting flexibility provisions, which released them from
base acreage requirements for specific crops. They also took advantage of the
removal of annual acreage limitations, permitting additional acreage to be
planted in the 1996 crop year.  

As the year unfolded, sharp price falls revised farm decision makers'
expectations for the year's profits.  With a generally less optimistic outlook
for 1997, farm managers and operators began to consider the implications of
the 1996 Farm Act more closely, with increasing concern about commodity price
volatility and the need for appropriate marketing and risk management
strategies.

Overall, the panel discussions highlighted several effects of the new Farm Act
that conductors of the study believe have particular relevance for the future
of farm management decision making in the U.S. 

*  The new farm act's production flexibility contract payments (PFCP's) and
the elimination of most planting restrictions are popular with landowners,
operators, and farm managers; 

*  the PFCP's are being capitalized into land values and reflected in land
rental rates; and 

*  farm managers and operators have an increased interest in strategies for
marketing and for managing price risk.

Planting Flexibility
Is Shaping Decisions

As expected, survey responses and discussions with panelists confirmed that
farm owners, operators, and managers are favorable toward three particular
features of the 1996 Farm Act: the predictability of program payments
(PFCP's), which are no longer tied to farm prices; the unambiguous
qualifications for PFCP's; and especially, the elimination of most planting
restrictions.  More than half of all panelists (58 percent) identified
"elimination of planting restrictions" as a factor in their 1997 management
decisions, and nearly half (45 percent) expected the same provisions to affect
their decisions in 2000-02.  

Panelists' own estimates of how they are adjusting crop mixes suggest that
aggregated average data do not reflect the full potential benefits to
individual farming operations associated with planting flexibility.  For
example, Illinois panelists' expectations of the proportion of land they will
devote to corn and soybeans were 45 and 43 percent on average for both 1997
and 2000-02--the same as for 1996.  However, seven of the eight Illinois
panelists expected that they would devote a different percentage of land to
corn in 1997 than they had in 1996--three anticipated planting less and four
anticipated planting more.  Thus, aggregate statistics may obscure year-to-year 
changes occurring at the individual farm level that balance out across
all farms.

Panelists were alert to potential opportunities for growing nontraditional
crops, those that have not often been grown on large acreages in the past. 
These farm managers and operators indicated they will shift land quickly to
optimize their cropping mixes.  They also appear willing to consider producing
crops that have particular characteristics, like waxy and high-protein corn,
and tofu soybeans, although the profitability of such crops will be watched
closely.  Whether the profitability of new crops will attract even modest
acreages away from major program crops like corn, wheat, soybeans, cotton, and
rice remains an open question. 

PFCP's & Land Values

The demand for farmland has expanded recently in several areas of the country. 
Panel discussions in North Dakota, Illinois, Ohio, Georgia, and Mississippi in
particular noted increases in land prices and cash rents.  The land market in
many areas had already been adjusting to higher commodity prices and to the
optimism over future commodity exports when the new farm bill became law.  The
predictability of PFCP's became an additional, important impetus for increased
demand for land.

The high degree of certainty attached to the PFCP's makes their valuation
fundamentally different from the valuation of the price deficiency payments of
the 1990 Farm Act.  The amount and timing of income from PFCP's has been set
through 2002.  In contrast, the anticipated value of deficiency payments under
the 1990 act was conditioned by commodity price expectations--high prices
would lead to low (or no) deficiency payments, while low prices would
precipitate high deficiency payments.  Farm managers and operators could not
be certain what their farm program income would be at the end of the current
year, let alone in future years.

As land prices rise relative to other input prices, economic reasoning
suggests that land use will become more intensive, employing more nonland
inputs per acre.  Some panelists indicated, however, that nonland input prices
are also increasing, which could keep the ratio of land prices to other input
prices fairly constant and negate the effect of rising land prices and rental
rates on farm management decision making.

The effect of the 1996 Farm Act on land markets may also be influencing how
landowners and renters negotiate leases.  Changes in underlying economic
conditions do not normally warrant dramatic year-to-year changes in lease
terms, but the potential for capitalization of PFCP's into farmland rents may
affect the degree of adjustment owners and renters are prepared to consider. 
Panelists in most regions acknowledged tensions between landlords and tenants
and serious reviews of traditional leasing arrangements.

In some cases, landowners appear to benefit almost exclusively from new rental
conditions, which can include, depending on the type of lease, higher cash
rents, higher landlord crop shares, and/or less landlord sharing of production
expenses.  In other areas, farm operators have been successful in seeking some
protection from commodity price volatility by gaining higher levels of
landlord risk sharing.  Additionally, panelists acknowledged that the
conditions of leases negotiated for the 1997 crop year were influenced by
whether they were signed in early or late 1996, since crop price expectations
dropped dramatically at mid-year, changing the expected profits of landlords
and renters.

Continued adjustments may be more problematic for crop-share leases than for
cash leases.  Panelists generally perceived that the intention of the 1996
Farm Act was that PFCP's attached to land leased on crop shares be divided
between landowner and tenant, in the same proportions as the crop share called
for in the lease.  Thus, for landowners to receive more of the value of the
PFCP's attached to their land, they must negotiate adjustments in crop share
leases. The simplest method is to change the crop share allotted to the
landowner.  An alternative is to change the sharing of input costs, such as
the cost of fertilizer.

Panelists indicated that some landowners are simply discontinuing the renting
of their farmland in order to "capture" the full value of PFCP's.  Instead of
renting their land, these landowners are turning to custom services to operate
their farms.  They pay operators (sometimes the same person who had previously
been a share tenant) to perform needed field work, and pay input suppliers to
make the appropriate applications of fertilizers and pesticides.  

According to panelists, not all landowners are changing rental rates or crop
share leases to reflect the value of PFCP's attached to their land.  Some may
be unaware of the additional value the PFCP's bring to their land.  Others may
have personal or long-term relationships with tenants that would make such
lease changes inappropriate.  Still others may find that a lack of competition
for land in local rental markets precludes their renegotiating more
advantageous leases.

Whether landowners renegotiate leases or otherwise take advantage of increases
in the value of their land, the initiation of PFCP's has increased the wealth
of those who own land.  Panelists indicated that PFCP's are being used by
landowners for widely divergent purposes.  Recipients' use of PFCP's does not
appear to be guided by a belief that transfer payments will disappear in 2003
or that PFCP's should be "banked" for use in years of depressed commodity
prices.  Some of the farm manager panelists indicated they encourage their
clients (owners) to use PFCP's to make productivity-improving investments,
such as land leveling and installing irrigation and drainage systems.  Other
panelists, however, indicated that some recipients of PFCP's are using the
proceeds to purchase additional land or aggressively bid for additional rental
acreage.

Marketing & Risk Management In Sharper Focus

The 1996 Farm Act program changes have affected farm management beyond simply
broadening options such as which crop mix to adopt.  Panelists recognized the
increased importance of marketing and its relationship to price risks. 
Forty-one 
panelists identified "increasing risks" as one of the "major changes that
have occurred in the economic and financial setting for farming" on the survey
administered for this study.  Panel discussions indicated a widespread belief
that the 1996 Farm Act may lead to greater fluctuation in commodity prices
than has occurred in recent years.  

Panelists expressed a high level of interest in revenue insurance, but the
amount of insurance will likely depend on the extent to which lenders require
such coverage and the amount of subsidy offered to producers.  For example,
when asked if they would favor buying crop insurance if it were not
subsidized, many panelists indicated that unless a lender required them to do
so, they would not.

Because the importance of risk management is currently widely recognized, now
may be the "teachable moment" for introducing risk management topics like
speculation, risk transfer, and risk avoidance to farm managers and operators. 
It may also be the  "commercial opportunity" to develop and promote 
private-sector risk transfer instruments.  

Farming interests understandably desire protection from low and declining
prices without restricting their opportunity to gain individual profits from
rising prices.  Farm managers and operators expect to design marketing
strategies that will capture high prices, while continuing to take selective
advantage of government-sponsored crop insurance programs when these provide a
high probability of net positive payouts.  

Although the study of farm operators and managers contributes important
insights about current and prospective effects of the 1996 Farm Act, much more
information needs to be collected and analyzed to fully understand its
implications.   For example, it is not yet evident what will be the economic
and distribution effects of the income streams and wealth associated with
PFCP's.  Similarly, questions about the effects of attaching program benefits
to land and making them transferable require careful analysis.  Farm
management decision makers, analysts, policy makers, and the public will
continue to follow these issues, as experience with the provisions of the 1996
Farm Act grows.
Lyle P. Schertz, ERS Cooperator (540) 636-8919 and Warren E. Johnston,
University of California-Davis (916) 756-0870
lrschert@rma.edu
wejohnston@ucdavis.edu

BOX - FARM ACT  96 

About the Study 

To examine changes in the management of the nation's farm resources resulting
from the 1996 Farm Act, USDA's Economic Research Service funded a study in
early 1997, conducted with the support of the Farm Foundation, the University
of California Agricultural Issues Center, and the American Society of Farm
Managers and Rural Appraisers (ASFMRA).  The study focused on "whole farm"
decisions, as distinct from specific commodity decisions, examining potential
effects of the 1996 Farm Act on the management of farm resources.

The study's approach was to conduct eight regional discussion panels, six
composed of professional farm managers and two of farm operators.  Panel
members were identified in consultation with ASFMRA state chapter leaders and
with land-grant university faculty and extension staff members who had
expertise in the study of farm management decisions.  Regions were selected
where farm programs were historically important to local economies.  Panels
were formed in North Dakota, Kansas, Texas, Illinois, Ohio, Georgia,
Mississippi, and California.

The planned focus of the panel discussions was primarily on changes in the
farm management decision environment, the mix of crops produced, responses to
risks, landowner and operator lease arrangements, use of marketing
information, and employment and economic activities in rural communities.  


FOOD & MARKETING

Food Marketing Costs Rose Slightly in 1996

U.S. consumers spent $547 billion on food in 1996 (excluding imports and
seafood), $17 billion more than in 1995.  For every dollar spent, 23 cents
covered the farm value of food purchases, and the rest was marketing costs. 
Food marketing costs--as measured by USDA's marketing bill--includes expenses
associated with processing, wholesaling, distributing, and retailing of foods
produced by U.S. farmers.  It is the difference between the value farmers
receive for food commodities and the amount consumers spend on food both at
home and away from home.

A sharp 8-percent increase in farm value--reflecting higher prices for pork,
eggs, dairy products, and cereal--accounted for a larger-than-usual portion of
the increase in consumer food costs.  However, with moderate inflation, and
sluggish growth in consumer food expenditures--about 3 percent--food
manufacturers, wholesalers, and retailers absorbed much of the sharp increase
in farm prices, substantially slowing the rise in marketing costs in 1996.

The marketing bill rose only about 2 percent to $424 billion in 1996,
following a nearly 4-percent increase in 1995.  The rise in food marketing
costs in 1996 was lower than the overall 2.9-percent rate of inflation, and
substantially below the average annual increase of about 4.5 percent during
the last decade.

Labor Costs Have Increased Steadily 

Labor costs (wages and salaries, and employee benefits such as group health
insurance) comprise 38 percent of total consumer food expenditures, the
largest component of the marketing bill.   Labor costs grew about 5 percent to
more than $206 billion in 1996, but at a marginally slower pace than the
annual average rise during the last 10 years.  The slower growth was the
result of relatively sluggish sales which dampened demand for additional
employees.

In 1996, 13.5 million people were employed in the food industry sector beyond
the farm.  Food industry employment increased almost 1.5 percent in 1996, a
smaller rate of increase than the nearly 3-percent rise recorded in 1995. 
Food-service establishments employed the single largest share at 56 percent. 
About 25 percent of the food-sector work force was employed by food stores, 12
percent by food manufacturing firms, and 7 percent by wholesalers.

Employment in the food manufacturing sector dropped by about 1.5 percent,
reflecting higher labor productivity and increased use of labor-saving
technology, which continued to dampen hiring rates.  For the other three
sectors, employment increased, but at a smaller rate than in 1995.

Hourly earnings of food manufacturing and food store employees rose almost 3
percent in 1996, similar to 1995.  The relatively stable earnings in these two
sectors partially reflect provisions of union contracts negotiated over the
last few years.  Average hourly earnings of wholesaling employees rose over 2
percent, compared with 2.5 percent in 1995.  The average hourly wage for
employees in the food-service sector, one of the highest contributors to U.S.
job growth in 1996, advanced about 3.5 percent compared with 2 percent in
1995.  This higher rate of growth reflects brisk sales in the away-from-home
market over the last decade, when sales increased an average of 5 percent per
year.

Wage supplements, about 20 percent of total labor costs, increased because of
rising health insurance premiums and pension costs.  The rising cost of
medical care pushed up health insurance costs.  However, the 3.5-percent
increase in the Consumer Price Index for medical services in 1996 was
considerably smaller than the 6.5-percent average annual increase over the
last 10 years, and helped mitigate 1996 labor cost increases.  Similarly, the
Employment Cost Index for private industry benefits rose almost 2 percent in
1996, markedly smaller than the nearly 6-percent annual average rise of the
last decade.

Packaging Costs Drop

Packaging costs, 9 percent of food expenditures and the second-largest
component of marketing costs, dropped 2 percent to nearly $47 billion,
restraining aggregate food marketing costs in 1996.  The price of paperboard,
which accounts for about 40 percent of food industry packaging costs,
plummeted over 7 percent in 1996, following a record 16-percent rise the
previous year.  In 1995, the paper industry had experienced the most rapid
price increase in its history, as the industry was unable to add capacity fast
enough to meet demand.  In 1996, paperboard prices dropped after consumers
such as the food industry restocked inventories.

Meanwhile, the price of metal cans dropped 10 percent in the face of excess
beverage can capacity as demand increased for competing plastic containers. 
Despite this increased demand, plastic container prices dropped over 1 percent
as producers were unable to raise prices in the face of price reductions for
competing packaging products.

Energy costs, comprising 3.5 percent of food expenditures, rose nearly 4
percent last year, despite a 2-percent drop in the price of electricity. 
Higher energy costs were largely the result of a 4-percent rise in the price
of natural gas and increased volume of marketing services.  Electricity
accounts for 55 percent of the energy costs incurred in food manufacturing,
with natural gas accounting for the remaining 45 percent.  Electricity
accounts for 85 percent of energy consumed by public eating places and nearly
all of the energy used in food stores.

Transportation costs rose 2.5 percent, about the same as in 1995, as a result
of higher trucking rates which climbed by more than 2 percent.  Railroad rates
were only slightly lower.

Advertising expenditures have risen at a slightly faster rate than aggregate
marketing costs during the last few years.  Advertising expenses, which
account for about 4 percent of food expenditures, rose 4 percent to nearly $21
billion in 1996, slightly faster than in 1995.  The food industry uses a
mixture of print and broadcast media to promote their products.  Food
manufacturing accounts for about 55 percent of total food industry advertising
expenditures, with food service adding another 25 percent, and food retailing
contributing 14 percent to the total.

Business taxes account for 3.5 cents of the American food dollar.  They
include property, state, unemployment, insurance, and Social Security taxes,
but exclude Federal income taxes.  Business taxes rose by more than 3.5
percent to $20 billion in 1996.  Interest expenditures, which  accounted for
only 2 percent of total consumer expenditures, increased nearly 3.5 percent in
1996.

Depreciation, rent, and repairs together totaled $48 billion in 1996,
accounting for almost 8.5 percent of the consumer food dollar.  The 
food-service sector incurred the highest percentage of these costs, at 41
percent
of the total, as food-service establishments paid higher property rent than
the other food sectors.  Food stores made up 27 percent, while processing and
wholesaling firms together accounted for the remaining 32 percent.

Food industry profits grew over 5 percent in 1996, considerably less than the
9-percent pace recorded in 1995.  Retail food stores accounted for most of
last year's profit gain by attracting customers to less expensive generic
brands and offering nonfood services such as video rentals.  However, profits
were moderated in 1996 by a variety of conditions in the other food industry
sectors.  For example, food processors were constrained from raising prices
much because of consumer preference for generic brands, and were further
squeezed by higher farm prices.  Meanwhile, competition among restaurants,
particularly fast-food outlets, has restrained profits among food-service
establishments.

Food marketing costs tend to reflect aggregate inflationary trends.  Current
projections suggest that moderate inflation will continue.  Therefore,
marketing costs will probably continue to increase at a relatively slow pace
into 1998.
Howard Elitzak, (202) 219-1254, e-mail:  helitzak@econ.ag.gov


SPECIAL ARTICLE

NAFTA's Impact on U.S. Agriculture:  The First 3 Years

[See NOTICE at top of report.]

END_OF_FILE
