AGRICULTURAL OUTLOOK (August 1997, AO-244)                    August 29, 1997

               Approved by the World Agricultural Outlook Board
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CONTENTS

In This Issue

Commodity Briefs
     Field Crops: Durum Wheat Crop Dips in 1997
     Specialty Crops: New Markets Boost U.S. Tobacco Prospects

Commodity Spotlight
     Record U.S. Soybean Crop Looks to Growing Demand
     High Prices Pull Up U.S. Rice Acreage

Policy
     1996 Farm Act Eases Acreage Shifts

Resources & Environment
     Restoring the Everglades: Challenges for Agriculture

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


IN THIS ISSUE...

SOYBEAN AND RICE CROPS UP IN 1997
Farm Act Eases Acreage Shifts

The 1996 Farm Act granted U.S. farmers more flexibility to respond to strong
market price signals by eliminating acreage reduction programs, base acreage
planting requirements to maintain program payments, and limits on flex acreage
that farmers could plant to other crops.  Higher prices in 1996 prompted
farmers to increase planted acreage of major field crops by 16 million acres,
to nearly 262 million.  In 1997, although total planted acreage was about the
same as in 1996, the crop mix changed as farmers planted more soybeans in
response to strong prices relative to other crops.

Under prior farm legislation, farmers' flexibility to switch acreage among
crops was limited. But the 1996 Farm Act, by removing constraints on land use,
permitted a larger supply response to the economic incentives provided by
absolute and relative price movements.  

Soybean Producers Look to World Market 

U.S. soybean farmers responded to this spring's strong prices and greater
planting flexibility by planting an estimated 70.9 million acres, up 10 percent
and the largest in 15 years.  Crop conditions to date suggest a record 1997
U.S. soybean crop.  Soybean marketers will turn to growing international as
well as domestic markets to sell the expected 1997 bumper crop.  

Record supplies are projected to lift both domestic crush and U.S. soybean
exports to record volumes.  Recent trade agreements that have removed
international barriers and opened U.S. export markets should provide a welcome
boost.  However, sensitivity in some European markets to the importation of
new, genetically modified soybeans, and related discussions of product
labeling, represent potential hurdles for future U.S. exports.

Rice Output Reflects Strong Prices

The 1997 U.S. rice crop is estimated at 182 million cwt, up over 6 percent
from last year, although the effects of a cool, wet spring will keep southern
rice yields from matching last year's record.  The production increase comes
entirely from a 15-percent rise in southern long grain rice acreage, the
result of higher prices at planting for long grain rice compared with medium
and short grain varieties and alternative crops.

Strong rice prices reflected an extremely tight domestic supply situation,
with a stocks-to-use ratio of 13.1 percent at the end of the 1996/97 marketing
year, the lowest since 1980/81.  For long grain rice, the ratio fell even
lower--to 7.4 percent.  In recent years, stronger world trade, fueled by
rising incomes in Asia, lower trade barriers, and faster growth in world rice
consumption than in production, has helped maintain higher domestic prices for
U.S. rice.  

NAFTA: Third-Year Assessment

The North American Free Trade Agreement (NAFTA) has had a positive overall
effect on the U.S. agricultural sector, reinforcing the trend toward greater
integration of U.S., Canadian, and Mexican markets and enhancing the
competitiveness of U.S. agriculture.  Analysis by USDA's Economic Research
Service (ERS) has attempted to isolate the economic impacts of agricultural
trade liberalization under NAFTA from other economic forces.  Looking at the
3-year period following NAFTA's implementation on January 1, 1994, ERS
analysis found that a little more than a fifth of the $2.7-billion increase in
U.S. exports to Canada and Mexico, and slightly less than a fifth of the 
$3.3-billion increase in U.S. imports, can be attributed to NAFTA.

The agricultural provisions of NAFTA have had small but positive impacts to
date on investment and employment in agriculture and agriculture
-related industries.  The effects are small principally because NAFTA trade is
a small component of the U.S. agricultural economy, and to a lesser extent
because trade liberalization under NAFTA is only partially complete.  However,
the export performance of the U.S. agricultural sector supports assertions that
NAFTA is creating incentives for resources, labor, and capital to remain in
the sector. 

Everglades Restoration & Agricultural Options

One of the most ambitious environmental restoration efforts--the South Florida
Ecosystem Restoration Project--is now underway to restore the Everglades
watershed.  Decades of urban and agricultural development in south Florida
have profoundly altered the Everglades--wetlands have been lost, natural water
flows disrupted, and water quality impaired.

Restoration will place increasing demands on the agricultural sector to adjust
traditional patterns of land and water use.  Acquisition of land or 
land-use rights for environmental restoration is a priority activity, and much
of the land would likely be areas currently in crop production or pasture.  In
addition, changes in cropping patterns and crop type may help to integrate
agricultural production with natural water flow systems. Improved management
of land, water, chemicals, and other purchased inputs will be a key element of
the restoration program.   The environmental benefits of maintaining a strong
agricultural sector need to be considered when assessing the benefits and
costs of alternative restoration measures.  


COMMODITY BRIEFS

Field Crops
Durum Wheat Crop
Dips in 1997

Fluctuating moisture conditions this year in the Northern Plains is wreaking
havoc with U.S. production of durum wheat, the main ingredient for pasta. 
USDA's August 1 forecast indicates that farmers will harvest only 90 million
bushels in 1997, down 22 percent from last year's large crop and the smallest
in 4 years.  As a result, U.S. durum imports are projected to rise in 1997/98,
as are durum prices relative to other classes of wheat.

Extremely wet field conditions following spring storms and snowmelt slowed
spring planting across much of North Dakota, which typically accounts for at
least three-fourths of the U.S. durum crop.  Just over one-third of North
Dakota's durum planting was completed by mid-May, compared with an average of
nearly half for this period during 1992-96.  Dry weather allowed farmers to
finish planting by early June, but lowered yield prospects when the dryness
continued through the month.

The clouds opened again in July, bringing much-needed rain.  Crop prospects
improved somewhat, especially in the northern parts of the region where the
crop matures later.  However, the moist (and cool) conditions have promoted
development of disease in some areas, which can reduce both yield and quality. 
Compounding the impact of lower projected overall yields this year, U.S.
farmers had planted 10 percent less durum area, in response to prices that
were lower at planting time than a year earlier. 

Durum is also grown under irrigation in the desert areas of California and
Arizona, where farmers are expected to harvest a combined 21 million bushels
in 1997.  While yields in those states are near last year's levels, planted
area is down in both states, especially in Arizona.  The discovery of Karnal
bunt fungus in durum wheat seed last year led to restrictions on planting and
marketing to prevent its spread to other wheat growing regions.

Reflecting sharply lower production prospects, farm prices for durum rose
during June and July.  In contrast, prices for other classes of wheat declined
in mid-summer as the harvest of a bumper winter crop advanced up the Plains. 
Durum prices do not necessarily fluctuate in unison with other classes of
wheat, because there is little substitution between durum and other 
classes--e.g., hard red winter, soft red winter, and white wheat, which are not
well suited for pasta production.  Durum is first ground into coarse flour
(called semolina) and then usually processed into pasta.  

Beginning stocks are higher than a year earlier, but not nearly enough to
offset the expected smaller crop.  The tight domestic supply situation will
likely boost the season-average farm price for durum relative to other classes
of wheat.  The durum price premium (over the all-wheat price) may approach $1
per bushel in 1997/98, more than double last year's level but similar to
1995/96.  Strong prices will attract more durum from Canada, with imports
forecast to rise to 25 million bushels, just under the 1993/94 record.  Tight
U.S. durum supplies will encourage U.S. millers to bid aggressively for 
high-quality Canadian durum.  

Most foreign durum producers are also expecting smaller 1997 crops, which will
support durum prices in 1997/98.  Mirroring conditions in North Dakota, yields
and area are down in Canada--the world's largest durum producer.  Italy and
France are also expected to harvest smaller crops, and drought has sharply
curtailed prospects in North Africa.  Morocco, Tunisia, and Algeria are major
producers and importers of durum; in this region, semolina is used primarily
to make couscous.  

Although U.S. durum exports have been running higher than a year earlier, the
pace is expected to slow as the season progresses, due to tight domestic
supplies.  Domestic food use is forecast to remain relatively flat at 80
million bushels in 1997/98. Despite the projected lower output and larger
imports, the U.S. is expected to maintain its status as a net exporter of
durum (grain and products), with exports of 35 million bushels. 
Dennis A. Shields (202) 219-0768 
dshields@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; George Duvalis, world oilseeds;
Les Meyer, domestic cotton; Steve MacDonald, world cotton.  All are at (202)
219-0840. 


Specialty Crops

New Markets Boost 
U.S. Tobacco Prospects

U.S. tobacco production is expected to reach 1.63 billion pounds in 1997,
outpacing last years's output by nearly 7 percent and well above recent
averages.  Tobacco acreage expanded by about 8.5 percent in response to higher
production quotas for flue-cured and burley tobacco.

Flue-cured and burley are the two major types of tobacco grown in the U.S.,
accounting for 95 percent of the crop.  Both are used almost exclusively to
produce cigarettes.  In 1996, both types were adversely affected by disease
and weather, resulting in tight supplies and high auction prices.  As a
result, the 1997 effective quota for flue-cured tobacco--the amount growers
can sell, adjusted for over- and undermarketings of the previous 
year--is up 8 percent to 1,019.4 million pounds, and the burley effective quota
is up 22 percent to 880 million pounds.

U.S. tobacco is grown mostly in the Southeast, with six states producing the
majority of the crop.  North Carolina and Kentucky, the two largest producers,
account for about 65 percent of total U.S. production.  North Carolina is the
major state producing flue-cured, which is distinguished by its curing under
heat in an air-tight barn or container.  Kentucky is the leading burley
producer, followed by Tennessee.  Burley leaf is cured by hanging the entire
stalk of tobacco in a barn with openings that allow outside air to circulate
among the leaves.  It is more dependent on ambient temperature and humidity
during the curing process than flue-cured tobacco.

This year's flue-cured crop is relatively good, though the quality will likely
be slightly below the crops of the last 2 years.  A mild winter, followed by a
prolonged cool, damp spring curtailed early plant development, and very hot
weather in July caused additional stress to the crop.  Wet weather during
planting increased concerns among growers about the risk of damage from blue
mold, a fungus which attacks tobacco leaves, although reports suggest little
damage has occurred.  The hot, dry weather which has limited the spread of
blue mold, however, has itself become a threat to the growing crop.  Yields in
North Carolina and other flue-cured producing states are expected to be about
2 percent lower than in 1996, and are slightly lower than the 10-year average.
 
Burley faced similar growing conditions.  A long, cool, wet spring delayed
planting and left tobacco plants with minimal root systems.  Then in July,
severe drought caused considerable stress to the vulnerable crop.  

The 1997 flue-cured tobacco marketing season opened in Florida and Georgia on
July 22, followed shortly by market openings in South Carolina and the Border
Belt of North Carolina and Virginia. Prices through the third week of the
season were about 3 percent lower than last year.  Burley auctions will open
in burley-growing states in November and continue through February. 

The U.S. is the second-largest tobacco producing country behind China, and
alternates with Brazil as the largest exporter, depending on yearly crop
conditions in the two countries.  The U.S. is also the largest importer of
tobacco leaf,  exporting high-quality flue-cured and burley leaf and importing
cheaper, lower quality leaf to blend with domestic tobacco to reduce cigarette
production costs.  U.S. imports also include types of tobacco not grown
domestically.

U.S. exports of unmanufactured tobacco leaf in 1996 advanced 5 percent over a
year earlier to 486 million pounds declared weight, the highest since 1992. 
Japan and the European Union (EU) are the major destinations for U.S. leaf,
although exports to other Pacific Rim nations are increasing.  Importing
countries use high-quality U.S. tobacco to improve their cigarette blends and
enhance the cigarette flavor.  In 1996, exports to Asia and Africa declined,
while shipments to Europe advanced 21 percent as a result of increased
European cigarette production.  

Leaf imports for consumption to the U.S. surged 59 percent in 1996 after
declining the previous year.  Stocks of imported leaf were being replenished
after a tariff-rate quota replaced a 25-percent limit on foreign tobacco
content in U.S.-produced cigarettes in 1996.  Imports in 1996 reached 668
million pounds, a gain of 59 percent.  Oriental tobacco, a type of leaf not
grown in the U.S., makes up about 14 percent of a typical U.S. cigarette. 
Manufacturers also use cheaper imported flue-cured and burley leaf in
cigarettes, especially lower priced cigarettes known as discount brands.  

The U.S. cigarette industry is the second largest in the world, behind China. 
About two-thirds of the cigarettes produced in the U.S. are consumed here, and
the remaining third are exported.  The major markets for U.S. cigarettes are
the EU and Japan, and new markets are opening around the Pacific Rim and in
the Newly Independent States of the former Soviet Union.  

Although domestic cigarette consumption has been virtually constant for the
past 4 years, cigarette exports have continued to rise, pushing U.S. cigarette
output to a record 755 billion pieces in 1996.  U.S. cigarettes have achieved
a high level of popularity worldwide, and demand is increasing as the number
of smokers expands and higher incomes enable consumers to purchase more
expensive foreign cigarettes.  About a third of U.S.-produced tobacco is used
in exported cigarettes, and increased exports have boosted purchases at U.S.
auction warehouses.  

Per capita cigarette consumption in the U.S. has been falling for two decades,
although population growth has limited the overall decline in consumption. 
During the past 10 years, cigarette consumption declined 15 percent--from 575
to 487 billion cigarettes, while per capita consumption fell 22 
percent--from 3,047 to 2,390 cigarettes per person.  Increased awareness and
publicity about links between smoking and disease, restrictions on permissible
smoking areas, and increasing cigarette prices have led to lower U.S. demand
for cigarettes.  

The cigarette industry and tobacco producers continue to face numerous
challenges.  The recent Federal budget agreement signed into law included a
cigarette tax increase--beginning at 10 cents per pack in 2000 and rising to
15 cents in 2002--which will have a further dampening effect on consumption. 
As cigarette consumption continues to fall, demand for domestically produced
leaf will become more dependent on the export market.  

State attorneys general and U.S. cigarette manufacturers completed
negotiations on a comprehensive settlement of litigation on liability for
cigarette-related illnesses on June 20 of this year.  The agreement requires
congressional approval and will face intense scrutiny.  

In its current form, the proposed agreement would require cigarette
manufacturers to pay up to $368 billion over 25 years to settle lawsuits and
reimburse states for smoking-related Medicaid expenses.  The settlement also
contains provisions that restrict forms of advertising, hold cigarette
manufacturers responsible for reducing teen smoking, and require cigarette
companies to fund smoking cessation programs.  The agreement's provisions
would likely lead to a 25-50-cent increase in the retail price of cigarettes.  

In exchange, manufacturers would receive immunity from future punitive damage
claims resulting from past actions.  The final form of the settlement and thus
its impact on the industry will not be known until Congress approves
legislation codifying the agreement.  
Thomas Capehart, Jr. (202) 219-0890
thomasc@econ.ag.gov

SPECIALTY CROPS BOX

Tobacco Program: 
Quotas & Price Support

Flue-cured and burley marketings are restricted by the tobacco program, which
limits the quantity of leaf that may be marketed without a penalty and sets a
support price for each grade and type of tobacco.  The purpose of the program
is to ensure a stable market and reduce fluctuations in grower income.  

The basic tobacco quota for flue-cured and burley is based on the quantity of
leaf cigarette manufacturers indicate they will purchase, the previous 3
years' exports, and the amount of reserve stocks on hand.  The national quota
is allocated among quota owners according to the proportion of the total quota
they own.  The basic quota is adjusted by previous years' over- and
undermarketings to calculate the effective quota, the actual amount growers
can market.

The support price or loan rate for each type and grade of tobacco is set by
adjusting the previous year's loan rate by the cost-of-production index and
changes in the 5-year moving average of prices.  Costs of operating the price
support program are borne by the growers and buyers of tobacco leaf through an
assessment levied on each pound of tobacco sold.

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

Record U.S. 
Soybean Crop Looks 
To Growing Demand

This year's soybean acreage is strong evidence that a major goal of the 1996
farm legislation--to increase market orientation--has been achieved.  U.S.
farmers have more flexibility to plant as many soybeans as they believe may be
sold to growing domestic and international markets.  

Acreage and crop conditions to date suggest a record 1997 U.S. soybean crop. 
Soybean marketers will have to turn to growing international as well as
domestic markets to sell the expected 1997 bumper crop.  

U.S. soybean farmers responded to this spring's strong prices by planting an
estimated 70.9 million acres, up 10 percent and the highest in 15 years,
according to USDA's June Acreage report.  This would be the third
-largest soybean area planted on record and the first time in history that U.S.
planted acreage for soybeans has exceeded wheat area.  The bumper crop is
expected to pressure 1997/98 U.S. farm prices into the range of $5.40-$6.60 per
bushel, down sharply from 1996/97's estimated season average of $7.38.  

Expected record supplies are projected to lift both domestic crush and U.S.
soybean exports to record volumes of 1.485 billion and 0.945 billion bushels,
respectively.  Recent trade agreements that have removed international
barriers and opened U.S. export markets should provide a welcome boost. 
However, sensitivity in some European markets to the importation of new,
genetically modified soybeans, and related discussions of product labeling,
represent potential hurdles for future U.S. exports.

1996 Farm Act 
Facilitates Acreage Gains

Prior to 1996, each farmer participating in the commodity programs had an
established crop-specific base acreage for wheat, feed grains, cotton, or
rice.  Government program payments for most crops were based on a 
5-year average of acreage planted or considered planted to program crops. 
Soybeans were not among the commodities for which farmers received payments.  
Farmers were frequently reluctant to risk reducing future deficiency payments
by chasing potentially temporary spikes in soybean prices and planting
soybeans instead of program crops.  Consequently, high cash prices for
soybeans did not always provide enough incentive to summon the amount of U.S.
acreage needed to satisfy growth in world market demand.  Instead, foreign
producers were often left with an opportunity to capture these gains.  Between
1985 and 1995, combined Brazilian and Argentine soybean production increased
69 percent, compared with U.S. growth of only 4 percent.

Farm legislation in 1990 initiated greater planting flexibility by excluding
15 percent of each producer's base acreage from deficiency payments.  Program
participants were allowed to plant any field crop on the excluded acreage
without sacrificing base acreage and future payment eligibility.  The 1996
Farm Act completely eliminated any link between farm payments and the crops
grown.  Expected relative market returns between crops has become the major
determinant for crop selection.  

Farm prices for soybeans climbed above $8 per bushel this spring, the highest
level since the 1988 drought as the market rationed dwindling stocks.  Despite
a relatively large 1996 harvest, it became apparent early in the year that
robust domestic use and exports were drawing down U.S. stocks of soybeans
rapidly and driving the price rise.  Projected yearend stocks of 125 million
bushels for the September-August 1996/97 marketing year would be the smallest
inventory in two decades. 

Farmers responded to last spring's very attractive price signals by expanding
soybean planting, mostly at the expense of corn, wheat, and sorghum acreage. 
Every sta te will have more soybean area this year, with the sole exception of
Ohio, which held to its 1996 record acreage.  

Spring planting conditions for soybeans were nearly ideal this year, unlike
the very late start in 1996.  Moisture this summer has been favorable, pushing
the U.S. average soybean yield forecast to 39.3 bushels per acre, second only
to 1994/95's 41.4 and up from last year's 37.6.  The combination of high
acreage and yields is expected easily to push 1997/98 soybean production
beyond the 1994/95 record of 2.517 billion bushels.  As of August 12, 1997
production was forecast at a record 2.744 billion bushels.  The final output
will depend on growing conditions through harvest, which is expected in
September and October for most of the crop.

To supplement tight U.S. supplies, the first-ever shipments of soybeans from
Brazil began arriving this summer.  Larger imports were made possible by a
historically wide price differential between U.S. and Brazilian ports.  These
imports will be a short-lived phenomenon and will likely revert to only 5
million bushels in 1997/98 as record U.S. supplies become available.  In fact,
both Brazil and Argentina will likely import new-crop U.S. soybeans later this
year, crush them, and export the products.  By then U.S. soybean prices will
be much lower, and domestic supplies available to South American crushers will
be very short because of Brazil's prolific summer exports and a drought-reduced 
harvest in Argentina.

The U.S. is not the only country where farmers have responded to strong world
soybean prices.  The world's second-leading producer of soybeans, Brazil, is
also expected to produce a record harvest next year.  Attractive soybean
prices, an improved farm debt situation, and improvements in transportation
infrastructure are encouraging Brazilian farmers to plant more soybeans than
ever, including some land never before farmed.  

A 1996 policy change eliminated Brazil's system of differential export taxes
that had been used to encourage domestic processing.  For soybeans,
eliminating the tax not only filtered down to producers in the form of higher
prices at the farm, but also erased domestic processors' advantage over
soybean exporters.  As a result, soybean exports from Brazil dramatically
increased last spring and summer, more than double the previous year's volume. 
However, Brazilian crushers have been compelled to operate their facilities at
a reduced level this year as foreign buyers have outbid them for domestic
supplies.  

Together, the U.S. and Brazil accounted for 70 percent of global soybean
output in 1996/97, with shares of 51 and 19 percent.  A larger crop is also
projected for the world's third-largest producer, Argentina (9-percent world
share in 1996/97), on the strength of expanded area and improved yields.

Trade Pacts Boost Growth
In Key U.S. Markets

Recent trade pacts are expected to increase U.S. exports to two key 
markets--the European Union (EU) and Mexico--while growing demand 
is improving prospects in China.

The European Union is the world's largest import market for soybeans and
soybean meal.  In 1995/96, U.S. soybean exports to the EU were 286 million
bushels (valued at $2.1 billion), about one-third of total U.S. soybean trade. 
U.S. soybean meal exports to the EU totaled 0.9 million metric tons (nearly
$200 million), about 15 percent of total U.S. soybean meal trade.  EU soybean
imports in 1997/98 are expected to slip because of record EU oilseed
production, although imports of soybean meal should rebound following a mild
downturn the past 2 years.

In 1992 the U.S. and EU completed bilateral trade negotiations that produced a
common U.S.-EU position--known as the Blair House agreement--with respect to
several unresolved agricultural issues in the then-ongoing Uruguay Round of
trade negotiations.  Under the terms of a side accord to the Blair House
agreement, the EU committed to a maximum area for oilseed production with
penalties for overplanting.  

EU producers are currently very close to their maximum allowed oilseeds area,
if not already in excess.  Thus, future growth in protein meal demand must be
increasingly filled by non-EU sources.  Imports of sunflowerseed from the
Newly Independent States of the former Soviet Union, and Eastern European
countries (which lack adequate processing facilities), have risen in recent
years.  By processing high-oil-type oilseeds, the EU is self-sufficient in
vegetable oil production.  However, substantial EU soybean imports from the
U.S. and South America are still necessary to obtain the superior protein meal
of those exporting regions.

U.S. trade barriers with Mexico, one of the world's most rapidly growing
soybean customers, have been falling since implementation of the North
American Free Trade Agreement (NAFTA).  Prior to NAFTA, Mexico had 
a seasonal tariff of 15 percent on U.S. soybeans.  Under the treaty this
tariff, as 
well as duties on soybean meal and oil, will be phased out over 10 years,
giving
the U.S. a unique advantage in supplying this expanding market.  Improvements
in Mexico's rail links at the border have also expedited oilseed trade between
the two countries.  

Since 1994 implementation of NAFTA, the value of annual U.S. exports of
soybeans to Mexico has increased 50 percent.  However, the increase was not
all due to NAFTA implementation.  The initial years of NAFTA coincided with
significant changes in the domestic agricultural policies of the U.S., Canada,
and Mexico and in the global trade policy environment.  In addition, the peso
crisis and subsequent recession in Mexico seriously disrupted trade in 1995,
overwhelming the effects of the early tariff reductions under NAFTA.  Further,
adverse weather conditions, which affected Mexican grain and cattle
production, influenced trade in several agricultural commodities in North
American markets. 

ERS analysis which isolated the economic impacts of NAFTA from other
developments estimated that U.S. soybean exports to Mexico were 2-5 percent
higher in 1996 than they would have been without the reduction in trade
barriers under NAFTA.

For 1997/98, import volume is forecast nearly 30 percent above 5 years
earlier.  Cumulative 1997 Mexican soybean imports from the U.S. to date are 16
percent above a year ago.  Mexico's rapidly expanding crushing capacity is
supplied almost entirely by U.S. exports.  Very little soybean production now
exists in Mexico following the dramatic rise in less costly imports from the
U.S. and substantial reforms in Mexican farm policy.  On the other hand,
Mexican soybean oil imports have been cut because of the greater oil supplies
being produced by domestic processors.

China was traditionally a net exporter of soybeans and soybean meal, mainly
supplying other Asian markets.  In the 1993/94 marketing year, China exported
1.1 million metric tons of soybeans and 1.05 million tons of soybean meal. 
However, a rapidly expanding domestic market is cutting into exportable
supplies.  Only 200,000 tons of soybeans and 30,000 tons of soybean meal are
projected to be exported from China in 1997/98.  

With greater harvested area projected for 1997/98, China's soybean output is
forecast up 7 percent.  Even with a larger domestic output, booming
consumption has transformed China into a major importer.  While China's per
capita consumption of meat and cooking oils is still among the world's lowest,
rising incomes have led to greater spending by Chinese consumers in recent
years to improve diets.  Since 1991, China's total soybean consumption has
nearly doubled.  This has required imports of soybeans and soybean products to
supplement domestic supplies.  

China's domestic soybean production has lagged behind demand because of
inefficient price and marketing systems and outdated technology.  Moreover,
China's agricultural policy typically skews producer prices in favor of rice,
wheat, corn, and cotton production, making it difficult to expand soybean
area.  The government procurement price paid to Chinese soybean farmers by
local grain bureaus is usually lower than the world market price.  And
internal taxes between provinces discourage movement from major northern
producing regions to the main consumption centers in the south, making it more
practical for these southern areas to import from abroad.

China's imports of soybeans and soybean meal have catapulted from only 160,000
and 50,000 tons in 1994/95 to projected levels of 2.7 and 3.35 million tons in
1997/98.  Just 2 years ago, China imported only 3 percent of the soybean
volume of Japan, the world's largest soybean importing country.  In 1997/98,
China's soybean imports are projected to be more than half the volume of
Japan's, making China the world's fourth-largest importing country.  Dryness
in some regions has already cut into current production and could push China's
soybean and soybean product imports even higher.

Transgenic Soybeans 
Face Trade Hurdles 

The development of genetically modified soybeans has the potential to reduce
U.S. farmers' production costs.  But these commodities face a number of
hurdles in the trade arena.  Upon approval in 1995, the first significant U.S.
commercial production of transgenic soybeans--genetically modified to be
herbicide resistant--began last year, with more than 1 million acres
harvested.  Industry estimates are that 12-15 percent of the 1997/98 U.S. crop
will be from transgenic soybean seed and could be double that level in
1997/98.  

One advantage many farmers may gain by producing such varieties is the cost
savings from fewer herbicide applications--reduced by one-third--without yield
loss.  Although herbicide-resistant seed costs are higher than standard
varieties, the cost savings can be substantial for farmers with significant
weed problems.  Other genetically modified soybeans that may be commercially
produced within a few years would enhance the use properties and fat
composition of the oil, although their high value would segregate them from
conventional uses in the market.

Producers in Argentina are also planting the herbicide-resistant soybean, as
seed adaptable for these areas becomes available.  Argentine producers may
harvest an estimated 3.25 million acres in 1998.  

Prior to 1997, Brazil had no plant variety protection legislation that would
safeguard the patent rights of seed developers.  This prevented seed research
and development within Brazil, including bioengineered seeds.  Now, with such
legislation in place, experimental production of transgenic soybeans is
occurring, but commercial output awaits government approval.  

EU protein meal needs declined in 1996 when meat consumption dropped because
of the bovine spongiform encephalopathy or "mad cow" disease crisis that
devastated British beef production (AO June 1996).  At the same time, this
food scare heightened the sensitivity of EU countries toward genetically
modified organisms (GMO's) in their food supplies, including the 
herbicide-resistant soybeans.  

In 1996, the EU approved imports of these soybeans, concluding that processing
them into oil and meal destroyed any novel genetic material.  However, given
the area constraints on EU oilseed production, and the increasing amounts of
U.S.-produced GMO soybean imports, some Europeans have expressed the desire
for product labeling of GMO and non-GMO soybean content.  There is no easy
method to visually or chemically distinguish a GMO variety from conventional
varieties.

In late July, the European Commission agreed to guidelines on drafting
legislation for product labeling required for GMO content under its Novel
Foods legislation, with final plans due late this year.  For products
manufactured without GMO's, no labels would be required, but certified 
non-GMO product could voluntarily label (e.g., "this product does not
contain..."). 
Mandatory labeling (e.g., "this product contains...") would apply to products
known and verified to consist of GMO material.  For products possibly
containing material of GMO origin but with no evidence  available, a mandatory
label (e.g., "this product may contain...") would be used.

If the final directives apply to all food or feed products produced from
GMO's, such labeling could require GMO segregation beginning at the farm
level.  Requirements for separate storage space would be imposed on commercial
handlers at great expense.  Rail cars, barges, port loading facilities, and
ocean freighters would have to be dedicated to GMO or non-GMO commodities. 
The costs of complying with such a system could seriously undermine foreign
import demand for U.S. soybeans.

In 1996, Japan also approved imports of GMO soybeans.  Large amounts of
soybeans are used directly for food in Japan such as tofu.  Japanese
authorities are now facing significant popular support for regulation of
transgenic food products.  The well-publicized illnesses caused by
contamination of some food with e. coli bacteria cast doubt on Japan's food
safety system and still lingers in the memories of many consumers.  Interest
in organic soybeans by Japanese consumers has increased, although these are
still very expensive and only a small component of the current market.

Under the rules of the World Trade Organization (WTO), required labeling of
commodities as having GMO content could be construed as a technical barrier to
trade.  If the GMO's are scientifically determined to be as safe to consume as
conventional varieties, the justification for labeling would not be apparent. 
But international consensus on this point has not yet been reached.  

The U.S. Food and Drug Administration has cleared these GMO's as posing no
threat to human health.  Tests by USDA's Animal and Plant Health Inspection
Service concluded that this soybean variety posed no risk to the natural
environment.  Although some countries have determined transgenic soybeans are
safe, public perceptions of biotechnology have pressured other governments to
ban domestic production, obtain imports from alternate origins, or require
labeling.  As a result, the treatment of GMO's in international trade will
likely remain a subject of discussion for some time to come.
Mark Ash (202) 219-0712
mash@econ.ag.gov


COMMODITY SPOTLIGHT

High Prices 
Pull Up U.S. 
Rice Acreage

U.S. farmers planted over 3 million acres of rice in 1997, up nearly 9 percent
from 1996 and more than 6 percent higher than producers' planting intentions
reported in March.  Nearly all of the area increase was for long grain rice,
grown almost exclusively in the South.  The increased plantings--indicated in
USDA's June Acreage report--were due to relatively high rice prices at
planting compared with those for alternative crops grown in the 
South--primarily soybeans.

When the 1996 Farm Act was signed in April 1996, many industry analysts
expected rice acreage to decline for a few years before stabilizing, then
modestly increase to pre-1996 Farm Act levels.  Expectations of declining rice
area arose from provisions in the act that terminated deficiency payments and
supply management programs, ending the connection between income support
measures and historic production of a particular crop and giving producers
much greater planting flexibility.  

In fact, planted area did drop nearly 10 percent in 1996.  Farmers in the
South took advantage of the opportunity to switch some rice area to soybeans
and in some cases to corn, as prices for these crops were very high at
planting in 1996.  In many of the southern rice planting areas, soybeans are
regularly grown in 1- and 2-year rotations with rice to improve yields.  Rice
area would likely have declined even more in 1996 had rice prices not been
high as well.

During the spring planting period, no year-to-year decrease in the
season-average 
rice price was projected for the 1997/98 marketing year (August-July). 
But season-average farm prices for both soybeans and corn were expected to
drop.  At the time, both new-crop futures and monthly rice prices exceeded $10
per cwt, higher than any season-average price after 1980/81.

The 1997 U.S. rice crop is estimated at 182 million cwt, up over 6 percent
from last year and the first increase since 1994's record 198
-million-cwt crop.  Long grain rice accounts for this year's production
increase, estimated at 127.3 million cwt--12 percent above 1996.  Long grain
rice acreage posted an increase of over 15 percent from 1996--to 2.28 million
acres--the result of stronger prices for long grain relative to other rice
types.  

In 1996/97, strong domestic and world demand for high-quality long grain rice,
coupled with tightening U.S. long grain supplies, raised the price of southern
long grain above prices for medium grain.  Medium grain crops are estimated at
53.2 million cwt, down 4 percent from last year--the result of a 20
-percent drop in southern medium grain plantings.

Output Up for 
Southern Rice

The projected gain in southern rice output for 1997 is due entirely to the
increase in planted area, offsetting an expected decline in average southern
yield this year to 5,546 pounds per acre, down from last year's record of
5,851.  Wet weather delayed plantings along the Texas gulf coast, making the
crop more susceptible to damage from weeds, diseases, and pests, as well as
increasing the potential for heat stress later in the season.  Cool spring
weather also delayed emergence of the crop.  

In addition, the delayed planting prevented most Texas producers from growing
a second, "ratoon," crop by reflooding the stubble of the first.  About 40
percent of Texas producers typically harvest a ratoon crop, accounting for
about 10 percent of the state's total output.  Cold weather this spring also
delayed crop emergence in the Delta, postponing field flooding and causing
many farmers to rely on herbicides to control weeds until the flood was
established.  

Rice area is up in five of the six rice producing states, with the greatest
increases appearing in the Mississippi Delta region.  Arkansas, which produces
over 40 percent of the U.S. crop, accounts for 69 percent of the net gain in
U.S. rice area this year.  All of the increase was for long grain, the bulk of
it in the Mississippi Delta region of the state, according to state extension
specialists.  Other states in the Delta ricegrowing region reported increased
acreage as well--Mississippi and Missouri expanded long grain plantings 29 and
8 percent, and state extension specialists believe northeast Louisiana
plantings are up as well.  

Texas is the only state to report declining rice area for 1997.  Long grain
area--which accounts for over 95 percent of the state's crop--is down 35,000
acres, a 12-percent decline, while medium grain area fell 5,000 acres, a 
50-percent decline.  The recent farm program changes account for some of this
loss.  Because of higher costs, Texas producers had relied more on farm
program payments to make rice farming profitable.  With the end of such
programs in 1996, many Texas landowners have abandoned rice farming and moved
acreage they had previously maintained to meet minimum planting requirements
for rice program benefits into other uses. 

Texas rice acreage, however, had been declining steadily in recent years and
is down nearly 100,000 acres from the early 1990's and nearly 300,000 since
1980/81.  Texas producers face several production disadvantages compared with
other southern states.  First, the state is a high-cost rice producer,
especially in expenses for water, which must be pumped from much deeper wells
than in the Delta, and for which rice farmers compete with urban areas like
Houston.  Second, considerable seed is lost to migrating blackbirds.  Finally,
the climate is too hot and moist for many farmers to produce an economically
viable rotation crop.  Many producers in Texas leave a portion of their land
idle, contributing nothing to covering fixed expenses during the years when
their rice land is rested. 

Yields in California, in contrast to the South, are expected to exceed 1996
due to very favorable weather throughout the growing season.  The average
yield in California is estimated at 8,200 pounds per acre, up over 9 percent
from 1996.  California producers achieve average yields 40 percent higher than
in the South.  This is due partly to the cooler, drier climate, which
typically has less pest and disease problems and supports higher yielding
varieties.  The California "japonica"-type rice is viewed by most
international buyers as superior to southern medium grain rice for direct food
use and typically sells at a premium.  In fact, the two largest foreign buyers
of U.S. medium grain rice--Japan and Turkey--generally purchase only
California rice. 

California, which grows primarily medium grain rice and accounts for the bulk
of the U.S. medium grain crop, reported rice plantings of 515,000 acres, up
13,000 from 1996, including a 7,000-acre increase for medium grain.  An
additional 5,000 acres of the increase was in short grain plantings,
accounting for the entire 25-percent increase in U.S. short grain acreage. 
Short grain rice, grown also in Arkansas, accounts for less than 1 percent of
U.S. rice area.  California short grain acreage has increased steadily over
the past 2 years--from 10,000 acres in 1995 to 13,000 in 1996 and 18,000 for
1997.

Rice Prices Show
Steady Strength

The 1997/98 season-average farm price for rough--unhusked--rice is projected
to be $9.25 to $10.25 per cwt, with the midpoint 15 cents below last season's
$9.90.  The 1996/97 season-average price was the highest since 1980/81, and
this year's projection would be the second highest.  Since 1980/81, only the
1995/96 season-average price exceeded $9 per cwt. 

U.S. rough rice typically traded at $6-$9 per cwt from 1982/83 through
1994/95, although in the mid-1980's, when exports were stagnant or declining,
some monthly prices dropped to just $4-$5 per cwt, and the 1986/87 
season-average farm price dropped to just $3.75 per cwt.  U.S. 
farm-level monthly-average prices started to climb in the second half of 1995,
in response to continued growth in U.S. rice consumption, a smaller U.S. crop,
and increased world demand for high-quality rice imports.  Since November 1995,
U.S. farm prices have exceeded $9 per cwt.  Monthly rice prices continued to
rise during 1996/97 and have averaged over $10 per cwt since January 1997.

This spring's strong U.S. rice prices were supported by expectations of an
extremely tight domestic supply situation, especially for long grain rice. 
The 1996/97 marketing year ended on July 31 with total rice stocks estimated
at 23.9 million cwt and a stocks-to-use ratio of 13 percent, both down
slightly from the previous year's already low values.  The 1996/97 stocks and
stocks-to-use ratio were the lowest since 1980/81, a year when the season
-average farm price for rice was $12.80 per cwt.  

For long grain rice--which accounts for nearly 70 percent of U.S. rice
production--ending stocks in 1996/97 were only 9.1 million cwt, yielding a
stocks-to-use ratio of 7.4 percent.  In addition, the delayed planting this
year in Texas--typically the first state to harvest rice--meant that the 1997
harvest began later than normal, stretching last year's stocks further and
adding to the already tight long grain supply situation.  Long grain stocks
and stocks-to-use ratio had declined each year since 1993/94.

The medium grain situation in 1996/97 was less tight, with ending stocks
estimated at 14.2 million cwt and the stocks-to-use ratio at 24 percent,
although both were down from a year earlier.  An 11-percent increase in
production in 1996, with only a very small increase in exports in 1996/97,
account for the relatively abundant medium grain supply situation.

For 1997/98, total rice ending stocks are projected to be 24 million cwt,
yielding a stocks-to-use ratio of just 12.5 percent, down from 13 percent for
1996/97.  The stocks-to-use ratio for 1997/98 would be the lowest since
1980/81, with 1996/97's ratio ranking second. 
 
The larger 1997 rice crop is projected to raise long grain ending stocks in
1997/98 to 12.6 million cwt, increasing the stocks-to-use ratio to 9.5
percent.  But even with these increases, the tight supply situation will keep
long grain prices strong during the 1997/98 marketing year.   

For medium/short grain rice, a smaller Delta crop and essentially steady
demand will pull ending stocks down 10.8 million cwt in 1997/98, lowering the
stocks-to-use ratio to 18 percent.  

World Rice Trade
Stronger Since 1995

A contributing factor in strong U.S. rice prices has been that world trade
increased to a record 21 million tons in 1995 and has remained at an elevated
level since then.  From 1980/81 through 1990/91, world rice trade had
accounted for under 4 percent of total use and never reached 14 million tons. 
Since 1995, trade has accounted for almost 5 percent of total use.

Several factors explain the higher level of world rice trade in recent years. 
First, strong income growth in much of Asia has led to greater demand for
better quality rice by higher income urban consumers.  Second, a reduction in
trade barriers has opened some markets to rice trade--most importantly the
partial opening of the Japanese and South Korean markets.  Japan imports
almost exclusively high-quality japonica-type rice, with U.S. growers
accounting for nearly half of these sales.  Korea has thus far turned to India
and China for its imports.  

Finally, a faster rate of growth in world consumption than in production in
recent years has created greater demand for imported rice.  This has been
particularly true for Latin America.  Since 1993, Brazil has been one of the
world's largest importers, typically taking over a million tons annually. 
Argentina and Uruguay have supplied most of Brazil's import needs.

Thailand is the world's largest exporter of rice, and trades a broad array of
rice types and qualities.  The U.S. exports mostly high-quality rice,
primarily to the Western Hemisphere, Western Europe, some higher income Middle
Eastern countries, and Japan.  U.S. rice exports for 1998 are projected at 2.7
million tons, up 200,000 from 1997.  The increase is a result primarily of the
greater U.S. supply.  U.S. exports were projected to decline along with rice
acreage following the termination of deficiency payments in the 1996 Farm Act,
but strong demand and larger-than-expected supplies have allowed the U.S. to
remain a major exporter. 

World rice production is projected to be 379 million tons, just below the
1996/97 record of more than 380 million but 1.2 million tons below projected
use.  These projections would result in an almost 2-percent drop in ending
stocks from a year earlier, yielding a stocks-to-use ratio of 14 percent, down
from 14.5 percent in 1996/97.  Global trade is projected to reach 18.4 million
in 1998, up from 17.9 million this year and the third highest on record.  The
combination of tighter supplies and greater trade limit the likelihood of any
drop in trading prices from the already high levels of 1996/97.

El Nino Delays
Asian Monsoon

El Nino--a periodic warming of the tropical Pacific Ocean that alters weather
patterns in tropical and subtropical regions--is currently affecting weather
in parts of Asia, western South America, and Australia and will continue to
affect weather into the spring of 1998.  While current projections assume
normal weather for the remainder of the 1997/98 crop year, analysts will
closely monitor El Nino for any potential impacts on crop production.

Thus far, the weather effects of El Nino have included a delayed and erratic
monsoon in parts of South and Southeast Asia, which has disrupted normal
rainfall patterns in several major rice producing and exporting countries. 
About 90 percent of the world's rice crop is grown in Asia, with much of the
Asian crop dependent on the timing and consistency of the monsoon.  

Rice growing areas in Thailand--the world's largest rice exporting country
--and in the Philippines and Indonesia--two of the world's largest rice
importing countries--are experiencing droughts.  Drought has also affected the
primary rice growing region of Australia.  In contrast, India and Bangladesh
have experienced heavy rain and flooding in their main rice growing areas. 
Parts of western South America have faced torrential rains as well.
Nathan Childs (202) 501-8513
nchilds@econ.ag.gov


POLICY

1996 Farm Act Facilitates
Acreage Shifts

In the first two seasons under the new farm legislation, U.S. farmers adjusted
their planting decisions to take advantage of strong crop prices.  In 1996,
total acreage planted to principal crops rose more than 16 million acres to
334.5 million, with acreage in 1997 remaining nearly unchanged from the 1996
level.

The Federal Agriculture Improvement and Reform Act of 1996 (1996 Farm Act)
allows farmers more flexibility to respond to strong market price signals (AO
Supplement April 1996).  The eight major crops most affected by the change in
policy are wheat, corn, sorghum, barley, oats, upland cotton, rice
--all previously covered by supply management programs--and soybeans.  Total
plantings for these eight crops rose from about 245 million acres in 1995 to
261.6 million in 1996, falling only slightly to 261 million in 1997.  These
crops accounted for virtually all of the changes in principal crop acreage
during the past 2 years.

Increased total acreage reflects the supply response to higher absolute
prices.  In addition, a change in the mix of planted crops is a response to
changes in relative prices among the crops, combined with some year
-specific weather-related events.  Increased planting flexibility under the new
farm legislation facilitated producers' ability to change land use.

The farm legislation enacted in 1996 made important changes in the nature of
government commodity programs, including supply management for major field
crops.  The 1996 Farm Act increased farmers' planting flexibility by
eliminating acreage reduction programs (ARP's), base acreage planting
requirements to maintain eligibility for program payments, and limits on flex
acreage that farmers could plant to other crops.  The increased planting
flexibility has facilitated producers' ability to adjust both total land use
and the cropping mix over the past 2 years.  Some planting constraints
continue for program participants under the 1996 act, in the provisions for
conservation of highly erodible lands and protection of wetlands.

Under a continuation of previous farm law, higher prices in 1996 and 1997
would have brought additional land into production from previously idled
acres, and 25-percent planting flexibility would have allowed switching among
crops (15 percent "normal" flex acres and 10 percent optional).  However, base
acreage considerations, limited flexibility, and ARP's would likely have
constrained acreage adjustments farmers could make to the large runup in
prices and to the price relationships among crops.  This spring, for example,
soybean prices exceeding $8 a bushel were high in relation to prices for
competing crops such as corn.

By removing the base acreage planting constraints and flexibility limitations
of previous farm law, the 1996 Farm Act permitted a faster supply response to
the economic incentives provided by absolute and relative price movements. 
Greater ability of producers to respond to signals from the marketplace
results in agricultural production being economically more efficient.  

The significant gain in the 1996 aggregate acreage planted to major field
crops was due largely to higher prices for most major field crops, combined
with commodity program changes that increased planting flexibility.  Some of
the 1996 acreage increase resulted from double counting of failed winter wheat
land that was replanted to alternative spring-planted crops.  In 1997, total
plantings remained near the 1996 level, but a new set of relative prices led
to a different mix of crops planted.

Land idled in 1995 likely provided much of the acreage gains during the past 2
years, brought into use in response to high price incentives.  In 1995, the
last year under the previous farm law, nearly 5 million acres had been idled
under corn and rice ARP requirements.  Flex acreage voluntarily left idle by
farmers accounted for an additional 5 million acres.  Another 13.6 million
acres had been idled under voluntary 0,50/85-92 programs. 

Within the higher acreage total of the last 2 years, changes in the mix of
crops planted have resulted from relative price shifts among various crops
combined with year-specific weather-related events.  Large acreage shifts to
corn and spring wheat in 1996 and to soybeans in 1997 reflected price
incentives that favored planting those crops rather than competing crops, as
well as some weather-induced planting adjustments.

For 1996, in eight southeastern and Delta states (Arkansas, Louisiana,
Mississippi, Alabama, Georgia, South Carolina, North Carolina, and Tennessee),
corn acreage increased sharply and  soybean plantings rose, while upland
cotton and rice acreage fell.  Corn prices in the spring planting season were
very attractive relative to cotton prices, and opportunities for early harvest
provided additional incentives for the shift to corn.  In 1997, soybean
plantings grew further in these states as strong soybean prices drew acres
from upland cotton, corn, and wheat.  Rice acreage also rose in 1997,
reflecting strong prices this year.

In Texas, Oklahoma, and Kansas, acreage rose sharply for sorghum in 1996, due
in part to its strong prices.  Sorghum gains also reflected replanting of
failed winter wheat area to sorghum and drought-induced shifts from cotton in
Texas.  In 1997, total planted area in these states is smaller partly because
of the double counting in 1996 of failed winter wheat land that was replanted. 
Plantings of sorghum in 1997 declined sharply as its prices fell relative to
wheat and cotton, although sorghum area remained above 1995 levels.

In Minnesota, North Dakota, and South Dakota, strong prices in 1996 pushed up
total plantings.  For the three-state total, the increase in plantings was
about equal to the amount of land idled under annual commodity programs in the
previous year.  Spring wheat and corn captured most of the 1996 acreage gain,
reflecting higher relative prices, with soybeans and barley rising less. 
Notably, high wheat prices in the spring of 1996, following the reduction in
winter wheat production potential in other regions of the country, provided a
strong incentive for spring wheat area expansion.  Also, acreage planted to
sunflowers and other minor oilseeds fell in 1996, reflecting lower prices
relative to wheat.

Some of the 1996 gain in spring wheat acreage likely occurred on land
typically in summer fallow, as plantings were no longer limited to the program
crop acreage base of prior law.  In particular, 1996 wheat plantings in North
Dakota equaled that state's 1995 wheat acreage base plus about two-thirds of
the 1995 total normal flex acreage of other program crops.  This suggests that
1996 North Dakota wheat plantings would have been hard to achieve within the
program bounds of previous legislation. 

For 1997, in contrast, strong soybean prices relative to corn, wheat, and
barley shifted land in the tri-state region to soybeans from those competing
crops.  Acreage planted to minor oilseed crops also rebounded somewhat this
year on the strength of oilseed prices.

In the Corn Belt, a large increase in 1996 plantings came mostly from land
idled under annual commodity programs in the previous year.  Strong prices for
corn relative to competing crops led to corn plantings capturing nearly all of
the region's increase in total acreage.  Additional increases in Corn Belt
plantings in 1997 pushed the 2-year gain in acreage above the amount of land
idled under annual commodity programs in 1995.  Strong soybean prices relative
to corn and wheat prices shifted land to soybeans in the region for 1997, with
corn acres rising less and wheat area falling.  The nearly complete planting
flexibility helped in attaining these adjustments.
Paul Westcott (202) 219-0609 and Ed Young (202) 219-0680
westcott@econ.ag.gov
ceyoung@econ.ag.gov


RESOURCES & ENVIRONMENT

Restoring the Everglades:
Challenges for Agriculture

One of the most ambitious environmental restoration efforts--the South Florida
Ecosystem Restoration Project--is now underway to restore the natural
functions of the Everglades watershed.  The Florida Everglades watershed is
among the world's most productive and biologically diverse wetland/estuarine
ecosystems.  But urban and agricultural development in south Florida,
supported by past public policies, has resulted in significant damage to the
Everglades' natural systems.

Restoration of natural systems, combined with a rapidly expanding urban
sector, will place increasing demands on the agricultural sector to adjust
traditional patterns of land and water use.  But the precise demands on
agriculture, and the appropriate mix of strategies to meet those demands, are
not fully known.  An economic analysis can aid in developing restoration
strategies that balance resource allocations among competing uses. Economic
analysis provides a framework to assess the tradeoffs and potential joint
benefits between agricultural, urban, and environmental demands. 

Development
& Its Impacts

The historic Everglades basin--extending from the Kissimmee River drainage to
the Florida Bay--was a vast system of hydrologically connected wetlands and a
rich mosaic of smaller micro-ecosystems reflecting different topographic
features and soil types, small-scale climatic variation, and frequent natural
disturbances.  Over the years, the various wetland plant communities provided
an abundance of wildlife habitat and sufficient habitat diversity to sustain
populations through natural disturbances such as flooding, drought, fire, and
tropical storms.  Waterflows through the watershed tended to follow a
predictable seasonal pattern--critical to life cycles of native wildlife.

During the wet summer-to-fall season, Lake Okeechobee--the heart of the
regional hydrologic system--would swell and overflow with heavy runoff from
northern tributary basins, forming a vast, slow-moving "river of grass"
through the Everglades marsh roughly 50 miles wide and extending 100 miles
south to the Florida Bay and Gulf estuaries.  As floodwaters receded during
the dry season, moisture stored in the thick peat soils of the Everglades
would help to maintain surface water in wetlands and deepwater sloughs,
providing continued freshwater flows to the marsh and coastal estuaries
throughout the year and across multiple dry years.  The naturally low nutrient
content of the water accounted for the rather sparse, open character of much
of the Everglades marsh--providing well-oxygenated conditions for many aquatic
species at the base of the food chain.

Human settlement and economic expansion have profoundly altered the
Everglades.  Wetland conversion for agricultural and urban uses substantially
reduced available land for wildlife habitat, natural environmental functions,
and opportunities for recreation and other services.  Of the remaining
wetlands, large areas are seriously degraded due to disruptions in natural
water flows and impaired water quality, with dramatic effects on native
wildlife, including changes in community composition, loss of biodiversity,
and risk of extinction for many species.  Moreover, the continued decline in
natural systems threatens the long-term prosperity of local economies
dependent on tourism, fishing, and adequate freshwater supplies.

Wetland conversion.  Land development for agriculture and urban 
expansion--supported by earlier public policy to reclaim wetlands for economic
uses--has diminished the wetland resources in south Florida by an estimated 1.1
million acres, about one-half of the original wetland expanse.  Early
development activities during the 1920's and 1930's focused on land reclamation
and drainage for agriculture.  Construction of the Central and Southern Florida
Project permitted an acceleration of wetland conversion after the 
mid-1950's. North of the Everglades, extensive diking and channelization
eliminated historic floodplain wetlands, and large tracts of wetland/upland
prairie were converted to improved pasture.

South of Lake Okeechobee, 700,000 acres of marsh--roughly one-fourth of the
historic Everglades--has been developed for irrigated production of sugarcane
and other crops in the Everglades Agricultural Area (EAA) since the 1950's. 
Extensive seasonal wetlands in southeast Florida were drained and developed
for high-valued fruit and vegetable production and residential development. 
While agricultural development on private lands remains a factor in wetland
conversion--particularly the expansion of citrus in southwest Florida
--urban growth in the coastal areas of south Florida is expected to account for
most future wetland losses.  Although public ownership and state and local
controls over much of the central and southern Everglades have restricted land
development, much of the remaining wetland has been degraded.

Water-flow modifications.  Highly regulated water systems--initially to
support agriculture and increasingly for urban development--have vastly
altered the quantity, distribution, and timing of water flows throughout the
Everglades watershed.  Alteration of historic flow patterns has degraded much
of the remaining undeveloped wetlands, and is perhaps the single most
important factor underlying ecosystem decline in south Florida.  Managed water
releases through the Everglades marsh system have been limited in most years,
with much of the northern basin runoff diverted to sea for flood-control
purposes.  Natural patterns of high and low flows have been replaced with
rapid fluctuations in water depth and loss of flow variability across the
years.

Landscape fragmentation--due to canals, levees, roads, and other 
structures--has further disrupted the natural flow of water from Lake
Okeechobee through the Everglades.  Land subsidence due to drainage has limited
the basin's capacity to store and regulate water flows, while reducing the
gradient necessary to route water southward.  As a result, reduction of
freshwater inflow to southern estuaries has increased saline concentrations and
is believed to be a major factor in the declining marine life of Florida Bay.

Water quality impairment.  Degraded water quality from agriculture and other
land uses is a serious concern in areas of the watershed.  Water quality can
have significant impacts on native wildlife--either directly through
adjustments in toxicity and oxygen concentrations--or indirectly through
changes in plant communities and animal organisms required to support aquatic
systems.  

Nutrient runoff from livestock operations and urban development in the
northern drainage area has contributed to high phosphorus concentrations, low
dissolved oxygen levels, and large blooms of algae in Lake Okeechobee. 
Irrigation drainage flows containing chemical fertilizers and pesticides have
impaired water quality in some discharge areas of the northern and eastern
Everglades.  Sediment from farm fields and canals has caused silting damage in
coastal estuaries.  In addition, drainage of organic soils releases naturally
occurring nitrogen and phosphorus to the environment.  Finally, wetland
conversion has limited the land's capacity to filter pollutants and sediment,
while water diversions alter pollutant concentrations.

Adjustments in Agriculture
Will Aid Restoration

Agriculture is a major industry in south Florida, accounting for more than
half of U.S. cane sugar production and a significant share of winter
vegetables, citrus fruits, and other products.  While the south Florida
economy has diversified in recent decades, agriculture remains an important
source of income to the region--providing about $1.5 billion in annual sales. 
Current options to restore ecologic functions in south Florida could affect
the area's agricultural production in several ways.

Increased freshwater inflows to the Everglades marsh would be accomplished, in
part, through wet-season water retention on agricultural lands.  Some
restrictions on water supply and flood control for agricultural purposes would
likely be required to meet environmental and expanding urban needs.  Much of
the land sought for environmental restoration--flow-ways, filtration ponds,
water preserves, and wildlife corridors/buffers--would have to be obtained
through acquisition of private land currently in crop production or pasture. 
Changes in farming practices and input use will be required to achieve state
water management and water quality standards.

Cropland reductions.  Land acquisition is the highest priority activity under
the south Florida restoration program.  The 1996 Farm Act allocated $200
million from the Treasury to the Secretary of the Interior for south Florida
restoration, to be used for land acquisition and other purposes.  Specific
land-acquisition needs potentially affecting agriculture include
reservoir-storage 
development, flow-way construction, constructed wetlands, canal system
improvements, and wildlife management areas. 

However, large-scale buy-out of agricultural interests to meet all
environmental needs may not be economically feasible.  Other potential means
of acquiring land-use rights include land exchanges, short-term or permanent
easements, and temporary transfer of use rights (wet-year flood
retention/dry-year 
water storage) on an as-needed basis.  Easements, long-term contracts,
and other avenues for restoration may play a more prominent role in south
Florida under the Everglades restoration program.  The removal of a large
amount of acreage from agricultural production could have significant economic
costs to the region; equivalent environmental benefits may be possible through
other farm-level adjustments that aid restoration.

Cropping shifts.  Changes in cropping patterns and crop type may help to
integrate agricultural production with natural hydrologic systems, enhancing
on-farm water storage and slowing soil subsidence.  Researchers are developing
new sugarcane varieties with greater tolerance for shallow water tables and
extended flooding.  Rice--currently grown in rotation with sugarcane on
limited acreage in the EAA--has been recommended as a cost-effective means of
controlling soil loss because it is a flood-tolerant crop with peak irrigation
demands during the wet summer season, and it has comparatively low fertilizer
requirements.

Other possible enterprises include aquatic cover crops and partial conversion
to wet-pasture beef-cattle production or to aquaculture.  Adjustments in
cropping patterns will depend on the economic viability in large-scale
production, restrictions on expansion of alternative enterprises, compensation
incentives to encourage adoption, and effects on water quality.

Improved management practices.  On-farm resource management--or the managed
allocation of land, water, chemicals, and other purchased inputs within the
farming system--is a key element of the Everglades restoration program.  
USDA--in coordination with the South Florida Water Management District and the
Florida Department of Environmental Protection--helps identify agricultural
best management practice (BMP's) to reduce production impacts on natural
systems, and provides technical assistance and cost sharing to promote BMP
adoption.

Management of applied fertilizers and pesticides--involving assessment of crop
needs and improved application and timing techniques--is essential in meeting
water quality standards.  Water-table management is required to minimize soil
subsidence, reduce release of soil nutrients, and enhance ground-water
storage.  Recommended practices include timed pumping of water based on
rainfall events, and installation of canal riser controls to maintain higher
average water tables and reduced depth fluctuations.  Drainage management
-- involving water retention and re-use--can minimize pollutant loadings into
the regional water system.

Improved soil and water management practices across the Everglades watershed
have already had significant beneficial impacts on natural systems.  Adoption
of BMP's in the 1980's for dairy, livestock, and poultry production has
contributed to improved water quality and reduced algal blooms in Lake
Okeechobee.  Improved practices for sugarcane production in the EAA have
reduced phosphorus discharges into the northern Everglades by 68 percent over
the 1979-88 base period, well ahead of regulatory schedules.  An initial
evaluation of a 4,000-acre filtration pond indicates that 40,000 pounds of
phosphorus per year were successfully removed from EAA drainage flows prior to
discharge into the regional drainage system.

Balanced Approach
Is Needed

The environmental benefits of maintaining a strong agricultural sector need to
be considered when assessing the benefits and costs of alternative restoration
measures.  Agriculture may be the most environmentally benign use of developed
land and, in some cases, may produce larger benefits than nonmanaged uses.

Agricultural lands often serve as a buffer to encroaching urban development,
and can restrict the spread of exotic and nuisance species to undeveloped
areas.  Cropland soils may be managed to store wet-season water supplies,
reducing flood impacts downstream.  Under proper management, crop production
can also improve water quality by removing excess nutrients from ground and
surface waters.  Land management practices--such as filterstrips, set
-asides,flooding of fallow fields, and drain water retention--provide important
wildlife habitat benefits.  Finally, a strong agricultural sector will remain
an important source of revenue for ongoing restoration initiatives.

Efforts to restore the south Florida ecosystem will depend on success in
recreating essential functions of the natural system while providing for
managed growth and economic activity.  The role of agriculture will depend
ultimately on tradeoffs in benefits among agricultural, urban, and
environmental uses of land and water resources.  An economic assessment of
relative benefits and costs that arise from future resource allocations is
essential to achieve a balance between agricultural producers, the regional
economy, and environmental quality.
Marcel Aillery (202) 219-0427, Robbin Shoemaker (202) 219-0936, and Margriet
Caswell (202) 219-0507
maillery@econ.ag.gov
robbins@econ.ag.gov
mcaswell@econ.ag.gov

RESOURCES & ENVIRONMENT: Box 1

The Central & South Florida Project

The Central and South Florida Project (C&SFP) is the primary means of
drainage, water supply, and flood control for agricultural, urban, and
environmental purposes in south Florida.  The U.S. Army Corps of Engineers
(USACE) has had lead responsibility for project design and construction.  The
South Florida Water Management District, a regional public agency, manages the
system in cooperation with the USACE.

Project construction extended from the mid-1950's through the mid-
1980's--with main features essentially in place by the mid-1960's. 
Construction costs totaled $252 million between 1950 and 1985, 80 percent
financed through the Federal government.

The C&SFP represents regional water management on a massive scale. 
Encompassing an 18,000-square-mile service area stretching from Orlando to the
Florida Bay, the project includes more than 1,400 miles of canals and levees,
with pumping stations, locks, floodgates and other water control structures.

Main components of the C&SFP infrastructure are the upper Kissimmee basin
impoundments and channelized Kissimmee River; the Lake Okeechobee levee and
pumping system; the Everglades Agricultural Area, a large area of the northern
Everglades designated for agriculture; three Water Conservation Areas
consisting of five pools managed primarily for water supply and flood
-control purposes; and the perimeter levee through the eastern Everglades,
providing flood protection to agricultural and urban areas, and serving as the
westward limit for most development.

RESOURCES & ENVIRONMENT: Box 2

Governments Act 
To Restore the Everglades

Growing concern over recent decades about the degradation of natural systems
in south Florida led to increasingly insistent calls for public action.  In
1983, the state of Florida initiated the first of a series of regional
restoration projects designed to protect and restore key features of south
Florida's natural landscape--the Kissimmee River, Lake Okeechobee, Big Cypress
Swamp, the Water Conservation Areas, and Everglades National Park.  The
litigation that followed over legal and financial responsibilities of private,
state, and Federal entities in the recovery process led to the Everglades
Forever Act, passed by the Florida Legislature in 1994.

Principal elements of the act include directives to restrict pollutant
discharges in the northern Everglades, to restore more natural hydrologic
flows through the Everglades marsh system, and to establish financing
mechanisms for recovery programs.  The act also reaffirmed a strong Federal
commitment to the south Florida restoration effort.  

The Federal Restoration Task Force, founded in 1993, has sought to integrate
ecosystem restoration efforts across principal Federal and state agencies and
Native American tribal governments engaged in restoration efforts in south
Florida.  The Governor's Commission for a Sustainable South Florida was
established in 1994 to define broad principles for south Florida ecosystem
restoration and to prioritize restoration activities.

The U.S. Army Corps of Engineers, in cooperation with the South Florida Water
Management District, is directing a major Reconnaissance Study of the Central
and South Florida Project water control system to identify operational and
structural modifications to meet long-term regional water needs.  The intent
of the study is to provide broad strategies guiding hydrologic restoration
while maintaining or enhancing other authorized project purposes.


SPECIAL ARTICLE

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

The North American Free Trade Agreement (NAFTA) has had a positive overall
effect on the U.S. agricultural sector, reinforcing the trend toward greater
integration of markets in North America and enhancing the competitiveness of
U.S. agriculture.  From implementation of NAFTA in 1994  through 1996, total
U.S. agricultural trade has grown rapidly, rising from nearly $68 billion
(exports $43 billion; imports $25 billion) to about $94 billion (exports $60
billion; imports $34 billion).  In relative terms, the share of trade with
NAFTA partners has held steady at about 24 percent of total U.S. agricultural
trade.  

During the 12 months prior to NAFTA's January 1, 1994 implementation, U.S.
agricultural trade with Canada and Mexico totaled just over $16 billion (more
than $9 billion in exports and $6 billion in imports).  By the end of 1996,
just 3 years after implementation, it had grown to over $22 billion (nearly
$12 billion in exports and nearly $11 billion in imports). 

But quantifying the trade effects directly attributable to NAFTA is less than
straightforward.  The increase was not all due to the implementation of NAFTA
or the already-existing U.S.- Canada Free Trade Agreement (FTA).  The initial
years of NAFTA implementation have coincided with significant changes in the
domestic agricultural policies of the U.S., Canada, and Mexico and in the
global trade policy environment.  Mexico has also undertaken significant
economic reform.  These policy reforms have affected some commodity markets in
ways that are difficult to separate from the direct effects of NAFTA trade
reforms, because the policy and trade reforms are compatible and mutually
reinforcing.  

The peso crisis and subsequent recession in Mexico seriously disrupted trade
in 1995, overwhelming the effects of the early tariff reductions under NAFTA. 
Further, adverse weather conditions which affected Mexican grain and cattle
production, and changing production technology for vegetables, influenced
trade in several agricultural commodities in North American markets. 

The collapse of the Mexican peso in December 1994 and the subsequent recession
reduced Mexican consumers' purchasing power and increased short-term price
competitiveness of Mexican exports.  Consequently, U.S. agricultural exports
to Mexico plunged 22 percent in 1995, offsetting the gains from 1994, while
Mexican exports to the U.S. grew 32 percent.  The Mexican economy began a
strong recovery in 1996, and U.S. agricultural exports to Mexico rebounded,
increasing almost 55 percent from the previous year, while imports from Mexico
dropped slightly. 

USDA's Economic Research Service (ERS) examined the impact of agricultural
trade liberalization under NAFTA and the FTA on trade through 1996
--the third year of NAFTA implementation.  The analysis disentangles the
effects of the changes in tariffs and nontariff barriers under the agreement
from other forces influencing economic conditions and agricultural markets in
North America.  

To what extent is the trade growth due to NAFTA?  ERS analysis which isolated
the economic impacts of NAFTA from other developments found that U.S.
agricultural exports to Mexico were about 3 percent higher in 1996 than they
would have been without the reduction in trade barriers under NAFTA.  U.S.
agricultural exports to Canada were about 7 percent higher because of the free
trade agreement.  Similarly, U.S. agricultural imports from Mexico were just
over 3 percent higher in 1996 than they would have been without NAFTA, while
imports from Canada were about 5 percent higher. 

A little more than one-fifth of the increase in U.S. exports to NAFTA
countries since 1993 can be attributed to trade liberalization under NAFTA
provisions, and slightly less than a fifth of the increase in U.S. imports.

In addition, analysts at the Federal Reserve Bank of Dallas indicate that
NAFTA eased trade flows in the wake of the peso crisis and promoted more rapid
economic recovery in Mexico than might otherwise have occurred.  NAFTA's
greatest contribution may well have been to prevent the Mexican government
from reverting to the restrictive trade policies that had been so destructive
during the debt crisis of the early 1980's.  

A primary U.S. goal in seeking a trade agreement with Mexico was to lock in
and expand the unilateral trade and investment reforms Mexico had undertaken
in the mid-1980's.  Mexico's adherence to its NAFTA commitments and the rapid
recovery of trade in 1996 provide compelling evidence that NAFTA has achieved
this.

Trade Effects Vary 
Across Countries & Commodities

For most commodities, the direct impact of NAFTA has been small because trade
barriers were relatively low before the agreement, liberalization is only
partially complete, and tariffs are only one of many factors that influence
trade.  The largest NAFTA-induced trade changes have occurred among products
having the highest tariffs and nontariff barriers before the agreement and
undergoing significant reductions in trade barriers the first few years of
implementation.  

Of the U.S.'s two NAFTA trade partners, Mexico is the faster growing
agricultural market with the value of imports averaging nearly 15
-percent growth per year since 1993, compared with about 12 percent for U.S.
exports to the world.  U.S. agricultural exports to Mexico climbed to $5.4
billion by 1996.  

The largest rates of NAFTA-specific gains in U.S. exports to Mexico have been
for sorghum, cattle, beef, and dairy products, apples, and pears.  U.S.
exports of these products were 10-30 percent higher in 1996 than would have
occurred without the agreement.  At the same time, U.S. imports of fresh
vegetables from Mexico were about 5-10 percent higher in 1996 than they would
have been without the agreement. 

Growth in U.S. agricultural trade with Canada during the 1993-96 period has
been slower but less volatile than trade with Mexico because, as a mature
market, Canadian consumer demand is relatively stable.  Also, the FTA had
already been in place for over four years by 1993.  U.S. agricultural exports
to Canada grew to $6.1 billion by 1996.  The largest gains for U.S.
agricultural exports to Canada because of NAFTA (and the subsumed FTA) have
been in beef and veal, wheat and wheat products, vegetable oils, processed and
fresh tomatoes, and other vegetables.  

Agricultural commodities that were freely traded before NAFTA have not been
directly affected by the agreement.  The U.S. tariff on coffee imports was
zero before NAFTA; therefore, the recent increase in U.S. coffee imports from
Mexico cannot be credited to NAFTA.  Likewise, trade in oats between the U.S.
and Canada carried zero tariffs before the U.S.-Canada Free Trade Agreement
(FTA), so NAFTA does not explain the recent increases in U.S. imports of oats
from Canada.

NAFTA has not yet provided for significant trade liberalization in all
agricultural products.  For Mexican imports of corn, dry beans, and poultry,
over-quota tariffs remain prohibitively high. However, the Mexican government
chose to expand the quotas in some years, and this policy rather than NAFTA
has allowed U.S. exports of these commodities to increase.  Similarly, dairy,
poultry, and eggs still face prohibitive over-quota tariffs in Canada.

NAFTA tariff reductions on U.S. imports of winter tomatoes from Mexico have
been very small, less than 1.5 percent on an ad valorem basis.  Therefore,
only a small part of the increase in trade can be attributed directly to the
tariff changes.  The peso crisis in Mexico, technological shifts in tomato
production, and unusual weather in Florida were far more important than the
tariff reductions under NAFTA (AO June 1996).  

For many agricultural products, FTA has fostered two-way trade between the
U.S. and Canada since implementation.  ERS analysis shows that in 1996, U.S.
beef exports to Canada were about 100 percent higher, and U.S. beef imports
from Canada were about 50 percent higher, because of  FTA.  At the same time,
bilateral trade between the U.S. and Canada in wheat and wheat products and
vegetable oils were 5 to 10 percent higher than they would have been without
the agreement.

The agricultural provisions of NAFTA have had small positive impacts on
agricultural investment and employment to date.  Three years into NAFTA,
investment in U.S. agriculture and agriculture-related industries has
increased on the order of 0.19 percent over what would have been expected
without the agreement.  Employment in agriculture and agriculture
-related industries has increased slightly due to NAFTA, on the order of 0.07
percent. While specific job losses will occur due to direct import competition
or the relocation of production facilities, the overall increases in employment
and trade since 1993 suggest that any job losses in agriculture-related
industries have been more than offset by job gains elsewhere in agriculture and
the general economy.

These effects are small because NAFTA trade is a small part of U.S.
agriculture, and to a lesser extent because trade liberalization under NAFTA
is only partially complete.  As NAFTA creates competitive challenges and
opportunities, labor and capital will seek out their highest returns, driving
out less efficient performers while bolstering more efficient enterprises. 
This dynamic process of adjustments will continue throughout implementation of
the agreement.  

Trade liberalization through NAFTA expands agricultural producers' ability to
compete in a larger marketplace, as more market-oriented domestic policies
increase producers' reliance on trade.  As the markets of North America become
more integrated, regional production shortfalls will increasingly be mitigated
by trade flows.  Evidence to date appears to support the claim that NAFTA is
creating incentives for resources, labor, and capital to remain in the U.S.
agricultural sector.  
Terri Raney (202) 219-1290 and Shayle Shagam (202) 219-0836
tlraney@econ.ag.gov; sshagam@econ.ag.gov

SPECIAL ARTICLE BOX #1

The Nuts & Bolts 
of NAFTA

Calendar 1996 marked the third year of trade liberalization between the U.S.
and Mexico under the North American Free Trade Agreement and the eighth year
of an earlier trade agreement between the U.S. and Canada.   NAFTA liberalizes
trade and investment rules among the U.S., Mexico, and Canada.  It encompasses
the U.S.-Canada Free Trade Agreement (FTA), in place since January 1, 1989,
and builds on the "Framework of Principles and Procedures for Consultations
Regarding Trade and Investment Relations" between the U.S. and Mexico,
initiated in 1987.  

The U.S. and Mexico began discussions on a free trade agreement in 1990, and
Canada joined the discussions in 1991.  Negotiations were completed, and the
presidents of all three countries signed the agreement in December 1992.  The
U.S. Congress approved it in November 1993, and it was signed into law on
December 8, 1993. 

NAFTA, which went into effect on January 1, 1994, established two new
bilateral agreements on cross-border trade--one between the U.S. and Mexico
and the other between Canada and Mexico--adding to the original FTA between
the U.S. and Canada.  The agricultural provisions of NAFTA addressed tariffs,
nontariff barriers, safeguards, rules of origin, and sanitary and
phytosanitary regulations. 

Under NAFTA's agricultural provisions, all tariffs, quotas, and licenses that
restrict agricultural trade between the U.S. and Mexico will be eliminated by
the end of the 15-year implementation period.  Restrictions on about half of
all U.S. agricultural exports to Mexico were eliminated immediately upon NAFTA
implementation in 1994, and numerous other restrictions will be eliminated
over 10 years.  Agricultural trade between Mexico and the U.S. will be
completely liberalized by 2008. 

Regarding agricultural trade between the U.S. and Canada, NAFTA provided no
new market access provisions beyond the FTA, and in general, the rules of the
FTA continue to govern U.S.-Canadian trade.  Tariffs on most agricultural
products traded between the U.S. and Canada will be eliminated by January 1,
1998.  Tariffs on certain products previously subject to nontariff barriers
will remain in place.  Canada will continue to be able to protect its 
supply-managed products: dairy, poultry, and eggs.  

NAFTA established an agreement among the U.S., Canada, and Mexico on sanitary
and phytosanitary standards.  The agreement requires that regulations for the
protection of food safety and plant and animal health be consistent with
internationally accepted scientific standards.  And the agreement recognized
the concept of regional, as opposed to national, certification for plant and
animal health standards, and established a dispute settlement mechanism to
address sanitary and phytosanitary issues.

SPECIAL ARTICLE BOX #2

Measuring NAFTA'S Impact 

USDA's Economic Research Service used a dynamic computable general equilibrium
(CGE) model to isolate the economic impacts of NAFTA on investment and
employment in U.S. agriculture and agriculturally related industries, and on
agricultural trade among NAFTA signatories.  The global model included 7
countries or regions and 12 commodities or sectors.  The base-year data used
in the study (1992) were drawn from USDA's Global Trade Analysis Project
database.  The model results for consumption, production, investment, and
trade are derived from consumer and producer optimization for each country or
region.

In deriving the results, the model first estimated the levels of investment,
employment, and trade that would have occurred without NAFTA.  This was done
by using the Most Favored Nation (MFN) tariffs and nontariff measures that
each of the three countries applied to other members of the World Trade
Organization (WTO) in 1992.  Then the MFN rules were replaced with NAFTA
provisions for 1996, and the impacts on investment and employment were
calculated.  The difference between the two outcomes represents the pure
impact of the tariff and nontariff changes under NAFTA to date.  This approach
assumes that the domestic agricultural policy reforms and multilateral trade
reforms undertaken in each member country would have happened without NAFTA.  

To evaluate the impact of NAFTA on trade for individual commodities, the CGE
analysis was supplemented with more detailed country and commodity models. 
These static equilibrium models were used to evaluate two scenarios for the
1994-96 period based on actual exchange rate and income data. 

The first scenario simulated the trade flows that would have occurred without
NAFTA.  As in the CGE-only analysis, the MFN tariffs and nontariff measures
for each country were used to generate a base estimate of the trade that would
have occurred without NAFTA.  Where import licenses or quotas were replaced by
tariff-rate quotas under the Uruguay Round agreement (implemented at the
beginning of 1995), analysts made knowledgeable judgments about the level of
imports that might have occurred in the absence of NAFTA.  The second scenario
altered the trade rules for each member country following the terms of the
NAFTA agreement, and compared the estimated trade changes to those derived
without NAFTA.  By comparing the difference in the two scenarios, it was
possible to estimate NAFTA's impact in the absence of the economic, weather,
and other forces that have affected specific North American commodity markets
in the past 2 years.  

Since NAFTA is essentially three bilateral agreements (Canada-Mexico,
U.S.-Mexico, and
U.S.-Canada under the FTA), analysis of NAFTA without assessing
the impact of changes in Canada would have provided an incomplete picture of
the effects of trade liberalization on the U.S.  The FTA was subsumed under
NAFTA at the beginning of 1994, and the no-NAFTA scenario explicitly assumes
no FTA as well.  Because U.S. bilateral trade liberalization has proceeded
further with Canada than with Mexico for many commodities, a return to MFN
treatment implies a larger shift in bilateral trade rules with Canada than
with Mexico.  Consequently, the results for Canada may seem larger than one
would expect intuitively, because they are capturing the full scope of
liberalization between the U.S. and Canada since 1989, not just the
liberalization that has occurred since 1994.

SPECIAL ARTICLE BOX #3

NAFTA: Impacts 
On U.S. Consumers

Trade liberalization under NAFTA increased product availability, lowered
prices for some products, and provided greater variety.  During the 3 years
since NAFTA's inception (1994-96), U.S. agricultural imports from Mexico grew
38 percent compared with the 3-year period preceding NAFTA (1991-93), while
U.S. imports from Canada grew 46 percent.  U.S. imports from all 
non-NAFTA source countries grew only 18 percent, suggesting that NAFTA has had
a significant effect on imports from Canada and Mexico over and above the
general increase in imports from all source countries.  Still, much of this
growth was due to factors other than NAFTA, such as peso devaluation in Mexico
and the continuing integration of the food production and marketing economies
of the U.S., Mexico, and Canada.  ERS analysis estimates that about 3-5
percent of this trade growth can be attributed directly to NAFTA provisions.

In 1996, the U.S. imported more than $33 billion of agricultural products from
more than 200 countries.  Of this total, $6.8 billion, or 20 percent, came
from Canada--the largest U.S. import source--and another $3.8 billion came
from Mexico.  Together, Canada and Mexico supplied 31 percent of U.S.
agricultural imports in 1996.

Imports lead to increased product availability in two ways.  First, some
imports are purely supplementary in that the supply of imports adds to the
supply of domestic product, increasing total supply available to consumers. 

Second, some domestic industries produce at costs that are low enough to limit
competition from imports.  However, even in these industries, occasional tight
supplies sometimes occur due to poor harvests or demand miscalculations. 
Imports then may compensate for domestic shortfalls.  

Lower import tariffs for many products and the arrival of Mexican 
products-- produced and shipped at lower costs than domestically produced
goods--result in directly lower consumer prices.  In addition, increased
competition from abroad has the indirect effect of lowering consumer prices by
forcing domestic marketers to lower their own prices--typically through cost
cutting measures, increased productivity, or by importing inputs and
ingredients at lower costs than on the domestic market. 

Trade liberalization also provides consumers with greater variety.  On the
grocery shelves, this takes two forms.  Foreign firms may provide an entirely
new product line, or new alternatives to an existing product line. 

Objectively measuring consumer impacts can be difficult.  For most goods
produced or consumed in the U.S., international trade tends to be small
relative to domestic consumption or production.  And while Canada and Mexico
are among the largest U.S. trading partners, the economies of these countries
are relatively small compared with the U.S. economy.  This means that for most
goods produced and marketed in the U.S., decisions by Canadian and Mexican
producers and consumers will have only a small effect on U.S. prices.  
Chuck Handy (202) 219-0859 and Fred Ruppel (606) 622-1769
chandy@econ.ag.gov 
ecoruppe@acs.eku.edu
END_OF_FILE
