AGRICULTURAL OUTLOOK                  September 24, 2002
October 2002, ERS-AO-295
             Approved by the World Agricultural Outlook Board
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AGRICULTURAL OUTLOOK is published 10 times a year by the Economic Research 
Service, U.S. Department of Agriculture, Washington, DC 20036-5831. Please note 
that this release contains only the text of AGRICULTURAL OUTLOOK -- tables and 
graphics are not included. 
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CONTENTS

BRIEFS
Poor Weather Reduces 2002 U.S. Apple Crop 

COMMODITY SPOTLIGHT
Organic Food Industry Taps Growing American Market 
French Fries Driving Globalization of Frozen Potato Industry

WORLD AGRICULTURE & TRADE
U.S. Agricultural Exports to Rise $4 Billion in 2003
EU Revisits Agricultural Policy Reform with Bold New Proposals

FOOD & MARKETING
Food Price Inflation to Moderate in 2002 & 2003

FARM & RURAL COMMUNITIES
Farm Numbers: Largest Growing Fastest

RESEARCH & TECHNOLOGY
A Role for Technology in 21st Century Global Agriculture

SPECIAL ARTICLE
NAFTA's Impacts on U.S. Agriculture: Trade & Beyond

IN THIS ISSUE

Poor Weather Reduces 2002 U.S. Apple Crop 

This year's U.S. apple crop will be smaller for the third consecutive year due 
to adverse weather during the growing season.  Apple production in 2002 is 
forecast to decline to 9.2 billion pounds--the smallest crop since 1988.  With 
production down significantly in both the Eastern and Central states, even an 
increase in production in the Western region (with 60 percent of U.S. 
production) will not prevent overall declines. Agnes Perez (202) 694-5255 
acperez@ers.usda.gov

Organic Food Industry Taps Growing American Market 

American consumer interest in organically grown foods has opened new market 
opportunities for U.S. producers, leading to a transformation in the organic 
foods industry.  Once a niche product sold in a limited number of retail 
outlets, organic food is currently sold in a wide variety of venues, including 
farmers' markets, natural foods supermarkets, conventional supermarkets, and 
club stores.  Since the early 1990s, certified organic acreage in the U.S. has 
increased as producers strive to meet growing demand for organic food.  New 
national organic standards will facilitate the marketing of organic products as 
more U.S. growers move into organic production and more processors and 
distributors add organic selections to their product lines. Carolyn Dimitri 
(202) 694-5252 cdimitri@ers.usda.gov 

French Fries Driving Globalization of Frozen Potato Industry

Driven largely by the growing global popularity of Western-style cuisine, frozen 
french fries and other frozen potato products are generating billions of dollars 
in sales worldwide each year.  Global frozen potato production capacity is 
estimated to be at least 9.6 million metric tons a year.  Worldwide exports of 
frozen potato products in 2000 (over 90 percent of which is frozen french fries) 
were valued at $1.9 billion.  The rapid global expansion of quick-service (fast 
food) restaurants, is key to the tremendous growth in worldwide consumption and 
trade of frozen potato products. Charles Plummer (202) 694-5256 
cplummer@ers.usda.gov

U.S. Agricultural Exports to Rise $4 Billion in 2003

Sharply higher prices for grains and soybeans, reflecting drought-reduced U.S. 
production, are expected to boost the value of U.S. agricultural exports to 
$57.5 billion in fiscal year 2003, a 7.5-percent gain over 2002.  Bulk commodity 
exports are likely to lead the gains, although high-value product (HVP) exports 
also are expected to increase.  In contrast to the higher export value, bulk 
export volume will be down in 2002, mainly from lower soybean volume. Carol 
Whitton (202) 694-5287 cwhitton@ers.usda.gov

EU Revisits Agricultural Policy Reform with Bold New Proposals

The Commission of the European Union (EU) is proposing bold changes to its 
Common Agricultural Policy (CAP). The core proposal is a single annual whole-
farm payment, not requiring production by farmers, in contrast to the current 
payments that are linked to production of specific commodities. Farmers would 
have greater flexibility in choosing what to produce, and support for large 
farms would be cut for the first time. Greater emphasis would be placed on rural 
development, food safety, animal welfare, and environmental regulations. The 
proposals also have implications for WTO negotiations and EU enlargement. 
Nonetheless, for many commodities, traditional CAP price support and 
stabilization mechanisms would be maintained.   David Kelch (202) 694-5151 
dkelch@ers.usda.gov

Food Price Inflation to Moderate in 2002 & 2003

The U.S. Consumer Price Index (CPI) for all food is forecast to increase 2.1 
percent in 2002 and 2-2.5 percent in 2003, compared with a 3.1-percent increase 
in 2001.  In 2002, record beef, pork, and poultry supplies, along with dampening 
of consumer demand by the lackluster domestic economy, are holding down meat 
prices.  Smaller potato supplies pushed up the fresh vegetable CPI more than 7 
percent in 2002. But with adequate supplies of fresh fruits, dairy products, 
nonalcoholic beverages, and other processed foods, total food-at-home prices 
increased less than 2 percent. Annette L. Clauson (202) 694-5389 
aclauson@ers.usda.gov

Farm Numbers: Largest Growing Fastest

Declining farm numbers, increasing farm size, and concentration of production 
have captured the interest of the media, the general public, and lawmakers for 
decades. Average farm size has grown as farms consolidated. A smaller share of 
farms accounts for a growing proportion of agricultural production, but the 
proportion of very small farms is also growing. Acreage and sales-class data 
show a trend toward large farm operations with at least 500 acres or with annual 
sales of at least $250,000 in farm products. Robert A. Hoppe (202) 694-5572 
rhoppe@ers.usda.gov

A Role for Technology in 21st Century Global Agriculture

Technological advances have the potential to enhance agricultural productivity, 
incomes, and the quality of life in all countries.  However, some regions of the 
world have gained little from the discoveries and innovations made in 
agriculture and from global agricultural markets, partly because private 
research investment tends to be directed toward meeting the market demands of 
developed-country consumers rather than the needs of less developed countries.  
One way that the agricultural community and public sector could meet these needs 
is to strengthen the technological infrastructure in developing countries and 
facilitate the transfer of appropriate technologies. Margriet Caswell (202) 694-
5529 mcaswell@ers.usda.gov

NAFTA's Impacts on U.S. Agriculture: Trade & Beyond

NAFTA, the North American Free Trade Agreement, has generally benefited U.S. 
agriculture and related industries.  U.S. agricultural trade with Canada and 
Mexico more than doubled during the 1990s, a development to which NAFTA 
contributed. Most U.S. barriers to Canadian and Mexican exports were low prior 
to NAFTA, and dismantling of tariffs under the agreement is in general 
proceeding on schedule. Beyond direct trade impacts, the agreement has 
established rules and institutions that mitigate potential trade frictions, 
promote foreign direct investment, and facilitate public discourse about 
environmental issues. Steven Zahniser (202) 694-5230 zahniser@ers.usda.gov


BRIEFS: Specialty Crops

Poor Weather Reduces 2002 U.S. Apple Crop: Higher Prices Likely

This year's U.S. apple crop will be smaller for the third consecutive year. 
Apple production in 2002 is forecast to decline to 9.2 billion pounds, down 4 
percent from 2001 and the smallest crop since 1988. With production down 
significantly in both the Eastern and Central states (16 percent and 30 percent, 
respectively), even a 5-percent increase in production in the Western region, 
which accounts for over 60 percent of total U.S. production, will not offset 
overall declines. 

Weather-related factors during the growing season are behind this year's 
production decline in most apple-producing states. Most of the Eastern and 
Central states encountered problems with heavy frost damage in the spring, in 
addition to hail and drought. The only states expecting increased production are 
Georgia, South Carolina, North Carolina, Rhode Island, and Maine in the Eastern 
region, and Kansas and Arkansas in the Central region. 

While production is expected up overall for the Western states, a late frost, 
combined with a cool, late spring, poor pollination conditions, and a dry 
summer, have combined to reduce crop size in all apple producing states in this 
region except Washington, Colorado, and Arizona. 

Weather conditions throughout the harvest season could also directly impact 
final crop size. A windstorm that moved through north central Washington in mid-
August caused some fruit to drop onto the ground and damaged some that remained 
on trees as well. Depending on the severity of these losses, the effects of this 
storm could eventually reduce the size of Washington's apple crop. Prior to this 
event, USDA forecast Washington's apple production at 5.5 billion pounds in 
2002, up 8 percent from a year ago. 

Fresh-market apples. Figures on total quantity of fresh-market apples produced 
from this year's new apple crop will not be released until July 2003. The number 
will be determined primarily by the size of crop in Washington, where over 
three-quarters of the nation's fresh-market apples are grown. 

Last year, the Washington crop was smaller due to weather problems and to 
continued decline in bearing acreage--a response to poor economic conditions in 
the industry. Overall fresh-market apple production declined 11 percent in 2001 
from the previous year, and the season-average price for fresh-market apples 
increased 29 percent to 22.9 cents per pound. 

Based on the consumer price index for apples, retail prices during 2001/02 
mirrored the pattern in grower prices, averaging 5 percent higher than the 
previous year. If the forecast for Washington's 2002 production is lowered, 
2002/03 fresh-market apple prices may average higher than last year. 

The overall slump in U.S. apple production this year, coinciding with below-
average carryover stocks of 2001 crop apples and a smaller U.S. pear crop this 
year, should also help boost apple prices this season. In addition, the U.S. 
Apple Association has reported that the nation's new apple crop, especially in 
Washington, is of high quality, which should boost demand in both domestic and 
export markets. 

As of July 1, 2002, the U.S. Apple Association reported U.S. apple holdings at 
15.2 million bushels, down 28 percent from the same time last year and 18 
percent below the 5-year average. Holdings of most apple varieties, including 
the most common (such as Red and Golden Delicious, Granny Smith, Fuji, Gala, and 
McIntosh) were all down significantly from last year. Holdings of the more 
common varieties were also down from the 5-year average, except for Fuji, Rome, 
and Jonathan apples. Fresh apple holdings (mostly Washington apples in 
controlled-atmosphere storage) were down 34 percent, while total processing 
holdings were 10 percent lower. 

Processing apples. Although Washington is the largest producer of processing 
apples, more than half of production comes from other large producers such as 
California, Michigan, New York, Pennsylvania, Virginia, and West Virginia. Crops 
are expected to be smaller this year in all these states. U.S. production of 
apples for the processing sector in 2002 will therefore likely be limited. 
Reduced supplies and lower stocks of processing apples will help boost grower 
prices. Production of processing apples was also down in 2001 from the year 
before, and although imports (mainly of apple juice) were higher, returns to 
growers were 4 percent higher, averaging $106 per ton.

With the U.S. market open to most Chilean fruit, aided in part by 
counterseasonal production schedules in the two countries, the U.S. has become 
Chile's largest apple export market. Over a third of last season's U.S. fresh 
apple imports were from Chile, with New Zealand and Canada following closely in 
share. 

Early reports of a likely smaller European apple crop this year will provide 
export opportunities to Chilean apple growers. Chile's exports to the U.S. may 
be curtailed if apple production declines in marketing year 2002 (marketed 
January-December 2003). As yet, there are still no indications on the size and 
condition of the new apple crop in Chile. 

Sweet/sour varieties, particularly Granny Smith apples, are gaining in share of 
Chile's fresh apple exports, mostly to Europe and the U.S. Meanwhile, the export 
shares of traditional red varieties, destined mostly for the European and Middle 
Eastern markets, are declining. Like the U.S., also a major player in the global 
apple market, apple growers in Chile are rapidly expanding their production and 
exports of new varieties, such as the Fuji apple, to remain competitive. Both 
countries, however, have cut back on acreage in recent years due to financial 
difficulties faced by apple growers. In the U.S., total bearing acreage of 
apples declined in each of the last 4 years. 

Last year's smaller U.S. apple crop, compared with the previous year, limited 
exports during 2001/02. U.S. fresh apple exports from August 2001 through June 
2002 were 19 percent lower than shipments made during the same period of the 
previous season. Shipments were down to most major export markets, with the 
largest declines posted in Mexico, Hong Kong, Indonesia, and Taiwan. In recent 
years, U.S. exporters have faced stiffer competition in Southeast Asian markets 
from increased volumes of lower priced apple exports from China. 

The expected smaller European apple crop and recent shipments of U.S. apples to 
Cuba (first shipments arrived in Cuba the week of July 8, 2002) could provide 
increased opportunities for U.S. exporters this season. Mexico is the market for 
about one-third of U.S. apple exports. However, reduced domestic supplies and a 
sharp increase in tariffs imposed on Washington apples (the outcome of an 
antidumping investigation in 1997) will limit exports during 2002/03. 

Reduced production in the fall of 2001 increased U.S. imports of fresh apples 
during the 2001/02 marketing season. Imports from August 2001 through June 2002 
totaled 309.7 million pounds, up 3 percent from the same period the year before. 
Increases came from nearly all major foreign suppliers, including Chile (up 9 
percent), New Zealand (up 7 percent), and Canada (up less than 1 percent). 
Reduced production this year will likely lead to further increases in imports 
during the 2002/03 marketing season. 

U.S. imports of apple juice and cider from August 2001 through June 2002 were 12 
percent higher than the volume imported during the same period a year earlier. 
The top three suppliers--Argentina, China, and Chile--all posted significant 
increases in shipments to the U.S. However, imports from Italy, also a major 
supplier, declined by more than half. U.S. exports of apple juice and cider 
remained unchanged from the previous year. Lower shipments to many overseas 
markets, including leading markets such as Japan and Taiwan, offset the sharp 
increase in exports to Canada and Mexico.  

Agnes Perez (202) 694-5255 acperez@ers.usda.gov


COMMODITY SPOTLIGHT

Organic Food Industry Taps Growing American Market

American consumer interest in organically grown foods has opened new market 
opportunities for U.S. producers, leading to a transformation in the organic 
foods industry. Once a niche product sold in a limited number of retail outlets, 
organic food is currently sold in a wide variety of venues, including farmers 
markets, natural foods supermarkets, conventional supermarkets, and club stores. 
Since the early 1990s, certified organic acreage in the U.S. has increased as 
producers strive to meet growing demand for organic agricultural and food 
products. The dramatic growth of the industry spurred Federal policy to 
facilitate organic marketing. 

Supermarkets Expand 
Organic Offerings

The U.S. organic food industry crossed a threshold in 2000: For the first time, 
more organic food was purchased in conventional supermarkets than in any other 
type of venue. Packaged Facts, a market research firm, indicates that of the 
$7.8 billion spent on organic food in 2000, consumers purchased 49 percent in 
conventional supermarkets, exceeding the 48 percent sold in natural foods 
stores. This contrasts sharply with the early 1990s, when an estimated 7 percent 
of all organic products was sold in conventional supermarkets and 68 percent in 
natural food stores. Organic products are now sold in 73 percent of all 
conventional supermarkets along with nearly 20,000 natural foods stores. 

Certified organic acreage is increasing to meet growing consumer demand, 
doubling between 1992 and 1997 to 1.3 million acres. Preliminary estimates for 
2001 indicate a similarly high rate of growth between 1997 and 2001. New organic 
products are also rapidly entering the market--over 800 in the first half of 
2000. Desserts made up the majority of new products in 2000, while most new 
products introduced in 1999 were beverages. 

New USDA standards for organic food, slated to be fully implemented by October 
21, 2002, are expected to facilitate further growth in the organic foods 
industry. The national organic standards address the methods, practices, and 
substances used in producing and handling crops, livestock, and processed 
agricultural products that are sold, labeled, or represented as organic. The 
standards define organic production as a system that is managed "to respond to 
site-specific conditions by integrating cultural, biological, and mechanical 
practices that foster cycling of resources, promote ecological balance, and 
conserve biodiversity." 

Organic food is sold to consumers through three main venues in the U.S.--natural 
foods stores (including natural foods supermarkets, health food shops and 
coops), conventional grocery stores, and direct-to-consumer markets. Industry 
sources indicate that a small amount of organic products is also exported to 
foreign markets, but this is difficult to track because the trade monitoring 
system does not yet include codes for organic products.

Various industry sources have reported retail sales of organic food for over a 
decade. A trade publication, the Natural Foods Merchandiser (NFM), estimated 
total organic sales through all marketing outlets rose steadily from about $1 
billion in 1990 to $3.3 billion in 1996. Packaged Facts reported organic food 
sales totaling $6.5 billion in 1999 and $7.8 billion in 2000. According to these 
sources, industry sales have grown by 20 percent or more annually since 1990.

Fresh produce is the top-selling organic category by sales value, followed by 
nondairy beverages (including juice and soymilk), breads and grains, packaged 
foods (such as frozen and dried foods, baby food, soups, and desserts), and 
dairy products. Organic dairy was the most rapidly growing market segment during 
the 1990s. 

Consumer Interest 
Varies

At least three industry groups--Walnut Acres, Food Marketing Institute, Hartman 
Group--as well as The Packer, a produce business publication, have conducted 
nationwide surveys of American consumers about their preferences and buying 
habits for organic food. These surveys posed different questions to consumers, 
and several focused exclusively on the fresh produce segment of the organic 
market. Consequently, caution must be used in comparing results and 
generalizing. 

The Hartman Group's 2000 survey found that approximately one-third of the U.S. 
population was currently buying organically grown food products, with "light 
organic buyers" (those who buy some organic food) accounting for 29 percent of 
the U.S. population and "heavy buyers" (those who buy many organic food 
products) accounting for 3 percent. The Walnut Acres Survey in 2001 found that 
63 percent of respondents purchased organic food at least sometimes, and 57 
percent of the purchasers had been doing so for at least 3 years. The Food 
Marketing Institute's survey in 2001 found that 66 percent of surveyed shoppers 
bought organically grown foods. 

According to the Food Marketing Institute survey, 37 percent of those who bought 
organically grown food did so to maintain their health. Consumers surveyed by 
the Hartman Group reported multiple reasons for purchasing organic food: health 
and nutrition (66 percent), taste (38 percent), environmental concerns (26 
percent), and availability (16 percent). The Packer's Fresh Trends survey in 
2001 revealed that for 12 percent of the surveyed shoppers, the "organic" label 
was a primary factor in their purchasing decision. Sixty-three percent of the 
respondents of the Walnut Acres survey believed that organic food and beverages 
were more healthful than their conventional counterparts. 

The Packer's Fresh Trends survey found that of the shoppers who had purchased 
organic produce in the previous 6 months, more purchased vegetables than fruit. 
According to the Hartman Group survey, the top 10 organic products were 
strawberries, lettuce, carrots, "other fresh fruit," broccoli, apples, "other 
fresh vegetables," grapes, bananas, and potatoes. The Hartman survey also found 
that fruits and vegetables were gateway or entrance categories into organic 
foods. In the Walnut Acres Survey, 64 percent of surveyed consumers who did not 
purchase organic food every time they shop cited price as the main reason. 

Universities are also starting to examine consumer behavior toward organic food 
and agriculture. Academic studies so far are limited in scope and geographic 
coverage. Some preliminary findings are that consumers consider the following 
factors when purchasing fresh produce: appearance (the fewer defects the 
better), price, size and packaging, whether the item is on sale, and whether the 
item is organic. Also some studies have found the most likely purchasers of 
organic produce to be younger households in which females do the shopping, 
smaller sized and higher income households, households knowledgeable about 
organic agriculture, and those with children under 18. 

The Organic 
Marketing Chain

As food moves from farm to consumer, it passes through many hands. Some foods 
are fresh when delivered (apples and eggs), while others are processed before 
delivery (pasta and bread). Each commodity, depending in large part on whether 
it is fresh or processed, follows an individualized path from farm to market. 
Regardless of whether they are fresh or processed, higher quality products and 
products with unique attributes (such as organic foods) generally have a higher 
selling price. As a result, farmers have a strong incentive to produce and sell 
commodities with quality and other price-enhancing attributes intact. 

Since most foods pass through a number of intermediaries as they move from the 
farm to the consumer, maintaining premium product integrity along the marketing 
chain is a challenge. Each agent along the chain must begin by moving the 
product to the next agent quickly. Farmers need to sell their perishable 
commodities immediately after harvesting, while distributors, brokers, and 
wholesalers need to move fresh products to retailers as quickly as possible.

National organic production standards are tailored for different categories of 
crops and livestock, and the organic integrity of certified products must be 
maintained throughout the production and marketing chain.

Fresh Produce--Highest in Organic Food Sales. Fresh fruits and vegetables were 
the first organic products marketed half a century ago, and are still the top 
organic food category. Sales of organically grown fresh produce grew by over 50 
percent between 1999 and 2000, according to industry sources. 

In accord with the new national standards, organic fruit and vegetable producers 
must rely on ecologically based practices, such as biological pest management 
and composting, and produce crops on land that has had no prohibited substances 
applied to it for at least 3 years prior to harvest. Soil fertility and crop 
nutrients are managed through tillage and cultivation practices, crop rotations, 
and cover crops, supplemented with manure and crop waste material and permitted 
synthetic substances. Crop pests, weeds, and diseases are controlled through 
cultural, biological, and mechanical management methods. Organic fruits and 
vegetables must be stored and shipped separately from conventionally grown 
produce. Organic produce is shipped or packed in containers free from synthetic 
fungicides, preservatives, or fumigants. 

The first stage in the organic fresh fruit and vegetable marketing chain--
production and preparation of produce for shipment--involves growers, packers, 
and shippers working together in a number of possible combinations. In some 
cases, one firm grows, packs, and ships the produce, while in other cases one 
firm grows and another packs and ships. Organic produce can either be sold to 
retailers by a broker or delivered to a terminal market, where it is sold by 
wholesalers to retailers. In practice, most organic produce is sold through a 
specialty broker rather than in a terminal market. In some instances, when a 
specific variety, quality, or quantity is desired, larger retailers may buy 
fresh fruits and vegetables directly from the produce shipper. 

Organic produce is also sold directly to consumers through farmers' markets, 
"community supported agriculture" subscriptions, and roadside stands. A larger 
proportion of organic sales than of conventional sales is made through direct 
markets, which have been gaining popularity over the last decade. According to 
USDA's Agricultural Marketing Service, the number of farmers' markets in the 
U.S. jumped from 1,755 in 1994 to 2,863 in 2000. The number of farmers and 
consumers using these markets approximately tripled during this period, to 
66,700 farmers serving 2.7 million consumers.

Organic Processed Food--Abundant and Varied. Organic processed foods include 
frozen vegetables and entrees, pasta, canned vegetables, baby food, sauces in 
jars, and shelf-stable entrees. New product offerings continue to appear in 
every supermarket aisle.

In accord with the new standards, a certified organic processed product, such as 
pasta or frozen pizza, is first prepared using at least 95 percent organic 
ingredients. For products that contain 70-95 percent organic ingredients, 
processors may label the product "made with organic ingredients." Organic and 
conventionally grown ingredients must be kept separate, and the organic 
ingredients must be stored in containers that do not compromise the organic 
nature of the food. Neither organic nor conventional ingredients in organic 
products can be treated with ionizing radiation or synthetic solvents, or arise 
from excluded processes (such as genetic engineering).

There are several basic marketing channels for processed organic foods, once 
farmers produce the organic raw commodities. In one channel, farmers send the 
commodities to the manufacturer, who converts them into a processed product. A 
distributor then moves processed products from manufacturers to retailers. In 
another channel, a shipper procures the raw commodities from farmers, ensures 
that the commodities meet the manufacturer's organic standards, and delivers 
them to manufacturers. After creating the processed good, the manufacturer moves 
the products to retailers. 

Organic farmers also produce a large array of value-added products--foods 
processed on their farm or in farm-owned plants or farm-based cooperatives--and 
sell many of these products directly to consumers. According to a survey of 
organic producers by the Organic Farming Research Foundation, 31 percent 
produced value-added products in 1997. These products included salsa, syrup, 
cider, pickles, preserves, vinegar, dried and canned fruits and vegetables, 
butter, yogurt, cheese, milled flours, sausages and other processed meats, baked 
goods, and wine. 

Organic Dairy Products--the Fastest Growing Segment. Organic dairy was the most 
rapidly growing organic market segment during the 1990s, with sales up over 500 
percent between 1994 and 1999. Sales of most organic dairy products--including 
milk, cheese, butter, yogurt, and ice cream--have been rising in both 
conventional and natural foods supermarkets. 

Organic dairy products, as defined by the USDA, are made from the milk of 
animals raised under organic management. The cows are raised in a herd separate 
from conventional dairy cows, receive preventive medical care such as vaccines 
and dietary supplements of vitamins and minerals, but are not given growth 
hormones or antibiotics. Based on stage of production, the climate, and the 
environment, all organically raised dairy cows must have suitable access to 
pasture, the outdoors, shade, shelter, exercise areas, fresh air, and direct 
sunlight.

Organic dairy products must make use of milk from animals raised organically for 
at least 1 year prior to milking, or from cows converted from conventional to 
organic production. To convert cows to organic production, the cows must be fed 
a diet consisting of at least 80 percent organic feed for 9 months, and then 
100-percent organic feed for 3 additional months, or must be grazed on land that 
is managed under a certified organic plan. 

The process used to bottle milk and to make and pack cheese, ice cream, yogurt, 
and other dairy products must also be certified. The processor is required to 
keep organic and nonorganic products separate, and to prevent organic products 
from having any contact with prohibited substances. 

Regionally distributed organic dairy products are bottled and processed in a 
small local dairy, and may contain milk from one or more farms. In contrast, 
organic dairy products that are distributed nationally are marketed in two 
different ways. In the first, milk from several farms is processed and then 
distributed nationwide through a marketing cooperative. In the second option, 
many farms produce milk under contract for a dairy, which pasteurizes and 
bottles milk, or processes it into cheese or ice cream. In both cases, the 
organic dairy products are distributed under a brand name.

Future 
Prospects

Many industry analysts expect demand for organically grown foods to continue 
growing at a rapid pace, as more U.S. growers move into organic production and 
more processors and distributors expand or add organic selections in their 
product lines. In addition to organic foods that have already been growing at a 
fast pace--including dairy products, juices, soymilk, frozen pizza, and dinner 
entrees--expanded organic beef and other meat selections, new processed 
products, and new types of health-promoting foods are likely to appear on the 
market. Some new organic products are aimed at mainstream markets--Heinz, for 
example, has just launched an organic catsup--while others may target Spanish-
speaking and other groups. Products like kefir, a health-promoting cultured-milk 
beverage, are gaining popularity among health-conscious consumers. 

Demand for organically grown food in local markets is also likely to rise as the 
renaissance in farmers' markets continues and more local communities--in both 
high- and low-income areas--pay greater attention to increasing consumer access 
to fresh, healthy food.  

Carolyn Dimitri (202) 694-5252 cdimitri@ers.usda.gov 
Catherine Greene (202) 694-5541 cgreene@ers.usda.gov

For more information see:

ERS briefing room on organic agriculture, particularly Recent Growth Patterns in 
U.S. the Organic Foods Market www.ers.usda.gov/briefing/organic

Agricultural Marketing Service, USDA web site www.ams.usda.gov/nop/

COMMODITY SPOTLIGHT BOX

USDA Organic Marketing System Support

Agricultural Marketing Service (AMS) is home to the National Organic Program 
(NOP), which developed, implemented, and currently administers national 
production, handling, and labeling standards for organic agricultural products. 
The NOP also accredits the certifying agents (foreign and domestic) who inspect 
organic production and handling operations to ensure that they meet USDA 
standards. 

To facilitate the export of U.S. organic agricultural products, the NOP is 
working to establish formal recognition agreements with foreign governments 
(www.ams.usda.gov/nop). The AMS Fruit and Vegetable Market News has provided 
price data for some organically grown fruits and vegetables at the Boston 
wholesale market for a number of years, and has occasionally provided data on a 
few other markets (www.ams.usda.gov/fv/mktnews.html). AMS is also involved in 
several areas of organic marketing research, working either independently or in 
cooperation with major universities. 

Economic Research Service (ERS) conducts economic research and develops and 
distributes a broad range of economic and other social science information and 
analysis on organic agriculture. ERS' briefing room on organic agriculture 
describes characteristics of the U.S. organic farm sector, including estimates 
of certified organic farmland acreage and livestock, by commodity and by state. 
The briefing room also features data depicting industry growth and sales and 
highlights ERS publications on organic agriculture and current organic-related 
activities of ERS researchers (www.ers.usda.gov/briefing/Organic/).

Foreign Agricultural Service (FAS) assists the organic industry with U.S. export 
programs and services. FAS, in conjunction with AMS, has developed protocols for 
working with foreign nations to keep organic trade moving as more countries 
develop organic standards, including labeling, certification, and market access. 
FAS has helped fund the promotion of U.S. organic products in Canada, Europe, 
and Japan. FAS publishes Organic Perspectives, a newsletter containing reports 
from around the world as well as items on the U.S. national organic program and 
the domestic organic industry (www.fas.usda.gov/agx/organics/organics.html).


COMMODITY SPOTLIGHT

French Fries Driving Globalization of Frozen Potato Industry

Driven largely by growing popularity of Western-style cuisine, particularly fast 
food through quick-service restaurants (QSRs), frozen french fries and other 
frozen potato products are generating billions of dollars in sales worldwide 
each year. Although exact worldwide production and sales figures for frozen 
fries are not available, global frozen potato production capacity is estimated 
to be at least 9.6 million metric tons (mmt) a year. Worldwide exports of frozen 
potato products (over 90 percent of which is frozen french fries) in 2000 were 
valued at $1.9 billion. This export value does not account for the billions of 
dollars of frozen potato products produced and sold domestically in countries 
around the world. 

The rapid global expansion of QSRs is key to the tremendous growth in worldwide 
consumption and trade of frozen potato products. Beginning in the U.S. in the 
1950s, the QSR chains of McDonald's and Burger King expanded rapidly. Expansion 
through the 1960s occurred primarily in the U.S. In the 1970s, these restaurants 
also began to open franchises around the world. Early expansion was concentrated 
in Canada, Western Europe, Japan, Hong Kong, Australia, and New Zealand. 
Additionally, new firms such as Wendy's were founded and began expanding. In the 
1980s and 1990s, QSR growth was occurring worldwide, surging in many Asian 
countries as well as in Latin America, while continuing to grow in the original 
markets. By 2001, McDonald's had over 29,000 outlets in 121 countries, Burger 
King had over 11,000 in 57 countries, and Wendy's over 5,000 in 34 countries.

Growth of 
An Industry 

Rapid, continuing growth in the fast-food industry over the years has spawned 
growth in the frozen potato industry, first in the U.S. and then worldwide. 
Commercial production of french fries began in the U.S. on a small scale in the 
mid-1940s, but did not develop into a major industry until after the inception 
of QSRs in the 1950s. As QSRs expanded, so did the frozen potato products 
industry, with U.S. output increasing from 129 million pounds in 1955 to 3.9 
billion pounds in 1980, and to an estimated 9.3 billion pounds in 2000.

Despite this tremendous growth, ever-increasing domestic and international 
demand for frozen french fries far exceeded U.S. processing capacity. By the 
1970s, processors in Canada and Western Europe were producing fries to meet the 
growing demand. Today, the U.S. still ranks as the largest producer of frozen 
french fries in the world, producing an estimated 3.6 mmt of fries in 2000. The 
Netherlands ranked second in 2000, producing 1.2 mmt of fries, while Canada was 
third with 1.1 mmt. 

Without frozen fry production statistics from every country, assessing shares of 
global production is difficult, but it is likely that the U.S., the Netherlands, 
and Canada collectively produce 60-80 percent of the world total. The bulk of 
the remaining fry production occurs in other European Union (EU) nations 
(particularly Belgium, France, Germany, and the United Kingdom) and, to a lesser 
extent, Australia and New Zealand. French fries are also produced in Eastern 
Europe, Asia, Africa, and South America. As french fry consumption increases in 
these areas, local production is likely to increase as well.

Major & Potential 
Markets

Although frozen potato products are clearly global commodities today, the major 
markets are still predominantly the U.S., the EU, Canada, and Japan. However, as 
these markets mature, they are likely to have only limited growth potential. 
This is most evident in the U.S., the oldest and largest single-country market 
for frozen potato products, where demand seems to have leveled off in recent 
years. Per capita utilization of frozen potato products in the U.S. is estimated 
at 29.4 pounds per person in 2001, 2.4 percent below the record level set in 
1996. 

Further evidence of market maturity is the somewhat slower expansion of 
traditional burger and fry outlets in the U.S. compared with the rest of the 
world. For example, in 2001 the number of McDonald's outlets in the U.S. 
increased by only 2.3 percent from the previous year compared with 4.8 percent 
worldwide. With over 13,000 outlets in the U.S. in 2001, there was one 
McDonald's for approximately every 22,000 people. Canada ranks second with one 
McDonald's outlet for approximately every 25,000 people.

Japan is also showing signs of market maturity for frozen potato products, with 
consumption leveling off recently after years of rapid growth. Per capita 
consumption of frozen potato products in Japan reached 5.3 pounds in 1999, and 
has hovered at around the same level since then. Most of this consumption occurs 
through the food service industry, with McDonald's by far the leading retailer. 
After the U.S. and Canada, Japan ranks third in the number of McDonald's outlets 
per capita, with one outlet for approximately every 33,000 people. 

However, other indicators seem to show that the Japanese market may not be quite 
as mature for frozen potatoes as the U.S. market. McDonald's added 224 new 
outlets in Japan in 2001 (up 6.2 percent from 2000--a higher growth rate than 
the U.S. and world averages). Also, "ready-to-eat" french fries, sold through 
convenience stores, are a relatively new product that is gaining popularity in 
Japan. Although still accounting for less than 10 percent of the market, this 
product could help boost Japanese french fry consumption in coming years.

QSRs have been operated in most EU countries since the 1970s, and in 2001 there 
was one McDonald's restaurant for every 125,000 people (including Eastern 
Europe). European per capita utilization of frozen potato products in 2000, 
although based on limited data from only 13 countries, is estimated at about 
13.7 pounds per person, about half the U.S. level. However, per capita 
utilization in the United Kingdom (UK), the largest European market for frozen 
potato products, was an estimated 34.6 pounds per person in 2000, 15 percent 
higher than the 1999 level, due largely to surging demand in the catering 
sector.

Countries with the most growth potential for frozen potato products in coming 
years are likely to be those that are still largely untapped by the QSRs, 
particularly in Asia and Latin America. As these regions continue to develop 
economically, QSR outlets will likely expand, increasing demand for frozen 
potato products. In Latin America, there is currently only one McDonald's for 
every 332,000 people, and in the Asia/Pacific region, there is only one outlet 
for every half million people. 

Two countries that show perhaps the most potential for QSR growth and potential 
demand for frozen potato products are China and India. Development of the QSR 
industry in China has occurred rapidly in recent years (e.g. McDonald's expanded 
the number of outlets from 326 in 2000 to 430 in 2001--a 32-percent increase), 
but is still in its relative infancy. As of 2001, there was only one McDonald's 
for approximately every 3 million people in China. And in India, with a 
population of nearly a billion, the QSR industry hasn't really even started to 
develop, with only 34 McDonald's outlets in the entire country in 2001.

World Trade Dominated by 
A Handful of Countries

The Netherlands, Canada, and the U.S. accounted for 67 percent of total world 
export volume in frozen potato products in 2000, down from 86 percent in 1980. 
Half the loss in export-market share of these three countries has occurred since 
the mid-1990s. During this time, many other frozen-potato-producing countries--
e.g., France, the UK, and New Zealand--expanded production capacities and 
increased exports, while several new countries--e.g., Poland, Argentina, China, 
and India--entered the frozen potato production and trade arena. Output, 
capacity, and exports from the Netherlands, Canada, and the U.S. continued to 
rise, but increasing competition caused their overall export market share to 
fall. In 2000, Belgium edged out the U.S. to become the third-largest exporter 
of frozen potato products by volume, but still ranked fourth in value.

The largest exporter of frozen potato products in the world is the Netherlands. 
In 2000, it exported just over 1 mmt (valued at $567 million) of frozen potato 
products, nearly 90 percent of which went to other EU nations. The other markets 
for Dutch frozen potatoes include the Middle East, South America, and Eastern 
Europe. With EU markets beginning to mature, future Dutch export growth may 
focus on Eastern Europe, Russia, and South America. 

The second largest exporter of frozen potato products in the world is Canada, 
which exported 624,399 metric tons (mt) (valued at $423 million) in 2000, nearly 
90 percent of which went to the U.S. Between 1989 and 2000, Canadian exports of 
french fries to the U.S. rose an average of 25 percent per year. In 2000, 
Canadian fries accounted for about 13 percent of all fries consumed in the U.S., 
up from only 2 percent in 1989. 

Much of Canada's fry processing capacity is located in the central and eastern 
portions of the country. This creates a comparative advantage over Western U.S. 
producers when shipping to the Midwest and Eastern U.S. In addition, the 
relatively weak Canadian dollar (compared with the U.S. dollar) in recent years 
has also given Canadian fry producers an advantage in shipping to the U.S. 
Exports of frozen potato products to Japan have risen in recent years, 
accounting for about 13 percent of the Japanese import market in 2000 (the U.S. 
accounted for 85 percent). With Canadian processing capacity continuing to 
expand, Canadian exports are expected to continue increasing as well.

The U.S. is the third largest exporter of frozen potato products in value. In 
2000, the U.S. exported 511,922 mt of frozen potato products, valued at $370 
million. The largest foreign markets for U.S. frozen potato products are in Asia 
and the Pacific Rim, accounting for 84 percent of U.S. export volume in 2000. 

The largest single export market for U.S. french fries is Japan, accounting for 
46 percent of U.S. fry export volume in 2000. U.S. fry exports to Japan rose an 
average of 20 percent a year in the 1980s and 9 percent a year in the 1990s. The 
U.S. share of the Japanese frozen potato product import market rose from 84 
percent in 1990 to a high of 90 percent in 1998, before falling to 85 percent in 
2000. The recent decline in market share in Japan is the result of increased 
competition (particularly from Canada) and increased U.S. exports to other Asian 
and Latin American countries. 

Other major markets for U.S. frozen potato products in Asia include China (11 
percent of U.S. export volume, including Hong Kong), South Korea (7 percent), 
Taiwan (6 percent), and the Philippines (4 percent). In the Western Hemisphere, 
Canada and Mexico are the major markets for U.S. frozen potatoes with an export 
share of 3 and 6 percent, respectively.

Globalized Production 
& Foreign Direct Investment

Although output of U.S. frozen potato products has continued to expand and 
benefit from the globalization of the QSR industry, increased worldwide demand 
has also led to globalization in the production sector. As worldwide demand for 
frozen potato products increases, a natural progression for the processing 
industry has been to invest directly in major markets abroad, with processors 
building and expanding processing plants worldwide. This allows processors to 
reduce transportation costs by minimizing shipping distances, and to help 
stabilize the overall market by limiting the effects of local crop disasters and 
shortages.

The motivation for foreign direct investment (FDI) in frozen potatoes is no 
different from other related sectors such as wineries or beverages. FDI is 
motivated primarily by pressures to reduce transaction costs, to access and 
develop foreign markets, and to jump trade barriers. FDI in frozen potatoes is 
also driven by a need for a cost-effective, stable, and adequate supply of 
frozen potatoes to meet the demands of a growing worldwide QSR sector. 

Decisions about where and how much to invest also depend on factors specific to 
host countries. First, a host country must have large markets for frozen potato 
products, or markets with excellent growth potential. Second, a host country 
must have the ability to produce ample supplies of processing potato varieties 
at a competitive cost, along with the infrastructure necessary to support the 
movement and storage of both raw potatoes and finished products to and from 
processing locations. Finally, factors such as the economic and political 
stability of a host country are likely to affect investment decisions. The 
expansion of processing plants around the world in recent years is a testimony 
to increasing FDI in the frozen potato industry.

FDI & 
Exports

As FDI and globalization of production increase, they are likely to affect 
global trade in frozen potato products. The relationship between exports and FDI 
is influenced by variables such as factor productivity and cost, as well as 
monetary and fiscal policies in the home country and host countries. 
Additionally, the relationship between exports and FDI depends on 
characteristics of the host country (e.g., gross domestic product and resource 
endowments, per capita income, infrastructure, and markets), industry or product 
(e.g., size, structure, concentration, and inputs), as well as the risks 
associated with trade and/or investments.

Analytical work on the relationship between FDI and exports in the U.S. 
processed food industry provides mixed conclusions. One study found evidence 
that exports may serve as a precursor to FDI. Another study, which explored the 
relationship between exports and FDI for six food manufacturing firms, found 
three disparate patterns among firms, suggesting that the export-FDI 
relationship is ambiguous. A third study, using processed food industry data 
from the Organization for Economic Cooperation and Development countries, showed 
substitutability between FDI and exports.

Although a lack of data on FDI in the frozen potato industry prevents us from 
drawing strong conclusions about the nature of the relationship between exports 
and FDI, the relationship appears ambiguous and may change over time and across 
countries. In the short run, FDI may complement home-country exports because 
foreign production may enable the companies to lower transaction costs and open 
even more new markets for their products. Producing frozen potato products 
locally in foreign countries may initially stimulate demand in those countries 
by helping to introduce the product to consumers. If demand for the product 
increases beyond what can be produced locally, it could boost exports from the 
parent companies' home country. In the long run, however, FDI may replace home-
country exports if local production increases sufficiently to satisfy local 
demand. This may occur as worldwide markets mature and worldwide production 
capabilities improve.  

Charles Plummer (202) 694-5256 cplummer@ers.usda.gov
Shiva Makki (202) 694-5316 smakki@ers.usda.gov

For more info, see the potato briefing room on the ERS website 
www.ers.usda.gov/briefing/potatoes


WORLD AGRICULTURE & TRADE

U.S. Agricultural Exports to Rise $4 Billion in 2003

Sharply higher prices for grains and soybeans reflecting reduced U.S. production 
due to drought are expected to boost the value of U.S. agricultural exports to 
$57.5 billion in fiscal year 2003, a 7.5-percent gain over 2002. Bulk commodity 
exports are likely to lead the gains, although high-value product (HVP) exports 
also are expected to increase. Higher corn export volume is more than offset by 
lower soybean volume, pulling bulk export volume down from 2002.

U.S. agricultural imports also are projected up in 2003, but with a smaller gain 
than for exports. Forecast at $42 billion, imports will be $1.5 billion (4 
percent) above estimates for 2002. This rate of growth over the previous year is 
higher than in some recent years, that were plagued by financial crises, but is 
still well below the strong average annual rates of growth of U.S. imports in 
the mid-1990s. 

Most of the projected increase in import value is in horticultural products, 
such as fruits and juices, and wine and malt beverages. These products are 
likely to show gains in both volume and value. Most U.S. horticultural product 
imports come from Canada and Mexico.

The 2003 U.S. agricultural export surplus is forecast at $15.5 billion, 19 
percent or $2.5 billion above the surplus estimated for 2002. This would be the 
largest export surplus since fiscal year 1998.

Bulk Product Export Gains 
Exceed High-Value Products

Bulk exports include wheat, rice, coarse grains, soybeans, cotton, and tobacco. 
Projected at $21 billion, bulk commodities lead the gains in value, increasing 
14 percent over 2002 compared with only an estimated 4-percent increase in value 
for HVP exports in 2003. Higher prices from drought-induced production drops are 
largely responsible. Average export unit values for corn, soybeans, and wheat 
are projected sharply higher. 

Volume of bulk commodity exports is expected to decline to 110.3 million tons in 
2003 from 114.9 million tons in 2002, due to an expected sharp drop in soybean 
exports. Corn volume is anticipated to rise by 2.5 million tons, taking 
advantage of less foreign competition, and stronger imports by Canada and 
Mexico. U.S. soybean export volume is projected down by 6.5 million tons, 
reflecting reduced prospects for the U.S. crop, as well as the likelihood of 
greater foreign competition from larger South American supplies. Wheat volume 
will slip 500,000 tons. 

As prices rise, bulk commodities' share of total U.S. agricultural export value 
is projected at 36.5 percent in 2003, a gain from the 34.4-percent share 
estimated for 2002. This would be the first increase in share for bulk 
commodities since fiscal 1995 and 1996, when exports reached record levels and 
bulk exports rose sharply.

HVP exports include products such as meat, vegetable oils and meals, fruits, 
vegetables, and packaged, frozen, and canned foods. While still larger in total 
value than bulk exports, HVP exports, at $36.5 billion, are expected to contract 
to a 63.5-percent share from the 65.6 percent estimated for 2002. Shipment of 
higher valued goods tends to be more dependent on global income growth and 
demand for luxury goods than do staple bulk commodities.

Global Economic Recovery 
To Be Uneven

Global income growth is fueled by economic growth. In 2003, the world's gross 
domestic product (GDP) is expected to show modest recovery from the slowdown 
that began in 2001 and continued in 2002. But the distribution of growth is 
expected to be uneven from region to region. Global GDP growth is projected at 3 
percent for 2003, compared with less than 2 percent in 2002.

Some of the modest economic gain will occur in developed countries, such as the 
U.S. and the European Union (EU). The U.S. economy has already begun to rebound 
this year, and growth is expected to increase to about 3 percent next year. 
Growth in the EU also is projected to be approximately 3 percent in 2003. 

However, growth in other developed economies, such as Japan, is projected to 
remain very slow. Japan's GDP growth in 2003 is projected at 1 percent or less. 
Some analysts even expect Japan to remain in recession in 2003, as doubt about 
the depth of its financial system's structural problems continues to weaken 
business expectations. Consequently, developed-country GDP growth is forecast up 
only modestly in 2003 to 1.5 percent, from 1.1 percent in 2002. And, since 
global economic recovery is largely dependent on growth in the developed 
economies, recovery elsewhere also is likely to be uneven in 2003.

Developing countries as a group are forecast to show stronger gains than 
developed countries, with GDP increasing about 5 percent in 2003. While stronger 
economic growth is projected in some developing countries, others continue to 
experience financial crises. Asia's growth will be buoyed by continued annual 
growth of 5-8 percent in China and India, which are largely unaffected by slow 
world growth. Other Asian countries, such as South Korea, Taiwan, Malaysia, the 
Philippines, and Thailand, are likely to be dependent on growth in the U.S. and 
Europe. 

In Latin America, the large markets--Mexico, Brazil, and Argentina--are cause 
for concern. Mexico's projected growth for 2003 is likely to be more favorable 
than in 2002, as its growth is closely tied with that of the U.S. But Argentina 
and other South American economies such as Brazil continue to suffer serious 
economic and financial problems, which may reduce growth potential as well as 
hamper their competitiveness in global agricultural markets.

The U.S. dollar has depreciated slightly from its strong position of recent 
years. Against the euro and other developed-economy currencies this depreciation 
may be insufficient to help promote exports. Continued relative strength of the 
dollar, and appreciation against the yen, may temper expected gains in U.S. 
agricultural exports and continue to encourage import growth in 2003.

Drought Affects 
Corn & Soybean Exports

Drought in the U.S., and reduced export competition, will be major factors 
reducing soybean exports in 2003. U.S. production is forecast down to 71.5 
million tons from 78.7 million in 2002. Export volume is expected to plummet to 
just 22.3 million tons, down 23 percent from 2002, and the lowest level of 
soybean exports since 1994. Brazil, in contrast, is expected to increase 
production and exports significantly in 2003. Argentina, faced with a financial 
crisis, will help boost export competition by switching some acreage from corn 
(higher production costs) to soybeans (lower production costs), reducing costs 
and raising export value. Forecast U.S. soybean export value remains unchanged 
at $5.4 billion, despite the drop in volume, as the drought pushes prices to a 
5-year high.

U.S. corn exports are projected up 5 percent to 51 million tons in 2003. Exports 
of other coarse grains, however, are projected the same to slightly less in 
volume. Corn export value is projected up 32 percent to $6.2 billion. Drought 
will reduce the U.S. corn crop, and with the U.S. accounting for about two-
thirds of global corn exports, U.S. corn prices determine global prices which 
rise significantly. Despite the lower production, however, U.S. supplies are 
expected to be sufficient to replace reduced exports from Argentina, where the 
financial crisis and high input costs are reducing corn area and production.

The smallest U.S. wheat crop in 30 years, coupled with drought-reduced crops in 
Canada and Australia, will raise wheat prices. U.S. wheat and flour exports are 
projected at 25 million tons, which rises to $4 billion. While large, lower 
priced supplies will be available from the Black Sea region and a near-record 
crop is expected in the EU, the sharply lower production in Australia and Canada 
means many importers will turn to the U.S. for needed supplies, despite the 
sharply higher prices.

U.S. rice exports in 2003 are projected up 100,000 tons to 3.4 million tons, as 
some food aid shipments delayed from 2002 occur. The value of U.S. rice exports 
is expected to remain virtually unchanged from 2002. A slight gain in global 
prices is anticipated, reflecting small growth in global consumption coupled 
with a small reduction in global supplies.

Unusually high exports are projected for U.S. cotton in 2003. Large U.S. 
exportable supplies, as well as expected larger imports by China, contribute to 
the gains. Volume in 2003 rises 4 percent from the already high estimate for 
2002. At 2.5 million tons in 2003, projected volume of U.S. cotton exports 
approaches record levels last seen in the 1920s. A new trend of sharply reduced 
U.S. consumption is adding to export expansion. Cotton export value is projected 
up $400 million, or 17 percent, to $2.7 billion, reflecting both volume gains 
and recent improvements in cotton prices.

Growth Slows for 
HVP Exports 

Although 2003 U.S. HVP exports are projected up $1.4 billion to $36.5 billion, 
the expected growth rate in HVP exports is much more modest than bulk export's 
14-percent climb. The 4-percent HVP growth over 2002 is slightly slower than 
2002's growth over 2001.

Horticultural products account for much of the growth in 2003 HVP exports. 
Horticultural exports are projected at $11.5 billion, up $300 million from 2002. 
Exports of soybean oil and broiler meats are expected to show gains of $200 
million each. Livestock exports gain $100 million over 2002, propelled by 
expected increases in beef, pork, and variety meats.

Horticultural product gains include increases of $100 million each in exports of 
fruits, vegetables, and tree nuts. Canada, Mexico, and Asia continue to be the 
main markets for these exports, and their demand continues to grow, promoting 
trade expansion. The volume of fruit, vegetable, and tree nut exports also is 
projected to rise 4 percent or 300,000 tons. Apple exports will be boosted by a 
large crop in Washington State, the main U.S. exporter. Almond, walnut, and 
pistachio crops are expected to remain near record levels, also promoting 
exports.

Expected U.S. soybean oil exports are driven by ample U.S. supplies. In 
addition, foreign production of competing oilseeds and vegetable oils is 
expected to slow while foreign demand growth continues. Prices are expected to 
be pulled up by reduced 2003 production both abroad and in the U.S. Supplies of 
competing vegetable oils as a group will likely decline in 2003, boosting prices 
further. Global consumption of vegetable oils, rises as well, so ending stocks 
are expected to be drawn down somewhat to meet demand.

Broiler exports, which lead gains in livestock and products, are expected to 
increase by $200 million and 300,000 tons in 2003. The U.S. and Russia recently 
reached an agreement on veterinary certificates, which should allow poultry 
exports to Russia to resume in 2003. But export growth is expected to be 
moderate as Russia tries to expand its own poultry industry. Russia's imports of 
U.S. poultry meat rose sharply in fiscal 2001 over fiscal 2000, but imports so 
far in 2002, during the veterinary dispute, are smaller in quantity.

Slight expansion is expected in 2003 U.S. beef exports, as both volume and value 
increase. Sales to Asia and in North America are expected to remain strong. 
Japan's imports of U.S. beef are expected to be closer to normal in 2003 as 
concerns about bovine spongiform encephalopathy abate. Higher prices also are 
likely to boost pork export value, but drought and higher feed costs make the 
outlook very uncertain.  

Carol Whitton (202) 694-5287 cwhitton@ers.usda.gov

WORLD AGRICULTURE & TRADE BOX 1

This is USDA's initial forecast of agricultural exports for fiscal 2003 
(released August 29, 2002). It reflects USDA forecasts in the August 12, 2002 
World Agricultural Supply and Demand Estimates report. Bulk commodities include 
wheat, rice, feed grains, soybeans, cotton, and tobacco. High-value products 
(HVPs) comprise total exports minus bulk commodities. HVPs include semi-
processed and processed grains and oilseeds (e.g., soybean meal and oil), 
animals and animal products, horticultural products, and sugar and tropical 
products. A breakout of U.S. agricultural exports and imports by major commodity 
group--both volume and value--for 2000-03 is included in appendix table 27.


WORLD AGRICULTURE & TRADE

EU Revisits Ag Reform With Bold New Proposals

The Commission of the European Union (EU) is proposing bold changes to its 
Common Agricultural Policy (CAP). The core proposal is a single annual whole-
farm payment, not requiring production by farmers, in contrast to the current 
payments that are linked to production of specific commodities. Based on 
historical direct payments, this single payment would reduce the link between 
farm subsidies and production. Farmers would have greater flexibility in 
choosing what to produce. 

Also, the proposals would cut support for large farms for the first time. 
Greater emphasis would be placed on rural development, food safety, animal 
welfare, and environmental regulations. Nonetheless, for many commodities, 
traditional CAP price support and stabilization mechanisms would be maintained. 

These proposals are contained in the Commission's Mid-Term Review (MTR) of 
"Agenda 2000," a 6-year (2000-06) budget and agricultural policy reform package 
to facilitate enlargement of the EU to include Central and Eastern European 
(CEE) countries during the coming decade. The EU legislative process requires a 
formal proposal from the Commission and approval by the Council of Agricultural 
Ministers. The MTR proposals are not yet formal legislative proposals, and many 
important details are not specified, making assessment of impacts difficult. The 
Commission intends to produce a detailed legislative proposal by the end of the 
year. 

As part of the ongoing EU agricultural policy debate, these proposals are 
prompted by structural market imbalances, World Trade Organization (WTO) 
negotiations, the prospect of enlargement, and growing demands of consumers and 
environmentalists. The Commission alleges that these proposals would create a 
more market-oriented farming environment, facilitate enlargement, and provide a 
major WTO advantage because most EU direct payments would become less trade 
distorting. 

Pressures for CAP Reforms
Past & Present

The proposed reforms would be the latest of many CAP reforms. Since its 
inception, the CAP has relied principally on high prices protected by high 
tariffs to support farmers. Sugar quotas were established in 1968. 

During the 1980s, consumption and export subsidies to dispose of surpluses led 
to soaring budget costs. These internal pressures led to reduction of effective 
support prices and introduction of dairy production quotas. Despite many 
reforms, most EU agricultural prices and trade are still managed by policy. 
Threats of future surpluses for many commodities, as well as recent accumulation 
of stocks of rye, rice, and beef, are an important underlying motivation for the 
MTR proposals. 

Subsidized exports have depressed world prices, prompting other countries to 
press for reduction of trade-distorting EU policies in the Uruguay Round (UR) of 
multilateral trade negotiations, beginning in 1986. The UR agreement, 
implemented during 1995-2000, included significant reductions in domestic 
agricultural support and export subsidies. 

The "MacSharry" reforms (named for the agricultural commissioner at the time), 
implemented from 1993 to 1995, addressed CAP budget problems and provided for 
expected UR commitments. Support prices were reduced and farmers were fully 
compensated with direct income payments, a significant CAP change. Larger farms 
were required to idle some cropland. Payments to beef producers were also 
associated with production limitations. 

The prospect of EU enlargement places additional pressure on the CAP because of 
the potential cost for support of millions of CEE farmers. Agenda 2000 addressed 
enlargement budget issues, and extended MacSharry reforms, further reducing 
grain support prices and effective support for beef. EU grain support prices 
have been reduced by 45 percent since 1992, and payments for oilseeds were 
reduced to the same level as payments for grain. 

Anticipation of further restrictions on trade-distorting policies in the current 
Doha Round of multilateral trade negotiations has become an important source of 
pressure on EU policymakers, in part because of the impact of EU enlargement on 
WTO commitments. 

Nontraditional issues, beyond market and farm income support, are increasingly 
influential. Increasingly, agriculture is seen as part of the rural economy, 
shifting the orientation of policy towards rural development. Animal disease and 
food contamination incidents have directed attention to food safety and quality 
issues. There is a growing perception that CAP support has led to intensive 
agricultural production, resulting in significant environmental degradation. 
Finally, animal welfare advocates are calling for changes in production systems. 
The EU refers to measures addressing these emerging issues as the CAP's "Second 
Pillar," the first being market and income support. 

MTR 
Proposals

The MTR proposals would alter the regimes for grains, oilseeds, protein crops, 
rice, legumes, dried fodder, nuts, beef, and sheep. Other regimes, including 
fruits and vegetables, potatoes, dairy, and sugar, would remain unchanged. 
Instead of a specific dairy proposal, several dairy options are presented, 
ranging from maintenance of the current regime to a dramatic elimination of 
production quotas combined with large price reductions. 

The Whole-Farm Payment. The Commission's most innovative proposal is the whole-
farm payment. Current payments require production of specific products. 
Historical payments for arable crops, rice, beef, and sheep, adjusted for 
implementation of Agenda 2000, would be combined into a single annual farm 
payment. The whole-farm payment would be largely decoupled because production 
would not be required.  

The payment would be attached to the land, conveying with transfer of the land. 
If part of a farm were sold or leased, an equivalent part of the whole-farm 
payment would be transferred. Farm support would be simplified, another 
Commission goal. 

Before 1993, the EU supported most agricultural product prices directly through 
intervention purchasing at established prices. The MacSharry reforms converted 
that support to product support through direct income payments. A whole-farm 
payment not requiring production would be a final evolutionary shift to support 
for producers rather than products. Nonetheless, high CAP support prices for 
milk, beef, and sugar would continue to provide powerful production incentives. 

Set-Aside Requirements. Since 1992, larger farms have been required to set aside 
some land. The Council fixed the set-aside percentage annually. Set-aside is 
rotational--i.e., all land must be set aside in turn, quality land as well as 
the poorest land. The MTR proposals would require larger farms to set-aside at 
least 10 percent of their land for 10 years on a non-
rotational basis, allowing farmers to idle their poorest land on a continued 
basis. 

Grain Support Price Reductions. The single grain intervention price for bread 
wheat, barley, and corn would be reduced by 5 percent, and current monthly 
increases in grain storage subsidies would be eliminated. Otherwise, the grain 
intervention system would remain unchanged. The whole-farm payment would be 
adjusted to provide compensation for half of the price reduction. 

Intervention support for rye would be eliminated, leaving rye to find a price in 
the market given its feed value relative to feed wheat and barley. Large rye 
price and production reductions would be likely. Germany and Poland (an EU 
applicant) are large producers of rye. 

The MTR proposals would dramatically decrease support for rice. By 2004, "safety 
net" intervention would occur at 120 euros per metric ton (mt), a 60-percent 
reduction from current support. Below 150 euros per mt, private storage 
subsidies would be provided. Producers would be compensated by an adjustment in 
the whole-farm payment, equivalent to the overall compensation provided other 
grain producers for cumulative price reductions since 1992. The EU rice 
intervention price would be reduced to near world price levels, necessary to 
accommodate trade levels likely under the EU's Everything But Arms (EBA) policy. 
The EBA policy provides duty- and quota-free access to EU markets for the least 
developed countries by 2010 (AO September 2002. 

Grain Import Regimes. The MTR calls for conversion of the EU system of varying 
import duties for grains and rice to a simplified system. Outside the MTR 
proposals, the Commission has proposed to implement tariff-rate quotas to limit 
large EU imports of grain that recently have resulted from the tariff regime 
agreed to in the UR. The EU currently is engaged in preliminary consultations 
with WTO members to determine appropriate compensation. U.S. grain exports to 
the EU, 2 million mt valued at $340 million in 2001/02, could be affected. 
Recent EU imports have come mainly from Russia and Ukraine, however, which are 
not WTO members. 

Reduced Payments for Large Farms. The MTR proposals provide for "dynamic 
modulation," the reduction of payments and limits on total support for large 
farms, a significant departure for the CAP. The reductions would occur on 
payments above minimum amounts that increase with each farm employee. Farm 
payments for about one-fourth of EU farms, accounting for 80 percent of 
production, would be reduced by 3 percent annually up to 20 percent after 7 
years. Following reductions, total annual payments would be limited to 300,000 
euros. 

Allocations for Second Pillar Programs. Budgetary savings from payment cuts to 
larger farms would be allocated to rural development, environmental programs, 
food safety and quality, and animal welfare programs. Funding would be nearly 
double the 4.5 billion euros for these programs under Agenda 2000. All farm 
payments would require cross-compliance with Second Pillar regulations. 

The "Carbon Credit." CAP provisions allowing production of nonfood crops, 
including energy crops, on set-aside land, would be eliminated. Support for 
energy crops would be provided by a payment of 45 euros per hectare. 

Durum Wheat Regime. The payment for durum wheat in traditional production areas 
of 344.5 euros per hectare would be reduced by 27 percent. The 138.6-euros-per-
hectare aid in other designated areas would be abolished over 3 years. A premium 
of 15 euros per mt would be provided for some prescribed standard of high 
quality. 

Implications of the 
MTR Proposals

Farm Production, Budget Costs, and Farm Incomes. The Commission forecasts that 
the MTR proposals would have little impact on the EU budget, but they could 
significantly affect product selection, overall production, and incomes of 
individual farmers. 

Farmers would have greater flexibility in production choices among arable crops, 
rice, beef, and sheep, but production choices still would be influenced by high 
EU prices for beef and sheep. Production incentives for dairy, sugar, fruit, and 
vegetables would be unaffected. 

Decoupling direct payments from commodities would reduce incentives to produce 
arable crops, beef, and sheep. Returns to dairy operations also would be 
reduced, since much beef production is associated with milk production. Reduced 
output of beef and sheep is likely, particularly if pasture can be converted to 
arable land. The MTR proposals would leave that issue to national governments. 
Reduction in beef production would be limited because of its association with 
milk production, which would not be reduced because current incentives are very 
high; production is limited by quotas. 

The MTR proposals would reduce production of rice and rye, but the implications 
of the MTR proposals for other grain and oilseed production are unclear. 
Producers would likely reduce output in response to support price cuts and 
abolition of rye intervention. Reduced incentives for arable crops would 
encourage the idling of land, which would tend to reduce production. However, as 
farmers would be free to idle their marginal land (land on which production 
costs exceed market returns), average crop yields would likely rise. Conversion 
of pasture land to arable crops in response to reduced support for beef and 
sheep would also tend to increase arable crop production.

Cross-compliance with environmental, animal welfare, and other requirements 
could potentially raise costs significantly for EU farmers, making them less 
competitive in world markets. The MTR proposals include temporary direct 
payments to assist farmers in meeting demanding standards and additional 
payments for achievement of standards beyond mandatory requirements. 

Farm income impacts are also ambiguous. Reduced payments would tend to lower 
incomes of larger farms, but greater flexibility in product selection could 
improve efficiency and raise net returns. Taking marginal land out of production 
would also raise net farm income. Increased spending on rural development would 
aid some farmers.

An analysis of the MTR proposals by a German research group (reported in 
AgraEurope in August 2002) concludes that German farmers would increase set-
aside by 66 percent to 13 percent of arable land, reducing grain production by 7 
percent, probably mostly of rye. Net German farm income would be unchanged 
because reduced costs from lower production offset reduced returns. Income per 
farm worker would be increased because employment was reduced. Results cannot be 
generalized to other countries.

WTO Commitments and Negotiations. Support for agriculture remains high among 
developed countries, but EU agricultural policy has been a major target of 
international criticism because the CAP has employed trade-distorting policies 
on a substantial scale. EU export subsidies accounted for 93 percent of total 
global agricultural export subsidies in 1999. According to the Organization for 
Economic Cooperation and Development (OECD), overall support for EU agriculture 
is high--$94 billion in 2001, or 35 percent of the value of production. U.S. 
support was $49 billion, or 21 percent of production. The MTR proposals would 
affect EU commitments in the UR and any new commitments in the Doha Round. 

The impact of the MTR proposals on export subsidies is unclear. Large export 
subsidies for dairy products and sugar would be unaffected. EU grain support 
prices have been near the long-term trend in world prices in recent years, 
allowing the EU to export without subsidies. However, low world prices or a 
strong euro relative to the dollar would again require the EU to export grains 
with subsidies. 

The 5-percent reduction in grain intervention prices would slightly improve the 
likelihood that export subsidies would not be required. Slightly lower 
production and exports would decrease the cost of subsidies if they are 
necessary. The rice support price reduction is large and probably would 
eliminate the need for export subsidies in most years, but rice is a minor 
product. Reduced intervention prices for grains and rice would reduce EU 
tariffs, but overall EU import barriers would not be significantly affected 
unless the EU is successful in revising its grain import regime outside of the 
MTR proposals.

The MTR proposals would principally affect WTO commitments for domestic support. 
The Commission asserts that an important portion of EU domestic support would be 
converted to policies much less likely to be reduced in future agreements. 

The UR established three classifications of domestic support--amber, blue, and 
green boxes. Amber policies are the most trade-distorting because they are 
linked to production, such as price supports or direct payments requiring 
production. The UR reduced support under these policies. For 1999, the EU 
notified 47.9 billion euros in amber policies to the WTO. The MTR proposals 
would little affect these policies. 

Policies associated with production limitations, even trade-distorting policies, 
were classified as blue box policies, and were not subjected to reductions. The 
EU notified 19.8 billion euros to the WTO in blue box policies for 1999/2000, 
including the current EU compensatory payments for arable crops, beef, and sheep 
that would be converted to a whole-farm payment under the MTR proposals. 

Green box policies are minimally trade-distorting. They are not subject to 
reductions. These policies could include payments that do not require production 
and are not linked to prices. The EU notified 19.9 billion euros in green box 
policies to the WTO in 1999. 

WTO challenges were rare before 1995 because of ineffective GATT dispute 
resolution procedures. Since 1995, agricultural challenges have been curtailed 
by a UR "peace clause," which protects policies subject to UR Agreement on 
Agriculture commitments from challenge under other WTO provisions. The peace 
clause expires at the end of 2003, at which time all policies will no longer be 
protected from challenges. 

The Commission asserts that the whole-farm payments would be green and would be 
less susceptible either to challenges after expiration of the peace clause or to 
required reductions in future WTO agreements. Although there is general 
consensus that minimally trade-distorting policies should be considered green--
i.e., exempt from reductions--classification of specific policies as green, 
particularly direct payments, may be challenged in the WTO. 

EU Enlargement. Preparation for EU enlargement was a major focus of Agenda 2000. 
Although enlargement is not explicitly addressed in the MTR proposals, the 
proposals have significant implications. Direct payments for CEE producers in an 
enlarged EU are extremely important for the EU and candidate members. The MTR 
proposals signal that CEE farmers will receive whole-farm payments, but the 
amount and timing would have to be negotiated because CEE's have had no 
historical payments.

Lower support prices and the elimination of commodity-specific payments under 
the MTR proposals would result in lower CEE production of arable crops, beef, 
and sheep compared with production resulting under Agenda 2000. Rye production 
could be greatly reduced. The more market-oriented environment also would be 
expected to reduce or eliminate market imbalances. 

Cross-compliance with environmental, food safety and quality, and animal welfare 
regulations could create significant problems for CEE countries, requiring 
considerable investment to meet those standards. On the other hand, enhanced 
funding for rural development would aid CEE farmers. 

What's 
Ahead

CAP reform proposals always have been more ambitious than the reforms finally 
enacted. Reform has occurred when the political cost of not reforming exceeded 
the political cost of reform. The MTR proposals have received support from the 
United Kingdom, the Netherlands, Germany, and Sweden, while provoking strong 
opposition from France and Spain. The remaining member states are cautiously 
critical of various proposals. 

The current political and economic impetus for CAP reform is more complex than 
during previous reforms. While the proposals have limited budget implications, 
the traditional pressures of market imbalances and large stocks of rye, rice, 
and beef are central motivations for these proposals. The proposals also have 
important implications for EU enlargement and WTO negotiations. 

The proposals also reveal a continuing evolution in what is considered important 
for EU agriculture--a much greater emphasis on food quality and safety, 
protection of the environment, animal welfare, and rural development to meet the 
growing demands of consumers and environmentalists. Reduced support for large 
farms also reflects a growing desire to target programs to those farms in need 
rather than a general commitment that overcompensates relatively wealthy farms. 

The whole-farm payment represents an impressive conversion of agricultural 
support towards less trade-distorting policies. Combined with large past 
reductions in support prices for grains and effective support for beef, adoption 
of the MTR proposals would amount to a remarkable increase in market orientation 
of the CAP since 1992. The whole-farm payment could enhance the EU's bargaining 
position in the WTO with respect to the U.S. and other more market-oriented 
exporting countries. 

Nonetheless, there remains much room for reform in the CAP beyond the MTR 
proposals. The EU dairy regime is due for review in 2005 and the sugar regime in 
2006. For both these commodities, high and stabilized prices are maintained 
through quotas, high tariffs, direct intervention, and export subsidies. 

According to the OECD, EU market price support in 2001 (i.e., domestic prices 
above world prices) was almost twice as large as the combined payments the MTR 
would convert to a whole-farm payment. For most important products other than 
oilseeds and meals, the CAP would continue to manage prices and trade, 
restricting competition from imports. 

Gene Hasha (202) 694-5168 ghasha@ers.usda.gov
David Kelch (202) 64-5151 dkelch@ers.usda.gov
Mary Anne Normile (202) 694-5162 mnormile@ers.usda.gov

For Additional Information:

USDA's Economic Research Service Briefing room on the European Union 
www.ers.usda.gov/briefing/EuropeanUnion/

Briefing room on the WTO www.ers.usda.gov/briefing/WTO/

The European Union's Common Agricultural Policy: Pressures for Change
www.ers.usda.gov/publications/wrs992/

EU Enlargement: Negotiations Give Rise to New Issues
http://www.ers.usda.gov/publications/AgOutlook/Jan2001/AO278H.pdf

Agricultural Policy Reform in the WTO--The Road Ahead 
www.ers.usda.gov/publications/aer802/

Commission of the European Union

Communication from the Commission to the Council and the European Parliament, 
Mid-Term Review of the Common Agricultural Policy. COM(2002394.) Brussels: 
European Commission. 2002. 
http://europa.eu.int/comm/agriculture/mtr/comdoc_en.pdf

WORLD AGRICULTURE & TRADE BOX 2

Current Policy Under Agenda 2000

*  Mandatory land set-aside determined annually by the EU Council. Rotation of 
set-aside land required. All land eventually set aside in turn.

*  Multiple, commodity-specific direct payments for arable crops, rice, beef, 
and sheep.

*  Large farms receive direct payments at the same rate as small farms. 

*  Payments unlimited. 

*  Voluntary state enforcement of regulations. 

*  No further cuts in single grain intervention price or in rice intervention 
price (for bread wheat, barley, and corn). Rye intervention maintained. (Cuts 
under Agenda 2000 already are implemented.)  

*  Rural development funding maintained at 4.5 billion euros. 

Proposed Policy Changes

*  Mandatory set-aside of 10 percent of land for 10 years. Rotation not 
required.

*  A single whole-farm payment based on historical payments for arable crops, 
rice, beef, and sheep, adjusted for full implementation of Agenda 2000.

*  Whole-farm payment above 5,000 euros reduced by 3 percent annually reaching 
20-percent reduction over 7 years. 

*  Total payments, including the whole-farm payment and other direct payments, 
limited to 300,000 euros per farm.

*  Payments conditional upon mandatory compliance with environmental, food 
safety, and other measures.

*  Single grain intervention price cut by 5 percent, and rice intervention price 
cut by 60 percent. Rye intervention abolished.

*  Spending on rural development nearly doubled over 7 years, financed by 
payment reductions for large farms.


FOOD & MARKETING

Food Price Inflation To Moderate In 2002 & 2003

The U.S. Consumer Price Index (CPI) for all food is forecast to increase 2.1 
percent in 2002 and 2 to 2.5 percent in 2003, compared with a 3.1-percent 
increase in 2001. With 8 months of CPI data already collected in 2002, the 
annual average food CPI is 2.3 percent above the first 8 months of 2001. The 
inflation rate for the all-items CPI, which was 2.8 percent in 2001, is forecast 
to be 1.6 percent in 2002 and 2 percent in 2003.

In 2002, record beef, pork, and poultry supplies, along with dampened consumer 
demand, are holding down meat prices. Higher feed costs and eroding pasture 
conditions from widespread drought mean more animals moving to slaughter in the 
short term. This, along with slumping poultry exports and a lackluster domestic 
economy, are pressuring livestock and meat prices down this year. Smaller potato 
supplies pushed the fresh vegetable CPI up over 7 percent in 2002, but adequate 
supplies of fresh fruits, dairy products, nonalcoholic beverages, and other 
processed foods contributed to food-at-home prices increasing less than 2 
percent. 

Total food purchased by consumers is expected to increase 3.6 percent in 2002 to 
an estimated $832 billion, up from $803 billion in 2001. In 2002, at-home-food 
sales are forecast to increase 1.2 percent, while food-away-from-home sales (in 
restaurants and fast-food establishments) are expected to increase 5.5 percent. 
Consumer spending on food away from home continues to increase faster than food-
at-home sales, although slow economic growth has encouraged people to eat more 
at fast-food establishments and less expensive restaurants. Retail prices for 
meals eaten away from home are expected to increase less in 2002 than in 2001. 

The CPI, which measures changes in prices only, is forecast to increase 2.5 
percent for full-service meals and snacks (restaurants) in 2002, while the CPI 
for limited-service meals and snacks (fast-food establishments) is expected to 
increase 3 percent. In 2001, the increases were higher, with restaurants 
increasing 3.2 percent and fast-food establishments increasing 3.1 percent. 
Restaurants and fast-food establishments continue to compete vigorously with the 
take-home meals offered by supermarkets. The three main sources of takeout food 
are fast-food (33 percent), restaurants (23 percent), and supermarkets (20 
percent).

Total food expenditures (sales plus home production, donations, and supplied 
foods) are forecast to increase to $875 billion dollars, up 3-4 percent from 
$844 billion in 2001. Food price changes are key determinants of the proportion 
of income consumers spend for food. In 2001, 10 percent of household disposable 
personal income went for all food, with consumers expected to spend the same or 
smaller share of their income on food in 2002 and 2003. The proportion of 
household disposable personal income spent on food generally has trended 
downward, from 11.6 percent in 1990 and 13.2 percent in 1980.

Beef and veal. Widespread drought is pushing up feed costs and eroding pasture 
conditions, which means more beef production in the short term as more heifers 
and cows are slaughtered. However, this will lower beef production over the next 
2-3 years as a greater proportion of females are held for breeding. Declining 
2002 crop yield prospects will likely result in higher grain prices. Although 
the mid-year cattle inventory report indicated a slightly larger calf crop in 
2002, drought and worsening forage conditions and rising grain prices are likely 
to end any prospects for herd expansion this year. Beef supplies over the next 
few years partially depend on when producers begin to retain heifers for 
expanding the breeding herd. Once retention begins, beef production will 
decline. Output should rise a few years later as the number of calves increases, 
but from a relatively low level as inventories are already down. During this 
transition, market prices could move sharply higher before cattle supplies for 
slaughter rebound.

Beef supplies are forecast to reach record levels in 2002, but are expected to 
tighten later this fall and into 2003. Retail prices are expected to average 
$3.31 per pound in 2002, before rising to record levels in late 2003, as 
supplies decrease. Smaller beef supplies and rising U.S. beef prices make the 
U.S. beef market more attractive for world beef exporters. Although the economy 
continues to expand, the rate of expansion has slowed and expectations for 
future growth are uncertain. Dampened consumer demand and record supplies of 
pork and poultry expected in late 2002 and into 2003 will temper beef retail 
price increases. The CPI for beef is expected to be up about 0.5 percent in 
2002, increasing 1-2 percent in 2003. With continued heavy cattle weights, per 
capita consumption is expected to average 67.9 pounds in 2002 before declining 
to 63.8 pounds in 2003.

Pork. Pork production is forecast to reach record levels of 19.8 billion pounds 
in 2002 and remain at about this level in 2003. Producers are expected to 
respond to higher feed costs by reducing the number of sows that farrow in 2003, 
but pigs per litter are expected to increase slightly as less productive sows 
are culled from the breeding herd. U.S. pork imports are expected to top 1 
billion pounds in 2002 and 2003, as pork products from Canada increased more 
than 17 percent in the first 6 months of 2002. The U.S. and Canadian pork 
industries are becoming more integrated. American appetites for pork ribs also 
support Danish exports to the U.S. Lower export demand for U.S. pork products 
can be attributed to slower-than-anticipated economic growth in important 
foreign markets. Exports to Japan and Mexico, the 2 largest markets for U.S. 
pork, have been down slightly in 2002. U.S. pork exports in the first half of 
2002 were down 5 percent from last year, and are expected to be down 2 percent 
for the entire year.

U.S. retail demand for pork remains strong. Retail pork prices are expected to 
average $2.67 per pound in 2002, with the CPI for pork forecast to decline less 
than 1 percent from 2001. With large supplies continuing in 2003, the CPI for 
pork will likely be below 2002. Per capita consumption is expected to average 
51.1 pounds in 2002, up from 50.2 pounds in 2001. With pork production down 
slightly in 2003 and the export market forecast to increase to 1.6 billion 
pounds, domestic per capita consumption is expected to average 51.2 pounds next 
year.

Poultry. The CPI for poultry is forecast to increase 1.7 percent in 2002, with a 
further increase of 1-2 percent expected in 2003. Competing supplies of red meat 
and an uncertain broiler export market led to large supplies of poultry in the 
U.S. market. Broiler meat production in 2002 is expected to be 32.3 billion 
pounds and to increase 1 percent in 2003 to 33 billion pounds. Turkey 
production, expected to be 5.66 billion pounds in 2002, is forecast to increase 
up slightly in 2003.

While domestic broiler production was up 3.8 percent the first half of 2002, 
production is expected to slow somewhat in the second half of 2002 due to large 
supplies of competing meats, uncertainty of the broiler export market, and 
expected higher feed costs. In the first 6 months of 2002, broiler meat 
shipments were down 18 percent from the same period in 2001. Exports to Russia 
were 30 percent lower, while exports to Hong Kong (the second largest market) 
were 12 percent lower and shipments to Japan were down 59 percent. Partially 
offsetting these declines were higher exports to Mexico (up 8 percent) and to 
Korea (up 57 percent). Overall poultry exports during the first half of 2002 
fell 15 percent over a year ago.

Fish and seafood. The CPI for fish and seafood is expected to be down 1.7 
percent in 2002, but up 1-2 percent in 2003. A strong domestic economy boosted 
seafood sales in the restaurant and foodservice sectors in 2000 and 2001. With a 
weaker economy in 2002 and fewer people eating in restaurants, the demand for 
seafood was down, and competition from beef and pork was stronger than the 
previous 2 years. A large percentage of total seafood sales are in the away-
from-home market. More than 50 percent of the fish and seafood consumed in the 
U.S. is imported, with another 20 to 25 percent from U.S. farm-raised 
production.

Eggs. The CPI for eggs is forecast to increase 1.1 percent in 2002 and to hold 
steady or decrease slightly in 2003. Egg production is forecast to increase 1 
percent in 2002 and is expected to remain steady in 2003. While egg production 
has changed little, eggs used in the breaking egg market (by restaurants and 
food manufacturers) continue to expand. Exports to the four largest traditional 
markets were mixed during the first half of 2002. Shipments to Canada, Mexico, 
and Japan were down while shipments to Hong Kong and the European Union were up. 
U.S. per capita consumption is expected to average 252 eggs in 2002 and 249 eggs 
in 2003, down from 253 eggs in 2001.

Dairy products. Retail prices and the CPI for dairy products are forecast to 
increase 1 percent in 2002, with an increase of 1-2 percent projected for 2003. 
Milk production is expected to grow almost 1 percent, from 169.8 billion pounds 
in 2002 to 171.4 billion pounds in 2003, due to partial recovery in milk per cow 
and a small increase in milk cow numbers. Demand for cheese and other dairy 
products should gradually resume growth following a stagnant first half of 2002.

Fats and oils. The fats and oils CPI is forecast to fall 0.4 percent in 2002, 
but to increase 1-2 percent in 2003. Lower retail prices for butter, which 
accounts for 31 percent of the fats and oils index, led to the index forecast to 
be unchanged in 2002. The remaining items contained in the fats and oils index 
are highly processed food items, with their price changes influenced by the 
general inflation rate and U.S. and world vegetable oil supplies.

Fresh fruits. The major fresh fruits consumed in the U.S. continue to be bananas 
(19 percent of the fresh fruit index), apples (18 percent), citrus (17 percent), 
and other fresh fruits including grapes, peaches, pears, and strawberries (46 
percent). For 2002, higher retail price expectations for apples (up 7.2 percent) 
and citrus fruits (up 2.1 percent) are partially offset by lower prices for 
bananas (down 0.3 percent), peaches, strawberries, Thompson seedless grapes, and 
selected fall fruits. A CPI increase of 1.7 percent is expected for 2002 and a 
1-2 percent increase for 2003.

In the first half of 2002, adequate supplies of California stone fruit (peaches, 
nectarines, and plums) held retail prices down. Import volume of bananas and 
papayas were lower in 2002 compared with 2001, while imports of pineapples and 
mangoes were higher. Domestic consumption of fresh apples is expected to average 
17 pounds per person, pear consumption averages 3 pounds per person, and grape 
consumption averages 7 pounds per person. Imports provide most of the tropical 
fruit supplies in the U.S., with bananas, mangoes, pineapples, and papayas the 
most popular. Demand for fresh tropical fruit in the U.S. has been on the rise, 
a trend influenced by the nation's growing immigrant population. Bananas are the 
most popular imported tropical fruit, accounting for over 85 percent of total 
import volume. 

Fresh vegetables. The major fresh vegetables consumed in the U.S. continue to be 
potatoes (17 percent of total fresh vegetable index), lettuce (13 percent), 
tomatoes (20 percent), and other fresh vegetables (50 percent). In 2002, the CPI 
for fresh vegetables is expected to increase 7.1 percent, with a projected 
growth of 4-6 percent for 2003. Reduced potato acreage (down 9 percent) and 
lower production (down 15.5 percent) in 2001 contributed to an expected 23-
percent increase in retail prices in 2002. Lettuce prices are forecast to be 11 
percent higher in 2002, largely due to cool, damp weather in California, which 
delayed harvesting of lettuce in March. Tomato prices are expected unchanged 
from 2001 to 2002, with shipments to the retail market up 9 percent in 2002, 
providing adequate supplies of fresh market tomatoes. Retail prices for other 
fresh-market vegetables (including snap beans, broccoli, cabbage, carrots, 
cauliflower, celery, sweet corn, cucumbers, peppers, and squash) are expected to 
increase an average of 4 percent in 2002. 

The Farm Security and Rural Investment Act of 2002, which governs Federal farm 
programs for the next 6 years, features programs that will have a direct bearing 
on the fruit and vegetable industry. Two specific programs that may affect 
future retail pricing of fresh fruits and vegetables include: (1) Country of 
origin labeling for perishable agricultural commodities, including fruits and 
vegetables after a 2-year voluntary program; and (2) Government purchase of 
fresh fruits and vegetables for distribution to schools and service 
institutions. Additional funds will be used to increase fruit and vegetable 
consumption and publicize related health promotion messages.

Processed fruits and vegetables. Contract production of the five major 
processing vegetables (tomatoes, sweet corn, snap beans, cucumbers, and green 
peas) was down 10 percent in 2001 but is forecast to be up 3 percent in 2002 to 
1.26 million acres. Responding to burdensome inventories and weak wholesale 
prices, processors contracted for fewer acres of the five leading processing 
vegetables in 2001, but contract area was greater in 2002 for tomatoes (up 10 
percent), green peas (up 3 percent), cucumbers for pickles (up 22 percent), and 
snap beans (up 2 percent). Although production area was up in 2002, the drought 
situation may lower yields of some of the vegetables for processing. 

With reduced supplies of fruits and vegetables for processing in 2000 and 2001, 
the CPI for canned fruits and vegetables is forecast up 3.9 percent in 2002 and 
the CPI for frozen fruits and vegetables is expected to be 3.8 percent higher. 
The CPI for all processed fruits and vegetables is expected to increase 4 
percent in 2002 and an additional 3-4 percent in 2003. Since frozen fruit and 
vegetable demand has been shown to be price and income sensitive, retailers will 
be reluctant to raise prices more than a modest amount in the coming year.

Sugar and sweets. Domestic sugar production for 2002/03 is projected at 8.75 
million tons, with cane sugar estimated at 4.25 million tons and beet sugar 
estimated at 4.5 million tons. Total production was estimated to be 8.017 
million tons in 2001/02. The area planted to sugar beets in 2002 was up 3 
percent, while sugarcane acreage harvested during the 2002 crop year was down 
slightly from the year before. Most of the sugar beet acreage increase occurred 
in North Dakota and Idaho, while harvested sugarcane acreage was up in Hawaii 
and Texas.

The CPI for sugar and sweets is forecast to increase 2.2 percent in 2002 and 
another 2-3 percent in 2003. The sugar and sweets index has 3 sub-categories: 
sugar and artificial sweeteners (17.8 percent of the index), candy and chewing 
gum (63.5 percent), and other sweets (jellies, jams, preserves, and syrups, 18.7 
percent). The sugar and artificial sweeteners category is forecast to increase 
1.8 percent in both 2002 and 2003, candy and chewing gum, 2.2 percent and 2.9 
percent, and other sweets, 3.4 percent and 3.3 percent.

Cereal and bakery products account for over 15 percent of the at-home food CPI. 
Breakfast cereals and bread are the two largest components, each accounting for 
19 percent of the index. Breakfast cereal prices are expected to increase 2 
percent in 2002, and bread, 2.2 percent. With lower grain prices earlier this 
year and modest inflation-related processing cost increases, the CPI for cereals 
and bakery products is forecast to increase 2.1 percent in 2002 and another 2-3 
percent in 2003. Most of the costs required to produce cereal and bread products 
are for processing and marketing (more than 90 percent in most cases), leaving 
the farm-grown ingredients a minor cost consideration.

Nonalcoholic beverages. The CPI for nonalcoholic beverages is forecast to fall 
0.7 percent in 2002 and an additional 1 percent in 2003. Prices of carbonated 
drinks, nonfrozen noncarbonated juices and drinks, and coffee are the three 
major components, accounting for 38, 32, and 10 percent of the nonalcoholic 
beverage index, respectively. In 2002, retail prices are forecast lower for 
carbonated drinks (down 0.1 percent), and significantly lower for coffee (down 3 
percent). World production of coffee in 2001/02 and 2000/01 set records of 
almost 110 million 60-kilogram bags. Near-record production in Brazil, which is 
the largest producer of arabica beans, and other Central and South American 
countries contributed to lower consumer coffee prices in 2002. In the U.S., the 
leading coffee consuming country, consumers prefer the smoother, premium, 
arabica beans produced in South America. More recently, coffee production has 
increased in Asia, making world coffee supplies more plentiful. For carbonated 
drinks, competition among leading manufacturers has held down retail prices. In 
2003, the CPI for carbonated drinks is forecast to fall slightly.

Other foods. The CPI for other foods is forecast up 0.5 percent in 2002, and 1-2 
percent in 2003. Products in this category and their expected price changes for 
2002 include soups (up 2.4 percent); frozen and freeze-dried prepared foods (up 
0.4 percent); snacks (down 0.7 percent); spices and seasonings (up 2 percent); 
olives, pickles, and relishes (up 0.1 percent); sauces and gravies (up 0.7 
percent); and baby foods (up 2 percent). These highly processed foods are 
heavily affected by changes in the all-items CPI. Competition among these 
products and from the away-from-home market should continue to dampen retail 
price increases for items in this category in 2003.  

Annette L. Clauson (202) 694-5389 aclauson@ers.usda.gov

Keep up with food prices and spending

Visit ERS' Food CPI, Prices, and Expenditures briefing room 
www.ers.usda.gov/briefing/CPIFoodAndExpenditures/

Find information on impacts of the 2002 Farm Act 
www.ers.usda.gov/features/farmbill/


FARM & RURAL COMMUNITIES
Farm Numbers: Largest Growing Fastest

Declining farm numbers, increasing farm size, and concentration of production 
have captured the attention of the media, the general public, and policymakers 
for decades. While the number of farms peaked in 1935, then began declining, 
average farm size grew as consolidation occurred. A smaller share of farms 
accounts for a growing proportion of agricultural production, but the proportion 
of the smallest farms (sales less than $10,000) is also growing. 

Estimates of the number of farms and total farm acreage are available back to 
the 1850 Census of Agriculture, and the distribution of farms by acreage class 
is available back to 1880. But farm acreage measures land use, with no 
indication of the value of what is produced. The level of sales of farm products 
is arguably a better measure of farm size, since it unambiguously measures 
economic activity in dollars. Sales class as well as acreage should be 
considered when analyzing trends in farm size.

Changes in the distribution of farms by sales class in the last four 
agricultural Censuses (1982, 1987, 1992, and 1997) can be compared across time 
by using the producer price index for farm products to adjust for price changes. 
Unfortunately, constant-dollar sales class cannot be prepared before 1982, as 
census records for individual farms are incomplete before then. 

Counts of farms by constant-dollar sales class--available from 1982 onward--are 
consistent with conclusions about farm size based on acreage classes. Acreage 
and sales-class data show a trend toward large farm operations with at least 500 
acres or with annual sales of at least $250,000 in farm products.

Longrun Trends: Numbers 
By Acreage Class

After peaking at nearly 7 million in 1935, the number of farms dropped 
dramatically and the decline has continued. 

*  Most of the decline occurred during the 1940s, 1950s, and 1960s. This drop in 
farm numbers continues, but at a slower pace. 

*  By 1997, 1.9 million farms remained. 

*  Because the amount of farmland decreased to a lesser extent than the number 
of farms, average acres per farm is larger. 

Counting Farms 
By Sales Class

Farms with fewer than 50 acres and farms with more than 500 acres have both 
increased their share of total farms since 1974, but mid-sized farms' share has 
declined. These changes reflect different trends by acreage class.

*  The number of farms with at least 500 acres increased steadily from 1880 
through the 1960s, before stabilizing at 350,000-370,000 farms. 

*  Farms with 1-49 acres declined from a maximum of 2.7 million in 1935 to about 
half a million in 1974, but since 1974 the count has ranged from 540,000 to 
640,000. 

*  The number of farms with 50-499 acres declined continuously from 3.9 million 
in 1935 to about 1 million farms in 1997. Nevertheless, mid-sized farms still 
accounted for about half (52 percent) of all farms in 1997.

Between 1982 and 1997, large farms (those with sales of at least $250,000) 
steadily increased their numbers. 

*  Large farms grew from 104,000 in 1982 to 157,000 by 1997. 

*  The share of large farms also grew, from 5 to 8 percent of all farms. 

*  Most farms in the large farm group had sales of $250,000-$499,999, but the 
number grew more rapidly among those with sales of $500,000 or more. 

*  The number of farms in all other sales classes declined in each inter-Census 
period, with the exception of farms in the subgroup selling less than $10,000 in 
farm products annually. 

*  Farms in the under-$10,000 sales class declined in number from 1982 to 1992 
but rose by 9 percent from 1992 to 1997--and account for half of all U.S. farms. 

Measuring Sales in the 
Farm Sales Classes

In addition to the shift in number of farms in the various sales classes, marked 
shifts occurred in the distribution of total sales among farm sales classes. 

*  The share of all sales accounted for by large farms increased steadily from 
51 percent in 1982 to 72 percent in 1997. 

*  The largest gains in share occurred in the classes with sales of $1 million-
$4.9 million (1.2 percent of farms in 1997), and $5 million or more (0.1 percent 
of farms); each of these two highest sales categories now accounts for about 
one-fifth of agricultural sales.

*  Farms with sales of at least $5 million specialized in relatively few 
commodities in 1997: 
**  high-value crops (vegetables and melons, fruits and tree nuts, and 
horticultural specialties), 34 percent;
**  cattle feedlots, 20 percent;
**  poultry and eggs, 16 percent; and 
**  dairy, 9 percent.
 
*  Farms with sales of $1 million-$4.9 million tended to specialize in a wider 
variety of commodities in 1997: 
**  high-value crops, 21 percent; 
**  poultry and eggs, 20 percent;
**  dairy, 12 percent;
**  hogs, 11 percent;
**  cash grains, 10 percent, and
**  field crops other than cash grains, 11 percent.

The Issue of 
Concentration 

Acreage-class and sales-class data show a trend toward bigger farms--operating 
at least 500 acres or selling at least $250,000 in farm products. Compared with 
acreage-class data, the sales-class data capture less of an increase in smaller 
farms, after making the adjustment in 1992 to include CRP/WRP point farms. 

Changes in the distribution of sales volume by size of farm, however, were 
actually more dramatic than changes in the distribution of farm numbers. In 
discussions of farm structure, the growing share of production on fewer farms 
and fewer acres is referred to as concentration.

Concentration has been in progress for at least a century. In 1900, 17 percent 
of U.S. farms accounted for 50 percent of farm sales. By 1997, 2 percent of 
farms generated half of the agricultural sales. This 2 percent includes all 
farms with sales above $1 million, plus nearly half (47 percent) of farms with 
sales of $500,000-$999,999. On the other hand, the 17-percent figure for 1900 
also indicates that some concentration existed a century ago, since production 
was not evenly distributed across all farms. 

In most industries, concentration is not considered a policy issue until a very 
small number of firms--such as two to four--dominates the industry. The 2 
percent of U.S. farms accounting for half of agricultural sales includes 46,100 
farm operations, far too many for any individual farmer to hold much market 
power. Although for some commodities the level of concentration is far higher 
than for farms overall, agriculture as a sector is not highly concentrated 
compared with other industries. 

Robert A. Hoppe (202) 694-5572 rhoppe@ers.usda.gov
Penni Korb (202) 694-5575 pkorb@ers.usda.gov

More info? See

"How concentrated is U.S. agricultural production?" at 
www.ers.usda.gov/briefing/FarmStructure/Questions/concentration.htm

"How Does the Change in Farm Numbers Vary by Farm Size?" at
www.ers.usda.gov/briefing/FarmStructure/Questions/farmnumbers.htm

U.S. Department of Agriculture, National Agricultural Statistics Service. 1997 
Census of Agriculture, Vol. 1: Geographic Area Series, Part 51:  United States 
Summary and State Data,. AC97-A-51. March 1999.

FARM & RURAL COMMUNITIES BOX 1

Most of the 1992-97 increase in farms with sales less than $10,000 occurred 
among "point farms"--those with sales under $1,000 that might normally have 
annual sales high enough to meet the $1,000 threshold for being considered a 
farm. Because of this increase in the last inter-census period, farms with sales 
less than $10,000 now account for half of all U.S. farms. 

The increase in point farms is due mainly to a change in how some farms were 
classified. In 1992, operations that placed all of their cropland in the 
Conservation Reserve Program (CRP) or Wetlands Reserve Program (WRP) were 
excluded from the Census farm tabulations if they did not otherwise meet the 
farm definition based upon sales, livestock, inventories, planted crops, or 
other criteria. 

The farm count in 1997 was expanded to include operations that had placed all 
their cropland in the CRP or WRP. In the 1997 Census, CRP/WRP operations were 
counted as point farms. There were 66,716 of these CRP/WRP establishments in 
1992. When these farms are added to the 1992 count of point farms in order to be 
consistent with the 1997 Census, the 1992-97 change in number of point farms 
shifts from a gain of 30 percent to a loss of 1 percent. In addition, the 9-
percent increase in number of farms with sales less than $10,000 becomes 2 
percent. 

Regardless of how CRP/WRP farms are handled, farms less than $10,000 constitute 
a large proportion of the total. These very small farms amounted to over two-
fifths of all U.S. farms in Censuses before 1997, when CRP/WRP farms were not 
counted.

FARM & RURAL COMMUNITIES BOX 2

Defining Farms & Point Farms

The official Census definition of a farm is "any place from which $1,000 or more 
of agricultural products were produced and sold or normally would have been sold 
during the census year." If an operation does not have $1,000 in sales, a "point 
system" assigns values for acres of various crops and head of livestock to 
estimate a normal level of sales. "Point farms" are farms with fewer than $1,000 
in sales with points worth at least $1,000. Point farms tend to be very small. 
Some, however, may normally have large sales but experience low sales in a 
particular year due to bad weather, disease, or other factors. Farms and point 
farms are determined for each Census, based on current dollars.

Although the official farm definition has not changed since the 1974 Census of 
Agriculture, minor differences existed between Census and USDA definitions. The 
Census Bureau excluded Christmas tree farms and farms with all their cropland 
enrolled in the Conservation or Wetlands Reserve Program (CRP and WRP). The 
Bureau, however, included farms having five or more 
horses and sales of no other farm products; USDA's National Agricultural 
Statistics Service (NASS) excluded these in its surveys. After responsibility 
for the Census of Agriculture was transferred to NASS from the Census Bureau by 
the 1997 Appropriations Act, the NASS and Census farm definitions merged. The 
1997 Census included Christmas tree and CRP/WRP farms, and NASS surveys began to 
include horse farms in 1995.

Two new types of farms--operations specializing in maple syrup or "short 
rotation wood crops" (other than Christmas trees)--were added to both counts 
starting in 1997, with implementation of the new North American Industry 
Classification System. Short rotation wood crops have a harvest cycle less than 
10 years and include trees grown for pulp or tree stock in addition to Christmas 
trees. 

The addition of these new farm types, however, had far less effect on the farm 
count than the addition of CRP/WRP farms, simply because there were fewer of 
them. Farms specializing in maple syrup or short rotation wood crops totaled 
14,400 in 1997. About 8,800 of these farms had sales less than $10,000, 
including 1,500 point farms.


RESEARCH & TECHNOLOGY

A Role for Technology in 21st Century Agriculture

Globalization-in the form of expanded trade, investment, and economic 
integration-could expand market opportunities for both developed and developing 
economies. Technological advances can be spread around the world, with the 
potential to enhance agricultural productivity, incomes, and the quality of life 
in all countries. However, some regions of the world have gained little from the 
discoveries and innovations made in agriculture and from global agricultural 
markets. This is partly because private research investment tends to be directed 
toward meeting the market demands of developed-country consumers rather than the 
needs of less developed countries. 

At recent meetings attended by the leaders of the major industrial countries, a 
commitment was made to increase the possibilities for less developed countries 
to participate in the global economy. One way that the agricultural community 
and public sector could contribute to this effort is to strengthen the 
technological infrastructure in developing countries and facilitate the transfer 
of technologies appropriate to developing countries' needs.

R&D Increases Productivity 
In the Developed World

New technologies and innovative practices have been key factors in the economic 
development of high-income countries. Investment in agricultural research and 
development (R&D) by both the private and public sectors in the U.S. has 
resulted in a high level of productivity. Recent breakthroughs in information 
technology and life sciences have expanded opportunities to increase production 
efficiency and to provide consumers with the products they demand. 

U.S. agricultural productivity, measured as the ratio of output to inputs, has 
increased two-and-one-half times since 1948. Canada and many European countries 
also have seen high rates of agricultural productivity growth over this period-
averaging nearly 2 percent per year. The production of more agricultural goods 
using fewer inputs frees resources to be invested in other parts of a country's 
economy, thus increasing affluence. In the U.S., less than 10 percent of 
disposable income is spent on food, and this share includes the purchase of 
high-quality and convenience attributes that consumers now demand. In many 
developing economies, more than 50 percent of disposable income goes toward 
providing food. 

The development of new machines, chemicals, and biological improvements was the 
result of substantial investment in R&D. Both public and private investment in 
U.S. agricultural R&D has grown over the last four decades, contributing to 
productivity growth. Private investment, however, has grown faster and now 
surpasses the R&D expenditures of the public sector. The public and private 
sectors often have different investment objectives. In general, public research 
has supported the development of basic scientific knowledge and applications 
that are beneficial to the general public, while private R&D has tended to focus 
on marketable applications.

The focus of technology development in agriculture in the last half of the 20th 
century was to increase production efficiency on the farm. These changes were 
driven by innovations in machinery, pesticides, fertilizers, information 
technologies, and plant breeding. While this was a supply-driven focus, 
consumers also benefited from increased production of basic commodities at low 
prices. 

Increased efficiency altered the structure of U.S. agriculture. As agricultural 
productivity increased by a factor of two-and-one-half, the total number of U.S. 
farms decreased by nearly two-thirds since the 1940s. Fewer farms are now 
involved in agriculture, but the total amount of land being farmed has changed 
little since the 1940s, and the average farm size has grown from under 200 acres 
to almost 500 acres. 

The Promise of New 
Technologies

Developments in the biological sciences have always been major contributors to 
agricultural productivity. Innovations in plant breeding after World War II 
produced the "Green Revolution" in many parts of the world. At the end of the 
20th century, breakthroughs in molecular biology led to the development of crops 
that are disease- and pest-resistant or herbicide-tolerant. Current farm-level 
biotechnology research is focused on developing crops that will tolerate a wider 
range of drought, acidity, salinity, heat, and flooding. These crop 
characteristics could contribute to productivity increases in resource-poor 
countries.

In addition, biotechnology research is responding to consumer demand for more 
nutritious food with improved post-harvest quality. Transgenic plants and 
animals are being developed as sources of edible vaccines, medicines, and 
vitamins. Biotechnology techniques are also being used to develop sources of 
biomass to substitute for fossil fuels; biopolymers and enzymes for industrial 
uses; and bioremediation to remove toxic substances from the environment.

At the end of the 20th century, innovations in many nonagricultural fields 
contributed to new technologies in agriculture. For example, satellite 
technology, computers, and robotics allow a farmer to manage the use of 
pesticides, fertilizers, and water more efficiently by tailoring input amounts 
to the specific characteristics of the site. The use of these precision farming 
technologies may reduce both input costs to the farmer and chemical runoff to 
the environment.

Many have described the beginning of the 21st century as the "information age." 
Precision farming and biotechnology resulted from the increased ability to 
analyze information. Innovations in computing capabilities and low-cost access 
to computers have dramatically enhanced the ability to store and analyze data. 
In addition, today's communication networks have facilitated the rapid exchange 
of information. Firms can assess consumer demands throughout the world, farmers 
can produce value-added crops for specific markets, and scientists can 
collaborate with researchers around the world in data gathering and analysis.

A World of Difference 
In Trade Opportunities

In May 2001, Neal Lane, former director of the National Science Foundation and 
former director of the White House Office of Science and Technology Policy 
(OSTP), expressed optimism about the value of new biological and information 
technologies. "The swift globalization of knowledge," he noted, "has created a 
web with the potential to draw nations and cultures together and to share 
benefits in a more equitable manner." Global trade, Lane said, has the potential 
to benefit all nations (making the pie bigger), but he cautioned that not all 
countries had the capacity to take advantage of these promising developments. 

With continued technology-induced productivity growth will come opportunities to 
develop new markets for agricultural products throughout the world. Export 
revenues accounted for 20-30 percent of U.S. farm income over the last 30 years. 
But expanding demand for agricultural products will depend on the income and 
agricultural productivity of the importing countries. Despite optimistic 
predictions about the benefits of globalization, there are still major 
differences in incomes and opportunities between countries.

In developed economies, where incomes are relatively high, consumers demand 
high-quality and varied agricultural products. They demand value-added processed 
products that offer convenience, enhanced nutritional characteristics, and 
assurances of food safety. Further, they increasingly are concerned with the 
potential environmental impacts of agricultural production systems. 

In middle-income countries (e.g., Poland, Mexico, and South Africa), the basic 
calorie needs have been met for the majority of the population. Consumers demand 
a wider range of agricultural commodities and sources of protein, but import 
demands are primarily for basic agricultural commodities and meats rather than 
for value-added processed products.

Developing countries offer the largest potential for expanding global markets, 
but major obstacles remain before incomes in these areas are sufficient to 
increase participation in international trade. Many of these countries have 
neither the income nor the productive capacity to consistently meet the basic 
nutritional needs of the population. Agricultural output makes up a large share 
of the national economy in many less developed countries. Per capita income is 
quite low in some of these regions, and there are wide gaps in income between 
and within regions. These countries currently offer little opportunity for 
profitable trade. 

Meeting Consumer Demand: 
The Role of Technology

Consumer demands depend in part, on income level, and public and private 
research priorities change to meet those demands. To supply the products 
demanded in high-income countries, the private sector invests in research to 
develop value-added products that can be profitably traded. Public-sector 
agricultural research can develop technologies and practices used to ensure food 
safety and to lessen potential environmental impacts of production. If consumer 
demand is strong for products that meet food safety or environmental quality 
criteria, the private sector can provide these products profitably as well. 

To meet demands in middle-income countries, both public and private agricultural 
research programs focus on providing increased quantities of affordable sources 
of nutrition. There is less demand for value-added and processed products than 
in high-income countries.

In less-developed countries, demand for imported products is low. R&D efforts 
within many of these countries are not sufficient to substantially increase 
agricultural productivity, and opportunities for profitable private research 
investment are limited. The success of public research depends on financial 
resources and educational levels (human capital), as well as natural resource 
endowments, adequate infrastructure, and political stability among many factors. 
Due to constraints on many of these factors, less developed countries often do 
not have the strong public research capacity needed to develop technologies 
suited for their needs.

The need for increased productivity growth is great in many developing 
countries. Population growth rates in lower income countries are generally 
higher than in developed regions. If current trends continue, the world's 
population is expected to increase by 737 million persons by 2011, and most of 
the growth will be in developing countries. Unfortunately, crop yields are often 
substantially lower in these developing regions. Even though world food 
production has been increasing faster than population growth (AO June-July 
2002), many people are undernourished in less developed regions. In Sub-Saharan 
Africa, 43 percent of the population is chronically undernourished, consuming 
less than the minimum recommended nutritional requirements. However, the 
greatest numbers of undernourished people live in Asia.

With high population and low productivity levels, many low-income countries are 
not able to produce enough food domestically to meet basic nutrition needs. Nor 
do they have adequate income to import enough to eliminate these food gaps. 
Agricultural productivity in developing countries must grow more rapidly than it 
has in the past decade, both to increase domestic food production and to raise 
incomes--which, in turn, will lead to increased agricultural trade. Development 
and adoption of new technologies will be necessary to improve both food 
availability and access to food. The projected yield growth that would be needed 
to achieve food security is highest in sub-Saharan Africa. 

Most low-income countries do not have large financial resources to invest in the 
training of scientists, maintenance of research facilities, or many other 
components of a strong agricultural R&D program. Asian countries have been able 
to invest more than most countries in Africa, but the average level of 
expenditure in Asia is still below the world average. Since internal investment 
may not be adequate, there is a need to transfer technologies from developed to 
less developed countries to increase agricultural productivity and income. But 
technology transfer entails more than just shipping machines, seeds, or 
blueprints. Often, existing innovations developed for one region are not 
suitable to the unique circumstances that exist elsewhere. 

Removing Barriers to 
Technology Transfer

Problems can arise in transferring agricultural technologies, methods, and ideas 
between developed and less-developed countries. While each situation is 
different, three barriers often have been encountered within developing 
countries: 

*  lack of investment incentives; 

*  weak or nonexistent intellectual property rights; and

*  insufficient research capacity. 

Within a developing country, financial resources and incentives for private 
research investment may be lacking. In order for a company to develop improved 
agricultural inputs or enhanced outputs, there must be a large and growing 
demand for its products. To ensure strong demand, farmers must have access to 
financial resources to purchase inputs, and the country's infrastructure must 
support the deliveries of inputs and crops in a timely fashion. Increases in on-
farm efficiencies have little benefit if the product cannot reach the market. 
Lack of roads, transportation and communication networks, or storage facilities 
can impede effective productivity growth. 

Legal, political, and financial institutions must also support market 
development. Private investment from foreign sources will not be forthcoming 
without a strong demand by farmers and a well-functioning infrastructure. Direct 
financial aid may be needed in some cases to improve the infrastructure and 
institutions that currently act as barriers to internal and foreign private 
investment.

Inconsistencies in intellectual property rights (IPR) protection between 
countries have also been a barrier to technology transfer. IPRs for agricultural 
innovations generally are granted in several ways: patents, copyrights, and 
Plant Variety Protection Certificates. These rights encourage private investment 
in R&D by giving firms a way to retain a greater share of research benefits than 
if the rights were not protected. IPRs can offer substantial incentives for 
development of technologies to increase agricultural productivity. 

However, strong IPRs held outside the less developed country may inhibit the 
flow of new knowledge. Many in less developed countries have expressed concerns 
that firms in developed countries control so many intellectual property rights 
that innovations targeted for agricultural development may be impeded. The 
strength of IPRs also can affect incentives for investment by public research 
sectors in developed countries. In multilateral trading agreements, the U.S. has 
stressed the need for more consistent IPR protection between developed and 
developing countries. To overcome the concern that access to innovations will be 
impeded, international public and private partnerships that share, pool, or 
license rights could offer incentives for research while encouraging innovation 
that serves the public good. Strong IPRs in developing countries could then help 
these countries gain access to needed technology from the private sector.

The third barrier to technology transfer is the lack of a strong technology 
research capacity within many developing countries. Development of new 
technologies and practices is a complex process. Each innovation must be adapted 
to the specific characteristics of an application. Geographic, climatic, and 
cultural factors differ substantially between countries, so technologies can 
seldom be directly transferred without adaptation. Local scientific expertise is 
needed to take advantage of the knowledge found throughout the world, and to 
establish environmental and food safety safeguards to ensure that both the 
positive and negative potential impacts of a new technology are adequately 
assessed.

Basic research findings made in one application spill over and can be used to 
enhance productivity in both developed and developing agricultural economies. 
Site-specific adaptations are often required, however, and a locally based 
research capacity is needed to reap the benefits of the technology transfer. 
Developed economies can help poorer countries build the research and development 
capacity and facilitate the transfer of productive and appropriate technologies. 

Improving research infrastructures in the poorest regions can be accomplished 
through direct investment in facilities and education in the developing country, 
and through support of organizations like the World Bank and the Consultative 
Group on International Agricultural Research. International collaboration in 
public agricultural research has been very successful in transferring basic 
knowledge throughout the world. 

Public investment in research to increase the agricultural productivity of the 
poorest nations could have many benefits. Better nutrition and higher incomes 
would improve lives, and incentives for private investment would increase as 
regions gain the economic resources to participate more actively in the global 
marketplace. With less developed and developed countries active in the market, 
there is potential to increase the benefits of globalization in terms of equity, 
prosperity, and global food security for more of the world's population.

Margriet Caswell (202) 694-5529 mcaswell@ers.usda.gov

For further information:

"Does Land Degradation Threaten Global Agricultural Productivity & Food 
Security?" Agricultural Outlook, AGO-292, June-July 2002.

Neal Lane, "Talking Turkey: Science, the Economy, and the Community," Science 
and Technology Policy Yearbook: 2002, American Association for the Advancement 
of Science, 2002.

Phil Abbott, Mike Boehlje, and Otto Doering, "Coming to Grips with 
Globalization," Choices, Winter 2001-2002.


SPECIAL ARTICLE

NAFTA's Impacts on U.S. Agriculture: Trade & Beyond

NAFTA, the North American Free Trade Agreement, has generally benefited U.S. 
agriculture and related industries. U.S. agricultural trade with Canada and 
Mexico more than doubled during the 1990s, a development to which NAFTA 
contributed. Moreover, the agreement has established rules and institutions that 
mitigate potential trade frictions, promote foreign direct investment, and 
facilitate public discourse about environmental issues. Thus, NAFTA's effects on 
agriculture should be assessed not only in terms of trade impacts, but also for 
the trade, investment, and institutional reforms resulting from its 
implementation.

The adjustment to freer trade in North America has been relatively smooth. Most 
U.S. barriers to Canadian and Mexican exports were low prior to NAFTA, and 
dismantling of tariffs under the agreement is in general proceeding gradually. 
However, the U.S. dollar has tended to appreciate in real terms against the 
Canadian dollar since 1992. While this development is not the result of NAFTA, 
it has made U.S. farm exports more expensive to Canadian customers while making 
imports more affordable to U.S. consumers. In contrast, the real value of the 
U.S. dollar in Mexican pesos has tended to decline in recent years, gradually 
reversing the precipitous drop in the peso's value that occurred in late 1994 
and early 1995. This increase in value of the peso has worked to the advantage 
of U.S. exports to Mexico.

NAFTA Has Increased 
Trade of Some Products

NAFTA, which took effect January 1, 1994, provides for the progressive 
dismantling of most barriers to trade and investment among Canada, Mexico, and 
the U.S. over the 14-year period ending January 1, 2008. The agreement 
incorporates the Canada-U.S. Free Trade Agreement (CFTA), whose implementation 
was completed on January 1, 1998. Although NAFTA's transition is still in 
progress, tariff elimination for agricultural products is nearly complete. For 
this reason, NAFTA's influence on U.S. agriculture to date should provide a good 
indication of the agreement's long-term impacts.

U.S. agricultural trade with Canada and Mexico has continued on an upward trend 
since NAFTA's implementation. While only a portion of this increase can be 
attributed solely to the agreement, NAFTA has allowed competitive market forces 
to play a more dominant role in determining agricultural trade flows among the 
three countries. The agreement has facilitated a reorientation of U.S. 
agricultural trade in which U.S. exporters and importers put greater focus on 
the NAFTA region. In 2001, 29 percent of U.S. agricultural exports were destined 
for either Canada or Mexico, and the two countries supplied 38 percent of U.S. 
agricultural imports. In 1990, these shares were 17 percent and 25 percent, 
respectively.

To examine NAFTA's trade impact, USDA's Economic Research Service estimated the 
trade changes resulting from CFTA and NAFTA for 38 commodities or commodity 
groupings, isolating the agreements' influence from population growth, changes 
in macroeconomic performance and exchange rates, unusual weather patterns, and 
other factors. For commodities subject to quotas or other quantitative 
restrictions before CFTA and NAFTA, the volume of trade during 1994-2000 was 
compared with previously allowed quantities. This assumed no over-quota trading 
except where analysts determined that previous limits were not enforced. For 
commodities subject to tariffs prior to CFTA and NAFTA, economic models and 
assessments by commodity trade specialists were used to estimate the impact of 
tariff changes.

For most commodities, NAFTA's trade effect has been relatively minor, generating 
a small increase in U.S. exports to or imports from Canada or Mexico over what 
would have occurred without the agreement. For a handful of commodities, NAFTA's 
impact has been larger, with an increase of 15 percent or more in trade 
attributable to the agreement. This increase is particularly noticeable for 
products whose trade was severely restricted prior to CFTA and NAFTA.

U.S.-Canada beef trade has expanded substantially from the elimination of 
quantitative restrictions formerly imposed by both countries. In fact, U.S. beef 
exports to Canada may be twice as high as without CFTA and NAFTA. In addition, 
NAFTA tariff reductions have provided a moderate boost to U.S. beef exports to 
Mexico. Continued economic growth in Mexico should strengthen demand for this 
high-value product.

Because of animal health considerations, North American hog trade consists 
almost entirely of Canadian exports to the U.S. and U.S. exports to Mexico. 
Canadian hog exports to the U.S. increased from about 900,000 head in 1994 to 
5.3 million head in 2001, due largely to Canada's elimination of grain transport 
and other agricultural subsidies, rather than to CFTA or NAFTA. Removal of 
subsidy assistance to grain and hog producers, in particular, provided a strong 
incentive for the local use of grain in livestock production, and it helped 
bring about an end to U.S. countervailing duties on Canadian hogs. U.S. hog 
exports to Mexico currently face a duty of 35.1 cents per kilogram, the result 
of a Mexican antidumping investigation in 1998 and 1999.

CFTA and NAFTA have had a small, positive impact on U.S. pork and poultry meat 
exports to Canada and Mexico, but the influence of other factors has been more 
powerful. Sustained economic growth in Mexico during the late 1990s boosted 
demand for U.S. pork and poultry, and both Canada and Mexico have shown 
flexibility in their application of quantitative restrictions on U.S. poultry.

Mexico's import policy toward U.S. corn is more open than required by NAFTA, and 
a series of droughts limited Mexican corn production in past years. U.S. corn 
exports to Mexico in 2001 were more than three times their average volume during 
1990-93. Although Mexico eliminated its seasonal tariff on U.S. sorghum as part 
of NAFTA, some Mexican livestock producers switched from sorghum to corn feed 
due to increased availability of U.S. corn. Still, sorghum is one of the major 
U.S. agricultural exports to Mexico.

The gradual elimination of tariffs on U.S.-Canada corn trade has facilitated 
increased volumes of trade in years when bad weather severely damaged the crop 
in one country but not the other. A prominent example of this occurred in 2001, 
when a drought in Canada led to the importation of 3 million metric tons (mt) of 
U.S. corn, compared with an annual average of just 890,000 mt during 1990-2000.

CFTA and NAFTA also gradually did away with tariffs on U.S.-Canada wheat trade. 
Although this reform has increased U.S. wheat imports from Canada by a large 
amount, its impact on U.S. wheat exports to Canada is negligible, reflecting 
both Canada's historic strength in wheat production and the long-term impact of 
Canada's various regulatory actions. 

Canada and the U.S. continue to spar over the activities of the Canadian Wheat 
Board (CWB), and in February 2002, the Office of the U.S. Trade Representative 
(USTR) completed a Section 301 investigation of this subject, in which it 
concluded that the CWB had "taken sales" from U.S. wheat farmers. In its 
finding, USTR outlined several measures that it would take to "level the playing 
field" for U.S. farmers, including the exploration of a possible dispute 
settlement case against the CWB in the World Trade Organization. Section 301 of 
the Trade Act of 1974, as amended, authorizes the Federal government to impose 
trade sanctions against foreign countries under certain conditions, including 
the violation of a trade agreement with the U.S. and the maintenance of 
"unjustifiable, unreasonable, or discriminatory" policies that restrict U.S. 
commerce. Section 301 investigations are conducted by USTR and may be initiated 
in response to a petition from an interested party or self-initiated by USTR.

The U.S. is currently the predominant foreign supplier of rice to Mexico, due 
largely to Mexico's strict phytosanitary standards which the U.S. meets but 
other major exporters do not. Should Asian rice exporters satisfactorily meet 
these standards, the U.S. tariff advantage under NAFTA would become extremely 
important to U.S. rice exporters. Rough rice accounts for the bulk of Mexico's 
rice imports. Currently, no major Asian rice producer allows this product to be 
exported, in an effort to preserve jobs associated with rice processing. Long 
grain milled rice from the U.S. has been subject to Mexican antidumping duties 
of up to 10.18 percent since June 2002. Shipments of this product make up about 
10 percent of U.S. rice exports to Mexico.

NAFTA's impact on U.S.-Canada oilseed trade differs substantially from its 
impact on U.S.-Mexico trade in oilseeds. CFTA and NAFTA have increased two-way 
trade between Canada and the U.S. in processed oilseed products, particularly 
vegetable oil. In contrast, NAFTA has boosted U.S. soybean exports to Mexico, as 
expansion of the Mexican livestock industry has increased the demand for 
vegetable meal, which Mexico satisfies by crushing imported oilseeds.

Creation of a tariff-rate quota (TRQ) for raw peanuts from Mexico has enabled 
that country to export substantial quantities of this product to the U.S. for 
the first time. In the last several years, Mexico also has begun to export 
peanut butter and paste to the U.S., but these products make up only a small 
proportion of U.S. consumption. U.S. imports of Canadian peanut butter are 
restricted by a TRQ, one of the few remaining tariff barriers between the U.S. 
and Canada.

To qualify for NAFTA tariff reductions, textiles and apparel traded among the 
NAFTA countries must be made from yarn and fiber produced by a NAFTA member. 
These provisions have enabled the U.S. textile and apparel industries to 
integrate more closely with their Canadian and Mexican counterparts. As part of 
this process, U.S. cotton exports to Canada and Mexico more than doubled in 
volume between 1993 and 2000, while apparel imports from Mexico and other 
countries increased.

NAFTA is gradually expanding duty-free quotas for U.S.-Mexico sugar trade, as 
the two countries move toward free trade in this commodity starting in fiscal 
year (FY) 2008. The formula for the quota on Mexican shipments to the U.S. is 
based on the difference between Mexico's projected production and projected 
domestic consumption, including an allowance for consumption of high-fructose 
corn syrup. As the quotas have expanded, Mexico's access to the U.S. sugar 
market has climbed from 7,258 mt prior to NAFTA to 116,000 mt in FY 2001. These 
imports, along with low world prices for sugar, pose challenges for the U.S. 
sugar support program.

CFTA and NAFTA have affected some aspects of North American tomato trade, but 
other factors have played a more prominent role. A price-floor agreement among 
principal Mexican and U.S. growers secured the suspension of U.S. antidumping 
duties on fresh tomatoes from Mexico from 1996 to 2002. The price-floor 
agreement ended in August 2002, after Mexican growers submitted written notice 
of their withdrawal, and the antidumping duties, which were based on a 
preliminary U.S. investigation, have since been imposed.

Increasing U.S. demand for high-quality tomatoes and the relative strength of 
the U.S. dollar have fostered the emergence of sizable Canadian exports of 
hydroponic tomatoes to the U.S. Between 1990 and 2000, Canadian exports of fresh 
or chilled tomatoes to the U.S. expanded from about 3,000 mt to more than 
101,000 mt. In 2001, U.S. tomato growers initiated an antidumping case against 
Canadian producers of greenhouse tomatoes, and a Canadian trade organization 
filed a similar suit concerning fresh tomatoes from the U.S. Neither case 
resulted in the imposition of antidumping duties.

U.S. imports of processed tomatoes from Mexico have shifted in recent years from 
primarily tomato paste to increasing quantities of tomato juice and sauce, a 
change that is partially due to NAFTA tariff changes. As part of NAFTA, the U.S. 
immediately eliminated its tariff on Mexican tomato juice and ketchup in 1994, 
and is gradually phasing out its tariffs on other processed tomato products from 
Mexico. Tariff elimination under CFTA and NAFTA also has boosted U.S. tomato 
sauce exports to Canada.

CFTA and NAFTA also have influenced North American potato trade. Elimination of 
U.S. tariffs on fresh potatoes from Canada has provided a moderate boost to 
Canadian fresh potato exports to the U.S. But an expansion in Canadian potato 
production and processing and the strong U.S. dollar have played even greater 
roles in the growth of Canadian exports of frozen french fries to the U.S. 
Through Mexico's establishment of a transitional TRQ with a low preferential 
tariff for processed potatoes from the U.S., NAFTA has had a large, positive 
impact on U.S. processed potato exports to Mexico, particularly frozen french 
fries (see related story on page 8).

North American fruit trade provides many examples of NAFTA's impacts. U.S. grape 
and pear exports to Mexico expanded with the end of Mexican import licensing on 
grapes and the elimination of Mexico's tariff on U.S. pears, both the result of 
NAFTA. Mexico's transitional TRQ for fresh apples from the U.S. has had a large, 
positive impact on U.S. apple exports to Mexico, but a minimum-price arrangement 
forged by the Mexican government and the U.S. apple industry in order to suspend 
Mexican antidumping duties has worked to limit this trade. On the U.S. import 
side, NAFTA tariff reductions have provided a moderate stimulus to Mexican 
shipments of cantaloupes to the U.S. These shipments had decreased during the 
mid-1990s due to weather-related damage in some producing areas in Mexico.

NAFTA Has Facilitated Investment 
& Aggregate Employment

NAFTA's rules concerning foreign direct investment (FDI) strengthen the rights 
of foreign investors to retain profits and returns from their initial capital 
investments. The combination of trade liberalization and investment reform has 
stimulated FDI in the North American food processing industry, with firms in 
each NAFTA country providing substantial investment capital.

The stock of U.S. direct investment in the Mexican food processing industry has 
increased by about two-thirds since NAFTA's implementation, reaching $3.8 
billion in 1999. Much of this investment is concentrated in highly processed 
products such as pasta, confectionery items, and canned and frozen meats. 
Similarly, under CFTA and NAFTA, U.S. FDI in the Canadian food processing 
industry expanded from $1.8 billion in 1989 to $5.8 billion in 1999. But unlike 
FDI in Mexico, U.S. FDI in Canada is geared more towards the handling and 
processing of grains.

Mexican firms also increased their investments in U.S. food companies. In 1999, 
Mexican FDI in the U.S. processed food industry equaled $1 billion, compared 
with just $306 million in 1997. Mexican companies own U.S.-based firms engaged 
in bread baking, tortilla making, corn milling, and the manufacture of Mexican-
style food products, just to name a few examples.

In contrast, the stock of Canadian direct investment in the U.S. processed food 
industry dropped from $6.7 billion in 1998 to about $1.0 billion in 1999, 
following the liquidation of a major company's assets. This reduction is a sharp 
departure from the first several years of NAFTA, when Canadian FDI in the U.S. 
processed food industry grew from $5.1 billion in 1993 to $7.6 billion in 1997, 
exceeding the U.S. presence in Canada.

By increasing opportunities for U.S. exports and encouraging a more efficient 
allocation of economic resources, NAFTA has likely had a small, positive 
influence on the overall level of U.S. agricultural employment. But this impact 
is difficult to detect, in part because many aspects of U.S. agricultural 
production are capital intensive, and in part because factors other than NAFTA 
have driven many of the employment changes. Employment in crop production has 
changed very little overall since NAFTA's implementation, while employment in 
livestock production has decreased, reflecting technological change and 
consolidation in the hog industry and drought and poor range conditions in the 
cattle industry.

Two manufacturing sectors related to agriculture--textiles and apparel--have 
experienced a definite decline in employment since implementation of NAFTA. The 
reduction began in the 1970s and most likely would have continued in NAFTA's 
absence. By encouraging the development of a more integrated textile and apparel 
industry within North America, the agreement has expanded textile and apparel 
trade among the NAFTA countries and increased productivity in the U.S. textile 
and apparel sectors. But this development has been accompanied by further 
reductions in U.S. textile and apparel employment.

Resolving Trade Frictions 
In the NAFTA Era

Sanitary and phytosanitary measures. By "locking in" key trade and investment 
reforms, the agricultural sectors and governments of NAFTA partners have been 
able to devote greater attention to resolving conflicts related to sanitary and 
phytosanitary (SPS) measures. Some initiatives on these measures have taken 
place within the trilateral NAFTA Committee on SPS Measures. In addition, 
producers in each NAFTA country have worked to formulate and meet higher quality 
standards.

Inspection and approval of product quality at the regional level, and in some 
instances at the level of individual producers, have opened the door to new 
markets across international borders. Resulting developments include:

*  imports of avocados to the U.S. from certain approved growers in the Mexican 
state of Michoacn;

*  U.S. recognition of the Mexican states of Sonora and Yucatan as having a low 
risk of transmitting hog cholera;

*  Mexico's lifting of its ban on citrus from Arizona and certain producing 
areas in Texas that are not regulated for fruit fly; and

*  continuing efforts to design and implement a satisfactory inspection process 
for U.S. apple exports to Mexico.

Trade remedies. Trade growth and liberalization can generate conflicts. 
Agricultural producers in each NAFTA country have been involved in a number of 
disputes, many of which concern antidumping and countervailing-duty measures 
against imports regarded as harmful to domestic industry. NAFTA arbitration 
panels currently are looking at two agricultural cases concerning Final 
Antidumping Duty Determinations by Mexico. One panel is addressing U.S. exports 
to Mexico of high-fructose corn syrup; the other is dealing with U.S. exports of 
bovine carcasses. Previous NAFTA panels have issued rulings in cases involving 
U.S. exports of refined sugar to Canada, Canadian exports of live swine to the 
U.S., and Mexican exports of fresh cut flowers to the U.S.

Transportation issues. Mexico successfully brought a case before a NAFTA 
arbitration panel concerning U.S. delays in implementing the agreement's 
provisions for cross-border trucking. In response, the U.S. is establishing a 
safety inspection and certification system for Mexican trucks entering the U.S. 
to be administered by the U.S. Department of Transportation's Federal Motor 
Carrier Safety Administration. This will allow Mexican trucks to continue to 
U.S. destinations without reloading their goods to U.S. trucks, which has been a 
bottleneck hampering trade and causing congestion. Several studies have 
quantified total delay costs along the entire U.S.-Mexico border, with the most 
recent comprehensive study placing these costs at $77.4 million in 1999. This 
estimate would have been even higher if increases in air pollution associated 
with traffic congestion at the borders had been taken into account.

Further development of the Mexican transportation system will influence the 
modes of transportation that are used in U.S.-Mexico agricultural trade. With 
continuing integration of U.S. and Mexican railway systems, intermodal rail 
(truck-rail-truck) may handle increased traffic of containerized grains. 
Improvements in the Mexican Port of Veracruz should increase the competitiveness 
of ocean grain shipping from U.S. ports along the Gulf Coast. But improvements 
in Mexican ports may also lower transportation costs for U.S. competitors.

Environmental concerns. NAFTA appears to have a combination of positive and 
negative environmental effects, as producers select alternative techniques of 
production, increase or decrease the scale of production, and modify the crop 
and animal composition of their activities in response to changing economic 
incentives. The notion that NAFTA has encouraged a general weakening of 
environmental quality and protection has been refuted by a comparative study in 
2000 of the environmental regulations of border and nonborder states.

Among NAFTA's innovations was the creation of the North American Commission for 
Environmental Cooperation (CEC), which promotes environmental objectives and 
provides opportunities for environmental organizations and other stakeholders to 
voice their concerns. Several public symposia have been held under the auspices 
of the CEC. By bringing environmental concerns before policymakers, these 
gatherings have facilitated coordination of trade and environmental policies and 
lessened potential conflicts.

Formal NAFTA mechanisms represent only a small part of the dispute resolution 
process. Most disputes are addressed in earlier stages through governmental 
consultations and negotiations. The private sector also has begun to play a 
larger role in dispute resolution. For example, in two disputes over grapes and 
cattle, producer groups in Mexico and the U.S. worked jointly to resolve 
regulatory incompatibilities that were at the root of the disagreement.

By facilitating increased trade and investment among Canada, Mexico, and the 
U.S., NAFTA is enabling agricultural producers throughout North America to 
benefit more fully from their relative strengths and to respond more efficiently 
to changing economic conditions. Each NAFTA country has participated in the 
expanded agricultural trade and FDI fostered by the agreement. Moreover, the 
agreement has been accompanied by substantial improvements in the North American 
transportation system and in the institutional capacity of the NAFTA governments 
to facilitate agricultural trade, resolve trade disputes, and cooperate on 
environmental issues. Together, these developments can lead to a more 
prosperous, more integrated North American economy.

Steven Zahniser (202) 694-5230 zahniser@ers.usda.gov

For more information see:

ERS' NAFTA Briefing Room www.ers.usda.gov/briefing/nafta/

FAS' NAFTA web page www.fas.usda.gov/itp/policy/nafta/nafta.html

USTR's NAFTA web page www.ustr.gov/regions/whemisphere/nafta.shtml
"Is There a Race to the Bottom in Environmental Policies? 

The Effects of NAFTA," 
www.cec.org/programs_projects/trade_environ_econ/pdfs/Fredrik.pdf.

SPECIAL ARTICLE BOX

This article is based on a recently released ERS Report, "Effects of North 
American Free Trade Agreement on Agriculture and the Rural Economy" (WRS-02-1, 
July 2002, www.ers.usda.gov/publications/wrs0201/). The report provides a 
commodity-level assessment of NAFTA's impact on U.S. agricultural trade with 
Canada and Mexico, and it evaluates the agreement's influence on investment and 
employment in agriculture and related industries. Other topics addressed by the 
report include the relationship between trade liberalization and the environment 
and recent developments in U.S.-Mexico transportation.

The report is prepared in accordance with the North American Free Trade 
Agreement Implementation Act, which requires the Secretary of Agriculture to 
submit a biennial report on this subject to the U.S. Congress, starting in 1997 
and ending in 2011. The current edition of the report reflects the research 
team's understanding of economic and policy developments through early 2001.

END_OF_FILE
