AGRICULTURAL OUTLOOK                  April 19, 2002
May 2002, ERS-AO-291
             Approved by the World Agricultural Outlook Board
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CONTENTS

AGRICULTURAL ECONOMY
Farm Credit Use Expected to Expand Moderately in 2002
Interest Rates on Farm Loans Expected to Increase During 2002-03

BRIEFS
Increased Fall Potato Acreage Expected

COMMODITY SPOTLIGHT
Soybean and Cotton Plantings to Decline in Favor of Corn in 2002
Oats Market Strong in 2001/02

WORLD AGRICULTURE & TRADE
Argentina's Economic Crisis: Can the Ag Sector Help?
Could the NIS Region Become a Major Grain Exporter?

RESOURCES & ENVIRONMENT
Farmland Protection Programs: What Does the Public Want? 

SPECIAL ARTICLE
China: En Route to a New Role in Global Agriculture

IN THIS ISSUE

Farm Credit Use Expected to Expand Moderately in 2002

Farm lending, which has been growing since 1992, is expected to increase 
again in 2002. Last year, U.S. farmers held $192.8 billion in farm loans. 
For 2002, a rise of 1.9 percent to $196.5 billion is forecast, the smallest 
annual growth in a decade.  With limited or no gains in farm commodity 
prices expected this year following the relatively low levels of 2001, and 
uncertainties about future levels of direct government payments, farmers 
and lenders may be more cautious about adding debt.  Also moderating demand 
for credit are high levels of direct government payments to farmers in 
recent years, adequate levels of working capital, and sizable off-farm 
earnings.  Jerome Stam (202) 694-5365; jstam@ers.usda.gov

Interest Rates on Farm Loans Expected to Increase During 2002-03

Borrowers, including farm borrowers, are likely to encounter rising 
interest rates in 2002 and 2003 after enjoying declining rates since 
mid-2000.  The upward pressure comes from the economic rebound that began 
in late 2001, stronger business credit demand, tighter domestic monetary 
policy, and gradually accelerating economic growth.  Because agricultural 
credit is only a small proportion (0.7 percent in 2001) of total credit, 
interest rates on agricultural loans are determined primarily by factors 
outside agriculture in national and international credit markets.  
Nevertheless, farm loan rates are expected to increase less than most 
interest rates because of a historic adjustment lag. Paul Sundell (202) 
694-5333; psundell@ers.usda.gov

Soybean and Cotton Plantings to Decline in Favor of Corn in 2002

Planting intentions in 2002 for the eight major U.S. field crops amount to 
248.3 million acres, nearly identical to last years plantings despite 
widespread weak price signals. Corn planting intentions are up 4 percent 
from last year, partly due to reduced fertilizer costs for corn production 
and lower anticipated returns for competing crops, particularly cotton in 
the Delta.  Crop rotation considerations and uncertainty about the farm 
bill may also draw acreage from soybeans to corn, contributing to the 
slight intended reduction (for the second straight year) in overall soybean 
area. Wheat plantings continue to decline. William Lin 202-694-5303; 
wwlin@ers.usda.gov

Oats Market Strong in 2001/02

Oats, the least prominent of the feed grains, have been gaining attention 
as prices climb and buyers scramble to ensure supplies. In the U.S., 
improved genetics for crops other than oats, and planting flexibility under 
the 1996 Farm Act, has cut into oats production in favor of corn and 
soybeans, and the U.S. currently imports about 30 percent of its total oats 
supply, primarily from Canada. While world stocks are projected to increase 
due to larger global production (increases in the former Soviet Union and 
Eastern Europe), stocks of high-quality milling oats are projected to 
decline significantly. Canadian oats stocks are projected at the lowest 
since 1995/96. The tight domestic supply of high-quality oats in 2001/02 
has been caused by weather problems in the upper Midwest, and in the oats-
growing regions of Canada, Sweden, and Finland. William Chambers (202) 694-
5312; chambers@ers.usda.gov

Argentina's Economic Crisis: Can the Ag Sector Help?

A simple resolution to Argentinas severe economic crisis does not appear 
to be imminent.  Although devaluation of the Argentine peso could 
eventually lead to an export-led recovery, agricultural production and 
exports will likely be hindered by new export taxes, capital controls, 
higher input prices, and tight credit conditions.  To improve cash flow and 
reduce operating expenses, Argentine farmers may switch some corn 
production to a soybean-wheat double-cropping rotation using fewer 
manufactured inputs. David Torgerson (202) 694-5334; dtorg@ers.usda.gov

Could the NIS Region Become a Major Grain Exporter?

Western analysts have predicted that reform in the New Independent States 
(NIS) of the former Soviet Union could transform the region from a large 
grain importer (as during the Soviet period) into a major grain exporter.  
The ability of the NIS region to become a major grain exporter depends 
mainly on whether or not it can produce grain at a relatively low cost 
compared with other major grain producers. Recent research by USDAs 
Economic Research Service indicates that relative production costs of 
outputs and inputs compared with other producing countries do not currently 
support large grain trade by the NIS--either imports or exports. William 
Liefert (202) 694-5156; Wliefert@ers.usda.gov

Farmland Protection Programs: What Does the Public Want? 

Public support has been growing for government farmland protection 
programs. Behind this support is the perception that farmland produces more 
for society than food and fiber, such as scenic views, environmental 
benefits, and maintaining an agrarian heritage.  Designing and implementing 
a farmland protection program that is cost-effective and that provides the 
greatest possible benefits requires an understanding of public preferences 
for particular rural amenities, as well as which of these amenities is best 
provided through farmland preservation. Dan Hellerstein (202) 694-5613; 
danielh@ers.usda.gov

China: En Route to a New Role in Global Agriculture

Beyond the headline-grabbing events that have recently captured the 
attention of market analysts and policymakers is a larger picture of 
China's evolving role in agricultural markets. As China grows, develops, 
and integrates with the world economy, it is likely to become an even 
larger and steadier customer for agricultural imports. At the same time, 
China could become a competitive exporter of fruits, vegetables, fish, 
meat, and poultry if its production were modernized, its marketing 
infrastructure improved, and food safety and animal health issues resolved. 
Fred Gale (202) 694-5215; fgale@ers.usda.gov

AGRICULTURAL ECONOMY 

Farm Credit Use Expected to Expand Moderately in 2002

Note: As of this writing, House and Senate farm bill conferees were still 
working out the language of the legislation.

Credit plays an important role in helping U.S. farm operators acquire the 
assets they need to compete in a capital-intensive industry experiencing 
rapid advances in technology. In 2001, U.S. farmers owed $192.8 billion in 
farm loans, an amount that has been growing since 1992 and is expected to 
increase again in 2002. Low farm prices for several key commodities in 
recent years and uncertainties about future levels of direct government 
payments have created some concerns regarding farmers' continued access to 
adequate credit and the willingness of credit suppliers to meet their 
needs.

Total farm business debt in 2002 is forecast to rise by $3.7 billion--or 
just 1.9 percent--to $196.5 billion. This will be the 10th consecutive 
annual increase, but represents the smallest annual growth since debt 
dipped slightly in 1992. With limited or no gains in farm prices expected 
this year following relatively low levels in 2001, farmers may be more 
cautious about adding new debt. Also, the farm sector and its lenders 
learned from the farm financial crisis of the 1980s that borrowing does not 
substitute for adequate cash flow and profits.
Slower debt growth partially reflects moderate levels of expected new 
capital investments. Also, adequate levels of working capital and sizable 
off-farm earnings are expected to help farmers hold down new borrowing.

High levels of direct government payments to farmers (including payments 
under five emergency assistance programs between October 1998 and August 
2001) are also moderating demand for credit and helping to maintain 
farmland values. Farmers collectively received an average of $17.7 billion 
per year in direct payments for 1998-2002, up from $8.8 billion per year 
for the 1990-97 period. Many farmers have been maintaining or improving 
their balance sheets by avoiding new debt or by applying some of their 
government payments to reducing existing debt.

There are some dark clouds, however. Continued low prices for several key 
agricultural commodities, coupled with weather problems in some regions, 
may diminish the ability of less creditworthy farmers to continue securing 
or retaining loans, especially production credit. 

Thanks to sizable government assistance, net cash income (which measures 
cash available from sales after paying cash operating costs) is estimated 
at $59.5 billion for 2001, the highest on record. But in 2002--assuming no 
new farm bill or additional emergency assistance--direct farm payments are 
projected to drop from 2001 levels and farm lenders will be dealing with a 
farm sector whose net cash income could decline 14 percent to $50.9 
billion. If that happens, the reduction in net cash income and continuing 
narrow margins in 2002 would force more farmers to manage relatively tight 
cash flows. 

Although farm-sector equity by the end of the year is expected to be some 
$7.8 billion more than in 2001, the projected drop in net cash income--
assuming no new farm bill or additional emergency assistance--would reduce 
farmers' credit reserves and expose a larger share of farms to potential 
debt repayment problems. 

Growth in Nonreal-Estate Debt 
May Outpace Mortgage Debt

Farm nonreal-estate debt is forecast to rise marginally faster than farm 
mortgage debt in 2002. This differs from 2001 when farm real-estate loan 
balances increased 5.7 percent compared with 3.8 percent for nonreal-estate 
debt. The recent more rapid growth in real-estate debt, relative to loans 
for nonreal-estate purposes, is at least partially due to more lenders 
requiring farmland as collateral for nonreal-estate loans. Loans to 
purchase machinery and seasonal production inputs may be reported as loans 
secured by farmland, and are counted as farm mortgage loans.

Nonreal-estate business loans to farmers is forecast to increase about 2.4 
percent in 2002 to $91.9 billion. Total planted acres for the eight 
principal field crops (corn, sorghum, barley, oats, wheat, rice, upland 
cotton, and soybeans) in 2002 are forecast to be 248.3 million acres. Even 
with some acreage shifts among crops, and lower input prices, total 
production expenses in 2002 are forecast at $200 billion, up 0.3 percent 
from 2001. Because of lower input prices, expenditures for seeds, 
fertilizer, and agricultural chemicals are forecast at $27 billion, down 
from $27.4 billion in 2001. Farm-sector fuel expenses declined from $7.2 
billion in 2000 to $6.7 billion in 2001, and were expected to edge down in 
2002 until the current uncertainty entered the oil market. 

Unit sales of farm tractors, combines, and other farm machinery in 2001 
were up from a year earlier, but have not recovered from the farm sector's 
economic slowdown that began in 1998. In 2001, sales of large two-wheel-
drive tractors (100-horsepower and over) were down 29 percent, and those of 
four-wheel-drive tractors were down 43 percent from their highs in 1997. 
Sales of combines were down 38 percent from the 1998 high. For 2002, the 
Association of Equipment Manufacturers (AEM) projects a 3.4-percent decline 
for two-wheel-drive tractors, a 0.7-percent drop for four-wheel-drive 
tractors, and a 6-percent decrease for self-propelled combines. In 
contrast, AEM projects increases in 2002 for 10 of the 15 equipment 
categories other than tractors and combines.

On balance, sluggish sales for "big-ticket items" such as tractors and 
combines, are likely to overshadow or at least partially offset sales 
strength for other machinery lines in 2002 and moderate demand for short- 
and intermediate-term farm loans. A larger share of big-ticket items is now 
financed by subsidiaries of machinery companies rather than by the more 
traditional institutional lenders.

Farm business interest expenses are projected to decrease about 3.4 percent 
in 2002 to $14.1 billion. While farm business debt is forecast to increase 
in 2002, interest rate reductions in 2001 by the Federal Reserve suggest 
interest rates on farm credit--because of a lag--will average lower in 
2002, particularly for shorter term loans.

Farm real-estate loans are forecast to increase 1.5 percent to $104.6 
billion in 2002. Mortgage loan volume is generally affected by changes in 
farmland values. Total U.S. farmland value, as reported in USDA's farm-
sector balance sheet, increased an estimated 3 percent in 2001 and is 
expected to advance about 1.2 percent in 2002. This would be the 16th 
consecutive annual increase since 1987, though the recent rate of increase 
has slowed. The outlook for 2002 could be tempered if new farm legislation 
does not provide additional direct payments to bring total farm spending 
more in line with recent years. 

While recent farmland value growth rates are down, they have been buoyed in 
many areas by direct government payments, off-farm employment, and urban 
sprawl (expansion of urban areas and large-lot development in rural areas). 
During 1992-2000, the yearly gains, averaging 5.6 percent, were the highest 
since values began to recover in 1987.

Recent gains in farmland value may not have led to corresponding increases 
in demand for farm mortgage credit. A significant portion of the price gain 
may have been driven by urban sprawl and nonfarm investors rather than by 
farmers. Moreover, many of the farmer buyers reportedly were able to pay 
wholly or in large part with cash and not via borrowing. For many midsize 
to smaller farms, strong off-farm earnings in recent years have allowed 
operators to bid higher on farmland tracts than agricultural-use values 
would indicate. 

Will the Credit 
Supply Be Adequate?

The financial position of commercial agricultural lenders in 2002 is 
generally healthy. Farm lending institutions continued to build capital and 
maintain favorable credit quality levels in their loan portfolios. All 
major lender categories continue to experience low levels of delinquencies, 
foreclosures, loan chargeoffs, and loan restructuring. Farm financial 
stress, unless sustained, should not significantly affect aggregate loan 
delinquency rates or other farm lender indicators. The duration of relative 
price weakness for several major farm commodities is unknown, but the data 
indicate no significant problems in national lender performance to date.

The four traditional categories of institutional farm lenders, in order of 
overall farm credit volume, are commercial banks, the Farm Credit System or 
FCS (a collection of federally-chartered, borrower-owned credit 
cooperatives that lend primarily to agriculture), life insurance companies, 
and USDA's Farm Service Agency or FSA (the government "farm lender of last 
resort"). Together, these four classes of lenders accounted for 79 percent 
of all farm loans outstanding in 2001. The remaining share of farm credit 
comes from individuals and from nontraditional lenders, primarily input and 
machinery suppliers, cooperatives, and processors. 

In 2001, total farm business debt grew 4.8 percent, and outstanding loan 
volume increased for all farm lenders except FSA. FCS, second to commercial 
banks and having the fastest growth in loan volume, accounted for two 
thirds of the growth in total debt last year. Outstanding farm business 
loans at the FCS grew 12.1 percent to $54.4 billion, followed by commercial 
banks (2.9-percent growth to $78.6 billion) and life insurance companies 
(1.5-percent growth to $12 billion). In contrast, FSA's total farm business 
direct loans outstanding decreased 2.5 percent in 2001 to $7.3 billion.

Availability of funds is not a major concern for creditworthy borrowers 
since most lenders have access to more money than they can profitably lend. 
Farm loan interest rates in 2002, while expected to increase moderately 
during the year, should remain low by historical standards, and this will 
help farmers carry debt. As always, agricultural lenders will closely 
examine the profit margin of farmers' operations when making loan 
decisions. Borrowers who cannot show repayment ability even with the 
substantial government assistance of recent years may have to curtail 
operations, restructure, or exit farming.

Commercial banks show a recent growth in farm loan demand in agricultural 
areas as reflected in their loan-to-deposit ratios. In the past, the 
liquidity position of these agricultural banks was closely watched because 
of their dominant role in providing farm loans. Average loan-to-deposit 
ratios for agricultural banks were 76.5 at the end of the third quarter of 
2001 (latest available data). They appear to have reached a plateau since 
mid-2000 when they stood at 76 percent compared with 72 at the beginning of 
the year. Ten years earlier, the ratio was 56 percent. 

In the past, high loan-to-deposit ratios might have constrained new loan 
originations, but commercial banks now have nondeposit sources of funds 
such as the Federal Home Loan Bank System, and may sell farm mortgage loans 
to Farmer Mac. The recent jump in loan-to-deposit ratios may indicate 
greater reliance on these funding sources, plus sluggish growth in 
deposits. Profitable, well-managed agricultural banks often have very high 
loan-to-deposit ratios. Although banks in rural areas make considerably 
less use of nondeposit funds than metropolitan banks, most still use these 
funds to some extent.

Overall, adequate funds are available from banks for agricultural loans, 
with few banks reporting a shortage of loanable funds. Commercial bank farm 
loans are projected to increase 2.3 percent in 2002, compared with 2.9 
percent in 2001.

The Farm Credit System (FCS) is in excellent financial condition and well 
positioned to supply farmers' credit needs in 2002. In recent years, the 
FCS has undergone massive restructuring of its organization and procedures. 
FCS has gained farm loan market share in 6 of the past 7 years after a 
gradual loss in 9 of the 10 previous years. Government backing allows the 
FCS to access national money markets and provide credit at very competitive 
rates. 

In 2002, FCS farm business debt is forecast to increase 2.1 percent 
following a 12.1-percent rise in 2001. The mortgage debt portion is 
expected to increase about 1.6 percent in 2002, and the nonreal estate 
portion about 3 percent.

Farm Service Agency (FSA) loans serve farmers unable to obtain credit 
elsewhere. Based on loan activity from the first 6 months of fiscal year 
2002, FSA should have sufficient lending authority to meet most program 
demand during the balance of the year. Lending authority of $4.4 billion 
was available at the start of the fiscal year, compared with $3.3 billion 
in actual lending during fiscal 2001. For fiscal 2003, the President's 
budget calls for $3.7 billion in lending authority. FSA can also provide 
emergency credit after the occurrence of natural disasters. 

Life insurance companies report adequate funds for loans that meet their 
quality standards. Farm lending activity by life insurance companies is 
forecast up 1.6 percent in 2002, compared with a 1.5-percent increase in 
2001. Since 1992, life insurance industry holdings of farm mortgages have 
increased each year for a total gain of 36.7 percent.

In the coming months, lenders will likely remain cautious in extending 
agricultural credit, due largely to uncertainty about farm commodity prices 
and the level of government payments. Lenders were able to manage most farm 
loan repayment problems last year, given relatively healthy recent farm 
incomes bolstered by the additional Federal financial assistance. 

Any deterioration in lenders' portfolios due to the 2002 farm financial 
situation is likely to be manageable. But, if low commodity prices persist 
and Federal assistance to farmers declines, lenders would increasingly face 
renewal requests for substandard loans and see a deterioration in customer 
creditworthiness. In this scenario, some farmers would need to reconsider 
and reformulate their plans to use additional loans to finance operations.

Today, despite relatively low prices, lenders appear confident about the 
bulk of their farm customers, given the level of Federal financial 
assistance provided to farmers. Although farm debt has risen in recent 
years, most farmers are not as heavily leveraged as a decade ago. Veteran 
lenders cite significant differences from the 1980s, including lower 
interest rates, more owner equity, better credit analysis and monitoring 
methods, strong off-farm incomes, and improved management ability of their 
producer customers.  

Jerome Stam (202) 694-5365 jstam@ers.usda.gov
Steven Koenig (202) 694-5353 skoenig@ers.usda.gov
James Ryan (202) 694-5586 jimryan@ers.usda.gov
Daniel Milkove (202) 694-5357 dmilkove@ers.usda.gov

For more information:

Demand for farm credit and the farm lender situation are discussed further 
in the latest issue of Agricultural Income and Finance at 
www.ers.usda.gov/publications/so/view.asp?f=economics/ais-bb/

Factors affecting farmland values are discussed in Agricultural Outlook 
October 2000 and August and November 2001, at 
www.ers.usda/publications/AgOutlook/Archives/

AGRICULTURAL ECONOMY

Interest Rates on Farm Loans Expected to Increase During 2002-03

Note: As of this writing, House and Senate farm bill conferees were still 
working out the language of the legislation.

Borrowers, including farm borrowers, are likely to encounter rising 
interest rates in 2002 and 2003 after enjoying declining rates since mid-
2000. The upward pressure comes from the unexpectedly strong pace of the 
economic rebound that began in late 2001. Because agricultural credit is 
only a small proportion (0.7 percent in 2001) of total credit, interest 
rates on agricultural loans are determined primarily by factors outside 
agriculture in national and international credit markets. Changes in demand 
for credit on the part of consumers, nonfarm business, and government, as 
well as the supply of credit funds from consumers and depository 
institutions, all strongly influence interest rates on farm loans. 

Interest rates are determined in credit markets by the collective actions 
of credit suppliers and users. Credit markets determine interest rates and 
risk premiums on debt that balance the overall supply and demand for 
credit. Interest rates are composed of a real return (in terms of 
purchasing power of real goods and services) and an inflationary 
expectations return (to compensate lenders for changes in a dollar's 
purchasing power over time). The real rate of interest represents a return 
to the lender for forgoing current consumption of goods and services in 
exchange for the opportunity to consume more goods and services in the 
future. An increase in inflationary expectations will cause nominal 
interest rates to rise as lenders demand higher interest rates in order to 
maintain purchasing power. Interest rates will vary among borrowers 
depending upon borrower characteristics (such as default risk), loan 
characteristics (including liquidity, collateral quality, and loan size), 
and lender's risk aversion.

Interest Rates Moved 
Sharply Lower in 2001

Between mid-2000 and the end of 2001, nominal and real interest rates fell 
sharply as economic growth slowed, then turned negative in the third 
quarter of 2001. Interest rates on nonreal-estate farm loans from 
commercial banks, for example, fell from 10.2 percent to 6.2 percent. The 
two most important macroeconomic factors behind the fall were an aggressive 
easing of U.S. monetary policy by the Federal Reserve Board in 2001 and 
much lower credit demand by business. Other contributing factors were a 
rise in the consumer savings rate in the second half of 2001, strong 
foreign demand for U.S. securities, a loosening of foreign monetary 
policies, and a moderate fall in year-ahead inflationary expectations in 
late 2001. Most of the fall in actual interest rates was in the real 
(inflationary expectations adjusted) component.

Beginning in January 2001, the Federal Reserve Board eased monetary policy 
by lowering its Federal funds interest rate target (the interest rate on 
deposits held at Federal Reserve banks primarily by depository 
institutions) by 4.75 percentage points in 11 separate moves ending in 
December. This reduced other interest rates by lowering the expected level 
of the Federal funds rate for 2001 and 2002 and encouraging a more rapid 
expansion in the supply of money and credit by depository institutions.

Overall private credit demand grew at a 2 percent slower pace in 2001 
relative to 2000, led by 3.8-percent slower growth in outstanding credit of 
nonfinancial business firms. Credit demanded by business dropped because of 
falling real business fixed investment spending and reduced business 
inventories. Falling business fixed investment reflected lower capacity 
utilization rates (which lowered the productivity of the existing capital 
stock), falling profits, tighter credit standards, and much weaker equity 
markets. Businesses reduced inventories by $62 billion in 2001 in response 
to weaker final sales and falling corporate profits.

Stronger Economic Growth To 
Pressure Interest Rates

Interest rates are likely to be under increasing upward pressure in 2002 
and 2003, although inflation and inflationary expectations are expected to 
remain low. The upward pressure will come from stronger business credit 
demand, expected tighter domestic monetary policy, and gradually 
accelerating economic growth. Real interest rates may rise more sharply in 
2003 if business fixed investment spending accelerates, world economic 
growth picks up sharply, or the Federal Reserve aggressively raises Federal 
funds rates. Increases in farm interest rates will be tempered by 
sluggishness in the adjustment of farm interest rates to changes in open 
market interest rates.

Economic growth was unexpectedly positive in late 2001, led by very strong 
growth in consumer and government spending. The recovery picked up steam in 
early 2002, led by robust growth in residential construction, an unexpected 
upturn in manufacturing output, and a moderate rise in consumer spending. 
With the U.S. economy clearly growing at least at a moderate pace in early 
2002, credit market participants grew increasingly concerned that the 
recovery would lead to robust growth in credit demand and much tighter 
monetary policy by the Federal Reserve. Because debt markets are forward 
looking, interest rates rose significantly in response to these concerns. 

Over the October 2001-March 2002 period, 1-year and 10-year Treasury bonds 
rose approximately 0.3 and 0.8 percentage points, respectively. Rising 
money market yields caused bond investors to demand higher risk premiums to 
hold long-term bonds, further boosting bond rates. The rise in Treasury 
interest rates has put upward pressure on private lending rates in general, 
including farm interest rates. In 2002, if U.S economic growth is moderate, 
inflation remains low, and Federal Reserve tightening is not severe, 
further increases in bond market interest rates during the balance of the 
year could be relatively mild. 

Economic growth in 2002 will get a substantial boost from business efforts 
to rebuild inventories. In 2001, inventories fell approximately $62 
billion, lowering real GDP growth by approximately 1.5 percent. Rising 
inventory levels will raise short-term credit demand. Moreover, with 
concerns over business accounting standards expected to continue, large 
firms will continue to have difficulty raising funds in the commercial 
paper market and will be more dependent on commercial banks for their 
short-term credit needs. 

Economic growth in 2002 is likely to be moderate, tempered by a lack of 
pent-up demand on the part of consumers and homebuyers. Typically in 
recessions, with increased employment uncertainty, consumer purchases of 
durables and homes falls. But in 2001, purchases of consumer durables and 
residential housing rose 6.7 and 1.5 percent, respectively. Business 
investment in plant and equipment, which fell 3.2 percent in 2001, is 
expected to turn positive by the second quarter of 2002 and gradually pick 
up pace in the second half of 2002 and in 2003. Business spending will be 
constrained by current excess capacity and poor profitability in many 
industries.

Stronger economic growth in general will raise the demand for credit and 
money to support higher levels of economic activity. In 2002 and 2003, the 
combination of stronger short- and long-term business credit demands, 
coupled with expected tighter domestic monetary policy, and more rapid 
domestic and foreign growth will place upward pressure on real interest 
rates. As excess capacity is reduced over the course of the recovery and 
business profit margins slowly improve, real returns to the existing 
business capital stock will increase. Higher returns to existing capital 
stock will raise expected real returns to business investment in plant and 
equipment and place upward pressure on real interest rates. Also, expected 
tighter monetary policy in the second half of 2002 and in 2003 will place 
upward pressure on real short-term interest rates and, to a lesser extent, 
real long-term interest rates 

Inflation should remain low in 2002. Declines in producer prices in the 
second half of 2001 were broad-based, extending well beyond energy and food 
prices. In addition, growth in employment costs--as measured by the 
employment cost index--slowed in the second half of 2001. Given excess 
capacity in most industries, and the very strong dollar, business profit 
margins will continue to be squeezed in the first half of 2002. Therefore, 
little inflationary pressure from rising costs exists in the economy 
outside the volatile energy area. Low inflation in the first half of 2002 
and expected continued strong productivity growth should keep short-term 
inflationary expectations low for the remainder of 2002 and 2003. Inflation 
is likely to pick up mildly in 2003 in response to tighter labor and 
capital markets coupled with stronger economic growth abroad. 

Farm Interest Rates Should Trail 
Interest Rates in General 

While interest rates are likely to rise in 2002 and 2003, farm loan rates 
are expected to increase less than most interest rates. Typically, interest 
rates on farm loans at commercial banks are less volatile than most nonfarm 
interest rates and adjust more slowly. However in the long term, interest 
rates charged on farm loans by lenders must earn competitive risk-adjusted 
returns that are comparable to risk-adjusted returns from nonfarm loans and 
other financial assets. 

Banks in rural areas are heavily dependent on consumer deposits (checking 
and savings accounts, plus time deposits of less than $100,000) for the 
bulk of their loan funds. Rates paid on consumer deposits typically lag 
changes in open-market interest rates. In addition, changes in deposit 
interest rates typically affect loan rates at rural banks relatively 
slowly. Banks prefer to keep their small business loan rates more stable by 
determining their loan fund costs on an average cost-of-funds basis. This 
helps stabilize interest rate margins between the expected return from 
lending and the average interest rate paid to depositors. 

The relative stability of farm loan interest rates charged by commercial 
banks has been enhanced in recent years by the lack of large fluctuations 
in farm loan delinquency rates. In 2000 and 2001, agricultural loan 
performance held up well in relation to nonagricultural business loans. 
Loan delinquency rates for agriculture have been relatively stable since 
1998, while delinquency rates for nonreal-estate business loans have moved 
upward during this period, especially during the economic slowdown and 
recession of 2000 and 2001. Given the Federal government's commitment to 
supporting farm income and the likelihood of some overall improvement in 
export market conditions for U.S. agricultural products in 2002, 
agricultural loan delinquency rates are not expected to rise sharply over 
the next year.  

Paul Sundell (202) 694-5333
psundell@ers.usda.gov

For more information:

Real-estate and nonreal-estate farm loan rates are reported in the 
Agricultural Finance Data Book, published quarterly by the Board of 
Governors, Federal Reserve System, Washington, DC.

Forecasts for key real, inflation, and financial variables are published 
quarterly by the Federal Reserve Bank of Philadelphia in the Survey of 
Professional Forecasters. www.phil.frb.org/econ/spf/index.html

Macroeconomic Factors Behind the Fall in Farm Interest Rates, ERS Outlook 
No. AIS 78-01, March 2002. www.ers.usda.gov/publications/ais78/

BRIEFS

Increased Fall Potato Acreage Expected

Key factors such as significantly higher grower prices and relatively low 
stocks on hand this spring point to an increase in potato acreage for fall 
harvest this year. However, several other factors such as uncertain 
processor demand, potential for increased Canadian production/competition, 
and acreage intentions for several alternative crops put the extent of the 
increase in potato acreage in question. Based on overall market conditions, 
planted acreage is forecast to increase by 4 to 7 percent. 

Last fall, U.S. growers harvested 401 million hundredweight (cwt) of 
potatoes, 14 percent below the record crop of the fall of 2000. This large 
decline in production, the combination of decreased acreage and lower 
yields, has pushed stocks of fresh potatoes well below previous year levels 
throughout the marketing season. On March 1, 2002, fresh stocks were 15 
percent below year-previous levels and 1 percent below 2000. Adding 
pressure to the reduced supply situation are the effects of a significant 
drop in Canadian production last fall (down 12 percent from the previous 
year to 89 million cwt), which put Canadian stocks down 19 percent from a 
year earlier on March 1. 

The smaller supply of potatoes in North America has subsequently led to 
higher prices for U.S growers this marketing season. Monthly grower prices 
for all potatoes have averaged 38 percent higher than a year ago for the 
September through February period. This is due largely to significantly 
higher prices for fresh-market potatoes, which are up 117 percent from 
prior year levels (September through January). About 30 percent of potato 
sales are for fresh market use. Prices for processing potatoes are also up, 
but only slightly (5 percent for September through January) as they are 
held in check by contracts between growers and processors that are made 
prior to the growing season. 

As a result of lower production and higher prices, use of potatoes by 
processors this season is down 13 percent from a year ago, and is at the 
lowest levels since the 1993/94 marketing year. However, despite producing 
fewer frozen potato products, processors have managed to keep frozen stocks 
near previous levels into early spring. At the beginning of March, stocks 
of all frozen potato products were 1 percent above a year ago--stocks of 
fries were up 3 percent while all other frozen potato products were down 7 
percent.

Significantly lower usage by processors combined with smaller changes in 
frozen stocks is probably a reflection of somewhat lower demand for frozen 
potato products in the last 4 months of 2001, the result of a slowed 
general economy and lower foodservice demand. U.S. exports of frozen french 
fries also showed signs of reduced output and demand during the September 
to December 2001 period, as they were off 8 percent compared to the same 
period in 2000. As the remainder of the marketing season continues, 
however, foodservice demand for processed potato products may increase as 
the economy recovers. With supplies of raw potatoes even tighter in Canada 
than in the U.S., processors may increase open market purchases of U.S. 
potatoes this spring and summer.

The uncertainly in the processing sector this year has continued into the 
time for drawing up new contracts between growers and processors this 
spring. Contract negotiations have been slow to develop in every growing 
region in North America this year (as of the beginning of April, only 
growers in Washington state had signed contracts with frozen processors) 
and many growers are delaying plantings until contracts are in hand. What 
effect this will have on overall plantings this spring is hard to tell, but 
if several areas get off to a later start than usual it could mean early 
season harvest (late July-mid September) will be atypically small. With 
current supplies of potatoes likely to run out earlier than usual, a late 
start to this fall's harvest could create a supply gap in late summer and 
early fall. 

In addition to stalled contract negotiations, potential competition for 
acreage by alternative crops in several regions is possibly cutting into 
the size of the expected acreage expansion this year. The crop with the 
most potential impact on potatoes this year seems to be dry beans. 
Prospective planted area of dry beans in the U.S. is expected to be up 24 
percent this year, with 17, 36, and 43 percent increases anticipated in 
major potato-producing states of Colorado, North Dakota, and Minnesota 
respectively. Also, increases in sugar beet acreage, up 3 percent 
nationally (up 7 percent in Idaho and 15 percent in Colorado), could limit 
the increase in potatoes in certain areas. However, the overall acreage 
impacts these crops have on potatoes may not be significant. 

At least one significant potato-growing region is going to have a large 
increase in potato acres this year compared to last. The Klamath Basin of 
Oregon and California, which was prevented from producing at full capacity 
last year due to water supply issues, will be back in business and alone 
should add one percent to the U.S. fall acreage total. Last year the region 
realized an 80 percent drop in acreage due to drought and the Federal shut 
down of irrigation water to protect endangered fish. On February 27, the 
Federal Bureau of Reclamation announced that the region will have 
irrigation water access and early snow pack estimates indicate an adequate 
supply. Most of the 10-15 thousand acres of potatoes that were not planted 
last year are expected to return to production this fall.

Based on these overall market conditions, total U.S. potato acreage planted 
for fall harvest is expected to increase 40-80 thousand acres from a year 
ago. Excellent prices and relatively low stocks of potatoes from the 
previous fall crop are likely to drive the increase, although mitigated 
somewhat by various other factors. If realized, acreage increases in the 
forecast range combined with average acreage abandonment and yields would 
put fall production between 419-431 million cwt (up 5-8 percent from fall 
2001). Increased acreage with yields similar to record levels achieved in 
2000 could put fall production up 10-14 percent from a year ago (between 
444-457 million cwt). USDA's first official estimate of planted acreage for 
fall potatoes will be released in July, and should provide a clearer 
indication of production and prices in the coming year.  

Charles Plummer (202) 694-5256
Cplummer@ers.usda.gov

Brief Box

The U.S. fall potato crop accounts for about 90 percent of total U.S. 
annual production (all growing seasons combined). Harvest usually starts in 
September or October depending on the growing region and weather 
conditions, and is completed by October or November. The marketing season 
for fall potatoes is September through August of the following year, with 
most spuds sold from storage during October through July. In recent years, 
Western states have accounted for about 69 percent of the U.S. fall crop, 
Central states about 25 percent, and Eastern states about 6 percent. Idaho 
and Washington together account for about 55 percent of the U.S. fall crop, 
and the crops in each of these states individually is typically larger than 
the entire Canadian crop.

COMMODITY SPOTLIGHT

Soybean and Cotton Plantings to Decline in Favor of Corn in 2002

For the eight major U.S. field crops (corn, soybeans, wheat, cotton, 
sorghum, barley, oats, and rice), planting intentions for the 2002 crop 
year are pegged at 248.3 million acres. While acreage is down more than 3 
million acres from last year's intentions, it is nearly identical to last 
year's actual planted acreage, despite widespread weak price signals this 
spring. Planting intentions for 2002 are 8.6 million acres below the most 
recent peak in planting intentions in 1996. 

Leading this year's change in crop mix is a surge in corn planting 
intentions. Intended corn plantings are up in part because (natural gas-
based) fertilizer costs are down compared with last year. Also contributing 
to expanded corn planting intentions this year are changes in relative 
commodity prices and non-price factors, such as crop rotation 
considerations and disappointment with soybean yields in recent years. In 
all, farmers intend to expand planted corn acreage by about 4 percent from 
2001, to 79 million acres. Soybean plantings are expected to be down 1.1 
million acres to 73 million, and wheat plantings will continue their 
downward trend, with intentions 0.6 million acres off last year's 59.6 
million planted acres. Intended cotton plantings, at 14.8 million acres, 
show a 6.3-percent decline.

Compared with last year, corn and spring wheat price expectations--based on 
futures contract prices--are down 5 percent and 1 percent, respectively. 
Winter wheat prices dropped 12 percent and cotton prices by 19 percent. In 
contrast, soybean prices rose 7 percent. With commodity price expectations 
remaining below farm program loan rates for some crops, marketing loan 
benefits--marketing loan gains or loan deficiency payments (LDPs)--will 
continue to be an important determinant of planting decisions, particularly 
for soybeans and cotton. Although commodity program loan rates had not been 
announced at the time USDA's planting intentions survey was taken in early 
March, many U.S. farmers are likely to have assumed that loan rates will 
remain unchanged for the 2002 crop year.

Trend yields, along with planting intentions, suggest a larger U.S. corn 
crop and a slightly smaller soybean crop than last year's. Even with 
slightly lower expected wheat acreage, production prospects point to a 
larger crop than last year due to lower projected abandonment (unharvested 
acres). Overall yields could also rebound from last year, in part because 
most of the decline in "all wheat" acreage this year is expected to be from 
generally lower yielding spring wheat. A smaller cotton crop is anticipated 
as cotton acreage is being bid away to more profitable competing crops.

Corn. Corn growers intend to plant 79 million acres in 2002, up more than 4 
percent from last year's planted acreage but still well below the record 
84.1 million acres in 1981. Many producers in the Midwest probably 
anticipated more attractive net returns for corn than for soybeans. This 
year's increase is due largely to lower per acre costs of fertilizer and 
fuel for corn production than last year, and a switch from cotton acres in 
the Delta as cotton's producer incentive prices (PIP)--market price plus 
benefits from LDPs and marketing loan gains--declined. Also important are 
crop rotation considerations, uncertainty about new farm bill provisions 
and the potential for lower soybean loan rates, and plantings on land that 
farmers intended to put in corn last year but could not plant due to 
adverse weather conditions. 

The prospective expansion of corn plantings in the Corn Belt this year 
outpaces the rise in the Central and Northern Plains. Intended corn 
plantings in the Corn Belt are up 1.6 million acres, with the increase 
spread throughout the entire region. Iowa and Illinois lead the increase 
with 0.3 million acres each, followed by Minnesota, Indiana, Wisconsin, and 
Ohio. Intended corn acreage in the Central and Northern Plains region is up 
a total of 0.6 million acres, most notably in North Dakota, Nebraska, and 
South Dakota. The potential 0.3-million-acre expansion of corn plantings in 
North Dakota may reflect a shift from other spring wheat (spring wheat, 
excluding durum), which shows a decline of 0.7 million acres in that state. 

Intended corn acreage is also up throughout most of the South (the Delta, 
Southeast, and Southern Plains regions), with Texas and Louisiana leading 
the increase with 0.3 million acres each. In all, intended corn plantings 
are up 1.1 million acres in this region. In Texas, relatively large 
declines in sorghum and cotton planting intentions suggest that expanded 
corn area may come from land previously planted to these crops. A 
considerable reduction in cotton acres in the Delta region reflects lower 
expected per-unit returns for cotton this year.

Planned adoption of biotech varieties accounts for about 32 percent of 
intended corn plantings this year, up from 26 percent last year. Plantings 
of insect-resistant (Bt) corn varieties, including stacked-gene varieties 
(which have both Bt and herbicide-tolerant traits), are expected to reach 
24 percent of all corn acres, up from 19 percent last year.

Soybeans. Intended soybean plantings for 2002 total 73 million acres--1.5 
percent below last year's planted acreage and a 2-percent decline from 
record plantings in 2000. This year's intentions, if realized, would be the 
second consecutive year of declining soybean acreage, a slight reversal 
from the continuous expansion of soybean acreage since 1990. 

Crop rotation considerations favor more corn plantings at the expense of 
soybeans in the Midwest this year, but marketing loan benefits also play a 
role in farmers' planting decisions for soybeans. If not for the prospect 
of a continuation of relatively high marketing loan benefits for soybeans, 
U.S. soybean intended plantings may have declined even further. Marketing 
loan provisions have made soybean production attractive to many producers 
because the potential for marketing loan gains (repayment of government 
loans below the loan rate) and LDPs can provide soybeans a higher net 
return than competing commodities when market prices of these crops fall 
below commodity loan rates.

The decline in intended soybean plantings this year is concentrated in the 
Corn Belt. Soybean plantings in this region are expected to contract by 1.1 
million acres, spread fairly evenly among key producing states (Iowa, 
Illinois, Indiana, Missouri, and Ohio). In the Central and Northern Plains, 
soybean plantings may remain unchanged this year. 

A notable exception to this year's soybean picture is North Dakota, where 
soybean plantings could rise almost 0.5 million acres--more than 20 
percent--reflecting the switch from other spring wheat, which is expected 
to yield lower net returns. However, soybean plantings are expected to 
decline in other wheat-dominated states in the Central and Northern Plains, 
a deviation from the trend towards expanded soybean production in this 
region.

Similarly, intended soybean plantings remain virtually unchanged in the 
Delta and Southeast from last year. Farmers intended to expand soybean 
plantings in a few states--especially Mississippi, Texas, Georgia, and 
Alabama--but these gains may be offset by decreases in Oklahoma, Kentucky, 
and North Carolina.

Although overall soybean planting intentions have decreased, herbicide-
tolerant soybeans appear to have become even more popular with U.S. 
farmers. The expected adoption rate for biotech soybeans reached 74 
percent, up from 68 percent last year. 

Other feed grains. Among "other feed grains," sorghum planting intentions 
dropped 13 percent from last year's plantings to 9 million acres, whereas 
intended oats plantings surged 16 percent to 5.1 million acres. Intended 
barley plantings are up slightly, to 5.1 million acres from last year's 5 
million. 

Intended sorghum plantings are down in key producing states, led by a 0.8-
million acre drop in Texas, the second-largest sorghum producer behind 
Kansas. Intended sorghum plantings are down this year in part because of 
the faster pace of winter wheat seedings last fall than the previous year 
and lower projected abandonment of winter wheat acreage--land that 
alternatively may have been planted to sorghum. For example, sorghum 
plantings in Kansas last year were up 0.5 million acres from 2000 mainly 
because adverse weather prevented winter wheat seedings. In fact, although 
this year's sorghum planting intentions in Kansas are down from last year's 
actual plantings, they are up 0.2 million acres from last year's intentions 
of 3.6 million acres. Higher yields for corn in recent years have also 
enticed producers to switch from sorghum to corn this year. 

Among the major field crops, intended oats plantings show the largest 
percentage increase from last year. Intended acreage is up 16 percent, with 
most of the increase coming from Texas, North Dakota, Wisconsin, South 
Dakota, California, Kansas, and Minnesota. Oats plantings in other states 
are expected to be fairly steady. An expected farm price more than 50 
percent above last year, reflecting a shortage of food-grade oats, enticed 
U.S. farmers to expand their planting intentions. Important suppliers to 
the U.S. market--Canada, Sweden, and Finland--experienced production 
problems last year. Canadian oats production was down nearly 20 percent and 
the quality of oats in these countries was poor.

Intended barley plantings are up 2 percent from last year's plantings. 
Expected plantings remain unchanged at 1.5 million acres in North Dakota, 
the leading barley producer. The bulk of the increase is in Montana, as 
barley plantings have shifted from east to west to avoid plant diseases. 
Producers in some states (California and Washington) may be switching much 
of the cropland previously planted to barley to more profitable competing 
crops.

Wheat. Wheat area intentions for 2002 total 59 million acres, a 1-percent 
decline from last year's planted area, mostly reflecting decreases in durum 
and other spring wheat plantings. USDA's Winter Wheat Seedings report in 
January indicated that farmers had planted 41 million acres of winter wheat 
for harvest in 2002, down 0.1 percent from last year and the lowest since 
1971. The March planting intentions survey--which updates actual winter 
wheat seedings--put the level of winter wheat plantings at 41.1 million 
acres.

The expected price of winter wheat facing producers at planting time last 
fall was 12 percent below a year earlier based on new-crop futures prices 
for harvest-time contracts. But potential marketing loan benefits 
anticipated by producers, particularly for soft red winter (SRW) wheat, 
limited the decline in the PIP. Lower anticipated PIPs for cotton also 
upheld winter wheat plantings in the South. 

Acres seeded to winter wheat in Texas, Oklahoma, and Montana showed 
significant increases over last year, more than offsetting a 4-percent drop 
to 9.4 million acres in Kansas. Winter wheat seedings in Kansas have been 
declining since 1996 and are now at the lowest level since 1957, reflecting 
a long-term expansion of corn and soybean acreage in this wheat-dominated 
state. Winter wheat seedings in the Southern Plains rebounded 9 percent, 
mostly in Texas, from last year's lower levels. Seedings were down last 
year due to poor planting conditions--seeding progress was hindered by 
early dryness followed by excessive rainfall. Most of the 0.8-million-acre 
gains in Texas this year were likely originally intended for grazing and 
hay, not for grain.

SRW wheat area is down 4 percent from last year and 13 percent from 2 years 
ago. Underlying the decline are a 4-percent reduction in the expected farm 
price for SRW from the previous year and wet conditions across the eastern 
Corn Belt last fall that hampered plantings. Acreage fell across the Corn 
Belt and much of the Southeast. 

In 2002, U.S. farmers intend to plant about 17.9 million acres of spring 
wheat (durum and other spring wheat), down 3 percent from last year. Behind 
the slight decline are a 6-percent drop in the expected price for hard red 
spring wheat from last year and disease problems. In North Dakota, the 
leading spring wheat producing state, planting intentions for other spring 
wheat are down nearly 10 percent, due most likely to higher expected net 
returns for soybeans, corn, and other oilseeds. 

Similar to the intentions for other spring wheat plantings, durum wheat 
showed a 2-percent decline from last year, mostly in North Dakota. One 
reason for the decline is the removal of incentives provided by the durum 
Crop Revenue Coverage program, which was cancelled last year due to 
administrative difficulties. In addition, concerns about scab problems--
which ravaged the durum crop across a wide area last year--further dampened 
incentives. Most of the cropland not planted to durum wheat will likely be 
switched to corn, oilseeds (soybeans, flaxseed, or canola), or oats. 

Cotton. Planting intentions for cotton in 2002 total 14.8 million acres, a 
decline of more than 6 percent from last year's planted acreage. With this 
spring's (mid-March) expected PIP for cotton--which includes expected 
marketing loan benefits--down by about 11 percent from a year earlier, 
cotton acreage is being bid away to more profitable competing crops. Cotton 
growers are still eligible to purchase higher coverage levels of crop 
insurance at the lower premium provided under the Agricultural Risk 
Protection Act of 2000, but the price guarantee under this program is 
considerably lower this year. Uncertainty about the outcome of the farm 
bill, especially with respect to payment limitations, may also be a factor 
contributing to the decline in cotton planting intentions.

The anticipated drop in total cotton area in 2002 is unevenly distributed 
among the leading cotton-producing states. In Texas, cotton plantings are 
down about 0.3 million acres (a decline of 5 percent). Cotton plantings in 
the Delta region (Mississippi, Louisiana, and Arkansas) are down 0.5 
million acres, a decline of 15 percent. In California, farmers intend to 
plant nearly the same amount of cotton as in 2001.

Cotton growers intend to plant 71 percent of upland cotton acres to biotech 
varieties, up from 69 percent last year. The intended adoption rate of 
herbicide-tolerant cotton, including stacked-gene varieties, is 59 percent 
of cotton acreage, up from 56 percent last year. In contrast, Bt cotton 
(also including stacked-gene varieties) is expected to be down, accounting 
for 35 percent of cotton acreage compared to 37 percent last year.

Rice. U.S. rice growers indicated plantings of about 3.3 million acres in 
2002, virtually unchanged from a year earlier but almost 2 percent above 
the 1997-2001 average. Total returns to rice production, including 
marketing loan benefits, were estimated higher than returns from 
alternative planting options--primarily soybeans in the South--for most 
producers despite expectations of large carryover stocks this year and the 
lowest prices in 15 years. 

This year, producers indicated long grain rice plantings of almost 2.7 
million acres, less than 1 percent below last year's near-record. Nearly 
all long grain rice is grown in the South. Plantings of long grain rice are 
expected up in Arkansas, but down in Texas and Louisiana. 

Combined medium/short grain planting intentions are up 2 percent, with 
California accounting for all of the expansion. Medium grain prices have 
strengthened since the start of the 2001/02 market year and have remained 
well above long grain prices, a result of a sizeable decline in the crop in 
California, where the bulk of U.S. medium grain is grown. In contrast, U.S. 
long grain prices have declined sharply since last summer.

Producers in the Mississippi Delta region indicated slightly higher rice 
acreage in 2002, with record plantings likely for Arkansas and Missouri. 
The Delta is the largest U.S. rice-growing region and has the lowest per-
unit production costs. In contrast, producers in Texas and Louisiana 
indicated smaller rice plantings, with Texas reporting the fewest acres 
since 1936. The Gulf Coast reports the highest per-unit production costs 
among U.S. rice growing regions.

Minor Oilseeds. Peanut and sunflower planting intentions are down 5 percent 
and 4 percent, respectively. Sunflower plantings are expected to make way 
for higher-net-return corn, and perhaps canola. U.S. farmers intend to 
plant a near record 1.5 million acres of canola, up 4 percent from last 
year and nearly 45 percent from 1999, reflecting higher per-unit returns 
and fewer disease problems than sunflower production.

Hay. U.S. farmers intend to expand the area harvested for hay crops this 
year by about 200,000 acres, or 0.4 percent above last year. Texas 
indicates the largest increase in area harvested for hay crops, which are 
important feedstuffs for beef cattle and dairy operations. Hay prices are 
expected to remain strong (around $90 per ton) this spring, providing 
ranchers with the incentive to expand hay acreage. However, lower dairy cow 
numbers and anticipated decreases in beef production might temper the 
expansion of harvested hay acreage this year.  

William Lin (202) 694-5303
wwlin@ers.usda.gov

For further information, contact: 

Gary Vocke, wheat; Allen Baker, feed grains; Nathan Childs, rice; 
Mark Ash,oilseeds; Les Meyer, cotton. All may be reached at 
(202) 694-5300.

Commodity Spotlight Box 1

Planting intentions for 2002 are compared with actual plantings in 2001 
unless otherwise stated. Price expectations are based on year-to-year 
changes in new-crop futures price quotes for harvest-time delivery in mid-
March for spring crops and mid-October for winter wheat (when planting 
decisions are made). For wheat, futures prices are from the Kansas City 
Board of Trade for hard red winter wheat and the Chicago Board of Trade for 
soft red winter wheat. Spring crop producers may have indicated their 
planting intentions based on early-March futures prices. For soybean 
producers this year, new-crop futures prices are less relevant than the 
per-unit revenue floor available from marketing loan benefits.

Commodity Spotlight Box 2

These estimates are based on farmer surveys conducted by USDA's National 
Agricultural Statistics Service during the first 2 weeks of March. USDA's 
Prospective Plantings report for 2002, released March 28, provides this 
year's first (USDA survey-based) indication of farmers' spring planting 
intentions for major field crops. Weather or price changes could alter 
planting decisions. USDA will release acreage estimates in its June 30 
Acreage report, after crops have been planted or when planting intentions 
are more definite. The March Prospective Plantings report is available at 
http://usda.mannlib.cornell.edu/ and the June Acreage report will be 
available at http://usda.mannlib.cornell.edu/reports/nassr/field/pcp-bba/

Commodity Spotlight Box 3

With Corn Prices Falling, Why Are Planting Intentions Up?

U.S. farmers are planning to expand corn plantings in 2002 to 79 million 
acres, despite expected farm prices for corn that are lower than last 
year's. This represents an increase of about 4 percent from last year's 
actual planted acreage and a 2-percent rise from 2001 planting intentions. 
What explains the surge of corn plantings? 

Based on the settlement price of new-crop December futures for corn in mid-
March 2002, the expected farm price for corn of $2.07 per bushel is about 5 
percent lower than last year. Analysis by USDA's Economic Research Service 
(ERS) indicates that, by itself, this price decline would lower corn 
plantings by 1.14 million acres from last year's level. 

However, compared with competing crops (particularly cotton), the expected 
farm price for corn looks relatively attractive this year. The reductions 
in expected producer incentive prices (PIP)--market price plus either loan 
deficiency payments or marketing loan gains--were greater for some other 
crops than for corn. The PIP for cotton fell 11 percent from last year 
because of lower anticipated domestic prices (based on new-crop futures 
contract prices) and a narrower gap between the loan rate and expected 
world prices (which reduces LDPs to producers).

ERS research indicates that a 1-percent decrease in the expected cotton 
farm price would translate into a 0.072-percent rise in corn plantings. So, 
with an 11-percent decrease in cotton's per-unit returns, about 0.6 million 
acres of cotton cropland would be switched to corn. Of the major competing 
crops, the expected change in the PIP for cotton appears to have the most 
significant effect on this year's corn plantings. Altogether, about 0.9 
million acres of cropland planted last year to competing crops (cotton, 
wheat, and sorghum) are bid away by corn this year due to relative changes 
in PIPs. 

Also leading to the prospective expansion of corn plantings--particularly 
vis--vis soybean plantings--is a decline in the energy component of input 
costs this year. Last year's overall increase in energy prices prompted 
farmers to switch some corn cropland to soybeans because corn production 
uses significantly more (natural gas-based) nitrogen fertilizer relative to 
soybeans, and corn production became disproportionately more costly. ERS 
research indicates that last year's higher per-acre fertilizer and fuel 
cost in corn production was equivalent to a 4.59-percent decrease in the 
expected corn farm price. This resulted in an increase in the soybean-to-
corn price ratio from 2.53 in 2000 to 2.62 last year (after adjusting for 
marketing loan benefits). The price effect attributed to the higher 
fertilizer and fuel costs increased last year's soybean plantings by 0.67 
percent, or a switch of 500,000 acres of cropland from corn to soybeans. 

But lower energy prices early this year appeared to dim the production cost 
advantage for soybeans. Factoring in reduced fertilizer costs and assuming 
unchanged loan rates, the expected soybean-to-corn price ratio at active 
planting decision times (around mid-March) decreased from 2.62-to-1 last 
year to 2.57-to-1 this year. The decline in the ratio suggests that corn 
could be more profitable than soybeans when compared with last year. It is 
likely that the 0.5 million acres of cropland that was switched to soybeans 
last year will return to corn production. In Iowa and Illinois, for 
example, most of each state's 0.3-million-acre increase in intended corn 
plantings probably indicate a switch from soybeans to corn--a pattern that 
is widespread throughout the Corn Belt region.

Changing the crop rotation system away from the traditional soybean-corn 
rotation and toward a soybean-corn-corn rotation has also likely 
contributed to the expansion of corn plantings. Many farmers felt that a 
soybean-corn rotation was not effective enough to control insect pests in 
soybean production, and that a soybean-corn-corn rotation might break the 
pest cycle more effectively. Disappointing soybean yields experienced by 
many farmers in recent years, coupled with higher corn yields, may have 
fueled the modification in the crop rotation system this year. 

Uncertainty about the farm bill might also have motivated farmers to expand 
corn plantings. Although many producers expect that crop loan rates will 
remain intact, others remain wary of changes in loan rates (especially for 
soybeans) that might emerge from a new farm bill, which could apply to the 
2002 crops. Preconference versions of both the House (H.R. 2646) and Senate 
(S. 1731) farm bill propose a lower loan rate for soybeans than the current 
maximum, whereas the corn loan rate would remain unchanged or be higher 
under these proposals. 

COMMODITY SPOTLIGHT

Oats Market Strong in 2001/02

Note: As of this writing, House and Senate farm bill conferees were still 
working out the language of the legislation.

Oats are the least prominent of the feed grains, but rising prices have 
garnered a tremendous amount of attention. The 5-year average grain value 
of U.S. oats production between 1997 and 2001 was $200 million, compared 
with nearly $20 billion for corn. Despite the relatively small production, 
however, oats have been gaining attention lately as prices climb and buyers 
scramble to ensure supplies. The tight supply has been caused by weather 
problems in the upper Midwest, and in the oats-growing regions of Canada, 
Sweden, and Finland. 

At one time, oats were one of the most important crops grown in the U.S., 
but production began a steep decline in the 1950s. In the early 1950s, 
planted acres for oats ranked fourth among all principal crops, exceeded 
only by corn, wheat, and hay. Production declines were brought on by 
emergence of the internal combustion engine, which greatly reduced the need 
for horse feed. The declining value of oats as a rotation crop, and the 
emergence of other crops that earn greater farm returns, are additional 
factors that explain the drop in oats acreage. The U.S. became a net oats 
importer in the early 1980s and currently imports about 30 percent of the 
total supply, primarily from Canada. 

Oats have historically been a multipurpose crop grown for numerous uses 
other than for cash grain. Nongrain uses include hay, pasture, and silage. 
Oats work well as a companion crop with the establishment of a forage such 
as alfalfa. The whole grain, which is high in fiber, is used in horse or 
ruminant feeds but is not commonly used for hog or poultry feed. Some horse 
owners feel that horses need oats as part of their ration. However, oats 
can often be replaced with other grains when oats prices are high, which 
has happened this year. Oat hulls, a byproduct of the milling process, are 
also used in feed rations. 

The de-hulled oat (known as the groat) is used in a variety of food 
products. Food consumption of oats increased dramatically in the 1980s when 
possible health benefits associated with oats were announced, especially 
the potential for oat bran to reduce cholesterol. In contrast to the feed 
market, oats food uses usually cannot be replaced with other grains. This 
inability to substitute helps explain why milled oats prices, especially 
for food-grade oats, have risen so much over the past year relative to 
other grains. 

Long-Term Decline in
Oats Acreage & Production

Oats production occurs in many states. However, because oats only do well 
in a relatively cool climate, their production is concentrated in the upper 
third of the U.S. The five states with the largest average oats production 
from 1997-2001 were North Dakota (19.1 million bushels), Minnesota (17.9 
million bushels), Wisconsin (17.7 million bushels), South Dakota (13.8 
million bushels), and Iowa (12 million bushels). 

Average production figures from 1981-85 showed that the same five states 
were the top oats-producing states in the country (although in a different 
order). Oats production has steadily declined in these states because 
farmers are planting other crops with higher per-acre returns. 

Major causes of shifts in farmer planting decisions are improved crop 
genetics and the planting flexibility provided by the 1996 Farm Act. 
Improved genetics for crops other than oats have led to expanded corn and 
soybean acres outside the traditional Corn Belt, which has cut into the 
production of all small grains, including oats, in these areas. Of the five 
major oats-producing states, this change has most affected northwestern 
Minnesota and the Dakotas. For example, 2001 harvested soybean acres in 
North Dakota were 2.1 million acres, up 325 percent from 1990; harvested 
area for North Dakota corn in 2001 was 705,000 acres, up more than 50 
percent from 1990. By contrast, oats acres in North Dakota declined 60 
percent between 1990 and 2001. 

Improved genetics have increased crop options, and planting flexibility 
enables farmers to base planting decisions on economic reasons. Under 
traditional farm legislation, planting decisions were determined to a large 
extent on the farmer's base acres for different program commodities, 
including oats. However, after the 1996 Farm Act, farmers were able to 
plant virtually any crop on their contract acreage without losing program 
benefits. Also, with the elimination of acreage reduction programs under 
the 1996 Farm Act, oats are no longer planted as a cover crop on acreage 
idled under annual farm program provisions.

With planting flexibility, farmers have been free to plant the crops that 
provide the highest market return. In the current marketing year, national 
average farm returns over variable costs (including government marketing 
loan benefits) are estimated to be $118 and $137 per acre for corn and 
soybeans, respectively, compared with $44 for oats. Although farmers 
outside of the traditional corn and soybean growing regions may have lower 
net returns for corn and soybeans and higher returns for oats, there has 
been a clear economic incentive for farmers who at one time planted oats to 
now plant other crops. 

In contrast to the U.S., recent oats production has been rising in Canada. 
Like the U.S., Canadian production had begun declining in the 1950s, 
although it trended upward during the 1990s. About 90 percent of Canada's 
oats are grown in the western provinces, mainly Saskatchewan (with about 40 
percent of total Canadian production), Manitoba (25 percent of total 
production), and Alberta (more than 20 percent of total production). The 
growing need for U.S. imports is the primary reason for the increase in 
Canadian oats production. In addition, several U.S. mills have relocated to 
Canada in order to have a milling presence in a primary production region. 

U.S. oats supplies in the 2001/02 marketing year are down from last year 
because of lower beginning stocks and a decrease in production and imports. 
Production in 2001 was 117 million bushels--33 million below 2000--the 
lowest production since records were first kept in 1866. Decreased planted 
area, harvested area, and yields all contributed to the decline in 
production. Planted acreage, at 4.4 million acres, was down nearly 2 
percent from 2000, and harvested acreage was down 18 percent to 1.9 million 
acres. Oats yields in 2001/02 were 61.3 bushels per acre, down from 64.2 
bushels in 2000/01.

Weather problems affected oats-growing areas throughout the growing season. 
The planting season began slightly later than normal and much later than 
the early start in 2000/01. Moisture shortages hindered germination and 
early growth in parts of the eastern Corn Belt, and below-normal 
precipitation limited crop potential in parts of the western Corn Belt, 
Great Plains, and Pacific Northwest during the summer. Cool weather in late 
May and early June hindered development across most of the Corn Belt and 
northern Great Plains. At the end of June, just over one-half of the 
acreage was headed, compared with the historical average of nearly two-
thirds. 

Harvest began late and progressed behind normal in Iowa, Minnesota, 
Nebraska, South Dakota, and Wisconsin. In the eastern Corn Belt and 
Northeast, ideal temperatures and mostly adequate moisture supplies aided 
late-season development. The harvest season in Ohio and Pennsylvania 
progressed ahead of the 5-year average.

According to the 2002 Prospective Plantings report, growers intend to plant 
5.1 million acres and harvest 2.5 million acres in 2002/03. If realized, 
this would be a 16-percent increase in planted area and a 33-percent 
increase in harvested area. This would reverse 4 straight years of acreage 
declines (both planted and harvested) and would be the largest oats acreage 
planted since 1998/99. Rising price is the main factor behind increased 
area prospects for 2002/03.

Low Import Supplies
Have Raised Oats Prices

Imports in 2001/02 are expected to total 95 million bushels, down from 106 
million in 2000/01, because of reduced production in the major exporting 
countries. The U.S. imports oats primarily from Canada, with lesser amounts 
from Finland and Sweden. All three countries tend to have cooler summers 
that are conducive to production of the heavy white oats favored by the 
food processing industry and many horse enthusiasts. Imports are forecast 
to comprise about one-third of the U.S. oats supply in 2001/02.

Total oats use in 2001/02 is expected to equal 230 million bushels, down 29 
million from a year earlier. Ending stocks are forecast down 25 percent 
from the 73 million bushels in 2000/01. Food and seed use is expected to 
increase 4 million bushels above the 2000/01 level. Feed and residual use 
in 2001/02 is expected to be down 34 million from the 189 million bushels 
used in 2000/01.

Prices received by farmers for oats in 2001/02 are expected to average 
about $1.55 per bushel, compared with $1.10 in 2000/01. Average prices from 
June 2001 through March 2002 were $1.62, compared with $1.13 during the 
same period last year. 

Global Production Increased
In 2001/02...

Global oats production in 2001/02 is estimated at 26.7 million tons, up 4 
percent from last year and the highest since 1997/98. Most of this increase 
came from the former Soviet Union and Eastern Europe. Russia, the world's 
largest oats producer, produced 7.7 million tons in 2001/02, up from 6 
million tons last year. Virtually all of this output will be consumed in 
Russia. Production also increased in Ukraine and Belarus. Eastern European 
production increased 17 percent to 2.3 million tons, with most of the gain 
in Poland. 

Partly offsetting these increases are drops in Canada and the European 
Union (EU). Production in the EU is estimated at 6.5 million tons in 
2001/02, down 6 percent from a year earlier. Finnish production is up 
slightly at 1.3 million tons; Swedish production dropped 150,000 tons to 
1.15 million.

Canadian oats production for 2001/02 is estimated at 2.8 million tons, down 
from 3.4 million the previous year. Drought conditions throughout the 
Canadian prairies and excessive moisture in parts of Manitoba led to a 17-
percent decline in yield and a nearly 2-percent decline in harvested area. 
A combination of the short U.S. crop and the drop in Canadian production 
led to the tight supply situation, which sent oats prices skyward. 
Continued dryness in Saskatchewan and Alberta is causing concern about the 
upcoming crop. 

The drop in Scandinavian oats production had an impact on the U.S. market. 
However, the primary international factor affecting the U.S. was the 
production shortfall in Canada, the largest oats exporter to the U.S.

...but World Trade Is 
Projected to Decline

Oats are a thinly traded commodity where most of the world production is 
consumed in the country of origin. Despite larger overall production, total 
oats trade is projected at 1.9 million tons in 2001/02, down 15 percent 
from 2000/01. Canada's production decline is behind the drop in world 
trade, and North American production problems have required the U.S. to 
look for other sources of oats imports. 

In response to the drop in Canadian and U.S. oats production, U.S. 
importers have increased the quantities purchased from non-traditional 
sources and have "front-loaded" imports to the early part of the marketing 
year. 

Finland and Sweden are major oats suppliers to the U.S., although they also 
have major markets elsewhere, and production dropped for 2001/02. On an 
October-September basis, the U.S. is projected to import 1.2 million metric 
tons in 2001/02, down from 1.8 million last year and the lowest since 
1995/96. However, for October to December (the first quarter of the 
marketing year) total imports were 611,000 tons, up 27 percent from the 
same period in 2000/01 and the highest since 1997. Canadian exports to the 
U.S. from October to December were 462,000 tons, up nearly 7 percent from 
the prior year. Scandinavian exports to the U.S. were also up for the 
October-December period. 

Import pace is rapid because buyers, concerned that supplies will become 
even tighter, are making their purchases earlier. Because of the tight 
supplies, imports are expected to decline significantly in the latter part 
of the marketing year. 

World stocks are projected to increase due to larger global production 
(increases in the Former Soviet Union and Eastern Europe), but stocks from 
the major U.S. trading partners are projected to decline significantly. 
Canadian oats stocks are projected at 500,000 tons, down 40 percent from 
last year and the lowest since 1995/96. EU stocks are projected to 
increase, but quantities of high-quality milling oats are limited. Tight 
stocks could have a serious impact on the U.S. market if continued dryness 
in the oats-growing regions of Canada and the U.S. leads to low production 
in 2002/03.  

William Chambers (202) 694-5312 
Allen Baker (202) 694-5290
Linwood Hoffman (202) 694-5298
Chambers@ers.usda.gov
Albaker@ers.usda.gov
Lhoffman@ers.usda.gov

WORLD AGRICULTURE & TRADE

Argentina's Economic Crisis: Can the Ag Sector Help?

In the past year, a number of relatively long-standing economic problems in 
Argentina have converged to create a full-fledged economic crisis. With 
Argentina's economic future remaining cloudy, the current crisis could 
produce important spillover effects on the agricultural sector that may 
diminish Argentina's competitiveness in international commodity markets.

Underlying the current economic crisis are three interrelated factors: the 
policy of pegging the domestic currency to the U.S. dollar at a fixed one-
to-one rate throughout most of the 1990s, the failure of the Argentine 
government to reduce budget and trade deficits, and the ensuing default on 
government debt.

In 1991, Argentina pegged its peso to the dollar to control the 
hyperinflation of the late 1980s and early 1990s. Unfortunately for 
Argentina, fixing the peso's exchange rate at a one-to-one ratio with the 
dollar ultimately resulted in less competitive peso-priced commodities in 
international markets and artificially high domestic wages following strong 
appreciation of the U.S. dollar beginning in 1996. 

The problems associated with an overvalued currency were compounded by 
Argentina's failure to lower its budget deficit and finance the trade 
deficit. This led to suspension of an International Monetary Fund (IMF) 
loan payment to the Argentine government due in December 2001 and 
subsequent default on sovereign (public) debt. In the wake of the default, 
the peso-dollar peg collapsed, and Argentina's recession--which had emerged 
in 1998--turned into a depression. Argentina's Gross Domestic Product (GDP) 
is projected to shrink by about 10 percent in 2002 alone, and a further 
contraction in 2003 is all but inevitable. A complicating factor in 
stabilizing the government's overall budget picture is the apparent 
inability to constrain provincial (state-level) spending even as provincial 
tax revenues have fallen.

Argentina's attempts to recover from the crisis have been hampered by 
multiple changes in government leadership and exchange-rate policies and 
controls. In early December 2001, the government of Argentina (GOA) imposed 
a banking freeze--know as the "corralito"--on all personal savings 
accounts. Initially, only minimal withdrawals were permitted. The banking 
freeze has greatly eroded confidence in both the government and the banking 
system, while severely reducing liquidity in local markets. In late 
December, widespread civil unrest followed the banking freeze and resulted 
in several deaths and significant destruction in the financial center of 
Buenos Aires.

In January 2002, as part of a gradual loosening of the "corralito," the GOA 
allowed monthly salary deposits to be withdrawn. The government also 
announced a dual exchange rate with a pegged rate of 1.4 pesos per dollar 
and a market-determined rate that has since exceeded 3 pesos per dollar. 
The official rate of 1.4 pesos per dollar was mandated to cover essential 
imports and all exports, whereas the market rate applies to nonessential 
imports, tourism, and most financial transactions. (To date, the Argentine 
government has not categorized agricultural inputs as either essential or 
nonessential.) On February 11, the GOA allowed a total "float" of the 
exchange rate for most goods and services, although the central bank uses a 
discounted rate (which acts as an implicit export tax). 

These developments have led to credit policies that have disrupted 
Argentina's bank operations and credit markets. Dollar denominated small 
bank loans and mortgages are to be converted to pesos at a one-to-one 
exchange rate, despite the peso's drop in value. Banks in Argentina could 
lose over 20 billion pesos as a result of being saddled with devalued loan 
assets that would be repaid in pesos at the rate of one peso per dollar 
rather than at the market rate. The government has imposed export taxes on 
various products to compensate banks for losses caused by repayment of 
dollar-denominated debt in devalued pesos. Lenders are not the only ones to 
suffer. Savings deposits and other financial assets are only convertible to 
dollars at the less attractive prevailing market rate. Limitations on the 
amount of savings convertible to dollars per day have also been 
established.

Initially, the one peso-to-one dollar conversion rate for existing debt 
repayment placed agricultural creditors in the position of having to accept 
enormous losses on loans for the current crop year (2001/02). However, 
Argentina's agricultural input suppliers--who furnish most of Argentina's 
$2.5-$3 billion in shortrun agricultural operating credit--refused to 
accept the conversion terms and their implied losses. Eventually the GOA 
reversed course and has offered conversion of shortrun agricultural debt at 
the floating exchange rate, but this episode compounded sectoral risks and 
will certainly raise operating costs throughout the marketing chain.

Argentina's devaluation should eventually benefit the economy in the form 
of increased exports and inward foreign direct investment once the 
country's fiscal house is in order. In the near term, however, the supply-
side effects of capital controls, including the flow of capital out of the 
country, are devastating. Even large corporations are having trouble 
obtaining dollars needed to buy imports such as computer equipment and 
machine parts. The resulting shortages are crippling both the domestic and 
export economies, making prospects for near-term recovery unlikely. 

Dampening the prospects for export-led recovery is the recent imposition of 
export taxes on some products. In February 2002, the GOA announced export 
taxes of 20 percent on petroleum products and crude petroleum. This was 
followed in March by export taxes of 10 percent on most other primary 
products (soybeans were to be taxed at a 13.5-percent rate), and lower 
differential export taxes (DETs) of 5 percent on processed products 
including soybean oil and meal. Then in April, export taxes were raised to 
20 percent for many agricultural products, including wheat, feed grains, 
and vegetable oils and meal, thus eliminating most DETs. 

Soybeans are still assessed a 3.5 percent surcharge, making the export tax 
23.5 percent. Major exceptions to this tax structure include a 5 percent 
export tax on meat, and a 10 percent rate for fruits, cotton, and rice.

A further major uncertainty clouding the export picture is the GOA's 
failure to comply with contractual commitments made to major grain and 
oilseed export companies. For example, a steep 21.5-percent value-added tax 
(VAT) applied on all domestic sales was traditionally reimbursed to 
companies that subsequently exported domestically produced agricultural 
products (The VAT was recently lowered to 10.5 percent for all grain and 
oilseeds transactions, and should not be confused with the export tax 
mentioned above). However, in December 2001, the GOA stopped VAT 
reimbursements to export companies, who were left waiting for nearly $700 
million in outstanding payments. After protracted discussions with the 
major export companies, the GOA agreed to repay the VAT reimbursements for 
exported goods in a series of 19 monthly payments beginning in March 2002. 
However, as of early April, the GOA had yet to make even the first of these 
monthly payments.

Decline in 2002 
All but Certain 

Major private forecast services (DRI-WEFA, Oxford Economics Forecasting, 
the London Economist) expect Argentina's GDP to shrink by 10 percent in 
2002, with inflation of between 20 and 50 percent. Forecasters expect the 
Argentine exchange rate to range between 3 and 4 pesos per dollar by late 
2002, representing a depreciation of 66 to 75 percent from the fixed one-
to-one peg with the dollar. Short-term interest rates are expected to be in 
the range of 30 to 40 percent. With the official unemployment rate likely 
to be above 30 percent and with the prospect of inflation and GDP shrinkage 
also at double-digit rates, it is no exaggeration to say the Argentine 
economy is in a severe depression. 

To view this in perspective, no country directly involved in the Asian 
financial crisis of 1997-98 experienced such a large cumulative decline in 
GDP as Argentina already has. Furthermore, the policy levers usually used 
to pull a country out of recession are not viable for Argentina. Loose 
monetary policy (e.g., interest rate cuts by the central bank) would drive 
inflation further up. Loose fiscal policy--some combination of tax cuts 
and/or increases in government spending--would lead to large structural 
budget deficits and would further drive long-term interest rates to levels 
high enough to offset any stimulative effects. Consequently, upside 
prospects for the Argentine economy in the near term are dim.

In 2002, the ability of Argentine banks to make even short-term loans 
continues to be very restricted. If inflation rates approach or exceed 20 
percent, the risk premiums built into loans will be substantial and will 
likely grow, driving real interest rates even higher. The government's 
inability to collect tax revenue in proportion to its direct debt 
obligations remains a problem. As businesses and individuals routinely 
evade taxes, nominal rates on less avoidable taxes on business activity--
such as VATs--are likely to rise, hindering new business development and 
consumer confidence. 

Agricultural Sector: 
Part of the Solution?

Exports of farm products, crude oil, and manufactured goods will likely 
play an important role in pulling the Argentine economy out of its deep 
recession. The question is when. Market signals that might normally 
encourage greater farm exports are greatly muted as the higher peso prices 
received by farm producers are offset by export taxes, elevated input 
prices, rising interest rates, and tighter credit conditions.

Peso-valued commodity prices are expected to rise due to the devaluation, 
but the effective price paid to grain farmers is not likely to keep pace, 
thus dampening production incentives. The cost of most inputs--including 
new capital and imported inputs--could rise by as much as 100 percent. 
Nitrogen-based fertilizer and fuel, although domestically produced, are 
expected to at least double in cost, offsetting any gain in output prices. 

In addition, the percentage markup for transportation and export marketing 
expenses will likely rise due to increased market and policy uncertainty, 
and increased export taxes will further lower effective earned prices for 
commodities. Improved access to farm credit is also very unlikely. The 
banking system's deteriorating balance sheets have been strongly pressured 
by farm debt burdens accumulated over the last decade, farming's high risk, 
and increased export price volatility. 

One way for Argentine farmers to mitigate the input cost situation is to 
change cropping patterns. If this happens, farmers are likely to plant more 
soybeans and less corn, since corn normally relies on more intensive use of 
fertilizer, diesel fuel, agricultural chemicals, and high cost hybrid seed 
that a farmer cannot save from the current crop to plant next year. 
Although Argentine corn growers tend to have lower fertilizer application 
rates than their U.S. counterparts, operators using fertilizer will still 
have strong economic incentive to switch to lower input soybeans. 
Wheat cultivation normally requires more fertilizer than soybeans, but 
wheat production is unlikely to decline much because of the cash-flow 
benefits offered from wheat-soybean double cropping (although less 
fertilizer will likely be used). Cash generated from the wheat harvest can 
be used to finance production of the follow-up soybean crop, thereby 
sidestepping costly credit markets. However, medium and small single-crop 
operators may have a difficult time financing even the lower input costs 
associated with soybeans.

Prospects for Argentine farm exports hinge on whether the farm sector 
adopts innovative solutions to deal with higher business costs. During past 
economic crises, the farm sector has been able to cope and expand. This 
current economic crisis, due to its severity, will tax the innovative 
abilities of farm operators. 

At this time, efforts by the Argentine government to negotiate a rescue 
package with the IMF have not been successful. Further, if the expected 
macroeconomic forecasts materialize and the economy goes into free fall, 
agricultural exports may be greatly hindered, particularly if credit 
continues to be generally unavailable or a significant additional tax is 
imposed on farm exports. Instead, farm exports could shrink.  

David Torgerson, (202) 694-5334  
Randy Schnepf, (202) 694-5293
dtorg@ers.usda.gov
rschnepf@ers.usda.gov

WORLD AGRICULTURE & TRADE

Could the NIS Region Become a Major Grain Exporter?

When market-oriented economic reform began in the New Independent States 
(NIS) of the former Soviet Union in the early 1990s, some Western 
forecasters predicted that reform could transform the region from a large 
grain importer (as during the Soviet period) into a major grain exporter. 
However, in each year from 1994 to 2000, the NIS region recorded net grain 
imports or exports of only a few million metric tons (mmt). In marketing 
year 2001/02, the region is expected to have net grain exports of about 10 
mmt, mainly wheat and barley, to non-NIS countries. The exportable surplus 
coincides with rising NIS grain production during the last 3 years, 
yielding a bumper harvest of 93 mmt of wheat and 36 mmt of barley in 
marketing year 2001/02.

In addition to these grain production and trade developments, there are 
signs that Russia (if not Ukraine and Kazakhstan) may be improving its 
agricultural system to increase productivity, perhaps presaging a long-term 
rise in output. For example, new large, vertically integrated producers in 
the Russian agriculture and food economy, typically financed and managed by 
enterprises outside agriculture, could bring more efficient management to 
the sector than the former state and collective farms that currently 
dominate agriculture.

During most of the 1990s, annual growth in gross domestic product (GDP) in 
Russia, Ukraine, and Kazakhstan (the main NIS grain producers) was 
negative. In the last 2 years, however, GDP in the three countries has 
risen annually by 5-10 percent. The recent improvement in NIS macroeconomic 
performance has stimulated grain production and exports, particularly 
because farms are better able to take advantage of soft credit provided by 
the government. Soft credit and other forms of subsidies in all NIS 
countries plunged during the transition period of the past decade, more 
from dwindling state revenues than from deliberate government policy. 

Russia, in its negotiations for accession to the World Trade Organization 
(WTO), is asking for maximum allowable subsidies that are more than 10 
times the current level. This is equal to 4-5 percent of current GDP, and 
almost equal to the country's agricultural GDP (7 percent of total GDP). 
Russia is also pushing for export subsidies, despite using no agricultural 
export subsidies during the transition from a planned to a market economy. 
The Russian government's optimistic plans for subsidization are due to the 
expected growth in GDP and government revenue.

Could rising agricultural productivity in Russia and the other major NIS 
grain producers, combined with possibly expanding subsidies, finally 
transform the NIS region into a major grain exporter?  

Should the NIS Region 
Export Agricultural Products?

Whether or not the NIS region becomes a major grain exporter depends mainly 
on whether it can produce grain at a relatively low cost compared with 
other major grain producers--that is, whether or not the region has a 
comparative advantage in grain production relative to the world market. 
Recent analysis by Liefert of USDA's Economic Research Service (ERS), shows 
that Russia has a comparative disadvantage in producing agricultural 
outputs compared with inputs (specifically for the years 1996-97). 

Among the various methods available for calculation and analysis, the 
social cost-benefit (SCB) approach was used, which involves computing SCB 
ratios for all products being analyzed. The SCB ratio for a good equals the 
cost of domestically producing the good in Russia (measured in rubles), 
divided by the good's trade price, measured in U.S. dollars. In the 
numerator of the ratio, tradable intermediate inputs used in production are 
also valued at world market prices.

The SCB ratios allow the ranking of goods on a comparative advantage 
spectrum. If the ratio for good A is less (greater) than the ratio for good 
B, the country has a comparative advantage (disadvantage) in producing A 
relative to B. This is because it costs less to produce an amount of A that 
sells for $1 on the world market than it costs to produce an amount of B 
that sells for $1 on the world market. The SCB ratios Liefert computes for 
agricultural inputs (such as fertilizer and fuel) are less than those for 
agricultural outputs, which indicates that Russia has a comparative 
advantage in producing agricultural inputs compared to outputs. The 
comparative disadvantage of agricultural output production implies that it 
should decline in favor of the production of agricultural inputs. The 
ratios for grains are less than those for meat, which means that Russia has 
a comparative advantage in producing grain compared with meat. This 
suggests that meat output should fall more than that of grain.

These results are wholly consistent with--and help explain--the major 
changes in Russian agricultural production and trade during the transition. 
The livestock sector (both animal inventories and output) has been cut in 
half since 1992, and imports of meat (especially poultry from the U.S.) 
have surged. The elimination of the massive subsidies given to livestock 
producers during the Soviet period resulted in falling meat production, 
bringing it more in line with its comparative advantage. With the 
contraction of the livestock sector, the large Soviet-era imports of grain, 
soybeans, and soybean meal, needed to feed livestock herds during the 
Soviet period, have ended. Use of intermediate inputs in agriculture 
(fertilizer, machinery, fuel, feed) has fallen substantially, while the 
country has become a large exporter of products that could be used 
domestically as inputs in agricultural production (including 80 percent of 
its fertilizer output). The large drop in domestic use of key inputs such 
as fertilizer, as well as heavy export of those products, has cut grain 
yields and harvest levels, working against the country being a big grain 
exporter.

Although ERS research on NIS agricultural comparative advantage has been 
confined to Russia, the commodity developments identified for Russia during 
transition apply also to Ukraine, Kazakhstan, and the NIS region in 
general. These include contraction of the livestock sector; virtual 
elimination of imports of grain, soybeans, and soybean meal; a large drop 
in domestic use of intermediate agricultural inputs; and export of 
agricultural inputs. Ukraine, for example, exports about two-thirds of its 
fertilizer. These similar commodity developments suggest that the cost 
structure of agricultural production throughout the NIS is similar to 
Russia's. The economic fundamentals of the NIS region, reflecting relative 
costs of production of outputs and inputs, currently do not support large 
grain trade--either imports or exports.

Grain Export Levels &
Competitiveness Could Change

The SCB calculations provide a recent "snapshot" of Russia's agricultural 
comparative advantage. Production costs and other economic fundamentals are 
currently working against a large volume of NIS grain exports. In the 
future, a number of factors could change to alter the cost-competitiveness 
and export volumes of grain, either positively or negatively. These 
variables include:
*  weather; 
*  real exchange rates; 
*  consumer income;
*  port capacity constraints; 
*  agricultural productivity; and 
*  state policy.

Weather. The rise in grain output over the last 3 years, resulting in 
medium-level grain exports in 2001/02, could be explained largely and 
simply by favorable weather. Since 1998's severe weather, which resulted in 
the NIS region's lowest grain harvest in decades, weather has steadily 
improved, with 2001 an outstanding year for grain and other crops. The 2001 
NIS grain harvest was 157 mmt, compared with average annual output over 
1996-2001 of 126 mmt. Weather to date for 2002 has generally been 
favorable, but many crops are just entering the most critical period of 
development. For long-term predictions, the effects of weather are assumed 
to be neutral.

Real exchange rates. Russia's economic crisis of 1998, which affected the 
entire NIS region, resulted in major depreciation of NIS currencies, in 
both nominal and real (inflation-adjusted) terms. For example, from the 
start of the crisis in August 1998 through the end of 1999, the Russian 
ruble and Ukrainian hryvnia depreciated in nominal terms by about 80 and 65 
percent, respectively. Currency depreciation substantially improved the 
price competitiveness of NIS grain on the world market, and likely helped 
the NIS region become a grain exporter in 2001/02. In 2000, however, NIS 
currencies began appreciating in real terms (because the inflation rate 
exceeded the nominal rate of currency depreciation). In the view of Western 
financial experts, NIS currencies are still undervalued relative to Western 
currencies. Real currency appreciation is therefore likely to continue in 
the near to medium term, particularly if NIS economies keep growing at high 
rates. The effect of changes in real exchange rates on NIS grain exports is 
expected to be negative.

Consumer income. GDP is projected to grow in most NIS countries during the 
next decade by 4-5 percent a year. Given that demand for livestock products 
is relatively sensitive to changes in consumer income, GDP growth might 
help revive demand for meat products, and consequently for feed grains as 
well. The growing domestic demand for feed will cut into domestic grain 
surpluses available for export.

If agriculture and food markets in the NIS region are functioning well 
internally and are well integrated into world agricultural markets, any 
rise in consumer demand for meat would have little or no effect on grain 
exports. When domestic markets are well integrated into world markets, 
domestic producer prices are predominantly determined by world trade 
prices. Thus, an increase in domestic demand for a foodstuff, such as meat, 
will only slightly affect domestic producer prices, and therefore only 
slightly affect domestic meat production. Most of the rise in domestic 
demand for meat would be met by additional imports (or by reduced exports, 
if the country is a net meat exporter), not by a change in meat output. 
There would be little or no secondary effect on domestic grain markets. If 
markets in the NIS region are not functioning well, however, the projected 
GDP growth should significantly stimulate meat producer prices and domestic 
production.

How well integrated are NIS agriculture and food markets into world 
markets? ERS estimates indicate that the transmission of changes in world 
trade prices, and in the exchange rate, to changes in Russian domestic 
prices for foodstuffs is fairly weak. Thus, the country's integration into 
world agricultural markets is poor. Undeveloped physical and institutional 
infrastructure (such as poor transportation and weak legal and market 
information systems) segment regional markets from each other and cut off 
regional markets from the world market. Although the ERS estimates are 
confined to Russia, the other NIS countries have made no more progress than 
Russia in improving their physical and institutional infrastructure for 
agriculture. Another factor that can "separate" regional markets from the 
world market, to the benefit of regional producers that must compete with 
imports, is differences in quality and taste between locally produced and 
imported goods, such that consumers prefer their local products.

Over the next decade, the NIS countries are likely to improve their 
infrastructure and integration into world markets. Increased Western 
investment (which the Russians identify as a major motive for joining the 
WTO) could play a key role in developing agricultural infrastructure and 
linkages. NIS grain producers might also improve their skills at marketing 
their output to foreign buyers. Nonetheless, progress in these areas will 
probably not be rapid. Because of lingering segmentation of regional 
markets, the anticipated growth in consumer income is likely to motivate 
some rise in domestic production of livestock products. The effect on grain 
exports is expected to be negative.

Port capacity constraints. Ports in both Russia (such as Novorossysk) and 
Ukraine (such as Odessa) operate under capacity constraints for exporting 
grain. All Black Sea ports, through which Ukraine's and much of Russia's 
grain exports have to move, currently have a total annual grain export 
capacity of only about 8 mmt (lack of elevators being the main bottleneck). 
Capacity should improve over time, but progress will be slow in building 
this physical infrastructure, which will continue to constrain growth in 
grain exports.

Agricultural productivity. Agricultural productivity (output per unit of 
input) in the Soviet Union was traditionally much lower than in the U.S. 
and other western countries. If the vast potential for productivity growth 
were realized, reform could transform the NIS region into a major grain 
exporter. 

However, recent analyses find that productivity growth in NIS agriculture 
during the transition has been poor. ERS estimates indicate that from 1993 
to 1998, productivity in Russian crop production fell by 8 percent overall. 
Another study finds that total agricultural productivity in Russia and 
Ukraine rose from 1992 to 1997, but by a paltry total of 7 and 2 percent, 
respectively (the difference in results is largely due to the large drop in 
fertilizer use from 1992 to 1993). Failure to improve productivity is due 
to the incomplete implementation of reform in Russia, Ukraine, and most 
other NIS countries. Reforms are needed to improve farm-level organization 
and management, as well as to develop the physical and institutional 
infrastructure that supports agricultural production. However, private 
farming has not developed to any substantial degree; effective land and 
rural credit markets have not emerged; and, a commercial legal system is 
not yet in place to protect property and enforce contracts.

Russia shows signs of perhaps developing more progressive forms of farm 
organization and management. New, vertically integrated producers are 
emerging in the agriculture and food sector, with finance and management 
often coming from outside the sector. These new operators could stimulate 
productivity growth by improving both the technology of the country's 
production and its system of organization and management. Yet, no empirical 
evidence exists to show whether these new operators have increased 
productivity. Also, even if successful, the new producers might simply 
represent the best possible management and production practices within the 
economy's existing technology and administrative systems. Any productivity 
gains might come from strengthening vertical ties for production and 
distribution of output, rather than from real technological or systemic 
change.

Legislation was recently passed in Ukraine, and a similar law is proposed 
by the Russian government, that would sanction agricultural land markets, 
allowing the relatively free buying and selling of farmland. The complete 
implementation of land reform, allowing the use of land as collateral, 
would help develop a credit market for agriculture. It is unclear, however, 
whether or not the land legislation will be successfully implemented.

If thoroughly implemented, these reform efforts should have a positive 
effect on productivity. Because there is little evidence that reforms will 
be pursued with the necessary vigor, productivity growth during the next 
decade is anticipated to be moderate. The effect of productivity growth on 
grain exports is expected to be only mildly positive.

State policy. Although institutional-type reforms can affect grain output 
and trade volumes by raising productivity, there are two categories of 
state policy that can more directly impact grain export potential. The 
first is subsidies for production and exports. Current levels of state 
support to NIS agriculture are historically low. The NIS agricultural 
establishments are hoping that GDP growth will provide the government with 
the budgetary resources to raise support. In its agricultural negotiations 
for WTO accession, Russia is pushing for maximum allowable budget subsidies 
more than 10 times the current level, as well as for export subsidies 
(which Russia has not used during the transition period). Because NIS 
support to agriculture is more likely to rise than fall in the near to 
medium term, the effect of changes in support policies on grain exports 
would be positive.

The second state policy with direct impact is regional governmental 
controls on grain outflows, which have the effect of reducing national 
exports. Such controls are common in both Russia and Ukraine. There are two 
possible reasons for the restrictions: 
*  regions want to ensure that local food needs are met; or
*  local officials deliberately create price differences between regions, 
then control grain outflows in order to earn profits by selling to regions 
where prices are higher. 

The federal governments of the NIS countries oppose these controls. Such 
restrictions could also create monitoring and enforcement problems for WTO 
membership. Thus, over time these controls are likely to weaken, and the 
effect of the policy change on grain exports is predicted to be positive.

NIS Region Likely to Be a 
Medium-Level Grain Exporter

Likely developments in the future that would exert downward pressure on NIS 
grain exports are the real appreciation of currencies and income growth. 
Limited port capacity for exporting grain would not cause current export 
levels to drop, but rather would act as a constraint on large growth in 
exports. The likely developments that will have a positive effect on future 
grain export volumes are: 
*  improvement in physical and institutional infrastructure; 
*  productivity growth in agriculture; and 
*  changes in state policy, specifically rising support to agriculture and 
weakening regional controls over grain outflows. 

Among these developments, productivity growth is probably the most 
influential (even given our expectation of only modest growth over time). 
It would improve agriculture's cost competitiveness and thereby move the 
NIS toward a comparative advantage in agricultural production. On balance, 
developments that will exert a positive effect should outweigh those that 
will exert a negative effect. Over the next 10 years or so, the NIS region 
could well become a medium-level grain exporter of 5-10 mmt per year.

In the most recent USDA global agricultural 10-year projections, the NIS 
region is a net grain exporter (to countries beyond the region) of about 7 
mmt by 2012. Under more optimistic productivity growth assumptions, NIS net 
grain exports could reach 18 mmt. Under either scenario, reform will have 
finally transformed the NIS region from a major grain importer into a grain 
exporter.  

William Liefert (202) 694-5156
Stefan Osborne (202) 694-5154
Michael Trueblood (202) 694-5169
Olga Liefert (202) 694-5155
Wliefert@ers.usda.gov
Sosborn@ers.usda.gov
Trueb@ers.usda.gov
Oliefert@ers.usda.gov

Further Reading

Cochrane, N., B. Bjornlund, M. Haley, R. Hoskin, O. Liefert, and P. 
Paarlberg, Livestock Sectors in the Economies of Eastern Europe and the 
Former Soviet Union: Transition from Plan to Market and the Road Ahead, 
Agricultural Economic Report No. 798, Economic Research Service, U.S. Dept. 
of Agriculture, February 2002. http://www.ers.usda.gov/publications/aer798/

Liefert, W., "Comparative (Dis?)Advantage in Russian Agriculture," American 
Journal of Agricultural Economics, forthcoming.

Liefert, W. and J. Swinnen, Changes in Agricultural Markets in Transition 
Economies, Agricultural Economic Report No. 806, Economic Research Service, 
U.S. Dept. of Agriculture, February 2002. 
http://www.ers.usda.gov/publications/aer806/

World Agriculture & Trade Box

ERS Forecasting Models for NIS Agriculture
Separate ERS forecasting models exist for Russia, Ukraine, and the rest of 
the NIS combined, which are integrated into a world agricultural model to 
generate long-term projections. The individual models incorporate 
assumptions for values that reflect the analysis and judgement given in 
this article on: 
*  real exchange rates; 
*  consumer income; 
*  price and exchange rate transmission elasticities, which represent the 
degree of these economies' integration into world agricultural markets; 
*  agricultural productivity; 
*  state subsidies to agriculture; and 
*  state trade restrictions. 

For more information concerning forecasts for NIS agriculture, as well as 
other topics in NIS agriculture, see the ERS briefing rooms on Russia 
(http://www.ers.usda.gov/briefing/Russia) and Ukraine  
(http://www.ers.usda.gov/briefing/Ukraine). 

Projections for U.S. and world agricultural supply, demand, trade, and 
prices can be found at the ERS agricultural baseline briefing room 
(http://www.ers.usda.gov/briefing/baseline).

RESOURCES & ENVIRONMENT

Farmland Protection Programs: What Does the Public Want?

Public support has been growing for government farmland protection 
programs. Since the late 1980s, the extent of farmland enrolled in these 
programs has grown from tens of thousands of acres, largely in the 
Northeast, to nearly a million acres spread across 20 states. With the 
authorization of USDA's Farmland Protection Program (FPP)--intended to 
protect topsoil by limiting nonagricultural use of the land--the Federal 
government has become a partner in the effort to preserve agricultural 
land, distributing about $50 million since 1996 to a variety of state and 
local programs.

What explains the growing interest in farmland protection? At the root of 
support for these programs is the recognition that farmland produces more 
for society than food and fiber. In particular, farmland is an important 
source of rural amenities--a range of goods and services from opportunities 
for outdoor recreation, such as hunting and fishing, to the pleasures of 
viewing a pastoral scene on a Sunday drive. For some, rural amenities even 
include the satisfaction of simply knowing the agrarian way of life 
continues, whether or not they are able to view it.

Rural amenities rarely provide enough income to farmland owners to sway 
decisions concerning land use or development. Preserving rural amenities is 
sometimes approached through programs like farmland protection, which 
provide payments to landowners for maintaining their land in farms or 
ranches. Rural amenities, however, are not a uniform commodity. Farmland 
differs from place to place, providing varying levels of rural amenities. 
Moreover, preferences among the public for various rural amenities differ, 
and not all rural amenities may be best provided by farmland. While some 
amenities--like an agrarian cultural heritage--seem to require protection 
of farmland, others--like wildlife habitat--may be better provided by 
protecting nonagricultural rural lands such as forestlands and grasslands. 

Designing and implementing a farmland protection program that is cost-
effective and provides the greatest possible benefits requires an 
understanding of 1) public preferences for particular rural amenities, and 
2) which of these amenities is best provided through farmland preservation. 
Since rural amenities generally have no price tags, it can be difficult to 
compare public preferences for one rural amenity or set of amenities over 
another, or to assess public willingness to spend on rural amenities over 
other projects. Some means of ascertaining public values for various 
amenities is therefore necessary for effective policy design. 

Discovering Public Preferences
For Rural Amenities

One approach is to ask people what characteristics they think farmland 
protection programs should preserve. A limited number of economic studies 
have taken this approach. These studies suggest that preserving amenities 
that are uniquely associated with active agriculture may not always be a 
dominant preference of the public. A variety of reasons for protecting 
farmland is given, ranging from environmental concerns and maintaining open 
space, to preservation of family farms and the protection of local food 
supplies. No single reason seems to dominate, although some reasons rise to 
the top in particular regions. For example, some studies indicate that 
environmental concerns rank highest in Rhode Island, while other studies 
suggest that protecting small- and medium-sized farms is most important in 
Colorado. 

To further explore public preferences for rural amenities and their 
relationship to farmland preservation, USDA's Economic Research Service 
(ERS) examined the design and implementation of actual farmland and rural 
land preservation programs. Since these programs have already received 
taxpayer support, researchers expected that preferences of the public could 
be identified. 

The study involved three lines of investigation:

*  An analysis of the language in legislation authorizing farmland 
preservation programs in 48 states (excluding Alaska and Hawaii). 
**  Legislative intent, as revealed in statutory language, can indicate 
which rural amenities matter most to voters.

*  An examination of ranking criteria in several state- and county-level 
Purchase of Development Rights (PDR) programs in several northeastern 
states. 
**  PDR program administrators use ranking systems to choose among 
easements offered for sale by landowners. If these ranking schemes reflect 
the intent of program legislation and favor preserving certain parcel 
characteristics over others, then they can reveal which amenities are most 
preferred by the public.

*  An examination of case studies of how farmland protection legislation 
fits into the broad array of state and local rural land conservation 
programs in these northeastern states.
**  Because other rural land use programs may complement or substitute for 
farmland preservation programs, it is necessary to examine the full array 
of rural land conservation programs in a region to determine public 
preferences for rural amenities. If preferred amenities are also being 
provided through preservation of nonagricultural rural lands, preferences 
may not be fully revealed by focusing only on farmland protection. 

Conclusions from 
the ERS Study

Although this empirical information is not conducive to definite 
conclusions on the values of different rural amenities, the ERS study 
provides a number of insights on how farmland preservation programs operate 
as a policy instrument for protecting rural amenities. Some of these 
insights suggest the kinds of amenities that seem to be most important, 
while others highlight concerns that affect the design and implementation 
of farmland protection policies.

State and local governments use farmland preservation programs to protect a 
large number of rural amenities. Analysis of the enabling legislation of 
farmland protection programs suggests that local food security, scenic 
beauty, and cultural heritage are primary concerns for the majority of 
states that have farmland preservation programs. However, the more densely 
populated regions are often concerned with protecting the widest variety of 
rural amenities, while less concern is evident in sparsely populated states 
and regions. 

For example, the greatest interest in preserving rural amenities appears in 
the farmland protection legislation of states in the Northeast, Lake, and 
Pacific regions, while rural amenities are not mentioned in farmland 
protection legislation in North Dakota, Alabama, Mississippi, Oklahoma, 
Idaho, New Mexico, and Wyoming. In sparsely populated states, the continued 
relative abundance of rural amenities may make protective legislation seem 
unnecessary, whereas more densely populated states often have less 
remaining farmland, leading them to enact a broad portfolio of programs to 
protect many types of rural amenities.

Most farmland protection programs focus on maintaining agricultural 
viability. Most programs favor protecting actively farmed agricultural 
landscapes rather than merely preserving open space. For example, ranking 
criteria of state- and county-level PDR programs in several northeastern 
states place high priority on maintaining active agricultural operations, 
rather then passive or open space uses. The strong emphasis within PDR 
programs on active agriculture suggests that in the Northeast, public 
preferences are for amenities that are uniquely provided by agriculture. 
But, although active agriculture is the prime concern, it is not the sole 
concern. For example, many PDR programs require conservation plans, which 
help provide "water quality" amenities in the form of reduced soil erosion. 

A tradeoff may exist between long-term provision of some rural amenities 
from farmland and achieving the best mix of rural amenities. Many PDR 
programs give priority to farms that are considered most likely to stay in 
agriculture. In practice, this usually means favoring high-quality soils 
and row-crop farming, since cropland operations (particularly those 
specializing in high-value commodities like fruits and vegetables) may be 
most likely to remain successful in the face of rising land values in urban 
fringe areas. If the public is interested in having a broader mix of 
farmlands preserved, then this focus on cropland suggests a tradeoff 
between providing the most desired mix of amenities today, and maximizing 
the long-term production of cropland-related rural amenities. Given the 
evidence from the enabling legislation, and evidence from survey data, the 
proper balance between "maximizing long-term viability" and "obtaining the 
best mix of preserved farmlands" is an open question. 

The design of preservation programs has implications for the spatial 
pattern of permanently preserved lands, and hence the location of preserved 
rural amenities. The preservation programs reviewed generally target farms 
that face development pressure. Coupled with criteria favoring preservation 
of larger farms and blocks of farms, this suggests a preference for 
preserving parcels in clusters. While this outcome may be favored as a 
means of fostering long-term agricultural viability, it also has impacts on 
the distribution of rural amenities--favoring those amenities that are best 
produced in larger blocks of farmland. 

However, other concerns likely lean toward distribution of preserved lands 
over a wide area. Some programs are specifically designed so that 
preservation funds are distributed across the jurisdiction. In others, the 
desire to preserve as much farmland as possible at least cost leads to 
prioritizing applications based on the lowest per-acre cost or on the 
largest discount at which landowners offer to sell development rights. This 
can result in a more scattered pattern of preserved farms, or in 
preservation of lands distant from urban centers.

The scope of other rural land protection policies influences the extent to 
which farmland preservation programs can concentrate on protecting 
amenities that are not dependent on active agriculture. The results of 
several surveys reported in the literature (on attitudes toward farmland 
preservation) suggest that the rural amenities many government farmland 
preservation programs favor may not always be the same set desired by the 
public. However, given the broad array of rural land conservation programs 
in many states, it may be efficient for farmland protection programs to 
give priority to agriculturally related amenities, with other programs 
focusing on lands that provide other rural amenities. For example, 
Pennsylvania's PDR program coexists with a variety of other public and 
private rural land preservation programs, which have protected significant 
amounts of rural lands for public recreation purposes or to protect lands 
(such as battlefields) with historical significance. Massachusetts has a 
variety of public and private programs dedicated to the preservation of 
rural land uses, both by outright purchase and by purchase of easements 
(both on agricultural lands and on forestlands).

The Federal Role in Preserving 
Rural Amenities

Since the FPP was established in the 1996 Farm Act, the Federal government 
has been a partner in efforts to preserve rural amenities through 
protecting prime, unique, and other productive soils. Findings from the ERS 
study suggest several ways in which the Federal program might best interact 
with state and local programs. 

Help coordinate the actions of state and local preservation agencies. The 
rural amenities protected by farmland preservation are often local in 
nature. However, farmland preservation and the loss of rural amenities are 
issues in nearly all major metropolitan areas across the nation. Americans 
like to travel, and many Americans move across state lines when changing 
residence. Thus, the preservation of rural amenities can be considered a 
"national" issue, and the Federal government has a role in representing the 
nation's interests in "local" rural amenities. Coordinating state 
preservation activities, encouraging states to coordinate county 
preservation efforts, and assisting with funding would constitute a useful 
Federal role. The draft 2002 farm bill (in conference) contains language to 
significantly increase Federal matching grants from a total of $50 million 
spent to date, to annual funding of $50-$500 million. 

Help balance the relative importance of rural amenities on privately owned 
farmland vs. recreational opportunities and amenities provided by publicly 
protected lands. These considerations can help establish Federal priorities 
for funding public park systems and farmland preservation programs, which 
may influence the distribution of funds between various rural land 
conservation programs. 

Coordinate Federal transportation and infrastructure development activities 
with local preservation efforts. The Federal government should ascertain if 
its activities interfere with local preservation priorities. For example, 
the Federal government provides grants and loans to state and local 
governments to finance sewer and water investments through Section 201 
Municipal Facilities Construction grants and the Rural Housing Service. 
While these are designed to address concerns over point-source water 
pollution and the safety of drinking water, an unintended consequence of 
financing facilities that are greatly oversized for the current population 
may be to promote growth and thus to the conversion of farmland to 
residential uses.

The set of rural amenities available to rural and urban residents alike is 
influenced by a large and complex network of policymakers from various 
levels of government and nongovernmental organizations, with farmland 
protection policies one of a wide array of amenity preservation tools. 
Though each entity acts largely independently, in aggregate they shape the 
nation's landscape.  

Dan Hellerstein (202) 694-5613
Cindy Nickerson (202) 694-5626
Danielh@ers.usda.gov
Cynthian@ers.usda.gov

Resources & Environment Box 1

What Rural Amenities are Provided by Farmland?

Agrarian cultural heritage includes: knowing that the rural character of 
the land is being maintained, and knowing that farming as a way of life 
continues in your community.

Rural pleasantries includes: walks in pastoral settings, scenic drives in 
the countryside, and visiting local farms.

Supporting rural communities includes: creating a diversified rural 
economy, and maintaining viable rural communities.

Recreational opportunities and environmental services include: fishing, 
swimming, birdwatching, biodiversity, watershed protection, and flood 
control.

Resources & Environment Box 2

The Government's Role in Providing Rural Amenities

Because markets for rural amenities are limited, economic theory indicates 
that not enough of them will be produced. This occurs for two reasons:

1) Rural amenities are often a beneficial side effect that occurs in the 
production of a particular good. For example, a dairy farm may offer a 
pleasing pastoral landscape to sightseers as it provides forage for grazing 
cows.

2) For many rural amenities, it is difficult for the farmer to receive 
payment for providing the good. For example, although numerous sightseers 
can enjoy the dairy farm's beauty, the farmer cannot charge a price per 
view.

Farmers have little motivation to preserve rural amenities that earn them 
no profits, even if the benefits to the public of preserving rural 
amenities exceed what it would cost most farmers to produce them. Many 
farmers face this issue when confronted with nonagricultural development 
opportunities. Hence, rural amenities can be maintained through government 
support of farmland preservation programs by keeping more land in 
agriculture than market forces would provide.

SPECIAL ARTICLE

China: En Route to a New Role in Global Agriculture

China's World Trade Organization (WTO) accession in December 2001, its new 
labeling regulations for bioengineered agricultural products, and questions 
about the actual size of its grain stocks are among the issues that have 
recently captured the attention of market analysts and policymakers. 
Potentially market-driving issues emanate from China on a regular basis, 
but beyond the headline-grabbing events is a larger picture of China's 
evolving role in agricultural markets. 

As the 21st century opens, China stands ready to enlarge its role in global 
markets. After decades of political upheaval, poverty, and food shortages, 
China has emerged as one of the world's largest and fastest growing 
economies. Since the late 1970s, a historical tendency toward isolation and 
self-sufficiency has been replaced by an outward-looking reliance on 
foreign trade and investment as engines of economic growth. As its economy 
grows and develops, China will undergo unprecedented changes as it evolves 
from a largely rural, centrally planned, low-tech economy into one that is 
urbanized, and market- and consumer-driven. 

China's potential as a market has long tantalized overseas merchants. While 
in some years it has been the world's largest customer for wheat, corn, 
cotton, and soybeans, its imports have fluctuated considerably, and the 
overall level of agricultural imports seems below potential. 

Given a population of 1.27 billion (4.5 times that of the U.S.) and limited 
endowment of cropland (75 percent that of the U.S.) and of other natural 
resources, one would expect China to rely on agricultural imports from more 
land-abundant countries to feed its people. Agricultural imports have grown 
slowly, especially in comparison with surging trade in manufactured goods. 
The agricultural share of China's imports fell from about 33 percent in 
1980 to about 7 percent in 1999. According to WTO statistics, China had a 
modest $2.9-billion deficit in agricultural trade in 2000 (agricultural 
imports minus agricultural exports), equivalent to about 1.3 percent of its 
$225-billion overall trade surplus. 

Considerable potential exists for China to become a larger and steadier 
customer for agricultural imports as it sheds its inward orientation, opens 
its markets to the world, and rationalizes the use of its scarce resources 
by importing goods that can be grown more efficiently overseas. China's 
role in agricultural markets will be shaped by a number of factors, 
including: 
*  pace of development; 
*  shift from central planning to markets in guiding production and 
consumption decisions;
*  development of markets and related infrastructure and institutions; and
*  impacts of trade on China's farmers, impoverished regions, and other 
vulnerable sectors that could, in turn, affect its trade policy.

Farmers, agribusiness managers, and policymakers around the world will need 
to carefully watch the complex process of development in order to assess 
China's likely policy changes and their impacts on world markets for 
agricultural products. With a rapidly growing economy and WTO membership as 
the latest step in the march toward global integration, China is poised to 
becoming a larger market for imported agricultural products. 

Changing Patterns of Consumption 
& Production 

The Chinese economy is reportedly growing at a rapid 7 to 8 percent 
annually. While it is difficult to verify the accuracy of China's national 
income statistics, there have been rapid improvements in living standards 
and striking changes in consumption habits. Economic growth will boost 
Chinese consumer incomes, purchasing power, and demand for food. With 
slowing population growth (less than 1 percent annually) and rising per 
capita income (6 percent real annual growth in urban areas), food spending 
is growing (although at a slower rate than the rise in income). 

The composition of food demand is also changing as demand for meat, 
poultry, fish, fresh fruit and vegetables, and other high-value products 
grows faster than for staples such as rice, wheat, and traditional 
vegetables. After decades of limited consumption choices, China's emerging 
middle class is acquiring a taste for convenience and high-value foods, 
such as instant noodles, baked goods, exotic fruits, dairy products, fast 
food, and processed foods. 

The food processing and food retail sectors have grown and developed 
rapidly, reflecting increased demand for convenience and quality. Chinese 
consumers are dining in restaurants more frequently, traveling more, and 
starting to demand foods with specific attributes. Consumer awareness of 
environmental protection, food safety, and health issues is emerging in 
China, reflected in recently introduced "green food" and organic standards, 
and heightened concerns about sanitation in meat-packing plants. 

A large, low-tech, labor-intensive farm sector currently supplies most of 
China's food needs, but whether it will be able to make needed adjustments 
in input use and product mix to meet the country's growing and shifting 
food needs is not yet clear. The Chinese farm sector encompasses over 200 
million small-scale household operations using little machinery and 1 
worker for every acre of cropland. By comparison, the U.S. has less than 2 
million farms operating on a cropland base 25 percent larger, with over 140 
acres of cropland for every farm worker. Most Chinese farmers grow rice, 
wheat, or corn on small plots of land; grow a cash crop such as cotton, 
rapeseed, peanuts, or tobacco; maintain a vegetable plot; and raise a few 
head of livestock
or chickens. 

This traditional semisubsistence production structure will give way to a 
more commercialized farm sector in order to supply China's growing and 
changing food needs. Production is shifting from food grains and basic 
vegetables toward meats, fish, fruits, refined vegetable oils, and 
processed foods. Emerging supermarket and restaurant chains require large 
quantities of standardized high-quality products, which are nearly 
impossible to procure from large numbers of small independent growers. 

Meat production is one of the fastest changing components of China's 
agricultural sector. Already producing nearly half of the world's pork, 
China is also the world's second-largest poultry producer and third-largest 
beef producer. The livestock sector is expected to grow further to supply 
the country's growing demand for meat. 

Traditionally, hogs and other livestock were produced in "backyard" 
operations, and fed with table scraps, waste, and aquatic plants. Today, 
production is shifting to larger, more commercialized operations using 
manufactured feeds. In 1985, traditional backyard production accounted for 
95 percent of pork output, but that share is now down to 80 percent. A 
growing share of pork production is on household farms specializing in 
livestock (15 percent) and on commercial farm operations (5 percent). 
Foreign investors and other suppliers to fast-food restaurants, 
supermarkets, and export markets are contracting with large operations to 
procure poultry, meat animals, and dairy products. 

Rapid growth and commercialization in China's livestock industry will boost 
demand for feed grains and oilseed meals. Increased feed grain and oilseed 
plantings will probably displace some food grains, and, in the long run, 
China may have to rely more heavily on imported corn and soybeans to feed 
its expanding numbers of livestock. Growing demand for protein meals is 
partly responsible for the dramatic rise in soybean imports from $75 
million in 1995 to $2.8 billion in 2001. The USDA baseline projects a 
doubling of Chinese soybean imports to reach 30 million tons by 2011/12. 
Corn imports are projected to grow from current minimal levels to 7.8 
million tons annually by 2011/12. 

Specialized household and commercial livestock operations will probably 
supply most of China's growing demand for livestock products, but some 
analysts anticipate increased imports of meat. Other analysts argue that 
further commercialization of the livestock industry will make China 
competitive on international markets and that China may even become an 
exporter of meat products to Asian neighbors if food safety and sanitary 
requirements can be met. 

The Evolving Role 
of Government

After several decades of central planning (from the 1950s through the 
1970s), China now relies increasingly on the market to allocate resources 
following a series of policy and institutional reforms. Consumers, 
processors, and farmers make their own consumption and production decisions 
subject to market forces. In the early years of market reforms after 1978, 
Chinese farmers responded to price incentives by dramatically increasing 
production. Changes in market prices can have dramatic impacts on farmers' 
planting decisions and production. For example, strong cotton prices in 
2000/01 boosted cotton acreage to record levels, while declining prices in 
2002 are expected to reduce cotton plantings considerably. 

Market development is still proceeding, and some market functions, such as 
specification and enforcement of grades and standards, have ample room for 
improvement. In recent years, millers have been seeking higher quality 
wheat to make breads and rolls for urban consumers. Farmers have been 
encouraged to grow high-quality wheat varieties, but the supply of 
domestically produced high-quality wheat has not grown fast enough to keep 
up with demand. There is reportedly a high demand for imported high-protein 
wheat to meet domestic millers' demands.

Government policies and other institutions have yet to evolve fully. 
Farmers are free to sell their production on the market, and markets have 
arisen for this purpose. But some government bureaucracies cling to their 
planned-economy role. For example, high grain supply estimates from local 
governments are still passed up to the provincial level and ultimately to 
Beijing, where they are used to assess supply/demand balance and prospects 
for imports and exports.

In a market economy, a government must provide supporting services such as 
reliable market information systems, transportation and market 
infrastructure, an agricultural finance system, and a modern legal system 
to clarify property rights, enforce contracts, and resolve disputes. 
Without the institutional infrastructure to provide these essential 
services, market development will lose momentum, and farmers' ability to 
take advantage of international market opportunities will be limited.

Reduction of tariffs, quotas, and other border measures will have little 
impact on Chinese markets if imports are unable to penetrate market 
channels and reach consumers at competitive prices. Inefficient marketing 
systems can have the same trade-reducing effect as a tariff by adding to 
the cost of trade. 

Lack of efficiency in China's marketing and distribution system reduces 
flows of both international and domestic interregional trade. Basic market 
infrastructure, including highways, railway track, storage, and 
refrigeration has grown dramatically over the past decade. However, lack of 
cold storage and port facilities still constrain both international and 
domestic trade. Marketing industries in China are relatively inefficient, 
with their markup accounting for more than 20 percent of the retail price 
of perishable products (much higher than in the U.S.) Marketing channels 
are often difficult to penetrate for foreign firms and for Chinese firms 
operating outside their home regions. 

Trade Liberalization--
How Liberal?

China's foreign trade has been liberalized considerably over the last two 
decades. But trade in a few strategic commodities, including imports of 
grains, cotton, tobacco, sugar, and fertilizer, remained tightly controlled 
through state trading entities (STE), import and export licensing 
requirements, and unannounced import quotas prior to WTO accession. 

Import and export decisions carried out by state trading monopolies were 
often guided by a policy of maintaining self-sufficiency in basic 
foodstuffs. Domestic stock levels--considered a state secret and not 
announced to the public--have often motivated government purchases or sales 
of commodities. Concern about dwindling stocks in the mid-1990s led to 
massive imports of wheat and corn in 1995 and 1996, while a subsequent 
buildup of stocks led to a plunge in grain imports from 1999 to 2001. 

China's stocks make up a large share of global stocks. Lack of information 
about the actual level of these grain stocks has created uncertainty about 
the global grain stocks-to-use ratio, an indicator used by traders and 
other market analysts in assessing supply-demand conditions. 

As a WTO member, China has made wide-ranging commitments designed to make 
its trade system more transparent and to increase the role of market forces 
(AO, April 2002). However, there are concerns that regulatory requirements 
could restrict the number of companies eligible to participate in 
international trade, and will use technical barriers--such as new 
biotechnology labeling requirements--to limit imports.

Restrictions on agricultural imports may protect farmers' income and 
preserve grain self-sufficiency in the short run, but insulating farmers 
from international markets prevents them from receiving signals that would 
push China's product mix toward the most efficient use of resources. In 
particular, land-intensive grain production is not well suited to China's 
limited arable land base, especially production of irrigated wheat in north 
China, where water supplies are dwindling. In contrast, China's vegetables, 
fruits, livestock, and processing industries--activities that require a 
great deal of labor and little land--are cost-competitive not only in the 
domestic market but also overseas.

Input Markets:  A 
Work in Progress

Transforming China's agriculture into a commercial production sector will 
require consolidation of small farm operations; release of agricultural 
labor to industrial and service employment; and investment in land 
improvements, machinery, and human capital. Input markets will play a key 
role in this transformation. Yet, while market forces now play a strong 
role in most of China's economy, markets for agricultural inputs are weak, 
highly regulated, or nonexistent. This is a serious bottleneck that could 
slow needed adjustments in the agricultural production sector.

Markets for land and water still retain features of China's collective 
agriculture period (roughly 1958-78). Rights to use farmland, owned 
collectively by villages, are allocated to households by village leaders. 
Land cannot be bought or sold by individual farmers, and land rentals are 
relatively uncommon and mostly informal. Lack of land markets impedes the 
readjustment of land to its most efficient use. 

Water is exploited as a commonly-owned resource, and its low marginal price 
leads to overuse. Despite low levels of water availability, irrigated 
agriculture has expanded rapidly in the North China Plain, where per capita 
water availability is only one-tenth the international average. The higher 
yields brought about by irrigation contributed to increases in grain 
production that have allowed China to maintain near self-sufficiency in 
grain, especially wheat. But this production level may not be sustainable 
as water supplies dwindle.

Capital investment in industry and infrastructure has been heavily 
concentrated in urban areas. Loans to farm households are available 
primarily through informal channels--from family members or savings clubs 
organized by village neighbors. Many farmers have invested in greenhouses, 
fish ponds, irrigation systems, and fruit orchards using financing from 
off-farm earnings and informal channels, and some villages have banded 
together to pool their land for industrialized agriculture, to dig wells, 
or to offer machinery services. Still, lack of rural credit greatly 
constrains investment in the agricultural sector. 

One of the chief challenges facing policymakers is the task of promoting 
the flow of laborers from agricultural to nonagricultural work in order to 
raise rural per capita incomes. At least one-third of rural laborers work 
at least part-time outside of farming, but greater transfer of labor to 
nonagricultural employment will be necessary to raise per capita rural 
incomes and commercialize the farm sector. Restrictions on rural migrants' 
movement to cities has limited the number of off-farm job opportunities 
available to rural residents, since nonfarm jobs tend to be concentrated in 
cities, especially in economically vibrant coastal regions. Low education 
limits job choices of rural residents, and poor access to markets and 
technology limits nonfarm job growth in rural areas. 

Low investment in rural schooling and extension services is another case of 
urban investment bias that affects the movement of labor out of 
agriculture. Urban schools in China are subsidized by the government, but 
rural schools are financed by burdensome taxes and fees collected from 
village residents. As a result, rural schools are falling far behind their 
urban counterparts. A slowdown in the country's rural economy since 1998 
has cut into tax revenue flowing from rural industries, making the problem 
more acute. Education, however, is key to lifting labor out of the low-
technology agricultural sector and increasing the technological 
sophistication of agriculture itself. Lack of an effective rural education 
system hinders the movement of labor out of agriculture and slows the rise 
in agricultural labor productivity.

China as Customer 
& Competitor

As China grows, develops, and integrates with the world economy, it is 
likely to become an even larger and steadier customer for agricultural 
imports. Imports of grains and oilseeds will allow the country to feed 
itself without overburdening its limited natural resource endowment. 
Consumers growing demand for convenience and quality foods is likely to be 
satisfied largely through domestic production with some imports. At the 
same time, China could become a competitive exporter of fruits, vegetables, 
fish, meat, and poultry if its production were modernized, its marketing 
infrastructure improved, and food safety and animal health issues resolved.

Willingness to rely on markets to allocate resources will influence China's 
development and its role in world agricultural markets. Chinese 
policymakers seem committed to market reliance, and many now accept the 
logic of comparative advantage. 

Despite China's commitment to trade liberalization, there is potential for 
nontariff barriers and regulatory requirements to periodically restrict 
imports and slow entry of foreign firms in order to balance competing 
interests within the country. However, China seems to be firmly on the path 
to market reliance and integration with the world economy, a path that will 
lead to greater world trade and more efficient use of global resources.

Fred Gale (202) 694-5215 
Bryan Lohmar (202) 694-5226, 
fgale@ers.usda.gov
blohmar@ers.usda.gov

Special Article Box

A Closer Look at China Issues

This article is based on a new ERS report, China's Food and Agriculture: 
Issues for the 21st Century, which delves more deeply into issues that 
could affect the evolving role of China in world agricultural markets. It 
covers issues related to food consumption, marketing and transportation, 
international trade, agricultural policy, regional differences, 
biotechnology, input markets, rural development, and market information. A 
series of 13 articles prepared by ERS economists teamed with colleagues in 
universities and other institutions in the U.S., Canada, and China provides 
background information, assesses the current state of knowledge, and asks 
key questions that can be addressed by research.

END_OF_FILE
