AGRICULTURAL OUTLOOK                  March 22, 2002
April 2002, ERS-AO-290
             Approved by the World Agricultural Outlook Board
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CONTENTS
IN THIS ISSUE

AGRICULTURAL ECONOMY
USDA Longrun Projections to 2011: Global Developments Play Key Role

BRIEFS
Imports Increase Their Share of U.S. Food Consumption

COMMODITY SPOTLIGHT
U.S. Cotton & the Appreciation of the Dollar
Imports & Lackluster Demand Pressure Catfish Prices

WORLD AGRICULTURE & TRADE
Calculating Damages in WTO Trade Disputes
WTO Accession Will Increase China's Agricultural Imports

RESOURCES & ENVIRONMENT
Proposed Requirements for Manure Nutrient Management: Potential Sector Impacts
Livestock Operations Face Greater Restriction

SPECIAL ARTICLE
Farm Families' Savings: Findings from the ARMS Survey


IN THIS ISSUE

USDA Longrun Projections to 2011: Global Developments Play Key Role
In USDA's new longrun, 10-year baseline projections, a recovery in global 
economic growth following the slowdown of 2001-02 leads to stronger U.S. 
exports, gains in agricultural commodity prices, and rising farm incomes over 
the next decade. U.S. agricultural export value and market cash receipts to U.S. 
farmers have improved since the late 1990s when large global production and weak 
global demand pushed prices and trade down. Nonetheless, slow U.S. and global 
economic growth in 2001-02 and a strong U.S. dollar provide a weak setting in 
the near term for the agricultural sector. In the longer run, projected 
improvement in world economic growth, particularly in developing countries, 
provides a foundation for gains in global trade and in U.S. agricultural 
exports. Paul Westcott; (202) 694-5335 westcott@ers.usda.gov

Imports Increase as Share of U.S. Food Consumption

In the second half of the 1990s, Americans increased the proportion of imported 
foods they consumed. The rise is attributed partly to greater demand for high-
value agricultural products that other countries offer, and partly to the higher 
exchange rate of the U.S. dollar, which increases the purchasing power of the 
dollar. The continuous rise in import shares of fruits and vegetables is related 
to improved transport and storage technology. For fish and shellfish, domestic 
production may be unable to keep up with consumer demand. Increasing ethnic 
diversity of the U.S. population, rising consumer incomes, and more open trade 
agreements induce lower cost foreign producers to supply the large U.S. market. 
Alberto Jerardo; (202) 694-5266 ajerardo@ers.usda.gov

U.S. Cotton & the Appreciation of the Dollar 

Exchange rates can have an enormous impact on a country's economy, and the 
dollar's strength has undoubtedly exacerbated the difficulties facing the U.S. 
textile industry during the recent slowdown in U.S. and world economic growth. 
It has also been a factor in lowering cotton prices. When a country's currency 
appreciates, either its share of world trade and production will decline or its 
prices must drop in terms of its own currency. Unlike textiles, cotton 
production in the U.S. accounts for about the same proportion of world 
production as it did in 1995 and slightly more than in 1990, and its share of 
world trade has surged. However, the dollar-denominated world price of cotton 
has fallen by an inflation-adjusted 56 percent between marketing-year 1990 and 
February 2002. Stephen MacDonald; (202) 694-5305 stephenm@ers.usda.gov

Imports & Lackluster Demand Pressure Catfish Prices

In the last 2 years, catfish imports have increased dramatically, in contrast to 
the 1990s when U.S. catfish production was a domestically focused industry, with 
only small amounts of imports and exports. This rise in imports, combined with 
relatively flat per capita seafood consumption and increased inventories of 
catfish products, has put downward pressure on domestic catfish prices. Imports, 
in fact, play a major role in satisfying overall U.S. seafood demand. A strong 
dollar relative to most other currencies will encourage further growth in 
seafood imports. Although the markets for catfish products may be somewhat 
depressed, producers whose feeds are primarily grain-based should be able to 
take advantage of expected relatively low grain prices. David Harvey; (202) 694-
5177 djharvey@ers.usda.gov

Calculating Damages in WTO Trade Disputes

Since its inception in 1995, the World Trade Organization (WTO) dispute 
settlement system has received over 200 notifications of trade disputes. While 
most disputes have been settled, in only three cases has the Dispute Settlement 
Board (DSB) had to approve damage awards. The system, which is designed to 
encourage the parties to settle disputes bilaterally, is a major achievement. 
And although no explicit methodology is mentioned in the WTO agreements for 
calculating damages, these three cases suggest the DSB has adopted an approach 
that measures damages simply and transparently and in a way that minimizes 
incentives for WTO member countries to violate their agreements. Although damage 
awards may appear to simply split the difference between defendants' and 
complainants' estimates, they in fact reflect the success of the DSB's 
straightforward evaluative approach in reducing incentives to over- or 
underestimate damages. Jason Bernstein; (202) 694-5165 jasonb@ers.usda.gov

WTO Accession Will Increase China's Agricultural Imports

China's accession to the WTO and further integration into the world economy is 
expected to lead to a wealthier and more stable international food system. Under 
the terms of accession, China's agricultural trade regime will be more open and 
responsive to international markets. WTO accession is the latest initiative in a 
process of liberalization in China's economy that will also benefit U.S. 
agricultural exports. A modest increase in China's imports of important bulk 
commodities in the next few years should result from the new trade regime under 
the WTO, but most benefits to U.S. farmers will occur several years down the 
road. Even before China's formal accession to the WTO, China's imports of major 
commodities were expected to increase in the coming years due to internal market 
reforms and gradual economic liberalization. Accession must be viewed in the 
context of China's broader economic development and its transition from a 
planned to a market economy. Bryan Lohmar; (202) 694-5226 blohmar@ers.usda.gov

Proposed Requirements for Manure Nutrient Management: Potential Sector Impacts

When manure from animal feeding operations (AFOs) exceeds land application needs 
for crop production, the runoff can enter waterways and impair water quality. 
The U.S. Environmental Protection Agency has proposed bringing additional AFOs 
under regulation and requiring implementation of nutrient management plans 
(NMPs) by all regulated AFOs, with a decision expected by December 2002. Using a 
10-region agricultural model, analysts at USDA's Economic Research Service 
estimated the potential national/regional impacts of the proposed NMPs on all 
regulated AFOs. In general, the results suggest that the proposed NMPs will not 
be highly disruptive to livestock and poultry production and may even increase 
returns to the overall industry. The costs of developing and implementing NMPs 
could motivate some shift in animal production to regions with greater available 
land for manure application, while decreasing animal production overall 
throughout the U.S. Jonathan Kaplan; (202) 694-5494 jkaplan@ers.usda.gov

Farm Families' Savings: Findings from the ARMS Survey

Savings play a direct role in helping farm households maintain their standard of 
living from year to year as well as complementing other risk management 
strategies. If farmers were able to save during "good times" and draw on the 
reserves, there might be less perceived need for large government outlays for 
disaster assistance and other unearned compensation to decrease income 
variability. In 1999, 78 percent of farm households saved out of current income, 
compared with 50-60 percent of families within the general population. Using 
data from the Agricultural Resources Management Study (ARMS) survey, analysts at 
USDA's Economic Research Services examined the influence of several factors on 
the types and level of farm household saving. These factors include size and 
type of farm, receipt of government payments, purchase of insurance, and major 
source of income (farm vs. off-farm). Ashok Mishra; (202) 694-5580 
amishra@ers.usda.gov


AGRICULTURAL ECONOMY

USDA Longrun Projections to 2011: Global Developments Play Key Role

In USDA's new longrun, 10-year baseline projections, a recovery in global 
economic growth following the slowdown of 2001-02 leads to stronger U.S. 
exports, gains in agricultural commodity prices, and rising farm incomes over 
the next decade.

U.S. agricultural export value and market cash receipts to U.S. farmers have 
improved since the late 1990s, when large global production and weak global 
demand exerted downward pressure on prices and trade. Government payments to the 
sector, through marketing loan benefits and emergency and disaster assistance 
legislation, added to farm income during this period. 

However, slow U.S. and global economic growth in 2001-02 and a strong U.S. 
dollar provide a weak near-term setting for the agricultural sector. In 
addition, for some agricultural commodities, such as soybeans and cotton, large 
world production and increasing global stocks have pressured prices. For wheat 
and coarse grains, in contrast, reduction in global stocks since the late 1990s 
has strengthened prices. 

Longer run developments in the agricultural sector reflect strengthening 
domestic and international macroeconomic growth. Despite continuing strength in 
the U.S. dollar (a constraint on export growth) and growing trade competition, 
the projected improvement in world economic growth provides a foundation for 
gains in global trade and U.S. agricultural exports. 

Strengthening economic growth in developing countries is particularly important 
for global agricultural demand and trade. Incomes in many developing countries 
are at levels where consumers tend to diversify their diets to include more meat 
and other higher valued food products. In these countries, the level of food 
consumption and imports of food and feed are particularly responsive to income 
changes.

Over the 10-year projection period, U.S. export gains, combined with steady 
increases in domestic agricultural demand, result in rising market prices, 
increases in farm income, and improvement in the financial condition of the U.S. 
agricultural sector. Consumer food prices are projected to continue a long-term 
trend of rising less than the general inflation rate. The trend in consumer food 
expenditures towards a larger share for meals eaten away from home is expected 
to continue.

Projection Highlights 
For Field Crops

Baseline projections assume continuation of 1996 Farm Act provisions. Under 
extension of the current law, several major U.S. field crops would continue to 
receive marketing loan benefits during the projection period because their 
prices are low. Soybeans receive these benefits in the early years of the 
baseline, and rice and cotton receive benefits for the entire period. 

For most major field crops, the domestic market is the main component of demand, 
although the export market is projected to increase in importance for several 
commodities. After an initial decline, U.S. wheat exports grow throughout the 
projection period as global consumption and trade rise. However, continued 
competition, particularly from the European Union, holds the U.S. trade share 
below levels of the late 1990s. Corn exports also grow in response to 
strengthening trade. The corn sector faces strong competition  from Argentina, 
to some extent muting U.S. corn export gains. 
U.S. exports of soybeans and products see greater gains in the initial years of 
the baseline as low market prices slow foreign production somewhat and encourage 
domestic crushing. As prices strengthen, however, foreign production rises 
further, particularly in South America, and increased competition leads to 
smaller gains in U.S. soybean exports. Although benefiting from payments under 
the cotton user marketing certificate program (Step 2), cotton exports decline 
through most of the projection period in the face of strong foreign competition.

Domestic demand for many crops is projected to grow faster than population. 
Strong projected gains in domestic use of corn for ethanol reflect bans on MTBE 
in many states. Increases in domestic soybean crushing reflect growth in poultry 
production and demand for soybean meal. Growth in domestic use of rice reflects 
a greater emphasis on dietary concerns and an increasing share of the U.S. 
population of Asian and Latin American descent. In contrast, only moderate gains 
are projected for domestic food use of wheat, generally consistent with 
population growth. Domestic mill use of cotton falls, due in part to full 
phaseout in 2005 of textile and apparel import restrictions under the Multifibre 
Arrangement. 

With demand strengthening, planted acreage for the eight major U.S. field crops 
(corn, sorghum, barley, oats, wheat, rice, upland cotton, and soybeans) rises to 
about 257 million acres by 2011, somewhat less than the high of 260.5 million 
acres attained in 1996. Planting flexibility in farm programs facilitates 
acreage movements among crops by allowing producers to respond to market 
returns, with marketing loan benefits also important in low price years. 
Marketing loan benefits influence the aggregate level of plantings as well as 
the cropping mix in the early years of the baseline when prices for some crops 
are relatively low. Projected acreage gains in the longer term reflect land 
drawn into production based on strengthening market incentives as world demand 
grows. 

A tightening balance between supply and demand results in declining stocks-to-
use ratios for most field crops, with nominal prices rising. 

Livestock 
Highlights

Trends toward larger and more commercialized livestock and dairy systems 
continue throughout the baseline. Decreases in real prices of meats combined 
with increases in real disposable income allow U.S. consumers to purchase more 
total meat with a smaller proportion of disposable income. Relatively lower 
priced poultry gains a larger proportion of both total meat consumption and 
total meat expenditures. Per capita consumption of eggs rises moderately as 
processed egg products become an increasing part of the egg market. Global meat 
trade and U.S. meat exports are projected to grow only moderately in the near 
term, partly a result of the recent slowdown in world economic growth. Exports 
for all meats benefit from a strengthening of global economic growth after 2002.

Drought and poor forage conditions over the past several years have extended the 
liquidation phase of the current cattle cycle and, along with the length of 
biological lags, prevent beef-cow herd expansion before 2004-05. Beef production 
continues to shift toward a larger proportion of higher quality fed beef, with 
almost all steers and heifers being fed in feedlots. U.S. beef production also 
continues to move toward a higher graded product directed toward the export and 
domestic hotel-restaurant markets. The U.S. remains the primary source of high-
quality, fed beef for export, largely to Pacific Rim nations. 

Pork production expands moderately through the baseline. The pork sector 
continues to evolve into a more vertically coordinated industry, with larger, 
more efficient producers marketing a greater percentage of the hogs. These 
structural changes lower production costs, improve pork quality and product 
consistency, and facilitate timely production of pork products with 
characteristics desired by domestic and foreign consumers. The Canadian and U.S. 
pork sectors will become more integrated into a combined North American hog 
industry. The U.S. is an important net pork exporter, with long-term growth 
markets for U.S. pork exports focused on Pacific Rim nations and Mexico. Canada 
will increasingly compete for trade in these markets.

Broiler production grows steadily throughout the baseline, but gains slow to 
only slightly more than population increases by the end of the projection period 
because of the maturity of the sector. Continued technological improvements are 
expected to occur in the broiler and turkey industries, although efficiency 
gains are likely to be smaller than the rapid advances of the past 25 years. 
Processed products and fast-food markets are key sources of domestic growth for 
the poultry sector. The focus in global poultry markets is on low-value 
products, with the strongest import demand growth expected in Asia, Mexico, and 
Russia. Growing trade competition, notably from Brazil, holds U.S. poultry 
exports to moderate gains. 

Milk production grows despite slowly declining cow numbers, as strengthening 
milk-feed price ratios, improved management, and dairy productivity gains push 
milk output per cow higher. 

Ag Sector Relies Increasingly 
On Market Earnings

Over the last several years, net farm income has remained near the average of 
the 1990s mostly because of large marketing loan benefits and additional funds 
provided by emergency and disaster assistance legislation. With the baseline 
assuming no further ad hoc government assistance and with production flexibility 
contract payments scheduled to decline, farm income is initially lower as gains 
in commodity prices and cash receipts do not match the assumed reduction in 
government payments or offset the projected increases in production expenses. 

The longer run outlook for the sector improves as domestic agricultural demand 
and exports strengthen and prices rise, leading to gains in farm income and 
greater stability in aggregate financial conditions. After holding relatively 
flat in 2002 through 2005, net farm income gradually moves upward for the rest 
of the baseline. The agriculture sector relies increasingly on the marketplace 
for income rather than on government payments. 

Debt management will be crucial to the financial condition of the agricultural 
sector over the next several years. Longer run increases in farm incomes and 
relatively low interest rates support asset accumulation and debt management, 
leading to improvement in the financial condition of the farm sector. 

Ag Trade 
Surplus Grows

The value of U.S. agricultural exports rises to $77 billion by fiscal year 2011, 
up from about $53 billion in 2001. Both bulk and high-value product exports are 
expected to show strong growth, with high-value products accounting for about 
two-thirds of the total. The agricultural sector continues to have a trade 
surplus, which rises through the projections, but still remains below the record 
surplus of 1996. 

Paul Westcott (202) 694-5335
westcott@ers.usda.gov

AGRICULTURAL ECONOMY BOX

What is the Baseline?

The USDA baseline provides longrun projections for the agricultural sector 
through 2011. Projections cover agricultural commodities, agricultural trade, 
and aggregate indicators of the agricultural sector, such as farm income and 
food prices. The projections are based on specific assumptions regarding 
macroeconomic conditions, policy, weather, and international developments. The 
baseline assumes that there are no shocks due to abnormal weather or other 
factors affecting global supply and demand, and that provisions of the 1996 Farm 
Act continue throughout the projection period. 

The projections presented are one representative scenario for the agricultural 
sector for the next decade. As such, the baseline provides a point of departure 
for discussion of alternative farm-sector outcomes that could result under 
different assumptions. The projections in the USDA baseline report were prepared 
during September through November 2001, and reflect a composite of model results 
and judgment-based analysis.

USDA's complete 2002 baseline projections are available at:
http://www.ers.usda.gov/briefing/baseline/


BRIEFS

Imports Increase Their Share of U.S. Food Consumption

 In the second half of the 1990s, Americans increased the proportion of imported 
foods they consumed. Imports as a share of food consumption climbed to an 
average 9 percent annually in 1996-2000, up from 7.6 percent in the two decades 
before 1996. The rise is attributed partly to greater demand for high-value 
agricultural products that other countries offer, and partly to the higher 
exchange rate of the U.S. dollar, which increases the purchasing power of the 
dollar. By 2000, the inflation-adjusted value of the dollar, compared with the 
currencies of countries who import U.S. foods, was 21 percent higher than in 
1995.

The import share of food consumption--the ratio of imported quantity to the 
total quantity of food consumed--is influenced by long- and short-term factors 
affecting the supply of, and demand for, imported food relative to domestic 
food. Likewise, supply and demand conditions in the domestic food market have a 
bearing on import share. If food import quantities were unchanged, import share 
rises if consumption of domestic food declines. If domestic food supply drops 
relative to foreign supply, import share would be expected to rise, assuming 
total demand was unchanged. U.S. demand for imported food is influenced by 
relative prices of imported versus domestic food, taste preferences, and 
domestic income growth. As demand changes, supply will shift accordingly. Thus, 
feedback effects from demand to supply and from supply to demand affect the 
longrun pattern of U.S. food import share.

Several factors have caused the import share of certain foods consumed in the 
U.S. to increase over the past 25 years. The continuous rise in import shares of 
fruits and vegetables is related to improved transport and storage technology, 
as well as consumers' desires to raise the nutrient content of their diets. 
Also, for certain commodities such as fish and shellfish, domestic production 
may be unable to keep up with consumer demand. In addition, the seasonal 
production of perishable domestic fruits and vegetables invites more imports 
during the off-season. 

Changes in demographics, economic well-being, and liberalization of 
international trade policy are also reflected in the marketplace. The increasing 
ethnic diversity of the U.S. population correspondingly demands a greater 
variety of foods and food sources. Rising consumer income fuels the importation 
of high-value products, including fresh, exotic, and specialty foods, and 
certain processed foods. And more open trade agreements induce lower cost 
foreign producers to supply the large U.S. market.

Regional trade agreements can complicate accounting for trade shares. For 
example, products are exported from the U.S., processed into higher valued 
products, and may be imported back into the U.S. In the absence of trade 
restrictions or tariffs, the relative prices of products determines the trade 
flows.

Short-term changes in import share generally result from temporary developments 
such as exchange-rate movements, food safety concerns, and weather conditions. 
At times, U.S. farmers find it more profitable to produce for export markets, 
which reduces supply to the domestic market. A higher dollar exchange rate 
encourages import demand as U.S. purchasing power increases. If consumer income 
rises at the same time, the impact on import share is magnified. While exchange 
rates do not permanently affect import share, changes in per capita income 
growth do--and markedly affect the import share of higher value food items such 
as sturgeon caviar that are not available from domestic sources. 

A Recent Rise in 
Aggregate Import Shares 

USDA's Economic Research Service calculated the import shares of major food 
groups for 1976 to 2000. Per capita U.S. consumption shares of each food group 
were used as weights in estimating the weighted average of import shares for 
crops, animal products, and total food consumption.

A number of adjustments were made to more closely estimate U.S. food 
consumption. With respect to grains, the amount used for feed, seed, alcohol, 
fuel, and industrial production was excluded. Correction for waste and spoilage 
was likewise made. Still, because of waste and spoilage in the food marketing 
system and in the home, food consumption estimates tend to overstate actual 
consumption. In addition, when a portion of imported commodities is exported, 
the amount of imports can exceed actual domestic consumption, which can raise 
the import share above 100 percent. This was the case for olive oil in 1995 and 
canola oil in 1980.

Following a relatively flat range of 7.5-7.7 percent from 1976 to 1995, the 
aggregate import share of U.S. food consumption jumped to 8.6 percent in 1996, 
then to 9.3 percent in 1999. Although individual food groups exhibit varying 
long-term import share patterns, the respective average shares for animal 
products and crops follow generally flat trends before a sharp incline--in 1996 
for crops and in 1998 for animal products. By 2000, the aggregate import share 
of animal products was 4.6 percent, up from 3.3 percent in 1995. For crops, the 
import share climbed to 12.3 percent in 2000 from 10.5 percent in 1995. 

These jumps in import share coincided with both the continued appreciation of 
the U.S. dollar and strong U.S. economic growth. Separating the relative effects 
of these two macroeconomic events is outside the scope of this analysis, 
although the price effect of the exchange rate by food group can be measured.

The purchasing power of the dollar grew 21 percent from 1995 to 2000 with 
respect to all countries supplying U.S. food imports. With respect to red meats, 
the dollar rose 22 percent against source countries' currencies. This explains 
part of the rise in import share of red meats to 8.9 percent in 2000 from 6.4 
percent in 1996. 

In contrast, the dollar appreciated by only 3 percent against the currencies of 
U.S. sources of vegetables between 1995 and 2000, due largely to the 
appreciation of the Mexican peso against the dollar in price-adjusted terms. 
That the import share of U.S. vegetable consumption rose to 9 percent in 2000 
from 7 percent in 1995 is thus largely due to U.S. income and such long-term 
effects as improved transport and storage technology, and consumers' desire to 
raise nutrient content in their diets. The 33-percent boost in import share of 
fruits and nuts on the other hand--from 14.2 percent in 1995 to 19 percent in 
2000--is partly the result of the dollar's 18-percent gain with respect to the 
currencies of fruit and nut source countries. The U.S. income growth of 22 
percent also helped boost fruit and nut imports.

The average import share of crops in 1997 and 1998 was more than 3 times that of 
animal products--12.6 percent compared with 3.5 and 4 percent. Crop share in 
these years was also higher than its 10.6-percent average in the previous 
decade. Similarly, the share of crops in U.S. per capita food consumption has 
grown steadily to 56 percent in the late 1990s from 53 percent in 1976-85, while 
the share of animal products slipped to 44 percent in 1997-2000 from 47 percent 
in 1976-85. 

These long-term trends indicate the increased importance of crop foods in 
American diets, and reflect the decline in per capita consumption of red meat 
and dairy products. Nevertheless, due largely to the strong dollar, import 
shares of both crops and animal products have increased in the late 1990s. 

If trends in the past few years continue--that is, if more red meat, fish and 
shellfish, fruits, nuts, and vegetable oils are imported--the future import 
share of U.S. food consumption will rise. Driving these trends are increased 
preference for high-value imports, the strength of the dollar, and renewed 
growth of U.S. per capita income. 

Alberto Jerardo (202) 694-5266
ajerardo@ers.usda.gov

For more information on global food trade issues see:

Food Review: Global Food Trade, No. 24-3, December 2001 online at 
www.ers.usda.gov/publications/
FoodReview/septdec01/FRv24i3c.pdf


COMMODITY SPOTLIGHT

U.S. Cotton & the Appreciation of the Dollar

Exchange rates can have an enormous impact on a country's economy, as the Asian 
financial crisis and recent events in Argentina have demonstrated. The dollar's 
strength has undoubtedly exacerbated the difficulties facing the U.S. textile 
industry during the recent slowdown in U.S. and world economic growth, and has 
been a factor in lowering cotton prices. Exchange rates are difficult to 
forecast, but understanding the changes to date might provide some guidelines 
for future expectations.

Since it began adjusting freely in 1971, the U.S. dollar has strengthened more 
with respect to the currencies of developing countries than developed countries, 
although this long-run pattern reversed in the late 1990s. Since the 1980s, a 
large number of developing countries reoriented their economies to encourage 
exports and foreign investment. Previously, overvalued exchange rates had helped 
many countries indirectly subsidize selected industries, through government 
rationing of undervalued foreign exchange. As it became apparent that exposure 
to foreign capital and competition led to higher sustained rates of economic 
growth, many countries terminated these "import-substitution" polices and 
dropped their overreaching currency pegs. In 1997, the Asian financial crisis 
forced still more countries to abandon fixed exchange rates with respect to the 
dollar, and to devalue. In contrast, for developed countries like Germany and 
Japan, convergence with U.S. technical prowess and productivity led to 
appreciation of their currencies with respect to the dollar from 1971 to 1995.

During the 1990s, the U.S. economy demonstrated renewed productivity growth. At 
the same time, the aftermath of Japan's 1980s "Bubble Economy," and uncertainty 
regarding the European Union's structural rigidities and evolving monetary 
union, took some of the luster out of the outlook for these economies. Since 
1990, the inflation-adjusted U.S. dollar has appreciated 42 percent against the 
currencies of its textile trading partners in developed countries. In contrast, 
the U.S. dollar appreciated only 16 percent against the currencies of developing 
countries. This is the reverse of the pattern observed over the longer period of 
the 1960s through 1995.

The dollar has appreciated 13 percent since 1990 with respect to all textile 
trading partners combined. If Mexico is excluded--in acknowledgement of the 
integration of the U.S. and Mexican textile industries driven by the North 
American Free Trade Agreement (NAFTA)--the dollar's appreciation has been 
greater, 18 percent.

U.S. Cotton & Textiles/Apparel 
Respond Differently

For U.S. cotton, exchange rates have shifted even more unfavorably than they 
have for textiles, but U.S. cotton output has been relatively unchanged while 
U.S. textile output has fallen. Weighted by foreign cotton production, the 
dollar has appreciated 40 percent since 1990, even though China, the largest 
foreign cotton producer, pegs its currency to the dollar. China is one of a 
handful of large economies that maintain a de facto fixed exchange rate against 
the dollar, and the dollar has only appreciated 16 percent against the yuan 
since 1990. The average depreciation for other cotton producers was 53 percent. 
Uzbekistan--the largest foreign exporter--also manages its currency, but data 
from Uzbekistan and other Central Asian exporters are poor, and these countries 
were excluded from the calculation of the production-weighted index (altogether, 
10 percent of world production was excluded). Also, Uzbekistan did not have its 
own currency before 1994, making longrun comparisons difficult. Uzbekistan's 
exchange rate has been perceived to be overvalued since 1996, and the government 
has recently been devaluing.

According to numerous economic studies, changes in the dollar's exchange rate 
and changes in dollar-denominated commodity prices largely parallel each other. 
Generally speaking, when a country's currency appreciates, then either its share 
of world trade and production will decline or its prices must drop in terms of 
its own currency. Unlike textiles, cotton production in the U.S. accounts for 
about the same proportion of world production as it did in 1995, and slightly 
more than in 1990, and its share of world trade has surged. However, the dollar-
denominated world price of cotton fell an inflation-adjusted 56 percent between 
marketing year 1990 and February 2002.

The U.S. textile industry's cotton use in 2001/02 is forecast 35 percent lower 
than in 1994/95. Some U.S. spinning mills are running at below-average capacity, 
but many others have been shut down, dismantled, and exported to Asian textile 
producers. U.S. spinning mills have been indirectly affected by foreign 
competition as the apparel industries they supply in North America have reduced 
output or closed, in part due to the strength of the dollar. The U.S. trade 
deficit in cotton textiles and apparel has about doubled, increasing from one-
third of U.S. consumer purchases in 1994/95 to more than 60 percent in 2001/02. 
During this time, apparel prices have been relatively unchanged, falling only 3-
4 percent, in marked contrast to the cotton industry's falling prices and 
relatively steady production.

The different responses for textiles and cotton reflect several factors. 
Generally, prices are much more flexible for undifferentiated commodities like 
cotton and corn than for more differentiated products like clothing and cars. 
Another difference is reduced import protection for the U.S. textile industry. 
For decades U.S. producers have been protected from competition by import quotas 
under the Multifibre Arrangement (MFA). But since 1995, these quotas have been 
progressively relaxed in accordance with U.S. obligations under the World Trade 
Organization. Estimates from the International Textile and Clothing Bureau (an 
intergovernmental organization of developing country textile exporters) indicate 
that the U.S. expanded its MFA quotas by more than 30 percent between 1995 and 
2001. Also, NAFTA and the extension of similar privileges to Caribbean Basin 
textile exporters have effectively reduced U.S. import protection for textiles 
and apparel. Finally, U.S. cotton producers benefit from the marketing loan 
program, which helps producers maintain revenues while permitting large 
adjustments in market prices.

Exchange Rate 
Outlook Unclear

Exchange rates are difficult to predict. Economists have been hard-pressed to 
find any model that forecasts shortrun exchange rate movements any better than 
assuming no future change. In the long run, currencies adjust to equilibrate 
inflation-adjusted prices of tradable goods in the world's economies. However, 
the studies that demonstrate this adjustment have used data spanning decades, so 
it is far from clear which is closer to the equilibrium level:  2001's strong 
dollar or its lower point in 1995, before appreciation. Exchange rates are 
volatile, and the inflation-adjusted U.S. exchange rate has more than once 
changed by at least 40 percent in the space of a few years. On the other hand, 
it also can take several years for currencies to correct divergences from 
equilibrium, with half of the divergence typically persisting after 3-5 years.

Thus, even if the recent appreciation of the U.S. dollar is not a permanent 
phenomenon, there is no guarantee that depreciation can be expected in the 
immediate future. During the last half of the 1990s, the U.S. dollar appreciated 
versus other developed countries as equity and bond investment flowed into the 
U.S. With actual and prospective budget surpluses, U.S. fiscal policy during 
this period was quite different than during previous years. U.S. growth versus 
the rest of the world was the fastest since 1985, which not coincidentally was 
the previous period of dollar appreciation. Private forecasters like DRI-WEFA or 
Oxford Economics are not forecasting such relative U.S. economic strength over 
the next few years, although the recent poor economic news from Japan and 
resumed deterioration of the yen suggests the U.S. dollar will not quickly 
depreciate against Japanese yen. 

The euro could appreciate as it completes its transition period, assuming the 
European Central Bank can establish its credentials. Alternatively, the large 
investments that occurred in the U.S. during the 1990s may have raised 
productivity. Faster productivity growth in the U.S. than the rest of the 
developed world would sustain the value of the dollar, just as relatively slower 
U.S. growth helped drive the dollar's depreciation during 1971-95.

Regarding developing countries, the danger remains that countries attempting to 
fix their exchange rates or continue import-substitution policies may eventually 
devalue their currencies. To varying degrees, the largest foreign cotton 
producers--China, India, and Pakistan--attempt to control their exchange rates. 
India and Pakistan are likely to face significant fiscal deficits and 
devaluation in the future, although the lack of fixed exchange rate pegs argues 
for gradual changes. China's fixed peg carries both the prospect of stability 
for the foreseeable future and the potential for the compression of future 
changes into a shorter time frame. 

Uzbekistan and the rest of Central Asia remain even less predictable, although 
for the foreseeable future their exchange rate policies will be less relevant to 
the world cotton industry than the rest of their economic policies. (At the end 
of January 2002, Uzbekistan announced a program monitored by the International 
Monetary Fund to significantly close the gap between its official and black 
market exchange rates and to increase the transmission of world prices to its 
cotton producers. See ERS Cotton and Wool Outlook, CWS-0202, March 2002 for 
details.)

For the rest of the developing world, it remains to be seen if countries can 
maintain flexible exchange rates as they make the long-term effort to establish 
credible monetary and fiscal policies, or whether the shift towards floating 
exchange rates and opening financial markets was a cyclical phase. Regardless, 
exchange rates will remain an important influence for the U.S. cotton and 
textile industries, as they are for all tradable goods and services. 

Stephen MacDonald, (202) 694-5305, stephenm@ers.usda.gov

COMMODITY SPOTLIGHT BOX

What is a Weighted Exchange Rate?

An exchange rate is the price of one currency in terms of another and, since the 
collapse of the Bretton Woods system in 1971, the price of the U.S. dollar has 
floated freely. There are as many U.S. dollar exchange rates as there are other 
currencies; and even countries fixing the nominal price of their currencies in 
U.S. dollars will nonetheless probably have fluctuating inflation-adjusted 
exchange rates. A currency is a financial asset, and prices of financial assets 
are more volatile than prices of goods. Thus, the costs and returns of exchange 
between two countries varies with the inflation-adjusted exchange rate between 
them. However, even countries that do not trade with one another or even compete 
in common markets can indirectly influence one another through trading partners.

A weighted average is one way to summarize the aggregate impact on one country 
of global foreign exchange markets and policies. Since the exchange rate is only 
directly relevant to transactions across international borders, economywide 
measures of aggregate exchange rates are typically weighted by the value of 
merchandise trade. The International Monetary Fund's (IMF) trade weights take 
into account third market competition and competition between domestic imports 
and home production. However, as the IMF points out, "no single available 
measure can claimstatus [as a].uniformly superior indicator of 
competitiveness." The IMF's inflation-adjusted U.S. exchange rate index 
appreciated 35 percent during 1995-2001.

Much simpler calculations were used to derive the weights used here. For the 
textile trade-weighted index, the inflation-adjusted U.S. exchange rate with 
each country was weighted by that country's share of total U.S. textile and 
apparel imports and exports during 1995-99. For the cotton index, weights equal 
each country's share of foreign cotton production during 1995-2000. Production 
was chosen rather than trade since much of the output of the largest foreign 
cotton producers is consumed domestically, and then exported as textile 
products. In the long run, since cotton is almost exclusively a cash crop and 
much of apparent domestic consumption is eventually exported, production seemed 
a more suitable weight.

Since 1995, the cotton production-weighted U.S. exchange rate has appreciated by 
28 percent, while the trade-weighted rate appreciated 43 percent. Virtually the 
same pattern is observed in rice production- and trade-weighted indices. For 
wheat, the difference in appreciation is more pronounced:  22 percent with 
production weights versus 40 percent for trade weights. On the other hand, for 
beef, both production and trade weights lead to indices with about a 42-percent 
appreciation. Since a substantial portion of grain output in countries like 
China is never even traded on domestic markets--let alone international markets-
-for grain, a trade-weighted index is much more indicative of the impact of 
exchange rates on the U.S. than a production-based index.


COMMODITY SPOTLIGHT

Imports & Lackluster Demand Pressure Catfish Prices

Throughout the 1990s, U.S. catfish production was a domestically focused 
industry, with only small amounts of imports and exports. In the last 2 years, 
however, catfish imports have increased dramatically. This, combined with 
relatively flat per capita seafood consumption and increased inventories of 
catfish products, has put downward pressure on domestic catfish prices.

Seafood Imports Up, 
Per Capita Consumption Flat

Imports play a major role in satisfying overall U.S. seafood demand. Imported 
seafood is made up of a wide variety of fish and shellfish products, many of 
which are farm-raised. Shrimp, Atlantic salmon, and tilapia are the three most 
valuable farm-raised imports. But catfish from Vietnam, crawfish and mollusks 
from China, and mussels from Canada and New Zealand are also among the farm-
raised products imported.

Both domestic seafood producers and exporters to the U.S. market have faced 
relatively sluggish U.S. consumption over the past decade. Per capita seafood 
consumption varied little from 1990 to 2000, staying between 14.6 and 15.6 
pounds over the entire period (2000 is the last year for which data are 
available). 

This virtual "no growth" situation came about in a decade when favorable income 
and food consumption patterns would suggest rising consumption. Increasing 
incomes tend to translate into greater consumption of seafood, and greater food 
consumption in the away-from-home market could be expected to boost seafood 
consumption. Despite strong increases in disposable income and continued growth 
in the percentage of meals eaten away from home during the decade, per capita 
seafood consumption remained virtually unchanged.

This lackluster picture of growth in per capita consumption does not mean that 
all was static in seafood consumption. In 1990, U.S. per capita seafood 
consumption was 15 pounds, with fresh and frozen products at 9.6 pounds, canned 
products at 5.1 pounds, and cured products at 0.3 pounds. By 2000, the pattern 
had shifted slightly, with fresh and frozen products totaling 10.5 pounds and 
canned products falling to 4.8 pounds. Shrimp consumption accounted for much of 
the growth in fresh and frozen products, and amounts to slightly over 20 percent 
of total seafood consumption. Catfish consumption in 2000--mostly fresh and 
frozen fillets--was about 1.1 pounds per capita, or 8 percent of the total.

Catfish Sales Up Slightly 
in 2002 Despite Low Prices

Catfish production is the dominant and most successful sector of the U.S. 
aquaculture industry, accounting for over 60 percent of U.S. aquaculture 
production. Production is concentrated in the Delta states of Mississippi, 
Alabama, Arkansas, and Louisiana, primarily because of warm climates, abundant 
water, ready access to feeds, and heavy clay soils for pond construction. In 
2001, these four states accounted for 97 percent of total U.S. output, with 
Mississippi's 60-percent share leading the way.

A catfish farm is similar to other livestock feeding operations. Fingerling 
catfish are placed in ponds, provided with special feeds, carefully monitored 
for any signs of disease, and provided with an optimum environment (proper water 
quality and oxygen levels) until they reach market size.

The greatest difference between catfish farming and hog or poultry operations is 
that the production area is outside, so catfish farmers are faced with problems 
unlike those of other livestock industries. While almost all hogs and chickens 
are raised inside specially constructed, climate-controlled buildings, open 
ponds leave catfish operations vulnerable to less-than-ideal growing conditions 
and to predators. Water temperatures can become above or below optimal, for 
example, causing catfish growth rates to decline. Adverse weather conditions can 
also interfere with feeding or harvesting. Predators, mostly birds, threaten 
catfish production, and growers are evaluating a number of nonlethal ways to 
keep birds away from the ponds.

Catfish sales by growers to processors are expected to increase in 2002 and 
reach between 603 million and 615 million pounds, up 1-3 percent from 2001. 
Sales in 2001 were mixed. Grower sales were higher than the previous year in 
April and May and again in December, but about even or lower than the previous 
year during the other months.

Catfish processor sales were also weak, finishing the year at 296 million 
pounds, down less than 1 percent from 2000. The slowdown in processor sales 
caused inventories to accumulate throughout the year, and processors' holdings 
of finished products at the end of January 2002 were 1.8 million pounds above 
the previous year. 

Lack of growth in grower and processor sales has been overshadowed by the 
continuing decline in grower and processor prices. Farm prices fell almost 
continually during 2001. Prices started 2001 at 69 cents a pound and then moved 
downward, finishing at 55 cents a pound in December. Average processor prices 
followed roughly the same path, moving from $2.32 a pound in January 2001 to 
$2.09 a pound in December.

Based on grower inventories reported as of January 1, 2002, grower sales are 
expected to show modest increases during the first half of 2002 compared with 
the previous year. Boosted by relatively strong grower prices going into 2001, 
growers had increased capacities and stocks of fish for breeding. Entering 2002, 
growers still have relatively large holdings of small food-size fish, up 20 
percent from the previous year. These fish will be sold during the first half of 
2002, normally the period of highest demand due to greater fish consumption 
during the Lenten period. Most of the increase in the small food-size fish 
inventory was in the three largest catfish producing states (Mississippi, 
Alabama, and Arkansas).

The large inventory of small food-size fish held by growers is expected to 
prevent any significant upward movement in farm prices during the first half of 
2002. Grower sales in the second half of 2002 will be affected not only by 
supplies but also by the performance of the general economy and red meat and 
poultry supplies. Higher poultry supplies are expected to have a slight downward 
effect on catfish sales. However, in the second half of 2002, catfish sales are 
expected to gain some strength, helped by lower beef and pork supplies. Farm 
prices for catfish are expected to remain depressed during the first half of 
2002, improving in the second half of the year, but still remaining lower than 
the average prices seen over the last 5 years.

Over the last several years, most catfish farmers have benefited from low feed 
prices, and prices for both corn and soybeans are expected to remain relatively 
low again in 2002. The combination of low feed costs and relatively low interest 
costs is expected to help catfish producers weather the prolonged period of low 
grower prices that has affected the industry since the last quarter of 2000. The 
latest forecasts indicate that corn prices are expected to be slightly higher 
than in 2001, but prices for soybean products are expected to be lower than the 
previous year.

Catfish Production 
To Rise Slightly in 2002

At the start of 2002, catfish growers indicated that stocks of broodfish had 
declined, but that stocks of all classes of food-size fish were higher than the 
previous year. The catfish grower survey, which is conducted annually by USDA's 
National Agricultural Statistics Service in January, is the only one that 
includes data from states other than the four largest producing states 
(Mississippi, Alabama, Arkansas, and Louisiana). Inventory levels of food-size 
catfish have increased for the fourth year in a row, with the level of grower-
held inventories in 2002 up considerably from 2001.

At the beginning of 2002, the total number of food-size catfish held by growers 
was estimated at 404 million, up 21 percent from the previous year. There were 
large inventory increases in each of the three food-size fish categories. The 
inventory of large food-size fish was 56 percent above the beginning of 2001. 
Strong increases in inventory numbers for this size class came in Alabama, 
Arkansas, and Mississippi. The number of medium food-size fish held by growers 
totaled almost 106 million, up 20 percent from the previous year. In this size 
class, large increases in holdings by growers in Alabama, Arkansas, and 
Louisiana more than offset a small decline in Mississippi's holdings. 

Small food-size fish normally account for the bulk of growers' food-size 
inventories, in terms of numbers. These fish average around 1 pound and will 
make up the core of fish processed during the first half of 2002. At the 
beginning of 2002, growers estimated there were 287 million small food-size fish 
on their farms. This is up by about 47 million, or 20 percent more small food-
size fish than had been in inventory at the beginning of 2001. Over the last 2 
years, inventory holdings of small food-size fish have risen by about 87 
million. This increase in stocks, plus a number of other factors, has placed 
downward pressure on grower prices.

The number of market-size catfish in ponds at the beginning of the year 
represents the supplies available to processors. With a strong increase in the 
inventory of food-size fish, a slower economy than the previous year, and 
increased competition from imports, catfish prices are expected to remain 
depressed. Prices are not expected to move upward even though the first half of 
the year is normally the strongest demand period.

The numbers of stockers and fingerlings in inventory at the start of the year 
will become the majority of fish available to processors in the second half of 
the year. The January 1, 2002 inventory report indicated a 20-percent decrease 
in the number of stockers held by growers. There were 1.066 billion fingerlings 
in inventory at the start of 2002, 4 percent higher than the previous year. With 
a lower inventory of stockers and small growth in fingerling holdings, the total 
available supply of catfish for processing is expected to decline in the second 
and third quarters.

With current prices so low, many growers are likely to lower stocking rates 
through the middle of 2002. While a smaller supply of catfish would normally be 
forecast to put some upward pressure on prices, the strength of the economy, 
supplies of competing meat and poultry products, and imports will also have a 
strong influence.

Farm Prices Lower 
Over First Half 2002

In 2000, the farm price for catfish averaged 75.1 cents a pound. Prices were 76 
cents a pound in July 2000, then declined in the second half of 2000, ending at 
68 cents a pound in December. Large holdings by growers, high stocks of 
processed catfish, and an influx of imported catfish all combined to keep 
downward pressure on prices at the beginning of 2001. Over the first half of 
2001, farm prices averaged 69 cents a pound, down 12 percent from the previous 
year. As the economy declined in the second half of 2001, farm prices fell even 
lower, ending the year at only 55 cents a pound. This was the lowest price for 
catfish since January 1992.

The expected scenario for 2002 is for continued low prices during the first half 
of 2002, as the large supplies of food-size fish are utilized. Prices after this 
period are expected to show some upward movement as the much-lower supplies in 
the stocker class become the major source of supply for processors.

During 2001, farm sales to processors totaled 597 million pounds, with an 
average price of 64.7 cents per pound. This implies gross sales of $385 million 
for catfish growers, down more than 13 percent from a year earlier. Including 
sales of broodfish, stockers, and fingerlings to other producers and outlets, 
catfish growers reported total sales of $443.4 million in 2001, 12 percent lower 
than in 2000. For 2002, with an expected small increase in sales and relatively 
flat farm prices, grower sales of catfish to processing plants are expected to 
generate between $390 million and $405 million.

Processor Revenues 
Down 6 Percent

During 2001, catfish processors sold 296.4 million pounds of product, down less 
than 1 percent from a year earlier. The average price for all processed catfish 
products in 2001 was $2.26 per pound, down 4 percent from 2000. Much of this 
decrease was due to weak sales in the frozen market, where the average price 
fell by 16 cents a pound. The average price for fresh catfish products also 
declined, but by only 8 cents a pound.

With a decrease in sales volume and a lower average price, gross processor 
revenues from catfish sales declined by $66 million in 2001, 6 percent lower 
than in 2000. With expectation of slightly higher sales levels and relatively 
stable prices, processor revenues are forecast to reach between $675 million and 
$690 million in 2002.

Overall sales of processed catfish fell slightly in 2001, but sales of fresh 
products rose by 3.5 percent. Most of the increase in fresh product sales was 
due to a 9.6-percent increase in fresh fillet sales. Sales of fresh whole fish 
declined 4.2 percent, and sales of fresh other products (nuggets, strips, etc,) 
were about even with the previous year. While volume rose, the average price for 
fresh catfish products fell 3.5 percent. The average prices of whole, fillet, 
and other products all were between 4.6 and 5.7 percent lower than the previous 
year. The average price for fresh products decreased less, because the increase 
in sales of fillet products pushed the average price higher.

Frozen catfish products averaged $2.30 per pound in 2001, down 6.5 percent from 
the previous year and the lowest since 1993. The largest price decline was for 
frozen fillets--the category most affected by the increase in catfish imports, 
which were primarily frozen fillets from Vietnam. Frozen catfish fillet imports 
in 2001, 95 percent of which were from Vietnam, totaled 18.1 million pounds, up 
120 percent from 2000 and 424 percent higher than in 1999. Imported catfish 
accounted for 6 percent of U.S. catfish supply.

The average price for frozen fillets was down 7.8 percent compared with 2000, 
and sales volume fell by 3.8 percent. Sales of frozen fillets are the largest 
segment of catfish sales, accounting for 39 percent of total sales in 2001. 
Sales of frozen other products in 2001 actually rose to a record 48 million 
pounds, but the average price for these products fell by 2.4 percent, the sixth 
year in a row that the annual average price for frozen other catfish products 
has declined.

U.S. catfish growers and processors face some uncertainty in 2002. Economic 
growth in the U.S. is expected to be slow, but strengthening in the second half 
of the year. A slowly growing economy is expected to generate a somewhat higher 
demand for seafood products, especially in the food-service sector. A strong 
dollar relative to most other currencies will encourage further growth in 
seafood imports. Although the markets for catfish products may be somewhat 
depressed, producers whose feeds are primarily grain-based should be able to 
take advantage of expected relatively low grain prices. 

David Harvey (202) 694-5177
Don Blayney (202) 694-5171
djharvey@ers.usda.gov
dblayney@ers.usda.gov

COMMODITY SPOTLIGHT BOX 2

From Hatchery to Market: A Glossary of Catfish Terms

Fingerlings/fry: Fish weighing 0.06 pounds or less (measured as 60 pounds per 
1,000 fish or less).

Small stockers: Fish weighing over 0.06 pounds and up to 0.18 pounds (measured 
as over 60 pounds and up to 180 pounds per 1,000 fish).

Large stockers: Fish weighing over 0.18 pounds and up to 0.75 pounds (measured 
as over 180 pounds and up to 750 pounds per 1,000 fish).

Small food-size fish: Fish weighing over 0.75 pounds and up to 1.5 pounds.

Medium food-size fish: Fish weighing over 1.5 pounds and up to 3 pounds.

Large food-size fish: Fish weighing over 3 pounds.

Broodfish: Fish kept for egg production, including males. Broodfish produce the 
fertilized eggs which go to hatcheries. The most desirable individual size is 3-
10 pounds or 4-6 years of age.

COMMODITY SPOTLIGHT BOX 3

To Be Labeled Catfish, Imports Must Be From the Family Ictaluridae

The appropriation bill for Agriculture, Rural Development, Food and Drug 
Administration, and Related Agencies, which was signed into law on November 28, 
2001, contained a provision related to catfish imports. Section 747 states that 
"none of the funds appropriated or otherwise made available by this Act to the 
Food and Drug Administration shall be used to allow admission of fish or fish 
products labeled wholly or in part as 'catfish' unless the products are 
taxonomically from the family Ictaluridae."  The food industry uses these types 
of definitions to identify specific products. For example, for an item to be 
labeled only "caviar," they must be sturgeon eggs. A similar product from salmon 
can be labeled "salmon caviar."

In 2001, the U.S. imported 17.1 million pounds of frozen catfish fillets from 
Vietnam, valued at $21.5 million, which accounted for 95 percent of all frozen 
catfish fillet imports on a quantity and value basis. The law is expected to 
strongly impact imports from Vietnam, as the catfish species farmed in that 
country is from the family Pangasiidae.


WORLD AGRICULTURE & TRADE

Calculating Damages in WTO Trade Disputes

The establishment of a system to settle disputes among member nations of the 
World Trade Organization (WTO) represents one of the major achievements of the 
Uruguay Round of the General Agreement on Tariffs and Trade (GATT). The WTO 
Dispute Settlement Body (DSB), which provides binding arbitration, marks an 
improvement over the earlier GATT system, which could mediate disputes but not 
enforce their resolution. Under the new system, a dispute proceeds through a set 
of clearly defined and timed stages, which encourages the disputants to settle 
their differences. 

Since its inception in 1995, the WTO dispute settlement system has received over 
200 notifications of trade disputes involving distinct matters. Yet only three 
dispute cases have gone through the final stage of the system, the retaliation 
stage, where the DSB awards damages for a country's failure to comply with its 
obligations under the WTO agreements. Two of these three cases involved 
agricultural trade and received much media attention in the late 1990s--the 
Bananas dispute and the Hormones dispute--and both involved the U.S. and the 
European Union (EU).

Those rare cases that reach the retaliation stage shed light on the WTO's 
rationale in determining the level of damages. The WTO methodology is very 
similar to other dispute resolution systems and is best viewed from a law and 
economics perspective. The principles reflected in the Bananas and Hormones 
damage determinations may carry important lessons for resolution of future trade 
disputes. Indeed, these principles could be immediately relevant, since the WTO 
may have to determine the damage amount in the current dispute between the EU 
and the U.S. over Foreign Sales Corporations. The EU may petition the WTO to 
award damages in this case if an agreement on compensation cannot be reached.

The WTO System: Dispute 
Resolution in Action

If one WTO member claims to suffer damages as a result of another member's 
failure to abide by its WTO obligations, it can notify the DSB of its complaint. 
Although the process encourages members to settle disputes bilaterally, the DSB 
will hold hearings and make rulings to resolve the dispute if bilateral 
settlement is not possible. 

If the DSB finds a member's policies to be noncompliant with the WTO agreements, 
it allows a "reasonable period of time," usually about 15 months, for the member 
to bring its domestic policies into compliance. If the member does not comply, 
the complainant country can "retaliate" by petitioning the DSB for the right to 
suspend its tariff concessions (i.e., raise tariffs) on imports from the non-
compliant member. A DSB arbitration panel ensures that the amount of trade 
damages awarded is equivalent to the level of damage or impairment suffered. 

While much is made of the "retaliation" stage, the WTO dispute settlement system 
is designed so that very few cases ever reach this final stage. Most trade 
disputes are settled bilaterally during initial consultations or after the 
initial panel body ruling. As in civil courts, "pre-trial" settlement is the 
common outcome; relatively few cases or disputes are actually brought to trial. 

In the dispute settlement process, each subsequent stage increases the 
incentives for the two parties to reach a resolution. This results in a "funnel-
shaped" pattern of settlement, which has a strong economic rationale. First, 
each successive stage is costly: it increases expected cost for the defendant 
and reduces expected net compensation for the plaintiff (the complainant). 
Second, each stage forces the disputants to exchange or disclose more 
information about the facts of the case. A formal dispute continues to the next 
stage only if the plaintiff and defendant have substantially different 
subjective expectations of the alleged damage. As more information is disclosed, 
the facts of the case become clearer and expectations typically converge. 

Usually--more than 95 percent of the time in DSB cases--the value of the 
difference in expectations becomes less than the costs of moving to the next 
formal step, so settlement occurs. The only economically rational basis for the 
disputants to persist to the trial phase is if their perceptions of the facts of 
the case remain divergent. (Of course, economic rationality may be only one of 
several determinants of disputant decisionmaking; for example, political 
considerations may also play a role.)

Calculating the Level 
Of Impairment

While no explicit methodology is mentioned in the WTO agreements for calculating 
the level of impairment, some observations on the rationale can be made from 
reviewing the DSB panel decisions in the Hormones case and, to a lesser extent, 
the Bananas case. 

The DSB considers only gross trade. Only gross trade revenue--the gross value of 
exports affected or impaired by the alleged WTO violation--is calculated. 
Effects from substitute or complement products, other trade concessions, or 
multilateral trade are not considered. For example, in the Hormones case, the 
DSB estimated the gross value of U.S. beef exports to the EU impaired by the EU 
ban on imports of beef produced with growth hormones. However, a portion of the 
export revenue lost to the EU was made up by increased U.S. exports to other 
countries, particularly to Asia. The lost U.S.-EU trade caused an increase in 
the excess supply of beef in the world market. This depressed world prices and 
allowed the U.S. to export additional quantities of beef to other countries. The 
gross value of U.S. beef exports lost to the EU overestimates the actual damage 
to net U.S. export revenue. However, the DSB, in its assessment of the trade 
damage in the Hormones case, did not consider such net effects.

The DSB considers only bilateral trade. The DSB considers only bilateral trade 
damages imposed on the complainant by the defendant: no third country effects 
are considered nor are indirect effects considered. For example, in the Bananas 
case, the U.S. argued that it should be compensated for the loss of 
transportation, packaging, and other forms of revenue that U.S. companies 
suffered from the lost banana exports to the EU. The WTO rejected this claim, 
since the lost exports came from countries in Central America, not the U.S. The 
DSB argued that only gross trade directly between the exporting and importing 
country can be considered.

The DSB panel focuses on determining the "facts" of the case. In hearings, the 
DSB is interested mainly in receiving a convincing story of exactly how the 
violation in question affected trade. In the Hormones case, for example, the DSB 
panel cross-examined each country's account of what happened to trade as a 
result of the EU hormone ban and generally did not rely on results from complex 
economic methodologies or models to make its determination of damages. Such 
results can be useful only when accompanied by supporting facts and a convincing 
economic analysis. 

The DSB final damage award appears to approximate the average of the two 
parties' estimates. In the Hormones dispute, the average of the U.S. and EU 
estimates of the damage to exports of High-Quality Beef (HQB) was US$32.4 
million. The final damage award determined by the DSB was US$32.7 million. The 
average of the two parties' estimates of damage to exports of Edible Beef Offal 
(EBO) was US$85.6 million; the final damage award was $84.1 million. In the 
Bananas case, the final damage award of US$191.4 million was close to half of 
the U.S. base estimate of US$362.4 million.

The Underlying Rationale for 
Determinations: Transparency

These DSB guidelines for determining trade impairment may at first seem 
capricious or even erroneous. The observation that final damage awards are close 
to a simple average of the two parties' estimates could cause one to conclude 
that the DSB is simply "splitting the difference" between estimates. The 
guidelines also seem to ignore some of the economic effects from trade-
distorting measures. In the Hormones dispute, third-country trade effects made 
up for some of the lost U.S. export revenue as a result of the EU hormone ban 
and might have decreased the total damage award if they were included in the 
assessment of damages. 

However, there is a method to the WTO's reasoning. An extensive body of 
literature on dispute resolution systems, combined with knowledge of WTO 
principles, suggests a rationale for the DSB guidelines.

Dispute resolution panels employ methodologies that measure damages not only 
accurately but also simply and transparently. Methods must be relatively easy to 
understand for panel members and countries, as well as easy to explain to 
outsiders. Complex economic simulation models may provide greater accuracy, but 
arbitrators tend to prefer straightforward calculations, even if they are 
somewhat less theoretically satisfying than more complex methods. 

The preference for simple and transparent methods probably explains why the DSB 
excludes third-country or indirect effects not directly related to the dispute 
in question. Each WTO dispute has covered trade only in specific products 
between specific countries. The inclusion of other products or countries can 
cloud the issue and even lead to further debate and controversy, something that 
the DSB and all dispute settlement systems wish to avoid. While the methodology 
used in the Hormones case was not very sophisticated, it was straightforward in 
approximating the amount of damages. 

The Underlying Rationale for 
Determinations: Deterrence

Legal dispute settlement panels are charged with upholding the rule of law. In 
the case of the DSB, the law is the relevant WTO agreement. When calculating 
damages, dispute panels do not merely consider the economic cost caused by the 
violation in question--they also consider whether the damage award will deter 
future violations. 

To compare this with a familiar situation, the fine for illegally parking in a 
space reserved for the disabled is probably much larger than the economic cost 
of the violation. However, if the fine were low, it would not be an adequate 
incentive to deter future violations. Panels that calculate damages must weigh 
the economic costs of individual violations against how such violations will 
affect the incentives of others. 

For the DSB, damage awards that are too low can provide an incentive for 
countries to violate their obligations as WTO members. Low damage awards may 
occur if the DSB considers third-country effects, effects from other products, 
or indirect effects in its assessment of damages. The total economic effects of 
a trade-distorting measure such as a ban, tariff, or tariff-rate quota are 
usually much smaller than the gross effects of such measures on bilateral trade. 
If countries violate WTO agreements because the expected penalty is low, it 
could undermine confidence in the enforcement ability of the DSB. 

At the same time, the DSB--in common with all formal dispute settlement systems-
-encourages parties to settle their disputes bilaterally. Expectation of 
unusually high damage awards might reduce a complainant's incentive to settle. 
Thus, the DSB must strike a balance between awarding damages that are too low or 
too high, to avoid creating the wrong incentives. Recognition that the DSB will 
work to strike this balance creates an incentive for the parties not to 
excessively overestimate or underestimate the amount of damages; if excessive 
differences lead to a failure to settle bilaterally, the parties know that DSB 
scrutiny of the estimates will quickly identify unjustifiable damages and 
determine an award in line with amounts supported by the evidence. As a result, 
parties are likely to provide estimates that strengthen their credibility with 
the panel, leading to convergence, rather than divergence, of damage estimates. 
Thus, the final damage award is likely to approximate an average of the two 
parties' estimates, which may give the appearance that the DSB is simply 
"splitting the difference" when determining damages.

Finally, dispute resolution systems must abide by the principles under which the 
corresponding legal agreements were created. Trade concessions in the WTO 
agreements adhere to the principle of reciprocity under which countries have 
liberalized their markets over the past 53 years. The reciprocity principle 
implies that during rounds of negotiations for tariff reductions, each country 
should make equivalent tariff concessions. Since tariff concessions are 
negotiated as blocks of trade, this should also be the case for the suspension 
of tariff concessions (i.e., trade damages). Therefore, the DSB considers only 
gross trade (i.e., blocks of trade) when assessing trade damages. 

Based on the Hormones and Bananas cases, the DSB settlement system appears to 
function like any other arbitration process: the arbitrators' job is to 
determine the amount of damage, and to make that determination, they want to 
hear a factual account of the case and employ a simple and transparent 
calculation or estimate of direct damages. 

A party in a trade dispute would likely benefit from attending to this line of 
reasoning--by constructing qualitative arguments to support their damage 
calculation and by preparing answers to questions from the DSB panel to support 
those arguments. Complex methodologies or results from forecasting models might 
best be used only if the model assumptions are reasonable and the model results 
support, rather than replace, solid qualitative arguments. 

Jason Bernstein (202) 694-5165
David Skully (202) 694-5236
jasonb@ers.usda.govdskully@ers.usda.gov

WORLD AGRICULTURE & TRADE BOX 1

The General Agreement on Tariffs and Trade (GATT) is a multilateral agreement on 
rules governing the kinds of tariffs and trade policies that parties to the 
agreement can use. The GATT, established in 1947, was to be enforced by the 
International Trade Organization (ITO), but the U.S. and other countries opposed 
the ITO. Thus, from 1947 until the formation of the World Trade Organization 
(WTO) in 1994, the GATT existed as an agreement without an independent 
institution to enforce discipline on its members.

WORLD AGRICULTURE & TRADE BOX 2
GATT vs. WTO Dispute Settlement Systems: The Hormones Dispute

The WTO dispute settlement system has several advantages over the GATT dispute 
settlement system that existed before the Uruguay Round. Under the GATT system, 
a country could simply block the formation of a panel to address a dispute 
against it or veto an adverse ruling from the panel. Moreover, there was no way 
for the GATT to enforce a panel ruling even if it was adopted. 

The WTO avoids these problems by establishing a set of clearly defined stages to 
the dispute process, deadlines for pushing disputes through these stages, and an 
enforcement procedure that allows the WTO to award damages for failure to comply 
with panel rulings. As a result, the WTO succeeded in addressing several high-
profile trade disputes that were stalled under the GATT system, one of the most 
famous of which is the Hormones dispute.

The Hormones dispute centered on opposition by the U.S. and Canada to a 1989 ban 
by the European Union (EU) on imports of beef produced with growth hormones. The 
main claim of the U.S. against the EU hormone ban was that it had no scientific 
justification and was therefore illegal under the GATT agreements. When the U.S. 
attempted to create a GATT panel to address its claim, the EU simply refused 
formation of the panel. The U.S. retaliated by placing restrictions on exports 
of EU agricultural products. The EU then tried to form a panel to address these 
retaliatory measures, which was blocked by the U.S. As a result, the Hormones 
dispute was never fully addressed by the GATT.

In May 1996, the U.S. challenged the EU hormone ban under the WTO dispute 
settlement system. After initial consultations failed, a Dispute Settlement Body 
(DSB) panel was created, eventually ruling in August 1997 that the EU ban 
violated the WTO Agreement on Sanitary and Phytosanitary Measures. The EU 
appealed the panel ruling, which was upheld by a WTO Appellate Body in January 
1998. Since only one appeal is allowed, the DSB gave the EU a period of 15 
months (until May 1999) to comply with the appellate body ruling. 

After the deadline expired, the U.S. sought WTO authorization to impose 
retaliatory tariffs. In July 1999, a DSB arbitration panel calculated the level 
of impairment to U.S. producers caused by the ban to be $116.8 million a year 
and the WTO authorized U.S. retaliatory tariffs in that amount. While the 
Hormones dispute still remains to be settled, the WTO created a reasonable end-
game to the dispute, which had not been accomplished under the GATT dispute 
procedure.


WORLD AGRICULTURE & TRADE

WTO Accession Will Increase China's Agricultural Imports

China is one of the world's largest agricultural economies, and its accession to 
the WTO and further integration into the world economy will lead to a wealthier 
and more stable international food system. Under the terms of accession, China's 
agricultural trade regime will be more open and responsive to global markets. 
Farmers in the U.S. are particularly well positioned to benefit from China's 
accession to the WTO because the farming systems and underlying resource 
endowments in China and the U.S. complement each other, providing opportunities 
for mutually beneficial trade.

WTO accession is the latest initiative in a process of liberalization in China's 
economy that will also benefit U.S. agricultural exports. A modest increase in 
China's imports of important bulk commodities in the next few years should 
result from the new trade regime under the WTO, but most benefits to U.S. 
farmers will occur several years down the road. China's imports of major 
commodities were expected to increase in the coming years due to internal market 
reforms and gradual economic liberalization even before China's formal accession 
to the WTO. Accession must be viewed in the context of China's broader economic 
development and its transition from a planned to a market economy.

China's WTO Agreement 
Revisited

As part of the agreement for WTO accession, China made far-reaching commitments 
to lower tariffs and reform its trading system. Central to China's agricultural 
policy commitments in the WTO agreement is a system of tariff-rate quotas (TRQs) 
for several major agricultural commodities. While many countries now regulate 
agricultural trade through a system of TRQs, China's TRQ regime is unique in 
that it also has provisions designed to break the monopoly power of state-owned 
trading enterprises. In addition to TRQs, China committed to lower tariffs on 
agricultural goods not covered by TRQs. China will also eliminate export 
subsidies, apply sound science for any sanitary and phytosanitary regulations, 
and limit potentially trade-distorting domestic support provided to its 
agricultural producers.

Under China's TRQ regime, a specified quantity of importsi.e., a quotamay 
enter at minimal tariffs, while over-quota imports are charged much higher 
tariffs. The TRQ levels are set for each calendar year. It is important to note 
that these are not "minimum purchase" agreements, and actual imports may fall 
short of the full quota amounts. 

The TRQ system is designed to ensure that market opportunity, not bureaucratic 
decree, will determine the level of imports. To loosen the control of China's 
state trading enterprises (STEs) over agricultural trade, a share of the TRQ for 
each commodity is set aside for private and other nonstate trading enterprises. 
In addition, if an STE has not contracted to import its share of the TRQ by 
August 15 of the year, then the noncontracted portion of the STEs' share may be 
made available to nonstate trading enterprises. 

While TRQ levels and state trading components have been determined only through 
2004 (2005 for edible oils), the levels, tariff schedules, and state trading 
components liberalize over time, and the in-quota tariffs are low. For example, 
the TRQ for corn rises from 5.9 million metric tons (mmt) to 7.2 mmt from 2002 
to 2004, and the tariff for corn imported within the TRQ is only 1 percent. Also 
over this period, the TRQ share allocated to STEs falls from 68 to 60 percent, 
and the tariff for corn imported above the TRQ amount falls from 60 to 40 
percent. While STE share of the TRQ does not fall during this period for wheat 
and rice, the over-quota tariff does decrease. The TRQs for soy, palm, and 
canola oils decline to a flat 9-percent tariff rate by 2005, eliminating the TRQ 
for these commodities. 

China is still working out the details of how the TRQ regime will be 
implemented, and those details will determine just how open China's market will 
be. China agreed that TRQ certificates will be allocated to end users (such as 
millers, crushers, and feed lots), and the certificates will specify whether 
users must import their portion of the TRQ through a state-owned or a nonstate-
owned trading enterprise. 

In February, China announced the application process for acquiring a portion of 
the 2002 TRQ. The wording of the TRQ allocation rules suggests that end users 
that are private enterprises will be allocated the nonstate-owned portion of the 
TRQ, while end users that are STEs will be allocated the state-owned TRQ 
portion. 

There are a variety of unanswered questions and unresolved issues in the TRQ 
allocation process that may affect China's agricultural trade. These include:

*  whether STEs will respond to market signals or continue to trade according to 
politically determined levels of imports and exports;

*  the role of government in reallocation of unused TRQ at the end of the year; 
and 

*  whether imports that are designated as inputs into re-exported products can 
comprise a set portion of the TRQ.

Over time, pressure from domestic users who want access to imported wheat, corn, 
and cotton will likely reduce some initial rigidity and bureaucracy that may 
plague the TRQ system in its infancy. In addition to the TRQ regime, China has 
made substantial commitments to limit trade-distorting policies in agriculture, 
which go beyond the WTO commitments of many of its trading partners. China has 
also agreed to reforms that will liberalize domestic marketing institutions, 
giving foreign producers greater access to inland markets. Tariff rates on many 
important agricultural products not subject to TRQs are significantly below pre-
WTO rates. 

Effects of WTO 
Accession

USDA's Economic Research Service (ERS) estimated the effects of WTO accession on 
China's agricultural imports and international markets. Using the USDA baseline 
model, ERS analysts altered aspects of the model to reflect China's more open 
and transparent trade regime, then compared the results with the February 2002 
USDA baseline. China had not formally joined the WTO when 2002 baseline analysis 
was carried out, so its accession is not assumed in the baseline. The China 
component of the baseline model assumes rates of import protection under the 
rigid state trading system, by incorporating knowledge of 1) the difference 
between global prices and China's domestic prices, and 2) the inelastic price-
response behavior of the STEs.

Under the TRQ regime, China will be less able to keep prices above international 
levels through state control of agricultural trade, so lower import protection 
rates and less rigid import price responses were incorporated into the model, 
with the results presented here as the WTO scenario.

Implementing the TRQ regime and tariff cuts is expected to have an immediate 
effect on China's agricultural imports. Imports of corn and wheat change the 
most under the WTO scenario, but imports of other key commodities also increase. 

In the 2002 baseline projections, China is expected to be a minor net corn 
importer in the 2002-09 period (a minor net exporter for the first few years of 
this period). In the WTO scenario, China's annual net corn imports were an 
average of 4.8 mmt higher than in the baseline, making China a net importer 
throughout the projection period. The 2002 baseline estimates China to be a 
wheat importer over the 2002-09 period, but wheat imports are 2.6 mmt per year 
higher in the WTO scenario, reaching an annual average of 7.3 mmt. While 
increases in corn and wheat imports are significant, China's annual imports of 
these commodities are still below TRQ levels for every year during 2002-09 under 
the WTO scenario, so there is little reason to expect the TRQs to fill in the 
near future.

China also imports more soybeans and soy oil under the WTO scenario--an annual 
average of nearly 0.5 mmt above the baseline for the period 2002-09. The small 
size of the import boost attributable to WTO accession is due mostly to the fact 
that the 2002 baseline already projects China to be a major soybean importer, 
with annual imports averaging over 21 mmt in the years 2002-09. Annual imports 
of soy oil are higher under the WTO scenario--by 0.2 mmt, a 25- percent increase 
from the 2002 baseline level of 0.8 mmt.

The ERS estimates are consistent with the intuition and observations of many 
China analysts. Studies have shown corn and wheat to be protected by China's 
trade regime, and domestic users of these commodities in China have wanted more 
access to imports for the past several years. China's corn exports are also 
expected to stop due to the commitment not to use export subsidies. While 
soybeans have also been protected in the past, China has invested heavily in 
crushing capacity for soybeans and other oilseeds in the last few years, and 
these facilities are positioned to rely on soybean imports. Rice and cotton will 
be less affected by WTO-induced policy changes because recent changes in the 
procurement system have reduced internal prices to levels competitive with world 
prices. 

But the ERS estimates do not take into account other non-WTO-related policy 
changes that may affect China's agricultural imports in the coming years. Recent 
changes concerning genetically modified (GM) crops may curb imports in the next 
few years. On March 20, 2002, China began requiring all GM crops to be labeled 
and accompanied by a safety certificate. In early March, China agreed, 
temporarily, that exporting countries' safety certifications will be honored 
while China carries out its own certification, which may take as long as 270 
days. Future changes in this policy could impede imports of U.S. corn and 
soybeans, both of which contain GM varieties.
 
Producers in the U.S. are expected to gain from China's increased imports of 
wheat, corn, and other agricultural products. China's WTO accession will 
increase international demand and prices for these important commodities that 
U.S. producers export. Due to the increased export demand, farm grain prices 
increase, on average, by 0.5 to 3 percent above baseline levels over the 2002-09 
period, and soybean prices increase an average of 2 percent. Average annual 
value of U.S. exports will increase by $0.9 billion, and the annual value of 
cash receipts will increase by $1 billion over the 2002-09 period. Taking the 
increase in production expenses into account, annual U.S. net farm income rises 
an average of $0.8 billion over the period 2002-09 under the WTO scenario. These 
changes will also lead to marginally higher food retail prices.

The Long 
View

Beyond the immediate effects on import levels based on price differences and new 
trade rules, underlying forces will influence China's trade over a longer time 
horizon. Fundamentally, China's endowment of the basic factors of production, 
(land, labor, and capital) will determine which agricultural products are most 
profitable for China's farmers to specialize in and which to import from other 
producers. In addition, economic development already underway will boost food 
demand and commercialize China's subsistence-oriented farm operations. Finally, 
while China has made significant progress toward transition from a planned to a 
market economy, issues remain in this process that will affect future trade.

China's factor endowments will have the most profound effect on future 
agricultural trade, but these markets are still restructuring to allow farmers 
to choose optimal factor allocation. China has roughly 40 percent of the world's 
farmers but less than 10 percent of arable land, so China's comparative 
advantage clearly lies in labor-intensive agricultural products. Thus, the 
tendency will be for China to import more land-intensive grains and field crops, 
and export labor-intensive fruits, vegetables, and other specialty crops. 

The adjustments needed to change the structure of production to take full 
advantage of trade liberalization are hampered by the slow mobility of factors 
of production. Land is still collectively owned by villages in China and 
villages, in turn, allocate land use rights to farmers. While land rental is 
possible, it is not common, nor is it easy to transfer land to its highest 
valued use. Rural laborers cannot freely move to cities--where most nonfarm jobs 
are found--and formal farm credit institutions have only begun to emerge. 

China's accession to the WTO bodes well for its long-term development prospects. 
As Chinese incomes grow and the population becomes more urbanized, diets will 
diversify and consumers will demand more meat, fish, fruits, vegetables, 
processed foods, and restaurant meals. Demand for feed grains will rise to 
support a growing livestock sector. This process will generate larger import 
demand in China and increased global opportunities for bulk feed grain exports 
to China. In addition, increased import demand for some high-value and processed 
agricultural products will generate opportunities for exporters. 

Further economic development also will cause China's subsistence-oriented farm 
households to become wealthier and more integrated into the nonagricultural 
economy. When nonfarm earnings and farm marketing receipts rise, farm households 
are more likely to purchase food rather than grow it themselves, and instead 
produce commodities that bring the highest returns. This will facilitate 
movement away from staple grains toward higher valued labor-intensive products. 

China has made remarkable progress in moving away from a planned economy, but 
some institutions have yet to reform. It is hard to imagine that a little over 
20 years ago all agricultural production in China was carried out according to 
bureaucratic decree. Today, the government procures only a very small percentage 
of agricultural commodities, and most farmers make their own decisions about 
what to produce. Barriers to transporting goods between regions and provinces 
have fallen significantly, and markets are becoming more integrated. Even grain 
markets--where the state-owned bureaus handled more than 70 percent of all 
marketings for most of the 1990s--are showing clear patterns of market 
integration and price responsiveness. 

While the government has reduced its role in the economy, it has yet to 
establish reliable market information systems, develop transportation and market 
infrastructure, build an agricultural finance system, and modernize its legal 
system to clarify property rights, enforce contracts, and resolve disputes. 
Without the institutional infrastructure to provide these essential services, 
market development will be slowed and farmers will be constrained in their 
ability to take advantage of the opportunities provided by international 
markets. WTO accession, however, will facilitate the development of market-
supporting institutions in China.

China's accession to the WTO is a positive development for China, the 
international agricultural economy, and U.S. producers. Under the WTO, China's 
farmers will be better able to access markets for labor-intensive products for 
which they have a comparative advantage. All residents of China, not just 
farmers, will benefit from the role that WTO accession will play in hastening 
China's overall economic development and its reform of outdated institutions. 
Integrating a large and diverse agricultural producer and consumer, such as 
China, into international markets will serve to alter world food production and 
trade on an unprecedented scale. China's rapidly growing and urbanizing economy 
will increase export opportunities for farmers in the U.S. and other countries.

Estimates of changes in China's agricultural trade due to the new trade regime 
under the WTO suggest China will substantially increase imports of corn and 
wheat under the more liberalized trade regime, and the increased international 
demand for these products will raise farm incomes in the U.S. On average, 
increased access to China's market under the WTO will expand annual U.S. farm 
incomes by $0.8 billion over the period 2002-09.

In the big picture, formal accession to the WTO is a reflection of broader 
changes underway in China that will continue for years to come. WTO accession 
solidifies these changes and sets the stage for further reform as China's 
economy becomes more transparent and guided by the rule of law. For the same 
reasons policymakers in China strove for WTO membership, they also are working 
to liberalize markets and integrate China with the world economy in ways that 
are independent of the WTO. Continued economic development and transition to a 
market economy, along with trade liberalization, will provide greater 
opportunities for agricultural exports to China in the future. 

Bryan Lohmar (202) 694-5226, James Hansen (202) 694-5321, Hsin-Hui Hsu (202) 
694-5224, and Ralph Seeley (202) 694-5332
blohmar@ers.usda.gov
jhansen@ers.usda.gov
hhsu@@ers.usda.gov
rseeley@ers.usda.gov

ERS researchers Fred Gale, Michael Price, Richard Stillman, Randall Schnepf, and 
Francis Tuan contributed to the analysis in this report.

WORLD AGRICULTURE & TRADE BOX 3

The World Has Changed Since 1999 

In the spring of 2000, ERS evaluated the potential trade effects of China's WTO 
accession using USDA's February 2000 baseline as the starting point. That 
analysis indicated that China's entry into the WTO would increase U.S. 
agricultural exports by an average of $2 billion per year during the period 
2000-09. Of this $2 billion figure, $1.5 billion was estimated using the global 
baseline model, as in the present analysis. But the 2000 analysis exceeded the 
annual average $0.9-billion estimate in the present analysis for the 2002-09 
period.

Circumstances surrounding USDA's view of China's domestic agricultural policy 
and participation in international commodity markets have changed significantly 
in the 2 years since the earlier analysis. For example, USDA's 2000 baseline 
projections were heavily influenced by a pessimism regarding China's commodity 
trade participation related to the effects of China's "Grain Bag" policy of 
1996-99. The "Grain Bag" policy had generated substantial domestic supplies and 
subsequent strong pressure to limit imports. However, over the past 2 years this 
pessimism has been displaced by the central government's rejection of the "Grain 
Bag" policy, as well as a commitment to market reform and trade liberalization 
in advance of WTO accession. This policy change was initiated in 1999, and was 
first incorporated into the USDA longrun projections for the 2001 baseline 
report, which raised China's projected imports of many commodities. With higher 
imports already projected in the current baseline even without the assumption of 
WTO accession, the boost from accession is not as large as earlier estimated.

Another important policy change in the last 2 years concerns the central 
government's policy vis--vis China's domestic oilseed crush sector. In mid-
2000, China reversed previous policy and made a strong commitment to support the 
domestic crushing sector through strict border control of vegetable oil imports 
(including a value-added tax, high tariffs, quotas, and licensing). At the same 
time, restrictions on soybean imports were greatly eased. These policy changes 
had the effect of cutting off vegetable oil and protein meal imports, while 
accelerating importation of whole oilseeds for the domestic crushing industry. 
It is likely that China's oilseed policy will come under increasing pressure 
with accession to the WTO.


RESOURCES & ENVIRONMENT

Proposed Requirements for Manure Nutrient Management: Potential Sector Impacts

Animal feeding operations (AFOs) produce most of the nation's livestock and 
poultry. Manure from these facilities is rich in nitrogen and phosphorus, and 
these nutrients are important for crop production. However, when their 
application to land exceeds crop needs, and when manure storage spills or leaks 
occur, the runoff can enter waterways and impair water quality. In December 
2000, the U.S. Environmental Protection Agency (EPA) proposed bringing 
additional AFOs under Clean Water Act regulation and requiring improvements in 
manure management, including implementation of nutrient management plans by all 
regulated AFOs. A final decision is expected by December 2002 on the proposed 
rules, which could affect not only additional AFOs but also regional livestock 
and poultry production, prices, and net returns.

Increasing concentrations of AFOs geographically, as well as the general 
increase in the size of these facilities, are generating concerns over manure 
and water quality. Geographically concentrated production of livestock and 
poultry can generate manure nutrients in excess of what can be used 
agronomically within the watershed while maintaining water quality. In 1997, 60-
70 percent of manure nutrients were produced on operations that had insufficient 
land to absorb the nutrients at application rates not exceeding crop needs. Also 
over the past several years, major lagoon spills or leaks in Illinois, North 
Carolina, Iowa, Kentucky, Minnesota, Missouri, Montana, South Dakota, Utah, 
Virginia, Washington, and Wisconsin led to high-profile media coverage that 
raised public demand for greater regulation and preventive measures. 

What EPA Has 
Proposed

EPA has proposed regulatory changes affecting all "Concentrated Animal Feeding 
Operations" (CAFOs) in response to growing public concern about water quality 
impairments from nutrients, pathogens, and pharmaceutically active compounds 
associated with manure and wastewater from AFOs. EPA currently defines a CAFO as 
an operation with at least 1,000 animal units (AUs). One proposed change would 
define CAFOs based on operation size alone, and at the extreme could include all 
AFOs with 300 AUs or more. This would bring under regulation the largest 20 
percent of the AFOs nationwide and approximately 70 percent of all AUs and 
manure production. 

A second proposed change would require each CAFO to develop and implement a 
nutrient management plan (NMP) that restricts land application of livestock and 
poultry manure to rates that do not exceed the nutrient needs of whatever crop, 
including pasture, is on that land. CAFOs would apply manure to their own land 
to the extent permitted by the NMP, then arrange with other willing land 
operators to accept the balance of the manure as an alternative or supplement to 
commercial fertilizer. These producers would have to limit nutrient application 
to amounts not exceeding crop needs. When the manure is applied to another 
producer's land, the CAFO may or may not incur the additional cost of 
transporting and properly applying the manure, depending upon the specific 
arrangement. The proposed regulatory changes will be finalized by December 2002, 
with plans to publish them in the Federal Register by January 2003.

The principal costs a CAFO would incur to meet the NMP requirements are:

*  fixed cost of developing and managing the NMP, estimated at approximately 
$1,300 per year per operation, regardless of size;

*  cost of land application of manure, estimated to average around $2 per acre; 
and 

*  manure transport costs averaging between $0.007 and $0.14 per ton of manure, 
depending upon the distance to the land available for application.

These costs represent annual average costs across the nation and are taken from 
a recent EPA study on the costs of the proposed CAFO rule. CAFOs will likely 
consider these NMP costs along with other costs of manure storage and handling 
when deciding on the number and kind of animals to feed or even whether to stay 
in business. The NMP costs may be high enough to make unprofitable some 
marginally viable CAFOs. The aggregate decisions of CAFOs could have national 
and regional impacts on livestock, poultry, and crop production; on net returns 
to livestock and poultry producers; on nutrients generated; and on prices for 
leading food commodities from the livestock and poultry sectors. 

Two key factors affect manure transport costs and land application on a regional 
basis. The first is the amount of manure produced (based on the total AUs in 
CAFOs) relative to the overall amount of cropland within a region. The second 
factor deals with the amount of cropland that crop producers make available for 
application of manure under the conditions that CAFOs must meet (pasture and 
grazing lands are not considered in this analysis because of their low capacity 
to assimilate manure nutrients above those from current animal grazing.)  

Willingness to make cropland available for manure application is an unknown but 
potentially major hurdle to managing manure nutrients. In the late 1990s, U.S. 
farmers applied manure to 9-17 percent of land in corn and soybeans as a 
supplement or substitute for commercial fertilizer. But will producers accept 
manure for 40 percent or more of an area's crop nutrient needs, or even 20 to 30 
percent? Some crop producers may be reluctant to accept manure given the 
inherent variability in its nutrient content and the possibility that the manure 
nutrient content and/or the ratio of those nutrients will not meet the needs of 
the crops. Also, some producers may be concerned about the potential presence of 
pathogens or other undesirable elements. In addition, manure is more difficult 
to handle than commercial fertilizer. In any event, the greater the willingness 
of crop producers to accept manure the greater the availability of land for 
spreading manure and the lower the average cost of manure dispersal. 

How Substantial Are 
National/Regional Impacts? 

Using a 10-region agricultural model, analysts at USDA's Economic Research 
Service estimated the national/regional impacts of the proposed regulations. The 
model predicts how producers would alter livestock and poultry production over 
time in response to the costs of transporting manure under potential levels of 
manure acceptance by crop producers. The model examines how the changes in 
production affect national/regional supply and demand for crops and livestock, 
commodity prices, farm income, and nutrient generation. Predictions from the 
analysis assume that NMP costs and land availability constraints affect all AFOs 
that feed 300 or more animal units--the smallest operation size being considered 
under the regulation proposal. 

The analysis estimated and compared the results of three alternative manure 
acceptance scenarios with the results of a base-year situation that assumed no 
federal or state restrictions on land application of manure.

*  High-acceptance scenario. Assumes that crop producers in each region will 
accept manure to satisfy up to 40 percent of the region's crop nutrient needs. 
(Agricultural sector impacts were found to be mostly negligible above 40 
percent.)

*  Medium-acceptance scenario. Assumes that crop producers in each region will 
accept manure to satisfy only up to 30 percent of the region's crop nutrient 
needs.

*  Low-acceptance scenario. Assumes crop producers in each region will accept 
manure to satisfy only up to 20 percent of the region's crop nutrient needs. 

The model allows the impacts of the NMP costs and manure acceptance constraints 
to work themselves out over time (i.e., over the next eight years). Only 
aggregate changes are estimated; the impacts of the proposed CAFO rules on 
individual operations cannot be addressed in this type of analysis. The analysis 
also assumes a stable amount of total cropland over time, a stable level of 
willingness to accept land application of manure, and a stable set of 
technologies for managing and using manure.

Production impacts. In general, the results suggest that the implementation of 
nutrient management plans on operations feeding 300 or more AUs will not be 
highly disruptive to livestock and poultry production if crop producers are 
generally willing to accept manure from CAFOs. Cropland availability is 
essential for NMPs. The more land that is in crop production in a region and in 
proximity to CAFOs, the less costly is the NMP requirement that manure nutrients 
be applied to cropland at proper rates. 

The costs of developing and implementing NMPs could motivate some shift in 
animal production to regions with greater available land for manure application, 
while decreasing U.S. animal production overall. The potential production 
impacts are marginal in the high-acceptance scenario--all regions decrease AUs 
by less than 1 percent except for the Southeast, which declines by only 2 
percent. Under the medium-acceptance scenario, the Southeast decreases AUs by 14 
percent, while small production increases occur in the Northeast and Delta 
regions. Only in the low-acceptance scenario when land available for manure 
application is highly constrained does predicted production shift substantially 
among regions. AU decreases of 19-30 percent occur in the Southeast, Appalachia, 
and Mountain regions, while increases of 5-11 percent occur in the Lake, Corn 
Belt, Northern Plains, Delta, and Southern Plains.

Regional changes in animal production translate into changes in manure nutrient 
generation. For the most part, these changes mirror production changes. Where 
animal units increase, manure nutrients increase. The increases in manure 
nutrients are not detrimental to water quality per se, only if mismanaged. The 
threat to water quality can be reduced when manure nutrients replace or 
supplement commercial fertilizers and, according to EPA's proposed CAFO rules, 
total nutrients applied do not exceed the nutrient needs of the crops.

Decreasing livestock and poultry production would reduce the demand for animal 
feeds, which could lower certain feed crop prices (such as corn) and acreage 
devoted to those crops. These effects would induce changes in overall crop 
production acres. In general, the predicted changes to crop production are less 
than 3 percent throughout the U.S. The aggregate savings to crop producers from 
using manure nutrients instead of commercial fertilizer are potentially between 
$2 and $4 billion, depending on the scenario. These savings do not account for 
the cost of transporting the manure to crop producers willing to accept it, 
which may or may not be paid by the CAFOs depending upon the specific 
arrangements. Also, some of these savings may go to CAFOs that apply manure on 
their own land as a substitute for commercial fertilizer.

Impacts on prices and net returns. Decreases in animal production nationwide 
translate into higher livestock and poultry prices. These higher prices coupled 
with a decrease in animal feed cost (lower corn price from lower feed use) 
result in net gains for all unregulated AFOs, given the assumption that these 
AFOs do not adopt NMPs and thus avoid the associated costs. The effect on the 
CAFOs is less clear, since they will bear the cost of developing and 
implementing NMPs. Some CAFOs that are already marginally viable will likely to 
be forced out of business, while others experience lower returns due to other 
costs associated with changes in manure handling and storage. The current 
analysis does not allow us to capture these losses. 

Given the nature of supply and demand within the livestock and poultry sectors 
of the U.S. economy, higher output prices and lower input costs more than offset 
the costs of NMPs and the decreases in actual animal production, resulting in 
higher net revenues for the industry as a whole. The overall increase in net 
returns to all AFOs ranges from approximately 0.5 percent under the high 
acceptance scenario to 16 percent under the low-acceptance scenario. These 
results might be surprising to some because the cost of NMPs rises as transport 
costs go up. However, increases in prices for animal products caused by the 
relatively greater declines in production associated with low manure acceptance 
more than compensate for the cost increases. 

Regional impacts differ. Most notably, model results show net returns to AFOs 
declining in the Southeast and Mountain regions when crop producers have 
relatively low manure acceptance. This decline reflects both increased net 
returns to unregulated AFOs and decreased returns to CAFOs. The requirement that 
nutrients be applied at rates that do not exceed crop needs forces CAFOs in 
these regions to decrease the number of animals to such a level that they do not 
receive the overall benefit from increased prices. When manure acceptance is at 
a medium level, net returns to AFOs only in the Southeast show decreases 
associated with the land application restrictions. However, when manure 
acceptance is high, several regions show slight decreases in net returns. Net 
returns to CAFOs fall because the increase in livestock and poultry prices are 
not as significant as under the low- and medium-acceptance scenarios and do not 
offset the increased cost of implementing NMPs.

Changes in prices for products from the livestock and poultry sector indicate, 
not surprisingly, that restricting animal production results in higher retail 
prices for such commodities as milk, butter, pork, and beef. While these higher 
prices adversely affect consumers, livestock and poultry producers experience 
greater net returns ranging between $50 million and $4 billion, depending on the 
level of manure acceptance and resulting transport costs. The potential losses 
to consumers from the higher retail prices are relatively small (less than 0.16 
percent). A full calculation of the effects on consumers would also include any 
benefits derived from improved water quality. This analysis has focused only on 
the potential impacts of developing and implementing NMPs on the U.S. 
agricultural sector. 

Jonathan D. Kaplan, 202-694-5494
Robert Johansson
Mark A. Peters 
jkaplan@ers.usda.gov

For more information: 

Manure Nutrients Relative to the Capacity of Cropland and Pastureland to 
Assimilate Nutrients: Spatial and Temporal Trends for the United States, 
www.nhq.nrcs.usda.gov/land/pubs/manntr.html

RESOURCES & ENVIRONMENT BOX 

The U.S. Mathematical Programming Model for Agriculture

To estimate changes in production, nutrient generation, prices, and net returns 
to livestock and poultry producers, ERS uses a U.S. regional agricultural sector 
model designed for general-purpose economic, environmental, and policy analysis 
of the U.S. agricultural sector. The model represents agricultural markets and 
production enterprises in considerable detail and all elements of the model are 
calibrated to the latest available baseline, geographic, and cost-of-production 
data. The model is linked with regularly updated USDA production practice 
surveys, and geographic information system databases such as the National 
Resources Inventory.

The model predicts how changes in farm resources, environmental or trade policy, 
commodity demand, or technology will affect supply and demand of crops and 
livestock, farm prices and income, use of production inputs, participation rates 
and government expenditures for farm programs, and environmental indicators 
(such as erosion, nutrient and pesticide loadings, greenhouse gases, and 
others).


RESOURCES & ENVIRONMENT

Livestock Operations Face Greater Restriction

Take an AFO, concentrate it to make a CAFO, mix in some NPDES and TMDL, and you 
have a brew that more livestock and poultry producers may have to imbibe in the 
near future. These terms are defined in current and proposed legislation, and 
their related requirements can affect an operation's facilities, practices, and 
costs. Behind the terms is an increasing public interest and government effort 
to reduce actual and potential pollution from animal manure.

According to the U.S. Environmental Protection Agency, an AFO is an Animal 
Feeding Operation that meets the following criteria:

*  Animals have been, are, or will be stabled or confined and fed or maintained 
for a total of 45 days or more in any 12-month period.

*  Crops, vegetation, forage growth, or postharvest residues are not sustained 
in the normal growing season over any portion of the lot or facility.

A CAFO or Concentrated Animal Feeding Operation is currently defined by EPA as 
an AFO that:

*  confines more than 1,000 animal units (AUs), where 1,000 AUs are defined as 
1,000 slaughter and feeder cattle, 700 mature dairy cows, 2,500 swine each 
weighing more than 25 kilograms, 30,000 laying hens or broilers (if a facility 
uses a liquid manure system), or 100,000 laying hens or broilers (if a facility 
uses continuous overflow watering); 

*  confines between 300 and 1,000 AUs and discharges pollutants into waters 
through a manmade ditch, flushing system, or similar manmade device, or directly 
into waters that pass through the facility.

CAFOs are considered point sources (specific, identifiable pollutant sources) in 
EPA's National Pollutant Discharge Elimination System (NPDES) program, and in 
theory need permits to operate. The current CAFO definition contains an 
exemption for facilities that discharge only in the event of a 25-year, 24-hour 
storm event. 

To mitigate actual and potential water quality impacts posed by large animal 
feeding operations, EPA has proposed revised regulations for CAFOs. Among the 
major changes for the NPDES permit and Effluent Limit Guidelines proposed by EPA 
are:

*  change in size thresholds for determining which animal feeding operations are 
considered CAFOs and therefore require a permit (one option would include all 
AFOs over 300 AUs);

*  elimination of the 25-year/24-hour storm exemption;

*  making a nutrient management plan part of the NPDES permit, which would cover 
land application of animal waste;

*  adopting a zero discharge requirement with no overflow allowance for swine, 
veal, and poultry CAFOs; and

*  requiring installation of depth markers for open liquid impoundments.

USDA has increased and enhanced the assistance available in recent years to 
livestock producers for nutrient management planning and storage. In addition, 
more research on alternative uses of manure and alternative storage technologies 
could help alleviate problems in the future.

EPA estimates that up to 44,000 operations might be covered by the proposed 
regulations, depending on the size thresholds that are finally put in place. 
Currently, about 12,000 operations are of sufficient size to be considered 
CAFOs, but only about 3,900 (33 percent) actually have permits.

EPA is also proposing increased use of the Total Maximum Daily Load (TMDL) 
provisions of the Clean Water Act (33 U.S.C.  1313(d)). A TMDL is a calculation 
of the maximum amount of a pollutant that a water body can receive and still 
meet water quality standards, and an allocation of that amount to the 
pollutant's sources. The TMDL provisions are intended to be the second line of 
defense for protecting the quality of surface water resources. When technology-
based controls on point sources are inadequate for water to meet State water 
quality standards, Section 303(d) of the Clean Water Act requires states to 
identify those waters and to develop TMDLs. The TMDL for the watershed is the 
sum of individual wasteload allocations for point sources, load allocations for 
nonpoint sources and natural background, and a margin of safety. Wasteload 
allocations for point sources are enforced through NPDES discharge permits. Load 
allocations for nonpoint sources are not currently regulatory, but can be met 
through voluntary approaches. 

Proposed revisions to TMDL regulations would require TMDLs for impaired waters 
even where the sole source of impairment is nonpoint source pollution, and 
"reasonable assurance" that the load allocation (for nonpoint sources such as 
agriculture) will in fact be implemented. Demonstration of reasonable assurance 
must show that management measures or other control actions address the 
particular pollutant, and that they are implemented. 

While not creating new authorities, the proposed changes would focus attention 
on the role pollution from AFOs (and the rest of agriculture) plays in 
contributing to water quality impairment, and could be an incentive for states 
to elevate pressure on AFOs to adopt alternative management practices. There are 
more than 20,000 waters identified nationally as being impaired and possibly 
requiring a TMDL. The top impairments in 1998 were sediment, nutrients, and 
pathogens. AFOs can be a source of all three pollutants.

Marc Ribaudo (202) 694-5488
Mribaudo@ers.usda.gov


SPECIAL ARTICLE

Farm Families' Savings: Findings from the ARMS Survey

Farmers are not unique in their ability or willingness to save. They are 
influenced by the same factors that affect savings in other sectors of the 
population--age, education, cultural and other socioeconomic attributes and, of 
course, income levels. The level and source of farm household income is governed 
by how the household allocates its own labor and financial assets. These 
allocation decisions affect the composition and stability of household income 
and therefore the level and disposition of household savings.

Continued large government outlays for disaster assistance and other unearned 
compensation are viewed by some as evidence of farmers' inability or 
unwillingness to save. Policies that would provide incentives to encourage 
farmers to save as one means to stabilize incomes and better prepare for 
retirement are thus being discussed. A recent report by the Employee Benefits 
Research Institute points out that saving for retirement is small, not well 
understood, and a subject of an ongoing debate in the general population. 
Further, 63 percent of current workers expect to keep working for pay after 
formal retirement. 

The concept of farmer savings accounts is not new to the farm bill debate (AO 
May 1999) and such accounts have been implemented in other countries, including 
Australia and Canada (Net Income Savings Account program). Recent evidence from 
USDA's Agricultural Resource Management Study (ARMS)  survey provides 
information about the savings behavior of farmers, focusing not only on how much 
farmers save but also on how they save. Savings rates are sensitive to 
characteristics of farms and farmers, and the portfolio of savings and 
investment instruments varies considerably across the sector. Savings and farm 
family financial assets at the household level are distinguished from farm 
business investments.

Clearly, savings are beneficial both for farmers and others. Among the principal 
rationales for saving are:

*  to maintain a certain standard of living after retirement (retirement or 
life-cycle motive);

*  to provide for the education of children and grandchildren; 

*  to purchase big-ticket items such as equipment and appliances; and 

*  to guard against unexpected income shocks (precautionary motive). 

Households are vulnerable to various sources of risk (in earnings, health, and 
mortality), and the markets for insuring against such risks are often 
unavailable, or when available the coverage is not complete. In instances where 
insurance is available, many farmers view the coverage as unaffordable or 
consider it an acceptable risk to purchase no insurance.

But, if farmers are able to save during "good times" and draw on the reserves in 
"bad times," then the impact from relatively large farm income swings can be 
dampened and there would be less need for government policies that decrease 
income variability. In other words, farmers can self-insure against risk by 
"income smoothing." Savings play a direct role in helping farm households 
maintain a standard of living from year to year since they can be used to 
maintain consumption during income shortfalls. The key to understanding the role 
of "precautionary savings" is to identify how these savings can be used as 
complements to other risk-management strategies. The financial impact of income 
variability depends not only on the degree to which production and revenue risks 
are insured but also on the extent to which farm household income sources are 
effectively diversified. 

What Is Known About Farmers' 
Savings & Investments?

Previous analysis of family savings behavior has been limited by data 
availability. Information on household savings (which can be held either as farm 
inventory, cash, or some type of financial or nonfinancial asset) is generally 
inferred from data on consumption and income or estimated by examining changes 
in net worth. To avoid inference errors, the 1999 ARMS queried farm operators 
about nonfarm assets owned by the operator and by other members of the 
operator's household. Along with information about assets and liabilities of the 
household's farm business, ARMS collected information on several different 
categories of household assets. 

In order to provide some context for interpreting the survey results, a general 
characterization of the economic climate in 1999 is necessary. By most accounts, 
1999 represented the bottom of the most recent downturn in commodity prices. 
Record receipts for farm commodities were achieved in 1996, followed shortly 
thereafter by a collapse in commodity prices, which led to a dramatic decline in 
the value of agricultural production and lower market returns. 

At the same time, the general economy was in the eighth year of an economic 
expansion, with relatively low interest rates and unemployment, substantial 
stock market gains, and increases in home values. This discrepancy between 
prosperity in the general economy and lower market returns in the farm economy 
created a conflicting financial planning environment for many farm families. In 
1999, 78 percent of farm households saved out of current income; surveys of the 
general population suggest that 50-60 percent of families saved during the last 
decade. Within the general population, families headed by the self-employed were 
more likely to be savers (63 percent) than all families.

Farm households, like their nonfarm counterparts, have diverse financial 
portfolios. Farmers were asked about four classes of savings: 

*  retirement accounts (excluding Social Security); 

*  stocks and bonds; 

*  cash and other liquid accounts like checking and savings; and 

*  real estate and other assets not part of the farm business.

Approximately 31 percent of the total assets of an average farm household are 
held in other nonfarm assets--real estate and businesses aside from the farm, 
off-farm houses, recreational vehicles, and other assets. One-fourth of nonfarm 
assets are in the form of retirement accounts (IRA, 401K, Keogh, and others). 
Nonfarm assets held as cash, checking, money market accounts, bonds, and 
certificates of deposit (CDs) comprise 21 percent, and stocks and mutual funds 
comprise 22 percent. 

For all U.S. households, financial assets represent about 35 percent of total 
assets, with retirement accounts one of the largest components. Excluding 
entitlement to Social Security, 49 percent of households in the general 
population held tax-deferred retirement accounts, while 35 percent of farm 
families participated in tax-deferred savings plans.

Off-farm investment by farm households in various forms has increased in recent 
years. The average farm household possesses both financial and physical assets, 
of which physical assets represent the largest share (almost 90 percent). The 
most important asset of the farm business is land, which constitutes more than 
70 percent of the total value of farm assets. Other assets include farm 
machinery (tractors, combines, and other implements), land improvements, 
buildings, and livestock. 

Total assets of an average farm household increased 34 percent in nominal terms, 
from $423,659 in 1993 to $633,525 in 1999. Farm business assets increased 23 
percent in nominal dollars, from an average of $354,747 in 1993 to $435,438 in 
1999. Meanwhile, average household nonfarm assets more than doubled during the 
same period, from $67,912 in 1993 to $198,087 in 1999. 

Investment in various types of nonfarm assets varies by level of farm household 
income. Farm households with incomes of $100,000 or more have less money 
invested in checking, money market accounts, and CDs than farm households with 
incomes of less than $15,000. 

Households of residential/lifestyle farms have more money invested in retirement 
accounts than any other group--off-farm income is the main source of income for 
these families, and off-farm jobs often have fringe benefits that include 
contributions into retirement or profit-sharing accounts. Off-farm employment 
usually provides access to affordable health care, which reduces the need for 
farm operators with off-farm jobs to save against unexpected health issues. 
Households of limited-resource farms have 63 percent of their nonfarm assets in 
cash, checking, money market accounts, bonds, and CDs and other liquid nonfarm 
assets.

Households of very large farms have the highest investment in nonfarm assets 
($258,354 on average), followed by residential/lifestyle farm operator 
households ($236,577) with substantial investment in other nonfarm assets and in 
IRA, 401K, and Keogh plans. Limited-resource farm households have the least 
amount of nonfarm investment ($67,011). Almost all farm households (93 percent) 
have money invested in cash and checking, money market accounts, bonds, and CDs. 
Seventy percent of farm households have assets in other nonfarm assets, and 
nearly 65 percent of farm households have money invested in some form of 
retirement account. 

Investment in nonfarm assets differs among operator age groups, showing the 
classic pattern suggested by the life-cycle theory of household savings and 
investment: over an individual's life cycle, wealth is built up during working 
years and consumed during retirement. Off-farm investment is highest ($271,522) 
in the 55-64 age group, followed by the 45-54 age group ($205,208). The majority 
of investment assets is in the form of retirement accounts and other nonfarm 
assets. These two age groups best represent the wealth accumulation phase of the 
life cycle. Households headed by operators younger than 35 have the least amount 
of off-farm investment. However, almost 50 percent of their off-farm assets are 
invested in nonfarm assets such as real estate and businesses not part of the 
farm--off-farm houses, recreational vehicles, and other assets. 

Formal education tends to be a good indicator of nonfarm investment as well as 
earning ability over the long term (both from farm and off-farm work). The 1999 
ARMS data show a positive correlation between investment in nonfarm assets and 
educational level of the farm operator. Farm operators with less formal 
education have more money in cash, checking, money market accounts, bonds, and 
CDs compared with other groups. Producers with a higher level of formal 
education are more likely to take advantage of off-farm investment 
opportunities. Those with graduate-level schooling and beyond have distributed 
their nonfarm assets approximately equally into retirement accounts (31 percent) 
and other nonfarm assets (32 percent). 

The Role of Government Payments,
Insurance, & Income Sources

To help determine which farm households need incentives to save, and which would 
benefit from additional savings, ARMS data were used to separate farm households 
into three different groups, that were then compared with their counterparts:  

*  farm households who receive government payments and those who do not; 

*  farm households who purchase some type of insurance and those who do not; and 

*  farm households who depend mainly on farming for their income (greater than 
80 percent of all income), and households with multiple sources of income. 

The analysis shows that savings rates are lower for farm households that receive 
government payments than for those that did not. This suggests either that 
government payments become a substitute for savings, or that program 
participation decreases the amount of perceived income risk. Farm households 
that received payments from the government (42 percent) saved less on average 
than those who received no payments. However, farm households that received 
government payments have higher precautionary savings--the ratio of funds in 
checking, savings accounts, money market accounts, bonds, CDs, and cash to total 
savings and investment off the farm. 

Buying insurance is another way farms and farm households cope with 
uncertainties in income. In 1999, approximately 78 percent of farm businesses 
bought some type of insurance. Farm households that bought business insurance 
have on average a lower propensity to save compared with the uninsured. As with 
government payments, farm households that purchased business insurance have 
higher precautionary savings compared with farm households who did not. 

Finally, farm households' income sources are associated with the way they save. 
In 1999, approximately 13 percent of farm households depended on farming as 
their major source of income. This group's average propensity to save was 54 
percent, and precautionary savings was 22 percent. On the other hand, farm 
households that earned their entire income from off-farm sources, of which wages 
and salaries made up 50 percent of their total off-farm income, have a higher 
average propensity to save (62 percent) and lower precautionary savings (16 
percent). 

Farm bill legislation has addressed the issue of risk management in farming from 
several perspectives, including commodity program adjustments, crop insurance, 
and new forms of insurance such as revenue insurance. More recently, tax-
deferred savings accounts have been considered as an additional complementary 
risk management tool. Data collected by USDA show that, like nonfarm households, 
farmers are diversified in their choice of investments. Farm households have 
money invested in a variety of outlets ranging from stocks and bonds to other 
business pursuits. Even so, farmers have a substantial portion of their wealth 
in real estate.

Differences in savings rates between farm program participants and other farm 
households suggest that further investigation is necessary to determine the 
cause and effect of the difference in behavior. Providing some portion of 
government payments in the form of tax-deferred savings accounts will likely 
increase savings. The effectiveness of the additional savings in smoothing 
income will need to be examined in the context of its impacts on use of other 
risk management tools. For example, a savings program may not have the desired 
impact if fewer farmers enroll in crop insurance as a result of tax-deferred 
savings accounts. 

The lower savings rate observed for farms that purchased insurance provides 
evidence of the complex interaction with use of other risk management tools. The 
analysis presented here also suggests that farm households that depend on 
farming as their main source of income may need some additional incentives to 
increase their savings. 

The disparity in savings rates may merely reflect the economic environment in 
agriculture during 1999, with lower levels of farm income encouraging more farm 
families to save. The real dilemma may be getting more farmers to save during 
times of economic prosperity. 

A key consideration in evaluating savings-incentive policy is the adequacy of 
the amount saved to provide income smoothing, and the interaction between 
household savings and farm business liquidity. On average, farm household 
savings amount to only 6 percent of farm business expenses. This may be 
sufficient to handle minor income shocks, including those from unexpected input 
cost increases such as a rise in fuel prices, but would not compensate for much 
larger or catastrophic occurrences. 

Ashok Mishra (202) 694-5580
Mitchell Morehart (202) 694-5581
Amishra@ers.usda.gov
Morehart@ers.usda.gov

For further information, see:

Mishra, Ashok K. and M.J. Morehart. "Income and Wealth Accumulation of U.S. Farm 
Households." Proceedings of Southeast Regional Sciences Institute, held Feb. 21-
23, 2001, Charlotte, NC. pp.75-81. 

Mishra, Ashok K. and M.J. Morehart. "Off-Farm Investment of Farm Households: A 
Logit Analysis." Agricultural Finance Review, 61, No. 1 (Spring 2001): 87-101.

Mishra, Ashok K. and M.J. Morehart. "Farm Household Savings." Financing 
Agriculture and Rural America: Issues of Policy, Structure, and Technical 
Change. Proceedings of Regional Committee NC-221, held Oct. 5-6, 1998, 
Louisville, KY. pp. 148-174.

SPECIAL ARTICLE BOX

Definitions

Life cycle: Series of stages through which an individual passes during a 
lifetime. The concept can provide a well-defined linkage between the consumption 
patterns of the individual and expectations of income and savings as one passes 
from childhood, through education, training, participation in the workforce, and 
into retirement. For farm operators it can trace the stages of the business from 
entry into farming, growth of the farm, consolidation, and retirement and 
transfer of the farm. 

Precautionary motives: The motivation behind farm households' saving to meet 
unexpected shortfalls in income (such as health, market returns) and smooth 
consumption.

Precautionary saving: Currency plus any holdings quickly convertible into cash 
without great loss. Defined as the ratio of total money available in the form of 
liquid assets, such as checking, savings in money market accounts, bonds, and 
certificates of deposit (CDs) to total savings. 

Income smoothing: Offsetting the effects of swings in income, often by 
accumulating savings. Saving during "good times" can help farm households 
maintain their standard of living from year to year. 

Average Propensity to Save: The ratio of savings to farm household income at any 
given income level.

Financial Assets: Financial assets include money held in cash; bank accounts 
(checking and saving accounts, certificates of deposit, and money market 
accounts); money invested in tax-exempt bonds; taxable bonds; tax-deferred 
accounts such as Individual Retirement Accounts, 401K, Keoghs, and other 
retirement accounts; other financial assets (whole life insurance, trusts).


END_OF_FILE
