AGRICULTURAL OUTLOOK     August 22, 2002
September 2002, ERS-AO-294
Approved by the World Agricultural Outlook Board -----------
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AGRICULTURAL OUTLOOK is published ten times a year by the
Economic Research Service, U.S. Department of Agriculture,
Washington, DC 20036-5831. Please note that this release
contains only the text of AGRICULTURAL OUTLOOK -tables and
graphics are not included.


CONTENTS

BRIEFS
Livestock, Dairy, & Poultry: Pork Production to Reach Record
Levels in 2002 & 2003
Specialty Crops: Demand Strong for Tree Nuts
Specialty crops: U.S. Sugar Policy Under the 2002 Farm Act

COMMODITY SPOTLIGHT
Rising Prices & Strong Competition Confront U.S. Soybean
Exports
Cabbage Heads Higher

WORLD AGRICULTURE & TRADE
The Ongoing Reform of Land Tenure Policies in China
Trade Among Unequal Partners: Changing EU Trade Arrangements
with
Developing Countries

RESEARCH & TECHNOLOGY
Genetically Engineered Crops: U.S. Adoption & Impacts
Does Off-Farm Work Hinder "Smart" Farming?


IN THIS ISSUE

Pork Production Up, Farrowings Down

U.S. hog producers are expected to respond to higher feed costs
by reducing the number of sows farrowing in 2003. Pigs per
litter are expected to increase slightly, as less productive
sows are eliminated from the breeding herd. USDA forecasts 2002
pork production at 19.8 billion pounds, and 2003 production at
19.85 billion pounds. Both quantities exceed all previous U.S.
production levels. Contact: Mildred Haley (202) 694-5176;
mhaley@ers.usda.gov

Tree Nut Crops: Production Up, Prices Down

Strong demand for tree nuts, especially in export markets, has
been driving up shipments this season. Supply is also strong,
the result of large crops and large beginning stocks, and the
net effect is lower grower prices. Overall revenue is expected
to be high despite expected lower prices, because of the large
volume of tree nut crops being moved. Contact: Susan L. Pollack
(202) 694-5251; pollack@ers.usda.gov

U.S. Sugar Policy Under the 2002 Farm Act

by: Stephen Haley and Nydia Suarez
The 2002 Farm Act reauthorized the sugar price support loan
program, and introduced measures to make the program work more
effectively for producers. A key change in the 2002 Act
requires that USDA operate the sugar loan program at no cost to
the Federal government. To accomplish this, the Act includes
measures to discourage forfeiture of sugar to the government by
processors who offered it as collateral for nonrecourse loans
under the sugar program. Among the Act's cost-reducing
provisions is the authority for USDA to impose flexible
marketing allotments for sugar (supply control). Contact:
Stephen Haley (202) 694-5247;
shaley@ers.usda.gov

Rising Prices & Strong Competition Confront U.S. Soybean
Exports

The U.S. soybean crop for 2002 is forecast at 2,628 million
bushels, well below last year's record 2,891 million. The
forecast reflects both a decline in plantings and a slip in
expected yield. Crop rotations, improved net returns for corn
(with lower costs for nitrogen fertilizer), and economic and
weather conditions in western states encouraged greater
planting of corn and the lowest U.S. soybean area since 1998.
Soybean yields were curbed by summer drought and high
temperatures, and by an acreage shift from higher yielding to
lower yielding states. Lower soybean supplies will promote a
hard retreat in U.S. soybean exports. Higher U.S. prices will
erode the ability to compete with likely aggressive export
campaigns by Brazil and Argentina. Contact: Mark Ash (202) 694-
5289; mash@ers.usda.gov

Cabbage Heads Higher

The French word for cabbage is incorporated into a term of
endearment: "mon petit chou" ("my little cabbage"). This
vegetable has recently become a little more endearing to
Americans, a turnaround from a steady decline in use between
the 1920s and the 1990s as Americans looked elsewhere for
variety and convenience in their food. In the past decade,
fresh-cut products, new recipes, and a growing body of
nutritional research have lent new support to cabbage demand.
Total cabbage consumption rose to 10.3 pounds per person in the
early 2000s, but is still 57 percent below the 1920s. Contact:
Gary Lucier (202) 694-5253; glucier@ers.usda.gov

The Ongoing Reform of Land Tenure Policies in China

The combined forces of economic transition, rapid economic
growth, and increased integration into the world economy are
propelling substantial changes in rural China. How farmers
respond to changing economic opportunities and challenges
depends critically on the choices they are able to make about
use of land and other resources-choices that depend in turn on
land tenure patterns. With 9 percent of the world's arable land
and 40 percent of the world's farmers, China's land is scarce
relative to its labor. Control over land in China reflects a
complex and changing distribution of authority among the
national government, local governments, and households, with
potential implications for efficiency, equity, and
environmental quality. Contact: Bryan Lohmar (202) 694-5226;
blohmar@ers.usda.gov

Changing EU Trade Arrangements with Developing Countries

The European Union (EU), more than other members of the World
Trade Organization (WTO), has used exceptions to international
trading rules to provide nonreciprocal trading preferences to
selected developing countries. Some of these arrangements have
been challenged under WTO procedures as discriminatory and not
in compliance with trade rules. To achieve compatibility, the
EU proposes to convert the arrangements into reciprocal free
trade areas, which for developing countries could result in new
trade competition and economic challenges, without clear
advantages. The EU, on the other hand, would gain strong
advantages for its agricultural and other exports to some
developing countries at the expense of exports from the U.S.
and other countries. Many elements of the EU's current and
proposed free trade area arrangements remain controversial and
untested in the WTO. Contact: Gene Hasha (202) 694-5168;
ghasha@ers.usda.gov

Genetically Engineered Crops: U.S. Adoption & Impacts

Since the introduction of genetically engineered (GE) crops in
1996, U.S. farmers have rapidly adopted some varieties,
notwithstanding conflicting claims about economic and
environmental impacts and consumer acceptance. Soybeans and
cotton with herbicide-tolerant traits have been the most
widely and rapidly adopted GE crops in the U.S., followed by
insect-resistant cotton and corn. Analyses by USDA's Economic
Research Service and others indicate economic benefits to many
farmers adopting first-generation GE crops. Not all benefits of
GE crop adoption are reflected in standard measures of net
returns. Contact: Jorge Fernandez-Cornejo (202) 694-5537;
jorgef@ers.usda.gov

Does Off-Farm Work Hinder "Smart" Farming?

As off-farm income takes on greater importance to farm
households, less time is available for farm management. Smart
farming (e.g., soil testing, integrated pest management, and
precision farming) typically substitutes management for
capital, and management is time-intensive. The value of
management time and effort does not typically enter into
calculations of economic returns to alternative production
technologies or farming systems. The result could be misleading
in understanding the benefits of technology adoption,
particularly if farm households, like most of their nonfarm
counterparts, are willing to forfeit some financial return from
farming to gain convenience. Contact: Katherine R. Smith (202)
694-5500; ksmith@ers.usda.gov


BRIEFS

Livestock, Dairy, & Poultry
Pork Production Up, Farrowings Down

U.S. hog producers are expected to respond to higher feed costs
by reducing the number of sows that farrow in 2003. Sow
farrowings in 2003 are expected to decline about 1 percent from
2002. Pigs per litter are expected to increase slightly, as
less productive sows are eliminated from the breeding herd. The
pig crop is expected to be down about 1 percent next year, with
slaughter to increase just slightly. Average dressed weights
will be lower, with the higher cost of gain.

USDA produces a Quarterly Hogs and Pigs report. This
information, combined with pork production figures for the
first half of 2002, indicates record quantities of U.S. pork
products, both this year and in 2003. USDA forecasts 2002 pork
production at 19.8 billion pounds and 2003 production at 19.85
billion pounds. Both quantities exceed all previous U.S.
production levels.

Total red meat and poultry production is expected to be about
85.3 billion pounds this year, but may decline slightly in
2003. This year's large meat production, combined with an 8-9
percent decline in exports and a 3-4 percent increase in
imports, will create an abundant supply of meat for domestic
consumption.

Hog Prices to Average in the Mid-$30s
This Year, & in 2003

Prices of 51-52-percent lean hogs (liveweight equivalent) ended
the second quarter on a high note, averaging $35 per
hundredweight (cwt). Seasonally lower slaughter in June and
higher demand for pork products, particularly since mid-June,
have increased hog prices. With demand expected to remain
comparatively strong through the summer months, prices are
expected to average $35-$37 per cwt in the third quarter.
Because of the seasonally heavy slaughter, prices are expected
to decline into the high-$20s per cwt in the fourth quarter of
2002, while first-quarter 2003 prices are expected to average
around $34 per cwt. Second-quarter 2003 hog prices are expected
to rise again, and average around $37 per cwt.

Retail pork prices are expected to average about $2.68 a pound
this year and decline slightly in 2003. The difference between
prices received by the producer, the wholesaler, and the
retailer indicates the total price spread. The spread has
averaged about $1.86 a pound since 1999, but in the
second quarter of 2002 the total spread was $2.06. Over the
last 3 years, the wholesale-retail price spread has accounted
for 80 percent of the total spread. So far in 2002, the
wholesale-retail price spread accounts for about 82 percent of
the total. The total price spread is expected to narrow back
toward the 3-year average next year, pointing to lower retail
prices.

The U.S. is expected to export almost 6 percent less pork in
2002 than in 2001. Lower demand for U.S. pork products can be
attributed generally to muted consumer demand, resulting from
slower than anticipated economic growth in foreign markets.
Specifically, there are several foreign markets where weakness
has either already been noted or is likely to become apparent
in the near future.

Japan Imposes
Safeguard Again

Japan--the largest foreign market for U.S pork products--
imported 4 percent less pork in the first 5 months of 2002 than
for the same period last year. Moreover, the Safeguard was
triggered at the end of June--after data for the first quarter
of Japan's April-March fiscal year became available. The
Safeguard is a World Trade Organization-sanctioned restriction
that protects domestic markets from surges in imported
products. The imposition of the Safeguard raises the minimum
price at which foreign pork can be imported into Japan by 25
percent, making imported pork products less attractive to
Japanese consumers than domestically produced pork products.
The higher minimum import price resulting from the Safeguard
was imposed on August 1, and will remain in place until March
31, 2003.

While Safeguard imposition typically lowers demand for all
imported pork, frozen products tend to decline the most. Since
fresh pork tends to have larger margins and limited shelf life,
demand for imported fresh pork has not declined as dramatically
as has demand for frozen pork under past Safeguard scenarios.
And, since fresh products comprise more than half of U.S.
exports to Japan, the Safeguard has impacted U.S. pork exports
to a lesser degree than to a country such as Denmark--whose
exports to Japan are nearly all frozen.

Compared with demand patterns under past Safeguard scenarios,
Japanese demand for imported pork appears to have changed under
the Safeguard that was imposed from August 2001-March 2002.
Total August 2001-March 2002 pork imports increased compared
with the same period in 2000-2001, when no Safeguard was in
place. Under the most recent Safeguard, Japan imported more
pork products (fresh and frozen), despite higher prices.

Consumer fears of bovine spongiform encephalopathy (BSE) was
one likely factor in continuation of  Japanese consumer demand
for higher priced imported pork under the August 2001-March
2002 Safeguard. Intense competition for market share among
international exporting companies is another likely factor.

Prospects for Other
Countries Mixed

Export totals for the first 5 months of 2002 to Mexico and
Canada--the second and third largest foreign markets for U.S.
pork--show a mixed picture. Exports to Mexico declined
slightly, likely resulting from the relatively high U.S. dollar
exchange rate, and continued economic uncertainty in Mexico.
Canada has imported 7 percent more U.S. pork so far this year,
to meet demand for selected pork cuts that the domestic
Canadian pork industry is unable to meet, or to fill
"shortages" created by Canada's aggressive pork export
industry.

Russia's declining demand for U.S. pork products continued
through May. So far this year, U.S. exports to Russia are 62
percent lower than for the same period last year. U.S. pork
products continue to have difficulty competing with lower
priced pork products from Brazil and China.

For South Korea, 2002 was to have been the year of re-entry
into international pork markets--Japan in particular--after
foot-and-mouth disease (FMD) infected the Korean herd in the
spring of 2000. In anticipation of resuming the lucrative loin
trade to Japan, the Korean pork industry accumulated
significant stocks of pork this year. U.S. exports to Korea had
increased 75 percent over the same period last year. Korean
traders imported lower priced U.S. cuts in order to accumulate
stocks of Korean products for export to Japan. But, the
reappearance of FMD in May has postponed Korean loin exports to
Japan. Large Korean pork stocks will likely slow Korean demand
for U.S. pork products for the remainder of 2002.

U.S. Pork Imports
Increase

So far through May 2002, the U.S. has imported 17 percent more
pork than over the same period last year. About 80 percent of
U.S. imports are from Canada, representing the continuing
integration of the U.S. and Canadian pork and food service
industries. Denmark accounts for about 13 percent of U.S.
imports. The American appetite for pork ribs is the primary
factor driving Danish exports to the U.S.

Despite concerns about low fourth-quarter 2002 prices, and
uncertainty surrounding requirements for Country of Origin
Labeling contained in the 2002 Farm Act, the U.S. continued to
import large numbers of live Canadian hogs. In the first 5
months of 2002, imports were 18 percent higher than for the
same period last year. So far this year, nearly 64 percent of
live Canadian imports have been feeder pigs destined largely
for finishing in the Corn Belt States. The U.S. is expected to
import 6.2 million hogs from Canada this year, 17 percent more
than in 2001.

Mildred Haley (202) 694-5176 mhaley@ers.usda.gov
Leland W. Southard (202) 694-5817 southard@ers.usda.gov

For the latest data and analysis on hogs and pigs, see the hogs
briefing room on the ERS website at
www.ers.usda.gov/briefing/hogs/


BRIEFS

Specialty Crops
Demand Strong for Tree Nuts

Strong demand, especially from export markets, has been driving
up tree nut shipments this season. Supply is also strong this
season because of large crops and large beginning stocks. The
net effect is lower grower prices. Overall revenue is expected
to be high, despite expected lower prices, because of the large
volume of tree nut crops being moved.

High almond shipments provide almond growers with good returns.
Almonds dominate nut production in the U.S. The near-record
crop in 2001/02 has provided ample supply for marketing. While
lower than the previous season, beginning stocks were still
very large, pushing total available supplies above the record
crop in 1999/2000.

Domestic demand has been very strong so far this year (August
through May), about 15 percent over last season, which could
help drive domestic consumption to its highest level yet.
Americans consume more almonds than any other tree nut,
including those used in candy and baked goods, yet the average
person consumes less than a pound a year. Fortunately for the
industry, other regions of the world have a stronger preference
for almonds. Europeans, the major customers U.S. almonds, use
much of their nut imports to make paste.

Strong demand for almonds in Europe has helped fuel a rapidly
expanding U.S. almond industry. Virtually the entire U.S.
almond crop comes from
California, which has an ideal environment for the trees.
Foreign nut demand has driven this expansion, and bearing acres
reached 525,000 in 2001. Acreage is likely to increase slightly
for the 2002/03 crop, although the rate of growth is slowing
after several years of continuous expansion. In July, USDA's
National Agricultural Statistics Service (NASS) forecast the
new almond crop at a record 980 million pounds. As the 2001/02
season winds down, dwindled supplies put the industry in a good
position to handle next year's expected record crop. The
industry expects grower prices to improve despite the forecast,
and the coming season, which got underway in early August, will
likely see stable or even increasing prices as strong demand is
expected to continue.

No big surprises expected for walnut crop. Almost all of the
commercial walnut industry is concentrated in California's San
Joaquin Valley. The good weather that boosted California's
almond crop was also a plus to the walnut crop. Because this
season was a record crop for walnuts, the trees will likely
produce a smaller crop in 2002/03. Acreage has remained
relatively stable over the past few years, and no major changes
are expected in the near future.

2001/02 walnut crop movement was about 4 percent above the
previous year through June (on an inshell equivalent basis).
Domestic movement, which accounted for 58 percent of total
shipments through May, was 3 percent higher than last season.
Exports have been stronger so far this season, increasing 6
percent over 2000/01. Most walnuts are exported shelled, and
are destined primarily for Japan, Germany, Israel, and Spain.

Walnut prices for the 2001/02 season averaged $1,120 per ton.
The expected smaller crop this coming harvest should increase
grower prices. As a result, total revenue should continue
higher as it has the past 3 years.

Pistachio shipments strong. Finishing out the California tree
nuts, the 2002/03 pistachio crop is expected to be larger than
the present crop in the market, following the general alternate-
year-bearing trend of tree nuts. Pistachio production is on the
opposite cycle of the other tree nuts, and 2001 was the "off
cycle" year for the crop. The 2001 crop was 34 percent below
last year's record crop, but still 31 percent above the similar
low cycle 2 years ago. A forecast of the new season crop will
be available at the end of August.

Pistachio nut shipments were higher for September 2001-May 2002
than during the same period last year. Despite the smaller 2001
crop, exports were higher. Shipments of inshell pistachios
increased 41 percent, with large increases in quantity going to
the European Union. The major markets are Germany, France, Hong
Kong, and Canada. Large beginning stocks for this year's crop
likely contributed to the larger shipments. Strong demand has
driven down inventory below last year's level, with stocks of
loose kernel and artificially opened pistachios nearly
depleted. As a result, growers are in good position to demand
higher prices once the new crop harvest begins. Low inventory
should help moderate price-depressing effects of a larger crop.

Pecan markets hurt by slowed economy. The 2001/02 pecan crop
suffered from the domestic economic slowdown this year. Unlike
many of the other tree nuts, much of the pecan crop is not
stored before marketing. Rather, inventory is held by
processors who purchase the pecans to make cookies, ice cream,
pies, and similar goods. As a result, much of the crop is sold
shortly after harvest. With the pecan harvest beginning in
September, the 2001/02 crop was hurt by the economic downturn
that occurred after September 11. Growers were receiving good
returns at the beginning of harvest, but demand fell once the
economic effects of the tragedy reached the food industries.
Because close to 90 percent of the crop is sold to the baking,
candy, and ice cream industries, and nearly all the nuts are in
the market at the same time, prices fell. As a result, the per
pound price dropped to 68.7 cents, the lowest in 5 years. The
value of the crop in 2001 fell 9 percent from the previous
year.

In response to declining revenues, pecan farmers reduced their
inputs to cut costs. The industry is expecting a much smaller
crop this year because of the reduced input use, drought
conditions through most of the pecan-growing States, and the
alternate-bearing cycle of the trees. A smaller crop generally
would be good news to growers, because prices would be expected
to rise. However, pecan inventories held by processors are
reported to be high as the season is ending, and the new
harvest is just a few months away. As a result, processors will
be unwilling to pay high prices for the new crop. Those pecans
going to fresh market, such as the gift industry, should be
able to get good prices.

Fewer hazelnuts expected this season. Following the largest
crop on record, the incoming hazelnut crop is expected to
return to normal levels for an off year. Producing such a large
crop last year placed a heavy burden on the trees and could
push this year's production down to around 20,000 tons,
according to industry sources. This significantly lower crop
should boost grower prices, which fell to $700 a ton in 2001,
the lowest level since 1993. However, low prices helped move
the crop and bring total revenue above last year's level.

Hazelnut shipments have been strong, leaving very little
inventory at the end of the season. While domestic shipments
were above a year ago, they were 18 percent below 2 years ago.
Fortunately for the industry, export demand has been growing.
At the end of April, over 24,000 tons of hazelnuts had been
exported compared with only about 3,000 tons sold domestically.
The major international markets for U.S. hazelnuts are Hong
Kong, China, and Germany. Almost all of the shipments are
inshell nuts. Kernels account for a very small proportion of
sales.

Susan L. Pollack (202) 694-5251 pollack@ers.usda.gov

For more info, visit the ERS fruit and tree nuts briefing room
at www.ers.usda.gov/Briefing/FruitAndTreeNuts/


BRIEFS

Specialty Crops
U.S. Sugar Policy Under the 2002 Farm Act

The 2002 Farm Act--the Farm Security and Rural Investment Act
of 2002--reauthorized the sugar price support loan program and
introduced measures to make the program work more effectively
for producers and processors, and to lessen the cost of the
program to the U.S. government.

The Sugar Loan
Program

The 2002 Farm Act reauthorized the U.S. Department of
Agriculture (USDA) to make loans available to processors of
domestically grown sugarcane at the rate of 18 cents per pound
and to processors of domestically grown sugar beets at 22.9
cents per pound for refined sugar. As before, loans are made
for a maximum term of 9 months and must be liquidated along
with interest charges by the end of the fiscal year. Processors
are required to provide payments to producers in proportion to
the amount of the loan value accounted for by the sugar beets
and sugarcane the producers deliver. USDA retains the authority
to establish minimum producer payment amounts.

Other sugar loan provisions in the 2002 Act include the
following:

*  Sugar loans must be nonrecourse, meaning that when the loan
matures, the USDA must accept sugar pledged as collateral as
payment in full in lieu of cash repayment of the loan, at the
discretion of the processor.

*  A new provision allows processors to obtain loans for "in-
process" sugar
and syrups at 80 percent of the loan rate. "In-process" sugar
and syrups must be converted into raw cane or refined beet
sugar at no cost to the Commodity Credit Corporation (CCC)
before being eligible for forfeiture.

*  The Act eliminates penalties that, under prior legislation,
had been charged to processors who forfeited sugar to the CCC.

*  The Act eliminates the requirement that sugar processors
notify USDA of their intention to forfeit sugar under loan.
Also eliminated are government assessments on sugar marketing
by processors.

Operation of the program at no cost to the government. A key
change in the 2002 Farm Act requires that USDA operate the U.S.
sugar loan program at no cost to the Federal Government, to the
maximum extent possible. Specifically, USDA must avoid
forfeiture of sugar to the CCC. To discourage loan forfeiture,
the sugar price at the time of loan repayment must be high
enough to cover the loan principal plus interest and marketing
expenses.

The 2002 Farm Act gives USDA authority to accept bids from
sugarcane and sugar beet processors to obtain raw cane sugar or
refined beet sugar in CCC inventory in exchange for reducing
production. This is one way to control expected excess (or
"price-depressing") supplies of sugar. The 2002 Farm Act
specifies that this authority is in addition to any authority
the CCC may have under other laws.

Marketing allotments. Another way to guarantee that the sugar
loan program operates at no cost to the Federal government is
the requirement in the 2002 Farm Act that USDA establish
flexible marketing allotments for sugar (supply control). The
overall quantity of sugar to be allotted for a crop year is
determined by subtracting the sum of 1.532 million short tons
raw value (STRV), plus carry-in stocks of sugar (including CCC
inventory), from USDA's estimate of sugar consumption and
reasonable carryover stocks at
the end of the crop year. USDA must adjust allotment quantities
to avoid forfeiture of sugar to the CCC.

The overall allotment quantity is divided between refined beet
sugar (at 54.35 percent of overall quantity) and raw cane sugar
(at 45.65 percent). For cane sugar, Hawaii and Puerto Rico are
jointly allotted 325,000 STRV. For the mainland cane sugar
producing states (Florida, Louisiana, and Texas), allocations
are assigned based on past marketings of sugar, the ability to
market sugar in the current year, and past processing levels.
Beet sugar processors are assigned allotments based on their
sugar production for the 1998-2000 crop years. The 2002 Farm
Act provides for a number of contingencies that could require
reassignment of allotments during the crop year.

USDA's authority to operate sugar marketing allotments is
suspended if import levels of sugar for human consumption, not
including Re-Export Program quantities, are estimated to exceed
1.532 million STRV (such that the overall allotment quantity
would have to be reduced). The marketing allotments would
remain suspended, until imports have been restricted,
eliminated, or otherwise reduced to or below the 1.532 million
STRV level.

Flexible marketing allotments are likely to provide more
effective price support throughout the marketing year. When
allotments are on, processors who have expanded marketings in
excess of the rate of growth in domestic sugar demand will have
to postpone the sale of some sugar, and either store it at
their own expense or sell it for uses other than domestic food
use. The cost of storing excess production is thus shifted from
the Government to the industry. (However, the 2002 Farm Act
requires that the CCC establish a sugar storage facility loan
program to assist processors who want to construct or upgrade
storage and handling facilities.)

Trade Measures

In addition to the sugar loan program, U.S. sugar policy is
implemented
through a tariff-rate quota (TRQ) system, which is continued
under the 2002 Farm Act. The TRQ is a two-tiered tariff for
which the tariff rate charged depends on the volume of imports.
A lower (in-quota) tariff is charged on imports within the
quota volume, and a higher (over-quota) tariff is charged on
imports in excess of the quota volume. Each year, the Secretary
of Agriculture announces the quantity of sugar that may be
imported at the in-quota rate. Any quantity above that level
would be imported at a higher tariff rate. The raw cane sugar
TRQ is allocated to 40 countries. The 2002 Farm Act specifies
that on June 1 of each year, the U.S. Trade Representative,
along with USDA, shall determine the used and unused portions of
the TRQ for each quota-holding country, and may reallocate unused
quota to qualified quota holders.

The U.S. also operates the Refined Sugar and Sugar-Containing
Products Re-Export Programs to allow U.S. refiners to compete
in global refined and sugar-containing product markets. The
programs establish a license against which a company can import
sugar at world prices for refining and sale to replace sugar
that has been exported either as refined sugar or in sugar-
containing products. The 2002 Farm Act specifies that all
refined sugars derived from either sugar beets or sugarcane are
substitutable under these programs.

Stephen Haley (202) 694-5247  shaley@ers.usda.gov Nydia Suarez
(202) 694-5259  nrsuarez@ers.usda.gov

For additional research and information on sugar and
sweeteners, see the sugar and sweeteners briefing room on the
ERS website at: www.ers.usda.gov/briefing/sugar/


COMMODITY SPOTLIGHT

Rising Prices & Strong Competition Confront U.S. Soybean
Exports

The U.S. soybean crop for 2002 is forecast at 2,628 million
bushels, well below last year's record of 2,891 million
bushels. The smaller expected crop reflects both a drop in
plantings and a drop in expected yield. Crop rotations and
improved net returns for corn (because of lower costs for
nitrogen fertilizer) created market anticipations earlier this
year for much higher corn acreage and the lowest U.S. soybean
area since 1998.

While corn planting advanced well in the upper Midwest, delays
were acute in the Ohio River Valley. When the optimal planting
dates for corn had passed, farmers in Indiana and Ohio planted
more acres to soybeans than indicated by the March intentions,
because late planting carries a greater risk to corn yields
than to soybean yields. Fewer acres planted to cotton also
raised soybean area in Mississippi and Louisiana. However,
these additional soybean plantings were partially offset by
economic and weather conditions in states farther west,
encouraging farmers to expand their corn acreage at the expense
of soybeans. Overall, actual soybean plantings for the nation
dropped from 74.1 million acres in 2001 to 73 million acres
this year.

Throughout the summer, drought and high temperatures worsened
crop conditions in the heart of the soybean belt. Yields were
also curbed by an acreage shift between higher-yielding and
lower-yielding states. Average U.S. soybean yield this year is
forecast at 36.5 bushels per acre, down from 39.6 last year.
Soybean plantings in the high yield states of Illinois, Iowa,
Nebraska, and Minnesota are down by a combined 1 million acres,
while acreage increased in some states with below-average
yields (particularly North Dakota, Mississippi, and Louisiana).

U.S. Exports Forecast Lower

Despite interruptions in trade this year with China over its
regulation of biotech crop imports, the overall strength of
U.S. soybean export demand
endured through 2001/02. Soybean exports rose to a record 1,060
million bushels, which contributed to surprisingly slim
carryover stocks of 195 million bushels. For the upcoming
marketing year, the brunt of the supply shortfall will be borne
by a hard retreat in U.S. soybean exports. Higher prices will
erode the ability to keep up with a likely aggressive export
campaign by Brazil and Argentina. U.S. soybean exports are
forecast plunging to 820 million bushels in 2002/03, which
would be the lowest volume in 4 years.

Foreign oilseed production is projected to rise 2 percent in
2002/03 to 237.9 million metric tons (mmt), partly offsetting a
9-percent decline in U.S. output to 82 mmt. World oilseed
supplies should shrink as larger soybean harvests for Brazil
and Argentina in 2002/03 may only partly compensate for
reductions elsewhere. In a repeat of similar circumstances from
a year ago, Brazilian farmers are getting favorable returns on
their latest soybean harvest (as well as forward sales for the
next crop) and are likely to sharply expand plantings again in
2002/03. Argentina's continuing financial crisis is favoring
planting proportionately more oilseeds than wheat and feed
grains in 2002/03 because oilseeds can be grown with lower
input costs.

In addition, Brazil and Argentina together carried over about
3.5 mmt more soybean stocks into 2002/03 than the previous
year. Producers in both countries held back marketing of
soybeans as they anticipated even higher farm prices following
currency depreciations. That temporary deferment supported U.S.
exports in 2001/02, but should intensify the competition for
sales early in 2002/03. As tight supplies sparked a recovery in
China's soybean imports last summer, South American exporters,
with their large stock buildup, will compete strongly with U.S.
suppliers for that and other markets this fall.

Soybean demand by the European Union (EU), the world's largest
import market and U.S. buyer, will likely slow in 2002/03.
Larger European oilseed harvests this year should curtail EU
soybean meal consumption. A record-large EU wheat supply will
expand its use in livestock feeds. Wheat has higher protein
than corn, so feeding more wheat would also curb soybean meal
demand, as less is needed as a protein supplement in feeds.
This slowdown may occur in spite of a recent strengthening of
the euro to near parity with the dollar (which increases the
purchasing power of foreign importers). In addition, a recovery
of Canada's domestic soybean harvest from last year's drought
would cut its import needs from the U.S.

The anticipated decline in U.S. soybean supplies is seen paring
2002/03 ending domestic stocks to a scant 155 million bushels.
The 2002/03 forecast U.S. average farm price is $5.15-$6.05 per
bushel, compared with the 2001/02 average of $4.35. A much
higher market price and a lower national soybean loan rate
($5.00 per bushel) enacted in the Farm Security and Rural
Investment Act of 2002 may eliminate any marketing loan gains
this year, which were approximately $3.5 billion for the 2001
soybean crop.

Domestic soybean crushing is expected to decrease next season
to 1,680 million bushels. Weaker export prospects, particularly
for soybean meal, and higher soybean costs will temper
processing demand. Soybean meal exports are forecast at 6.75
million tons, down sharply from 7.65 million in the current
season.

Growth in domestic soybean meal consumption is likely to
moderate next year as well, because of a slow expansion of
livestock numbers. The U.S. feed outlook has dimmed because a
large accumulation of frozen meat stocks has pressured prices
for both hogs and poultry, the primary consumers of soybean
meal. Domestic disappearance of soybean meal for 2002/03 is
forecast up to 33.5 million tons from 33.2 million in 2001/02.
Yet, a comparatively stronger market for soybean oil should
produce surplus soybean meal supplies and limit any increase in
value. Soybean meal prices for 2002/03 are expected to average
$170-$200 per ton compared with the 2001/02 average of $166.50
per ton.

Demand Strong for Vegetable Oil

Disappointing foreign harvests of palm oil and oilseeds other
than soybeans are tightening the global market for vegetable
oil relative to the protein feed market. Even with a modest
increase in soybean oil output, large U.S. carryover stocks
will sustain steady demand through 2002/03. U.S. soybean oil
exports will be competitive with an expected robust pace of
South American shipments. So, in a year that portends to have a
brisk rate for foreign vegetable oil imports, U.S. soybean oil
exports may remain relatively high, edging up to a forecast
2,500 million pounds.

Domestic soybean oil consumption in 2002/03, like the previous
year, will be supported by negligible supply increases for
competing vegetable oils. USDA projects 2002/03 domestic
disappearance of soybean oil to rise 2 percent to 17,200
million pounds.

Increased oil use will not be limited to just the edible
applications; biodiesel consumption may also begin to expand.
In April, Minnesota passed a law mandating that all diesel fuel
sold in the state contain a 2-percent biodiesel blend by June
2005. When this law becomes fully implemented, analysts
estimate that Minnesota alone may require 120 million pounds of
soybean oil annually for biodiesel. Although other fats and
recycled oils can be substituted in biodiesel production,
initially soybean oil may be the primary material. Other states
and the federal government are considering similar legislation.
Increased soybean oil use in 2002/03 is expected to cut season-
ending oil stocks to 1,990 million pounds. Prices of soybean
oil in 2002/03 would strengthen within the forecast average of
18.5-21.5 cents per pound, compared with the 2001/02 average of
16 cents.

Macroeconomic Policies & Biotech Shape World Trade

On January 7, China announced new details of its import
policies for biotech products that were first issued in 2001.
Beginning March 20, 2002, every import shipment of biotech
products must have a safety certificate from the Chinese
Ministry of Agriculture before it can be sold. Requirements for
the certificate include proper product labeling and a statement
from the originating country's government indicating that the
shipment poses no harm to humans, animals, or the environment.
The labeling requirement applies to biotech oilseeds as well as
their processed derivatives such as soybean meal, soybean oil,
rapeseed meal, and rapeseed oil. Upon arrival, imports are
quarantined while inspections are conducted to verify the
presence of any genetically engineered material, diseases, and
impurities.

Shortly after the January announcement, exports of U.S.
soybeans surged as Chinese processors rushed to secure delivery
before March 20. Because of the complex and still unclear
administration of the new policies, China later agreed to ease
implementation of the regulations on biotech crop imports. On a
transitional basis through December 20, China is providing
interim safety certificates to importers within 30 days of
receipt of required documents. Soybean imports resumed in June
after many exporters had acquired the interim certificates, but
the earlier lapse in obtaining certificates closed the pipeline
of foreign shipments for April and May. The shutdown cut
China's 2001/02 imports of soybeans to 10.5 mmt from 13.3 mmt
the previous year and exhausted stocks held at ports and
processing mills.

Despite expectations of higher trade, China's imports of
soybean oil were also subdued this year. Both China and Taiwan
officially joined the World Trade Organization on December 11,
2001. China's accession agreement stipulated that its 2002
tariff-rate quota on soybean oil increase to
2.518 mmt and the within-quota tariff fall from 13 percent to 9
percent. China had originally announced it would issue its
vegetable oil import licenses by March 5, but administrative
delays prevented distribution until early April. Also, since
prices for palm oil imports were generally
cheaper, China's importers nearly filled the 2002 palm oil
tariff-rate quota (2.4 mmt) first. Consequently, soybean oil
imports increased minimally to just 375,000 tons.

Unlike 2001/02, China will not head into the new marketing year
with a large cushion of oilseed stocks. These stocks allowed
China to maintain consumption this year during the stoppage of
soybean imports, but stocks have now been reduced to mere
pipeline supplies that are used as fast as they can arrive.
Minimal increases in domestic crops of soybeans, peanuts, and
sunflowerseed are expected this fall, but will not likely ease
the tight oilseed supply situation next year.

The most likely sources for meeting China's mounting domestic
needs will be imports of soybeans, soybean oil, and palm oil.
China would be a potentially good market for imports of rapeseed
next season, but production shortfalls among the major foreign
suppliers will raise prices and curtail imports. Soybean imports
by China are projected to rise to 14 mmt in 2002/03 from 10.5
mmt in 2001/02. Domestic crushing will still provide most of the
protein meal required, but China's vegetable oil deficit could
double soybean oil imports to 0.8 mmt and modestly raise palm
oil purchases to a record 2.2 mmt in 2002/03.

While China generally favored palm oil imports last season,
India purchased a large volume of soybean oil because of a
comparatively lower import duty. India is expected to import a
record large 2 mmt of soybean oil in 2002/03 because poor
monsoon rains will substantially reduce its domestic oilseed
harvests. Another reason for expected strong gains in soybean
oil imports by both India and China is that thinning supplies of
palm oil are likely to slow exports by the major Southeast Asian
producers.

Robust soybean demand in the rest of the world helped take up
the slack left this year by China's import stoppage. However, in
2002/03, China should reclaim its role as the world's fastest
growing soybean market. EU oilseed harvests fell by 0.3 mmt in
2001, so a shortfall of vegetable oils increased the
profitability of soybean crushing last season. Domestic oilseed
harvests are better this year, so EU soybean imports in 2002/03
should moderate. In Japan, higher costs of importing rapeseed
and a ban on feeding meat and bone meal promoted consumption of
soybean meal, a factor expected to continue into 2002/03. A very
dry summer in Canada last year cut soybean production by more
than 40 percent and sharply raised imports of soybeans and
soybean meal. But, a recovery in this year's Canadian soybean
crop should limit import needs in 2002/03.

Argentine farmers in 2002 reaped a bumper soybean harvest, 1.7
mmt larger than last year's, in spite of the many weather and
financial obstacles. Even so, a standoff between suppliers and
the government curtailed exports to a modest increase in
2001/02.

Argentina's default in December 2001 on its large public debt
forced currency devaluation in January. The peso had been pegged
at a one-to-one rate to the U.S. dollar since 1991. But in
February, the currency was allowed to freely float and has
subsequently depreciated to around 3.6 pesos per dollar. By
itself, such a large devaluation should benefit agricultural
exports in the long run. However, oilseed exports temporarily
ceased because of disputes over the government's reluctance to
repay about $600 mill ion of value-added taxes owed to
agricultural exporters. With international grain companies
compelled to finance their own trade, tighter controls on the
dollar exchange slowed foreign sales. The government also
converted all current dollar-denominated debts in the country
(except farm debts) to pesos at a rate of one peso per dollar.
Most significantly, the government raised export taxes to 23.5
percent for oilseeds and 20 percent for oilseed products.
Argentina had imposed export taxes on agricultural pro ducts in
the 1980s, but mostly abandoned them by 1991, retaining only a
modest 3.5-percent tax on oilseeds.

Although the domestic soybean price in Argentina soared
following the
January devaluation, unpredictable policy shifts on export
taxes, value-added tax refunds, and farm debt squelched the
immediate incentives to export. In the current economic climate,
producers lack confidence in the banking system and see their
dollar-based soybeans as a hard asset with the best store of
value. Also, Argentine farmers held on to their crops to protest
high export taxes, fuel costs, and inequitable treatment of farm
debt. They waited to see whether the peso stabilized or if
rising U.S. prices continued. Trucker strikes further
complicated transportation of crops.

To encourage soybean deliveries, Argentine exporters offered
producers the opportunity to deliver sales immediately after
harvest and defer pricing (with no discounts for storage)
through August. Still there was only a modicum of farm sales and
Argentine exporters had little to sell abroad. Thus, the
government was unable to reap tax payments from agricultural
exporters, the leading source of tax revenue for the cash-
strapped treasury. The International Monetary Fund has yet to
restore lending to the country. Having few financial resources,
the Argentine government suspended the promised rebates of
delinquent value-added tax to exporters. This hurt the ability
of processors to expand output and to offer farmers better
prices for their crops.

At the same time, demand from Argentina's largest soybean
customer (China) had stalled. Thus, most of Argentina's
increased 2002/03 supplies will be stocks carried over from the
previous year. Argentine farmers have little cash to pay off
debts or buy new inputs, so when they start planting new crops
this October they should favor planting proportionately more
oilseeds than feed grains. If fewer inputs are applied, lowering
yield potential, the expansion in 2002/03 soybean output may
moderate.

Like Argentina, Brazilian soybean producers also had a record-
large 2001/02 crop that was sold piecemeal. Farmers locked in
relatively high prices last year on a portion of the crop with
forward sales and Brazil's soybean area surged 17 percent.
Brazilian soybean prices slumped earlier this year when the
currency strengthened against the dollar. But, farmers were
capitalized well enough to wait for better post-harvest returns,
which came by August after a substantial depreciation and a
spike in U.S. prices. Low soybean shipments by Argentina and the
resumption of import demand by China also subsequently
accelerated Brazilian sales. Fortunes should turn in favor of
South American soybean exports in 2002/03 as higher U.S. prices,
larger South American supplies, and favorable exchange rates cut
deeply into the U.S. market share for global exports.

Mark Ash (202) 694-5289  mash@ers.usda.gov

For more information see: ERS briefing room on soybeans,
www.ers.usda.gov/briefing/soybeans


COMMODITY SPOTLIGHT

Cabbage Heads Higher

It was the French who inspired the English word "cabbage,"
believed to be derived from caboche, a slang term meaning
"head." Head cabbage has been an important player in U.S.
produce circles for many years. Thomas Jefferson grew 22
varieties of cabbage at his Monticello estate, according to the
1987 volume Blue Corn and Square Tomatoes.

The French also used "mon petit chou" ("my little cabbage") as a
common term of endearment. In recent years, cabbage has recently
become a little more endearing to Americans, gaining 7 percent
in per capita use between 1990-92 and 2000-02. This is a
turnaround from a steady decline between the 1920s and the
1990s, as Americans looked elsewhere for more variety and
convenience in their food. In the past decade, fresh-cut
products, new recipes, and a growing body of nutritional
research have lent new support
to cabbage demand. While total cabbage consumption rose to 10.3
pounds per person in the early 2000s, it is still 57 percent
below the 1920s, when cabbage use averaged 22 pounds.

Cabbage  has four distinct end uses:

*  food manufacturing including deli-type coleslaw and frozen
eggrolls; * the traditional fresh market; *  the sauerkraut
industry; and *  the fresh-cut salad industry which uses cabbage
in salad mixes, shredded bagged cabbage, and as the main
ingredient in fresh-cut bagged coleslaw.

According to ERS estimates, processed deli-type coleslaw (40 to
45 percent of use) and fresh head cabbage (around 35 percent)
account for the majority of cabbage disposition. Other major
uses include sauerkraut (12 percent) and various fresh-cut
products (5 to 10 percent). Retail sales of fresh-cut bagged
coleslaw averaged about $70 million in 2000 and 2001--4 percent
of the $2 billion fresh-cut salad retail industry. A small
amount of cabbage is also dehydrated (dried, flakes, or powder)
for use as a flavoring agent in soups and as an ingredient in
other dehydrated foods.

Fresh-market cabbage consumption averaged a fairly steady 8.5
pounds in the 1970s, 1980s, and 1990s. However, the 1990s
witnessed increased use of red cabbage in fresh-cut salad mixes
and popularity of fresh-cut bagged coleslaw, which helped spur
consumption. Sauerkraut use appears to have stabilized at about
1.3 pounds per person over the past decade. Demand for
sauerkraut peaked shortly after World War II and trended
steadily lower before leveling off in the early 1990s.

The U.S. accounts for 4 percent of world cabbage production,
ranking sixth behind China (38 percent of world output), India,
Russia, South Korea, and Japan. U.S. cabbage production is
largely centered in the East and upper Midwest but spreads
across the 50 states, with 82,000 acres and 4,289 farms shipping
to the fresh and processing markets. U.S. head cabbage had an
average farm value of $319 million annually during 1999-2001,
with the fresh market accounting for 97 percent of crop value.

Cabbage Volume Peaks in March

The volume of fresh-market cabbage shipments peaks in March,
spurred by the traditional St. Patrick's Day fare of corned beef
and cabbage. About 14 percent of the domestic crop is marketed
in March, compared with 10 percent for February and December
(the next-highest months). The majority of these winter
shipments come from Texas, Florida, and New York. Volume is
lowest in July at 4 percent of annual shipments.

Depending on the variety and growing conditions, a mature head
of cabbage weighs from 1 to 5 pounds with some even larger,
especially when destined for processing. Most fresh-market
cabbage is hand harvested to minimize damage and maximize yield,
while most cabbage destined for processing is machine harvested
to keep costs down. Because cabbage plants do not mature
uniformly, fresh-market fields are frequently harvested several
times to maximize yield.

Shippers in states such as New York, Pennsylvania, Michigan, and
Wisconsin routinely place late-season cabbage in cold storage
for later marketing--even until the following summer in the case
of New York, the industry leader. If stored under proper
conditions (controlled atmosphere facilities) late-season
cabbage can keep for as long as 6 months.

Annual cabbage shipping-point prices trended higher during the
1990s, after a decade of stagnation in the 1980s. Between 1991
and 2001, nominal f.o.b. shipping point prices nearly doubled.
Higher average fresh cabbage shipping-point prices in the face
of rising production likely results from strong demand. In this
case, much of the additional demand is likely coming from fresh
processing firms that use shredded cabbage in salad mixes.

The portion of the cabbage retail value accounted for by the
shipping-point price has been slowly but steadily declining.
During 1995-99, growers and shippers received about 27 percent
of the retail value-up from 24 percent during 1990-94 and 25
percent during 1985-89 but down from 32 percent during 1980-84.
In 2000, when final cabbage retail prices for the year were
reported, shippers had received 29 percent of the retail value.

New York Heads the Pack

According to the 1997 Census of Agriculture, head cabbage is
produced on 4,289 farms in all 50 states--down 22 percent from
1992. Although the number of farms producing cabbage has
declined, production has been trending higher, and average farm
size has increased, powered by demand for fresh-market cabbage.
Over 1999-2001, total annual cabbage production averaged 19
percent above 1979-81 levels.

During this time, cabbage used for sauerkraut (called "liberty
cabbage" during World War I) declined 19 percent, but production
of fresh-market cabbage rose 27 percent. There is little overlap
between the fresh cabbage and sauerkraut markets since
sauerkraut makers prefer cabbage varieties with white interiors
and high solids content (less water). In any given year, 98
percent of cabbage used for sauerkraut is grown under contract
with processors, with open-market purchases limited to a few
hundred acres. According to the 1997 Census of Manufacturers,
there were seven firms manufacturing sauerkraut with sales over
$100,000--the same number as in 1992. These manufacturers
shipped the equivalent of nearly 10 million gallons of
sauerkraut (in cans, jars, and fresh-market polybags), valued at
$20.5 million, to  distributors and retailers in 1997.

New York produces about one-fourth of the nation's head cabbage,
with 79 percent of the crop destined for the fresh market. New
York tops the fresh market with 22 percent of national output
and also produces 39 percent of the nation's sauerkraut--second
only to Wisconsin. According to the Census of Agriculture, there
were 389 New York farms growing cabbage in 1997--28 percent
fewer than in 1992. New York's fresh-market production increased
61 percent over the past decade (1989-1991 to 1999-2001). Output
of cabbage for sauerkraut in New York has also increased, rising
23 percent over the past decade. Consolidation among processors
has led to diminishing production in Michigan, Ohio, and
Washington.

Growers in five New York counties planted cabbage on 1,800 acres
or more, led by Genesee (22 percent of state cabbage area),
Monroe (16 percent), and Niagara (15 percent) counties, which
each plant more than 2,000 acres. New York's fresh-market crop
accounts for 95 percent of the State's $77 million in farm cash
receipts for cabbage (1999-2001). New York's fresh-market
cabbage is shipped year-round with planting beginning in early
April. Harvest begins in August and continues into early
December with market shipments strongest from September through
November and seasonally low in June. A portion of the crop is
placed in cold storage and is marketed into the following
summer.

California is the second-largest producer of head cabbage
(virtually all for the fresh market), with 16 percent of
national output and 18 percent of the fresh-market crop.
California's cabbage acreage and production has been trending
higher since bottoming out in the mid-1970s. With a farm value
of $72 million, cabbage production during 1999-2001 averaged 44
percent above that of 1989-1991 and 125 percent above 1979-1981.
According to the Census of Agriculture, cabbage was produced
commercially on 252 California farms in 1997, up 14 percent from
1992 and 50 percent from 1982. Much of the recent acreage gains
have originated in the Salinas Valley of Monterey County--
sometimes referred to as the salad bowl of America and
headquarters for many of the major fresh-cut salad firms in the
U.S. Monterey County accounts for 30 percent of the State's
cabbage acreage, followed by Ventura County with 25 percent.
California harvests and ships fresh-market cabbage year-round
with volume peaking in January and February and again in
September and October.

Texas is the third largest domestic source of head cabbage,
accounting for 13 percent of the U.S. crop and 15 percent of the
fresh-market crop. Despite periods of extreme irrigation water
shortages in key production areas, fresh-market cabbage acreage
and production has increased 23 percent since 1989-91, but
output remains 7 percent below peaks reached in the 1980s. With
a farm value of $53 million, head cabbage was harvested by 152
farms in 1997--down 14 percent from 1992. Hidalgo (39 percent of
the crop) and Uvalde (17 percent) counties are the two leading
production areas in the Lone Star State. Texas harvests and
ships fresh-market cabbage year-round with volume peaking in
January and February and again in September and October.

With 10 percent of U.S. production, Wisconsin is the fourth-
leading source of head cabbage and is the top producer of
cabbage for sauerkraut (nearly half of national output). Two-
thirds of the State's head cabbage (valued at $4 million) goes
into manufacturing sauerkraut. Although the Badger State's
cabbage production during 1999-2001 has not changed much over
the past decade, it stands 25 percent higher than 1979-81. Fresh-
market production is up 44 percent since 1979-81, while cabbage
for sauerkraut is up 16 percent. Despite a downward trend in
both national supply and demand for sauerkraut, production has
been maintained through industry consolidation. According to the
1997 Census of Agriculture, head cabbage is produced on 142
Wisconsin farms--down 34 percent from 1992. Two-thirds of the
acreage is concentrated in Racine (39 percent) and Outagamie (26
percent) counties. Fresh-market cabbage is shipped July-
November, with volume generally peaking in October. Although
Wisconsin only accounts for 4 percent o f U.S. fresh-market
production, the state provides one-third of national supply in
October.

With 145 farms (1997 Census of Agriculture), Georgia supplies
more than 8 percent of U.S. head cabbage (10 percent of the
fresh-market crop)--placing the state fifth. Production in
Georgia was valued at $21 million in 2001--five times larger
than 1979-81. This reflects both a general increase in national
vegetable production over the past two decades, plus the
relocation and/or expansion of farm operations from other
States. In 1997, about 45 percent of the State's head cabbage
acreage was located in Colquitt County--up from 39 percent in
1992.

Trading Heads

Foreign trade plays a relatively minor role in the U.S. fresh
and processed cabbage industries. In terms of value, the U.S.
has historically been a net exporter of cabbage as steady year-
round supplies from an efficient domestic industry keeps prices
low and limits opportunities for imports. In 2001, exports of
fresh-market cabbage totaled $18 million while imports were
valued at $14 million. For sauerkraut, exports totaled $2.7
million while imports totaled $1.1 million in 2001.

Since at least 1960, the U.S. has exported a steady 3-4 percent
of available fresh-market cabbage supply. While export share has
changed little, fresh import share of consumption has increased
from less than 1 percent in the 1960s and 1970s, to 2 percent in
the 1980s, 3 percent in the 1990s, and nearly 4 percent thus far
in the 21st century. Canada takes 89 percent of U.S. fresh
exports, while fresh imports arrive mostly from Canada (55
percent) and Mexico (44 percent). Fresh imports peak in December
but are also strong out of Canada during the summer and fall.
For sauerkraut, imports have averaged under 2 percent of
consumption over time, with Germany accounting for more than
half the volume. About 3 percent of U.S. sauerkraut supplies are
exported annually, with most shipments to Canada.

Cabbage Is Nutrient-Rich

Cabbage, a cruciferous vegetable, is rich in nutrients. It is a
good source of vitamin C, has some vitamin A, and a fair amount
of thiamin, riboflavin,
potassium, and soluble and insoluble fiber. Fresh-market cabbage
is about 93 percent water, low in calories and sodium, and free
of fat and cholesterol. A 100-gram serving of fresh green
cabbage (about one and a half cups of shredded cabbage) contains
24 calories and more than three-fourths of the recommended daily
allowance (RDA) for vitamin C. A 100-gram serving (just under
one-half cup) of undrained sauerkraut contains 19 calories, has
no fat, provides fiber, and has 25 percent of the RDA for
vitamin C.

According to researchers at the Duke Comprehensive Cancer
Center, cruciferous vegetables like cabbage may be powerful anti-
cancer agents. Cabbage reportedly contains 11 of the 15
identified vegetable-related compounds found to deter cancer.

In addition to various fresh uses (salads, slaws, garnishes),
cabbage can be prepared by boiling, steaming, sautTing, baking,
braising, or stir-frying. Cabbage is frequently used in soups,
stews, eggrolls, casseroles, sweet and sour dishes, and meat
dishes, including the traditional corned beef and cabbage meal.
Shredded cabbage can also be used to replace lettuce in tacos.
At retail, fresh cabbage is traditionally sold from bulk
displays and in a variety of fresh-cut products sold in
polybags. A 1-1/2 pound cabbage yields 6 to 8 cups of shredded
raw cabbage.

Americans consumed 3 billion pounds of cabbage (fresh and
processed) in 2001. About 88 percent of cabbage consumption
occurs in fresh forms with the remainder largely in sauerkraut.
According to the USDA 1994-96 Continuing Survey of Food Intakes
by Individuals, 71 percent of all head cabbage is consumed at
home. While the majority of sauerkraut is consumed at home,
coleslaw accounts for the largest share of cabbage consumed away
from home. Reflecting a wide range of food service uses, about
56 percent of coleslaw is consumed away from home, with fast
food (26 percent of all coleslaw) the single largest source. Per
capita use of fresh-market cabbage was 9.1 pounds in both 2000
and 2001 and coleslaw was the primary dietary source of fresh
cabbage for many consumers.

Before recently stabilizing at 1.3 pounds per person, sauerkraut
consumption had trended lower during the 1980s from an average
of 2.2 pounds in the 1960s and 1970s. This may have reflected
occasional negative publicity regarding red meat consumption
(particularly smoked meats) and a general trend away from salty
foods. The recent stabilization in per capita use may reflect
the inclusion of sauerkraut in a wider array of recipes as
consumers search for more variety in foods. Despite the close
association of sauerkraut with deli sandwiches like the Rueben
and the popularity of the condiment on hot dogs, the USDA
consumer diet survey indicated that sauerkraut is largely
enjoyed at home (79 percent of sauerkraut is consumed at home).
The survey indicated that just 6 percent of sauerkraut came from
fast food places, and 8 percent each from other restaurants and
"miscellaneous" places (such as ball parks, arenas, and street
vendors).

Who Eats Cabbage?

Regional breakdowns for total head cabbage consumption indicate
that consumers in the South  (a 16-state region defined by the
Census Bureau) eat proportionately more cabbage than all other
regions. This may reflect preferences along racial lines as 53
percent of non-Hispanic blacks reside in the South and blacks
are the only major racial group (aside from Asians) to consume
proportionately more cabbage. Whites and Hispanics each consumed
less cabbage than their respective proportions of the
population. Looking at just sauerkraut, the survey indicated
that three-fourths of sauerkraut was consumed in the Midwest and
East with consumers in the South and West reporting light
consumption.

Among fresh products, whites and Hispanics consumed
proportionately less fresh whole cabbage, while blacks and
Asians ate a larger share. While non-Hispanic blacks account for
close to 13 percent of the population, they consumed 33 percent
of fresh whole cabbage. For coleslaw, whites dominated
the market, consuming 85 percent of all coleslaw, while all
other identified racial/ethnic groups consumed proportionately
less than their population shares. Similarly, whites consumed 91
percent of all sauerkraut, while Hispanics and Asians consumed
very little.

Sauerkraut and coleslaw appear to be favored most by consumers
with the greatest financial means. Survey households identified
as upper income (income 3.5 times the poverty level) represented
39 percent of the U.S. population but consumed 50 percent of the
coleslaw and 43 percent of sauerkraut. For whole fresh cabbage,
the 19 percent of consumers identified as being lower income
households consumed 20 percent of cabbage, while those in the
upper income group consumed 36 percent. For all cabbage, middle-
income households accounted for the greatest share of use (43
percent) with the lower income group consuming proportionally
less.

Men consume about one-fourth more cabbage (fresh and processed)
per capita than women. This may largely be explained by the
higher caloric intake of men, differences in tastes and
preferences, and perhaps a greater consumption of fast foods. In
proportion to their population shares, both men and women over
the age of 40 are strong consumers of cabbage. With the
exception of coleslaw, men aged 20-39 (16 percent of the
population) favor cabbage, particularly sauerkraut, for which
they account for 30 percent o f the total. Curiously, the survey
indicated that women between the ages of 20 and 39 tend to avoid
cabbage of all types.

Relative to other age groups, people under 20 are very light
cabbage consumers. This age group accounts for nearly 30 percent
of the population, yet consumes just 10 percent of all cabbage.
Part of this may reflect a natural maturation of tastes and
preferences, something that seems plausible given strong cabbage
consumption by men aged 20-39. These people were raised in the
1960s and 1970s when a wider array of foods were available,
compared with the largely "old world" vegetable choices of those
who grew up prior to 1960.

The U.S. cabbage market is a relatively mature, domestically
oriented market. Demand for cabbage and cabbage products appears
to have stabilized within the past decade after an extended
period of contraction. The decline was likely arrested by the
introduction of fresh-cut products containing cabbage, plus
industry efforts to expand and encourage consumption. The
success of the cabbage and sauerkraut industries may lie in
expanding the range of product uses and also in the discovery
and communication of pro duct benefits. As medical and
nutritional research continues to unlock the secrets to the
potential health benefits of cruciferous vegetables like
cabbage, consumer reaction to any new findings may ultimately
hold the key to future industry growth.

Gary Lucier (202) 694-5253 glucier@ers.usda.gov Biing-Hwan Lin
(202) 694-5458 blin@ers.usda.gov

To read more about vegetables (and melons), see the ERS website
at www.ers.usda.gov/briefing/ vegetables/

SIDEBAR #1--Cabbage

The Cabbage Patch

Cabbage belongs to the Cruciferae (mustard) family--which
includes Brussels sprouts, broccoli, cauliflower, and kale.
Cabbage is of the genus Brassica, species oleracea, and variety
capitata. This shallow-rooted, cool-season crop (grows best when
temperatures are 50-75 degrees F.) is cultivated for its large
leafy head and is thought to have originated in Western Europe.
Before being thought of as a food, cabbage was valued for
medicinal purposes in treating headaches, gout, and diarrhea.
Cabbage juice was reportedly used as an antitoxin for poisonous
mushrooms.

The pungent smell for which cooked cabbage is noted is caused by
sulfur
compounds that are released when the vegetable is heated.
Cabbage is best cooked in an uncovered steel pot or pan since
aluminum pots and pans tend to enhance the sulfurous chemical
reaction.

Although this article focuses largely on traditional head
cabbage, there are several different types of cabbage. There are
also several vegetables that have cabbage in their names but may
not even resemble what we commonly consider cabbage. Some of the
various kinds of cabbages and pretenders include:

Green head cabbage is the traditional common type that still
dominates the market. It sports light green leaves in a large
compact head consisting of many thick, overlapping, smooth, waxy
leaves. The outer "wrapper" leaves on fresh cabbage fit loosely
and are usually discarded by the consumer. On cabbage sold from
cold storage, the wrapper leaves are trimmed off before
retailing and the head color is usually much paler (prolonged
cold storage whitens cabbage). There are three main types of
green head cabbage--domestic, Danish, and pointed.

*  Domestic types feature loose, rounded, or partly flattened
heads which tend to be medium in size (2-3 pounds), relatively
sweet, and preferred for coleslaw.

*  Danish types feature smooth, round, hard and compact, almost
white heads. These late varieties are both marketed in the late
fall and moved into cold storage for later sale. They are
suitable for sauerkraut and are also said to be good for
cooking.

*  Pointed varieties, grown chiefly in the Southwest, feature
smooth leaves and small, cone-shaped heads.

Red cabbage (Rubra subgroup) resembles green head cabbage except
that its leaves have a purplish-red color that adds interest to
salad mixes.

Savoy-type cabbage varieties (Sabauda subgroup) feature crinkled
leaves in a loosely compact, yellow-green, oval-shaped head. A
good source of beta-carotene, savoy tends to be tender and mild
and is well suited for both cooking and salads.

Chinese cabbage (brassica pekinensis) is also known as napa,
hakusai, pe-tsai, won bok, and Peking cabbage. Chinese cabbage
is sweeter and milder than head cabbage and has oblong, thin,
crisp, crinkly, cream-colored inner leaves with light green
ends.

Bok choy (brassica chinensis) also called Chinese white  cabbage
and white mustard cabbage, has long, mild, white stalks topped
with green leaves.

The pretenders (cabbage by name only)...

Cabbage palm yields a delicacy known as the "Heart of Palm"--the
meat of the cabbage palm tree which is actually the Sabal Palm--
Florida's state tree.

Ornamental cabbages also known as flowering kale. Some varieties
are marketed as decorative garnishes for salad bars, but most
are grown for fall and winter landscaping plants.

Cabbage turnip is another name for Kohlrabi, which resembles a
turnip with leaves and whose flavor is similar to turnip.

Skunk cabbage (Symplocarpus foetidus), unrelated to the cabbage
family, is found in wet areas of the Midwest and Northeast. It
is an early spring wildflower with an unpleasant odor.

SIDEBAR #2--Cabbage

Sour Cabbage

Although a type of wine-pickled sauerkraut was reportedly made
in China over 2,000 years ago, the Germans are credited with
being the first to ferment cabbage using salt near the end of
the 16th century. The word sauerkraut means "sour cabbage" in
German. Since it kept well and contained vitamin C, sauerkraut
sailed the open seas and helped prevent scurvy. Sauerkraut was
introduced to America by German immigrants in Pennsylvania.

Sauerkraut is made by shredding special varieties of cabbage,
adding salt, and curing for several weeks in large wooden or
concrete vats. Since it is a salt-pickled product, consumers
concerned about sodium intake can rinse sauerkraut to reduce the
sodium and also provide a milder flavor. According to the Pickle
Packers International, there are several variations of
sauerkraut including;

*  Bavarian kraut--includes caraway seeds and added sugar; *
Winekraut--fermented in white wine; *  Sauerkraut salad--a ready-
to-eat, somewhat sweet and mild mixture of cabbage, onions, red
peppers, vinegar, and seasonings.

According to the industry, over one billion servings of
sauerkraut are consumed each year, with one-fourth of all
households buying sauerkraut. Sauerkraut is featured at various
Oktoberfest festivals (the first was in Bavaria in the early
1800s) around the world. Among the more popular uses for
sauerkraut is the Reuben sandwich. This is a combination of
corned beef, Swiss cheese, sauerkraut, and Russian dressing on
rye bread and was invented by deli owner Reuben Kulakofsky in
the kitchen of Omaha's Blackstone Hotel about 60 years ago. Even
the juice remaining in a container of sauerkraut can provide
added value as it makes an effective and tasty meat tenderizer.
To top off your meal, sauerkraut can even contribute to dessert-
-among the many innovative recipes is one for chocolate
sauerkraut cake.


WORLD AGRICULTURE & TRADE

The Ongoing Reform of Land Tenure Policies in China

The combined force of economic transition, rapid economic
growth, and increased integration into the world economy are
propelling substantial changes in rural China. The changes not
only expose China's farmers to competition from producers in
other countries, but also provide them greater autonomy and
incentives to produce crops more efficiently, drawing farm
households from subsistence production into more commercialized
agriculture and shifting rural resources out of agriculture into
other sectors of the economy.

How farmers respond to changing economic opportunities and
challenges depends critically on the choices they are able to
make about the use of land and other resources. These choices
depend in turn on land tenure patterns. With 9 percent of the
world's arable land and 40 percent of the world's farmers, China
is scarce in land relative to labor. Control over land in China
(as elsewhere) reflects a complex and changing distribution of
authority among national governments, local governments, and
households, with potentially important implications for
efficiency, equity, and environmental quality.

Land Tenure in China Today

China once had an active land market, but land tenure practices
have undergone several major transformations since the early
1950s. The lack of incentives and the difficult management
burdens inherent in the collective system (1958-78) ultimately
gave way to reforms that restored the farm household as the main
unit of production. Nevertheless, land rights continue to be
shared by collectives and households.

Collective Rights. Collectives maintain formal ownership of
farmland in China, and the collective body allocates land use
rights to member households. Initial allocations took place
during 1978-84 as villages adopted the Household Responsibility
System (HRS). To maintain the egalitarian access to land that
was a hallmark of the collective system, households were
generally allocated rights to land on a per capita basis (some
villages also took the number of workers into consideration).
Despite efforts to maintain fairness by allocating each
household multiple plots of varying quality, these allocations
had the potential to be very contentious.

Collectives also maintain the right to reallocate land between
households periodically. Some reallocations are instigated by
the xiaozu--groups of 30-40 households that are often the de
facto owners of farmland--and only affect selected households.
Under village-wide reallocations (cunzhuang tiaozheng) the
village leadership makes the allocation decisions and most, if
not all, of the land in the village is reallocated. The
collective's right to reallocate land introduces tenure
insecurity since farm households cannot count on being allocated
rights to the same land in the future.

Household Rights. Farm households' rights consist primarily of
rights to produce and dispose of crops, although rights vary by
type of plot. Farmers make most of the production decisions on
their land, but the land must stay in agricultural production.
Villages sometimes impose compulsory planting requirements on
some of the land allocated to farm households. For example, most
households receive responsibility land from which they are
required to produce and deliver a fixed amount of grain to the
state, although the grain delivery obligation has not been
enforced in many provinces in the last few years. More recently,
some villages have sought to promote cultivation of specific
cash crops, and have imposed compulsory planting requirements on
some plots. Some villages allow land to go fallow, but others
enforce fallow taxes. Household land rights are subject to local
taxes and fees (often paid in kind), which are usually based on
households' land al locations.

The 1984 law establishing the HRS explicitly extended to farm
households the right to rent their land to other households, and
most villages now allow households to exercise this right. A
growing land rental market has developed, particularly in
certain regions, but land rental arrangements in China tend to
be very informal and short-term. Further growth in land rental
transactions may be constrained by ambiguity over these rights.
A 1996 survey of 780 rural households in northeast China found
that 76 percent of farm households did not know if they had the
right to rent their land to others.

Reallocation Practices

Since the original land allocations to households at the
beginning of HRS, roughly 80 percent of villages have
reallocated their land at least once. But reallocation practices
vary widely. In Guizhou Province, less than 5 percent of the
villages have carried out a reallocation since HRS, while in
other provinces this figure is above 90 percent.

In the 1996 survey of rural households in northeast China, 4 of
the 31 villages reported no village-wide land reallocations as
of 1995, but 3 villages had reallocated land nearly every year
since adoption of HRS. Why some provinces and local regions
engage in reallocations while others do not is not fully
understood and is widely debated among China scholars. There are
a variety of possible economic and political explanations for
these differences.

Underlying changes in household demographics are usually cited
as the main motivation to reallocate village land. Marriages,
births, and deaths can change the number of people in village
households so the original land distributions no longer
represent the egalitarian ideal. Many argue,
however, that egalitarian reasons are usually not the main
motivation for land reallocations.

Other reasons for land reallocations may include number of
workers and availability of nonfarm employment. Many villages
explicitly consider the number of workers, and sometimes the
number of workers depending on agriculture, in their
reallocation decisions. Villages where nonfarm employment is
abundant may have established policies to pool land and allocate
it to a small subset of village households to farm with labor-
saving equipment. Many of these villages then allocate shares of
the profits from agricultural production to village households.
Households in which workers are engaged in nonfarm employment
have less demand for their land, making them vulnerable to
dispossession in land reallocations. In very wealthy villages
where all residents earn income from nonfarm sources, farmland
may be rented out to migrant workers.

Land management practices vary at the local level in China in
part because of ambiguities in national laws and policies.
National land laws state that rural land is collectively owned
and that village leaders have ultimate authority over
agricultural land. In some villages, however, the xiaozu are
recognized as the de facto owners, while in other areas
townships wield considerable influence over land use policy. In
a recent World Bank survey, 26 percent of households reported
that farmers (through their xiaozu) have the primary
decisionmaking power concerning land reallocations, while 43
percent replied that villages had this authority, and 24 percent
indicated the township was the primary decisionmaker. Instances
of villages or townships reallocating land away from village
households also abound, often passed to outside investors for
nonagricultural uses. The compensation to farm households in
such cases is arbitrary.

Equity, Efficiency, & the Environment

China's land tenure policies have both positive and negative
effects. After adoption of HRS, productivity growth in
agriculture and rural incomes rose dramatically, lifting
hundreds of millions of rural residents out of severe poverty.
Among the key factors in these developments are the enhanced
incentives afforded to China's farmers once they had greater
access to land and rights to their production.

Unlike many countries at similar stages of development, China
does not have a large population of rural landless workers
vulnerable to famine or other extreme economic shocks. This is
in part due to land tenure policies that guarantee households
access to land. China does have large numbers of rural-urban
migrants, but they are spread among several large urban centers
and hundreds of smaller urban centers, and the number of rural-
urban migrants is likely much smaller than it would be if land
were not allocated on a per capita basis. Relatively egalitarian
access to land has also ensured that nearly all rural households
are at least food self-sufficient, and has been linked to levels
of nutrition higher than other countries with similar income
levels.

On the other hand, China's reallocation policies may have
negative effects on land use efficiency. Many observers argue
that tenure insecurity generated by reallocation policies
undermines households' incentives to invest in their land. The
fragmented nature of household land holdings and the small plot
sizes may also discourage investment. The negative effect on
investment may be most pronounced in the case of expensive, long-
term investments such as orchards, wells, and ditches. This may
slow the process of specialization into labor-intensive crops
for which China has a comparative advantage, since many of these
crops require large investments. It may also slow the shift to
higher-valued crops that are increasingly in demand by China's
wealthy urban consumers.

China's land tenure practices may also adversely affect the
process of specialization by making it difficult to take
advantage of economies of size and scale and by discouraging
movement off-farm. Farm households that
develop successful cash crop operations may face obstacles to
expanding these operations due to the difficulty of acquiring
land. Other farm households may not rent their land to these
specialized households due to village policies that discourage
renting, or out of fear that renting out land heightens the risk
of dispossession in the next reallocation.

Research suggests that land rental activity is constrained, but
precise causes remain unclear. It may be that the risk of
dispossession reduces the supply of land for rent.
Alternatively, it could be that periodic land reallocations
decrease overall demand for rental land. Households may also be
discouraged from allocating labor off-farm for fear that land
may be taken away if it appears they do not need it. When rights
to land are ambiguous, households have an incentive to stay in
the village and protect t heir rights by continuous occupation
and cultivation.

Concern is also growing about the effects of China's land tenure
policies on the environment. Farm households with insecure
tenure have less incentive to apply conservation practices since
the land is not theirs in perpetuity. This may encourage farm
households to expand farm operations on environmentally
sensitive land, causing soil erosion, overgrazing, and other
environmental problems.

Toward a Land Market in China

Scholars and observers both inside and outside China advocate
policies to increase tenure security. Some call for
establishment of a land market based on private ownership of
land. Others argue that this may exacerbate existing problems or
generate new ones, noting that without a system of title
registration, enforcement, and credit, a land market based on
private property rights may be unworkable. It might also result
in a concentration of land ownership and the rise of landless
households, an outcome that is politically unacceptable to
China's leaders. Market-based outcomes, however, can be achieved
through a system of clear, enforceable, and tradable rights,
without establishing full private ownership.

The current policy trend in China is to establish 30-year use
rights to land and written contracts guaranteeing these rights.
China's most recent national directive concerning land use
(1998) encourages the extension of 30-year land use rights to
farm households backed by a written contract. A World Bank
survey found that 55 percent of farmers have signed a 30-year
contract, but this varied by locality. Furthermore, many of
these contracts do not explicitly rule out land reallocations
during the 30-year period, and many contain language that
specifically allows reallocation. Indeed, of the farmers who
were aware of the national policy encouraging 30-year use rights
and written contracts, only 12 percent felt that these policies
will definitely prevent reallocations during the 30-year term,
and 46 percent felt that reallocations will definitely continue
despite the new policy.

These findings point to the critical issue of enforcement. No
matter which policies are established to increase tenure
security, they will fall short of their goal so long as fair and
accessible institutions are not also established to resolve
conflicts and settle disputes. Funding such a system through
higher levels of government would help ensure that local
governments do not use their control over finances to sway
decisions. But such a system can be expensive, and China's
government faces severe fiscal constraints already.

There are alternative ways to build a land market in China other
than by establishing full private ownership rights in land.
Clarifying and enforcing existing land rights, and making these
rights tradable, has the potential to improve farm households'
incentives for investment and specialization while maintaining
broader public interests in equity and the environment.
Fundamentally, a land market is simply a set of clear and
enforceable property rights--including partial rights such as
existing household rights to use land and dispose of crops--and
a mechanism to trade these rights. China currently has a set of
partial land rights that
appears complex and ambiguous when viewed from the national
level, since local areas engage in such a wide variety of land
tenure practices. But the rights in particular localities may be
very well established. If existing rights can be codified and
institutions set up to enforce and trade them, right-holders
will be able to trade them according to market principle s--even
in the absence of full private ownership at the household level.

Bryan Lohmar (202) 694-5226 blohmar@ers.usda.gov Agapi Somwaru
(202) 694-5295 agapi@ers.usda.gov Keith Wiebe (202) 694-5502
kdwiebe@ers.usda.gov

SIDEBAR #1--China

Land Rights are Distributed at Many Levels in China

National government:    The central government establishes
national land laws and directives that provide guidelines for
local policy makers.

Provinces:  Provincial as well as national policies affect local
policies. For example, Guizhou Province promotes secure 30-year
use rights for farmers, and has far less reallocation activity
than other provinces.

Townships:  In some areas, townships may influence village land
policies, including village-wide land reallocations.  A township
district contains roughly 10-20 villages.

Villages:  Villages in China comprise roughly 300-500
households.  Village leaders usually have ultimate authority on
land allocation, but often delegate some or all of this
authority to the xiaozu.

Xiaozu:  Xiaozu are groups of 30-40 households (remnants of
production teams organized during the collective period). Xiaozu
are often the de facto owners of the land, but generally work
with village leaders on land allocation. Xiaozu leaders may
periodically reallocate land among member households, usually to
provide land for new households at marriage.

Households:  Households are allocated rights to use land,
usually several small plots.  Specific rights on each plot may
vary, but are mainly the right to farm the land for a finite
period and to keep or sell the produce.

Farmers:  Individual farmers do not have rights to the land, but
farm the land allocated to their households.

SIDEBAR #2--China

The Evolution of China's Land Tenure System

Private land markets, pre-1949. Under China's feudal system,
land was held by small landowners who farmed their own land, and
by landlords who rented land to tenant farmers. Land markets
were supported by (often local) institutions to define
boundaries, register ownership, and provide titles.

Land reform, 1950-53. China's new government implemented a
national land reform movement soon after coming to power in
1949. Landholdings were redistributed to landless and land-short
farm households. Deeds held by landlords were destroyed, and new
deeds were issued to the new owners along with full rights to
rent and sell their land.

Initial collectivization, 1953-57. Shortly after land reform,
Party cadres began encouraging farmers to set up agricultural
producer cooperatives--small groups of farm households that
pooled some or all of their land and farmed the larger plots
collectively. Income was distributed according to the land each
household contributed to collective production. After forming
cooperatives, the cooperatives were pooled into larger
collectives where income was distributed according to the amount
of land and labor contributed. By 1957, over 90 percent of farm
households had organized into roughly 700,000 large agricultural
collectives.

Full collectivization, 1958-78. Under the Great Leap Forward,
agricultural collectives were ultimately merged into 24,000
communes encompassing entire townships. Households turned over
nearly all of their productive assets, and teams of workers
carried out nearly all production (households often maintained
small private plots during all or part of the collective
period). Income was distributed according to labor contribution
and need through a complex system of "workpoints." This system
existed through the end of the Cultural Revolution (1966-76),
except for a period of partial liberalization in the early
1960s.

Decollectivization, 1978-84. Under new leadership, China's
government encouraged efforts to alleviate poverty and induce
economic growth. Many rural areas abandoned collective
production entirely and contracted with households to deliver
fixed amounts of grain in exchange for access to land.
Households were allowed to keep the remaining production for
their own consumption or to sell on the market.

Household Responsibility System, 1984-present. In 1984, the
expanding system of contracting with households directly was
officially approved by China's national government. The law
stipulated that land was still owned by the collective, but did
not clarify whether the collective was the village or the
xiaozu. The law also stipulated that households should receive
15-year contracts to their land, and have the right to rent land
and hire labor. Collectives maintained the right to reallocate
land among households. Subsequent clarifications and directives
have encouraged extending the contract length from 15 to 30
years, providing households with written contracts, and limiting
the collective's right to reallocate land.


WORLD AGRICULTURE & TRADE

Trade Among Unequal Partners: Changing EU Trade Arrangements
with Developing Countries

[NOTE: See end of article for acronyms used.]

The European Union (EU) has been a major player in the General
Agreement on Tariffs and Trade (GATT) since its inception in
1947 and in World Trade Organization (WTO) agreements since
1995, when the WTO began administering international trading
rules. The foremost WTO principle is most-favored-nation (MFN)
treatment, requiring WTO members to accord all members the best
trading conditions provided to any particular country.
Implicitly, the MFN principle precludes special trading
arrangements.

WTO rules provide exceptions to the MFN principle, however. Far
more than other WTO members, the EU has used these exceptions to
justify preferential trading arrangements. The EU's many
preferential arrangements form a mosaic of tariffs, quotas, and
other restrictions on EU agricultural imports (AO December
2001).

Some EU preferential trading arrangements with developing
countries were challenged under GATT procedures, and again more
recently in the WTO, as discriminatory and not in compliance
with international trade rules. The challenges focused on EU
import regimes that favored EU distributors over other
distributors and former colonies over other countries.

Since 1996, EU actions and proposals to make its trading
arrangements compatible with WTO rules have centered on
renegotiation of arrangements with some developing countries to
establish free trade areas. The WTO compatibility of EU
proposals and of numerous elements of current EU preferential
arrangements remains controversial and untested in the WTO,
however.

The proposed free trade areas could have important implications
for global
trade. Some developing countries could face difficult new trade
competition and economic challenges, without clear new
advantages. The EU, on the other hand, will gain strong
advantages for its agricultural and other exports to some
developing countries at the expense of exports from the U.S. and
other countries.

WTO Exceptions to the MFN Requirement

The GATT and WTO agreements have recognized a need to improve
developing countries' access to world markets. Since 1979, the
"Enabling Clause" has provided a permanent exception from MFN
obligations so that developed countries "may accord differential
and more favorable treatment to developing countries" through a
"system of generalized, nonreciprocal, and nondiscriminatory
preferences" (usually referred to as a Generalized System of
Preferences, or GSP).

Under GSP provisions, developed countries do not expect
reciprocity for commitments made by them in trade negotiations
to reduce or remove tariffs and other barriers to the trade of
developing countries. Developing countries are not required to
make concessions that are inconsistent with their development,
financial, and trade needs. These provisions for nonreciprocal
concessions acknowledge that developing countries cannot
necessarily compete economically with developed countries.

The Enabling Clause also provides that countries identified as
Least Developed Countries (LDC) by the United Nations may be
granted even more favorable treatment. Additional concessions
for the LDCs allows for differentiation of trading preferences
based on economic capabilities and needs.

WTO rules provide another, very different, exception to MFN
obligations. WTO members may establish free trade areas (FTAs)
within which the duties and other restrictive regulations of
commerce (except where expressly permitted within WTO rules) are
eliminated on substantially all trade between the member
countries. Unlike nonreciprocal arrangements, FTAs expose all
partners to economic competition with all other partners at zero
duties on substantially all traded goods.

In addition to the FTA and GSP exceptions, special waivers of
MFN or other WTO obligations can be granted with approval of
three-fourths of WTO members.

EU Trade Arrangements & WTO Compatibility

The EU has provided a GSP to most developing countries since
1971. Since the 1970s, the EU also has provided special
nonreciprocal tariff reductions for former African, Caribbean,
and Pacific (ACP) colonies and for Mediterranean countries. For
agricultural products, many of these concessions have been
limited by quotas. Historically, most EU preferential
arrangements with developing countries have been nonreciprocal,
providing no preferences to EU exports. The EU's preferential
trade agreements have provide d relatively greater advantages to
some developing countries, effectively disadvantaging others.
Least favored are the GSP countries that are neither LDCs, ACP,
or Mediterranean countries.

Challenges to EU preferential trading arrangements have arisen
from unresolved ambiguities in WTO provisions. Most publicized
has been a challenge to the EU banana import regime. The EU's
banana regime clearly was GATT/WTO-incompatible long before
resolution of the case in 2001. Several countries had
successfully challenged the banana quotas in 1992, but the EU
prevented adoption of the panel rulings by blocking the
consensus required under GATT dispute resolution rules. The U.S.
filed a case against the regime in 1997 under the new WTO
dispute settlement procedures. The WTO panel found the regime to
be discriminatory. Because of the binding nature of WTO dispute
settlement and the procedures providing for automatic adoption
of WTO findings, no longer requiring consensus, the
EU could not ignore the WTO findings.

Binding WTO dispute resolution procedures have greatly improved
prospects for less-favored developing countries to successfully
challenge EU trading arrangements. These countries presented
considerable resistance in 2001 to a waiver for newly adopted
ACP arrangements, which included the revised EU banana quotas.
Since 1994, Brazil, India, Venezuela, and Thailand have filed
challenges to the EU's GSP.

Generalized System of Preferences. The EU's GSP provides reduced
tariffs without quotas on selected products to most developing
countries. However, only small or no tariff reductions are
granted on most agricultural products supported by the EU's
Common Agricultural Policy (CAP). Additional tariff reductions
are granted to countries observing environmental or labor
standards and for participation in drug control programs. Since
March 2001, under its "Everything But Arms" (EBA) policy, the EU
has provided duty and quota-free access to its markets for the
agricultural products of 42 LDCs. Quotas will manage transition
to duty-free and quota-free imports of sugar, bananas, and rice
until 2008. The EU's current GSP program expires in 2004, and
will be reconsidered at that time.

Some countries have been "graduated"--i.e., GSP preferences have
been withdrawn because a country became relatively wealthy, or
became a dominant supplier of EU imports of a particular
commodity. Nine countries, including Brazil, Argentina,
Malaysia, and Thailand, have lost preferences on specific
agricultural commodities. South Korea and Taiwan have lost all
preferences.

The EU has not acknowledged any WTO incompatibilities regarding
its GSP, even though faced with challenges. The challenges focus
on the graduation (withdrawal of preferences) for some
countries, and on tariff concessions related to environmental,
labor, and drug programs. Challengers see these provisions as
inconsistent with the Enabling Clause's provision for
generalized and nondiscriminatory preferences for all developing
countries. Provisions of the EBA policy have not been
controversial and have not bee n challenged in the WTO.

Nonreciprocal ACP and Mediterranean arrangements. In addition to
the GSP, the EU has granted special nonreciprocal trade
preferences to 76 former ACP colonies and to Mediterranean
countries since the 1970s. Unlike the GSP, which is quota-free
but generally with somewhat higher tariffs, tariff-rate quotas
limit some of the most valuable ACP and Mediterranean tariff
preferences. Particularly important are ACP protocols for EU
imports of 52,000 tons of beef from 6 ACP countries and 1.2
million tons of sugar from 13 other ACP countries. The
Mediterranean countries have had valuable import quotas for
fruits and vegetables.

The EU banana import regime favored EU banana distributors over
distributors of other countries, and former ACP colonies over
other developing countries. The WTO dispute panel found the
banana import quotas for former colonies to be discriminatory
and inconsistent with WTO rules. Following the WTO panel
finding, the EU requested a waiver and received approval by the
necessary three-fourths of WTO members to operate the ACP
arrangements, including a revised banana regime, for an interim
period while implementing a tariff-only system for banana
imports and renegotiating EU trading arrangements with ACP
countries.

Of WTO disputes that involve preferential trading arrangements,
only the EU banana case has so far been resolved through WTO
dispute resolution. The findings in that case are numerous and
complex, limiting clear application to other situations.
Consequently, many issues relating to WTO requirements for
preferential trading arrangements remain unresolved. Positions
taken by the EU and others relating to preferential arrangements
await clarification through WTO dispute panels or multilateral
negotiations. At this point, none of the EU's current FTA
agreements, or those of other countries, have been verified by
WTO review processes as fully consistent with WTO
requirements.

Without clarity on important issues relating to preferential
trade arrangements, the EU is proceeding based on its own view
of WTO requirements. EU positions are implicit in its proposals,
background papers, and the provisions of EU trading agreements
already negotiated. In nonreciprocal arrangements, the EU
appears to believe that preferences to a
selected group of developing countries require a waiver of MFN
obligations.

WTO rules also require that administration of quantitative
restrictions be nondiscriminatory--"no prohibition or
restriction shall be applied by any contracting party on the
importation of any product of the territory of any other
contracting party...unless the importation of the like product
of all third countries...is similarly prohibited or restricted."
EU proposals imply that the provision of tariff-rate quotas for
a selected group of developing countries within nonreciprocal
arrangements requires a waiver
of that WTO requirement.

Free trade area agreements. The EU itself is an FTA, and the EU
has FTA agreements with Mexico, South Africa, and various non-
EU European and Mediterranean countries. FTAs have been
controversial. In review of more than 120 FTA agreements, GATT
and WTO working parties on regional trade agreements have
almost never agreed unanimously that GATT or WTO criteria were
fully met. Lack of binding dispute resolution before 1994
seriously limited effective challenges, however.

EU FTA agreements include tariff-rate quotas for sensitive
agricultural products that compete with EU products, even
though WTO provisions for FTAs call for free trade and do not
provide for quota restrictions. Whether tariff-rate quotas
within FTAs must conform to WTO requirements for
nondiscriminatory administration of quantitative restrictions
is a key unresolved issue. Current EU FTA agreements and EU
proposals imply that the EU considers that tariff-rate quotas
need not be nondiscriminatory so long as "substantially all the
trade" is duty- and quota-free. The EU strategy is that current
tariff-rate quotas for sensitive agricultural products in
nonreciprocal relationships can be maintained without waivers
within FTA agreements. This proposition has not been tested
within the WTO, however.

While the WTO requires that "substantially all the trade"
within an FTA be liberalized, no precise interpretation of that
phrase has yet been established. The EU has interpreted the
requirement to mean substantially all historical trade. The
problem with relying on historical trade is that it effectively
allows continuation of significant historical trade barriers.
Historical trade has excluded the EU's most sensitive
agricultural products. EU FTA agreements protect sensitive
agricultural products by excluding them from liberalization or
by restricting imports through tariff-rate quotas. The EU-
Mexico agreement, for example, provides for total
liberalization of 95 percent of historical EU imports. For
agriculture, however, only 62 percent of historical trade will
be fully liberalized, and historical trade already excluded
sensitive products. In the EU agreements with Mexico and South
Africa, those countries also excluded some of their imports
from liberalization.

Complying with WTO Rules

The overarching problem for the EU is that current WTO rules
provide limited unambiguous scope for differentiation of
trading preferences among developing countries. For example,
should small or poor countries like St. Kitts or Senegal, which
are not LDCs, be provided better trading preferences than
larger and more economically powerful developing countries such
as Brazil or China?

The WTO framework clearly provides for only four classes of
differentiation between trading partners: 1) MFN treatment, 2)
bilateral reciprocal free trade, 3) nonreciprocal and
nondiscriminatory preferences for developing countries, and 4)
special nonreciprocal and nondiscriminatory preferences
for the LDCs. Further differentiation among non-LDC developing
countries remains controversial. To maintain historical trade
preferences for some developing countries by opting for
reciprocal FTA arrangements also provides large advantages for
EU exports, especially in agriculture.

EU arrangements effectively have differentiated among non-LDC
developing countries. GSP "graduation" (withdrawal of
preferences) is based upon economic criteria related to trade
performance or economic development. ACP preferences, however,
are not based on economic criteria, but reflect the legacy of
European colonial relationships. Nonreciprocal Mediterranean
preferences also have had no economic basis, but reflect long-
standing trade relationships and important political
associations.

Having accepted that its trading arrangements with former
colonies do not comply with WTO requirements, the EU has
committed to negotiating FTA agreements with ACP and
Mediterranean countries on the assumption that current ACP
quotas are compatible with WTO requirements for FTAs. WTO
provisions, however, do not necessarily support such an
assumption. EU FTA agreements may be a fertile field for WTO
contests.

Nonreciprocal Mediterranean arrangements shared most of the
problems of ACP arrangements. Appropriate waivers could provide
for current ACP or other arrangements, but the EU apparently
assumes that politics would not allow for such waivers beyond
the interim period to 2008 provided by the current waiver.

For some developing countries, solutions already are in place.
For ACP countries that also are LDCs, the EBA policy provides
the best preferences available and those preferences are
uncontested. Solutions for the Mediterranean countries are also
largely in place. Since 1997, FTA agreements with the
Palestinian Liberation Organization, Tunisia, Israel, Morocco,
Egypt, and Jordan have been implemented or negotiated to
replace earlier nonreciprocal arrangements. Additional FTAs are
envisioned to replace nonreciprocal arrangements with the
remaining Mediterranean countries.

The EU proposes to negotiate FTA agreements by 2008 with
several groupings of ACP countries. In the EU plan, regional
integration would be enhanced, while the broader unity of ACP
countries would be maintained. Agreements would provide
development assistance to foster integration into the global
economy. The agreements would include tariff-rate quotas
equivalent to current ACP provisions for sugar and beef.

Current EU provisions for the GSP expire in 2004. Proposals for
a revised GSP have focused on bolstering preferences to provide
a viable alternative for ACP countries that are unable or
unwilling to enter into FTAs. Extension to all developing
countries of preferences equivalent to current ACP preferences
would reduce the value of ACP preferences. Some advocates of
ACP countries would like to see WTO rules revised to allow for
greater differentiation of preferences among developing
countries. For LDC arrangements, no changes have been proposed.

Implications of EU's Proposed Free Trade Agreements

The implications of proposed FTA agreements depend on the EU
policy context in which they would operate. To protect EU
agriculture, the CAP has carefully managed EU imports of
agricultural products that compete domestically with those of
EU producers. The CAP has assured that import quantities are
consistent with internal price objectives by applying tariffs
high enough to raise the price of imports to CAP levels, by
establishing minimum import price requirements, or by
restricting import quantities to tariff-rate quota amounts. The
EU is largely an open market for nonagricultural products, with
an average MFN tariff of only 4.2 percent in 1999. However, for
agricultural products, MFN tariffs average 30 percent and
exceed 50 percent for grains, sugar, and frozen meats, and 87
percent for dairy products. The potential application of very
high MFN
tariffs enforces minimum import price requirements and assures
that imports do not exceed tariff-rate quota amounts, despite
WTO elimination, in principle, of all non -tariff import
restrictions. Most of the EU's agricultural tariff-rate quotas
are provisions of preferential trading arrangements.

Since EU agricultural imports remain restricted by the CAP to
amounts consistent with CAP internal price objectives, EU
preferential trading agreements do not create trade.
Principally, they determine the sources of imports. Throughout
eight rounds of multilateral trade negotiations, the EU has
maintained high MFN agricultural tariffs and retained effective
control of its agricultural imports. The unconditional opening
of EU agricultural markets to the LDCs under the EBA policy was
possible because the limited export potential of those
countries posed a limited threat to EU interests.

Current EU FTAs exclude sensitive agricultural products from
liberalization. If proposed FTAs with ACP countries conform to
historical practice, they are unlikely to expand EU
agricultural imports. Without increased EU agricultural
imports, the principal outcome of the revised agreements for
developing countries may be some reallocation of historical EU
imports among developing country partners.

The EU really cannot lose with the proposed FTA agreements. It
is likely simply to continue current preferences, including
quotas, in arrangements that the it hopes will be WTO-
compatible. While giving up little, the EU would gain preferred
access to the markets of developing-country FTA partners. The
U.S. and other exporters would lose share in these markets as
the EU gains advantage.

The advantage for the EU could be quite strong for agricultural
products. Developing countries maintain relatively high MFN
agricultural tariffs, with average tariffs of 71 to 113 percent
in Africa, the Caribbean, and South Asia and 39 percent in
South America. MFN tariffs on cereals in the important North
African markets average 84 percent. EU products priced well
above world prices could be competitive as exports to FTA
partners so long as the MFN tariff is as large as the gap
between EU and world prices. The EU potentially would be able
to export to FTA partners without subsidies, effectively
circumventing WTO restrictions on subsidized exports.

Even if the FTA agreements exclude some agricultural products
from liberalization, important advantages for the EU could be
obtained within quotas. Current FTAs include preferences for
800,000 tons of EU wheat annually to Mediterranean countries.

For developing countries, benefits from FTA agreements with the
EU are uncertain. The strong advantage of LDCs in EU markets
would be unaffected. ACP and Mediterranean countries entering
into FTA agreements would largely maintain current preferences
in EU markets, although proposed arrangements also would
liberalize trade among regional neighbors.

Current proposals would diminish preferences only for non-LDC
ACP countries that do not negotiate FTA agreements. ACP
countries probably have had the best access to EU markets that
is politically possible. They have had duty and quota-free
access to EU markets for all industrial goods and 80 percent of
agricultural products, and they have been exempt from
disciplines on textiles and clothing. Including duty-free
agricultural imports within quotas, 99 percent of EU imports
from non-LDC ACP countries enter duty-free. Of course, these
imports do not include sensitive CAP products. Retention of
current quotas for sugar and beef is key for ACP countries.

Loss of benefits by any ACP country would benefit all other
countries, particularly those that are neither LDCs nor ACP
countries. Those countries would be better off in the sense
that they would be less disadvantaged. Moreover, successful
challenges to the GSP could also benefit those countries that
have graduated.

Proponents of reciprocal FTAs argue that economic integration
will create trade, attract foreign investment, and lead to
greater efficiency and improved competitiveness in developing
countries. By expanding the effective home market, regional
economic integration would expand the range of viable economic
activities, allowing for diversification of production and
exports. They also argue that trade and other policy reforms
would be locked in, leading to more stable and effective
governance. A more stable economic and trade environment would
stimulate higher levels of investment. FTAs also would benefit
consumers by increasing real incomes through lowering import
prices. Developmental assistance, which could be part of the
FTA arrangement, would increase scientific and technical
capacity and enhance infrastructures.

However, many developing countries are concerned about
competition with the EU. Subsidized EU agricultural exports are
particularly worrisome. Most developing countries are protected
by agricultural and other tariffs that are much higher than
those of the EU. Reduced tariff revenues could force drastic
restructuring of government finance, and many fear worsening
balance-of-payments problems. The most feared result of free
trade would be partial deindustrialization and increased
unemployment if imports from the EU and elsewhere displace
domestic production.

EU proposals are for lengthy transition periods of up to 12
years, and transition would be asymmetrical, with the EU
eliminating tariffs more quickly than developing countries.
Liberalization of regional trade also would be more rapid than
liberalization of trade with the EU, allowing competitiveness
to be developed first through competition with other developing
countries.

The impetus for revision of EU trading arrangements is WTO
compatibility, but the options are limited. The conflict
actually is among developing countries trying to obtain or
maintain relative advantages over one another in access to EU
markets. Reciprocal arrangements will not provide new
advantages to ACP and Mediterranean countries, but rather
maintain historical ones. The dangers of reciprocal trade
agreements are central to the broader debate concerning the
economic path of developing countries in the context of
globalization. Developing countries have assumed a more
prominent role in multilateral trade activities since the
Uruguay Round of trade negotiations, and arrangements affecting
developing countries are likely to attract greater attention in
future negotiations. For the EU, proposed reciprocal FTA
agreements will provide significant new advantages for EU
agricultural exports.

Gene Hasha (202) 694-5168 ghasha@ers.usda.gov

Want More Information?

USDA's Economic Research Service "EU Preferential Trading
Agreements: Heightened Competition for U.S.", Agricultural
Outlook. December 2001.
www.ers.usda.gov/publications/AgOutlook/dec2001/

Briefing room on the European Union
www.ers.usda.gov/briefing/EuropeanUnion/

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

Commission of the European Union Green Paper on relations
between the European Union and the ACP countries on the eve of
the 21st century--Challenges and options for a new partnership.
Brussels: European Commission. 1996.
www.europa.eu.int/comm/development/publicat/l-vert/lv_en.htm

Consequences for the ACP Countries of Applying the Generalized
System of Preferences (GSP). Joint analysis by EU and ACP
experts for Negotiating Group 3. Brussels. April 1999. World
Bank

Global Economic Prospects and the Developing Countries.
December 2001. www.worldbank.org/prospects/gep2001/

SIDEBAR--EU trade

Acronyms Used in This Article

ACP--African, Caribbean, and Pacific:  former colonies of
Britain and France.

CAP--Common Agricultural Policy:  the policy that governs
agriculture within the European Union.

EBA--Everything But Arms:  a policy providing for duty- and
quota-free imports from the least developed countries.

EU--European Union:  the economic and free trade grouping of
most western European countries, now enlarging to include some
eastern European and Mediterranean countries.

FTA--Free Trade Area:  as provided for by Article XXIV of the
GATT.

GATT--General Agreement on Tariffs and Trade:  the original
rules governing international trade, augmented by various WTO
agreements since 1994.

GSP--Generalized System of Preferences:  a GATT exception to
MFN requirements allowing developed countries to provide
preferential arrangements for developing countries.

LDC--Least Developed Countries:  the poorest countries as
designated by the United Nations.

MFN--Most-Favored-Nation treatment:  the fundamental principle
of the WTO requiring all countries to provide the same trading
conditions to all WTO members.

WTO--World Trade Organization:  since 1994, the organization
supervising the GATT and WTO agreements governing international
trade.


RESEARCH & TECHNOLOGY

Genetically Engineered Crops: U.S. Adoption & Impacts

Since the introduction of genetically engineered (GE) crops in
1996, U.S. farmers have rapidly adopted most of them,
notwithstanding conflicting claims about economic and
environmental impacts and consumer acceptance. Soybeans and
cotton with herbicide-tolerant traits have been the most widely
and rapidly adopted GE crops in the U.S., followed by insect-
resistant cotton and corn.

Analyses by USDA's Economic Research Service (ERS) and others
indicate economic benefits to many farmers adopting first-
generation GE crops. Not all benefits are reflected in standard
measures of net returns.

Extent of GE Crop Adoption

Herbicide-tolerant (HT) crops, developed to survive application
of specific herbicides that previously would have destroyed the
crop along with the targeted weeds, provide farmers with a
broader variety of options for effective weed control. Based on
USDA survey data, HT soybeans expanded from 17 percent of U.S.
soybean acreage in 1997, to 68 percent in 2001 and 75 percent
in 2002. Plantings of HT cotton expanded from 10 percent of
U.S. acreage in 1997 to 56 percent in 2001 and 58 percent in
2002. The adopt ion of HT corn, however, has been much slower,
barely exceeding 10 percent of U.S. corn acreage in 2002.

Insect-resistant crops containing the gene from the soil
bacterium Bt (Bacillus thuringiensis) have also been available
for corn and cotton since 1996. These bacteria produce a
protein that is toxic to certain lepidopteran insects (insects
that go through a caterpillar stage), protecting the plant over
its entire life.

Plantings of Bt corn grew from 8 percent of U.S. corn acreage
in 1997 to 26 percent in 1999, then fell to 19 percent in 2000
and 2001, before climbing back to 24 percent in 2002. Plantings
of Bt cotton expanded more rapidly, from 15 percent of U.S.
cotton acreage in 1997 to 37 percent in 2001, but adoption
appears to be leveling off, as U.S. farmers planted 35 percent
in 2002. Use of Bt corn will likely continue to fluctuate over
time, based on expected infestation levels of European Corn
Borer (ECB). Similarly, adoption of Bt cotton is based on
expected infestation of Bt target pests. Adoption appears to
have reached the low-growth phase, as adoption has already
occurred on acreage where Bt protection is most needed. Insects
have not posed major problems for soybeans, so insect-resistant
varieties have not been developed.

Some farmers have adopted "stacked" varieties of cotton and
corn that have both HT and Bt traits. Stacked cotton reached 24
percent of cotton plantings in 2001, dropping slightly to 22
percent in 2002. Plantings of stacked corn are much lower,
making up only 2 percent of corn acres in 2002.

Total adoption of GE cotton, taking into account the acreage
with either or both HT and Bt traits, reached 71 percent in
2002, slightly lower than that for soybeans at 75 percent. In
contrast, adoption of GE corn in total was 33 percent.

Factors in GE Crop Adoption

Adoption of HT soybeans has occurred uniformly across all farm
sizes. This might be expected, since GE crop technologies
require changes only in variable inputs (such as seeds), which
are completely divisible (unlike machinery, they may be
purchased as needed).

However, adoption of HT and Bt corn has occurred more often on
larger farms. For HT corn, this is attributed to its low
overall adoption rate, which implies that adopters were largely
innovators and other early adopters. Adoption is more
responsive to farm size at the innovator stage and this effect
generally diminishes as diffusion increases. In the case of Bt
corn, larger farms may be adopting more frequently because Bt
corn targets a pest problem that is generally most severe in
areas where operations growing corn are largest, such as the
western Corn Belt and Great Plains.

GE crop adoption is positively and significantly related to
operator education, experience, or both. More educated or
experienced operators are more likely to understand that the
greatest economic benefits of new technologies generally accrue
to early adopters. Use of marketing or production contracts is
positively associated with GE crop adoption, possibly
reflecting the greater importance placed on risk management by
adopting farms. Contracting ensures the adopter a market for
the GE crop, reducing price and any market access risk.

The Impacts of Adoption

The impacts of GE crop adoption on U.S. farmers vary by crop
and technology. GE crops potentially benefit U.S. farmers
through yield gains over conventional varieties or through
savings in insecticide/herbicide costs. In addition, HT
soybeans and cotton are relatively simple to use, increase
flexibility in timing herbicide applications, and fit in well
with conservation tillage and other production systems. While
these latter benefits have an economic value in terms of saving
farmers' own labor and
management time, this value is difficult to measure and has not
yet been incorporated into impact estimates.

Various studies have examined the impacts of GE crop adoption.
ERS analyses for 1997-98, based on data from the Agricultural
Resource Management Survey (ARMS), are highlighted below.

Planting HT cotton and corn increased producer net returns. ERS
analyses found yields higher, pesticide use lower, and net
returns higher with HT cotton and corn, compared with
conventional varieties. Despite the positive impact on net
returns, production and marketing factors may be contributing
to the stagnant growth in adoption of HT corn. The limited
acreage on which HT corn has been used is likely the acreage
with the greatest comparative advantage for this technology.
Limited adoption of HT corn compared with HT soybeans and
cotton may be due in part to constraints imposed on corn-
soybean rotations (such as "volunteer" corn growing in soybean
fields because it tolerates the applied herbicide). Also, some
HT corn varieties so far have limited approval and consumer
acceptance outside the U.S., restricting their export market
potential.

Adoption of Bt cotton and corn increases returns when pest
pressures are high. Adoption of Bt cotton had a positive impact
on producer net returns in 1997, but the impact was negative
for Bt corn in 1998. This suggests that Bt corn may have been
planted on some acreage where the value of protection against
the ECB was lower than the premium paid for the Bt seed.

Pest infestations differ across the country (for example, ECB
infestations are more frequent and severe in the western Corn
Belt), and the economic benefits of Bt corn are greatest where
target pest pressures are most severe. The decision to use Bt
corn is complicated, because damage caused by the ECB varies
from year to year and because the decision must be made before
observing the ECB pest pressure. Thus, some farmers may have
overestimated infestation levels, yield losses, and corn
prices, resulting in "overadoption."  Also, some producers
plant Bt corn because it reduces the risk of significant losses
due to pest damage, a factor not explicitly included in ex-post
net returns calculations.

HT soybeans did not significantly impact farmers' net farm
returns in 1997 or 1998. But, the crop has been profitable for
some farms, depending on the types of weed problems on the
farm. For some farms other factors may be driving adoption,
such as simplicity and flexibility, which allow growers to use
one product instead of several herbicides to control a wide
range of both broadleaf and grass weeds, and making harvest
"easier and faster." Such benefits are not reflected in
standard measures of net returns to farming.

Pesticide use has changed and declined, benefiting the
environment. Pesticide use on corn and soybeans has declined
since the introduction of GE corn and soybeans in 1996.
Planting Bt varieties has led to reductions in insecticides
previously used to treat the pests targeted by Bt. However, use
of conventional insecticides targeting other insects has not
been affected. Adoption of herbicide-tolerant crops involves
substitution of a particular herbicide (such as glyphosate) for
others, changing the mix of herbicides used in the cropping
system.

Field tests and enterprise studies have analyzed the agronomic,
environmental, and economic effects of adopting GE crops,
including actual changes in pesticide use associated with using
GE crops. Many of these studies have shown that insecticide use
declines with the adoption of Bt varieties and that herbicide
use is reduced with herbicide-tolerant varieties.

ERS analysis, using an econometric model that statistically
controls for other factors affecting pesticide use, shows an
overall reduction in pesticide use (including insecticides and
herbicides) associated with the increased adoption of GE crops
(Bt cotton, and herbicide-tolerant corn,
cotton, and soybeans; Bt corn data were not available). The
decline in total pesticide use between 1997 and 1998 on U.S.
corn, soybeans, and cotton was estimated to be 19.1 million
acre-treatments, or 6.2 percent of total treatments. Total
active ingredients applied to corn, soybean, and cotton fields
also declined by about 2.5 million pounds, resulting in a
significant reduction in potential exposure to pesticides.

The amount of herbicide active ingredient applied to soybeans
increased slightly because the additional amount of glyphosate
applied to HT soybeans exceeded the reduction in other types of
soybean herbicides. However, glyphosate has a lower toxicity to
mammals, birds, and fish; binds to the soil rapidly, preventing
leaching; and is easily biodegraded by soil bacteria.
Glyphosate is only a third as toxic to humans and is likely to
persist in the environment for only half as long as the
herbicides it displace s.

HT crops may indirectly benefit the environment by encouraging
adoption of conservation tillage. Nearly 60 percent of the area
planted with HT soybeans in 1997 was under conservation
tillage, which reduces soil erosion, soil degradation, and
runoff. In comparison only 40 percent of soybean acres planted
with conventional varieties was under conservation tillage.
Differences in the use of no-till between adopters and
nonadopters of HT soybeans were even more pronounced. Of acres
planted with HT soybeans, 40 percent were under no-till (where
weed control is fully dependent on herbicides), twice the
corresponding share for farmers planting conventional soybeans.

Analyses of impacts will continue. ERS analyses of impacts are
based on just 2 years of survey data: 1997 and 1998. The extent
and impacts of GE crops vary with several factors, most notably
annual pest infestations, seed premiums, prices of alternative
pest control programs, and any premiums paid for segregated
crops. These factors will continue to change over time as the
technology, marketing strategies for GE crops, and consumer
perceptions evolve. ERS will continue to provide information on
the evolution, as well as the impacts on farmers, consumers,
and the environment. Future surveys and analyses will attempt
to evaluate the most widely touted farmer benefits of HT seeds-
-simplicity and flexibility of use and management--that are not
captured by the standard measurement of net returns.

Jorge Fernandez-Cornejo (202) 694-5537 jorgef@ers.usda.gov
William D. McBride (202) 694-5577 wmcbride@ers.usda.gov

For more information:

Acreage data available from the USDA's National Agricultural
Statistics Service (NASS)
http://usda.mannlib.cornell.edu/reports/nassr/field/pcp-
bba/acrg0602.pdf

ERS briefing rooms

Briefing room on biotechnology:
www.ers.usda.gov/Briefing/biotechnology/

Briefing room on agricultural chemicals and production
technology: www.ers.usda.gov/Briefing/AgChemicals/

Briefing room on Agricultural Resource Management Survey
www.ers.usda.gov/briefing/ARMS/

SIDEBAR #1--GE crops

What Is Genetic Engineering?

Genetic engineering is, very broadly, a technique used to alter
or move genetic material (genes) of living cells to create,
improve, or modify plants, animals, and microorganisms.
Narrower definitions are used by
agencies that regulate genetically engineered organisms. In the
U.S., under guidelines issued by USDA's Animal and Plant Health
Inspection Service, genetic engineering is defined as "the
genetic modification of organisms by recombinant DNA techniques."
Definitions used in Europe are somewhat broader.

Using conventional techniques, such as selective breeding,
scientists have been working to improve plants and animals for
human benefit for hundreds
of years. Genetic engineering techniques now enable scientists
to move genes (and therefore desirable traits) in ways not
possible before, and with greater ease and precision.

SIDEBAR #2--GE crops

ERS Study on the Adoption of GE Crops

Issues related to the adoption of GE crops--including farm
impacts, consumer acceptance, environmental safety, and others-
-are among the leading concerns affecting U.S. agriculture.
Because of the controversy surrounding these issues and the
continual introduction of new technologies, a need exists for
objective measurement and analysis of all social welfare
implications of GE crops, including farm-level impacts. USDA's
Economic Research Service (ERS) has studied GE crops and their
adoption by farmers since 1998. The farm-level component of
this research program used econometric methods and data
obtained from surveys conducted by USDA to address the
following three questions.

*  What is the extent of adoption of GE crops and their
diffusion path? * What factors have affected the adoption of GE
crops and how? *  And finally, what are the farm-level impacts
of the adoption of GE crops?

The GE crops considered here include those with herbicide-
tolerant and insect-resistant traits--the principal GE crops
available to and adopted by U.S. farmers. This article
summarizes the findings of the recent ERS report Adoption of
Bioengineered Crops, AER 810, May 2002
(www.ers.usda.gov/publications/aer810/).


RESEARCH & TECHNOLOGY

Does Off-Farm Work Hinder "Smart" Farming?

As off-farm income takes on greater importance in the portfolio
of farm household activities, less time is available for farm
management. Management, the key to "smart" farming, is time-
intensive. But management does not typically figure in
analyst's calculations of economic returns to alternative
production technologies or farming systems. The result could be
misleading in understanding the benefits of technology
adoption, particularly if farm households, like most of their
nonfarm counterparts, are willing to forfeit some financial
return from farming to gain convenience.

Smart farming typically substitutes management for capital.
Smart farming is the practice of collecting data (or paying
someone to collect data) on specific, variable aspects of a
farm's production system; analyzing the data to discern
whether, how much, or when a farm input is needed; and
adjusting practices to optimize input use.

Examples of smart farming include:

*  soil testing to determine the extent of  nitrogen and
phosphorus application needed on a particular field for optimal
crop growth--a practice directed at avoiding out-of-pocket and
environmental costs of over-fertilization;

*  integrated pest management (IPM)--scouting for insect pests
and using economic thresholds to help assure that insecticide
timing is optimal, to
derive the most from expenditures on input applications, and,
when insect populations stay low, to avoid the expense of
"insurance" use of insecticides altogether;

*  precision farming to apply inputs in optimal patterns within
and across fields.

Economic assessments of smart farming management systems
invariably show a potential reduction in variable production
costs that is greater than the value of any concurrent loss in
average yield. The assessments sometimes demonstrate both lower
variable input costs and higher average yields.

Not All Farms Practice "Smart" Farming

More than 35 years after the introduction of integrated pest
management systems, the Clinton Administration goal of IPM
practice on 75 percent of crop acres in the U.S. has not been
achieved, despite longstanding evidence that IPM systems tend
to increase net returns (as traditionally measured) by
optimizing pest control actions and inputs. Moreover, nitrogen
testing of soil occurred on less than half of corn acreage in
1996. As for precision farming, 14 percent of U.S. grain and
oilseed farmers had embrace d aspects of this practice by 1998,
but adoption growth rates are slow.

These paths of technology adoption stand in stark contrast with
the remarkable rates of adoption for genetically engineered
(GE) insect-resistant and herbicide-tolerant crops (see
previous article). In the case of herbicide-tolerant soybeans,
first available in 1996, adoption grew to nearly 70 percent in
just 5 years, despite no significant impacts on farm financial
net returns attributable to adoption. Indeed, empirical results
from more than 20 studies of the financial implications of
first-generation GE corn and soybeans have been mixed. They
tell a story quite dissimilar to IPM's tale. Though not always
profitable by standard measures, adoption of GE seed has been
soaring.

A major difference between planting GE crop varieties and
practicing IPM is that the former is management saving while
the latter is management using.

The Appeal of "Convenience Agriculture"

When asked what motivated their adoption of GE crop varieties,
farmers often respond that these varieties are simply easier to
use. Cultivation of these crop varieties is characterized by
simplicity and flexibility. A great advantage of adoption is
that it saves time... and takes no extra thought. It is
convenient.

Farm operators are likely to be as appreciative of convenience
as is the busy, multi-tasking member of the average U.S.
household. In fact, farm households are increasingly similar to
non-farm households in terms of working spouses, diversity of
income sources, and dependence on the general economy (AO
August 2002).

While one-third of farm operators have worked off the farm
essentially full time since the 1970s, this is not the full
story. What has changed most over the last few decades is the
importance of off-farm income to farm households. Since 1999,
less than 10 percent of farm household income (including
government payments to the farm operator) derives from the farm
operation. The rest--the vast majority--is off-farm income. Off-
farm income comes from off-farm employment of the operator, off-
farm work by the operator's spouse, non-farm businesses run by
the operator or household members, and a gamut of investments.

The observed trend in importance of off-farm income has many
causes: higher wage rates in non-farm jobs, more females in the
general workforce, and efficient household financial
management. The common feature of all sources of off-farm
income is that each takes time away from concentration on the
farm business, if not time off the farm altogether. In 2002,
when a farm
operator and spouse are working at the kitchen table (or at
their computer), they are as likely to be poring over brokerage
account statement s or bringing work home from the office, as
they are to be reviewing farm accounts or scrutinizing ratios
of livestock weight gains to feed rations.

As more time and more thought is devoted to off-farm endeavors,
less of each is available for farm management and/or leisure by
the operator or members of the operator's household.
Recognizing that farm households face time/management
constraints generates several lines of inquiry:

*  whether the traditional ways of measuring the economic
returns to new technologies capture the convenience factor,

*  the implications of structural shifts for off-farm activity
and, consequently, for the feasibility of various technologies,
and

*  the effect of farm programs on interactions among off- and
on-farm work and on preferences for certain types of production
technologies.

The Measurement Dilemma: "Time Is Money"

The standard metric for farm profitability is net returns to
labor and management. The farm-level profitability of
technology adoption is typically calculated as the difference
between net returns with and without the technology. In this
month's article on GE crops, for example, farm-level financial
implications of adoption are measured by estimating the change
in variable production costs (mainly seed and pesticide costs)
plus the value of change in average yield associated with
specific GE varieties, and comparing the results with those for
their conventional counterparts.

This widely accepted practice of measuring profitability holds
the value of management time/thought/effort constant when
comparing returns to various production practices,
technologies, or systems. It measures financial returns quite
well. But it gives an incomplete picture of economic returns
because it excludes changes in the value of management.

If increased importance of off-farm income acts also to
increase the opportunity cost of spending time on farm
management (lost opportunity to spend time in another pursuit),
then the consequences of this exclusion become serious. An
indication of negative net returns as typically measured can be
misleading if unmeasured management costs are actually
decreasing (in which case total economic returns might actually
be increasing). This appears to be the case with herbicide-
tolerant soybeans. It may be the case with other "convenience
technologies."

Two potential ways out of the measurement dilemma are discussed
here. Analysts could use the prevailing off-farm wage rate as a
proxy for the value of a unit of management time. Assuming that
differences in management time necessitated by various
practices or technologies were known, changes in the value of
management could be incorporated into a more robust measurement
of economic returns. An alternative is to examine net returns
in terms of a farm household's total income, rather than
limiting it to income generated by the farm operation. With
this approach, the tradeoffs between time spent managing the
farm operation and time spent generating off-farm income become
inherent in calculations of the impact of a change in farm
production practice.

Either of these approaches to more precise measurement of net
economic returns is data demanding. Also both fail to account
for the value of leisure, which is how farm operator time could
be spent if not devoted to generating income.

Farm Structure, Off-Farm Work, & Technology Adoption

Analysis by USDA's Economic Research Service (ERS) demonstrates
that, for a
large sample of corn/soybean farm operations, there is a
definite tradeoff between time spent on-farm and in off-farm
employment. For these farm households, it seems clear that
economies of scope (derived from engaging in multiple income-
generating activities, on and off the farm, as a single
economic unit) can substitute for economies of scale in
farming. Thus, households operating small corn/soybean farms
that lack economies of scale may be more likely to devote time
to off-farm employment, more likely to adopt management-saving
technology, and less likely to adopt management-intensive
technologies.

Evidence from ERS research on the adoption of the growth
hormone bovine somatatropin (rBST) in dairy production suggests
that the relationship between scale of farm operation and
management intensity of production technology holds for large
farms as well. Use of rBST is very management-intensive. While
in 2000 only about 17 percent of U.S. dairy operations were
using rBST, these operations accounted for 32 percent of all
dairy cows. In this case, it is the larger operations that
could accommodate management -intensive technology. This makes
sense in the context of off-farm work, since it is only for
large and very large farms that off-farm income has not
represented the majority of farm household income in recent
years.

Economists have become accustomed to considering capital-
intensive technologies as scale-dependent. Perhaps management-
intensity should also be viewed as a potential source of scale
bias.

Does Farm Policy Play a Role?

The direction of farm policy affects many farm household
decisions. ERS research on the effects of different types of
farm program payments on the time allocation of operators and
spouses has implications for off-farm work and technology
adoption. Research has shown that, in accordance with the
theory of labor supply, an increase in decoupled farm program
payments (payments not linked to production) is likely to
result in decreased off-farm work and increased leisure time
spent by farm household members. By facilitating substitution
of leisure for off-farm work, decoupled payments should have a
neutral impact on the management intensity of adopted
technologies.

By contrast, it was found that an increase in farm program
payments linked to or coupled with production is associated
with less off-farm work, but more farm income generation. In
this case, there is a substitution of effort on the farm for
effort off the farm. Relatively less off-farm effort may
diminish the appeal of management-extensive or "convenience"
technologies that do not also exhibit strong, positive net
returns exclusive of management time saved.

Food for Thought

At the downstream branches of the agriculture and food system
are convenience stores and convenience foods. It is likely
that, as off-farm income takes the lead in farm household
portfolios, farm operators at the upstream branches of that
system will also take advantage of convenience. Individuals
developing new technologies or analyzing their implications
will want to keep this development in mind, and measure its
impact to the extent possible. And because it appears that
structural change and government policy can reinforce or dampen
the value of convenience in farm management, they will also
influence the direction of technological change in agriculture.

Katherine R. Smith (202) 694-5500 ksmith@ers.usda.gov

