AGRICULTURAL OUTLOOK	             				  November 22, 2002
November 2002, ERS-AO-297
             	Approved by the World Agricultural Outlook Board
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This is the final issue of AGRICULTURAL OUTLOOK.  Beginning in February 2003, 
the Economic Research Service will publish a new magazine covering the full 
range of the agency's work. Watch the ERS website for details. 
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AGRICULTURAL OUTLOOK
December 2002, AGO-297

CONTENTS:

IN THIS ISSUE

AGRICULTURAL ECONOMY
Yearend Review: U.S. Ag Markets Encountered Turbulence

BRIEFS
Tortoises Triumph: Gradual Changes Transform the Dairy Industry
Grape Expectations: Abundant Quantity, High Quality
Smaller 2002/03 Citrus Crop May Boost Grower Prices

COMODITY SPOTLIGHT
Holiday Sales Look Bright for Christmas Trees & Poinsettias

THE LIVESTOCK SECTOR
Controversies in Livestock Pricing
Where's the Beef? Small Farms Produce Majority of Cattle

FOOD & MARKETING
Globalization of the Soft Drink Industry

WORLD AGRICULTURE & TRADE
Enhancing Food Safety in APEC Countries
Commodity Policies of the U.S., EU, & Japan--How Similar?
Shaping the Global Market for High-Value Foods

SPECIAL ARTICLE
What's at Stake in the Next Trade Round


IN THIS ISSUE

Yearend Review: U.S. Ag Markets Encountered Turbulence 

The tightest grain and oilseed supplies in several years are boosting prices 
and forcing adjustments for end-users this year. Drought in many regions of the 
country slashed crop and forage production, stressed cattle operations, and 
raised costs for livestock producers. With the crop supply situation 
essentially established, markets are focusing on how buyers will adjust and how 
producers will change 2003 plantings in response to higher prices. For the 
livestock sector, adjustments due to higher feed costs and tight forage 
supplies are resulting in abundant meat supplies as producers incline more 
toward marketing than building herds. Livestock prices are expected to rise in 
2003 as total meat and poultry production declines for the first time in 21 
years. Dennis Shields (202) 694-5193 dshields@ers.usda.gov

Tortoises Triumph: Gradual Changes Transform the Dairy Industry

Today's dairy industry is transformed from the one profiled in the inaugural 
issue of Agricultural Outlook (June 1975). Dairy operations are one-fifth the 
number, and some are much larger and more specialized. Cow numbers are down, 
but milk production per cow jumped 80 percent to increase total production by 
half. Cheese now accounts for half of total milk use, displacing beverage milk 
that dominated milk use in 1975. Some supply and demand forces driving the 
transformation operated gradually and continually and may continue to be major 
shapers of the dairy industry. Among these forces are economies of scale and 
specialization. James Miller (202) 694-5184 jjmiller@ers.usda.gov

Grape Expectations: Abundant Quantity, High Quality

U.S. consumers are finding an abundance of high-quality fresh-market grapes at 
slightly higher prices this year than a year ago. USDA forecasts the 2002 U.S. 
grape crop at 14.5 billion pounds, the third-largest crop ever. The crop is 11 
percent larger than a year ago but 5 percent smaller than the 2000 record. 
Despite increased production, grape prices received by growers in 2002 are up 
from last year due to a higher quality crop. While most grape and grape 
products produced in the U.S. are sold through domestic channels, foreign 
markets are increasingly important. U.S. export volumes of fresh grapes and 
raisins rank third in the world, with wine exports ranking sixth. Agnes Perez 
(202) 694-5255 acperez@ers.usda.gov

Smaller 2002/03 Citrus Crop May Boost Grower Prices

The 2002/03 orange, grapefruit, tangerine, and Temple crops are expected to be 
smaller, while lemon and tangelo crops should be bigger. As a result of the 
expected smaller crop, growers are likely to receive higher prices for their 
product. Higher prices could, in turn, improve revenues for some of the citrus 
industries. Susan Pollack (202) 694-5251 pollack@ers.usda.gov

Holiday Sales Look Bright for Christmas Trees & Poinsettias

Christmas tree sales depend not only on consumer holiday budgets, but also on 
competition from artificial trees. In 1989, sales of real and artificial 
Christmas trees were equal, but by 2000 the share of real trees had fallen to 
39 percent. The 2002 holiday season's sales of real Christmas trees are 
expected to total at least 32 million. With estimated retail prices averaging 
$36 per tree, total retail sales should approach $1.2 billion, a rise of 9 
percent. Poinsettia sales are expected to continue growing, up 2 percent to 
$260 million at wholesale. Alberto Jerardo (202) 694-5266 ajerardo@ers.usda.gov

Controversies in Livestock Pricing

Some livestock producers allege that aspects of the livestock pricing system 
contribute to low prices. Vertical coordination, which includes contract 
arrangements between packers and producers, has been accompanied by declining 
use of spot markets (the auction markets and directly negotiated sales between 
producer and packer). The benefit of spot markets is the easy dissemination of 
price information, but vertical coordination also offers advantages--both for 
sellers and buyers. There are continuing controversies over the extent to which 
structural changes and pricing methods in the industry have affected producer 
prices. William Hahn (202) 694-5175 whahn@ers.usda.gov

Where's the Beef? Small Farms Produce Majority of Cattle

Small operations produce the majority of beef cattle in the U.S., and control 
74 percent of the land dedicated to beef cattle production. Three quarters of 
the nation's beef cattle spend at least part of life on a small farm (annual 
sales under $250,000). Small enterprises producing beef cattle in the U.S. can 
be divided roughly into two groups: full-time operations for which agricultural 
production is a significant source of income, and part-time operations for 
which it is not. These operations may differ--among themselves and with large 
operations--in areas like production, marketing, and land stewardship, with 
implications for farm policy. A. James Cash II (202) 694-5149 
ajcash@ers.usda.gov

Globalization of the Soft Drink Industry

The beverage industry is a bellwether for the food industry, where 
globalization has affected the structure. Soft drink companies produce for 
domestic and foreign markets, license their products, and invest in plants 
abroad. U.S. soft drink exports totaled $232 million in 2001. Names like Coca-
Cola and Pepsi are recognized worldwide, and foreign brands are consumed in 
record amounts in the U.S. Major shifts in the business environment for these 
manufacturers include refocusing from national to international, expansion 
across product lines, and rising competition. Chris Bolling 
(202) 694-5322 hbolling@ers.usda.gov

Enhancing Food Safety in APEC Countries

Changing consumption patterns, lengthening of supply chains, and the rising 
share of perishable food products in trade are all generating concerns about 
food safety in the Asia Pacific Economic Cooperation (APEC) region. Recent 
outbreaks of foodborne illness in China (contamination by rat poison) and the 
U.S. (Listeria) have heightened that concern. Such incidents result in added 
health care costs to society, lost productivity, and changes in consumer 
behavior that can adversely affect a firm or an entire industry. APEC countries 
are increasingly implementing quality and risk management systems and training 
programs to make food supplies safer. William Coyle (202) 694-5216 
wcoyle@ers.usda.gov

Commodity Policies of the U.S., EU, & Japan--How Similar?

Commodity policies of the U.S., the European Union, and Japan address some of 
the same goals, but there have always been key differences in approach and in 
their policy instruments. In recent years, all three have made significant 
changes to their commodity policies. Efforts to encourage freer trade in 
agricultural commodities have led each of the three toward less trade-
distorting programs. Although differences certainly remain, some of the factors 
influencing development of agricultural policy may be pushing their commodity 
policies in a similar direction. Anne Effland (202) 694-5319 
aeffland@ers.usda.gov

Shaping the Global Market for High-Value Foods

The global market for high-value foods is subject to an ever-changing product 
mix demanded by wealthier and more selective consumers. But as developing 
countries' income and population levels grow, they account for a growing share 
of global food sales. In response, multinational food companies are rapidly 
restructuring their manufacturing and retail operations to better meet evolving 
world food demand. Global sales of high-value food products were estimated at 
US$4 trillion in 2000. Mark Gehlhar (202) 694-5273 mgehlhar@ers.usda.gov

What's at Stake in the Next Trade Round

As the next round of multilateral trade negotiations begins later this winter, 
attention is most frequently trained on commodity-by-commodity impacts of trade 
liberalization. But the most compelling economic story is the potential for 
trade liberalization to accelerate income growth in developing countries. It is 
income growth that increases demand for food and shifts demand to high-value 
products such as meat. Expansion of demand in developing countries would 
present a significant opportunity for U.S. producers who otherwise face a 
stable and mature domestic food market. 
Susan Offutt (202) 694-5000 soffutt@ers.usda.gov


AGRICULTURAL ECONOMY

U.S. Crop & Livestock Markets Encounter Turbulence
The Year Behind & a Look Ahead

The tightest grain and oilseed supplies in several years are boosting prices 
and forcing adjustments for end-users this year. Drought-related problems have 
affected many regions of the country, slashing crop and forage production, 
stressing cattle operations, and raising costs for livestock and poultry 
producers. Growing conditions for crops, as well as for pasture and rangeland, 
were uneven across the country. Accordingly, there is a wide range of 
variability in economic impacts.

Falling crop production and sharp price increases are reviving at least a few 
memories of 1995/96, when strong demand and limited supplies led to record 
prices. The situation in 2002/03 is less extreme, but it is a striking 
departure from the fairly steady market conditions seen in recent years for 
grain and oilseeds, largely a result of benign weather in the U.S. and rest of 
the world. With the crop supply situation essentially established, markets are 
focusing on how buyers--both domestic and abroad--will adjust consumption 
patterns and how producers will change 2003 plantings in response to higher 
prices.

For the livestock sector, adjustments due to higher feed costs and tight forage 
supplies are resulting in abundant meat supplies, as producers incline more 
toward marketing than building herds. These large supplies will keep livestock 
and product prices relatively low for the next few months. As producers react 
to higher costs by slowing expansion plans or even reducing production, 
livestock and meat prices are expected to increase, and margins could swing 
from red to black. 

U.S. Grains & Oilseeds: 
Tighter Supplies, Rising Prices 

Production and supplies of the major field crops have dropped sharply in 2002, 
due largely to weather problems. The wheat harvest was the lowest since 1972, 
and corn and soybeans are expected to be the lowest since 1995 and 1999 
respectively, although production estimates will not be finalized until 
January. Stocks of each crop will decline to very low levels, with use 
projected to show virtually no decline for corn and wheat, and with a modest 
contraction for soybeans. (Rice is a notable exception to the supply situation 
among major grains in 2002.)

Wheat prices have led the upward charge in recent months, and cash prices for 
some classes of hard wheat have crossed the $5 threshold this fall. Wheat farm 
prices are forecast to climb to the highest level in 6 years, and corn and 
soybeans to the highest in 5. The ratio of global stocks to use for wheat and 
coarse grains is projected to be similar to the tight 1995/96 period. Yet 
prices are not expected to jump as high, assuming no more unforeseen demand or 
supply shocks.

Prices have been lower in recent years relative to historical patterns, 
consistent with a long-term downward trend. There are a number of likely 
factors, such as fewer stocks held by governments and thus more available to 
markets, buyers' tolerance of lower inventories to hold down costs, and better 
market information. Perhaps most critical to the 2002/03 price outlook is the 
existence of a significant volume of foreign exportable supplies for each major 
crop despite the overall tightness: wheat from Europe and the Black Sea region, 
corn from China, and soybeans from Argentina and Brazil. This global influence 
may keep a lid on the upward swing in U.S. prices.

At the same time that market conditions have shifted, the policy environment 
has also changed with the 2002 Farm Act. In contrast to the previous 4 years, 
there were no market loss assistance payments this fall. This will aggravate 
cash flow issues for many producers who had poor crops, although crop insurance 
coverage was widespread and should provide some minimal assistance. The new 
counter-cyclical payments will not kick in for wheat, corn, or soybeans, 
because prevailing prices are too high. Likewise, government payments from the 
commodity loan program (loan deficiency payments and marketing loan gains), 
continued under the new Act, will be small to nonexistent, given forecast 
prices.

Producers with normal or above-average crops will see strong gains in revenue, 
as increasing market receipts outweigh the decline in government payments. 
However, many producers had poor crops, and they will see market revenue plunge 
despite the higher prices, because they lack volume to sell. 

Wheat. Wheat has experienced the most pronounced tightening, as a smaller U.S. 
crop coincided with steep declines in Australia and Canada. These three 
countries account for the bulk of the world's high-quality wheat exports. For 
the U.S. and Canada, wheat output will be the lowest in 30 years, and for 
Australia, the lowest in nearly a decade. Overall, global supplies are not as 
tight, because of abundant but mostly lower quality wheat in Europe, India, and 
the "nontraditional" exporters, Russia, Ukraine, and Kazakstan.

Wheat feeding to livestock is projected to be down 22 percent, accounting for 
virtually all of the reduction in wheat use in 2002/03. Food use should 
continue on track, and exports will likely be down slightly. End users in the 
U.S. and overseas will be forced to make major adjustments, such as blending 
different qualities of wheat and running down stocks, as they scramble for 
short supplies of milling quality wheat. Many end users of wheat have bought 
"hand to mouth" in recent years when markets were relatively sedate and the 
risk of a runup in prices appeared small.

U.S. and foreign users both will have difficulty buying wheat from Canada 
because of its severe shortfall. U.S. markets surged when Canada announced that 
it would not be able to take on new export commitments several weeks ago, and 
prices have similarly risen as forecasts of Australia's wheat crop have been 
cut. Limited supplies and higher prices are expected to prevent an increase in 
U.S. exports, but U.S. share of the world wheat market will increase. 

Corn. The drop in corn production was less pronounced than that of wheat. 
Average yields across the country are below trend, but with tremendous 
variability. Iowa and Minnesota producers generally had good to excellent 
crops, with yields forecast at record highs. In contrast, yields were down 
sharply in many areas of the eastern and western Corn Belt and Plains. 
Furthermore, there was likely a large increase in corn cut for silage because 
of pressing needs for livestock feed and because the grain yield would be so 
low. Yields in some fields were so low that they were probably abandoned, in 
some cases to collect insurance payoffs.

Although the overall supply shock was not that severe, there are indications 
that many users have had trouble procuring corn this fall, and cash markets 
have seen strength in some regions. Basis levels (the relationship between cash 
prices and futures) in some regions of the Corn Belt and Plains were unusually 
strong. After a sharp runup in late summer, futures prices for corn were fairly 
flat for most of the fall, reflecting improvements in the crop outlook and slow 
early-season exports.

For the year, how will the corn sector adjust? Total use is expected to remain 
high, close to the 2001/02 record (9.8 billion bushels). Gains in industrial 
use and exports are projected to offset a reduction in feed and residual use. 
As pressures increase on the livestock sector from higher costs and low product 
prices caused by large supplies, corn feed and residual is forecast to drop 3 
percent. Ending stocks of corn are projected to fall by nearly half to a very 
low 848 bushels. 

Ethanol is the key driver in the robust demand outlook, despite higher prices. 
Corn used for ethanol is forecast to increase 15 percent in 2002/03, on top of 
a 14-percent rise last year, as the industry gears up for the upcoming 
switchover to ethanol in California. The nation's largest gasoline-consuming 
state has said it will be phasing out the fuel oxygenate MTBE, because it has 
polluted groundwater supplies. New ethanol plants are increasing capacity 
dramatically.

U.S. corn exports are projected to increase slightly, as exports from other 
countries shrink and world imports show little change. Importers have not 
indicated any large-scale reaction to rising U.S. prices. Because the supply of 
corn from competing exports will be down, U.S. market share should increase 
modestly. Exports from Argentina, Brazil and Eastern Europe will fall because 
of smaller supplies. However, China, with an excellent crop and large stocks, 
is exporting fairly aggressively, stimulated by higher prices. China is 
expected to overtake Argentina as the largest foreign exporter this year.

Soybeans. The fall in the soybean crop will be less dramatic than wheat, and 
like corn, shows strong variations within growing areas. Many states saw lower 
yields, but yields were record high in a few states (e.g., Minnesota). 
Beginning stocks of soybeans were low to start the year, so the reduction in 
2002/03 supply will be slightly larger than the drop in production would 
indicate.

Demand prospects are somewhat more clouded than for wheat and corn, because of 
some signs of softening demand for soybean meal. An expected reduction in the 
hog inventory in the next few months and an unusual production slowdown for the 
poultry sector will limit growth in domestic soybean meal use. Meal exports are 
projected to decline significantly because of greater competition from South 
America. 

A bright spot in the soybean complex is oil, as a tighter global vegetable oil 
situation has boosted prices. On balance, the amount of soybeans crushed (for 
meal and oil) is expected to fall slightly from its record pace of the previous 
year as crush margins fall. The industry will face soybean prices that are 
forecast to jump 24 percent, while prices for meal, the principal product, rise 
only 1 percent.

The international arena presents many uncertainties. On the demand side, 
soybean imports by China, the world's fastest growing market, are projected to 
increase to a record 14 million metric tons. However, concerns have emerged 
about shifting policies on imports of genetically modified soybeans--which 
constitute the bulk of world trade. Recent import gains by the European Union, 
the world's largest importer of soybeans and soybean meal, are expected to 
flatten because of increased feeding of wheat, which has higher protein than 
other feedgrains. 

The biggest story is the specter of enormous production gains continuing in 
South America, presenting more competition for the U.S. In both Argentina and 
Brazil, economic and financial problems and weakening currency values against 
the dollar are reinforcing soybean's dominance. Soybeans are cheaper to produce 
than corn, the main competing crop, and they are less dependent on imported 
inputs. A sixth consecutive record crop is forecast for Argentina in 2002, and 
a fourth for Brazil. Steep depreciation of their currencies also enhances 
Brazil and Argentina's exports of soybeans and products. It is not clear if the 
newly elected government in Brazil will embark on any policies such as 
differential export taxes that affect the mix of soybean versus product 
exports.

How Long Will 
High Crop Prices Persist?

Crop prices are expected to continue rising for the next several months as they 
come off harvest lows and rise seasonally. However, when markets are this 
tight, the seasonal pattern is not easy to predict. How much higher they move 
will depend on how well end-users are covered, what substitutes are available, 
and the strength of import demand. Crop prospects for the 2003 crops--both here 
and abroad--will also affect when prices peak and how fast they fall.

U.S. farmers responded to the stimulus of record prices in 1996 by increasing 
acreage dramatically. For the eight major field crops (wheat, corn, sorghum, 
barley, oats, soybeans, cotton, and rice), plantings went up 15 million acres 
or 6 percent. It is doubtful that the response will be as large in 2003, 
because price signals are not as extreme and there are questions about how much 
land is available. Nevertheless, a healthy increase is likely. 

Another issue is how the crop mix will play out, with tradeoffs among crops. 
Early expectations are for a drop in soybeans as wheat and corn acres rise 
based on current market signals. Changes in loan rates under the 2002 Farm Act 
would reinforce these expectations. The rate for soybeans declined 26 cents per 
bushel while rates for wheat and corn rose 22 and 9 cents, respectively. 

Winter wheat plantings for 2003 harvest will be up sharply. Incentives include 
higher prices, wheat's relatively low production costs, and improved moisture 
conditions in much of the Southern Plains. An increase is also in store in the 
Midwest, mid-South, and Southeast, but excessive moisture may limit the rise. 
In the Southern Plains, many producers normally use winter wheat for grazing, 
and incentives are particularly strong this year because of tighter feed and 
forage supplies. Although corn prices are also up, limited irrigation water in 
the Western Plains may also lead many producers to turn back to wheat, which 
requires less water.

Meat Supplies 
To Moderate in 2003

While U.S. markets for many crops headed higher this year, livestock and meat 
prices have been under pressure from simultaneous peaks in supplies of beef, 
pork, and poultry. Cold storage stocks of red meat and poultry at the end of 
September were 30 percent above a year earlier. As meat and poultry supplies 
mount, a sharp increase in feed costs is challenging producers of all animal 
proteins in turning a profit this year.

Record pork production this fall results from a large March-May pig crop and 
higher imports of feeder pigs. Beef production may hit a record this year as 
carcass weights continue their long-term growth and as drought and poor pasture 
conditions in many parts of the U.S. forced continued liquidation of the cattle 
herd. For poultry, large production is coinciding with a substantial drop in 
export demand. 

For consumers, plentiful supplies have translated into supermarket specials 
with attractive prices. For much of 2002, retail beef prices have been below 
year-earlier levels (which were affected by poor feeding conditions and smaller 
supplies), and the growth in retail prices for all meat and poultry is only 
one-third the level of overall food price inflation. Overall, U.S. consumers 
have a strong appetite for meat and poultry, with per capita consumption 
forecast at a record 219 pounds (retail basis) in 2002. 

The current supply situation has highlighted the growing importance of foreign 
demand for meat. Between 1992 and 2002, export volume as a share of total use 
rose from 5 percent to 8 percent for beef, from 2 percent to 8 percent for 
pork, and from 7 percent to 16 percent for broilers. During this period, global 
economic growth and reductions in trade barriers, primarily in East Asia and 
Mexico, have spurred growth in exports.

With exports accounting for a growing portion of the long-term growth in meat 
production, market participants see export-related issues take on added 
importance--any change in foreign demand is felt quickly in U.S. livestock and 
meat markets. In 2002, disease and food safety issues disrupted poultry 
exports, for example. As for overall export demand, sluggish world economic 
growth and the strong U.S. currency value this year have limited export growth 
and producer returns. 

U.S. per capita meat and poultry consumption continues its long-term upward 
trend, fueled by growth in broiler consumption (beef and pork have been 
relatively flat for the last 10 years). But gains in per capita poultry 
consumption since the early 1990s have been much lower than in previous years, 
except for years when exports declined, suggesting a maturing of market demand 
for poultry products. It does not appear that this year's well-publicized meat 
recalls related to food safety have adversely affected U.S. demand for meat. 

While the market works through large meat supplies, near-term prospects for a 
downturn in total meat production appear more likely than at any time in the 
recent past. Producers, particularly in the hog and poultry sectors, are 
responding to higher feed costs and several months of low market returns by 
paring back production plans. In the absence of an unforeseen drop in demand, 
livestock and product prices are expected to turn up in 2003 after languishing 
for most of this year.

Cattle. Attractive calf prices in recent years have created an annual 
expectation in the industry that cow-calf operators, assuming normal weather 
and good forage-growing conditions, would soon begin to retain heifers and 
expand their herds. But poor forage conditions during the last several years in 
major cow-calf producing states have resulted in a steady liquidation. The 
level of cow slaughter and numbers of heifers in feedlots continued at levels 
that dampened prospects for a rebuilding phase in the national cow herd and for 
the sharply lower beef supplies that would accompany the process. Record 
slaughter weights also have contributed to record beef production and put 
downward pressure on cattle prices for more than a year. 

Market prospects appear to be changing, though. Cattle placements in feedlots 
were down from year-earlier levels in September and October, which signals 
reduced slaughter levels in 2003. Beef production is forecast down 5 percent in 
calendar 2003, although with high slaughter weights preventing a further 
decline. Fed-cattle prices broke through year-earlier levels in late October, 
and the seasonal price rally is stronger than in recent years. Prospects for 
higher cattle prices next year depend to a large extent on "normal" forage and 
grazing conditions in spring and summer, which would encourage producers to 
retain animals for breeding rather than feeding them for slaughter. 

Demand for beef is relatively strong. In 2002, the market has seen large 
volumes of meat pass through domestic and export channels at prices that are 
above expected levels based on historical relationships. Domestic demand 
appears to have bounced back from a drop in the last quarter of 2001 (related 
to reduced travel, restaurant sales, and business spending). Similarly, beef 
exports this year have exceeded early forecasts, with strong shipments to Korea 
and Mexico. With some improvement in global economic growth, additional gains 
are expected in 2003. 

Hogs. A few months ago, hog market prospects for the fourth quarter appeared to 
be almost as grim as in 1998--very low prices and significant financial losses, 
especially for producers who sold on the spot (cash) market. Rather than face a 
repeated crisis, producers began making adjustments this summer. In 
anticipation of higher feed costs and lower hog prices in the fall, sow 
slaughter increased, helping drop the U.S. breeding herd to 2 percent below a 
year earlier on September 1. Producers also intend to reduce farrowings in the 
next 6 months, which will result in 2 percent lower pork supplies and higher 
hog prices in 2003. 

Two other supply factors related to market and industry structure will also 
moderate pork supplies next year. First, U.S. imports of Canadian hogs, after 
increasing nearly 10-fold in 10 years, are expected to remain unchanged in 
2003. Given poor hog market conditions and high feed costs this year, the 
Canadian industry is shifting from dramatic growth to more stable inventory 
levels. Second, growth in the average number of pigs per litter (and pig crops 
per year), after advancing throughout the 1990s, has halted as the structural 
shift to larger, more efficient hog operations has been mostly completed. 

Pork exports are expected to continue rising next year. General economic gains 
in the three most important markets--Japan, Mexico, and Canada--will likely 
enhance U.S. shipments. However, the U.S. faces increasing competition from 
Canada in the Mexican and Japanese markets, and from the European Union 
(especially Denmark) and Brazil in other markets. 

Broilers. Export difficulties broadsided the poultry industry in 2002. Much 
lower prices have accompanied large meat and poultry supplies and the drop in 
export demand. As a result, U.S. per capita consumption of boiler meat is 
forecast to rise to a record high at nearly 80 pounds (retail weight) after 
remaining steady at 76-77 pounds since 1999. Whole-bird and leg meat prices in 
third-quarter 2002 were down 8 and 31 percent from a year earlier. 

The most publicized factor in this year's 12-percent drop in broiler exports is 
a major slowdown in shipments to Russia, the largest U.S. market. A trade 
dispute between the two countries emerged earlier this year involving localized 
outbreaks of avian influenza, sanitary regulations and reporting requirements. 
It was eventually resolved in August. Other countries such as Japan, Korea, and 
Mexico have also imposed restrictions on U.S. poultry products at some point 
during 2002 due to localized disease outbreaks.

Higher feed costs, uncertain export demand, and lower product prices are 
affecting the poultry industry. From mid-September to early-November, the 
number of broiler-type eggs going into incubators was down 3 percent from a 
year earlier. Broilers from these eggs will come to market around early 
December, slowing growth in fourth-quarter broiler production. Broiler 
production grew 5 percent per year between 1980 and 2000, but has since slowed. 
Growth in production is forecast at 2 percent in 2003. 

Volatile Markets 
Ahead?

Prospects for a rebound in grain and oilseed production in 2003 will be the key 
factor driving prices next spring. However, even if the outlook for production 
gains are favorable, the price path may be bumpy and the timing of price drops 
uncertain. Low stocks make the markets more skittish and magnify the reaction 
to weather events or other news. Consequently, buyers and sellers face more 
price risk.

One of the first indicators of next year's crop supply prospects will be the 
Winter Wheat Seedings report in January. Then, in early spring, USDA will 
report farmers' planting intentions for all the major crops. But the main focus 
of markets in the next few months will be consumption, with reports on 
indicators such as grain stocks, export sales, soybean crush, and livestock 
inventories also taking on added importance as the market deals with reduced 
supplies and higher prices.

Exports head the list of demand-side uncertainties for the crop and livestock 
sectors. Recovery from the world economic slowdown of 2001 continues to be 
anemic, and the dollar remains strong against the currencies of many important 
importers and competing exporters. Timely resolution of the West Coast port 
labor-management situation, which made headlines in September, will be 
necessary to ensure smooth flow of agricultural products to Asian markets. More 
than half of U.S. meat and poultry exports goes to Asia, and much of these 
shipments pass through West Coast ports. Also, as poultry marketers can attest, 
world markets for meat and poultry are highly sensitive to animal disease 
outbreaks and government policies, creating major market opportunities or 
precipitating declines in export demand, depending upon the level of trade in 
affected countries and how competing suppliers respond.

For the livestock complex, prospects entering 2003 are for a general upturn in 
prices as total red meat and poultry production declines for the first time in 
21 years. Due to lower returns in 2002, the broiler industry is slowing its 
growth, and the hog sector is essentially set for lower pork production. 
Domestic and export demand prospects appear good, although declining U.S. 
consumer confidence and lower manufacturing activity raise questions about the 
strength of the U.S. economy and demand for meat. 

The perennial challenge in forecasting beef production has been pinpointing 
when producers will begin retaining heifers for herd expansion. When enough 
producers see favorable pasture and range conditions and have sufficient forage 
supplies, the number of cattle for slaughter could drop sharply given the 
already reduced inventory and as producers retain females for breeding. A 
strong runup in cattle prices would likely ensue. If total meat production 
fails to slow as much as expected next year, though, livestock and meat prices 
will face some downside price risk. 

The potential for market volatility may be greatest in the soybean market, 
where a record South American soybean crop is already factored into current 
price levels. Any weather problems in Argentina or Brazil could lead to 
skyrocketing prices, with grain markets likely following. But assuming normal 
weather next year, higher acreage and improved yields in the U.S. should 
replenish grain and oilseed supplies and dampen prices.

Dennis Shields (202) 694-5193 dshields@ers.usda.gov
Pete Riley (202) 720-7787 Farm Service Agency Pete_Riley@wdc.usda.gov

AGRICULTURAL ECONOMY BOX

Farm Household Income Fares Better Than Farm Business 

Substantially weaker markets for livestock and dairy products in 2002 have had 
a dramatic impact on U.S. net farm income, which is forecast at $36.2 billion, 
down about $10 billion from last year and from the 10-year average. The 
forecast includes direct government payments of $17 billion, down 18 percent 
from the last year. With higher crop prices, payments associated with the loan 
deficiency program will decline. The first forecasts for farm income in 2003 
will be published in January.

Farm households derive more than 90 percent of their earnings, on average, from 
off-farm sources, which significantly dampens the impact of farm-sector 
performance on the economic well-being of farm households. Despite a dramatic 
drop in farm-sector income in 2002, farm households will see their income 
decline just 1 percent, on average, to $63,237 per household. Off-farm income 
is currently hampered by continued slow recovery of the general economy and 
slow wage growth. 

Commercial family farms (147,000 households with farm sales of at least 
$250,000) will realize the largest declines in household income, at 18 percent. 
Household income on these farms averages more than $100,000. Commercial family 
farm households derive about 30 percent of their income from off-farm sources.


BRIEFS: Livestock, Dairy, & Poultry

Tortoises Triumph: Gradual Changes Transform the Dairy Industry

Today's dairy industry is transformed from the one profiled in the inaugural 
issue of Agricultural Outlook (June 1975). Some of the supply and demand forces 
that were most important in the transformation operated so gradually and 
continually that they received scant attention in short-run outlook. But they 
may continue to be major shapers of the dairy industry in years to come. Among 
these forces are economies of scale and specialization, more women working 
outside the home, higher household incomes, and greater interest in ethnic 
foods.

In 1975, 115.4 billion pounds of milk, near the post-World War II low, were 
produced by 444,000 dairy operations. The 11.1 million milk cows produced an 
average of 10,360 pounds of milk, record milk per cow at the time. In 2002, 
operations with milk cows are only a fifth as many as in 1975, but hold four-
fifths as many cows. Milk production will be up almost by half from 27 years 
ago, thanks to an increase in milk per cow of almost 80 percent. The 1975 dairy 
markets were dominated by fluid milk, absorbing half of all milk marketings. In 
contrast, cheese now uses half the milk, its share doubling since 1975. 

Cheese Becomes the 
Dairy King

By the mid-1970s, cheese had already become an important part of dairy demand, 
as sales had grown briskly for about 10 years and per capita consumption had 
shot over 14 pounds. But, per-person use in 2002 is likely to be more than 
twice the 1975 level. Cheese is convenient, versatile, and an easy quick way to 
add flavor to dishes. These attributes became more highly prized as more women 
entered the labor force and family incomes rose, particularly in multiple-
income households. Ethnic cooking, such as Italian and later Mexican, using 
substantial amounts of cheese, moved into the mainstream of American eating. A 
greater variety of cheeses became available as cheese sales grew, fueling 
further increases in total sales.

If anything, cheese attributes important to retail customers were even more 
prized by restaurateurs and food processors. The long-run shift from at-home 
food preparation to consumption of partially or fully prepared foods has 
benefited cheese sales. Less than half of all cheese is now sold at retail, 
excluding that in food products.

The pizza phenomenon contributed greatly to dairy demand. Pizza was well 
established by the mid-1970s, available to most consumers in restaurants, as 
take-out or delivery, and in the freezer case. However, pizza grew continuously 
to become a true staple food, available in tremendous diversity and supplied by 
numerous competitors. Pizza and similar products may account for as much as 
one-third of total cheese use and are important contributors to overall demand 
for dairy products.

Total sales of beverage milk are now virtually the same as in the mid-1970s, in 
spite of the large increase in population. A number of factors have contributed 
to declining per capita use, including a smaller share of children in the 
population, more meals eaten away from home, increased control of children over 
their food consumption, and stronger and more diverse competition from other 
beverages. Milk has fundamentally lost ground to carbonated soft drinks as 
consumers' choice of a mealtime beverage.

Declines in butter and cream use that reduced dairy demand during the 1950s and 
1960s had essentially ended by the mid-1970s. Since then demand for milkfat 
products has generally been stable to slightly increasing. However, sales of 
most other dairy products, such as ice cream, cottage cheese, and canned milk, 
have declined even with mostly favorable prices. Similarly, use of dry and 
condensed milk as ingredients in processed foods slipped, in part because of 
increased use of inexpensive whey products.

Milk Output per Cow 
Has Soared

Grain and other concentrate feeds have remained a cheap input for dairy farmers 
relative to the capital and labor needed to maintain a cow. Low relative input 
prices encouraged farmers to boost concentrate feeding to achieve as much milk 
per cow as possible, in effect substituting milk per cow for milk cow numbers. 
In addition, milk per cow was boosted by genetic improvement and by improved 
knowledge and management of feeding.

Optimal feeding of dairy cows has changed over time, even though the basic 
challenge remains of getting the cow to eat enough of the right nutrients to 
efficiently produce milk close to her genetic potential. Through most of the 
1980s, most dairy farmers boosted milk per cow by increasing the amount of 
grain fed. More recently, with many dairy herds already getting maximum starch, 
producers are increasingly relying on feeds, such as whole cottonseed, 
containing concentrated nutrients other than starch.

Forage quality is now a much more important factor in milk per cow than it was 
in the mid-1970s. Low quality forage wastes valuable stomach space. Changes in 
the relative supply of very high quality forage are a major source of variation 
in milk per cow. However, the milk-feed price ratio, long a powerful predictor 
of growth in milk per cow, has lost some relevance because of modern feeding 
practices.

A New Type 
of Farm

Large dairy farms organized with an industrial-style specialization of labor 
can substantially reduce both labor and capital costs per cow. In addition, 
these farms typically are highly specialized in milk production and purchase 
almost all their inputs. Such operations continue to become more numerous in 
most major dairy areas. These farms have also proven adept at training dairy 
managers--employees learn management skills as they climb the career ladder. 
More than one-third of current milk production comes from farms with 500 or 
more cows, compared with less than one-tenth in the mid-1970s.

Industrial-style dairy farms were pioneered in the West. Rapid development of 
the Western dairy industry and stagnation or contraction of the dairy 
industries in other areas have resulted in dramatic shifts in regional shares 
of milk produced, often described as "milk production moving west."  However, 
individual dairy farmers have often moved east, not west. California in 
particular has long exported dairy farmers, first to other western states such 
as Idaho and New Mexico, and more recently to states east of the Rockies.

Swings in Supply/
Demand Balance

Milk production was generally in balance with demand during the late-1970s. In 
fact, real milk prices rose slightly. Relatively high returns, and the 
assurance that the support price would not let returns decline precipitously, 
unleashed a massive supply shift in the early 1980s. Most dairy farms expanded, 
Western dairy growth accelerated, and few farmers left dairying. Not until the 
end of the 1980s did reduced milk prices slow expansion and precipitate enough 
exit of dairy farmers to restore balance between milk supply and demand.

Since the mid-1990s, milk prices have been erratic. Demand has shown a mild 
tendency to grow more than supply. Dairy farms appear to fall into two types: 
those new-style farms generating good returns and growing rapidly, and the 
majority that are struggling to adjust and produce an adequate family income.

The Future of 
Demand

Will the demand for cheese continue to grow, or is the American appetite for 
cheese about satisfied?  Sluggish 2002 cheese sales have boosted the question's 
prominence. However, cheese sales have paused temporarily before, and many 
European countries have seen sales grow steadily over recent decades, even 
though their use was already higher than the current U.S. level. Cheese sales 
probably will continue to grow, although increases may be proportionally 
smaller.

Milkfat and skim solids can add flavor and functional quality to many processed 
foods. Demand for quality enhancing ingredients probably will grow along with 
markets for pre-prepared foods. However, this may not benefit demand for 
traditional milk solids. Fractionated milk products used as food ingredients 
are likely to be more important, and these products may well be whey-based. 
Undoubtedly, new markets will emerge for milk-based fractions, but these 
markets may not offset lower demand for milk solids.

Production Growth 
Likely

Growth in milk per cow may tend to be slower, at least in proportional terms, 
and probably will be more erratic. Milk per cow might have already slowed in 
the 1990s if it had not been for adoption of bovine somatotropin, a hormone 
that stimulates milk output. Growth in milk per cow probably will be even more 
dependent on forage quality and further advances in feeding knowledge. In 
addition, the concentration of milk cows in small geographic areas increases 
the vulnerability of milk production to the effects of abnormal weather.

New-style dairy farms will become much more numerous and widespread, having 
proven their viability under a variety of circumstances. Development in the 
West may be slowed by tighter forage supplies and greater environmental and 
other restrictions, but the Western dairy industry will continue to expand. The 
number of new-style dairy farms in the Midwest and Northeast may accelerate as 
new production concepts are adapted to local climates and feed situations. Some 
of these dairy farms will be smaller operations making the leap to a much 
larger size and a totally different organization.

For the foreseeable future, most medium-size dairy farms will adapt and 
survive. Although many of these farms cannot generate enough return for both 
family living and reinvestment, they will be able to stay in business until the 
retirement of the current operator or until major new investment is needed. 
They even are likely to increase their herd size, although expansion probably 
will be fairly modest.

A majority of the small and some medium dairy farms will exit the industry when 
current operators retire or give up, and the next generation goes elsewhere. 
Small-scale dairy farms have been the only feasible land use in a number of 
marginal agricultural areas. As these farms exit dairying, much of their land 
may be converted to nonagricultural uses.

Some downward pressure on real farm milk prices is likely in the years to come, 
as milk supply is expected to grow a bit faster than demand. However, longrun 
demand has proven more resilient than often perceived, and falterings in milk 
output are likely to trigger occasional price surges. Similar unique 
circumstances that lead to the sharp erosion of milk prices during 1980-95 are 
unlikely.

James Miller (202) 694-5184 jjmiller@ers.usda.gov

For more information:

ERS briefing room on dairy
www.ers.usda.gov/briefing/dairy/


BRIEFS: Specialty Crops

Grape Expections: Abundant Quantity, High Quality

U.S. consumers are finding an abundance of high-quality fresh-market grapes at 
slightly higher prices this year than a year ago. USDA forecasts the 2002 U.S. 
grape crop at 14.5 billion pounds, the third-largest crop ever. Production is 
up in most of the nation's grape-producing states, including California and 
Washington, the two leading producers. 

The grape crop is 11 percent larger than a year ago but 5 percent smaller than 
the record 15.4 million-pound crop in 2000. Despite this year's increased 
production, prices received by growers are up from last year due to the higher 
quality crop. Higher prices will increase the value of the 2002 grape crop 
above last year's $2.92 billion, when a 15-percent decline in production more 
than offset the effects of higher prices. Grower prices for fresh grapes from 
June through October 2002 averaged $788 per ton, up 6 percent from the same 
period a year ago. 

At the retail end, January-September prices for Thompson seedless grapes were 
higher than a year ago for each month except April and June. Grape supplies 
this past winter, mostly imported from Chile, were up considerably from a year 
ago, but retail prices averaged higher due to strong consumer demand and less 
competition from reduced U.S. production of fall crop apples and California 
navels in 2002, and lower banana imports. Smaller apple and pear harvests again 
this fall will likely help keep grape prices strong for the balance of 2002 and 
into early 2003. 

U.S. fresh grape consumption in 2002/03, even with higher prices, is projected 
to increase over last year to 7.67 pounds per person. However, higher prices 
are affecting exports, with May-August shipments up only fractionally from the 
same period a year ago. Exports are down thus far to important markets, 
including Malaysia, Taiwan, the Philippines, and the United Kingdom. The 
heaviest export shipments typically occur during September and October, and 
exports this year for those months may have slowed due to the recent 2-week 
shutdown of West Coast ports. 

On the bright side, California table grapes are finally entering the Australian 
market after several years of negotiations. The first shipments totaling 132 
cartons of flame seedless grapes arrived in Sydney, Melbourne, and Brisbane via 
airfreight on July 16, 2002. Export growth potential for U.S. grapes to the 
Australian market appears promising given the country's large population, high 
income, and counter-seasonal grape production. 

The U.S. grape industry remains a valuable component of the U.S. agricultural 
sector with farm cash receipts averaging close to $3 billion per year over the 
last 5 years. Technological improvements in production and marketing have 
helped the industry achieve both the quality and volume demanded by foreign 
customers, and to play a key role in the global grape market. The U.S. is the 
world's third largest producer of grapes, next to Italy and France, and 
provides about 10 percent of the world's production. While most of the grape 
and grape products produced here are sold through domestic channels, foreign 
markets are increasingly important. Export markets have taken over 20 percent 
of U.S. grape production since the mid-1990s, up from 12 percent during the 
early 1980s. U.S. export volumes of fresh grapes and raisins rank third in the 
world while wine exports rank sixth.

California Dominates 
Production

California accounts for over 90 percent of U.S. grape production, dominating 
both the fresh and processing markets and supplying most of the grapes for 
exports. Except for the heat wave that moved across the state this summer, 
weather was generally favorable throughout the grape-growing period and 
production is expected to increase 12 percent from a year ago to 13.3 billion 
pounds. All varieties are expected to increase: raisin-type grapes, up 23 
percent; table-type grapes, up 8 percent; and wine-type grapes, up 5 percent. 

The rapid growth of California's grape vineyards during the 1990s, largely from 
the state's expanding wine industry, appears to have slowed in recent years. 
Grape acreage in California actually declined fractionally in 2001 from the 
previous year, mostly reflecting lower nonbearing acreage of wine grape 
varieties as some vineyards reached productive stage and growers made no new 
plantings. Wine varieties accounted for 60 percent of California's grape 
acreage in 2001, with bearing acreage up 5 percent and nonbearing acreage down 
18 percent. Bearing acreage for raisin and table varieties each declined 1 
percent. 

The 2001 grape crush for California totaled 3.37 million tons, down 15 percent 
from the 2000 record. Approximately 16 percent of this crushed volume was sold 
as grape concentrate. Red wine varieties accounted for the largest share of 
crushed grapes, 51 percent (1.7 million tons), followed by white wine 
varieties, at 39 percent (1.3 million tons). Raisin and table grape varieties 
made up the remaining 10 percent of the total volume crushed. The farm gate 
value of crushed grapes averaged $555 per ton in 2001, up from $504 in 2000. 
Grower prices for raisin, table, and white wine varieties averaged lower in 
2001 than the previous year, while prices for red wine varieties, mostly 
higher-priced than other varieties, averaged 8 percent higher. 

While still far behind California in production, Washington has rapidly 
increased its grape acreage over the last decade in line with the expansion of 
its wine sector. The state's crop in 2002 is expected to be 640 million pounds, 
up 13 percent from 2001, with increases in both wine and juice varieties. 
Grapes are produced solely for the processing sector in Washington, with wine 
manufacturers taking an increasing share. In 2001, 35 percent of the state's 
crop went into wine, compared with 26 percent in 1999. The balance went into 
juice. 

Wine Consumption 
Is Growing

While U.S. grape growers generally receive a higher value for fresh-market 
grapes, over 65 percent of the U.S. grape crop value comes from sales of grapes 
used to make wine. Wine is a high-value finished agricultural product. Retail 
sales of wine in the U.S. averaged $18 billion over the last 5 years, almost 
triple the value during the early 1980s, according to the Wine Institute, an 
advocacy association of California wineries. The U.S. wine industry also grew 
rapidly over the last 20 years with the number of commercial wineries tripling 
to about 1,800. Most of these are family owned and operated and nearly half are 
located in California where approximately 90 percent of all U.S. wine is 
produced. 

Wine shipments from California totaled 450 million gallons during 2001, with 
domestic shipments totaling 387 million gallons--70 percent of U.S. wine 
consumption last year, including wines from other states and foreign countries. 
Of the estimated $19.8 billion in retail value of all wines sold in the U.S. 
last year, sales of California wine generated $13.4 billion, or about 68 
percent. 

While the demand for wine, in general, received a boost from the many reports 
linking moderate wine consumption to good health, demand for U.S. wines grew 
rapidly during the 1990s as U.S. wineries improved quality. Shifts occurred in 
the varietal composition of grapes crushed in favor of premium varieties. The 
top 5 varieties during 2001 were Chardonnay (17 percent of total crush), 
Cabernet Sauvignon (12 percent), French Columbard (10 percent), Zinfandel (10 
percent), and Merlot (8 percent). Except for French Columbard, crush volumes 
for each of these varieties were much larger than in 1992 when Thompson 
seedless was the leading variety crushed for the wine and juice sector, 
accounting for 24 percent of total crush volume. This share declined to 8 
percent in 2001. 

Export markets have served as a growing outlet for U.S. wine. U.S. wine exports 
over the last 3 years averaged 13 percent of domestic production, up from 7 
percent during the early-to-mid 1990s and 3 percent during the 1980s. Based on 
Bureau of the Census data, wine exports set another record during 2001, 
increasing 4 percent from a year earlier, to 75.4 million gallons. Of the top 
five markets, shipments were up to the United Kingdom, the Netherlands, and 
Belgium but were down to Canada and Japan, partly due to the growing 
competition from other large world producers. Also in Japan, an oversupply 
situation over the last 2 years also negatively affected that country's demand 
for U.S. wine. However, the outlook for 2002 is for a drop in U.S. wine exports 
from the 2001 record due to increased global competition and the continued 
strength of the U.S. dollar. During the first 8 months of 2002, wine exports 
were down 13 percent from the same period in 2001, with decreased sales to all 
the top five markets.

In 2001, because of the smaller U.S. grape crop and a stronger U.S. dollar, 
U.S. importation of wine rose 7 percent over 2000. From the main suppliers, 
shipments were up from Italy, Australia, and Spain but were down from France 
and Chile. During the first 8 months of 2002, U.S. imports of wine continued 
higher, up 16 percent from the same period a year ago. 

Raisin Production 
& Exports Down

Raisins account for the second largest use of U.S. grape production. Partly due 
to the smaller 2001 grape crop, fewer grapes were used for raisin production 
last year. However, large carryover stocks and increased imports raised 
domestic raisin supplies during the 2001/02 season, and pressured already low 
raisin prices. Imports increased 29 percent, with larger shipments from the 
leading suppliers--Chile, Mexico, Argentina, and the Republic of South Africa. 
Even with increased supplies, commercial shipments, as reported by the Raisin 
Administrative Committee, were down slightly from the previous year and ending 
stocks remained large. U.S. raisin consumption was estimated at 1.46 pounds per 
person during 2001/02, down 3 percent from the previous season. However, low 
domestic prices and decreased world supplies helped boost export demand for 
U.S. raisins, raising shipments 4 percent. Increased shipments to Japan, 
Canada, and other important markets in the Asian Pacific Rim more than offset 
decreased shipments to the European Union. 

This year's larger U.S. raisin crop and another year of large carryover stocks 
will likely keep U.S. raisin prices competitive in the world market, but 
increased world production and a continued large world surplus will likely 
prevent any significant growth in U.S. exports. Good drying conditions 
prevailed for sun-dried raisins in September of this year. By early November, 
harvesting of raisin vineyards in California was complete.

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

For more information:

ERS's briefing room on fruits and tree nuts
www.ers.usda.gov/briefing/FruitAndTreeNuts/


BRIEFS: Specialty Crops

Smaller 2002/03 Citrus Crop May Boost Grower Prices

The 2002/03 citrus crop is projected to total 15 million short tons, 9 percent 
smaller than last season, according to USDA's National Agricultural Statistics 
Service (NASS). The orange, grapefruit, tangerine, and Temple crops are 
expected to be smaller, while lemon and tangelo crops should be bigger. As a 
result of the expected smaller crops, growers are likely to receive higher 
prices for their product. Higher prices could, in turn, improve revenues for 
some of the citrus industries.

With the Florida crop typically accounting for at least three-quarters of all 
citrus produced in the U.S., any changes in its crop affects the overall 
industry. An expected 14-percent decline in Florida's citrus crop is driving 
overall decline for the 2002/03 season. As a result of the sharp projected 
decline in Florida's production, its share of the total U.S. citrus crop is 
likely to be 74 percent, down from 78 percent last season. 

A projected 11-percent increase in California's crop is offsetting some of the 
overall decline in the U.S. citrus crop. Since Florida and California market 
their citrus differently, one state's crop has little effect on the other 
state's market. For example, most of California's oranges are sold in the fresh 
market while most of Florida's oranges go into making juice. Because of the 
split markets, quality factors often have more effect on markets, with poor-
quality California oranges increasing sales to processing and high-quality 
Florida oranges increasing its sales to the fresh market. The impact of any 
change in market, however, is generally very small. Similarly, Florida 
grapefruit dominate the winter fresh market with California's product taking 
over from spring through early fall.

More Fresh Oranges Expected in the Markets This Season. California and Arizona 
orange crops are projected to reach 2.4 million short tons, 13 percent bigger 
than last season and potentially the largest since 1997/98. The navel orange 
crop, which is already being marketed, is expected to be 17 percent larger than 
last season. The Valencia crop, which will not be harvested until February or 
March, will be 4 percent larger. The significantly larger navel crop is good 
news for growers since navels are popular both domestically and 
internationally, bringing growers strong returns. The navels, however, were 
reportedly on the small side, which decreases their market value. As the season 
progresses, and with some rain, the fruit will likely increase in size and 
improve the prices growers can demand for their fruit.

Texas' orange crop is forecast to be 8 percent smaller than last season and 28 
percent smaller than 2 seasons ago, although the 68,000 tons expected to be 
utilized is higher than any other year since the mid-1980s. According to the 
industry, f.o.b. prices averaged lower than last season during the third week 
of October. Prices are likely be hampered by the large number of small fruit 
available at the time. 

Smaller Florida Orange Crop Could Drop Juice Supplies to 5-Year Low. The first 
projections of Florida's orange crop is 8.9 million short tons, 14 percent 
below a season ago. Both the early-to-mid-season orange crop, expected to total 
5.1 million tons, and the Valencia orange crop, at 3.8 million tons, are 
forecast down in 2002/03. 

Two major factors affected production this season. First, drought affected the 
number of blooms and therefore the number of fruit on the trees. Second, 
several diseases helped decrease the number of bearing acres and trees. Warm, 
rainy summer weather helped accelerate fruit maturity and size. The bigger 
fruit relative to recent years at the time of the October forecast likely 
offset some of the loss in volume.

Many of Florida's juice processors opened their plants by mid-October, with all 
plants expected to be operating by mid-November. Although the quantity of 
oranges being processed in October was ahead of last season, there were reports 
of bitterness in the juice. This problem should dissipate as the season 
progresses and temperatures decline, sweetening the fruit. 

According to industry data, processors were paying an average of 20 percent 
more for their oranges as of the third week of October. Anticipated tightness 
in this year's market should improve prices growers receive for their fruit 
after several years of low prices.

USDA's Economic Research Service estimates that 1.2 billion single-strength 
equivalent (SSE) gallons of orange juice will be produced from this year's 
crop. If realized, production would be the lowest since 1993/94. Although 
beginning juice stocks are the third highest on record and imports are forecast 
to be significantly higher than last season, the overall supply available for 
marketing this season is projected to be 2.2 billion SSE gallons, the lowest in 
5 years. The smaller supply will likely drive down ending stocks as processors 
continue to compete for market share, especially in the not-from-concentrate 
(NFC) orange juice market. Consumers could benefit from this competition and 
see low retail prices for NFC this season. Low prices and an expected 
improvement in the U.S. economy should push consumption slightly higher than 
last season to an average 5.2 gallons per person for 2002/03. 

Brazil's orange juice production, the largest in the world and the major source 
of U.S. imports, is projected higher this season. The bigger supply should 
lower the world price and provide for sufficient juice available to U.S. 
processors and reconstituting plants, mostly located in the Northeast. With 
more Brazilian orange juice in the world market, U.S. exports will probably 
drop, as domestic processors push more juice into the U.S. market.

Grapefruit Production Declining. According to NASS's October estimates, 
grapefruit production for 2002/03 will only reach about 2.2 million tons, the 
smallest crop since the freeze in 1989/90. Crop size has been declining over 
the past 3 years as trees and bearing acreage were removed in Florida due to 
disease and low grower returns. Both Florida's colored and white grapefruit 
crops are anticipated to be 10 percent lower than last season. Since Florida's 
expected 1.8 million-ton grapefruit crop is less than the average utilization 
over the past 5 years, competition from both the domestic and international 
markets should be strong, boosting grower prices. Prices should also benefit 
from this season's large fruit, a strong selling factor for some international 
markets.

California Expects More Lemons This Season. The forecast for the 2002/03 lemon 
crop is 904,000 tons, 9 percent above last season. California's crop is 
expected to be 11 percent larger than last season at 798,000 tons, 88 percent 
of the total. Arizona's lemon crop comprises the remaining 106,000 tons, the 
same as last season. California's lemons, like its oranges, are smaller so far 
this season. Without some rain, the size of the fruit could dampen prices. 
Arizona's lemons are reported to be of good size and quality. Without much 
import competition this season, and with the ban still in effect for Argentine 
lemons, there should be sufficient demand throughout the year to keep prices 
firm for growers and at the retail level.

Smaller Tangerine Crop Forecast In Florida. Florida's tangerine crop accounts 
for 71 percent of total production this season. The crop is projected to 
decline 21 percent from last year's large crop, to 314,000 tons. The early-
variety tangerine crop is expected to drop by 29 percent from last year, due to 
a decline in the number of trees, and the number of fruit per tree. 

Beginning in 2002/03, the early varieties include only Fallglo and Sunburst 
tangerines. The Sunburst variety is the major early variety. The number of 
trees also declined for the late Honey tangerine, but the number of fruit per 
tree is higher this season than last. Therefore, the estimate for Honey 
tangerines declined only 7 percent. Elimination of forecasts for Robinson and 
Dancy tangerines may alter the forecast slightly. However, these crops have 
become so small (being replaced by more popular varieties), that the overall 
effect on the forecast is likely minimal. 

With fewer tangerines available in the market, prices may climb above last 
season. A price increase, however, would be tempered by the return of Spanish 
clementine imports that will again be available this fall and winter. Under new 
regulations by USDA's Animal and Plant Health Inspection Service, clementines 
cannot be marketed in any citrus-producing States. Since the strongest demand 
for clementines is in the Northeast, the restrictions should have little effect 
on demand. They might, however, increase competition for domestic citrus. 
Consumers may benefit from such competition, should the industries decide to 
include price discounts in their promotions. 

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


COMMODITY SPOTLIGHT

Holiday Sales Look Bright for Christmas Trees & Poinsettias

Christmas tree sales depend not only on consumer holiday budgets, but also on 
competition from artificial trees. In 1989, sales of real Christmas trees and 
artificial trees were equal. Since then, purchases of artificial trees have 
steadily climbed. By 2000, the share of real Christmas trees had fallen to 39 
percent as artificial trees reached 61 percent. Demand for real Christmas trees 
is also sensitive to tree prices, which have inched up over the past 6 years. 
However, since the housing market--residential construction and home resales--
was strong in 2002 despite slower consumer spending, modest gains in Christmas 
tree sales are anticipated.

The holiday season's sales of real Christmas trees are expected to be at least 
32 million trees, slightly larger than in 2000, but below 1999's 35 million. At 
estimated retail prices ranging from $4.30 to $7.80 per foot, or an average $36 
per tree, total retail sales will be close to $1.2 billion in 2002. These sales 
are up from $1.1 billion in 2000 and $900 million in 1998. 

Poinsettia sales are expected to continue growing, up to $260 million at 
wholesale in 2002 from $256 million in 2001, a 2-percent rise. While poinsettia 
sales equal only a quarter of Christmas tree sales, the quantity sold has grown 
steadily over the past decade. The number of Christmas trees sold, in contrast, 
has seen a gradual decline after reaching 35 million trees sold in 1999 and 37 
million in 1995.

Poinsettia consumption patterns are much less dependent on price or competing 
ornamental plants. In recent years, many mass marketers have increasingly used 
poinsettias as loss leaders--selling them at or below cost to attract customers 
into their stores. Poinsettias, like Christmas trees decked with trimmings and 
lights, decorate store windows and displays. As the first items customers 
usually notice in stores, poinsettias in effect advertise themselves. Thus, 
demand for poinsettias is very much related to where and how they are 
displayed.

Christmas Trees 
A-Plenty

Natural Christmas trees are grown and sold in all 50 states, with the bulk of 
production located in the northern half of the country. Most commercial 
Christmas trees begin life from seed in a nursery. Two-year old seedlings are 
then replanted in tree farms. Sold commercially since 1850 in the U.S., 
Christmas trees originally were cut from evergreen forests. Christmas tree 
farming started only in the 1950s as demand grew. The top-producing states by 
sales rank in 2000 were Oregon, North Carolina, Michigan, Pennsylvania, and 
Washington. 

The three major Christmas tree species are all conifers--fir, spruce, and pine. 
The best selling varieties are the noble, Douglas, Fraser, and grand firs, blue 
spruce, and scotch and white pines. Recent trends show increasing demand for 
firs over pine trees, as well as more spruce and exotic fir trees at the higher 
price range. These trees are considered more attractive and look fresh longer.

An average 2,000-2,100 trees are planted per acre on as many as 1 million acres 
in the U.S. The more than 15,000 tree farms in North America (U.S. and Canada) 
employ about 100,000 full- and part-time workers. Annual tree harvests range 
from 1,000-1,500 per acre. It takes 5-12 years before trees are ready for 
harvest, depending on tree species, geographic location, and weather conditions 
during growth. The average growing time from seedlings is 7 years. More than 70 
million seedlings are planted each year, at least 2 new seedlings for every 
harvested tree.

About 25 percent of consumers who purchase real trees do so at a Christmas tree 
farm, 25 percent buy trees from a retail lot, and 30 percent buy from chain 
stores and nonprofit groups (Boy Scouts, churches, and other fundraisers). 
Internet and mail orders number about 300,000. Of the approximately 108 million 
U.S. households, 30 percent are expected to buy a natural tree, about 50 
percent have or will purchase an artificial tree, and 20 percent have no trees. 
Artificial trees normally cost more than a natural tree, but can be 
disassembled, stored, and reused. The higher-priced artificial trees are 
increasingly natural-looking and lifelike, and are fireproof. Some newer models 
already come with built-in lights ("pre-lighted" or "pre-lit"). Since most 
artificial trees are manufactured in China, Taiwan, or Hong Kong, fewer natural 
Christmas trees sold means more imports.

In 2000, the average wholesale price of real Christmas trees sold by U.S. 
producers was $16, half the retail price. Of the 32 million trees sold that 
year, 2.5 million were imported from Canada, the bulk of which were Douglas 
firs. Real tree imports from other countries are negligible. The average cost 
of Canadian Christmas trees was $10 per tree in 2000 and 2001. Since the 
Canadian dollar's exchange rate is still low relative to the U.S. dollar, the 
market share of Christmas trees from Canada should continue rising. The import 
value of Canadian Christmas trees exceeded $26 million in 2001, up from $17 
million in 1993, but still less than 3 percent of U.S. production.

Christmas tree retail prices are expected to average $36 per tree in 2002, up 
from $35 in 2000. This compares with $29 per tree in 1998 and $25 in 1994. 
Christmas tree prices have roughly matched consumer price inflation from 1997 
to 2000. Nevertheless prices of the most popular species increased 8-10 percent 
per year during this period. Since 2000, increases in Christmas tree price have 
slowed due to competition from imported artificial trees and outdoor and indoor 
Christmas lights. The strong U.S. dollar, generally cheaper imports of natural 
trees from Canada, and current lackluster U.S. economic conditions, should keep 
downward pressure on prices of domestically grown Christmas trees.

Poinsettia Sales 
Point Upward

Native to Mexico and South America, poinsettias were named after the U.S. 
ambassador to Mexico (Joel Poinsett) who introduced the plant in the U.S. in 
1825. Potted poinsettias are typically grown in greenhouses for the Christmas 
holiday market. Their leaves are predominantly red in color, although white, 
pink, and color combinations are gaining in popularity. While most poinsettias 
are discarded after the holidays, they are also used as landscape shrubs, 
houseplants, and cut flowers. In their native habitat, poinsettias are 
perennial flowering shrubs that can grow to 10 feet in height.

Over 85 percent of potted poinsettia sales occur during the Christmas holiday 
season. Poinsettias are grown in all 50 states by about 1,750 growers, with 
California the top producer. U.S. production of potted poinsettias amounted to 
67.4 million pots in 2001, which were worth $256 million at wholesale. The 
average wholesale price of a 5-inch poinsettia pot was $4.37 last year. 
Although the average wholesale price of potted poinsettias increased by only 32 
cents from 1992 to 2001--from $3.48 to $3.80 per pot--the number of pots sold 
jumped by 21 percent, from 55.5 million in 1992 to 67.4 million in 2001.

Over the past decade, the wholesale value of poinsettias expanded by more than 
32 percent from $194 million in 1992 to $256 million in 2001. Sales per U.S. 
household in 2001 totaled $2.40, the highest among major flowering plants in 
pots. Led by California, Western states purchased $2.90 worth of poinsettias 
per household on average in 2001, more than the rest of the country. U.S. 
imports of poinsettias totaled 4.5 million pots last year, worth $9.2 million. 
Like real Christmas trees, U.S. poinsettia imports came almost exclusively from 
Canada since only Canada is allowed to export finished plants or plants with 
soil to the U.S. While these imports are still a fraction of domestic 
production, the number of imported poinsettia pots has shot up by more than 200 
percent since 1995.

Poinsettia growers' wholesale receipts in 2002 are projected to climb 2 percent 
to $260 million. Christmas tree farmers are expected to net $510 million at 
wholesale, up 3 percent from 2001. This represents a $20 million gain--or 2.7 
percent--from $750 million in 2001. Considered against a slower projected 
growth pace for the rest of the nursery and greenhouse industry, Christmas tree 
and poinsettia growers may have a well-planted reason for holiday cheer.

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


THE LIVESTOCK SECTOR

Controversies in Livestock Pricing

Livestock prices fluctuate daily. Viewed over time and corrected for inflation, 
the longrun trend in livestock prices, like prices in the rest of the sector, 
is downward. Growth in productivity and economic competition have driven the 
longrun decline in the number of U.S. producers of most agricultural 
commodities. Declining real prices cause serious financial problems, leading to 
a decline in the number of producers. 

Some producers allege that the livestock pricing system is one of the causes of 
declining prices. Many of the producers who are concerned about price 
discrimination or corporate farming have complained about concentration and 
captive supplies, and have called for Government action. This pressure has 
produced results, with several state legislatures enacting anti-price-
discrimination and anti-corporate-farming laws. And the U.S. Congress enacted 
new mandatory livestock price reporting legislation in 1999. 

Can declining livestock prices be attributed to structural changes in the 
industry? The U.S. livestock pricing and coordination system has been a topic 
of debate and a focus of public policy for well over a century. An excerpt from 
an 1890 report of the Senate Select Committee on the Transportation and Sale of 
Meat Products illustrates.

In place of the old system when shippers and butchers went from one cattle 
raiser to another, competing in the purchase of cattle, there is now a 
concentration of the market at a few points... So far has this centralizing 
process continued that for all practical purposes the [Chicago] market... 
dominates absolutely the price of beef cattle in the whole country. 

Concerns about industry practices continued into the 1900s. President Theodore 
Roosevelt ordered an investigation of the meatpacking industry after reading 
Upton Sinclair's novel The Jungle, which dramatized unsanitary processing plant 
conditions and manipulative business practices. When Roosevelt met Sinclair, he 
indicated that while he disapproved of the book's socialist leanings, he agreed 
that regulation of the industry was needed. 

Federal action on the issue of concentration was seen in the Packers' Consent 
Decree of 1920 and the Packers and Stockyards Act of 1921. Packers consented to 
divest themselves of stockyard real estate, railroads, and market newspapers, 
and to refrain from selling at retail. USDA was given power to govern against 
unfair or deceptive practices in the buying and selling of livestock. This, 
like other early legislation, worked to the benefit of producers--protecting 
sellers from dishonest scales and financial insolvency of marketing firms, and 
ensuring fair charges for yardage and services. 

Changes in the business relationships between livestock producers and packers 
may have implications for the internal organization of livestock production. 
The importance of terminal and smaller auction markets declined significantly 
in the latter half of the 20th century. It became common again for packer-
buyers to go directly to larger farms bidding on cattle--akin to the system the 
1890 testimony lamented as having passed. Auction markets and directly 
negotiated sales between producer and packer--still operating but declining in 
importance--are part of what is called the "spot" market. Spot market 
transactions refer to livestock that are ready for immediate delivery at the 
time the agreement is entered. Spot market sales include liveweight and 
carcass-merit pricing. Sales through auctions are on a liveweight basis.

Information flow is key to the efficient performance of an economic system, and 
livestock prices are the key information that coordinates producer and packer 
behavior. An advantage of centralized auction markets is the ease with which 
livestock price information is collected and disseminated. Government and 
private sources have been able to collect and disseminate price and other 
market information from many livestock and wholesale meat market areas. The 
rules under which transactions take place and the dissemination of information 
on prices and other terms of trade are considered vital to a well-functioning 
price discovery system. 

This system has provided a trusted public outlet for an independent farmer's 
product at relevant times and locations. In most cases, producers could assess 
how their price and quality experience compared with other sellers and other 
locations. The decline of auction markets in relation to other methods of 
procurement has led to new pricing controversies.

Vertical Coordination Overtakes 
Spot Markets...

Current pricing controversies arise over the growing importance of various 
forms of vertical coordination between packers and livestock producers and the 
declining use of spot markets. Vertical coordination takes many forms, ranging 
from informal marketing agreements to packer ownership of feedlots and hog 
farms (and the livestock in them). Forms of coordination where the packer takes 
an early ownership interest in livestock have proven to be particularly 
controversial. Cattle that are committed to or owned by a packer before they 
are ready for slaughter are termed "captive supply" in the fed-cattle industry. 
Congress has debated several measures to prohibit or restrict these practices, 
but none have passed. 

The cattle and hog industries differ in the degree and types of vertical 
linkages being used. The pork industry has shifted dramatically toward long-
term contract coordination and packer ownership of production facilities, while 
cattle producers still rely more heavily on spot market or short-term 
arrangements with packers. 

The situation has changed dramatically for hog production. About 87 percent of 
U.S. hogs were sold in the spot market in 1993, 2 percent were owned by 
packers, and the remaining 11 percent were purchased on contract. By 2000 the 
share of spot-market hogs had dropped to less than 20 percent, while packer 
ownership climbed to 18 percent, and marketing contracts (or agreements) grew 
rapidly to over 60 percent. Spot-market sales of barrows and gilts have been 
relatively stable since mid-2001. 

For cattle, even though a majority are still sold through negotiated sales, 
spot-market fed-cattle deliveries as a percentage of market volume have 
decreased over the last decade in major cattle feeding states. In Colorado, 
Kansas, and Texas, for example, nonspot fed-cattle deliveries (additional 
movements) during the early 1990s typically represented less than 30 percent of 
fed-cattle weekly volume, while often exceeding 60 percent in the late 1990s. 
While the extent of formal ownership or contract integration has remained 
stable near 20 percent of fed-cattle slaughter, the volume of negotiated spot-
market transactions declined.

What factors have driven the decline in spot market sales?  The strength of the 
spot market is the easy dissemination of price information and ready access to 
buyers for producers. The weakness of the spot market is its poor transmission 
of other relevant information. Government and private sources have collected 
and disseminated price and other market information from many livestock and 
wholesale meat market areas. Mandatory reporting of livestock prices has been 
the law since mid-2001 for certain categories of sales. 

Spot-market livestock are priced based on readily observable animal 
characteristics. The problem is that these characteristics translate poorly 
into those that packers, and ultimately consumers, actually want. The apparent 
drop in demand for beef has often been blamed on lack of consistent beef 
quality that consumers demand. 

Vertical coordination gives packers a mechanism for obtaining a consistent 
supply of higher quality animals. Some livestock producers also see advantages 
to vertical coordination. Surveys showed that pork producers who entered 
marketing arrangements with packers identified higher prices and lower price 
risk as the two greatest advantages of having a marketing contract. Beef 
producers identified the advantages as higher carcass premiums, access to 
carcass data, and less time spent marketing cattle. Researchers reported that 
reduced risk and enhanced financing opportunities were benefits to feedlots 
from marketing agreements. One study reported that feedlots saw less advantage 
from risk reduction or financing options, but noted that feedlots did not feel 
pressured by packers to enter contracts. Thus there appear to be incentives for 
both parties--seller and buyer--to enter market contracts.

...& Obscures 
Prices

A potential problem with vertical coordination is that it weakens or disperses 
the availability of price information. In many types of coordination, the task 
of livestock pricing is solved by what is called "formula pricing."  The packer 
pays the producer using a formula that includes quality premiums and discounts 
around some "base" price. The "base" price is usually some selected spot-market 
or futures-market price. Various types of formula-based pricing methods have 
dominated sales of hogs by producers. 

There is some concern that spot markets for cattle and hogs might disappear, as 
has essentially happened in poultry markets--and with it the public 
availability of price information. As spot markets disappear, fewer price 
signals are available to convey messages to producers and consumers concerning 
available quantities, qualities, cost and value. Formula pricing in contracts 
also becomes problematic as too few animals are traded in public transactions 
to generate confidence in the prices. This leads to concerns about packers 
using vertical arrangements to artificially suppress the spot-market price. 
Market participants typically turn to other price series (e.g., meat or grain 
markets) when a market becomes too thin.

At the USDA Forum on Captive Supplies in 2000, economist and attorney Neil Harl 
gave a summary of objections to packer control of livestock production in 2000.

On the face of it, captive supplies are discriminatory in effect... It is also 
reasonable to conclude that captive supplies are "unfair" to independent 
producers and that some features of captive supplies are "deceptive" in the 
operation and functioning of markets for cattle destined for slaughter. 
...there is general agreement that increasing levels of concentration correlate 
with lower price levels.

In fact, economic studies of the effects of increasing packer concentration and 
"captive supplies" on livestock prices, despite Harl's contention, produce 
mixed results and often show little or no price-depressing effects of captive 
supplies or packer concentration. 

In the early 1990s, Congress directed USDA's Grain Inspection, Packer, and 
Stockyards Administration (GIPSA) to study concentration in the red meatpacking 
industry. The agency responded by contracting with universities and ERS for 
several research projects and developing a data set of cattle purchase 
transactions by 43 steer and heifer plants operated by all firms that 
slaughtered more than 75,000 steers and heifers annually (accounting for over 
92 percent of total U.S. slaughter) in 1992-93. 

In one of the projects, a team from the Texas Agricultural Markets Research 
Center analyzed the determinants of differences in prices paid for individual 
lots of cattle. The team measured the effects of regional market concentration 
while controlling for characteristics of the transaction (such as lot size and 
pricing method), cattle quality indicators (weight, cattle type, and yield 
grade), and overall market trends (national daily cattle prices). Controlling 
for those other sale characteristics, larger price effects of concentration 
were found than previous research indicated. Cattle prices in regions with a 
single buyer were estimated to be 2 percent lower (on average) than prices in 
regions with two equal-sized buyers, and 2.7 percent lower than prices in 
regions with four equal-sized buyers. 

Another study used monthly cost and revenue data for individual plants for 
1992-93. The cost data were used to assess the ability of packers to raise beef 
prices above competitive levels or to reduce cattle prices below competitive 
levels. While the research found a small amount of packer market power in 
product (beef) markets, no statistically or substantively significant 
departures from competitive prices in the input (cattle) market were present. 
In the highly concentrated cattle market of the period, cattle prices did not 
fall below competitive levels. 

In a report by USDA's Economic Research Service (ERS), researchers investigated 
the relationships between farm, wholesale, and retail prices over the cattle 
cycle. Part of this study used monthly data from 1980 to 1997. ERS found that 
cattle prices in the early 1990s were slightly higher than would have been 
expected, based on experience with previous cycles. Farm-to-retail price 
spreads also fell slightly as concentration trended upward during the 1980s and 
1990s. 

A fourth study designed a test for competition in packer purchases of fed 
cattle, and found that prices were pushed below competitive levels as packer 
concentration rose. However, the divergence was extremely small, and prices 
were quite close to perfectly competitive levels. Moreover, this research found 
that slaughter costs fell as concentration increased. The cost decline induced 
packers to purchase more cattle, and to drive cattle prices up--the price 
effect more than offset the direct effect of concentration on packer bids. 

If the vertically integrated livestock marketing system appears to have, at 
worst, only minor effects in depressing livestock prices, what is the source of 
the longrun decline in real prices? While increasing supply will dampen price, 
the most important source of declining livestock prices is technical 
innovations which have led to increasing productivity. Increasing productivity 
means that livestock can be produced at lower costs or that more can be 
produced at the same cost. Economic competition among producers pushes 
livestock prices toward production costs.

William F. Hahn (202) 694-5175 whahn@ers.usda.gov
Kenneth E. Nelson (202) 694-5185 knelson@ers.usda.gov

Read more:

U.S. Beef Industry: Cattle Cycles, Price Spreads, and Packer Concentration, 
April 1999
www.ers.usda.gov/publications/tb1874/

Briefing rooms on the Economic Research Service website:
www.ers.usda.gov/briefing/cattle/
www.ers.usda.gov/briefing/hogs/
www.ers.usda.gov/briefing/poultry/

U.S. Department of Agriculture, National Agricultural Statistics Service. Hogs 
and Pigs (various issues).

Hayenga, Marvin, Ted Schroeder, John Lawrence, Dermot Hayes, Tomislav Vukina, 
Clement Ward, and Wayne Purcell. "Meat Packer Vertical Integration and Contract 
Linkages in the Beef and Pork Industries: An Economic Perspective," special 
report for the American Meat Institute, May 22, 2000.

THE LIVESTOCK SECTOR BOX 1

Livestock Industry Marketing Highlights

1812	"Uncle Sam" is modeled after Sam Wilson, a meatpacker from Troy, New York. 
During the War of 1812, the meat he shipped to the government was stamped "U.S. 
Beef." Soldiers began to call it Uncle Sam's beef.

1850s	Cincinnati accounts for more than half the pork packed

1861	Chicago surpasses Cincinnati in meat packing

1866-80	Era of the cattle drives from Texas to Missouri and Kansas stockyards

1890-1920	Series of Anti-trust and Unfair Trade Acts (Sherman Anti-trust, Meat 
Inspection Act, Clayton Anti-trust Act, Federal Trade Commission Act, Packers' 
Consent Decree)

1921	Packers and Stockyards Act passed. Provides financial protection to 
producers and promotes fair and competitive markets for livestock, meat, and 
poultry. Administered by USDA's Grain Inspection, Packers and Stockyards 
Administration.

1954	Census of Agriculture conducts special survey on poultry contracting

1955	Omaha replaces Chicago as nation's largest livestock market and 
meatpacking center

1960-70	Independent meat packers establish plants in the countryside near 
livestock supplies

1980-90	Mergers and acquisitions of independents into modern large national 
packers, several owned by even larger firms
1996	First time that purchases on carcass basis accounted for more than half 
the hogs sold. Price animal brings is unknown until animal is dead, skinned, 
graded, etc. and out of farmers' control.

1999	First time that purchases on carcass basis accounted for more than half 
the cattle sold. Price animal brings is unknown until animal is dead, skinned, 
graded, etc. and out of farmers' control.

1999	Mandatory Livestock Reporting Act signed into law. 

2000	Senate (but not House) passed Amendment to the Farm Bill to limit packer 
ownership and control of livestock production.

2001 USDA launched the mandatory price reporting system in April.

THE LIVESTOCK SECTOR BOX 2

Price Spreads & Marketing System Performance

Price spreads are one way of measuring the performance of the meat marketing 
sector. The increasing spread between farm and retail prices has been cited as 
evidence that changes in market structure have lowered prices to farmers. Meat 
price spreads show how the value of an animal and the resulting meat products 
changes as the animal (carcass) moves from the farm, to the packer, and 
finally, to the grocery store. 

While price spreads are not particularly useful as measures of industry profits 
(other cost data are needed), longrun spread changes are useful as measures of 
longrun developments in industry efficiency. As firms become more efficient, 
their costs decline, and they can earn the same profits with lower spreads. If 
industries become more competitive or more economically efficient, spreads can 
also decline as excess profits are eliminated. 

What effects would contracting and captive supplies have on price spreads? 
First, if captive supplies allow meat packers to run their plants more 
efficiently, contracts would lower the costs of meatpacking, which would tend 
to lower the farm-to-wholesale spread. Second, if captive supplies allow meat 
packers to exert market power, they would tend to raise the farm-to-wholesale 
spread. While farm-to-wholesale spreads have not kept pace with inflation over 
the past 30 years, the farm-to-wholesale spreads for beef and pork have 
increased faster than inflation since the mid-1990s.  

The effects of changes in government regulation such as mandatory price 
reporting and food-safety regulations on farm-to-wholesale price spreads depend 
on which of the supply effects is most prevalent, and on the cost of new 
programs to the private sector. Compliance costs borne by packers tend to be 
shifted forward to consumers and/or backward to producers. 

The share of cost shifted depends on relative responsiveness of consumers and 
producers to price changes. Cost shifting lowers producer prices and raises 
consumer prices. Lower producer prices tend to reduce livestock supply, while 
higher consumer prices reduce meat demand. The less responsive side of the 
market bears the larger part of the costs. Since livestock supply is 
unresponsive to price changes in the short run, part of the compliance cost 
will be borne by livestock producers. 

The costs of complying with new government interventions will increase the 
farm-to-wholesale spread. If packers currently exert significant market power, 
spreads could drop if the new regulations lead to sufficient decreases in any 
abuses.

The largest component of the total price spread for beef and pork is the 
wholesale-retail component, which mainly reflects the costs and profits of meat 
retailing. USDA's wholesale-retail spreads are less useful as a measure of 
costs and profits than the farm-wholesale spreads. The USDA retail value is the 
cost of buying an animal's meat parts at the grocery store. It is generally 
believed that grocery stores sell mostly lower and medium-priced cuts of the 
animal, while higher valued cuts go to the hotel and restaurant trade, and to 
exports. 

ERS' new retail scanner meat price database will give a better measure of what 
some grocery stores sell. Current USDA price spreads are based on retail prices 
reported by the Bureau of Labor Statistics (BLS) which in turn are based on 
average consumer prices. The scanner data weights prices by sales volume. Since 
lower prices are associated with higher sales, the scanner data's average 
Choice-grade prices tend to be lower than BLS's average prices. 

The wholesale-retail price spread has increased more rapidly than inflation 
over the past 30 years. There is evidence of declining productivity in grocery 
stores' overall operations. That translates into higher costs, which in turn 
increases price spreads. 

William F. Hahn (202) 694-5175 whahn@ers.usda.gov


THE LIVESTOCK SECTOR

Where's the Beef? Small Farms Produce Majority of Cattle

It may come as a surprise to many that small operations produce the majority of 
beef cattle in the U.S., and control 74 percent of the land dedicated to beef 
cattle production. Three quarters of the nation's beef cattle spend at least 
some portion of their life on a small farm. 

Small beef operations vary substantially in size and in their access to labor 
and other inputs. Some operators are full-time farmers, while others rely 
largely on off-farm income. As a result, the needs of these operations may 
differ--among themselves and compared with large operations--in areas like 
production, marketing, and land stewardship. Their contributions to the beef 
industry warrant an effort to better understand the similarities and 
differences.

How U.S. Beef Cattle 
Are Produced 

Beef cattle operations take three basic forms: cow-calf, stocker, and fed 
cattle. All three of these production systems may occur on small farms. On a 
cow-calf operation, a breeding herd is managed with a small number of bulls, 
while steer calves (young neutered males), a portion of heifer calves (young 
females), and non-productive cows are sold each year to generate income. 
Traditionally, cow-calf operations have been small-farm operations.

Stocker operations purchase calves from cow-calf operators, and put the animals 
out to pasture for part of the year to gain weight. Stocker operations then 
either 1) feed the animals on grain (finishing) and sell them directly to 
slaughterhouses when they have reached full size, or 2) sell them as yearlings 
to fed-cattle operations. 

Fed-cattle operations place long and short yearlings (14-24 months old and 10-
14 months old) on feedlots, where they are fed grain and specially formulated 
concentrates until they reach optimal slaughter weight and grade. The next step 
is to sell the cattle to beef packers for processing. Fed-cattle operations are 
usually larger farms or full-time small farms.

Half of all farms in the U.S. have beef cattle on their operations, including 
farms classified as feedlots. Beef cattle production is compatible with, and 
often occurs in conjunction with, other agricultural production such as cash 
grains. A crop and beef cattle operation is a logical combination, as cattle 
can graze on residual acreage not suitable for higher value production and can 
consume post-harvest vegetation (such as corn stalks) that otherwise has little 
value. Such a mix also lowers producers' price and other risks that are common 
to single-commodity operations. 

However, on many small farms beef cattle production is the primary enterprise. 
This is particularly true for those located in areas that are less well suited 
to crop production and for those run by part-time operators, who can more 
easily combine off-farm employment with the farm tasks required to raise beef 
cattle, which are less labor-intensive than crop production.

Cattle lend themselves quite nicely to a low-input production process, which is 
well suited to many small farms. Except in winter, or other periods of adverse 
weather conditions when forage may be unavailable, cattle are fairly self-
sufficient. Unlike hogs or chickens, cattle can roam freely with little direct 
supervision except during calving season. Thus, beef cattle require a much 
smaller labor input than many other competing agricultural products. 

Moreover, cattle production, especially on a small operation, is a relatively 
low-cost pursuit. Variable costs associated with beef cattle (e.g., feed, 
medicine) are generally lower than those associated with field crops. Fixed 
costs such as for land, access to water, fencing, and corrals, while 
constituting the largest costs of cattle operations, nevertheless have a 
relatively long life. For example, once the investment is made in fencing and 
corrals, only regular maintenance and repair is required to keep them usable.

Small Beef Operations: 
A Range of Characteristics

Analysts from USDA's Economic Research Service (ERS) grouped data from the 
Agricultural Resource Management Survey (ARMS) using the ERS farm typology, to 
study the characteristics of small beef cattle operations within each farm 
category.

The analysis provides a picture of the average farm in each category, with some 
clues to likely needs of these producers.

Small enterprises producing beef cattle in the U.S. can be roughly divided into 
two groups: full-time operations for which agricultural production is a 
significant source of income, and part-time operations for which it is not.

Full-Time Farms with Beef Cattle Operations. Producers on small beef cattle 
farms who identify themselves as "full time" (farm typology categories farming 
occupation/low sales, and farming occupation/high sales) hold more than half of 
all cattle and calves on small farms. Their average herd size is substantially 
larger than on part-time operations, and includes a higher ratio of cattle to 
calves. Among small beef cattle operations, full-time farmers and ranchers also 
sell the largest share of cattle over 500 pounds. 

These characteristics reflect the full-time status of the operators who have 
the time, labor, feed, and land inputs necessary to grow out calves to long 
yearlings and heavier weights before selling them to feedlots for finishing. 
The full-time operations control much larger acreage than their part-time 
counterparts, including a larger share of leased land. 

At the same time, the average full-time farmer raising beef cattle receives a 
larger share of income from crop production than from beef production. On 
average, less than 50 percent of the total value of production on their 
operations comes from raising beef. 

For the full-time small farmer, beef cattle provide a supplemental source of 
income in the traditional mixed-output agricultural enterprise--these operators 
generate 29 percent of the total value of U.S. beef production. The beef cattle 
enterprise also provides a hedge against falling crop prices. For example, if 
the market price of field crops declines, the beef cattle producer can feed 
cattle with a portion of the harvest instead of having to sell it directly at 
low prices. 

Part-Time Farms with Beef Cattle Operations. The most numerous group of beef 
cattle producers is not actually in the business of farming. This "part-time" 
group includes small farmers who derive most of their income from other sources 
(typology categories retirement and residential/ lifestyle) and small farmers 
who have very low incomes and assets overall (limited-resource). These three 
types of small "part-time" operations together account for 68 percent of all 
operations producing beef cattle. And although agricultural production is not 
the primary source of income for these farms, in aggregate they produce 34 
percent of all beef cattle and calves in the U.S., despite smaller average herd 
sizes and acreage devoted to beef production. 

Retirement and residential/lifestyle producers may operate farms because they 
enjoy a rural lifestyle, or they may view their operations as an investment and 
place to spend time. Retired farmers' part-time operations may be a final stage 
in a life of agricultural production. For these small farmers, beef cattle 
production is a logical choice since it requires lower inputs of time and labor 
for a steady (if smaller) income stream than labor-intensive agriculture such 
as field crop production. In fact, for both these categories of part-time beef 
cattle operations, well over half the value of agricultural production comes 
from cattle: 58 percent for residential/lifestyle farms and 66 percent for 
retirement farms.

Lower use of inputs needed to raise beef cattle also likely accounts for the 
relatively large number (96,000) of limited-resource farms that produce beef 
cattle. These operations still generally derive a larger share of their value 
of production from crops (54 percent), however. 

Implications for 
Policy

The characteristics of the various types of beef operations suggest several 
likely areas in which program or policy needs may vary among small operations 
or differ from those of large operations. Full-time operations produce a 
significant number of cattle, accounting for nearly 30 percent of the value of 
total beef cattle production, and nearly 60 percent of the value of beef cattle 
production on small farms. These full-time operations also sold more cattle 
than calves, at a ratio of over 2-to-1, indicating they are concentrating their 
production on heavier yearling cattle, rather than on providing calves for 
stocker enterprises. These operations, on which the owners devote the bulk of 
their time to farming, might be helped by production and marketing assistance 
tailored to smaller operations, to help them improve their competitiveness as 
cattle producers. 

Full-time operations also receive a higher percentage of the value of their 
farm's production from crops, in part because they have the time and labor 
necessary to devote to field crop production. These operators may benefit from 
assistance with crop production, to help them diversify risk, increase their 
own production of feed needs for their cattle, and balance downturns in the 
beef cattle market. 

Part-time operations, on the other hand, produce a much lower proportion of the 
value of beef cattle. Their sales of cattle and calves are about equal, 
indicating they may be focusing on production of calves for sale, rather than 
growing out stocker calves or feeding cattle themselves. Part-time operations 
generally have limited access to labor and other inputs, making concentration 
on producing calves a good choice, since cow-calf pairs are essentially self 
sufficient and require little outside monitoring or labor input. These 
operations provide an important input for large stocker operations that 
concentrate on the grow-out phase of cattle production.

Full-time farmers and ranchers, because their livelihoods are dependent on 
agricultural production, may benefit most from programs that provide 
production-related assistance. Both full- and part-time operations, however, 
may benefit from programs and policies focused on land use. In aggregate, small 
beef operations control 74 percent of all acreage on which U.S. beef cattle are 
produced, making them de facto pasture and rangeland managers. 

Even though many small farms and ranches with beef cattle are on 
environmentally fragile land, only 2 percent of this land, a total of 10.9 
million acres, is enrolled in either of the major Federal land retirement 
programs--the Conservation Reserve and Wetland Reserve Programs. But small beef 
operators might benefit from working lands conservation programs tailored to 
pasture and rangeland use. Given the sizable combined landholdings of these 
beef producers, the effects of such tailored land use and conservation policies 
could be quite large on a national scale.

A. James Cash II (202) 694-5149 ajcash@ers.usda.gov

THE LIVESTOCK SECTOR BOX 3

Farm Typology & ARMS Shed Light on Small Beef Farms

The farm typology developed by USDA's Economic Research Service (ERS) provides 
a useful tool for characterizing the differences among small beef operations. 
The typology captures differences in both size and organizational structure. 

Nonfamily owned farms constitute one category in the typology, and large family 
farms fall into two categories--very large farms (sales of $500,000 or more), 
and large (sales from $250,000-$499,999). 

Small family farms are divided into five categories, providing analysts with 
the opportunity to examine their characteristics more closely. Two categories 
account for family farms on which the operators work primarily on the farm--
higher sales (sales of $100,000-$249,999) and lower sales (sales under 
$100,000). Two other categories--residential/lifestyle and retirement--include 
farms on which the operators report either that they are retired or that they 
have primary occupations other than farming. The last category--limited-
resource--include farms with sales below $100,000, farm assets of less than 
$150,000, and household income under $20,000. 

Using the typology to stratify the data, the Agricultural Resource Management 
Survey (ARMS) yield a wealth of information on the characteristics of small 
beef operations. The ARMS, developed jointly by ERS and the National 
Agricultural Statistics Service, gathers data on production and financial 
characteristics of all types of operations in an annual sample of U.S. farms. 
Data here are from the 1997 ARMS.


FOOD & MARKETING

Globalization of the Soft Drink Industry

The beverage industry is a bellwether in the food industry, where globalization 
has affected the structure. Soft drink companies produce for domestic and 
foreign markets, license their products, and invest in plants in other 
countries through foreign direct investments (FDI). Names such as Coca-Cola and 
Pepsi are recognized worldwide, and foreign brands are being consumed in record 
amounts in the U.S. Consequently, national brand association can be confusing 
or even meaningless. 

For example, the Dannon brand is produced in the U.S., while Poland Springs 
water is owned by Nestle (based in Switzerland). Moreover, national ownership 
of brands may change overnight, slanting consumers' perceptions of national 
brands. The Schweppes brand, for example, is owned by Coca-Cola in 155 
countries.

U.S. soft drink companies trade under some of the most widely recognized names 
around the globe. About half of Coca-Cola and Pepsi sales are abroad, and 
PepsiCo ranks sixth among the largest global food and beverage companies, with 
sales of $27 billion. Coca-Cola, with sales of nearly $20 billion, is eighth. 
Coca-Cola controls about a quarter of the world's $393-billion dollar global 
soft drink industry (defined by Euromonitor as carbonated beverages, 
fruit/vegetable juices, and bottled water), Pepsi controls about 11 percent, 
Nestle 4 percent, and Philip Morris 3 percent. 

Among global soft drink sales, carbonated beverages are the largest market 
segment, with $193 billion in sales. Fruit and vegetable drinks and bottled 
water shared second place with roughly $69 billion each in sales in 2001. The 
overall trend is one of increasing the variety of soft drinks produced by 
multinationals. Improved infrastructure and packaging expand market potential.

Three major shifts have occurred in the business environment of these 
manufacturers since the end of the 1980s: 

*  refocusing the business view from national to international; 

*  expanding firms' activities across business lines; and 

*  increasing competition in the global soft drink industry. 

Beverage companies' international ventures clearly show the role U.S. firms 
play in generating economic growth that is based on a global rather than a 
national view of the market, and tied to specific companies. 

Beyond the trends in composition and level of FDI, two questions come to mind 
from the U.S. standpoint: 

*  What is the tradeoff between trade and sales resulting from U.S. FDI?

*  What is the effect of trade liberalization on FDI?

U.S. Firms Search for 
Global Market Gains

Competition for market share in the U.S. is keen, and U.S. per capita 
consumption of soft drinks is already the highest in the world, at 161 liters. 
So, U.S. beverage companies have expanded abroad, particularly to the high-
income countries of Western Europe and more recently to middle-income countries 
where populations and opportunities for increasing incomes are expanding. 

The U.S., Japan, Mexico, Germany, China, and Brazil are the largest soft drink 
markets, and per capita consumption has increased by double digits since 1997. 
While total U.S. consumption grew by 6 percent, consumption in most other 
countries increased faster. The dollar volume, however, declined in several 
major countries (including Brazil) as the dollar strengthened relative to their 
currencies.

Beverages lend themselves to FDI, particularly those that are easily replicated 
through a standardized process and set of ingredients. Because of the high cost 
of shipping and handling liquids, beverage companies find it less costly to 
invest in foreign affiliates than to export. U.S. companies directed most of 
their FDI to Mexico, the United Kingdom, France, Canada, and Brazil. The bulk 
of the $15 billion of U.S. beverage FDI is in soft drinks.

Licensing also plays a major role in the global beverage industry, where name 
recognition is vital. Licensing existing plants and distribution systems to 
handle products is often more profitable than building plants and establishing 
distribution systems. A typical licensing agreement allows a beverage company 
to produce and market the branded beverage of another company by paying a 
royalty fee to that company. In exchange, the licensing company insists that 
consistent quality be maintained. The licenser is selling its knowledge of 
producing the specific beverage and the right to use that trademark (and the 
name recognition built into that trademark) in exchange for the royalty 
payment. U.S. beverage companies currently have licensing agreements with 
companies in Canada, Japan, and China.

Market Segmentation 
Becoming Less Clear

Beverage companies have also consolidated to include multiple beverage 
categories--soft drinks, beer, bottled water, flavored drinks, wine, and 
distilled liquors--so that it is now difficult to segment the trillion-dollar 
global beverage industry. Beverage companies that were solely drink 
manufacturers have expanded their horizons far beyond original product lines. 

Segment crossing has occurred throughout the industry as companies seek ways to 
cut marketing and transportation expenses, handle increased competition, and 
utilize existing capacity more efficiently. As beverage companies recognized 
the increased market power of retailers, they began offering a bundle of 
products to large-scale retailers and food service corporations as one way of 
accomplishing those objectives.

The two leading soft drink companies--Coca-Cola and PepsiCo--viewed the market 
in different ways, and have chosen different paths for expansion.

*  Coca-Cola stayed in soft drinks, fruit juice, sports drinks, and bottled 
water, while PepsiCo ventured beyond beverages into snack foods and breakfast 
cereals. 

*  PepsiCo invested in fast-food restaurants that have since spun off. Quaker 
Oats (with its subsidiary Gatorade) is part of the PepsiCo domain. PepsiCo also 
expanded into other marketing channels--particularly restaurants.

*  Both PepsiCo and Coca-Cola relied on licensing and special bottling 
agreements to establish markets abroad. PepsiCo, for instance, bottles for Dole 
juice, Starbucks coffee drinks, and canned Lipton iced tea. 

Investments are often tied to fast-food franchises, global hotel chains, 
entertainment venues, and other institutional channels. Licensing and other 
exclusive use of product brands are often combined with FDI as a means of 
reaching an even broader local consumer base. PepsiCo was perhaps the farthest 
reaching in this approach when it also owned fast-food enterprises such as 
Pizza Hut, Kentucky Fried Chicken, and Taco Bell, where its product was sold 
exclusively. FritoLay, the snack food division of PepsiCo and the world's 
fourth-largest snack food provider, has global sales rivaling PepsiCo's soft 
drink division.

Competition Is Keen in the 
Soft Drink Market

The soft drink industry found new competition as it expanded. The bottled-water 
phenomenon marked a new opportunity in the beverage industry, where local 
companies supplied local markets and had little brand recognition beyond their 
respective areas. As health concerns captured the interest of the American 
public and U.S. consumers developed brand recognition for European bottled 
spring water brands such as Perrier and San Pellegrino, a booming market for 
water arose. 

Japanese companies consolidated bottled-water companies during the 1980s, 
keeping the already recognized regional brand names. Coca-Cola and PepsiCo 
developed brands of their own, which could flow through their already 
established marketing and distribution systems, to meet this new consumer 
demand. Competition came from several segments of the food industry-Nestle 
(Switzerland), Danone (France), and Suntory (Japan) invested heavily in major 
U.S. bottled-water companies. 

The call for health-oriented drinks by U.S. consumers led PepsiCo to purchase 
Tropicana orange juice, and Coca-Cola to purchase Minute Maid. These purchases 
put the soft drink companies into competition with yet another group--fruit 
juice processors. 

Does FDI Complement 
Exports?

A comparison of U.S. FDI sales with U.S. exports illustrates the magnitude of 
FDI beverage sales. Sales from U.S. FDI in the global soft drink industry were 
well above $30 billion in 1999 in a global market of $393 billion. U.S. soft 
drink exports totaled $232 million in 2001, compared with $105 million in 1990. 

FDI can potentially expand U.S. syrup and flavoring exports since these 
ingredients are necessary inputs for soft drink production. Increased foreign 
production of soft drinks by U.S. affiliates has caused a boom in exports of 
syrups and flavorings. Syrup and flavoring exports doubled to $981 million from 
1990 to 2001, far exceeding soft drink exports.

Beverage production location also impacts international sugar and grain 
markets, since soft drink producers utilize large quantities of sugar, corn 
sweeteners, and fruit/vegetable juices. But soft drinks that are not 
agriculturally based at all (such as Tang) are important branded products in 
the food sector.

The experiences of Coca-Cola and PepsiCo demonstrate that a firm that starts as 
a soft drink manufacturer does not necessarily expand by producing more soft 
drinks, but can expand into varying product lines.

Other segments of the beverage industry offer myriad examples of 
diversification. Allied Domecq, a large British-based liquor multinational, 
owns companies as diverse as Dunkin' Donuts and Baskin and Robbins ice cream 
stores. Allied Domecq and Diageo (another large British-based liquor 
multinational) have also purchased wineries. Integration of economies and 
industries has affected firms' decisions on how to deal with larger markets and 
keener competition. 

Chris Bolling (202) 694-5322 hbolling@ers.usda.gov

FOOD & MARKETING BOX

A Case of Foreign Investment

Coca-Cola's relationship with Coca-Cola Amatil is an illustration of the 
complexity of foreign investment in the soft drink industry. In 1977, Amatil 
(then part of British Tobacco Company) purchased the Coca-Cola bottling 
companies in Vienna and Graz, Austria, and in 1989, purchased bottling 
companies in New Zealand and Fiji. By 1989, the Coca-Cola parent company became 
the majority stockholder of Amatil, after it was spun off from the original 
tobacco business. 

Amatil then became Coca-Cola Amatil, which then expanded to New Guinea, Central 
and Eastern Europe, and the Philippines. The European segment of Coca-Cola 
became Coca-Cola Beverages in the same year. Much of this was achieved through 
licensing of the Coca-Cola brand. Foreign affiliates of the U.S. soft drink 
sector generate billions of dollars in sales compared with U.S. exports, which 
are in the millions.


WORLD AGRICULTURE & TRADE

Enhancing Food Safety In the APEC Region

Changing consumption patterns, longer shipping distances, and the rising share 
of perishable food products in trade are all generating concerns about food 
safety in the Asia Pacific Economic Cooperation (APEC) region. Recent outbreaks 
of foodborne illness in China (contamination by rat poison in Nanjing) and the 
U.S. (Listeria in the Northeast) have heightened that concern. Such incidents 
result in added health care costs to society, lost productivity, and changes in 
consumer behavior that can adversely affect a firm or an entire industry.

However, lack of data, underreporting of cases, and epidemiological 
difficulties in tying disease to food consumption hamper understanding of the 
risk and trends of foodborne illness in the APEC region. Although 
underreporting is most serious in regions with limited public resources, even 
researchers using data on the U.S. make large adjustments to foodborne 
morbidity and mortality data to account for underreporting. 

Researchers in some APEC economies, such as China, Chinese Taipei, Korea, and 
New Zealand, report rising incidence of foodborne illness. Yet investigators in 
Malaysia found fewer food poisoning, cholera, and typhoid cases. Data-related 
difficulties prevented making judgments in Australia and the Philippines. 
According to the U.S. Centers for Disease Control and Prevention (CDC), the 
incidence of seven common foodborne bacterial diseases in the U.S. dropped 23 
percent between 1996 and 2001. But new pathogens, such as E. coli O-157 and 
Cyclospora, are always emerging. The lack of consistent and comprehensive data 
makes it difficult to establish trends about the regional incidence of 
foodborne illness over time. 

Compared with other causes of death, the best estimates suggest that foodborne 
illness ranks low. World Health Organization (WHO) statistics show infectious 
diseases, of which many foodborne diseases are a subset, rank well below heart 
disease, cancer, and accidents as a cause of death worldwide, even in less 
developed regions. 

The CDC estimates 5,000 people die each year from microbial pathogens in the 
U.S. While the number of deaths from foodborne pathogens is relatively small, 
the incidence of illness and hospitalization appears quite significant. The CDC 
calculates 76 million cases of foodborne illnesses (one case for every four in 
the population) occur each year in the U.S., with 325,000 associated 
hospitalizations. The young, the elderly, and those with autoimmune 
deficiencies are the most prone. 

In addition to acute illness caused by pathogens, other widely recognized food 
safety risks include:

*  sequelae or longer-term aftereffects (e.g., neurological, cardiac, kidney 
disease, or rheumatoid syndrome) associated with most acute foodborne 
illnesses; 

*  environmental toxins (e.g., lead and mercury) and persistent organic 
pollutants (e.g., dioxin); 

*  prions associated with bovine spongiform encephalopathy (BSE, also known as 
"mad cow" disease); and 

*  transmission of disease through food from animals to humans (e.g., 
tuberculosis). 

Some perceived food safety risks are more controversial:

*  pesticide residues and food additives; and 

*  irradiated foods or animal products produced with growth hormones and 
antibiotics. 

Food safety concerns can also hinder international food trade and are 
intertwined with questions about the health consequences of food containing 
genetically modified organisms, the labeling of these foods, and the 
uncertainty of their long-term impact on the environment. 

Ranking Food 
Pathogens 

Although cultures and diets across the APEC region are highly diverse and 
levels of development vary, some commonality surfaces when ranking specific 
pathogens found in food. Ten of the 11 APEC economies reporting information on 
foodborne illness indicate Salmonella as a leading cause. The ubiquity of 
Salmonella is associated with the widespread rise in consumption of many 
perishable products across the region. Vibrios and Norwalk-type viruses are 
important hazards associated with fish and shellfish consumption, common in 
Korea and Chinese Taipei.

While Salmonella, Staphylococcus, Campylobacter, and E. coli appear to be the 
more common causes of foodborne illnesses in the region, other pathogens such 
as Listeria and botulism are less common but more deadly. Most commonly 
involved in disease outbreaks and contamination are processed foods, fresh 
horticultural products, and meats--those foods that are enjoying increased 
popularity consistent with income and urban growth. Although most outbreaks 
affect few people and are localized, some affect hundreds and even thousands: 
for example, the E. coli infection of radish sprouts in 1996 and dairy products 
contaminated by Staphylococcus in 2000 in Japan; and the Salmonella-ice cream 
(1994) and Cyclospora-raspberry (1996) cases in the U.S. 

Estimating Economic 
Costs 

In general, foodborne illness entails costs to: 

*  individuals/households (e.g., medical care, loss of work, and premature 
death); 

*  industry (e.g., lost business and trade, product liability suits, additional 
cost from applying systems/techniques to boost food safety); and 

*  the regulatory and public health sectors (e.g., disease surveillance, 
outbreak investigations). 

Estimating these costs is difficult. Most calculations are partial, focusing on 
the direct cost of healthcare and losses to individual productivity, not the 
costs to business and the public sector. In Australia, researchers estimated 
the costs of foodborne illness at $1.7 billion in 1999. In South Korea, 
researchers recently appraised the direct cost of food poisoning from meats 
alone to be $16-$28 million per year. And in the U.S., five foodborne pathogens 
cause $6.9 billion each year in health care costs and lost productivity. These 
costs are low relative to each economy's gross domestic product and reflect 
their partial nature and the relatively low incidence of serious sickness and 
death from foodborne causes. 

Since consumers usually have many choices about the foods they consume and 
where they consume them, news of tainted food can induce strong changes in 
consumer behavior, sometimes out of proportion to the real risk of adverse 
health consequences. Such response can have a devastating impact on a food 
industry firm and its employees or even more broadly on an entire industry's 
reputation, sales revenue, and trade. A company involved in the spread of a 
foodborne pathogen can also face costs imposed by courts or government 
agencies, including fines, product recalls, and temporary or permanent plant 
closures as well as large liability settlements and associated legal costs. 
Potential market and liability losses are strong incentives for food firms to 
ensure the food supply is as safe as possible. 

Two cases from APEC economies illustrate the strong consumer reaction to events 
related to the food industry. In September 2001, BSE was detected in a 5-year 
old Holstein cow in Japan's Chiba Prefecture, the first case discovered in 
Asia. Authorities discovered four more infected animals during the next 12 
months. BSE is a brain-wasting disease caused by prions and is linked to a 
human variant, Creutzfeldt-Jakobs disease, which killed one person in Canada in 
August 2002 and approximately 100 people in Great Britain, where BSE is most 
often found. 

In the 3 months following the first BSE case, consumers in Japan reduced beef 
consumption 40-60 percent, with an equally dramatic decline in beef imports. 
Sales at 3,800 McDonald's outlets in Japan dropped sharply, despite 
reassurances that only beef imported from three BSE-free economies (U.S., 
Australia, and Canada) were being used. Sales of meat products at other chains 
also fell. In 2002, beef consumption is anticipated to be lower in Japan than 
last year, causing economic losses for both beef cattle and dairy producers. 
Consumption is likely to recover over time.

In a rapid response to the sharp public reaction, Japan's Ministry of 
Agriculture, Forestry, and Fisheries (MAFF) established a system in October 
2001 to restrict the movement of cattle at risk of BSE. The MAFF also 
introduced a ban on the use of all livestock feed containing meat and bone 
meal, the suspected carrier of the disease. 

Another example of sharp reaction to a food supply problem occurred in the U.S. 
with negative outcomes for both the Chilean and U.S. food industries. In March 
1989, an anonymous caller to the U.S. Embassy in Santiago, Chile claimed that 
Chilean fruit bound for the U.S. was injected with cyanide. A U.S. Food and 
Drug Administration (FDA) inspector in Philadelphia, where most Chilean fruit 
enters the U.S., discovered in a shipment two grapes that were punctured and a 
third that appeared slit. After testing positive for a non-lethal dose of 
cyanide, the FDA issued an order banning entry of Chilean fruit into the U.S. 
and requiring the destruction of all Chilean fruit then in U.S. marketing 
channels. 

Four days later, after Chile adopted certain safety measures and no further 
contamination was discovered, the U.S. lifted the ban on Chilean grapes. But in 
the meantime, the incident affected half of Chile's grape production that 
season, including the loss of more than 20,000 jobs. The ban adversely affected 
not only producers, but all commercial points along the supply chain of the 
Chilean fruit export industry, with losses estimated at more than $400 million. 

Setting Standards--
Public & Private Roles

Because of limited public resources and strong private sector incentives for 
promoting food safety, some APEC governments are implementing risk management 
systems that grant businesses flexibility in their performance of operations as 
long as the required food safety outcomes are achieved. These systems rely on a 
model that delineates the following sector roles and implementation activities: 

*  government acting as the regulator, setting appropriate sanitary standards; 

*  industry taking full responsibility for producing food products that conform 
to those standards, using risk-based management plans; and  

*  objective auditors verifying compliance with standards. 

Consistent with this model, Hazard Analysis and Critical Control Points (HACCP) 
is a system increasingly adopted by governments and the food industry that 
identifies potential sources of food safety hazards and establishes procedures 
to prevent, eliminate, or reduce these hazards. The HACCP system builds on Good 
Agricultural Practices that ensure a clean and safe working environment for 
employees while eliminating the potential for food contamination and are often 
integrated with ISO 9000 practices oriented toward meeting customer 
requirements. HACCP is mandatory in several APEC economies for certain 
perishable products, some of which are important to export trade: 

*  processed fish in Canada; 

*  seafood in Malaysia destined for export to the European Union and the U.S.; 

*  meat and poultry processors and slaughterhouses in the U.S.; 

*  all slaughterhouses in South Korea (by 2003); and 

*  seafood and dairy products in New Zealand. 

In other APEC economies and food sectors, HACCP is encouraged but voluntary. In 
some instances, food industry organizations may mandate use of a HACCP system 
by their members, such as the Frozen Seafood Union in Chinese Taipei and the 
Meat Industry Council in New Zealand. Some export-dependent industries have 
adopted HACCP voluntarily, including Chile's fruit and Peru's asparagus 
industries, in an effort to differentiate their products as being safe and to 
meet the demands of importers. Demands by foreign buyers regarding 
certification and such requirements as traceability can be costly and variable, 
particularly for small and medium-sized firms in less developed economies. For 
example, regulations imposed by Europe may not be the same as those imposed by 
the U.S. or Japan. 

The use of internationally recognized quality management systems is 
particularly prevalent in New Zealand's primary agricultural industries, such 
as kiwifruit and apple growing, and sheep, beef, and dairy farming along with 
their related processing industries. 

In Canada, 327 establishments are certified as HACCP-compliant, and another 337 
plants, mostly meat processing establishments, operate under HACCP principles 
and are awaiting recognition. Non-meat industries are encouraged to begin 
incorporating HACCP principles into processing and food preparation practices 
in anticipation that compliance will become mandatory. 

In Malaysia, 85 food firms have applied for certification under the HACCP 
system, and 55 have successfully obtained certification. The majority of these 
are from the seafood industry. 

The public sector in the APEC region supports a range of food safety training 
and education programs, including training on HACCP systems, food safety 
education for handlers in the food service sector, and programs for consumers 
on how to reduce their risks of foodborne illness in the home. 

Training in food hygiene and handling, for example, has increased substantially 
in Chile during the past few years. The agency channeling public resources to 
this area reported 403 training courses and 14,000 students in 2000. Since 
1996, Malaysia's Ministry of Health has administered mandatory training 
programs for food handlers, and has since established the Food Handlers 
Training Institute, which conducts a compulsory food safety program for all 
operators of food stalls and restaurants. 

In a consolidated effort to reduce foodborne illness, provincial governments 
across Canada worked with industry associations and consumer, environmental, 
and health groups to create the "Canadian Partnership for Consumer Food Safety 
Education."  The partnership informs Canadians about safe food-handling 
techniques to reduce the risk of microbial contamination. The "Thermy the 
Thermometer" program in the U.S. is an example of a public campaign to 
encourage proper meat cooking at home. And New Zealand's Food Safety 
Partnership promotes four safety actions for consumers: clean hands and 
utensils, thorough cooking of meats, adequate covering of food before and after 
cooking, and storage of perishables at low temperatures.

International and regional efforts to harmonize food safety standards have 
helped to facilitate trade and instill consumer confidence in the safety of 
imports. The need for economies to align with international food safety 
standards has grown with trade. Codex Alementarius (CODEX), created 40 years 
ago by the WHO and the Food and Agricultural Organization, has helped this 
process. CODEX is used as a global reference for food standards by many 
regional trade organizations in which APEC members participate. These 
organizations acknowledge the importance of food safety and common standards to 
facilitate trade. 

The Association of Southeast Asian Nations subcommittee on Food Science and 
Technology facilitates collaborative research and development on food safety 
and quality assurance systems, including nutritional quality, improvement of 
existing technologies, and the development and strengthening of the scientific 
basis for technology development and innovation. The leading harmonization 
agreement in the APEC region is the Australia New Zealand Food Authority 
(ANZFA) which develops food standards for both countries. 

The North American Free Trade Agreement created a committee on sanitary and 
phytosanitary measures (SPS) to facilitate improvement in food safety and 
sanitary conditions and to align SPS measures across Mexico, Canada, and the 
U.S. 

Sharing Information--
Cooperating on Research 

Sharing data is an important part of disease surveillance, and several 
organizations are cooperating in the tracking of foodborne illness, facilitated 
by use of the Internet. APEC's Emerging Infections Network is intended to 
address containment of infectious diseases, including some foodborne diseases, 
regionally and globally. WHO, with the participation of 113 countries, has a 
global surveillance system for some foodborne diseases. PulseNet is a U.S. 
laboratory-based surveillance system using DNA fingerprinting for several 
foodborne pathogens, including E. coli O-157:H7, Salmonella, Shigella, 
Listeria, Campylobacter, C. perfringens, and cholera. The system facilitates 
prompt identification of outbreaks and timely food product recalls when 
necessary. PulseNet has an international dimension: Canada joined in 2000, and 
scientists from Japan, Hong Kong China, and Chinese Taipei have been trained to 
use the system. FoodNet is another U.S. government surveillance system for 
foodborne illness, tracking population-based incidence rates, epidemiological 
trends, hospitalizations, and deaths by selected pathogens.

APEC needs a strong commitment to generate more comprehensive data on the 
incidence of foodborne illness and its causes and to share this information 
around the region. Better data will reduce uncertainties and enhance risk 
analysis to enable more rapid identification, mitigation, and elimination of 
the threat from an outbreak. Pinning down specific pathogens and locating them 
in the food supply chain will reduce the human toll and help reduce uncertainty 
faced by food suppliers. Responsible government agencies will be able to 
mobilize a more robust and rapid response to prevent pathogens or contain their 
spread. 

International cooperation is a necessary dimension in data and information 
development and sharing because of the substantial role of trade in disease 
outbreaks and in other food safety issues. Similarly, better data and research 
will inspire public confidence in the ability to assess the risk of foodborne 
illness with any given outbreak and to respond accordingly. Better information 
should make the consumer response to foodborne events more consistent with 
actual risks. Uncertainty about food safety is the enemy of both rational 
behavior and business investment in the APEC region's food system.

The public and private sectors are working cooperatively to harmonize science-
based standards and implement practices aligned with HACCP in food processing 
and food service. These practices are proven to be effective in reducing the 
incidence of some foodborne pathogens in the U.S. Adoption of HACCP has been 
voluntary in many export sectors in APEC because of the strong incentive for 
these businesses to differentiate their product as being "beyond reproach" from 
the standpoint of food safety and to establish credibility with buyers. The 
high cost of implementation of HACCP by mid- and small-sized firms may require 
public support. 

William Coyle, (202) 694-5216 wcoyle@ers.usda.gov

Contributors:

Mark Denbaly
Jean Buzby
Tanya Roberts

WORLD AGRICULTURE & TRADE BOX 1

This article is a summarized version of Making the Region's Food Supplies 
Safer, a report released at the 14th APEC Ministerial Meeting in Los Cabos, 
Mexico, October 23-25, 2002. USDA's Economic Research Service collaborated in 
the report along with economists from 15 Pacific Rim economies. Dr. Jinap 
Selamat, Professor, Department of Food Science, Universiti Putra Malaysia, 
provided leadership in developing the report's outline.

The complete report and economy-by-economy profiles of participating countries 
are available on the web at www.pecc.org/food.

WORLD AGRICULTURE & TRADE BOX 2

APEC Goals & Membership

APEC, the Asia Pacific Economic Cooperation Forum, is an informal grouping of 
market-oriented Asia-Pacific economies sharing goals of managing the growing 
interdependence in the Pacific region and sustaining its economic growth. 
Started in 1989, APEC provides a forum for ministerial-level discussions and 
cooperation on a range of economic issues, including trade promotion and 
liberalization, investment and technology transfer, human resource development, 
energy, telecommunications, transportation, and others. 

Members are Australia, Brunei, Canada, Chile, China, Hong Kong-China, 
Indonesia, Japan, Korea, Malaysia, Mexico, New Zealand, Papua New Guinea, Peru, 
the Philippines, Russia, Singapore, Chinese Taipei, Thailand, the U.S., and 
Vietnam.


WORLD AGRICULTURE & TRADE

Commodity Policies of the U.S., EU, & Japan--How Similar?

Commodity policies of the U.S., the European Union, and Japan address some of 
the same goals, but there have always been key differences in approach and in 
their policy instruments. In recent years, all three have made significant 
changes to their commodity policies. Efforts to encourage freer trade in 
agricultural commodities, particularly the disciplines agreed to under the 
Uruguay Round Agreement on Agriculture (URAA) have led each to move toward 
programs that are less trade-distorting. Although differences certainly remain, 
some of the factors influencing development of agricultural policy may be 
pushing their commodity policies in a similar direction.

Similarities: Shifts from Price 
To Income Support 

Most commodity policies can be categorized as either income support or price 
support. A key trend in commodity policy in the last decade has been the move 
from primary reliance on price support to increased use of income support, 
which is less trade-distorting. All three have reduced the use of price support 
for several commodities, replacing at least a part of their price support with 
income support through direct payments to producers. The European Union (EU) 
and Japan remain more reliant on market price support than the U.S.

The U.S. provides a number of income support measures. Direct payments (similar 
to production flexibility contract payments) and counter-cyclical payments both 
provide support to producers based on historical production. Direct payments 
are decoupled from current production and prices, while counter-cyclical 
payments are decoupled from current production but linked to current prices. 
Marketing loan benefits provide payments to producers based on current 
production and prices. Ad hoc disaster assistance and subsidized crop and 
revenue insurance support income by reducing risk and losses from weather and 
other disasters. Planting flexibility, a companion reform to decoupled 
payments, allows producers to plant almost any crop or leave land fallow 
without losing eligibility for direct payments. 

Price support programs have declined in importance in U.S. farm policy, 
continuing only for sugar, tobacco, and dairy.

In the EU, income support measures include compensatory payments, which 
compensate for reduced price supports with direct payments to crop producers 
based on historical production, and livestock headage payments to beef cattle 
and sheep producers based on number of animals. Livestock payments will be 
expanded to include dairy producers beginning in 2005. Neither of these 
measures is related to current prices, but they are linked to current area 
planted and livestock numbers, subject to area caps and ceilings on number of 
eligible animals. EU producers have a limited form of flexibility that allows 
them to receive payments as long as they continue to plant some type of arable 
crop or put land in set-aside. 

EU price support programs include intervention purchasing and product 
withdrawal, production and marketing quotas, import protection, and export 
subsidies. Prices for major commodities such as grains, oilseeds, protein 
crops, dairy products, beef and veal, and sugar depend on the EU price support 
system, although with recent reforms, price support has become less important 
for grains, oilseeds, and beef. Other mechanisms, such as subsidies to assist 
with temporary storage of surpluses, as well as consumer subsidies paid to 
encourage domestic consumption of products like butter and skimmed milk powder, 
supplement the direct price-support instruments. 

Japan maintains two kinds of income support programs. Commodity-specific income 
stabilization programs, introduced since 1998, compensate farmers when current 
market prices fall below a moving average of previous years. The government 
provides the bulk of funds for these payments, but participating farmers also 
contribute based on their output. Traditional deficiency payment programs pay 
producers of certain commodities the difference between current market prices 
and a fixed reference price, rather than a moving average as with income 
stabilization. Both deficiency payments and income stabilization payments allow 
market prices to be freely determined, similar to U.S. marketing assistance 
loans and loan deficiency payments. As in the U.S., subsidized crop and 
livestock insurance reduces risk for Japan's farmers.

Price support programs, though less prevalent than in the past, continue in 
Japan. Production limits for a few key commodities, including rice, are 
designed to keep market prices high by controlling supply. Government 
corporations continue to manage prices in sweetener, wheat, and dairy markets, 
chiefly through import control. Most importantly, high tariffs raise the price 
of imported products and reduce competition with domestic products that might 
pressure prices.

Differences: Supply Control 
& Border Measures 

In contrast to the shared trend toward substituting income support for price 
support, approaches to supply control, surplus disposal, and border measures 
(including export subsidies, tariffs, and tariff-rate quotas) illustrate 
continuing policy differences.

The U.S. eliminated its use of land set-asides as supply control measures in 
1996; its remaining land retirement programs--the Conservation Reserve, Wetland 
Reserve, and Grassland Reserve programs--are based on an environmental 
protection rationale. The EU, which previously had supply control programs only 
for dairy and sugar, extended supply control to arable crops with a voluntary 
set-aside program in 1988 and a mandatory set-aside in 1992. It applied a 
weaker form of supply restrictions to the livestock sector, imposing limits on 
the number of beef cattle and sheep eligible for payments. Japan uses supply 
control programs for rice and milk.

U.S. use of export subsidies has been limited in recent years to dairy products 
and poultry. The EU continues to use export subsidies for many price-supported 
commodities, although World Trade Organization (WTO) obligations have required 
reductions in subsidy levels. Japan, an importing country, does not use export 
subsidies, although it donates some of its rice imports and production to other 
countries as food aid rather than releasing them into the domestic market.

The three differ in their reliance on import tariffs and tariff-rate quotas to 
support domestic prices. Although all maintain tariffs, EU and Japan tariffs 
are higher, on average, and include a greater number of megatariffs (tariffs 
over 100 percent).

While all three provide moderately high support to their agricultural sectors, 
the EU and Japan maintain higher overall support, and provide more support that 
is coupled or partially coupled to production than the U.S. A common measure of 
government support to domestic agriculture--the OECD Producer Support Estimate 
(PSE)--indicates the U.S., EU, and Japan provide support to their farmers at 
21, 35, and 59 percent of the value of their agricultural production.

The Burdens of History, Trade 
Agreements, & Budget

Many factors shape agricultural policy formation, but among the most 
significant for these three have been historical differences in policy context 
and constraints from budget limits and trade agreements (including planned 
enlargement of the EU). 

Current commodity policies in the U.S., the EU, and Japan are the result of 
developments and policy changes during the last century. U.S. commodity policy 
is rooted in price support programs established in the 1930s in response to the 
Depression-era collapse of farm prices. Chronic surpluses, steadily increasing 
government stocks, and rising agricultural spending resulting from these 
programs, however, led to growing pressure for change. 

The 1996 Farm Act introduced nearly complete planting flexibility and promised 
continued government efforts to enhance access to international markets. 
Redesigned support programs encouraged greater market orientation, along with 
fixed income support payments that were no longer tied to production. The 2002 
Farm Act, while introducing new counter-cyclical payments, continued planting 
flexibility and basing program payments on historical production. 

The EU's Common Agricultural Policy (CAP) arose in response to post-World War 
II concerns about food security, poor productivity, and low farm incomes in an 
agricultural sector characterized by small, fragmented farms. Since the 
inception of the CAP in the 1960s, however, managing surpluses has replaced 
food security as a major preoccupation of EU agricultural policymakers. The EU 
has shifted from being a net food importer to one of the world's largest 
exporters of wheat, sugar, meat, and dairy products.

Japan, which also experienced food shortages after World War II, is 
increasingly reliant on imports for its food supply. Today, about 60 percent of 
Japan's aggregate calorie intake comes from imports. Japan has argued that 
goals of self-sufficiency in agriculture are needed to maintain a significant 
production base in the event trade becomes difficult. However, another major 
focus of Japan's agricultural protection has been a desire to support farm 
incomes and rural economies. Japan's postwar land reform created a very small-
scale farm structure, and maintaining incomes to small farmers has been 
accomplished principally by very high price support, chiefly through border 
measures.

In all three, fiscal constraints have figured prominently in commodity policy 
changes. The need to reduce U.S. government expenditures in the face of 
persistent fiscal deficits made it difficult for legislators to increase 
spending on agricultural programs in the 1990s. Budget surpluses by the end of 
the decade permitted significant increases in funding commitments for 
agricultural programs in preparation for the 2002 Farm Act. With the return of 
deficits, however, pressure may again develop to reduce spending on 
agricultural programs.

In the EU, supporting agriculture has also required large outlays, and as EU 
support has shifted toward producer support policies funded by taxpayers rather 
than consumers, the capacity of the budget to provide that support may be 
further strained. The EU also faces a unique circumstance in the anticipated 
budget effects of its impending enlargement. Unlimited price support with the 
entry of several new agricultural producing members will place an even greater 
burden on the EU budget. 

Japan's government deficit has soared to worrisome levels at the same time 
agricultural commodity policy moves toward income support. Unlike current 
market price support, which is mostly paid by consumers through high tariffs on 
imports, a program of income support relies on tax money that is in 
increasingly short supply. Replacing market price support with income support 
could require much higher government expenditures and place a greater strain on 
government resources.

Trade is important to all three. As increases in agricultural output have 
outpaced the growth of domestic demand in the U.S. and the EU, the share of 
production that is exported has risen. With continued growth in productivity, 
both these countries will have to find outlets for additional production if 
they are to maintain strong agricultural sectors. Japan's situation as a net 
food importer is fundamentally different--and its government policy is aimed at 
increasing the scale and efficiency of farms in order to help them survive and 
provide a greater share of Japan's needs.

The URAA was the first meaningful multilateral agreement covering agricultural 
trade. Although URAA disciplines did not require major changes in U.S. policies 
in the early years of the agreement, the 2002 Farm Act explicitly acknowledged 
URAA constraints on future U.S. farm support. The Act requires the Secretary of 
Agriculture to reduce expenditures on commodity programs to ensure they do not 
exceed allowable levels. 

The EU's Agenda 2000 reforms explicitly acknowledged the importance of the 
URAA, citing the need to reduce support prices to comply with Uruguay Round 
commitments to cut domestic support to agriculture (AO October 2002). 
Constraints on subsidies imposed by the URAA have led to increasing concern 
among policy makers about the competitiveness of EU agriculture. This concern 
underlies the additional support price cuts of the Agenda 2000 program.

Japan passed a new Basic Law on agriculture in 1999, which outlined goals for 
Japan's agriculture, including greater attention to multifunctional aspects of 
farming, such as preserving rural landscapes and supporting rural economies. 
Traditional support for commodity production now must share the agriculture 
budget with such non-commodity specific goals. The new legislation also 
emphasized the need to reduce Japan's reliance on food imports by strengthening 
the competitiveness of its agriculture.

As the three continue to provide support for their farm sectors while complying 
with tightening limits on trade-distorting support, they may seek to work 
increasingly through policies such as environmental or rural development 
programs, which may qualify for exemption from WTO reduction commitments. 
Additional trade agreement disciplines that limit the potential differences 
among countries in level and type of trade-distorting programs may lead to 
convergence in commodity policy approaches and could contribute to less 
contentious trade relationships and negotiations.

New Issues 
Shaping Policies

New issues, including environmental concerns, food safety and quality, rural 
development, and changing farm structure, are increasingly shaping or promising 
to shape commodity policy of all three. 

In the U.S., the 2002 Farm Act increased support for conservation programs by 
about 80 percent. U.S. attention to bio-security issues and recent outbreaks of 
foodborne illnesses and animal disease may generate changes in policy that 
affect production practices. Policymakers have also begun to look beyond 
traditional commodity support programs to encourage rural development, as 
nonfarm activities increasingly dominate the economic life of many U.S. rural 
communities.

Public pressure regarding these new issues is perhaps most fully developed in 
the EU, where the Berlin European Council of 1999, which adopted the Agenda 
2000 reform program, endorsed policies aimed at producing a "multifunctional, 
sustainable and competitive agriculture."  The EU Agenda 2000 policy reforms 
strengthened links between producer support payments and environmental 
protection requirements. 

Concerns related to the safety and quality of food have occupied EU officials 
for the last several years, as "mad cow disease," outbreaks of foodborne 
illnesses, and the foot-and-mouth disease crisis shook Europeans' confidence. 
Policy changes aimed at promoting less intensive livestock production, combined 
with stricter standards on animal feeds and meat hygiene, have been instituted 
to address these concerns. 

Through its policy of "modulation," the EU allows member countries to shift 
some funding from commodity support to rural development programs, including 
agri-environmental programs and programs aimed at promoting increased 
diversification. 

Japan has begun to subsidize environmental improvements made by livestock 
farmers and has launched policies to preserve farming in hilly and mountainous 
areas that have difficulty competing even within Japan's protected markets. 
While these policies support some commodity production, their larger aim is the 
elimination of externalities of production, such as odor and water pollution, 
as well as the preservation of societal benefits such as landscapes and rural 
welfare. Food safety has also become a pressing issue, leading to the creation 
of a new food safety commission and to government pledges to focus more 
attention on consumer needs.

Traditional domestic support and trade concerns will undoubtedly continue to 
play a primary role in commodity policy direction for all three, and trade 
goals and constraints will likely have the greatest influence on whether their 
commodity policies become more similar. However, the pressure of public demands 
for attention to such issues as environmental impacts and food safety will 
likely gain influence.

The U.S., EU, and Japan have in some cases moved toward similar approaches to 
meet the goals of commodity policies in recent years. Their policies still 
differ, however, in significant ways--particularly in the extent of their 
reliance on income versus price support, reliance on border measures, and use 
of surplus disposal and supply control. They face similar pressures from tight 
budgets, trade constraints, and increasing public connection of agricultural 
policy with issues beyond traditional goals for supporting production 
agriculture. Whether these pressures will lead to similar policy responses 
remains to be seen. So far, they have not done so consistently, in part because 
the level of public interest and pressure they face has differed, reflecting 
differences in current conditions and recent experiences. 

In the U.S., debate on the impacts of the 2002 Farm Act will continue to 
influence the future of U.S. farm policy as budget outlays, trade negotiations, 
environmental and consumer concerns, and production issues fuel discussions of 
appropriate and effective agricultural programs. In the EU, a reform proposal 
arising from the 2002-03 mid-term review of the CAP is spurring a similar 
debate, offering the prospect of comprehensive reform or, if Member States 
reject the Commission's proposal, the possibility of further marginal change. 
In Japan, the government continues to introduce new measures to speed 
consolidation of farming into more efficient, lower cost operations. 

In the midst of these debates, the future direction of farm policy is unclear. 
But while significant differences will undoubtedly remain, some of the 
discussion suggests that the U.S., the EU, and Japan could be headed in a 
similar direction.

Anne Effland (202) 694-5319 aeffland@ers.usda.gov
Mary Anne Normile (202) 694-5162 mnormile@ers.usda.gov
Edwin Young (202) 694-5336 ceyoung@ers.usda.gov
John Dyck (202) 694-5221 jdyck@ers.usda.gov

For further information on U.S. and EU commodity policy, see the following 
briefing rooms on the ERS website:
www.ers.usda.gov/briefing/farmpolicy/programprovisions
www.ers.usda.gov/EuropeanUnion/policy

For further information on Japan's commodity policies, see the following 
articles:
Sweetener Policies in Japan
www.ers.usda.gov/publications/so/view.asp?f=specialty/sss-bb/
Vegetable Policies in Japan
www.ers.usda.gov/publications/vgs/oct02/vgs293-01/


WORLD AGRICULTURE & TRADE

Shaping the Global Market for High-Value Foods

The global market for high-value foods is complex, and subject to an ever-
changing product mix demanded by wealthier and more selective consumers. While 
consumers in industrialized countries are the primary customers for high-value 
foods, developing countries are a growing market. As income and population 
levels grow, these countries account for a growing share of global food sales. 
In response, multinational food companies are rapidly restructuring their 
manufacturing and retail operations to better serve evolving world food demand. 
The resulting coordination between retail and supply chains has implications 
for both food producers and exporters.

The size of the global food market is difficult to measure precisely given 
varying national definitions of the food sector and the range of venues in 
which food is sold. From street-side stalls in developing countries to 
supermarkets in highly developed countries, the market may also be defined by 
its stage in the distribution channel (wholesale, manufacture, retail, or food 
service). This article focuses on the retail level of the food market where 
virtually all products sold are high-value products. These products are either 
commodity-based--such as meat, fruits and vegetables--or manufactured--such as 
beverages, and bakery products. Global sales of high-value food products 
including food sold through food service were estimated at US$4 trillion in 
2000 with beverages representing more than a fourth of total retail sales.

Much of the growth in the global food market can be accounted for by increased 
"value-added" rather than volume. Value is added at various stages along the 
food marketing chain. At the manufacturing level, raw commodities are 
transformed into palatable products and packaged for the retail market. Further 
value may be added to products destined for the food-service sector, one of 
faster growing segments of the food market, and accounting for about one-third 
of global food sales. 

Who Buys 
What?

Developed countries account for most of the about US$2.2 trillion worth of food 
products that move through global retail outlets. European Union countries, the 
U.S. and Japan together accounted for over 60 percent of processed food 
(packaged food and beverages) retail sales. Retail sales of processed food 
account for about half of total food expenditures in developed countries, but 
only a quarter or less in most developing countries. In most countries, 
packaged food products account for about two-thirds of all retail processed 
food products with alcoholic, soft and hot drinks comprising the remainder. 

The value of total packaged food retail sales varies among countries based on 
per capita income levels. For example, in 2001, per capita retail sales of 
packaged food averaged about $1,190 among high-income countries, $491 among 
upper-middle-income countries, $209 among low-middle-income countries, and $107 
among low-income countries. Japan spent $1,255 per capita on packaged food, the 
U.S. $912, and Mexico $334, compared with $33 per capita for China and $10 for 
India.

While market size as measured in retail sales is much larger in high-income 
countries, market growth has generally been faster among developing countries, 
where oils and fats, dried food, and dairy products have sizable retail markets 
with strong growth trends. Although a smaller market, breakfast cereal sales 
have skyrocketed, registering double- and triple-digit growth in many 
developing countries. 

Processed food retail sales are generally growing at a slower pace in high-
income countries than in developing countries. Ready-to-eat meals is the 
fastest growing sector, with the exception of markets where cultural values may 
tend to discourage purchases (e.g., France and Singapore). Growth in retail 
sales of items used in meal preparations such as oils and fats and dried food 
have slowed or decreased in many high-income countries. Breakfast cereal sales, 
which increased in Europe and Asia during the past 5 years, have declined in 
the U.S. The decline in the U.S. may be due to increased competition from other 
items such as frozen breakfast food, bagels, and other bakery products. 

The global market for soft drinks is expanding rapidly with large growth in 
sales in Eastern Europe, Asia, and Latin America (see related story). Growth in 
the soft drink market in the U.S. has slowed with average annual growth under 2 
percent, but continues strong with 3-4 percent growth in other high-income 
countries. Growth rates in developing countries are much higher, with Asian 
markets ranging from almost 13 percent in the Philippines to 19 percent in 
Indonesia. In the U.S., Latin America, India, the Philippines, and South 
Africa, most soft drinks sold in retail stores are carbonate based, but in 
other countries a larger share is accounted for by fruit juices and various 
ethnic drinks. However, carbonate-based drinks register higher growth rates in 
these countries. 

Reflecting the increased demand for variety as incomes increase, the number of 
products purchased at retail outlets is greater for wealthier countries. For 
example, the top 5 product categories account for 71 percent of the entire 
processed food retail sales for Mexico and 74 percent for India, but only 48 
percent for the U.S. and 47 percent for the United Kingdom (UK). In many 
countries, the top 5 categories are bakery, dairy, confectionery, snack foods, 
and dried foods. As the demand for processed food products is also driven by 
the demand for quality and labor-saving products, the items consumed by 
different income groups reflect different levels of services embodied in the 
products. For example, ready-to-eat meals account for about 4 percent of total 
retail sales in the U.S. and the UK, but only 0.06 percent in Mexico, 0.55 
percent in China, and none in India. In contrast, products such as fats and 
oils, which account for over 7 percent of total processed food retail sales in 
India, 13 percent in Indonesia, and 5 percent or more in many developing 
countries, account for less than 2 percent in high-income countries (0.79 
percent in the U.S.). 

As Consumer 
Demands Change...

Consumer's diets have changed worldwide due to income growth, lifestyle changes 
brought about by urbanization, and increased availability of a wide variety of 
food products. Either because of increases in purchasing power or the increased 
opportunity cost of time required for preparing food, the demand for higher 
value and processed food products has expanded globally. Consumers in 
developing countries, who have traditionally consumed low-value carbohydrate-
rich cereals, have increased their consumption of higher value meats, fruits, 
and vegetables. Similarly, consumers in wealthier countries are increasingly 
substituting semi-processed products for relatively higher value prepared 
meals. Although the quantity and nutrient value of the foods consumed may not 
have changed, the increased value of the products consumed may reflect value-
added services embodied in the products, which reduce preparation time required 
before consumption. 

Although consumers with higher income levels spend more money on food, the food 
share of total household expenditures is low for wealthier consumers who 
typically spend a larger share of their income on more expensive items such as 
health care, energy, and recreation. During the last decade, consumers in high-
income countries spent an average of 14 percent of their total household 
expenditures on food, while consumers in low-income countries spent an average 
of 45 percent. In 2001, this share ranged from a high of 56 percent of total 
household expenditures in Indonesia to 35 percent in Morocco, 26 percent in 
Mexico, 11 percent in Japan, and 7 percent in the U.S. About half of the total 
household food expenditure in high-income countries is for processed food 
products. 

Shares of food expenditures spent on high-value products have generally 
increased during the last decade in most countries. The increased share of 
total food expenditures for high-value food products not only reflects 
consumer's increased purchasing power but also changes in lifestyle afforded by 
increased prevalence of household amenities. For example, having refrigerators 
may lead households to purchase perishable food products, while increases in 
microwave ovens may lead to increased purchases of ready-to-eat food items that 
require minimal preparation before consumption. Most developing countries have 
significantly increased the number of households with refrigerators. Between 
1990 and 2001, the share of households with refrigerators in India increased 
from 4.6 to 12.6 percent, in China from 1 to 6.4 percent, in Indonesia from 
13.4 to 25.1 percent, in Morocco from 27.1 to 42.6 percent, and in Brazil from 
62.4 to 82.6 percent. 

The share of households with microwave ovens in high- and high-middle-income 
countries has significantly increased during the last decade. Ninety-one 
percent of households in Japan now have microwave ovens compared with about 76 
percent a decade ago. Over 84 percent of U.S. households now have microwave 
ovens compared with less than 80 percent in 1990. Microwave oven ownership has 
also increased dramatically in the UK, Singapore, Hungary, and many other 
wealthier countries. In lower income countries such as Brazil, Morocco, and 
Indonesia, the number of households with microwave ovens is small, but growing. 
Increased ownership of microwave ovens is likely to increase purchases and 
consumption of prepared food products. Accordingly, retail sales of ready-to-
eat meals, though small, have increased among some developing countries with 
dramatic growth rates in many middle-income countries in Eastern Europe and 
Latin America. In developing Asia, total value of retail sales of prepared 
meals is relatively small, and annual growth in sales suffered in the late 
1990s due to the Asian financial crisis. Given the financial recovery, ready-
to-eat meal sales are expected to grow along with increases in the number of 
households with microwave ovens.

Eating habits among consumers vary with their income level. Consumers diversify 
their diets as their incomes grow--products with more value-added services are 
increasingly substituted in the diet. For example, in 2000, an average consumer 
in Vietnam consumed about 1,200 calories less per day than an average American 
consumer. However, about 70 percent of the total calories consumed by the 
Vietnamese consumer were from cereals, which require more preparation time. 
Only about 22 percent of the total calories consumed by the average American 
were cereals, while 12 percent were from meat (8 percent in Vietnam) and 
another 12 percent were from dairy products (less than 1 percent in Vietnam). 

Changes in expenditures for different food items over time (reflecting income 
growth over time), relative to caloric intake may also capture the additional 
premium paid for food quality, preparation, and processing embodied in the 
product. Between 1996 and 2000, total available calories per capita in the U.S. 
increased by 4 percent, while per capita food expenditures in constant dollars 
increased over 5 percent. Seafood showed the most dramatic change--with a 7-
percent increase in per capita calories, but a nearly 26-percent increase in 
expenditures. 

...So Do Firms' 
Strategies

Firms have several options for selling in foreign markets. Exporting high-value 
food products is one option, but foreign direct investment (FDI)--investing or 
acquiring assets abroad and manufacturing--is often preferred. Commodity-based 
products are less suited for FDI since processing is generally done close to 
the primary production location. Once processed, commodity-based products can 
be exported like most other food products. Commodity-based products are traded 
far more than are manufactured packaged products, and account for over 75 
percent of the total value of U.S. high-value food trade. While the bulk of 
FDI-based food sales is in beverages and cereal products, the largest share of 
high-value food exports is in meat, fruits and vegetables, and fish and 
seafood. 

In the case of manufactured products, firms can tailor both manufacturing and 
packaging to suit local preferences. Thus, firms generally opt for an FDI-based 
sales strategy over an export-oriented sales strategy. For private firms owning 
trademarks, brands, formulas, and processing technologies associated with 
manufacturing, licensing and marketing agreements with other national and 
multinational firms play a big role in determining how products are sold in 
foreign markets. A manufacturer's ability to establish close business 
relationships with global supermarket chains is increasingly important. 

An export-oriented sales strategy is important in cases where the geographical 
origin of production matters to the consumer. In these cases, a foreign brand 
can sell at a premium over a comparable domestically produced good. Alcoholic 
beverages (wine in particular), and various confectionery products are good 
examples. A combination of trade and FDI sales strategy is another alternative. 
For example an Australian beer (Fosters) can be brewed and exported from Canada 
and sold at a premium in the U.S. 

Food manufacturing firms have traditionally relied on brand ownership to 
successfully differentiate their products. As a result, firm dominance can be 
seen at the global level for specific product markets. For example, a single 
company, Coca-Cola, is dominant in global soft drink sales. Due to changes in 
consumer preferences, the market has shifted from carbonated drinks to 
functional drinks, teas, and bottled water. While Coca-Cola led the market in 
carbonated drinks, it ranks no higher than third in other soft drink 
categories. With faster growth in non-carbonated beverage sectors, Coca-Cola's 
share in the soft drink market has somewhat declined in recent years. 

The Kellogg Company illustrates how firms adjust to consumer demand to remain 
competitive. As consumer disposable income grew in the second half of the 20th 
century, Kellogg capitalized on consumer demand for convenience and consumer 
perception that ready-to-eat cereals were nutritious. Consumer demand shifted 
in the late 1990s as eating patterns and consumer lifestyles evolved, and eat-
out-of-hand baked goods and snack bars started replacing ready-to-eat cereals. 
By 1998, ready-to-eat cereal sales declined in the U.S. and, under pressure 
from competition, Kellogg was forced to cut prices on 16 of its brands. Since 
many products--such as Kellogg's Corn Flakes--were relatively easy to imitate, 
competition had grown from private labels and other cereal competitors. In 
response, during the past 5 years, Kellogg has diversified its product 
portfolio through acquisitions of smaller companies specializing in convenience 
snack and breakfast foods.

In addition to shifting consumer demand, food companies have had to develop 
strategies for geographic coverage. Since 1996, Western European sales shares 
for both U.S. and European companies have declined. Nestle, the world's largest 
food company, had 40 percent of its sales in Western Europe in 1996. By 2000, 
this share declined to 32 percent, mainly as a result of stronger sales outside 
Europe. Population, demographics, and economic growth have all contributed to 
changes in food consumption patterns, particularly among consumers in 
developing countries.

Future Lies In 
Developing Countries

Although high-income countries account for over 60 percent of total processed 
food retail sales, they are essentially mature markets with little future 
growth potential. Developing countries are expected to account for most of the 
future increases in food demand, resulting from increases in population and per 
capita food consumption. Accounting for over three-fourths of total global food 
consumers, developing countries also register higher rates of population growth 
and younger population, signaling faster growths in future food demand. 

With per capita income levels forecast to grow faster in developing countries, 
their demand for high-value and processed food products is expected to 
increase. USDA's published estimates of world average per capita Gross Domestic 
Product (GDP) shows annual growth rates of 2 percent during the next decade, 
but developing country GDP is estimated to increase by about 3.5 percent 
annually. Studies indicate that as income levels rise, consumers in developing 
countries spend a larger share of the additional income on food compared with 
consumers in high-income countries with similar increases in income levels. The 
additional expenditure on food by consumers in developing countries often 
translates to diet diversification and increased expenditures on high-value 
food products, such as retail packaged items. 

Changing food demand in developing countries, along with the structure of food 
markets, is transforming into more coordinated systems linking consumer demands 
with procurement strategies. In fact, the basic structure of an industrialized 
food market is evolving rapidly in these countries. Of significance is the 
explosive growth in supermarkets and large-scale food manufacturers. In Latin 
America, supermarket sales rose from 10-20 percent of total retail food sales 
to 50-60 percent during the past decade. Global multinational retailers such as 
the Dutch Royal Ahold, Carrefour, and Wal-Mart are beginning to dominate the 
sector in this region.

With increasing demand and changes in the retail sector, developing countries 
will largely account for future growth in high-value food sales. While retail 
sales of packaged food products grew at about 2 percent annually in high-income 
countries, these sales have grown much faster among developing countries, 
ranging from 7 percent in upper-middle-income countries to 29 percent in lower-
middle-income countries. The dramatic growth among middle-income countries is 
partly due to a tremendous growth in sales in Bulgaria, Romania, Poland, and 
Hungary. With sales in these countries peaking, future growth in packaged food 
retail sales among developing countries is expected to be much slower, but will 
continue to exceed the rates for high-income countries. As growth in sales 
slows in Eastern Europe, markets in the Far East are predicted to pick up. 
Vietnam, China, and Indonesia are expected to be the fastest growing markets 
for packaged food retail sales over the next 5 years, with growth rates 
forecast at 11, 10 and 8 percent, respectively. Additionally, Korea, Thailand, 
India, and the Philippines rank among the top 10 growing markets, with total 
packaged food retail sales expected to grow 5-7 percent annually.

Mark Gehlhar (202) 694-5273 mgehlhar@ers.usda.gov
Anita Regmi (202) 694-5161 aregmi@ers.usda.gov

Want to know more?  

Cotterill R., "Continuing Concentration in Food Industries Globally: Strategic 
Challenges to an Unstable Status Quo," Food Marketing Policy Center Research 
Report No.49, 2000.

Price G., "Cereal Sales Soggy Despite Price Cuts and Reduced Couponing," Food 
Review, USDA, Economic Research Services, May-August, Vol. 23 Issue 2. 

Reardon T. and J.A. Bergegue, "The Rapid Rise of Supermarkets in Latin America: 
Challenges and Opportunities for Development," Development Policy Review, 2002 
20(4):317-334.

Regmi, Anita, M.S. Deepak, James L. Seale Jr., and Jason Bernstein, "Cross-
Country Analysis of Food Consumption Patterns," in Regmi (ed.) Changing 
Structure of Global Food Demand and Trade, Agriculture and Trade Report WRS-01-
1, ERS-USDA, May 2001.

Rosegrant M., Paiser M., Meijer S., and Witcover J. Global Food Projections to 
2020. Washington, DC: International Food Policy Research Institute; 2001. 2020 
Vision series.

USDA, USDA Agricultural Baseline Projections to 2011, February 2002.

WORLD AGRICULTURE & TRADE BOX 3

Measuring the Global Food Market

The size of the global food market is difficult to measure accurately. 
Consistent definitions of "markets" and data availability make comparisons 
across countries problematic. In developing countries, a large share of food is 
traditionally sold through street-side stalls which are likely not captured in 
a consistent and clear manner. Supermarkets have begun to have a greater 
presence in these markets making commercial food sales data more available, 
although such data may understate the size of the actual market. 

A market may be defined in terms of product coverage and the stage in the 
distribution channel (wholesale, manufacture, retail, or food service). In the 
retail level of the food market, virtually all products sold are high-value 
products. High-value food products can be divided into either commodity-based 
products or manufactured products. Commodity-based products are those that are 
identifiable with a specific commodity such as meat, fruit and vegetables, 
fish, milk, or sugar. Manufactured products combine multiple commodities, 
undergoing substantial transformation from their original raw materials. For 
example, breakfast cereals or bakery products are manufactured from a wide 
variety of ingredients such as milled grain, flours, oils, sugar, fruit, nuts, 
dairy products, and eggs. These are processed into consumer-ready packaged 
products carrying company brands that differentiate themselves in the 
marketplace. High-value, commodity-based products are typically sold under 
generic labels.

In this article, world estimates of food sales and specific food and beverage 
categories are drawn from Euromonitor, a commercial market data vendor, 
containing globally consistent food categories. Global sales of high-value food 
products including food sold through food service were estimated at US$4 
trillion in 2000. High-value foods can basically be broken down into packaged 
food, fresh food, and beverages. Processed food sales are combined sales of 
packaged food and beverages. Beverages are an important part of the high-value 
food market, representing more than a fourth of total retail sales.


SPECIAL ARTICLE

What's at Stake in the Next Trade Round

If there were ever a time for speculation about the future direction of 
agricultural policy, this is it. Major new farm legislation represents a 
departure from the market orientation and lower spending levels of the last 
Farm Act. The next round of multilateral negotiations begins in earnest later 
this winter. The intersection of domestic and international agricultural and 
trade policy determines the framework in which agricultural markets operate. 
What will happen to this architecture in the next few years?  Will it be 
altered through trade liberalization and policy reform?  Or will it remain 
largely intact?

Among the many factors that will condition the path policy ultimately takes are 
the dynamics of the trade talks themselves. Since the end of the last trade 
round, developing countries have sought a more effective influence on the World 
Trade Organization and negotiations under its auspices. Will their quest for 
meaningful participation and increasing technical proficiency make a difference 
in the outcome of the next round?  What will the European Union (EU) and Japan 
ultimately be willing to negotiate in the way of reform?  

Such considerations are important, but the fundamental question, in terms of 
U.S. enthusiasm for reform, is whether liberalization is really in line with 
the self-interest of American farmers. From this perspective, it is worth 
considering which economic arguments are most compelling and how they can be 
developed in an effective way.

A well-reasoned argument about market gains is a necessary but perhaps not 
sufficient condition for marshaling substantial U.S. support for agricultural 
trade liberalization. That is why the future cannot be predicted with 
confidence. Domestic farm policy reform, including reductions in subsidy 
spending and in import protection, would impose costs of adjustment in moving 
to a new world market order. Future benefits might not be realized if nearer 
term dislocations caused by policy reform could not be overcome--a real 
possibility. But, even if significant adjustment costs were associated with 
multilateral trade liberalization, is maintenance of existing programs and 
spending levels a viable alternative?  

Developing World Is 
Source of New Markets 

The most compelling argument for trade liberalization is that the future of 
developed-country agriculture lies in the markets of the developing world. Why 
is this so?  Because food markets in developed countries are mature--that is, 
they grow only slowly with population growth. Expansion in the market share of 
one food product generally comes at the expense of another. So the future, if 
U.S. farmers want to sell more food, is with markets in developing countries, 
where income growth has strong implications for the level and composition of 
food demand. In economic terms, the domestic U.S. demand for food is stable. 
Therefore, in order to maintain returns to agriculture as supply increases with 
productivity gains, demand also has to increase. This growth must come from 
outside the U.S., and indeed from outside the developed world (e.g., the EU).

Income growth drives demand in developing countries. Trade liberalization can 
be an important catalyst for improving incomes as well as for freeing markets 
by improving market access and limiting subsidies that distort market signals. 
To recognize the dynamism that drives income growth requires an approach to 
economic analysis that differs from traditional considerations of the gains 
from freer trade. The feedback loops in an economy, from consumers to suppliers 
to investors, have to be considered in order to trace the boost that open 
markets give a country's well-being. Typically, economic gains from 
agricultural trade liberalization have been couched in terms of changes at the 
margin in commodity imports and exports. This is not an unimportant phenomenon, 
of course, but to ignore the larger economic impact and its course over time is 
to miss the opportunity to make one of the strongest cases for agricultural 
trade reform.

The bedrock of the story is the relationship between food demand and income. 
One of the facts of economic development is the change in level and composition 
of food consumption as the incomes of a nation's population change over time. 
This phenomenon can be considered in the aggregate, by looking at country 
consumption profiles, but a national perspective necessarily obscures 
differences in the distribution of food across households and individuals. Two 
important observations flow from looking at amount and composition of calories 
consumed per capita across countries. One is that overall calories consumed 
increase with income. The second is that the composition of the diet also 
changes, incorporating needed protein through such foods as meat and animal 
products as income grows. 

The change in diet can be viewed in a more dynamic way, keeping the focus on 
aggregate country level and paying particular attention to meat demand, to see 
how world market dynamics are determined. As a country moves up the income 
ladder, the population's willingness to spend additional money on food (and on 
meat) changes. At low levels of income, the income elasticity of demand for 
meat is very high--meaning consumers' meat consumption will strongly increase 
with income--but the elasticity declines with income growth (diets need 
balance). The budget share of food expenditures that goes to meat increases 
with income. Empirical evidence gathered in many countries over many decades 
confirms the existence of a strong structural force that fuels demand for meat 
products, or inputs to the production of meat. This fundamental relationship 
between income growth and food demand is known as Engel's Law. Consistent with 
the evidence, the International Food Policy Research Institute projects that by 
2020, 85 percent of the increase in global demand for cereals and meat will 
occur in developing countries, and demand for meat in the developing world 
could potentially double.

Developed Countries' Competitive Edge: 
Livestock & Food Grain Production

To complete the market picture, consider the supply side. Which countries 
produce the most livestock and/or the feedgrains that food animals consume?  
The answer is many developed countries, and the U.S. in particular. Not only do 
the U.S. and its developed-country competitors in these markets produce 
livestock and feedgrains, but they also have a competitive edge in doing so. 
The expansion in the share of meat exports relative to cereals in the value of 
developed-country agricultural exports between 1960 and 2000 is illustrative. 
The most rapid expansion has been in recent decades, which would not be 
expected unless these producing countries had an inherent advantage. 

The apparent advantage of the U.S. and other developed countries may be due in 
large part to their "head start" in food animal production given their large 
high quality resource base (land availability) and high feedgrains yield. The 
need to satisfy domestic consumer demand for meat arose around the middle of 
the last century with strong gains in affluence. Developing countries, then, 
might be expected to "catch up" at some point in the future by building their 
own domestic livestock industries. However, the tropical and subtropical 
settings of many developing countries present challenges in the management of 
animal disease in the large herds that currently characterize low-cost meat 
production. Low feedgrains yields and constraints on water availability may 
hinder more extensive production systems in some areas.

Trade Liberalization As 
Catalyst of Growth

How to promote income growth in developing countries--a tall order indeed, but 
here the focus is on the potential contribution of trade liberalization. The 
"three pillars" of agricultural trade liberalization are: 1) increases in 
market access through lower tariffs, 2) eliminations of export subsidies, and 
3) elimination of domestic subsidies that distort markets. What effect would 
successful multilateral agricultural trade liberalization have on the prospects 
for income growth in developing countries?  

To answer that question, we use a dynamic computable general equilibrium (CGE) 
model, one that captures all transactions in the circular flow of income among 
economic actors in an economy. This framework also permits tracing the flow of 
income from producers to households, government, and investors and finally back 
to demand for goods in product markets. The model provides projections for 
individual commodity imports and exports but also for the full economy over 
time. The results show the expected increase in the value and volume of both 
imports and exports for developing countries that arise largely from 
improvements in market access. Such results are familiar parts of the debate 
over gains from freer trade, but they tell only part of the story.

The picture changes when considering potential welfare and income gains and how 
they accumulate over time. Estimates of gains from agricultural trade 
liberalization are shown under different assumptions about the increases in 
developing countries' total factor productivity (TFP) that can occur as a 
result of reform, in addition to gains from investment incentives. The 
productivity gains come about from spillovers of developed country technology 
into developing countries that in turn yield increases in labor productivity 
and returns to land and social capital. This growth then attracts additional 
capital investment from external sources. Varying assumptions about the 
magnitude of this change in productivity are illustrative. With no productivity 
increase, these gains are associated only with the commodity trade changes, and 
they do not increase with time. However, as TFP increases, there are more 
significant gains in welfare, and they compound over the years. 

While the projection of anticipated TFP growth is challenging, these results 
dramatize its significance and the importance of appropriate technology 
transfer to developing countries. Then, income gains would be driving diet 
change, in level and in composition, toward demand for higher quality protein 
from meat animals.

To recap, trade liberalization has the potential to accelerate income growth in 
developing countries. It is income growth that drives change in demand for 
food, both in terms of total calories consumed and in the source of calories, 
and that favors an increase in calories derived from meat and animal products. 
This change in demand can and often does result in demand for imports of 
livestock products and/or derived demand for feedgrains. The U.S. is a highly 
competitive exporter of meat products and feedgrains; its advantage would only 
be enhanced by reform, given our ample resource base. 

If the focus of trade liberalization benefits is only on immediate changes in 
commodity trade levels, an important gain is overlooked. There is good reason 
to expect trade liberalization to support income growth in developing 
countries, and some of this income will assuredly be spent on more food and, in 
particular, on a diet upgrade to meat proteins. This source of demand expansion 
is a significant source of opportunity for U.S. producers who otherwise face a 
stable and mature domestic food market. 

From Here to 
Liberalized Trade

The strong positive relationship between income growth and food demand is a 
well-established lesson of economic history. But even if the future prosperity 
of U.S. agriculture does lie in developing-country markets, there remains the 
question of how to get from here to there. What might the path of adjustment to 
freer world agricultural markets look like?  

It seems reasonable to assume that successful trade liberalization will require 
the U.S. to reduce its domestic spending on agriculture and to loosen import 
restrictions; indeed, that is what the U.S. has itself proposed. In that case, 
the deflation of farmland values could likely be the biggest challenge to 
adjustment. 

ERS research has shown that the value of government payments has been 
capitalized into land values; nationally, about 15-20 percent of value is 
derived from the ability of landowners to garner government payments. Deflating 
farmland values would represent a cost of adjustment that would likely be felt 
before the full gains from expanded exports began to accrue. But expectations 
about future returns affect farmland values; while reductions in subsidies 
might have a depressing effect, recognition of the future potential for market 
expansion might buoy values. In order to be realistic in assessing prospects 
for U.S. farmers' support of trade liberalization, the time lag between the 
costs and benefits of trade and policy reform should be considered.

But there are those who, perhaps disappointed by the results of previous trade 
rounds, will consider it misguided to pin hopes for U.S. farm prosperity on 
developing countries' uncertain prospects for economic growth. In that case, 
one has to consider the alternative to trade liberalization. That is, can 
returns to the U.S. agricultural sector be maintained by government programs in 
the absence of market expansion?  

The level of payments in the 2002 Farm Act are comparable to the level of 
payments made in the preceding 4 or 5 years, which included those mandated by 
the 1996 Act and those subsequently enacted as supplementary assistance. This 
spending occurred in a context in which Federal budget surpluses were present 
and expected into the foreseeable future. But now the Congressional Budget 
Office is predicting deficits through the end of the decade. Faced with the 
prospects of red ink, Congress and the President have in the past agreed to 
restrain spending across many Federal programs, including agricultural 
programs. How will projected spending under the 2002 Farm Act fare in such a 
constrained environment?  

Much is at stake in the next trade round. While attention is most frequently 
trained on commodity-by-commodity impacts of trade liberalization, the most 
compelling economic story lies with the potential for income gain in developing 
countries. The long-observed relationship between increases in income and 
spending on food--Engel's Law--is one of the few tenets in economics that seems 
to hold over time and across countries. Still, even a compelling structural 
argument for trade liberalization has to acknowledge the costs of adjustment in 
reaching reconfiguration of world agricultural markets. To be serious about 
handicapping the prospects for reform will require serious thought about how to 
get from the current policy structure to the next.

Susan Offutt (202) 694-5000 soffutt@ers.usda.gov
Agapi Somwaru (202) 694-5295 agapi@ers.usda.gov
Mary Bohman (202) 694-5140 mbohman@ers.usda.gov


END_OF_FILE
