Agricultural Baseline Projections: Baseline Presentation, 2003-2012

Summary of Projections
Macroeconomic Assumptions
U.S. Crops
U.S. Livestock
U.S. Agricultural Sector Measures
Global Agricultural Trade

Summary of Projections: February 2003 Baseline

The USDA Baseline consists of 10-year projections for agriculture, assuming continuation of current farm law as well as specific conditions for the economy, the weather, and the global situation. The baseline covers commodities, trade, and aggregate indicators such as farm income and food prices.

In the initial years of the baseline, U.S. farmers respond to reduced supplies and higher prices for many crops in 2002, with planted acreage projections higher in 2003 and 2004 than in recent years. Near-term livestock sector projections reflect adjustments to relatively low net returns in 2002, brought on by increased production levels that reduced meat animal prices, coupled with higher grain prices. Total meat production falls in 2003 and net returns improve as meat animal prices increase and grain prices decline.

Stronger domestic and international economic growth beginning in 2003 provides a more favorable demand setting for the agricultural sector, supporting longer run increases in consumption, trade, and prices. A continued strong U.S. dollar and trade competition from countries such as Brazil, Argentina, and the Black Sea region are constraining factors on U.S. exports, however. Nonetheless, improving global economic growth, particularly in developing countries, provides a foundation for gains in trade and U.S. agricultural exports, resulting in rising market prices, increases in farm income, and improvement in the financial condition of the U.S. agricultural sector. Consumer food prices are projected to continue a long-term trend of rising less than the general inflation rate. The trend in consumer food expenditures towards a larger share for meals eaten away from home is expected to continue.

With production growing faster than domestic demand, agricultural export markets are important for sustaining prices and revenues and, in turn, farm income. Export revenues account for 25 to 30 percent of U.S. farm cash receipts, and are a key factor in determining gains in net farm income.

Agricultural trade depends on the economic prosperity of consumers throughout the world.

• Economic growth in developing countries will generate most of the increase in global food demand over the next decade.
• Economic growth in developing countries is important for global agricultural demand because many developing countries have incomes at levels where consumers diversify their diets to include more meats and other higher valued food products, and where consumption and imports of food and feed are particularly responsive to income changes.
• Projected growth in the transition economies (countries of the former Soviet Union and Central and Eastern Europe) of about 4 percent over 2003-12 is significant in comparison to the economic contraction of the 1990s. This growth will increase consumer income and thereby raise demand for agricultural goods, such as livestock products for which demand is relatively responsive to income changes.

A strong U.S. dollar in the baseline is a constraining factor for United States agricultural competitiveness and growth in exports.

• Although declining somewhat in the near term, the dollar is assumed to stay at historically strong levels throughout the projections as relatively high financial market returns attract financial flows into the United States.

Competition in global agricultural markets will continue to be strong, with expanding production in a number of foreign countries.

• For example, increasing exports of soybeans and soybean meal from South America reflect a continuing conversion of land to crop production uses, particularly in Brazil.

The value of U.S. agricultural exports, which fell from a record of almost $60 billion in fiscal year 1996 to $49.1 billion in 1999, has risen since then.

• Gains in U.S. exports are constrained by a strong U.S. dollar and by continued strong trade competition throughout the baseline period.
• Nonetheless, strengthening world economic growth in the longer run, particularly in developing countries, provides a foundation for gains in U.S. agricultural exports, which increase to about $76 billion by the end of the projections.
• The share of U.S. agricultural exports accounted for by high-value products continues to rise, reaching about 68 percent in the last several years of the baseline.

Strengthening market conditions lead to rising market prices, increases in farm income, and improvement in the financial condition of the U.S. agricultural sector.

• U.S. net farm income rises gradually throughout the baseline. Income projections for the next decade average near $47 billion, compared to about $46 billion in the 1990s.
• Gross cash income gradually increases as crop and livestock receipts increase due to growing domestic and export demands.
• Production expenses increase modestly in the baseline at slightly less than the general inflation rate. Cash operating margins are stable in the projections with cash expenses at 77-79 percent of gross cash income.
• Government payments become relatively less important over time as a greater share of gross cash income comes from the marketplace.
• Increasing farm incomes and relatively low interest rates through the baseline assist in asset accumulation and debt management. Debt-to-asset ratios decline to about 15 percent in the last several years of the projections, compared with over 20 percent in the mid-1980s.

Macroeconomic Assumptions: February 2003 Baseline

Macroeconomic assumptions underlying the USDA baseline are characterized by a rebound from the recent U.S. and global slowdown, with a return to sustained growth at historical levels by 2005. These assumptions were completed in October 2002, incorporating data and other information available at that time.

During the last decade, the U.S. and world economies became increasingly interdependent. The United States is not only the world's largest economy with around 30 percent of global gross domestic product (GDP), but the U.S. capital market is also the world's largest. Growth of U.S. exports has also become relatively more important in overall U.S. GDP gains. Because of this interdependence, international macroeconomic conditions affect consumer incomes, exchange rates, trade, inflation, and interest rates and thus have major effects on U.S. agriculture.

The baseline assumes that U.S. GDP growth improves in the near term (increasing to 2.6 percent in 2003) as the economy recovers from the recent economic slowdown. U.S. growth then returns to a longrun sustainable rate of 3.0 percent. A similar pattern is expected globally, with sustained economic growth projected in the longer term for most countries in the world.

• Improved global economic performance combined with continued, if slowing, population growth is expected to strengthen food demand in the baseline.
• Developing countries play an increasingly important role in increasing global food demand in the baseline and become a more important destination for U.S. exports. High population and income growth, along with relatively large food responsiveness in these countries, underlie this projection.

Definition of country groups

World economic growth is projected to average 2.4 percent annually between 2001 and 2005, before increasing to a 3.2 percent average in 2006 through 2012.

• Increased global purchasing power and population growth are key to increasing U.S. exports.
• Consumption and imports of food and feed in developing countries are particularly responsive to income changes. As incomes rise in these countries, consumers generally diversify their diets, moving away from staple foods to include more meat, fruits and vegetables, and processed foods. These consumption shifts increase import demand for feedstuffs and high-value food products.

Definition of country groups

Developed economies are projected to grow at rates comparable to the 1990s, averaging 2.5 percent in 2005 and beyond.

• Adoption of the euro enhances cross-border trade and investment within the European Union. Even without formal enlargement to include countries of Central and Eastern Europe, closer integration with these countries creates more trade and investment opportunities.
• Japan continues to face significant economic problems, largely the result of its ongoing financial crisis and persistent deflation. Japan's share of world GDP is expected to decline to 12 percent by 2012, down from 18 percent in 1991.

Definition of country groups

Economic growth in developing countries is projected at a strong 4.5 percent annual rate in 2003, increasing to 5.2 percent in 2006-12. Long-term growth in the transition economies (former Soviet Union, Central and Eastern Europe) is projected at 4 percent annually, a significant reversal from the contraction of their economies in the 1990s.

• Strong long-term growth of 4.3 percent is projected for Latin America. This will attract significant foreign capital inflows, sustaining that growth.
• Growth in East and Southeast Asia is projected to rebound from the economic slowdown of the last 2 years to over 6 percent for most of the next decade, but will still be below the very strong average growth of 7.5 percent in the 1990s.
• China's economic growth has been consistently the strongest in Asia, and is expected to average a robust 7.4 percent over the next decade.
• Poland, Hungary, and the Czech Republic show stronger growth than other countries of Central and Eastern Europe, due largely to successful integration into the global economy.
• After a decade of setbacks, Russia and Ukraine begin to benefit from a shift to market economies, with annual GDP gains of 4 percent projected for the next decade.

Definition of country groups

A major factor in the future growth of international demand for agricultural products will be declining population growth around the world. Historically, about 70 percent of increases in food use has been related to population growth, leaving about 30 percent driven by increasing incomes and other factors. With population growth slowing in the projections, income growth will become a relatively more important factor underlying food and agricultural demand growth.

• World population growth declines from an annual rate of 1.7 percent in the 1980s to 1 percent per year at the end of the baseline.
• Developed and transition economies have relatively low projected rates of population growth in the baseline. Population growth rates for developed economies continue to decline, while those for the transition economies are projected to go to zero and then increase modestly by the end of the baseline.
• Population growth rates in developing economies decline by almost half, but remain above those in the developed and transition economies. As a consequence, the share of world population accounted for by developing countries, which is currently about 80 percent, increases to over 81 percent by 2012.
• China's population growth rate slows from 1.5 percent per year in 1981-90 to 0.7 percent in 2001-10. India's population growth rate is projected to decline from 2.1 to 1.4 percent per year in the same periods, Brazil's to decline from 2.1 to 0.8 percent per year, and Sub-Saharan Africa's to decline from 2.9 to 1.9 percent per year.

A strong U.S. dollar reduces U.S. agricultural competitiveness and constrains growth in exports. This is partially offset by longer term global economic growth, which increases the demand for U.S. exports.

• Strong GDP growth in the United States leads to a real appreciation of the U.S. dollar.
• The U.S. dollar is assumed to stay strong as financial flows into the United States are attracted by well-functioning financial markets, a relatively risk-free environment, and high expected financial returns.
• U.S. exports of bulk commodities tend to be the most sensitive of agricultural products to the strong U.S. dollar due to relatively stronger global trade competition for non-differentiated products.

Oil prices declined in 2001-02 from the high levels of 2000. From 2003 forward, oil prices are projected to rise only slightly faster than the general inflation rate. These projections are generally consistent with the Energy Information Administration's January 2002 Annual Long Term Outlook.

• New oil discoveries, along with new technologies for finding and extracting oil, are assumed to allow for substantial growth in demand without significant energy price inflation.
• Most of the growth in world oil demand will be due to strong Asian GDP growth, which has a relatively high energy dependence.
• Oil prices affect the price of natural gas and the supply conditions for nitrogen-based fertilizer. However, since oil prices increase only slowly in real (inflation adjusted) terms in the baseline, no large boost in fertilizer prices is expected in 2003-12. As a result, energy prices have little impact on farm production costs over the projections period.

Definition of country groups

Inflation rates, which were relatively low in the 1990s (except in the transition economies), are projected to remain relatively low through 2012.

• For developed countries and the world, inflation is projected to be 2.5 percent or less.
• For the transition economies, inflation rates in the baseline come down dramatically from an annual average exceeding 20 percent in the 1990s, to approximately 4 percent per year in the projection period.
• Inflation rates in developing countries are also projected to fall, but less precipitously—from over 8 percent to just over 6 percent. Inflation in Asia declines to rates comparable to those in developed countries. Those in Latin America and the Middle East, while declining, will still remain substantially above inflation rates in the rest of the world.

More Detailed Data

Baseline macroeconomic data

U.S. Crops: February 2003 Baseline

Stronger global economic growth beginning in 2003 provides a more favorable demand setting for field crops, supporting longer run increases in consumption, trade, and prices. A continued strong U.S. dollar and trade competition from areas such as Brazil, Argentina, and the Black Sea region are factors constraining U.S. exports, however.

Near-term acreage projections for 2003 and 2004 indicate a response to drought-related production shortfalls and higher prices for many crops in 2002. U.S. plantings for eight major field crops rise from 249 million acres in 2002 to about 253 million acres in 2003. Acreage falls back to about 248 million in 2005 before growing slowly to about 252 million by 2012 in response to growing demand and rising market prices.

Baseline assumptions for field crops reflect provisions of the Farm Security and Rural Investment Act of 2002 (2002 Farm Act), which is assumed to continue through the projection period. The new farm legislation introduces some new policies to the array of agricultural commodity programs. However, in many ways, the 2002 Farm Act extends provisions of the 1996 Farm Act and the ad hoc emergency spending bills of 1998-2001. For example, marketing assistance loans existed under previous U.S. farm law; direct payments replace production flexibility contract payments of the 1996 Farm Act; and counter-cyclical payments are intended to institutionalize the market loss assistance payments of the past several years.

The 2002 Farm Act continues planting flexibility provisions, giving farmers almost complete flexibility in deciding which crops to plant. Producers are permitted to plant all cropland acreage on the farm to any crop, except for some limitations on planting fruits, vegetables, and wild rice on base acres. The land must be kept in an agricultural or conserving use (as determined by the Secretary), and farmers must comply with certain conservation and wetland provisions.

Crop Revenues Under the 2002 Farm Act

Corn market revenues and program payments at different price levels illustrate some of the properties of income-support provisions of the 2002 Farm Act. Corn program provisions for the 2002 crop are used in this illustration. Revenue calculations are for a farm with 100 acres of corn, 100 acres of corn base, corn yields of 135 bushels an acre, a program-payment yield of 103 bushels an acre used for direct payments, and an updated payment yield for counter-cyclical payments (CCPs) of 120 bushels an acre. In this example, it is assumed that the farmer has chosen to plant the same crop as the acreage base on the 100 acres.

• The portions of the figure labeled "Market revenue" represent receipts from the marketplace, which increase as market prices rise.
• The triangle labeled "LDP/MLG" represents marketing loan benefits in the form of loan deficiency payments (LDPs) and/or marketing loan gains (MLGs) that supplement market revenues at market prices below the loan rate ($1.98 for corn). As prices fall below the loan rate, marketing loan benefits rise and fully offset declines in market revenues since these program benefits are available for all production of loan eligible commodities.

• The area of the figure labeled "Counter-cyclical" represents the counter-cyclical payments under the 2002 Farm Act. Counter-cyclical payments are linked to market prices, with payments provided when prices are below the target price minus the direct payment rate ($2.60 minus $0.28, or $2.32, for corn). Payments increase as prices decline below $2.32 until they reach the loan rate ($1.98 for corn). For prices below the loan rate, counter-cyclical payments are at their maximum and do not change. Counter-cyclical payments do not fully offset reductions in market revenues as prices fall from $2.32 to $1.98 because payments are made on 85 percent of the fixed acreage base and are paid on CCP payment yields rather than actual yields, and thus do not change with the farm's production.

• The area of the figure labeled "Direct payments" are fixed payments of $0.28 a bushel for corn, paid on 85 percent of the acreage base and a payment yield. These payments do not change with market prices or the farm's production.

Counter-Cyclical Payments Likely to Overlap Marketing Loan Benefits

Counter-cyclical payments are likely to overlap with counter-cyclical aspects of marketing loan benefits in certain price ranges.

• In the previous figure, marketing loan benefits are assumed only for season average prices below the loan rate. However, marketing loans have enabled farmers to attain per unit revenues that, on average, exceed commodity loan rates when prices are relatively low. Many farmers use a two-step marketing procedure in which they receive program benefits when prices are seasonally low (and marketing loan benefits seasonally high) and then sell the crop later in the marketing year when prices have risen.
• This chart includes a representative level of $0.20 a bushel for corn for the expected above-loan-rate revenue facilitated by marketing loans when prices are low, based on the experience of recent years. With this expectation, average per unit market receipts and marketing loan benefits are kept from falling below $2.18. As a result, expected counter-cyclical payments overlap with counter-cyclical aspects of marketing loan benefits in the price range from $1.98 to $2.18, in effect providing two counter-cyclical benefits to farmers. As season-average prices fall in this price range, both counter-cyclical payments and marketing loan benefits rise, causing total revenues to increase.

Under the voluntary Conservation Reserve Program (CRP), farmland owners submit bids to retire highly erodible and other environmentally sensitive cropland from production for 10-15 years. CRP enrollment is designed to enhance environmental quality and improve wildlife habitat. Farmers receive a cost-share payment to establish a permanent cover crop and annual rental payments for retiring land and maintaining specified conservation practices.

• The maximum CRP area is increased to 39.2 million acres under the 2002 Farm Act, up from 36.4 million acres under the 1996 Act. The expansion of the CRP under the 2002 Farm Act will reduce land available for crop production somewhat, with about 60 percent of the reserve allocated to the eight major field crops.

Global economic recovery underlies longrun growth in U.S. exports, but gains in trade are constrained by a strong U.S. dollar and by expanding competition in some key export markets.

• U.S. corn exports are projected to increase at a faster rate than in the 1980s and 1990s. The U.S. corn sector increases its trade share of the global corn market although competition from Argentina and Eastern Europe result in their corn trade shares increasing as well.
• U.S. wheat exports decline through 2005/06 because of a recovery in exports from Canada and Australia following droughts in 2002, as well as large exports from the Black Sea region and the EU. As global wheat trade strengthens, U.S. exports rise through the remainder of the projections, although competition holds the U.S. trade share relatively flat in 2005-12, at levels below those of the late 1990s.
• U.S. exports of soybeans rise only moderately in the baseline, reflecting slow growth in domestic production and increased foreign competition, particularly from South America.

U.S. rice and cotton exports show little or no growth through most of the baseline period.

• After falling slightly in 2003 from a record high level in 2002, rice exports rise moderately through 2007 as gains in production are stronger than domestic market needs; and price differentials between domestic and world rice prices weaken. In the longer run, U.S. rice exports fall as domestic use outstrips production growth, raising the price differential between U.S. and Asian rice.
• Upland cotton exports remain relatively stable in the baseline, near 10 million bales annually, as foreign competition strengthens and keeps U.S. cotton exports from expanding above the recent 75-year high. With world cotton trade expanding throughout the projections, the U.S. share of global exports declines but is still about 30 percent in 2012/13.

U.S. stocks-to-use ratios for corn and wheat initially increase from relatively low levels at the end of 2002/03, before declining through the remainder of the baseline as domestic use and exports rise faster than production. The stocks- to-use ratio for soybeans is relatively flat throughout the projections.

The stocks- to- use ratio for cotton declines from recent high levels and becomes relatively stable toward the end of the projections. The rice stocks- to- use ratio initially rises due to large domestic production, but then gradually falls through the rest of the baseline as domestic use strengthens and outstrips production growth.

Projected prices for corn, wheat, and soybeans reflect, in part, movements in stocks to use ratios.

• Prices decline over the next several years as production recovers from the reduced levels of the 2002 crops.
• Prices for corn, wheat, and soybeans rise during the remainder of the baseline as growth in demand outpaces gains in production.

Aggregate U.S. crop area increases sharply in 2003, due mainly to rising corn and wheat plantings as farmers respond to reduced supplies and higher prices in 2002. As production rebounds and prices decline, acreage falls through 2005. For the remainder of the projections, acreage increases as producers respond to generally rising net returns as demand and prices strengthen.

• Area planted to the eight major U.S. crops is expected to rise from 249 million acres to about 253 million in 2003, fall back to 248 million in 2005, and then gradually rise to about 252 million acres by 2012. Plantings remain considerably below the recent high level of over 260 million acres in 1996. Corn, wheat, and soybeans account for about 85 percent of this acreage.
• Marketing loan benefits have a direct impact on net returns for some crops through much of the baseline, thus influencing the aggregate level of plantings as well as the cropping mix in the projections.
• Corn and wheat acreage each rise in 2003, particularly wheat, in response to reduced supplies and high market prices in 2002/03. Plantings fall back over the following 2 years as supplies rebound and prices decline. Marketing loan benefits largely offset market price movements and, thus, hold corn plantings flat in 2005-07 and wheat acreage flat in 2005-10. Additional acreage is attracted to these crops in later years as net returns increase.
• Soybean area planted declines in 2003 due to higher returns for competing crops, particularly corn. Soybean acreage then is expected to increase slightly through the rest of the projection period in response to growing demand and higher prices and net returns. Marketing loan benefits also support soybean net returns and acreage in 2004-06.

Domestic corn use is strong in the initial years and continues growing throughout the period.

• Feed and residual use is relatively unchanged in the initial years with fewer cattle on feed and lower pork production offsetting increases in poultry output. Feed use then rises through the remainder of the projections as meat production increases.
• Major growth is expected for ethanol use as many States ban methyl tertiary butyl ether (MTBE) as a fuel oxygenate.
• Gains in high fructose corn syrup (HFCS) and most other food and industrial components are projected to be smaller than in the past decade. These are mature markets, with projected gains largely reflecting population growth.
• U.S. corn exports rise faster than global trade with the United States increasing its market share. China's corn exports drop as its livestock sector expands. However, the U.S. corn sector faces increased competition from Argentina and Eastern Europe, which increase their shares of the global corn trade market.

Demand in the U.S. wheat sector grows slowly, with steady domestic market gains and moderate long-term increases in exports.

• Domestic wheat demand is a relatively mature market. Food use increases less than the rate of population growth, in line with recent trends since the mid 1990s as consumers have adjusted diets to include fewer carbohydrates. Feed use of wheat rebounds from relatively low levels in 2002/03, with yearly levels largely reflecting prices of wheat relative to corn.
• U.S. wheat exports decline through 2005/06 as wheat production in Canada and Australia rebounds from drought-reduced levels in 2002 and competition continues from the EU and from nontraditional exporters of the Black Sea region. As global wheat trade expands over the remainder of the baseline, U.S. exports rise as well, but the U.S. market share remains relatively low at near 21 percent as all major wheat exporters gain proportionately.

• Growth in domestic soybean crush is largely driven by increasing demand for domestic soybean meal, mostly because of rising feed demand for expanding pork and poultry production.
• U.S. soybean exports show little or no growth in the baseline and decline towards the end of the projections, largely due to strong competition from Brazil. Consequently, the soybean trade market share for the United States continues to decline.
• U.S. exports of soybean meal and soybean oil also face competition from South American producers. Trade competition from Argentina in these markets reflects the predominantly export orientation of crushing in that country.

Domestic mill use of upland cotton declines slowly through the projection period. Annual exports of about 10 million bales remain above domestic mill use as cotton is exported for processing in developing countries with lower labor costs.

• After 2004, import quotas that have protected the U.S. textile industry will be completely eliminated, per the Uruguay Round's Agreement on Textiles and Clothing. Without the quotas originally instituted under the Multi Fiber Arrangement (MFA), apparel imports rise, reducing the apparel industry's demand for fabric and yarn produced in the United States, and the U.S. spinning industry contracts.
• Some increase in U.S. yarn and fabric exports is likely as a result of tariff reductions in other countries. However, the effects of these tariff adjustments are not expected to offset the impact of reduced U.S. apparel production on domestic mill use.

Steady growth in domestic food use of rice is projected. U.S. rice exports rise somewhat from 2003 to 2007 as large per-acre yields raise production and total supplies. Rising supplies reduce the price differential between U.S and foreign rice. By the latter part of the projections, continued expansion in domestic use outstrips supply growth, causing U.S. rice exports to contract.

• The expansion in domestic food use of rice reflects a growing share of U.S. population of Asian and Latin American descent, a continuing emphasis on healthier life styles, and the greater use of rice for processed foods, including pet foods.
• Continued expansion in domestic use of rice pushes U.S. prices higher relative to Asian competitors later in the projection period, a factor underlying weaker exports after 2008.

Slowly declining relative prices of U.S. sugar crops compared with alternative crops result in modest reductions in area planted and harvested in the baseline. Nominal sugar and sugar crop prices are expected to be at or above levels consistent with current sugar loan rates. Prices of alternative crops are projected to decline from recent high levels through fiscal year (FY) 2005, but are then expected to increase modestly to FY 2013.

• Despite declining acreage, U.S. sugar production will grow over the next 10 years. Trend improvements in sugarcane and sugarbeet growing, harvesting, and processing are reflected in projected gains in sugar produced per acre and technical improvements result in higher sugar yields.
  
  
• Total domestic deliveries are projected to increase slightly faster than the rate of population growth in the baseline, rising from about 10 million short tons, raw value (STRV) in FY 2004 to 11.2 million STRV in FY 2013.
• Baseline projections for sugar are very sensitive to sweetener developments in Mexico. The Mexican tax on soft drinks using high fructose corn syrup increases Mexican demand for domestically produced sugar. Sugar available for export to the United States is projected to average 253,000 STRV a year in FY 2004-13.
• In the United States, total sugar imports less imports for re-export programs average 1.496 million STRV a year, below the 1.532 million STRV trigger for the suspension of marketing allotments. Application of marketing allotments guarantees that U.S. sugar prices are at, or above, the minimum price level to avoid forfeitures to the Commodity Credit Corporation. Stocks held by processors that cannot be marketed because of the allotments (blocked stocks) average 761,000 STRV a year in FY 2004-13.

Both flue-cured and burley tobacco production, which together account for 95 percent of total U.S. leaf production, are expected to decline during the baseline period. Both are grown under a quota program. The marketing quota for both is determined by manufacturers' purchase intentions, the last 3 years' average exports, and an adjustment to maintain a specified reserve stock level. Manufacturers' purchase intentions have declined as cigarette output levels have fallen and imported tobacco use has risen. Furthermore, exports of both flue-cured and burley have slipped in the past 5 years as world leaf stocks are at sufficient levels and U.S. tobacco faces strong price competition from foreign producers such as Brazil and Zimbabwe. Loan reserve stocks have been adequate recently and adjustments have further reduced quota levels. Tobacco prices will continue to edge up as price supports increase.

• Declining cigarette consumption and exports combined with increased use of imported leaf reduce the volume of domestic leaf used by the cigarette manufacturing industry.
• U.S. cigarette consumption is falling 1 to 2 percent per year. As cigarette smoking in public places becomes more restricted and both prices and taxes increase, cigarette smokers are reducing per capita and total consumption even though about the same proportion of the population smokes.
• Cigarette exports peaked in 1996 and have been declining steadily since then. Exports during calendar 2002 are expected to be about 135 billion pieces, about the same as in 2001. Exports are expected to maintain this level.
• Use of imported cigarette leaf has ballooned in the last few years. The imported component of U.S.-manufactured cigarettes reached 51 percent in 2000, then slipped to 48 percent in 2001. Manufacturers use less expensive imported leaf to produce more economical blends and reduce manufacturing costs. Imported leaf is expected to continue to displace domestic leaf in U.S. cigarettes.

The United States remains a net importer of horticultural products (fruit and nuts, vegetables, and greenhouse and nursery products). Exports continue to be crucial to the success of the U.S. horticultural sector, averaging about 22 percent of production value during the baseline period.

• Grapes, oranges, apples, fresh and processed potatoes, and processed tomatoes are among the leading horticultural export commodities.
• Major export markets for U.S. horticultural products include Canada, Japan, and Southeast Asian nations.
• Imports will continue to play an important role in the domestic supply of fresh vegetables during the winter months and, increasingly, during other times of the year.
• Major U.S. horticultural imports include bananas, grapes, frozen concentrated orange juice, potatoes, and tomatoes from Mexico, Chile, Canada, and Brazil.

U.S. Livestock: February 2003 Baseline

Livestock sector projections initially reflect adjustments to relatively low net returns in 2002, brought on by another drought year and increased production levels that reduced meat animal prices, coupled with higher grain prices. Total meat production falls in 2003 in the baseline, assuming normal moisture conditions, and net returns improve as meat animal prices increase and grain prices decline. In the longer run, rising farm-level livestock prices for meat animals, efficiency gains which help contain production costs, and only moderate increases in feed prices support producer returns and encourage growth in total meat production. U.S. poultry use gains a larger proportion of total meat consumption. Meat exports benefit from a rebound in foreign economic growth.

Beef production declines in the near term as producers retain cows and heifers for expansion. Cattle herds are expected to increase somewhat from cyclical lows near 95 million head in 2004-05. Rising slaughter weights compensate for slower herd expansion. Pork production grows slowly, as the more coordinated/integrated industrial structure dampens the U.S. hog cycle. Poultry production continues to rise, but at a slightly lower rate than historically due to the maturity of the sector.

The trend toward larger and more commercialized livestock systems continues throughout the baseline period; efficiency gains allow production to expand while real prices generally decline.

• Vertical coordination increases in the beef sector as strong demand for higher quality beef continues, particularly for the export and hotel and restaurant markets.

• Transformation to a more vertically coordinated pork sector continues, with larger, more efficient producers gaining market share which limits increases in production costs.

• Poultry producers have benefited from economies of scale associated with the industry's horizontal and vertical integration; projected gains in efficiency over the next decade are smaller than in the past 25 years.

Cattle, hog, and broiler prices increase moderately in response to growing domestic market demand coupled with export gains. Projected price increases are slower than the general inflation rate.

U.S. consumers buy more meat but use a smaller proportion of disposable income for these purchases, continuing a long-term trend. Over the next 10 years, consumer meat expenditures decline from about 1.9 percent to 1.4 percent of disposable income.

• The trend continues of poultry expenditures rising as a share of consumer spending on meats, while beef and pork expenditure shares decline.

Total per capita meat consumption (boneless weight basis) declines from a relatively high level of more than 185 pounds in 2002 to near 180 pounds over most of the projection period.

• Per capita consumption of relatively lower priced poultry increases throughout the baseline, allowing poultry to gain a larger share of total meat consumption and meat expenditures.
• Per capita consumption of beef initially declines, but then stabilizes later in the projections, while pork consumption remains near 47 pounds per person throughout.

U.S. meat exports rise throughout the baseline period, reflecting improved global economic growth and rising demand for meats.

Beef

• The United States, which imports grass-fed beef from Australia and New Zealand, becomes a net beef exporter in the latter part of the projections as exports of high-quality fed beef exceed imports of lower quality processing beef.

• The United States remains the primary source of high-quality fed beef for export, largely to Pacific Rim nations.

Pork

• Pacific Rim nations and Mexico remain key markets for long-term growth of U.S. pork exports. Canada continues to be a strong competitor for pork trade in these markets.

• While increased efficiency in pork production helps limit production costs, longer term gains in U.S. pork exports will be determined by costs of production and environmental regulations relative to competitors. Such costs tend to be lower in countries with growing pork industries, such as Brazil and Mexico.

Poultry

• U.S. broiler export growth is expected to slow from the rate of the 1990s. U.S. producers will face strong competition from other major broiler exporting countries, particularly Brazil.

• Major U.S. export markets include Asia, Russia, Eastern Europe, and Mexico. Growth in U.S. poultry exports to Russia is not expected to return to the pace of the last decade, reflecting slower import growth and greater trade competition.

While U.S. meat exports grow in importance, the domestic market remains the dominant source of demand. The farm value of meat exports, about 11 percent of the total value of domestically produced meat in 2002, approaches 13 percent by the end of the projections.

Baseline projections for the dairy sector reflect adjustments made in price support purchase prices for dairy products that were announced on November 15, 2002. These changes raised the purchase price for butter and lowered the purchase price for nonfat dry milk to better reflect market conditions and to help the Commodity Credit Corporation (CCC) manage accumulated inventories and control program costs.

• Strengthening milk-feed price ratios, improved management, and dairy productivity gains continue to push milk output per cow higher and real costs lower.
• Milk production continues to increase as rising output per cow offsets declining milk cow inventories.
• Domestic dairy demand continues to grow slowly throughout the baseline period, slightly faster than the growth in population. Cheese and butter demand will benefit from greater consumption of prepared foods and increased away-from-home eating. Per capita consumption of fluid milk, however, is projected to shrink slowly.

U.S. Agricultural Sector Measures: February 2003 Baseline

Longrun developments for the farm sector reflect strengthening domestic and international economic growth which support gains in consumption, trade, and prices. While export competition and a strong U.S. dollar are projected to continue, improving world economic growth, particularly in developing countries, provides a foundation for gains in global trade and U.S. agricultural exports. The results are rising market prices and farm income as well as improvement in the financial condition of the agricultural sector. Consumer food prices are projected to continue a long-term trend of rising more slowly than the general rate of inflation.

Export revenues account for an increasing share of total U.S. farm cash receipts. With the productivity of U.S. agriculture growing faster than domestic demand, farmers rely increasingly on export market growth.

Income projections for the next decade average near $47 billion, compared to about $46 billion in the 1990s. Net farm income increases to over $53 billion at the end of the baseline.

• Net farm income was relatively low in 2002. Large supplies and low prices for meat animals and dairy products reduced livestock receipts. Government payments to farmers declined as relatively high prices for many crops reduced marketing loan benefits and limited counter-cyclical payments, while some payments were shifted into 2003 as the 2002 Farm Act was implemented. Additionally, emergency assistance payments were lower than in 1999-2001.

• Net farm income generally rises through the projections. Income gains reflect strengthening domestic demand and exports, which lead to improvements in financial conditions of the sector.

Government payments generally decline through the projections, largely due to rising market prices for program commodities which reduce marketing loan benefits and counter-cyclical payments.

• Direct government payments are projected to fall from over $17 billion in 2003 to $12 billion in 2012.

• Toward the end of the projections, government payments largely reflect direct payments under the 2002 Farm Act, payments for the Conservation Reserve Program, and financial assistance for other conservation programs.

• Some variability in government payments occurs in the early years of the projections. Marketing loan benefits and counter-cyclical payments are affected by market price movements for many program commodities, which fall from recent high levels before gradually rising through the remainder of the projections. Also, payments are shifted across calendar years early in the projections as different provisions of the 2002 Farm Act are implemented.
  

Gross cash income gradually rises through the projections. Both crop and livestock receipts increase, reflecting growing domestic and export demands.

• The agriculture sector relies on the market for most of its income. The share of income provided by government payments declines through the projections. Government payments, which represented almost 10 percent of gross cash income in 2000, account for 4 to 5 percent at the end of the projections.
  

Production expenses increase modestly from 2003-12, at slightly less than the general inflation rate. These expenses are divided into three categories in the accompanying chart: farm-origin (seed, feed, and feeder livestock), manufactured (fuel, fertilizer, pesticides, and electricity), and other (labor, interest, and other expenses).

• The largest percentage increase is for the other expenses category, reflecting increases in labor expenses and interest costs. Labor expenses rise as sector output increases and wage rates rise. Projected increases in interest costs reflect higher interest rates as well as higher debt facilitated by rising farm incomes.

• Manufactured input expenses increase through the projections as oil prices rise and planted acreage expands.

• Cash operating margins are stable in the projections with cash expenses at 77-79 percent of gross cash income.

Strengthening farm income through the projections supports gains in farmland values.

• Increasing demand for land use from non-agricultural sources, such as housing and recreation, also affects farmland values.

Increasing farm incomes and relatively low interest rates through the baseline assist in asset accumulation and debt management.

• Farm debt moves up less rapidly than asset values in the projections, rising an average of about 2.4 percent a year compared with an increase of 2.7 percent annually for assets.
  

Increasing farm income and rising farm equity lead to improved financial conditions in the agricultural sector.

• Debt-to-asset ratios decline over the next few years and then remain near 15 percent, compared with over 20 percent in the mid-1980s.

Retail food prices continue a long-term trend of increasing less than the general inflation rate.

• Among foods purchased for consumption at home, price increases are generally strongest for more highly processed foods such as cereals and bakery products. For these foods, prices are related more to processing and marketing costs than to farm-level prices and, therefore, rise at a rate near the general inflation rate.

Expenditures for meals prepared away from home account for a growing share of food spending, reaching about 49 percent of total food expenditures by 2012.

• Increases in away-from-home food spending, which contains a large service component, are held down by competition in the fast-food and food-service industries.

U.S. agricultural export value is projected to grow an average of 3.6 percent annually from about $53 billion in fiscal year 2002 to $76 billion in 2012. High-value product (HVP) exports continue to grow, accounting for more than two-thirds of total U.S. exports.

• Strengthening world economic growth, particularly in developing countries, provides a foundation for gains in trade and U.S. agricultural exports. However, competition in global markets remains strong.

• Much of the growth in HVP exports is for horticultural products and animal products.

• After declining from near-term high levels, growth in the value of bulk product exports (grains, oilseeds, cotton, and tobacco) reflects expected price increases and some gain in bulk volume.

• U.S. agricultural exports rise more than imports, with the agricultural trade surplus rising to $21 billion in fiscal year 2012.

Global Agricultural Trade: February 2003 Baseline

With strengthening world economic growth, global agricultural trade is projected to rise throughout the baseline. Agricultural trade will remain very competitive, reflecting expanding production in a number of foreign countries.

The economies of developing countries provide a foundation for gains in demand for agricultural products and increases in trade. Broad-based economic growth and increasing urbanization lead to diet diversification in most developing regions, generating increased demand for livestock products and feeds, as well as for fruits, vegetables, and processed products. Developing-country import demand is further reinforced by population growth rates that remain nearly double the growth rates of developed countries.

International trade in animal products, however, remains heavily dependent on demand from developed countries and from market access achieved under existing global trade agreements. Strong regional preferences for domestically produced meat are expected to motivate growth in feed grain trade, especially to those regions where limited land availability or agro-climatic conditions preclude expanding domestic crop production, such as North Africa, the Middle East, and East and Southeast Asia.

Strong agricultural trade competition is expected in international commodity markets, not only from traditional exporters such as Argentina, Australia, and Canada, but also from countries that are in the process of investing in previously underdeveloped resources including Brazil, Hungary, Romania, Russia, Ukraine, and Kazakhstan.

The baseline does not incorporate any effects of agreements not formally ratified by November 2002. Examples of potential multilateral agreements that could have significant impacts on agricultural trade during the projection period but are not reflected in the baseline include:

• Accession to the World Trade Organization (WTO) by Russia or any other country not formally admitted as of November 2002;
• Enlargement of the European Union (EU) to add one or more Central or East European countries; and
• Expansion of North American Free Trade Agreement (NAFTA) to include additional countries.

Rising unabated since the late 1980s, global trade in soybeans and soybean products surpassed wheat—the traditional leader in agricultural commodity trade—and total coarse grains in 2000. Continued strong growth in global demand for vegetables oils and protein meal feedstuffs is expected to maintain the trade supremacy of soybeans and its products throughout the next decade.

• These three major commodity groupings—wheat, coarse grains, and oilseeds (including soybeans)—compete with each other and with other crops for increasingly limited temperate cropland. Of the major crops, only oilseeds—notably soybeans in central Brazil and palm oil in Indonesia's Kalimantan province—are successfully tapping into new reserves of virgin tropical soils. As a result, oilseed production and trade can be expected to expand with growth in demand for vegetable oils and protein meals.
• Virtually no growth in overall global wheat and coarse grains trade occurred in the 1990s, largely reflecting reductions in imports by the transition economies of the former Soviet Union (FSU) and Central and Eastern Europe (CEE). With those demand adjustments largely complete, the continuing growth in import demand from other countries leads to overall gains in global grain trade. Both FSU and CEE countries are expected to be increasingly important export competitors in future grain trade.

Definition of country groups

Growth in wheat imports is concentrated in developing countries, primarily Africa, the Middle East, and Asia, where robust growth in income and population underpins increases in demand. Important growth markets include China, Brazil, Algeria, Egypt, Indonesia, and the Philippines.

• World wheat trade (including flour) expands by nearly 29 million tons (27 percent) from 2003 to 2012.
• Developing countries in Sub-Saharan Africa, North Africa, and the Middle East account for over one-third of world wheat imports.
• Limited growth in domestic wheat production in the face of strong income growth maintains Brazil as the world's leading wheat importer through most of the baseline.
• China is expected to experience rapid growth in wheat imports and overtakes Brazil as the world's leading wheat import market late in the period. Land-use competition and increasing water limitations are projected to slow growth in Chinese wheat production. As a result, China turns to the international market to supplement internal supplies.

The top five wheat exporting nations (the United States, the EU, Canada, Argentina, and Australia) account for about 75 percent of world trade through 2012. This is down from an average of 83 percent during 1996-2001. The U.S. market share of global wheat trade holds steady at about 21 percent under intense competition from the other traditional wheat exporters and from an emerging set of competitors including Ukraine, Kazakhstan, Russia, Hungary, and India. Recent market-share gains by this latter set of non-traditional exporters signal increased competitiveness in international wheat markets.

Definition of country groups

• The United States remains the world's leading wheat exporter through the projection period.
• Wheat production in Argentina, Australia, and Canada recovers from drought-reduced levels in 2002. Wheat export shares for Argentina and Canada remain fairly stable from 2003 to 2012. The EU and Australia benefit from plentiful supplies and favorable exchange rates to expand wheat exports and gain market share throughout the period.
• In Canada, increased demand for barley and oilseeds are expected to keep wheat area from expanding. Only modest yield improvements curtail production growth, while expanding domestic demand limits export growth.
• In Australia, wheat competes with barley, oilseeds, and wool for a land base that is characterized by limited rainfall for crop production and grazing. Yield gains are the principal factor behind rising Australian wheat production and exports during the baseline.
• EU wheat exports are fueled by a projected decline in the cereal area set-aside rate, continued internal production incentives that favor wheat, abundant wheat stocks, and a favorable exchange rate. However, increases in domestic use limit export gains. Nonetheless, the EU share of world wheat trade is projected to increase from 13.5 percent in 2003 to 15.5 percent by 2012.
• Several former Soviet bloc countries, particularly Ukraine, Kazakhstan, Russia, and Hungary, emerge as steady suppliers of wheat to international markets. The Black Sea is an important outlet for wheat exports from the FSU and CEE. Low costs of production and on-going investment in their agricultural sectors are expected to support FSU and CEE wheat export market share at about 17 percent through the period, compared with an average of less than 11 percent during 1996 to 2001.
• In India, huge government-held stocks and strong government production incentives maintain large domestic supplies through the projections. In an effort to bring down stocks, the government is expected to continue efforts to boost domestic consumption as well as to export from government-held stocks, thereby maintaining a steady flow of low-quality wheat exports through the baseline period.

• Under the Uruguay Round Agreement on Agriculture, the EU's volume of wheat exported with subsidies is subject to ceilings. The need for export subsidies hinges on the relationship between internal EU prices, international market prices, and the EU exchange rate. Although the euro appreciates early in the period, weakness through the latter half of the period and reduced levels of EU internal cereal support prices implemented under Agenda 2000 reforms and rising global wheat prices combine to allow the EU to export wheat without subsidy throughout the projections. Thus, EU wheat exports are not constrained by WTO subsidized-volume limits.
• Under Agenda 2000 reforms, the set-aside rate for cereals was set at 10 percent. However, since the EU is projected to be able to export all wheat and some coarse grains without subsidies, based on market conditions, internal producer pressure is assumed to result in a reduction of the mandatory 10 percent set-aside to 7.5 percent in 2003 and to 5 percent by 2005.
• Despite the smaller set-aside rate, wheat stocks are not expected to rebuild to the excessive levels of the past. Instead, surplus production is absorbed by increases in domestic demand and exports. Wheat is fed extensively to hogs in the EU. By allowing the set-aside rate to fall, the EU keeps feed consumption high while exporting without subsidy.
• Under the baseline, the EU is assumed to restrict wheat imports to 6 million tons through the projection period to meet domestic policy goals.
• By equalizing compensatory payments between cereals and oilseeds, and by maintaining a single cereals intervention price, Agenda 2000 put an emphasis on wheat production. Apart from the assumed set-aside decline and limitation on wheat imports, no additional incentives to expand wheat area are projected. (For additional details, see the Agricultural Trade chapter of the February 2003 USDA baseline report, pp. 83-84).

Growth in trade of coarse grains is strongly linked to expansion of livestock activities in regions unable to meet their own forage and feed needs, particularly North Africa, the Middle East, and East and South East Asia.

• Corn is the dominant feed grain traded in international markets. Corn accounts for an average of 72 percent of all coarse grain trade through the projection period, followed by barley (17 percent), and sorghum (7 percent).
• Hogs and ruminants, such as cattle and sheep, are capable of digesting a broad range of feedstuffs, making demand relatively price sensitive across alternate feed sources. However, as pork and poultry production become increasingly commercialized, they also demand a higher minimum quality of feedstuffs, particularly related to energy and protein content. This commercialization of livestock activities has been a driving force behind the gains in global protein meal markets and the growing dominance of corn in international feed grain markets.
• Trade in barley, sorghum, and other coarse grains is becoming increasingly specialized and driven by specific end-use demands.

Definition of country groups

Rising incomes and associated gains in per capita meat consumption, particularly in developing countries, are important drivers of projected gains in coarse grain use and trade. Key growth markets include China, North Africa, the Middle East, and Mexico.

• World coarse grain trade expands by nearly 25 million tons (24 percent) from 2003 to 2012.
• About two-thirds of global coarse grain supplies is used as animal feed. Industrial uses, such as starch production, ethanol, and malting, are relatively small but growing. Food use of coarse grains, concentrated in parts of Latin America, Africa, and Asia, has generally declined over time as consumers tend to shift consumption toward wheat, rice, or other foods, as their incomes rise.
• A key factor that weakened global coarse grain demand during the 1990s was the drop in livestock numbers and feeding that occurred in the FSU and CEE as these economies underwent structural reform. These adjustments are largely completed. In the projections, steady longrun growth in the livestock sectors of developing countries in Asia, Latin America, North Africa, and the Middle East is expected to overtake and replace the lost feed demand of the FSU and CEE.
• Already a major destination for global feedstuffs, North Africa and the Middle East experience continued growth in import demand for grain and protein meals through 2012 as rising populations and an increasing average growth rate in real gross domestic product sustain strong demand growth for home-grown animal products. Feed requirements have grown in step with livestock and poultry sectors in North African and Middle East countries. However, limited arable land and inadequate water resources constrain their capacity to produce feed grains and oilseeds, resulting in increasing dependency on international markets for commodities.

Definition of country groups

The United States dominates world trade in coarse grains, particularly corn. The U.S. share of world corn trade is expected to grow from less than 60 percent in recent years to over 72 percent by 2012 as few countries have similar capabilities to respond to rising international demand for corn. China's trade share drops, but the U.S. corn sector faces increased competition from Argentina and Eastern Europe, which also increase their shares of the global corn market.

• Argentina, with a small domestic market, remains an important corn exporter as its economy recovers and area and investments gradually return to corn production over the baseline.
• China's corn exports decline in the baseline reflecting strengthening domestic demand driven by rapidly expanding livestock sectors.
• The Republic of South Africa continues exporting some corn to neighboring countries in southern Africa, but amounts remain small (less than 2 million tons).
• Corn exports from CEE countries nearly triple to about 7 million tons by 2012. Favorable resource endowments, increasing economic openness, and greater investment in their agricultural sectors are behind projected gains in production and trade.
• Brazil continues to export small amounts (less than 1 million tons) of corn through the period in response to niche market demand for non-genetically modified grain, but strong growth in domestic demand prevents corn exports from increasing.

China remains a net corn exporter through most of the projection period, reflecting abundant domestic supplies and strong producer preferences in production. Later in the period increased domestic livestock production and demand for feed, in response to income growth and increased meat demand, overtake China's internal supplies and total corn imports exceed exports. However, China continues to export corn throughout the projection period, although in declining amounts, due to regional supply and demand differences—Northern China runs a corn surplus, while Southern China is corn deficit.

Corn is the favored crop in Northeast China. The proximity to South Korea and other Asian markets provides a ready source of demand, while various government measures—including subsidies for sales of corn from state grain reserves, waiver of certain transportation construction taxes, and a rebate of the value-added tax on exported corn—keep corn exports competitively priced in international markets.

China experienced a large buildup of corn stocks in the mid- to late-1990s due to a combination of favorable weather and local self-sufficiency policies that boosted grain production to record levels. Large stocks and continued strong domestic production result in domestic corn supplies exceeding domestic needs through most of the projection period. (For additional details, see the Agricultural Trade chapter of the February 2003 USDA baseline report, pp. 89-90).

Definition of country groups

Global barley trade expands throughout the baseline, driven by rising demand for both malting and feed barley.

• Feed barley imports by North African and Middle Eastern countries—where barley is preferred as a specialty feed for large populations of camels, goats, and sheep—grow steadily through the period. In the mid-1990s, corn overtook barley as the principal coarse grain imported by these countries, due mainly to rising poultry production. This pattern is expected to continue through the projection period. However, the North African and Middle East region is expected to remain the world's largest barley importing block.
• Saudi Arabia—the world's foremost barley importer—accounts for over 30 percent of world barley trade through the baseline. Saudi Arabia's barley imports are used primarily as a ruminant feed.
• International demand for malting barley is boosted by strong growth in beer demand in many developing countries, notably China—the world's largest malting barley importer since the mid-1990s. Malting barley is the leading ingredient used by brewers to produce beer, and China's beer demand is rising steadily due to growth in incomes and population.

Definition of country groups

Historically, global barley exports have originated primarily from the EU, Australia, and Canada. However, Ukraine and, to a lesser extent, Russia have emerged as important competitors in international feed barley markets and remain so throughout the baseline period.

• The EU, with abundant barley supplies, doubles its barley exports over the projection period to 7.8 million tons, accounting for over 38 percent of world trade.
• The FSU remains a major barley exporter throughout the baseline. However, exports decline from record levels in 2002 to under 7 million tons by 2012 as production in Australia and Canada recovers from 2002 crop-year droughts. Exports return to more normal levels for both countries. Together, the FSU and EU account for over 70 percent of world barley trade by the end of the period.
• Malting barley is of much higher quality and commands a substantial price premium over feed barley. In the longrun, malting barley's price premium is expected to strongly influence planting decisions in Canada and Australia, and malting barley's share of total barley area rises in the latter half of the period.

World sorghum trade increases gradually through the baseline, driven entirely by Mexico. Mexico favors sorghum imports as less politically sensitive than corn imports for domestic feed rations.

• Mexico—the world's leading sorghum importer—increases its sorghum imports to over 6 million tons by 2012 (almost 74 percent of world import demand).
• Japan imports a fairly stable volume of sorghum throughout the period in an effort to diversify its feed grains.
• The United States accounts for an increasing share of world sorghum exports, rising to almost 90 percent in 2012. Australia's and Argentina's combined share falls from 14 to 7 percent during the period as sorghum becomes less profitable relative to other cropping choices in both countries.

Strong income and population growth in developing countries generates increasing demand for vegetable oils for food consumption and for protein meals used in livestock production. World soybean oil trade grows at a robust 4 percent through the projection period compared with rates of 2.8 and 1.9 percent for soybeans and soybean meal.

• Many countries with limited opportunity to expand oilseed production continue investment in oilseed crushing capacity— e.g., China, North Africa, the Middle East, and South and Southeast Asia. As a result, oilseed import demand is maintained above protein meal import demand throughout the baseline. However, strong competition in international protein meal markets is expected to pressure crushing margins and shift some of the import demand for oilseeds to cheaper meals.
• This steady competitive pressure forces many inefficient crushers out of business. Many importing markets remain deficit in vegetable oils and growth in vegetable oil import demand exceeds growth in import demand for either oilseeds or protein meals. Incentives to produce high-oil content oilseeds—e.g., rapeseed and sunflower seed—and palm oil strengthen through the baseline period.
• Because of its effect on world commodity markets, China's policy of expanding domestic crushing capacity, instead of importing protein meal and vegetable oil, significantly influences the composition of world trade, causing international import demand for soybeans and other oilseeds to be greater than would otherwise be the case.

Definition of country groups

• The EU is traditionally the world's leading importer of soybeans and soybean meal. However, abundant EU grain stocks and lower internal grain prices (due to Agenda 2000 reforms) combine to reduce the relative cost of feeding grains versus soybean meal. As a result, increases in grain feeding are expected to slow the growth in EU soybean meal consumption. This results in slightly declining soybean imports.
• China accounts for over 63 percent of the world's growth in soybean imports over the next 10 years. Significant investment in oilseed crushing infrastructure by China, seeking to capture the value-added from processing oilseeds into protein meal and vegetable oil, drive strong gains in soybean imports.
• East Asia's trade outlook is dominated by a continuing shift from importing feedstuffs to importing meat and other livestock products. As a result, this region's import demand for protein meal and oilseeds slows over the baseline. This process occurs most noticeably in Japan.

• The three leading soybean exporters—the United States, Brazil, and Argentina—account for 90 percent of world trade through the baseline.
• Driven by continuous area gains, Brazil overtakes the United States as the world's leading exporter of soybeans mid-way through the period.
• Limited expansion of acreage and increasing domestic use eventually constrict exportable U.S. supplies.
• Argentina's substantial crush capacity and an export tax structure, favoring domestic crushing of whole seeds and exporting of the products, hold soybean exports steady at just under 9 million tons.

Definition of country groups

• Despite increased domestic grain feeding, the EU remains the world's principal destination for soybean meal through the projection period, as favorable import prices for meal relative to soybeans pressure crush margins and curtail soybean imports in favor of the products.
• Southeast Asia, Latin America, North Africa, the Middle East, the former Soviet Union, and Central and Eastern Europe remain important growth markets for soybean meal.
• Significant expansion in domestic crushing in China and large imports of oilseeds in the baseline replace the temporary period of soybean meal imports seen in the late-1990s. By the end of the period, China becomes a net exporter of over 1 million tons of soybean meal.

• In international protein meal markets the three major exporters—the United States, Brazil, and Argentina—see their share of world trade grow from 75 to about 80 percent through the baseline.
• Small but steady soybean meal exports from the EU and India are joined by increasing exports from other South American countries (mostly Paraguay) and China to keep international protein meal markets very competitive.
• Argentina increases its world-leading share of soybean meal exports from 36 to almost 42 percent, while the export shares of Brazil and the United States remain steady.
• Strong growth in domestic meal consumption due to rapid expansion of the poultry and pork sectors limits growth in Brazil's soybean meal exports.

Definition of country groups

• Income and population growth drive strong gains in soybean oil import demand in North Africa, the Middle East, Latin America (particularly Mexico, the Caribbean, and Central America), and Southeast Asia. However, these gains are partially offset by slower growth in the mature markets of Europe, Japan, and the United States.
• India and China account for an increasing share of world soybean oil imports, due to burgeoning domestic demand for vegetable oils and limitations on domestic production of oilseeds.
• In China, growing demand for high-quality vegetable oils outpaces domestic oil production and fuels expanding soybean oil imports. Land-use competition from other crops constrains area planted to vegetable oil crops in China.
• In India, there is no strong preference for soybean oil per se; however, relatively lower tariffs on soybean oil (held in check by WTO tariff binding commitments) than on other vegetable oils favor continued strong imports of soybean oil through the period. Land-use competition also limits oilseed area in India.

A strong emphasis on exporting soybean products pushes Argentina's and Brazil's combined share of world soybean oil exports from 62 to 68 percent by the end of the baseline.

Competition from South America in soybean and soybean meal trade becomes stronger, continuing a long-term trend and reducing the U.S. trade share in global soybean and product markets. Increases in both Argentina's and Brazil's soybean production reflect gains in both yields and area. Soybean area gains are strongest in Brazil.

• Argentina's total crop area expands slowly (about 1 percent per year) over the period due to extensive double-cropping, further adjustments to crop-pasture rotations, and the addition of marginal lands in the Salta-Tucuman region in the northwest part of the country. Soybeans are the major beneficiary of land expansion.
• In Brazil, total crop area expands at a rapid 2.5-percent annual rate as agricultural production continues to push onto undeveloped land in the country's vast interior regions. As in Argentina, soybeans are the major beneficiary of land expansion and planted soybean area increases over 3 percent per year.
• Transportation infrastructure development remains the key to the pace of area expansion in Brazil and the competitiveness in international markets of agricultural production from the country's interior regions.
• Brazil exports significant amounts of both soybeans and soybean meal, with its share of global trade in these markets on a combined basis growing from 24 to 29 percent.
• Argentina exports more soybean meal than Brazil and more soybean meal than soybeans, reflecting the country's substantial crush capacity as well as its small domestic consumption of soybean meal. (For additional details on Argentine exports, see the Agricultural Trade chapter of the February 2003 USDA baseline report, pp. 103-104).

Definition of country groups

Completion of the Multi-Fiber Arrangement (MFA) phaseout on December 31, 2004, will eliminate quotas and other trade restrictions that have governed international trade in textiles and apparel for more than 30 years. These restrictions are being removed as part of WTO commitments and are having a major influence on world cotton trade patterns. For apparel production, labor is the decisive input factor. As a result, cloth and raw cotton consumption will increase in developing countries where labor costs are lowest. In contrast, high-cost labor markets in Europe and East Asia continue to reduce their cotton imports through the baseline.

• The textile industries in China and South and Southeast Asia are the major beneficiaries of MFA phaseout. Much of the increase in world imports is attributable to China, whose textile industry begins to import record amounts of cotton in the latter half of the forecast period.
• India overtakes Indonesia as the world's second-largest cotton importer about mid-way through the baseline period. India's textile industry grew in the wake of domestic policy reforms early in the 1990s, and will continue to benefit from additional recent reforms.
• Other countries with low labor costs that are most likely to gain from MFA phaseout include Bangladesh, Indonesia, Philippines, Thailand, and Vietnam.
• In contrast, Turkey relinquishes its place as one of the world's largest cotton importers. In recent years, Turkey's textile industry has benefited from favorable trade access to the EU, its major export market for textiles and apparel. However, the end of the MFA quotas will give lower cost competitors the same favorable access to these EU markets.
• Similarly, the EU, Japan, Taiwan, and South Korea all steadily reduce their cotton imports as textile trade reforms and/or higher wages in these countries drive textile production to lower wage countries.

Definition of country groups

The MFA phaseout is expected to speed the transfer of raw cotton production to countries whose resource endowments and technology result in the lowest cost production. Land is a key input factor. Traditional producers with large land bases suitable for cotton production are expected to benefit from the post-MFA phaseout trade patterns. Such producer/exporter regions include the United States, Sub-Saharan Africa, the former Soviet Union, Australia, and Brazil.

• The United States remains the world's leading cotton exporter throughout the baseline with annual exports (upland and extra-long staple) of between 10.5 and 10.6 million bales.
• Central Asia, the principle competitor of the United States on world raw cotton markets for the last decade, is overtaken by Sub-Saharan Africa early in the forecast period. Government policies in Central Asia promoting investment in textiles have increasingly resulted in exports of textile products rather than exports of raw cotton. Central Asia's textile industries continue to grow faster than cotton production in the region, and exports decline slowly during the period.
• Sub-Saharan Africa's exports have risen in large part due to economic reforms. A large correction in the foreign exchange value of the currency (the CFA Franc) of the major cotton exporting countries of West Africa in 1994 led to nearly a decade of growth in West Africa's cotton production. As West Africa's production gains began to lag at the end of the 1990s, several southern African countries began increasing their cotton production, aided by reforms like ending marketing board monopolies. Continued increases in output are expected as producers take advantage of more export-oriented government policies.

Definition of country groups

Global rice trade is projected to average 2.4-percent annual growth from 2003 through 2012. By 2012, global trade is projected to exceed 33 million tons, more than 25 percent above the record set in 1998. Rice trade as a share of total use remains very small, at only 6 to 7 percent, relative to other cereals.

• International rice trade consists predominantly of long- grain (indica) varieties, which also account for the bulk of trade growth over the next decade. Indica rice is imported by a broad spectrum of countries in Asia, the Middle East, Sub-Saharan Africa, and Latin America. Indonesia, Iran, Iraq, Philippines, and Saudi Arabia are among the top long-grain markets.
• In contrast, most medium-grain (japonica) imports are by middle and higher income countries, primarily Japan, South Korea, Turkey, Taiwan, and Jordan. Expansion in medium-grain trade is much slower, despite increases in medium- and short-grain rice imports by Japan and South Korea (since 1995) and Taiwan (since 2002) under WTO market access commitments.
• Food demand from Indonesia's burgeoning population drives escalating rice imports. Already the world's leading rice importer, Indonesia's import share grows from 13 to 20 percent in the baseline. Land constraints and already high crop intensity indexes suggest little opportunity for significantly expanding production.
• The African and Middle East regions are major destinations for internationally traded rice. Strong demand growth driven by rapidly expanding populations and rising incomes confront limited opportunities to expand domestic production, due to agro-climatic reasons in North Africa and the Middle East and to political and infrastructure deficiencies in Sub-Saharan Africa.

Definition of country groups

Asian producing countries dominate trade in rice through the projection period.

• Thailand and Vietnam, the two leading exporters of long- grain rice, account for about 44 percent of all rice exports in the baseline. Yield gains in production and declining domestic per capita consumption rates account for the expansion in exports for both countries.
• India emerged as an important rice exporter in the mid- 1990s. Apart from small amounts of high-quality basmati, most of India's rice exports are low-quality long-grain rice from burdensome government stocks. High internal price supports encourage over-production, stock accumulation, and a steady flow of exports through the period.
• Rice exports from China—typically the world's fifth-leading exporter—grow only modestly as production is shifting to higher quality but lower yielding varieties in response to domestic market signals. Exports are mostly short-grain japonica to nearby markets and low-quality long-grain indica rice to Indonesia and other price-sensitive long-grain markets.
• High-quality basmati rice is an important share of Pakistan's rice exports. Although rice has been an important foreign exchange earner, Pakistan has little ability to expand rice area, and production is confronting a growing water shortage. As a result, its exports grow slightly but fail to return to the 2.4-million metric ton record of 2000.

Increased market access achieved under existing global trade agreements was behind much of the trade gains in animal products of the past decade. During the baseline, per capita income growth in a broad number of importing countries is the driving force behind rising global meat demand.

• Beef exports from Australia and New Zealand, mostly destined for lower valued beef markets in the United Sates and Asia, remain fairly stable through the baseline.
• Argentine exports of fresh/chilled beef and processed products remain strong due to competitive pricing into Asian and European markets that are less concerned about foot and mouth disease (FMD) status.
• EU beef is not competitive in international markets because of domestic pricing policies and cannot be exported without subsidies. EU beef exports expand until they hit their annual WTO export-subsidy limit of 817,000 metric tons mid-way through the projection period.
• Pork exports from CEE countries, particularly Hungary and Poland, rise steadily in the baseline, aided by pre-accession trade agreements with the EU.
• Brazil's rapidly increasing pork production is expected to be very competitive and its pork exports rise strongly. Brazil does not gain nationwide FMD-free status and focuses its pork exports on the EU, Russia, and Asian markets other than Japan.
• The United States encounters increasing competition in international poultry markets from Brazil, the EU, and several CEE countries.
• An important share of Brazil's rapidly increasing poultry production enters international markets at very competitive prices and Brazil's poultry exports rise strongly.
• Thailand's poultry exports are slowly squeezed out of the EU market as a result of increasing competition from CEE countries, which benefit from pre-accession trade agreements.

Definition of country groups

Most beef trade occurs between developed countries and is closely linked to market access gains already achieved under prior trade agreements.

• Higher income countries of East Asia, such as Japan and South Korea, increase imports of beef as their domestic cattle sectors are constrained by land availability.
• U.S. beef imports, primarily from Australia and New Zealand for ground beef and other processed products, decline slightly through the period. This declining trend, combined with robust growth of U.S. higher-quality beef exports to Mexico and East Asian markets, results in the United States becoming a net exporter of beef late in the projection period.
• No Russian tariff-rate quota (TRQ) for beef is assumed in the baseline. Russia remains a large market for EU subsidized beef exports, as rising consumer demand continues to outpace increases in domestic production.

Definition of country groups

• Higher income countries of East Asia, such as Japan and South Korea, increase pork imports as their domestic hog sectors are constrained by imported feed costs and environmental issues.
• Russia remains a major destination for competitively priced pork exports from the EU, Brazil, and the United States through the period as demand growth continues to outpace Russian meat producers' ability to respond.

Definition of country groups

• Russia remains the world's foremost poultry importer as rising consumer demand continues to outpace increases in domestic production. However, Russian policymakers are coming under rising pressure to limit poultry imports in support of domestic producers.
• No Russian poultry TRQ is assumed in the baseline. However, other non-tariff measures are applied to slow the growth in poultry imports. The import slowdown has the effect of raising domestic prices and spurring domestic poultry production and feed demand. As a result, wheat and barley feeding, as well as corn imports, rise over the period.
• Poultry imports into Saudi Arabia continue to rise through the baseline. However, consumer preference for freshly killed birds keeps domestic production strong.
• Meat consumption growth in China is met largely by expanding domestic production, but imports, particularly poultry, are also projected to grow.
• Strong economic growth in Mexico, along with trade liberalization under NAFTA, will generate increases in poultry imports.