Agricultural Baseline Projections: Baseline Presentation, 2004-2013

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

Summary of Projections: February 2004 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. The projections were prepared in October through December 2003 prior to the diagnosis of a case of bovine spongiform encephalopathy (BSE) in an adult Holstein cow in Washington State in December 2003.

Stronger domestic and international growth, following the economic slowdown of 2001 through early 2003, provides a favorable demand setting for the U.S. agricultural sector. Despite declines from a recent peak, a relatively strong U.S. dollar (by historical standards) and trade competition from countries such as Brazil, Argentina, and the Black Sea region are constraining factors on U.S. exports for some agricultural commodities. Nonetheless, improving economic growth, particularly in developing countries, provides a foundation for gains in global consumption and trade, U.S. agricultural exports, and farm commodity prices. Domestic demand also increases for meat, feeds, horticultural products, corn used in ethanol production, and food use of rice. As a result, market prices and cash receipts rise, which help to improve 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.

Agricultural export markets are important for sustaining prices and farm revenues. Exports account for a growing share of U.S. farm cash receipts, and are a key factor in determining gains in gross farm income.

Definition of country groups

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

• Economic gains and population 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 over 4 percent in 2004-13 is significant in comparison to the economic contraction of the 1990s. Economic reforms undertaken to shift to market economies and European Union (EU) enlargement contribute to the improved growth prospects. 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.
• Although declining somewhat in the near term, the U.S. dollar is assumed to stay at historically strong levels throughout the projections as financial market returns attract financial flows into the United States. The strength of the dollar is a constraining factor for U.S. agricultural competitiveness and export growth.

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.
• Competition in global wheat trade continues with traditional exporters (Australia, Argentina, Canada, and the EU) as well as with more-recent exporters from the Black Sea region.
• Brazil and Canada provide competition to U.S. pork exports, while U.S. exports of broilers face strong competition from Brazil and Thailand.

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, is projected to exceed the prior record in 2005 through 2013.

• U.S. agricultural exports face continued strong trade competition throughout the baseline period. A relatively strong U.S. dollar by historical standards, despite declines from a recent peak, also is a constraining factor on U.S. agricultural exports.
• 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 $72 billion by the end of the projections.
• U.S. agricultural imports rise by about the same amount as exports, with the agricultural trade surplus relatively stable at $10 to $12 billion during the projection period.

Strengthening market conditions lead to rising prices, increases in gross farm income, and improvement in the financial condition of the U.S. agricultural sector. Net farm income declines through much of the projections period from a high 2003 level, reflecting lower government payments and adjustments in the cattle sector.

• Gross cash income gradually increases as crop and livestock receipts increase due to growing domestic and export demands.
• Production expenses are projected to increase at slightly less than the general inflation rate. Cash operating margins tighten somewhat, with cash expenses increasing from 75 percent of gross cash income in 2004 to about 78.5 percent at the end of the projections.
• Government payments become relatively less important over time as a greater share of gross cash income comes from the marketplace.
• Net farm income projections for the next decade average about $51 billion, compared to $47.6 billion in the 1990s. Income increases toward the end of the projections and reaches $51.5 billion in 2013.
• Increasing gross cash income and relatively low interest rates through the baseline assist in asset accumulation and debt management. Debt-to-asset ratios decline to about 14 percent in the last several years of the projections, compared with over 20 percent in the mid-1980s and 14.7 percent in 2003.

Macroeconomic Assumptions: February 2004 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 average historical levels beginning in 2005. The baseline's macroeconomic assumptions were completed in September 2003, incorporating data and other information available at that time.

The United States and world economies continue to become increasingly interdependent both through growing trade and through financial market integration. The United States, as the world's largest economy with around 30 percent of global gross domestic product (GDP) and the largest capital market, is also the engine of world growth. Thus, what happens in the United States will continue to play a large role in determining economic conditions around the world. However, because of growing economic interdependence, international macroeconomic conditions affect U.S. consumer incomes, the U.S. exchange rate, global trade, inflation, and interest rates. All these factors have major effects on U.S. agriculture.

The baseline assumes that U.S. GDP growth improves in the near term (increasing to 3.3 percent in 2004 and 3.5 percent in 2005) as the economy continues to recover from the economic slowdown in 2001 through early 2003. U.S. growth then returns to a longrun sustainable rate near 3.0 percent in 2006. While there may have been some overinvestment in technology in the late 1990s, ongoing U.S. technological advances associated with computing and telecommunications will provide support for worldwide productivity growth throughout the 2004-13 projection period. As the U.S. economy recently has been showing solid growth in investment in new technology, other economies will follow.

• A similar pattern is expected for global economic growth, with sustained gains projected in the longer term for most countries in the world. Despite modest European growth expected in 2004, most of the world will be moving much closer to normal economic growth with trend rates in 2006 and beyond. The modest expected decline in real (adjusted for inflation) oil prices in 2004 will give an extra boost to Asia and its manufacturing sector, which is far more dependent on energy for GDP growth than more developed economies.
• 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 global food demand growth in the baseline and become a more important destination for U.S. exports. Relatively high population and income growth, along with large food responsiveness to income growth in these countries, underlie this projection.

Definition of country groups

World economic growth is projected to average 2.3 percent annually between 2001 and 2005, before increasing to approximately a 3.2-percent average between 2006 and 2013.

• Increased global purchasing power and population growth are essential for gains in 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, vegetables, and processed foods. These consumption shifts increase import demand for feedstuffs and high-value food products. For the United States, this has included increases in meat and processed-food exports.

Definition of country groups

Developed economies are projected to grow at rates similar to those of the 1990s, averaging 2.5 percent in 2006 and beyond.

• The adoption of the euro continues to enhance cross-border trade and investment within the European Union (EU). Enlargement to include countries of Central and Eastern Europe implies closer integration, creating more trade and investment opportunities.
• In spite of this, the EU does not grow as rapidly as the United States because lingering structural rigidities, particularly in labor markets, constrain growth.
• Japan continues to face significant economic problems, largely the result of its ongoing banking problems and persistent deflation. Japan's share of world GDP is expected to decline to less than 13 percent by 2013, down from about 18 percent in 1991.

Definition of country groups

Economic growth in developing countries is projected at a 5.1 percent annual rate in 2006-13. Long-term growth in the transition economies (countries of the former Soviet Union and Central and Eastern Europe) is projected at around 4.2 percent annually, a significant reversal from the contraction of their economies in the 1990s. Furthermore, strong growth performance throughout the developing and transition countries should encourage relative stability throughout the regions.

• Significant long-term growth exceeding 4 percent is projected for Latin America. This will attract foreign capital inflows, sustaining growth.
• Growth in East and Southeast Asia is projected to be about 6 percent for the next decade, but will still be below the very strong average growth of over 7 percent in the 1990s.
• China's economic growth has been consistently the strongest in Asia, and is expected to average around 7 percent over the next decade.
• Poland, Hungary, and the Czech Republic all grow near 4.5 percent due to their successful integration into the global economy and their accession to the European Union.
• Russia, Ukraine, and the other former Soviet Republics benefit from their shift to market economies, with annual GDP gains of more than 4 percent projected for the next decade.

Definition of country groups

Slowing population growth around the world will be a major factor that constrains the growth of agricultural demand over the next decade and beyond. Historically, about 70 percent of increases in food use have 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 an average of about 1.1 percent per year during the projection period.
• Developed and transition economies have very low projected rates of population growth in the baseline, 0.4 and 0.1 percent respectively. The projected population growth rate for the United States is the highest among developed countries, in part reflecting immigration.
• Population growth rates in developing economies decline by almost half between the 1970s and the projection period, but remain above those in the developed and transition economies. As a consequence, the share of world population accounted for by developing countries continues to increase over the projection period.
• China's population growth rate slows from 1.5 percent per year in 1981-90 to 0.6 percent in 2006-13. The population growth rate in India, the world's second most populous nation, is projected to decline from 2.1 to 1.3 percent per year over the same periods, but this growth narrows the gap between its population and China's.
• Brazil's population growth rate falls from 2.1 percent per year in 1981-90 to 1.0 percent annually in 2006-13, and Sub-Saharan Africa's population growth rate declines from 2.9 to 2.0 percent per year in the same years.

While there is a depreciation of the U.S. dollar in the near term, the projected long-term level is high by historical standards. 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.

• When strong GDP growth returns in the United States, the dollar will likely appreciate.
• The U.S. dollar stays strong because capital flows into the United States to take advantage of well-functioning financial markets, a relatively risk-free environment, and high expected long-term financial returns.
• U.S. exports of bulk commodities and horticultural products tend to be the most sensitive agricultural products to the strong U.S. dollar due to relatively stronger global trade competition.

Definition of country groups

Inflation rates, which came down in the 1990s (except in the transition economies), are projected to remain low through 2013.

• For developed countries and the world as a whole, 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 30 percent in the 1990s, to less than 3.5 percent per year in the projection period.
• Inflation rates in developing countries are also projected to fall, from over 7 percent to just over 5 percent. Inflation in Asia declines to rates comparable to those in developed countries. Those in Latin America and Africa and the Middle East, while declining, will remain substantially above inflation rates in the rest of the world.
• As the U.S. and world economies move solidly into the expansion phase, inflationary pressures will begin. In response, the Federal Reserve Board and central banks in other countries are assumed to raise short term interest rates to prevent an inflationary spiral. In addition, as world economies grow more rapidly, demand for credit will rise and further boost interest rates. Finally, a weaker dollar relative to the yen and the euro will require U.S. interest rates to rise to continue financing the trade deficit. However, low inflation will keep interest rates from moving to the high levels seen in the 1980s.

Oil prices declined in 2001 from the high levels of 2000, but then moved back up in 2003 as uncertainties in the international oil market continued from an unstable situation in Iraq and as the economic expansion in developing Asia, especially in China, boosted oil demand. Continued growth in these economies will keep oil demand strong in 2004, but crude oil prices will drop modestly as some new crude supplies come onto the market. From 2005 forward, oil prices are projected to rise, but only slightly faster than the general inflation rate. These projections are generally consistent with the Energy Information Administration's January 2003 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 relatively high energy dependence.
• Oil prices have historically affected prices of natural gas and supply conditions for nitrogen-based fertilizer. However, the links between the oil and natural gas markets have weakened significantly due to dramatic growth in the demand for natural gas and deregulation throughout the natural gas supply and demand system. As a result, prices for natural gas and fertilizer may be somewhat volatile over the next several years.

More Detailed Data

Baseline Macroeconomic Data

U.S. Crops: February 2004 Baseline

Improved U.S. and global economic growth, following the slowdown of 2001-03, provides a favorable demand setting for field crops, supporting longer run increases in consumption, trade, and prices. However, a relatively strong U.S. dollar, despite declines from a recent peak, and trade competition from areas such as Brazil, Argentina, and the Black Sea region constrain U.S. exports for some crops.

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 2002 Farm Act continues planting flexibility provisions, giving farmers almost complete flexibility in deciding which crops to plant. Additionally, marketing assistance loans are continued.

The maximum area in the Conservation Reserve Program (CRP) was increased to 39.2 million acres under the 2002 Farm Act, up from 36.4 million acres under the 1996 Farm Act. Under the 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 expansion of the CRP under the 2002 Farm Act will reduce land available for crop production somewhat, with the planting history for about two-thirds of land in the reserve being for the eight major field crops.

Projected plantings for eight major field crops in the United States remain relatively stable at 249 to 250 million acres through much of the baseline, considerably below the high level of over 260 million acres in 1996. Corn, wheat, and soybeans account for about 86 percent of this acreage. The cropping mix shifts somewhat more to corn and away from wheat and soybeans, reflecting underlying growth in demand as seen in price signals and net returns. Yield gains also contribute to production increases and limit the need for additional land to be cropped.

• Corn acreage rises gradually through the projections as increasing export and domestic demands lead to rising prices and net returns.
• Wheat acreage declines to 60 million acres for most of the baseline as relatively weaker gains in demand are generally met through gains in yields. Marketing loan benefits augment market revenues for wheat through most of the projections, keeping net returns relatively flat and holding land in wheat.
• Soybean plantings initially rise in response to relatively high prices and net returns. Soybean acreage then declines somewhat before stabilizing in the second half of the projection period as yield gains are sufficient to meet growing domestic demand. Also, higher prices and net returns for competing crops, particularly corn, keep soybeans from gaining much acreage.

Domestic corn use is strong in the initial years and continues growing throughout the period. Global economic recovery underlies longrun growth in U.S. corn exports.

• Feed and residual use of corn is initially unchanged 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.

• Significant growth is expected for ethanol use over the next several years as many States ban methyl tertiary butyl ether (MTBE) as a fuel oxygenate.

• Gains in most other food and industrial components are projected to be smaller than in the past decade. Additionally, near-term gains in the use of corn for high-fructose corn syrup (HFCS) and glucose and dextrose are small due to dietary concerns. Projected gains for these uses, later in the baseline, largely reflect 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. Additionally, corn exports from Eastern European countries will increasingly remain in Europe following the expansion of the EU in 2004. Also, the reduction and elimination of the high-tariff rate for over-quota corn imports, by Mexico from the United States under NAFTA, shifts some U.S. exports to corn from sorghum. Corn exports from Argentina will continue to grow, increasing that country's global market share.

Demand in the U.S. wheat sector grows slowly, with steady domestic food-use gains, relatively large feed use, and moderate long-term increases in exports.

• Domestic wheat demand is relatively mature. After declining from 2000 to 2004, food use of wheat resumes very slow growth in the projections, reflecting consumer adjustments to diets that include fewer carbohydrates. Additionally, new technologies can significantly extend the shelf life of bread and reduce spoilage, lowering flour needs required to meet consumer demand. Income support, provided by marketing loan benefits when prices are low, keeps land in wheat, resulting in large supplies relative to domestic food use and exports. Consequently, feed use of wheat rebounds from low levels in 2002/03 to relatively high levels through most of the projections, with annual wheat feeding largely reflecting prices of wheat relative to corn.
• U.S. wheat exports initially decline from 2003/04 to 900 million bushels in 2004/05 through 2006/07 as wheat production in the EU rebounds from drought-reduced levels in 2003, while production levels in Russia and Ukraine recover from a large winter kill. As income and population in developing countries grow over the remainder of the baseline, global wheat trade and U.S. exports increase as well. Competition from the EU, Canada, Argentina, Australia, and exporters from the Black Sea region continues through the projections, holding the U.S. market share relatively low at about 23 percent.

Domestic use of soybeans continues to rise, but exports decline due to increased competition.

• 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 rebound in 2004/05 from a decline in 2003/04 caused by reduced 2003 production. U.S. exports then gradually decline through the rest of the projections, largely due to strong competition from Brazil. Consequently, the U.S. market share of global soybean trade declines in the baseline.
• U.S. exports of soybean meal and soybean oil also face competition from South American producers, resulting in moderate growth but declining U.S. trade shares in those markets.

Domestic mill use of upland cotton continues to fall sharply through 2006/07, with further gradual declines over the remainder of the projection period. However, upland cotton exports rise to about 13 million bales 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. This lowers the apparel industry's demand for fabric and yarn produced in the United States.
• 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.
• After increasing somewhat through 2007/08, upland cotton exports remain relatively stable at about 13 million bales annually for the rest of the baseline. Foreign competition strengthens and keeps U.S. cotton exports from expanding further. With world cotton trade expanding throughout the projections, the U.S. share of global exports declines but is still about 39 percent in 2013/14.

Steady growth in domestic food use of rice is projected in the baseline. U.S. rice exports increase in 2004/05 and 2005/06, but decline moderately for the remainder of the projections.

• The expansion in domestic use of rice reflects a growing share of the U.S. population of Asian and Latin American descent and the greater use of rice for processed foods, including pet foods.
• An initial increase in U.S. rice exports in 2004/05 and 2005/06 is due to increasing production and total supplies more than offsetting rising domestic use, and a declining price difference between U.S and foreign rice. Continued expansion in domestic use of rice pushes U.S. prices higher relative to Asian competitors' prices later in the projection period, resulting in a small downward trend in U.S. rice exports after 2005/06.

U.S. stocks-to-use ratios for corn, wheat, and soybeans initially increase from reduced levels at the end of 2002/03 (corn and wheat) or 2003/04 (soybeans) caused by low yields and reduced production. Stocks-to-use ratios for corn and soybeans are then relatively flat throughout the rest of the projections as production gains match increases in domestic use and exports. The stocks-to-use ratio for wheat rises through 2007/08, largely reflecting weak exports, but declines in subsequent years as exports strengthen.

The stocks-to-use ratio for cotton becomes relatively stable at about 25 percent for most of the baseline projection period. The rice stocks-to-use ratio initially rises as production rebounds from the 2003 level, and then remains at 10 to 11 percent as prices and exports adjust to reflect available supplies and domestic demand.

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

• Price declines in the near term reflect the rebound in production from the reduced levels of the 2002 crops of corn and wheat and the 2003 soybean crop.
• Prices for corn and soybeans rise for several years with only moderate changes for the remainder of the baseline as growth in demand is largely matched by gains in production. Wheat prices decline through 2006/07 reflecting weak near-term exports, but then increase in later years as exports strengthen and push demand up more than gains in production.

The sugar price support program includes the loan rate program and marketing allotments. Marketing allotments are functioning each year in the baseline through fiscal year (FY) 2014.

• The annual marketing allotment is set at a level to keep prices just above the forfeiture level. Since area planted and harvested are functions of sugar crop prices relative to alternative crop uses, there is little incentive to increase sugar acreage. Sugarbeet planted area varies little over the projection period and averages about 1.34 million acres a year. Sugarcane harvested area declines a small amount (about 31,000 acres) from FY 2005 to FY 2014; for the projection period, it averages about 880,000 acres a year. Historical growth trends in productivity measures (sugar per acre, and beet and cane yields) are assumed to hold in the projections and are responsible for almost all the growth in production of 400,000 short tons, raw value (STRV) during the period FY 2005 to FY 2014.
• Sugar deliveries to producers of sugar-containing products (SCP) and to nonindustrial endusers are a function of U.S. population growth. After accounting for SCP trade, the underlying yearly sugar delivery growth is projected at about 98,000 STRV between FY 2005 and FY 2014.
• The sugar baseline projects that the raw sugar tariff-rate quota (TRQ) is established each year at 1,231,497 STRV, the World Trade Organization (WTO) minimum access level, until FY 2007. After FY 2007, the raw sugar TRQ is increased to compensate for levels of domestic production below the Overall Allotment Quantity. The refined sugar TRQ is established each year at 42,990 STRV. The yearly raw sugar TRQ shortfall is assumed to equal 50,000 STRV.
• The Mexican consumption tax on soft drinks that use fructose is assumed to remain in place through the projections period, thereby limiting sugar available for export to the United States under the terms of the North American Free Trade Agreement (NAFTA). Sugar imports from Mexico reach a high of 224,000 STRV in FY 2005 but fall each year thereafter until they reach zero in FY 2011.

Both flue-cured and burley tobacco production, which together account for 92 percent of total 2003 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 U.S. tobacco faces strong price competition from foreign producers, particularly Brazil, which has boosted output substantially in the past decade. Adjustments for high reserve stocks have further reduced quota levels. Tobacco price supports rise in the projections, reflecting increasing production costs. U.S. tobacco prices will continue to edge up as price supports are raised.

• 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 have declined steadily since their record high of 244 billion pieces in 1996. Exports during calendar 2003 are expected to be about 120 billion pieces. Cigarette exports have declined at least 5 percent annually since 2000 but are expected to level off in the upcoming years.
• Use of imported cigarette leaf reached record high levels in the last few years. The imported component of U.S.-manufactured cigarettes exceeded 50 percent in 2002. 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.

Exports continue to be crucial to the success of the U.S. horticultural sector, averaging about 21 percent of production value during the baseline period. However, the United States remains a net importer of horticultural products (fruit and nuts, vegetables, and greenhouse and nursery products).

• 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.
• Canadian potato production and potato processing capacity have been increasing more than U.S. production levels and processing capacity. As a result, the United States is a net importer of potatoes and potato products during some years of the baseline.

U.S. Livestock: February 2004 Baseline

Livestock sector projections initially reflect stronger meat animal prices in 2003, largely due to very tight beef supplies, particularly of high-quality beef. Total meat production falls in 2004 in the baseline, assuming normal moisture conditions, largely because of lower beef production due to already-reduced cattle inventories and the rebuilding of the cattle herd.

In the longer run, a combination of high cattle prices and rising hog and broiler prices, gains in production efficiency, and only moderate increases in feed prices encourage growth in total meat production. Poultry use becomes a larger proportion of total meat consumption in the projections. Meat exports benefit from stronger 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 augment gradual herd expansion over the remainder of the projections. 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 lower rate than during the 1980s and 1990s due to the maturity of the domestic sector and slower export growth.

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, but increasingly also at retail.

• The increase in efficiency of the U.S. hog breeding herd over the last 5 to 10 years reflects a shift to larger, more efficient operations and the decline in smaller, less efficient operations. For the baseline, the increase in efficiency slows somewhat since larger, more efficient operations (those with more than 5,000 head) now account for three-fourths of the U.S. pig crop.

• Production coordination and market integration between the United States and Canada increase in the hog sector. Feeder pigs produced in Canada are finished and processed in the United States, where feed grain prices remain favorable and processing costs are lower. Large North American retailers and hotels, restaurants, and institutions source pork cuts where prices are attractive, with demand accommodated by trade between the countries.

• The poultry sector has 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.

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. Cattle prices decline in the projections from record high levels.

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 1.8 percent to 1.4 percent of disposable income.

• The trend continues of poultry expenditures rising as a share of consumer spending on meats.

Total per capita meat consumption (boneless-weight basis) declines from about 185 pounds in 2003 to near 181 pounds, before rising back to 185 pounds at the end 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 varies between 48 and 50 pounds per person.

U.S. meat exports rise throughout the baseline period, reflecting improved global economic growth and rising demand for meats. U.S. imports of beef and cattle from Canada recover from reduced levels in 2003, which followed the discovery of BSE in Canada. (Baseline projections were completed prior to the diagnosis of a case of BSE in an adult Holstein cow in Washington State in December 2003.)

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 cattle inventories rise and 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. Brazil also is a major pork exporter, competing with the United States, Canada, and the European Union in international 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 and Thailand.
• 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 higher production in Russia, greater competition in that market, and current import quotas which are assumed to continue through early 2006.

While U.S. meat exports grow in importance, the domestic market remains the dominant source of demand. Meat exports account for about 11 percent of the total value of domestically produced meat in 2003, growing to more than 12 percent in the second half of the projections.

Farm milk prices during the next several years are expected to recover from recent low levels. Growth in milk production is projected to slow through 2005/06 because of the recent low prices and the loss of payments under Milk Income Loss Contracts after the 2004/05 marketing year. Meanwhile, demand for dairy products is expected to recover from its recent slump.

• Management and productivity gains are expected to boost milk output. Further development of large, specialized operations in many regions will be a significant contributor to these gains.
• Milk per cow is projected to continue to grow, while cow numbers decline. However, the rates of change may well be slower than in the past as milk per cow is less easily boosted by simply increasing the amount of concentrate feeds fed. Also, increasing specialization of dairy farms over time (and the associated specialized nature of dairy capital and other inputs) probably has made exit from milk production more sluggish than in past decades.
• Domestic dairy use grows 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.
• Following the near-term price adjustments, real farm milk prices are projected to decline slowly in the long run.

U.S. Agricultural Sector Measures: February 2004 Baseline

Longrun developments for the U.S. farm sector reflect strengthening domestic and international economic growth, which support gains in consumption, trade, and prices. While export competition is projected to continue, improving world economic growth, particularly in developing countries, provides a foundation for gains in global trade and U.S. agricultural exports. Combined with gains in domestic demand, the results are rising market prices and cash receipts, 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, rising from 26 percent to 29 percent over the projections period. 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 about $51 billion per year, compared to $47.6 billion in the 1990s. (Projections were completed prior to the diagnosis of a case of BSE in an adult Holstein cow in Washington State in December 2003.)

• Net farm income falls from high 2003 levels through much of the projections period, reflecting lower government payments and adjustments in the cattle sector, but then increases toward the end of the projections to $51.5 billion in 2013. Longer run gains reflect strengthening domestic demand and exports.

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 $18 billion in 2003 to about $12 billion in 2011-13. Toward the end of the projections, direct government payments largely reflect direct and counter-cyclical payments under the 2002 Farm Act, payments for the Conservation Reserve Program, and financial assistance for other conservation programs.

Gross cash income gradually rises through the projections. Cash receipts for both crops and livestock increase.

• Longer run gains in cash receipts and gross cash income reflect strengthening domestic demand and exports, which help to improve financial conditions in the sector.
• 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 about 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 2004 to 2013, at slightly less than the general inflation rate. These expenses are divided into three categories in the 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 gross cash income.
• Manufactured input expenses increase through the projections as oil prices rise and crop production expands.
• Cash operating margins tighten somewhat, with cash expenses increasing from 75 percent of gross cash income in 2004 to about 78.5 percent at the end of the projections.

Strengthening cash receipts and gross cash income through the projections support gains in farmland values. Increasing demand for land use from nonagricultural sources, such as housing and recreation, also affects farmland values.

• There is considerable variation in the growth of farmland prices across the country. This reflects a variety of factors, including differences in land quality and location, demand for urban and recreational development, credit conditions, nonfarm investment opportunities, government farm policies, and production risks and weather uncertainties unique to each region's agriculture.
• As the general economy continues to expand, demand for land for nonagricultural uses contributes to rising farmland values. Continuation of favorable inflation and interest rates will facilitate the conversion of farmland to nonfarm uses.
• Benefiting most from the general economic expansion will be farmland in the path of urban development. Farmland in areas with recreational amenities also will increase in value as second-home market demand remains strong.

Increasing gross cash income and moderate interest rates assist in asset accumulation and debt management.

• Farm debt moves up less rapidly than asset values in the projections, rising an average of about 1.6 percent a year compared with an increase of 2.4 percent annually for assets.

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

• Debt-to-asset ratios decline slowly through the projections to under 14 percent by 2013, 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, projected price increases are generally strongest for more highly processed foods such as cereals and bakery products and fats and oils. 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 48 percent of total food expenditures by 2013.

• 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 2.6 percent annually from $56 billion in fiscal year 2003 to $72 billion in 2013. High-value product (HVP) exports continue to grow, accounting for almost 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. (The baseline projections were completed prior to the diagnosis of a case of BSE in an adult Holstein cow in Washington State in December 2003.)
• Growth in the value of bulk commodity exports (grains, oilseeds, cotton, and tobacco) reflects expected price increases and gains in volume.
• U.S. agricultural imports rise by about the same amount as exports, reaching $61 billion in 2013. The agricultural trade surplus is relatively stable at $10 to $12 billion.

Global Agricultural Trade: February 2004 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 policy support for domestically produced meat is expected to motivate growth in feed grain trade, especially to those regions where limited land availability or agroclimatic 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.

Baseline trade projections to 2013/14 are founded on long-term assumptions concerning trends in foreign area, yields, and use and on the assumption that all countries fully comply with all existing bilateral and multilateral agreements affecting agriculture and agricultural trade.

The baseline does not incorporate any effects of agreements not formally ratified by November 2003. However, the baseline does incorporate the effects of trade agreements and domestic policy reforms already in place in November 2003. For example, the expansion of the European Union (EU) from 15 to 25 countries in 2004 and scheduled reforms of the EU's Common Agricultural Policy (CAP) affect the baseline projections for many commodities.

Domestic agricultural and trade policies in individual foreign countries are assumed to continue to evolve along their current path, based on the consensus judgment of USDA's regional and commodity analysts. In particular, economic and trade reform underway in many developing countries is assumed to continue. Similarly, the development and use of agricultural technology and changes in consumer preferences are assumed to continue evolving based on past performance and analysts' judgment regarding future developments.

Rising unabated since the early 1990s, global trade in soybeans and soybean products has surpassed wheat—the traditional leader in agricultural commodity trade—and total coarse grains. Continued strong growth in global demand for vegetable oil and protein meal is expected to maintain soybean and soybean product trade well above wheat and coarse grains trade 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. Additionally, of the major crops, soybeans in central Brazil and palm in Indonesia's Kalimantan province are successfully tapping into reserves of virgin tropical soils.
• Virtually no growth in overall global wheat and coarse grain trade occurred in the 1990s, largely reflecting reductions in imports by the transition economies of the former Soviet Union (FSU) and CEE. With those demand adjustments largely complete, the continuing growth in import demand from other countries leads to overall gains in global grain trade.
• In the projections, total area planted to all crops changes little in most countries. Growth in production is derived mostly from rising yields. The growth rate in crop yields has slowed somewhat during the last several decades and is projected to continue to do so.
• Slower growth in aggregate crop production is offset by slower growth in world population. Nonetheless, population is a significant factor driving overall growth in demand for agricultural products. Additionally, rising per capita income in many countries generates growth in demand for livestock and horticultural products.

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, Indonesia, Egypt, Mexico, Pakistan, and Sub-Saharan Africa. World wheat trade (including flour) expands by 25 million tons (25 percent) between 2004 and 2013 to nearly 128 million tons.

• Brazil is projected to remain the world's largest importer. The climate in Brazil does not favor wheat, and in some key wheat-producing states, winter corn is expected to have better returns than wheat.
• China is expected to gradually increase wheat imports to over 5 million tons as higher returns for other crops and increasingly expensive irrigation in the North China Plain limit wheat production. As a result, China turns to the international market to supplement internal supplies.
• Changing consumption patterns affect the projections for some major importing countries. In Indonesia, diversification of diets and strong economic growth are projected to increase per capita wheat consumption. Mexican consumers are projected to continue substituting some wheat for corn in their diets.
• Population growth boosts imports by some other countries. Egypt remains one of the world's largest wheat importers with growth driven by increases in population. Even though Pakistan's per capita consumption is projected to decline somewhat, wheat imports rise because of population growth.
• Developing countries in Sub-Saharan Africa, North Africa, and the Middle East account for over 40 percent of world wheat imports. In most developing countries, little change in per capita wheat consumption is expected but imports expand modestly because of population growth and limited potential to expand production.

Definition of country groups

The top five wheat exporting nations (the United States, the EU, Canada, Argentina, and Australia) account for about 75 percent of world trade through 2013. This is down from an average of 80 percent during 1996-2002. The U.S. market share of global wheat trade holds steady at about 23 percent under strong competition from the other traditional wheat exporters and from an emerging set of competitors including Ukraine, Kazakhstan, Russia, and India.

• Wheat export shares for Australia and Canada remain fairly stable from 2004 to 2013.
• In Canada, increased demand for barley and oilseeds is expected to keep wheat area from expanding. Only modest yield improvements curtail production growth, while expanding domestic demand limits export growth.
• Exports by the EU and Eastern Europe will be constrained by several factors. Some marginal EU land will go out of wheat and rice production as a result of CAP reform. As the EU expands, more production will likely remain in the EU rather than being exported outside the EU-25. In the near term, the set-aside rate has been lowered from 10 to 5 percent in response to the drought-reduced 2002 crop and low stock levels. These projections assume that the set-aside rate will remain at 5 percent in 2005 before being raised back to 10 percent.
• The Black Sea is an important outlet for wheat exports from the FSU and CEE. Ukraine, Kazakhstan, and Russia emerge as steady suppliers of wheat to international markets. 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 9 percent through the period.
• India's exports of low-quality wheat from government-held stocks are expected to continue at about 2 million tons per year.

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 77 percent of all coarse grain trade through the projection period, followed by barley (15 percent), and sorghum (5 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 and oats is becoming increasingly specialized and driven by specific end-use demands. Trade in sorghum and rye will be affected by changing government policies in Mexico and the EU-25.

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 about 27 million tons (26 percent) from 2004 to 2013. About two-thirds of global coarse grain supplies are 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, and 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 more than make up for the lost feed demand of the FSU and CEE.
• North Africa and the Middle East experience continued growth in import demand for grain and protein meals through 2013 as rising populations and increasing incomes sustain strong demand growth for domestically produced animal products. Feed requirements have grown in step with livestock and poultry sectors in North African and Middle Eastern countries.
• Mexico's imports of corn are projected to jump nearly 7 million tons between 2004 and 2013. Under the North America Free Trade Agreement (NAFTA), Mexico's over-quota tariff on corn imports from the United States is gradually reduced to zero by January 1, 2008. Before then, the tariff will reach levels that are low enough to facilitate over-quota corn imports. As a result, Mexico's corn imports are projected to rise sharply. The increase in corn imports will substitute for imports of sorghum, which already has tariff-free status.

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 about 60 percent in recent years to over 70 percent by 2013 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 the world's second largest corn exporter. As Argentina's economy continues to recover, investments and planted area gradually return to corn production over the baseline, with exports projected to rise from 10 to nearly 14 million tons.
• 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 (about 1 million tons).
• Corn exports from Eastern Europe double to about 6 million tons by 2013. 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 about 5 million tons of corn 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 2008/09, reflecting abundant domestic supplies and strong producer preferences for growing corn. Later in the period, domestic livestock production increases in response to income growth and rising meat demand. The resulting increase in demand for feed overtakes China's internal supplies, with total corn imports exceeding 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 nearby source of demand, while various government measures—including subsidies for corn sales 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. In the last half decade, China's consumption exceeded production, and stocks have declined sharply. Because a continued drop in stocks is unsustainable, China is projected to increase imports and reduce exports, and to become a net corn importer by the middle of the baseline period.

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 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, increases its barley exports over the projection period to 5.8 million tons and its share of world trade rises to nearly 30 percent. Barley production is expected to increase throughout the EU as a result of CAP reform and EU enlargement. The abolition of EU intervention for rye, combined with higher barley prices in the acceding countries, will stimulate more area allocated to barley production.
• The FSU remains a major barley exporter throughout the baseline as exports exceed 5 million tons. Together, the FSU and EU account for 50 to 55 percent of world barley trade throughout the baseline.
• Malting barley is a different variety and quality than feed barley and commands a substantial price premium over feed barley. In the long run, 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 projections period.

World sorghum trade, which has averaged nearly 7 millions tons during the last decade, declines to about 6 million tons by the middle of the projection period. The decline is driven almost entirely by Mexico.

• Mexico is the world's leading sorghum importer although its sorghum imports were reduced in 2002 and 2003 due to reduced U.S. production. During this two-year period of reduced U.S. exportable supplies of sorghum, U.S. exports to Mexico of kibbled corn (processed corn that also has tariff-free status) rose sharply, reaching a record 2.5 million tons (whole corn equivalent) in 2002/03. Under NAFTA, Mexico's over-quota tariff on corn imports from the United States is gradually reduced to zero by 2008. The projections assume that the tariff will be low enough before 2008 to facilitate over-quota corn imports. As a result, Mexico's corn imports are projected to increase sharply. As corn substitutes for sorghum in the import mix, Mexico's sorghum imports decline by about 1 million tons to less than 3.5 million tons by 2008/09. Even at the reduced sorghum import level, Mexico still accounts for almost 60 percent of world import demand for sorghum.
• Japan imports a fairly stable volume of sorghum throughout the period to maintain diversity and stability in its feed grain supplies.
• The United States is the largest exporter of sorghum, accounting for more than 80 percent of world trade. During the projection period, the U.S. share declines to 76 percent by 2013, as Argentina, the world's second largest exporter, raises its share of world exports to 16 percent as U.S. sorghum exports to Mexico decline.

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 trade grows at an average annual rate of 3.6 percent through the projection period compared with rates of 3.3 and 2.4 percent for soybean oil and soybean meal.

• Many countries with limited opportunity to expand oilseed production continue investment in oilseed crushing capacity, such as China and some countries in North Africa, the Middle East, and South 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. The steady competitive pressure of new oilseed crushing capacity forces many inefficient crushers out of business.
• Growth in import demand for total vegetable oils exceeds growth in import demand for either oilseeds or protein meals. Consequently, economic incentives to produce high-oil content oilseeds, such as 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 has been the world's leading importer of soybeans and soybean meal. Despite an increase in the dairy quota that would increase the feeding of soymeal, the net growth of soymeal feeding will decline. Abundant EU grain stocks, lower internal EU grain prices due to Agenda 2000 price cuts, increased barley production due to CAP 2003 reforms, more imports of coarse grains from acceding countries, and more rapemeal available as a result of the biofuels initiative, combine to slow the growth of soymeal consumption. As a result, increases in grain and rapemeal feeding are expected to continue to slow the growth in EU soybean meal and soybean imports.
• China accounts for over 70 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 more than 90 percent of world trade throughout the baseline.
• Driven by continuous area gains, Brazil extends its lead over the United States as the world's leading exporter of soybeans.
• Limited expansion of acreage and increasing domestic use eventually constrict exportable U.S. supplies.
• Argentina's soybean exports hold steady at 8 million tons, reflecting the country's substantial crush capacity and an export tax structure that favors domestic crushing of whole seeds and exporting of the products.

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 soybean products.
• Latin America, North Africa, the Middle East, Southeast Asia, the FSU, and CEE 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 projection period, China becomes a net exporter of 1 million tons of soybean meal.

Definition of country groups

• Argentina, Brazil, and the United States are the three major exporters in international protein meal markets. These countries increase their share of global soybean meal trade from about 85 percent in recent years to more than 88 percent at the end of the projection period.
  
  
• Small but steady soybean meal exports from the EU are joined by increasing exports from other South American countries (mostly Paraguay) and China to keep international protein meal markets very competitive. India remains an exporter, although export volume declines.
  
  
• Argentina and Brazil, the world's two largest exporters, increase their share of soybean meal exports slightly, while the export shares of the United States and other exporters fall slightly.
  
  
• Strong growth in domestic meal consumption due to rapid expansion of the poultry and pork sectors constrains growth in Brazil's soybean meal exports.

Definition of country groups

• Import demand for soybean oil rises in nearly all countries and regions except for the FSU, CEE, and the EU. The largest gains are projected for India, North Africa, the Middle East, and Latin America (particularly Mexico, the Caribbean, and Central America), where income and population growth drive strong gains in soybean oil imports. Slower growth is projected for the mature markets of Europe and Japan.
• In India, relatively lower tariffs on soybean oil (held in check by World Trade Organization tariff-binding commitments) than on other vegetable oils favor continued strong imports of soybean oil. India accounts for an increasing share of world soybean oil imports, due to burgeoning domestic demand for vegetable oils and limitations on domestic production of oilseeds. Land-use competition also limits oilseed area in India.
• 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.

Definition of country groups

A strong emphasis on exporting soybean products pushes Argentina's and Brazil's combined share of world soybean oil exports from 75 to 82 percent by the end of the baseline.

• Argentina has a small domestic demand for soybean oil. Argentine soybean production is projected to rise 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. Nearly all additional soybean oil production will be exported.
• Argentina exports more soybean oil than Brazil, reflecting the country's large crush capacity and its small domestic market.

Definition of country groups

Global rice trade is projected to average 2.4-percent annual growth from 2004 through 2013. By 2013, global rice trade is projected to reach nearly 33 million tons, about 18 percent above the current record set in 2002. Despite the growth, rice trade as a share of total use remains very small relative to other cereals, at only 6 to 7 percent.

• International rice trade consists predominantly of long-grain varieties, which also account for the bulk of expected trade growth over the next decade. Long-grain rice is imported by a broad spectrum of countries in South and Southeast Asia, the Middle East, Sub-Saharan Africa, and Latin America. Indonesia, Nigeria, Iran, Iraq, the Philippines, and Saudi Arabia are typically the top long-grain markets.
• In contrast, medium- and short-grain rice is primarily imported by the high-income countries of Northeast Asia (Japan, South Korea, and Taiwan) and by two middle-income countries (Turkey and Jordan). Expansion in medium-grain rice trade is projected to be much slower than for long grain, despite the partial opening of domestic markets to imported rice by Japan and South Korea in 1995 and Taiwan in 2002 as part of World Trade Organization (WTO) commitments.
• Aromatic rice, primarily basmati and jasmine, make up most of the rest of global rice trade. Aromatics typically sell at a substantial price premium to long- and medium-grain varieties in global markets. Aromatics are imported mostly for high-income consumers.
• Rising food demand from Indonesia's burgeoning population is responsible for escalating rice imports. Already the world's leading rice importer, Indonesia's share of global rice imports grows from 12 to 15 percent in the baseline. Land constraints and already high crop-intensity indexes suggest little opportunity for Indonesia to significantly expand production.
• Sub-Saharan Africa and the Middle East are also major destinations for internationally traded rice. In both regions, strong demand growth driven by rapidly expanding populations and rising incomes confronts limited opportunities to expand production, due to agroclimatic reasons in the Middle East and to political and infrastructure deficiencies in Sub-Saharan Africa.
• EU rice imports are expected to rise as the 50-percent cut in the rice intervention price imposed by CAP reform causes yields and planted area to decline.

Definition of country groups

Asian producing countries dominate rice trade throughout the projection period.

• Thailand and Vietnam, the world's largest rice-exporting countries, account for nearly half of all rice exports in the baseline. Both countries produce and export primarily long-grain rice. Rising production, mostly due to higher yields, and declining per capita consumption account for the expansion in exports for both countries.
• The United States is projected to be the third largest rice-exporting country during most of the baseline. U.S. exports decline slightly after 2006 as rising domestic demand offsets production growth. Record yields are responsible for the larger crops.
• India emerged as an important rice exporter in the mid-1990s. Most of India's rice exports are low-quality, long-grain rice, often purchased from burdensome government stocks. High internal price supports in India encourage over-production, stock accumulation, and a steady supply of exports throughout the period. India also exports smaller quantities of high-quality basmati rice.
• Rice exports from China, typically the world's fifth-leading exporter, decline modestly in the baseline as production shifts to higher quality, but lower yielding varieties in response to domestic prices and policy signals. China exports mostly high-quality, short-grain rice to Northeast Asian markets and low-quality, long-grain rice to Indonesia and other low-income markets in Asia and Sub-Saharan Africa.
• Pakistan exports both high-quality basmati rice and low-quality long grain. Although rice is 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 are relatively stable over the baseline and remain well below the 2.4-million metric ton record of 2000.

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. 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 is expected to benefit from the MFA phaseout as well, but cotton imports are expected to remain below record levels. India's textile industry use of man-made fiber has been accelerating in recent years, and cotton use is not expected to grow as rapidly as in China, despite India's growing textile exports.
• Other countries with low labor costs that are most likely to gain from MFA phaseout include Bangladesh, Pakistan, 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 now give lower cost competitors the same favorable access to 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 where resource endowments and technology result in the lowest production costs. Land is a key input factor. Traditional producers with large land bases suitable for cotton production are expected to benefit from 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 period with annual exports (upland and extra-long staple) of between 12.5 and 13.8 million bales.
• Central Asia, the principle competitor with the United States on world raw cotton markets for the last decade, has been overtaken by Sub-Saharan Africa, which is expected to expand its lead. 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 much of the forecast 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 such as ending marketing board monopolies. Continued increases in output are expected as producers take advantage of more export-oriented government policies.

Increased market access achieved under existing global trade agreements was behind much of the gains in animal product trade over 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.

• Bovine spongiform encephalopathy (BSE) in Canada has resulted in restrictions on live cattle imports into the United States and increased beef exports from Canada to the United States. (The baseline projections are based on assumptions that were made prior to the report of a BSE case in the United States.)
• The accession of 10 new countries into the EU results in more trade between the EU and the acceding countries and less shipments of meat outside the EU-25.
• Beef exports from Australia and New Zealand, mostly of grass-fed beef destined for markets in the United States and Asia, increase slightly through the baseline.
• Argentine exports of fresh/chilled beef and processed products remain strong due to competitive pricing into Hong Kong and European markets.
• EU beef exports remain below the annual WTO export-subsidy limit of 817,000 metric tons as a stronger euro limits their competitiveness and policy changes lower beef production, reducing the supplies of beef that need to be removed from the domestic market.
• Pork exports from CEE countries, particularly Hungary and Poland exports to the EU, rise steadily in the baseline, aided by accession into the EU.
• Brazil's rapidly expanding 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 Russia, Argentina, and Asian markets other than Japan and South Korea.
• The United States encounters increasing competition in international poultry markets from Brazil, the EU, and several CEE countries.
• A growing share of Brazil's rapidly increasing poultry production enters international markets at very competitive prices, and Brazil's poultry exports rise strongly.

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. However, BSE in Canada forces restrictions on trade in the beef market.

• Higher income countries of East Asia, such as Japan and South Korea, increase imports of beef, reflecting domestic cattle sectors that are constrained by land availability as well as a resumption of growth in their beef consumption.
• 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.
• The baseline assumes that the tariff-rate quota (TRQ) for beef that Russia imposed in 2003 remains in effect until 2006 (the period established by current Russian legislation). The TRQ slows, but does not stop, the growth in beef imports, as rising consumer demand continues to outpace gains in domestic production. Russia remains a large market for EU subsidized beef exports as well as Brazilian beef.

Definition of country groups

• Mexican pork imports increase about 200,000 tons over the projection period, making Mexico one of the fastest growing pork importers. Increases in income and population are the primary drivers of Mexico's increasing demand for pork products.
• Higher income countries of East Asia—such as Japan, Hong Kong, and South Korea—increase pork imports as their domestic hog sectors are constrained by imported feed costs and environmental issues.
• As with beef, the baseline assumes that the TRQ that Russia imposed for pork in 2003 remains in effect until 2006. Although the TRQ initially lowers pork imports, Russia remains a major destination for competitively priced pork exports from the EU and Brazil as demand growth continues to exceed 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.
• The quota on poultry imports that Russia imposed in 2003 is assumed to exist until 2006. The quota raises domestic prices, thereby spurring domestic poultry production and feed demand. As a result, wheat and barley feeding, as well as corn imports, rise over the period. When the poultry quota is discontinued, imports begin to rise steadily, driven by growing consumer demand.
• Poultry imports into Saudi Arabia continue to rise through the baseline. However, consumer preference for freshly killed birds keeps domestic production strong.
• Poultry consumption growth in China is met largely by expanding domestic production, but imports are also projected to grow.
• Strong economic growth in Mexico, along with trade liberalization under NAFTA, will generate increases in poultry imports.
• Thailand's poultry exports are slowly squeezed out of the EU market as a result of increasing competition from acceding countries, but exports to other markets such as Japan increase.