FEED YEARBOOK March 28, 1997 Approved by the World Agricultural Outlook Board ---------------------------------------------------------------------------- FEED YEARBOOK is published annually by the Economic Research Service, U.S. Department of Agriculture, Washington, DC 20005-4788. CWS-1997. Please note that this release contains only the text of the FEED YEARBOOK--tables and graphics are not included. Printed copies of this yearbook are available from the ERS-NASS order desk. Call, toll-free, 1-800-999-6779 and ask for stock #FDS-1997, $15. ERS-NASS accepts MasterCard and Visa. ---------------------------------------------------------------------------- Feed Situation and Outlook Yearbook. Commercial Agriculture Division, Economic Research Service, U.S. Department of Agriculture, March 1997, FDS-1997. Contents Summary Feed Grain Supply and Use Corn Box: Bt Corn Use to Expand in 1997 Box: Market-Oriented Supply Response Under the 1996 Farm Act: Implications for 1997 Corn Plantings Sorghum Barley Oats Hay Feed Demand Food, Seed, and Industrial Use of Corn Box: Food, Seed, and Industrial Use Revisions World Coarse Grain Outlook Special Articles Market Factors Affecting Fuel Ethanol Production Policy Decisions Are Critical Determinant of China's Corn Trade Argentina's Corn: Productivity Gains Underlie Strong Export Performance U.S. Barley Imports From Canada: Issues and Prospects U.S. Feed Grain Producers Benefit from Strong U.S. Meat Exports to Russia Box: Transportation Data and Analysis List of Tables and Figures Situation Coordinator Peter A. Riley (202) 501-8512 Allen E. Baker (202) 219-0360 Principal Contributors Allen E. Baker (202) 219-0360 Jenny Gonzales (202) 219-0704 Peter A. Riley (202) 501-8512 Approved by the World Agricultural Outlook Board March 21, 1997. Situation and Outlook text may be accessed electronically. For details, call (202) 219-0515. Summary March 21, 1997 Feed Grain Supply and Use Rebounds in 1996/97 Despite very low carryin stocks, the 1996/97 U.S. feed grain supply is up an estimated 11 percent from a year earlier. Increased acreage and yields boosted U.S. feed grain production 28 percent in 1996, led by gains in corn. With the larger supply and prices down from the record highs of the 1995/96 marketing year, total feed grain disappearance is expected to increase despite weaker exports. In 1997, market considerations will play a more critical role in farmers' planting decisions, reflecting the growing impact of new farm legislation allowing more flexibility. Corn production in 1996 was up 26 percent from the poor crop in 1995. High prices provided strong incentives to increase acreage, but poor weather prevented some planting and delayed the crop in many areas. Generally late frosts allowed the crop to develop and final yields were better than expected over much of the summer. Grain sorghum production was up 74 percent and the largest since 1992. Farmers increased acreage in response to high prices, and the opportunity to realize a return on large amounts of failed wheat acres in Kansas and cotton acres in Texas. Strong prices encouraged barley producers to increase plantings, despite a very large increase in spring wheat acreage, and production rose 10 percent from 1995. Production of oats continued downward to a new low in 1996, dropping 4 percent due to reduced acreage. U.S. imports of oats are expected to rise sharply in 1996/97. Hay prices have been strong all during the 1996/97 May-April hay marketing year, mainly because adverse weather reduced the quantity and quality of the 1996 hay crop. Alfalfa hay production in 1996 was down 6 percent. Yields declined 5 percent as dry conditions late in the season reduced yields from second and third cuttings across many northern areas. In the southern United States, however, mild temperatures and ample precipitation during August and September led to additional cuttings and helped boost yields. Hay stocks on December 1, 1996, were down 4 percent from a year earlier, with the biggest declines in the eastern Corn Belt and Lake States. Domestic feed grain disappearance will be up sharply in 1996/97, but will not recover to the record high of 1994/95. Feed and residual use is projected up 19 percent because of increases in corn, sorghum, and barley. Sorghum feed and residual use is expected to be the highest in several years due to more abundant supplies and lower prices relative to corn. Food, seed, and industrial use of feed grains is expected to rebound but will not match its 1994/95 high. Ending stocks of feed grains are projected to increase significantly in 1996/97, about doubling from the extremely small carryover of the previous year. Strong prices and shortages of corn forced many grain consumers to adjust use in 1995/96. Feed and residual use of corn was cut 15 percent as livestock feeders were forced to change production plans. Industrial use of corn, which generally shows little reaction to changes in prices, did decline for some types of use. In particular, ethanol production was cut sharply from the previous year as producers were caught between high corn costs and slowly rising ethanol prices. World coarse grain production is forecast to increase sharply in 1996/97, more than offsetting reduced beginning stocks, and boosting supplies, which were extremely tight in 1995/96. While the United States accounts for the largest gains, foreign production is expected to reach a record high. World coarse grain consumption is projected to increase 3.5 percent in 1996/97, as increased supplies reduce prices and generally strong global economic growth boosts demand for meat. World poultry production is projected up in 1997, laying the foundation for strong feed demand in several countries. U.S. corn exports are forecast at 1.9 billion bushels in 1996/97, down 15 percent from a year earlier, because of increased competition. The U.S. share of world coarse grain trade is expected to fall from recent highs in 1994/95 and 1995/96, but remain well above earlier years this decade when China was a larger exporter. High prices in 1995/96 encouraged several foreign producers to expand production. Foreign exporters are expected to raise their share of world coarse grain trade in 1996/97, led by an increase in EU barley exports. Argentina and China will also expand corn exports. Special articles in this report examine market factors affecting ethanol production and factors shaping corn exports by China and Argentina. Another article examines issues in the Canadian barley sector that may affect U.S. imports. A final special article shows how Russia's rising imports of U.S. poultry products have partially offset its reduced imports of U.S. feed grains. 1997/98 Outlook Prospective Plantings for 1997, providing the first look at farmers' intentions, will be released about the time this report goes to press at the end of March. USDA will issue its first official forecasts for 1997 feed grain production in May, along with supply and use forecasts for the 1997/98 marketing year. Early expectations were presented at the annual USDA Agricultural Outlook Forum in February. More up to date outlook information can be found in the monthly Feed Outlook report. Spring weather will, as usual, play a major part in determining planting decisions. Under the new farm legislation, market forces will play an increasingly important role in 1997. Previously, decisions were heavily shaped by program considerations. The experience of 1996 provides evidence of more planting flexibility. However, the 1996 season was somewhat of a transitional year, because new farm legislation was not finalized when many farmers were making decisions and purchasing seed and fertilizer. In 1997, this source of uncertainty has been removed and farmers can focus on planting what they think will provide the best economic returns, given their soils, location, and other production factors. Many of the key elements that will shape the outlook are discussed in this report. Feed Grain Supply and Use Supply and Use Rebounds with Larger Production Despite a very low carryin, feed grain supply in 1996/97 is forecast up 11 percent to 285 million metric tons. Use is projected to recover 5 percent from 1995/96, when it was reduced by tight supplies and record prices. U.S. feed grain production increased 28 percent in 1996 from the poor outturn of the previous year to 267 million metric tons. Higher acreage and improved yields contributed to the rebound. Corn accounted for most of the production gains, but sorghum output was also up dramatically. There was a moderate increase in barley, while oats production declined. Market forces reacted to the extremely tight 1995/96 feed grain situation. High prices in the spring created strong incentives to increase 1996 plantings, and new farm legislation allowed farmers more flexibility in making planting decisions. The weather's impact at planting time was mixed. Very wet conditions prevented much corn planting. However, sorghum acreage rose sharply as farmers planted on failed cotton and winter wheat acres. Despite very low carryin stocks, increased production led to an 11-percent rise in 1996/97 supply. Feed grain supply is estimated at 285 million tons, with corn accounting for 87 percent of the total. Even with the increase, the supply remains relatively low by historical standards, reflecting a downward trend in stocks over the last several years. Carryin stocks in 1996/97 were only 14.4 million tons, down 31 million from the year before, and the lowest since the late 1940s. Domestic Feed Grain Use Increases, Exports Shrink Feed grain disappearance is forecast at 255 million tons, up 5 percent from 1995/96. This would the second highest after the 270 million tons of 1994/95. Unlike the supply estimates, which are relatively firm at this point, 1996/97 demand prospects are subject to more potential change in the next few months. The outlook reflects a substantial rebound in domestic use, both for feeding and food and industrial purposes, because of larger supplies and lower prices. Feed and residual use is forecast to rise 14 percent but would still not recover to the 1994/95 level. Food, seed, and industrial (FSI) use is forecast to increase about 5 percent, but still not match its 1994/95 high. Feed grain exports are forecast to decline 13 percent in 1996/97 because of larger competitor exports. Review of 1995/96: Supply Crunch Slashes Use In 1995/96, a steep drop in feed grain production in the face of strong demand led to a very tight supply/demand balance. Although supply concerns surfaced early, adjustments in use were relatively slow to occur, driving most prices to record highs in the second half of the year. The feed grain supply dropped 58 million tons in 1995/96, while total use declined by only 27 million. All of the reduction occurred domestically, as exports rose slightly to the highest level since 1989/90. Importers tended to react first to the impending feed grain shortages, reflecting both robust demand and an interest in procuring supplies early. At the beginning of the year, U.S. export sales of corn were record high. Sales trailed off later, but, for the year, total feed grain exports actually increased 1 percent from an already strong performance in 1994/95. Feed and residual use decreased 16 percent, or about 25 million tons, for the year. Domestic feeders continued using large amounts of feed grains up through the spring until restricted by short grain supplies and price rationing. Generally high product prices supported margins in many cases, with strong meat exports contributing to high prices. Shortages of pasture and forage in parts of the country also helped support demand for feed grains. FSI use fell 2.7 million tons in 1995/96, the first decline in recent history, with nearly all of the decline in corn use for ethanol. Food and industrial demand for feed grain is largely inelastic, with little or no substitution possibilities. The main exception is ethanol, which competes against other fuel oxygenates and fuel octane enhancers. Corn Production Increases 26 Percent in 1996 Production was the third largest on record, as acreage rose and yields improved. Domestic use of corn is projected to increase in 1996/97, but exports to decline. Prices will retreat from the record highs of 1995/96 as stocks increase. Corn Production Up Sharply With Higher Acreage and Yields Corn production in 1996 was estimated at 9,293 million bushels, up 26 percent from the poor 1995 crop. This was the third largest on record after the 1992 and 1994 crops. The average yield was 127.1 bushels per acre, up 13.6 bushels, and in line with the long-term trend. Yields were also the third highest achieved. Planted acreage rose 12 percent to 79.5 million acres, the highest since 1985. Harvested acres rose 13 percent to 73.1 million. With prices soaring at planting time, 1996 acreage would have been higher, but adverse conditions in the Midwest prevented some plantings for the second year in a row. Most of the unplanted acres were in the eastern Corn Belt, especially in Indiana and Ohio. Some of this land went into soybeans, which have a shorter growing season. There was a very strong price response in Missouri and in many smaller producing States of the South, where producers took advantage of high expected premiums for their early harvested corn. Since farmers no longer faced planting restrictions stemming from base acreage considerations under the old farm program, much land was shifted into corn. In the Delta States of Arkansas, Louisiana, and Mississippi, corn plantings more than doubled. The late status of the crop in the Corn Belt remained a concern throughout the season, and put upward pressure on market prices. Initially, it was feared that late pollination would coincide with the summer's hottest weather, eroding yields. However, a strong shot of moisture in late July and below-average temperatures provided very favorable conditions. Then, the lateness raised concerns that early frosts--or even normal frosts in some areas--would prevent the crop from maturing. Fortunately, frosts were also late for the most part, allowing the crop to develop. Yield forecasts, which had dropped during the summer, increased through the fall. Despite the market's desperate need for early corn, the harvest was late nationally and moisture levels of the corn tended to be high. The cool season was somewhat similar to that of 1992 when a record yield was achieved. In 1996, the objective yield data collected for 7 States indicated the ear count per acre had surpassed the 1992 record. Corn production was record high in a number of large producing States, including Nebraska, South Dakota, Kansas, and Missouri. In addition, records were set in many smaller producing States, such as North Dakota, Louisiana, and Mississippi. Corn Silage Also Higher in 1996 Production of corn for silage was estimated at 83.1 million short tons in 1996, up 7 percent from the small 1995 crop. Although area harvested was up slightly for the Nation, higher yields accounted for most of the production increase. In Wisconsin, the largest producing State, output rose 44 percent entirely due to more acres cut. New York and Pennsylvania, the second and third largest producers, also had large production gains. Corn Use Projected To Increase 3 Percent in 1996/97 The rebound in corn supplies and lower prices will lead to higher disappearance in 1996/97, and total use is projected at 8,770 million bushels. All of the gains will occur domestically, with exports expected to drop. Competitors reacted to record prices by increasing production and forecast exports, reducing the U.S. market share. The final export performance will largely depend on the extent of China's exports over the remainder of the year. China, somewhat of a swing factor in world corn trade, has recently increased its exports (see special article). Limited availability and continued high prices restricted corn use in the first few weeks of the marketing year. Pipeline supplies were virtually exhausted by late summer and the late harvest further squeezed users. Thus, the recovery in domestic use for the year will not be that large. However, indicative of the large demand base, use will still rank as the second highest after 1994/95. FSI use is projected up more than 5 percent in 1996/97. Higher use for ethanol will account for most of the prospective increase while more steady growth continues for sweeteners. Feed and residual use of corn is projected to rise 10 percent, with use for the upcoming summer quarter partly dependent on corn's price relative to new-crop wheat. Prices Moderate from Record Highs of 1995/96 Corn prices will decline in 1996/97 because of more abundant supplies, reduced exports, and some rebuilding of stocks. The season average farm price is projected at $2.55-2.85 per bushel. Although this will be a sharp decline from 1995/96, it compares favorably with the average of $2.30 for the previous 5 years (1990/91-1994/95). Prices, which reached 1996 highs in the summertime, began to slip in late summer as crop prospects improved and early harvested corn began to enter marketing channels. In the early months of 1997, corn prices began to level out and then strengthen, gaining some spillover support from a bull market for soybeans. The final season average price will be influenced by a number of factors, including the timing of farm sales, the market response to planting intentions, major changes in demand prospects, and weather. In 1995/96, the average corn price received by farmers hit a record $3.24 per bushel, surpassing the old record of $3.21 of 1983/84. The short crop and unexpectedly strong demand pushed up prices. One factor underpinning large exports was China's abrupt switch from a major corn exporter to a large corn importer in 1994/95. China's exports were negligible in 1995/96 and importers continued to be heavily dependent on U.S. corn. Futures prices and many cash prices skyrocketed to well over $5.00 during the summer of 1996, as supplies dried up. The old monthly farm price record of $3.45 set in October 1974 was obliterated in March 1996, and eventually topped out at $4.43 in July. The season average farm price remained comparatively low since so much of the crop was marketed early before the surge in prices. The basis between farm prices and most cash and futures prices remained record high over most of the year. Corn Disappearance Declined 9 Percent in 1995/96 Corn use in 1995/96 was 8,522 million bushels, down nearly 900 million from the record a year earlier. After a very fast pace in the early part of the year, corn disappearance slowed to a crawl by the summer as supplies dwindled. Total use in the first quarter of 1995/96 was the second highest on record, mainly due to booming exports. For the year, exports actually increased 2 percent despite rising prices. Importers moved early to cover themselves, and there were some fears of a great disaster if the U.S. had another poor crop in 1996. Exports for September-November were the highest since 1980/81 and the third largest quarter ever. By the last quarter, June-August, many importers canceled purchases or rolled them over into 1996/97 to benefit from lower new-crop prices. FSI use of corn dropped by more than 100 million bushels, the first reduction in recent history. Feed and residual use dropped 825 million bushels, slightly less than the decline in the drought year of 1988/89. While domestic use consistently trailed the year before in each of the first three quarters, use in June-August was remarkably small. Some corn processors shut down at this time or extended normal maintenance periods. Livestock and poultry feeders used large amounts of wheat, while improvements in pastures in some regions allowed cattle to stay on grass longer. In addition, some early harvested new-crop corn was used that does not show up in the domestic disappearance data for the quarter. Stocks To Increase from the 1995/96 Low of 426 Million Bushels Ending stocks of corn are projected to more than double in 1996/97 and will approach 1 billion bushels. The larger crop will enable this increase. Although up from the previous year, the prospective ratio of stocks to use would still be relatively low at 10.9 percent, compared with the 1990/91-1994/95 average of 17.2 percent. In 1995/96, ending stocks of corn fell 73 percent to 426 million bushels. This was the lowest ever for the September-August marketing year and the lowest for any year since 1974/75 when there was an October- September marketing year. The ratio of stocks to use was just 5 percent, the lowest since the Depression years of the 1930s. Early in the year, there was doubt that stocks could fall much below 600-700 million bushels, a commonly cited estimate of minimum pipeline needs. The robust pace of use actually led to forecasts falling below 400 million bushels during the year. BEGIN BOX Bt Corn Use To Expand in 1997 Availability and use of Bt corn seed is expected to expand significantly in 1997. The seed has enhanced resistance to the European corn borer and is derived from Bacillus thuringiensis (Bt) using biotechnology. Bt corn seed was approved and introduced for use in the United States in 1996, but it was used on a fairly small scale. There were only limited quantities of seed available in 1996. USDA does not collect acreage data on Bt corn. Industry sources estimate that enough Bt corn seed will be available to plant as much as 5-6 million acres in 1997, with more seed companies offering the seed this spring. Bt corn plantings could amount to as much as 7 percent of total U.S. corn acreage. The Bt trait by itself does not increase yield; it simply protects whatever yield potential is already present in that particular hybrid. Use of the seed will become more attractive as Bt technology is increasingly used with more "elite" corn varieties. A variety of factors will influence farmers' use of Bt corn. Key to this decision is whether the expected benefits outweigh the added costs since Bt corn seed is sold at a premium. Many farmers already use insecticides to deal with corn borers and could presumably save on other inputs. The decision will not be easy in many cases because precise measurement of the damage from corn borer infestation is difficult. ERS has not yet conducted any analysis of potential market impacts from Bt corn. Corn grown from Bt seed is not expected to be labeled or marketed any differently than other field corn. Major importers of U.S. corn such as Japan and the European Union have approved the import of Bt corn. Note on Specialty Corn. Acreage and use of various specialty corns have become more widespread in recent years. Some of the most prominent types include white corn, waxy corns, high amylose, high oil, and high lysine. (None of these was developed through biotechnology.) These corns are sometimes called value-enhanced and generally command a price premium. They are frequently identity preserved, and thus segmented from the main marketing channels. Much of this corn is grown under contract. USDA does not collect data on various specialty corn varieties, except for some white corn price data and white corn export inspection data. Many years ago, USDA collected white corn production data, but this was discontinued due to budgetary constraints. END BOX BEGIN BOX Market-Oriented Supply Response Under the 1996 Farm Act: Implications for 1997 Corn Plantings The Federal Agriculture Improvement and Reform Act (1996 farm act) alters several program rules that have been in existence, in some form, since the 1930s. In addition, it continues the trends of the previous two farm acts toward greater market orientation that have gradually reduced the government's intervention in the agricultural sector. Farm commodity programs became more market oriented through features such as freezing program payment yields under the 1985 farm act and planting flexibility with 15 percent nonpayment acres in the 1990 legislation. The 1996 farm act provides producers with almost complete planting flexibility by decoupling planting decisions from program payments and by eliminating annual supply control programs. Target prices and deficiency payments are eliminated and replaced by fixed contract payments that are independent from market prices. Supply Response Estimates Supply response becomes especially important in a market where resources can quickly adjust to market signals. In addition to a more market- oriented commodity policy, reduced trade barriers through passage of GATT and NAFTA are leading to freer trade and closer linkage of commodity prices between domestic and world markets. Under the old program, acreage response largely depended on program rules and planting restrictions. Existing econometric models are heavily influenced by effects of the previous commodity programs, which no longer hold under current legislation. Due to the lack of historical data under the 1996 farm act, one approach to estimating supply response is to base computations on normal flex acres (NFA) for program crops during 1991-95. Such a procedure provides an estimate of how acreage responded to price where marginal planting decisions were largely dependent on market conditions. A regional approach is taken with this analysis and cross-section and time-series data are combined. At present, results from the North Central Region are available as an illustration, which uses an example of a 100-acre base farm that grows primarily corn. Acreage price elasticities (own and cross) are computed in two parts. First, elasticities for NFA are computed from the regression analysis. Second, these elasticities for NFA are then combined with those for payment acres to derive elasticities for the whole farm. Own-price elasticity for corn plantings is estimated at 0.26 for the whole farm--a 1-percent rise in corn prices would result in a 0.26-percent increase in corn plantings--when evaluated at average planting levels. This acreage own-price elasticity is higher than the 0.17 estimated under old program rules for 1991-95, when plantings were subject to more restrictions. Similarly, a cross-price elasticity of -0.25 between soybean prices and corn acreage is estimated, again evaluated at average planting levels. This means that a 1-percent rise in soybean prices would result in a 0.25-percent reduction in corn plantings. This cross-price elasticity is greater (in absolute value) than the -0.10 estimated for 1991-95. 1/ 1/ For details of the procedures to derive these elasticities, see William Lin and Andrew Washington, "Measuring Supply Response Under 1996 Farm Act: The Cases of Corn and Soybeans," Presentation at the Southern Agricultural Economics Association Annual Meeting, Birmingham, Alabama, Feb. 3, 1997. Implications for 1997 Corn Plantings Prospects for 1997 corn plantings are analyzed by comparing conditions for 1996 and 1997 plantings. The newly-estimated supply elasticities suggest that changes in current market conditions would lower 1997 U.S. corn plantings by 1.6 million acres from intended plantings last year. However, the pervasive decline in winter wheat seedings in the fall of 1996 for harvest in 1997 and crop rotation concerns mean 1997 corn plantings could be up 1-2 million acres from the 79.5 million acres planted last year. Corn plantings intended by producers in March 1996 were about 0.9 million acres greater than actual plantings. Plantings were delayed by frequent and heavy rains, especially in the eastern Corn Belt (Indiana and Ohio). Most of these acres, although intended for corn, were planted to soybeans. Given the market conditions at planting time, producers intended to plant 80.4 million acres of 1996 U.S. corn, compared with 79.5 million acres actually planted. Relative to last year, current price relationships between soybeans and corn, however, favor planting soybeans at the expense of corn. As of March 14, December corn futures at the Chicago Board of Trade closed at $2.92 per bushel, compared with $7.26 per bushel for November soybean futures. Thus, the price ratio of November soybean futures to December corn futures stood at 2.49 to 1, compared to the 2.30-to-1 ratio in mid-March 1996. The newly- estimated supply elasticities suggest that changes in current market conditions would lower 1997 U.S. corn plantings by 1.6 million acres from the 80.4 million acres intended for last year, assuming these elasticities obtained from the North Central Region, which accounts for two-thirds of U.S. corn production, apply to the nationwide situation. The negative effect of the change in soybean-to-corn price relationships on 1997 corn plantings could be outweighed by a positive effect of the decline in winter wheat seedings in the fall of 1996. Winter wheat seedings were estimated to be down 7 percent from a year earlier. Late row crop harvest and wetness presented problems in the Plains States and major soft red winter (SRW) wheat States. In addition, a high yield risk in recent years also discouraged producers from growing SRW wheat. Finally, with less restrictive rules, crop rotation will have more influence on producers' corn planting decisions. In 1995, corn-soybean rotations accounted for about one-half of cropland planted to corn. 2/ For producers following crop rotations, corn plantings last year may thus imply a switch from corn to soybeans this year. Conversely, soybean plantings last year would suggest that the reverse is true. Also under the new legislation, farmers are looking at decisions having a multiyear impact. 2/ Natural Resources and Environment Division,"AREI Update," ERS-USDA, No. 18, December 1996. END BOX Sorghum Production Largest Since 1992 Sorghum supplies were bolstered by 74-percent increase in production. Use is projected to rise nearly 50 percent in 1996/97 as prices decline. Higher Plantings Boost 1996 Sorghum Production Production of sorghum rose 74 percent in 1996 to 803 million bushels. This was the largest crop since the 1992 crop of 875 million bushels. A sharp increase in acreage and better yields raised production. The average yield of 67.5 bushels per acre was 12 bushels higher than in 1995. Sorghum plantings, which had been declining recently, increased 3.7 million acres to 13.2 million, about equal to 1992. Farmers increased acreage in response to high prices, and the opportunity to get a return on large amounts of failed wheat acres in Kansas and cotton acres in Texas. Sorghum acres harvested for grain had shrunk to under 8.3 million acres in 1995, the lowest since 1953, but climbed to 11.9 million in 1996. Prolonged drought conditions over the central and southern Plains led to large abandonment of winter wheat by the spring of 1996, while tight grain supplies and terrible grazing boosted sorghum prices, making sorghum an attractive alternative. Plantings in Kansas jumped 1.5 million acres to the highest since 1985 and also rose sharply in Oklahoma and Colorado. Plantings in Texas, where cotton was also faring poorly, increased 1.7 million acres. Kansas had a record crop as summer rains improved growing conditions and yields equaled the previous high of 1994. Production was up in virtually every significant sorghum producing State. Supply Gains and Lower Prices Fuel Larger Use in 1996/97 Sorghum supply in 1996/97 is up more than 50 percent due to the large increase in the 1996 crop. The increase in availability and much lower prices will promote a dramatic gain in feeding and some growth in exports. Ending stocks are projected to recover to more normal levels from the extreme low of 1995/96. The season average farm price of sorghum is projected at $2.20-2.50 per bushel in 1996/97, down sharply from a year earlier. Total disappearance is projected to rise nearly 50 percent from the year before. Sorghum feed and residual use is projected to increase about 200 million bushels, up about two-thirds from the very low level of 1995/96. Exports are expected to increase more moderately, up about 25 million bushels. Sorghum Prices Charged to Record Highs in 1995/96 In 1995/96, sorghum use was constrained by very low supplies despite large demand by cattle feedlots in the major production areas. Sorghum grain production in 1995 was the smallest since 1956, reflecting shrinking acreage and mediocre growing conditions. The ratio of ending stocks to use declined to a minuscule 3.6 percent as stocks were reduced to just 18 million bushels. This was the lowest since 1952. The tight situation propelled sorghum prices to record highs. The season average farm price of $3.19 per bushel easily surpassed the former record of $2.91 reached in 1980/81. The monthly sorghum farm price peaked at $4.28 per bushel, and for several months was actually higher than corn. For the 1995/96 year, the sorghum price stood at 98.5 percent of the corn price. Over the previous 5 years, sorghum prices averaged 93 percent of corn prices. Barley Production Rose 10 Percent in 1996 The barley crop was the largest since 1993 as high prices led to an increase in acreage. Disappearance is projected to rise 5 percent in 1996/97. Barley Production Was Highest Since 1993 Barley production in 1996 totaled 397 million bushels, up 10 percent from 1995 and the largest since 1993. Both acreage and yield gains contributed to the increase. Yield per acre in 1996 was 58.5 bushels, up 2 percent from a year earlier. Area harvested was up 8 percent from the 6.3 million acres harvested in 1995 and the largest since 1992. Last spring's robust grain prices drew a strong response from farmers in the northern Plains. Prices for all barley, and even feed barley, had surpassed $3.00 per bushel, while wheat prices were near or above $5.00 per bushel. In this market environment, farmers increased barley plantings nearly 500,000 acres or 7 percent. Durum wheat acres rose slightly while other spring wheat plantings rose 3 million acres to the highest since 1936. With favorable moisture conditions, some land was brought out of fallow, contributing to this large increase in grain area. At the start of the planting season in 1996, there was concern that the cool, wet weather that delayed planting in North Dakota and Minnesota would affect the crop. However, conditions improved, and seedings were completed on a near normal schedule. Timely rains helped the crop and final yields for these two States were above a year earlier. Conversely, drought-like conditions in Montana and northern Idaho during midsummer reduced yields from 1995. North Dakota, the leading barley State, produced 143 million bushels, over twice that of the number 2 State, Idaho, which produced 53.3 million bushels. Montana, Minnesota, and Washington followed Idaho in size of production. Barley Use in 1996/97: Feed and Residual Rebounds, Exports Decline Total disappearance of barley is projected to increase 5 percent in 1996/97. Higher feed and residual use will account for virtually all of the gain. Not just the supply increase is boosting barley feeding, but also the timing: new-crop barley became available before corn. Even with very high prices, first-quarter feed and residual use of barley was unusually large. Barley exports are projected to decline in 1996/97 to the lowest in several years. A large turnaround in global barley supplies and resumption of subsidized exports by the European Union are depressing U.S. export prospects. In 1995/96, total barley use declined 12 percent. Feed and residual accounted for most of the reduction. Food and industrial use of barley remained relatively steady, reflecting inelastic demand for barley for this use. U.S. barley exports were fairly high at 62 million bushels, despite tight market conditions. Part of this strength stemmed from a surge in U.S. exports to Japan because of short supplies in Canada, usually Japan's major supplier. Exports to Mexico, mainly of malting barley, also rose because of growth in beer production and some shifting of imports from malt to grain. U.S. imports in 1995/96, which all come from Canada, fell 25 million bushels to 41 million. Tight Supplies Elevate Barley Prices Barley prices received by farmers in 1995/96 averaged a record $2.89 per bushel, up from $2.03 in 1994/95, and eclipsed the previous record of $2.81 set in 1974/75. This reflected the extremely tight market prevailing for barley and all grains. Prices received for malting barley in 1995/96 averaged $3.09, up from $2.27 the year earlier. Feed barley prices in 1995/96 averaged $2.68, up from $1.83 in 1994/95. Barley is harvested earlier than corn, and much of the barley is sold early in the season. Since the season average price is a weighted average, low prices early in the 1995/96 marketing year partly offset soaring prices later in the year. The all-barley monthly farm price hit $3.45 per bushel by May 1996, passing the old record of $3.41 reached in 1974, and then increased to $3.55 in June. The 1996/97 average price is forecast at $2.70-2.80, still relatively high despite a recovery in feed grain supplies because of the impact of the strong grain market early in the year. Prices received were still over $3 in July. Interestingly, feed barley prices were reported 7 cents above malting barley prices in June, a reversal from the usual higher price for malting barley and an indication of the severity of feed grain shortages. Since then, malting barley has reestablished a price premium. Oats Production and Use Slips Again Production dropped 4 percent in 1996 despite better yields. Imports are expected to increase in 1996/97. Oats Production a New Low Oats production in 1996, at 155 million bushels, was the lowest since records began in 1866, according to the National Agricultural Statistics Service. The crop was down 4 percent from 162 million bushels in 1995. The decline was caused by reduced acreage. Yields were up in 1996 to 57.8 bushels per acre, compared with 54.7 bushels the year before. The area planted was down 26 percent from the 6.3 million acres planted in 1995. Area harvested, at 2.7 million acres, was only down 9 percent from the year before. South Dakota produced the most oats in 1996. North Dakota was the second largest producer, followed by Wisconsin and Minnesota. Spring rains in the northern States delayed seeding in 1996. In some cases, farmers may have decided not to risk late planting which makes the crop more vulnerable to summer heat and lower quality. Compared to planting intentions reported in March, plantings were down more than 600,000 acres. A decline was expected in any case because the end of the acreage reduction program meant less use of oats as a cover crop or nurse crop to protect forage crops when they first start growing. Oats were used to conserve the soil on setaside land in government programs and these acres could not be harvested for grain. Imports Provide Higher Share of Supply Despite expectations for higher imports, the oats supply in 1996/97 is forecast to drop about 6 percent, because of very low carryin stocks and lower production. Oats disappearance is projected to fall again in 1996/97, consistent with a long-term declining trend. Food use of oats has been growing in recent years (although there was an adjustment in the USDA data series), and lower feed and residual use accounts for most of the reductions in use. Seed use is also trending downward as fewer acres are planted. Oats have carved out a niche in the feed market, however, as a quality feed for horses. Imports have become increasingly critical in the last decade and provide a large portion of the high quality oats demanded for food milling and horse feed. In 1996/97, U.S. oats imports are projected to increase about 25 percent because of a sharp increase in Canada's oats crop and an increase in shipments from Sweden and Finland. For the latter two countries, export subsidies (restitutions) are required to bridge the gap between high domestic prices and lower export prices. In 1995/96, U.S. imports fell to a 3-year low as Scandinavian shipments declined. Imports from Canada increased to a record high, but were not sufficient to offset the loss of European supply. Oats Prices Strengthen in 1996/97 Marketing year prices received by farmers in 1995/96 averaged $1.68 per bushel, up from $1.22 in 1994/95. In 1996/97, oats prices, unlike other feed grain prices, will be up and may average $1.90 to $2.00. Oats are the only feed grain with lower supplies. Imports are not likely to depress prices, and delays stemming from transportation problems in Canada during the early months of 1997 tended to push futures prices higher. Hay Situation and Outlook Hay Prices on Track To Set Record for 1996/97 Marketing Year California was the top producing State in 1996. Hay stocks on December 1, 1996 were down 4 percent from a year earlier. Alfalfa hay production in 1996 totaled 79.4 million short tons, down 6 percent from a year earlier. Acres harvested were only down 1 percent, but yields were down 5 percent from 1995's 3.45 tons per acre. Dry conditions late in the season reduced yields from second and third cuttings in most of the northern half of the United States. In the southern United States, however, mild temperatures and ample precipitation during August and September led to additional cuttings and helped boost yields. California, which boosted yields in 1996, had some hay damaged by late season rains but still was the top producing State. In Texas, yields of alfalfa and alfalfa mixtures were up 25 percent from 1995, offsetting the 6-percent decline in acreage. Kansas yields were up 13 percent from 1995's 3.8 tons per acre, but Oklahoma yields declined 8 percent. Wisconsin, Michigan, Minnesota, South Dakota, and North Dakota, among others, saw yields decline. All other hay production was 70.1 million tons, 1 percent above a year earlier. Acres harvested were up 5 percent but yields were down 4 percent from 1995's 1.96 tons per acre. Favorable growing conditions late in the season helped yields, especially in Louisiana and Oklahoma. Texas had reduced production because additional acreage was offset by lower yields. Hay stocks on December 1, 1996, were down 4 percent from a year earlier, with the biggest declines in the eastern Corn Belt and Lake States, where stocks were down 15 percent. Overall, thirty of the 48 contiguous States had lower stocks. The largest stocks increases occurred in the Atlantic Coast States, the Central Plains States, and Alabama and Mississippi in the Southeast. Calculating U.S. stocks on December 1 vs. the number of cows that have calved, gives a decline in hay per cow of 1 percent relative to a year earlier. Hay stocks per cow in the eastern Corn Belt and Lake States were down 12 percent. Many cattle producers likely supplemented hay supplies with additional silage. The index of roughage consuming animal units is estimated to be down 3 percent for 1996/97 from the 78 million units in 1995/96. The stock of hay on December 1 per RCAU is expected to total 1.39 tons, down 1 percent from 1995/96. Prices received by farmers for alfalfa and alfalfa hay mixtures were $115 per ton in mid-February, up from $84.60 last year and January 1997's $106. Other hay prices in February were $80 per ton, up from $64.90 in 1996, but down from $80.10 in January 1997. Hay prices have been strong all during the 1996/97 May-April hay marketing year, mainly because adverse weather reduced the quantity and quality of the 1996 hay crop. In addition, in the first half of the year, shortages of feed grains raised demand for high quality hay. Last spring, dry weather in Texas, Oklahoma, and Kansas cut forage supplies, requiring supplemental feeding of carryover hay. The eastern Corn Belt had wet weather that kept farmers from harvesting high quality hay. Summer rains led to improved grass hay production in Texas and Oklahoma. Feed and Residual Use Tight Supplies Kept Feed and Residual Use in 1995/96 15 Percent Below a Year Earlier With strong demand , grain prices were high for the 1995/96 marketing year and feed per grain consuming animal unit was down 16 percent from 1994/95. The December 1, 1996, hog breeding inventory was the lowest on record, and the January 1 cattle inventory was down 2 percent from a year earlier. Feed and residual use of the four feed grains (corn, sorghum, barley, and oats) plus wheat in September 1995-August 1996 totaled 141 million metric tons, down from 166 million in 1994/95. In 1995, delayed planting because of wet weather and then dry, hot weather at the end of the growing season reduced yields, resulting in a smaller crop. Also government programs for feed grains included set-asides and acreage was reduced because of the record large crop the previous year. Thus with strong demand, prices were high for the 1995/96 marketing year and feed per GCAU was down 16 percent from 1994/95. Livestock producers have been faced with fluctuating supplies of feed ingredients and shifting prices. Producers that had begun to expand flocks and herds after the good 1994 crops were hit with tight supplies in 1996 because of the small 1995 crop. Too make matters worse, the 1996 crop was also late getting planted in the eastern Corn Belt, which kept markets very nervous in the summer. Many feeders apparently contracted for their needs and were able to offset some of the price increase but others were hard pressed to find grain at any price. During the summer, prices were bid to record highs and some unusual developments occurred. For example, by August there were reports that some early harvest southern corn was being barged up river to supply northern markets. This is the opposite direction usually taken by barge traffic on the Mississippi River. The higher cost of feed in 1995/96 meant that cattle feeders could not bid as much for feeder cattle, reducing the earnings of cow-calf producers. Lower returns, coupled with dry pastures, especially in the Southwest, encouraged increased cow slaughter. As a result, the cattle inventory on January 1, 1997, was down 2 percent from a year earlier and the number of beef cows was down 3 percent. Beef replacement heifers were down 2 percent from 1996. Dairy cow numbers on January 1, 1997, were down 1 percent from the year earlier. Dairy producers were affected by higher feed costs and hay quality was lower in many parts of the country. Lower quality hay means dairymen need to increase concentrates to maintain the cows' nutritional levels, but with tight concentrate supplies this was difficult to do. In 1996, the quarterly reported concentrates fed per cow did not continue the upward trend they had shown for many years. In January, feed and other concentrates fed were up from the year earlier as the dairy industry began to get back on track. The high cost of feed in 1996 and the changing structure of the hog industry led to the lowest December 1 breeding inventory on record. The hog industry has been shifting to large specialized operations that increase the number of pigs saved per sow, thus needing fewer sows. During December 1995-May 1996 the pig crop was down 4 percent from the year earlier and in June 1996- November 1996 it was down 3 percent. The poultry sector started 1996 with plans to increase output to satisfy both domestic and foreign demand, especially for broilers. However, strong corn prices caused producers to trim expansion plans and output for all of 1996 was up 5 percent, from the year earlier. Broiler producers have just recently begun to strongly expand the number of eggs set and chicks placed, and may expand 1997 production 6 percent from 1996. In 1996, table egg producers increased production 2 percent from 1995's 5.3 billion dozen in spite of strong feed prices and may expand output 3 percent in 1997. Turkey producers increased output 7 percent in 1996, from 1995' 5.1 billion pounds, even with the strong feed prices. Turkey producers reported that they intend to produce 2 percent more turkeys in 1997. Food, Seed, and Industrial Use of Corn Food, Seed, and Industrial Use of Corn in 1995/96 Declines 6 Percent from Year Earlier Corn used to produce ethanol and starch in 1995/96 was down from the year earlier as the high cost of corn squeezed profit margins. Corn sweetener production was up, however, even with higher input costs. Food, seed, and industrial (FSI) uses of corn in 1995/96 were 1.6 billion bushels, down from the 1.7 billion used in 1994/95. FSI uses accounted for 18 percent of the corn supply, up from 15 percent in 1994/95 when supplies were much larger. Corn used to produce ethanol and starch in declined from the year earlier as the high cost of corn squeezed profit margins. Some of the corn FSI uses are not as price-sensitive as feeding or exports. Ethanol production, which competes with MTBE, declined 26 percent from 1994/95. Ethanol producers were caught between higher costs for inputs and competing products that limited raising prices and many suspended operations to do maintence on their plants. Ethanol producers then found many petroleum firms had committed to MTBE when ethanol prices were not competitive as they made plans for the winter oxygenate season. Thus use in 1996/97 has been slow to pick up and is not likely to match the corn use of 1994/95. Corn used in starch production in 1995/96 declined 3 percent from the 226 million bushels used in 1994/95. As producers passed along the higher costs of corn, their buyers apparently found alternative products that were less expensive. In 1995/96, corn used for beverage and manufacturing alcohol increased 10 percent from the year earlier. Even with tight supplies of corn, higher exports of grain neutral spirits mainly made from corn boosted corn use. Corn sweetener production was up in 1995/96, even with higher input costs. Prices of HFCS and corn sweetener did strengthen slightly but it is not known if rise of a cent or two was enough to offset the higher corn prices or if additional capacity kept prices from rising. Corn used to produce HFCS was up 4 percent from 1994/95, with year-to-year production gains throughout the year. Corn used for glucose and dextrose was up 3 percent from the 231 million bushels used in 1994/95. Use was up throughout the year, but June- August 1996 use was up only 1 percent from the year earlier. In September- November, the first quarter of the 1996/97 marketing year, corn used for glucose and dextrose was down 5 percent as producers had problems securing corn to process. In contrast, HFCS production in September-November was up nearly 5 percent, probably reflecting strong demand from soft drink bottlers. To get an idea of the relative cost of corn to various wet millers and dry mill ethanol producers, the net corn cost can be calculated. We use the price of corn received by farmers at central Illinois points. Processors may pay more if they purchased from these elevators because they have to pay a fee to the elevator and transportation costs to their plant. Byproduct prices are those quoted by USDA Market News for corn gluten feed, corn gluten meal, distillers' dry grain, and a wet mill corn oil price in Chicago reported in the Wall Street Journal. Calculating the expected yield of byproducts per bushel and subtracting from the corn price gives an estimated net corn cost. In May 1996, corn prices were $4.86 and the estimated net corn costs were $3.23 for dry millers and $2.96 for wet. May was the peak net corn cost calculated in this manner for dry millers. The peak for wet millers was in July when their net corn cost was $3.08, because the byproduct values did not move the same way. Wet millers usually have lower corn costs because they sell oil, and gluten feed and meal. Dry millers get a higher yield of ethanol from a bushel of corn but only have distillers' dry grains as their byproduct. BEGIN BOX Food. and Industrial Uses Revisions USDA has revised its time series data for food and industrial use of feed grains. Most of the changes were relatively small, except for oats. Food and industrial uses data for corn, sorghum, barley, and oats are not regularly surveyed by any government agency. The Census of Manufactures is the only survey data that approach the detail needed to determine use and this survey is only done every 5 years. Between surveys, the data are estimated based on population growth, industry estimates, or whatever information is available. Data for fuel alcohol is available from the Department of Transportation on a monthly basis, but the breakdown of raw material used to produce the ethanol is not available. Therefore, periodically we need to revise the estimates based on the latest Census of Manufactures. With publication of the final 1992 Census of Manufactures, changes have been made in estimates to reflect the reported numbers by Census. For corn, changes have been made in the historical data for HFCS, glucose and dextrose, and starch, while changes in beverage and manufacturing alcohol also relied heavily on data from the Bureau of Alcohol, Tobacco, and Firearms (ATF). The net impact on total FSI use was small in the current and most recent 2 years, 5 million bushels or less, because of offsetting changes. However, in the supply and demand balance sheets, any changes in total FSI use of a grain results in a corresponding change in feed and residual use. For HFCS, changes in production data resulted in minor changes in the historical data. However, glucose and dextrose estimates dropped by 5 million bushels. A similar correction was made for starch. Percent changes in prior estimates of corn used for starch stayed about the same in the current estimates but the magnitudes declined. For beverage and manufacturing alcohol, the new series is much more variable and it is around 20 million bushels larger than previous estimates for recent years. Although licensed by the ATF as beverage plants, some of the plants that produce beverages also produce fuel or manufacturing alcohol. This necessitated a revision in the data. While the Census of Manufacturers has previously published data on beverage industries, this past census broke out ethyl alcohol production by the organic chemical manufactures, including fuel alcohol from wet and dry milling along with pure (natural) alcohol. The Census data are within 1 percent of the ATF data, assuming denatured alcohol is 95 percent alcohol and pure alcohol in proof gallons is actually 185 proof. Because alcohol data are reported in proof gallons, tax gallons, and wine gallons, getting two sets of data to come close is not always easy. ATF has distinct legal definitions of proof and tax gallons, but in practice a proof gallon and a tax gallon are about the same, both 100 proof, 50 percent ethyl alcohol. While the alcohol production checks between ATF and Census, Census numbers on grains used in alcohol production are not available for the organic chemical category to compare with ATF numbers. The ATF data give production of various types of alcohol and total grains used. For alcohol and spirits 190 proof and over, there is a breakout of production by kind of materials used such as grain, fruit, or ethylene gas. Some simplifying assumptions were used to calculate use. Estimated corn used for beverage and manufacturing alcohol was calculated by taking grain needed and using the proportion corn was of total grains as reported by ATF. Grain needed was the sum of estimated grain spirits over 190 proof, less net withdrawals for fuel, grain spirits less than 190 proof, and whiskey production converted to grain at 5.1 proof gallons per 56 pounds of grain. Finally, corn used to produce beer, as reported by ATF, continues to be included. Production of cereals and other food products made from corn were also revised upwards using the Census of Manufactures data. In general, food uses originated through the milling industry and cereals production. The flour and other grain mill industries purchased 133.9 million bushels of corn in 1992. In addition, the snack food industry purchased 9.2 million bushels of field corn to be used for food, bring total corn purchases to 143.1 million bushels. This total was reduced to 128 million bushels to account for brewers' corn grits because they would be included in beer. The difference was averaged in over the 5 years between Census reports. Since 1991/92, corn use was assumed to grow by 1 percent to correspond to population growth. This growth trend will continue until the next census or until industry sources come up with other information that warrants a change. Food and industrial uses of grain sorghum have been difficult to document. Some grain sorghum is used to make alcohol and beer, but none was reported by the food grain milling industries. If some sorghum was used, it was reported with other grains, so it could not be accounted for separately. Barley used for food and industrial uses was calculated from that used by the flour and other grain milling industries plus the cereal industry. Some of the barley malt is used to flavor baked goods but there was no way to separate this use from malt used by distilling and beer production. Based mainly on reported values, 6 million bushels were estimated to be used for food in 1992. Again the difference was averaged in over the 5 years between censuses. Food use of barley was assumed to grow at the same rate as population. The 1992 Census of Manufactures reported oat purchases by millers and cereal makers of 76.6 million bushels, considerably less than previously estimated. A very small amount of oats was probably used for industrial purposes but was likely purchased as milled product rather than oats. There was tremendous growth in food use of oats in the late 1980s verified by comparison of the 1987 and 1992 census. After this major jump, annual increases were been much smaller in the early 1990s. END BOX World Coarse Grain Outlook Record Global Coarse Grain Production in 1996/97 Boosts Supplies Higher yields led to increased world production in 1996/97, more than offsetting reduced beginning stocks, and boosting coarse grain supplies. While much of the year-to-year increase occurred in the United States, foreign coarse grain production set a record in 1996/97. World coarse grain consumption is expected to increase, but more slowly than production. World Coarse Grain Production Up 11 Percent in 1996/97 The United States paced increased world coarse grain production in 1996/97, as high prices encouraged production and yields rebounded, boosting U.S. production by 58 million tons from the year earlier, when adverse weather reduced yields. Foreign production increased more slowly, up 30 million tons, a 5-percent increase. Almost the entire increase was due to increased yields, with foreign coarse grain area up only 0.5 percent from 1995/96. Increased global supplies in 1996/97 are in stark contrast to a year ago. Coarse grain prices were high in 1995/96 because exportable supplies were limited. China had become a major importer instead of the world's second largest exporter, and the U.S. corn crop was reduced by adverse weather. Before and during the U.S. harvest, importers were concerned that supplies would be critically short and some, especially Japan, increased purchases, driving up prices further. Because of importers' aggressive early buying, U.S. corn export commitments in 1995/96 started out at a record pace. Later in the year, as supply concerns waned, some earlier purchases were canceled or delayed, and the export pace slackened. Foreign coarse grain imports dropped 6 percent in 1995/96, but consumption continued to grow as foreign ending stocks fell. Foreign corn production in 1996/97 is estimated at a record 340 million tons, up 3.5 percent, as the five largest foreign producers each increased production. Record corn production occurred in China, the EU, and Argentina, while Brazil and Mexico had near-record crops. Foreign barley production increased 9 percent to 146 million tons in 1996/97. While foreign barley area dropped 4 percent, the average yield is estimated up 13 percent, with record yields in the EU and Canada. Most of the area decline occurred in the NIS (NIS refers to the 12 countries, excluding the three Baltic nations, that comprised the former Soviet Union) where declining livestock numbers reduced feed demand and high wheat prices encouraged some producers to shift barley area to wheat. In addition, drought cut yields in some areas, especially Russia and Kazakstan. Barley area increased in the EU, Canada, and Turkey. Foreign sorghum production increased 5 percent to 46 million tons. Although foreign area was virtually unchanged, average yields were just above the previous record and 9 of the 10 top foreign sorghum producers are estimated to have maintained or increased production in 1996/97. Foreign oats production increased 6 percent to 28 million tons in 1996/97. Increased yields in the EU, Canada, and Australia boosted average yields, offsetting reduced area in the NIS and Australia. Foreign Coarse Grain Supplies Up in 1996/97 Despite Lower Beginning Stocks and Imports Foreign coarse grain supplies are forecast up in 1996/97 as increased production more than offsets lower beginning stocks and reduced imports. More than one-third of the foreign production increase is offset by reduced estimated beginning stocks. Foreign coarse grain beginning stocks are estimated at 78 million tons, down 12 million from the previous year and the lowest since 1990/91. Most of the decline was because of a drop in estimated barley stocks, and the NIS accounted for about half the decline, as the feed-livestock sector continues to restructure and shrink (see special article on Russia's poultry imports). EU beginning stocks are also down, as barley production in both 1994 and 1995 were the lowest since 1971 because of low yields and reduced area. Global Coarse Grain Use Accelerates on Larger Production and Macroeconomic Growth World coarse grain consumption is projected to increase 3.5 percent in 1996/97, as increased supplies reduce prices and generally strong global economic growth boosts demand for meat. World poultry production is projected up in 1997, laying the foundation for strong feed demand. Large increases are expected in China, the United States, Brazil, Saudi Arabia, and Thailand. World beef and pork production are expected to expand more slowly than poultry. Cattle numbers in the EU are expected to stabilize after 5 straight years of declines. With increased barley and corn production, and grain prices encouraging more grain feeding, EU feed use of feed grains is forecast up 7.5 percent in 1996/97. The biggest increase in 1996/97 coarse grain consumption is forecast for China, while the largest decline is in the NIS. Most countries are increasing consumption, but a significant decline is forecast for South Korea, where wheat feed consumption is expected to increase. World Coarse Grains Outlook World Corn Trade To Drop in 1996/97, But Total Coarse Grain Trade Little Changed Increased foreign production is expected to reduce world corn trade in 1996/97 while increasing barley and sorghum trade. Moreover, the U.S. share of reduced world corn trade is expected to decline. Corn Imports To Drop in 1996/97, While Barley and Sorghum Expand World coarse grain trade is expected to be stagnant in 1996/97 because of forecast large production growth in foreign importing countries. While global barley imports are forecast up 21 percent, and sorghum up 6 percent, world corn imports are forecast at 63 million tons, down 5 percent from a year ago,. Corn imports are dropping most dramatically in Mexico, China, and Turkey because of increased domestic coarse grain production, and in South Korea and Japan, where corn is being replaced by other feeds. Mexico is expected to drop 1996/97 corn imports by 45 percent from the record 6.4 million tons a year earlier. This year, Mexico's corn and sorghum production increased, with record sorghum production and a near-record in corn. Additionally, sorghum imports are expected to increase, because of favorable prices compared to corn. Demand for feed grains in Mexico has grown in 1995/96 and 1996/97 despite economic and exchange rate problems. China is expected to drop corn imports and become once again a major net exporter as record production and large stocks reduce internal prices (see special article on China). The EU is forecast to reduce corn imports by more than 20 percent. Larger supplies of feed grains in 1996/97, especially in Spain and Portugal, will limit corn imports. South Africa will reduce corn imports in 1996/97 (October/September) because of higher production in both 1996 and 1997. Drought-stricken production in 1995 caused corn imports in 1994/95 and 1995/96, but larger production has reestablished South Africa as a net corn exporter. South Korea is forecast to remain the world's second largest corn importer, but reduce imports by 8 percent, as feed wheat imports are forecast higher. Japan, the largest importer, is forecast to reduce corn imports 3 percent, while increasing total coarse grain imports by 3 percent. Although 1996/97 coarse grain consumption is expected to increase, more of the grain ration will be sorghum and less corn. Corn imports by the NIS are expected to remain minimal. Several corn importers are projected to increase imports in 1996/97, partly offsetting the aforementioned declines. Egypt is forecast to boost corn imports almost 30 percent as poultry and beef production increase. Algeria's corn imports are expected to rebound from exceptionally low levels in 1995/96. Brazil is expected to increase corn imports from minimal levels in 1995/96, as the Mercosur regional trade agreement encourages purchases from Argentina, but increased domestic production will limit import gains. Colombia is expected to increase corn imports by more than 25 percent as feed demand is increasing faster than production. Malaysia, the Philippines, Jordan, and Chile are projected to post record corn imports as strong economic growth boosts demand for meat. North Korea, which uses corn for used as food as well as feed, is expected to increase corn imports as part of food relief. World Barley and Sorghum Imports To Rebound In 1996/97 Saudi Arabia, the world's largest barley importer at 5 million tons, is expected to import more barley in 1996/97 than in the previous 4 years because of increased demand for feeding, declining domestic production, and reduced stocks. However, Saudi barley imports are expected to be well below the record 9 million tons reached in 1986/87. Japan's barley imports are expected to rebound to the level reached 2 years ago, with feed barley replacing some corn in animal rations. China has emerged as the third largest barley importer (all malting barley), as domestic production is small and demand for beer is growing rapidly. U.S. barley imports are projected little changed in 1996/97 (see special article), because imports are limited by larger U.S. feed grain supplies and reduced incentives for Canada to ship barley to the United States. In Canada, despite the large barley crop, domestic demand is up and export opportunities to other countries are attractive. The increased availability and low prices of EU supplies are boosting barley imports by Iran and Libya. An exception to generally expanding barley imports is the Eastern Europe/NIS region, where barley imports are expected to continue to decline in 1996/97 because of reduced animal numbers and limited foreign exchange. The NIS is expected to reduce barley imports sharply as demand for feed grains continues to decline. Barley imports by Eastern Europe are expected to remain minimal in 1996/97. Although barley production declined, more corn and less barley is being fed. Sorghum imports by Japan and Mexico, the world's dominant importers, are expected up sharply in 1996/97. U.S. sorghum export prices have been low compared to corn prices, so these countries are expected to buy more sorghum and less corn. Foreign Coarse Grain Exports Forecast Up 12 Percent in 1996/97 Foreign exporters are expected to increase their share of world coarse grain trade in 1996/97, led by an increase in EU exports of almost 2 million tons. EU barley exports are rebounding because of increased production in 1996/97 and prospects for a significant stock buildup. Increased consumption of feed wheat and domestically produced corn in the EU is limiting internal barley consumption. To limit the buildup of intervention stocks, the EU has decided to aggressively subsidize and export feed barley. High coarse grain prices in 1995/96 provided an incentive for foreign producers to increase production and increase exportable supplies in 1996/97. Argentina, Canada, and China are expected to boost coarse grain exports in 1996/97. Record corn production in Argentina and China, and record barley production in Canada are providing the supplies to increase exports. Turkey is expected to emerge as a significant barley exporter after harvesting a record crop. In China, record corn production has increased exportable supplies, but exports will largely hinge on government policy decisions (see special article on China's corn trade). Several traditional coarse grain exporters, especially Australia, South Africa, Eastern Europe, and Thailand, are not expected to raise exports in 1996/97 because supplies did not increase or domestic use has risen. In Australia, barley production increased in 1996/97, but this was offset by reduced sorghum production. Australia's barley exports, for feeding and malting, are expected to be little changed, while sorghum exports drop. In South Africa, corn production is not expected to match last year's crop, but to be near average because good conditions in some areas offset dry conditions in some southern parts of the maize triangle. Although corn exports are expected to decline, South Africa will remain one of the top 3 or 4 world corn exporters. However, it is unknown how reorganization of the marketing board is going to affect the quantity exported. In East Europe, coarse grain area was little changed in 1996/97, but average yields declined because of unfavorable weather. Exports are expected to drop more than internal consumption or stocks. Corn production actually increased in 1996/97 led by a large crop in Hungary. However, demand for export licences was surprisingly low, as increased internal demand kept local prices high relative to world levels. East Europe's barley production dropped in 1996/97 as adverse winter weather damaged the crop in Hungary and Romania, more than offsetting increased production in Poland. In Thailand domestic demand for feed grains is growing faster than production. Even though corn production is up in 1996/97, exports are expected to decline and imports to increase. U.S. Corn Exports Down in 1996/97 as U.S. Share of World Trade Declines U.S. 1996/97 corn exports are forecast at 1.9 billion bushels (October/September, 48.5 million tons), down 8 percent from a year ago, because of increased competition. The U.S. share of world coarse grain trade is expected to fall from recent high levels in 1994/95 and 1995/96, but remain well above earlier years this decade when China was a larger exporter. Prices in 1995/96 were high enough to encourage foreign producers like Argentina to expand production. During the first half of 1996/97 U.S. corn exports and sales are down sharply compared to the record early pace of a year ago. According to U.S. Export Sales, corn export shipments were down 20 percent compared to a year earlier for September 1, 1996, through March 13, 1997, while outstanding sales were down almost 50 percent. However, exports in 1995/96 started very quickly, because importers were worried about supply availability, but then slowed dramatically later in the year. Compared to last year, 1996/97 exports are expected to be higher in the summer months. Through mid-March, U.S. sales and shipments to Asia are down sharply. No shipments have been made to China, whereas a year ago over 2 million tons had been shipped. South Korea, the second largest market for U.S. corn, has shipments 14 percent behind last year's pace. Moreover, outstanding sales to South Korea are down 85 percent, and outstanding sales to our largest market, Japan, are down almost 50 percent. However, actual corn shipments to Japan are only down 4 percent and U.S. corn sales to these two key markets are expected to increase in the second half of 1996/97. Shipments to the EU are down sharply, but are likely to increase later. The EU by treaty must give market access for set quantities of corn and sorghum for Spain and Portugal. Mexico's imports are also expected to pick up later in the year as domestic supplies are used up and prices rise. Corn export commitments (shipments plus outstanding sales) are also down 20 percent to Africa, but to the Western Hemisphere excluding Mexico, commitments are up 9 percent, with increased shipments to Colombia, Venezuela, El Salvador, and Guatemala. BEGIN BOX Transportation Data and Analysis ERS will no longer include a section on grain transportation in the text of the Feed Yearbook, although we will continue some of the appendix data tables. However, the Agricultural Marketing Service of USDA is another source of transportation information. The AMS Transportation and Marketing Division (TMD) publishes the weekly Grain Transportation Report, which includes data on domestic rail and barge movements. By fall 1997, the report will be available on the Internet, and will include more data, analysis, and expanded coverage of grain transportation issues. The TMD also publishes periodic reports on issues and trends in rail, barge, and ocean shipping, and port infrastructure development. To obtain a free subscription to the Grain Transportation Report or to obtain copies of other TMD reports, contact Keith Klindworth, Program Manager, (202) 690-1303, fax (202) 690-3616. END BOX Special Article MARKET FACTORS AFFECTING FUEL ETHANOL PRODUCTION by John McClelland Abstract: Fuel ethanol production has varried sharply over the past 2 years. This paper analyzes price relationships among corn and corn milling coproducts, ethanol, and gasoline to discribe market forces that are likely to affect the supply and demand for fuel ethanol. Keywords: Ethanol, corn, coproducts, oxygenates, gasoline, prices, costs Fuel ethanol producers have taken a wild ride since production reached record highs in late 1994 and early 1995. With corn prices at or near record levels for an extended period during the 1995/96 crop year, ethanol producers were squeezed and fuel ethanol production dropped to 39,000 barrels per day by July 1996, a full 60 percent below the high of 100,000 barrels per day in January 1995. What market forces precipitated such a production decrease, and what did we learn about how ethanol producers may react to future changes in commodity prices? Over 60 percent of all fuel ethanol is blended into conventional gasoline as a fuel extender or octane enhancer. The remaining 40 percent is blended into conventional gasoline and reformulated gasoline as oxygenate. Oxygenates are required in both reformulated gasoline and oxygenated fuels although fuel producers can choose oxygenates based on their blending economics. Decisions on which oxygenates to use in mandated programs are based on the relative prices among oxygenates. For example, ethanol is used in about 70 percent of the reformulated gasoline sold in Chicago because it is more economical to use than methyl tertiary butyl ether (MTBE), its main competitor. Oxygenates are not required in conventional gasoline, so a decision to blend ethanol into conventional gasoline is based strictly on the relationship between ethanol and gasoline prices. Thus, ethanol blending margins for gasoline suppliers are an important market factor to consider in this analysis. Because a large percentage of ethanol is blended into conventional gasoline, we would expect the relationship between ethanol and gasoline prices to be a determining factor in the amount of ethanol demanded. Fuel producers receive an incentive for blending ethanol into gasoline through a partial exemption of the Federal gasoline excise tax. The incentive is equivalent to $0.54 for every gallon of ethanol blended. When the difference between gasoline and ethanol prices is roughly $0.54 per gallon, gasoline suppliers begin to have an economic incentive to use ethanol. 1/ Thus, when the difference between ethanol and wholesale gasoline prices is greater than $0.54 cents per gallon, ethanol blending margins are negative and we would expect gasoline suppliers to blend less ethanol. When the difference is less than $0.54 per gallon, ethanol blending margins are positive and we expect gasoline suppliers to blend more ethanol. 1/Octane values for ethanol make the break-even price for ethanol vary, sometimes by several cents per gallon. Ethanol producers process corn into ethanol and other products. Ethanol wet mills produce corn oil, corn gluten feed (CGF), corn gluten meal (CGM), and dry mills produce distillers' dried grains (DDG). The profitability of ethanol production not only depends on the gross price of corn, but also on the prices of all products made from the corn. A major factor affecting producers' decisions to process corn into ethanol is the net cost of corn for each gallon of ethanol produced. Net corn costs of ethanol for wet mills are defined as the price of corn per bushel minus the price of CGF times the amount of CGF produced per bushel, minus the price of corn oil times the amount of oil produced per bushel, minus the price of CGM times the amount of CGM produced per bushel. Dividing this sum by the yield, 2.5 gallons per bushel, converts to the net corn cost per gallon. When net corn costs increase relative to ethanol prices, producers' margins are squeezed and there is less incentive to produce ethanol than when net corn costs fall relative to ethanol prices. Ethanol production margins are another important market factor to consider in this analysis. Preliminary statistical analysis indicates that the difference between ethanol and gasoline prices (blending margin), and ethanol and net corn costs (production margin), largely determines the level of ethanol production. The chart illustrates these relationships. One line on the chart plots the difference between ethanol and wholesale gasoline prices by month from June 1994 through December 1996. A second line plots the difference between ethanol prices and net corn costs per gallon of ethanol for the same period. The bars show daily ethanol production in thousand barrels scaled by 100,000. During June 1994-May 1995, the economics of ethanol production and ethanol blending were working in opposite directions. Blending margins represented by the difference between ethanol and wholesale gasoline prices increased for the first 5 months of that period before beginning a sharp 6-month decline during which ethanol blending economics were very favorable. During that same period, ethanol margins represented by the difference between ethanol prices and net corn costs increased slightly in the first 5 months but then also took a sharp decline that lasted for 20 months. During November 1994-May 1995 blending margins were made favorable by rising gasoline prices and falling ethanol prices. Over the same period, production margins were declining because corn prices were rising and the prices of ethanol and feed coproducts were not keeping pace. The economic forces affecting supply and demand for ethanol were working in opposite directions, one tending to increase demand, the other pushing to reduce supply. If the seasonal variation for ethanol production is accounted for, ethanol production remained about constant or declined slightly during July 1994- May 1995. In May 1995, the economics of ethanol blending and production margins began to change significantly. Production margins continued to decline sharply until they reached a low of $0.08 per gallon in May 1996 as corn prices rose sharply. At the same time, blending margins worsened as the difference between ethanol and wholesale gasoline remained consistently above $0.60 per gallon. With economic forces reducing both demand for and supply of ethanol, production that was already about 10 percent lower than a year earlier began declining sharply in December 1995. By July ethanol production had hit a low of 39,000 barrels per day, or less than 600 million gallons on an annual basis. Falling corn prices and increasing gasoline prices toward the end of 1996 turned the economic fortunes back in ethanol's favor. Blending margins, while not good, have improved substantially from last summer when gasoline was nearly $1.00 per gallon cheaper than ethanol. When blending margins were this poor, it is likely that most of the ethanol blended was in reformulated gasoline markets where ethanol competes with MTBE. Because gasoline, natural gas, and MTBE prices were all climbing throughout 1996, ethanol could remain competitive with MTBE in oxygen-mandated areas. Production margins have greatly improved with net corn costs back under $0.50 per gallon. Fuel ethanol production followed these signals and increased sharply in August, September, and October, but has remained level through January 1997. One reason may be due to adjustments made by the industry while ethanol production economics were poor. Many producers shut down plants for repairs and additions during the 1996 summer slump. Several producers added equipment making them capable of producing ethanol for a strong beverage alcohol market. Sales into this market, that are mostly exported, could help explain why fuel ethanol production levels remain lower then they were a year ago. Given the experiences ethanol producers have had over the past 28 months, a little diversification may help smooth the way ahead. Special Article Policy Decisions Are Critical Determinant of China's Corn Trade by Frederick Crook and Peter A. Riley Abstract: Despite a record crop in 1996, many uncertainties continue to surround the outlook for China's corn exports. China resumed exports of corn in late 1996 and is forecast to be a net exporter in 1996/97. A series of policy reforms opened the agricultural sector to more market forces during the 1980's and early 1990's, but recent changes have made policy concerns more important in assessing trade prospects. Keywords: China, corn, production, exports, policy, price Record 1996 Corn Crop Suggests Large Exportable Supplies Corn demand has grown rapidly in recent years in China as strong income growth has brought increasing consumption of meat and poultry products. China switched from a large net exporter of corn to a net importer during 1994/95 in the face of sharply higher demand. Corn imports were large at over 4 million tons in 1994/95 and 1.5 million tons in 1995/96. This year, China resumed exports of corn while its imports have virtually dried up. China is forecast to be a significant exporter again during 1996/97, with corn imports expected to fall to less than 100,000 tons in 1996/97. China's corn production in 1996 is estimated at a record 117 million tons, up 5 million from the year before. Corn prices have fallen sharply over the last few months, reflecting the large increase in supply. This also indicates that market forces are at work in the grain economy. However, the central government still exerts the most critical influence on trade. Even with more competitive prices and the strong desire of local authorities to export corn, China has taken a very cautious approach. Exports have proceeded slowly early in 1997 and traders have reported that export licenses have periodically been held up. Although corn is now overwhelmingly used as a feed grain in China, rather than as a staple food, food security concerns appear to be central to recent agricultural policies affecting corn as well as the major staple grains, wheat and rice. Background: Reforms in Government Grain Policies From the mid-1950s to the early 1980s, China's government maintained a tight grip on agricultural production, consumption, domestic marketing and international trade. From 1953 to 1993 urban families were issued coupon books that entitled them to purchase fixed quantities of grain and edible oils at low fixed prices from government-operated grain stores. Then, in the early 1980s, the government disbanded the commune system, allowed the old pre-1950 marketing system to revive, and set up the household land contract system in which farm households were permitted to sign long term land contracts to cultivate specific plots. As long as farm households delivered specified quotas to local government-owned Grain Bureaus--thus paying their taxes and meeting government grain procurement requirements--the households were free to produce whatever they wanted and were permitted to sell their goods through local open markets. The central government raised the purchase price of grains to encourage farmers to produce more, but the Grain Bureau retail shops in the urban areas continued to sell rice, flour and corn at low prices that had largely remained constant since the early 1960s. By the late 1980s, China's government found that over 20 percent of total national government revenues was used to finance the gap between the purchase and retail price of grain. Starting in 1992, the central government introduced market reforms to reduce the burden of the grain subsidies and to improve the economic efficiency of grain markets. By the end of 1993, these market reforms accelerated, as 28 out of 31 provinces began to phase out the grain ration system that allowed urban consumers to purchase grain at low fixed prices. Thus, to many observers it looked like China would steadily pursue an economic course based on free markets and comparative advantage. Government Begins To Reassert Controls in 1994 Three factors appear to have pushed China's leaders from 1994 to 1996 to reassert government control over grain markets, veer away from the principle of comparative advantage, and restrict market operations. First, inflationary pressures in late 1993-early 1994 and a sharp rise in grain prices in 1994 undermined the government's resolve to carry out market reforms. While there may have been local grain imbalances, on a national basis there does not appear to have been a huge gap between demand and supply. A major factor underlying the general rise in prices was the large increase in the money supply, as the Ministry of Finance was required to issue more money to bail out inefficient state-owned enterprises and to increase wages and bonuses to largely urban workers. In 1994 and 1995, the government implemented anti-inflationary measures, including price controls. Price stability has always been important to China's central leaders, many of whom witnessed the devastation of hyperinflation at the end of World War II. When the objective of price stability came into conflict with raising farm incomes, China's leaders chose their traditional urban bias of pursuing price stability. Second, while rural reforms brought relatively rapid increases in grain production in the 1980s, the rate of increase slowed in the 1990s and leaders became concerned about the decrease in the area sown to grains. Third, in 1994 and 1995, analysts in and outside of China questioned the country's capacity to produce enough grain to meet growing consumption requirements. It is possible that these reports had a sobering effect on the central leaders, pushing them to limit market reforms and initiate the "governors' grain bag responsibility system," a policy designed to promote adequate supplies of domestic grain at provincial levels whenever possible. Governors' Grain Bag Responsibility System Aims at Self-Sufficiency In early 1995, the central government initiated a new grain policy in which provincial governors were given responsibility of maintaining the "grain bag." The policy applies to all grain crops--especially wheat, corn, and rice. Under this policy, governors are responsible for: stabilizing area sown to grains; guaranteeing investment in inputs like chemical fertilizer to stimulate grain production; guaranteeing that certain quantities of grain are put into stocks; insuring that transfers of grain in and out of a province are completed; stabilizing urban residents' concerns by supplying grains and edible oils; stabilizing grain and edible oil prices; controlling 70 to 80 percent of commercial grain sales; developing means to control grain markets; raising commercial sales as a share of grain sales; controlling grain imports and exports; and raising the level of grain self-sufficiency. The "governors' grain bag responsibility system" has operated for less than 2 years, hence little information has been published with which to evaluate its success. However, general observations can be made on the policy's effect on China's grain economy. First, the implementation of this policy indicates the government's emphasis on self-sufficiency, intervention, and control of the grain economy, and reassertion of its old objectives to support its urban constituents. And in a like manner, it indicates a turning away from emphasis on comparative advantage in production decisions, economic efficiency, participation in world grain markets, open domestic markets, and a return to the old policy of relative neglect of the agricultural economy. Second, by using government administrative measures, local authorities were able to halt the downward trend of area sown to grains. Plantings for all grains in 1995 increased 516,000 hectares from 1994. Third, this policy encouraged local leaders to pay increased attention to grain production in 1995 and 1996, led to greater government investment in the grain economy, and saw total grain production rise from 445 million metric tons in 1994 to 467 million in 1995 and to a projected record 480 million this year. Fourth, again by using administrative measures, government authorities were able to halt increases in grain prices and stabilize grain markets. Fifth, in 1995 and 1996 China's participation in international grain trade decreased. In marketing year 1994/95, China imported 18.58 million tons of grain and exported 1.66 million. But in 1995/96, China imported 15.84 million tons and exported 860,000 tons. In 1996/97 China is projected to import 6.4 million tons and export 2 million tons. Grain Bag Policy Affected China's International Corn Trade When world corn prices rose in fall and winter 1996, a number of provinces in China had corn stocks to sell into the international market. These provinces were prevented from doing so by the central government which placed an embargo on corn exports. Presumably this was done to comply with the "grain bag" policy, and northeast provinces were encouraged to ship their corn to feed-deficit provinces in south China. In spring 1996 government and party leaders pushed farmers to increase corn output for the year. It is clear that farmers responded to administrative measures and prospects of high corn prices in fall and winter 1996. With the help of good weather, farmers reaped a record crop, estimated by USDA at 117 million tons. With a record crop on hand, and abundant stocks, domestic corn prices fell. (While production estimates are considered to be fairly reliable, China normally does not release data on stocks and information remains sketchy.) In some places the corn market price fell below the government's fixed quota price (see figure). Vice Premier, Zhu Rongji, in January 1997 made a rare comment on China's grain stock situation noting that at yearend China's state grain reserves totaled a record 148.5 million tons, up 34.4 million tons from yearend 1995 (1). In 1991 state grain reserves were reported to be around 120 million tons (2). These sources disclosed total grain stock numbers but gave no breakdown between wheat, rice, and corn, the primary grains held in state stocks. These numbers also exclude on-farm grain stocks. The increase in state-owned corn stocks probably was a factor in the downturn in corn imports and the lifting of the corn export embargo in winter 1997. Corn Outlook Is Unsettled for 1997 In winter 1997, leaders in Beijing are concerned that local government- owned Grain Bureaus may lack the cash to purchase all the corn that farmers are willing to sell. They fear that if the Grain Bureaus stop purchasing corn, farmers will turn deaf ears to government pleas to increase, or maintain corn area for 1997 and will switch to more profitable activities. It is not likely that area sown to corn in 1997 will be higher than in 1996. It is unknown what administrative directives or policy decisions can do to maintain plantings if price signals point to better profitability for other crops. Even if corn production were to stay relatively high in 1997, evaluation of trade prospects will be difficult because the actual size of corn stocks is not known. References 1. Reuter, Beijing, January 9, 1997. 2. Li Yan, "Importing Grains To Be Continued," China Daily, Business Weekly, March 19-25, 1995, p. 1. Special Article Argentina's Corn: Productivity Gains Underlie Strong Export Performance by Chris de Brey Abstract: Argentine corn production for 1996/97 is expected to be record high, boosted by strong world prices. Increased use of technology and inputs in past years, led by fertilizers, is expected to continue. A more neutral farm policy should also help keep Argentina as the world's second largest corn exporter. The spread of a disease to wider corn areas casts some doubt on this year's production. Keywords: Argentina, corn, input use, Rio Cuarto disease. Argentina's corn production for 1996/97 (corresponding to Argentine marketing year March 1997/February 1998) is expected to be a record 14.5 million tons. Plantings were the largest since 1985 in response to high world prices. Good weather and the increased adoption of technology are expected to produce close to record yields. Corn exports for 1996/97 are expected to reach 8.8 million tons, the second highest ever, based on record output prospects. Destinations continue to be quite diversified with shipments to over 50 countries, Iran being the largest purchaser during calendar year 1996, followed by Malaysia, Venezuela, and Korea. Brazil, the largest Argentine corn buyer in calendar 1995, took less corn in 1996, drawing down domestic stocks instead. Argentine corn export prices were below U.S. export prices for most of the year, making Argentine corn competitive in most markets. Domestic Use Remains Relatively Low Domestic demand for corn in 1996/97 is expected to recover to 5.5 million tons from the previous year's low level. Lower corn prices this year, coupled with rises in income, are expected to produce a rebound in poultry output, the largest domestic corn consumer. Grain feeding of beef cattle is still in embryonic stage, with its evolution strongly tied to beef/corn price ratios. Projected price ratios are not expected to result in significant increases in beef cattle feeding in the foreseeable future, with grass-fed continuing to be the dominant low-cost alternative. Input Use Has Expanded Rapidly in Recent Years, Driving Up Yields Technology adoption in the corn sector has evolved at a brisk pace the last few years. Fertilizer use (mostly imported) this year is reported on more than 50 percent of the corn area, and overall use has doubled since 1994. Fertilizer consumption would have been even greater if grain prices had not fallen after mid-1996, likely causing farmers to reduce expected application rates. The positive outlook for fertilizer consumption has prompted plans for the construction of two local nitrogen fertilizer plants based on natural gas. Use of agricultural chemicals (herbicides and fungicides, also mostly imported) has likewise increased, more than doubling from 1991 to 1996. Farm equipment sales, including on-farm grain storage bins, have also reached new highs. Irrigation equipment, used for complementary irrigation on existing corn land and once only seen on more progressive large farms, has become relatively more common, although it still accounts for a small proportion of area. More than 300 center-pivot systems irrigate over 20,000 hectares, mostly for corn. Reduced import duties on capital goods, easier credit terms, and long-term leasing arrangements have improved prospects for input use. U.S. seed companies have changed the domestic seed profile from mostly flint corn hybrids to the higher yielding dent hybrids. Minimum and no-till practices to conserve soil moisture have become increasingly popular. One potential area of concern is the spread of a disease, Rio Cuarto, named after the city and county in South Cordoba province where it was first detected in the 1960s. The causal virus is carried by a leafhopper, and for the first time has spread by varying degrees to all major corn producing areas, including the central corn belt of North Buenos Aires and South Santa Fe, apparently favored by mild weather conditions. The disease can have potentially devastating effects on yields, so much that it is considered the most important disease currently facing corn production. Although there is no current plant-bred resistance to the disease, some hybrids show greater degrees of tolerance. At this stage, it is impossible to know the full impact of the disease on 1996/97 production. Longer term projections indicate Argentine corn output to reach 16 million tons by 2005, mostly on the premise of continued increases in yields. Area is not expected to increase sharply, given increased competition from other crops, mainly soybeans and sunflower, and to some extent wheat. Greater input use will increase yields and push corn exports to close to 10 million tons by 2005, keeping Argentina the world's second largest corn exporter. Anticipated relatively high crop prices and the maintenance of a more neutral farm policy (as opposed to a previous anti-farm bias via export taxes and other farm income-reducing tools) are likely to push overall crop area to new highs. However, corn area is not expected to reach the more recent high levels of the late 1960s and early 1970s, before soybeans emerged as a major crop. The bulk of crop area increase is likely to come from area currently used to graze cattle. Cattle pastures are rotated with crops in the major production areas of the pampas. The introduction of new land for corn production is unlikely, given the high costs involved to bring such lands into productive use. Policy Changes Have Been Favorable for Agriculture The Argentine economy underwent some profound reforms starting in 1989, that included deregulation, decentralization, and privatization, in an effort to control chronic public sector deficits. In 1991, the Convertibility plan establishing a quasi-currency board was introduced. The plan pegged the domestic peso to the dollar and set severe constraints on the discretionary power of the monetary authority, thus ending hyperinflationary pressures that plagued Argentina for over a decade. Unilateral market liberalization was complemented with the full establishment of the Mercosur customs union in 1995 with neighboring Brazil, Uruguay, and Paraguay, and further-reaching free trade agreements between Mercosur and Chile and Bolivia. Argentina's position as the prevailing temperate-agriculture supplier for the region, particularly the large Brazilian market, appears strengthened. The current administration has gone a long way in correcting some of the chronic weaknesses affecting Argentine agriculture's competitiveness, adopting a more free-market approach. Export taxes on most agricultural products have been eliminated (bovine raw hides and oilseeds exports are still taxed to favor local processing), including the 1.5-percent tax to fund agricultural research. In the past, periods of high prices were almost invariably followed by increases in export taxes or other tools to 'extract' a proportionate segment from farm incomes. The major state-owned marketing boards for grains, meats, and sugar have been scrapped. Privatization of export facilities has reduced port handling costs. Dredging of the shallow Parana river to enable access to upriver ports by larger ships and barges should further help reduce shipping costs. Privatization of railroads has also begun to help curtail high domestic transportation costs. Corn Sector Likely To Remain Competitive Argentine agriculture, including corn, stands to gain from strong world grain prices, the maintenance of a more neutral farm policy, and increased regional integration. Argentina is expected to remain a significant competitor in world corn markets. Its traditional low costs of production, based on low input use, are evolving to a situation more prevalent in the United States. Although the transition to a high-input technology carries some downside risk in case of declining grain prices or adverse weather in the absence of a safety net' system, the potential for considerable yield increases in a more deregulated global policy environment is expected to generally maintain Argentine agriculture's competitive position. Special Article U.S. Barley Imports From Canada: Issues and Prospects by Mark Simone and Linwood Hoffman Abstract: During the winter of 1997, Western Canadian barley producers voted on whether to continue marketing barley exports through the single-desk selling system of the Canadian Wheat Board (CWB) or move to an open market system, composed of multiple sellers. When the results were announced in late March, producers had voted to maintain the CWB as the single-desk seller. However, the removal of the CWB's monopoly would not have led to increased sales of Canadian barley in the United States unless price differentials were sufficiently attractive under certain conditions, such as a depreciating Canadian dollar, abnormal weather in the United States, or a high level of subsidized exports in non-U.S. markets. Keywords: U.S. barley imports, Canadian Wheat Board, feed barley, malting barley U.S.- Canada Barley Trade Canada supplies virtually all U.S. barley imports with the share of imports divided between feed and malting uses usually favoring malting barley. From 1990/91 through 1995/96, malting barley imports exceeded feed barley imports, except in 1993/94. Feed barley imports are mostly destined for West Coast feedlots, where the high cost to transport U.S. feed grains from other regions gives barley from Alberta, the largest barley producing province, a potential cost advantage. Even though 65 to 70 percent of Western Canada's barley area is seeded to malting varieties, only 15 to 20 percent of the crop is selected for malting (KenAgra). Conditions during a growing season can damage the barley quality so that it cannot meet malting quality standards. Canada has two types of malting barley, two-row and six-row, which are distinguished by the number and arrangement of kernels on the barley head. Most malting barley grown in Canada tends to be two-row as Canadian breweries prefer two-row malt instead of the six-row malt more commonly sought in the United States. However, several six-row malting varieties are grown under contract in Canada expressly for the U.S. market (Clyde). These contracting programs were expanded by U.S. brewers and maltsters as a means to source alternative barley supplies after shortages stemming from the 1988 North American drought (Carter). U.S. barley exports to Canada have been much smaller than Canada's barley exports to the United States. There currently is a lack of symmetry in market access between the two countries. Under the GATT Uruguay Agreement on Agriculture, the U.S. Section 22 authority was eliminated, thereby allowing open access for Canada with only a Most-Favored Nation (MFN) tariff remaining. This tariff is being gradually phased down under the Canada- U.S. Free Trade Agreement (CFTA) and will be eliminated on January 1, 1998. Although Canada converted its barley import license to a tariff-rate quota (TRQ), allowing for more market access for the United States than existed previously, the Canadian market is still restrictive compared to the U.S. market. Under Article 705 of the CFTA, Canada's current tariff-rate quota will only be removed when the 2-year average of the level of government support for barley in the United States is less than that of Canada's.1/ The most recent calculations indicate that the 2-year average of government support for barley as a proportion of producers' income was 56.40 percent in the United States, while Canada's was 21.81 percent (U.S. Department of Agriculture, 1995). 1/ Support is measured by a calculation similar to the Producer Subsidy Equivalent. Canadian Farmers Voted on Choice of Barley Marketing In January and February 1997, Western Canadian barley producers voted by mail on their preferences for marketing barley (Western Canada is the dominant barley producing region of Canada). Currently, the Canadian Wheat Board (CWB) is the sole entity responsible for marketing Canada's feed and malting barley for export. Barley producers voted to either remove feed and malting barley from the CWB and place it entirely on the open market for both domestic and export sales or to maintain the CWB as the single-desk seller for feed and malting barley for export. Results of this vote were released in late March and producers had voted in favor of retaining the CWB as the export seller. The possibility of an open market for barley exports in Western Canada was of importance to the United States because of the recent history of cross- border conflicts concerning wheat and barley imports from Canada. The increase in these grain imports led to negotiation of a Memorandum of Understanding between Canada and the United States which restricted U.S. imports of Canadian wheat and durum through tariff-rate quotas for one year. Following the expiration of the tariff-rate quota (TRQ) on wheat in September 1995, the United States announced that it would monitor wheat imports and "intends to consult with the Government of Canada before imports from Canada reach disruptive levels" (Office of U.S. Trade Representative). Although barley was not included in the one-year TRQ, the United States also indicated that it will continue to monitor barley imports because it "remains concerned about the potential for disruption of U.S. barley markets" (Office of U.S. Trade Representative). There has been an increasing debate in Western Canada about whether the CWB is able to extract greater total returns for farmers from export markets, primarily the United States, as compared to what multiple sellers would be able to achieve. Presently, a multiple market exists for domestic sales of feed barley, since farmers can sell feed barley to Canadian feedlots, the Winnipeg Commodity Exchange or the CWB. However, the CWB maintains a monopoly on all foreign sales. Under the CWB system, farmers receive an initial payment, usually 80 percent of full expected market value, when they deliver their barley to the CWB rather than a cash price, at full market value, as in the United States. The initial payment is a "pooled price" since it is an average price received from all sales. The main reason why the Canadian federal government proceeded with a producer vote on barley marketing is because of the recommendation by the Western Grain Marketing Panel (WGMP) that farmers be allowed to deliver feed barley on an open market in addition to the CWB, for both domestic and export use. The WGMP was formed on July 17, 1995, with the purpose of conducting a comprehensive review of grain marketing in Western Canada and providing recommendations for Canada's Agriculture and Agri-Food Minister. During 1993/94, there was a brief precedent for a multiple-seller environment for Canadian barley exports. The "Continental Barley Market" allowed Canadian farmers to bypass the CWB in selling barley to the United States. This occurred when then Minister of Agriculture, Charles Mayer, removed the CWB from having sole authority over barley exports to the United States on August 1, 1993. The Continental Barley Market only lasted until September 10, 1993, when Canada's Supreme Court overturned Mayer's action and returned control over all Western Canada barley exports to the CWB. Nevertheless, the volume of barley exports to the United States increased to an estimated 500,000 to 1 million tons during the period of the Continental Barley Market (Carter and Loyns). How much of the increase can be solely attributed to this short-term change is debatable, since it occurred during a severe U.S. feed grain shortage caused by the Midwest floods in the summer of 1993 that reduced corn production and attracted additional imports of barley and feed wheat. U.S. barley imports for 1996/97 (June/May) are currently forecast at 40 million bushels (871,000 tons) virtually unchanged from last year despite a record Canadian barley harvest in 1996. Canada's grain exports have been hampered in 1996/97 because a severe winter has affected its transportation system. U.S. barley imports were significantly lower in 1995/96 than in 1994/95 because Canada's exportable barley supplies were diminished by strong internal demand from livestock feeding and tight beginning stocks. Although producers have voted to stay with the CWB, the debate on whether the CWB is able to extract greater total returns for farmers from export markets, relative to multiple sellers, is expected to continue. Some producers felt that their voting choices were too restrictive since they were only asked to entirely remove barley from the CWB or to maintain the CWB as the single- desk seller. The option of a dual market, where producers could deliver to the CWB or to another seller was not provided. The Canadian federal government believed that the CWB would no longer be able to operate successfully under a dual system since it would no longer have an assurance of supplies with the loss of its monopoly. Additionally, although 63 percent of producers voted in favor of retaining the CWB, a significant minority of 37 percent decided in favor of an open market. Advocates of the multiple seller environment for barley in Western Canada believe they can build on this view. Finally, because the proportion of young farmers in Canada is increasing, the philosophy of grain marketing is changing, especially with the greater use of personal computers to access the latest price information in markets. This empowers Western Canadian farmers to feel they can make further decisions in grain marketing beyond the point where they deliver their grain to the CWB at the country elevator. As a result, farmers are increasingly asking to make the CWB more accountable and provide more options for the Western Canadian producers in grain marketing. Conditions That Could Lead to Larger U.S. Barley Imports from Canada An open market for barley exports in Western Canada is of concern to some in the United States because it has been acknowledged that the CWB, as a single-desk seller, exercises some restraint in exporting barley to the United States in order to maximize revenue, relative to a marketing agent under perfect competition (Canadian Wheat Board). However, the simple removal of the CWB on sales to the United States would not guarantee increased sales of Canadian barley in the United States. Instead, it would allow larger sales if price differentials between Canada and the United States were sufficiently attractive. This could occur under certain conditions, such as: o A high level of subsidized exports to markets outside of the United States that are traditional Canadian export markets. The U.S. barley price would then be relatively more attractive since it represents the full commercial (unsubsidized) market return. O A substantial decline in the Canadian dollar relative to the U.S. dollar, which allows Canadian grains to be priced more competitively in the U.S. market. This condition existed during the early part of the 1990s. O An extraordinary situation, similar to what occurred in 1993/94, where the United States has a feed grain shortage caused by adverse weather while Canada has an abundance of feed grains. The removal of Canada's Western Grain Transportation Act (WGTA) rail subsidy is also expected to influence U.S. imports of Canadian barley. Under the WGTA, Canada's federal government paid part of the rail transportation cost of moving eligible grains from the Prairie Provinces to export positions. Because of budgetary reasons and in order to fulfill its export subsidy reduction commitments for the GATT Uruguay Agreement on Agriculture, Canada discontinued its WGTA rail subsidy on August 1, 1995. As a result of the WGTA elimination, a higher proportion of barley production is projected to be retained within Canada than in previous years while less is exported in the long term (U.S. Department of Agriculture, 1997). Livestock production is projected to increase as producers attempt to maximize revenue by exporting their grain through meat exports. Feed barley prices are expected to drop as the cost of transporting grain to port is forced back to the producer level. A greater proportion of Canada's barley exports are anticipated to be malting barley in the future because a higher share of exports are likely to go to China, where per capita beer consumption is projected to continue expanding with its robust population and income growth (U.S. Department of Agriculture, 1997). References Canadian Wheat Board, Conduct and Performance of a Single Desk Marketing Organization in the North American Feedgrain Market, Winnipeg, Manitoba, April 1992. Carter, C.A., An Economic Analysis of a Single North American Barley Market, Agriculture Canada, March 1993. Carter, C.A. and Loyns, R.M.A., The Economics of Single Desk Selling of Western Canadian Grain, Alberta Agriculture, March 1996. Clyde, N., "Malting Barley and Barley Malt", Bi-weekly Bulletin, Agriculture Canada, October 13, 1995. KenAgra Management Services Ltd., "Barley Marketing: Issues and Alternatives," study prepared for Western Grain Marketing Panel, Edmonton, Alberta, May 1996. Office of U.S. Trade Representative and U.S. Department of Agriculture , "Joint Statement of Ambassador Charlene Barshefsky and Secretary of Agriculture Dan Glickman Regarding U.S.- Canada Grains Issues," September 17, 1995. U.S. Department of Agriculture, "U.S., Canada Release Support Level for Barley Under Free Trade Agreement," Washington, DC, May 8, 1995. U.S. Department of Agriculture, Agriculture Baseline Projections to 20005, Reflecting the 1996 Farm Act, Staff Report WAOB-97-1, Washington, DC, February 1997. Special Article U.S. Feed Grain Producers Benefit from Strong U.S. Meat Exports to Russia by Jay K. Mitchell 1/ Abstract: While reduced demand has sharply curtailed feed grain imports by the Newly Independent States (NIS) 2/ and Baltics since economic reforms began in 1992, U.S. exporters have been able to replace a portion of lost exports with indirect exports of corn and soybean meal in the form of meat, especially poultry meat. Russia has been the major destination for these exports, though other countries of the NIS and Baltics could also raise their meat imports from the United States in coming years. Along with forecast growth in U.S. corn exports once the region's livestock sector resumes growth, steady meat exports to the NIS and Baltics should ensure a strong market for U.S. feed grain producers in the form of meat in coming years which could be less volatile than the market they faced during the previous two decades. Keywords: Russia, feed grain imports, corn, poultry meat, and soybean meal. Although the former USSR was a major market for U.S. feed grain exports in the 1970s and 1980s, its volatility and unpredictability as an importer made it a destabilizing force on world markets. After the breakup of the USSR in early 1992 into 15 independent countries of the NIS and Baltics, collapse of subsidies to the livestock sector sharply reduced feed grain demand. This has led to much lower U.S. exports of corn and other feed grains in recent years, though U.S. feed grain producers have indirectly benefited from rapid expansion of poultry and other meat exports, mainly to Russia. As a result, U.S. feed grain producers have been able to regain at least one-third of the value of feed grain exports lost between 1991 and 1996 through the increased value of corn captured in higher poultry and pork exports. 1/ Millennium Institute Consultant to Europe, Africa, Middle East Branch, Commercial Agriculture Division, Economic Research Service. 2/ Newly Independent States (NIS) refers to the 12 countries, excluding the three Baltic nations of Estonia, Latvia, and Lithuania, that comprised the former Soviet Union. Large Swings in Soviet Corn Imports Destabilized World Markets U.S. corn exports to the Soviet Union averaged nearly 7 million tons annually during the 1970s and 1980s. The United States was the leading supplier of corn to the Soviets during this period, accounting for about two-thirds of total Soviet corn imports. After wheat, corn was the second-largest U.S. export item to the USSR, earning American exporters nearly $1 billion annually on average. U.S. corn exports to the USSR increased from nil in fiscal 1970 and 1971 (fiscal year data covering October-September) to a peak of more than 16 million tons in fiscal 1990. Large feed grain imports initially were caused by poor crops and a decision to import grain for the livestock sector. Imports soared due to a decision by economic planners to boost per capita consumption of meat and other livestock products as a major indicator of Soviet economic success. Corn was the major feed grain needed for import because of low domestic production and the priority assigned to expanding poultry and hog numbers. The Soviets met their stated goal as meat consumption rose nearly 40 percent between 1970 and 1990, reaching levels far above those typical for Western countries with similar income levels. However, they achieved this at enormous economic costs that included feed grain imports of nearly $2 billion per year by the late 1980s. The large size and unpredictable year-to-year fluctuations of Soviet feed grain imports made the country a destabilizing force on world markets and affected feed grain prices. Between 1970 and 1990, the USSR was the world's second-largest corn importer after Japan. Unlike Japan, however, which raised its corn imports steadily from around 5 million tons in 1970 to 16 million in 1990, Soviet corn imports were volatile and unpredictable for a number of reasons. First, USSR domestic grain output varied considerably from year to year as both area and yields fluctuated according to weather and growing conditions. Second, the non-market and highly autarkic nature of the Soviet economy made the timing of Soviet grain buying difficult to predict. One example is the beginning of large-scale Soviet corn imports in the early 1970s that caught the world market off guard and added to already high inflationary pressures resulting from the first oil price shock. Third, because the majority of corn imports came from the West, they were subject to the ebb and flow of East-West tensions, including economic sanctions imposed against the Soviets in the early 1980s that led to a temporary reduction in U.S. feed grain exports. U.S. Meat Exports Partially Replace Feed Grains Since the demise of the USSR and the beginning of economic reforms in 1992, corn imports by the 15 countries of the NIS and Baltics region have fallen sharply. U.S. exports were cut from 9 million tons in fiscal 1991 to less than 60,000 in fiscal 1996, declining nearly $1 billion in value during this period. Demand for feed grains collapsed as economic reforms slashed the subsidies that had propped up a large but inefficient livestock sector. Livestock herds in the NIS and Baltics shrank nearly one-third between 1991 and 1996 as declining real incomes reduced per capita consumption of meat and other livestock products. The nearly $1-billion decline in U.S. feed grain exports to the NIS and Baltics was partly offset by a surge in poultry exports, which rose from $62 million in fiscal 1991 to $1 billion in fiscal 1996. In quantity terms, poultry meat exports expanded 12-fold over the same period to more than 1 million tons in fiscal 1996. The NIS and Baltics have become the largest export market for U.S. poultry, with Russia accounting for nearly 90 percent of these exports. U.S. exports of other meats have also increased, with pork exports rising to 42,000 tons in 1995 and 27,000 tons in 1996. Strong Russian Poultry Demand Drives Up U.S. Meat Exports The United States has become the leading supplier of poultry meat to Russia, accounting for more than three-quarters of total Russian imports over the past 2 years. This extraordinary growth is due mainly to the competitiveness of American poultry on the Russian market and to changing Russian food demand patterns. America's poultry industry is competitive on price because it is far more productive, as illustrated by the fact that it is estimated to be twice as efficient at converting feed to weight gain than the Russian poultry sector. American poultry is also competitive on Russian markets because it produces large quantities of the types of products--cut-up chicken legs--that are most popular among Russian consumers for their ease of preparation (relative to whole chickens) and their lower cost (relative to white meat). Changing Russian food consumption trends, driven by falling consumer purchasing power as incomes drop, have increased demand for poultry relative to more expensive meats such as beef and pork. While per capita Russian beef and pork consumption declined about one-third between 1991 and 1996, the decline in per capita poultry consumption is estimated at only 8 percent. Poultry consumption has actually grown since 1994, while consumption of beef and pork continues to decline. Benefits to U.S. Feed Grain Producers U.S. corn producers have benefited from rising poultry exports. Assuming that the U.S. poultry industry uses about 2.0 tons of corn to produce each ton of dressed poultry meat, the 1 million tons of poultry meat exported in fiscal 1996 would represent the equivalent of roughly an additional 2.0 million tons of corn exports to the NIS countries. To produce the same quantity of poultry meat in Russia would require nearly 4 million tons of corn, given Russia's far lower efficiency of feed conversion. The approximately 2.0 million tons of corn exported to Russia and the other NIS countries in the form of poultry meat in fiscal 1996 would have a value of about $325-375 million to the upstream U.S. feed grains sector. U.S. pork exports, which totaled 27,000 tons in fiscal 1996, represented an estimated additional 160,000 tons of indirect corn exports in the form of meat, bringing the total value of feed grains embedded in U.S. meat exports to this region to about $350-400 million. While U.S. corn exports to the NIS and Baltics region declined nearly $1 billion between fiscal 1991 and fiscal 1996, at least one-third of the decline was offset by higher indirect corn exports in the form of poultry and pork meat. U.S. exports to the NIS and Baltics of soybean meal, another important poultry feed, also declined dramatically from $355 million in fiscal 1991 to $55 million in fiscal 1996. As in the case of corn, a significant portion of this decline was replaced by indirect exports of soybean meal in the form of poultry meat. Thus, the large competitive advantage of the U.S. livestock sector due to better feed conversion than in Russia and other factors have helped the U.S. feed grains sector recapture some of the market it lost when grain imports collapsed in the early 1990s. Indirect corn exports in the form of poultry meat exceeded U.S. corn sales to the region for the first time in fiscal 1995. In fiscal 1996, the roughly 2 million tons of indirect corn exports implied by poultry exports far exceeded the 58,000 tons of corn exported to the NIS/Baltics in the form of grain. NIS Poultry Import Market To Remain Strong There are several reasons to expect continued strong demand for poultry imports by Russia and other NIS countries. Limited investment is likely to keep domestic production considerably less efficient than that of foreign producers, including the United States. Continued low purchasing power by the population should favor poultry over more expensive meats such as beef and pork for the average consumer in the near term, while poultry could potentially replace a portion of current bread and potato consumption once income growth resumes as expected in a few years. Geographic trends also suggest continued strong demand for poultry imports, since market saturation is low outside major population centers in European Russia. As transport and infrastructure is upgraded in coming years, poultry imports could penetrate deeper into Russia's various consumer regions or to other NIS countries, even as current consuming regions such as Moscow reach saturation. Assuming no major rise in protectionism, strong demand for poultry and slow recovery in domestic output are expected to keep Russian poultry imports at around 1 million tons per year in coming years. Prospects are good for at least modest expansion of U.S. poultry exports to other countries of the NIS and Baltics, whose current poultry import levels are very low. This suggests indirect U.S. corn exports in the form of poultry shipments to the region as a whole (including Russia) are likely to average about 2 million tons per year in the near to medium term, earning American feed grain producers an estimated $250-300 million annually. While U.S. firms could eventually face competition from a number of other potential poultry suppliers to Russia, they are well-positioned to maintain market share in the near to medium term. European producers need subsidies to compete in the Russian market and tend to export whole birds, which are less in demand by Russian consumers owing to higher cost and lower ease of preparation than chicken legs. Brazil has the potential to emerge as a major exporter of cut-up birds in the longer term, but in the near term must solve the problem of where to sell premium white meat. China's growing domestic market and large distance from major consuming markets in European Russia also make it a less likely competitor. Livestock Recovery Could Add to U.S. Feed Grain Exports Recovery of the livestock sector in the NIS and Baltics, which is still several years off, is expected to lead to increased corn imports from the world market. As economic reforms and continued competition from imports push the region's livestock sector to become more efficient, demand should grow for quality feeds such as corn. Increased corn demand would likely lead to higher imports, since the region has limited capacity to raise corn production outside of Ukraine. The United States is likely to capture at least a portion of this growing market, although it may not dominate the market as it did in the 1970s and 1980s, given growing competition from countries like Argentina. In the longer term, gradual recovery and greater diversification of incomes due to economic reform are expected to increase demand for beef and pork imports, offering new export opportunities for U.S. feed grain producers in the form of either meat or grain. U.S. corn exports to the NIS and Baltics, including indirect exports of corn in the form of meat, have good prospects in the coming decade. They are likely to average considerably below the nearly 7-million-ton average for the 1970s and 1980s, even when indirect exports in the form of meat are included. However, market economic reforms, progress toward Russian accession to the World Trade Organization, and the conversion of a large portion of these exports to indirect exports in the form of meat could ensure more stable and predictable U.S. exports to the region than in the past. Thus, market-oriented economic reforms have helped make Russia more of a stabilizing force on world feed grain markets at the same time that some experts fear greater price instability resulting from developments in other parts of the world. END_OF_FILE