WHEAT YEARBOOK April 01, 1999 April 1999, ERS-WHS-1999 Approved by the World Agricultural Outlook Board --------------------------------------------------------------------------- WHEAT YEARBOOK is published annually by the Economic Research Service, U.S. Department of of Agriculture, Washington, DC 20036-5831. This release contains only the text of the WHEAT YEARBOOK -- tables and graphics are not included. Printed copies of this Yearbook will be available from the ERS-NASS order desk. Call, toll-free, 1-800-999-6779 and ask for stock # ERS-WHS-1999, $21. ERS-NASS accepts MasterCard and Visa. --------------------------------------------------------------------------- Contents Summary Supplies Large, Prices Low Outlook for 1999/2000 Winter Wheat Acreage Seeded Is the Lowest Since 1972/73 Wheat Supply and Ending Stocks Likely Down in 1999/2000 World Wheat Consumption Likely To Exceed Production again in 1999/2000 Situation and Outlook for 1998/1999 Prices Weaken Under Weight of Large U.S. Wheat Crop in 1998/99 Expected World Wheat Production Declines in 1998/99, But Global Trade Also Reduced Donations Help Boost U.S. Export Prospects Despite Declining World Trade in 1998/1999 Wheat by Class, 1998/1999 Record Yields Push Wheat Stocks Higher in 1998/1999 Special Articles Analyzing U.S. Wheat Acreage Response Under the 1996 Farm Act Wheat Shipments Under U.S. Export Programs Will Rebound in Fiscal 1999 Implications of the EU's Agenda 2000 Proposal on World Wheat Trade Situation Coordinator Mack Leath (202) 694-5302 Principal Contributors Mack Leath (202) 694-5302 Edward Allen (202) 694-5288 Data Coordinator Jenny Gonzales (202) 694-5299 Editor Diane Decker (202) 694-5116 Layout, Text Design and Graphics Wynnice Pointer-Napper (202) 694-5130 Approved by the World Agricultural Outlook Board. Summary released March 26, 1999. The Wheat Outlook and the Wheat Yearbook may be accessed electronically via the ERS web site at www.econ.ag.gov. Summary The Wheat Yearbook presents preliminary projections for 1999/2000 that were released at the 1999 Agricultural Outlook Forum on February 22-23, 1999. Supplies Large, Prices Low Wheat farmers responded to lower prices and unfavorable planting conditions, particularly in the Southern Plains, by reducing winter wheat plantings for the 1999 crop by 7 percent from a year earlier to the lowest level since 1972. Spring wheat plantings are expected to fall below a year earlier due to more favorable returns from competing crops such as soybeans and minor oilseeds. (USDA's Prospective Plantings report, to be released on March 31, will indicate farmers' planting intentions as of March 1.) If the average wheat yield in 1999 equals the average for the last 3 years, wheat production could decline about 15 percent in 1999/2000 (June/May). However, larger beginning stocks will be partially offsetting, leaving the total supply only slightly below the current marketing year. Total use is expected to expand as larger exports more than offset the smaller feed and residual use. With use exceeding production, ending stocks will decline but remain relatively large. The average price received by farmers will be up, but will likely be below $3.00 per bushel again in 1999/2000. For 1998/1999, U.S. wheat supplies rose to 3,368 million bushels, the highest since 1987/88. Total disappearance is forecast to rise about 4 percent from 1997/98, with most of the increase coming from higher domestic use. Food use is projected up about 10 million bushels, and a 100-million-bushel increase in feed and residual use is expected. Seed use will decline because of reduced acreage planted to the 1999 crop. The season average farm price is projected to range between $2.65 and $2.75 per bushel, down about 20 percent from 1997/98 and well below the record $4.55 farmers received in 1995/96. The farm price has been trending down since the monthly record of $5.75 in May 1996. U.S. exports in 1998/99 are forecast up only 10 million bushels or 1 percent from the previous year's 1,040 million. Another year of disappointing exports is projected because of strong competition and lower global imports. Slower-than-expected food aid shipments to Russia and other needy countries have lowered the export projection in recent months. A portion of these planned donations will not be shipped until the 1999/2000 marketing year that begins in June. Outlook for 1999/2000 Winter Wheat Acreage Seeded Is the Lowest Since 1972/73 Winter wheat plantings are down 7 percent from a year earlier to their lowest level since 1972/73. Spring wheat plantings are likely to fall too, as farmers evaluate the relative profitability of competing crops as the planting season approaches. USDA will release its first official forecast of U.S. wheat production for 1999/2000 on May 12. The first indication of winter wheat plantings for 1999/2000 was much lower than expected, which supports new-crop price prospects for wheat. However, price strength will be limited by continued large supplies and weak demand. Winter Wheat Seedings Decline for Third Year in a Row Planted winter wheat area for the 1999 crop is estimated at 43.4 million acres, the lowest since 1972/73 and down 7 percent from a year earlier (fig. 1). Apparently, farmers responded to low prices last fall by planting less wheat. While some of the area seeded to winter wheat a year earlier will be planted to other crops such as oilseeds and feed grains, some will likely be left fallow, especially in the drier sections of the Great Plains. Also, some of the area in Montana and the Pacific Northwest will likely be planted to spring wheat. Hard red winter (HRW) wheat seeded area is about 30.9 million acres, down 5 percent from 1998. Most HRW States have a smaller seeded area this year. Nebraska and Texas were notable exceptions, each having increases of 100,000 acres. The largest decline occurred in Montana where area is down 25 percent from 1998 to 350,000 acres, the smallest since 1937. Poor weather probably prevented planting of some HRW wheat acreage in Montana, and these acres may be planted with spring wheat or barley this spring. The soft red winter (SRW) seeded area, pegged at 9.0 million acres, is down 1.2 million acres or 12 percent from 1998. About three-fourths of the drop occurred in the soft red belt stretching from Arkansas to Ohio. Also, nearly all of the SRW producing States in the Southeast have fewer seeded acres, an early indication fewer acres will be double-cropped with soybeans in 1999. White winter (WW) wheat seeded area totals 3.48 million acres, down 11 percent from 1998. The major producing States in the Pacific Northwest account for most of the decline. Idaho's area is the lowest since 1962. The State of Washington had the largest absolute decline, loosing about 300,000 acres. Michigan and Nevada are the only WW wheat producing States with an increase in area seeded. Winter Wheat Crop Conditions The winter wheat crop conditions going into the winter were generally favorable across the Plains, with emergence spotty in Montana. Overall, 72 percent of the U.S. winter wheat crop was rated good to excellent on November 29, 1998, the same as a year earlier. The winter wheat crop in the Central and Southern Plains was breaking dormancy as March began because of warmer than normal temperatures at many locations. On March 1, 1999, 68 percent of the Kansas crop was rated good to excellent. Good to excellent conditions in other States were: Oklahoma, 79 percent; Nebraska, 75 percent; South Dakota, 84 percent; and Montana, 40 percent. South Dakota reported poor snow cover at the end of February for 74 percent of the winter wheat crop, and that posed a risk of winterkill. Reports from Montana at the end of February indicated that lack of snow cover during the winter caused 64 percent of the Montana winter wheat crop to have moderate to heavy wind damage. Some of these acres may be replanted to spring wheat. Crop conditions in Kansas and Oklahoma have continued to improve during March. Regular weekly crop reports will be published by most winter wheat producing States starting in April. Spring Wheat Acreage Prospects Producers of durum and other spring wheat were surveyed in early March to determine prospective plantings for 1999. Current prospects point to lower seedings than the 20.4 million acres seeded in 1998. Current farm price relationships for the various classes of wheat favor shifting some area from durum to spring wheat and other crops (fig. 2). Durum prices have dropped dramatically in response to large supplies and a weak export demand. Also, soil moisture supplies and the condition of the winter wheat crop later in the spring will influence planting decisions in Montana and other spring wheat producing States. Mix of Major Field Crops Will Continue To Change in 1999 Expectations concerning the relative market prices for corn, soybeans, and other field crops will also affect planting decisions in the spring wheat area of the Northern Plains. Average farm prices for wheat, corn and soybeans have been trending down during the last 3 marketing years. Spring wheat prices have strengthened relative to those of other classes of wheat and to the prices of corn and soybeans during the winter months, and this may moderate the decline in spring wheat acreage (fig. 3). Weather conditions this spring will also have an impact on cropping decisions, with dry weather likely to encourage producers to persevere with wheat and not risk planting alternate, more drought-susceptible crops. Preliminary prospects for corn and soybean acreage in 1999 were also discussed at the Agricultural Outlook Form. Continued weak price prospects for corn are expected to reduce corn plantings to 78-79 million acres. Soybean planted acreage is expected to reach a record of 73-74 million acres, compared with last year's 72.4 million. U.S. soybean acreage has been trending upward during the 1990's, and in 1998, the acreage planted to soybeans surpassed acreage planted to wheat for the first time ever (fig. 4). The soybean price is expected to fall below the loan rate in 1999/2000, and the prospects of receiving loan deficiency payments if soybean prices drop below the loan rate will make soybeans an attractive alternative to wheat at many locations. Conservation Reserve Program Update On March 4, 1999, Agriculture Secretary Dan Glickman announced that USDA will accept 5.0 million acres of environmentally sensitive farmland into the Conservation Reserve Program (CRP). All contracts accepted under sign-up 18 will become effective October 1, 1999. The stated goals of the program are to enroll the most environmentally sensitive land, keep productive farmland in production, and maximize environmental benefits in relation to the level of Federal program expenditures. The new enrollment has the potential to bring total acreage in the CRP to 31.3 million acres on October 1, 1999. The actual number of acres enrolled on that date will differ because of continuous sign-ups, appeals, dropouts, and other factors. A comparison of the regional distributions of acreage in the historical CRP, with acreage accepted in sign-ups 15, 16, and 18, and the aggregate acreage through sign-up 18 is shown in fig. 5. About 29.8 million acres are currently enrolled in the CRP, and about 3.5 million of these acres are under contracts that will expire September 30, 1999. Of the 3.5 million acres expiring on September 30, about 2.2 million acres were offered and about 2 million acres will be re-enrolled. The statutory maximum number of acres that can be enrolled in the program at any one time is 36.4 million. At least 4.3 million acres of the remaining acres allowed under the statutory maximum are reserved for practices covered by the continuous sign-up process, the Conservation Reserve Enhancement Program (CREP), and other initiatives. This figure is based upon USDA analysis of the acreage authority needed to ensure successful operation of these initiatives in the future. The continuous sign-up process encourages producers to enroll certain eligible land in selected high priority practices, such as conservation buffers. CREP involves Federal/State enhancement agreements that target environmentally sensitive land along designated rivers. It is used by States to specifically target significant conversion of eligible farmland to resource conserving uses in State-designated high priority problem areas. Outlook for 1999/2000 Wheat Supply and Ending Stocks Likely Down in 1999/2000 Given the lower acreage and yields near the average for the last 3 years, total wheat production will decline in 1999/2000. Larger beginning stocks will be partially offsetting. Total use of U.S. wheat is expected to grow slightly in 1999/2000, based on small increases in food use and higher exports. The following supply and use projections for 1999/2000 were released at the 1999 Agricultural Outlook Forum on February 23, 1999. The first official U.S., world, and country specific supply and use projections will be in the May World Agricultural Supply and Demand Estimates report. Wheat Production Will be Down in 1999/2000, But Beginning Stocks Will Keep Supplies Large Wheat production will be down in 1999/2000 (June/May) because of fewer acres seeded and lower yields. Wheat planted acreage in 1999 is forecast to total about 62.5 million acres, down 3.4 million from last year. Assuming yields hit the 39.5 bushels per acre average of the last 3 years, production could drop 15 percent to about 2.175 million bushels, the smallest crop in 4 years. However, larger beginning stocks, pegged at 955 million bushels, will be partially offsetting, and total supply will be off only about 4 percent from the current marketing year. Yield Uncertainty in 1999 Makes Forecasting Production Difficult Using the rounded average of the last 3 years gives an average wheat yield of 39.5 bushels per harvested acre, down from the record 43.2 bushels in 1998. Trend yields were not used in the yield projection for wheat presented at the Agricultural Outlook Forum because the large variability in yield in recent years has made trend analysis less relevant (fig. 6). Average U.S. wheat yields flattened out for most of the 1980's and the first half of the 1990's, but spiked up sharply in the last 3 years. It appears that much of this surge reflects favorable growing conditions rather than genetic improvements or changes in cultural practices. In any case, any significant deviation in 1999 yields will have a big impact on production. A change of 4 bushels from the yield used in the preliminary forecast with the same acreage would amount to a swing of 220 million bushels. Stronger Prices Will Drop Domestic Use in 1999/2000 Domestic use of U.S. wheat is expected to decline in 1999/2000 because of lower feed and residual use. Assuming no major quality problems, low corn prices will make wheat less attractive as a feed ingredient. The preliminary projection of the season average farm price for wheat presented at the Agricultural Outlook Forum was $2.95 per bushel, 25 cents above the midpoint of the 1998/99 forecast in March 1999. Although the ratio of stocks to use will decline, continued weak prices for corn and other feed grains will also influence the wheat market. As a result, feed and residual use is expected to be down in 1999/2000, as wheat prices are expected to strengthen relative to feed grains, leading to less wheat feeding than in 1998/99 (fig. 7). Food use is expected to continue a modest expansion, reflecting population growth and further increases in per capita use of wheat and wheat products. In calendar year 1998, the volume of wheat ground for flour surpassed 900 million bushels for the first time, but flour production declined from the previous year because of lower extraction rates (see appendix. table 23). Over the last decade, growth has averaged about 1.9 percent per year as per capita use approached 150 pounds in 1987. Per capita consumption of flour will likely drop to about 148 pounds in 1998, the first decline in 3 years. Small Rebound in Exports Is Anticipated for 1999/2000 Exports are projected at 1,150 million bushels in 1999/2000, up 10 percent from the disappointing level in 1998/99. Much of the increase reflects the delay of some food assistance shipments to Russia until the 1999/2000 marketing year. The prospects for U.S. exports and world trade are discussed in greater detail in the next section. High Ending Stocks Will Keep Pressure on Wheat Prices With total use exceeding production, stocks are expected to decline in 1999/2000. Even though ending stocks will be down, a stocks-to-use ratio of 33 percent provides little optimism that the season average price received by farmers will break the $3.00 mark in 1999/2000. USDA will release the first official supply and use projections for the 1999/2000 marketing season in the May World Agricultural Supply and Demand Estimates report. Those projections will reflect USDA's first survey-based winter wheat production forecast and prospective plantings for durum and other spring wheat. Trade projections will be based on detailed country by country supply and use forecasts. Outlook for 1999/2000 World Wheat Production Will Drop Again in 1999/2000 World wheat production in 1999/2000 is expected to decline for the second straight year because of reduced area planted to winter wheat in the Northern Hemisphere. Low world wheat prices and an increase in the European Union (EU) set-aside account for much of the reduction. Global Production Likely To Decline in 1999/2000 USDA will issue its first projections for 1999/2000 global supply and demand in May. However, because most winter wheat has already been planted, there are some clear early indications that global production will drop. For China, the world's largest wheat producer, production prospects are uncertain, and clearly not ideal. Some Chinese sources have indicated that winter crop area planted last fall increased, but other reports indicate that wheat area may have declined because of expanded rapeseed plantings. Also, marketing uncertainties created by reforms in China's distribution system may have reduced producers' incentives to plant. Last fall and winter were much drier than normal in much of the winter wheat areas, and the incidence of disease and insects has reportedly increased. The size of China's production and stocks is a major source of uncertainty about global wheat trade in 1999/2000. The size of China's wheat stocks are considered a state secret. Also, no one knows the quality of the stocks, especially following last summer's flooding. USDA forecasts that China's ending wheat stocks will decline in 1998/99, as production dropped from record levels the previous year. If both production and stocks are down in 1999/2000, China would likely increase wheat imports from the historic low of 1.5 million tons expected in 1998/99. EU wheat production in 1999/200 will likely drop below 100 million tons as the mandatory area set-aside requirement was doubled to 10 percent, prices were lower than a year earlier, and cold, wet weather hampered planting in several countries. However, durum area in Southern Europe is reportedly up, and total wheat area is expected to decline by less than 5 percent. Despite reduced production, EU wheat supplies in 1999/2000 are expected to remain large due to large beginning stocks. India is the first major producer to harvest in 1999/2000, with harvest beginning in March, so the crop is more advanced than in other parts of the world. Production is expected to increase, with area up and growing conditions favorable. Because the government increased the wheat support price by 8 percent, large procurements by the government are expected, and significant imports are not likely. If large production reduces internal prices, exports are possible. Pakistan reportedly planted less wheat area, but has had generally favorable growing conditions, and yields are expected to remain high. Production is not likely to match the 1998 record, and with a rapidly growing population, Pakistan is expected to continue as one of the world's largest importers. In Turkey, high government price supports encouraged continued large wheat plantings for 1999/2000. Weather was exceptionally favorable during the growing season last year in Turkey, but with more normal weather this year, yields are unlikely to match last year's level. Even if production declines some, it will remain very large, and Turkey will continue to export. However, the size of government purchases and subsequent subsidized sales on the world market depend on which political groups run the country and the country's financial condition. With the internal price well above world levels, this year's large subsidized exports placed a significant strain on Turkey's government finances. Growing conditions have not been good to date across much of the Middle East, but prospects could change dramatically if favorable rains are received in coming weeks. Information about Iran's wheat situation is always limited, and this fact increases uncertainty about world wheat supply and demand. Also, given low petroleum prices and large government expenditures, there are questions about whether the Government of Iran will reduce the consumer bread subsidy. In the NIS (New Independent States, also referred to as the former Soviet Union), wheat production is expected to increase. In Russia, winter wheat seedings were down slightly, and poor fall weather led to late planting and poor emergence and establishment of the crop prior to entering dormancy. While wet and warmer than normal weather improved conditions during the winter, the government has indicated there was increased winterkill this year and more area will have to be resown with spring grains. The government has announced an ambitious plan for spring plantings, but expensive inputs, inadequate machinery, and the unstable financial and budgetary situation are likely to hold plantings well short of the plan. Nevertheless, production is likely to expand because the extensive and prolonged drought last year led to widespread abandonment and very poor yields. Ukraine's winter crop area showed little change from a year earlier and weather conditions have been generally favorable to date. Also, government agencies have helped producers acquire critical inputs. Thus, some rebound in production is expected. Whether Ukraine continues as a large exporter in 1999/2000 will largely depend on the exchange rate and global demand for low quality wheat. In Eastern Europe, wheat production is expected to decline. Planted area is down in Romania, Bulgaria, Serbia, Croatia, Czech Republic, and Poland, because of low prices and excessive rains during the planting season. Hungary and Bosnia are expected to increase area some, but expensive inputs, excessive winter rains, and flooding may keep production from increasing. Early dryness delayed winter wheat planting throughout North Africa, but favorable weather throughout the winter months could offset this. However, imports by the region will likely remain strong to support the growing population. Spring wheat producers in the Northern Hemisphere, such as Canada, have not yet planted wheat for 1999/2000. Significant prices changes during March through June 1999 could still alter planting prospects. However, large wheat stocks held by the major exporters, especially the United States, EU, and Canada, are expected to limit price increases during this period unless a major weather event reduces production prospects. In Canada, wheat area is expected to increase because of the sharp drop in canola prices in recent months. Even with total wheat area expected to increase, durum plantings are expected to drop from the record in 1998. Southern Hemisphere producers plant even later than spring wheat producers in the Northern Hemisphere. The Australian Bureau of Agriculture and Resource Economics recently forecast little change in wheat area in Australia because of low prices for alternative uses of the land, such as barley or sheep. Global Trade Likely To Rise in 1999/2000 In 1998/99, some major importers, such as North Africa, have reduced imports because of larger production, while others, especially in the Middle East and Southeast Asia, reduced imports because of foreign exchange and macroeconomic problems. World wheat trade is forecast to drop about 5 percent in 1998/99, and exporters' stocks will rise. This combination is unlikely to continue into 1999/2000. World wheat trade in 1999/2000 will most likely be boosted by steady long-term growth in demand, based on demand for food, underpinned by increasing populations in Latin America, North Africa, the Middle East, and some Asian countries. With increased trade and reduced production in most major exporting countries, exporters' wheat stocks are expected to begin to decline in 1999/2000. However, exporters' stocks will not decline rapidly unless an importer like China or Iran increases imports dramatically or there are significant yield problems in one or more of the major exporting countries. Situation and Outlook for 1998/1999 Prices Weaken Under Weight of Large U.S. Wheat Crop in 1998/99 U.S. wheat production, spurred by favorable weather in the Southern and Central Plains States, increased in 1998 to the highest level since 1990. The season average price received by farmers is expected to drop for third year in a row. U.S. Wheat Supplies Up Sharply, Prices Down Again in 1998/99 Total U.S. wheat production is estimated at 2.55 billion bushels in 1998/99, up 3 percent from 1997/98. With larger beginning stocks and steady year-over-year imports, the U.S. wheat supply in the 1998/99 (June-May) marketing year is forecast to rise 12 percent from 1997/98, to the highest level since 1987/88 (fig. 8). The average farm price for all wheat dropped 67 cents during June-August because of increasing production prospects in the United States and competing exporting countries. Prices rallied during October and November 1998 due to the announcement of a program to donate U.S. wheat to needy countries and production uncertainties in the Southern Hemisphere. However, prices drifted mostly lower since November due to weak global demand and aggressive pricing by Australia and the EU. The lower winter wheat seedings indicated in USDA's Winter Wheat and Rye Seedings report temporarily lifted futures and cash prices in January, but generally favorable conditions for U.S. wheat, large supplies in competing exporting countries, and weak global demand have kept wheat prices under pressure. The farm price slipped to $2.72 by mid-February, the lowest February farm price since 1991. Prices will remain sluggish in the coming months in the absence of fresh export demand or a serious weather-related change in crop conditions. The season-average farm price in 1998/99 is forecast at $2.65-$2.75 per bushel, significantly below the $3.38 received by farmers in 1997/98, and the record $4.55 in 1995/96 (fig. 9). There will be continued pressure on cash and near-term futures prices as ending stocks remain large compared with recent years. U.S. ending stocks are projected to total 955 million bushels, the highest since 1987/88. New Yield Record for Winter Wheat Winter wheat production accounted for about 74 percent of the total U.S. output in 1998 and totaled 1,881 million bushels. Because of favorable weather, winter wheat yields surged to a record 46.9 bushels per harvested acre, 5 percent above the old record established the previous year. Also, the improved yield potential of winter wheat in 1998 led producers to harvest a larger percentage of planted area. An estimated 86.4 percent of the seeded winter wheat area was harvested for grain in 1998, compared with an average of 83.6 percent during the previous 5 years. Increase in Durum Production Eliminates Price Premiums High premiums for durum wheat relative to hard red spring during the spring of 1998 (see fig. 2) led to a large expansion in area seeded to durum. Acreage seeded to durum totaled 3.8 million acres, up 15 percent from 1997 and the largest since 1982. The optimism of U.S. durum producers was shared by producers in Canada, where durum planted area was record high. Favorable growing conditions in 1998 pushed durum yields to 37.8 bushels per harvested acre, 37 percent above the previous year. The yield was the second highest ever and only 2 bushels below the record established in 1992. As a result, production soared to 141 million bushels, a level exceeded only in 1981 (183 million) and 1982 (146 million). Larger production in the United States and other major durum producing nations led to increased competition in the world market. As a result, U.S. durum exports have declined, and ending stock are expected to be the largest since 1987/88. The larger crops in major exporting countries and many importing countries led to a decline in the price received by U.S. farmers. The farm price of durum fell to $3.08 per bushel in September 1998, 42 percent below the $5.35 received a year earlier. Durum farm prices averaged $3.30 during the first 8 months of the 1998/99 marketing year, down from an average of $5.00 during the same period in 1997/98. Lower Acreage Drops Production of "Other Spring" Wheat in 1998 The "other spring" wheat crop declined in 1998, as declines in harvested acreage more than offset substantially higher yields. The average yield was 34.9 bushels per acre for "other spring" wheat (i.e., includes hard red spring and white spring but excludes durum), up 5 bushels from 1997. The yield improvement almost offset the sizable reduction in harvested acreage (down 3.2 million acres to 15.1 million), and HRS production dropped only 19.5 million bushels to 529 million. Domestic Use Holds Steady in 1998/99 Total disappearance of U.S. wheat in 1998/99 is forecast to increase about 8 percent from 1997/98 with most of the increase coming in domestic use. Feed and residual use will account for most of the increase in domestic use. Food use is projected up about 9 million bushels--its fourth straight increase--reflecting continued growth based on population increases, income growth, and changing dietary habits. Seed use will decline because of fewer planted acres for the 1999/2000 crop. Feed and residual use is projected to increase about 100 million bushels 1998/99. First-quarter feed and residual was the highest since 1990/91. Larger supplies and lower prices encouraged greater use of wheat in livestock and poultry rations during the summer months. Annual feed and residual use, projected at 350 million bushels, was reduced 25 million bushels in January when the higher-than-expected December 1 stocks indicated that feed and residual use of 354 million bushels in the first 6 months was lower than previously forecast. The forecast annual feed and residual of 350 million bushels implies that feed and residual use in the final 6 months of the marketing year will be close to zero. Ending Stocks Highest Since 1987/88 U.S. ending stocks are forecast at 955 million bushels, up 32 percent from a year earlier. Most of the ending stocks will be "free" stocks accessible to the market. Current futures price relationships between old-crop and new-crop futures provide adequate incentives for holding old-crop stocks and carrying them forward into the new marketing year. Situation and Outlook for 1998/1999 World Wheat Production Declines in 1998/99, Global Trade Also Reduced Generally declining wheat prices reduced incentives to expand area in many countries, and lower yields in the former Soviet Union and China dropped world wheat production in 1998/99. However, increased production in North Africa reduced imports by the region, and China elected to draw on stocks, actually reducing imports. In Russia, foreign exchange constraints limit commercial imports but U.S. and EU food aid will allow some increase in imports. With sluggish trade, exporters' stocks are expected to increase. Foreign Wheat Production Down 25 Million Tons in 1998/99 World wheat production in 1998/99 is estimated at 587 million tons, down 4 percent from a year earlier (fig. 10). Although a significant drop from the previous year's record, it is still the third largest world wheat crop. Most major exporting countries increased production, while some importing countries had sharp reductions. The most dramatic drop occurred in the NIS, where wheat production is estimated to have plummeted by 24 million tons, a 30-percent drop. Wet conditions delayed seedings and drought accompanied with high temperatures in several key producing regions compounded problems with low prices, lack of inputs, and equipment shortages. Most of the reduction occurred in Russia, but Kazakstan and Ukraine also had sharply reduced crops. China's 1998/99 wheat production is forecast down 13 million tons to 110 million. There is some uncertainty about the size of the crop, most of which was harvested in the summer of 1998, because, as of late March 1999, the Government of China had not yet announced an official wheat production estimate. However, total grain production is little changed from the previous year, and it is clear that in 1998/99 China's corn production increased while wheat declined. The wheat growing season for the record-breaking 1997/98 season was generally good, with exceptionally favorable harvest weather. In contrast, 1998/99 growing conditions were more average and the harvest suffered from prolonged wet conditions. The forecast 110 million tons would still be a large crop--the second or third largest ever for China. India also experienced a decline from the previous year's record production. Yields fell enough to offset increased area spurred by increased government price supports. Despite reduced production, government procurements increased. Some important importing countries increased wheat production in 1998/99, reducing import demand and lowering trade. Wheat production in North Africa increased 4 million tons, a 38-percent increase, despite some lingering dryness in Morocco. This was a rebound from serious drought across most of the region the previous year. In Pakistan, another major importer, increased government price supports and favorable growing conditions produced a record crop, up 2 million tons from a year earlier. Most exporting countries increased wheat production for 1998/99. Wheat prices trended down through most of the previous 2 years, but during the fall of 1997, when winter wheat was being planted in the Northern Hemisphere, prices still provided profitable incentives for many export-oriented producers. For example, the f.o.b. Gulf price for HRW was about $150 per ton. However, prices were down from prices a year earlier, when they were even more attractive to producers. Thus, area declined in four of the five major exporting countries, with Australia, which rebounded from an El Nino drought, the exception. Favorable growing conditions boosted yields among most of the exporters, except Argentina, which failed to match the previous year's exceptionally high record. Record EU wheat yields boosted production above 100 million tons for the first time, as the crop increased over 9 million tons from the previous year. Some smaller wheat exporters also had good crops. Turkey continued to support wheat prices well above world prices, and with favorable growing conditions, posted a record crop, up 2 million tons. Although Eastern Europe's wheat production declined slightly, increased production in Poland and large beginning stocks allowed that country to emerge as an exporter. Low Prices Boost World Wheat Consumption 12 Million Tons World wheat consumption is forecast to reach 597 million tons in 1998/99, up 2 percent from a year earlier. Wheat used as feed is expected to account for about 5 million tons of the increase. Most of the increased feed use is expected in the EU, where feed quality wheat is not eligible for intervention, leaving prices for lower quality wheat very competitive with feed grain prices. South Korea is also expected to increase wheat feed use modestly because low freight rates and attractive f.o.b. prices have facilitated shipments from Eastern Europe and Ukraine. The 7- million-ton increase forecast for world wheat consumption for other uses (largely food) about matches world population growth, and is a significant rebound from an increase of less than 2 million tons estimated for the previous year. Wheat consumption will fall in the former Soviet Union, with feed use dropping more than total use. In Indonesia the elimination of consumer subsidies and economic contraction has slashed consumption by almost half. Economic problems are also expected to contribute to a significant decline in wheat consumption in Brazil, causing consumption in Latin America as a whole to stagnate, despite increased consumption in most of the rest of the region. However, these reductions are more than offset by increased consumption in the EU, North America, South Asia, China, and Eastern Europe. World Wheat Trade Forecast Down About 5 Percent in 1998/99 Production declines in Russia will not be offset by commercial imports because foreign exchange is not available. Food aid shipments will only increase imports slightly. Despite lower production, China has large grain stocks and is forecast to actually reduce its wheat imports to the lowest level covered by the USDA data base, which begins with 1960. India is also expected to reduce imports despite lower production because of ample wheat stocks. Increased production is dropping North Africa's forecast imports by more than 2 million tons, while Pakistan reduces imports by a smaller amount. Reduced imports in these countries more than offset modest increases expected in many countries because of low prices and increased food aid availabilities. World Wheat Stocks To Decline in 1998/99, But Exporters' Stocks Up Ending stocks for the United States, EU, Canada, and Australia are forecast up 13 million tons in 1998/99, a 30-percent increase. Because exportable supplies in exporting countries have a large role in determining prices, large stocks in these major exporting countries have tended to depress wheat prices through the first three quarters of the marketing year. The expectation that global stocks will decline by more than 10 million tons is less important for price determination because much of the stock reductions are expected in countries like Russia, China, and India, where domestic market prices are largely isolated from world markets. Situation and Outlook for 1998/1999 Donations Help Boost U.S. Export Prospects Despite Declining World Trade U.S. 1998/99 wheat exports are forecast up 3 percent because low prices and donations are expected to raise the U.S. share of declining world trade. U.S. Exports Forecast Up Despite Sluggish Start in 1998/99 U.S. 1998/99 wheat exports are expected to reach 29 million tons (July/June trade year) or 1.05 billion bushels (June/May marketing year), up slightly from the previous year, but still less than in 8 of the last 10 years. Exports are being constrained by declining world trade and intense competition among exporters. Export shipments during the first half of the marketing year have lagged year-ago levels, but prospects for increased donations and reduced competition in the latter months should boost the pace. According to U.S. Export Sales, U.S. wheat export shipments through March 18, 1999, were just under 21 million tons, down 10 percent from a year ago. However, outstanding sales were up by almost 30 percent. Shipments were down to Europe, Asia, and Africa, while increasing to the Western Hemisphere. Shipments are up to Mexico and Peru. But no sales have been made to Brazil, although negotiators have repeatedly announced a resolution to the phytosanitary regulation problems that have helped keep the United States out of the world's third largest market. Shipments to Africa have lagged despite increases to Nigeria and Algeria, because the U.S. share of the Egyptian market had declined significantly. However, outstanding sales to Egypt are up dramatically because the United States has been more successful in recent tenders. Shipments to Asia have dropped mostly because exports to Pakistan are running at less than 40 percent of a year ago, partly because Pakistan has reduced total imports, but also because Australia has increased its market share by offering attractive prices. Iraq has also reduced purchases from the United States. Shipments to Europe are down despite an increase to the EU, because of reduced purchases by Eastern Europe, the former Soviet Union, and others, especially Turkey. Massive Food Aid Shipments Expected in the Latter Part of 1998/99 The President's Food Aid Initiative, announced in July, originally was for 2.5 million tons, but has grown to 4.8 million (see special article by Ackerman). However, it has taken time to negotiate agreements with recipients, purchase the wheat through CCC tenders, and arrange shipments. Few shipments occurred during the first half of 1998/99. However, the pace of aid shipments is expected to increase dramatically during the second half of 1998/99, although some of the shipments are expected to be delayed until after the beginning of the 1999/2000 season on June 1. These food aid shipments will not show up as outstanding sales in U.S. Export Sales reports, but they will be included as shipments. This means that the current level of outstanding sales significantly underestimates the expected pace of shipments over the next several months. U.S. Share of World Trade Expected To Increase The United States and EU are expected to increase their share of world wheat trade in 1998/99 while shares held by Canada, Argentina, and Australia decline. Canada's share is expected to drop to only 15 percent from 21 percent in 1997/98. Canada's production is little changed from the previous year, but beginning stocks are sharply lower. The relatively slow pace of Canadian sales has helped support premiums for HRS wheat during much of 1998/99. Argentina's wheat production fell as producers responded to low prices by sharply reducing plantings. With reduced supplies, Argentina's exports will decline in 1998/99, potentially opening trade opportunities for the United States in Latin America. The EU is expected to increase wheat exports and increase market share in 1998/99. With record production and increasing stocks, there has been pressure on the European Commission to aggressively subsidize exports. However, the subsidies needed to move the wheat have been quite large, reaching up to 38 euros per ton (about U.S.$40). EU wheat has been priced competitively with U.S. SRW, and SRW has been selling at a large discount to other classes. As a result, the EU has been getting as little as the equivalent of $80 per ton for some of its exports, effectively less than the price of U.S. corn. The EU has also joined the United States in shipping wheat as food aid to Russia. Wheat by Class in 1998/1999 Record Yields Push Ending Stocks Higher Larger HRW and durum supplies and lower prices have led to higher use, particularly for domestic feed and residual use. Nonetheless, ending stocks are forecast to be the largest since 1987/88. HRW Crop Posts Record Yield Weather conditions were extremely favorable during the winter wheat growing season. As of April 6, 1998, 86 percent of the Kansas crop was rated good to excellent, compared to 82 percent the previous year. In comparison, 55 percent of the Texas crop, 86 percent of the Oklahoma crop, and 69 percent of the Nebraska crop were rated good to excellent. Temperatures dropped below freezing in Kansas in mid-April, raising some concern of freeze damage. But by late April, damage was determined to be limited. Favorable weather during the growing season led to rapid crop development throughout the Southern and Central Plains, and ideal growing conditions at most locations led to record yields. The U.S. winter wheat yield reached a record 46.9 bushels per acre, up nearly 5 bushels from the May 1, 1998, forecast, and up 2.3 bushels from the 1997 record. The Kansas crop was 495 million bushels, only 6 million below the 1997 record of 501 million. The Kansas yield was record high at 49 bushels per harvested acre. HRW beginning stocks for 1998/99 (June 1) were estimated at 307 million bushels, more than double the 143 million the previous year (table 2). With production increasing sharply, total HRW supplies are forecast to climb to 1.49 billion bushels, the highest since 1987/88 when beginning stocks were substantially larger. Lower protein in the HRW crop added upward price pressure on premiums for higher-protein wheat. According to the Kansas Agricultural Statistics Service and the Kansas Grain Inspection Department, the average protein content of Kansas wheat was 11.5 percent, compared with 11.8 percent in 1997 and the 10-year average of 12.4 percent. However, the average test weight was 61.5 pounds per bushel, compared to 60.6 in 1997 and the 10-year average of 58.8 Larger HRW supplies and lower prices have led to higher domestic use in 1998/99 (fig. 13). HRW food use is projected to increase almost 2 percent, feed and residual use is projected up in response to lower prices, and exports are projected to be up about 22 percent from 1997/98. The higher exports are due partially to USDA donations to needy nations. Despite the expanding use, ending stocks are forecast up at 451 million bushels, the largest since 1987/88. HRS Output Declines, Domestic Use and Exports Increase Modestly In July 1998, the first survey-based forecast for "other spring" wheat production (i.e., excluding durum) indicated a decline of 11 percent in 1998. The forecast primarily reflected a smaller planted and harvested area as farmers either shifted acres to durum wheat, soybeans, and other field crops or fallowed the land. Other spring wheat plantings were estimated at 15.6 million acres in 1998, down from the March planting intentions of 16.3 million acres. Harvested area declined 17 percent from the previous year. However, the impact of the lower area was partially offset by improved yields. Favorable weather in most locations led to rapid crop development, and as of July 5, 69 percent of the other spring wheat crop was headed, compared to a 5-year average of 45 percent. Yield prospects improved during the season, and the average U.S. yield for other spring wheat is estimated at 34.9 bushels per acre in 1998/99, up from 29.9 bushels the year before. Hard red spring (HRS) wheat production is estimated at 487 million bushels in 1998/99, and larger beginning stocks increased overall supplies to an estimated 764 million bushels (table 3). Estimated food use is projected to total 225 million bushels. Price premiums for higher protein levels have limited growth in domestic use this season. Exports are projected at 250 million bushels, up about 10 percent from the previous year. Ending stocks are forecast at 249 million bushels, up 13 percent from 1997/98. SRW Crop Is Smaller But Lower Exports Depress Market Prices Soft red winter (SRW) production was 443 million bushels in 1998, down 6 percent from 1997. Lower yields (estimated at 48.9 bushels per harvested acre) offset higher harvested acreage. Yields declined from the records established in 1997 in Illinois, Missouri, Virginia, New Jersey, Michigan, Maryland, and Delaware. Ohio was the only major SRW producing State to establish a record yield at 64 bushels per acre. Total SRW use in 1998/99 is forecast at 373 million bushels, down 9 percent from 1997/98 (table 4). Lower exports account for most of the decline. SRW exports are projected at 100 million bushels, down 80 million from the previous year. Reduced export demand has weighed heavily on SRW prices, as many foreign buyers have shown a preference for other classes of wheat. Total supply is down much less than production because beginning stocks were up more than 75 percent. Historically, export demand has been critical to keeping SRW supply and demand in balance. Exports were above 300 million bushels as recently as 1989/90, and totaled a record 460 million bushels in 1981/82. During the 1960's and 1970's SRW often moved under government aid programs such as PL 480 because it was the least expensive class of wheat. Shrinking aid shipments have been a factor in the declining volume in the 1990's. The declining importance of importing countries' government procurement agencies is also believed to be an important factor. In earlier years, foreign government procurement agencies often bought the least expensive wheat available and not necessarily the kind most preferred by their millers and end-users. Because the role of government procurement agencies has declined in recent years, foreign millers have a greater influence on purchasing decisions, and many now purchase other classes that are better suited for the intended end-uses of the flour they produce. Because of low prices in 1998/99, feed and residual use is forecast to increase more than 50 percent to 125 million bushels. Monthly regional average farm prices for SRW have been running about 27 cents per bushel below regional average farm prices for HRW during the first 9 months of the marketing year (see App. table 20). Normally this would encourage feed use, but weak corn prices have prevented more SRW wheat being fed to livestock and poultry. As a result, SRW stocks are projected to reach a record high of 125 million bushels at the end of the 1998/99 marketing year. Higher White Wheat Use, Ending Stocks Down White wheat supplies are forecast at 397 million bushels in 1998/99, only 2 million bushels less than the previous year (table 5). Production declined 10 percent, but larger beginning stocks offset that decline. Producers planted fewer acres due to planting problems in the Pacific Northwest. White wheat yields, estimated at about 67 bushels per acre in 1998/99, are down 5 percent from the high level of 1997, reflecting yield declines for other spring wheat in Idaho, Washington, and Oregon and white winter wheat in Michigan. Pakistan has traditionally been a large buyer of white wheat, and accounted for about 50 percent of U.S. white wheat exports in 1997/98. As of March 4, 1999, Pakistan accounted for less that 20 percent of the shipments to date during the 1998/99 marketing season. Egypt has emerged as the most important destination for U.S. white wheat exports this marketing year. Most U.S. wheat sales to Pakistan are under the Export Credit Guarantee Program (i.e., GSM-102). The program guarantees for up to 3 years repayment of credit extended to eligible banks that issue letters of credit on behalf of purchasers of U.S. products. Japan, the Philippines, the Republic of South Korea, Yemen, Taiwan, and Mexico are the other major destinations for U.S. white wheat exports. International trade is critical to the white wheat market because exports account for about two-thirds or more of total white wheat use. U.S. white wheat exports are forecast up about 10 percent from 1997/98. Australia is the other major supplier of white wheat in the world market, although Canada also exports white spring wheat from the western provinces and white winter from the east. Higher domestic use and strong exports will contribute to lower ending stocks this season. Ending stocks are projected at 61 million bushels, the lowest of any class. Durum Wheat Output Soars in 1998 as Acreage and Yield Rebound USDA's Prospective Plantings report, released on March 31, 1998, indicated that U.S. durum producers intended to increase the area seeded to durum wheat to 4.08 million acres in 1998, up 25 percent from 1997. That would have been the largest acreage since 1982. Statistics Canada also reported in March that Canadian producers intended a sizable acreage increase in 1998. Producers in both countries were reacting to the strong world prices for durum in 1996/97. The prospects of larger supplies of wheat and lower prices led U.S. producers to make adjustments in their 1998 cropping plans as the planting season approached. USDA's June 30 Acreage report confirmed that durum producers actually seeded only 3.7 million acres to durum last spring. The Crop Production--Annual Summary for 1998 released in January 1999 indicated that durum plantings totaled about 3.8 million acres in 1998. The Canadian area was record large. The larger harvested area and generally favorable growing conditions in the Northern Plains during the summer of 1998 led to a substantially larger U.S. durum crop. USDA's January 1999 estimate indicates that farmers harvested 141 million bushels in 1998, up 60 percent from the previous year. U.S. durum yields were placed at 37.8 bushels per acre, up 37 percent from 1997 and second only to the record 39.7 bushels in 1992. The principal durum region is the Northern Plains, and Minnesota, Montana, North Dakota, and South Dakota accounted for over 91 percent of the durum acreage harvested in 1988. Farmers in these States harvested 3.4 million acres, and those States accounted for about 78 percent of production. Yields in those States averaged about 32 bushels per harvested acre. Durum is also grown under irrigation in the desert areas of California and Arizona, where farmers harvested about 319,000 acres (9 percent of the total in 1998). Yields in those States averaged about 97 bushels per harvested acre, and desert area production totaled 31 million bushels. Domestic use of durum is forecast at 87 million bushels in 1998/99 (table 6). Imports are forecast to drop 3 percent from 1997/98 to 28 million bushels (grain and products). Domestic food use of durum is forecast to decline slightly to 71 million bushels, down from 73.1 million in 1997/98. Larger world supplies and weaker import demand in many countries have intensified competition among the major durum exporters in 1998/99. U.S. durum exports are projected at 40 million bushels (grain and products), down 30 percent from 1997/98. Export sales started slowly, and accumulated exports through the first two quarters totaled about 26 million bushels. Despite the lower export projection, the United States will maintain its status as the world's second most important exporter behind Canada. Ending stocks are projected at 68 million bushels, up 165 percent from last year. Burdensome stocks and static demand will pressure durum wheat prices for the remainder of the 1998/99 marketing season. Special Article Analyzing U.S. Wheat Acreage Response Under the 1996 Farm Act by William Lin 1/ Abstract: This article presents results for wheat from a recent study on supply response. The own-price supply elasticity is estimated at 0.36 for all U.S. wheat--0.38 for winter wheat and 0.29 for spring wheat--little changed from 1986-90. The cross- price elasticities, in most cases, show larger changes under the 1996 Act. A lower wheat price expected by producers, especially for soft red winter (SRW) wheat, is the most significant factor contributing to the 7-percent decline in 1999 winter wheat seedings. Lower expected prices for durum and other spring wheats are expected to lower planting intentions from last year for these crops. Keywords: Acreage response, acreage price elasticities, wheat, winter wheat, spring wheat 1/ William Lin is an Agricultural Economist, Field Crops Branch, Market and Trade Economics Division, Economic Research Service. U.S. wheat planted acreage has shown a declining trend since 1981 when it hit a record high of 88.3 million acres (fig. A-1). Until the enactment of the 1996 Farm Act, year-to-year variations in acreage were affected by not only costs and returns of growing wheat relative to competing crops, but also provisions of wheat programs, such as deficiency payments, annual set-aside and acreage reduction programs, paid land diversions, and the Conservation Reserve Program (CRP). However, since 1996 for spring wheat and 1997 for winter wheat, farmers have based their planting decisions primarily on market forces--expected farm prices and net returns of wheat relative to competing crops. The 1996 Farm Act decoupled program payments from planting decisions and removed concerns over base acreage protection, making fundamental changes towards full planting flexibility. Since the enactment of the 1996 Farm Act, wheat planted acreage has declined 3 years in a row--down from 75.1 million acres in 1996 to 70.4 million in 1997, 65.9 million in 1998, and a projected 62.5 million in 1999 (Riley). The decline applies to both winter and spring wheats. Planted acreage for 1999 winter wheat was estimated in January by USDA at 43.4 million acres, down 3 million from last year and 8 million below 1996 (USDA, 1999). The acreage for 1999 spring wheat (including durum) was projected at 19.1 million in late February, down slightly from last year but well below the 23.7 million in 1996 (Riley). It is not totally surprising to see the rapid decline in wheat acreage since 1996. Given nearly full planting flexibility, wheat farmers were offered incentives to switch away from wheat to other more profitable crops, such as corn, soybeans, and minor oilseeds (sunflower, canola, or rapeseed). For example, based on the ERS Agricultural Resource Management Survey (ARMS), while wheat producers in the Central and Southern Plains region had an average net return of $34.8 per acre in 1997, corn producers averaged a net return of $135.6 per acre in the Plains States. The average net return for soybeans was even higher--$166.2 per acre in the Northern Plains. 2/ Thus, wheat acreage in the Central and Northern Plains region has declined in recent years and acreage planted to corn and soybeans has increased . 2/ The comparison of average net returns among these crops may not be all base on comparable land due to differences in the regional breakdown for these crops in ARMS. Also, even in the same area, producers can switch from wheat to soybeans only on farms where precipitation is adequate for soybean production. Estimating Supply Response The limited time since the passage of the 1996 Act complicates the study of producers' acreage response. To increase the number of observations, State-level information on producers' planting decisions during 1991-95, when producers were granted limited planting flexibility under the 1990 Farm Act, was used. The time series (1991-95) and cross section (State) data were pooled to enhance the degree of freedom. This study focuses on producers participating in 1991-95 wheat programs. The approach adopted in this study assumes that wheat producers maximize their expected net returns. Wheat producers' acreage response is estimated on normal flex acreage (NFA), which represents the majority of producers who made planting decisions, at the margin, within the range of NFA. 3/ The results are then extended to the whole farm and included acreage impacts on both NFA and the rest of base. 3/ NFA refers to 15 percent of base acres where farmers were allowed to grow the base crop, other program crops, soybeans and other oilseeds, any other approved non-program crops, or leave the cropland idle without loss of base acreage, but received no deficiency payments. Wheat supply response is estimated for major production regions, including the Central and Northern Plains, Southern Plains, North Central, and Southeast and Delta regions combined (fig. A-2). Acreage price elasticities are approximated from the estimates developed in a Food and Agricultural Policy Research Institute (FAPRI) study for the Northeast and Far West regions based on the relationship between ERS and FAPRI estimates for neighboring regions. Supply response on wheat NFA is estimated by pooling time-series (1991-95) with cross-section (State) data in each production region. The acreage response is specified in two models, where the dependent variable is specified differently. In Model 1, a lower-bound estimate, the dependent variable is specified as the percent of wheat NFA planted to wheat or alternative crops. In Model 2, an upper-bound estimate, the percent of the combined NFA and acreage reduction program (ARP) acreage planted to wheat or alternative crops is used as an alternative dependent variable to derive estimates (Westcott). 4/ 4/ Specifying the dependent variable in the acreage response equation as the percent of wheat NFA planted to wheat may result in some measurement problems relative to the underlying acreage shifts. This results from changes in the acres covered by NFA for different ARP levels across years. These measurement problems introduce a downward bias into the estimated own-price coefficient resulting from interaction of NFA acreage with the year-specific ARP that reflects an inverse relationship between the expected price and the ARP level. That is, the acreage response reflects the effect of a change not only in the expected price, but also in ARP. A possible adjustment to the dependent variable to address this concern is to incorporate the ARP into the dependent variable. One way to do this is to define the dependent variable as the percent of the combined NFA plus ARP land that was planted to the base crop or alternatives. This alternative reduces the measurement's downward bias, but it does not fully eliminate it. However, it also adds a policy-related upper bias to the measurement of acreage shifts. Explanatory variables in both Models 1 and 2 include expected net returns for the program crop itself (wheat in this case) and competing crops, as well as a set of intercept dummies for States in the region. Expected net returns equal the expected price times the trend yield by State minus variable cash costs of production for the region. The expected price is the new-crop futures price at harvesttime in the month when planting decisions are made by producers. The new-crop futures price for winter wheat, spring wheat, and competing crops has the following time dimensions: Hard red winter (HRW) wheat: July futures price at the Kansas City Board of Trade in mid-October, previous year. Soft red winter (SRW) wheat: July futures price at the Chicago Board of Trade in mid-October, previous year. Spring wheat: September futures price at the Minneapolis Grain Exchange in mid-May, current year. Corn: December futures price at the Chicago Board of Trade for the Midwest region and September futures price for the South, as observed in mid-October, previous year, for winter wheat and mid-March, current year, for spring wheat. Soybeans: November futures price at the Chicago Board of Trade in mid-October, previous year, for winter wheat and mid-March, current year, for spring wheat. Cotton: December futures price at the Chicago Board of Trade in mid-October, previous year. The new-crop futures price is further adjusted by the expected basis (the difference between futures prices and cash prices received by farmers in the month right before the delivery month of the futures) to allow for price differentials across States, and to arrive at the farm-price equivalent. The trend yield is estimated using State data for 1975-95. The acreage response equations in terms of wheat NFA planted to wheat, other program crops, soybeans, minor oilseeds, other crops, and NFA idled are estimated by Seemingly Unrelated Regression (SUR) as a system (Zellner).5/ In addition, to the extent that it is appropriate, theoretical constraints--symmetry and linear homogeneity--are imposed in the SUR estimation procedures.6/ 5/ Due to the small sample size, any gain in efficiency of the estimation by SUR, relative to ordinary least squares (OLS), is limited. Thus, in many cases, there are only very small changes in the regression coefficient, although t-ratios are increased in some cases. 6/ The symmetry restriction requires that cross-net return regression coefficients across the share equations be equal while the linear homogeneity constraint requires that the sum of all own- and cross-return regression coefficients in each of the three equations be zero. The symmetry restriction reflects the notion that the cross-price elasticities are linked to the ratio of the acreage shares between two competing crops. The linear homogeneity constraint reflects the fact that the share of wheat NFA is homogenous of degree zero in prices since the same proportional change in net returns for the program crop and competing crops does not alter the share of wheat NFA planted to a specific crop. Estimated Acreage Price Elasticities Acreage price elasticities for all wheat in the major production regions are derived, in part, from regression coefficients in the estimated acreage response equations on NFA (table A-1). Acreage response on NFA associated with a 1-percent change in the expected price is first estimated, and then extended to the rest of base acreage. Thus, acreage price elasticities reported in this study reflect the whole farm acreage response, not just the response on NFA. Also, the midpoint average of the acreage price elasticities from Model 1 and Model 2 is used as the "best estimate." The own-price supply elasticity of U.S. wheat is estimated at 0.36 under the 1996 Act, little changed from the 0.34 for 1986- 90, when producers were only allowed limited planting flexibility (table A-2). 7/ This lack of increase in the elasticity for U.S. wheat is partially explained by the fact that much of U.S. wheat is produced in the Great Plains where producers have few alternatives to growing wheat. The elasticity in the Central and Northern Plains was estimated at 0.20 during 1986-90, compared with the 0.24 estimated under the 1996 Act. 7/ The own-price elasticity refers to the percentage change in wheat acreage in response to a 1-percent change in the expected wheat price. Acreage price elasticities during 1986-90 are those estimated by FAPRI (Adams). Most cross-price elasticities estimated under the 1996 Act also show an increase from 1986-90. At the national level, barley and sorghum are the two primary competing crops for wheat land. For example, a cross-price elasticity of -0.092 with respect to barley price means that a 1-percent increase in the expected barley price would cause a 0.092-percent decline in U.S. wheat planted acreage. Corn, cotton, and oats are also important competing crops in some areas. The effect of a 1-percent change in the expected soybean price on wheat acreage is the smallest among the competing crops. This is due to the fact that the negative effect on wheat plantings of increasing soybean prices in most regions is partially offset by a positive effect in the Southeast and Delta regions, where double cropping of winter wheat and soybeans is more common. The own-price elasticity of winter wheat plantings is estimated at 0.38 under the 1996 Act, considerably higher than 0.29 for U.S. spring wheat (table A-3). A larger number of competing crops and a wider geographic distribution of winter wheat production make winter wheat acreage more responsive to changes in its price. Sorghum is the primary competing crop for winter wheat. However, barley is the dominant competing crop for spring wheat. The cross-price elasticity of - 0.087 with respect to the sorghum price in winter wheat plantings means that a 1-percent increase in the expected sorghum price would cause a 0.087-percent decline in winter wheat plantings (table A-3). The effect of a 1-percent change in barley price on spring wheat plantings is greater, with a cross-price elasticity of -0.100. This is because barley production is concentrated in the spring wheat growing area. Minor oilseeds, such as sunflower and canola, also compete with spring wheat. Supply elasticities for all wheat plantings vary among major production regions. The wheat own-price elasticity in the Central and Northern Plains region (0.240) is the lowest, while that for the North Central region (0.567) is the highest (table A-4). 8/ In the Central and Northern Plains, where about 55 percent of U.S. wheat is grown, the own-price elasticity under the 1996 Act is about 20 percent higher than during 1986-90. Among major production regions, the North Central has the least increase in the own-price elasticity--only 2.5 percent. Barley and sorghum are the two primary competing crops for all wheat in the Central and Northern Plains region.9/ The increase in the cross-price elasticity with respect to soybean prices reaches 100 percent, reflecting higher profitability of growing soybeans on farms where precipitation is adequate for soybean production. 8/ Acreage price elasticities in the Southern Plains and Delta and Southeast regions were estimated by Scott Sanford and Bob Skinner of the Economic Research Service, USDA, at the time of this study. 9/ In this region, barley primarily competes with spring wheat and sorghum competes with winter wheat. In fact, in many areas of the Northern Plains, spring wheat is a primary competing crop for winter wheat. While virtually all cross-price elasticities have a negative sign, the cross-price elasticity of wheat acreage with respect to the soybean price in the Southeast and Delta has a positive sign because soybean-wheat double cropping is common in that region (table A-4). For example, the percentage of 1998 acreage planted to soybeans following another crop (primarily wheat) was estimated at 42 percent in Georgia, 51 percent in Kentucky, and 44 percent in North Carolina (USDA, 1998).10/ The cross-price elasticity of 0.164 with respect to the soybean price in this region means that wheat plantings in the Southeast and Delta would increase 0.164 percent, instead of decline as in other regions, if there is a 1-percent increase in the expected price of soybeans. This also is why the corn cross-price elasticity is the greatest negative. 10/ These percentages did not deviate greatly from those in 1996 when winter wheat acres were the highest in recent years 50 percent in Georgia, 45 percent in Kentucky, and 40 percent in North Carolina. Factors Contributing to the Decline in 1999 Winter Wheat Acreage Winter wheat seeded area for 1999 is estimated by USDA to total 43.4 million acres the smallest since 1972 and down 7 percent from the 46.4 million for 1998 (USDA, 1999). How does the National Agricultural Statistics Service (NASS) estimate compare with results from this study? What are the key factors that have contributed to the acreage decline? The most significant factor contributing to the decline in 1999 winter wheat seedings is the lower wheat price expected by producers, especially for SRW wheat. Based on July 1999 new-crop futures prices at Kansas City in mid-October 1998, the expected harvesttime farm price for 1999-crop HRW wheat was estimated to decline 13.6 percent from last year. The expected price for SRW wheat based on July 1999 new-crop futures at Chicago was projected to decline even more -- 19.6 percent. Thus, the expected price for winter wheat was estimated to decline 15.4 percent. Given the own-price elasticity of 0.383 for winter wheat plantings, the decline in the expected wheat price implies a decline of about 6 percent in winter wheat seedings from 1998, or about 2.75 million acres. 11/ 11/ The own-price elasticity for winter wheat potentially could be slightly higher than the 0.383 reported here because the effect of any price changes in other competing crops (such as sunflower, canola, and alfalfa) on winter wheat seeding is not reflected in the acreage response model due to a lack of readily available, accurate data on the costs of production for these crops in the Central and Northern Plains region. The decline in the expected price of competing crops would only partly offset the effect on winter wheat seedings due to the decline in the expected price for winter wheat itself. For winter wheat producers, the declines in expected prices for competing crops based on new-crop futures prices in mid-October 1998 were 8 percent for sorghum and corn, 6 percent for barley (corn futures prices are used as a proxy for the barley price), 13 percent for soybeans, and 2 percent for cotton. 12/ The decline in the expected price of these competing crops altogether is estimated to add not more than 0.4 million acres to winter wheat seedings. 12/ The expected prices for sorghum and barley are linked to the expected price of corn based on historical relations between sorghum and corn prices, and between barley and corn prices. As a result, the expected sorghum price is estimated to follow 100 percent the change in the expected corn price and the expected barley price follows 77.3 percent of the change in the expected corn price. Including both own- and cross-price effects altogether, the acreage response model suggests a decline of 2.3 million acres in winter wheat acreage from last year, compared with the decline of 3.1 million acres estimated by USDA in January. Thus, this model projected winter wheat acreage to total 44.1 million acres 1.6 percent higher than the 43.4 million estimated by USDA in January. The discrepancy could be attributed to the effect on wheat plantings of excessive rainfall in early planting season followed by dryness in the South, poor weather that prevented the seeding of some HRW acres in Montana, and forecasting error of the model. Implications for Spring Wheat Plantings Spring wheat (including durum) plantings in 1999 were projected by USDA in late February at 19.1 million acres a decline of 1.3 million acres from last year's planting intention, but only 0.3 million acres lower than actual 1998 plantings (Riley). 13/ This projected decline from 1998 intended acreage reflects a decline in the expected price from last year not only for hard red spring (HRS) wheat but also for durum wheat. This acreage response model framework helps explain the reduction from last year's planting intentions. 13/ Actual plantings of spring wheat last year fell short of planting intentions by 1.0 million acres because of rising oilseed prices between early March and late May 1998, which induced producers to switch from spring wheat to oilseeds. As of March 15, 1999, the September futures price for HRS at the Minneapolis Grain Exchange was settled for $3.560 per bushel down 2.6 percent (in farm price equivalent) from the September futures price in May 1998. This price decline implies a 0.8-percent decrease in HRS wheat acreage (about 0.13 million acres) based on the 0.291 own-price elasticity. The small decline in this year's new-crop futures price for HRS wheat is expected to keep the negative own-price effect on HRS wheat plantings at a minimum. The decline in the expected price for competing crops (such as barley, corn, and soybeans) would partly offset the effect on spring wheat plantings due to the decline in the expected price for spring wheat itself, but the offsetting effect would likely be relatively small. Thus, including both own- and cross-price effects altogether based on market conditions as of March 15, 1999, the acreage response model suggests a slight decline in this year's spring wheat planting intentions from last year. Conclusions The own-price acreage elasticity for U.S. wheat is estimated at 0.36 based on the acreage response model developed in this study. Winter wheat own-price elasticity (0.383) is higher than spring wheat (0.291) because a larger number of competing crops and a wider geographic distribution apply more readily to winter wheat than to spring wheat. Incorporating the cross-price effect of minor oilseeds (such as sunflower and canola) in the acreage response model potentially could show a greater response to changes in own price. In addition, the cross-price effect of changes in corn and soybean prices on winter wheat plantings appears to be understated in light of experience since 1996. Perhaps the record high prices for soybeans, corn, and wheat in 1996 might have skewed the model results. Corn and soybeans were important competing crops for winter wheat in Kansas and South Dakota. Also, there was a huge jump in spring wheat acres in 1996 in response to the record high prices in the spring, and there have been large increases in corn, soybeans, and minor oilseed plantings over the last 3 years. The use of NFA data also restricts the model from capturing more fully the cross-price effect of changes in the spring wheat price on winter wheat plantings in many areas of the Northern Plains. The acreage response is estimated for all wheat by region because no separate NFA data for winter and spring wheat were readily available. This data limitation precludes us from obtaining the cross-price effect from changes in the spring wheat price on winter wheat plantings. The 7-percent decline in winter wheat seedings for 1999 is attributed primarily to a 15-percent decline in the expected price for winter wheat. The own-price effect itself implies a decline of 2.75 million acres or more in winter wheat seedings. Spring wheat plantings in 1999 were projected by USDA in late February to decline to 19.1 million acres. A decline in the expected prices 3 percent for "other spring" and 22 percent for durum is the main contributing factor. References Adams, Gary. "Acreage Response Under the 1996 FAIR Act?" Speech presented at ERS-USDA seminar series on Supply Response Under the 1996 Farm Act. June 24, 1996. Riley, Peter A. "Grains and Oilseeds Outlook for 1999." Speech presented at Agricultural Outlook Forum 1999 in Washington, D.C. Feb. 23, 1999. Sanford, Scott and Bob Skinner. "Estimating Acreage Response in a Separate Production Functions Framework: The Southeast and Southern Plains Regions." Symposium presentation at the American Agricultural Economics Association Annual Meeting in Salt Lake City, Utah. Aug. 2-5, 1998. U.S. Department of Agriculture. Acreage. NASS-USDA, June 30, 1998. _________________________. Winter Wheat and Rye Seedings, NASS- USDA, Jan. 1999. Westcott, Paul. "Policy and Modeling Issues Affecting the Estimation of Supply Elasticities." Speech presented at ERS-USDA seminar on Supply Response Under the 1996 Farm Act. April 8, 1997. Zellner, A. "An Efficient Method of Estimating Seemingly Unrelated Regressions and Tests for Aggregation Bias," Journal of the American Statistical Association, June 1962, pp. 348-368. Special Article Wheat Shipments Under U.S. Overseas Food Donation Programs Will Rise in Fiscal 1999 by Karen Ackerman 1/ Abstract: Exports play an important role in the health of the U.S. wheat economy. More than 40 percent of the wheat grown in the United States has been exported in the 1990's, down slightly from previous decades. Export programs facilitated over 70 percent of U.S. wheat exports during fiscal years 1986-95. During fiscal 1996-98, export program shipments accounted for just under 25 percent of U.S. wheat exports as high world wheat prices in 1996 and 1997 halted shipments under the chief U.S. export price subsidy program, the Export Enhancement Program (EEP). Increasing donations to meet humanitarian needs will boost U.S. food aid shipments in fiscal 1999 and will account for a larger share of U.S. wheat exports. Keywords: Export programs, export credit, donations, food aid Introduction The United States operates a variety of programs to assist agricultural exports. Export credit guarantees and export price subsidies facilitate commercial exports. U.S. food assistance programs donate agricultural products directly to individual countries with food aid needs through private voluntary organizations or through the World Food Program and permit long- term credit sales of agricultural commodities to countries on a government-to-government basis and to nongovernmental organizations in recipient countries. 1/ Agricultural Economist, Field Crops Branch, Market and Trade Economics Division, ERS. International Food Assistance The United States provides food assistance through Public Law 480 (Food for Peace) Titles I, II, and III and through section 416(b) of the Agricultural Act of 1949, as amended, and the Food for Progress Program. Title I of PL 480 finances sales of commodities under long-term credit arrangements to developing countries with insufficient foreign exchange. Title II provides for donations for emergency food relief and non-emergency humanitarian assistance to international organizations such as the World Food Program and to recipient governments. Title III grants food assistance to support development programs in least developed countries. Section 416(b) of the Agricultural Act of 1949, as amended, provides for donations of CCC-owned surplus commodities to developing countries, and Food for Progress authorizes the donation or sale of food aid commodities to assist developing countries that are implementing market-oriented policy reform. U.S. food aid shipments of wheat declined from a high of 5.3 million tons in 1986 to 1.1 million tons in 1997 when tight U.S. supplies and high world wheat prices reduced the volume of wheat donations. For the 1998 fiscal year, planned food aid shipments rose to 1.7 million tons, but planned wheat donations and concessional sales for fiscal 1999 could double those of fiscal 1998. In 1998, the economic and financial turmoil in Asian and NIS countries, natural disasters, and the failure of the Russian 1998 grain crop boosted global food aid needs while large U.S. crops made ample supplies available for donation to needy countries. In July 1998, the President announced a separate food aid initiative to make available U.S. wheat and wheat products. The wheat and wheat products are being purchased by the CCC under its surplus removal authority contained in the CCC Charter Act and donated under section 416(b) of the Agricultural Act of 1949, as amended. While the initial announcement covered 2.5 million tons, other needs have arisen since the announcement. As of March 12, 1999, 5.1 million tons of wheat and wheat products had been allocated under the section 416(b) authority. Of the total, 3.4 million tons of wheat will be made available to 19 countries in government-to-government donations. Approximately 1.1 million tons of wheat and wheat products will go to the United Nations' World Food Program; and 482,441 tons of wheat will be made available to private voluntary organizations for projects in the NIS, Bosnia, Central American and Caribbean countries, Indonesia, and Kenya. Wheat flour and bulgur wheat have been allocated to 15 countries. The Russian Federation will receive 1.5 million tons of U.S. wheat under the President's food aid initiative, or almost one- third of the government-to-government allocations. Bangladesh, Pakistan, and Indonesia are each due to receive 200,000- 600,000 tons, and other allocations will help hungry people in Africa, Asia, the Central American countries devastated by Hurricane Mitch, other former Soviet republics, and Jordan. Many of the wheat recipients under the President's food aid initiative purchased wheat from the United States and other exporters on commercial terms in the past, but major financial crises and natural disasters this year reduced their ability to purchase wheat commercially. In fiscal 1999, 3.3 million tons of wheat are expected to be shipped under food aid programs in fiscal 1999. This represents 12 percent of projected wheat exports for fiscal 1999, up from 5-7 percent during fiscal 1995- 98. Export Credit Guarantees Export credit guarantee programs guarantee repayment of credit extended to eligible banks that issue letters of credit to importers on behalf of exporters of U.S. agricultural products. The programs help importers facing foreign exchange constraints to purchase U.S. agricultural products. The Export Credit Guarantee Program (GSM-102) guarantees loans of more than 6 months to 3 years. The Intermediate Export Credit Guarantee Program (GSM-103) guarantees loans of more than 3 to no more than 10 years. There were no wheat shipments in fiscal 1998 under two recently implemented export credit guarantee programs, the Supplier Credit Guarantee Program and the Facilities Guarantee Program. During fiscal 1986-98, importers used export credit guarantees to procure between 4 and 13 million tons of U.S. wheat annually (an average of 24 percent of annual wheat exports). In recent years, large shares of credit guarantee shipments have gone to Mexico and Pakistan. The Republic of South Korea began to reduce its credit guarantee imports in the mid-1990's, but following the Asian financial crisis, it once again became a large user of export credit guarantees. South Korean importers used GSM-102 guarantees to purchase 764,000 tons of U.S. wheat in fiscal 1998. Export credit guarantee shipments of wheat by destination region during fiscal 1986-98 are illustrated in fig. B-1. The major importers' use of U.S. export credit guarantee programs has changed over the years. The North African countries of Algeria, Egypt, Morocco, and Tunisia imported between 2.5 and 5.5 million tons of wheat each year from 1986 through 1990, but reduced their wheat imports under U.S. credit guarantee programs to 1.2 million tons or less since 1995. The former Soviet Union and Iraq also made extensive use of export credit guarantees in specific years. Iraq imported between 600,000 and 1.1 billion tons of wheat under GSM-102 between 1986 and 1990, and imports under GSM-102 by the former Soviet Union topped 8.5 million tons in 1992. During fiscal 1986-95, the United States developed a financing package that combined EEP price subsidies and export credit guarantees for wheat importers in the North African countries, the former Soviet Union, and other countries. As much as 10 million tons of wheat were shipped each year under this combination of programs. For fiscal 1999, it is not clear how much wheat will be shipped under export credit guarantee programs. Mexican and Andean importers continue to use export credit guarantees to purchase large quantities. However, some of the larger users of credit guarantees in past years either no longer make much use of the export credit guarantee programs or can no longer afford to purchase wheat commercially (the Russian Federation and other New Independent States - NIS). For instance, the Egyptian government has restricted its use of U.S. export credit guarantees, but shipments under the program continue on a reduced scale for sales to a private flour mill. Importers in other countries such as Algeria and Morocco have turned increasingly to the price and credit packages of the European Union. Export Subsidies The EEP has been the United States' chief export subsidy program. The EEP was initiated in May 1985 under the CCC Charter Act to help U.S. exporters meet competitors' subsidized prices in targeted markets. The program was later authorized by the 1985 and 1990 Farm Acts, the Uruguay Round Agreements on Agriculture, and, most recently, by the 1996 Federal Agriculture Improvement and Reform (FAIR) Act. Under the EEP, exporters are awarded cash payments on a bid basis, enabling them to sell wheat to specified countries at competitive prices. Over one-half of U.S. wheat exports were facilitated by the EEP from fiscal 1986 through fiscal 1995 (fig. B-2). Over the 10- year period, USDA awarded $5.5 billion in EEP bonuses to exporters for wheat sales totaling 168 million tons. U.S. wheat was sold under the program to more than 40 countries, although 41 percent went to the People's Republic of China and the former Soviet Union. Algeria and Egypt accounted for another 21 percent of EEP sales. The 1994 Uruguay Round Agreement on Agriculture (URAA) imposed meaningful disciplines on agricultural export subsidies for the first time. In the 1996 FAIR Act, Congress reduced the annual funding levels for the EEP below the URAA caps for fiscal 1996- 99. Subsequent appropriation bills further reduced funding for the EEP. The absence of EEP sales for wheat from 1996 through 1998 reflects higher world grain prices in 1996 and 1997. Outlook for U.S. Wheat Export Programs With global rules on export subsidies in place and many countries calling for the elimination of such policy tools, it is unlikely that U.S. export subsidies will support the large shares of U.S. wheat exports in the future that they did in the late 1980's and early 1990's. However, for fiscal 1999, food donations will increase in importance among export programs. Special Article Implications of the EU's Agenda 2000 Proposal on World Wheat Trade by Susan E. Leetmaa 1/ Abstract: Preliminary analysis of the European Commission's Agenda 2000 reform proposal approved by the European Council on March 26, 1999 for the European Union's (EU) agricultural sector suggests that the continued movement away from price support mechanisms will make EU wheat more competitive on world markets, reducing EU reliance on export subsidies. The 10 percent land set-aside and the increase in compensatory payments proposed in Agenda 2000 are likely to increase EU wheat production and exports above USDA's baseline projections. Keywords: Europe, Agenda 2000 1/ Agricultural Economist, Europe, Africa, and Middle East Branch, Market and Trade Economics Division, ERS. Introduction Agenda 2000, originally proposed by the European Union (EU) in July 1997, comprises the European Commission's proposals for agricultural, structural, and budgetary reforms for 2000-2006, in preparation for enlargement to Central and Eastern Europe. The original Agenda 2000 legislative proposals were modified and adopted by the European Commission in March 1998, and finalized by the European Council on March 26, 1999. 2/ For agriculture, Agenda 2000 proposal calls for further shifts from price support to direct payments to increase the competitiveness of EU agriculture, appease farmers, and avoid the buildup of intervention stocks. Reforms have been adopted for the crop sector, the beef and dairy regimes. 2/ The Agenda 2000 proposals adopted by the Council will be reviewed by the European Parliament during its April 1999 budget meeting. Parliament has the final word on each individual year's budget. Forces Behind Agenda 2000 Reforms Over the past few years, the EU has accepted applications for EU membership from 10 Central and Eastern European (CEE) countries and from Cyprus. As the realities of expanding the EU were dealt with in Brussels and throughout the EU, it became clear that the EU would have to change existing policies if enlargement were to become a reality. By adopting the EU's Common Agricultural Policy (CAP), the CEE countries--which have not had the means to provide much financial support to farmers--will become part of a highly protectionist customs union that generously supports its farmers. The CEE countries will benefit from unrestricted access to EU markets, higher prices for their agricultural products (in most cases), and financial support for farmers. The application of the CAP mechanisms to CEE would be very costly to the EU. Extending the generous benefits currently provided to EU producers would significantly increase EU agricultural spending. It would also stimulate CEE agricultural production and increase prices in most CEE countries for most commodities, increasing the countries' reliance on export subsidies. The EU is already close to meeting its World Trade Organization (WTO) commitments on the permitted volume and value of export subsidies (which will continue to decline until 2000). The next WTO round of agricultural negotiations, which is scheduled to begin in 1999, is likely to bring further cuts in permitted export subsidies. If the CEEs joined the EU under current CAP policies, they would need to subsidize the exports of many of their commodities, and they would certainly exceed their current export subsidy constraints. Agricultural policy reform is inevitable for the EU, regardless of whether it expands or not. The European Commission has published analyses suggesting that under the current CAP, the EU would build significant stocks across all major agricultural sectors, and these stocks would be unexportable under the WTO export subsidy constraints. This would lead to large and costly intervention stocks. For all of these reasons, the EU has adopted the Agenda 2000 reforms, further reducing price support to farmers (reducing the need for export subsidies) and expanding upon the EU agricultural reforms undertaken in 1992. CAP Reform for Cereals The Agenda 2000 proposals are an extension of the 1992 CAP reform, which proposed a 35-percent reduction in cereal support prices, provided payments to farmers to compensate for the cut in support price, and imposed a land set-aside. Due to increased demand for grains, drought in Spain, and high global grain prices, however, EU farmers did not initially experience the full price cut. Nevertheless, they continued to receive the full compensatory payments. Even the European Commission has acknowledged that EU cereal producers have been overcompensated since the 1992 reforms were enacted. Agenda 2000 Package for Cereals Under the approved Agenda 2000 package, the support price for cereals will be cut 15 percent, from 119.19 euros per ton to 101.31 euros per ton. The reduction will be phased in over 2 years starting in 2000. Compensatory payments will increase from 54 euros per ton to 63 Euros per ton. The intervention price from 2002/03 onwards will be decided at a later date, depending on market developments. Any future price cut will result in an increase in compensatory payments at the same proportion as applied in the first 2 years of Agenda 2000. The Commission believes that EU cereals will be more competitive on the world market, but the base rate for the mandatory set-aside will be set at 10 percent for the period 2000-2006. The EU will continue to offer a voluntary set-aside that will keep some additional land out of production (normally around 5-6 percent). EU Wheat Production Could Increase Preliminary analysis by ERS indicates that under the EU's Agenda 2000 proposals, EU grain production could increase above USDA's baseline projections. 3/ The baseline analysis assumes a land set-aside of 15 percent for 2000-2002 and 17.5 percent for the remainder of the projection period. The 10-percent set-aside requirement will make more land available for production than was assumed in the baseline. Additionally, compensatory payments to oilseed producers will be decreasing roughly 30 percent. The reduction in EU oilseed payments is likely to cause a slight shift out of oilseed production, quite possibly into wheat production. 3/ USDA Agricultural Baseline Projections to 2008, Interagency Agricultural Projections Committee, Staff Report WAOB-99-1, February 1999. The impact that Agenda 2000 will have on grains is contingent on world grain prices at the time of the reforms. Based on USDA grain price projections used for USDA baseline analysis, which did not include any Agenda 2000 reforms but assumed a continuation of current policies, it is possible that the EU grain intervention price will be below U.S. wheat prices (fig. C- 1). However, U.S. prices for corn, barley, and oats could be well below the EU support price. If U.S. and world wheat prices are above the intervention price for grains, the internal EU wheat price likely would be buoyed above the intervention level, while the price of other grains would remain at the intervention level. This would make growing wheat more profitable than growing other grains, potentially shifting more acreage out of coarse grains and into wheat, boosting wheat production. Grain consumption in the EU, primarily for feed use, is also likely to increase with the decline in internal price. Wheat is a preferred grain for feeding in the EU, because much of it is of a low quality that does not meet intervention standards. However, internal wheat prices are projected to be above world coarse grain prices during the budget period (2000/2006). If world wheat prices are above or equal to the internal EU wheat price, EU wheat would be competitive on world markets. This would eliminate the EU's need for export subsidies. EU wheat exports would no longer be constrained by WTO subsidized volume limits, and EU wheat exports could increase. An increase in EU wheat exports would drive down the world price of wheat. U.S. wheat prices would likely fall as well. However, if world prices were to fall below the EU's internal wheat price, the EU would have to once again rely on subsidies to export its wheat and would be constrained by its WTO limits on exports. The next round of WTO trade talks, which are scheduled to begin late this year, could lower (or eliminate) permitted volumes and expenditures on subsidized exports. This could further constrain EU wheat exports if world prices were below EU wheat prices. The 15-percent cut in the EU's intervention price will also translate directly into lower import barriers for the EU. The maximum duty paid price is set at 155 percent of the EU intervention price. If the intervention price drops, import duties would decline as well. It is possible that premium wheat such as U.S. Dark Northern Spring wheat, Canadian Western Spring wheat, and maybe even U.S. Hard Red Winter wheat could enter the EU duty-free. Conclusions It is likely that Agenda 2000 will increase the EU's wheat production because the USDA's baseline assumed a higher land set- aside requirement. The shifting of land from oilseeds to grains will also contribute to the production increase. EU wheat exports are likely to increase and be less reliant on export subsidies to target U.S. wheat export markets, and this is expected to pressure world wheat prices as in the past. Additionally, there is the possibility that the reduction in the intervention price would increase duty-free imports of premium quality wheat. BEGIN BOX The Agenda 2000 Package The Agenda 2000 reform of the Common Agricultural Policy (CAP), approved by European Union leaders in the budget deal approved on March 26, 1999, calls for changes to EU agricultural, structural, and financial policies, as well as guidance on EU enlargement to Central and Eastern Europe (CEE). In terms of agriculture, the package adheres to the following objectives: o to reduce the gaps between EU and world prices. The Commission approved a 20-percent reduction in the intervention price of beef to be implemented in three steps, and a 15-percent reduction in the intervention price of cereals to be implemented in two steps. Dairy sector reforms have been postponed until 2005. o to increase direct income support (except for oilseeds). Grain producers will be given payments to compensate for the price cut. Headage payments will increase in the beef sector, and cow payments will be instituted in the dairy sector. Oilseed prices will not fall, as they are not subsidized, but compensation payments will fall roughly 30 percent per ton, down to the same level as compensatory payments for grains. o to set the default land set-aside rate to 10 percent from 2002 to 2006. With the reduction in support prices, the EU will be less reliant on export subsidies. Therefore, intervention stocks should not build up as much, reducing the need for supply controls. However, if overproduction becomes a problem, the Commission could raise the set-aside rate. Additionally, voluntary set-aside will continue to be allowed. o to maintain the milk quota through 2006, increasing the quota for four countries above 2000 levels over a 2 year period. The EU will increase the milk production quota for producers in deficit regions (Greece, Spain, Ireland, Italy, and Northern Ireland). It appears that the remaining member States will be allocated a 1.5-percent increase in the quota to be allocated over three years, starting in 2005. o to ensure that total expenditure, excluding rural development and veterinary measures, in 2000-2006 does not exceed an average annual expenditure of 40.5 billion euros. The European Commission must submit a report in to the European Council in 2002 on agricultural expenditure. If budgetary limits are not to be met, the report should include proposals for further reforms to meet budgetary constraints. END_OF_FILE