WHEAT YEARBOOK April 06, 2000 March 2000, ERS-WHS-2000 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-2000, $21. ERS-NASS accepts MasterCard and Visa. --------------------------------------------------------------------------- Contents Summary Supplies Large, Prices Low (Leath) Outlook for 2000/01 Winter Wheat Acreage Seeded Is the Lowest Since 1972/73 Wheat Supply and Ending Stocks Likely Down in 2000/01 Balance Between World Wheat Production and Consumption Unclear for 2000/01 Situation and Outlook for 1999/2000 Prices Weaken Under Weight of Large U.S. Wheat Supplies and Weak Domestic Demand in 1999/2000 World Wheat Production Declines Slightly in 1999/2000, Trade Expands U.S. 1999/2000 Export Prospects Similar to a Year Earlier, Trade Share Declines Wheat by Class, 1998/1999 Lower Domestic Use Pushes Wheat Stocks Higher in 1999/2000 Special Articles Russia's Wheat Production and Trade: Recent Performance and Future Prospects EU Enlargement: Impacts on CEE Wheat Markets The Next Round of Agricultural Trade Negotiations: Background and Issues for the U.S. Wheat Sector Situation Coordinator Mack Leath (202) 694-5302 Principal Contributors Mack Leath (202) 694-5302 Edward Allen (202) 694-5288 Gary Vocke (202) 694-5291 Data Coordinator Jenny Gonzales (202) 694-5299 Editor Diane Decker (202) 694-5161 Layout & Text Design Wynnice Pointer-Napper (202) 694-5130 Approved by the World Agricultural Outlook Board. Summary released March 27, 2000. The Wheat Outlook and the Wheat Yearbook may be accessed electronically via the ERS web site at www.ers.usda.gov. Summary The Wheat Yearbook presents preliminary projections for 2000/2001 that were released at the 2000 Agricultural Outlook Forum on February 24-25, 2000. Wheat farmers responded to lower prices and unfavorable planting conditions, particularly in parts of the central and southern Plains, by reducing winter wheat plantings for the 2000 crop by 515,000 acres, down 1 percent from a year earlier and the lowest since 1972. Spring wheat (including durum) plantings are expected to fall too, as farmers evaluate the relative profitability of competing crops such as barley, soybeans, and minor oilseeds. If yields equal the average for the last 5 years, total wheat production for 2000/01 could decline about 8 percent. Larger beginning stocks will be partially offsetting, however, leaving the total supply about 4 percent below the current marketing year that ends on May 31. Total use is forecast down slightly because of smaller feed and residual use. However, the smaller use will exceed production, and ending stocks will decline. Even so, stocks will remain relatively large and the average price received by farmers will likely be below $3.00 again in 2000/01 (June/May). For 1999/2000, U.S. wheat supplies dropped slightly to 3,343 million bushels. Total disappearance is forecast to decline about 3 percent from 1998/1999, the result of lower projected feed and residual use. Use will trail production, and stocks will approach 1 billion bushels. The season average farm price is projected to range between $2.45 and $2.55 per bushel. U.S. exports in 1999/2000 are forecast up slightly to 1,050 million bushels. Another year of disappointing exports is projected because of strong competition from foreign exporters. Global imports are up slightly, but the U.S. market share will decline this year. This issue contains three special articles: (1) Russia's Wheat Production and Trade: Recent Performance and Future Prospects, (2) EU Enlargement: Impacts on CEE Wheat Markets, and (3) The Next Round of Agricultural Trade Negotiations: Background and Issues for the U.S. Wheat Sector. Outlook for 2000/01 Winter Wheat Acreage Seeded Is the Lowest Since 1972/73 Winter wheat plantings declined 1 percent from a year earlier to their lowest level since 1972/73. Spring wheat (including durum) plantings are likely to fall too, as farmers evaluate the relative profitability of competing crops. USDA will release its first official forecast of the 2000 crop on May 12, 2000. The first indication of winter wheat plantings for 2000/01 was in line with expectations. Thus, new-crop price prospects largely depend on yield prospects. However, price strength will be limited by continued large U.S. and global supplies and weak demand. Winter Wheat Acreage Drops for Fourth Year in a Row The Winter Wheat Seedings report released by the National Agricultural Statistics Service (NASS) on January 12 provides the first indication of wheat plantings for 2000/01. Planted winter wheat area for the 2000 winter wheat crop is estimated at 42.9 million acres, the lowest since 1972/73 and down 1 percent from 1999 (figure 1). The seeding area was within the range of analysts? expectations (42.5-44.0 million acres) but slightly below the average expectation of 43.0 million. Apparently, farmers responded to low prices and unfavorable weather conditions in some areas last fall by planting fewer acres to wheat. While some of the area that had been seeded to winter wheat for the 1999 crop will be planted to other crops such as oilseeds and feed grains, some likely will be left fallow, especially in the drier sections of the southern Great Plains. A notable exception to the decline in winter wheat acreage occurred in Montana, where the area seeded rebounded from the low 1998/99 level and is up 450,000 acres, or 43 percent. Hard Red Winter (HRW) wheat seeded area is estimated at 30.293 million acres, down 559,000 acres or 1.8 percent from 1999. Most HRW States have a smaller seeded area this year. Montana is the most notable exception. Area is down throughout the southern Plains. Texas led the drop with a reduction of 400,000 acres, followed by Oklahoma (down 300,000) and Kansas (down 200,000). Dry weather during the planting season is believed to be a contributing factor in the southern Plains States, but expectations of continued low prices also played an important role. The Soft Red Winter (SRW) area, pegged at 9.184 million acres, is up 53,000 acres or 0.6 percent from 1999. Seeded area is down in the Corn Belt States, likely because of dry conditions last fall. Acreage is up in the Delta States, and Arkansas led the way with a 19-percent increase of 180,000 acres. Much of this increase is probably acres that will be doubled cropped with soybeans next summer. White Winter (WW) wheat seeded area totals 3.439 million acres, down only 9,000 acres from last year. In the major producing States in the Pacific Northwest, area seeded is up 16,000 acres in Idaho, up 19,000 in Oregon, but down 45,000 in Washington. These three States will account for an estimated 87 percent of the WW wheat crop in 2000. In the two major eastern white wheat States, a 29,000-acre increase in New York is offset by a 31,000- acre decline in Michigan. The two States will account for an estimated 10 percent of the WW wheat crop in 2000. Dry Weather During Fall and Winter Has Affected Winter Wheat Crop Conditions in the Plains While the first national weekly Crop Progress report for 2000 will not be issued until April 3, 2000, various States have been reporting crop conditions in recent weeks. On March 26, 50 percent of the Kansas winter wheat crop was rated good to excellent versus 75 percent a year earlier. Good to excellent conditions in other States on March 26 were: Colorado, 76 percent; Nebraska, 62 percent; Oklahoma, 84 percent; Texas, 9 percent; and South Dakota, 55 percent. Benefical rains during the late winter and early spring have greatly improved crop conditions in Kansas, Nebraska, and Oklahoma. On February 28, Montana reported 39 percent. Lack of snow cover during the winter caused 34 percent of the Montana winter wheat crop to sustain moderate to heavy wind damage. Many of these acres may be replanted to spring wheat. According to the last weekly Crop Progress report released by NASS on November 29, 1999, 43 percent of the winter wheat crop was rated good to excellent, 29 percentage points below the ratings a year earlier. At the end of November 1999 only 36 percent of the Kansas crop was reported in good to excellent condition, compared with 73 percent the previous year. In Nebraska, 45 percent of the crop rated good to excellent, compared with 80 percent the previous year. In Oklahoma, 43 percent of the crop rated good to excellent, compared with 85 percent the previous year. In Texas, only 14 percent of the crop rated good to excellent, compared with 46 percent the previous year. Spring Wheat Acreage Prospects Producers of durum and other spring wheat were surveyed around March 1 to determine prospective plantings for 2000. Current expectations are that seedings will be lower than the 19.4 million acres seeded in 1999. Current farm price relationships for the various classes of wheat favor the shifting of some area from durum to spring wheat and other crops (figure 2). Farm prices of durum have dropped dramatically in response to large supplies, poor quality, and 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. Expectations concerning the relative market prices for corn, soybeans, and other field crops during 2000/01 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 (figure 3). Weather conditions this spring will also affect cropping decisions, with dry weather likely to encourage producers to persevere with wheat and not risk alternate, more drought- susceptible crops. Outlook for 2000/01 Wheat Supply and Ending Stocks Likely Down in 2000/01 Lower production due to reduced acreage and yields in 2000/01 is somewhat offset by larger carryin stocks. Total use of wheat is expected to remain weak as feed and residual use will likely decline because of low corn prices. Given the flat use, the smaller supplies will translate into a decline in ending stocks. The tighter supply/use balance is expected to boost prices. The following supply and use projections for 2000/01 were released at the 2000 Agricultural Outlook Forum on February 25, 2000. The first official U.S., world, and country-specific supply and use projections will be in the May 12 World Agricultural Supply and Demand Estimates report. Wheat Plantings for the 2000 Crop Are Likely Down Again Wheat plantings for the 2000 crop are likely to decline for the fourth consecutive year as producers continue to favor oilseeds in many parts of the Corn Belt and Plains States (figure 4). All Wheat Production Is Projected Down from 1999 Supply prospects for wheat in 2000/01 are affected by the expected decline in planted area and dryness in parts of the major hard red winter wheat region, especially in the southern and central Plains. Until recently, much of these regions had been dry for several months, and it is uncertain how much the yield prospects will recover due to the recent rains. In recent years, USDA has used the average yields for the 3 previous years as the yield forecast for the new crop. This would generate a forecast of 41.8 bushels per acre for the 2000 crop. Using a 5- year average yield, including 2 years with weather-reduced yields, lowers the projected yield to just over 39 bushels per acre (figure 5). Using the 62 million acres planted and the average of the harvested-to-planted ratios during the previous 5 years gives a projected harvested area of 54 million acres. Thus, all wheat production is projected at 2,120 million bushels, down 8 percent from 1999. Tighter Supply/Use Balance Is Expected To Boost Prices The lower U.S. production projected for 2000/01 is somewhat offset by larger carryin stocks. With wheat imports near last year's level, total U.S. wheat supplies are projected at 3,217 million bushels, down nearly 4 percent. Total U.S. wheat use in 2000/01 is expected to remain weak (figure 6). Food use will continue to show some growth, but feed and residual use will likely decline because of low corn prices. Total domestic use of 1,275 million bushels is projected down nearly 20 million bushels from a year earlier. Given expectations of continued larger supplies in major exporting countries and sluggish import demand, U.S. wheat exports are projected to remain flat in 2000/01 at 1,050 million bushels. The relatively flat use prospects and the smaller supplies will cause ending stocks to decline more than 100 million bushels to 892 million in 2000/01. This level would represent 38.4 percent of projected use, down from the 42.5 percent forecast for the current year. The tighter supply/use balance is expected to boost 2000/01 prices about $0.25 per bushel above 1999/2000 prices to near $2.75 per bushel. The export projections for 1999/2000 and 2000/01 do not include the planned fiscal year 2000 (October 1999 - September 2000) donations of approximately 3 million tons of food aid announced on February 10, 2000. Commodities to be donated include wheat and wheat flour, soybeans and soy products, rice, and milk powder. About 75 percent of the donations are expected to be wheat and flour (2.25 million metric tons or 83 million bushels). At this time, it is uncertain if the wheat/flour component will be shipped in the 1999/2000 marketing year or the 2000/01 marketing year. If purchases for these donations occur mostly in the 2000/01 marketing year, wheat prices in 2000/01 could increase about $0.10 per bushel. Outlook for 2000/01 Balance Between World Wheat Production and Consumption Unclear for 2000/01 Whether world wheat production increases or decreases in 2000/01 will depend on yields that, in turn, depend on weather. Winter wheat in the Northern Hemisphere has been planted, and while some regions increased area, others reduced area. Low world wheat prices limit the incentives to increase production. More favorable weather than last year could increase global production, but widespread drought or other production problems could cause global production to decline for the third straight year. Wheat use is likely to continue to grow slowly, with most of the increase driven by population growth supporting human consumption. Global Production May Grow Modestly in 2000/2001 USDA will issue its first projections for 2000/01 global supply and demand on May 12. However, because most winter wheat has already been planted, there are early indications that world production will increase modestly if weather is generally favorable. But there are already a number of ?problem areas? and much can happen in coming months. Reduced area planted in China, India, and the United States may be offset by increases elsewhere. One of the largest increases in plantings is expected in the EU. The EU grain trade association, Coceral, estimated that winter wheat area planted increased 10 percent last fall (fig. 7). Other analysts have forcast smaller increases, but there is little doubt that wheat area will be up sharply. The set-aside requirement remains at 10 percent, but expected wheat returns are more attractive than those for oilseeds or barley. Moreover, durum area in Southern Europe is reportedly up. Except for Spain and Portugal, weather conditions have been favorable to date and the EU could have a record wheat crop. Increased production in 2000/01 will be partly offset by lower beginning stocks, but EU wheat supplies are expected to remain large. Winter grain plantings in Russia reportedly increased more than 8 percent because of increased domestic prices and more favorable planting conditions. Also weather conditions to date have generally been favorable and less winterkill than average is expected. Planting conditions in Ukraine were poor last fall and combined with limited availability of inputs, financial uncertainty, and potential restructuring of land ownership, led to reduced winter grain seedings. Even with reduced area, Ukraine?s wheat production may increase if yields rebound from last year?s drought-devastated levels. In Eastern Europe wheat production is likely to increase. Winter wheat area reportedly rose in Hungary, Romania, Yugoslavia, Croatia, and the Czech Republic, because of better planting conditions and somewhat higher prices. However, area planted in Poland reportedly declined slightly. Increased wheat production in most of the region would likely lead to larger exports in 2000/01. Iran is expected to be the largest importer in 2000/01 because production was devastated by drought. Expectations of a rebound from last year's low production have been hurt by continued dryness this year. Across most of Iran, rainfall totals from November 1999 through February 2000 were even worse than the year earlier. Iran?s production, stocks, imports, and consumption are critical unknowns underlying world wheat supply and demand in 2000/01. However, across most of the rest of the Middle East, rains arrived somewhat late this winter, but eventually arrived, so yields are expected to increase in places like Israel, Jordan, and Syria, although eastern Syria is dry. In Turkey, government price supports remain high, but area planted reportedly declined slightly. An increase in yields is likely, as parts of Turkey suffered drought in 1999/2000, but rainfall so far this season has been very favorable. Even if production declines it will still be very large. The government has agreed to sell at least some wheat into the domestic market at the same price as in the international market. With producer prices still well above world levels, large subsidized exports and domestic sales would strain the Turkish government?s finances and contravene agreements with the International Monetary Fund. So it is not clear what will happen. In North Africa, wheat production may rebound from last year's serious drought. However, early dryness delayed winter wheat planting in Morocco, and continued dryness has reduced crop prospects in Morocco, Algeria, and Tunisia. Widespread moisture in the coming weeks is critical if these countries are to avoid another year of poor crops. Imports by the region will remain large. India is one of the first major producers to harvest in 2000/01, with most of the harvest beginning in March. Wheat area is expected to be down as some farmers switch back to oilseeds and coarse grains after switching to wheat last year. While rainfall has been below normal in some regions, most of the wheat crop is irrigated, so little change in yields is expected. Large stocks make increased imports less likely. However, consumption is large and growing, and domestic prices are above world levels, so exports are also likely to be minimal. Pakistan sharply increased procurement prices and the availability of inputs, boosting production prospects. With beginning stocks down, Pakistan?s imports will not only depend on 2000 production, but retail prices and how much flour is allowed to be exported to Afghanstan. In China, the world's largest wheat producer, the National Bureau of Statistics estimated that winter wheat area planted last fall declined about 6 percent because of reduced government price supports and stricter quality standards. However, growing conditions have been generally favorable through March, and good yields could offset much of the area drop. The size of China's production and stocks is a major source of uncertainty about prospects for wheat trade in 2000/01. The size of China's wheat stocks is considered a state secret. USDA forecasts that China's wheat stocks will decline for a second year in 1999/2000, but not by very much, as production was nearly as large as consumption. Import demand depends not only on the size of the 2000 crop and stocks, but also on the quality of the new crop and stocks. Many analysts believe China will increase wheat imports from the 0.7- million-ton historical low forecast for 1999/2000. But by how much is very uncertain. Spring wheat producers in the Northern Hemisphere, such as Canada and Kazakstan, and Southern Hemisphere producers, such as Argentina and Australia, have not yet planted wheat for 2000/01. However, unless wheat prices increase sharply during March through June 2000, most of these countries will not significantly increase wheat area, and it is likely that some will reduce plantings. Large wheat stocks among 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. However, Agriculture and Agri-Food Canada reports that wheat area is likely to increase because of low oilseed prices and rotation needs. With increased exports in 1999/2000, Kazakstan is expected to increase area planted in 2000/01. However, last year's exceptional yield is unlikely to be repeated, so production will decline. Strong barley prices are likely to lead to expanded area and reduce wheat planting slightly in Australia, making a repeat record crop unlikely. However, as planting time approaches, most areas have received good rains, and farmers could respond to the favorable moisture by expanding area this spring. Modest Consumption Growth Expected In 2000/01, world wheat consumption is likely to increase more than it did in 1999/2000. Consumption in 1999/2000 is currently forecast up less than 3 million tons, as a decline in wheat feed and residual use partly offsets an increase in food and seed use. In 2000/01, another decline in world wheat feed and residual is unlikely because of expected larger wheat production in the EU, Eastern Europe, and possibly the former Soviet Union, regions that traditionally feed a significant portion of the wheat they produce. Global food use is expected to increase 4 million tons in 1999/2000, somewhat less than the average growth of 6 million tons during the last decade (figure 8). Something close to average or trend growth in global food use can be expected in 2000/01 because nothing has happened to make growth exceptionally fast or slow. World wheat trade in 2000/01 is likely to be boosted by steady long-term growth in demand, based on demand for food, underpinned by increasing populations in importing countries of Latin America, North Africa, the Middle East, and parts of Asia. Continued dryness in Iran and North Africa would support world trade in 2000/01. China is likely to increase wheat imports, but Pakistan?s imports are uncertain. While Russia will receive less wheat as food aid in 2000/01, aid shipments to other destinations will remain strong because a portion of the fiscal 2000 U.S. food aid will not be shipped until the 2000/01 wheat marketing year. Major exporters' wheat supplies will remain large in 2000/01. U.S. stocks may largely offset lower production. EU production increases are likely to more than offset lower stocks. Australia and Canada are expected to start the year with slightly higher stocks, limiting any reduction in supplies. For Australia, the record wheat crop in 1999/2000 means that old-crop supplies will still be available for export during the first part of July/June 2000/01. Continued large exporters' supplies in 2000/01 are likely to encourage trade expansion and limit price increases. Situation and Outlook for 1999/2000 Prices Weaken Under Weight of Large Supplies in 1999/2000 U.S. wheat production declined in 1999/2000 because of a reduction in harvested acres and average yields. Favorable weather in the southern and central Plains States pushed winter wheat yields to a record high while durum and other spring wheat yields declined. Larger stocks partially offset the decline in total production, and the season average price received by farmers is expected to drop for the fourth year in a row. U.S. Wheat Supplies Down, but Prices Down Again in 1999/2000 U.S. wheat production is estimated at 2.3 billion bushels in 1999/2000, down almost 10 percent from 1998/99 (table 1). With larger beginning stocks, the U.S. wheat supply in the 1999/2000 (June-May) marketing year is forecast to drop only 1 percent from 1998/99, when supply was the largest since 1987/88 (figure 9). The average farm price for all wheat dropped to $2.23 per bushel during July 1999 because of increasing production prospects in the winter wheat belt and large supply prospects in competing exporting countries. Average farm prices rebounded to $2.52 in August, and have ranged between $2.50 and $2.66 since then. The preliminary farm price of all wheat in February 2000 was $2.58 per bushel, down from $2.66 reported for November and 15 cents below a year earlier. The weak prices reflect large U.S. and global supplies, weak global demand, and aggressive pricing by Australia and the European Union (EU). The surprisingly low December 1 corn stocks and the cut in 1999 corn production indicated in USDA's Grain Stocks and Crop Production: 1999 Summary report released in January 2000 helped lift price expectations temporarily. The July 2000 futures contract in Kansas City increased from $3.005 on January 11 to $3.155 on January 24. Prices remained firm and rose to $3.23 on February 10 because of concerns about the drought in the Southwest during the winter and below normal crop ratings in Kansas, Oklahoma, and Texas. However, improved weather conditions, large supplies, and weak demand caused prices to slide again. 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 1999/2000 is forecast at $2.45 - $2.55 per bushel, significantly below the $2.65 received by farmers in 1998/99, and the record $4.55 in 1995/96 (figure 10). There will be continued pressure on cash and near-term futures prices as stocks remain large compared with recent years. U.S. ending stocks are projected to total 997 million bushels, the highest since 1987/88. The average price received by farmers for all wheat during the first 8 months of the marketing year was $2.51, down from a $2.69 average during the same period last year. Sales during the first 8 months of the marketing season averaged about 78 percent of the accrued total during the previous 5 years. If the percentage of the 1999 crop sold during this period is the same, prices would have to average between $2.35 and $2.96 the rest of the marketing year for the season-average price to be within the projected range of $2.45-$2.55. Record Winter Wheat Yield Winter wheat production accounted for about 74 percent of U.S. output in 1999 and totaled 1,700 million bushels. Because of favorable weather, winter wheat yields surged to a record 47.8 bushels per harvested acre, 2 percent above the old record established the previous year. Lower prices and poor weather in some areas led to greater graze out and abandonment of wheat acres in 1999. An estimated 81.9 percent of the seeded winter wheat area was harvested for grain in 1999, compared with 86.4 percent in 1998 and a 5-year average (1993-98) of 83.6 percent. Increase in Durum Production Eliminates Price Premiums The large durum crop in 1998/99 led to the highest ending stocks forecast since 1991/92. The premium for durum wheat at the farm level relative to hard red spring wheat disappeared during the fall of 1999 (see figure 2), and durum was discounted to "other spring" wheat until December 1999. Weather during the late harvest damaged the quality of the 1999 durum crop, causing the U.S. average price received by farmers to decline to $2.30 per bushel in September and a seasonal low of $2.17 in October. The October farm price for durum was the lowest monthly average recorded since the National Agricultural Statistics Service (NASS) resumed reporting a monthly farm price for durum in June 1981. Excessive rainfall delayed the planting and harvest of durum and other spring wheat at several locations in 1999 and durum yields dropped to 27.8 bushels per harvested acre, 25 percent below the previous year. The durum yield has averaged less than 30 bushels only one time during the 1990's. The record durum yield of 39.7 bushels was set in 1992. Lower Acreage Drops Production of "Other Spring" Wheat in 1999 The "other spring" wheat crop declined in 1999 because of lower harvested acreage and average yield. The average yield was 34.1 bushels per acre for "other spring" wheat (i.e., includes hard red spring and white spring but excludes durum), down 0.8 of a bushel from 1998. Harvested acreage fell 380,000 acres, and HRS production dropped 38.4 million bushels to 448 million. Domestic Use Declines in 1999/2000 Disappearance of U.S. wheat in 1999/2000 is forecast to drop about 3 percent from 1998/99, with most of the decrease coming in domestic use. A projected 24-percent decline in feed and residual use will account for most of the decrease in domestic use. Food use is projected at 905 million bushels in 1999/2000, down about 2 million from a year earlier. This comes on the heels of a 7-million-bushel decline in 1998/99 and is a strong indication that wheat-based food products may be loosing market share to other food products. This probably reflects a change in dietary habits because wheat is apparently not benefiting from population and income growth in the United States. Seed use is forecast up in 1999/2000 because weather-related delays in planting durum and other spring wheat moved some seed use from the 1998/99 marketing year into the 1999/2000 year. Feed and residual use is projected to drop about 100 million bushels in 1999/2000. Feed and residual use during the first two quarters of the marketing year was down 70 million bushels. Larger supplies and lower prices did not encourage greater use of wheat in livestock and poultry rations during the summer of 1999 because corn prices were also weak. Annual feed and residual use, projected at 300 million bushels, was increased 50 million bushels in January when lower-than-expected December 1 stocks indicated that feed and residual use of 281 million bushels in the first 6 months was higher than previously forecast. The forecast annual feed and residual of 300 million bushels implies that feed and residual use in the final 6 months of the marketing year will be about 20 million bushels. Ending Stocks Highest Since 1987/88 U.S. ending stocks on May 31 are forecast at 997 million bushels, up 5 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. LDPs Support Wheat Farmers' Income in 1999/2000 The 1996 Farm Act contained key policy tools to assist farmers when market prices are low. The key provisions are the "nonrecourse marketing assistance loans" and "loan deficiency payments" (LDPs). Producers that entered into Production Flexibility Contracts with USDA are eligible to participate in these programs. The nonrecourse marketing assistance loans provide interim financing to eligible producers of wheat and other commodities covered by the program. Producers pledge their wheat as collateral and obtain a loan equivalent to the loan rate established in their county by the Farm Service Agency of USDA. The loan proceeds can cover short term cash needs. As of March 27, 2000, wheat producers had outstanding loans on 95 million bushels of 1999-crop wheat. The value of the outstanding loans totaled $243 million, yielding an average loan value of $2.558 per bushel. The loans may be forfeited to the Commodity Credit Corporation at maturity or repaid at the loan repayment rate at, or before, maturity. The loan repayment rate may actually be less than the loan rate (plus interest) if the posted county price (PCP), a proxy for the local price, falls below the local loan rate. The PCP--calculated each day the Federal Government is open--is based on terminal market prices and a fixed differential to each county, largely reflecting transportation and other marketing factors. When a farmer repays the loan at a lower PCP, the difference between the loan rate and the PCP is called a ?marketing loan gain.? If the PCP is below the county loan rate, eligible producers may opt for an LDP in lieu of securing a loan. The LDP rate is the amount by which the county loan rate exceeds the PCP on the date the application is made. The wheat cannot be placed under loan once an LDP is paid. If producers take the LDPs and immediately sell their crop and if the PCP accurately reflects local prices, producers effectively receive a per-unit revenue equal to the loan rate, partly from the market and partly from the government. After an LDP is accepted, the farmer can sell the crop and avoid storage expense or hold it in the expectation of a price rally later in the marketing season. As of March 27, 2000, eligible producers collected $884 million in LDPs covering 1,891 million bushels of 1999-crop wheat or about 82 percent of the 1999 crop. The average payment rate was 46.7 cents per bushel on 503,462 contracts. Only 55 percent of the 1998 crop received an LDP, and LDPs totaled $414 million for the 1998 crop. Situation and Outlook for 1999/2000 World Wheat Production Declines Slightly in 1999/2000, Trade Expands Global production slipped less than 1 percent in 1999/2000. Despite low international prices, production increased in Australia, Kazakstan, Canada, and Argentina. Also, large stocks in the United States and the EU insure ample exporter supplies. Drought across the Middle East and parts of North Africa is boosting import demand. World trade is forecast at 104 million tons, the highest in 7 years. Global consumption is expected to grow slowly, mostly because of a decline in wheat feed use. World ending stocks are projected down more than 6 percent. Foreign Wheat Production Up Marginally in 1999/2000 Foreign area is estimated down 3 percent in 1999/2000, largely due to weak prices and poor weather conditions in Russia and parts of Eastern Europe and North Africa. However, low prices for alternative crops in many regions, especially most of the major foreign exporter regions, limited the decline in wheat area. Foreign yields rebounded from the previous year, and are close to the 1997/98 record. Foreign production increased less than 1 percent to 523 million tons (figure 11). Several wheat exporting countries expanded production because prices for alternative crops were even lower than wheat prices. Kazakstan had very favorable growing conditions, and although area declined, production increased from 4.7 million tons to 11.2 million. Australia planted the largest wheat area since 1984 because of low prices for wool or alternative crops such as feed grains or oilseeds. This was followed by favorable weather during the growing season, boosting yields to the second highest on record, and generating a record 24.5-million-ton crop. Argentina also expanded wheat area, and reaped the second highest yields on record, boosting production by over 20 percent to 14.5 million tons. Canada reduced wheat seedings by 4 percent because of expectations of relatively more attractive prices for oilseeds. Yields were a record, however, boosting production more than 10 percent to 26.9 million tons. These four exporters raised wheat production 14.2 million tons in 1999/2000, despite relatively low world prices. Wheat production in 1999/2000 also increased a combined 9.7 million tons in two of the largest producing countries, China and India. China reduced price supports and wheat area declined some, but generally favorable growing conditions boosted yields. China?s wheat production reached 115 million tons, up 5 million from the year before, but still 8 million below the 1997/98 record. In India, increased price supports boosted wheat area planted, and the mostly irrigated crop posted the second best average yield, pushing production to a record high 70.8 million tons (significantly higher than U.S. production). Most of the increases in foreign wheat production were offset by reduced production in the EU, Eastern Europe, Middle East, and North Africa. Also, Russia and Ukraine suffered low yields and high area abandonment for a second straight year. Wheat area in the EU increased slightly because most producers found wheat prices more attractive than barley. However, cool weather and excessive rains reduced area in the United Kingdom and Germany, as well as sapping yields in France. EU wheat production dropped 6.2 million tons from the 1998 record. Too much rain and flooding interrupted wheat planting in Eastern Europe, so area declined. Although average yields about matched the previous year, production in Eastern Europe dropped 4.8 million tons. Drought caused sharply reduced production in several other regions. In North Africa, drought was particularly severe in Morocco, where yields were cut in half. An unusual drought spread across most of the Middle East, from southern Turkey and Israel through Iran, and wheat production dropped 7.6 million tons from the previous year?s record. Drought for a second straight year plagued wheat production in Russia and Ukraine, and although Russia?s wheat production increased, the small increase was from the 50-year low of the previous year. Ukraine production was the lowest since 1945. While foreign production increased slightly in 1999/2000, U.S. production dropped enough to cause a decline in total world wheat output. World Wheat Consumption Slows in 1999/2000 World wheat consumption is forecast to reach 594 million tons in 1999/2000, up less than 3 million. Global wheat feed and residual use is expected to decline more than 2 million tons because in most regions, prices for feed grains are even lower than wheat prices. Wheat feed use continues to expand in the EU, where the relative price of wheat and feed grains does not reflect international prices. However, in countries like the United States and South Korea, where world prices prevail, wheat feeding is down in 1999/2000. In Eastern Europe and the former Soviet Union wheat feed use is forecast relatively unchanged. Global food, seed, and industrial use is expected to rise only 1 percent in 1999/2000, to 489 million tons, despite the relatively low prevailing wheat prices. This is less than population growth. The underlying demand for wheat does not appear to be as strong as might be expected, given population growth and economic recovery in some key countries. Middle income countries may be diversifying diets, while the poorest who might wish to increase wheat consumption may not be able to afford wheat products even at current low prices. World Wheat Trade Forecast Up 4 Percent in 1999/2000 Global trade is forecast to reach 104 million tons (July/June), up 4 percent from the previous year and the largest since 1988/89, but still not near the record 116 million reached in 1987/88. Demand is being boosted by increased imports caused by drought across the Middle East, especially Iran. The former Soviet Union is also increasing imports, partly reflecting aid shipments, and partly the increase in shipments by Kazakstan to other countries in the region. However, most other regions of the world, including North and South America, Western Europe, North Africa, Sub-Saharan Africa, South Asia, and ?Other? Asia, show a year-to-year decline in forecast imports. Iran is emerging as the world?s largest wheat importer in 1999/2000, boosting imports from 2.5 million tons in 1998/99 to a forecast 7.0 million. Drought reduced Iran?s production almost 30 percent (figure 12). Population growth is rapid and wheat is the traditional staple. Iran?s imports have been variable, reaching 7.1 million tons in 1996/97, and then falling for the next 2 years. However, unlike 1996/97, Iran is expected to reduce ending stocks in 1999/2000, implying that imports are for current consumption. The increase in Iran?s 1999/2000 imports is larger than the increase in global trade. Other countries in the Middle East are also increasing imports to make up for drought- reduced production. The region is forecast to boost imports more than 5 million tons. Several other large wheat importers are expected to reduce imports in 1999/2000. Brazil, expected to be the second largest importer, is forecast to reduce imports 8 percent to 6.7 million tons. Brazil increased wheat production and is in a recession, but the decline in imports is mostly a matter of the timing of purchases. On a local marketing year, imports are unchanged year- to-year. Egypt is also forecast to import less wheat in 1999/2000, down 18 percent. Again there is a small increase in domestic production and a reduction in stocks, so that even with imports down sharply, consumption continues to grow. The decline in Egypt's imports will more than offset any increases in other parts of North Africa. In South Asia, imports by Pakistan are forecast down more than 25 percent because of a second year of large production and a decision to reduce stocks. Large wheat and rice crops in Bangladesh are reducing the need to import. These reductions offset increased imports by the rest of the region. In "Other Asia," South Korea is expected to reduce wheat imports 25 percent because feed wheat prices are less attractive this year. China has large grain stocks and is forecast to reduce wheat imports to the lowest level covered by the USDA data base that goes back to 1960 (figure 13). Exporters' availability of wheat is not a significant constraint on world trade in 1999/2000. For most of the year, export prices have remained at or below those of a year earlier. World Wheat Stocks To Decline in 1999/2000, But Stocks Up in Some Key Exporting Countries The combined ending stocks of the United States, Canada, and Australia are forecast up nearly 2 million tons in 1999/2000, about a 5-percent increase. Because exportable supplies in these exporting countries have a large role in determining prices, they have tended to depress wheat prices through the first three quarters of the U.S. marketing year. The expectation that global stocks will decline more than 9 million tons is less important for price determination because much of the stock reductions are expected in countries like the EU, China, Iran, Egypt, and Pakistan, where domestic market prices are isolated from world markets. Situation and Outlook for 1999/2000 U.S. 1999/2000 Export Prospects Similar to a Year Earlier, Trade Share Declines U.S. 1999/2000 wheat exports are forecast up slightly on a June/May local marketing year, but down slightly on a July/June international marketing year. Despite large ongoing donation programs, other exporters are capturing the increase in world wheat trade. U.S. Export Forecasts Flat Despite Strong Start in 1999/2000 U.S. 1999/2000 wheat exports are expected to reach 28.5 million tons (July/June), down 0.5 million from the previous year, or 1.05 billion bushels (June/May), up slightly from the previous year. The difference is June, a month of strong shipments in 1999 because of heavy donations. Forecast exports are near the levels reached in the last 2 years, and are more than a million tons greater than 1996/97. Nevertheless, exports are expected to be smaller than in any year from 1987/88 through 1995/96. U.S. exports are constrained by intense competition among exporters. Export shipments during the first half of 1999/2000 have generally been stronger than a year ago (figure 14), but according to U.S. Export Sales, as of March 16, outstanding sales were down about 16 percent from a year ago. Competition in the second half will be intense because of large Southern Hemisphere production, especially in Australia, which harvested a record crop, and the large Argentine production. Additionally, Canada has been marketing its large 1999 crop at a measured pace, and still has abundant supplies to sell during the second half. Donations are also affecting the pace of U.S. wheat shipments. Donations are not included in outstanding export sales. The latter part of last season was supported by a sharp increase in donations. Much of the recently announced donations will likely not occur until after the 2000/01 year begins. According to U.S. Export Sales, U.S. wheat export shipments through March 16, 2000, were just under 21 million tons. Shipments were down to Europe and Asia, while increasing to Africa and the Western Hemisphere. Shipments were up to Mexico, Colombia, and Chile, but only small shipments have been made to Brazil, despite a resolution to the phytosanitary regulation problems that had kept the United States out of the world?s second largest market. Shipments to Africa are up slightly, mostly because of larger shipments to Morocco and Egypt, but outstanding sales to Egypt are down dramatically from 1.1 million tons a year earlier to 0.2 million. The United States has not been successful in recent tenders, and Egypt's pace of purchases has dropped recently. Shipments to Asia have dropped mostly because of reduced exports to Pakistan, Iraq, China, and Bangladesh. Exports to Pakistan are running at less than half the pace of a year ago, partly because of reduced total imports, but also because Australia has increased its market share due to lower freight rates relative to U.S. rates. Iraq has not purchased any wheat this year from the United States. China and Bangladesh are reducing overall imports. These declines more than offset increased sales to Yemen and Israel. According to U.S. Export Sales, shipments to Europe are down because of reduced purchases by the EU, Eastern Europe, and the former Soviet Union. The EU has purchased less HRS for blending with lower protein wheats, partly because of competition from Canada and Germany. Commercial sales to Eastern Europe and the former Soviet Union are almost nonexistent this year. U.S. Share of World Trade Dropping in 1999/2000 Canada, Argentina, Australia, the EU, and Kazakstan are expected to increase their share of world wheat trade in 1999/2000 while shares of the United States (figure 15), Turkey, and Eastern Europe decline. Turkey and Eastern Europe have reduced production in 1999/2000, partly explaining their reduced exports, but U.S. exports are suffering from intense competition. Canada's share is expected to increase to 18 percent from 14 percent in 1998/99. Canada's production and stocks are up from the previous year, and competition from Canada is contributing to reduced U.S. shipments of HRS. Australia, with its record crop, is also expected to capture 18 percent of world trade in 1999/2000. Being a Southern Hemisphere producer, Australia will provide intense competition from its new crop, especially during the latter half of 1999/2000. This increased competition will continue in 2000/01. Argentina increased wheat production because prices of alternative crops were low. Argentina's exports are forecast at 10 million tons, the third largest on record. With increased supplies, Argentina's exports will limit opportunities for the United States in Latin America, especially Brazil. The EU is expected to increase wheat exports and raise market share in 1999/2000. The EU started the year with large stocks, and although production was down, large supplies have placed pressure on the European Commission to aggressively subsidize exports. However, the subsidies needed to move the wheat have been quite large, around 30 euros per ton. EU wheat has been priced competitively with U.S. SRW, and SRW has been selling at a significant discount to other classes. As a result, the EU has been getting effectively less for wheat f.o.b. than the export price of U.S. corn. The EU has been willing to pay these large subsidies, and is expected to increase exports in a low-priced market. Kazakstan's wheat exports are expected to double in 1999/2000, increasing its share of world trade, but most exports are expected to go to Russia. Wheat by Class in 1999/2000 Lower Domestic Use Pushes Wheat Stocks Higher in 1999/2000 Domestic use is projected to decline in 1999/2000 despite lower prices. Feed and residual use will lead the way, but food use is expected to be down for the second year in a row. Ending stocks are forecast to be the largest since 1987/88. HRW Crop Matches Yield Record Established in 1998 A mild winter followed by generally favorable spring weather in 1999 pushed crop development for winter wheat slightly ahead of average. An average of 88 percent of the crop was headed as of June 6, compared with the 5-year average of 86 percent. The HRW crop survived the winter well, but above average spring and early summer precipitation in the southern Plains hampered harvest at many locations. Excessive rainfall also raised concerns about disease problems and lower protein levels. The U.S. average yield for hard red winter was 43.1 bushels per acre, matching the record established in 1998. In Kansas, the largest wheat producing State, the crop totaled an estimated 432 million bushels, 24 million above the first forecast in May 1999 but 63 million below a year earlier. Harvested area in Kansas was down 900,000 acres while the yield averaged 47 bushels per acre, 2 bushels below the State?s 1998 record. HRW beginning stocks for 1999/2000 (June 1) were estimated at 435 million bushels, 42 percent above the previous year (table 2). Total production declined to 1,055 million bushels, but this was more than offset by the larger beginning stocks. Consequently, total HRW supplies are forecast to climb to 1.49 billion bushels, the most since 1987/88 when beginning stocks were substantially larger. The Kansas Department of Agriculture issued a press release on July 30, 1999, on the quality of the 1999 crop in Kansas. That release indicated that protein and test weight were down. Preliminary data from 9,386 carlot samples randomly collected from 61 counties showed an average test weight of 60.2 pounds per bushel, compared with the 1998 average of 61.5 pounds and a 10- year average (1988-97) of 59.9 pounds. The drop in test weight has probable affected milling efficiency (throughput). Protein is averaging 11.3 percent in 1999, compared with 11.5 percent for 1998, and a 10-year average of 12.4 percent. This decline has increased premiums paid for carlots of HRW and hard red spring (HRS) with higher levels of protein. Millers reportedly are blending higher percentages of high-protein HRS with the lower protein HRW class to produce flours of the desired protein level. Lower protein levels are expected to lead to lower domestic use in 1999/2000 (figure 16). HRW food use is projected to decline almost 3 percent, feed and residual use is projected down 27 percent despite lower prices, and exports are projected to be up about 7 percent from 1998/99 (figure 17). The higher exports are due partially to USDA donations to needy nations. The lower domestic use more than offset the rise in exports, and ending stocks are forecast up at 467 million bushels, the largest since 1987/88. HRS Output Declines, Exports Fall Significantly In July 1999, the first survey-based forecast for "other spring" wheat production (i.e., excluding durum) indicated production would total 527 million bushels in 1999. The forecast primarily reflected a planted area of 15.3 million acres and a harvested area of 15.0 million. The acreage decline indicated that farmers were shifting acres to durum wheat, soybeans, and other field crops or had fallowed the land. The final estimate of harvested area declined to 14.8 million, a drop of 3 percent from the previous year. Hard red spring (HRS) wheat suffered from delayed plantings, variable growing conditions, and a wet, prolonged harvest. These factors led to a decrease in planted and harvested areas, below- average yields, and a greater incidence of crop abandonment in 1999. Disease pressures were significantly lower than in previous years and the resulting crop had average to good quality. HRS production is estimated at 448 million bushels in 1999/2000, down 8 percent from the previous year. Average yield is pegged at 32.5 bushels per acre, a drop of 1.3 bushels. Imports declined from the record set in 1998/99, and total supply in 1999/2000 is estimated at 736 million bushels (table 3). Food use is projected to total 235 million bushels. The lower protein levels in the HRW crop led millers to increase the use of HRS with higher protein levels. Exports of HRS are projected at 215 million bushels, down about 13 percent from the previous year. Ending stocks are forecast at 226 million bushels, down 3 percent from 1998/99. The 1999 Regional Crop Quality Report for HRS wheat reported the results of analysis of 1,094 samples randomly collected in the four-State HRS growing region in the northern Plains (Minnesota, North Dakota, South Dakota, and Montana). The report is published jointly by the North Dakota Wheat Commission, the Montana Wheat and Barley Committee, the Minnesota Wheat Research and Promotion Council, and U.S. Wheat Associates. The report was based on wheat samples collected by the National Agricultural Statistics Service, USDA, and evaluated by the Department of Cereal Science of North Dakota State University at Fargo. The average protein content of the 1999 HRS crop was strong, with an estimated regional average of 14.2 percent. That was lower than the 14.3 reported in 1998, but above the 5-year average of 14.1 percent. Fifty-nine percent of the samples tested had protein content of 14 percent or more, compared with 60 percent in 1998. Average test weight in 1999 was estimated at 59.3 pounds per bushel, 0.7 of a pound below 1998 and 0.8 below the 5- year average. Test weights of 58 pounds or more were recorded for 68 percent of the samples. The average "falling number" for the 1999 crop was 347 seconds, down significantly from the 422 seconds reported for 1998 and the 5-year average of 386. Falling number indicates the soundness or alpha-amylase activity in wheat or flour. A high falling number indicates low enzyme activity, while low falling numbers indicates high enzyme activity associated with non-visible sprout damage. An estimated 28 percent of the regional HRS crop graded No. 1 Dark Northern Spring (DNS), down from 31 percent the previous year. The subclass DNS is HRS wheat that has 75 percent or more dark, hard, and vitreous kernels (DHVK). An additional 9 percent of the samples graded No. 2 and 3 DNS. An estimated 24 percent of the samples graded No. 1 Northern Spring (NS). The subclass NS is HRS wheat that has more than 25 percent, but less than 75 percent DHVK. In 1999, 67 percent of the samples graded No. 2 NS or better, down from 77 percent the previous year. SRW Crop Is Larger as Yields Reach Record Highs Soft red winter (SRW) production was 453 million bushels in 1999, up 2 percent from 1998. Higher yields more than offset a decline in harvested acreage. Yield records were established in Alabama, Arkansas, Indiana, Louisiana, Michigan, Mississippi, New York, Ohio, and Tennessee. Ohio led all of these States with 70 bushels per acre. Total supply is up 13 percent due mainly to record beginning stocks of 136 million bushels, 56 million above the previous year. Total SRW use in 1999/2000 is forecast at 443 million bushels, up 14 percent from 1998/99 (table 4). Higher exports account for almost all of the increase. SRW exports are projected at 160 million bushels in 1999/2000, up 55 million from the previous year. Major buyers this season are Egypt, Mexico, Morocco, and the Philippines. As of March 16, Egypt accounted for 34 percent of the accumulated exports reported in USDA's U.S. Export Sales report. SRW exports in 1998/99 totaled only 105 million bushels, the lowest since the 95 million exported in 1978/79. That year, supplies were tight and ending stocks totaled a modern time low of only 27 million bushels. 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 much of the 1990's. The declining importance of importing countries' government procurement agencies has also been an important factor. In earlier years, foreign government procurement agencies often bought the least expensive wheat available, which was 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. Feed and residual use is forecast to total 110 million bushels. Monthly regional average farm prices for SRW (appendix table 20) have been running about 11 cents per bushel below regional average farm prices for HRW during the first 8 months of the marketing year (see appendix table 20). The relatively strong prices for SRW have discouraged feed use, and weak corn prices have prevented more SRW wheat from being fed to livestock and poultry. As a result, SRW stocks are projected to reach a record high of 147 million bushels at the end of the 1999/2000 marketing year. Lower White Wheat Use, Ending Stocks Up White wheat supplies are forecast at 341 million bushels in 1999/2000, 60 million less than the previous year (table 5). Production declined 18 percent because of significant yield reductions in Idaho, Oregon, and Washington, the major western producing States. Producers in those States planted about 300,000 fewer acres due to planting problems in the Pacific Northwest. White wheat yields in the Pacific Northwest, estimated at 60.4 bushels per acre in 1999/2000, were down 10 percent from 1998, reflecting yield declines for other spring wheat in Idaho, Washington, and Oregon. Oregon yields declined the most -- 20 bushels per acre. In contrast, Michigan and New York, the major eastern white wheat producing States, set yield records in 1999, with averages of 69.0 and 65.0 bushels, respectively. These States combined produced 50 million bushels of white wheat or 11 percent of the national total, and the average yield of 68.3 bushels was 13 percent above the national average for soft white wheat. 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 16, 2000, Pakistan accounted for only 13 percent of the shipments to date during the 1999/2000 marketing season. Egypt and Mexico also were important destinations for U.S. white wheat exports during 1998/99. These countries have shifted purchases to SRW this marketing season in response to more favorable prices for SRW. Japan, the Philippines, the Republic of South Korea, Yemen, and Taiwan are the other major destinations for U.S. white wheat exports. International trade is critical to the white wheat market because exports normally account for about two-thirds or more of total white wheat use. U.S. white wheat exports are forecast down 24 percent from 1998/99. Australia is the other major white wheat supplier in the world market, although Canada also exports small quantities of white spring wheat from western provinces and white winter from eastern provinces. Lower domestic use and weak exports will contribute to higher ending stocks and low prices this season. Ending stocks are projected at 94.5 million bushels, up more than 8 percent from a year earlier. Adverse Planting and Harvest Weather Changes Durum Picture Weather-related problems plagued durum growers in 1999 and largely were responsible for the decrease in crop quality from 1998. Planting was delayed in many areas because of heavy rains in May. Seeding was not done until after June 15. The growing season was mostly favorable, though excessively moist at some locations. The harvest was drawn out by the late maturation of the crop and unusually cold and wet conditions. As of October 3, only 81 percent of the durum crop was harvested, compared with a 5-year average of 96 percent. USDA's Prospective Plantings report, released on March 31, 1999, indicated that U.S. durum producers intended to increase the area seeded to durum wheat to 4.270 million acres in 1999, up 12 percent from 1998 and the largest since 1982. However, excessive rainfall at many locations either seriously delayed or prevented plantings. USDA's June 30 Acreage report indicated that durum producers actually seeded or planned to seed only 4.165 million acres in 1999. The Small Grains: 1999 Summary reduced the area seeded to 4.065 million, and the Crop Production: 1999 Summary released in January 2000 indicated that farmers actually seeded only 4.035 million acres. Early in 1999, most analysts were expecting a drop in durum acreage in 1999 in response to lower prices. Apparently, producers responded to an attractive federally backed crop revenue coverage (CRC) pilot insurance program rather than market conditions in the spring of 1999. The 1999 durum production season ended the way it began, with cool, wet conditions hampering progress. In North Dakota only one-third of the durum acres were harvested as of September 12 and only 81 percent of the harvest was completed by October 3, 15 points below the 5-year average. Persistent wet weather during the harvest season led to increased acreage abandonment. In November, the weather-related harvest delays in North Dakota led the National Agricultural Statistics Service (NASS) to update projections of harvested acres, yield, and production for small grains in North Dakota and Montana in the November Crop Production report. The wheat revisions affected only the durum estimates. Durum harvested area was reduced to 3.609 million acres, down 250,000 from the previous estimate released on September 30. All of the reduction was in North Dakota. The projected U.S. yield was reduced 0.7 bushel, reflecting a 1-bushel decline in Montana and North Dakota. The final estimate released in January lowered harvested area to 3.569 million. Durum production is now estimated at 99 million bushels, down 24 percent from the first estimate for the year of 132 million bushels released in July 1999. The principal durum region is the northern Plains. Minnesota, Montana, North Dakota, and South Dakota accounted for over 95 percent of the durum acreage harvested in 1999. Farmers in these States harvested 3.4 million acres, and accounted for about 84 percent of production. Yields in these States averaged about 24.4 bushels per harvested acre, down from 32 bushels the previous year. Durum is also grown under irrigation in the desert areas of California and Arizona, where farmers harvested about 160,000 acres (less than 2 percent of the total) in 1999. Yields in those States averaged about 101 bushels per harvested acre, and desert area production totaled 16 million bushels, down from 31 million in 1998. Producers in Arizona and California responded to market signals and reduced acreage in 1999. The CRC insurance program was not offered in these States. Domestic use of durum is forecast at 84 million bushels in 1999/2000 (table 6). Imports if grain and products (converted to grain equivalent units) are forecast to drop slightly from the previous year's record to 32 million bushels (grain and products). Domestic food use of durum is forecast to decline for the fifth year in a row to 65 million bushels, down from 67.5 million in 1998/99. Durum grain and product imports will account for about half of the domestic food use for the second year in a row (figure 18). Larger world supplies and weaker import demand in many countries have intensified competition among the major durum exporters in 1999/2000. U.S. durum exports are projected at 40 million bushels (grain and products), about the same as last year. Export sales started slowly, and accumulated exports through the first two quarters totaled about 21 million bushels. Despite the weak export projection, the United States will maintain its status as the world's second largest exporter behind Canada. Ending stocks are projected at 63 million bushels, up 14 percent from last year. Burdensome stocks and weak demand will pressure durum wheat prices for the remainder of the 1999/2000 marketing season. The 1999 Regional Crop Quality Report for durum wheat released by the North Dakota Wheat Commission reflected an analysis of 375 randomly collected samples from individual farms and country elevators in major durum growing areas in North Dakota and Montana. The samples were collected by the North Dakota Agricultural Statistics Service and analyzed by the North Dakota State University Cereal Science Department. The average protein content of the 1999 durum crop is strong with an estimated regional average of 13.8 percent. That is lower than the 14.2 percent reported in 1998 but is above the 5-year average of 13.6 percent. Average test weight in 1999 is estimated at 59.8 pounds per bushel, 0.6 of a pound below 1998 and 0.3 below the 5-year average. The average falling number for the 1999 durum crop is 250 seconds, down significantly from the 369 seconds reported for 1998 and the 5-year average of 355. The lower falling numbers reflect the relatively high incidence of sprout damage in the 1999 durum crop. Sixty-six percent of the 1999 crop had a falling number of 250 seconds or greater, compared with 99 percent in 1998. An estimated 59 percent of the regional durum crop graded Hard Amber Durum (HAD)--the subclass with 75 percent or more of hard and vitreous kernels of amber color that are preferred by durum millers. An estimated 11 percent of the crop graded No. 2 Amber Durum (AD) or better. The AD subclass has 60 percent or more, but less than 75 percent, of hard and vitreous kernels of amber color. Special Article Russia's Wheat Production and Trade: Recent Performance and Future Prospects Michael Trueblood 1/ Abstract: At the time of reform, some economists thought Russia might switch from a net wheat importer to a net exporter, provided there were institutional and agricultural reforms that would increase productivity. However, this has not turned out to be the case. Several measures of productivity and efficiency have declined. Production efficiency on corporate farms fell within Russia for several reasons, including average farm size, self-sufficiency efforts, soft budget constraints, subsidiary private plot output, and marketing channels. A comparison of Russian wheat yields with those of other countries shows that the gap between Russia and other countries has widened in recent years. Keywords: Russia, agricultural reform, transition economies, productivity, efficiency, convergence 1/ Agricultural economist, Europe, Africa and Middle East Branch, Market and Trade Economics Division, ERS. David Sedik, Carlos Arnade, Gopinath Munisamy, Stefan Osborne, and William Liefert contributed to the research that is highlighted in this article. Introduction In the past, Russia was a major player in global food markets, in particular the wheat market. Russia's importance to global markets has declined in recent years, although the country still has the potential to affect world food prices, given its size and population (148 million people). Questions abound whether Russia can institute the reforms necessary to raise agricultural productivity and output, as well as create the institutional framework necessary for a well-functioning market-driven agricultural economy. Prior to the reform period that began in 1992 (following the breakup of the former Soviet Union), Russia produced about 8 percent (44 million tons on average for 1989-91) of the world's wheat output. The country's volume of wheat imports accounted for almost 10 percent (11 million tons) of the world's wheat trade. Recently, Russia's wheat production has declined to the point that it only accounts for about 5.7 percent (34 million tons on average for 1997-99, although the last 2 years have been drought years) of global production. Imports have contracted sharply and now account for only 2.7 percent (3.4 million tons on average for 1997-99) of global trade. 2/ 2/ In contrast to most other countries, a large portion of wheat in Russia is fed to livestock. Higher grades of wheat are used for human consumption, while inferior grades are routinely fed to animals. The changes in the Russian wheat market are part of the larger issue of economic reform. In general, Russia has cut back on meat consumption as incomes have dropped and real food prices have risen. This has a had a ripple effect, linking backward into the production system. Feed grain (including wheat) and livestock producers have been forced to cut back production. What has emerged recently in the consumer meat market are meat imports that compete with and substitute for meat that used to be produced domestically. These changes can be explained by two key reforms. First, Russia engaged in price reform by eliminating both production subsidies and consumer subsidies. Removing production subsidies led to reduced output. Removing consumer subsidies led to reduced consumption. Second, trade reform added further pressure to production, as Russian producers have had to compete with international suppliers. A key question of interest to policy makers that emerged early in the reform process -- and is still critical today -- was whether Russia would be able to raise its overall agricultural productivity. Early economic studies conducted after reform began forecast that Russia's agriculture would recover from its initial shock period within a few years and re-emerge on global markets as a potentially significant grain exporter. 3/ In retrospect, those early studies seem overly optimistic since they projected that productivity would increase as a result of real reform. Recent forecasts have projected that Russia's agricultural economy will remain stagnant and that the country will be a relatively minor importer on world agricultural markets. 4/ 3/ See Koopman (1991); Liefert, Koopman and Cook (1993); Johnson (1993); and Tyer (1994). 4/ See Sedik, Liefert, and Liapis (1998). This article reviews the overall agricultural reform situation in light of internal agricultural performance measurements. Then Russian wheat yields are compared with those of other countries for an external approach. Policy implications are discussed in the final section. Overall Agricultural Performance and Reform in Russia Recently, ERS has been examining Russia's agricultural performance in the reform era. The studies have reviewed the performance of large former state and collective farms, which are referred to as corporate farms in this article, since they continue to account for over 90 percent of all agricultural output. 5/ Data limitations have prevented detailed analysis of the wheat sector for the most part, but instead have focused on the crop sector overall. However, since wheat is one of the largest components of total output on a value basis, much of what is discussed below is directly applicable to wheat. 5/ This includes output on subsidiary private plots that is tied to the corporate farms. Several aspects of Russian efficiency and productivity have been examined by ERS, including production efficiency, market price responsiveness, yield performance, and overall agricultural productivity growth. Some of this research is still under review, but some has been formally published (Sedik, Trueblood and Arnade, 1999; Arnade and Munisamy, 2000). Much of this analysis can be viewed as reflecting on the overall effect of the reform process. Increasing efficiency or productivity indicators would suggest that reform has improved agricultural conditions and is having the desired effect, whereas decreasing indicators would suggest that conditions have deteriorated. Each of the studies has found that the various measures of efficiency and productivity have declined during 1991-95, suggesting that reform has led to deteriorating conditions. For example, it was found that overall production efficiency declined; several crop yields, including wheat, have declined (more on this in the following section); pricing efficiency has declined; and overall productivity growth has declined. 6/ 6/ It should be noted that prior to reform, there were incentives for managers to overstate output, while the reverse is true today. However, misreporting is not considered to be a serious problem in the agricultural sector, where data for such items as area sown and yields are considered to be accurate. Consider one study that examined production efficiency (Sedik, Trueblood and Arnade, 1999). Production efficiency involves the physical relationship between output and input. Efficiency is usually measured on a percentage basis, so that a score of 0.70, for example, would mean that a farm should have been able to obtain 30 percent more output than it actually achieved, given input levels. Using two different and commonly accepted methodological approaches, it was shown that production efficiency declined from an average of 0.91 to 0.76 during 1991- 95. This means that for given input levels, corporate farms in Russia should have been able to obtain 9-24 percent more from their inputs. For example, in 1994, taking these measurements and assuming that they apply proportionally to the wheat sector, output could have been increased by 21 percent (from 33 to 40 million tons). Under these methodologies, the efficiency measurements are made only on the basis of best practice techniques within Russia; if it had been possible to compare across countries, it is very likely that the results would have been lower. The study on production efficiency is particularly useful since it went a step further to quantify important institutional and economic factors that help explain why efficiency declined. Among some of the more important factors were: o Farm size. Russian corporate farms on average are about six times larger than the largest farms in the United States. Regions with the largest farms tended to be less efficient, in part related to what appeared to be labor shortages. The interpretation would appear to be that there are limits to economies of scale, even in a land-rich country like Russia. An institutional reform that would help address this problem is land reform. This would not only allow producers to address the scale issue, but would be useful in the development of credit markets if land could be used as collateral. This in turn would help with investment and long run productivity. However, land reform legislation allowing private ownership has stalled in the Russian Parliament. o Self-sufficiency efforts. Fear of food shortages has prompted many local officials and governments in Russia to pass laws that are clearly unconstitutional at the national level that prohibit agricultural outflows. This has encouraged self-sufficiency efforts by farm managers in each oblast and is reflected in high crop diversity measurements that were found to lead to production inefficiency. Production efficiency could be much improved if farms specialized in crops that are well suited to their regions and then traded with other regions. o "Soft budget constraints." Farm managers continue to receive subsidies or debt forgiveness after unprofitable growing seasons, often referred to as the "soft budget constraint." Regions with the highest levels of subsidies were shown to be ones with the lowest efficiency levels. Until managers are held accountable for losses, the system will not be reformed. o Output of small private plots. On the face of it, this factor might not appear that important. However, the study showed that in some regions, small private plot output rose while the corporate farm production efficiency levels declined, particularly in regions that had low efficiency levels at the beginning of reform. The interpretation would appear to be that workers took steps to ensure their personal survival while the corporate farms came under disrepair, or that workers contributed to the disrepair by pilfering supplies, a phenomenon that has been well documented in the past. o State marketing channels. The study found that corporate farms that sent their output through the old official state market channels were actually more efficient. Developing additional market channels will take time and effort that might contribute to production inefficiency in the short run but lead to improvements in the long run. Russian Wheat Yield Trend Analysis Many of these problems are more evident when one examines yield trends in Russia. Recently, ERS has been examining yields for crops that are important to Russia, including wheat. The research has focused first on whether there has been yield convergence over time for the largest producers in the world, which would tend to indicate whether international agricultural technology has spread to other countries. The research then has specifically examined Russian yield trends in comparison to the world yield leaders. Highlights from this research are presented below. One approach to testing for yield convergence is known as beta- convergence.7/ This measure refers to the parameter that is estimated from statistical linear regression analysis, that is, fitting a line through a group of observations. The intuition behind this approach is that laggard countries that start with relatively low yield levels would be converging (or catching up) to the leaders, which tend to grow more slowly when on or near the technological frontier, if the laggards display higher growth rates than the leaders. 7/ These approaches are borrowed from recent macroeconomic literature measuring convergence of per capita income levels across countries and have been used as a test to confirm or refute different types of growth models. An important part of this literature is trying to understand the role that technology and spillovers have in stimulating economic growth through education, research and development, and physical capital accumulation. The parallels to yield analysis are straightfoward. Figure A-1 shows the trend line for wheat beta-convergence. Globally, there is strong evidence that yields have converged for the top 25 producing countries. The linear regression model testing for beta-convergence shows that the beta coefficient is statistically significant with a sign that indicates that there has been convergence. To understand how well Russia's yield trends performed in comparison to the leaders, its yields and growth trend were analyzed separately. Absolute yield differences between Russia and the global yield leaders were calculated for three time periods: the initial period, 1961-63; the period just prior to the Soviet breakup, 1989-91; and the most recent period for which data are available, 1996-98 (table A-1). In addition, growth rates were calculated to help gauge the degree of yield convergence or divergence. The global yield leaders were selected on the basis of most recent period yields (1996-98 averages). 8/ 8/ For each commodity, the top five countries with the highest yields were selected and their yields averaged. In most cases, most of the five countries were also beginning period (1962) yield leaders as well. Russia was slowly gaining ground on the global wheat yield leaders through the Soviet period, 1962-1990. However, after the reform period began, the wheat yield growth rate became negative (table A-1, seventh column). Given that the global wheat yield leaders continued to display positive growth rates, the gaps between these countries and Russia widened again (compare columns 1 and 3 in table A-1). In fact, the yield gap between Russia and the global yield leaders was wider in 1997 than it was in 1962. In short, the yield convergence gains that were achieved during 1962-1990 have completely evaporated. This pattern occurred not only for wheat, but also for most of the other crops that were examined (corn, rye, sugar beets, and sunflowers), reinforcing this finding. Some might argue that it is inappropriate to compare Russia with other leading yield countries, such as those in Europe that have different resource endowments and climates, use intensive production practices, and are driven by strong policy incentives. To address this concern, Russian yields are compared with those of four other land-rich countries: Argentina, Australia, Canada, and the United States. The yield patterns are shown graphically in figure A-2, which displays yield trends in logarithms to emphasize the relative rates of growth. The figure shows that Russia was closing the yield gap prior to reform. After reform, Russian wheat yields declined as yields in the other countries moved ahead. It is not entirely clear why Russian yields have fallen in the reform period. However, one important explanation may be that Russian producers achieved the earlier yields by overusing fertilizers, which were heavily subsidized in the Soviet period. These subsidies have been removed in the reform era, leading to very high and sometimes unaffordable fertilizer prices and forcing farm managers to cope with alternative production practices. Other related factors also may have had a cumulative impact on yields, including soil nutrient depletion as fertilizer use has dropped, increasing pest and weed problems from lack of plant protecting agents, and accelerated topsoil erosion. In addition, many of the institutional issues discussed previously probably were important contributing factors. Conclusions Nearly a decade has passed since Russia began its political, economic, and agricultural reforms. The primary agricultural reform question that arose back then is still with us to some extent today: will Russia be able to reform its agricultural system and raise overall productivity? Increasingly, the answer appears to be that this will not occur in the short or medium run. Several measures of efficiency and productivity for the early years of reform for which data are available suggest that conditions have worsened. It is true that some studies use data that are only available through 1995 and have not allowed for a possible rebound effect. However, recent anecdotal evidence suggests that the situation is only getting worse. There have been several changes at the top of the Russian political leadership in recent years, adding to instability. There has been no significant legislation in recent years, such as concerning land reform or credit market development, that would promote agricultural reform. The major implication from this analysis is that Russia's agricultural production may rebound some from drought in 1998 and 1999 but will remain mostly stagnant for the foreseeable future. This means that Russia is unlikely to be a major wheat exporter in the short or medium term. A more likely outcome is that Russia will continue to import wheat, mostly from other countries of the former Soviet Union. References Arnade, C. and G. Munisamy, "Financial Constraints and Output Targets in Russian Agricultural Production," Journal of International Development Vol. 12(2000): 71-84. Johnson, D. Gale. "Trade Effects of Dismantling the Socialized Agriculture of the Former Soviet Union," Comparative Economic Studies, Vol. 35(1993): 21-33. Koopman, Robert. "Agriculture's Role During the Transition from Plan to Market: Real Prices, Real Incentives, and Potential Equilibrium," in Economic Statistics for Economies in Transition: Eastern Europe in the 1990's. Washington, DC: U.S. Department of Labor, 1991, pp. 127-157. Liefert, W., D. Sedik, and E. Cook. "Agricultural Reform in the Former USSR," Comparative Economic Studies Vol. 35(1993): 49-69. Sedik, D., W. Liefert, and P. Liapis. "Economic Reform in the Newly Independent States of the Former USSR: Effects on Agricultural Production and Trade to 2005," in Proceedings of a Conference of the International Agricultural Trade Research Consortium (eds. H. von Witzke and S. Tangermann), Nov 1998: 210-231. Sedik, D., M. Trueblood and C. Arnade, "Corporate Farm Performance in Russia, 1991-95: An Efficiency Analysis," Journal of Comparative Economics, Vol. 27 (1999): 514-533. Tyer, R. Economic Reform in Europe and the Former Soviet Union: Implications for International Food Markets. Washington, DC: International Food Policy Research Institute, Report 99, 1994. Special Article EU Enlargement: Impacts on CEE Wheat Markets Nancy Cochrane 1/ Abstract: This article presents analysis of the potential impact of EU Enlargement on Central and East European (CEE) wheat markets. The analysis focuses on Poland, Hungary, and the Czech Republic, three of the CEE countries most likely to join the EU in the near future. ERS model results suggest that enlargement under Agenda 2000 assumptions may actually reduce wheat surpluses in the CEE countries, principally because wheat prices in Poland and the Czech Republic had risen above the Agenda 2000 wheat price in 1998, the base year used in the model. However, the ultimate impact on CEE wheat markets will also depend on developments in the livestock sectors, other field crops, and CEE land and labor markets. Keywords: Poland, Hungary, Czech Republic, Central and Eastern Europe, wheat, grains, EU enlargement, Agenda 2000 1/ Agricultural economist, Europe, Africa and Middle East Branch, Market and Trade Economics Division, ERS. Introduction Negotiations between the European Union and five of the Central and East European (CEE) countries on the terms of eventual accession to the EU began in March 1998. Those five were Poland, Hungary, the Czech Republic, Slovenia, and Estonia. In November 1999 the EU agreed to open negotiations with five other CEE countries as well--Slovakia, Romania, Bulgaria, Latvia, and Lithuania. Official statements still name 2002 as the target date for accession by the first five. Unofficial reports from both the EU and the CEE countries name 2006 as a more realistic date. Before they can accede to the EU, the CEE countries must revise their entire body of laws and regulations to conform to those of the EU, and many people doubt they will be able to do this by 2002. However, it is a near certainty that at least some of the CEE countries will join the EU within the next 10 years. Prospects of EU enlargement raise some important questions for world wheat markets. Hungary and Romania are consistently surplus producers, while the Czech Republic, Slovakia, and Bulgaria have been surplus producers in some years. Even Poland has exported wheat in some years. Since the beginning of the transition, wheat prices in most of the CEE countries have been generally below world levels and were substantially below the EU intervention price in most years. 2/ Even the reduced wheat price under the EU's Agenda 2000 is above the market prices in most of the CEE countries. Principal exceptions were Poland and the Czech Republic, where wheat prices rose above the EU intervention price in 1998. 2/ The EU intervention price is a market floor price that triggers intervention in order to support the market price. Farmers are able to sell their products to the intervention authorities at an annually adjusted intervention price. Products sold must meet minimum quality standards to be accepted into intervention stocks. BEGIN BOX EU's Agenda 2000 Calls for Limited Price Reductions The EU's Agenda 2000, finalized in March 1999, is a set of reforms that aims to reduce the scope of EU intervention. The reforms were adopted with the goal of reducing EU budgetary expenditures and also as a first step in preparing for eventual enlargement. The reforms call for reductions in support prices for crops, oilseeds, and beef, and partial compensation to producers for the price declines through direct payments. The key provisions of Agenda 2000 are: o a 15-percent reduction in support prices of grains, phased in during 2000 and 2001, to be partially offset by increases in direct payments; o a 33-percent reduction in direct payments to oilseed producers, implemented over 3 years, so that by 2002 the payment will be equal to the direct payment to grain producers; o a 10-percent minimum set aside for cropland for 2000- 06; and o a 20-percent reduction in the support price for beef, to be phased in over 3 years and offset by direct payments. Under this formula the EU intervention price for wheat, corn, barley, and rye would be set at 101 euro per ton in 2002. For more details on Agenda 2000, see David R. Kelch, "EU's Agenda 2000 & Beyond," Agricultural Outlook, Economic Research Service, U.S. Dept. Ag,. October 1999. END BOX ERS analysis suggests that enlargement could actually lead to reduced wheat surpluses in the CEE countries. 3/ Hungarian wheat prices have consistently been under the EU intervention prices and are also below the price proposed in Agenda 2000. Thus Hungary could expand production and exports after accession. Polish and Czech wheat prices, on the other hand, are above the Agenda 2000 prices, so that production could decline in these two countries after enlargement. In addition, without significant quality improvements, much of the CEE wheat production will not qualify for EU intervention, which could further depress output. 3/ Cochrane, Nancy. "Enlargement to the East," The European Union's Commong Agricultural Policy: Pressures for Change, International Agriculture and Trade Report, Economic Research Service, U.S. Dept. Ag. WRS-99-2. October 1999. However, net wheat trade in an enlarged EU will also depend on developments in other field crops and the livestock sector. ERS model results show significant increases in CEE prices of corn and barley, leading producers to substitute these crops for wheat. In the livestock sector current CEE prices for all livestock products are 20 to 30 percent below those of the EU. This would suggest significant rises in CEE pork and poultry output, thus increasing demand for wheat as feed. But the need to meet high EU quality standards will raise CEE production costs, so that CEE livestock output may not increase as much as the price gaps would suggest. In this case the CEE countries could remain net wheat exporters even with reduced output. A second consideration is demand side effects on enlargement on the CEE economies. ERS analysis suggests that in the initial years of accession, the sudden rise in consumer food prices will lead to a significant contraction in demand. However, accession will almost certainly attract new investment to the acceding CEE countries. In addition, the EU is already providing large amounts of assistance for infrastructure development, and this assistance will continue after enlargement. The inflow of investment and the EU structural assistance can be expected to have a significant, positive effect on GDP, leading to a strengthening of demand for grains and livestock products. A final consideration is that accession will likely lead to important shifts in the primary factor (land, labor, and capital) markets in the CEE countries. The same inflow of investment and structural assistance could put upward pressure on wages and land prices, while making capital more readily available. These fundamental shifts could alter the eventual structure of CEE output. Some Background: The Wheat Situation in the CEE Countries The largest wheat producers among the CEE countries are Poland, Romania, Hungary, the Czech Republic, and Bulgaria, in that order. Of those, Romania and Hungary are consistently surplus producers. The Czech Republic and Bulgaria have been small net exporters in most years, while Poland is usually a net importer. During the 1990's there have been relatively large shifts in production from year to year, brought about by variations in weather. The result has been considerable variation in the net trade status of these countries. Market reform brought serious changes to the CEE wheat sectors. During the 1980's, the last years of the Communist period, yields showed a general upward trend. Yields in Hungary and the former Czechoslovakia were very close to EU yields (figure B-1). Even in Poland, where yields were lower because of the dominance of small, private farms, there was a slow upward trend in wheat yields. But this was mainly the result of generous government subsidies for fertilizers and other inputs. With the elimination of government subsidies and the sudden exposure to competition from the world market, producers experienced an abrupt rise in input prices and simultaneous drop in output prices. Producers responded by sharply curtailing their use of chemical inputs. As a result, yields fell precipitously and became much more variable after 1990. Demand fell as well. Food demand for wheat has been relatively inelastic and has not changed much. However, feed use has declined because of declining livestock inventories. As a result, the CEE countries together have maintained their net export position in most years since 1990. Most of Eastern Europe has seen a sharp decline in area planted to wheat in the last 2 years (figure B-2). The most drastic decline occurred in Hungary, where area harvested in 1999 was 38 percent below that of 1998. Wheat area in Romania and Bulgaria has also declined significantly. These declines were a response in part to falling world prices and in part to poor weather conditions during sowing. Preliminary reports from several of the CEE countries suggest a slight increase in area planted during the fall of 1999 for crops to be harvested in 2000. The principal exception is Poland, where wheat area has changed very little during the transition. In fact, there has been a slight upward trend. This trend is principally the result of extensive intervention on the part of Poland's Agricultural Market Agency (AMA). The AMA maintains a relatively high minimum price for wheat, which is supported through intervention purchasing and high import tariffs. Figure B-3 illustrates the extent to which Poland's intervention in the wheat market has insulated producers from the world market. Whereas Hungarian prices track the U.S. Gulf price fairly closely, Polish prices do not and at times have risen above the Gulf price. Polish prices have also occasionally exceeded the EU intervention price (figure B-4). Model Results Show Increase in Net CEE Wheat Imports ERS recently modeled the impact of Agenda 2000 plus EU enlargement on production and trade of grains, oilseeds, and livestock of the CEE countries and the enlarged EU. The CEE countries included in the analysis were Poland, Hungary, and the Czech Republic, since these are the most likely to accede to the EU in the coming decade. In the longer run, Romania will also be of interest. Romania has some of the richest soil in Eastern Europe and has the potential to generate very large surpluses with the right set of incentives. However, Romanian yields have been among the lowest in the region due to the country's fragmented farm structure and the slow pace of market reform. Precisely because of the slow pace of reform, it will be several years still before Romania will be a serious candidate for accession. The analysis included two scenarios: Agenda 2000 without enlargement and Agenda 2000 with enlargement. In each case the 1999 USDA Baseline was used as the base scenario. 4/ Results from Agenda 2000 without enlargement are shown in order to enable the reader to isolate the effects of enlargement from those of Agenda 2000 alone. 4/ World Agricultural Outlook Board. USDA Agricultural Baseline Projections to 2008. Office of the Chief Economist, U.S. Department of Agriculture. Staff Report No. WAOB-99-1. February 1999. The key assumptions underlying the analysis were: o the CEE countries will immediately adopt the EU's Common Agricultural Policy (CAP) in 2002, since that is still the official target year for accession, with no transition period. Thus in that year, CEE prices will adjust to the prices laid out in Agenda 2000. For the model run the Agenda 2000 prices were converted to U.S. dollars according to the exchange rate in effect in July 1999. o CEE producers will receive the same compensation payments and will be subject to the same set-aside requirements as their counterparts in the EU-15. o CEE producers will be subject to the EU dairy quota, which was fixed at milk production for each of the CEE countries in 2001, as projected in the 1999 USDA Baseline. The dairy quota also constrains CEE beef production, as more than half of the beef produced is a product of the dairy herd. The cap on beef output has implications for demand for wheat as feed. To understand the results, it is helpful to compare the 1998 producer prices in the CEE countries and the EU-15 (table B- 1). Three factors influence the model results: o Despite wide gaps between CEE and EU wheat prices that existed in the early 1990's, there has been some convergence of CEE and EU prices in more recent years. In fact, in 1998, the base year of the model, wheat prices in Poland and the Czech Republic, thanks to their domestic intervention schemes, had risen above the Agenda 2000 wheat price for 2002. o In all the CEE countries, prices of barley, corn, and other coarse grains were substantially lower than the price of wheat. The scenario thus brings greater price increases for coarse grains than for wheat. o CEE livestock prices were substantially below those of the EU. In the CEE countries, Agenda 2000 without enlargement brings declines in grain prices of 2 to 5 percent against the baseline in 2005 (table B-2). Under this scenario it is assumed that CEE price and border policies remain constant and world prices are fully transmitted to the domestic market. There are small declines in production and small increases in consumption, and the impact on net trade is marginal. Enlargement, however, brings some dramatic changes in CEE grain prices, and the CEE response to those changes has important implications for the EU-18. Enlargement causes wheat prices to rise 43 percent over the baseline in Hungary, while wheat prices fall in Poland and the Czech Republic. Corn and barley prices fall in Poland, but not as much as wheat prices. Prices of corn and barley rise in Hungary and the Czech Republic, and in Hungary price increases for these two grains are greater than those for wheat. In response, producers in all three CEE countries switch from wheat to corn and barley. The result is that wheat output declines in Hungary, even with the price increase (table B-3). Hungarian wheat exports rise despite the output decline, because domestic demand falls more than output (table B-4). However, Poland and the Czech Republic become large net wheat importers. Increased imports by Poland and the Czech Republic more that offset the rise in Hungarian exports. In 2005/2006 the three CEE countries switch from net exporters of 859,000 tons under the baseline to net importers of 1.7 million tons. As a result, the EU-18 sees a 6-percent decline in its net wheat surplus, so that pressure on world wheat markets is actually reduced. But There Are Important Caveats One must interpret these results with some caution, however, as a number of factors not captured by the model could alter them. The four principal factors discussed below are uncertainties about the response of the livestock sector, quality issues, GDP growth that could come as a result of new investment and EU structural assistance, and the changes in CEE land, labor, and capital markets that could come about with accession. Feed demand. An important reason for the dramatic reduction in net wheat exports under the enlargement scenario presented above is an increase in wheat feeding. According to these results, enlargement leads to significant rises in pork and poultry output and a consequent rise in demand for feed. Much of the increased feed demand is met through higher oilmeal imports. But livestock producers in all three of the CEE countries increase wheat feeding as well, as they substitute wheat for more expensive corn and barley. There are a number of reasons, however, why pork and poultry output may not rise as much as the model results suggest. Livestock producers will have to comply with a formidable array of EU regulations regarding product quality and animal welfare, and compliance will raise production costs. Moreover, part of the gap between CEE and EU livestock prices is due to the lower quality of CEE animals, and the model does not account for quality differentials. For these reasons, CEE livestock producers may not respond so positively to the higher prices that will come with accession. If livestock production does not rise as much as projected, feed use and imports of wheat will be correspondingly lower than the model results suggest. Quality. This is an issue for wheat as well as for livestock products, particularly in the case of Poland. Much of Poland's wheat crop is not of good milling quality and qualifies as feed wheat. Unless this situation changes, much of the Polish wheat crop will not be eligible for intervention after accession, and average wheat prices in Poland will be even lower than projected. In addition, once there are no border controls between Poland and its western neighbors, Polish millers will be able to buy Hungarian, French, or German wheat rather than Polish wheat. Thus, without significant efforts to raise wheat quality, Poland could experience an even greater contraction of its wheat sector after accession. Demand side impacts of accession. The model did not incorporate any adjustment in CEE income. It was assumed that income projections assumed in the 1999 Baseline (growth of about 4 percent per year) would not be significantly altered in the short run by accession. But in the medium term, accession could have a strong positive impact on consumers' incomes. The enlarged EU will almost certainly attract new investment, and the EU is already providing generous support to infrastructure development in the CEE countries. The result should be a significant increase in these countries' GDP. The direct impact of rising income on food use of wheat will not be large, because wheat demand is relatively inelastic. But there could be a rise in demand for livestock products, which in turn will stimulate greater feed demand. Changes in primary factor markets. Accession will also bring some significant changes in the markets for land, labor, and capital, which could significantly affect the structure of CEE agriculture. CEE agriculture is now highly labor intensive because wage rates are low, and capital and other inputs are relatively expensive. Wages could rise significantly after accession. If labor is fully mobile throughout the enlarged EU, there will be a tendency towards convergence of EU and CEE wages. Moreover, the EU is offering several billion dollars of infrastructure support both before and after accession. These funds could generate more employment in the CEE countries, putting upward pressure on wages. Higher wages will draw much of the labor out of agriculture and should lead to consolidation of farms. Land prices will also increase. Some CEE officials have expressed the desire to retain some restrictions on land purchases by citizens from other EU countries during a transition period. Eventually, however, all EU citizens will have to have the right to purchase CEE land. Higher land prices brought about by increased demand would affect the production of all field crops, leading to more input- intensive production. According to the model results, CEE grain yields remain substantially below those of the EU after accession, reflecting a continuation of current land- extensive production practices. With higher land prices, these practices will no longer be economically rational. As labor and land become more expensive, producers will substitute more capital and material inputs, and the result could be significantly higher yields. Wheat yields in Hungary and the Czech Republic could approach their pre-1990 levels. With a higher level of investment, Polish wheat producers could raise the quality of their output. Conclusions It is clear that more research is needed before we can make any definitive statements about the impact of EU enlargement on the CEE wheat sectors. ERS model results suggest that contrary to earlier expectations, EU enlargement could bring about a decrease in exportable wheat surpluses. Other forces, not captured in the model, could mitigate those declines. Special Article The New Agricultural Trade Negotiations: Background and Issues for the U.S. Wheat Sector Erik Dohlman and Linwood Hoffman 1/ Abstract: New negotiations on trade in agriculture were recently initiated by the World Trade Organization (WTO). It is likely that these negotiations will focus on issues previously addressed by the Uruguay Round Agreement on Agriculture (URAA), which placed limits on the use of tariff and non-tariff barriers to trade, export subsidies, and the type and level of spending countries are permitted on domestic support programs. These disciplines restrict the ability of member countries to use trade- distorting policies, but for U.S. wheat producers, the agreement has not been accompanied by an increased volume of exports or share of world trade. Consequently, U.S. objectives for the upcoming negotiations include further reducing tariffs and improving market access, eliminating and prohibiting the use of export subsidies, and placing further limitations on trade- distorting domestic support programs. Keywords: Wheat, trade, policy, WTO, market access, tariffs, tariff-rate quota, export subsidy, domestic support 1/ Agricultural economists, Field Crops Branch, Market and Trade Economics Division, ERS. Introduction New multilateral agricultural trade negotiations under the World Trade Organization (WTO) were recently initiated. During these negotiations, officials from WTO member countries will work to continue the process of reforming agricultural trade rules begun in the Uruguay Round, which concluded in 1994. The global wheat market is very reliant on trade, with about 20 percent of global production and nearly one-half of U.S. production destined for export, but it is also heavily influenced by a range of trade-distorting policies. Under WTO agreements, the maximum allowable ("bound") tariff rates on wheat are still potentially prohibitive among some major consuming and importing countries, although applied rates are often much lower than those allowed. Domestic farm programs, export subsidies or taxes, sanitary and phytosanitary measures, and state trading also have the potential to distort trade. With about 7.5 percent of U.S. agricultural export revenue coming from the sale of wheat, the U.S. wheat sector is naturally interested in the outcome of the new round of agricultural trade negotiations. 2/ This article identifies and discusses issues affecting global trade in wheat that are likely to be considered during the negotiations. Other issues related to wheat trade, such as the U.S.-China agreement on China's WTO accession and potential disciplines on state trading enterprises (STEs) are also covered. As an introduction, the importance of trade to U.S. wheat producers and the U.S. position in global markets are reviewed. 2/ A glossary of terms can be found in USDA (1996) and Nelson (1997). Production and Trade in the U.S. and Global Wheat Market In 1998/99, wheat production represented about one-fifth of total U.S. grain output by volume, and the value of U.S. wheat production averaged about $8.6 billion each year between 1995/96 and 1998/99. 3/ With about 45 percent of U.S. wheat being sold to foreign markets, exports represent a crucial source of demand for U.S. wheat producers, and wheat exports also make a large net contribution to the U.S. agricultural trade surplus. Wheat accounts for about 7.5 percent of all U.S. agricultural exports by value, and the United States has averaged about a $4.4-billion trade surplus in wheat between fiscal 1996/97 and 1998/99 (nearly one-fifth of the trade surplus recorded by U.S. agriculture during those years). Over 50 percent of U.S. wheat exports are destined for the top seven importers of U.S. wheat, but U.S. wheat exports are otherwise widely dispersed (table C-1). 3/ Among U.S. grains, the average (1995/96-98/99) value of wheat production ranks second to corn ($22.7 billion), and ahead of all other grains combined. Sources: USDA, WASDE, 12/99; USDA, Crop Values (1998 and 1999 Summaries). U.S. exports of wheat flour are modest compared with unmilled wheat, averaging just under $140 million per year (fiscal 1996- 98). Wheat flour exports are limited, in part, because many importing countries choose to import wheat grain for milling by domestic enterprises. Ocean shipping of flour is more likely to incur spoilage and, as a processed good, flour is often subjected to higher tariffs than those imposed on whole wheat - a situation known as tariff escalation. In addition, U.S. flour exports are limited by competition from the EU, by far the largest wheat flour exporter, which heavily subsidizes its exports. Although starting from a low base, U.S. exports of other processed wheat products, such as pastas, starch, gluten, and doughs and mixes have more than doubled in the 1990's, but the United States has averaged a trade deficit of roughly $270 million in recent years for these products (table C-1). U.S. imports of wheat are small compared with exports, but the United States is the world's eleventh largest wheat importer (1996-98). U.S. wheat imports, consisting mainly of durum and hard red spring wheat from Canada, have grown from an average of under 550,000 metric tons per year in 1986-88 to over 2.6 million metric tons per year during 1996-98. Imports of other wheat products consist mainly of pasta and noodles from the EU, Canada, and Asia, and wheat gluten from the EU and Australia (FATUS). In the context of global markets, the United States is the world's leading wheat exporter, and for 1996/97-1998/99 ranked third in wheat production. China, the European Union, the United States, India, Russia, and Canada produce over two-thirds (69 percent) of the nearly 600 million metric tons of global wheat output, and the United States, Canada, Australia, EU, and Argentina account for over 85 percent of world wheat exports (table C-2). Since 1975/76, U.S. wheat exports have fluctuated from a high of nearly 50 million tons in 1981/82 to a low of about 25 million in 1985/86. In 1981, the U.S. share of global exports also peaked at about 45 percent. In recent years (1996/97-1998/99), U.S. wheat exports have averaged less than 30 million tons, and the U.S. share of global exports has fluctuated between 25 and 30 percent since 1990/91. Rising U.S. production and a growing share of global production since 1995/96 have not translated into increased exports or a larger share of global exports (see figure C-1). There are a number of reasons for the decline (during the 1980's) and stagnation (during the 1990's) of the U.S. export market share. One important cause is increased foreign wheat production, which grew 46 percent between 1975/76-1979/80 and 1994/95-98/99, while U.S. wheat output increased only 15 percent. A particularly important development has been the rapid growth of wheat production by China and the EU. In 1975, the United States was the world's leading wheat producer, whereas in 1998/99 it ranked third, behind China and the EU, and just ahead of India. Another important reason is that trade in wheat is highly regulated by tariffs and other trade-distorting policies. Top consumers of wheat, such as the EU, China, Japan, India, the Philippines, and Morocco, maintain high applied tariffs (25 percent or more), or limit imports with tariff-rate quotas (TRQs) or government controls over imports by state trading enterprises (see later sections for an explanation of these issues). Exporters and importers have also used other trade-distorting policies designed to stabilize internal prices, such as the minimum price policies. These policies create incentives to boost wheat production, which limit imports or exacerbate the use of export subsidies. Even without substantial reductions of foreign import barriers (tariffs and TRQs) and domestic support policies, prospects for increased U.S. wheat exports are moderately positive. According to USDA projections (USDA, 2000), which assume no new WTO agreement on agricultural trade liberalization, world wheat trade is expected to increase at a pace of 2.2 percent per year until 2009, well above growth in the 1980's or 1990's. Much of the forecast growth in wheat import demand will come from middle and lower income countries that are expected to experience strong economic and population growth in the coming years, including North Africa, the Middle East, China, Indonesia, and Pakistan. The United States will compete with Australia, Argentina, Canada, and the EU to fill increased demand for imports, but slower growth in exports by these countries than by the United States is expected to raise the U.S. share of global exports. 4/ 4/ From 29.3 percent of global exports in 1999/2000 to 33.5 percent in 2009/2010 (USDA, 2000b). Product Composition of Trade 5/ The composition of wheat classes produced and products traded is changing and adding to the complexity of the world wheat market. In different parts of the world, wheat is classified using different characteristics and methods. In the United States, wheat has traditionally been divided into six classes: four hard wheats and two soft wheats. All of the classes are somewhat substitutable, but each class produces better quality grain in a particular ecosystem and each class has characteristics suited to particular end uses. 5/ Material in this section was contributed by Ron Trostle, ERS. The United States produces and exports significant quantities of all the classes of wheat except hard white. The other major exporters, each with a more limited variety of ecosystems, tend to specialize in fewer classes. The EU primarily grows soft wheats, with most varieties selected for bread-baking qualities. The EU also grows durum, but since the 1992 CAP reform reduced the area eligible for supplemental payments, the EU has generally had to import some durum. Argentina also exports mainly medium- protein bread and noodle wheat. While Canada generally specializes in high-protein hard spring wheat and durum, it grows limited quantities of soft white wheat in the eastern provinces. Australia made a decision years ago to specialize in white wheats and exports both hard and soft white varieties. In recent years it has attempted to raise some higher protein white wheat and specialized wheats for niche markets such as the Asian noodle market. Improved quality and more diverse end uses of grain are becoming more important as import decisions in some countries are being shifted from state trading enterprises to private sector millers. Consumer tastes and preferences for different types of wheat products are also changing, shifting demand for the classes of wheat needed to produce particular products. Rising incomes in many middle-income countries, for example, have generated demand for more consumer-ready products. Uruguay Round Accomplishments and Issues for the New Agricultural Negotiations After seven previous rounds of multilateral trade negotiations, the Uruguay Round (1986-1994) marked the first major effort by the GATT (the predecessor organization to the WTO) to include trade liberalization in agriculture as a central objective. One of the centerpieces of the pact was the Uruguay Round Agreement on Agriculture (URAA), which required signatories to cut average tariff levels on all agricultural products by set percentages, reduce the value and volume of subsidized exports, and lower aggregate spending on some domestic support programs for agriculture. 6/ Separate agreements also established new disciplines on the use of sanitary and phytosanitary (SPS) measures that could be used to restrict trade based on health and safety concerns, and created a new process for settling trade disputes. 6/ Least developed countries do not have to make commitments to reduce tariffs or subsidies. It is difficult to separate the influence of the URAA from other factors affecting trade, but the volume of world wheat trade has actually declined since the agreement was reached. Between 1991/92-93/94 and 1996/96-98/99, global trade fell by 5.5 percent (from 108.5 million tons to 102.5). On the other hand, 12 of the top 15 net wheat importing countries increased their wheat imports, with only China and Russia experiencing large declines (a combined drop of 15 million tons). For U.S. wheat producers, important issues for the new negotiations include furthering market access and reducing levels of trade-distorting programs. Developments in other areas--such as creating tighter disciplines on state trading enterprises, disciplining use of export taxes or credit guarantees, and the potential impact of China's WTO accession--could also have ramifications for U.S. wheat producers. Because the main provisions of the URAA are detailed elsewhere (see USDA,1998a), only a summary table (C-3) and a general overview of the main accomplishments are given at the beginning of each section below. Trade issues related specifically to the wheat sector are then discussed in more detail. Continuing Issues: Market Access-The URAA required participating countries to reduce "base" period (those in effect in 1986 or 1986-88) tariffs on agricultural products by an average of 36 percent for developed countries and 24 percent for developing nations, and to cap tariffs at a final "bound" level by the end of the implementation period (table C-3). The minimum tariff cut on each product is 15 percent (10 percent for developing countries). The agreement also required signatories to convert all non-tariff agricultural trade barriers, such as quotas, to tariffs, a process referred to as "tariffication." Countries doing so established a two-tiered tariff system (a tariff- rate quota, or TRQ) in which a lower tariff (the in-quota tariff rate) applies to product imports below a certain quantitative limit and higher tariffs (the over- quota tariff rate) to imports beyond that limit (USDA, 1998a). With the lower tariff rates for within-quota imports, TRQs were designed to ensure minimum trade access levels equal to or above a country's recent import levels. 7/ TRQs also increase the transparency of protection in agriculture by converting quotas to more easily measurable and comparable units of protection, such as ad valorem (percentage rate) or specific (units of currency per unit of weight) tariffs. As of September, 1997, about 40 percent of the nearly 1,400 TRQs on all commodities were scheduled to have their quota level (the quantity of imports subject to the lower tariffs) increased over the course of the implementation period, implying some increase in market access for agricultural products in general. 7/ The URAA required that the quota level be equal or greater than actual imports (or some percentage of domestic consumption) during a recent period, and mandated a reduction in over-quota tariff rates. The URAA also required that imports meet a minimum of 5 percent of domestic consumption by the end of the implementation period. Countries importing over that amount are not required to raise their quota. Lowering tariff barriers and expanding access levels in countries with TRQs will continue to be an important priority for the United States in any future negotiations. By establishing maximum bound tariff rates and "tariffying" quantitative import limits (through the creation of TRQs), the URAA placed limits on potential tariff increases and established minimum trade access levels, but it appears to have had only a limited impact on U.S. wheat export prospects. This is because the base period (1986 or 1986-88) from which tariff reductions were made was one of very high protection, and tariffs on goods subject to tariffication were frequently exaggerated, a practice known as "dirty tariffication." (USDA, 1998a) In many cases, developing countries were also permitted to designate base period tariffs at levels well above tariff levels that actually existed. One study estimated that tariffs affecting less than 15 percent of world agricultural trade will have become more liberal than base period levels by the end of the implementation period (Finger, et al., 1996; cited in USDA, 1998a). Tariffs on Wheat--Although the bound levels set a maximum tariff that each country can impose on a product, a look at table C-4 confirms that even with tariff reductions fully implemented, the final bound rates on wheat are still generally much higher than the "applied" tariff levels countries actually choose to impose. Among the countries listed in table C-4, for example, the maximum bound tariff rates on wheat equal or exceed 100 percent in six countries (several of which are major wheat consumers), whereas none charged a duty higher than 50 percent. So despite the effort to increase discipline on the use of tariffs, most countries still have a great deal of room to raise them. Several examples highlight the ability of wheat importing nations to impose large tariff increases to support certain policy goals. A notable one is India's decision in December 1999 to raise tariffs on wheat imports from duty-free up to 50 percent. India, which recently averaged about 1.7 million tons of wheat imports yearly, raised its tariffs because the price of imported wheat was substantially below the government's selling price to millers, and domestic stocks of government-purchased wheat had grown beyond desired levels. 8/ In April 1999, South Africa, which imported an average of 800,000 metric tons of wheat during 1996/97-1997/98 (30 percent from the U.S.), raised its tariff on wheat from zero to about $30 per ton, presumably to support local producers suffering from increased imports. 9/ Chile announced this year (2000) that it would impose additional import tariffs on wheat as part of a "safeguard" action, bringing its overall tariff above the 31.5 percent it had committed to in the Uruguay Round. 8/ FAS GAIN report #IN9087; 12/2/99. 9/ FAS GAIN #SF9014, 4/99. Wheat TRQs-Seventeen countries, including some of the world's largest wheat consumers (e.g. EU, Poland, Brazil, and Japan) have TRQs on wheat, and a look at table C-5 shows that high over-quota tariff rates and generally small (lower tariff) access (quota) levels remain a barrier to wheat trade. In some cases, countries with wheat TRQs import far more than the quota level, either because of relatively low applied over-quota tariffs or due to preferential trade arrangements allowing additional low tariff imports from selected trading partners. In most cases, though, the final bound over-quota tariff rate (OQTR), if applied, would be prohibitive to imports beyond the quota level, and quota levels were scheduled to increase only slightly, if at all. In the new negotiations, opportunities for improved market access can come from reduced OQTRs or by increasing the quota level. In addition to prohibiting or severely curbing imports above the quota level, the administration of tariff-rate quotas will most likely be a topic of negotiation. Some countries allocate the quota to suppliers based on the historical distribution of trade, which limits the opportunity of others to increase market share, and some countries have assigned import rights to state trading enterprises or producer associations. These organizations may limit market access in order to protect domestic producers, resulting in quota "underfill," or may bias the quota distribution to favored suppliers for political reasons (Skully). Export subsidies- Twenty-five WTO member countries agreed to reduce the volume and value of their subsidized agricultural exports from base period levels (table C-3). Ten countries made specific commitments to reduce subsidized wheat and wheat flour exports. These include five of the eight largest wheat exporters listed in table C-2: the United States, the European Union, Canada, Turkey, and Hungary. Of the total volume of subsidized agricultural exports permitted each year by the URAA, the quantity allowed for wheat and wheat flour is the highest of any commodity, reflecting its position as one of the most heavily subsidized agricultural commodities in global commerce. 10/ Although countries have generally remained well below their subsidized export limits, URAA export subsidy commitments have lowered the potential volume of subsidized wheat exports from about 40 percent of world trade in 1994 to about 25 percent in 2000 (USDA, 1998b). 11/ 10/ If all countries shipped the maximum permitted volumes of subsidized exports for each product, wheat and wheat flour would account for over one-half of the total volume (USDA, 1998a). 11/ The exception is the EU, which has used about 58 percent of its permitted export subsidy volume between 1995 and 1997. Details are discussed in a later section. Limitations on export subsidies for wheat and wheat flour are an important discipline on trade-distorting policies, since these subsidies were heavily used, particularly by the EU and the United States, in the decade or so preceding the URAA. Between 1986 and 1995, the United States assisted an average of about half of its wheat exports, amounting to nearly 170 million tons, through the Export Enhancement Program (EEP), and expenditures ("bonuses") on wheat totaled about $5.5 billion (Ackerman, 1999). In recent years, however, the United States has sharply cut back on the use of export subsidies. After awarding "bonuses" of about $240 million on nearly 14 million metric tons of wheat in fiscal 1995, the U.S. has not used EEP to subsidize wheat or wheat flour exports. As for the EU, expenditures on export subsidies for wheat and wheat flour generally exceeded those of the United States prior to the URAA. In addition, the EU has continued to rely on subsidies to promote wheat and flour exports since 1995, although it has not exceeded its Uruguay Round commitments. In 1995 and 1996, EU expenditures on export subsidies accounted for over four- fifths of all such spending on agricultural products (notified) by WTO members, and as indicated in table C-6, the EU accounted for 75 percent of all subsidized wheat and wheat flour exports, by value, between 1995 and 1997 (the most recent year for which consistent data are available). 12/ 12/ Values for 1996 not shown in table B-6. Prompted in part by concerns over meeting its URAA export subsidy commitments, the EU (as part of its Agenda 2000 reforms of its Common Agricultural Policy) will cut its domestic support prices for cereals (including wheat) by 15 percent and reduce the base rate of land set-aside from production from 17.5 percent to 10 percent. In combination with more land available for wheat production, a shift in production from oilseeds (which face a 30- percent reduction in compensatory payments) and other grains could increase EU wheat production (Leetmaa, 1999). ERS analysis indicates that EU wheat could be competitive in world markets without export subsidies by 2004 if world prices rise and exceed the internal EU wheat support price (USDA, 2000b). Direct export subsidies by other major wheat exporters were uncommon before the URAA, and have been generally insignificant among countries making export subsidy commitments since the agreement. Many countries, including the United States, have called for the complete elimination of export subsidies. Immediate elimination of these subsidies would probably have a positive impact on U.S. exports in the near future, as the United States and other countries could gain market share at the expense of the EU. Such an agreement would also restrain other countries (those that made no export subsidy commitments) from using export subsidies. Domestic support- Policies such as price supports and other types of subsidized production have the potential to distort trade flows by reducing imports below levels that would normally occur, or by encouraging the use of export subsidies to dispose of excess domestic production. The URAA required countries to reduce and cap total outlays, as measured by the Aggregate Measurement of Support (AMS), on certain domestic policies that provide producers with direct incentives to increase production. For developed countries, the AMS is to be reduced from base period (1986-88) amounts by 20 percent over a 6-year (implementation) period (table C-3). The EU and the United States, net wheat exporters, and Japan, a major wheat importer, have the most substantial domestic support programs of the 29 WTO members that agreed to these limits. Of the $285 billion spent on agricultural support programs by the 29 countries in 1995, the EU ($113 billion), Japan ($70 billion), and the United States ($61 billion) accounted for about 85 percent. For the EU and Japan, the majority of that spending (50- 55 percent) was on "amber box" policies that counted towards their AMS limits, in contrast to only 10 percent for the United States. The URAA divided support on domestic programs into three categories indicating the relative trade-distorting effects of the policies: 1) "amber box" policies, such as price supports, marketing loans and loan deficiency payments, which are subject to reduction and final spending limits; 2) "blue box" policies, which are exempt from limits because payments are tied to production limitations by basing payments on fixed area or yield, or on a maximum of 85 percent of base production; and 3) "green box" policies, such as domestic food aid (e.g. food stamps) and de-coupled income support (e.g. U.S. production flexibility contract payments) which are also exempt from limits. Only amber box policies count towards the AMS limits each country can provide. In addition, support from policies that would otherwise be considered "amber box" are not counted towards the AMS if support for a specific commodity is equal to or less than 5 percent of the value of that commodity's production in any given year. This is known as the de minimis exemption. The de minimis exemption also applies to non-commodity specific programs, such as crop insurance, as long as support for all such programs remains below 5 percent of the value of all agricultural production. To the extent that AMS limits lower spending on programs that boost production in wheat exporting or importing countries, the result may be a reduction in subsidized exports by exporting countries, increased imports by importing countries, and higher prices for wheat traded in global markets. It is difficult to predict what impact these spending limits will have on U.S. wheat production and exports, though, because the AMS limits are non- commodity specific. That is, the URAA disciplined aggregate spending on trade distorting domestic support programs, rather than spending on particular commodities, although commodity specific spending contributes to the AMS if it exceeds the de minimis level. This feature gives countries some discretion on how to establish individual commodity policies. Countries with the largest domestic support programs had little difficulty remaining below their AMS limits between 1995 and 1997 (the most recent year for which data are available). In 1997, the U.S. AMS amounted to $6.24 billion, less than 30 percent of its AMS ceiling for that year. The EU, with an AMS ceiling of $89 billion, and Japan, with a ceiling of $39.7 billion, spent far more than the United States on amber box policies but each remained at about 70 percent of their AMS ceilings. 13/ One of the reasons countries have had little difficulty staying within AMS limits is that the 20-percent reduction in AMS required by the URAA was from a base period (1986-88) that was characterized by very high spending on domestic support programs. Another is that the EU and United States, as well as countries such as Japan, Korea, and Switzerland, have "re-instrumented" (changed) policies to avoid exceeding AMS limits. 13/ Source: WTO notifications, compiled by Fred Nelson, ERS. In the United States, for example, the 1996 Farm Act replaced deficiency payments with market transition payments (production flexibility contracts - PFC's), but neither of these counted towards the United States' AMS commitments. Deficiency payments were considered an exempt blue box policy because payments were contingent upon participation in production limiting programs. PFC's were categorized as green box because the payments were completely de-coupled from current production and prices. As an amber box policy, though, marketing loan benefits for wheat are counted towards the U.S. AMS if the value of these payments exceeds the 5 percent de minimis level, which was not the case between 1995 and 1997. In 1998/99, about 55 percent of the U.S. wheat crop received a loan deficiency payment (LDP) averaging about 29 cents per bushel. This amounted to about $400 million, which is below 5 percent of the value of that year's crop. Because of falling farm incomes and weather-related disasters, the U.S. Congress provided supplemental emergency assistance (AMTA) payments to recipients of PFC payments in both 1998 and 1999, but no decision has been made on how the supplemental payments will be notified to the WTO (Childs and Hoffman, 1999). In the EU, changes since the base period have put its compensatory payment support program for wheat into the exempt "blue box" category of domestic support. This is because support for EU wheat producers is tied to production limitations based on fixed area and yields. Although not counted towards the EU's AMS, compensatory payments to EU cereal (including wheat) producers totaled about $11 billion in 1995/96 and $12 billion in 1996/97. 14/ The intervention market price support provided by the EU to wheat producers does count against the AMS limit, however. The product specific AMS from price support for "common" wheat in the EU totaled about $3.3 billion in 1995/96 and $3.6 billion in 1996/97 (about 3.5 percent of the EU's AMS ceiling for those years). 15/ 14/ The exchange rate was $1.288 per ECU in 1995 and $1.2 per ECU in 1996. 15/ Source: WTO (september 21, 1999) It is uncertain whether there will be further discussions on "amber" and "blue" box policies in the upcoming negotiations. The U.S. position is that criteria contained in the "green" box have allowed member countries to provide appropriate and legitimate support to farmers in a manner that minimizes distortions to trade, and that the "green" box exemption should continue to support the objectives of minimizing the link between support and production (USTR). Other Issues State Trading Enterprises (STEs)-According to a recent ERS publication (Ackerman and Dixit, 1999), state trading enterprises (STEs) can affect trade by influencing domestic and international prices in ways similar to the use of import tariffs and export subsidies. Negotiations in this area could be important for the U.S. wheat industry since STEs account for more than one-third of global imports, and trade in six of the top twelve wheat importing countries between 1995 and 1998 were controlled by STEs with exclusive importing rights (Ackerman and Dixit, 1999). STEs can limit imports either directly, by acting as a monopoly importer, or indirectly by controlling the distribution or availability of import licenses and foreign exchange to private firms. Examples of countries that use STEs to regulate or control part or all of wheat imports include Japan , India, Egypt, and a number of countries outside of the WTO, such as China, Taiwan, Russia, Algeria, and Iran. 16/ 16/ Private traders in Iran have recently imported significant quantities of corn from the United States, but perhaps due to greater government involvement in wheat trade, no purchases of U.S. wheat have been made. Among wheat exporting countries, STEs accounted for about 40 percent of wheat exports between 1994 and 1998. The Canadian Wheat Board (CWB) and Australian Wheat Boards are the major STEs involved in wheat exports. Although the United States (when using EEP) and the EU (through the export of EU intervention stocks) regulate wheat exports, neither the United States nor the EU act as "single desk" sellers of wheat as do the CWB and AWB. The WTO does have some guidelines governing STEs, but many countries are calling for stricter controls since the lack of transparency in STE pricing and operational activities has caused concern that these activities are used to circumvent URAA export subsidy and market access commitments. There is also the concern that STEs may become more active in managing trade in the future if market access and export subsidy rules become more disciplined. Recently though, some countries have begun to reform import rules to allow private companies to import wheat. In 1998, for example, Indonesia's BULOG made an agreement with the International Monetary Fund to allow private firms to import wheat and flour, and Morocco opened wheat imports to private traders in 1996. Pakistan briefly allowed private imports in 1998/99. Country Accession to WTO-The WTO counts most of the world's major trading partners among its members, but several nations, including China, Taiwan, Russia, and Vietnam, are not yet members and are therefore not bound to its rules. China, which as recently as 1995/96 imported 12.5 million tons of wheat, reached an agreement at the end of 1999 with the United States on the terms of its accession to the WTO. Chinese wheat imports are now only about 1 million tons (1998/99), with the United States accounting for less than 30 percent of those imports (FATUS). Nevertheless, accession on the terms agreed to by the United States and China could have a favorable impact on U.S. wheat exports. China currently maintains low applied tariffs on wheat, but two aspects of the agreement in particular could improve access to China's market. First, as part of the Agreement on U.S.-China Agricultural Cooperation, China has removed the long-standing ban on U.S. wheat (and other grains) from the Pacific Northwest due to TCK (Tilletia controversa Kuhn), a mold that can, under certain conditions, damage wheat. In signing the agreement, China recognized that imported wheat does not pose a threat to its domestic wheat crop, and may now be imported. 17/ 17/ Foreign Agricultural Service, USDA, "Grains: World Markets and Trade," 12/99. Second, China has agreed to establish, upon its accession to the WTO, a TRQ for wheat with an initial quota of 7.3 million tons, rising to 9.636 million by 2004. 18/ A 10-percent share of the quota has been reserved for importation through entities other than state trading entities. Previously, the Chinese STE for cereals had exclusive authority to import grains. In addition, quota allocations unused by state or private traders by October 1 of any given year can be reallocated and used by any authorized importer (USDA, FAS,12/99). The in-quota tariff rate will be fixed at below 10 percent (1 percent for grain, including durum), and the over-quota tariff rate will be capped at 65 percent. 18/ The TRQ is not a minimum purchase requirement, but the agreement does require China to establish access opportunities for the full quota amount. The agreement also introduces private trade and increased transparency of the import process to maximize the likelihood that quotas will fill. China has also agreed to forego the use of export subsidies, to cap and reduce domestic support for agriculture, and to abide by the WTO agreement on SPS measures. A recent USDA analysis of the anticipated trade effects of China's WTO accession concluded that, by the year 2005, China's net wheat imports could increase more than $500 million over original USDA projections (USDA, 2000b), which had assumed no accession by China (Colby, Price, and Tuan, 2000). Sanitary and Phytosanitary Agreement (SPS)--Many countries have phytosanitary regulations governing wheat trade. Several have been controversial and have emerged as important issues in previous trade negotiations. The most notable were China and Brazil's stringent limits on TCK smut and Brazil's controls on Karnal bunt, other fungi, and weed seeds between 1995 and 1998. In some countries, such as India and Turkey, phytosanitary regulations have been used as justification for rejecting some incoming shipments of wheat. Uncertainty about phytosanitary standards and their implementation increases exporters' risks in selling wheat to such markets. The Uruguay Round Sanitary and Phytosanitary (SPS) Agreement imposed new rules and procedures on measures countries may take to protect human, animal or plant life or health. The agreement required that regulations be based on science and should not be arbitrary or discriminate between countries where there are similar conditions. This Agreement could increase the transparency of countries' SPS regulations and provides an improved means for settling SPS-related trade disputes (USDA, 1998a). Export Credit Guarantees and Export Taxes--A potential issue related to the upcoming negotiations is the discussion on export credits and credit guarantees currently taking place in the Organization for Economic Cooperation and Development (OECD). Export credit guarantees are not considered export subsidies under the WTO, but some U.S. competitors may argue that export credits and credit guarantees should be treated as a subsidy. The United States continues to engage in negotiations on credit disciplines in the OECD, and has submitted proposals in an attempt to move discussions forward in that forum. Additional discussions in the WTO could include limitations on export taxes, such as the tax on wheat exports imposed by the EU in 1995 and 1996. Export taxes restrict the quantity of a commodity available on world markets and tend to raise world prices above what they would be otherwise. Under current WTO rules, restrictions on exports, such as export embargoes, are supposed to be used only in emergencies, and a country imposing such restrictions is required to notify the WTO of its actions. Trade in Genetically Engineered Commodities--Presently, there is no transgenic wheat being grown in the United States. Therefore, foreign regulations have not had a direct impact on U.S. wheat producers or exports. However, with the introduction of transgenic wheat varieties possible in the next several years, the outcome of any potential discussions on trade rules governing genetically engineered crops could have a big impact on U.S. wheat producers. Conclusions As the world's leading exporter, the U.S. wheat sector has much to gain from reforms of agricultural trade rules. The Uruguay Round Agreement on Agriculture (URAA) was a major first step in this process, but further gains are possible. Most major net wheat importing countries increased wheat imports after the agreement, but greatly reduced imports by Russia and China have meant that the volume of global wheat trade has declined since the agreement. The U.S. share of global wheat trade has also remained fairly constant despite rising production between 1995/96 and 1998/99. 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