WHEAT YEARBOOK April 11, 2001 March 2001, ERS-WHS-2001 Approved by the World Agricultural Outlook Board --------------------------------------------------------------------------- WHEAT YEARBOOK is published annually by the Economic Research Service, U.S. Department 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 USDA order desk. Call, toll-free, 1-800-999-6779 and ask for stock #ERS-WHS-2001,$21. ERS-NASS accepts MasterCard and Visa. --------------------------------------------------------------------------- Contents Summary Ending Stocks Down, Prices Rise Outlook for 2001/02 Winter Wheat Acreage Seeded Is the Lowest Since 1972/73 Wheat Supply and Ending Stocks Likely Down in 2001/02 World Wheat Supplies Unlikely To Increase in 2001/02 Situation and Outlook for 2000/01 Prices Strengthen As Ending Stocks Decline in 2000/2001 World Wheat Production, Stocks, and Trade Drop in 2000/01 U.S. Wheat Exports Up Slightly in 2000/01, U.S. Share of Global Grade Increases Wheat by Class, 2000/01 Wheat Quality Good in 2000/01 Special Articles The Effects of the Federal Crop Insurance Program on Wheat Acreage Organic Wheat Production in the United States: Expanding Markets and Supplies Situation Coordinator Gary Vocke (202) 694-5285 Principal Contributors Edward Allen (202) 694-5288 Gary Vocke (202) 694-5285 Production Assistance Lorie Thomas (202) 694-5314 Michalene Schechter (202) 694-5296 Monte Vandeveer (202) 694-5271 Mary Fant (202) 694-5272 Editor Martha R. Evans (202) 694-5118 Layout & Text Design Wynnice Pointer-Napper (202) 694-5130 Summary The Wheat Yearbook presents preliminary projections for 2001/02 that were released at the 2001 Agricultural Outlook Forum on February 23, 2001. Wheat farmers responded to unfavorable planting conditions, particularly in parts of the Central and Southern Plains, by reducing winter wheat plantings for the 2001 crop by 2 million acres, down 5 percent from a year earlier and the lowest since 1971. Spring wheat (including durum) plantings are expected to rise due to lower winter wheat plantings in some areas, especially Montana, and more attractive prospective returns relative to competing crops. The calculated 2001 harvested area, based on the 5-year average by State, is reduced a half-million acres due to late plantings and emergence and currently poor conditions of some of the wheat in the Southern Plains. Total wheat production for 2001/02 (June/May) could decline about 4 percent, assuming an average wheat yield of 40.5 bushels per acre, based on the average of 1996-2000 yields by State. Coupled with smaller beginning stocks, the total supply would be about 6 percent below the current marketing year that ends on May 31. Total use is forecast down slightly because of reduced exports and smaller feed and residual use. However, the smaller use will still 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 2001/02. For 2000/01, U.S. wheat supplies are expected to drop 2 percent to 3,268 million bushels. Total disappearance is forecast to rise about 2 percent from 1999/2000, the result of higher projected domestic use and exports. Use will exceed production, and stocks are forecast down 12 percent from 1999/2000. The season-average farm price is projected to range between $2.60 and $2.70 per bushel. U.S. wheat exports are forecast to increase slightly because of reduced competition from the European Union, Kazakstan, Australia, Eastern Europe, Turkey, and others. Some increased competition is expected from Argentina, India, and Pakistan. The top markets for U.S. wheat exports, including Egypt, Japan, Mexico, and the Philippines, are expected to be little changed. Printed copies of the Wheat Yearbook will be available in several weeks for printed copies. For further information, contact Gary Vocke (202) 694-5285. This issue contains two special articles: The Effects of the Federal Crop Insurance Program on Wheat Acreage, and Organic Wheat Production in the United States: Expanding Markets and Supplies. The full report will also be available on the ERS web site at http://www.ers.usda.gov/briefing/wheat/. Outlook for 2001/02 Winter Wheat Acreage Seeded is the Lowest Since 1971/72 Winter wheat plantings declined 5 percent from a year earlier to their lowest level since 1971/72. However, spring wheat (including durum) plantings are expected to rise due to lower winter wheat plantings in some areas and more attractive prospective returns relative to competing crops. U.S. Department of Agriculture will release its first official forecast of the 2001 production on May 10, 2001. Winter Wheat Acreage Drops for Fifth Year in a Row The Winter Wheat Seedings report released by the National Agricultural Statistics Service (NASS) on January 11, 2001, provides the first indication of wheat plantings for 2001/02 (fig. 1). Winter wheat planted area for harvest in 2001 is estimated as of December 1, 2000, at 41.3 million acres. This is down 5 percent from 2000 and is the lowest level since 1971. Hard red winter (HRW) wheat seeded area is about 28.9 million acres, down 5 percent from a year earlier. Oklahoma and Texas led the decline, down 700,000 and 400,000 acres, respectively. Colorado and Montana also showed large decreases. Dry conditions were the leading cause of the lower acreage. These dry conditions delayed seeding progress and slowed emergence. In Texas and Oklahoma, the dry conditions were followed by excessive rainfall that further hindered planting progress. The summer drought in Montana continued into the fall, leading many farmers to reduce their planted acreage. Notable exceptions to the reduced plantings include Kansas and Nebraska, where growers planted more acres than last year. Soft red winter (SRW) seeded area is down 6 percent from last year to about 8.9 million acres. Arkansas, Indiana, and South Carolina planted acreage equal to a year earlier. Dry conditions across most of the Southeast hampered seeding. In contrast, excessive soil moisture this past fall in parts of the Midwest was the cause of slowed planting progress. Wheat farmers in Indiana had an ideal fall season for seeding winter wheat. White winter wheat seeded area totals about 3.5 million acres, down slightly from 2000. In Idaho, above normal moisture in October was followed by a cold, dry November. Winter wheat seedings ran slightly ahead of normal for most of the State. Weather conditions were also good for seeding wheat in Oregon. Durum wheat seeded area in Arizona and California for the 2001 harvest are estimated at a combined 160,000 acres, down 14 percent from a year earlier. Seeding in California's San Joaquin Valley progressed rapidly during October and November, but below normal precipitation forced growers to irrigate earlier than usual. Seeding began in the Imperial Valley in late November and will continue into March. Spring Wheat Acreage Prospects Spring and durum wheat producers will likely be watching the condition of the HRW crop on the Central and Southern Plains as it comes out of dormancy and wheat prices versus competing crops when making their planting decisions (fig. 2). Continued poor conditions will result in higher prices and encourage expanded spring wheat plantings (fig. 3). Current expectations are that seedings will be higher than the 19.4 million acres planted a year earlier. Also, soil moisture supplies and the condition of the winter wheat crop will influence planting decisions in Montana and other spring wheat producing States. NASS will release an estimate of farmers intentions to plant durum, other spring wheat, and row crops in the March 30 Prospective Plantings report. Weather in Plains is a Continuing Concern for 2001/02 Crop State Agricultural Statistical Services provide information about the wheat crop in the Central and Southern Plains where weather concerns continue. In Kansas, the largest wheat growing State, 26 percent of the crop was rated poor to very poor on March 19. On March 20 last year, 15 percent of the crop was rated poor to very poor. There was no estimated freeze or wind damage for 71 percent of the States wheat crop. For the previous years crop there was no freeze or wind damage for 93 and 86 percent of the crop, respectively. For Oklahoma, 44 percent of the States crop was rated poor to very poor and only 1 percent of the crop received an excellent rating. For the previous year, only 3 percent of the States crop was rated poor to very poor and 73 percent good to excellent. The State Statistical Service indicated that some wheat acres will be grazed out, hayed, or abandoned due to lack of proper emergence or heavy infestation of cheat. On March 19, the Texas wheat crop was rated 61 percent of normal, compared with 33 percent the previous year. Growth progress occurred across the State, with only minimal progress on the Plains. In Colorado, 6 percent of the winter wheat is being pastured, slightly more than the previous year, but the same as the 5-year average. Twelve percent of this years crop received a rating of poor to very poor. In Nebraska, 15 percent of the wheat crop was rated poor to very poor on March 4. However, there was above normal precipitation across the southern part of the State. Outlook for 2001/02 Wheat Supply and Ending Stocks Likely Down in 2001/02 Lower production due to reduced acreage and yields in 2001/02, coupled with smaller carryin stocks, results in an expected reduction in supplies from a year earlier. Total use of wheat is expected to remain weak as exports and feed and residual use will likely decline. Carryout will continue to shrink, driven by smaller production, not increasing demand. The tighter supply/use balance is expected to boost prices. The following supply and use projections for 2001/02 were released at the 2001 Agricultural Outlook Forum on February 23, 2001. The first official U.S., world, and country-specific supply and use projections for 2001/02 will be in the May 10 World Agricultural Supply and Demand Estimates report. All Wheat Production Is Projected Down from 2000 Supply prospects for wheat in 2000/01 are affected by the expected decline in planted area and weather related conditions in parts of the major hard red winter wheat region, especially in the Southern Plains. The harvested area is forecast using an adjusted 5-year average harvested-to-planted ratio. The calculated 2001 harvested area, based on the 5-year average by State, is reduced a half-million acres due to delayed plantings and late emergence in the Southern Plains which resulted in many fields with thin stands. Decisions are pending whether to stay with the crop and top dress or replant to some spring crop. Yields are calculated at 40.5 bushels per acre using a 5-year average (fig. 5). Thus, all wheat production is projected at 2,125 million bushels, down 4 percent from 2000. Tighter Supply/Use Balance Is Expected To Boost Prices The lower U.S. production projected for 2001/02, coupled with smaller carryin stocks, results in 2001/02 supplies down almost 200 million bushels, or 6 percent, from a year earlier. Total U.S. wheat use in 2001/02 is expected to remain weak (fig. 6). Food use will continue to show some growth consistent with population growth and the average annual percentage change in food use since 1990, but feed and residual use will likely decline because of lower supplies. Total domestic use of 1,318 million bushels is projected down slightly from a year earlier. Given expectations of continued large supplies in major exporting countries and sluggish import demand, U.S. wheat exports are expected to decline in 2001/02 to 1,025 million bushels. The declining use prospects are more than offset by the even smaller supplies, thus, ending stocks decline 721 million bushels in 2001/02. This level would represent 30.8 percent of projected use, down from the 34.5 percent forecast for the current year. The tighter supply/use balance is expected to boost 2001/02 prices about $0.20 per bushel above 2000/01 prices to $2.85 per bushel. Outlook for 2001/02 World Wheat Supplies Unlikely To Increase in 2001/02 Winter wheat in the Northern Hemisphere has been planted, and area in several of the largest producing regions has declined. However, whether world wheat production increases or decreases in 2001/02 will largely depend on yields which, in turn, depend on weather. To date, there has been more favorable weather than last year in regions that suffered from drought a year ago. However, in some countries that had record yields, yield declines are expected. Global supplies are likely to be reduced even if there is some increase in production, because beginning stocks are down sharply. World wheat use is likely to grow slowly, with most of the increase driven by population growth supporting human consumption. World Wheat Production in 2001/02 Could Increase Modestly or Drop Significantly The U.S. Department of Agriculture (USDA) will issue its first global and country-specific supply and use projections for 2001/02 on May 10. Winter wheat has already been planted in the Northern Hemisphere, and area is reportedly down in more regions than have posted increases. However, yields will depend on the weather during coming months. Moreover, spring wheat in the Northern Hemisphere and all wheat in the Southern Hemisphere has not been planted. Global wheat production declined slightly in 1999/2000 and more in 2000/01. World production could post an increase in 2001/02 if weather is generally favorable, but the decline in area limits the potential increase. However, if weather is not favorable, a significant decline in global production is possible. The 2001/02 wheat crop is harvested first in South Asia, beginning in India in March, and soon after in Pakistan. Area in India is reportedly down around 3.5 million hectares, and the rainfed areas have received below normal rainfall. Thus, yields are not expected to match last years record, and a significant drop in production is expected. However, Government wheat stocks remain large. Limited water for irrigation is expected to reduce area and yields in Pakistan, and production is expected to drop from last years record. The production decline in Pakistan is likely to be large enough to curtail exports, making Pakistan a net importer of wheat in 2001/02. In China, the worlds largest wheat producer, a recent Government survey indicated winter wheat area is down almost 5 percent. Despite increased wheat prices, producers are shifting to other crops because of higher returns. Last years wheat yields were well below trend because of unfavorable weather. The crop is in better condition than last year, but yields will likely remain below trend due to increased plantings of lower yielding, higher quality varieties. Thus, a strong rebound in production is unlikely. Various trade analysts in Europe have estimated European Union (EU) soft wheat plantings to be down 5 to 7 percent (fig. 7). Durum planting may be little changed from a year earlier. Excessive rains during planting reduced winter wheat area sharply in Portugal, Spain, and the United Kingdom. Plantings are estimated down 5 percent in France, but a higher percentage was planted to bread-making varieties. The drop in EU area planted is large enough to make it unlikely that last years record production will be matched in 2001/02. Eastern Europes wheat production is expected to increase in 2001/02 because during the previous year area and yields were devastated by drought. In Hungary, grains committee officials are predicting a 30-percent increase in production based on a 20- percent increase in harvested area, but planting delays and recent floods may limit the production increase. Drought has continued through most of the fall and winter in Bulgaria and Romania, though high prices reportedly encouraged an expansion in area. In contrast, Poland, the regions largest producer, had mild, favorable winter weather, but some sources estimate a small reduction from the previous years near-record area. In the former Soviet Union winter wheat area has increased. Russias winter grain area planted is reported up 5 percent. Despite dryness during planting, mild early winter growing conditions helped establish the crop. In some areas an unusually warm winter and thin snow cover left wheat vulnerable to cold outbreaks. Overall, as of early March, the condition of Russias winter crops was reportedly similar to the average of the previous 5 years. Ukraines winter grains plantings were up almost 13 percent. Less winterkill than average is expected and above normal moisture in February helped offset a dry winter. Given adequate spring moisture and favorable temperatures, Ukraines yields are likely to rebound from the previous years low level. The former Soviet Union looks likely to increase wheat production in 2001/02, but the most critical parts of the growing season are still ahead. Spring wheat, which accounts for over 55 percent of the area but only about 40 percent of production, has not yet been planted. There are also prospects for increased wheat production in North Africa and the Middle East. A year ago there was good planting moisture in much of North Africa, but the rains shut off in early spring, and drought devastated crops. Rains came late this year and plantings were delayed. Weather has been mixed in 2001, and yield prospects will depend on timely spring rains. Except for Turkey, planting conditions across the Middle East were much better than a year earlier. However, winter rainfall was below normal in some areas, notably Iran and Turkeys Anatolian Plateau. In addition, much above-normal temperatures caused crops to break dormancy earlier than usual and maintained high crop moisture demands during early development. Thus, while Irans yields will likely rebound from the drought-reduced levels of the past 2 years, much will hinge on timely rains. In Turkey, lower support prices reduced area planted, so reduced production is expected for the regions major producer and exporter. Spring wheat producers in the Northern Hemisphere and Southern Hemisphere producers have not yet planted wheat for harvest in 2001/02. This includes major exporters such as Canada, Australia, Argentina, and Kazakstan. Because current prices are somewhat higher than a year ago, most of these exporters are expected to increase area. In Canada, wheat area will expand as lower area is planted to canola. In early March, Agriculture and Agri-Food Canada projected a 2-percent increase in wheat area, but production is projected about the same level as last year. According to the Australian Bureau of Agriculture and Resource Economics, Australias wheat area is projected to increase slightly and production is expected to reach 23.3 million tons, up from 21.0 million (USDA) in 2000/01. Stronger wheat prices and more attractive expected returns will likely encourage higher wheat plantings in Argentina. The potential for increased wheat production in Canada, Argentina, and Australia boosts prospects for a competitive export market in 2001/02. Lower Beginning Stocks in 2001/02 To Limit Supplies Global wheat stocks at the start of 2001/02 are forecast down 16 million tons from the previous year. The major exporters, the United States, Canada, EU, Australia, and Argentina, account for only 3 million tons of the stock decline. Unless world wheat production increases by at least 16 million tons, global wheat supplies will be down in 2001/02 compared with a year earlier. The decline in winter wheat area in the Northern Hemisphere makes it unlikely that production will increase that much. However, even if global wheat supplies decline in 2001/02, exporters supplies could increase. Modest Global Wheat Consumption Growth Expected, but Trade Could Stagnate In 2001/02, world wheat consumption is expected to rebound some from the previous years decline (fig. 8). Most of the growth in wheat consumption is expected to be the result of population growth slowly boosting food use. There is some evidence that wheat food use is declining in urban areas of China as incomes increase and diets diversify. Increased wheat feed and residual use could occur in Eastern Europe and the former Soviet Union, if larger crops materialize. EU feed use is difficult to predict because of the unknown effects of BSE and foot and mouth disease. Also complicating the analysis is whether or not the temporary ban on use of meat and bone meal in animal feed will be extended. If many animals are killed because of disease concerns, demand for feed could decline. However, prices for wheat relative to other grains and protein meals will determine how much wheat is fed. Increasing demand for wheat for food in importing countries of Latin America and parts of Asia will support world wheat trade in 2001/02. With reduced production, Pakistan could be an importer in 2001/02. However, larger crops in North Africa and parts of the Middle East could reduce those countries need to import. China is expected to increase wheat imports in 2001/02 whether or not they enter the World Trade Organization. However, the size of Chinas imports is a key unknown that could determine if world wheat trade declines or grows in 2001/02. Situation and Outlook for 2000/01 Prices Strengthen As Ending Stocks Decline in 2000/01 U.S. wheat production declined in 2000/01 because of a reduction in harvested acres and average yields. Less favorable weather compared with a year earlier for winter wheat in the Plains dropped winter wheat yields, substantially reducing the supplies of hard red winter wheat. Durum and other spring wheat yields were up compared with a year earlier. Reduced supplies for 2000/01 and the expected increased total use result in declining ending stocks and higher season average prices received by farmers. U.S. Wheat Supplies Down, Prices Are Up in 2000/01 U.S. wheat production is estimated at 2.2 billion bushels in 2000/01, down 3 percent from 1999/2000 (table 1). With slightly larger beginning stocks, the U.S. wheat supply in the 2000/01 (June-May) marketing year is forecast to drop 2 percent from 1999/2000 (fig. 9). The average farm price for all wheat dropped to $2.32 per bushel during July 2000 because of improved production prospects in the Winter Wheat Belt and large supply prospects in competing exporting countries. Average farm prices rebounded to $2.41 in August, and have ranged between $2.44 and $2.87 since then. The preliminary farm price of all wheat in February 2001 was $2.83 per bushel, down from $2.87 reported for December, but 29 cents above a year earlier. 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 2000/01 is forecast at $2.60-$2.70 per bushel, significantly above the $2.48 received by farmers in 1999/2000, but much below the record $4.55 in 1995/96 (fig. 10). U.S. ending stocks are projected to total 834 million bushels, less than at the end of the past 2 years, but still large enough to put continued pressure on cash and near-term futures prices. Winter Wheat Yields Down from Last Years Record Winter wheat production accounted for about 70 percent of U.S. output in 2000 and totaled 1,563 million bushels. Because of less favorable weather than in 1999, winter wheat yields dropped from the record 47.8 bushels per harvested acre to 44.6 bushels. An estimated 80.8 percent of the seeded winter wheat area was harvested for grain in 2000, compared with 81.9 percent in 1999 and a 5-year average of 82.5 percent. Durum Ending Stocks Decrease for the Second Year in a Row The 2000 durum wheat production season in the Northern Plains was characterized by a dry planting season, variable growing conditions, and a wet harvest period. Durum yields rose to 30.7 bushels per harvested acre, 10 percent above the previous year. The durum yield has averaged less than 30 bushels only once during the 1990's. The record-high durum yield of 39.7 bushels was set in 1992. Durum production was up 11 percent in 2000/01 compared with a year ago. However, beginning stocks were down, leaving durum supplies up only 3 percent. Expanded use is leading to a further reduction in ending stocks for 2000/01 compared with the past two marketing years. However, the individual use categories of food and feed and residual are not comparable with past use data. The U.S. Census Bureau redefined their semolina flour and durum wheat grind data collection starting in 2000 to include pasta manufacturers if they have and operate a flour mill on site. Because these additional mills are included in the 2000 data, the projected food use and feed and residual use is not comparable with previous years data. For a tentative analysis of the impact of this redefinition, see Wheat Outlook, WHS-O500, May 16, 2000, posted on the Economic Research Services Wheat Briefing Room, http://www.ers.usda.gov/briefing/wheat/. The U.S. average price received by farmers for durum declined to a seasonal low of $2.32 per bushel in September before rebounding to a preliminary $3.25 for February 2001. Higher Yields Raise Production of Other Spring Wheat in 2000 The other spring wheat crop increased in 2000 because higher yields more than offset reduced harvested acreage. The average yield was 38.2 bushels per acre for other spring wheat (i.e., includes hard red spring (HRS) and white spring but excludes durum), up 4.1 bushels from 1999. Despite harvested acreage falling and estimated 209,000 acres, HRS production increased more than 50 million bushels to 498 million. Total Use Increased in 2000/01 Total disappearance of U.S. wheat in 2000/01 is forecast to rise about 2 percent, or 44 million bushels, from 1999/2000. Both domestic use and exports are up. Seed use is forecast down in 2000/01 due to lower plantings for the 2001 crop. Food use is projected at 950 million bushels in 2000/01, up about 25 million from a year earlier. Feed and residual use is projected to rise about 16 million bushels in 2000/01. However, these food use and feed and residual use numbers are not strictly comparable with last year because of the Census Bureaus redefinition of their semolina flour and durum wheat grind data collection starting in 2000. Their data, starting with the first quarter of 2000, now includes pasta manufacturers if they have and operate a flour mill on site, as mentioned above. Ending Stocks Decline U.S. ending stocks are forecast to be 839 million bushels on May 31, 2001, down 12 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 2000/01 The 1996 Farm Acts programs to assist farmers facing low market prices include 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 20, 2001, wheat producers had outstanding loans on 72 million bushels of 2000-crop wheat. The value of the outstanding loans totaled $182 million. For the 2000-crop wheat, total loans of $455 million were made on 176 million bushels. In comparison, a total of $398 million was loaned on 154 million bushels for the 1999 crop. 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 a loan deficiency payment (LDP) on par or all of the crop 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 20, 2001, eligible producers collected $787 million in LDPs covering 1,911 million bushels of 2000-crop wheat or about 80 percent of the 2000 crop. The average payment rate was 44 cents per bushel. Eighty-three percent of the 1999 crop received an LDP, and LDPs totaled $890 million for the 1999 crop. In 1998, only 55 percent of the crop received an LDP, and the total was $414 million. Situation and Outlook for 2000/01 World Wheat Production, Stocks, and Trade Drop in 2000/01 Global production is estimated down more than 7 million tons in 2000/01. Forecast consumption is down less than 2 million, but is forecast 17 million tons larger than production, dropping forecast stocks to about the same level as reached in 1995/96. However, world wheat trade is expected to decline 6 million tons largely because of increased production and reduced imports by Russia, Pakistan, and India. Although facing sharply lower production, China has reduced stocks while keeping imports at the previous years low. 2000/01 Global Production the Lowest in 5 Years World wheat production in 2000/01 is estimated at 580 million tons, down more than 1 percent from the previous year (fig. 11). Production dropped 12 million tons in China as area declined in response to reduced government support prices and lower market prices, while dry conditions reduced the average yield. Wheat production fell 4 million tons in Australia, where drought struck western growing areas while too much rain flooded some eastern regions. Wheat production in the former Soviet Union declined more than 2 million tons despite an increase for Russia. Drought- reduced production in Ukraine and Kazakstan failed to repeat the previous years exceptional results. North Africa and parts of the Middle East suffered from a second consecutive year of drought, and drought reduced production in Eastern Europe. These declines more than offset record production in Argentina, the European Union (EU), and South Asia. Lower wheat prices during planting reduced the incentive to plant wheat in some countries, like China and India, but for most countries, low prices for competing crops limited the shifts out of wheat. Foreign wheat area declined only 1 percent from the previous year, with some of the decline the result of drought, not low prices. In 2000/01 foreign area was 5 percent less than the recent peak reached in 1996/97, following higher prices. The 2000/01 average foreign wheat yield almost matched the previous years record. World Wheat Consumption Expected To Decline in 2000/01 Global consumption is forecast at 597 million tons, down 2 million from the previous year. Reduced food use in China, and lower feed use in Eastern Europe and the former Soviet Union account for most of the decline, offsetting increases elsewhere. Surveys indicate that per capita wheat consumption in urban China has begun to fall as incomes increase and diets diversify. Wheat feeding in Eastern Europe and the former Soviet Union has fallen through most of the last decade. Declining incomes and reduced subsidies have dropped animal numbers and meat production. Reduced 2000/01 wheat production in most of Eastern Europe, Ukraine, and Kazakstan, and tight supplies of other feed grains in several countries, led to continued liquidation of livestock. Global use of wheat for feeding is expected to remain virtually unchanged in 2000/01 because the declines in Eastern Europe and the former Soviet Union are offset by increased feed use in the EU. EU wheat feed use increased as the price of grains declined compared with the price of protein meals and other non-grain feeds. Wheat consumption is forecast up in South Asia, with record production. Despite tight supplies in some countries suffering from drought, particularly Iran, wheat use is up in the Middle East as the population is growing rapidly. However, consumption growth in Latin America is expected to be much slower than during the previous 2 years because Brazil and Mexico are expected to have nearly stable wheat consumption. Wheat consumption is expected to decline in North Africa where wheat supplies are tight after 2 years of drought, and in Sub-Saharan Africa, where foreign exchange constraints and limited food aid budgets crimp imports and consumption. Wheat consumption in relatively wealthy countries, like South Africa and Nigeria, is expected to grow. Even though down slightly from a year earlier, 2000/01 wheat consumption remains near the previous years record. World wheat consumption in 2000/01 is up 6 percent compared with a decade earlier, less than population growth. World wheat feed use peaked in 1990/91 at 131 million tons and dropped to a forecast 103 million in 2000/01, with most of the reduction in Eastern Europe and the former Soviet Union. Food use growth over the last decade has been large enough to more than offset the drop in feed use. World Wheat Stocks Forecast To Drop 17 Million Tons in 2000/01, Largest Decline Since 1993/94 China is expected to show the largest drop in ending stocks during 2000/01, down almost 12 million tons. The size of Chinas wheat stocks is considered a state secret, and USDAs estimate is an approximation, so the year-to-year change in stocks is likely more important than the forecast level. Grain stocks in China are large, and supplies are adequate. The expected decline in wheat stocks during 2000/01 is not confined to China, but includes most major producing and consuming regions. After consecutive years of drought, forecast stocks in the Middle East and North Africa are down. Eastern Europes wheat stocks are expected to sink to the lowest since 1985/86. Wheat stocks in North America, Latin America, and Oceania are also expected to decline. EU stocks are forecast up slightly. Only India, Pakistan, and Russia are expected to increase wheat stocks significantly in 2000/01. The decline in world wheat stocks has not had a large price impact because much of the drop is concentrated among major importers. Prices are largely set by supply and demand in exporting countries, and exporters stocks, though declining, remain large. World Wheat Trade Expected To Decline in 2000/01 Global trade (excluding intra-EU trade) in 2000/01 is forecast at nearly 107 million tons, down 6 million from the previous year but higher than the 102 million averaged from 1994/95 to 1998/99. Trade is down compared with a year earlier mostly because of a sharp drop in imports by Pakistan, India, and the former Soviet Union. India has emerged as a significant net exporter in 2000/01 because of large wheat stocks, record harvests, and Government subsidies for exports. Imports by the former Soviet Union have dropped because of a larger harvest in Russia, sharply reduced food aid to the region, and reduced shipments from Kazakstan to its neighbors. Eastern Europe is expected to increase imports in 2000/01 because of reduced production and tight stocks. Latin America (Brazil) and North Africa (Algeria) are expected to increase imports, but by less than 1 million tons each. While imports by the Middle East are little changed from a year earlier, they are much larger than the previous 3 years. Little change in wheat imports is also expected in North America, Western Europe, Sub-Saharan Africa, or Asia outside of South Asia. Brazil, with strong population growth and reduced wheat production, is expected to be the largest wheat importer in 2000/01, bringing in almost 8 million tons. Iran, suffering from a second year of drought, is forecast to import more than 7 million tons (fig. 12). Egypt harvested a record-high wheat crop in 2000/01, and is blending corn with wheat in the production of some flours. However, Egypt is still expected to increase wheat imports to over 6 million tons. Japans wheat imports are little changed at almost 6 million tons. Algeria, facing drought and tight supplies, is expected to import over 5 million tons. China, on the other hand, is forecast to import only 1 million tons of wheat, virtually unchanged from the previous year, even though wheat production and stocks are declining significantly (fig. 13). Situation and Outlook for 2000/01 U.S. Wheat Exports Up Slightly in 2000/01, U.S. Share of Global Trade Increases U.S. wheat exports are forecast to increase slightly because of reduced competition from the European Union (EU), Kazakstan, Australia, Eastern Europe, Turkey, and others. Some increased competition is expected from Argentina, India, and Pakistan. The top markets for U.S. wheat exports are expected to be little changed, including Egypt, Japan, Mexico, and the Philippines. U.S. Wheat Exports Forecast Up Slightly in 2000/01 U.S. 2000/01 wheat exports are forecast at 1.1 billion bushels, up only 10 million bushels on a June/May local marketing year. For the international trade July/June marketing year, 2000/01 U.S. exports are forecast up 0.5 million tons to 30 million. Shipments during the first half of 2000/01 lagged year earlier levels (fig. 14). Census data from June through December 2000 show U.S. wheat grain exports of 17.7 million tons, down 2 percent from a year ago. Grain inspections data for January and February indicate wheat exports of 3.9 million tons, higher than the 3.7 million that Census reported for a year earlier. Moreover, according to U.S. Export Sales, as of March 1, 2001, outstanding sales at 3.5 million tons, were up 12 percent from a year ago. Reduced net competition from the Southern Hemisphere is an important factor boosting U.S. export prospects. Competition during the second half of 2000/01 is not likely to be as intense as a year earlier because Australias production has dropped 4 million tons, more than Argentinas 1-million-ton increase. Moreover, the large carry in the futures markets, with wheat prices higher in later contracts than in nearby contracts, may induce competitors to market wheat more slowly during 2000/01, hoping to take advantage of higher prices in 2001/02. Largest Purchasers of U.S. Wheat Little Changed Since 1993 the level of U.S. wheat exports ranged between 27 and 33 million tons. Moreover, the major commercial markets for U.S. wheat have also remained largely unchanged. In the last couple of years the top five purchasers of U.S. wheat have been Egypt, Japan, the Philippines, Mexico, and South Korea. According to U.S. Export Sales, as of March 1, 2001, commitments (the sum of shipments and outstanding sales) compared with a year ago were up 20 percent to Egypt, down 7 percent to Japan, down 1 percent to the Philippines, down 6 percent to Mexico, and down 10 percent to South Korea. U.S. wheat is doing well in Egypt because U.S. white wheat prices are competitive with the EU and Australia. Japans wheat imports are forecast down only slightly in 2000/01, and market shares tend to be stable, so increased purchases of U.S. wheat are expected. The Philippines continues to purchase U.S. wheat both to mill for food use and to use for feeding because corn imports are restricted. However, recent sales to the Philippines by India will reduce U.S. export potential. Mexicos imports are expected to decline because of increased production and reduced consumption. South Korea is expected to increase wheat imports in 2000/01, but has been purchasing wheat for use as a feed grain from other sources, notably India. Smaller markets with significant gains in U.S. commitments as of March 1, 2001, include: Indonesia, with 0.7 million tons, more than double year-earlier levels; Tunisia, purchasing over 0.2 million after importing no U.S. wheat during 1999/2000; and Libya, also with 0.2 million, as U.S. exporters are allowed to sell wheat to this market for the first time in many years. U.S. Share of Global Trade Increasing in 2000/01 Despite a continued relatively strong U.S. currency, U.S. wheat is expected to increase its share of world exports in 2000/01 (fig. 15). The largest competitor in 2000/01 is expected to again be Canada, exporting 19 million tons. Canadas production and exports are expected to nearly match the previous year. However, the Canadian crop, though nearly as big as a year ago, was rained on extensively, reducing quality in some areas. Moreover, a larger portion of area was devoted to durum wheat, and the Canadian Wheat Board has not been as successful at marketing the durum as it has the hard red spring. Australia is expected to export 16 million tons, down 1.1 million from a year ago. Production, harvested in the middle of the July/June marketing year, dropped 4 million tons, but shipments during the first half of 2000/01 were boosted by the previous years record crop. Reduced competition from Australia is an important factor boosting the U.S. market share. EU wheat exports are forecast to drop 2.4 million tons to 15 million, despite record wheat production in 2000/01. The EU Commission started the year not subsidizing exports, because the lower support price and strong U.S. currency made EU grain competitive on world markets. Beginning in December, the EU has provided relatively small export subsidies during most weeks. Although record large, parts of the EU crop were rained on at harvest, causing extensive quality problems. A large increase in wheat feed use is forecast, allowing the commission to cut back on exports without a significant increase in stocks. The EU is the largest competitor for the lower quality U.S. wheat exports. Argentina, harvesting a record-large crop, is expected to export a record 12 million tons of wheat in 2000/01, up 1.2 million from last years record. Sales and shipments data indicate that much of the increase is to Iran, but Brazil will remain the dominant buyer. The remainder will be available to increase market share in other markets, including South America (Peru), North Africa, and the Middle East. Kazakstan is expected to reduce exports by 2.5 million tons to 4.0 million mostly because of reduced production. Russias imports from Kazakstan are expected to decline because of an increased Russian crop. The transportation system severely limits exports except through Russia. The U.S. share of world wheat trade is unlikely to increase directly as a result of these changes. Eastern Europe, Ukraine, and Turkey are also expected to reduce wheat exports in 2000/01, helping to boost the U.S. market share in North Africa and the Middle East. East Europe suffered from drought and is expected to reduce exports by 0.6 million tons to less than 3 million tons, with most of this being shipped to other countries in the region. Turkey is expected to reduce exports by 0.5 million tons to 1.5 million because financial constraints have limited purchases from farmers and subsidized exports. Ukraine is expected to become a net importer of wheat in 2000/01, with exports dropping by 1.6 million tons because of drought. U.S. wheat exports are forecast to increase only a small amount, but reduced competition and declining world trade will boost the U.S. share of world wheat trade to 28 percent (excluding intra-EU trade) in 2000/01, up from 26 percent a year ago. However, this is not an exceptionally large share, being slightly less than achieved in 1998/99. Wheat by Class in 2000/01 Wheat Quality Good in 2000/01 The quality of the 2000 crop is generally better than the 1999 crop except for some harvest-time damage to the hard red spring and durum crops because of late-season rains. Sharply reduced hard red winter production will lead to a higher proportion of hard red spring use by bread makers compared with the previous years. Durum food use is up, but the level is not comparable with past years because the Bureau of the Census began including in its flour milling surveys integrated pasta manufacturers that operate a durum mill onsite. HRW Crop Lower Than a Year Ago Hard red winter (HRW) supplies in 2000/01 were greatly reduced from a year earlier because production dropped more than 200 million bushels. Despite reduced domestic use and exports, the sharply reduced production is expected to result in an 18-percent drop in ending stocks. Food use of HRW is projected down from a year ago as bread makers substitute HRS (hard red spring) for HRW. HRW futures prices have risen relative to HRS because HRS supplies are relatively high compared with the previous year. HRW prices have been boosted by weather concerns about the prospects for next years HRW crop and reduced winter wheat plantings. At one point in January 2001, HRW futures prices exceeded HRS futures prices, an unusual inverted spread between the two classes of wheat. HRW wheat production was off sharply in the Plains States, typically because of lower yields. Hot, dry conditions occurred during crucial times in the wheat plant growing cycle, ultimately affecting yield and some quality factors. The biggest decrease in production was in Kansas, the largest wheat producing State. Kansas production was down 84.6 million bushels because of low yields. The U.S. average yield for HRW was 35.8 bushels per acre, less than the previous 2 years. The 2000 crop had processing quality comparable with, or better, than the 1999 crop for most characteristics according to the Midwestern Harvest Survey published by the U.S. Wheat Associates in the 2000 Crop Quality Report. Wheat protein content rose for the first time in 3 years, moisture content was lower, falling number was much higher, and test weight was nearly the same. As a result of hot, dry spring conditions, average kernel size was smaller, resulting in reduced milling yield and lower tolerance to mechanical stress. The U.S. Wheat Associates survey found the overall protein percentage, at 12.0 (12 percent moisture basis), higher than 1999s 11.4, but slightly below the 5-year average of 12.1 percent. The average moisture percentage of the crop was 11.5, lower than the previous years 12.1, and the 5-year average of 11.9. The 2000 HRW crops average sampled falling number of 393 seconds was much better than the 352 the year before and the 5- year average of 368. The overall test weight of 59.2 pounds per bushel was slightly higher than 1999s 59.0, but less than the 5- year average of 59.6. HRS Crop Production Was Up Compared With a Year Ago The U.S. average yield for hard red spring (HRS) was 36.6 bushels per acre, higher than in recent years. The higher yield boosted HRS production by 50 million bushels from a year earlier. The larger production more than offset reduced beginning stocks, resulting in HRS supplies 5 percent larger than the year before. However, with higher projected domestic use and exports, HRS ending stocks are expected to be lower than a year earlier. Three States accounted for most of the change in HRS production. Production increased in North Dakota and Minnesota. Both States had improved yields, and North Dakota also harvested more acres than in 1999. Offsetting the production increases was reduced production in Montana because of both reduced harvested area and lower yields. Portions of the western Dakotas and Montana experienced crop stress as the HRS crop matured due to lack of moisture and high temperatures. Protein levels were higher than a year earlier and above long- term averages. The U.S. Wheat Associates HRS survey in the four States of Minnesota, North and South Dakota, and Montana found the 2000 HRS crops protein percentage to average 14.4 (12 percent moisture basis), which was higher than 1999s 14.1 and the 5-year average of 14.0 (U.S. Wheat Associates). However, the last 10-15 percent of the crop harvested was affected by wet conditions which resulted in some quality loss, especially test weights, falling numbers, and bleaching. The 2000 crops average test weight of 60.4 pounds per bushel was slightly higher than the year befores 59.3, and about the same as the 5-year average of 60.0. The average falling number of 379 seconds was much better than 1999s 313, and slightly above the 5-year average of 372. The average moisture percentage of 11.6 was lower than both last years 12.4 and the 5-year average of 12.3. White Winter Wheat Production Up Sharply White wheat supplies are above a year ago because of sharply increased production. However, 2000/01 ending stocks will be lower because of higher feed and residual use and exports. According to the Pacific Northwest harvest survey published by the U.S. Wheat Associates in its 2000 Crop Quality Report, protein percentages of the soft white and club crops are 9.2 and 8.3 (12 percent moisture basis), respectively, were lower than 1999s 10.5 and 10 percent. The 5-year averages for the soft white and the club wheat crops are 9.6 and 9.2 percent, respectively. The 2000 test weights for the soft white and club wheat were 61.5 and 61.2 pounds per bushel, respectively, compared with 60.4 and 61.0 in 1999. The 5-year averages for the soft white and club wheats were 60.6 and 61.1 pounds. The 2000 soft white and club wheats moisture percentages were 9.2 and 8.3, respectively. These moisture percentages were lower than the year before at 10.1 and 9.5, respectively, and the 5-year averages of 9.6 and 9.2 percent. The 2000 soft white wheat crops falling number of 327 seconds, is slightly lower than 1999s 339 and the 5-year average of 331 seconds. The 2000 club wheat falling number of 319 is lower than the year befores 337 and the 5-year average of 333 seconds. Soft Red Winter Production Is Up More Than Disappearance The 2000/01 soft red winter (SRW) supplies are higher than a year ago because production increased 17 million bushels from a year earlier. Ending stocks are expected to be little changed from a year earlier as the increased supplies are offset by higher exports. SRW is grown over a wide geographic region of the eastern United States. Because the growing region is so large, weather patterns are quite diverse, which results in substantial variation in quality in SRW wheat. The 2000 SRW crop has similar moisture, lower average protein content, and very slightly lower average test weight than the 1999 crop (U.S. Wheat Associates). There were exceptions in areas where unfavorable weather resulted in lower test weights and falling numbers. According to the midwestern harvest survey published by the U.S. Wheat Associates in its 2000 Crop Quality Report, the average protein percentage in 2000 for SRW was nearly the same as 1999, 10.8 and 10.7 (12 percent moisture basis), respectively. The moisture percentage of the 2000 and 1999 crops was also almost the same at 13.2 and 13.1, respectively. Test weights were also almost the same at 58.0 and 58.1 pounds per bushel, respectively, for 2000 and 1999. The average 2000 falling number of 317 seconds is less than the 1999 crops 328 seconds. Bureau of the Census Expands Coverage of Durum Flour Milling This years projected total use is higher than a year ago because of increased domestic use and exports. This higher total use more than offset increased production this year, with the result that ending stocks this year are forecast down from a year ago. However, this years domestic food use of durum is not comparable with previous years numbers because the Bureau of the Census redefined semolina and flour and durum wheat grind in 2000. The Bureau decided to include in its flour milling surveys integrated pasta manufacturers that operate a durum mill onsite. In the past these establishments have not been included in Census reports related to establishments classified as flour milling establishments. The Bureau of the Census included these plants in the Current Industrial Report Series on Flour Milling for the first time in the MQ311A report for the January-March quarter of 2000. Thus, the volume of durum wheat ground by these establishments or the volume of semolina and durum flour produced in these onsite mills for use in their own pasta plants has been unaccounted for in previous Census Bureau reports focusing on the flour milling industry. The Northern Great Plains produced about 85 percent of the total estimated U.S. durum production of 110 million bushels. Widespread rains slowed harvest in late August and early September. During this time, sprouting occurred in some regions, affecting quality. The Southwestern States of California and Arizona accounted for the remainder of the countrys durum production. The protein percentage of the durum crop grown on the Plains averaged 14.3 (12 percent moisture basis), higher than the 13.8 reported for the previous years crop according to the U.S. Wheat Associates in their 2000 Crop Quality Report. Desert durum is grown primarily in Californias Imperial Valley and adjoining areas in Arizona. The 2000 crops falling number of 216 seconds is below the 1999 crops 250 seconds. The 2000 crops test weight at 58.8 pounds per bushel is also below the 1999 crops 59.8 pounds. The moisture percentage of the 2000 crop was also below the 1999 crop, 11.5 and 12.4, respectively. The 2000 desert durum crops average protein percentage of 13.5 (12 percent moisture basis) is slightly lower than the 13.6 reported in the 2000 harvest survey published by the U.S. Wheat Associates in their 2000 Crop Quality Report. The 2000 crops falling number of 699 seconds is well below the 1999 crops 1,156 seconds. The 2000 crops test weight at 62.3 pounds per bushel is below the 1999 crops 62.9 pounds. Moisture percentage of the 2000 crop was also below the 1999 crop, 6.7 and 7.4, respectively. Reference U.S. Wheat Associates. 2000 Crop Quality Report. 2000 The Effects of the Federal Crop Insurance Program on Wheat Acreage Monte L. Vandeveer and C. Edwin Young 1/---- ----- 1/ Agricultural economists, Field Crops Branch and Agriculture and Trade Outlook Branch, respectively, Market and Trade Economics Division, ERS. ----- Abstract The Federal crop insurance program insured more than 45 million wheat acres in 2000/01, roughly 73 percent of planted acres. Catastrophic (CAT) coverage is declining in importance, while revenue insurance has become prominent in just a few years. The changes in premium subsidy rates established by the Agricultural Risk Protection Act of 2000 (ARPA) are likely to reinforce the trend toward using higher insurance coverage levels and revenue insurance. Crop insurance subsidies appear to have small effects on wheat planting decisions. Analysis here suggests that wheat acreage under the ARPA premium subsidy structure is about 0.5 percent higher than total acreage in the absence of any insurance program. While subsidies tend to increase acreage, the resulting higher production dampens wheat prices slightly and limits the acreage shift. Cross-commodity effects are important, too, as crops receiving larger insurance subsidies could crowd out those receiving less. Keywords: wheat, crop insurance, subsidies, planting decisions, market distortions. The Federal crop insurance program has become one of the major Government programs related to wheat production. Wheat ranks third, behind corn and soybeans, in terms of acreage insured and premiums collected. The program insured 45.4 million acres of wheat for the crop harvested in 2000, about 73 percent of the planted area of wheat for all purposes.2/------ -----2/ This understates the insurance participation rate for wheat that is intended for grain harvest, since some planted wheat acres are used for haying and grazing. ----- New forms of crop insurance coverage, higher premium subsidies, and a shift away from counter-cyclical farm programs in the 1996 Farm Act all appear to have contributed to the growth of insurance. Among wheat producers, yield insurance products accounted for most of the insured acres in previous years, but revenue insurance products appear set to take the lead for the 2001/02 crop. ARPA provides premium subsidies greater than 50 percent for most levels of coverage and makes the premium rates for higher levels of coverage more attractive. Premiums for revenue coverage will also receive the same subsidy rate as yield insurance under ARPA, which should encourage greater use of revenue coverage. Insurance participation, measured in terms of both acreage and insurance liability, will probably maintain its current level or even grow. As crop insurance subsidies and participation have increased, some observers have wondered if crop insurance may affect farmers planting decisions by creating incentives to switch from one crop to another or to plant on land that might not otherwise be cropped (Knight and Coble, p. 150). Shifts in plantings could in turn affect total production, crop prices, regional patterns of production, and so on. This article describes the general features and performance of the Federal crop insurance program for wheat and examines the question of how crop insurance may affect cropping decisions. How Crop Insurance Works Producers of wheat and more than 100 other crops can purchase insurance at subsidized rates under Federal crop insurance programs. These insurance policies make indemnity payments to producers based on current losses related to either below-average yields (yield insurance) or below-average market revenue (revenue insurance). Policies are sold through private insurance companies, but the Federal Crop Insurance Corporation (FCIC)3/--- 3/-----The Federal Crop Insurance Corporation (FCIC) has no actual employees. It is managed by USDA's Risk Management Agency (RMA). ----- pays a portion of the insurance premiums and pays an additional subsidy to insurance companies for administrative and operating expenses. The Government also shares underwriting gains and losses with the companies under the Standard Reinsurance Agreement. Under ARPA, farmers will pay around 40 to 50 percent of the total premiums for most levels of coverage. Farmers sign up for insurance prior to planting, but usually pay premiums after harvest. Several types of crop insurance are available (see box: Crop and Revenue Insurance Products). Some plans protect against low yields, while others insure against low revenue. Some base premium and indemnity payments on farm yields or revenue, while others use county yields or revenues. Farmers have been required at various times to obtain crop insurance in order to be eligible for benefits from other farm programs, but insurance participation is generally voluntary. Program history and performance Wheat was the original crop covered by Government-backed crop insurance when the Federal Crop Insurance Act of 1938 created the Federal crop insurance program (Gardner and Kramer, p. 196). The crop insurance program operated on a rather limited basis for over 30 years, until Congress passed major reforms in 1980. This legislation intended to make crop insurance the primary Government program dealing with uncertain crop production, replacing the standing disaster payment programs of the 1970s. This reform greatly expanded the availability of crop insurance and created premium subsidies in hopes of raising farmer participation. In response to numerous, large, ad hoc disaster payments in the late 1980s and early 1990s, major insurance reform was passed in 1994. The goals of this reform were to reduce the likelihood of ad hoc disaster payments, increase crop insurance participation, and reduce the incidence of double payments from these programs. Specific provisions included: O repeal of emergency designation in the Federal budget for disaster payments (that is, disaster payments had to count in the Federal budget totals, presumably reducing their attractiveness to Congress); O creation of catastrophic (CAT) coverage offered at low cost to producers; O higher premium subsidies for buy-up coverage (coverage above CAT); O linkage between crop insurance and other farm program benefits; O creation of the Non-insured Assistance Program (NAP) for crops not covered by crop insurance. The linkage between crop insurance and other farm programs meant that farmers in 1995 were required to obtain at least CAT coverage for each insurable crop in order to be eligible for various other U.S. Department of Agriculture program benefits such as deficiency payments and FSA loans. This linkage, along with the fact that CAT was available for only a small processing fee, boosted insurance participation tremendously. Insured acres for all crops more than doubled, from 99.6 million for the 1994/95 crop year to 220.6 million in 1995/96. Insured acres for wheat jumped similarly, from 29.2 million in 1994/95 to 58.2 million in 1995/96. CAT accounted for practically all of this increase: the year-to-year increase of 121.0 million insured acres for all crops included 115.3 million CAT acres, and the 29.0 million added wheat acres included 27.3 million CAT acres. The 1996 Farm Act modified this linkage by dropping the requirement to purchase insurance for farmers who agreed to waive their rights to future disaster payments. Insured acreage declined somewhat, though not falling back to their previous levels. Since this dip in 1996/97, insured acres have risen again, totaling about 205 million acres for all crops in 2000/01. Insured wheat acreage actually increased from 1995/96 to 1996/97, corresponding to an increase in planted acreage, but since then both planted and insured acres have declined. However, another measure of insurance participation has trended up for wheat since 1995. The ratio of insurance liability (the maximum possible indemnity) to total crop value for wheat was only about 29.5 percent in 1995/96 but rose to over 50 percent in 1999/2000 and 2000/01. Table A-1 shows both measures of insurance participation for wheat since 1990. This relative growth in insurance liability is due to shifts among the various types of insurance coverage, mainly out of CAT and into APH buy-up (Actual Production History coverage, based only on yields) and the revenue insurance products. Figure A-1 shows these trends. After representing about 47 percent of insured wheat acres in 1995/96, CAT represented only about 17 percent in 2000/01. APH buy-ups share increased slightly over the same time, from 53 to 57 percent, and Crop Revenue Coverages (CRC) share rose to about 25 percent. Other buy-up products accounted for just over 1 percent of wheat insured acreage in 2000/01. Preliminary sign-up results for the 2001/02 wheat crop indicate a large increase in CRC and Revenue Assurance (RA) acreage, with these two revenue products representing about 76 percent of insured acres, and APH buy-up and CAT coverage representing about 23 percent. The rapid growth of revenue insurance is not limited to wheat, as revenue products accounted for about 51 percent of the corn acres insured and 40 percent of the soybean acres insured in 2000/01. This growth reflects several factors. The most obvious one is farmers interest in insuring revenue rather than just yields. Some have also suggested that as the 1996 Farm Act shifted farm program payments away from deficiency payments, farmers have become more concerned with adverse price movements. However, it must be noted that all the revenue insurance products protect only against revenue declines for a crop year, not against multi- year declines that reflect longer term changes in market conditions. While one goal of the crop insurance program has been to increase farmer participation, another goal has been to attain sound actuarial performance. Actuarial performance is usually measured with the loss ratio, defined as indemnities divided by premiums. If the loss ratio exceeds 1.0, then indemnities exceed premiums. Unlike some other forms of insurance, the loss ratio for crop insurance can vary widely from year to year due to widespread weather events like drought or flood, which have a large impact on indemnities. Thus, actuarial performance must be judged over a longer period of time. In 1993 Congress established a target of 1.075 for the long-term, overall program loss ratio (that is, measured across all crops in the program over an extended period of time). Figure A-2 shows the annual loss ratios from 1990/91 to 2000/01 for both wheat and all crops. More often than not, the loss ratio for wheat was higher than that for the overall program. Annual loss ratios for wheat ranged from 1.66 in 1993/94 to 0.57 in 1998/99, reflecting annual conditions. Examining the entire 1990/91-2000/01 period for wheat, total indemnities were $3.044 billion and premiums were $2.591 billion, resulting in a loss ratio of 1.17. Rising premium subsidies were also a distinguishing feature of the crop insurance program over the 1990s. Figure A-3 shows annual amounts for both total premium subsidies and the average premium subsidy rate for wheat over that decade. The significant jump in 1995/96 resulted from both the introduction of CAT (where the government pays the entire premium) and higher subsidy rates on buy-up. CAT became less important in subsequent years, but the additional premium discounts provided by Congress in 1999 and 2000 resulted in average premium subsidy rates over 50 percent in those years. In absolute dollar terms, premium subsidies for wheat topped $150 million in 4 of the last 5 years. Total premium subsidies for wheat over the 1990/91-2000/01 period totaled $1.158 billion. Farmers paid $1.433 billion in premiums over this time. One of the major components of the Agricultural Risk Protection Act of 2000 (ARPA) was a revision of the premium subsidy structure. Table A-2 provides a comparison of subsidy rates for the previous regime and for the new ARPA regime.4/----- ----- 4/ The subsidy rates listed in table 2 do not reflect the additional premium discounts provided in 1999 and 2000, which amounted to approximately an additional 30 percent producer premium reduction across all coverage levels in 1999 and an additional 25 percent reduction in 2000. ----- Notice first that subsidy rates are raised for all coverage levels, resulting in subsidies above 50 percent for most levels of coverage. However, now the difference in subsidies across coverage levels is much narrower. For many years, 65/100 coverage (65 percent of expected yield, 100 percent of expected price) has been the clear favorite for participants, but the narrower differential in premium subsidies will probably change this. Preliminary insurance sign-up results for the 2001/02 wheat crop indicate that about 28 percent of acres are insured at the 65 percent level, while about 59 percent are insured at the 70 or 75 percent coverage level. In addition, the subsidies for revenue coverage have increased significantly relative to APH coverage. This already appears to provide further impetus in the move towards revenue coverage, as described earlier. Can Crop Insurance Affect Plantings and Prices? As premium subsidies have risen, some observers have questioned whether crop insurance subsidies might have unintended effects on farmer behavior (Gardner, and Knight and Coble). Could subsidized crop insurance encourage farmers to assume unnecessary risk? Are subsidies large enough to encourage shifts in plantings from less risky crops to more risky crops or from less risky regions to more risky ones? Do they encourage plantings on marginal lands that otherwise might not be cropped? Some negative consequences could result from these types of planting shifts. Additional plantings increase total production and reduce crop prices. Demand for inputs and land prices would likely be affected. Regional shifts in production could favor some areas while hurting others. Farming on more marginal land-- for example, shifting land from pasture to crop production-- could add to soil erosion, chemical use, and water quality problems.-----5/ ----- 5/ The Farm Service Agencys conservation compliance rules do not prohibit sod-busting, though they do require approval of a new farm conservation plan that usually requires stricter conservation practices on land brought into crop production. ----- Distortions in production and prices could even have implications for trade negotiations, as the United States is committed under major trade agreements to limit its spending on agricultural programs (including crop insurance) which may directly affect crop plantings and prices. How could crop insurance affect planting decisions? A farmers choice for selecting which crops to plant reflects the expected returns and risks of the crops, just as an investors choice of stocks and bonds reflects the returns and risks of different securities. By changing the net expected returns to a crop and by reducing the risk of producing the crop, crop insurance affects farmers crop production decisions. The most obvious way that crop insurance can affect net expected returns of a crop is through premium subsidies. (See box: CRC Coverage for Durum Wheat--A Special Case, for an illustration of the potential for crop insurance to distort production decisions.) Assuming that insurance premiums accurately reflect expected losses over time, lowering the premium through government subsidy means that farmers could expect higher incomes over time--not in any particular year, but on average over several years--by purchasing crop insurance. Farmers who already intend to purchase crop insurance realize an immediate input cost savings. Over the 1990/91-2000/01 period, wheat farmers benefited from $1.158 billion in premium subsidies. Farmers also benefit from insurance to the extent that total premiums under-estimate total indemnities. As mentioned earlier in the discussion of actuarial performance, this potential benefit needs to be considered over an extended period of time, as indemnities in any particular year reflect conditions for only that year. Over the 1990/91-2000/01 period, total crop insurance premiums on wheat were $2.591 billion, while total indemnities were $3.044 billion. From a farmers viewpoint, net expected returns from insurance reflect the difference between premiums paid and indemnities received. This net indemnity reflects both premium subsidies and actuarial performance as just described. This effect on expected net returns may be referred to as the subsidy effect of insurance. Over the 1990/91-2000/01 period, wheat farmers paid $1.433 billion in premiums, while receiving $3.044 billion in indemnities. This subsidy effect enhances the expected net returns for a crop, giving it a potential advantage over other crops in the planting decision. Since most crops can now be insured in most areas, expected net returns from insurance affect expected net returns for each crop considered by the farmer. Because subsidies are calculated as a percentage of the premium, crops with higher premiums receive a higher subsidy, calculated on a dollar-per- acre basis. The amount of the premium reflects the expected value of the crop, its yield uncertainty as represented by the premium rate, and the coverage level chosen. Thus, the amount of expected subsidy depends on whether a crop is high risk or low risk, and high value or low value. Crop insurance also has a risk reduction effect in addition to any subsidy effect. That is, insurance eliminates the worst outcomes in exchange for the premium payment, making a crop less risky and potentially more desirable in the crop mix. Even in the case of unsubsidized fair insurance--where premiums are equal to indemnities over time--crop insurance would offer this additional benefit. However, while the risk reduction effect is quite real, it is more difficult to measure, in terms of dollars per acre, than the subsidy effect. Each individual has unique attitudes toward risk, and yield variability differs from farm to farm, so the amount of money each person might be willing to pay simply to avoid risk is not directly observed. Measuring the Effects of Crop Insurance on Plantings and Prices The extent to which crop insurance affects farmers planting decisions may have important aggregate effects. More planted acres lead to higher production and lower crop prices. Lower expected market prices could cause farmers in other regions to change their plantings. A subsidy to wheat producers in one region may have negative effects on producers in other regions. Acreage in subsequent periods may also decline in response to lower prices. It is important to note that this price-reducing feedback effect could mitigate to some extent the acreage- increasing effects of crop insurance subsidies. Competing crops also receive crop insurance subsidies, with accompanying acreage response and price effects. Wheat traditionally competes with grain sorghum and cotton in the Southern Plains, and with barley in the Northern Plains. In recent years corn and soybean production have expanded into traditional wheat producing areas and must also be considered. Market impacts were analyzed using the POLYSYS-ERS simulation model (Ray, et al.) for an average or representative year.----6/ ----- 6/ The results are not year specific. ----- The model simulates aggregate market behavior for eight crops (corn, grain sorghum, barley, oats, wheat, soybeans, rice, and cotton) over seven regions (see fig. A-4 for the demarcation of these areas). Crop insurance subsidies were modeled by converting them to a per-bushel equivalent and adding them to the crop price in a net returns framework. Crop insurance subsidies were calculated as the expected net indemnity (total indemnity minus farmer premium).-----7/ ----- 7/ Administrative and operating subsidies paid by RMA to insurance companies are not included in the estimated premium subsidies. ----- Total net indemnities reflect the new ARPA premium subsidy rates. Net indemnities also include the expected value of the excess of indemnities over total premiums, estimated using the insurance loss experience over 1990-1998. Projected insured acreage was used to determine the net indemnity per acre, and expected yields were used to convert the subsidies to a per-bushel (pound/cwt.) basis. Expected indemnities were calculated for each of the eight crops by region. Figure A-5 shows the expected net indemnities for wheat as a percent of price for the seven regions. We do not account for the risk reduction effects of insurance in the model. Unpublished research by Heifner and Coble indicates that the risk reduction effects, when converted to a dollar-per- acre basis for a typical farmer, are relatively smaller than the subsidy effects. However, to the extent that insurance premiums reflect the relative risk of producing alternative crops in different regions, the premium subsidies partially capture incentives to switch to riskier enterprises due to the availability of subsidized insurance. The simulation results are indicative of the average or representative effects of crop insurance subsidies on the wheat market. Changes in aggregate market impacts reflect the relative changes in net returns among alternative crops after insurance is added and market prices equilibrate. Total wheat acreage expands about 300,000 to 350,000 acres on average, roughly a 0.5 percent increase in acreage compared with a scenario of no crop insurance subsidies. Total acreage for all eight field crops expands about 900,000 acres, so that wheat accounts for about one-third of the total increase. Total wheat production increases by 0.7 percent and wheat market prices fall about 2 to 2.5 percent as a result of the additional acres in production. Wheats inelastic demand creates a situation where price falls by a larger percentage than production rises, resulting in lower overall annual market returns. The simulation indicates market returns for wheat in this scenario are about $150-200 million lower than in the scenario with no insurance, offsetting about two-thirds of the aggregate monetary benefits of insurance subsidies. Wheat acreage does not increase in all regions in response to the premium subsidies (fig. A-6). While premium subsidies have the direct effect of increasing net returns from wheat production, the resulting higher production reduces market prices, partially offsetting the incentive to expand production in subsequent years. In addition, subsidized insurance products are also available for competing crops, creating incentives to increase their production, with subsequent reductions in prices. Thus, the net incentives created by insurance subsidies for a particular farmer depend on premium subsidies for wheat as well as for competing crops and on market price adjustments. Acreage increases in three of the seven regions, with the largest increase coming in the Central and Northern Plains region. Wheat acreage decreases in the Southern Plains by almost 170,000 acres, a 1.4-percent decline for that region. This is mainly due to an increase in cotton acreage, which results from a $26.51/acre expected net indemnity for cotton. Some limitations to this approach should be mentioned. First, the expected net indemnities were calculated as averages across all insurance coverage levels. Higher coverage levels receive larger subsidies, measured in absolute dollar amounts, which could then affect the expected net indemnity. If farmers continue to switch toward higher coverage levels, then the subsidy levels used here may under-estimate the actual subsidies received by farmers. Second, the assumption that crop insurance subsidies affect returns to the same extent as crop prices overstates the case for producers who view insurance as an optional expense. Also, indemnities received on an irregular basis may count for less in a producers calculation of expected returns than an outright price change. Third, the simulation does not capture the risk reduction effect of insurance. However, some evidence exists that it is less important than the subsidy effect in explaining crop insurance participation. In spite of these limitations, the net benefits of insurance are still probably small enough to preserve the qualitative result that crop insurance tends to have a relatively small effect on wheat acreage and all field crop acreage in general. Another important observation from the simulation is that price feedback and cross-price effects tend to dampen the own-price effect of insurance subsidies on crop acreage. 8/----- ----- 8/ The scenarios did not incorporate the effects of loan rates on acreage in order to isolate the effects of insurance. If the market is in a low-price regime, the loan rate supports expected returns even when prices are low, and high plantings may persist. In this case, the price-dampening feedback effect on acreage could be quite limited. ----- Higher plantings lead to higher production, which in turn results in lower prices (absent any changes in demand). Some of the acreage may then shift back out of production in subsequent periods. Cross-commodity price effects also appear important, too, as the net benefits of crop insurance appear to be much higher for some crops than others, causing an acreage shift from one crop to another. Ignoring these feedback and cross-commodity price effects leads to an over-estimate of the acreage increases due to insurance. Summary The federal crop insurance program for wheat has grown into a significant government program for wheat production in recent years. More than 45 million wheat acres were insured in 2000/01, roughly 73 percent of planted acres. CAT coverage, introduced by the 1994 crop insurance reforms, is declining in importance, while revenue insurance has become prominent in just a few years. The changes in premium subsidy rates established by ARPA are likely to reinforce the trend toward using higher insurance coverage levels and revenue insurance. Crop insurance subsidies do appear to effect planting decisions, which in turn affect production and prices. However, these effects appear small: simulation results suggest that wheat acreage under the ARPA premium subsidy structure would be about 0.5 percent higher than total acreage in the absence of any insurance program. The own-price feedback effect suggests that while some new acreage may be brought into production because of insurance subsidies, this acreage shift is limited by the price- dampening effect of additional production. Cross-commodity effects were important, too, as crops receiving larger insurance subsidies could crowd out those receiving less. An important exception to this conclusion for wheat growers is the case of revenue insurance for durum in 1999. There, the expected crop price used in setting revenue coverage exceeded producers expectations. Farmers response to what seemed a sure thing under artificially high coverage levels was clearly greater than in the standard insurance case with more accurate coverage levels and meaningful deductibles. Box: Crop and Revenue Insurance Products 1/----- ----- 1/ Visit the Risk Management Agencys web site for more details on different types of crop insurance coverage. The page describing the various policies is located at http//www.rma.usda.gov/policies. ----- Several insurance products are available for wheat, including: O Actual Production History (APH) yield insurance at Catastrophic (CAT) and buy-up coverage levels O Group Risk Plan (GRP) yield insurance O Crop Revenue Coverage (CRC) revenue insurance O Revenue Assurance (RA) revenue insurance O Income Protection (IP) revenue insurance O Group Risk Income Protection (GRIP) revenue insurance. Actual Production History (APH). APH coverage is the oldest and most widely available crop insurance product. It protects farmers against yield losses due to natural causes such as drought, excessive moisture, hail, wind, frost, insects, and disease. Yield coverage levels are based on a producer's expected yield, which is calculated from the farm's actual production history (average yields over the last 4 to 10 years). The farmer selects a yield coverage level, ranging from 50 to 75 percent of average yield (up to 85 percent in some areas), and an indemnity price, ranging from 55 to 100 percent of the expected crop price, as estimated by the Risk Management Agency (RMA). If the harvested yield is less than the insured yield, the farmer receives an indemnity based on the difference between the actual yield and the insured yield. The total indemnity equals this yield shortfall times the indemnity price times acres insured. 2/----- ----- 2/ This example assumes the producer has a 100 percent interest in the crop. Farmers who have a smaller share in the crop due to a share rental arrangement may insure only their share of the crop. ----- The CAT version of APH provides the lowest level of coverage on yield losses. CAT pays indemnities at a rate of 55 percent of RMAs established price when farm yield losses are more than 50 percent. CAT premiums are completely paid by the government through RMA, but producers must pay an administrative fee for each crop insured. ARPA raised this fee to $100 for the 2001/02 crop year. Currently CAT coverage is also offered on Income Protection policies, but participation in IP-CAT has been extremely low. Coverage above the CAT level is often referred to as buy-up. Group Risk Plan (GRP). GRP policies use county yields as the basis for determining insurance. When the county yield for the insured crop falls below the trigger level chosen by the farmer, an indemnity is paid. Yield coverage is available for up to 90 percent of the expected county yield. This type of insurance is best suited for farmers whose yields track closely with the county average, since an individual farmer's crop loss may not be completely covered if the county yield does not suffer a similar level of loss. Crop Revenue Coverage (CRC). Among revenue insurance products, CRC has been the most popular. CRC provides protection against gross revenue (i.e., price times yield) falling below a guaranteed level. Guaranteed revenue is equal to the farmer's elected coverage level (50 to 75 or 85 percent), times the APH yield, times the higher of: (a) the base market price, which is a month-long average of the harvest-time futures price prior to planting; or (b) the harvest market price, defined as the average price for the same futures contract over a months time near harvest. CRC thus provides higher coverage in years when harvest prices are higher than what was expected at planting. When a farmer's actual revenue (calculated as the actual yield times the harvest market price) is below the guaranteed revenue, CRC pays an indemnity equal to the difference between those two amounts. Revenue Assurance (RA). RA coverage is similar to CRC, with two differences. First, farmers can choose between RA's base price option, where the revenue guarantee is determined using only the pre-planting price; or the harvest price option, where the revenue guarantee increases if harvest prices are higher, just like CRC. The harvest price option carries a higher premium. Second, RA also offers whole farm coverage whereby wheat can be combined with other crops also insurable under RA in that area. Income Protection (IP). IP provides protection similar to RA with the base price option but requires producers to use enterprise units. This means that the policyholder must insure all acreage for one crop in a county under a single unit (rather than having separate coverage for different landlords, land sections, etc.). Premiums are lower, but IP requires that losses occur across a wider area before an indemnity is paid. Group Risk Income Protection (GRIP). GRIP is a revenue insurance plan that uses county yields instead of farm yields when calculating revenue coverage levels and actual revenue. Farmers may select revenue coverage levels from 70 to 90 percent of expected county revenue, where county revenue is equal to the historic county yield times the relevant futures price averaged across 5 days prior to planting. Actual county revenue is calculated as the actual county yield times a month-long average of the new-crop futures price at harvest time. GRIP pays indemnities only when the actual county revenue for the insured crop falls below the revenue guarantee chosen by the farmer. {END BOX} Box: CRC Coverage for Durum Wheat--A Special Case While the analysis presented in this article concludes that crop insurance subsidies have a relatively small effect on planting decisions, the case of CRC coverage for durum wheat in 1999 illustrates a greater potential for insurance programs to distort market signals. CRC pays an indemnity when actual revenue falls below a revenue guarantee. This revenue guarantee is calculated as O the producers APH yield, times O some measure of expected price prior to planting, (the base market price in CRC terminology), usually based on a futures contract price, times O the insurance coverage level selected by the farmer, as high as 85 percent of expected revenue (that is, a 15 percent deductible). Actual revenue is calculated as the farmers actual yield times the harvest market price, usually the average price over a months time at harvest on the same futures contract. Determining an appropriate base market price has been more difficult for durum than for most other field crops. CRC typically uses widely traded futures contracts for major crops to establish both its base market price and harvest market price.-1/ 1/----- The wheat futures contract used varies according to State and planting date. ----- For the major classes of wheat, hard red winter uses the Kansas City Board of Trade July contract, hard red spring uses the Minneapolis Grain Exchange (MGE) September contract, and soft red winter uses the Chicago Board of Trade July contract. Coverage for wheat grown in Western States, mainly white wheat, uses prices from the Portland Grain Exchange for setting coverage. However, the MGE durum futures contract, which was only established in 1998, is very thinly traded, and there was some concern in 1999 that its trading might be too thin to provide an appropriate expected price. As a result, another method was used to establish the base market price. HRS futures price + spread used in 1999. Because of the concern over the durum futures contract, the CRC base market price was defined as the average during February of the September MGE HRS futures price plus the 5-year average Minneapolis milling price premium for durum over Minneapolis futures. This premium was $1.92/bushel, resulting in a base market price for insurance coverage of $5.45/bushel.2/----- ----- 2/ Some producers erroneously thought that this was the price guarantee. If number 1 durum wheat was not produced, the CRC contracts imposed a negative basis of up to $0.70. ----- Thus, a farmer with an APH yield of 30 bushels per acre could get a revenue guarantee of $138.97 per acre by using the 85-percent coverage level (= $5.45/bu x 30 bu/a x 85 percent). To put this level of coverage in perspective, this farmer could have realized a normal yield of 30 bushels per acre and still received an indemnity if the CRC harvest market price fell below about $4.63. With a yield of 20 bushels per acre, an indemnity would have been paid if the harvest market price was less than $6.95. Confounding the problem was that in February 1999, no significant price premium existed for durum over HRS. So at first glance, the coverage appeared to offer a potential windfall and received considerable attention in the farm media. What was the acreage response? According to the National Agricultural Statistics Service, 1999 planted durum acreage in North Dakota (which usually accounts for over 75 percent of U.S. durum production) increased 450,000 acres over the 1998 total of 3.0 million acres, in spite of the fact that durum prices were at 5-year lows. Unpublished data from RMA indicate about 4.2 million acres of durum were insured in North Dakota in 1999 across all insurance plans, with about 3.3 million acres insured under CRC.3/----- ----- 3/ The RMA acreage total exceeds the USDA March 1999 planting intentions report, but this difference is explained by the prevented plantings area and the fact that planting intentions may well have changed between the March 1 survey date and the March 15 insurance sales closing date due to the attention received by the CRC coverage. ----- Just over 900,000 acres were indemnified in North Dakota because adverse conditions prevented planting. Program rules also permitted producers with no durum yield history to use their HRS yield history to establish their durum APH yield. Over the last 20 years, HRS yields have averaged about 5 percent higher than durum yields. While this difference is relatively small, requiring these producers to instead use T- yields for their durum APH yield would have significantly reduced the expected benefits of the coverage.4/----- ----- 4/ Producers are typically assigned transitional yields, or T- yields, for the missing years in their APH yield history. T- yields are usually calculated as 60 percent of the county average yield. ----- Using HRS yields did not create the expected windfall, but it gave more producers access to it. The situation in 2001. On March 5, 2001, RMA announced CRC would not be available for durum wheat planted in 2001. After 1999, the CRC base market price for durum coverage was to be determined using the average price of the MGE September durum futures contract during the month of February. Rules also required a minimum of 15 daily prices be included in the average, with each daily price having a minimum of 25 open interest contracts. If the minimum number of daily prices with the minimum level of open interest was not found for the September contract during the month of February, prices could be taken from the July contract. The MGE September and July durum wheat futures contracts failed to fulfill these minimum requirements, so the CRC base market price could not be established. Though CRC is not available this year, durum producers may still insure their 2001 crops under APH coverage (yield insurance). The maximum price election on this coverage was announced as $3.40. However, higher revenue protection is available for durum producers under another revenue product, Income Protection (IP). IPs projected price was calculated using slightly different rules than CRC, resulting in a price of $4.38 for durum wheat in 2001. However, unlike CRC, IP coverage does not increase if harvest prices are higher than what was expected at planting. IP also requires that farmers insure all durum acreage in the county as one unit. Durum producers may also insure their durum wheat under a CRC policy as HRS wheat. {END BOX} References Gardner, Bruce. Statement Before the Senate Committee on Agriculture, Nutrition, and Forestry, A hearing to discuss risk management and crop insurance, U.S. Senate, Washington, DC (October 14, 1999), 3pp. Gardner, Bruce, and Randall Kramer. Experience with Crop Insurance Programs in the United States, in Crop Insurance for Agricultural Development: Issues and Experience. P. Hazell, C. Pomerada, and A. Valdes, eds. Johns Hopkins University Press, Baltimore, 1986. Heifner, Richard, and Keith Coble. The Risk-Reducing Performance of Alternative Types of Crop Yield and Revenue Insurance with Forward Pricing. Report to the Risk Management Agency by the Economic Research Service, December 1998. Heifner, Richard, and Keith Coble. Potential for Reducing Farmers Risk by Supplementing Farm-Level Crop Insurance with Area Insurance. Report to the Risk Management Agency by the Economic Research Service, Spring 2001. Knight, Thomas and Keith Coble. Survey of U.S. multiple peril crop insurance literature since 1980. Review of Agricultural Economics, vol. 19, no. 1 (Spring/Summer 1997), pp. 128-156. Ray, D., D. Ugarte, M. Dicks, and K. Tiller. The POLYSYS Modeling Framework: A Documentation. Agricultural Policy Analysis Center, University of Tennessee, 1998. Organic Wheat Production in the United States: Expanding Markets and Supplies Catherine Greene and Thomas Dobbs 1/----- ----- 1/ Greene is an agricultural economist, Production, Management & Technology Branch, Resource Economics Division, ERS, and Dobbs is Professor of Agricultural Economics, Economics Department, South Dakota State University. ----- Abstract: Small markets for certified organic wheat and other grain crops began to emerge in the United States, Europe, and other countries during the 1990s. The range of organically-grown foods now includes cereals, pasta, flour, breakfast bars, bread, and other grain-based products. Organic wheat crops carry significant price premiums at the farm level, but pose substantial challenges to produce and move through the supply chain. The top organic wheat producing States in 1997 were Montana, with almost 32,000 certified acres and North Dakota (24,000 acres). The U.S. Department of Agriculture (USDA) recently finalized regulations on organic production and marketing that are expected to facilitate trade. However, the competition for international markets is likely to expand considerably, and U.S. organic grain exports may be increasingly difficult to maintain or expand in the coming decade without additional support measures. Keywords: Wheat, identity-preservation, organic, organic certification, USDA organic rule, crop rotation, multifunctionality, exports. Introduction Organic agriculture was one of the fast-growing segments of U.S. agriculture during the 1990s, with total organic cropland doubling between 1992 and 1997 to approximately 850,000 acres. More recent estimates suggest this trend is continuing or accelerating (Greene, 2000a). While organic wheat and other grain crops are still only a small part of total U.S. production, interest is growing among farmers, input suppliers, food processors, and retailers and has been heightened by new USDA regulations that standardize requirements for organic production and marketing in the United States. Wheat and other crops grown under organic management are among the identity-preserved commodities that can carry significant price premiums at the farm level but pose substantial challenges to produce and move through the supply chain. The range of organically-grown foods widened substantially during the 1990s to meet consumer demand, and now includes a variety of organic cereals, pasta, flour, breakfast bars, bread, and other grain-based products. Although natural food supermarkets are still the largest retail outlet for organically-grown foods, consumers purchased more than half of industry-wide sales of several organic product categories--including cold cereals, cookies, and snack bars--in conventional supermarkets in 1999. The organic food processing industry includes manufacturers, millers, distributors, and exporters that specialize in handling organic commodities, as well as those that include organic products as only one segment of their operation. Eden Foods, for example, has been processing and retailing organic foods almost exclusively--including a line of organic pastas--since the late 1960s, and all of its plants, mills, and warehouses are certified organic. General Mills is one of the large, mainstream food companies that have entered the organic market in recent years, even though their products are mostly not made with organically- grown ingredients. General Mills began test marketing organic versions of its Gold Medal flour in Pacific Northwest supermarkets in 1998, and launched a major nationwide advertising campaign for its new wheat and corn organic cereal--Sunrise Cereal--in 1999. State and private certifying programs have developed over the last several decades to define and enforce organic standards that meet consumer expectations. Over a quarter of a million people participated in USDAs organic rule-making process in the late 1990s, and final regulations were published in December 2000. By mid-2002, all except the smallest organic farmers and food processors will have to be certified by a State or private agency accredited under these national standards. These new regulations are expected to facilitate interstate and international trade in organically produced and processed crop and livestock products. Organic product sales through all outlets in the United States have increased 20-25 percent annually between 1990 and 2000, according to several industry sources, and reached $7.8 billion in 2000. Organic food sales generally accounted for 1 to 2 percent of total food sales in the United States and other major markets for organic products (Japan, Denmark, France, Germany, the Netherlands, Sweden, Switzerland, and the United Kingdom). Annual growth rates are forecast at 20 percent or more for the next 5 to 10 years for most of these countries, according to the World Trade Organization/United Nations International Trade Centre. Demand is growing faster than supply in a number of these countries. Exports account for under 5 percent of total U.S. organic sales, according to a recent study partially funded by USDA (Fuchshofen and Fuchshofen). The top markets for U.S. organic exports to Europe include the United Kingdom, with an export volume of more than $30 million in 1999 and Germany ($23 million in 1999). About a quarter of the U.S. export sales to the United Kingdom were for grains, including wheat, oats, barley, millet, and buckwheat. The export study indicates that demand for grains will rise in a number of European countries because bakery chains and supermarkets are increasing their sales of organic bread and baked goods. U.S. export volume to Japan was estimated at $40 to $60 million in 1999, and included wheat, durum wheat, and wheat flour exports. Wheat Crops are Central In Organic Farming Systems Certified organic crops were grown on over 850,000 acres in 1997, and pasture and rangeland were certified on almost 500,000 acres, according to a recent Economic Research Service (ERS) report (Greene, 2000b). Almost every State in the United States had some certified organic crop production in 1997, and organic wheat was grown on over 125,000 acres--more than any other organic crop--in over two dozen States. The top organic wheat producing States in 1997 were Montana, with almost 32,000 certified acres, and North Dakota, with about 24,000 acres, followed by Utah, Colorado, and Kansas. The ERS report that contains the most recent national statistics on organic acreage analyzed data from 40 organic certification organizations in the United States--12 State and 28 private--that conducted third party certification of organic production in 1997. The Organic Crop Improvement Association, headquartered in Hitterdal, Minnesota, and Farm Verified Organic, based in Medina, North Dakota, are two of the largest private certifiers in the Midwest and certify organic crops in dozens of States. Over a dozen States also run organic certification programs, including the Departments of Agriculture in Colorado, Idaho, Iowa, Oklahoma, Texas, and Washington. Certified organic wheat acreage was up 31 percent in 1997 from the private-sector estimates for 1995. Hard red spring wheat organic prices were at least 50 percent higher than U.S. cash and futures prices for conventionally-grown spring wheat during that period (Dobbs, 1999a). The number of organic farmers certified in the top organic wheat States was also up during this period and has continued to increase through 1999 (Organic Farming Research Foundation). The four chapters of the Organic Crop Improvement Association in Montana, for example, certified about 140 growers in 1999, up 60 percent from 1995. While both organic and conventional wheat prices are currently lower than they were in the mid-1990s, organic wheat crops are still garnering a premium. Organic wheat farmers generally grow a diversity of crops because of the key role that crop rotation plays in controlling weeds and maintaining fertility in organic farming systems. Data from the organic certification agencies show that organic farmers are producing corn, soybeans, and other major grains and oilseeds, as well as crops such as spelt, millet, buckwheat, and rye that are not grown on a large scale in the United States. In North Dakota, organic rotations that include a green manure fallow every third, fourth, or fifth year are common, according to farm management and extension specialists in that State. The organic crop budgets published by North Dakota State University Extension Service (NDSU) do not include a specific rotation because growers use a lot of different rotations and their rotations continue to evolve over time as they experiment and use new techniques and adapt to changing market conditions (Swenson and Brummond). The crops covered by the NDSU organic crop budgets include spring wheat and durum, as well as feed barley, corn grain, oil and confectionery sunflowers, soybeans, oats, flax, field peas, millet, buckwheat, rye, and rotational green manure fallow (Swenson and Brummond). While certified organic grain acreage was well under 1 percent of the U.S. total for corn, wheat, soybeans, and other major field crops, between 1 and 3 percent of the U.S. oats, millet, and rye crops were certified organic in 1997, and a majority of several specialty grains (spelt, and buckwheat) were organic. (Organic farming systems have been more widely adopted for U.S. horticultural crops, with about 2 percent of major fruit and vegetable crops under organic cultivation in 1997.) The Rodale Institute Research Center in Kutztown, Pennsylvania, along with an increasing number of universities in the United States, are conducting farming system trials that compare organic rotations with conventional ones. Economic analysis of Rodales 3-year organic rotation--corn, soybeans, and wheat with two winter cover crops--suggests that per-acre returns can be competitive with and sometimes greater than for conventional grain rotations (Hanson, Lichtenberg, and Peters). However, the organic rotation required 20 to 42 percent more family labor at different points during the time period analyzed, 1982-1995, which is comparable with similar trial results in Prairie/Plains States. A recent review of the research on the economics of Midwestern organic grain and soybean production during the last several decades found that about half of the organic systems were more profitable than conventional systems, even without price premiums, due to higher yields in drier areas or periods, lower input costs, or crop mix (Welsh). The University of California recently finished the last season of its third 4-year organic crop rotation--processing tomatoes, safflower, corn, and a wheat- dry bean double crop--in its 28-acre farming system trial comparing conventional and organic management. Economic analysis suggests that the organic rotations were more profitable than 2- year or 4-year conventional rotations, but that price premiums were key in maintaining their higher profitability (Clark et al.). Organic grain buyers are located in dozens of States in the United States and in many other countries, according to various directories for the organic farming industry, and some States maintain a list of regional buyers. The Organic Trade Association, a business association that represents the organic industry in North America, listed over 70 import/export businesses in their 1999 industry directory. A number of companies have emerged in the United States to link organic grain farmers with food processors and other end users. Some of these companies own and operate specialty elevators, warehouses, transportation facilities, and conditioning equipment in numerous States and may service organic growers in a dozen States or more. Organic grain production is often contracted prior to planting as a way to manage traceability and other qualities. One company based in Illinois, for example, offers contracts specifically for organic wheat, corn, soybean, black bean, buckwheat, sunflower, popcorn, spelt, and milo crops under organic certification. According to North Dakota farm management specialists, contracts for organic crops vary considerably--for example, some make producers responsible for grain cleaning or shipping charges or both while others do not make the producer responsible for either (Swenson and Brummond). Some organic farmers produce and market their product through cooperatives, and a few of the cooperatives that have entered the organic market over the last several decades focus on marketing grains and soybeans to domestic and international markets. Organic certification organizations require growers to keep detailed records of their input use and other farm activities and to have on-farm inspections. In contrast, other grain crops with value-added attributes, such as high-oil corn and food-grade soybeans, do not require as close monitoring of farm production because tests can quickly and inexpensively confirm the enhanced qualities of these products (Hoffman, Chambers, and Pho). The fees charged by State and private certifiers for providing organic certification services, which may include membership fees, inspection fees, pesticide residue testing fees, and others, represent an ongoing added production expense in certified organic farming systems. Also, most of the State and private certifiers require a 3-year transition (conversion) period before certifying crop acreage and livestock (USDAs new uniform standard requires a 3-year transition period), and farmers cannot obtain certified organic price premiums during this period. Obstacles to adoption in the United States may include large managerial costs and risks of shifting to a new way of farming, limited awareness of organic farming systems, lack of marketing and technical infrastructure, and inability to capture marketing economies (Dobbs et al., 1999b; Lohr and Salomonsson). State and private certifier fees for inspections, pesticide residue testing, and other services represent an added production expense for organic producers. Furthermore, farmers cannot command certified organic price premiums during the 3-year conversion period required before crops can be certified as organic, although some companies may contract crops in transition. National Organic Standards Set in December 2000 Congress passed the Organic Foods Production Act of 1990 in order to establish consistent national standards for organically- produced commodities. The final regulations were published late last year and the USDA has initiated an 18-month transition period for affected growers, processors, and certifiers to come into compliance. 2/----- ----- 2/ USDA is currently implementing these organic regulations, and all agricultural products that are sold, labeled, or represented as organic must be in compliance with them after the 18-month transition period is completed in late 2002. For further information, visit USDAs Agricultural Marketing Service/National Organic Program (NOP) website at www.ams.usda.gov/nop/, or contact NOP staff at (202) 720-3252. ----- These regulations require that all organic growers and handlers (including food processors) will have to be certified by a State or private agency accredited under the uniform standards developed by USDA, unless they sell $5,000 or less per year in organic agricultural products. Most of the State and private certifiers that currently certify growers are expected to apply for accreditation under the national certification program. In USDA's final rule, organic production is defined as, A production system that is managed in accordance with the Act and regulations in this part to respond to site-specific conditions by integrating cultural, biological, and mechanical practices that foster cycling of resources, promote ecological balance, and conserve biodiversity. The national organic standards address the practices and substances used in producing and handling crops, livestock, and processed agricultural products. Although specific practices and materials used by organic operations may vary, the standards require every aspect of organic production and handling to comply with the provisions of the Organic Foods Production Act. Organic grain producers must comply with management requirements for the land they use and adhere to practice standards for soil fertility, seed selection, crop rotation, and pest, weed, and disease management. All producers and handlers must comply with recordkeeping requirements to prevent commingling of organic and nonorganic products. The standards include a National List of approved synthetic, and prohibited nonsynthetic, substances for use in organic production and handling. Organically-produced food cannot be produced using genetic engineering and other excluded methods, sewage sludge, or ionizing radiation. The USDA regulations also contain requirements for organic food labeling which apply to raw, fresh products, and processed foods that contain organic ingredients, and are based on the percentage of organic ingredients in a product. Food products labeled organic must consist of at least 95 percent organically- produced ingredients. Products labeled made with organic ingredients must contain at least 70 percent organic ingredients. The USDA organic seal--the words USDA organic inside a circle--may be used on agricultural products that are 100 percent organic or organic. A civil penalty of up to $10,000 can be levied on any person who knowingly sells or labels as organic a product that is not produced and handled in accordance with the regulations. One Regional Effort To Expand Markets and Supplies Several public and private regional projects were undertaken in the 1990s to examine the obstacles to increased organic production and work on ways to expand the availability of organically-produced food at the regional level. One of these projects, the Upper Midwest Organic Marketing Project (UMOMP), contributed to the strengthening of the markets for organic wheat and other foodgrains in the United States during this period. The project, funded primarily by The Pew Charitable Trusts, was implemented by the Midwest Organic Alliance and aimed to expand both the demand for and the regional supply of organic grains, edible beans, and dairy products in Minnesota, Wisconsin, Iowa, and the Dakotas. The Alliance developed production and marketing strategies during 1995--including a training program for grocery employees, an organic farming curriculum, and an organic meat- marketing infrastructure for its five-State region--and carried out these strategies in 1996 and 1997 (Dobbs, et al., 1999). Consumer demand efforts were focused on the Twin Cities of Minneapolis and St. Paul. The Twin Cities already had a fairly strong network of natural food retail cooperatives, but the involvement of most mainstream grocery stores in promotion and sale of organic foods was quite modest prior to initiation of the UMOMP. The Alliance also evaluated changes in organic prices and sales volume of organic products marketed in the Twin Cities market during this period, and identified obstacles to expanding organic production in the Upper Midwest. The Alliance collected data to compare retail prices of selected organic and comparable non-organic products in the Twin Cities market at the beginning of the project in mid-1995, and twice each year in 1996 and 1997. Three wheat-based products--bread, whole wheat flour, and pasta--were included in the sample data. All three organic wheat-based products received premiums during most of the study period, ranging from 0 to 26 percent for the pasta to 21 to 63 percent for the whole wheat flour. Sales of other organic products also increased during this time period, based on data from A.C. Nielsen, which tracked sales volume of selected organic products to mainstream supermarkets. Sales volume in the Twin Cities market for the top 12 organic product brands increased 20 percent from 1995 to 1996 and 34 percent from 1996 to 1997. The Midwest Organic Alliance also obtained sales volume data from a local distributor which showed their sales of top organic food brands to natural food cooperatives in the Twin Cities area were up 30 percent from 1995 to 1996 and another 13 percent from 1996 to 1997. One concern prior to initiation of the project was whether there would be adequate first-stage or intermediate products (e.g., flour) processing capacity within the five-State region for organic grains and edible beans. Therefore, organic processing volumes at six key plants were monitored. Wheat was the principal organic commodity processed at four of those plants, but oats, barley, millet, rye, and flax also were processed at some of them. Project evaluators interviewed the managers of these six plants and observed operations at some of them. The Midwest Organic Alliance and project evaluators concluded that processing capacity was not--at least as of 1996 and 1997--a constraint to growth in the Upper Midwest organic food industry. A number of the plants processed both conventional and organic grains and edible beans. As organic demands expand, they either add more shifts or process less conventional product to make room for more organic product. Several plants appeared to have the capacity to do more of either or both before they would need to invest in more physical plants. However, the techniques used by processors to prevent commingling of organic and nonorganic products are costly. Also, the more a plant can concentrate on organic processing, the more efficient it is likely to be, by shutting down to convert less often and by more regular scheduling of its organic runs. As demand for organic grains and edible beans continues to grow, both conversions and investments in new plant capacity are likely. Organic processors seemed attuned to industry trends and had potential expansion plans ready. However, there were some capacity problems during this period. Organic manufacturers sometimes had to wait longer than they would have liked for their processing to be worked into schedules. Also, processing capacity seemed to be inadequate for some specialty crops. Some of the lessons learned from this regional project to expand organic food markets and supplies in the Upper Midwest have special significance for wheat and other food grains at this stage of the U.S. organic farm and food systems development (Dobbs, et al., 2000): O For mainstream grocery stores to commit to promotion of organics, assurance of adequate and consistent supplies of organic products is necessary. This requires coordination of brokers, distributors, and some national suppliers. O Although this regional project appeared to have had definite impacts in the short span of a couple of years, consumer education about organic food and agriculture is a long-term process. Public and private sector institutions need to develop funding sources and mechanisms for ongoing educational and awareness efforts. O Industrialization of agriculture issues that confront conventional farmers also are of great concern to organic stakeholders. The need to diversify (versus the need to specialize), as well as the desire to maintain a family farm structure, may conflict with forces pushing farmers to integrate processing and distribution segments of the food chain. Processor needs for steady, consistent supplies of quality organic products could lead to more vertical integration and contract growing. O To balance bargaining power, farmers who are beginning organic production may wish to operate through marketing cooperatives. However, formation of a new generation of cooperatives also entails challenges. Cooperatives must have sufficient capitalization and volume of product committed before launching formal marketing and processing activities. Excessive emphasis on short-term profits can be risky; and developing and honoring long-term relationships may be more important than seeking the highest available prices. Also, organic cooperatives may want to cultivate long-term domestic markets along with their export markets to reduce the risk inherent in the export markets. Burgeoning cooperatives might also consider developing a niche role that serves members needs and seeks to complement existing firms that are already important to the organic industry. A public/private research partnership was recently funded by USDA to work at the national level on objectives that are similar to those of the Upper Midwest Organic Marketing Project, to revitalize small and mid-sized farms through organic research, education, and extension. The partnership includes four universities--the Ohio State University, North Carolina State University, Iowa State University, and Tufts University--and the nonprofit Organic Farming Research Foundation, headquartered in Santa Cruz, California. Policy and Export Issues Governmental efforts in the United States to facilitate organic production have focused primarily on developing national certification standards, although USDA has recently begun several small organic programs, including export promotion, farming systems trials, and weed management research. Also, the Agricultural Risk Protection Act, enacted in June 2000, states that crop insurance products cover good farming practices, including scientifically sound sustainable and organic farming practices, and USDA is examining risk management products offered through Federal crop insurance that would better meet the needs of organic producers. USDA has also started a pilot program in 15 States to provide financial assistance for certification costs (U.S. Department of Agriculture, 2000). Several States also offer some support for organic conversion. Iowa offers organic farmers $50 per acre, up to a maximum 40 acres, to experiment with organic production for a 3-year period under USDAs Environmental Quality Indicators Program (EQIP), and Minnesota provides payments for organic certification costs. U.S. support for organic farming is still very small compared with Europe, where most countries have been providing substantial financial support for organic conversion since the late 1980s. The European Union (EU) had about 1.5 percent of its cropland and pasture under organic management in 1997, compared with only 0.1 percent in the United States. The EU currently has 145,000 farms and 10 million acres--3 percent of the total agricultural land area in the EU--either in conversion or under full organic management (Organic Centre Wales). The basis for the organic support policy in Europe is the multifunctionality view of agriculture, in which agriculture produces not only food but also environmental and social goods. Organic agriculture is considered by many researchers and policymakers in Europe to be quite effective in providing some of these environmental and social goods. Organic grain and soybean farmers in the United States fared well in the growing international export markets during the late- 1990s. Although consumer demand for organic foods in the major organic export markets in Western Europe and Japan is expected to continue growing at a fast pace, the competition for those markets is likely to increase considerably. U.S. organic grain and soybean exports may be increasingly difficult to maintain or expand in the coming decade without additional support measures for organic farming in the United States (Dobbs and Pretty, 2000b). Organic supplies from within the existing EU are likely to expand substantially, for one thing. Lower and decoupled Common Agricultural Policy farm support, in combination with higher and broadened supports for organic production in EU countries, could result in a major expansion of organically- farmed land in EU countries over the next decade. Also, some east and central European countries could become major, low-cost suppliers of organic products. 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Swenson, Andrew, and Brad Brummond, 2000. Projected 2000 Organic Crop Budgets, South Central North Dakota, Farm Management Planning Guide, Section VI, Region 5, North Dakota State University Extension Service, March, see www.ext.nodak.edu/extpubs/agecon/ecguides/sc-org.htm. Welsh, Rick, 1999. The Economics of Organic Grain and Soybean Production in the Midwestern United States, Policy Studies Report No. 13, Henry A. Wallace Institute for Alternative Agriculture, May. See http://www.hawiaa.org/pspr13.htm. U.S. Department of Agriculture, 2000. Glickman Announces National Standards for Organic Food, USDA Press Release No. 0425.00, Washington DC, December. END_OF_FILE