Agricultural Baseline Projections: Baseline Presentation, 2006-2015

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

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

Summary of Projections: February 2006 Baseline

The baseline provides longrun projections for the agricultural sector through 2015. Projections cover agricultural commodities, agricultural trade, and aggregate indicators of the sector, such as farm income and food prices. The baseline identifies major forces and uncertainties affecting future agricultural markets; prospects for global long-term economic growth, consumption, and trade; and future price trends, trade flows, and U.S. exports of major farm commodities.

The projections are a conditional scenario with no shocks and are based on specific assumptions regarding the macroeconomy, agricultural policy, the weather, and international developments. The baseline assumes that the Farm Security and Rural Investment Act of 2002 (the 2002 Farm Act) and the Energy Policy Act of 2005 remain in effect through the projection period. Additionally, the Agricultural Reconciliation Act of 2005 is assumed to be in force. The projections are not intended to be a Departmental forecast of what the future will be, but instead a description of what would be expected to happen under a continuation of current farm legislation, with very specific external circumstances. Thus, the baseline is a neutral backdrop, reference scenario that provides a point of departure for discussion of alternative farm sector outcomes that could result under different domestic or international assumptions.

The baseline projections were prepared in October through December 2005 in support of the fiscal year 2007 President's Budget. Projections reflect a composite of model results and judgment-based analysis. Normal weather is assumed. Also, the baseline assumes no further outbreaks of plant or animal diseases. Short-term projections used as a starting point in the baseline are from the November 2005 World Agricultural Supply and Demand Estimates report.

Key Assumptions Underlying the Baseline Projections Include:

Economic Growth

• World economic growth is projected to increase at a 3.2-percent average annual rate between 2006 and 2015, after averaging 3 percent annually between 2001 and 2005. U.S. gross domestic product (GDP) slows from the high rates in 2004 and 2005 toward a sustainable longrun rate near 3 percent. Strong economic growth in developing countries of about 5 percent annually is projected for 2006-15.

Population

• Growth in global population is assumed to continue to slow in the baseline, to an average of about 1.1 percent per year over the projection period compared with an annual rate of 1.7 percent in the 1980s. Although slowing, population growth rates in developing countries remain above those in the rest of the world. As a consequence, the share of world population accounted for by developing countries increases to over 81 percent by 2015, up from about 80 percent in 2005.

The Value of the U.S. Dollar

• The U.S. dollar is assumed to appreciate slowly in real terms, remaining relatively high by historical standards. A strengthening U.S. dollar in the baseline assumes that capital moves into the United States to take advantage of well functioning financial markets and high expected long-term productivity growth.

Oil Prices

• Large increases in oil prices from late 2002 through 2005 resulted from strong crude oil demand, largely reflecting world economic recovery and rapid manufacturing growth in China and India. From 2007 to 2010, real oil prices are projected to fall as new crude supplies help offset the rise in demand from Asia. In subsequent years, crude oil prices are projected to rise, but only slightly faster than the general inflation rate. Factors expected to constrain longrun oil price increases include new oil discoveries; new technologies for finding, extracting, and refining oil; the ability to switch to nonpetroleum fuels; and the ability to increase energy efficiency by substituting nonenergy inputs for energy.

U.S. Agricultural Policy

• The 2002 Farm Act, as amended, is assumed to continue through the projection period.

• Area enrolled in the Conservation Reserve Program (CRP) is assumed to rise to 39.2 million acres from about 35 million acres currently enrolled.

• The Agricultural Reconciliation Act of 2005 is assumed to be in force for the baseline projections. As part of this legislation, authority to issue cotton user marketing certificates is repealed following the 2005/06 cotton marketing year, thereby ending the Step 2 cotton program. Also, national dairy market loss payments, administered under the Milk Income Loss Contract Program, are extended, with a reduced payment factor of 34 percent of the difference between $16.94 per hundredweight and the Boston Class I price through August 2007.

Ethanol

• The Renewable Fuel Program of the Energy Policy Act of 2005 mandates renewable fuel use in gasoline (with credits for biodiesel) to reach 7.5 billion gallons by calendar year 2012, nearly double 2005's level. This program largely affects production of ethanol, which is primarily produced from corn. Additionally, relatively high prices for oil contribute to favorable comparative returns for ethanol production, providing further economic incentives for expansion in the production capacity of that industry over the next several years. To reflect this ongoing expansion, the baseline assumes that the legislation's renewable fuel standard is significantly exceeded through 2010. In subsequent years, ethanol production is assumed to be closer to the levels in, or levels based on, the legislation.

Cattle and Beef Trade

• The baseline assumes a gradual rebuilding of U.S. beef exports to Japan and South Korea. Canada's exports of live cattle to the United States are assumed to remain limited to steers and heifers under 30 months old for immediate slaughter and Canadian feeder cattle that enter U.S. feedlots and are slaughtered before reaching 30 months of age.

International Policy

• Baseline trade projections assume that countries comply with existing bilateral and multilateral agreements affecting agriculture and agricultural trade. The baseline incorporates effects of trade agreements and domestic policy reforms in place in November 2005. The Central American and Dominican Republic Free Trade Agreement is assumed for the sugar baseline projections starting in calendar year 2006.

• Domestic agricultural and trade policies in individual foreign countries are assumed to continue to evolve along their current path, based on the consensus judgment of USDA's regional and commodity analysts. In particular, economic and trade reforms underway in many developing countries are assumed to continue.

Key Results in the Baseline Projections Include:

U.S. Aggregate Indicators

• Net farm income is projected to be relatively stable from 2006 to 2015, after declining from the historically high levels of 2004 and 2005. Overall farm cash receipts increase through the projections due to growing domestic use and export demand as well as increases in agricultural commodity prices. Rising production expenses and lower government payments, however, offset gains in cash receipts and other sources of farm income. With government payments declining, the agriculture sector relies increasingly on the market for more of its income. Cash receipts represent more than 89 percent of gross cash income at the end of the projections, up from about 85 percent in 2005. Net farm income projections average about $54 billion annually for the next decade, compared with $48 billion in the 1990s. Stable net farm income assists in asset accumulation and debt management. The debt-to-asset ratio falls moderately in the projections, continuing a generally declining trend since the mid-1980s.

• The value of U.S. agricultural exports rises in the baseline as steady global economic growth and stronger world trade lead to gains for U.S. agricultural export volumes and higher commodity prices. High-value product exports continue to grow in importance. Increases in U.S. consumer income and demand for a large variety of foods underlie growth in U.S. agricultural imports. Imports of processed foods are expected to continue growing in importance. Overall, the U.S. agricultural trade balance is projected to show a small surplus through most of the baseline, although it will remain lower than in the past two decades.

• Consumer food prices are projected to rise less than the general inflation rate.

U.S. Agricultural Commodities

• Corn used to produce ethanol in the United States more than doubles the 2004/05 level by 2015/16. This increase reflects the Renewable Fuel Program of the Energy Policy Act of 2005, large ongoing ethanol plant construction, and economic incentives provided by continued high oil prices. Increased feeding of distillers dried grains, a coproduct of dry mill ethanol production, helps meet growing livestock feed demand. Thus, feed use of corn rises only slowly in the projections.

• Growth in the food use of wheat is projected to be somewhat slower than the rate of population increases, reflecting dietary adjustments by some consumers to smaller overall portions, including lower carbohydrates.

• Growth in domestic soybean crush is largely driven by increasing demand for domestic soybean meal, mostly because of rising feed demand for expanding meat production. Domestic demand for soybean meal is tempered somewhat by a rising volume of coproducts from ethanol production.

• Mill use of upland cotton in the United States falls through the projection period as apparel imports by the United States continue to increase, reducing domestic apparel production and lowering the apparel industry's demand for fabric and yarn produced in the United States.

• Steady expansion of domestic food use of rice is projected over the baseline, largely due to an increasing share of the U.S. population of Asian and Latin American descent. Use of rice in processed foods and pet foods also increases.

• Consumption of horticultural products continues to rise in the baseline. Imports play an important role in domestic supply during the winter and, increasingly, during other times of the year, providing U.S. consumers with increased variety of horticultural products.

• With the end of the U.S. tobacco marketing quota and price support program, tobacco leaf production initially declines as some farmers exit the industry. Production then rises through the rest of the projections, primarily reflecting increases by the remaining growers. Declining cigarette consumption in the United States is an important factor underlying projected decreases in domestic use of tobacco leaf. Exports of tobacco leaf are projected to increase, however, reversing the generally downward trend of recent years, as lower tobacco leaf prices than during the last several years under the tobacco program make U.S. leaf more competitive in global trade.

• Higher grain prices reduce returns to U.S. meat producers and slow production gains. Higher levels of per capita meat consumption are projected, with poultry accounting for a larger share of the total. While consumer expenditures on meat increase, they represent a declining share of disposable income.

• Productivity gains are expected to boost milk output per cow and total milk production throughout the projections. Milk cow numbers are expected to decline after 2006 at a relatively slow pace as increasing specialization of dairy farms over time makes exit rates lower than in past decades.

Agricultural Trade

• Population and income are two important factors underlying global demand for food and agricultural products, world trade, and U.S exports. With population growth in the world continuing to slow in the projections compared with previous decades, income growth will become a relatively more important factor underlying strengthening food and agricultural demand. Economic growth in developing countries is especially important because consumption of food and feed are particularly responsive to income growth in those countries, with movement away from staple foods and increased diversification of diets.

• Increases in global demand for food and agricultural products provide the foundation for gains in agricultural trade and U.S. exports. The United States will remain competitive in global agricultural markets, although trade competition will continue to be strong. Expanding production in a number of countries, such as Brazil, Argentina, Canada, Ukraine, and Kazakhstan, provides competition to U.S. exports for some agricultural commodities. A strengthening U.S. dollar assumed in the baseline also is a constraining factor for U.S. agricultural competitiveness and export growth in the longer run. Nonetheless, increases in exports contribute to gains in cash receipts for U.S. farmers.

• Steady longrun growth in the livestock sectors of developing countries in Asia, Latin America, North Africa, and the Middle East accounts for most of the growth in world coarse grain imports projected during the next decade. The United States is the major corn exporter in the world. However, with increasing use of corn for U.S. ethanol production, particularly over the next several years, U.S. corn exports show very little growth through 2010/11. In response, increased corn production and exports are assumed in this period for Argentina and Brazil. China is also assumed to increase corn production as more U.S. corn is used in the production of ethanol. This changes China's net corn trade by slowing the decline in Chinese exports and the increase in its imports. Nonetheless, China is projected to be a net importer of corn in the longer run, reflecting declining stocks of grain and increasing demand for feed for its growing livestock sector.

• Strong income and population growth in developing countries generates increasing demand for vegetable oils for food consumption and for protein meals used in livestock production. Brazil's rapidly increasing soybean area enables it to gain a larger share of world soybean and soybean meal exports, despite increasing domestic feed use. Argentina is the leading exporter of soybean meal and soybean oil, reflecting the country's large and growing crush capacity, its small domestic market for soybean products, and an export tax structure that favors the exports of products rather than soybeans.

• The United States, Australia, the European Union (EU), Canada, and Argentina have historically been the primary exporters of wheat, although exports from the Black Sea region have grown in the past 10 years. Over the next decade, Kazakhstan and Ukraine are projected to have a growing importance in world wheat trade, reflecting low costs of production and continued investments in their agricultural sectors. However, high year-to-year volatility in these countries' production and trade can be expected due to weather extremes and related yield variation.

• Cotton consumption and textile production are projected to increase in countries where labor costs are low, such as China, India, and Pakistan. China is the largest importer of cotton in the world. Although China's cotton imports are expected to grow more slowly than the rapid gains since 2001, these increases account for the gains in global cotton trade in the projections. The United States continues as the world's leading cotton exporter, reflecting its large production capacity and its reduced domestic mill use of cotton as textile imports continue to grow.

• Long-grain varieties of rice account for around three-fourths of global rice trade and are expected to account for the bulk of trade growth over the next decade. Long-grain rice is imported by a broad spectrum of countries in South and Southeast Asia, much of the Middle East, nearly all of Sub-Saharan Africa, and most of Latin America. Thailand and Vietnam remain the world's largest rice-exporting countries, while India is projected to surpass the United States as the world's third-largest rice exporter.

• U.S. meat exports benefit from stronger foreign economic growth in the baseline. Although U.S. beef exports to Japan and South Korea are projected to gradually rebuild, total U.S. beef exports do not return to the levels attained prior to the U.S. case of bovine spongiform encephalopathy (BSE) in 2003.

• Canada continues to be a strong competitor with the United States in pork exports to Pacific Rim nations and Mexico. Canada is also the major supplier of live hog imports by the United States. Brazil also is a major pork exporter. However, the presence of foot-and-mouth disease in Brazil limits Brazilian pork exports to some markets, such as Japan and South Korea.

• Avian influenza is assumed to not significantly affect overall consumer demand for poultry. However, poultry exports from countries affected by the disease, such as Thailand, China, and Vietnam, are expected to be limited to fully cooked products. Brazil remains a leading poultry exporter; low production costs allow the Brazilian poultry sector to remain competitive in global trade.

Macroeconomic Assumptions: February 2006 Baseline

Macroeconomic assumptions underlying the USDA baseline are characterized by steady growth near average historical rates over most of the projection period. The sharp rise in energy and other raw material costs is the main risk to the economic growth outlook. The baseline's macroeconomic assumptions were completed in October 2005.

The U.S. and world economies are highly interdependent through both global trade and financial markets. The United States continues to be the engine of world economic growth, but economic interdependence implies that international macroeconomic conditions have important effects on the U.S. economy as well. While the United States continues to play a large role in determining economic conditions around the world, strong growth in China and India is becoming increasingly important.

U.S. gross domestic product (GDP) growth moderates over the next several years from 3.7 percent in 2005 toward a sustainable rate of about 3 percent over the longer term after 2007. Nonetheless, the United States continues to maintain its share of global GDP at around 30 percent. World economic growth is projected to increase to a 3.2-percent average between 2006 and 2015, after averaging 3 percent annually between 2001 and 2005.

• Despite moderate European and Japanese growth, most of the world will be moving closer to longrun economic growth, with trend rates in 2006 and beyond. Ongoing computing and telecommunications advances support worldwide productivity gains throughout the baseline projections.

• Continued high oil prices assumed in the baseline modestly constrain Asia and its manufacturing sector, which is far more dependent on energy for GDP growth than more developed economies.

• Improved global economic performance and continued, although slowing, population growth are expected to strengthen food demand in the baseline. Increased global purchasing power and population growth are essential drivers of gains in U.S. agricultural exports.

Definition of country groups

Developed economies are projected to grow at rates similar to those of the 1990s, averaging 2.5 percent in 2006-15.

• Enlargement of the European Union (EU) to include countries of Central and Eastern Europe implies closer integration of those economies, creating more trade and investment opportunities within the expanded EU.

• The EU does not, however, grow as rapidly as the United States because of lingering structural rigidities, particularly rigid labor laws and a very expensive social security system. Political difficulties also constrain the benefits of economic integration, particularly with continued restrictions on labor mobility between EU countries and a very cumbersome EU decisionmaking process.

• Japan continues to face significant economic problems, largely the result of long-term structural rigidities and a difficult process of economic reform. The projections assume growth at 1.5 percent a year, with Japan's share of world GDP declining to less than 12 percent by 2015, down from almost 18 percent in 1991.

Definition of country groups

Economic growth in developing countries is projected at about a 5-percent annual rate in 2006-15. Developing countries play an increasingly important role in global growth in food demand and become a more important destination for U.S. exports. Relatively high income growth, along with large food responsiveness to income growth in these countries, underlies this projection. Consumption and imports of food and feed in developing countries are particularly responsive to income changes. As incomes rise in these countries, consumers generally diversify their diets, moving away from staple foods to include more meat, fruits, vegetables, and processed foods (including vegetable oils). These consumption shifts increase import demand for feedstuffs and high-value food products. Historically, this has included increases in U.S. exports of meat and processed foods.

• Long-term growth of 3.7 percent is projected for Latin America. An overall improvement in macroeconomic policies should attract foreign capital inflows and sustain growth.

• Growth rates for Southeast Asia and developing countries of East Asia are projected at about 5 percent for the next decade, but will still be below the very strong average growth of over 7 percent in 1986-95.

• China's economic growth has been consistently the strongest in Asia, exceeding 9 percent between 2003 and 2005. While some moderation is expected, China's growth is expected to average above 7 percent over the next decade.

• India's projected average growth of around 6 percent a year puts it in the first tier of high-growth countries. India is still among the low-income countries, with a per capita income of less than $600 per year. The projected high-growth rate is expected to move a significant number of people out of poverty over the next decade.

• Economic growth in the countries of the former Soviet Union (FSU) is projected to average 5 percent for the next decade, continuing strong growth following the economic declines in the transition period of most of the 1990s. Russia, Ukraine, and other FSU countries benefit from their shift to market economies.

Definition of country groups

A continued slowing of population growth around the world is an important factor constraining increases in agricultural demand over the next decade. Historically, about 70 percent of increases in food use have been related to population growth, leaving about 30 percent driven by increasing incomes and other factors. With population growth slowing in the projections, income growth will become a relatively more important factor underlying food and agricultural demand growth.

• World population growth declines from an annual rate of 1.7 percent in the 1980s to an average of about 1.1 percent per year during the projections.

• Developed and FSU countries have very low projected rates of population growth, at 0.4 percent and 0.1 percent, respectively. The projected annual average population growth rate for the United States is the highest among developed countries, at 0.9 percent, in part reflecting large immigration.

• Population growth rates in developing economies decline by almost half between the 1970s and the end of the projection period, but remain above those in developed countries and the former Soviet Union. As a result, the share of world population accounted for by developing countries increases to 81 percent by 2015.

• China and India together account for around one-third of the world's population. China's population growth rate slows from 1.5 percent per year in 1981-90 to 0.6 percent in 2006-15. The population growth rate in India, the world's second most populous nation, is projected to decline from 2.1 percent to 1.3 percent per year between the same periods. This growth narrows the gap between India's population and China's.

• Brazil's population growth rate falls from 2.1 percent per year in 1981-90 to 0.9 percent annually in 2006-15, and Sub-Saharan Africa's population growth rate declines from 2.9 percent to 2.2 percent per year over the same period.

The U.S. dollar is assumed to appreciate slowly in real terms after 2005, remaining relatively high by historical standards. This high real exchange rate—expressed in the baseline as local currency per U.S. dollar, in inflation-adjusted terms—will constrain the growth in U.S. exports. Even so, high long-term economic growth rates, particularly in the developing countries, will increase the demand for U.S. exports.

• Strong relative GDP growth in the United States compared with the EU and Japan strengthens the dollar relative to the euro and offsets much of the trade-driven appreciation of the yen.

• The U.S. dollar stays strong because capital moves into the United States to take advantage of well-functioning financial markets, a relatively risk-free environment, transparent financial accounting standards, and high expected long-term productivity growth and financial returns.

• Due to relatively stronger global trade competition, U.S. exports of bulk commodities and horticultural products tend to be the most sensitive to the strong U.S. dollar among all agricultural products.

• China, after a long period of an undervalued exchange rate and substantial political pressure from its trading partners, has initiated a process for appreciating its currency. To date, the appreciation has been limited to slightly more than 2 percent. This compares with most estimates of undervaluation of at least 30 to 40 percent. The baseline assumes that China holds its real exchange rate constant, implying some appreciation in the nominal exchange rate.

Definition of country groups

Global inflation rates, which declined in the 1990s (except in the transition economies), are projected to remain relatively low through 2015.

• The U.S. and world economies are moving solidly into an expansion phase. As a result, inflationary pressures have begun. In response, to constrain inflation, the U.S. Federal Reserve Board and central banks in other countries are assumed to further increase short-term interest rates in the initial years of the projections, although less aggressively than in 2005.

• Because of this assumed policy response, inflation is projected to remain below 3 percent in developed countries and the world as a whole.

• Inflation rates in developing countries are projected to fall from over 7 percent to just over 5 percent. Inflation in Asia declines to rates comparable to those in developed countries. Those in Latin America, Africa, and the Middle East, while declining, will remain substantially above inflation rates in the rest of the world.

• In the FSU, inflation rates come down from the high transition rates of the 1990s to an average projected to be below 7 percent.

• Relatively low inflation rates will keep nominal interest rates from moving to the high levels seen in the 1980s. However, as world economies grow more rapidly, demand for credit will rise and further boost interest rates over the longer term. In addition, long-term U.S. interest rates rise in the short run to continue financing the current account deficit.

Crude oil prices rose sharply from late 2002 through 2005, largely reflecting world economic recovery and rapid manufacturing growth in China and India, which resulted in sharply increased crude oil demand. Hurricane Katrina put further upward pressure on world oil prices by temporarily reducing supplies of crude oil and refined products in the fall of 2005. The U.S. Government and the International Energy Agency released emergency oil and fuel reserves, keeping this transitory energy supply shock from further boosting oil prices.

Continued growth in Asian economies will keep oil demand strong in 2006. In 2007-10, crude oil prices are expected to drop modestly as new crude supplies help offset the rise in demand from Asia. After 2010, oil prices are projected to rise, but only slightly faster than the general inflation rate. These projections are generally consistent with the U.S. Department of Energy, Energy Information Administration's (EIA) Annual Long Term Outlook 2006 (released December 2005).

• Underlying these price increases, world oil demand is expected to rise due to strong GDP growth in the relatively high energy-dependent economies in Asia, including China, India, and the rapidly growing economies of East and Southeast Asia.

• Most of China's energy is from coal, but as consumer incomes and automobile demand grow, an increasing share of its energy use will be from petroleum. China has become increasingly efficient in energy use over the past 25 years, reducing its energy intensity by over 60 percent (using EIA's measure of energy used to produce a dollar's worth of GDP). Nonetheless, even with this improvement, China's energy intensity in the early 21st century is over three times as high as in the United States.

• India has become more energy intensive over the past 20-25 years compared with the United States. In the early 1980s, India used twice as much energy as the United States to produce a dollar's worth of GDP, while its current energy intensity is more than 2.5 times that in the United States. As India continues to develop its infrastructure, especially the highway system and electric power grid, energy intensity will rise further.

• The newly industrialized East and Southeast Asian economies of Taiwan, South Korea, Malaysia, Hong Kong, Singapore, and Thailand have gone from parity in energy intensity with the United States in the early 1980s to using 50 percent more energy to produce a dollar of GDP currently.

• Several factors are expected to constrain longrun increases in oil prices.

• New oil discoveries, along with new technologies for finding and extracting oil, are assumed to allow for substantial growth in demand without significant real energy price inflation.

• The ability to switch to nonpetroleum fuels, such as coal and natural gas, especially in industrial uses and electric power generation, is expected to continue restraining increases in oil prices.

• Further, the ability to substitute nonenergy inputs (such as microchip-driven equipment) for energy is an important factor increasing energy efficiency, which is expected to continue to improve through the baseline due to improved energy use technology.

• The net result is that real prices of oil in the baseline are expected to remain higher than over any sustained period historically, largely due to rapid demand growth globally. Nonetheless, higher oil prices are not expected to cause world economic growth to significantly slow (see box).

Oil prices have historically affected prices of natural gas and nitrogen-based fertilizer. However, the links between the oil and natural gas markets have weakened significantly due to dramatic growth in the demand for natural gas and deregulation throughout the natural gas supply and demand system. Prices for natural gas and nitrogen-based fertilizer have become somewhat more volatile than prices for oil largely because natural gas is less fungible and, as a result, its supply is more inelastic. Nevertheless, over a longer period of time, oil and natural gas prices are expected to move more closely together.

U.S. Crops: February 2006 Baseline

Steady U.S. and global economic growth assumed in the baseline provides a favorable demand setting for field crops, supporting longer run increases in consumption, trade, and prices. Additionally, the Energy Policy Act of 2005 mandates renewable fuel use in gasoline (with credits for biodiesel) to reach 7.5 billion gallons by calendar year 2012 (nearly double 2005's level), which underlies strong expansion of corn-based ethanol production in the projections.

Global livestock production rises in the baseline in response to growing incomes and demand for meats, which supports gains in world feedgrain trade. Despite a depreciation of the U.S. dollar relative to many currencies in the last several years, the recent strengthening of the dollar (U.S. agricultural export-weighted basis) is projected to continue. The stronger dollar, combined with trade competition from Brazil, Argentina, and the Black Sea region, constrains U.S. exports for some crops. Additionally, strong domestic use of corn due to increased ethanol production limits U.S. export gains.

Baseline assumptions for field crops reflect the Farm Security and Rural Investment Act of 2002 (2002 Farm Act), which is assumed to continue through the projection period. Income support to field crop producers is provided by marketing assistance loans, loan deficiency payments, counter-cyclical payments, and fixed direct payments. During the baseline period, area enrolled in the Conservation Reserve Program (CRP) is assumed to rise to 39.2 million acres from about 35 million acres currently enrolled. About two thirds of the land in the reserve is allocated to the eight major field crops (corn, sorghum, barley, oats, wheat, rice, upland cotton, and soybeans), based on historical plantings.

Projected plantings for the eight major field crops in the United States increase from 2005's level of about 243 million acres, remaining near 245 million acres throughout the projections, as higher producer net returns keep land in production. Yield increases also contribute to production gains.

Plantings of different crops are influenced by expected net returns. Net returns are determined by market prices, yields, and production costs, with returns augmented by marketing loan benefits when prices are low. Some benefits to growing crops may not be fully reflected in a single year's net returns, such as agronomic benefits of crop rotations. Nonetheless, while consideration of these multiyear factors can also affect planting choices, measures of farmers' response to net returns based on historical data implicitly include these effects.

• Corn, wheat, and soybeans account for about 87 percent of acreage for the eight major field crops. The cropping mix shifts more to corn and away from soybeans as growth in global supply and demand is reflected in prices and net returns. In particular, growth in domestic ethanol production from corn increases demand, raising corn prices and returns.

• Corn acreage rises significantly in the initial years of the projections, as larger domestic ethanol production from corn increases demand, raising corn prices and net returns. In the longer run, increasing exports also underlie higher corn acreage. The increase in corn plantings is facilitated, in part, by a reduction in soybean area.

• Wheat plantings range between 57 million and 59 million acres. Moderate growth in domestic and export demand is partly met by rising yields, thus limiting price increases and incentives to plant.

• Relatively higher energy-related production costs for corn in 2006 are expected to provide an initial boost to soybean plantings. However, acreage planted to soybeans then declines through the remainder of the projections as more favorable returns to corn production draw land from soybeans.

Domestic corn use grows throughout the projections period, primarily reflecting increases in corn used in the production of ethanol. Global economic growth underlies increases in U.S. corn exports after 2010/11.

• Large increases are projected in corn used for ethanol production over the next several years. The Renewable Fuel Program of the Energy Policy Act of 2005 mandates the volume of renewable fuel to be included in gasoline (with biodiesel credits) for each calendar year through 2012, reaching almost double current levels. This program predominantly affects ethanol production, which is primarily produced from corn. Additionally, relatively high prices for oil contribute to favorable comparative returns for ethanol production, providing further economic incentives for expansion in production capacity over the next several years.

• Feed and residual use of corn rises only slowly in the baseline as increased feeding of distillers dried grains (DDG), a coproduct of dry mill ethanol production, helps meet growing livestock feed demand. (Note: When a bushel of corn is used in the production of ethanol, the entire bushel is accounted for in the fuel alcohol use category, because the DDG coproduct, even though used in livestock feeding, is no longer corn.)

• Gains in food and industrial components of domestic corn use (other than for ethanol production) are projected to be smaller than increases in population. For example, consumer dietary concerns limit increases in the combined use of corn for high fructose corn syrup, glucose, and dextrose to about half the rate of population gain.

• As incomes grow in the rest of the world, especially in developing economies, consumers shift to more meat in their diets, which requires more feed grains for meat production. To support this growth in meat production, global trade in feed grains expands in the baseline. U.S. corn exports show very little growth over the next several years as more corn is used domestically in the production of ethanol. However, increased production and exports from Argentina, Brazil, and China are assumed during this period.

• In the longer run, after growth in ethanol production in the United States slows, U.S. corn exports rise in line with global trade to support growth in global meat production. Additionally, U.S. corn exports to Mexico are boosted because of the phase-down and elimination of the tariff rate on over-quota corn imports from the United States, shifting some U.S. exports to corn from sorghum, which already has tariff-free status. As a result, U.S. market share of global corn trade stabilizes in the latter years of the projections.

Demand in the U.S. wheat sector grows throughout the projection period, with moderate gains for exports and small increases in domestic food and feed uses.

• Domestic demand for wheat in the United States reflects a relatively mature market. After declining from 2000 to 2004, food use of wheat resumes moderate gains. Growth is somewhat slower than population increases, reflecting dietary adjustments by some consumers to smaller overall portions, including lower carbohydrates.

• Feed use of wheat, a low-value use of the crop, shows only small increases in the baseline. Projected gains in wheat feed and residual use are driven by growth in the livestock sector, relatively lower wheat prices compared with corn, and increases in production.

• U.S. wheat exports increase after 2008/09 as income and population in developing countries grow, raising global wheat consumption and trade. Competition from the European Union (EU), Canada, Argentina, Australia, and exporters from the Black Sea region continues, holding the U.S. market share relatively constant near 23 percent for most of the projections. Market shares for Australia, Argentina, and the Black Sea region increase, while shares for Canada and the EU decline.

Domestic use of soybeans continues to rise slowly, but U.S. soybean exports decline due to moderate production gains and increased global competition.

• Growth in domestic soybean crush is largely driven by increasing demand for domestic soybean meal, mostly because of rising feed demand for expanding meat production. Domestic demand for soybean meal is tempered somewhat by a rising volume of corn coproducts from the production of ethanol.

• With initially large stocks, low prices help U.S. soybean exports approach 1.1 billion bushels in the next several years. Exports then decline to under 1.0 billion bushels as U.S. acreage is shifted to corn to support ethanol production and competition from Brazil strengthens. Consequently, the U.S. market share of global soybean trade declines.

• U.S. exports of soybean meal and soybean oil also face strengthening competition from South American producers, limiting gains in U.S. soybean meal exports and reducing soybean oil exports.

Mill use of upland cotton in the United States continues to fall through the projection period from its peak in 1997/98. Upland cotton exports rise after 2006 as more cotton processing occurs in developing countries with lower labor costs.

• Textile and apparel import quotas that had been established under the Multi-Fiber Arrangement were eliminated at the start of calendar year 2005. As a result of this and other factors, apparel imports by the United States continue to increase through the projections, reducing domestic apparel production and lowering the apparel industry's demand for fabric and yarn produced in the United States. Some increase in U.S. yarn and fabric exports is projected due to trade liberalization, but the net effect is for declining domestic mill use, which is projected at less than 40 percent of its 1997/98 level at the end of the projection period.

• The baseline assumes that the upland cotton user marketing certificate program (Step 2) ends after the 2005/06 cotton marketing year. U.S. upland cotton exports initially decline in 2006/07, but then grow moderately throughout the remainder of the projections.

• Growth in the textile industry in China slows from the rapid expansion of recent years, reducing growth in China's cotton import demand. As a result, world cotton consumption and trade slow as well. With global trade growth slowing, gains in U.S. cotton exports after 2006/07 allow the United States to maintain a cotton trade share of about 37-38 percent, down from over 40 percent recently.

Steady expansion in domestic food use of rice is projected over the baseline, although the rate of expansion is well below rates in the 1980s and 1990s. U.S. rice exports are projected to expand moderately in the latter part of the projection period.

• Growth in domestic use of rice is largely due to an increasing share of the U.S. population of Asian and Latin American descent, with imports of specialty rices from Asia accounting for a growing share of domestic use. Use of rice in processed foods and pet foods also increases. Overall, these factors result in a small, but steady, rise in per capita rice use in the United States.

• U.S. rice exports are projected to decline in 2006/07 and then remain flat through 2009/10 as a relatively tight domestic market keeps the U.S. price premium over Asian competitors high. In the later years of the projections, U.S. production growth exceeds gains in domestic use, reducing the price premium. As a result, U.S. competitiveness in global markets improves and U.S. rice exports increase.

• Global rice prices are projected to increase about 3 percent per year, exceeding $8 per hundredweight (rough basis) by the end of the baseline. Slower production growth in Asia and growing worldwide import demand for rice are behind the steady increase in global prices.

U.S. stocks to use ratios for corn and soybeans are up sharply at the start of the projections after 2 consecutive years of large production. Large corn and soybean stocks are reduced early in the projections and stocks to use ratios for those crops decline from their initial high levels. Later in the projections, prices rise and encourage additional production, resulting in a leveling of stocks-to-use ratios for these crops. The stocks to-use ratio for wheat rises through 2008/09, largely reflecting weak exports, but declines in subsequent years as exports strengthen.

As with corn and soybeans, the stocks to use ratio for cotton is initially high due to large 2004 and 2005 production. Again, similar to corn and soybeans, the cotton stocks-to-use ratio declines and then flattens in the later years of the projections. In contrast, reduced 2005 yields lower the rice stocks-to-use ratio, with rice stocks and the stocks-to-use ratio gradually increasing over the projection period.

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

• Over the next couple of years, corn prices rise from the lows of 2005/06 as a return to trend yields and lower acreage reduce production and overall supplies, while increases in ethanol production strengthen corn demand. In the longer run, yield growth is sufficient to meet slower ethanol production gains and moderate export growth, resulting in stable stocks-to-use ratios and prices for corn.

• Similarly, soybean stocks decline from initial large levels and prices rise through the early years of the projections. In the longer run, soybean prices level off as the stocks-to-use ratio stabilizes near 8 percent, reflecting lower exports and reduced soybean acreage as land shifts to corn.

• Greater foreign competition and weaker U.S. wheat exports initially reduce wheat prices. Prices then rise through the remainder of the projection period as domestic demand and exports increase moderately and the stocks-to-use ratio declines.

The U.S. sugar baseline projections are highly integrated with projections for Mexico. A continuation of current sugar policies is assumed for both countries.

• U.S. sugar policies are set out in the 2002 Farm Act; Chapter 17 of the U.S. Harmonized Tariff Schedule that includes commitments made by the United States under Uruguay Round Agreement on Agriculture; the North American Free Trade Agreement (NAFTA); and the Central American and Dominican Republic Free Trade Agreement. The sugar price support program includes the loan rate program and domestic marketing allotments. The loan rate for raw sugar is 18 cents per pound and the rate for refined beet sugar is 22.9 cents per pound. After 2006, as part of the sugar marketing allotment program, the Overall Allotment Quantity (OAQ) is calculated by the formula set out in the 2002 Farm Act. The OAQ is the sum of desired ending stocks and deliveries for domestic food and beverage use less the sum of 1.532 million STRV and beginning stocks, including any stocks owned by the Commodity Credit Corporation (CCC). Desired ending stocks are assumed at 14.5 percent of total use (all sugar deliveries and exports).

• Mexican sugar policies are bound by the NAFTA. Additionally, the 20-percent tax that the Mexican Government levies on the consumption of beverages that use high-fructose corn syrup is assumed to continue in the projections despite being ruled inconsistent with international trade rules by a World Trade Organization panel. This tax limits the amount of Mexican sugar available for export to the United States.

Growth of sugar consumption in the United States exceeds growth in production in the baseline. U.S. sugar consumption is assumed to grow at the same rate as does population, implying constant per capita sugar consumption after 2006. With sugar prices nearly constant in range of 21-22 cents a pound for most of the baseline, there is no appreciable growth in area planted to sugar crops. Projected increases in production come from growth in yields.

On January 1, 2007, the U.S. high-tier NAFTA tariff falls to 1.51 cents a pound for raw sugar imports and 1.60 cents a pound for refined sugar imports, with each falling to zero in 2008. Because U.S. sugar prices are substantially higher than world levels, the destination of all Mexican sugar exports is the United States. With increased stocks in Mexico following large 2005 and 2006 production, Mexican exports of sugar are high in 2007 and 2008, but then fall back to more moderate levels after Mexican stocks are reduced.

In the United States, high levels of sugar imports from Mexico in FY 2007 and FY 2008 result in a domestic surplus of sugar and market-clearing sugar prices below the minimum to avoid forfeiture in 2008 without CCC removals. CCC is projected to own a modest 95,000 STRV at the end of fiscal year 2008.

Starting in FY 2010, additional tariff-rate quota (TRQ) sugar is needed to supplement domestic production and NAFTA imports in meeting domestic consumption requirements. TRQ imports grow from 1.373 million STRV in FY 2010 to 1.639 million STRV in FY 2016. Because these imports are needed to meet the OAQ, sugar imports above 1.532 million STRV do not cause the OAQ to be suspended. (Technically, unfilled OAQ from insufficient production is reassigned to imports, as per the 2002 Farm Act.)

Legislation enacted in October 2004 ended the U.S. tobacco marketing quota and price support program beginning with the 2005 crop year. A buyout of tobacco quotas accompanied the termination of the program. With the elimination of tobacco programs, which had been in effect since 1938, producers are no longer restricted in the location or quantity of tobacco they produce, nor do they receive price support for the tobacco they sell. As part of the quota buyout, stocks of tobacco currently held by grower-owned cooperatives will be sold in a manner that does not destabilize tobacco markets.

• With the end of the tobacco program, leaf production in the baseline initially declines as some farmers exit the industry. Starting in 2006, expansion by the remaining growers causes production to recover slowly as production costs decline due to the elimination of costs associated with acquiring quota and as economies of scale are achieved on fewer, larger farms. Additionally, production shifts to areas such as the Coastal Plain of North Carolina and western Kentucky, where producers can achieve more economically viable scales of operation.

• Leaf prices fell in 2005/06 and are projected to remain lower than during the last several years under the tobacco program, making U.S. leaf more competitive in global trade. Exports of tobacco leaf are projected to increase, reversing the generally downward trend of recent years. Nonetheless, the tobacco industry will continue to face competition from foreign producers, particularly Brazil.

• Declining cigarette consumption in the United States is an important factor underlying projected decreases in domestic use of tobacco leaf. Cigarette sales in the United States are expected to continue to fall 2-3 percent per year for the baseline period. Per capita consumption declines as those who smoke find fewer opportunities to smoke in public places and the cost of cigarettes increases due to higher prices and taxes. Exports of cigarettes will likely stabilize near current levels.

U.S. imports of horticultural products (fruit and nuts, vegetables, greenhouse and nursery products, essential oils, beer, and wine) are forecast to continue outpacing exports, with net imports expected to increase about $8 billion from 2005 to 2015. Imports play an important role in domestic supply during the winter and, increasingly, during other times of the year. Reduced trade barriers offer U.S. consumers increased variety, with freer trade also enhancing global competition.

• The exchange value of the U.S. dollar vis-à-vis currencies of other countries is an important factor affecting trade. The dollar's overall appreciation during the next 10 years slows export demand for U.S. horticultural products and raises U.S. import demand.

• U.S. horticulture imports are expected to grow by about 4 percent annually through 2015. The European Union is the top source of U.S. horticulture imports, accounting for $7.4 billion out of a total $25.8 billion in 2005. Mexico is the second biggest source of U.S. horticulture imports, which amounted to $6 billion in 2005. Chile, Canada, and Brazil are also large sources of horticultural product imports by the United States. Key import commodities include potatoes, tomatoes, bananas, grapes, frozen concentrated orange juice, apple juice, melons, tree nuts (especially cashews), wine, beer, and essential oils.

• U.S. horticulture exports are expected to grow by 3 percent a year through 2015. Exports of almonds and other tree nuts as well as noncitrus fruits will lead export growth of fruit and nuts. Exports of fresh and processed vegetables will be stronger than nursery and greenhouse crops. Exports of wine, beer, and essential oils are also expected to increase. Major export markets for U.S. horticultural products include Canada, Japan, and Southeast Asia.

• The production value of U.S. horticulture crops is forecast to grow by 2.3 percent annually over the next decade. The total farmgate production value in 2005 is estimated at $47.5 billion, with about a third of the total accruing to each of the following three categories: fruits and nuts; vegetables and melons; and nursery, greenhouse, and other crops.

U.S. Livestock: February 2006 Baseline

Livestock sector projections over the baseline period reflect increasing production, strong domestic demand, and strengthening exports for meat. Meat exports grow through the projection period as global incomes rise and meat demand increases. The baseline assumes a gradual rebuilding of U.S. beef exports to Japan and South Korea. While overall meat exports benefit from stronger foreign economic growth in the baseline, U.S. beef exports do not return to levels attained prior to the December 2003 discovery of bovine spongiform encephalopathy (BSE) in Washington State.

With rising grain prices, due largely to expansion of corn-based ethanol production, returns to U.S. red meat production are generally lower than in recent years, slowing beef and pork production gains, particularly in 2010-15. Larger increases in poultry output result in poultry becoming a larger proportion of total U.S. meat consumption. Overall, annual per capita consumption of red meats and poultry grows from 220 pounds in 2005 to 231 pounds in 2015.

U.S. beef production increases from the sharp declines of 2003 and 2004. Despite the loss of export markets following the case of BSE in late 2003, strong domestic demand for beef and restrictions on imports of Canadian beef and cattle pushed producer returns higher. Together with favorable forage and feedgrain supplies, this led to the retention of cows and heifers for future expansion. Cattle herds are expected to increase from cyclical lows near 95 million head in 2004 to near 103 million head at the end of the projections, with much of the gain occurring in the next several years. Rising slaughter weights augment the herd expansion, leading to strong beef production gains through 2009, with more moderate increases over the remainder of the projections. Pork production grows slowly as the coordinated/integrated industrial structure continues to dampen the traditional U.S. hog cycle. Poultry production continues to rise, but less rapidly than during the 1990s due to the maturity of domestic demand and slower export growth.

The trend toward larger livestock systems continues throughout the baseline period. Efficiency gains allow production to expand while real prices generally decline. Production of all meats slows in the second half of the projections, reflecting higher feed costs as more corn is used in the production of ethanol.

• Strong demand for consistent, higher quality beef continues in the domestic hotel and restaurant market, and increasingly in the retail market. Also, the rebuilding of beef export markets is primarily for high-quality beef. Increasing movement toward transparent animal identification in international trade will strengthen quality assurance and the shift toward Prime/Choice beef.

• Increased efficiency of the U.S. hog breeding herd is reflected in a continued shift to larger, specialized, more efficient operations and in the decline of smaller, less efficient operations. For the baseline, the increase in efficiency slows since larger, more efficient operations already account for a large share of the U.S. pig crop.

• Production coordination and market integration between the United States and Canada continues in the hog sector. Canada is the major supplier of live swine imports by the United States. Imported feeder pigs produced in Canada are finished and processed in the United States, where processing costs are lower.

• The poultry sector has benefited from gains in efficiency at both the production and processing levels that reflect economies of scale associated with the industry's horizontal and vertical integration. Projected gains in efficiency over the next decade are smaller than in the past 25 years.

Livestock prices are projected to average somewhat lower than the high levels of 2004, with producer returns generally lower as well.

U.S. consumers buy more meat, but spend a smaller proportion of disposable income for these purchases, continuing a long-term trend. Over the next 10 years, consumer meat expenditures decline from about 2 percent to 1.3 percent of disposable income. Poultry expenditures continue to increase as a share of consumer spending on meats.

Higher levels of total per capita meat consumption are projected over the next decade, largely reflecting continued increases in poultry consumption. On a retail-weight basis, per capita consumption rises to 231 pounds from the 2005 level of 220 pounds.

• Although declining toward the end of the projections, per capita consumption of beef remains at relatively high levels through the baseline because of strong domestic demand for high-quality beef. Additionally, although beef exports grow, they do not return to 2003 levels in the projections, thereby limiting price increases seen by U.S. consumers.

• Pork consumption remains stable at about 50-51 pounds per person throughout the projections.

• Per capita consumption of relatively lower priced poultry increases throughout the baseline, allowing poultry to gain a larger share of total meat consumption and meat expenditures.

U.S. meat exports rise throughout the baseline period as global economic growth increases demand for meats. A gradual recovery in beef exports to markets such as Japan and South Korea is also critical to the projections. The baseline assumes that Brazil and Argentina will not be recognized as free of foot-and-mouth disease (FMD) by key importing countries, such as Japan, which limits trade competition in those markets.

Beef

• U.S. beef exports primarily reflect demand for high-quality fed beef, with most U.S. beef exports typically going to markets in Pacific Rim nations. The loss of those markets following the BSE case in the United States in late December 2003 caused U.S. beef exports to be sharply reduced. However, with a gradual recovery in U.S. beef exports to Japan and South Korea assumed in the baseline, U.S. beef exports are projected to rise slowly.

• U.S. imports of processing beef from Australia and New Zealand decline in the baseline as more, lower quality processing beef comes from domestic sources with the rebuilding of the cattle herd. The United States is a net beef importer by volume throughout the projections as the recovery of high-quality fed beef exports does not reach prior levels.

Pork

• U.S. pork exports benefit from reduced beef exports as import demand shifts among competing meats. Pacific Rim nations and Mexico remain key markets for long-term growth of U.S. pork exports. Canada continues to be a strong competitor in these markets. Brazil also is a major pork exporter. However, without nationwide FMD-free status, Brazil focuses its pork exports on Russia, Argentina, and Asian markets other than Japan and South Korea.

• While increased efficiency in U.S. pork production limits production-cost increases and enhances the competitiveness of U.S. pork products, longer term gains in U.S. pork exports will be determined by costs of production and environmental regulations relative to competitors. Such costs tend to be lower in countries with growing pork industries, such as Brazil.

Poultry

• U.S. broiler export growth is expected to slow from the rate of the 1990s. Major U.S. export markets include Asia, Russia, and Mexico. Gains in these markets reflect strong economic growth and rising consumer demand for meat, with much of the higher demand being for poultry due to its lower cost relative to beef and pork. U.S. producers will face strong competition from other major broiler exporting countries, particularly Brazil. Poultry exports from countries affected by avian influenza, such as Thailand, China, and Vietnam, are expected to be limited to fully cooked products.

The sharp decline in beef exports in 2004 lowered the overall meat export share of the total value of domestically produced meat from about 11 percent in 2003 to under 8 percent, based on a measure that weights exports of beef, pork, and chicken by farm-level prices. While U.S. meat exports increase to over 11 percent of production value by the end of the projections, the domestic market remains the dominant source of overall meat demand.

Relatively favorable farm milk prices in 2004 and 2005 encouraged increases in milk cow numbers in 2005 and 2006. Combined with an upward trend in output per cow, this resulted in relatively strong gains in milk production and lower prices in 2005, which are also expected for 2006. Smaller production gains are projected over the rest of the baseline.

• Productivity gains are expected to boost milk output per cow and total milk production throughout the projections. Further development of large, specialized operations in most regions will be a significant contributor to these gains.

• Growth in milk output per cow is projected to slow in the baseline as gains are less easily boosted by simply increasing the amount of concentrate feeds fed.

• Milk cow numbers are expected to decline after 2006 at a relatively slow pace. Increasing specialization of dairy farms over time (and the associated less attractive salvage uses for dairy capital and other inputs) makes exit rates from milk production lower than in past decades.

• Commercial use increases slightly faster than the growth in population, reflecting slow growth in domestic demand for dairy products. Cheese and butter demand benefit from greater consumption of prepared foods and increased away-from-home eating. Per capita consumption of fluid milk, however, is expected to decline slowly.

• Farm-level milk prices decline in 2006 due to relatively large production increases. Prices then rebound somewhat in 2007 as milk production gains are smaller. Projected milk prices are then relatively flat for several years, but rise over the last part of the baseline as production gains slow further. Nonetheless, milk price movements are projected to be less than the general inflation rate after 2007.

U.S. Agricultural Sector Measures: February 2006 Baseline

Longrun developments for the U.S. farm sector reflect steady domestic and international economic growth, which support gains in consumption, trade, and prices. Although export competition is projected to continue, global economic growth, particularly in developing countries, provides a foundation for gains in world trade and U.S. agricultural exports. Combined with increases in domestic demand, particularly growth in corn used for ethanol production, the results are generally rising market prices and cash receipts. Rising production expenses and lower government payments offset the gains in cash receipts and other sources of farm income, holding net farm income relatively stable from 2006 to 2015, after declining from the historically high levels of 2004 and 2005. Consumer food prices are projected to rise more slowly than the general rate of inflation.

Net farm income falls over the next several years from the historically high levels of 2004 and 2005, and then stabilizes over the remainder of the projections.

• Decreases in cash receipts, lower government payments, and higher production expenses push net farm income down in 2006. Growing demand then boosts cash receipts after 2006. Rising farm production expenses and reductions in government payments to farmers largely balance the gains in cash receipts and other farm income, keeping projected net farm income relatively flat near $54 billion a year. Nonetheless, net farm income remains higher than the average in the 1990s of about $48 billion.

Direct government payments to farmers are projected to fall from $23 billion in 2005 to under $13 billion in 2011-14, and then to $11.5 billion in 2015 when the tobacco quota buyout payments end.

• As projected market prices rise, price sensitive payments decline toward the end of the projections. Consequently, fixed direct payments under the Farm Security and Rural Investment Act of 2002 (2002 Farm Act) and conservation payments account for a larger share of direct government payments.

• With government payments declining, the agriculture sector relies increasingly on the market for more of its income and the share of income provided by government payments falls. Government payments, which represented more than 8 percent of gross cash income in 2005, account for less than 5 percent at the end of the projections.

• To account for the possibility of both higher and lower prices than the baseline's deterministic (point estimate) prices, a stochastic estimation process has been adopted to project expected direct government payments. This process captures the asymmetry in farm program outlays due to stochastic (random) shocks (see box).