Agricultural Baseline Projections: Baseline Presentation, 2008-2017

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 2008 Baseline

This report provides longrun projections for the U.S. agricultural sector through 2017. Major forces and uncertainties affecting future agricultural markets are discussed, such as prospects for long-term global economic growth and population trends. Projections cover production and consumption for agricultural commodities, global agricultural trade and U.S. exports, commodity prices, and aggregate indicators of the sector, such as farm income and food prices.

The projections are a conditional scenario with no shocks and are based on specific assumptions regarding the macroeconomy, agricultural and trade policies, the weather, and international developments. The report assumes that the Farm Security and Rural Investment Act of 2002 (the 2002 Farm Act), the Energy Policy Act of 2005, and the Agricultural Reconciliation Act of 2005 remain in effect through the projection period. Projections do not reflect the Energy Independence and Security Act of 2007. The projections are not intended to be a Departmental forecast of what the future will be, but instead are a description of what would be expected to happen under a continuation of current farm legislation, with very specific external circumstances. Thus, the projections provide 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 projections in this report were prepared in October through December 2007 and reflect a composite of model results and judgment-based analyses. Normal weather is assumed. Also, the projections assume no further outbreaks of plant or animal diseases. Short-term projections used as a starting point in this report are from the November 2007 World Agricultural Supply and Demand Estimates report.

Overview of Assumptions and Results

Key Assumptions Underlying the Projections Include:

Economic Growth

• World economic growth is projected to increase at a 3.5-percent average annual rate between 2008 and 2017, after averaging 2.9 percent annually in 2001-07. U.S. gross domestic product (GDP) increases from the 2007 slowdown toward a sustainable rate of about 3 percent over the longer term. Strong economic growth in developing countries, particularly important for growth in global food demand, is projected at 5.8 percent annually for 2008-17.

Population

• Global population growth is assumed to continue to slow 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 most 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 nearly 84 percent by 2017, up from 79 percent in the 1980s.

The Value of the U.S. Dollar

• The U.S. dollar continues to depreciate through 2011, with a drop in value of about 14 percent from 2002. Over the rest of the projection period, the dollar is assumed to show a small appreciation. Strong economic growth in the United States relative to the European Union (EU) and Japan will mitigate continuing pressure for the euro to appreciate relative to the dollar and will offset much of the trade-driven appreciation of the yen. In addition, capital continues to move into the United States to benefit from well-functioning and diverse financial markets.

Oil Prices

• Large increases in oil prices over the past several years reflected strong demand for crude oil resulting from world economic recovery and rapid manufacturing growth in China and India. Following a continuation of increases through 2009, crude oil prices are expected to drop modestly in 2010 through 2013 as new crude supplies help offset the rise in demand from Asia. After 2013, oil prices are projected to rise slightly faster than the general inflation rate.

• Underlying these longer term price increases, world oil demand is expected to rise due to strong global economic growth, particularly in highly energy-dependent economies in Asia. Factors expected to constrain longer run oil price increases include new oil discoveries, new technologies for finding and extracting oil, the ability to switch to non-oil energy sources, the ability to increase energy efficiency by substituting nonenergy inputs for energy, and continued expansion and improvement in renewable energy.

U.S. Agricultural Policy

• The 2002 Farm Act, as amended, and the Agricultural Reconciliation Act of 2005 are assumed to continue through the projection period.

• Area enrolled in the Conservation Reserve Program (CRP) is assumed to decline through 2009 as high prices encourage the return of some land to production when CRP contracts expire. CRP acreage is then assumed to gradually rise toward its legislated maximum of 39.2 million acres, reaching 37 million acres by the end of the projections.

U.S. Biofuels

• The projections in this report were completed prior to enactment of the Energy Independence and Security Act of 2007. Thus, provisions of that legislation are not reflected in these projections, which are based on the Energy Policy Act of 2005.

• The projections also assume that the tax credits available to blenders of biofuels (ethanol and biodiesel) and the 54-cent-per-gallon tariff on imported ethanol used as fuel remain in effect. Combined with the Energy Policy Act of 2005, State programs, high oil prices, and other factors, returns for ethanol production provide economic incentives for a continued expansion in the production capacity of the ethanol industry over the next several years. As a result, over 12 billion gallons of ethanol are assumed to be produced by 2010. Although more moderate growth is projected in subsequent years, over 14 billion gallons of ethanol are produced annually by the end of the projection period. Corn starch is expected to remain the primary feedstock for ethanol projection during the projection period. Cellulosic-based production of renewable fuels is assumed to meet the minimum specified in the Energy Policy Act of 2005 of 250 million gallons in 2013 and subsequent years. Biodiesel production is assumed to increase to near 600 million gallons by 2013.

Cattle and Beef Trade

• The projections assume a gradual rebuilding of U.S. beef exports to Japan and South Korea. Due to recent changes in U.S. regulations, the projections assume Canadian cattle and beef from cattle over 30 months of age can be exported to the United States under the conditions that they are age-verifiable and born after March 1, 1999.

International Policy

• Trade projections assume that countries comply with existing bilateral and multilateral agreements affecting agriculture and agricultural trade. The report incorporates effects of trade agreements and domestic policy reforms in place in November 2007.

• 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.

International Biofuels

• The production of biofuels is experiencing rapid growth in a number of countries. The projections assume that the most significant increases in foreign biofuel production over the next decade will be in the EU, Brazil, Argentina, and Canada. In particular, the projections assume that the EU biofuel target of 5.75 percent of total transportation fuel use by 2010 is only partially met by that date, and is still not fully reached by 2017. Nonetheless, growth in biodiesel demand in the EU is a key factor underlying gains in global vegetable oils and oilseeds demand.

Key Results in the Projections Include:

Steady domestic and international economic growth in the projection period supports gains in consumption, trade, and prices of agricultural products. Additionally, the projections reflect continued high crude oil prices and increased demand for biofuels, particularly in the United States and the EU.

U.S. Aggregate Indicators

• Although net farm income initially declines from high levels of 2007 and 2008, it is projected to remain historically strong throughout the projection period, and reach record levels beyond 2011. Growth in export demand contributes to increases in agricultural commodity prices and gains in farm cash receipts. Increases in corn-based ethanol production also provide a major impetus for this strong income projection. Higher commodity prices lower government payments for price-dependent program benefits, although annual CRP payments increase. With lower government payments, the agriculture sector relies increasingly on the market for its income. Cash receipts represent more than 90 percent of gross cash income in the projections, up from about 85 percent in 2005.

• The value of U.S. agricultural exports rises in the projections as steady global economic growth and stronger world trade lead to gains for U.S. agricultural export volumes and higher commodity prices. The lower value U.S. dollar is also an important factor underlying recent export gains and the projected growth. Additionally, higher commodity prices due to expansion of global biofuel demand contribute to the projected gains in export values. Increases in U.S. consumer income and demand for a large variety of foods underlie continued strong growth in U.S. agricultural imports.

• For most of the projections period, consumer food prices increase less than the general inflation rate. However, adjustments in retail prices due to higher energy and agricultural commodity prices lead to food price increases somewhat larger than general inflation in 2008 and 2009. Relatively large price increases are expected in 2008 for fats and oils and for cereals and bakery products, reflecting higher prices for vegetable oils and wheat. Consumer prices for red meats, poultry, and eggs exceed the general inflation rate in 2009 as the livestock sector adjusts to higher feed costs. Consumer expenditures for food away from home continue to grow in importance and account for more than half of overall food spending during most of the projection period.

U.S. Agricultural Commodities

• Strong expansion of corn-based ethanol production in the United States affects virtually every aspect of the field crops sector, ranging from domestic demand and exports to prices and the allocation of acreage among crops. A higher portion of overall plantings is allocated to corn. Higher feed costs also affect the livestock sector, mitigated somewhat by the increased availability of distillers grains.

• Ethanol production in the United States continues its strong expansion through 2009/10, with slower growth in subsequent years. By the end of the projections, ethanol production exceeds 14 billion gallons per year, using almost 5 billion bushels of corn. The projected large increase in ethanol production reflects the Energy Policy Act of 2005, State programs, ongoing ethanol plant construction, and economic incentives provided by continued high oil prices. Feed use of corn declines in the initial years of the projections and then rises only moderately as increased feeding of distillers grains helps meet livestock feed demand, particularly for beef cattle.

• Growth in the food use of wheat is projected to match the rate of population increase. Feed use of wheat rebounds from the low levels of 2006/07 and 2007/08 as higher corn prices encourage increases in wheat feeding. Wheat feeding then levels off as wheat prices relative to corn stabilize.

• Soybean acreage falls in the projections after 2008 due to more favorable returns to corn production. Longrun growth in domestic soybean crush is mostly driven by increasing demand for domestic soybean meal for livestock feed. Some gains in crush also reflect increasing domestic soybean oil demand for biodiesel production.

• Moderate expansion of domestic food use of rice is projected. Although growth is somewhat faster than population growth, it is well below the rates of growth in the 1980s and 1990s when per capita use rose rapidly. Imports of rice account for a growing share of domestic use in the projections.

• Mill use of upland cotton in the United States falls in the projections as U.S imports of apparel continue to increase, reducing domestic apparel production and lowering the apparel industry’s demand for fabric and yarn produced in the United States.

• Duties and quantitative restraints on sugar and high fructose corn syrup (HFCS) trade between the United States and Mexico ended on January 1, 2008. This results in increased use of HFCS by Mexico’s beverage industry and, consequently, larger sugar exports from Mexico to the United States.

• The production value of U.S. horticultural crops is projected to grow by more than 3 percent annually over the next decade, with consumption of horticultural products continuing to rise. Imports play an important role in domestic supply during the winter and, increasingly, during other times of the year, providing U.S. consumers with a larger variety of horticultural products.

• Production of all meats slows or declines in the first half of the projections, largely reflecting higher feed costs and lower producer returns as more corn is used in the production of ethanol. After those production adjustments, strong domestic demand and some strengthening in meat exports result in higher prices and higher returns, providing economic incentives for expansion in the sector.

• Per capita meat consumption declines through 2012-14 as the livestock sector lowers overall production and retail prices rise. Meat consumption per person then rises again at the end of the projections period. Rising incomes facilitate gains in consumer spending on meat. Nonetheless, overall meat expenditures represent a declining proportion of disposable income.

• Strong domestic and international demand for dairy products contributed to high U.S dairy prices in 2007. Despite higher feed costs, strong farm-level milk prices are projected to encourage further increases in milk cow numbers through 2009. Combined with an upward trend in output per cow, the results are relatively strong gains in milk production in 2008 and 2009 and decreases in milk prices. Smaller production gains are projected on average over the rest of the projection period because milk cow numbers decline after 2009. Milk prices rise after 2009.

Agricultural Trade

• World consumption of many grain, oilseed, and meat commodities has exceeded world production in the past several years, reducing global stocks. As a result, global stocks-to-use ratios have dropped sharply and prices have risen. Tight market conditions are projected to persist for many commodities over most of the coming decade, keeping agricultural commodity prices high.

• Broad-based global economic growth provides a foundation for robust gains in world demand for agricultural products. Economic growth in developing countries is especially important because food consumption and feed use are particularly responsive to income growth in those countries, with movement away from staple foods and increased diversification of diets. Rapid expansion of ethanol and biodiesel production in some countries also adds to global agricultural demand growth.

• Population growth rates are slowing in most countries but rates in developing countries remain nearly double those of developed countries. Many developing countries are also projected to achieve rapid economic growth rates.

• 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, including Brazil, Argentina, Canada, Ukraine, and Russia, provides competition to U.S. exports for some agricultural commodities. The lower-valued U.S. dollar assumed in the first half of the projection period boosts U.S. agricultural competitiveness and export growth. Even as the U.S. dollar strengthens later in the projection period, export gains continue to contribute to gains in cash receipts for U.S. farmers.

• Continuing 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, U.S. corn exports show very little growth through 2012/13. In response, corn production and exports are assumed to increase for Argentina, Ukraine, Republic of South Africa, and Brazil. China is also assumed to increase corn production, which changes its net corn trade by slowing the decline in its exports and the increase in its imports. Nonetheless, China is projected to become a net importer of corn in the longer run, reflecting declining stocks of grain and increasing demand for feed for its growing livestock sector.

• Vegetable oil prices rise in response to rapidly increasing demand for food use in low- and middle-income countries. Vegetable oil prices also rise relative to prices for oilseeds and protein meals because of expanding biodiesel production in a number of countries. 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 exports of soybean products and biodiesel rather than soybeans. The former Soviet Union, Eastern Europe, and Southeast Asia increase rapeseed and palm oil production for use as biodiesel feedstocks.

• The United States, Australia, the 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, Russia 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 typical weather-related variation in yields.

• Cotton consumption and textile production are projected to increase in countries where labor and other 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 most of 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 apparel 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.  Indonesia, the Philippines, and Bangladesh become the three largest rice-importing countries and account for about 30 percent of the increase in global rice trade over the next decade.  Sub-Saharan Africa, a large importing region, accounts for more than a fourth of the increase in trade, with the Middle East also contributing to rice trade gains. Thailand, Vietnam, the United States, India, and Pakistan remain the world’s largest rice-exporting countries.

• U.S. meat exports benefit from strong foreign economic growth. However, even with U.S. beef exports to Japan and South Korea assumed to gradually rebuild, total U.S. beef exports do not return to levels of 2000-03 until late in the projection period.

• Pacific Rim nations and Mexico are key markets for long-term growth of U.S. pork exports. Higher income countries of East Asia increase pork imports as their domestic hog sectors are constrained by environmental concerns. Mexican pork imports rise rapidly, driven by increases in income and population. Brazil is constrained in its pork trade by the presence of foot-and-mouth disease, but continues to be a major pork exporter to markets such as Russia, Argentina, and Asian markets other than Japan and South Korea.

• Brazil remains a leading poultry exporter as low production costs allow the Brazilian poultry sector to remain competitive in global trade. Poultry exports from countries affected by avian influenza, such as Thailand and China, are expected to be mostly fully cooked products destined for higher income markets.

Macroeconomic Assumptions: February 2008 Baseline

Macroeconomic assumptions underlying USDA's long-term projections reflect steady growth at near-average historical rates over most of the projection period. Most of the world will be moving toward longrun sustainable economic growth, with trend rates in 2009 and beyond. Overall, world economic growth is projected to increase at a 3.5-percent average rate between 2008 and 2017, after averaging below 3 percent annually between 2001 and 2007. The projections have moderating growth in developed countries and accelerating growth in developing and former Soviet Union countries.

High crude oil prices and the U.S. subprime mortgage problems are assumed to have a moderate impact on the U.S. economy into 2008, holding growth to 2.5 percent (see box, U.S. Financial Market Effects on the Macroeconomic Outlook). U.S. gross domestic product (GDP) growth then moves back toward a sustainable rate of about 3 percent. The U.S. share of global GDP declines to 28 percent from 30 percent in 2005-07. Continued strong growth in China, India, and the rest of Asia make this region an increasingly important part of the global economy, with Asia overall rising to more than a 30-percent share by the end of the projection period.

Improved global economic performance and continuing, although slowing, population growth is expected to boost food demand in the projections. Increased global purchasing power and population growth, competing against demand for biofuels and other domestic uses, are important factors shaping the projections for U.S. agricultural exports and the strong outlook for commodity prices. Supporting the outlook for U.S. agricultural exports is also the cumulative effect of a depreciating U.S. dollar.

Even with the U.S. and world economies projected to move toward sustainable longrun growth, global inflation rates are projected to remain relatively low through 2017, averaging about 3 percent. Some inflationary pressures have resulted because of energy price increases and the movement towards full employment and full capacity utilization. In response, the U.S. Federal Reserve Board and central banks in other countries are assumed to continue policies to constrain inflation.

Definition of country groups

Developed economies are projected to grow at rates similar to those of the 1990s, averaging around 2.5 percent in 2008-17. Economic growth rates for the EU and Japan increase from recent gains, but remain around 2 percent per year in the projection period. As a consequence, both the EU and Japan account for smaller shares of global GDP.

• Enlargement of the European Union (EU) to include more countries of Central and Eastern Europe creates additional trade and investment opportunities within the expanded EU. The EU economy, however, does not grow as rapidly as the U.S. economy because of lingering EU structural rigidities, particularly inflexible 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 decision making process. Unemployment rates decline from double-digit rates, however, indicating some progress in increasing employment flexibility.

• Japan continues to face constraints to economic growth, largely the result of long-term structural rigidities, a difficult political process of economic reform, and a rapidly aging population. Japan's labor market liberalization partly offsets these constraints, aiding productivity growth. Japan's increasing integration with the other economies of Asia, especially China, further mitigates the growth constraints in the Japanese economy. The projections assume sustained economic growth in Japan at 2 percent a year, with the country's share of world GDP declining to below 12 percent by 2017, down from almost 18 percent in 1991. While Japan's projected growth remains relatively low compared with most other countries, it represents a major improvement from its growth in the 1990s.

Definition of country groups

Economic growth in developing countries is projected to average 5.8 percent annually during 2008-17. Developing countries will play an increasingly important role in global growth in food demand and will become a more important destination for U.S. farm exports. Relatively high income growth, along with large responsiveness of consumption and imports of food and feed to income growth in these countries, underlies this result. As incomes rise in developing countries, consumers generally diversify their diets, moving away from staple foods to include more meat, dairy products, fruits and vegetables, and processed foods (including vegetable oils). These consumption shifts increase import demand for feedstuffs and high-value food products.

• Long-term growth of 4 percent is projected for Latin America. An overall improvement in macroeconomic policies should attract foreign capital inflows, particularly foreign direct investment, and sustain growth.

• Projected growth for Southeast Asia exceeds 5.1 percent for the next decade while growth in developing countries of East Asia exceeds 7 percent. Although large, these projected growth rates are below the very strong average economic growth in these regions in 1971-2007.

• China's economic growth has been consistently the strongest in Asia, exceeding 10 percent between 2003 and 2006. While some moderation is expected, China's growth is expected to average above 8 percent over the next decade.

• India's projected average economic growth of almost 8 percent a year puts it in the top tier of high growth countries. Nonetheless, India is still a low-income country, with real 2000-based per capita income of $664 in 2007. Continued strong income growth is expected to bring India's real per capita income to more than $1,200 by 2017 and is expected to move a significant number of people out of poverty.

• High oil prices assumed in the projections modestly constrain Asia from even higher economic growth since its manufacturing sector is far more dependent on energy for GDP growth than more developed economies.

• Economic growth in the countries of the former Soviet Union (FSU) is projected to average 5.5 percent annually for the next decade. Russia, Ukraine, and other FSU countries benefit greatly from their shift to more market-oriented economies. Russia and other energy rich FSU countries also benefit from high oil prices.

Definition of country groups

A continued slowing of population growth around the world is an important factor limiting increases in food and agricultural demand over the next decade. 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 for the projection period.

• 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 more than 40 percent between the 1980s and the end of the projection period, but remain above those in developed countries and the FSU. As a result, the share of world population accounted for by developing countries increases to 84 percent by 2017.

• China and India together account for more than 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 2008 17. The population growth rate in India, the world's second most populous nation, is projected to decline from 2.1 percent to 1.5 percent per year between the same periods. The differential in population growth narrows the gap between India's and China's populations.

• Brazil's population growth rate falls from 2.1 percent per year in 1981-90 to 0.8 percent annually in 2008-17. Sub-Saharan Africa's population growth rate declines from 2.9 percent to 2.2 percent per year between the same periods, leaving this impoverished region with the highest population growth rate in the world.

• There are a number of countries with declining populations. Most of these are mature economies such as Japan and countries in Western Europe, Central Europe, and the FSU. However, several countries in Sub Saharan Africa have declining populations resulting from the AIDS epidemic, including the Republic of South Africa, Botswana, Lesotho, and Swaziland.

The U.S. dollar continues to depreciate through 2011, with moderate strengthening over the rest of the projection period. The lower-value dollar is a facilitating factor in the growth in U.S. exports in the projections. Combined with strong global economic growth, particularly in developing countries, the result is strong growth in the demand for U.S. farm exports.

• Strong GDP growth in the United States relative to the EU and Japan will mitigate continuing pressure for the euro to appreciate relative to the U.S. dollar and offsets much of the trade-driven appreciation of the yen.

• China initiated a process for appreciating its currency in 2005 after a long period of maintaining a fixed nominal exchange rate and an undervalued currency. The projections assume that China allows its real exchange rate to continue to appreciate at modest rates. The appreciation of China's currency also leads to appreciation of other Asian currencies.

• Capital continues to move into the United States to benefit from well-functioning and diverse financial markets, although these inflows are projected to continue to decline. The overall U.S. trade deficit and the capital account surplus fall over the projections period.

• Among agricultural products, U.S. exports of bulk commodities and horticultural products tend to be the most sensitive to swings in the U.S. dollar's value, because they face more global trade competition.

Crude oil prices rose sharply from late 2002 through 2007, largely reflecting increased crude oil demand due to a robust world economic recovery and rapid manufacturing growth in China and India. In 2008 through 2009, crude oil prices are expected to continue to rise modestly. Between 2010 and 2013, oil prices are expected to decline slightly. This is followed by a period when they rise slightly faster than inflation, reflecting rising world oil demand, due to strong global economic growth, particularly in highly energy dependent economies in Asia. By the end of the projection period, the refiner acquisition cost for crude oil imports is projected at over $85 per barrel.

Partly offsetting those effects, factors expected to constrain longrun increases in oil prices include:

• The ability to switch to non-oil energy sources, such as coal and natural gas, especially in industrial uses and electric power generation;

• Increasing energy efficiency due to the substitution of nonenergy inputs (such as microchip-driven equipment) for energy as well as improved energy-use technology;

• Continued expansion and improvement in renewable energy, such as wind and water power, thermal energy, solar power, and biofuels;

• Continued extraction of fossil fuels from unconventional sources such as oil shale and tar sands; and

• New oil discoveries, along with new technologies for finding and extracting oil.

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. At the same time, fertilizer imports have become more important in domestic supply. Prices for natural gas and nitrogen-based fertilizer have become somewhat more volatile than prices for oil, largely because natural gas is less transportable 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 as the United States and other natural gas importers develop the capacity to import more liquefied natural gas.

U.S. Crops: February 2008 Baseline

Strong expansion of corn-based ethanol production in the projections affects virtually every aspect of the field crops sector, ranging from domestic demand and exports to prices and the allocation of acreage among crops. Additionally, steady U.S. and global economic growth assumed in the projections provides a favorable setting for other uses of field crops, which, following the initially large ethanol expansion, supports longer run increases in consumption and trade and keeps prices at historically high levels.

Although tempered somewhat by higher feed prices, global livestock production rises in the projections in response to growing incomes and demand for meats, which supports gains in world consumption and trade for feed grains. Following a moderate depreciation of the U.S. dollar in the first several years of the projections, the dollar (U.S. agricultural export-weighted basis) is then projected to appreciate. The strengthening U.S. 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 and the shift of land to corn from soybeans limit U.S. exports in the early years of the projections, particularly for corn and soybeans.

Assumptions for field crops reflect provisions of the Farm Security and Rural Investment Act of 2002 (2002 Farm Act), which is assumed to continue through the projection period. However, with high prices projected, benefits from price-sensitive programs are reduced. For example, marketing loan benefits and counter-cyclical payments for feed grains are minimal, even accounting for stochastic factors. High prices also lead to a reduction in area enrolled in the Conservation Reserve Program (CRP) through 2011. The CRP is then assumed to expand toward its 39.2 million acre maximum, reaching 37 million acres in 2017. CRP rental rates will increase as farmers’ bids for participation in the program rise to reflect higher crop prices.

Projected plantings for the eight major field crops in the United States increase from about 246.5 million acres in 2007 to over 252 million in 2008 as the market responds to current high prices prompted by strong demand and lower global supplies of oilseeds and wheat. Although plantings for these eight crops then fall, they level off near 244 million acres during most of the projection period, as continued high prices and producer net returns hold land in production.

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.

• Corn, wheat, and soybeans account for about 88 percent of acreage for the eight major field crops over the projection period. In 2008, there is some shift in the cropping mix toward wheat and soybeans and away from corn due to short-term global supply reductions for those crops. However, longer term shifts move acreage back to corn, reflecting the growth in domestic corn-based ethanol production that raises corn prices and producer returns.

• Following a decline in 2008, corn acreage increases and remains above 90 million acres over the remainder of the projections as the expansion in ethanol production increases corn demand, prices, and net returns.

• Soybean plantings decline to less than 70 million acres after 2008 reflecting more favorable returns to corn production.

• Wheat plantings rise sharply in 2008 in response to high prices resulting from tight global supplies. Wheat acreage falls back to about 56 million acres in the longer run due to competition from other crops.

Domestic corn use grows throughout the projection period, primarily reflecting increases in corn used in the production of ethanol. Global economic growth underlies increases in U.S. corn exports after 2011/12.

• Large increases are projected in corn used for ethanol production over the next several years. Relatively high prices for crude oil contribute to favorable returns for ethanol production, which combine with government programs to provide economic incentives for a continuation of the ongoing expansion in ethanol production capacity.

• Feed and residual use of corn declines in the initial years and then rises only moderately as increased feeding of distillers grains, a coproduct of dry mill ethanol production, helps meet livestock feed demand.

• Gains in food and industrial uses of corn (other than for ethanol production) are projected to be smaller than increases in population. Consumer dietary concerns and other changes in tastes and preferences limit increases in the combined use of corn for high fructose corn syrup, glucose, and dextrose to about half the rate of population gain.

• U.S. corn exports fall over the next several years as global corn trade declines from the record 2007/08 level and as more corn is used domestically in the production of ethanol. After growth in ethanol production in the United States slows, U.S. corn exports rise in response to stronger global demand for feed grains to support growth in meat production.

• Additionally, U.S. corn exports to Mexico are boosted because of the elimination of tariffs on corn imports from the United States. This shifts some U.S. exports to corn from sorghum and corn products, which already had tariff-free status.

• Strong ethanol demand in the projections pushes U.S. corn stocks lower than current levels.

Overall demand in the U.S. wheat sector grows very slowly through the projection period.

• Domestic demand for wheat reflects a relatively mature market. Food use of wheat is projected to show moderate gains, generally in line with population increases.

• Feed use of wheat, a lower-value use of the crop, rises in the initial years of the projections from the levels of recent years as higher corn prices encourage increases in wheat feeding. As price relationships between wheat and corn stabilize, wheat feeding levels off after 2010/11.

• U.S. wheat exports are steady over the projections period as competition continues from the European Union (EU), Canada, Argentina, Australia, and the Black Sea region. In particular, wheat prices are projected at levels high enough that the EU can export wheat without subsidies, thus permitting higher EU exports. Consequently, the U.S. market share declines through the projections to under 20 percent by 2017/18. Market shares for Australia, Argentina, the EU, and the Black Sea region increase, while the market share for Canada continues to decline.

• Wheat stocks rebound from low 2007/08 levels as higher prices encourage additional acreage and production. Then in the later years of the projections, stocks decline as wheat acreage falls.

Domestic use of soybeans continues to rise slowly. U.S. soybean exports fall, however, as acreage declines and as more soybeans are processed domestically.

• Longrun growth in domestic soybean crush is mostly driven by increasing demand for domestic soybean meal for livestock feed. Some gains in crush also reflect increases in domestic soybean oil demand for biodiesel production through 2013/14. Increases in export demand for soybean oil and soybean meal also add to crush demand.

• U.S. soybean exports fall below 900 million bushels as competition from Brazil strengthens and U.S. acreage shifts to corn to support ethanol production. Consequently, the U.S. market share of global soybean trade declines from 35 percent in 2007/08 to about 21 percent at the end of the projections.

• Although U.S. exports of soybean oil and soybean meal increase modestly, the United States loses market share in global trade of these products against the strengthening competition from South American producers.

• Following a decline in 2007/08 from historically high stocks, a rebound in soybean acreage in 2008 keeps stocks from falling further. After 2008, shifts in acreage to corn from soybeans keep soybean stocks from rebuilding and the stocks-to-use ratio declines.

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

• Corn prices continue to rise through 2009/10 as increases in ethanol production strengthen corn demand. As ethanol expansion slows, stocks rebuild somewhat and corn prices decline. Then in the longer run, corn stocks-to-use ratios fall slowly as gains in corn used for ethanol production and moderate export growth outpace increases in production (resulting from generally higher acreage and gains in yields). Consequently, corn prices resume moderate growth and remain historically high.

• With competition from corn keeping soybean acreage lower, stocks are held relatively constant, the stocks-to-use ratio falls, and soybean prices remain high throughout the projections.

• Wheat prices decline from current levels in the early years of the projections as higher production facilitates the rebuilding of stocks. As wheat acreage declines in the latter years of the projections, stocks decline and push wheat prices up.

Continued expansion in domestic food use of rice is projected over the next decade. U.S. rice exports show moderate increases.

• Domestic use of rice is projected to grow somewhat faster than population growth, although well below the rates in the 1980s and 1990s when per capita use rose rapidly. Imports of aromatic varieties of rice from Asia account for a growing share of domestic use in the projections.

• U.S. rice exports are projected to increase at a moderate pace after 2008/09, as the U.S. price difference over Asian competitors falls, increasing U.S. competitiveness in global rice markets. Exports of rough rice to Latin America are expected to continue increasing, and account for most of the U.S. export expansion.

• Stocks of rice initially fall, but then gradually increase after 2008/09 as rice acreage rises.

• Global rice prices are projected to increase 2.5 to 3 percent per year, exceeding $10.50 per hundredweight (rough basis) at the end of the projection period. These price increases largely reflect a tightening global stocks situation due to slow yield growth and little ability to expand area in most producing countries. This effect is partially offset by declining global per capita disappearance, largely due to dietary shifts away from staple foods in Asia as incomes rise.

• U.S. rice prices rise through the projection period, reaching about $12.50 per hundredweight by 2017. The U.S. price difference over Asian competitors declines, but still remains relatively high at $2.00 at the end of the projection period.

U.S. mill use of upland cotton declines in the projections while upland cotton exports rise after 2009/10.

• At the end of the projection period, domestic mill use is projected at less than 40 percent of its 1997/98 level. Textile and apparel import quotas that had been established under the Multifiber Arrangement (MFA) were eliminated at the start of calendar year 2005. As a result of this and other factors, apparel imports by the United States 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.

• U.S. upland cotton exports decline in 2009/10 from levels in the previous 2 years that were facilitated by high stock levels. Exports then grow moderately, accounting for about 80 percent of U.S. cotton production throughout much of the projection period.

• Growth in the textile industry in China slows from the rapid expansion of recent years, reducing growth in China’s cotton imports. As a result, world cotton consumption and trade slow as well. With global trade growth slowing, gains in U.S. cotton exports after 2009/10 keep the U.S. cotton trade share at about one-third, down from 41 percent in 2003/04 and 2004/05.

• Cotton stocks decline in the first several years of the projections as some acreage shifts to corn. Beyond 2009/10, cotton acreage increases and stocks rebuild through the end of the projections.

The U.S. sugar price support program includes the loan rate program and marketing allotments as set out in the 2002 Farm Act. Sugar projections for the United States also are strongly interrelated with projections for Mexico. Starting January 1, 2008, there are no duties or quantitative restraints on sugar or high fructose corn syrup (HFCS) trade between the United States and Mexico, in compliance with the North American Free Trade Agreement (NAFTA).

• Use of HFCS by Mexico’s beverage industry is projected to increase beyond current levels, implying a higher exportable surplus of sugar in Mexico. Returns in Mexico from exporting sugar to the United States are projected to be higher than either delivering sugar to domestic food manufacturers for use in sugar-containing-product exports or exporting sugar to other countries at world prices. Over the period from fiscal year (FY) 2009 through 2018, annual U.S. sugar imports from Mexico are projected to average 1.568 million short tons, raw value (STRV), about 15 percent of human consumption of sugar in the United States.

• U.S. sugar imports are projected to exceed the trigger (1.532 million STRV) for suspension of marketing allotments in all years of the projections. U.S. sugar prices are driven down to the minimum level to avoid forfeiture to the Commodity Credit Corporation (CCC). It is assumed that the USDA uses all available measures to reduce CCC program costs. In spite of flat sugar prices, historical growth trends in productivity measures underlying domestic U.S. sugar production projections (sugar per acre, and beet and cane yields) are assumed to continue.

• Long term sugar projections assume that the raw sugar tariff-rate quota (TRQ) is established each year at 1.231 million STRV, the World Trade Organization (WTO) minimum access level. The refined sugar TRQ is established each year at 94,251 STRV. The refined TRQ includes 71,826 STRV of specialty (mostly organic) sugar. Sugar imported under the Dominican and Central American Free Trade Agreement is projected at 121,761 STRV in FY 2009 and increases by 2,237 STRV each year. The yearly raw sugar TRQ shortfall is assumed to equal 70,000 STRV.

• Overall sweetener consumption in the United States is assumed to grow at about the same rate as population. Imports of sugar-containing product are expected to grow faster than population, so per capita consumption of domestically delivered sugar decreases slightly during the projections period.

The total farmgate production value of U.S. horticultural crops for 2007 was $55 billion, with about a third contributed by each of vegetables, fruits and nuts, and nursery and greenhouse crops. The total production value grows by 3.2 percent annually over the next decade, reaching $73.7 billion in 2017.

• U.S. imports of horticultural products (fruit and nuts, vegetables, greenhouse and nursery products, essential oils, beer, and wine) are projected to continue outpacing exports, with net imports expected to increase about $12 billion from 2007 to 2017. The appreciation of the U.S. dollar after 2011 is an important factor affecting trade, slowing export demand for U.S. horticultural products and raising U.S. import demand.

• U.S. horticultural imports are expected to grow by about 4 percent annually through 2017. 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 EU is the top source of U.S. horticultural imports, accounting for $9 billion out of a total $32.4 billion in 2007. Mexico is the second biggest source of U.S. horticultural imports ($7.4 billion in 2007) followed by Canada ($3.5 billion). Chile 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. horticultural exports are expected to grow by 3 percent a year through 2017, with the major export markets including Canada, the EU, Mexico, Japan, and Southeast Asia. Exports of almonds, other tree nuts, and noncitrus fruits will lead export growth of fruit and nuts. Exports of fresh vegetables will be stronger than processed vegetables. Exports of wine and essential oils are also expected to increase.

U.S. Livestock: February 2008 Baseline

Projections for the livestock sector include production adjustments in response to high grain and soybean meal prices resulting from the expansion of corn-based ethanol production. Returns to U.S. meat and poultry production fall levels in recent years, slowing increases in or reducing production of all meats over the next several years. Once the sector adjusts, lower overall production combined with strong domestic demand and some strengthening in meat exports result in higher prices and higher returns, providing economic incentives for expansion in the sector and a resumption in meat production gains.

Production of all meats slows or declines in the first half of the projection period, reflecting higher feed costs as more corn is used in ethanol production. Distillers grains, a coproduct of ethanol production, can be used in livestock rations, partially substituting for corn and sometimes for soybean meal. However, distillers grains can more easily be used by ruminants (such as cattle) compared to monogastric animals (such as hogs and chickens). Beef cattle feedlots located close to ethanol plants are best situated to benefit from a steady supply of distillers grains, also reflecting the ability of those animals to use the wet form of distillers grains. Meanwhile, distillers grains are less suitable in poultry and hog rations.

• Higher grain prices as well as effects of drought in recent years hold down cattle inventories, pushing U.S. beef production down in 2008-10. Production then rises in the remainder of the projection period as returns improve and herds are rebuilt. The cattle inventory remains in a range of 96-99 million head throughout the projections. Rising slaughter weights contribute to the moderate expansion of beef production beyond 2010. Higher costs of feedlot gain will result in stocker cattle remaining on pasture to heavier weights before entering feedlots.

• Pork production declines in 2009-11 in response to higher feed prices and then grows for the remainder of the projections as higher hog prices improve returns. Production coordination and market integration between the United States and Canada continue in the hog sector. Canada is the major supplier of live swine imported by the United States. Imported feeder pigs from Canada are finished and processed in the United States, where both finishing and processing costs are lower.

• Poultry production slows in 2009-13 while adjusting to higher feed costs, but begins to rise towards the end of the projections period. During the period, rising exports account for a larger share of total production.

Livestock sector production adjustments to higher feed costs as well as gains in meat and poultry exports result in higher consumer prices and lower per capita consumption. Annual per capita consumption of red meats and poultry falls from 222 pounds in 2006 to a low of 214 pounds in 2012-14. Per capita consumption of red meats and poultry then resumes growth to almost 217 pounds in 2017.

• Per capita beef consumption declines through the projection period, reflecting production adjustments in the industry to higher feed costs. U.S. beef exports rise through the projection period, further limiting domestic per capita beef consumption. A gradual rebuilding of U.S. beef exports to Japan and South Korea is assumed.

• Strong demand for consistent, high-quality beef continues in the domestic hotel and restaurant market, and increasingly in the retail market. Demand for U.S. beef in export markets is also primarily for high-quality beef.

• Higher feed costs lead to reductions in pork production, which combine with rising pork exports to push per capita pork consumption down through 2012. A gradual rebound in per capita pork consumption occurs over the remainder of the projection period as production gains strengthen.

• Due partly to higher feed conversion rates, poultry prices remain lower than red meat prices. However, as returns are squeezed, slower production growth and higher exports result in per capita consumption declines in 2010-12. Following these adjustments, production strengthens and per capita consumption slowly grows toward the end of the projection period.

Livestock prices rise through most of the projection period reflecting production adjustments in response to higher feed costs.

Rising incomes facilitate gains in consumer spending on meat. Nonetheless, overall meat expenditures represent a declining proportion of disposable income, continuing a long-term trend.

Although the domestic market remains the dominant source of overall meat demand, exports account for a growing share of U.S. meat use. Despite higher prices, U.S. meat exports rise throughout the projection period as global economic growth and a continued weak U.S. dollar support increases in demand.

• U.S. beef exports primarily reflect demand for high-quality fed beef, with most U.S. beef exports typically going to Mexico, Canada, and markets in Pacific Rim nations. A gradual recovery of U.S. beef exports is assumed in the Japanese and South Korean export markets lost following the first U.S. case of bovine spongiform encephalopathy (BSE) in December 2003.

• U.S. imports of processing beef from Australia and New Zealand increase in the projections. With more demand in East Asian markets being met by the United States, exports from Australia and New Zealand are reduced, resulting in more of their product being shipped to the United States. The United States is a net beef importer by volume throughout the projection period as the recovery of high-quality fed beef exports does not reach levels of 2000-03 until the last several years of the projections.

• Pacific Rim nations and Mexico remain key markets for long-term growth of U.S. pork exports. Brazil is also a major pork exporter. However, no changes in the set of countries recognizing Brazil as free of foot-and-mouth disease (FMD) are assumed, thus limiting Brazilian pork producers' ability to compete in some markets. Consequently, Brazil's pork exports expand to markets such as Russia, Argentina, and Asian markets other than Japan and South Korea.

• Despite higher feed costs, increased efficiency in U.S. pork production enhances the competitiveness of U.S. pork products. Nonetheless, 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 which are developing integrated pork industries, such as Brazil.

• The value of the U.S. dollar relative to currencies of other pork exporting countries is expected to enhance U.S. pork export volumes, particularly in the early years of the projection period.

• U.S. broiler exports rise through the projection period, although at a slower pace than in earlier years. Major U.S. export markets include China, Russia, and Mexico. Gains in these markets reflect economic growth and increasing consumer demand. Demand for poultry also remains strong due to its lower cost relative to beef and pork. U.S. producers will continue to face strong competition from other major exporters, particularly Brazil. For most of the projection period, exports from avian influenza-affected countries are expected to be limited to fully cooked products.

In 2007, U.S. prices for farm-level milk and for dairy products, such as cheese, nonfat dry milk, and dry whey, were high relative to historic levels due in part to the international dairy situation. Relatively high prices are expected to extend into 2008. As incomes in developing countries have grown, so has the global demand for dairy products. World milk supplies have been tight, however, due in part to reform of the Common Agricultural Policy (CAP) in the European Union and drought conditions in Australia. The U.S. dairy industry has become a major commercial exporter of nonfat dry milk, dry whey products, and cheese. Although U.S. milk production grew significantly in 2007, the growth was limited by high feed costs relative to historic levels and tight supplies of dairy heifers.

• Despite higher feed costs, strong farm-level milk prices are projected to encourage further increases in milk cow numbers through 2009. Combined with an upward trend in output per cow, the results are relatively strong gains in milk production in 2008 and 2009 and decreases in milk prices. Smaller production gains are projected on average over the rest of the projection period because milk cow numbers decline after 2009.

• Milk output per cow is projected to increase, although some slowing in these gains occurs in 2009 and 2010 in response to higher feed costs. Nonetheless, further development of large, specialized operations in most regions will contribute to a continuation of gains in output per cow.

• Milk cow numbers are expected to decline after 2009, although reductions are moderate as increasing specialization of dairy farms over time slows exit rates from milk production compared with past decades.

• Commercial use of dairy products increases slightly faster than the growth in population. Cheese demand benefits from greater consumption of prepared foods and increased away-from-home eating. However, per capita consumption of fluid milk is expected to continue to decline slowly.

• Farm-level milk prices decrease in 2009 from recent high levels as milk production gains are relatively strong. Milk prices then rise through the rest of the projections, but increases are projected to be less than the general inflation rate. Efficiency gains in production accommodate moderately higher overall per capita consumption at declining real prices.

U.S. Agricultural Sector Measures: February 2008 Baseline

U.S. Agricultural Sector Aggregate Indicators: Farm Income, Food Prices and Expenditures, and U.S. Trade Value

Steady domestic and international economic growth supports gains in consumption, trade, and prices. In addition, large increases in corn-based ethanol production affect production, use, and prices of farm commodities throughout the sector. These factors combine to result in higher market prices and increasing cash receipts. Rising production expenses and lower government payments offset some of the gains in cash receipts and other sources of farm income, although net farm income remains strong and reaches record levels in the second half of the projections. Similarly, U.S. agricultural export values are robust through the projections and set new records beyond 2012. On average, consumer food prices are projected to rise more slowly than the general rate of inflation over the next decade, although continuing adjustments due to higher energy-related costs and agricultural commodity prices push food prices up faster in some years.

Strong domestic use and export demand push U.S. net farm income from a projected record of about $90 billion in 2008 to almost $100 billion by 2017.

• Expansion of corn-based ethanol production is a major factor underlying large increases in cash receipts in 2006-08. Continuing demand strength in domestic and international markets result in further gains in cash receipts through the projections. Lower government payments, due to higher commodity prices, and rising farm production expenses offset some of the gains in cash receipts, although net farm income remains historically high.

Direct government payments to farmers are projected to fall from $13 billion in 2008 to an average of less than $10 billion annually in 2009 to 2017, largely due to higher commodity prices and correspondingly lower price-dependent program benefits.

• Strong domestic and international demand for crops, including corn for ethanol production, causes projected market prices for crops to be at levels that result in very low government payments for price-sensitive income-support programs. For example, even with stochastic considerations included here to capture potential variation in farm program benefits due to shocks to production yields, payments for marketing loan benefits and counter-cyclical payments for feed grains are minimal, totaling less than $500 million over calendar years 2008-17 for the projections scenario in this report.

• In contrast, with higher crop prices, use of land for production is more valuable, so rental rates for land in the Conservation Reserve Program (CRP) rise and push overall annual CRP payments to close to $3 billion toward the end of the projections. As a result, fixed direct payments under the 2002 Farm Act and conservation payments account for a larger share of total direct government payments in the farm income accounts, over 80 percent in 2015-17.

• With lower government payments, the agriculture sector relies 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 3 percent during most of the projection period. Conversely, cash receipts plus farm-related income rises to over 97 percent of gross cash income.

Total production expenses increase at less than the general inflation rate from 2009-17, following the adjustments to higher energy costs that started in 2004. These expenses are divided into three categories in the chart above: farm-origin (seed, feed, and feeder livestock), manufactured (fuel, fertilizer, pesticides, and electricity), and other (labor, interest, net rent to nonoperator landlords, and other expenses).

• The largest percentage increase is for "other" expenses, reflecting increases in labor expenses, interest costs, and net rent to nonoperator landlords. Labor expenses rise as sector output increases and wage rates rise. Projected increases in interest costs reflect higher interest rates, as well as increased debt facilitated by higher income. Increases for net rent reflect higher cash receipts and profitability as well as larger sector output.

• Projected manufactured-input expenses reflect high oil prices and larger crop production. After increases in 2004-08 that were mostly due to rising oil prices, these expenses increase moderately through 2013 during a period of relatively stable oil prices. Then as oil prices rise faster than the general inflation rate over the remainder of the projection period, production expenses for manufactured inputs rise more rapidly.

• Farm-origin expenses rise less than the general inflation rate. Feed expenses, which have risen sharply in recent years with higher corn prices, are relatively flat in the projections period as corn prices stabilize. Seed expenses increase only moderately as acreage declines from 2008 highs and then stabilizes. Expenses for purchased livestock also increase moderately as the livestock sector continues to adjust to higher feed costs.

• Cash operating margins remain relatively stable over the projections period at about 73 percent as cash receipts and gross cash incomes rise at close to the same pace as cash expenses.

Adjustments in retail prices due to higher energy and agricultural commodity prices are projected to continue for the next 2 years and lead to food price increases somewhat larger than general inflation in 2008 and 2009. For the rest of the projections period, however, retail food prices increase less than the general inflation rate.

• Relatively large price increases are expected in 2008 for fats and oils and for cereals and bakery products, reflecting higher prices for vegetable oils and wheat. Consumer prices for red meats, poultry, and eggs exceed the general inflation rate in 2009 as the livestock sector adjusts to higher feed costs due to the expansion in corn-based ethanol production. Smaller increases in meat prices are then projected as production growth resumes.

• Prices for food away from home reflect the overall inflation rate as well as some effect of price movements for retail meat and poultry. Income growth supports continuing gains in prices for food consumption away from home, although competition in the fast-food and foodservice industries tend to moderate these price increases.

• Expenditures for meals prepared away from home account for a growing share of food spending, reaching about 52 percent of total food expenditures by 2017.

The value of U.S. agricultural exports rises in the projections due to increases in both export volumes and prices. Strong domestic economic growth and consumer demand boost agricultural imports.

• The value of U.S. agricultural exports is projected to grow from $82 billion in fiscal year 2007 to more than $103 billion in 2017. The lower value U.S. dollar is an important factor underlying recent export gains and the projected growth. In addition, steady world economic growth, particularly in developing countries, provides a foundation for gains in trade and U.S. agricultural exports. Higher commodity prices due to expansion of global biofuel demand also contribute to the gains in export values.

• Recent increases in bulk commodity prices have strengthened bulk export values, pushing the share of exports accounted for by high-value products (HVP) down through fiscal year 2008. In the longer run, however, HVP export values grow in importance again, representing about 65 percent of the value of U.S. exports by the end of the projection period. Much of the growth in HVP exports is for animal products and horticultural products.

• U.S. agricultural import values rise to almost $105 billion in 2017, boosted by gains in consumer income and demand for a large variety of foods. Strong growth in horticultural imports is assumed to continue, contributing over half of the overall agricultural import increase.

• Overall, the U.S. agricultural trade surplus is projected at $15.5 billion in fiscal year 2008, largely due to recent gains in bulk commodity prices and bulk export values. The agricultural trade balance declines from this level over the projections period, as bulk exports remain relatively flat while imports continue steady gains.

Global Agricultural Trade: February 2008 Baseline

World consumption of many grain, oilseed, and meats has exceeded production in the past several years. As a result, global stocks have dropped sharply—to record lows in some cases—and prices have risen. Tight market conditions are projected to persist for many commodities over most of the coming decade, keeping agricultural commodity prices high.

Robust global economic growth provides a foundation for gains in world demand for agricultural products. Rapid expansion of ethanol and biodiesel production in some countries also adds to the growth in global agricultural demand.

The growing economies of developing countries are the main source of growth in world agricultural demand and trade. Food consumption and feed use are particularly responsive to income growth in those countries, with movement away from staple foods and increased diversification of diets. The import demand of developing countries is further reinforced by population growth rates that remain nearly twice that of developed countries.

International trade in animal products, however, remains heavily dependent on demand from developed countries and from the market access achieved under existing trade agreements. Strong policy support for domestically produced meat is expected to motivate growth in feed grain imports, especially in regions where limited land availability or agroclimatic conditions preclude expanding domestic crop production, such as North Africa, the Middle East, and East and Southeast Asia.

Traditional exporters of a wide range of agricultural commodities, such as Argentina, Australia, Canada, the European Union (EU-27), and the United States, remain important in the coming decade. But countries that are making significant investments in their agricultural sectors, including Brazil, Russia, Ukraine, and Kazakhstan, are expected to have an increasing presence in export markets for basic agricultural commodities.

World agricultural production rises in response to high prices and technology enhancements. However, limited ability to expand planted area in many countries and higher input costs, particularly for energy intensive inputs such as fuel and fertilizer, constrain production growth and raise uncertainties about future supply response.

Global trade in soybeans and soybean products has risen rapidly since the early 1990s, and has surpassed not only wheat—the traditional leader in agricultural commodity trade—but also total coarse grains (corn, barley, sorghum, rye, oats, millet, and mixed grains). Continued strong growth in global demand for vegetable oil and protein meal, particularly in China, is expected to maintain soybean and soybean-product trade well above wheat and coarse grains trade throughout the next decade.

• Wheat, coarse grains, and oilseeds (including soybeans) compete with each other and with other crops for limited cropland. Higher prices for vegetable oils, partially the result of increased demand for biodiesel, are bringing previously uncropped land in Brazil and Indonesia into soybean and palm oil production.

• In the projections, the growth in total area planted to all crops rises less than a half-percent per year in most countries. Area expansion occurs more rapidly in countries with a reserve of available land and policies that enable farmers to respond to higher projected world prices. Such countries include Brazil, Argentina, other South American countries, some Eastern European countries, and Ukraine. About two-thirds of the growth in global production is derived from rising yields. The growth rate in crop yields has slowed somewhat during the last several decades and is projected to continue to do so.

• The impact of slowing growth in total crop production is partially offset by slowing growth in world population. Nonetheless, population is a significant factor driving overall growth in demand for agricultural products. Additionally, rising per capita income in many countries generates growth in demand for vegetable oils, livestock products, and horticultural products.

• In the coming decade, overall gains in global grain trade come from a broad range of countries, particularly from countries in Africa and the Middle East. Also, China exports less grain and imports more.

Definition of country groups

Growth in wheat imports is concentrated in those developing countries where robust growth in income and population underpins increases in demand. Important growth markets include Sub-Saharan Africa, Egypt, Pakistan, Algeria, Indonesia, the Philippines, and Brazil. World wheat trade (including flour) expands by more than 26 million tons (23 percent) between 2008 and 2017 to 137 million tons.

• Egypt maintains its position as the world's largest importing country, as imports climb slowly to nearly 9 million tons. Imports by Brazil, another large importer, are projected to exceed 8 million tons. Brazil's climate generally does not favor wheat, and in some key wheat-producing states, winter corn is expected to have better returns than wheat.

• Imports by developing countries in Sub-Saharan Africa, North Africa, and the Middle East rise nearly 12 million tons and account for 45 percent of the total increase in world wheat trade. In most developing countries, little change in per capita wheat consumption is expected, but imports expand modestly because of population growth and limited potential to expand production.

• Changing consumption patterns will boost wheat imports by some major importing countries. In Indonesia, strong economic growth and diversification of diets are projected to increase per capita wheat consumption. Mexican consumers are projected to continue substituting wheat for corn in their diets as incomes rise.

• Lower wheat-to-corn price ratios during most of the projection period enable wheat to compete effectively with corn for feed use in a number of countries. Europe is expected to continue to account for the largest share of global wheat feeding.

• China has been a small net exporter of wheat in recent years, but production constraints cause it to become a small net importer toward the end of the projections.

Definition of country groups

The top five wheat-exporting nations (the United States, Australia, the EU, Argentina, and Can