Agricultural Baseline Projections: Baseline Presentation, 2005-2014

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

Summary of Projections: February 2005 Baseline

The USDA baseline consists of 10-year projections for agriculture, assuming continuation of current farm law as well as specific conditions for the economy, the weather, and the global situation. The baseline covers commodities, trade, and aggregate indicators such as farm income and food prices. The projections were prepared in October through December 2004.

Steady domestic and international economic growth and gains in population strengthen demand for food and agricultural products in 2005-14, providing a favorable demand setting for the U.S. agricultural sector. The United States will remain competitive in global agricultural markets although trade competition will continue to be strong. Gains in global consumption, world trade, U.S. agricultural exports, and domestic demand for agricultural products result in rising farm commodity prices and cash receipts, which help to improve the financial condition of the U.S. agricultural sector.

Key Assumptions Underlying the Baseline Projections Include the Following:

Economic Growth

• World economic growth is projected to strengthen from the slow growth of 2001-03, averaging over 3 percent through 2014. The baseline assumes that growth in the U.S. gross domestic product (GDP) slows from the high recovery rate in 2004, and moves toward a sustainable longrun rate near 3 percent. Strong economic growth in developing countries of more than 5 percent annually is projected for 2006-14.

Population

• Growth in global population is assumed to slow in the baseline, from an annual rate of 1.7 percent in the 1980s to an average of about 1.1 percent over the projection period. Nonetheless, world population increases by more than 700 million people between 2004 and 2014. 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 from 80 percent in 2004 to 82 percent by 2014.

The Value of the U.S. Dollar

• A continuing depreciation of the U.S. dollar is assumed through 2006. However, the dollar is projected to appreciate again starting in 2007. 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

• From 2006 to 2009, real oil prices are projected to fall as supply and demand adjust to recent high prices and move the market to a more sustainable long-term balance. In subsequent years, crude oil prices are projected to rise slightly faster than the general inflation rate, as new oil discoveries as well as new technologies for extracting and refining oil allow for substantial demand growth with moderate energy price increases.

U.S. Agricultural Policy

• The Farm Security and Rural Investment Act of 2002 (2002 Farm Act) is assumed to continue through the projections period.

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

• Tobacco projections reflect legislation enacted in October 2004 that ends the Federal tobacco marketing quota and price support loan program after the 2004 crop year and provides for buyout payments to tobacco quota holders and tobacco quota producers.

Asian Soybean Rust

• The baseline does not include potential effects of Asian soybean rust in the United States. The finding of U.S. cases of soybean rust occurred after the baseline commodity projections were completed (see box, Asian Soybean Rust Could Permanently Alter the U.S. Agricultural Sector).

Beef Trade

• The baseline assumes a gradual rebuilding of U.S. beef exports to Japan, reflecting the October 2004 U.S.-Japan beef trade framework agreement that will permit the resumption of beef trade between the two countries (see box, Baseline Trade Assumptions for Cattle and Beef). A gradual recovery in U.S. beef exports to South Korea is also assumed.

• The resumption of imports from Canada of slaughter cattle under 30 months of age and feeder cattle is assumed to begin in 2006. The baseline projections were prepared before the minimal risk rule was published, which is expected to allow that trade to begin, effective March 7, 2005.

International Policy

• Baseline trade projections assume that all countries fully comply with all 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 2004, but does not incorporate any effects of agreements not formally ratified by that date.

• 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 reform underway in many developing countries is assumed to continue.

Key Results in the Baseline Projections Include the Following:

• Improved global economic performance and growth in population strengthen demand for food and agricultural products in the baseline, providing the foundation for gains in agricultural trade, U.S. exports, farm commodity prices, and cash receipts. Economic growth in developing countries is important for this result, because consumption and imports of food and feed are particularly responsive to income growth in those countries, with movement away from staple foods and increased diversification of diets.

• The United States will remain competitive in most 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. Additionally, a strengthening U.S. dollar assumed in the baseline starting in 2007 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 to U.S. farmers and improvement in the financial condition of the U.S. agricultural sector.

• Overall 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, overall 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 to the United States.

• Increased production of pork and poultry allow Brazil to become very competitive in world meat trade, enabling Brazil's pork and poultry exports to sustain strong growth.
  

• Domestic demand increases for meat, feeds, horticultural products, corn used in ethanol production, and food use of rice.

• Market prices and cash receipts rise, which helps to improve the economic and financial condition of the U.S. agricultural sector. Government payments become relatively less important over time as a greater share of gross cash income comes from the marketplace due to growing domestic and export demands. Increasing gross cash income assists in asset accumulation and debt management, raising farm equity and reducing the debt to-asset ratio in the sector. Net farm income projections for the next decade average over $60 billion, compared to $47.7 billion in the 1990s.

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

• Steady global economic growth and stronger global trade lead to gains for U.S. agricultural export volumes and higher commodity prices. Thus, the value of U.S. agricultural exports is projected to grow from $56 billion in fiscal year 2005 to $78.6 billion in 2014. High-value product (HVP) exports continue to account for almost two-thirds of total U.S. exports. Much of the growth in HVP exports is for animal products and horticultural products. Most of the growth in the value of bulk commodity exports reflects expected price increases and gains in volume for grains.

• Increases in U.S. consumer income and demand for a large variety of foods underlie growth in U.S. agricultural imports, which rise from $56 billion in fiscal year 2005 to more than $76 billion by 2014. Strong growth in horticultural product imports is assumed to continue in the projections, contributing much of the overall increase in agricultural imports. Processed foods are expected to account for a growing share of U.S. agricultural imports.

• China is projected to be a net importer of corn in the baseline starting in 2007/08, reflecting declining stocks of grain and increasing incomes which raise consumer demand for meat and derived demand for feed for a growing livestock sector.

• Brazil's rapidly increasing area planted to soybeans enables it to gain a larger share of world soybean and soybean meal exports, despite increasing domestic feed use. Its share of world exports of soybeans plus the soybean equivalent of soybean meal exports rises from about 35 percent in recent years to 45 percent by 2014.

• 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. Their share of world wheat exports is projected to increase from 4-6 percent in recent years to about 11 percent by the end of the period. However, high year-to-year volatility in these countries' production and trade can be expected.

• Removal of textile and apparel import quotas, resulting from the completion of the Multi-Fiber Arrangement (MFA) phaseout on December 31, 2004, is expected to have a major influence on world cotton production and trade. The MFA phaseout is expected to speed the transfer of raw cotton production to countries where resource endowments and technology result in the lowest production costs. Textile production and raw cotton consumption will increase in developing countries, such as China, India, and Pakistan, where labor costs are lowest. Countries in Europe and East Asia with higher cost labor markets will continue to reduce their cotton imports through the baseline.

Macroeconomic Assumptions: February 2005 Baseline

Macroeconomic assumptions underlying the USDA baseline are characterized by above-trend growth in 2004 followed by steady growth at average historical levels beginning in 2005. Costs of energy and other raw materials and exchange rate developments are important uncertainties in the outlook. The baseline's macroeconomic assumptions were completed in October 2004.

The U.S. and world economies continue to become increasingly interdependent both through growing trade and through financial market integration. The United States maintains its global share of gross domestic product (GDP) at about 30 percent. With the largest GDP and capital market, the United States plays a large role in determining economic conditions around the world, although growing economic interdependence implies that international macroeconomic conditions also have important effects on the U.S. economy.

The baseline assumes that U.S. GDP growth moderates in the near term from the rapid growth in 2004 as the economy moves toward a longrun annual growth rate near 3 percent. Continuing U.S. technological advances associated with computing and telecommunications will provide support for worldwide productivity growth.

• Global economic growth is also projected to reflect steady gains as most countries of the world move close to longrun sustainable economic growth rates.

• Relatively high oil prices in 2004 and beyond will constrain Asia and its manufacturing sector, which is far more dependent on energy for GDP growth than are more developed economies.
  

Definition of country groups

World economic growth is projected to strengthen from the slow growth of 2001-03, averaging over 3 percent through 2014. Increased incomes and growth in population raise global food demand, leading to gains in agricultural trade and U.S. exports.

• Consumption and imports of food and feed in developing countries are particularly responsive to growth in income. 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. 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.

Definition of country groups

Developed economies are projected to grow at rates similar to those of the 1990s, averaging 2.6 percent in 2006 and beyond.

• The adoption of the euro enhanced cross-border trade and investment within the European Union (EU). Enlargement of the EU to include countries of Central and Eastern Europe implies closer integration, creating more trade and investment opportunities.

• In spite of this, the EU does not grow as rapidly as the United States, reflecting smaller population growth and rigidities in labor markets that constrain economic gains.

• Japan continues to face significant economic challenges, largely the result of its unresolved banking problems and persistent deflation. Japan's share of world GDP is expected to decline to less than 13 percent by 2014, down from more than 17 percent in the early 1990s.

Definition of country groups

Economic growth in developing countries is projected at a 5.1 percent average annual rate in 2006-14, while overall growth in the former Soviet Union (FSU) is projected to average slightly below 5 percent per year.

• Long-term growth near 4 percent is projected for Latin America. This will attract foreign capital inflows, sustaining growth.

• Growth in the developing economies of East and Southeast Asia is projected to be about 6 percent for the next decade, but still will be below the very strong average growth of over 7 percent in the 1990s.

• China's economic growth is consistently the strongest in Asia, and is expected to average above 7 percent over the next decade.

• Russia, Ukraine, and the other former Soviet Republics benefit from their shift to market economies, with GDP gains of 4-5 percent annually in these countries for the next decade.

Definition of country groups

Global population growth is a major factor underlying agricultural demand and trade. 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 baseline projections and income growth strengthening, population gains will become relatively less important in determining 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 annually during the projection period.

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

• Population growth rates in developing countries decline by almost half between the 1970s and the projection period, but remain above those in developed countries and the FSU. As a consequence, the share of world population accounted for by developing countries continues to increase, from 80 percent in 2004 to 82 percent by 2014.

• China's population growth rate slows from 1.5 percent per year in 1981-90 to 0.6 percent in 2005-14. 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. Nonetheless, this growth narrows the gap between its population and that of China.

• Brazil's population growth rate falls from 2.1 percent annually in 1981-90 to 1.0 percent in 2005-14. Sub-Saharan Africa's population growth rate declines from 2.9 percent to 1.9 percent per year for the same periods, still leaving Africa with the highest population growth rates of any region.

Exchange rates in the baseline are expressed as local currency per U.S. dollar, in real (inflation-adjusted) terms, thus reflecting nominal exchange rates and relative inflation rates. With this measure, a decrease in a country's exchange rate indicates an appreciation of its currency since fewer units of that currency are needed to equal the value of one U.S. dollar. Implications for the value of the U.S. dollar are then measured as weighted averages of individual country-specific exchange rates. For example, the U.S. dollar value index shown in the chart is a trade-weighted measure for U.S. agricultural markets, where the weights reflect relative U.S. agricultural exports to foreign countries. Alternative measures of the value of the U.S. dollar can be constructed using different weights, such as agricultural trade weights of competitors in global trade or U.S. exports weights for a specific commodity.

• While there is a depreciation of the U.S. dollar in the near term in the baseline, the dollar is projected to appreciate again starting in 2007. A strengthening U.S. dollar in the baseline assumes that capital moves into the United States to take advantage of well-functioning financial markets, transparent financial accounting standards, a relatively risk-free environment, and high expected long-term productivity growth and investor returns, which mitigates concerns with the budget and trade deficits. Nonetheless, high aggregate U.S. trade and budget deficits and a historically low domestic savings rate could make the near-term depreciation of the dollar sharper and longer than assumed in the baseline. If this were to occur, near-term U.S. and world economic growth would be weaker as well.

• A return to a strengthening dollar in the baseline reduces U.S. agricultural competitiveness and constrains growth in exports. This is partially offset by longer term global economic growth, which increases the demand for U.S. exports. U.S. exports of bulk commodities and horticultural products tend to be the agricultural products most sensitive to an appreciating U.S. dollar due to relatively stronger global trade competition in those markets.

• China is assumed to maintain a policy of a fixed nominal exchange rate relative to the U.S. dollar, keeping its currency at a level that several indicators suggest is significantly undervalued. This policy lowers prices for Chinese exports, thereby affecting both agricultural and nonagricultural trade. Even with a fixed nominal exchange rate, higher projected inflation in China than in the United States implies some real appreciation of the Chinese currency. However, an appreciation of the Chinese currency in nominal terms would make the real currency appreciation greater, which would tend to lower China's exports and raise the volume of its imports.

Definition of country groups

Inflation rates, which came down in the 1990s (except in the transition economies of the FSU), are projected to remain low through 2014.

• For developed countries and the world as a whole, inflation is projected to be below 3 percent.

• Inflation rates for countries of the FSU are sharply lower than the exceedingly high rates during the transition period for those economies in the 1990s.

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

• As the U.S. and world economies move to longrun sustainable rates of economic growth, inflationary pressures will begin. In response, the Federal Reserve Board and central banks in other countries are assumed to raise short term interest rates to limit price increases. In addition, as world economies grow, demand for credit rises and further boosts interest rates. Finally, a weaker U.S. dollar relative to the yen and the euro in the near term is expected to result in U.S. interest rates rising more than those in Japan and Europe to continue financing the U.S. budget and trade deficits. However, relatively low inflation rates will keep domestic interest rates from moving to the high levels seen in the 1980s.

Oil prices increased in 2004 due to uncertainties in the international oil market that resulted from the unstable situation in the Middle East, supply problems from the Gulf of Mexico to Norway that lowered effective production capacity, and economic expansion in developing Asia (especially in China) that raised demand. Crude oil prices are projected to average somewhat higher in 2005 as continued (although slower) growth in the major Asian economies will keep oil demand strong, outpacing gains in new crude oil supplies.

• From 2006 to 2009, real oil prices are projected to fall as supply and demand adjust to recent high prices and move the market to a more sustainable long-term balance.

• From 2010 on, crude oil prices are projected to rise slightly faster than the general inflation rate. New oil discoveries, along with new technologies for finding, extracting, and refining oil, are assumed to allow for continued substantial growth in demand with modest relative energy price inflation. These projections are broadly consistent with the U.S. Department of Energy, Energy Information Administration's January 2005 Annual Long-Term Outlook.

• Most of the growth in world oil demand will be due to strong Asian GDP growth, which is highly dependent on energy availability. Higher oil prices could lower Asian and global GDP growth from rates projected in the baseline, although ensuing economic adjustments through adoption of existing energy-saving technologies common in developed economies make a sustained growth slowdown less likely.

• Oil prices have historically affected prices of natural gas and supply conditions for 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. As a result, prices for natural gas and fertilizer will continue to be volatile. U.S. imports of fertilizer will mitigate the impact of rising natural gas prices on farm operations in the United States.

More Detailed Data

Baseline Macroeconomic Data

U.S. Crops: February 2005 Baseline

Steady U.S. and global economic growth assumed for the baseline provides a favorable demand setting for field crops, supporting longer run increases in consumption, trade, and prices. Despite recent depreciation of the U.S. dollar relative to many currencies, a strengthening dollar (U.S. agricultural export weighted basis) starting in 2007 and trade competition from areas such as Brazil, Argentina, and the Black Sea region constrain U.S. exports for some crops, however.

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. The 2002 Farm Act continues planting flexibility provisions, giving farmers almost complete flexibility in deciding which crops to plant. Support to field crop producers is provided by marketing assistance loans, 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. This increase in enrollment reduces land available for crop production, with about two thirds of the land in the reserve 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 slowly in the baseline, from a low of 247 million acres to nearly 252 million acres by 2014, in response to higher producer net returns. Yield increases also contribute to production gains, limiting price increases and reducing the need for more land to be cropped. Thus, the eight-crop plantings total remains considerably lower than the more than 260 million acres planted in 1996.

Plantings of different crops are influencd by expected net returns among competing crops. 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 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 somewhat more to corn and away from soybeans as growth in global supply and demand is reflected in prices and net returns.

• Corn acreage rises gradually through the projections as increasing exports and domestic demand lead to rising prices and net returns. The increase in corn plantings is facilitated, in part, by a reduction in soybean area.

• Wheat acreage falls below 59 million acres early in the projections period, reflecting lower prices. A moderate increase in land planted to wheat is projected over the rest of the baseline as gains in demand exceed increases in supply provided by rising yields, thus raising prices and providing incentives to plant.

• Soybean plantings initially decline from a relatively high level in 2004 in response to lower prices caused by record 2004 production. Soybean acreage declines further through 2009 as higher prices and net returns for competing crops, particularly corn, provide incentives to switch some land from soybeans. Soybean plantings then stabilize in the remaining years of the projections.
  

Domestic corn use continues to grow throughout the projections period, particularly for feed use and ethanol. Global economic growth underlies longrun increases in U.S. corn exports.

• Feed and residual use of corn rises in the baseline as the U.S. livestock sector grows in response to increases in domestic demand and exports of beef, pork, and poultry. An expanding domestic economy will raise overall meat consumption in the United States. Additionally, 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. As a result, the baseline analysis also expands world trade in feed grains and increases exports from the United States to support growth in global meat production.

• Large increases are projected in corn use for ethanol production over the next several years, reflecting continued expansion of production capacity. State-level bans (such as those already in place in California, Connecticut, and New York) on methyl tertiary butyl ether (MTBE) as a fuel oxygenate increased incentives for ethanol expansion in recent years, while strong petroleum prices have provided additional support for ethanol use.

• Gains in most other food and industrial components of domestic corn use are projected to be smaller than increases in population. Consumer dietary concerns also limit increases in the use of corn for high fructose corn syrup (HFCS) and for glucose and dextrose.

• U.S. corn exports rise faster than global trade with the United States increasing its market share, reflecting a U.S. comparative advantage in corn production. Corn exports from Argentina will continue to grow and provide competition to the United States, but China's corn exports drop as its livestock sector expands. Strong increases in corn exports to Mexico reflect increased feed demand for a growing Mexican poultry sector. Additionally, U.S. corn exports to Mexico are boosted by the reduction and elimination by 2008 of the tariff rate on over-quota corn imports from the United States under the North American Free Trade Agreement (NAFTA). This tariff reduction shifts some U.S. exports to corn from sorghum, which already has tariff-free status.

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

• Wheat demand in the United States is a relatively mature market. After declining from 2000 to 2003, food use of wheat resumes moderate gains. Growth is somewhat slower than population increases, reflecting a continuation of dietary adjustments by many consumers. Additionally, new technologies can significantly extend the shelf life of bread and reduce spoilage, lowering flour needs required to meet consumer demand.

• Feed use of wheat, a low-value use of the crop, shows only small increases in the projections. Gains in wheat feed and residual use are driven by increases in production in the baseline.

• U.S. wheat exports increase through the projections as income and population in developing countries grow, raising global wheat consumption and trade. Competition from the European Union, Canada, Argentina, Australia, and exporters from the Black Sea region continues through the projections, holding the U.S. market share relatively constant at about 24-25 percent. Market shares for Australia, Argentina, and the Black Sea region increase.

Domestic use of soybeans continues to rise, but U.S. soybean exports edge down from projected 2005 levels due to moderate output growth 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 byproducts from the production of ethanol.

• Low prices help U.S. soybean exports rise to 1.1 billion bushels in 2005-07. Exports then fall, leveling off near 1.03 billion bushels in 2009-14, largely due to strong competition from Brazil. Consequently, the U.S. market share of global soybean trade declines in the baseline.

• U.S. exports of soybean meal and soybean oil also face strengthening competition from South American producers, holding exports of these soybean products relatively flat after 2005/06, with declining global trade shares.

• The baseline does not include potential effects of Asian soybean rust in the United States. The finding of U.S cases of soybean rust occurred after the baseline commodity projections in this report were completed.

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 to and hold at about 13 million bales for most of the baseline as more cotton processing occurs in developing countries with lower labor costs.

• Starting in 2005, textile and apparel import quotas established under the Multi-Fiber Arrangement are eliminated in accordance with the Uruguay Round's Agreement on Textiles and Clothing. Apparel imports to the United States increase, 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, 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.

• Upland cotton exports remain relatively stable at 12.8-13.6 million bales annually through the projections. As growth in the textile industry in China slows from the rapid expansion of recent years, growth in China's import demand and growth in global cotton trade slow as well. Thus, despite only a small expansion in U.S. cotton exports, the U.S. share of global cotton trade remains about 36-37 percent in the projections.

Steady expansion of 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 at a modest pace.

• Growth in domestic use of rice is largely due to an increasing share of the U.S. population of Asian and Latin American descent, expanding imports of specialty rice from Asia. 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 increase as production growth more than offsets expanding domestic use, keeping the U.S. price difference over Asian competitors quite small early in the baseline. In the later years of the projections, larger domestic use pushes U.S. prices higher, reducing U.S. competitiveness in global markets and slowing the growth in U.S. rice exports.

• Global rice prices are projected to increase about 3 percent per year over the baseline, reaching $8.43 per hundredweight (rough basis) by 2014/15, about equal to the 1997/98 El Niño-driven $8.45 price and more than twice the 2000/01-2002/03 annual averages. Slower production growth in Asia and growing worldwide import demand for rice are behind the steady increase in global trading prices.

U.S. stocks to use ratios for corn and soybeans are up sharply in 2004/05 following the record yields and large production of the 2004 growing season. 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 stocks-to-use ratios leveling. The wheat stocks-to-use ratio also is up initially but not as much as for corn and soybeans because 2004 wheat production, while large, was not a record. The stocks to-use ratio for wheat rises through 2006/07, largely reflecting weak exports, but declines in subsequent years as exports strengthen.

As with corn and soybeans, stocks to use ratios for cotton and rice are initially large due to high 2004 yields and production. Both decline from these high levels, with each flattening in the later years of the projections.

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

• Price movements in the near term reflect adjustments following the large 2004 production levels. Corn prices rise from the lows of 2004/05 as a return to trend yields reduces production and overall supplies from the 2004 record. Soybean production is reduced from the 2004 level, but large carryover stocks increase total supplies in the near term and lead to further price declines. Greater foreign competition and weaker U.S. wheat exports initially reduce wheat prices.
  

• Prices for each of these three crops then rise through the remainder of the projections as stocks-to-use ratios decline from the near-term high levels.

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. Marketing allotments are functioning each year of the projections. The annual marketing allotment (called the Overall Allotment Quantity, or OAQ) is set according to provisions of the 2002 Farm Act.

• Planted and harvested area in the projections are assumed to be related to lagged real sugar crop prices relative to prices for alternative crops and adjustments to the previous year's ratio of blocked stocks (those held by processors that cannot be marketed because of marketing allotments) to allotted marketings. These variables imply that there is little incentive to expand acreage for sugar crops in most years of the baseline.

• Historical growth trends in productivity measures, such as yields, are assumed to hold through the projection period.

• Sugar deliveries to producers of sugar-containing products (SCP) and to non-industrial endusers are a function of U.S. population growth. SCP imports are projected to increase throughout the baseline, although the rate of gain slows as the import share of SCPs levels off beyond fiscal year 2010. At that time, domestic deliveries of sugar are projected to increase about 81,000 short tons, raw value (STRV) a year.

• The sugar baseline projects that the raw sugar tariff-rate quota (TRQ) is established each year at 1,117,195 metric tons, raw value (MTRV), the World Trade Organization (WTO) minimum access level, except for fiscal years 2010, 2012, and 2015. In those years, the raw sugar TRQ is increased to compensate for levels of domestic production below the OAQ. In the year following a rise in the TRQ, the baseline projections assume that domestic producers respond by increasing sugar crop acreage on land that had been withdrawn from production in previous years due to adjustments to blocked stocks (stocks unable to be marketed because of marketing allotments). The refined sugar TRQ is established each year at 39,000 MTRV. The yearly raw sugar TRQ shortfall is assumed to equal 50,000 STRV.

• The Mexican consumption tax on soft drinks that use fructose is assumed to remain in place through 2015, thereby limiting sugar available for export to the United States under the terms of the North American Free Trade Agreement (NAFTA).

Since 1938, tobacco production in the United States has been under a marketing quota program with price supports. However, legislation enacted in October 2004 ends the U.S. tobacco marketing quota and price support program after the 2004 crop year. A buyout of tobacco quotas accompanies the termination of the program. With the elimination of the tobacco program, producers will no longer be restricted in the location or quantity of tobacco they produce, nor will they receive price support for the tobacco they sell. Mandatory inspection of imported tobacco will cease, although inspections will continue for some domestic types. 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.

• Ending the tobacco program will have unprecedented effects on the U.S. tobacco industry. Initially, an exodus of farmers will cause leaf production to decline. However, after this initial response, expansion by remaining growers will cause production to recover 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 will likely shift to areas where producers can achieve more economically viable scales of operation.
  
  
• Lower prices will make U.S. leaf more competitive in domestic markets and global trade, although the tobacco industry will continue to face declining domestic cigarette consumption and trade competition from foreign producers, particularly Brazil. Nonetheless, with lower prices, a greater share of U.S. leaf will be used in domestic production of tobacco products, raising total domestic use. Lower prices also underlie projected increases in U.S. exports of tobacco leaf. The projected gains in domestic use and exports reverse the generally downward trend of recent years in those markets.
  
  
• Cigarette sales in the United States are expected to continue declining at 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.
  
  
• After an initial multi-year adjustment period following the end of the tobacco program, the market will stabilize at higher production levels in the second half of the projection period and reflect trends in domestic and global demand for tobacco leaf.

The United States remains a net importer of horticultural products (fruit and nuts, vegetables, and greenhouse and nursery products). Export growth continues to be important to the U.S. horticultural sector.

• U.S. exports of horticultural products, worth $13.8 billion in fiscal year 2005, are projected to grow in value by 2.6 percent on average from 2005 to 2014. Horticulture imports of $24.8 billion in 2005 expand by 3.6 percent over the same period. Thus, the estimated $11 billion horticulture trade deficit in 2005 increases to more than $16 billion in 2014.

• Major export markets for U.S. horticultural products include Canada, Japan, and Southeast Asian nations. Among fruit exports, fresh noncitrus fruits and fruit juices lead in growth. The largest exports are grapes, strawberries, apples, and orange juice. Export prospects for processed vegetables are stronger than for fresh vegetables. Frozen potatoes are the leading U.S. vegetable export.

• Major U.S. horticultural imports include potatoes, tomatoes, bananas, grapes, frozen concentrated orange juice, apple juice, melons, and tree nuts (especially cashews) from Mexico, Chile, Canada, and Brazil. Imports play an important role in domestic supply during the winter months and, increasingly, during other times of the year as lower costs and reduced trade barriers make horticultural imports more competitive.

U.S. Livestock: February 2005 Baseline

Livestock sector projections over the baseline period reflect strong domestic demand for meat. Beef and poultry exports rise from the reduced levels of 2004 that reflected concerns with bovine spongiform encephalopathy (BSE) and Avian influenza, respectively. The baseline assumes a gradual rebuilding of U.S. beef exports to Japan, reflecting the October 2004 U.S.-Japan beef trade framework agreement that will permit the resumption of beef trade between the two countries. 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 discovery of a U.S. BSE case in December 2003.

Moderate returns to red meat production lead to only small gains in beef and pork production in the second half of the projections. Larger gains in poultry output result in poultry becoming a larger proportion of total U.S. meat consumption as per capita beef consumption declines and per capita pork consumption levels off.

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 has resulted in favorable producer returns which, together with favorable forage and feed grain supplies, begins the process of retention of cows and heifers for future expansion. Cattle herds are expected to increase somewhat from cyclical lows near 95 million head in 2005 and 2006. Rising slaughter weights augment gradual herd expansion over the remainder of the projections. Pork production grows slowly as the coordinated/integrated industrial structure dampens the U.S. hog cycle. Poultry production continues to rise, but at a lower rate 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.

• Strong demand for consistent, higher quality beef continues in the domestic hotel and restaurant market and increasingly in the retail market. Additionally, 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.
  
  
• Increased efficiency of the U.S. hog breeding herd is reflected in a shift to larger, more efficient operations and in the decline of smaller, less efficient operations. For the baseline, the increase in efficiency slows somewhat 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 to increase in the hog sector. Canada is the major supplier of live hog imports to the United States. Feeder pigs produced in Canada are finished and processed in the United States, where feed grain prices remain favorable and processing costs are lower. Large wholesale and retail buyers source pork cuts where prices are attractive, with demand accommodated by trade between the two countries.
  
  
• The poultry sector has benefited from 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, particularly in the second half of the projections period when per capita consumption flattens at record high levels.

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 1.4 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 about 234 pounds from the 2004 level of 223 pounds.

• Per capita consumption of beef remains at relatively high levels through the baseline in part because beef exports, although growing, do not return to 2003 levels in the projections.

• Pork consumption remains stable at 52-53 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 from the reduced levels in 2004 that reflected disease-related loss of markets, especially for beef and broilers. Improved global economic growth and rising demand for meats contribute to the gains in U.S. exports. The 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.

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. With the loss of those markets following the BSE case in the United States in late-December 2003, U.S. beef exports were sharply lower in 2004. However, U.S. beef exports are projected to rise slowly in the baseline as the October 2004 beef trade framework agreement between the United States and Japan facilitates the resumption of beef trade between the two countries. A gradual recovery in U.S. beef exports to South Korea is also assumed.
  
  
• 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 on a volume basis through the projections as the recovery of high-quality fed beef exports does not reach prior levels.

Pork

• U.S. pork exports benefit somewhat 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 pork production helps limit production costs, 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 and Mexico.

Poultry

• U.S. broiler export growth is expected to slow from the rate of the 1990s. U.S. producers will face strong competition from other major broiler exporting countries, particularly Brazil.
  
  
• Major U.S. export markets include Asia, Russia, and Mexico. Gains in these markets reflect strong economic growth and rising consumer demand.

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 grow in importance in the projections, the domestic market remains the dominant source of demand and exports only recover to 10 percent of the production value.

Relatively favorable farm milk prices encourage strong gains in milk production during the next several years. Demand for dairy products increases moderately.

• Management and productivity gains are expected to boost milk output per cow and total milk production. Further development of large, specialized operations in many regions will be a significant contributor to these gains.

• The baseline assumes a return to normal availability of the bovine growth hormone rBST (recombinant bovine somatotropin) to the dairy sector in 2006. Nonetheless, growth in milk output per cow is projected to slow as gains are less easily boosted by simply increasing the amount of concentrate feeds fed.

• Milk cow numbers are expected to decline 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) probably makes exit rates from milk production lower than in past decades.

• Domestic dairy product use grows slowly throughout the baseline period, slightly faster than the growth in population. 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.

• Real farm-level milk prices are projected to decline.

U.S. Agricultural Sector Measures: February 2005 Baseline

Longrun developments for the U.S. farm sector reflect steady domestic and international economic growth, which support gains in consumption, trade, and prices. With productivity of U.S. agriculture growing faster than domestic demand, farmers rely increasingly on export market growth. 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 gains in domestic demand, the results are rising market prices and cash receipts, as well as improvement in the financial condition of the agricultural sector. Consumer food prices are projected to rise more slowly than the general rate of inflation.

Strengthening domestic and export demands help to improve financial conditions in the sector. Income projections for the next decade average about $61 billion, sharply higher than the $47.7 billion average in the 1990s. Gross cash income (cash receipts, direct government payments, and farm-related income) gradually rises through the projections, with cash receipts for both crops and livestock increasing.

• Net farm income falls from the record high 2004 level over the next several years, reflecting changes in cash receipts that are largely offset by changes in government payments, large swings in changes in the value of inventory, and generally rising farm production expenses.



• As growing demand pushes market prices and cash receipts higher, gains in gross incomes match increases in production expenses. This results in net farm income stabilizing at near $60 billion, particularly after prices for crops rise high enough to eliminate most counter-cyclical payments and stabilize aggregate government payments to farmers.

After a large increase in government payments in 2005 that reflects emergency spending and higher expenditures for price-linked programs, government payments fall and level off as rising market prices for program commodities reduce marketing loan benefits and counter-cyclical payments.

• Direct government payments to farmers are projected to fall from over $24 billion in 2005 to about $11 billion in 2010-14. Toward the end of the projections, direct government payments largely reflect fixed direct payments under the 2002 Farm Act and conservation payments.



• With government payments stabilizing, the agriculture sector relies increasingly on the market for more of its income and the share of income provided by government payments declines. Government payments, which are projected to represent about 9 percent of gross cash income in 2005, account for less than 4 percent at the end of the projections.

Total production expenses increase at slightly less than the general inflation rate in the projections. 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, and other expenses).

• The largest percentage increase is for the other expenses category, reflecting increases in labor expenses and interest costs. Labor expenses rise as sector output increases and wage rates rise. Projected increases in interest costs reflect higher interest rates, as well as higher debt facilitated by rising gross cash income.



• Increases in manufactured input expenses reflect movements in oil prices and expansion of crop production. Overall, these expenses rise less than the general rate of inflation as increases in 2006-09 are held down by decreases in oil prices from recent highs.



• Cash operating margins tighten somewhat over the next several years as expenses rise while changes in cash receipts and government payments combine to keep gross cash incomes relatively constant. For 2009-14, however, as government payments level off, operating margins stabilize, with cash expenses representing 75-76 percent of gross cash income.

Increasing cash receipts and gross cash income assist in asset accumulation and debt management, with farm equity rising through the projections.

• Gains in farmland values and real estate assets (representing about 80 percent of total farm assets) reflect increases in agricultural revenues, as well as rising demand for nonagricultural land uses, such as housing and recreation.



• There is considerable variation in the growth of farmland prices across the country. This reflects a variety of factors, including differences in land quality and location, demand for urban development and recreational use, credit conditions, nonfarm investment opportunities, and production risks and weather uncertainties unique to each region’s agriculture. As the general economy continues to expand, demand for land for nonagricultural uses contributes to rising farmland values. Farmland in areas with recreational amenities also will increase in value as second-home market demand remains strong.



• Farm debt moves up less rapidly than asset values in the projections, rising an average of about 1.2 percent per year compared with an increase of 1.7 percent annually for assets, resulting in equity gains of 1.8 percent.

Increasing gross cash income assists in asset accumulation and debt management, raising farm equity and leading to improved financial conditions in the agricultural sector.

• Debt-to-asset ratios decline moderately in the projections to under 14 percent by 2014, compared with over 20 percent in the mid-1980s.

Retail food prices are projected to increase less than the general inflation rate.

• Among foods purchased for consumption at home, projected price increases are generally strongest for more highly processed foods such as cereals and bakery products and fats and oils. For these foods, prices are related more to processing and marketing costs than to farm-level prices and, therefore, rise at a rate near the general inflation rate.



• Prices for food away from home reflect a large service component, with gains held down by competition in the fast-food and foodservice industries.

A forecasted decline in the value of U.S. agricultural exports and an increase in agricultural imports for fiscal year 2005 are expected to result in a U.S. agricultural trade balance of 0, which, if realized, would be the first year without a surplus since 1959. The 2005 ex