Agricultural Baseline Projections: Baseline Presentation, 2007-2016

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 2007 Baseline

This report provides longrun projections for the agricultural sector through 2016. Projections cover agricultural commodities, agricultural trade, and aggregate indicators of the sector, such as farm income and food prices. This report identifies major forces and uncertainties affecting future agricultural markets; prospects for global long-term economic growth, consumption, and trade; and future price trends, trade flows, and U.S. exports of major farm commodities.

The projections are a conditional scenario with no shocks and are based on specific assumptions regarding the macroeconomy, agricultural 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. The projections are not intended to be a Departmental forecast of what the future will be, but instead a description of what would be expected to happen under a continuation of current farm legislation, with very specific external circumstances. Thus, the 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 2006 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 2006 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 3.4-percent average annual rate between 2007 and 2016, after averaging 2.9 percent annually in 2001-06. U.S. gross domestic product (GDP) slows over the next several years from 3.4 percent in 2006 toward a sustainable rate of about 3 percent over the longer term. Strong economic growth in developing countries of 5.6 percent annually is projected for 2007-16.

Population

• Growth in global population 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 over 83 percent by 2016, up from 82 percent in 2005.

The Value of the U.S. Dollar

• The U.S. dollar remains relatively strong by historical standards, depreciating slightly in 2008 and then continuing a long-term pattern of slow appreciation through the rest of the projection period. A strengthening U.S. dollar assumes that capital moves into the United States because of well-functioning and diverse financial markets and high expected long-term productivity growth.

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. In 2007 through 2011, crude oil prices are expected to drop modestly and then rise by less than the inflation rate as new crude supplies help offset the rise in demand from Asia. After 2011, 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 nonpetroleum fuels, 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 to its legislated maximum of 39.2 million acres by the end of the projections, with higher CRP rental rates.

U.S. Biofuels

• The Renewable Fuel Program of the Energy Policy Act of 2005 mandates that renewable fuel use in gasoline (with credits for biodiesel) reach 7.5 billion gallons by calendar year 2012. The legislation also contributed to the elimination of methyl tertiary butyl ether (MTBE) as a gasoline additive. The projections in this report assume the tax credits available to blenders of biofuels (ethanol and biodiesel) and the ethanol import tariff remain in effect through the projection period. These factors, along with relatively high prices for oil, contribute to favorable returns for ethanol production, providing economic incentives for a continued strong expansion in the production capacity of that industry over the next several years, primarily produced from corn. As a result, over 12 billion gallons of ethanol are assumed to be produced annually in the United States by the end of the projections. Biodiesel production is assumed to increase to 700 million gallons in 2011/12 and then level off.

Cattle and Beef Trade

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

International Policy

• 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 2006.

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

• The European Union (EU) expanded from 25 to 27 countries with the accession of Romania and Bulgaria on January 1, 2007.  EU projections in this report pertain to the EU-25.  Romania and Bulgaria are included in the Other Europe region, although adjustments were made to account for accession.

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 2016.

Key Results in the Projections Include:

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

U.S. Aggregate Indicators

• Net farm income is projected to be relatively strong during the projection period, averaging about $67 billion. Increases in corn-based ethanol production provide a major impetus for this strong income projection. Growth in export demand also contributes to increases in agricultural commodity prices and gains in farm cash receipts. Higher commodity prices lower government payments for price-dependent benefits, although annual CRP payments increase. Rising production expenses and lower government payments offset some of the gains in cash receipts and other sources of farm income. With lower government payments, the agriculture sector relies increasingly on the market for its income. Cash receipts represent about 90 percent of gross cash income during most of the projection period, up from about 85 percent in 2005. Strong and stable net farm income assists in asset accumulation and debt management. The debt-to-asset ratio falls moderately in the projections, continuing a generally declining trend since the mid-1980s.

• The value of U.S. agricultural exports rises in the projections as steady global economic growth and stronger world trade lead to gains for U.S. agricultural export volumes and higher commodity prices. Higher commodity prices due to expansion of global biofuel demand also contribute to the gains in export values. Increases in U.S. consumer income and demand for a large variety of foods underlie growth in U.S. agricultural imports.

• On average, consumer food prices are projected to rise more slowly than the general rate of inflation over the next decade, although increases in meat prices push food prices up faster in some years. 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.

Commodity Price Relationships

• During the next 3-4 years, rapid expansion in global production of biofuels changes the price relationships among various agricultural commodities. Increased demand for grain (especially corn) used to produce ethanol in the United States raises the price of corn relative to prices for other grains and soybeans, although prices for those crops also rise, buoyed by acreage adjustments and production changes and/or by their feed value as a replacement for corn.

• Expansion of biodiesel production globally results in prices for vegetable oils rising in comparison to prices for oilseeds and protein meals as more of the crush value of oilseeds derives from the oil. As a consequence, prices of protein feeds (such as soybean meal) rise relatively less than prices of feedstuffs used primarily as a source of energy (such as corn).

• Prices of poultry and pork in the United States rise relative to the price of beef because cattle can more effectively use the increasing supply of distillers grains, a coproduct of dry mill ethanol production. Corn, needed for broilers and swine, becomes more expensive while distillers grains, used for cattle, become more abundant and relatively less expensive.

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. Overall plantings expand and a higher portion of the total is planted to corn. Higher feed costs and the increased availability of distillers grains also affect the livestock sector.

• Corn used to produce ethanol in the United States continues strong expansion through 2009/10, with slower growth in subsequent years. By the end of the projections, ethanol production exceeds 12 billion gallons per year, using more than 4.3 billion bushels of corn. The projected large increase in ethanol production reflects the Energy Policy Act of 2005, the elimination of use of MTBE as a gasoline additive, 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 be somewhat slower than the rate of population increases, reflecting dietary adjustments by some consumers. Feed use of wheat rises sharply in the initial years of the projections as higher corn prices encourage increases in wheat feeding, particularly in the summer quarter. As corn prices fall, wheat feeding declines after 2010/11 due to relatively higher wheat prices compared with corn.

• Soybean acreage falls in the projections as more favorable returns to corn production draw land from soybeans. 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 through 2011/12.

• 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.

• Slow expansion of domestic food use of rice is projected. Growth is only slightly faster than population growth, well below the rates of growth in the 1980s and 1990s when per capita use rose rapidly.

• The sugar projections assume the elimination of Mexico’s soft drink and distribution taxes, resulting in higher levels of use of high fructose corn syrup by Mexico’s beverage industry and higher exports of sugar from Mexico to the United States.

• The tobacco sector continues to adjust to the ending of the U.S. tobacco marketing quota and price support program. After declining in 2005 when nearly half of tobacco producers exited the industry, tobacco leaf production increases in the projections as many remaining growers expand operations. Declining cigarette consumption in the United States is an important factor underlying projected decreases in domestic use of tobacco leaf. Exports of tobacco leaf are projected to increase moderately.

• The production value of U.S. horticultural crops is projected to grow by 2.5 percent annually over the next decade. Consumption of horticultural products continues to rise in the projections. 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, reflecting higher feed costs and lower producer returns as more corn is used in the production of ethanol. After those productions 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. How the sector adjusts to the increased availability of distillers grains will also be important.

• Per capita meat consumption declines in the first half of the projections as the sector lowers overall production, but then rebounds somewhat in subsequent years. Rising incomes facilitate gains in consumer spending on meat. Nonetheless, overall meat expenditures represent a declining proportion of disposable income.

• Productivity gains are expected to boost milk output per cow and total milk production, although some slowing in these increases occurs early in the projection period due to higher feed costs. Milk cow numbers are expected to decline after 2006, particularly in 2008-10 as feed costs rise.

Agricultural Trade

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

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

• Steady longrun growth in the livestock sectors of developing countries in Asia, Latin America, North Africa, and the Middle East accounts for most of the growth in world coarse grain imports projected during the next decade. The United States is the major corn exporter in the world. However, with increasing use of corn for U.S. ethanol production, particularly over the next several years, U.S. corn exports show very little growth through 2010/11 and prices rise. In response, increased corn production and exports are assumed for Argentina, Bulgaria, Romania, 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 relative to prices for oilseeds and protein meals because of expanding biodiesel production in a number of countries. This relatively new source of oilseed products demand amplifies already rising uses of vegetable oils for food consumption and protein meals for livestock production in developing countries, resulting from strong income and population growth. 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 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 weather extremes and related yield variation.

• 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 the gains in global cotton trade in the projections. The United States continues as the world’s leading cotton exporter, reflecting its large production capacity and its reduced domestic mill use of cotton as textile imports continue to grow.

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

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

• Mexican pork imports rise rapidly, driven by increases in income and population. Higher income countries of East Asia increase pork imports as their domestic hog sectors are constrained by environmental concerns and high imported feed costs. Brazil continues to be a major pork exporter, although the presence of foot-and-mouth disease in Brazil limits Brazilian pork exports to some markets.

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

Macroeconomic Assumptions: February 2007 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 2008 and beyond. Overall, world economic growth is projected to increase at a 3.4-percent average rate between 2007 and 2016, after averaging below 3 percent annually between 2001 and 2006. The projections have moderating growth in developed countries and accelerating growth in developing and former Soviet Union countries. Ongoing computing and telecommunications advances support worldwide productivity gains throughout the projections.

U.S. gross domestic product (GDP) growth slows over the next several years from 3.4 percent in 2006 toward a sustainable rate of about 3 percent over the longer term. Nonetheless, the United States continues to maintain its share of global GDP at around 30 percent. While the United States plays a large role in determining economic conditions around the world, strong growth in China and in India are becoming increasingly important.

Improved global economic performance and continuing, although slowing, population growth are 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.

Definition of country groups

Developed economies are projected to grow at rates similar to those of the 1990s, averaging around 2.5 percent in 2007-16. European and Japanese growth increases from recent levels, but remains around 2 percent per year in the projection period.

• 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 rigid labor laws and a very expensive social security system. Political difficulties also constrain the benefits of economic integration, particularly with continued restrictions on labor mobility between EU countries and a very cumbersome EU decisionmaking process.

• Japan continues to face 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. The projections assume sustained economic growth in Japan at 2 percent a year, with the country’s share of world GDP declining to around 12 percent by 2016, down from almost 18 percent in 1991.

Definition of country groups

Economic growth in developing countries is projected to average 5.6 percent annually in 2007-16. 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, fruits, vegetables, and processed foods (including vegetable oils). These consumption shifts increase import demand for feedstuffs and high-value food products.

• Long-term growth of 3.9 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 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 1971-2006.

• 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, despite problems with the structure of the banking system.

• India’s projected average economic growth of around 7 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 around $600 in 2006. Continued high income growth is expected to bring India’s real per capita income to more than $1,000 by 2016 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 almost 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 the other oil-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 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 83 percent by 2016.

• 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 2007-16. The population growth rate in India, the world’s second most populous nation, is projected to decline from 2.1 percent to 1.3 percent per year between the same periods. This growth narrows the gap between India’s and China’s populations.

• Brazil’s population growth rate falls from 2.1 percent per year in 1981-90 to 0.9 percent annually in 2007-16. Sub-Saharan Africa’s population growth rate declines from 2.9 percent to 2.2 percent per year over the same period, leaving this impoverished region with the highest population growth rates in the world, on average.

• 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 devastating impacts of the AIDS epidemic, including the Republic of South Africa, Botswana, Lesotho, and Swaziland.

The U.S. dollar remains relatively strong in the projections by historical standards, depreciating slightly in 2008 and then continuing a long-term pattern of slow real appreciation. The relatively high real exchange rate—expressed in this report as local currency per U.S. dollar, in inflation-adjusted terms—will be a constraining factor on the growth in U.S. exports. Nonetheless, strong long-term economic growth, particularly in developing countries, will result in an overall increase in the demand for U.S. farm exports.

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

• The U.S. dollar stays strong because capital moves into the United States to benefit from well-functioning and diverse financial markets, a relatively risk-free environment, transparent financial accounting standards, and high expected long-term productivity growth and corporate profitability. The dollar also stays high because developing countries that pursue export-led economic growth strategies often use fiscal and monetary policies that tend to produce depreciating currencies.

• Among agricultural products, U.S. exports of bulk commodities and horticultural products tend to be the most sensitive to a strong U.S. dollar, because they face relatively more global trade competition.

• China initiated a process for appreciating its currency in 2005 after a long period of an undervalued exchange rate and substantial political pressure from its trading partners. To date, the appreciation has been limited to 5-6 percent. This compares with most estimates of undervaluation of at least 30 to 40 percent. The projections assume that China allows its real exchange rate to slowly appreciate. The appreciation of the yuan also leads to appreciation in other Asian currencies.

Definition of country groups

Global inflation rates are projected to remain relatively low through 2016.

• The U.S. and world economies are moving into a steady growth phase of the business cycle. Some inflationary pressures have begun as a result 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 have increased short-term interest rates aggressively to constrain inflation, and are assumed to continue such policies in the projection period.

• While inflation in the United States and the world exceeded 3 percent in 2005 and 2006, a modest reduction in inflation is assumed in the projections. U.S. inflation as measured by the Consumer Price Index is projected at about 2.5 percent, while global inflation is around 3 percent.

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

• In the FSU, inflation rates come down from the high transition rates of the 1990s to an average projected to be below 5 percent.

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

Crude oil prices rose sharply from late 2002 through 2006, largely reflecting increased crude oil demand due to a robust world economic recovery and rapid manufacturing growth in China and India. In 2007 through 2011, crude oil prices are expected to drop modestly and then rise less than the inflation rate as new crude supplies help offset the rise in demand from Asia. After 2011, oil prices are projected to rise slightly faster than the general inflation rate, reflecting rising world oil demand, due to strong global economic growth, particularly in highly energy-dependent economies in Asia (see Economic Growth in Energy-Intensive Economies Underlies Oil Price Projections).

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

• The ability to switch to nonpetroleum fuels, 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 2007 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 (see U.S. Biofuel Overview). Additionally, steady U.S. and global economic growth assumed in the projections provide 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 stronger dollar, combined with trade competition from Brazil, Argentina, and the Black Sea region, constrains U.S. exports for some crops. Additionally, strong domestic use of corn due to increased ethanol production and the shift of land to corn from soybeans limit U.S. exports in the early years of the projections.

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 for 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 2009, but the CRP is then assumed to rise to 39.2 million acres by the end of the projection period, with higher CRP rental rates. About two-thirds of the land in the reserve is allocated to the eight major field crops (corn, sorghum, barley, oats, wheat, rice, upland cotton, and soybeans), based on historical plantings.

Projected plantings for the eight major field crops in the United States increase from about 243 million acres in 2006 to more than 247 million during most of the projection period, as higher prices and producer net returns bring land into 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. The cropping mix shifts more to corn and away from soybeans as growth in global supply and demand is reflected in prices and net returns. In particular, growth in domestic ethanol production from corn increases demand, raising corn prices and returns.

• Corn acreage rises sharply in the projections, reaching 90 million acres by 2010 as rapid expansion in ethanol production increases corn demand, prices, and producer returns. As growth in ethanol use stabilizes, annual increases in corn production from yield gains outpace increases in corn use for ethanol, allowing corn stocks to grow modestly and corn prices to ease somewhat. This supports renewed expansion in domestic corn feeding and exports. Stable, but moderate growth in corn ethanol demand combine with growth in feeding and exports to support producer returns and stabilize acreage at this higher level. Corn plantings are also facilitated by adjustments in soybean area.

• Wheat plantings rebound to 60 million acres in 2007 in response to high prices, but then fall back to 58-59 million acres due to competition from other crops.

• Soybean plantings decline to less than 69 million acres as more favorable returns to corn production draw land from soybeans.

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 2009/10.

• Large increases are projected in corn used for ethanol production over the next several years. Relatively high prices for oil contribute to favorable returns for ethanol production, which combine with government programs to provide economic incentives for the large 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 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, which already has tariff-free status.

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. Growth is somewhat slower than population increases, reflecting adjustments by some consumers to reduce carbohydrates in diets.

• Feed use of wheat, a low-value use of the crop, rises sharply in the initial years of the projections as higher corn prices encourage increases in wheat feeding, particularly in the summer quarter. As corn prices fall, wheat feeding declines after 2010/11 due to relatively higher wheat prices compared with corn.

• U.S. wheat exports are steady over the next several years, but increase after 2009/10 as income and population in developing countries grow, raising global wheat consumption and trade. Competition continues from the European Union (EU), Canada, Argentina, Australia, and the Black Sea region. The U.S. market share initially declines but then holds relatively constant near 22 percent once U.S. exports resume their growth. Market shares for Australia, Argentina, and the Black Sea region increase, while shares for Canada and the EU decline.

Domestic use of soybeans continues to rise slowly, but U.S. soybean exports initially fall and then grow very slowly.

• 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 through 2011/12.

• U.S. soybean exports fall below 900 million bushels as U.S. acreage is shifted to corn to support ethanol production and competition from Brazil strengthens. Consequently, the U.S. market share of global soybean trade declines to less than 25 percent.

• U.S. exports of soybean oil and soybean meal face strengthening competition from South American producers. U.S. exports of soybean oil are also limited by increases in domestic consumption, while soybean meal exports benefit from rising domestic supplies.

U.S. mill use of upland cotton declines in the projections while upland cotton exports rise after 2008/09.

• 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 2008/09 as supplies are reduced due to acreage shifts to corn. Exports then grow moderately, accounting for 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 2008/09 keep the U.S. cotton trade share at 37-38 percent, down from over 40 percent in 2003/04 and 2004/05.

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

• Growth in domestic use of rice is projected at only slightly faster than population growth, well below the rates of growth 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 over the next decade as the U.S. price difference over Asian competitors falls, increasing U.S. competitiveness in global rice markets. Rough rice exports to Latin America are expected to continue increasing and account for most of the U.S. export expansion.

• Global rice prices are projected to increase about 2 percent per year, exceeding $8.60 per hundredweight (rough basis) at the end of the projection period and remaining above the loan rate of $6.50 throughout. Despite slower production growth in Asia and growing worldwide import demand for rice, increases in global prices are limited by moderate consumption growth, reflecting dietary shifts away from staple foods in Asia as incomes rise. U.S. rice prices drop slightly early in the projection period, and then slowly increase to nearly $10 per hundredweight by 2016. The U.S. price difference over Asian competitors declines for most of the projection period.

Strong ethanol demand sharply lowers U.S. corn stocks in the projections. Shifts in acreage to corn from soybeans push soybean stocks down from their record levels of recent years. After the ethanol expansion slows later in the projections, stocks rebuild somewhat for corn and stabilize at lower levels for soybeans. Wheat stocks rebound from 2006/07 levels as higher prices encourage additional acreage and production. As wheat exports strengthen in subsequent years, stocks decline.

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. Similarly, stocks of rice fall as acreage initially declines, but rice stocks gradually increase after 2010/11 as rice acreage rises.

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

• Corn prices rise sharply through 2009/10 as increases in ethanol production strengthen corn demand. In the longer run, higher acreage and gains in yields are sufficient to meet slower ethanol production gains and moderate export growth, resulting in rising stocks-to-use ratios and falling prices for corn. Nonetheless, corn prices remain high.

• Acreage reductions for soybeans and declines in stocks from initially large levels lead to large soybean price increases through the early years of the projections. In the longer run, soybean prices are projected to fall back somewhat due to supply response in South America.

• Wheat prices are held high in the early years of the projections despite somewhat higher production as higher corn prices support wheat prices by encouraging increased wheat feed use. Later in the projections, wheat exports increase moderately, lowering the stocks-to-use ratio and raising wheat prices further.

Sugar projections for the United States and Mexico are strongly interrelated. For additional discussion of projections for Mexico, see Sugar and Sweeteners Outlook, February 2007 (PDF).

• On July 27, 2006, the United States and Mexico announced an agreement that resolves disputes related to each nation’s interpretation of sweetener provisions of the North American Free Trade Agreement (NAFTA). Effective on January 1, 2008, there will be no duties or quantitative restraints on sugar or high fructose corn syrup (HFCS) trade between the two countries. Mexico’s over-quota tariff on U.S. sugar will be eliminated on January 1, 2008, as required by the NAFTA. The United States and Mexico confirmed that on July 3, 2006, they submitted a joint letter to the World Trade Organization (WTO) Dispute Settlement Body in which both countries accepted in principle the elimination of Mexico’s soft drink and distribution taxes.

• Mexico’s beverage industry is assumed to shift to higher use of HFCS in 2008 and subsequent years in the projection period. This implies a higher exportable surplus of sugar from Mexico. Returns from exporting sugar to the United States are 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. As a result, Mexican sugar exports are projected to rise to 889,000 metric tons, raw value (MTRV) in 2008. After 2008, Mexican sugar exports decrease about 40,000 MTRV per year as more production is used to satisfy expanding Mexican sweetener demand. (In Mexico, per capita sweetener consumption is assumed to grow about 0.9 percent a year.)

• The U.S. sugar price support program includes the loan rate program and marketing allotments. With high imports of sugar projected, the import trigger (1.532 million short ton, raw value—STRV) for suspension of allotments is likely to be exceeded in all years of the projections. Downward price pressures implied by NAFTA sugar imports indicate forfeitures to the Commodity Credit Corporation (CCC) throughout the projection period, which average 164,000 STRV per year. Historical growth trends in U.S. sugar sector productivity measures (sugarbeet yields, sugarcane yields, and sugar per acre) are assumed to continue throughout the projections.

• The raw sugar tariff-rate quota (TRQ) is established each year in the projections at 1,117,195 MTRV, the WTO minimum access level. The refined sugar TRQ is established each year at 57,000 MTRV. The yearly raw sugar TRQ shortfall is assumed to equal about 45,000 MTRV.

• The sugar projections assume that sweetener consumption in the United States grows at the same rate as does population. Because growth in imports of sugar-containing products is higher than population growth, per capita consumption of domestically delivered sugar decreases slightly during the projection period.

The tobacco sector is continuing to adjust to the post-program era.  Legislation enacted in October 2004 ended the U.S. tobacco marketing quota and price support program beginning with the 2005 crop year.  During the first season without a program (2005/06), nearly half of the tobacco producers pulled out of production.  Remaining growers grew similar levels as previously.  During the second season after the program, many of those remaining growers expanded operations and tobacco acreage and production increased.  Production during the 2006 crop year is expected to be about 13 percent greater than the first post-program crop.

• Tobacco leaf production expands starting in 2006 as costs decline due to the elimination of costs associated with acquiring quota and as economies of scale are achieved on fewer, larger farms. Additionally, production shifts to areas such as the Coastal Plain of North Carolina and western Kentucky, where producers can achieve more economically viable scales of operation.  Pennsylvania has become a major burley producing State. Leaf prices recovered slightly in 2006/07 and are projected to remain favorable for growers with marketing contracts.

• Tobacco exports are projected to increase moderately over the next decade.  U.S. leaf remains competitive on the global market although the tobacco industry also faces competition from foreign producers, particularly Brazil.

• Declining cigarette consumption in the United States is an important factor underlying projected decreases in domestic use of tobacco leaf.  Cigarette sales in the United States are expected to continue to fall 2-3 percent per year for the projection period.  Per capita consumption declines as restrictions on smoking become more widespread and as the cost of cigarettes increases due to higher prices and taxes.  Exports of cigarettes will likely stabilize near current levels.

The total farmgate production value of horticultural crops for 2006 is $50 billion, with about a third of the total accruing to each of the following three categories: fruits and nuts; vegetables and melons; and nursery, greenhouse, and other crops. The production value grows by 2.5 percent annually over the next decade, reaching $64 billion.

• 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 $7 billion from 2006 to 2016. The dollar’s appreciation after 2008 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 2016. 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 $8.4 billion out of a total $29.2 billion in 2006. Mexico is the second biggest source of U.S. horticultural imports, which amounted to $6.7 billion in 2006. Chile, Canada, and Brazil are also large sources of horticultural product imports by the United States. Key import commodities include potatoes, tomatoes, bananas, grapes, frozen concentrated orange juice, apple juice, melons, tree nuts (especially cashews), wine, beer, and essential oils.

• U.S. horticultural exports are expected to grow by 3 percent a year through 2016, with the major export markets including Canada, 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 2007 Baseline

Projections for the livestock sector reflect production adjustments in response to sharply higher grain prices due to the expansion of corn-based ethanol production. Returns to U.S. meat and poultry production fall from those 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, substituting for corn and sometimes for soybean meal (see Livestock Sector Use of Distillers Grains, a Coproduct of Ethanol Production).

• Higher grain prices in tandem with drought impacts in 2006 hold down cattle inventories, pushing U.S. beef production down in 2009-11. Production then rises in the remainder of the projection period as returns improve. The cattle inventory remains in a range of 97-99 million head through 2011, and then expands to over 102 million by 2016. Rising slaughter weights augment this herd expansion, leading to annual beef production gains of 1 percent or more starting in 2013. Higher costs of feedlot gain will result in stocker cattle remaining on pasture to heavier weights before entering feedlots.

• Pork production declines in 2008-10 in response to higher feed prices and then grows for several years as higher hog prices improve returns. Expansion slows again at the end of the projections as returns narrow. 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 continues to rise, but less rapidly than during the 1990s due to the maturity of domestic demand, slower export growth, and adjustment to higher feed costs.

Annual per capita consumption of red meats and poultry falls from 223 pounds in 2007 to a low of 213 pounds in 2012, reflecting livestock sector production adjustments to higher feed costs due to increased ethanol production as well as gains in meat and poultry exports. Per capita consumption of red meats and poultry then resumes growth but, at about 219 pounds in 2016, remains lower than in recent years.

• Per capita beef consumption declines through the first half of the projection period reflecting lower production due to drought in 2006 and adjustments in the industry to higher feed costs and reduced returns. Use of distillers grains in cattle rations and reductions in corn prices later in the projections lead to production gains and increases in per capita beef consumption in 2013-16.

• Although U.S. beef exports do not return to the levels reached prior to the December 2003 discovery of bovine spongiform encephalopathy (BSE) in Washington State, a gradual rebuilding of U.S. beef exports to Japan and South Korea is assumed in the projections, further limiting domestic per capita beef consumption.

• Strong demand for consistent, high-quality beef continues in the domestic hotel and restaurant market, and increasingly in the retail market. Beef export markets are also primarily for high-quality beef. An important development will be how beef quality is affected by the increased use of distillers grains in beef cattle rations.

• Higher feed costs lead to reductions in pork production which combine with rising pork exports to push per capita pork consumption down through 2011. A gradual rebound in per capita pork consumption occurs over the remainder of the projection period.

• Poultry prices remain lower than red meat prices. However, as returns are squeezed, production gains slow and per capita consumption declines for several years. Following these adjustments, production strengthens and per capita poultry consumption resumes growth later in the projections.

Livestock prices are projected to move to higher levels following near-term production adjustments in the sector in response to higher feed costs. As production rebounds later in the projections, prices decline somewhat although they remain historically high.

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 U.S. meat use. Despite higher prices, U.S. meat exports rise throughout the projections as global economic growth supports increases in demand.

Beef

• 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. U.S. beef exports are projected to rise slowly as a gradual recovery is assumed in the Japanese and South Korean export markets lost following the first U.S. BSE case in December 2003.

• U.S. imports of processing beef from Australia and New Zealand increase in the projections. With more of demand in the East Asian market being met by U.S. beef exports, exports to that market 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.

Pork

• U.S. pork exports continue to benefit from lower levels of 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 competitor in these markets. Brazil also is a major pork exporter. However, the projections assume that Brazil will not be recognized as free of foot-and-mouth disease (FMD) nationwide, thus limiting Brazilian pork producers’ ability to compete in some markets. Consequently, Brazil’s pork exports expand to markets with less stringent import restrictions regarding FMD, including Russia, Argentina, and Asian markets other than Japan and South Korea.

• Despite higher feed costs, increased efficiency in U.S. pork production limits production-cost increases and 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 with pork industries in the early stages of development and integration, such as Brazil.

Poultry

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

Relatively high farm milk prices in 2004-05 encouraged increases in milk cow numbers in 2005-06. Combined with an upward trend in output per cow, this resulted in relatively strong gains in milk production in 2005-06 and reductions in milk prices. Smaller production gains are projected over the rest of the projection period, particularly in the next several years as the sector adjusts to higher feed costs.

• Milk output per cow is projected to increase, although some slowing in these gains occurs early in the projection period 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 2006, with the largest reductions in 2008-10 as feed costs rise. Longer term reductions are smaller as increasing specialization of dairy farms over time slows exit rates from milk production compared with past decades.

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

• Farm-level milk prices increase after 2006 as milk production gains are smaller than those in 2005-06. Price increases are largest through 2011 as the sector adjusts to higher feed costs. Milk price increases are then projected to be less than the general inflation rate through the rest of the projections.

U.S. Agricultural Sector Measures: February 2007 Baseline

Large increases in corn-based ethanol production affect production, use, and prices of farm commodities throughout the sector. Steady domestic and international economic growth supports gains in consumption, trade, and prices. These factors combine to result in higher market prices and 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 through the projections. U.S. agricultural export values rise through the projections. On average, consumer food prices are projected to rise more slowly than the general rate of inflation over the next decade, although increases in meat prices push food prices up faster in some years.

Strong domestic use and export demand push U.S. net farm income from its 2006 level of $60.6 billion to an average of $66.7 billion annually over the next 10 years.

• Large increases in cash receipts over the next several years mostly result from expansion of corn-based ethanol production. Lower government payments, due to higher commodity prices, and rising farm production expenses offset gains in cash receipts in the later years of the projections, resulting in some reduction in net farm income after 2010. Nonetheless, net incomes remain historically high in the mid- to upper-$60 billion range, well above the average in the 1990s of about $48 billion.

Direct government payments to farmers are projected to fall from $16 billion in 2006 to an average of less than $12 billion annually over the projection period, largely due to higher commodity prices and correspondingly lower price-dependent program benefits.

• To account for the possibility of both higher and lower prices than the deterministic (point estimate) prices, a stochastic estimation process is used to project expected direct government payments. This process captures potential variation in farm program benefits due to stochastic (random) shocks to yields.

• Strong demand for corn for ethanol production results in projected market prices for corn and other crops rising to levels that lower government payments significantly. For example, even with stochastic considerations, payments for price-sensitive marketing loan benefits and counter-cyclical payments for feed grains are minimal, totaling less than $200 million over calendar years 2007-16 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 more than $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.

• 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 4 percent during most of the projection period. Conversely, cash receipts plus farm-related income rises to over 96 percent of gross cash income.

Total production expenses increase at near the general inflation rate from 2007-16. 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 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 increased debt facilitated by higher income. Increases for net rent and other operating expenses reflect higher cash receipts and profitability as well as larger acreage and sector output.

• Projected manufactured-input expenses reflect high oil prices and larger crop production. After increases in 2004-06 that were mostly due to the rising oil prices, these expenses increase at about the general rate of inflation through the rest of the projections.

• Farm-origin expenses rise less than the general inflation rate. Feed expenses rise the most as demand for corn for use in the production of ethanol competes with feed demand and pushes corn prices higher.

• Cash operating margins tighten over the projections period as expenses rise while decreases in government payments slow gains in gross cash incomes. By 2016, cash expenses represent about 80 percent of gross cash income, compared with an average of 73 percent in 2000-05.

Strong and stable net farm income assists in asset accumulation and debt management.

• Gains in farmland values and real estate assets (representing about 80 percent of total farm assets) reflect increases in agricultural revenues, particularly in the first several years of the projections. Additionally, as the general economy continues to expand, demand for land for nonagricultural uses, such as housing and recreation, contributes to rising farmland values.

• Higher incomes facilitate increases in farm debt in the projections. Nonetheless, debt moves up less rapidly than farm asset values, resulting in gains in overall farm sector equity. The debt-to-asset ratio declines moderately from 11.8 percent in 2006 to about 11.3 percent at the end of the projections, continuing a decline from over 20 percent in the mid-1980s.

On average over the next 10 years, retail food prices are projected to increase less than the general inflation rate, although food price increases are somewhat larger than general inflation in some years.

• Consumer prices for red meats, poultry, and eggs exceed the general inflation rate in 2008-10 as the livestock sector adjusts to higher feed costs due to the expansion in corn-based ethanol production. As a result, overall retail food prices rise faster than the general inflation rate in those years.

• 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. Prices for these foods 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 the overall inflation rate as well as some effect of price movements for retail meat and poultry. Competition in the fast-food and food service industries tend to moderate price increases for food away from home.

• Expenditures for meals prepared away from home account for a growing share of food spending, reaching about 51 percent of total food expenditures by 2016.

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.

• Steady world economic growth, particularly in developing countries, provides a foundation for gains in trade and U.S. agricultural exports. However, competition in global markets remains strong. Higher commodity prices due to expansion of global biofuel demand also contribute to the gains in export values. Overall, the value of U.S. agricultural exports is projected to grow from $77 billion in fiscal year 2007 to nearly $95 billion in 2016.

• The initial increases in bulk commodity prices strengthen bulk export values, pushing the share of exports accounted for by high-value products (HVP) down over the next few years. In the longer run, HVP export values again grow in importance, 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. Most of the growth in the value of bulk commodity exports (grains, oilseeds, cotton, and tobacco) reflects expected price increases and gains in volume for grains.

• U.S. agricultural import values rise to about $93 billion in 2016, 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 rises to over $10 billion in the initial years of the projections, largely due to the gains in bulk commodity prices and bulk export values. The agricultural trade balance then narrows through the remainder of the projections as bulk export growth slows and imports continue steady gains.

Global Agricultural Trade: February 2007 Baseline

With strong world economic growth and increasing demand for agricultural products, global agricultural trade is projected to rise throughout the coming decade. Rapid expansion of ethanol and biodiesel production in some countries is projected to have a significant impact on global demand for feedstocks, such as corn, vegetable oils, and sugarcane, and on world price relationships. As a result, feeds fed primarily for their energy content become relatively more expensive than those fed for protein. Producers of pork and poultry are most affected, but users of grain for food also face higher prices. The continued expansion of oilseed crushing capacity in a number of importing countries is expected to strengthen import demand for total oilseeds, while increasing biodiesel production will boost the demand for total vegetable oils.

The growing economies of developing countries provide a foundation for gains in demand for agricultural products and increases in trade. Broad-based economic growth and increasing urbanization lead to diet diversification in most developing regions, generating increased demand for livestock products and feeds, as well as for fruits, vegetables, and processed products. Developing-country import demand is further reinforced by population growth rates that remain nearly double the growth rates of developed countries.

International trade in animal products, however, remains heavily dependent on demand from developed countries and from market access achieved under existing trade agreements. Trade is also affected by concerns regarding diseases such as bovine spongiform encephalopathy (BSE), avian influenza (AI), and foot-and-mouth disease (FMD). Strong policy support for domestically produced meat is expected to motivate growth i