World economic growth rates increased to 2.1 percent in 1994. Although this is not robust growth, it is the highest in several years and a full percent greater than growth in 1993. Developing countries, as a whole, have performed much better than the world average. In contrast, the developed countries had three successive years of sluggish economic performance before posting an aggregate gain of 2.8 percent in 1994. World economic growth is expected to increase faster in the future as the developed countries continue moderate growth and developing countries accelerate growth. In part, healthy economic expansion around the world is expected to result from the implementation of the GATT agreement, but other factors, many of them specific to country or regional development, will continue to impact the global economy.
The economies of the United States and Canada appeared to be fully recovered from the recession of the early 1990s. Both nations' economies grew at rates substantially above long-run expected growth rates. Western Europe reversed the slight economic contraction of 1993 by growing at a rate slightly below long-run expectations in 1994. As a whole, the economies of the European Union expanded by 2.4 percent. Although Japan's economic performance improved in 1994, it can still be described as sluggish at best. The growth of 1 percent is well below expected long-run growth for Japan. It still remains to be seen what effects devastation from the major earthquake at Kobe will have on the Japanese economy in the next year or so.
The world economic growth rate is projected to increase to 3.4 percent in 1995 and reach approximately 4 percent in subsequent years. Developed countries are expected to grow at 2.9 percent in 1995 and generally remain in that range in the future.
As a whole, the former centrally planned economies of Eastern Europe and the former Soviet Union (FSU) are forecast to contract more than 12 percent in 1995, with continued (though smaller) downsizing expected in 1996. Growth in this region is projected to begin in 1997. However, it should be noted that the economies of Eastern European nations are faring much better than the economies of the FSU. In aggregate, Eastern European economies grew at 1.4 percent in 1994, with increasing growth rates forecast through 1996. Long-term growth is expected to settle at around 4 percent per year. In contrast, the FSU continues to be caught in the grip of severe depression, with growth not expected to take place until 1998. By that time, these economies are expected to have shrunk by approximately 60 percent compared to their 1989 levels. By the turn of the century, growth is expected to increase to more than 5 percent in the FSU.
Economic growth has been strongest in developing regions, especially in Asia. China led the way with growth of 11 percent in 1994. Although China's growth rate is projected to fall below double-digit levels, long-term growth is expected to continue to be very high, exceeding 9 percent. Countries of the Pacific Basin are projected to maintain growth rates well above the world average, with several countries in the 5 to 8 percent range.
Economic growth declined in Latin America in 1994 as economies slowed, primarily in Argentina, Brazil, and Chile. The Venezuelan economy is going through a contraction from which it is not forecast to recover until 1996. However, this region, as a whole, still grew at approximately the same rate as developed countries in 1994 and is expected to exceed world average growth rates by 1996. Brazil has the largest economy in this region. Growth slowed to 3.9 percent in 1994 and is expected to slow further in 1995. Expansion of more than 6 percent is forecast for 1996 and 1997, after which growth is expected to stabilize at 4.9 percent. The Argentine economy is projected to grow at more than 5 percent per year for the next ten years.
The Mexican economy posted 2.6 percent growth in 1994. However, in December 1994 the peso fell more than 50 percent. Although the peso is forecast to stabilize relatively quickly, the economic fallout will likely last two or more years. Mexican GDP is forecast to decline in 1995 as a result of the devaluation. Growth is projected to resume in 1996, but full growth is not expected until at least 1997. After that time, robust economic expansion is predicted because of the stimulus provided by NAFTA and unilateral domestic policy changes.
In some parts of Latin America, high population growth will dampen per capita income growth, and high debt rates will continue to be a burden on these economies, limiting their ability to import. However, the expansion of trading blocs such as NAFTA and MERCOSUR will likely help economies in this region.
Over the next few years, Africa is expected to have real GDP growth rates similar to the rates of the developed countries. By the end of the twentieth century, however, growth in this region is projected to increase to around 3.3 percent. Although this is higher than developed countries, it is still substantially below world average levels. Like Latin America, Africa will continue to experience high rates of population growth that will erode per capita GDP growth. Heavy debt burdens will continue to limit growth in this region.
The U.S. dollar depreciated relative to the Japanese yen in 1994. Appreciation of the dollar relative to the yen is projected for 1995 and 1996, before the pattern of weakening resumes. The U.S. dollar weakened against the Australian dollar, but gained relative to the Canadian dollar in 1994. Long-term depreciation against these currencies is forecast.
In 1993, the dollar also depreciated relative to the European Currency Unit (ECU) and many of the western European currencies that make up this unit. However, projections indicate that strengthening of the dollar is expected to begin in 1995 and continue into the future.
The dollar is projected to appreciate relative to most currencies
of developing nations. Expectations are for the dollar to remain
generally stable relative to the currencies of newly industrialized
countries such as Taiwan and South Korea, as well as Thailand.
The relative strength of the dollar compared to the currencies
of developing countries is likely to constrain U.S. exports. Many
of these countries are considered to be growth markets for agricultural
commodities, but a strengthening dollar will make products more
expensive to purchase.
The Policy Environment
The major policy change in this baseline is the adoption and implementation of the GATT agreement. Implementation begins in 1995 and the phase-in period runs through 2000. For agriculture, the impact of GATT is likely to come from two general sources. The first is the commitments made by member countries to reduce trade barriers and reduce agricultural support. The second source is increases in demand for agricultural products which will be induced by increases in GDP around the world.
GATT constraints on agriculture are of three general types. The first is reduction in the aggregate measure of support (AMS), a measure of domestic support to agriculture. The GATT agreement calls for a 20 percent reduction in AMS relative to a 1986 reference level. For most countries, this measure is not binding on domestic agriculture and is therefore of little consequence. Many countries have substantially reduced their levels of support since 1986, making further reductions unnecessary. For countries which subsidize exports of agricultural products, a 21 percent reduction in subsidized export quantities and a 36 percent reduction in subsidy expenditures relative to a 1986-1990 reference level are required. These constraints are likely to have significant impacts on grain, meat, dairy, and vegetable oil markets. Finally, import access must be increased where there are barriers to trade. This is to be accomplished through minimum access and current access commitments. Nontariff barriers are to be converted to tariff equivalents and reduced by a simple average of 36 percent, with any individual item requiring a 15 percent reduction in tariff equivalent.
Other than the GATT agreement, or perhaps, because of the GATT agreement, there were relatively few other major agricultural policy changes in 1994. In previous years, changes such as CAP reform, PROCAMPO, CUSTA, NAFTA, and Japanese beef and citrus liberalization have been significant unilateral and multilateral shifts in policies. In 1994, most of the changes were adjustments to current policies, such as lowering set-aside rates in the EU for the 1995/96 crop. Of course, the 1995 U.S. farm bill could possibly be a major policy shift, but that will not be known for several months.
In 1993, the European Union implemented the first phase of its CAP reform. Much of the price adjustment took place in that first year. However, the phase-in is continuing, with full implementation slated for 1995. Alignment of domestic prices with world prices in Mexico under PROCAMPO will occur in 1995 for corn, sorghum, soybeans, edible beans, wheat, rice, and cotton. Japan has tightened its rice imports as production has recovered. Political and economic transformations are continuing in the countries of Eastern Europe and the former Soviet Union. Accompanying these political, social, and economic changes have been transformations of agricultural policies. These transformations are likely to continue for several years.
Although it was passed earlier, NAFTA was first implemented on January 1, 1994. On that date, the United States, Mexico, and Canada took the first steps toward putting in place policies to create a free-trade area. It is likely that NAFTA will be expanded in the future to include more western hemisphere nations. The European Union expanded in early 1995 to include Finland, Sweden, and Austria. This brings the number of EU member nations to 15.
In the EU, implementation of the reformed CAP began in 1993 with complete phase-in set for 1995. Target and intervention prices have been cut significantly in ECU terms; however, adjustments to individual country currencies for agricultural products, or green rates, have offset some of this price reduction. In 1995, intervention prices are scheduled to be reduced to less than 99 ECUs per mt for cereals. Target prices for cereals will be at 108 ECUs per mt, and threshold prices will be 45 ECUs per mt above target prices. To offset the reductions in intervention prices, producers will receive compensatory payments of 45 ECUs per mt. based on regional average cereal yields. In order to qualify for the compensatory payments, farmers must agree to set aside 15 percent (12 percent in 1995) of their combined cereal, oilseed, and protein cropland on a rotational basis. There is also a nonrotational set-aside option at slightly higher rates. The Agricultural Commission has the ability to review and change the set-aside rate annually.
The oilseed regime of the EU, which was implemented in 1992/93 and modified by the Blair House agreement in November 1992, was basically kept in place under GATT. Oilseed production for industrial purposes is allowed on set-aside land up to the equivalent of 1 mmt of soybeans. It is therefore probable that annual oilseed area planting will be in excess of the maximum guaranteed area of 5.128 million hectares. Payment to oilseed producers is based on a "world reference price" of 193.1 ECUs per mt. This level is lower than support prices for oilseeds under previous oilseed regimes. The lower support is offset by a 359 ECUs per hectare compensatory payment (based on regional average yields). As in the case of cereals, the oilseed program is subject to set-asides totaling a minimum of 10 percent of oilseed area.
CAP reform included a 15 percent reduction in the beef intervention price between 1993 and 1995. In order to offset income losses to producers, payments are made for each animal, limited to the number of head in a region in a reference year and subject to stocking density constraints. Milk delivery quotas were increased marginally in 1994.
GATT commitments constrain EU subsidized exports of wheat to 13.4 mmt in the year 2000. Coarse grains subsidized exports are limited to 10.0 mmt and sugar B quota exports to 1.3 mmt in 2000. There are also export subsidy constraints on beef, pork, poultry, butter, nonfat dry milk, and cheese. Import access must be allowed for grains, meats, and dairy products as well.
Japan's government procurement and resale prices for rice, wheat, and barley are held at current levels. The Japan Food Agency is assumed to continue controlling the importing and marketing of these grains so that grain markets in Japan remain insulated from world price variability. A short crop made it necessary for Japan to import approximately 2 mmt of rice in 1993, but an improved harvest in 1994 removed the need to purchase rice on the world market. However, with the implementation of GATT, Japan must once again open its borders to rice trade beginning in 1995. By 2000, more than 750 thousand mt of rice will be imported annually by Japan. However, Japan has not committed to tariffication for rice, still leaving its domestic rice market insulated from world price volatility.
Japan had completed its commitment to liberalize its beef market in 1993 under the 1988 beef liberalization agreement. However, further tariff reductions are scheduled during the phase-in of the Uruguay Round, leading to lower domestic beef prices and offering incentives for increased trade.
The baseline incorporates provisions of the Food, Agriculture, Conservation, and Trade Act of 1990 (FACTA-90) and the Omnibus Budget Reconciliation Acts of 1990 and 1993 (OBRA-90 and OBRA-93). Provisions of the three acts are assumed to be extended indefinitely. FACTA-90 mandates a freeze on target prices for grains and cotton and loan rates for sugar. Acreage Reduction Programs (ARPs) are assumed to be managed with a specific focus on achieving stable domestic prices and continued competitiveness of U.S. commodities in world markets. Normal flexible acreage reduces by 15 percent the amount of base acreage eligible for deficiency payments. Farmers can plant this acreage to any crop, except fruits and vegetables, without affecting current or future payments.
It is assumed that the Conservation Reserve Program (CRP) will include the maximum of 15.4 million hectares (38 million acres) allowed by OBRA-93. It is further assumed that this maximum will not be reached until 1996. Some CRP contracts are assumed to be renewed as they expire. It is assumed that long-term CRP enrollment will fall to 7.1 million hectares and not to zero as was assumed in previous FAPRI baselines. Of the land that is not re-enrolled in the CRP, approximately half returns to production. The remainder is expected to be enrolled in 0-85 programs for wheat and feed grains and 50-85 programs for cotton and rice, or be removed from production. Export Enhancement Program (EEP) expenditures and quantities are reduced according to GATT commitments. The commodities affected by EEP reductions will be wheat, barley, vegetable oils, rice, and broilers. Vegetable oil exports are also limited under reductions for the SOAP and COAP programs. Subsidized dairy exports are reduced under the DEIP program. FACTA-90 specifies that the milk support price cannot fall below $10.10 per hundredweight. Import access for cheese is required by U.S. GATT commitments.
World feed-grain production increased by 78 mmt in 1994/95, mainly due to increased production in the United States. The U.S. corn crop was 93 mmt larger than in 1993/94 when widespread flooding in the Midwest wiped out large crop areas. The record U.S. corn crop topped 10 billion bushels for the first time. Other areas of the world did not have the nearly perfect weather of the midwestern United States, however. Australian grain areas were hit by a severe drought. Barley production in that country was reduced from 6.8 mmt in 1993/94 to 2.4 mmt a year later. Dry conditions continued in Eastern Europe for the third consecutive year. This drought also affected grain production in parts of Ukraine, Kazakhstan, and Russia.
World feed-grain utilization is expected to increase by 21 mmt in 1994/95, partly in response to lower prices resulting from increased supplies. Another reason for the increase in global feed-grain utilization is an estimated 8 mmt increase in Chinese use. U.S. feed-grain use is rebounding after declining in 1993/94. However, there is downward pressure on feed-grain utilization in the FSU as livestock inventories continue to decline. Feed use is stagnating in Japan and the European Union as animal inventories show little growth. Feed use is increasing most rapidly in developing Asian countries as high income growth is leading to increased demand for livestock and dairy products.
Because world feed-grains production increased more than utilization, stocks are estimated to increase by 15 mmt in 1994/95 to 139 mmt. This level of ending stocks is still well below levels held at the end of 1992/93, and leaves the world in a somewhat tight stock situation. The 28 mmt increase in feed-grain stocks in the United States is expected to be partly offset by stock reductions in the FSU and European Union. EU feed-grain ending stock reduction is not so much a result of low production as it is of stock management under the reformed CAP. The continuing tightness in the world stock situation leaves markets sensitive to production shortfalls as there is limited ability to draw down stocks to relieve upward pressure on prices. A severe drought in a major producing region could cause rapid price increases.
In spite of substantially lower prices in 1994/95, total world trade is not expected to change greatly from 1993/94. However, this seems to be the result of offsetting changes in various parts of the world. Regional trade patterns are shaping up much differently. The largest difference is an estimated 10 mmt reduction in Chinese exports. Australia and the EU are exporting significantly less than in 1993/94. Imports continue to expand in Asia but decline in the FSU. Increased supplies in the United States lead to an expected increase in exports of 16 mmt.
Over the longer term, Argentina is expected to become increasingly competitive, but Australia and Canada are likely to increase exports only marginally. The continuing expansion in livestock production in China has begun to erode exportable surpluses of feed grains, and this country is projected to reduce exports and move toward a net importer position over the projection period. Similarly, Thailand's poultry industry is expected to increase feed-grain utilization beyond its production capacity, moving this country steadily toward a net importer position.
Further liquidation of livestock herds in the FSU is expected to result in this region becoming self-sufficient in feed grains. Ukraine is already near a net export position. Republics such as Russia will likely remain net importers, but of relatively low quantities. However, even low levels of imports are contingent upon the ability to pay for grain on the world market, and credit availability. Generating foreign exchange through oil exports could be key to grain purchases by the FSU. Along with Ukraine, Kazakhstan is expected to become a consistent net exporter of feed grains.
The price reducing effects of PROCAMPO in Mexico combined with opening of livestock and grain markets under NAFTA have resulted in increased feed-grain imports in 1994. As NAFTA and eventually GATT lead to accelerated income growth in Mexico, the demand for meat and dairy products will lead to larger imports of feed grains, particularly corn. Because corn prices have fallen much more than sorghum prices, corn feed use has increased partly at the expense of sorghum feed use, resulting in an increase in corn imports.
Perhaps the highest rate of feed-grain import growth will occur in Asian countries. High income growth and increasing livestock production are expected to continue, making it necessary to increase feed imports. Countries such as Taiwan and South Korea are currently leading the way in expanding feed-grain utilization. However, Taiwan is experiencing environmental problems from hog production, and it is possible that this could limit expansion of meat production.
Because of increased supplies of feed grains, especially corn and sorghum in 1994/95, prices have fallen. The annual average corn export price at the gulf is expected to be $98 per mt, a decrease of $19 per mt from 1993/94 levels. Lower production is expected for 1995/96 as yields decrease somewhat and ARP rates in the United States are increased to 7.5 percent. Prices are projected to be boosted to $105 per mt in 1995/96 and remain between $96 and $108 per mt throughout the rest of the projection period.
World feed-grain utilization has faced increased competition from feed wheat during the past decade. Wheat feeding is projected to continue in areas such as the European Union and the FSU. Protein meals are expected to provide further competition for feed grains in many regions. Nevertheless, world feed-grain consumption increases are expected because demand for livestock products is increasing around the world.
Soybeans and soybean products dominate the world oilseed market in terms of both production and trade. Similarly, world production of soybeans is dominated by five major producers (the United States, Brazil, Argentina, China, and India) accounting for more than 90 percent of world production. The United States alone accounts for over 50 percent of world soybean production and over 65 percent of world soybean exports. Because so few countries constitute such a large proportion of world soybean supply, factors affecting production in any single country can produce significant consequences in world soybean markets.
World production of soybeans is expected to increase by 15 percent in 1994/95, largely as result of a 37 percent increase in soybean production in the United States. In 1993/94, floods in the Midwest and drought in the Southeast resulted in an 8.75 mmt decline in soybean production in the United States, which overwhelmed the 14 percent increase in production in the rest of the world. In 1994/95, record yields of 2.19 mt/ha, combined with a 7 percent increase in area harvested, have resulted in a record crop of 69.6 mmt of soybeans in the United States. In Brazil, production is expected to decrease by 180 tmt in 1994/95 as area stabilizes and yields return to normal. Argentina is expected to increase production by 700 tmt in 1994/95 due almost entirely to yield, while Chinese production is projected to be down by 1.5 mmt for the same reason. Soybean production in India is expected to decrease by 750 tmt due to unusually wet weather at planting time.
Several factors will affect soybean production over the next ten years. Technological advances, which are expected to result in yield increases, are assumed to continue at the recent historical pace. Brazil and Argentina are expected to continue expansion of area into soybeans, although at a much slower rate than in the past 10 years. Income growth and a self-sufficiency policy in vegetable oils will be the driving forces behind India's continued expansion into soybeans, although there will be competition from other oil-producing crops such as rapeseed, cotton, and peanuts. China has been rapidly switching crop area into soybeans due to the increase in soybean prices relative to competing crops that has taken place as a result of the 1992 grain and oilseed market reform. Soybean area increased by 2.5 mn ha in 1993/94, pushing China ahead of Argentina as the world's third largest producer of soybeans. Over the next ten years, China is not expected to shift significant area into soybeans, as the prices of competing crops stabilize. Demand for soybeans and soybean products in China is expected to continue to grow with increased income and livestock production. In the United States, soybean area is projected to grow by 1.5 mn ha between 1994/95 and 2003/04 as area is flexed into soybeans due to relative prices and as CRP land is brought back into production.
There are several factors that will have negative effects on world soybean production as well. Competition from other feeds and vegetable oils is an ever present factor that results in downward pressure on soybean and soybean product prices. Reductions in livestock inventories because of the severe economic contraction that occurred in the republics of the former Soviet Union and a slowdown in the growth in livestock production in many other countries will slow demand for soybeans and soybean products. CAP reform has lowered cereal prices relative to protein meal prices and will continue to do so, resulting in the substitution of cereals for feed use in the European Union. Implementation of the GATT starting in 1995/96 is expected to decrease livestock production in some feed-deficient countries due to import access commitments for meat.
The primary use for soybeans is for crush for the production of meal and oil, but many Asian countries also use soybeans for food. World crush is expected to increase by 5.4 mmt in 1994/95, with the United States accounting for 44 percent of the increase, and the European Union picking up roughly 33 percent in response to high world vegetable oil prices and abundant world soybean supplies. Steady income growth throughout Asia and other developing regions of the world is expected to drive crush via the demand for soybean oil, and to a lesser extent, soybean meal. Throughout the 1980s, world demand for soybean meal increased as a result of increased world livestock production, and due to the joint nature of the product, this caused large accumulations of soybean oil. More recently, world demand for vegetable oil has been outpacing supply, and is expected to be the primary cause of increasing world crush over the projection period.
Soybean production is expected to remain concentrated in relatively few areas of the world, making it necessary to import soybeans in nonproducing regions. As soybean oil demand is pushed beyond the abilities of importing countries' crush capacity, more and more meal and oil will be imported relative to soybeans, particularly in developing countries. Exporters with the ability to trade value-added products will benefit more than those who mainly trade soybeans.
Some industrial countries import soybeans and crush them domestically to supply feed and soybean oil requirements. The European Union imports soybeans for crushing and soybean meal for livestock feed use, but exports nearly half of the soybean oil it produces. However, more than two-thirds of the total world soybean meal and oil output comes from four major producing regions: the United States, Brazil, Argentina, and China. Soybean meal and oil production in these four countries in 1994/95 is expected to reach 55.9 mmt and 12.8 mmt, respectively.
World demand for protein through meat and other livestock products is heavily influenced by income, population growth, and health trends. Livestock production and meat consumption are expected to continue growing over the next ten years, with world growth in poultry production causing most of the increased soybean meal demand. Many regions will not experience the income or livestock production growth rates of the past, particularly those densely populated areas that for environmental reasons may begin to import more meat rather than feed for livestock. On the other hand, several countries have recently shown dramatic increases in meat production and consumption, and there is the potential for many others to do so as well. In 1994/95, world soybean meal consumption is expected to reach 82.7 mmt, a nearly 5 percent increase above the previous year.
Soybean oil demand and trade are heavily influenced by production increases of competing oils, income and population growth, and year-to-year fluctuations in supplies of oil-bearing crops in importing countries. Palm oil is the number one vegetable oil in terms of total world trade, but soybean oil holds the top spot in terms of world production. Palm oil is considered a less desirable vegetable oil because of its high proportion of saturated fat and is generally priced significantly below soybean oil. However, in August of 1994, the Malaysian palm oil price rose above the Decatur soybean oil price for the first time since 1983/84. A decrease in the rate of growth in palm oil production mostly due to the lagged effects of insufficient rainfall, combined with low palm oil stocks, are the primary reasons for the high palm oil prices. As palm oil production recovers in the coming months, world vegetable oil stocks will see less pressure and prices should moderate. World demand for soybean oil has driven the world soybean price recently, and is expected to continue as incomes rise in developing countries where per capita consumption of fats and oils is relatively low. World consumption of soybean oil increased by nearly 1 mmt in 1993, despite high prices. In 1994/95, tight world oil stocks, strong Chinese demand for soybean oil, increased domestic consumption of soybean oil in Brazil, and the palm oil situation combine to hold world soybean oil prices above 550 dollars per metric ton.
Although CAP reform and the Blair House oilseeds agreement have placed constraints on oilseed production in the European Union, there is a clause in the Blair House agreement that allows industrial oilseed acreage to be planted on set-aside land that produces up to 1 mmt of soybean meal equivalent. In 1993/94, 217 thousand ha of oilseeds (sunflower and rapeseed) were planted for industrial use, and in 1994/95, 519 thousand ha of oilseeds, primarily rapeseed, were planted for industrial use, which would indicate that the acreage reference area of 5.128 mn ha might not be constraining. Canada, India, China, and Eastern Europe have the potential to increase rapeseed production. Canada and Eastern Europe have the potential to increase exports of rapeseed and rapeseed products, while India and China will be attempting to satisfy domestic demand for vegetable oils. Because oilseeds are traded relatively freely throughout the world, implementation of the GATT agreement will have only minor impacts on world trade. The United States has agreed to reduce the quantity and expenditures for subsidized exports of vegetable oil to 587 tmt and 52.9 million dollars in 1995, and decrease down to 141 tmt and 14 million dollars in 2000.
Strong world demand for soybean oil without a compensating increase in the demand for soybean meal has driven down the Decatur price for 44 percent soybean meal to $166 per metric ton in 1994/95. The increased demand for soybean oil, combined with the short palm oil situation, have held the Decatur soybean oil price at $563 per metric ton, and have also helped to support the soybean price somewhat despite the U.S. bumper crop and expected large South American crop. Projections call for slow recovery of soybean and soybean meal prices as world production of soybeans returns to normal. Soybean oil prices are expected to moderate as palm oil production recovers, stock levels return to normal, and domestic production catches up with demand in some rapidly growing areas of the world.
World wheat production was an estimated 527 mmt in 1994/95, a reduction of 31 mmt from 1993/94. World area and average yields were both reduced from levels a year ago. Wheat production was off 8.5 mmt in Russia, 8 mmt in both Australia and Ukraine, and 4 mmt in Canada. China and the United States also had smaller crops in 1994/95. The single largest increase was in Morocco where the wheat crop was 4 mmt larger than in 1993/94. Eastern Europe and the European Union also increased production over the previous year.
Wheat is expected to account for nearly 50 percent of world grain trade in 1994/95. World wheat trade is estimated to total 96 mmt, nearly 4 mmt below trade in 1993/94. Wheat trade is expected to expand steadily over the next ten years with approximately half of the trade increases going to developing Asian markets, including China. Although the traditional wheat exporters-- Australia, Canada, Argentina-- are expected to increase trade in response to reductions in subsidized exports by the EU and United States, new competitors are also expected to emerge. The ability to grow grain will help countries such as Ukraine, Kazakhstan, and some Eastern European countries to generate foreign exchange by selling on the world market.
Not only will there be a shift in exports of wheat, but there will be change in import patterns as well. Wheat importing republics of the FSU have been relying on world markets to a much smaller extent in the past few years. This trend is projected to continue changing what was once the world's largest importing region into a very minor net importer, with the possibility of exporting wheat in some years. Population and income growth are expected to force China to continually increase wheat imports. Eastern Europe is projected to consistently export wheat. On the other hand, some established patterns are likely to persist. Developing nations, particularly those of the Pacific Basin, will continue to be heavy importers. Africa and Latin America will also continue to depend on the world market to supply their domestic wheat requirements, but debt is expected to continue to constrain their ability to import. Also limiting the quantities these regions can import is the reduction in subsidized exports by the EU and United States under the GATT agreement. Argentina, Australia, Canada, the United States, and the European Union are projected to remain the major wheat exporters over the next ten years.
With the reduction in world wheat production in 1994/95 came higher prices on the world market, and an accompanying decrease in world wheat consumption. Total consumption is expected to fall 13 mmt compared to 1993/94. The major declines in wheat consumption are in the FSU, while China exhibits the largest increase, followed by Eastern Europe. The substantial increase in wheat use by the EU in 1993/94 is not expected to be repeated as most of the price adjustment resulting from CAP reform has already taken place.
Because the decrease in consumption is expected to be significantly smaller than the reduction in production, it is expected that wheat stocks will be drawn down during the 1994/95 marketing year. Total stock reductions are estimated at 24 mmt and are distributed among several of the major producing countries, including Australia, Canada, European Union, United States, and the FSU. This is the second consecutive year of declining world wheat ending stocks.
Aside from the decline in utilization in 1994/95, the trend has been for increasing wheat utilization, and it is projected that this general trend will continue. During the 1980s, a large increase occurred in the amount of wheat fed to livestock in the European Union and the Soviet Union. Much of this increase was substitution for feed grains. With CAP reform, wheat feeding in the European Union increased again, but to a lesser extent. The cause for this increase was the decline in cereal prices, both in absolute terms and in relation to nongrain feeds. Reduced corn production in the European Union has caused a feed deficit that must be filled by either imported corn or domestic wheat. It is expected that lower priced, domestically produced wheat will continue to fill this gap, maintaining relatively high levels of wheat feed use.
Contraction of livestock herds in the FSU has resulted in drastically reduced feed requirements and reduced imports of all grains. Domestically produced feed grains now make up a larger proportion of total feed requirements than in the late 1980s and early 1990s because subsidized wheat is no longer being purchased in large quantities on the world market. GATT-related reductions in subsidized wheat from both the United States and European Union will further erode the FSU's ability to import wheat.
Most of the increases projected for wheat utilization are expected to be for food use. Countries such as China and India are trying to expand wheat production to feed expanding, urbanizing populations. Developing regions are characterized by high rates of population and income growth, both of which are translating into increased food requirements. These trends are expected to continue, pushing wheat demand higher over the projection period.
Subsidized exports from the European Union and the United States under the EEP have increased trade by lowering offer prices to areas such as the FSU, China, and developing countries in Africa, Latin America, and Asia. Three important developments are likely to reduce the amount of wheat subsidized over the next few years. The first is the continuing decline in wheat imports by the FSU. Since a large proportion of its wheat imports were subsidized and this region was one of the largest importers of wheat in the world, the decline in its imports will have a direct effect on the level of subsidized wheat sold on the world market, given the current structure of wheat subsidy programs. The second development is the impact of CAP reform on wheat production, consumption, and exports by the European Union. Lower wheat production and higher domestic use will translate into a reduction in wheat trade by this region. The third, and perhaps most important, reason for the expected reduction in subsidized wheat exports is the implementation of the GATT agreement. In past years, the United States and European Union have sometimes combined for 40 mmt of subsidized wheat exports. Under GATT, their combined subsidized exports can total no more than 27.7 mmt by the year 2000/01. The result will be substantially higher prices on wheat offered to many importing countries.
The reduced production and declining stocks are leading to firmer wheat prices than in 1993/94. Wheat prices are expected to exceed $155 per mt at the gulf in 1994/95, but decline through 1987/88 as Australia and Eastern Europe recover from droughts and the FSU continues to reduce wheat imports. After that time, increasing incomes, including in the FSU, will lead to increased wheat imports and strengthening prices. By the end of the projection period, wheat prices at the gulf are projected to be near $160 per mt. It must be noted that at these prices, the European Union could be close to exporting wheat without subsidy. When this happens, or the EU makes fairly minor changes to the CAP to lower domestic wheat prices to world prices, a substantially larger quantity of wheat could find its way to the wheat market without being constrained by GATT. It is felt that this is not an "if" situation, but rather a "when" situation. Although this set of projections is bound by GATT constraints, it is not expected that this will be a permanent feature of world grain trade beyond the time horizon dealt with here.
Rice assumes such an important role in the diets, cultures, and economies of many Asian nations that policies are aimed at producing adequate supplies to avoid dependence on a thin world market. Rice is the second largest grain in terms of total production, but the proportion traded is only about 4 percent of consumption, as compared with wheat which has roughly 18 percent of consumption being traded. World rice production increased by only 3 mmt to 353 mmt in 1994/95, while world exports decreased by 1 mmt.
In 1993/94, Japan's failed crop was the lead story in the world rice market. In 1994/95, Japanese production increased by 53 percent to 10.9 mmt. In 1993/94, stocks were liquidated to 300 tmt, and 2.2 mmt of rice were imported in an attempt to satisfy domestic consumption in the face of a 2.5 mmt production shortfall from the previous year. With a healthy crop in 1994/95, stocks are replenished and no further imports are expected. In compliance with the Uruguay Round of the GATT, Japan has agreed to an initial import access quantity of 379 tmt in 1995, rising to 758 tmt by 2000/2001, and is not expected to import any rice beyond its GATT commitment. The Republic of South Korea has also made commitments to import rice in compliance with the GATT. Korea has agreed to import 51.3 tmt in 1995, rising to 102.6 tmt in 2000, and further rising to 205 tmt in 2004.
China and India are the two largest rice producers, with combined production comprising 56 percent of world production. Chinese rice area has decreased by 3 mn ha since 1990/91, as farmers have switched to competing crops due to relative prices. Chinese rice production is down by 2 percent, or nearly 3 mmt, in 1994/95. The production shortfalls in China have caused stocks to be drawn down to dangerously low levels, and have seen China go from a net export position of 1 mmt in the past two years to a net import position of 250 tmt. China is not expected to lose more rice area over the projection period, with production recovering sufficiently to maintain a position as a net exporter. India has a self-sufficiency policy for rice and tends to balance production and consumption, trading less than 1 percent of total production.
World rice trade is down by nearly 1 mmt in 1994/95 after unprecedented imports by Japan drove world trade to nearly 16 mmt in 1993/94. World exports of rice are dominated by a small number of countries trading a highly differentiated product. Thailand accounts for only about 4 percent of world rice production, yet its share of rice trade is 30 percent in 1994/95. Even with land availability constraints in Thailand, yield increases are expected to result in expanded production and Thailand is projected to maintain its position as the world's leading rice exporter. Thailand has been exporting more high-quality jasmine varieties, which have enhanced the value of its rice exports.
Expanding rice production in Vietnam and Myanmar has contributed to increased competition in world markets, especially for lower quality indica rice. Vietnam is projected to moderate area growth for rice and diversify into other crops, but will maintain a sizable export base over the projection period. Myanmar has recently increased production due to a government initiative to expand the dry season crop. A lack of investment in Myanmar's milling industry will slow its ability to increase exports of milled rice. In 1994/95, Vietnam and Myanmar have been the main beneficiaries of China's inability to export low quality rice.
Rice production increased by 26 percent in the United States in 1994/95, in response to strong world prices and a 0 ARP. U.S. net exports of rice rise to 2.5 mmt in 1994/95, and fall off to 2 mmt by the end of the projection period. As a result of the GATT agreement, the United States will reduce the quantity and expenditure of its subsidized exports of rice over the projection period. The quantity and expenditure of subsidized exports of rice will be reduced to no more than 272 tmt and 15.7 million dollars starting in 1995, and will be further reduced in equal annual increments to no more than 39 tmt and 2.3 million dollars by the year 2000.
Indonesia, like India and Japan, maintains a policy of self-sufficiency for rice. These countries engage in state trading to insulate their domestic markets from world price fluctuations in order to enforce these policies. Indonesia experienced a severe drought in several regions in 1994/95, forcing imports of nearly 700 tmt. Despite the self-sufficiency policy, Indonesia has consistently been a net importer of rice since 1987/88, with the exception of a good crop in 1993/94 that allowed 450 tmt of exports.
The large quantity of Japanese rice imports caused the NPQ price for Thai 100B rice to rise to $294 per mt in 1993/94. The Thai NPQ price is expected to drop off only slightly in 1994/95 despite good crops in major exporting countries. The production shortfalls in China and Indonesia this year, along with a tight world stock situation left over from last year, have combined to hold the Thai price at $267 per mt in 1994/95. Increasing demand combined with a world production base constrained by land availability in some areas and competing crops in others, is projected to result in steadily increasing prices over the next ten years. Rice prices are projected to exceed $310 per mt by 2003/04.
The current livestock and dairy baseline projections differ from the last year's projections, mostly as a result of the GATT agreement signed in April 1994. The GATT commitments detailed in the respective country schedules affect both the short-term projections as well as long-term trends in production, utilization, and trade of these commodities. In general, the GATT commitments will enhance the exports of competitive producers by reducing subsidized production in several countries. Another significant impact of GATT is the likely increase in global income that is expected to generate additional consumption demand, and consequently increase import requirements worldwide. Among the other significant exogenous changes affecting world agricultural trade are the continued economic deterioration and delay in economic recovery projected for the Former Soviet Union, and lower feed-grain prices in the near term, due to 1994's favorable weather in the United States as well as in several other regions. In the Oceanic countries, exceptionally favorable weather in the early part of the year led to initial optimism, especially with regard to potential growth in animal numbers. However, this was not to be, as the drought that set in later proved to be one of the worst in recent history.
Prior to discussing the livestock and dairy projections in the current baseline, some notes need to be made with respect to country coverage. Although the membership of the European Union (EU) has increased to 15, the FAPRI projections are based on the 12-country membership of 1994. The primary reason for retaining this regional coverage is that the structural coefficients used in the model were estimated based on the aggregate data of these 12 countries. This coverage is also consistent with the USDA coverage in their Situation and Outlook reports and the PS&D database which are used to update FAPRI's historical data and short-term (1994-95) projections. The remaining countries, namely Austria, Sweden, and Finland, along with Norway, are included under the group "Other Western Europe" as was done in the past. Further, USDA's country coverage for two other groups, namely the Former Soviet Union (FSU) and Eastern Europe, changed considerably beginning in fall 1994. Therefore, simple linear extrapolations based on rates of change consistent with USDA data were made to update the FAPRI data for these two groups of countries.
In discussing the current baseline, focus will be on the direction and likely magnitude of change in trade of the major commodities, identifying the principal reasons for such change, and noting how production and consumption patterns shift in the major trading countries to bring about such changes in trade.
Livestock production in the FSU is projected to continue to decline for the next several years, although at more moderate rates than in the recent past. Low breeding herd sizes as a result of the past liquidations, combined with shortage of feed and limited foreign exchange reserves to import feed, will continue to plague these countries until their economies begin to recover later in the projection period. While production continues to decline, low income and discontinuation of the traditional consumption subsidies reduce domestic consumption leading to lower consumption demand, thus countering the upward pressure on import demand. In the long term, pork and poultry imports are projected to show moderate growth in response to relative meat prices and quality preferences of the high-income groups. The Japanese economy is projected to overcome the current slump and regain a growth rate of over 4 percent within the next three to four years. Further, GATT commitments impose restrictions on domestic support, both directly and through access commitments and reduced tariff levels. Japanese beef production, for instance, will cease to expand in response to the GATT-agreed tariff reduction to 38 percent (reduced to 50 percent by 1994, under a previous agreement) and reduction in dairy programs. However, income growth and lower domestic prices contribute to increased demand, thus leading to a rapid expansion in beef imports. While demand for pork continues to grow with income in Japan, expansion in domestic production will be restrained by environmental constraints, resulting in increased pork imports. In contrast to the growing consumption demand for poultry, production continues to decline following its past trend, thereby making Japan a continually growing market for poultry meat as well. Hong Kong, Saudi Arabia, and to a lesser extent Canada, are also projected to be growing markets for poultry.
The Oceanic countries and the United States increase exports of beef in response to the growing high-income Asian markets, especially Japan and South Korea. The United States in particular has an advantage because of the preference for grain-fed beef in these markets. Although Latin American beef exporters also increase their supply, they will continue to be constrained in exports due to increased domestic consumption and because the larger markets require FMD-free (foot-and-mouth disease) status. The United States will also benefit from the growing import demand for pork in Japan because Taiwan, the current major supplier to that market, will face increasing environmental concerns.
Demand for poultry meat is projected to expand worldwide relative to the other meats, primarily due to health concerns. Consequently, poultry production of all major producers is expected to show continued expansion. The United States, being the largest producer and exporter, is projected to increase both production and exports to take advantage of the rapidly increasing import demand in Japan, Hong Kong, Saudi Arabia, Mexico, FSU, and Canada.
A general strengthening is projected in the dairy sector worldwide, primarily because of lower stocks of dairy products in most exporting countries, and GATT-related reductions in subsidized production and relaxation of import restrictions.
An eleventh-hour concession in GATT, the no-front loading provision, is of particular interest in the case of the European Union. Under this provision, EU's cheese exports are not constrained to be below current levels in the 1996-97 period. Therefore, EU is projected to expand its cheese exports somewhat in the short term, before having to cut back on exports to abide by the GATT restrictions. This short-term shift to cheese causes a temporary slowdown in butter and NFD exports around the 1996-97 period.
Many assumptions about the macroeconomy, agricultural policies, technology, and weather are incorporated into these projections. There are no guarantees that any one of them will be proven correct. The assumptions are aimed at producing a middle-of-the-road baseline projection. The effects of many of the assumptions are small; however, there are a number of factors that could completely change the complexion of these projections.
The level of oil production and accompanying oil prices could have a major impact on the global economy. Although oil production is largely recovered from the disruption caused by the Persian Gulf War, Iraq and Kuwait are still not producing at peak levels. Production in the FSU is off from the late 1980s as well. If production increases more quickly than the assumptions underlying the prices used here, prices could be lowered. This could have several impacts. First of all, producing countries would receive lower revenues for oil and would therefore earn lower foreign reserves. This could dampen world trade. However, costs of production of agricultural commodities would also be lower, translating into higher production and lower prices. Finally, if Iraq and the FSU were to increase exports of oil, they would be able to import more agricultural products. (This is assuming that trade sanctions against Iraq were lifted.)
A large question mark remains with the FSU. Current projections are for continued depression through 1997. A 60 percent economic contraction is projected between 1989 and 1997. If the contraction is prolonged, the internal demand situation could be different than the slight recovery projected in the baseline. If credits or export subsidies are not available, these countries will not be able to maintain substantial imports.
Perhaps the largest wild card incorporated in the projections is China. Although official Chinese data has been more readily available over the last few years, significant questions exist regarding production and consumption of agricultural commodities. For example, it has been estimated by some analysts that arable area has been underestimated by as much as 40 percent with yields overestimated. These estimates have important implications for projecting China's future production capability as yields may be able to increase more rapidly than in the baseline. Additional uncertainty exists about the rate of increase of livestock production. If the last two years are any indication, then China is on the road to rapid expansion of animal inventories. This has major implications for the level of Chinese grain trade. It is possible that China will become a major importer of grains much sooner than indicated in this set of projections.
Many uncertainties pertaining to CAP reform have been clarified, however there is ongoing debate as to the effects of reduced intervention prices on cereal yields. There have been reports of reduced fertilizer use, but no corresponding reduction in yields. Is this the effect of residual nutrients in the soil from years of high rates of fertilizer application? It is possible that the Agricultural Commission could mandate set-aside rates at different levels than those assumed here. The response of livestock producers to livestock premiums and reduced stocking densities are factors for which there is few historical precedents upon which to base projections.
Not only are there no guarantees that assumptions used here will actually materialize, but much uncertainty exists about factors, both anticipated and unforeseen, that are not incorporated into this baseline. It is almost certain that U.S. agricultural policy will change with the new farm legislation in 1995. Many policies to come out of the new farm bill could be driven by the U.S. budget. Environmental concerns will also be a factor and will probably be reflected in new laws and policies.
We know that many nations will adjust agricultural policies with the implementation of the GATT agreement. This baseline raises a key issue regarding how the EU will respond to quantitative restrictions on subsidized exports, especially for wheat. These restrictions reduce EU wheat exports in the last five years of the baseline and require the EU to set aside more land and increase stocks. If instead the EU further reduces intervention prices, or can avoid the GATT restrictions by other means, their exports would be higher and world prices lower than under current policy in the baseline.
GATT will change trade by many countries during the period over which this agreement stands. This brings up another area of uncertainty. How long will this agreement stand? Will it be extended under the spirit of further negotiations? New trade talks will almost certainly be necessary before this century comes to an end. Will these talks be truly liberalizing?
Technological changes have enormous long-term impacts on agriculture and agricultural markets. Shifts in agricultural production affect world commodity markets, often changing consumption and trade patterns. The rate at which different regions or countries are able to adopt technological advances will play an important role in the future. If the rate of technological change deviates substantially from the historical trends assumed here, the actual situation likely will be very different than that conveyed by these projections.
Actual weather in any given year might not be average. Nearly
any year can be used as an example of this. With a tight stock
situation persisting in grain markets, a severe drought or another
flood in a major producing region cannot be readily offset by
inventory adjustments in one year. A major supply shortfall would
likely affect price levels for several years as stock levels recover,
but long-term effects are not likely to be as profound as those
resulting from changes in economies, technology, or policy.