Agricultural Baseline Projections: Baseline Presentation, 2007-2016

Overview Summary of Projections Macroeconomic Assumptions U.S. Crops U.S. Livestock U.S. Agricultural Sector Measures Global Agricultural Trade Recommended Readings Recommended Data USDA Baseline Process Questions and Answers

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 in feed grain imports, especially in those regions where limited land availability or agroclimatic conditions preclude expanding domestic crop production, such as in North Africa, the Middle East, and East and Southeast Asia.

Traditional exporters of a wide range of agricultural commodities such as Argentina, Australia, Canada, and the European Union (EU-25) remain important in the coming decade. But an increasing presence in export markets is expected from countries that are making significant investments in their agricultural sectors, including Brazil, Russia, Ukraine, and Kazakhstan.

Trade projections to 2016 are founded on assumptions concerning trends in foreign area, yields, and use, and on the assumption that countries comply with existing bilateral and multilateral agreements affecting agriculture and agricultural trade. The projections incorporate the effects of trade agreements and domestic policy reforms in place or signed by November 2006.

Domestic agricultural and trade policies in individual foreign countries are assumed to continue to evolve along their current paths, 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. Similarly, the development and use of technology and changes in consumer preferences are assumed to continue evolving based on past performance and analysts’ judgments regarding future developments.

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

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

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

• Slower growth in aggregate crop production is offset by slower growth in world population. Nonetheless, population is a significant factor driving overall growth in demand for agricultural products. Additionally, rising per capita income in many countries generates growth in demand for vegetable oils, livestock products, and horticultural products.

• Virtually no growth in overall global wheat and coarse grain trade occurred in the 1990s, largely reflecting reductions in imports by the former Soviet Union (FSU) and Central and Eastern Europe (CEE). In the coming decade, overall gains in global grain trade come from a broad range of countries, particularly from countries in Africa and the Middle East. Also, China exports less grain and imports more.

Definition of country groups

Growth in wheat imports is concentrated in those developing countries where robust growth in income and population underpins increases in demand. Important growth markets include Sub-Saharan Africa, Brazil, Egypt, and Pakistan. World wheat trade (including flour) expands by nearly 27 million tons (23 percent) between 2007 and 2016 to 140 million tons.

• Egypt maintains its position as the world’s largest importing country, as imports climb slowly to nearly 10 million tons. Imports by Brazil, another large importer, are projected to approach 9 million tons. Brazil’s climate generally does not favor wheat, and in some key wheat-producing states, winter corn is expected to have better returns than wheat.

• Imports by developing countries in Sub-Saharan Africa, North Africa, and the Middle East rise 11 million tons and account for 40 percent of the total increase in world wheat trade. In most developing countries, little change in per capita wheat consumption is expected but imports expand modestly because of population growth and limited potential to expand production.

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

• Lower wheat-to-corn price ratios during most of the projection period enable wheat to compete effectively with corn for feed use in a number of countries. South Korea is projected to substitute 1 million tons of feed wheat for corn annually by 2016. Europe is expected to continue to account for the largest share of global wheat feeding.

• China has been a small net exporter of wheat in recent years, but production constraints cause it to become a net importer by 2009/10 and to import nearly 2 million tons annually by 2016.

Definition of country groups

The top five wheat-exporting nations (the United States, Australia, Canada, the EU-25, and Argentina) account for 73 percent of world trade in 2007-2016. This is down from a high of 87 percent in 2000/01, mostly due to increased exports from the Black Sea area. U.S. wheat exports are projected to account for 22 percent of global wheat trade, down from 25 percent in the past 5 years.

• Shares of the world wheat market held by Canada, the EU, and the United States decline slightly, offsetting increases by Australia, Ukraine, Russia, Argentina, and other Europe.

• In Canada, increased demand for vegetable oils, especially rapeseed oil for biodiesel production, and for barley is expected to reduce wheat area, which causes Canadian exports to trend slowly downward.

• The EU set-aside rate, currently 10 percent, is assumed to be lowered during the projections. However, most of any increase in planted area will go to rapeseed.

• Ukraine, Russia, and Kazakhstan have become significant wheat exporters in recent years. Low costs of production and new investment in their agricultural sectors have enabled their world market share to climb to as high as 18 percent in 2005/06. Exports from Ukraine and Russia are projected to continue gaining market share, more than offsetting a slight decline in the share held by Kazakhstan. However, because of the region’s weather extremes, high year-to-year volatility in production and trade can be expected. Also, continued real appreciation of these countries’ currencies, caused mainly by domestic inflation, could mitigate the rise in exports.

• China has been a small net exporter of wheat in recent years, but becomes a net importer of nearly 2 million tons annually by 2016. This is offset by other Europe, mostly Romania and Bulgaria, which shifts from a small net importer to a net exporter of more than 2 million tons. Most of these exports go to the EU-25.

• Exports by Turkey and other smaller exporters change little or trend slowly downward during the projection period. Although India has exported some wheat in recent years, exports are expected to be minimal as stocks remain relatively tight.

Growth in coarse grain trade is strongly linked to expansion of livestock production in regions unable to meet their own forage and feed needs. Key growth markets include China, Mexico, North Africa, the Middle East, and Southeast Asia. Japan and South Korea are large but mature import markets for coarse grains.

• Corn is the dominant feed grain traded in international markets. Corn accounts for an average of 77 percent of all coarse grain trade through the projection period, followed by barley (17 percent), and sorghum (4 percent).

• Commercialization of livestock feeding has been a driving force behind the growing dominance of corn in international feed grain markets. Hogs and ruminants, such as cattle and sheep, are capable of digesting a broad range of feedstuffs, making demand relatively price-sensitive across alternate feed sources. However, as pork and poultry production become increasingly commercialized, higher quality feeds are used, boosting the demand for corn and soybean meal.

• World coarse grain trade is projected to increase about 2 percent a year, with corn capturing some share of the total market from sorghum. Mexico’s composition of imports accounts for most of the shift. Under the North American Free Trade Agreement (NAFTA), Mexico’s over-quota tariff on U.S. and Canadian corn ends in 2008. Consequently, Mexico’s grain imports shift more to corn rather than sorghum. Also, after 2007/08, Mexico’s imports of kibbled and cracked corn (processed corn that is tariff-free) are entirely replaced by whole-grain corn. Mexico’s corn imports continue to rise through the rest of the projections, while sorghum imports resume growth after 2010/11.

Definition of country groups

World coarse grain trade expands about 21 million tons (21 percent) from 2007 to 2016. About two-thirds of global coarse grain production is used as animal feed. Industrial uses, such as starch, ethanol, and malt production, are relatively small but growing. Food use of coarse grains, concentrated in parts of Latin America, Africa, and Asia, has generally declined over time.

• Steady longrun growth in the livestock sectors of developing countries in Asia, Latin America, North Africa, and the Middle East is projected to account for most of the growth in world imports during the next decade.

• Mexico’s corn imports are projected to rise from 6.7 million tons in 2005/06 to 11 million tons in 2016. Imports will be stimulated by rising poultry production and the elimination of Mexico’s over-quota tariff on U.S. and Canadian corn on January 1, 2008. Some corn imports will substitute for imports of kibbled corn and sorghum, which already have tariff-free status.

• Canadian corn imports double between 2006 and 2016 due to rising demand for corn for feed and for ethanol production and limited capacity to expand production.

• North Africa and the Middle East experience continued growth in import demand for grain and protein meals through 2016, as rising populations and increasing incomes sustain strong demand growth for domestically produced animal products. In Egypt, outbreaks of avian influenza have shifted government policy toward importing poultry meat rather than importing feedstuffs to produce poultry.

• Increasing meat imports will limit coarse grain imports in Japan, South Korea, and Taiwan. By 2016, relatively low-priced feed wheat is projected to replace about 1 million tons of South Korean corn imports.

• The EU-25’s corn imports from Eastern European countries are expected to increase, particularly from Romania and Bulgaria as they have gained duty-free access due to accession to the EU.

• Coarse grain imports by countries in Southeast Asia rise more than a million tons in the projections as increased demand for livestock products surpasses their capacity to grow more feed grains.

Definition of country groups

The United States dominates world trade in coarse grains, particularly corn. However, increasing use of corn for U.S. ethanol production and rising world prices are assumed to limit U.S. export growth. During the next half decade, some countries respond to higher world prices by increasing corn production and exports—most notably Argentina, some countries in Eastern Europe, the Republic of South Africa, Ukraine, and Brazil. Still, U.S. corn exports are projected to grow after the ramp up in domestic ethanol production slows in 2009. The U.S. share of world corn trade stays close to 60 percent as few countries have the capability to respond to rising international demand for corn.

• Argentina, with a small domestic market, remains the world’s second largest corn exporter. Argentina’s corn planted area gradually increases in response to higher prices. Corn exports rise steadily by more than 60 percent to 21 million tons. Argentina and other South American countries increase corn exports to Chile to support its expanding pork exports to South Korea.

• The Republic of South Africa boosts corn exports slightly to nearly 3 million tons. Some exports go to East Asian markets and some shipments of white corn are exported to neighboring countries for food use. Uncertainties associated with the land reform program in the Republic of South Africa are assumed to limit increases in production.

• Corn exports from non-EU-25 Eastern European countries, primarily Romania and Bulgaria, rise to more than 3 million tons by 2016. Favorable resource endowments, increasing economic openness, greater investment in their agricultural sectors, and duty-free access to the EU-25 for Romania and Bulgaria are behind the projected gains in production and trade.

• Brazil’s corn exports increase rapidly in the early years of the projections in response to higher corn prices relative to soybean prices. Brazil targets niche market demand for nongenetically modified grain. However, strong growth in domestic demand from its livestock sector and the profitability of growing soybeans limits corn exports.

• China’s corn exports decline in the projections, reflecting strengthening domestic demand driven by its expanding livestock and industrial sectors. It is assumed that Chinese policy will tend to favor importing soybeans rather than corn.

As more U.S. corn is used to produce ethanol, China is assumed to increase its corn production, slowing its decline in exports and its increase in imports. Nonetheless, China is projected to become a net corn importer midway through the projection period as demand for livestock feed overtakes China’s internal supplies of corn. China continues to export corn throughout the projection period, although in declining amounts, due to regional supply and demand differences. Northern China runs a corn surplus, while southern China has a corn deficit.

• Corn is the favored crop in northeast China. Proximity to South Korea and other Asian markets provides a nearby source of demand, while various government measures—including waivers of certain transportation construction taxes, and a rebate of the value-added tax on exported corn—keep corn exports competitively priced in international markets. High ocean-freight rates raise the delivered cost of U.S. corn to Asian markets, another factor that keeps Chinese corn competitive. Shipments of corn from northeast China to the country’s southern markets are limited by China’s high internal transportation costs.

• China’s corn consumption exceeded production during the early 2000s, pushing stocks lower. As consumption continues to grow, China is projected to increase imports and reduce exports, and to eventually become a net corn importer by 2012. Livestock feeding continues to increase in response to income growth and rising meat demand. Industrial use of corn, especially for starch, is also expected to grow robustly in China, but direct human consumption declines.

Definition of country groups

Global barley trade expands more than 3 million tons (18 percent) during the projection period. Rising demand for both malting and feed barley underpin the increased trade.

• Feed barley imports by North African and Middle Eastern countries grow steadily through the period. In the mid-1990s, corn overtook barley as the principal coarse grain imported by these countries, due mainly to rising poultry production. This pattern is expected to continue through the projection period. However, the North Africa and Middle East region is expected to remain the world’s largest barley-importing area.

• Saudi Arabia—the world’s foremost barley importer—accounts for over 30 percent of world barley trade through the coming decade. Saudi Arabia’s barley imports are used primarily as feed for camels, goats, sheep, and poultry.

• International demand for malting barley is boosted by strong growth in beer demand in many developing countries, notably China—the world’s largest malting barley importer. China’s beer demand is rising steadily due to growth in incomes and population. Expansion in China’s brewing capacity is being aided by foreign investment. China’s breweries use rice and other grains, as well as malting barley, which limits the growth in imports of malting barley. Australia and Canada are China’s main sources of malting barley imports.

Definition of country groups

Historically, global barley exports have originated primarily from the EU, Australia, and Canada. However, Ukraine and, to a lesser extent, Russia have emerged as important competitors in international feed barley markets and remain so throughout the projection period.

• Barley production is expected to increase in the EU-25 as a result of Common Agricultural Policy (CAP) reform. The abolition of EU intervention for rye, combined with high barley prices, will stimulate the allocation of more area to barley production. However, EU-25 exports to non-EU countries are projected to hover around 3 million tons over the projection period (15 percent of world trade), as the EU-25 is expected to be reluctant to subsidize exports.

• The FSU remains a major barley exporter throughout the coming decade as exports surpass 7 million tons. Together, the FSU and EU-25 account for more than 50 percent of world barley trade.

• Malting barley is a different quality than feed barley and commands a substantial price premium over feed barley. This premium is expected to influence planting decisions in Canada and Australia and, in both countries, malting barley’s share of total barley area rises during the projection period.

Definition of country groups

World sorghum trade, which averaged nearly 6.5 million tons during the last decade, declines to just below 5 million tons in the middle of the projection period before rising slightly through the remainder of the coming decade. This trade is driven almost entirely by trade between the United States and Mexico.

• Mexico is the world’s leading sorghum importer. However, corn imports are expected to replace sorghum and kibbled corn imports as Mexico’s over-quota tariff on U.S. and Canadian corn ends in 2008. In the projections, Mexico’s sorghum imports increase slightly in the later years, but remain just below 2.5 million tons. Even at this reduced import level, Mexico is expected to account for about 50 percent of world sorghum imports.

• Japan imports a fairly constant volume of sorghum (1.4 million tons) throughout the period to maintain diversity and stability in its feed grain supplies.

• The United States is the largest exporter of sorghum, accounting for more than 80 percent of world trade in recent years. During the projection period, the U.S. share declines slightly as some of its sorghum exports to Mexico shift to corn.

• The primary sorghum markets for Argentina, the world’s second largest exporter, are Japan, Chile, and Europe. In Argentina, prices and profitability favor planting other crops, particularly soybeans and corn, so sorghum exports remain flat during the projection period.

• Brazil has begun to export small quantities of sorghum and the volume is projected to rise during the projection period. In the Central-West region of Brazil, sorghum is increasingly planted during the dry season between crops of soybeans or cotton.

Strong income and population growth in developing countries generates increasing demand for vegetable oils for food consumption and for protein meals used in livestock production. Additional demand is generated by the use of soybean oil in biodiesel production in some countries. World trade in soybeans and soybean oil both grow at an average annual rate of 3.5 percent through the projection period, compared with 2.7 percent for soybean meal.

• Prices for vegetable oils rise due to expansion of biodiesel production. As more of the value of oilseeds derives from the oil content relative to the protein meal content, vegetable oil prices rise in comparison to prices for oilseeds and protein meals.

• Many countries with limited opportunity to expand oilseed production continue investment in oilseed crushing capacity, such as China and some countries in North Africa, the Middle East, and South Asia. As a result, import demand for soybeans and rapeseed grows rapidly. However, strong competition in international protein meal markets is expected to pressure crushing margins and shift some of the import demand for oilseeds to cheaper meals. The steady competitive pressure of new oilseed crushing capacity is expected to result in some inefficient crushers going out of business.

• China’s expansion of domestic crushing capacity instead of importing protein meal and vegetable oil significantly influences the composition of world trade by raising international import demand for soybeans and other oilseeds rather than for oilseed products.

• 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. Its share of world exports of soybeans plus the soybean equivalent of soybean meal exports rises from about 30-35 percent in recent years to 46 percent by 2016.

• The expansion in Argentine soybean area slows as incentives to grow corn and sunflower seed improve and conversion of pasture land to crop land slows.

Definition of country groups

World soybean trade is projected to rise rapidly, climbing more than 27 million metric tons (36 percent) during the next decade.

• The EU was the world’s leading importer of soybeans until 2002. However, increases in grain and rapeseed meal feeding and rising imports of soybean meal have resulted in declining soybean imports since then.

• China will face policy decisions regarding tradeoffs in producing or importing corn and soybeans. The projections assume that Chinese policies will tend toward maintaining domestic corn production and importing soybeans. Thus, China accounts for 78 percent of the world’s 27-million-ton growth in soybean imports over the next 10 years. Significant investments in oilseed crushing infrastructure by China drive strong gains in soybean imports as China seeks to capture the value added from processing oilseeds into protein meal and vegetable oil. The use of vegetable oils for biofuels production is assumed to have only a minimal impact on China’s total vegetable oil use.

• East Asia’s trade outlook is dominated by a continuing shift from importing feedstuffs to importing meat and other livestock products. As a result, the growth in this region’s import demand for protein meal and oilseeds slows during the coming decade.

• As Argentina seeks to operate its expanding crushing facilities at full capacity, it is projected to import nearly 3 million tons of soybeans from Brazil, Paraguay, Uruguay, and Bolivia by the end of the period.

Definition of country groups

The three leading soybean exporters—the United States, Brazil, and Argentina—account for more than 90 percent of world trade.

• With continuing area gains, Brazil maintains its position as the world’s leading exporter of soybeans and soybean products. Combating soybean rust disease increases production costs. However, because of the increased domestic demand for soybean meal for feed and for soybean oil for human consumption and biodiesel production, soybeans remain more profitable than other crops in most areas of Brazil. It is assumed that some land in southern Brazil will shift from oilseed to corn production during the middle of the projection period in response to higher corn prices and more limited competition from U.S. corn exports. Still, with expanded soybean plantings in the Cerrado regions, the growth rate for Brazil’s soybean planted area is projected to average more than 4 percent a year, reaching about 32 million hectares by 2016. Soybean exports are projected to double.

• In the United States, projected declines in soybean acreage and increased domestic crush limit exportable supplies.

• Argentina’s export tax structure favors domestic crushing of whole seeds and exporting the products. Also, Argentina is projected to divert some land from soybeans to corn. As a result, Argentina’s soybean exports decline slightly to about 6 million tons.

• Soybean exports from Russia and the Ukraine increase slightly in response to higher international market prices.

Definition of country groups

World trade in soybean meal grows briskly during the projections, rising nearly 15 million tons (more than 25 percent) by 2016. Continuing growth in the demand for livestock products coupled with limited capability to increase oilseed production boosts demand for soybean meal by a number of countries with rising middle-income populations. Lower import prices of soybean meal relative to soybeans and grains provide incentives for countries to import soybean meal for inclusion at a higher rate in livestock feeds.

• The EU remains the world’s largest destination for soybean meal throughout the projection period, despite increased domestic feeding of grains. Growth in soybean meal imports is expected to continue even though there will be increased competition from coarse grains from acceding countries, and more rapeseed meal available as a result of the biofuels expansion. These factors are partially offset by an increase in the dairy quota which increases soybean meal feeding.

• The regions of Southeast Asia, North Africa, the Middle East, and Latin America all become larger importers of soybean meal as the demand for livestock feed boosts import demand in a number of countries.

• Mexico’s strong growth in demand for protein feed and vegetable oils is projected to continue. The crushing industry is also expected to continue expansion. This will boost soybean imports, but soybean meal imports from the United States are also expected to grow rapidly.

Definition of country groups

Argentina, Brazil, and the United States remain the three major exporters in international protein meal markets. Together they account for around 90 percent of total world soybean meal trade during the next 10 years.

• Argentina, the world’s largest exporter, increases its share of soybean meal exports from around 45 percent in recent years to more than 50 percent in the latter portion of the projection period. The export shares of Brazil, the United States, and other exporters fall. Argentina maintains high utilization of its growing crushing capacity by importing soybeans from Brazil and other South American countries.

• In Brazil, strong growth in domestic meal consumption due to rapid expansion of the poultry and pork sectors limits increases in soybean meal exports. Also, domestic soybean crushing capacity is not expected to grow as fast as soybean production because Brazil’s differential export tax structure favors exporting soybeans rather than soybean meal or soybean oil.

• U.S. soybean meal exports could see growth for the first 2 years of the projection period, but slow thereafter as soybean stocks are reduced and limited production growth tightens the supply available for crushing.

• The EU continues to be a small but steady exporter of soybean meal to Russia and other East European countries. India remains an exporter, although export volume declines as domestic use, especially for poultry feed, rapidly expands.

Definition of country groups

World demand for soybean oil imports climbs 3.6 million metric tons (36 percent) in the projections, bolstered by increased food use and increased demand for use in biofuel production. China and India are the world’s two largest soybean oil importers. In recent years, their combined imports have been around 3.5 million tons, nearly 40 percent of the world total.

• Import demand for soybean oil rises in nearly all countries and regions. Income and population growth in North Africa, the Middle East, and Latin America (particularly Central America and the Caribbean) drive rapid gains in soybean oil imports. Rising international prices for soybean oil will temper consumption, however, especially in developing countries.

• India is one of the world’s largest soybean oil importers. Factors that contribute to continued growth in imports include burgeoning domestic demand for vegetable oils and limitations on domestic production of oilseeds. Low yields, associated with erratic rainfed growing conditions and low input use, inhibit growth of oilseed production in India. Lower Indian tariffs on soybean oil (held down by World Trade Organization (WTO) tariff-binding commitments) compared with tariffs for other vegetable oils support continued large imports of soybean oil.

• China experiences a growing demand for vegetable oils. However, land-use competition from other crops constrains area planted to oilseed crops. As a result, demand outpaces domestic vegetable oil production and fuels a moderate expansion in soybean oil imports, although China seeks to restrain them to support margins for domestic crushers.

Definition of country groups

Argentina’s and Brazil’s combined share of world soybean oil exports rises from less than 80 percent in recent years to about 85 percent by the end of the projections.

• Argentina is the leading exporter of soybean oil, reflecting the country’s large crush capacity, its small domestic market for soybean oil, and an export tax structure that favors exports of soybean products rather than soybeans. Increases in soybean crush and soybean oil exports are supported by gains in Argentine soybean production due to extensive double-cropping, further adjustments to crop-pasture rotations, and the addition of marginal lands in the northwest part of the country. Argentina also increases soybean imports from other South American countries in order to more fully utilize its crushing capacity. Growth in Argentina’s biodiesel production capacity, with incentives from a lower export tax for biodiesel than for soybean oil, may constrain growth in soybean oil exports in the future.

• Brazil’s expansion of soybean production into new areas of cultivation enables it to increase both its volume of soybean oil exports and its share of world trade.

• The European Union and the United States remain the world’s next largest soybean oil exporters, although their export volumes and shares of world trade continue a downward trend. In the EU, exportable supplies of vegetable oils are limited by the growth in biodiesel production.

Definition of country groups

Global rice trade is projected to grow 2.4 percent per year from 2007 to2016. By 2016, global rice trade reaches nearly 35 million tons, nearly 25 percent above the record set in 2002.

• In recent years, long-grain varieties have accounted 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. Much of the increase in rice consumption in these regions reflects population growth.

• Medium- and short-grain rice account for 10-12 percent of global trade, with Japan, South Korea, Taiwan, Turkey, Jordan, and Papua New Guinea the major importers. Expansion in medium-grain rice trade is projected to be much smaller than for long grain. Among the Northeast Asian buyers, only South Korea is projected to increase purchases over the next decade. All rice imports by Japan, South Korea, and Taiwan are the result of minimum import commitments under the WTO.

• Aromatic rice, primarily basmati and jasmine, makes up most of the rest of global rice trade. Aromatics typically sell at a substantial price premium over long- and medium-grain varieties. Aromatics are imported mostly for high-income consumers.

• Indonesia and Bangladesh, two of the world’s leading rice-importing countries, will experience rising food demand due to growing populations. However, land constraints and already high cropping intensities indicate little opportunity for either country to significantly expand production. Thus, their imports are projected to increase over the next decade and account for 28 percent of the increase in rice trade.

• In Sub-Saharan Africa and the Middle East, strong demand growth is driven by rapidly expanding populations. But opportunities to expand production are limited by climatic conditions in the Middle East, and by infrastructure deficiencies in Sub-Saharan Africa. Sub-Saharan Africa accounts for 20 percent of the increase in world rice trade during the projection period.

Definition of country groups

Asia remains the largest rice-exporting region throughout the projection period.

• Thailand and Vietnam, the world’s largest rice-exporting countries, account for almost half of all rice exports in the coming decade. Vietnam exports primarily long-grain rice. Thailand exports aromatic, regular long-grain, and glutinous varieties of rice. Rising production, a result of higher yields, and declining per capita consumption, particularly in Thailand, drive the expansion in exports from both countries.

• India is the third-largest rice exporter. India has been a major exporter since the mid-1990s, although export levels have been rather volatile, primarily due to fluctuating production and stock levels. Exports are projected to increase over the next decade as high internal prices stimulate production and exportable supplies. India exports both low-quality long-grain rice and smaller quantities of high-quality basmati rice.

• The United States is projected to remain the fourth-largest rice-exporting country. Rising domestic demand, fractional area expansion, and a slower growth rate in yields constrain the expansion of U.S. rice exports. The United States exports both long-grain and medium/short-grain rice.

• Pakistan is the world’s fifth-leading exporter. Pakistan has boosted rice area and production in the past few years. However, Pakistan has little ability to expand rice area beyond its current record level, and its agricultural sector is confronting a growing water shortage and a decaying infrastructure. Rice exports increase very slightly, to about 3.1 million tons by 2016. Pakistan exports both high-quality basmati and low-quality long-grain rice.

• Rice exports from China have declined from about 2 million tons in most years during the half-decade ending in 2003, to about 1 million tons annually since then. Little, if any, growth in China’s rice exports is projected. Production is projected to decline very slightly during the next decade, as declining area more than offsets rising yields. Consumption decreases fractionally over the next decade as declining per capita rice consumption more than offsets a rising population. China exports high-quality, medium/short-grain rice to Northeast Asian markets and low-quality, long-grain rice to Sub-Saharan Africa and some lower-income Asian markets.

Definition of country groups

With global cotton consumption growing dramatically, international trade has become increasingly important in world cotton markets. Not only has textile trade liberalization helped boost world cotton demand through increased efficiency, but geographic shifts in the mill use of cotton have increased the role of trade in meeting the global textile industry’s need for cotton. Trade’s importance has rebounded in recent years as China’s and, to a lesser extent, Pakistan’s textile sectors have grown substantially faster than their cotton production.

• The textile industries in China, India, and Pakistan are the major beneficiaries of textile trade liberalization through the elimination of Multifiber Arrangement (MFA) quotas.

• China has been importing record amounts of cotton as its textile industry’s growth rapidly accelerated with a booming economy and WTO accession. Both its textile industry and its cotton imports are expected to grow more slowly than the rapid increase since 2001. However, during the next decade, the increase in cotton imports by China is projected to more than offset the decline in imports by other countries, and China accounts for 47 percent of world imports by 2016.

• Pakistan has emerged as a major importer in recent years, and is expected to remain in this role throughout the projection period, eventually overtaking Turkey as the second-largest global market.

• In recent years, Turkey’s textile industry has benefited from favorable trade access to the EU, its major market for textile and apparel exports. However, the end of the MFA quotas gives lower cost competitors more favorable access to EU markets. Consequently, Turkey’s cotton imports are projected to decline slowly over the next 10 years.

• The EU, Japan, Taiwan, and South Korea all steadily reduce their cotton imports as textile trade reforms and/or higher wages in these countries drive textile production to countries with lower wages and other costs.

Definition of country groups

Globalization is expected to continue to move raw cotton production to countries with favorable resource endowments and technology. Land is a key input factor, but the importance of technology has been highlighted by the impact of India’s rapid adoption of genetically modified cotton, nearly all Bacillus thuringiensis (Bt) cotton. Traditional producers with large land bases suitable for cotton production are expected to benefit from post-MFA trade patterns. Such producer/exporter regions include the United States, Sub-Saharan Africa, and Brazil.

• The United States continues as the world’s leading cotton exporter throughout the projections. Exports dip to 17.2 million bales in 2008/09, but grow to more than 19 million bales by 2016/17.

• The Central Asian countries of the former Soviet Union have been the principal U.S. competitors since the early 1990s. However, government policies in Central Asia promoting investment in textiles have resulted, to some extent, in exports of textile products rather than exports of raw cotton. Furthermore, the region’s economic liberalization is far from complete, and cotton production is expected to grow only slowly.

• Sub-Saharan Africa’s exports have overtaken Central Asia’s exports in large part due to economic reforms. West Africa’s 1994 exchange rate devaluation led to nearly a decade of growth within the region’s monetary union. As West Africa’s production gains began to lag at the end of the 1990s, several southern African countries began increasing their cotton production, aided by reforms such as eliminating marketing board monopolies. Continued increases in output are expected as producers take advantage of more export-oriented government policies, and Bt cotton is eventually adopted by the region’s producers.

• Improved Indian cotton crop yields, in part due to the adoption of Bt cotton, have raised India’s output in recent years. Rapid yield growth is projected to continue with the increase in cotton output being used for domestic textile production rather than for export.

The growth rates of exports from major exporters of beef, pork, and poultry meat average 1.3, 1.5, and 1.9 percent a year, respectively, between 2007 and 2016. During this period, exports rise nearly 1 million tons for beef, 0.7 million for pork, and 1.3 million for poultry. Rising per capita incomes, combined with population growth in a number of countries, are the driving force behind the projected growth in global meat demand.

• BSE in Canada and the United States has resulted in changes in Canada’s beef and live cattle exports to the United States. In 2004-05, Canadian beef exports recovered from much of the decline that followed its 2003 BSE case, but then fell again in 2006. During the coming decade, Canadian beef exports are expected to recover once again, rising to a level just below their 2002 record. Canadian exports to the United States of live cattle under 30 months of age are assumed to continue.

• EU enlargement from EU-15 to EU-25 results in greater shipments between the EU member countries and restrained trade of meat outside the EU-25. EU beef exports remain well below the annual WTO export-subsidy limit of 817,000 tons, as a stronger euro limits their competitiveness and policy changes lower both beef production and the need to remove beef from the domestic market.

• Argentine beef exports rose sharply in 2004 and 2005. However, export taxes and other recent policy changes have made Argentina’s exports less competitive. Beef exports are projected to decline, but remain above their pre-2004 levels.

• The projections assume that Brazil does not gain nationwide FMD-free status. However, exports from Brazil’s expanding pork sector are expected to be competitive in price-sensitive markets, and countries less concerned about FMD, such as Russia.

• During the coming decade, Brazil is expected to remain the largest exporter of poultry products, due to low production costs and competitive export prices.

• Poultry exports from the United States are expected to continue to increase.

• Exports of poultry from Thailand and China will be limited to fully cooked products for most of the projection period because avian influenza has occurred in those countries.

Definition of country groups

Beef imports by major importers expand about 1.4 million tons (27 percent) between 2007 and 2016. Traditionally, beef trade occurred largely between developed countries. However, Brazil has become a large exporter of lower quality beef that is imported by lower income countries and countries with less stringent import restrictions concerning FMD. The projections assume gradual recovery of U.S. and Canadian exports to Japan and South Korea.

• Higher income countries, such as Japan and South Korea, increase beef imports, reflecting domestic cattle sectors that are constrained by land availability. These imports are primarily of grain-fed beef. U.S. beef exports to these countries are projected to rebuild over the next 10 years, but do not completely recover to levels attained prior to the first U.S. BSE case in December 2003. Also, there continues to be an increased presence of Australia and New Zealand in these East Asian markets.

• U.S. beef imports, primarily of grass-fed lean beef from Australia and New Zealand for use in ground beef and processed products, rise slightly through the period. Continued strong Asian imports of beef from Australia and New Zealand enable these exporters to maintain significant levels of exports.

• Robust import growth of U.S. higher quality beef is projected for Mexico.

• The projections assume that Russia’s tariff-rate quota (TRQ) for beef, first imposed in 2003, remains in effect until 2009. In the longer run, the growth in Russia’s beef imports resumes as rising consumer demand outpaces gains in domestic production. Russia remains a large market for EU and Brazilian beef exports.

Definition of country groups

The major pork importers are projected to increase trade by nearly 1 million tons (26 percent) between 2007 and 2016.

• Mexican pork imports increase nearly 200,000 tons between 2007 and 2016, making Mexico one of the fastest growing pork importers. Increases in income and population are the primary drivers of Mexico’s increasing demand for pork products.

• Higher income countries of East Asia, such as Japan, Hong Kong, and South Korea, increase pork imports as their domestic hog sectors are constrained by environmental concerns and high imported feed costs. In South Korea and Japan, animal-health-related concerns regarding beef and poultry also boost pork demand.

• As with beef, the projections assume that the TRQ that Russia imposed for pork in 2003 remains in effect until 2009. Although the TRQ initially lowered pork imports, Russia remains a major destination for competitively priced pork exports from the EU and Brazil as demand growth continues to exceed Russian meat producers’ ability to respond. By 2016, Russia is projected to import about 250,000 tons more pork than in 2007, growing more than any other country.

• In China, increasing incomes boost per capita pork consumption and raise imports in the projections. However, China’s pork production and exports also continue to rise but China’s net pork exports rise only slightly during the coming decade.

Definition of country groups

Poultry meat imports by major importers are projected to increase by about 0.8 million tons (15 percent) from 2007 to 2016.

• Russia is expected to remain the world’s largest poultry importer, with higher consumer income increasing demand for poultry products and offsetting slow population growth. However, the increase in demand is expected to be filled mostly by domestic production, and Russia’s poultry imports are expected to decline slightly during the coming decade.

• In Mexico, strong economic growth raises poultry consumption and imports. Domestic poultry production continues to increase, but lags rising consumer demand. Although beef is the preferred meat among Mexico’s consumers, consumption of poultry meats rises more rapidly because of its lower price.

• Poultry consumption growth in China is met by expanding domestic production and growing imports.

• Because of avian influenza, some major poultry-exporting countries such as Thailand and China will shift most of their exports to fully cooked products. Due to their higher costs, these cooked poultry products will be marketed to developed or high-income countries in Asia, Europe, and the Middle East.

• Poultry imports by Saudi Arabia and the Other North Africa and the Middle East region are projected to rise strongly. Outbreaks of avian influenza in some countries may slow growth in domestic production and increase reliance on imports to fill consumption needs.

• Rising consumer incomes increase reliance on larger poultry imports in a number of Central America and Caribbean countries. The Central America Free Trade Agreement is also expected to stimulate trade. Together with Mexico, these countries form one of the largest markets for poultry imports.

Baseline Tables

• 2007-16 Baseline Projection Tables are available in spreadsheets (wk1 format).