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| ![]       | USDA Agricultural Baseline Projections to 2015           |
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| age1.wmf) | **Interagency Agricultural Projections Committee**       |
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| **United  | > World Agricultural Outlook Board, Chair                |
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**USDA Agricultural Baseline Projections to 2015.** Office of the Chief
Economist, World Agricultural Outlook Board, U.S. Department of
Agriculture. Prepared by the Interagency Agricultural Projections
Committee. Baseline Report OCE-2006-1, 108 pp.

**Abstract**

This report provides longrun baseline projections for the agricultural
sector through 2015. Projections cover agricultural commodities,
agricultural trade, and aggregate indicators of the sector, such as farm
income and food prices. The projections are based on specific
assumptions regarding macroeconomic conditions, policy, weather, and
international developments. The baseline assumes that there are no
shocks due to abnormal weather, further outbreaks of plant or animal
diseases, or other factors affecting global supply and demand. The Farm
Security and Rural Investment Act of 2002 and The Energy Policy Act of
2005 are assumed to remain in effect through the projection period.
Additionally, the Agricultural Reconciliation Act of 2005 is assumed to
be in force. The baseline projections are one representative scenario
for the agricultural sector for the next decade. As such, the baseline
provides a point of departure for discussion of alternative farm sector
outcomes that could result under different assumptions. The projections
in this report were prepared in October through December 2005,
reflecting a composite of model results and judgment-based analysis.

Steady domestic and international economic growth and gains in
population strengthen demand for food and agricultural products in the
baseline, providing a favorable demand setting for the U.S. agricultural
sector. Additionally, strong expansion of corn-based ethanol production
is projected, reflecting renewable fuel provisions in the Energy Policy
Act of 2005. Although trade competition will continue to be strong, the
United States will remain competitive in global agricultural markets.
Thus, increases in global consumption and world trade result in gains in
U.S. agricultural exports. Combined with growing domestic demand for
agricultural products, overall farm cash receipts rise. Rising
production expenses and lower government payments, however, offset gains
in cash receipts and other sources of farm income, keeping net farm
income relatively stable from 2006 to 2015, after declining from
historically high levels in 2004 and 2005.

Keywords: Projections, baseline, crops, livestock, ethanol, trade, farm
income, food prices.

# Contents

Page

A Note to Users of USDA Baseline Projections [3](#Note_to_users)

Baseline Projections on the Internet
[4](#Baseline_projections_on_the_internet)

Baseline Contacts [4](#Baseline_contacts)

Acknowledgments [4](#Baseline_contacts)

Introduction [1](#Introduction)

Overview of Baseline Assumptions and Projections
[2](#overview-of-baseline-assumptions-and-projections)

Macroeconomic Assumptions [8](#macroeconomic-assumptions)

Crops [20](#Crops)

Livestock [48](#Livestock)

U.S. Agricultural Sector Aggregate Indicators

Farm Income, Food Prices, and U.S. Trade Value
[60](#US_Ag_sector_agg_indicators)

Agricultural Trade [71](#Agricultural_trade)

List of Tables [107](#List_of_tables)

+-----------------------------------------------------------------------+
| []{#Note_to_users .anchor}**A Note to Users of USDA Baseline          |
| Projections**                                                         |
|                                                                       |
| USDA long-term agricultural baseline projections presented in this    |
| report are a Departmental consensus on a longrun scenario for the     |
| agricultural sector. These projections provide a starting point for   |
| discussion of alternative outcomes for the sector.                    |
|                                                                       |
| The scenario presented in this report is not a USDA forecast about    |
| the future. Instead, it is a conditional, longrun scenario about what |
| would be expected to happen under a continuation of current farm      |
| legislation and specific assumptions about external conditions. The   |
| baseline uses as a starting point the short-term projections from the |
| November 2005 *World Agricultural Supply and Demand Estimates*        |
| report.                                                               |
|                                                                       |
| Critical long-term assumptions are made for U.S. and international    |
| macroeconomic conditions, U.S. and foreign agricultural and trade     |
| policies, and growth rates of agricultural productivity in the United |
| States and abroad. Normal weather is assumed. The baseline also       |
| assumes no further outbreaks of animal or plant diseases. Changes in  |
| assumptions for any of these items can significantly affect the       |
| baseline projections, and actual conditions that emerge will alter    |
| the outcomes.                                                         |
|                                                                       |
| The baseline projection analysis was conducted by interagency         |
| committees in USDA and reflects a composite of model results and      |
| judgment-based analysis. The Economic Research Service has the lead   |
| role in preparing the Departmental baseline report. The projections   |
| and the report were reviewed and cleared by the Interagency           |
| Agricultural Projections Committee, chaired by the World Agricultural |
| Outlook Board. USDA participants in the baseline projection analysis  |
| and review include the World Agricultural Outlook Board, the Economic |
| Research Service, the Farm Service Agency, the Foreign Agricultural   |
| Service, the Agricultural Marketing Service, the Office of the Chief  |
| Economist, the Office of Budget and Program Analysis, the Risk        |
| Management Agency, the Natural Resources Conservation Service, and    |
| the Cooperative State Research, Education, and Extension Service.     |
+-----------------------------------------------------------------------+

[]{#Baseline_projections_on_the_internet .anchor}**Baseline Projections
on the Internet**

The Economic Research Service of USDA has a briefing room for baseline
projections at:

http://www.ers.usda.gov/briefing/baseline/

Also, data from the new USDA baseline are available electronically at:

http://usda.mannlib.cornell.edu/data-sets/baseline/

[]{#Baseline_contacts .anchor}**Baseline Contacts**

Questions regarding these projections may be directed to:

Paul Westcott, Economic Research Service, Room 5188, 1800 M Street,
N.W., Washington, D.C. 20036-5831, phone: (202) 694-5335, e-mail:
westcott@ers.usda.gov

Ronald Trostle, Economic Research Service, Room 5160, 1800 M Street,
N.W., Washington, D.C. 20036-5831, phone: (202) 694-5280, e-mail:
rtrostle@ers.usda.gov

C. Edwin Young, Economic Research Service, Room 5191, 1800 M Street,
N.W., Washington, D.C. 20036-5831, phone: (202) 694-5336, e-mail:
ceyoung@ers.usda.gov

David Stallings, World Agricultural Outlook Board, MS 3812, 1400
Independence Ave., S.W., Washington, D.C. 20250-3812, phone: (202)
720-5715, e-mail: dstallings@oce.usda.gov

# 

# Acknowledgments

The report coordinators, on behalf of the Interagency Agricultural
Projections Committee, thank the many analysts in different agencies of
USDA for their contributions to the baseline projection analysis and to
the preparation and review of this report.

**USDA Agricultural Baseline**

**Projections to 2015**

> Interagency Agricultural Projections Committee

[]{#Introduction .anchor}**Introduction**

This report provides longrun baseline projections for the agricultural
sector through 2015. Projections cover agricultural commodities,
agricultural trade, and aggregate indicators of the sector, such as farm
income and food prices. The baseline 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 policy,
the weather, and international developments. The baseline assumes that
the Farm Security and Rural Investment Act of 2002 (the 2002 Farm Act)
and The Energy Policy Act of 2005 remain in effect through the
projection period. Additionally, the Agricultural Reconciliation Act of
2005 is assumed to be in force. 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 baseline is 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
2005 in support of the fiscal year 2007 President's Budget Estimates.
Projections reflect a composite of model results and judgment-based
analysis. Normal weather is assumed. Also, the baseline assumes no
further outbreaks of plant or animal diseases. Short-term projections
used as a starting point in the baseline are from the November 2005
*World Agricultural Supply and Demand Estimates* report.

# Overview of Baseline Assumptions and Projections

# Key assumptions underlying the baseline projections include the following:

***Economic growth***

-   World economic growth is projected to increase at a 3.2-percent
    average annual rate between 2006 and 2015, after averaging 3 percent
    annually between 2001 and 2005. U.S. gross domestic product (GDP)
    slows from the high rates in 2004 and 2005 toward a sustainable
    longrun rate near 3 percent. Strong economic growth in developing
    countries of about 5 percent annually is projected for 2006-15.

***Population***

-   Growth in global population is assumed to continue to slow in the
    baseline, 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 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 81 percent by 2015, up from
    about 80 percent in 2005.

## The value of the U.S. dollar

-   The U.S. dollar is assumed to appreciate slowly in real terms,
    remaining relatively high by historical standards. A strengthening
    U.S. dollar in the baseline assumes that capital moves into the
    United States to take advantage of well‑functioning financial
    markets and high expected long-term productivity growth.

***Oil prices***

-   Large increases in oil prices from late 2002 through 2005 resulted
    from strong crude oil demand, largely reflecting world economic
    recovery and rapid manufacturing growth in China and India. From
    2007 to 2010, real oil prices are projected to fall as new crude
    supplies help offset the rise in demand from Asia. In subsequent
    years, crude oil prices are projected to rise, but only slightly
    faster than the general inflation rate. Factors expected to
    constrain longrun oil price increases include new oil discoveries;
    new technologies for finding, extracting, and refining oil; the
    ability to switch to non-petroleum fuels; and the ability to
    increase energy efficiency by substituting nonenergy inputs for
    energy.

***U.S. agricultural policy***

-   The 2002 Farm Act, as amended, is assumed to continue through the
    projection period.

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

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-   The Agricultural Reconciliation Act of 2005 is assumed to be in
    force for the baseline projections. As part of this legislation,
    authority to issue cotton user marketing certificates is repealed
    following the 2005/06 cotton marketing year, thereby ending the
    Step-2 cotton program. Also, national dairy market loss payments,
    administered under the Milk Income Loss Contract Program, are
    extended, with a reduced payment factor of 34 percent of the
    difference between \$16.94 per hundredweight and the Boston Class I
    price through August 2007.

***Ethanol***

-   The Renewable Fuel Program of the Energy Policy Act of 2005 mandates
    renewable fuel use in gasoline (with credits for biodiesel) to reach
    7.5 billion gallons by calendar year 2012, nearly double 2005's
    level. This program largely affects production of ethanol, which is
    primarily produced from corn. Additionally, relatively high prices
    for oil contribute to favorable comparative returns for ethanol
    production, providing further economic incentives for expansion in
    the production capacity of that industry over the next several
    years. To reflect this ongoing expansion, the baseline assumes that
    the legislation's renewable fuel standard is significantly exceeded
    through 2010. In subsequent years, ethanol production is assumed to
    be closer to the levels in, or levels based on, the legislation.

***Cattle and beef trade***

-   The baseline assumes 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 

-   Baseline trade projections assume that countries comply with
    existing bilateral and multilateral agreements affecting agriculture
    and agricultural trade. The baseline incorporates effects of trade
    agreements and domestic policy reforms in place in November 2005.
    The Central American and Dominican Republic Free Trade Agreement is
    assumed for the sugar baseline projections starting in calendar year
    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.

**Key results in the baseline projections include the following**:

***U.S. aggregate indicators***

-   Net farm income is projected to be relatively stable from 2006 to
    2015, after declining from historically high levels in 2004
    and 2005. Overall farm cash receipts increase through the
    projections due to growing domestic use and export demand as well as
    increases in agricultural commodity prices. Rising production
    expenses and lower government payments, however, offset gains in
    cash receipts and other sources of farm income. With government
    payments declining, the agriculture sector relies increasingly on
    the market for more of its income. Cash receipts represent more than
    89 percent of gross cash income at the end of the projections, up
    from about 85 percent in 2005. Net farm income projections average
    about \$54 billion annually for the next decade, compared with
    \$48 billion in the 1990s. 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 baseline as
    steady global economic growth and stronger world trade lead to gains
    for U.S. agricultural export volumes and higher commodity prices.
    High-value product exports continue to grow in importance. Increases
    in U.S. consumer income and demand for a large variety of foods
    underlie growth in U.S. agricultural imports. Imports of processed
    foods are expected to continue growing in importance. Overall, the
    U.S. agricultural trade balance is projected to show a small surplus
    through most of the baseline, although it will remain lower than in
    the past two decades.

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

***U.S. agricultural commodities***

-   Corn used to produce ethanol in the United States more than doubles
    the 2004/05 level by 2015/16. This increase reflects the Renewable
    Fuel Program of the Energy Policy Act of 2005, large ongoing ethanol
    plant construction, and economic incentives provided by continued
    high oil prices. Increased feeding of distillers dried grains, a
    coproduct of dry mill ethanol production, helps meet growing
    livestock feed demand. Thus, feed use of corn rises only slowly in
    the projections.

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-   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 to smaller overall portions, including
    lower carbohydrates.

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-   Growth in domestic soybean crush is largely driven by increasing
    demand for domestic soybean meal, mostly because of rising feed
    demand for expanding meat production. Domestic demand for soybean
    meal is tempered somewhat by a rising volume of coproducts from
    ethanol production.

-   Mill use of upland cotton in the United States falls through the
    projection period as apparel imports by the United States continue
    to increase, reducing domestic apparel production and lowering the
    apparel industry's demand for fabric and yarn produced in the United
    States.

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-   Steady expansion of domestic food use of rice is projected over the
    baseline, largely due to an increasing share of the U.S. population
    of Asian and Latin American descent. Use of rice in processed foods
    and pet foods also increases.

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-   Consumption of horticultural products continues to rise in the
    baseline. Imports play an important role in domestic supply during
    the winter and, increasingly, during other times of the year,
    providing U.S. consumers with increased variety of horticultural
    products.

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-   With the end of the U.S. tobacco marketing quota and price support
    program, tobacco leaf production initially declines as some farmers
    exit the industry. Production then rises through the rest of the
    projections, primarily reflecting increases by the remaining
    growers. 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,
    however, reversing the generally downward trend of recent years, as
    lower tobacco leaf prices than during the last several years under
    the tobacco program make U.S. leaf more competitive in global trade.

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-   Higher grain prices reduce returns to U.S. meat producers and slow
    production gains. Higher levels of per capita meat consumption are
    projected, with poultry accounting for a larger share of the total.
    While consumer expenditures on meat increase, they represent a
    declining share of disposable income.

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-   Productivity gains are expected to boost milk output per cow and
    total milk production throughout the projections. Milk cow numbers
    are expected to decline after 2006 at a relatively slow pace as
    increasing specialization of dairy farms over time makes exit rates
    lower than in past decades.

***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 will
    become 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, such as
    Brazil, Argentina, Canada, Ukraine, and Kazakhstan, provides
    competition to U.S. exports for some agricultural commodities. A
    strengthening U.S. dollar assumed in the baseline 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.

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-   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. In
    response, increased corn production and exports are assumed in this
    period for Argentina and Brazil. China is also assumed to increase
    corn production as more U.S. corn is used in the production of
    ethanol. This changes China's net corn trade by slowing the decline
    in Chinese exports and the increase in its imports. Nonetheless,
    China is projected to be a net importer of corn in the longer run,
    reflecting declining stocks of grain and increasing demand for feed
    for its growing livestock sector.

-   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. 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 the exports of products rather than soybeans.

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-   The United States, Australia, the European Union (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, Kazakhstan and Ukraine are projected to
    have a growing importance in world wheat trade, reflecting low costs
    of production and continued investments in their agricultural
    sectors. 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 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.

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-   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 and Vietnam remain the world's largest
    rice-exporting countries, while India is projected to surpass the
    United States as the third largest rice exporter.

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

-   Canada continues to be a strong competitor with the United States in
    pork exports to Pacific Rim nations and Mexico. Canada is also the
    major supplier of live hog imports by the United States. Brazil is a
    major pork exporter. However, the presence of foot-and-mouth disease
    limits Brazilian pork exports to some markets, such as Japan and
    South Korea.

-   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, China, and Vietnam, are
    expected to be limited to fully cooked products. Brazil remains a
    leading poultry exporter, as low production costs allow their
    poultry sector to remain competitive in global trade.

# Macroeconomic Assumptions

Macroeconomic assumptions underlying the USDA baseline are characterized
by steady growth near average historical rates over most of the
projection period. The sharp rise in energy and other raw material costs
is the main risk to the economic growth outlook. The baseline's
macroeconomic assumptions were completed in October 2005.

The U.S. and world economies are highly interdependent through both
global trade and financial markets. The United States continues to be
the engine of world economic growth, but economic interdependence
implies that international macroeconomic conditions have important
effects on the U.S. economy as well. While the United States continues
to play a large role in determining economic conditions around the
world, strong growth in China and India is becoming increasingly
important.

![](media/image2.wmf){width="4.7in" height="2.997916666666667in"}

U.S. gross domestic product (GDP) growth moderates over the next several
years from 3.7 percent in 2005 toward a sustainable rate of about 3
percent over the longer term after 2007. Nonetheless, the United States
continues to maintain its share of global GDP at around 30 percent.
World economic growth is projected to increase to a 3.2-percent average
between 2006 and 2015, after averaging 3 percent annually between 2001
and 2005.

-   Despite moderate European and Japanese growth, most of the world
    will be moving closer to longrun economic growth, with trend rates
    in 2006 and beyond. Ongoing computing and telecommunications
    advances support worldwide productivity gains throughout the
    baseline projections.

-   Continued high oil prices assumed in the baseline modestly constrain
    Asia and its manufacturing sector, which is far more dependent on
    energy for GDP growth than more developed economies.

-   Improved global economic performance and continued, although
    slowing, population growth are expected to strengthen food demand in
    the baseline. Increased global purchasing power and population
    growth are essential drivers of gains in U.S. agricultural exports.

> ![](media/image3.wmf){width="4.7in" height="2.997916666666667in"}

Developed economies are projected to grow at rates similar to those of
the 1990s, averaging 2.5 percent in 2006-15.

-   Enlargement of the European Union (EU) to include countries of
    Central and Eastern Europe implies closer integration of those
    economies, creating more trade and investment opportunities within
    the expanded EU.

-   The EU does not, however, grow as rapidly as the United States
    because of lingering 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 significant economic problems, largely the
    result of long-term structural rigidities and a difficult process of
    economic reform. The projections assume growth at 1.5 percent a
    year, with Japan's share of world GDP declining to less than 12
    percent by 2015, down from almost 18 percent in 1991.

![](media/image4.wmf){width="4.7in" height="2.997916666666667in"}

Economic growth in developing countries is projected at about a
5-percent annual rate in 2006-15. Developing countries play an
increasingly important role in global growth in food demand and become a
more important destination for U.S. exports. Relatively high income
growth, along with large food responsiveness to income growth in these
countries, underlies this projection. Consumption and imports of food
and feed in developing countries are particularly responsive to income
changes. As incomes rise in these countries, consumers generally
diversify their diets, moving away from staple foods to include more
meat, fruits, vegetables, and processed foods (including vegetable
oils). These consumption shifts increase import demand for feedstuffs
and high-value food products. Historically, this has included increases
in U.S. exports of meat and processed foods.

-   Long-term growth of 3.7 percent is projected for Latin America. An
    overall improvement in macroeconomic policies should attract foreign
    capital inflows and sustain growth.

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-   Growth rates for Southeast Asia and developing countries of East
    Asia are projected at about 5 percent for the next decade, but will
    still be below the very strong average growth of over 7 percent in
    1986-95.

-   China's economic growth has been consistently the strongest in Asia,
    exceeding 9 percent between 2003 and 2005. While some moderation is
    expected, China's growth is expected to average above 7 percent over
    the next decade.

-   India's projected average growth of around 6 percent a year puts it
    in the first tier of high‑growth countries. India is still among the
    low-income countries, with a per capita income of less than \$600
    per year. The projected high growth rate is expected to move a
    significant number of people out of poverty over the next decade.

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-   Economic growth in the countries of the former Soviet Union (FSU) is
    projected to average 5 percent for the next decade, continuing
    strong growth following the economic declines in the transition
    period of most of the 1990s. Russia, Ukraine, and other FSU
    countries benefit from their shift to market economies.

![](media/image5.wmf){width="4.7in" height="3.1486111111111112in"}

A continued slowing of population growth around the world is an
important factor constraining increases in agricultural demand over the
next decade. Historically, about 70 percent of increases in food use
have been related to population growth, leaving about 30 percent driven
by increasing incomes and other factors. With population growth slowing
in the projections, income growth will become a relatively more
important factor underlying food and agricultural demand growth.

-   World population growth declines from an annual rate of 1.7 percent
    in the 1980s to an average of about 1.1 percent per year during the
    projections.

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

-   Population growth rates in developing economies decline by almost
    half between the 1970s and the end of the projection period, but
    remain above those in developed countries and the former Soviet
    Union. As a result, the share of world population accounted for by
    developing countries increases to 81 percent by 2015.

-   China and India together account for around 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 2006‑15. The population growth
    rate in India, the world's second most populous nation, is projected
    to decline from 2.1 to 1.3 percent per year between the same
    periods. This growth narrows the gap between India's population and
    China's.

-   Brazil's population growth rate falls from 2.1 percent per year in
    1981-90 to 0.9 percent annually in 2006-15, and Sub-Saharan Africa's
    population growth rate declines from 2.9 to 2.2 percent per year
    over the same period.

![](media/image6.wmf){width="4.7in" height="3.2472222222222222in"}

The U.S. dollar is assumed to appreciate slowly in real terms after
2005, remaining relatively high by historical standards. This high real
exchange rate---expressed in the baseline as local currency per U.S.
dollar, in inflation-adjusted terms---will constrain the growth in U.S.
exports. Even so, high long-term economic growth rates, particularly in
the developing countries, will increase the demand for U.S. exports.

-   Strong relative GDP growth in the United States compared with 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 take advantage of well-functioning financial markets, a
    relatively risk-free environment, transparent financial accounting
    standards, and high expected long-term productivity growth and
    financial returns.

-   Due to relatively stronger global trade competition, U.S. exports of
    bulk commodities and horticultural products tend to be the most
    sensitive to the strong U.S. dollar among all agricultural products.

-   China, after a long period of an undervalued exchange rate and
    substantial political pressure from its trading partners, has
    initiated a process for appreciating its currency. To date, the
    appreciation has been limited to slightly more than 2 percent. This
    compares with most estimates of undervaluation of at least 30 to 40
    percent. The baseline assumes that China holds its real exchange
    rate constant, implying some appreciation in the nominal exchange
    rate.

![](media/image7.wmf){width="4.7in" height="3.0027777777777778in"}

Global inflation rates, which declined in the 1990s (except in the
transition economies), are projected to remain relatively low through
2015.

-   The U.S. and world economies are moving solidly into an expansion
    phase. As a result, inflationary pressures have begun. In response,
    to constrain inflation, the U.S. Federal Reserve Board and central
    banks in other countries are assumed to further increase short‑term
    interest rates in the initial years of the projections, although
    less aggressively than in 2005.

-   Because of this assumed policy response, inflation is projected to
    remain below 3 percent in developed countries and the world as a
    whole.

-   Inflation rates in developing countries are projected to fall from
    over 7 percent to just over 5 percent. Inflation in Asia declines to
    rates comparable to those in developed countries. Those 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 7 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.

![](media/image8.wmf){width="4.7in" height="2.997916666666667in"}

Crude oil prices rose sharply from late 2002 through 2005, largely
reflecting world economic recovery and rapid manufacturing growth in
China and India, which resulted in sharply increased crude oil demand.
Hurricane Katrina put further upward pressure on world oil prices by
temporarily reducing supplies of crude oil and refined products in the
fall of 2005. The U.S. Government and the International Energy Agency
released emergency oil and fuel reserves, keeping this transitory energy
supply shock from further boosting oil prices.

Continued growth in Asian economies will keep oil demand strong in 2006.
In 2007-10, crude oil prices are expected to drop modestly as new crude
supplies help offset the rise in demand from Asia. After 2010, oil
prices are projected to rise, but only slightly faster than the general
inflation rate. These projections are generally consistent with the U.S.
Department of Energy, Energy Information Administration's (EIA) *Annual
Long Term Outlook 2006* (released December 2005).

-   Underlying these price increases, world oil demand is expected to
    rise due to strong GDP growth in the relatively high
    energy-dependent economies in Asia, including China, India, and the
    rapidly growing economies of East and Southeast Asia.

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-   Most of China's energy is from coal, but as consumer incomes and
    automobile demand grow, an increasing share of its energy use will
    be from petroleum. China has become increasingly efficient in energy
    use over the past 25 years, reducing its energy intensity by over 60
    percent (using EIA's measure of energy used to produce a dollar's
    worth of GDP). Nonetheless, even with this improvement, China's
    energy intensity in the early 21^st^ century is over three times as
    high as in the United States.

-   India has become more energy intensive over the past 20-25 years
    compared with the United States. In the early 1980s, India used
    twice as much energy as the United States to produce a dollar's
    worth of GDP, while its current energy intensity is more than 2.5
    times that in the United States. As India continues to develop its
    infrastructure, especially the highway system and electric power
    grid, energy intensity will rise further.

-   The newly industrialized East and Southeast Asian economies of
    Taiwan, South Korea, Malaysia, Hong Kong, Singapore, and Thailand
    have gone from parity in energy intensity with the United States in
    the early 1980s to using 50 percent more energy to produce a dollar
    of GDP currently.

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-   Several factors are expected to constrain longrun increases in oil
    prices.

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-   New oil discoveries, along with new technologies for finding and
    extracting oil, are assumed to allow for substantial growth in
    demand without significant real energy price inflation.

-   The ability to switch to non-petroleum fuels, such as coal and
    natural gas, especially in industrial uses and electric power
    generation, is expected to continue restraining increases in oil
    prices.

-   Further, the ability to substitute non-energy inputs (such as
    microchip-driven equipment) for energy is an important factor
    increasing energy efficiency, which is expected to continue to
    improve through the baseline due to improved energy use technology.

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-   The net result is that real prices of oil in the baseline are
    expected to remain higher than over any sustained period
    historically, largely due to rapid demand growth globally.
    Nonetheless, higher oil prices are not expected to cause world
    economic growth to significantly slow (see box, page
    [16](#Global_Economy_Has_Not_Slowed)).

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. Prices for natural gas and nitrogen-based
fertilizer have become somewhat more volatile than prices for oil
largely because natural gas is less fungible 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.

[]{#Global_Economy_Has_Not_Slowed .anchor}**Global Economy Has Not
Slowed With Higher Oil Prices**

Despite high oil prices, growth in the United States, most of Asia, and
the large countries of Latin America is continuing at or above trend
levels. Most studies, however, suggest that U.S. and world economic
growth should have slowed significantly due to the oil price increases
that occurred in 2004 and 2005. What kept a significant global slowdown
from occurring?

-   In 2004, the world economy realized record growth and the United
    States had very strong growth. The impact of any macroeconomic shock
    depends on the state of the economy at the time it occurs. The
    stronger the economy, the larger a shock must be to have a near-term
    impact.

-   Oil prices, which rose to around \$67 per barrel (nominal) in early
    September 2005, did not reach the record high inflation-adjusted
    levels of 1981. Nominal oil prices would have to reach \$90 per
    barrel to be at the same inflation-adjusted level reached in the
    supply-shock-driven price spike that year.

-   Oil-surplus countries are boosting global economic growth through
    financial and direct business investment, lowering the cost of
    capital and offsetting some of the oil-induced upward boost in
    production costs. This investment is also helping keep interest
    rates relatively low.

-   Because of low inflation and prudent monetary policy, higher energy
    prices are not being fully passed on to final consumers. This cost
    pass-through impact is significantly weaker now than in the 1970s
    and 1980s, when higher fuel prices were fully reflected in higher
    prices for other inputs, which were largely passed on to consumers.
    In the current competitive environment, higher fuel costs are only
    partially passed on. Lower profit margins and reduced spending on
    other inputs are now largely offsetting the impact of higher fuel
    costs. Productivity growth has also partly offset higher energy
    prices in the business bottom line. The net impact of the recent
    runup in energy costs is a 1-percent increase in the consumer price
    index (CPI) spread over 2 years. The result of a similar oil price
    increase in the 1970s on the CPI would have been several times as
    large.

-   Industrial economies and the rapidly growing economies of Asia are
    increasingly energy efficient. Moreover, these economies have
    growing service sectors that are not energy intensive.

-   In a number of emerging markets, energy subsidies are cushioning the
    effects of higher oil prices. In Brazil, for example, the widespread
    use of ethanol, which benefits from government support, has largely
    sheltered that economy from higher oil prices.

-   The liberalization of the world economy has increased the ability of
    businesses to substitute other inputs, such as fertilizer imports,
    for domestic energy on a broader scale than in the 1980s.

Some sectors of the world economy, such as manufacturing and
agriculture, are more highly affected by high energy prices than are
others. High energy costs are a likely contributor to the decline in
U.S. manufacturing jobs since 2002, with employers finding it too costly
to operate with as many workers.

Despite the muted impact to date of higher energy prices across the
global economy, a large and persistent rise in crude oil prices could
cause a world slowdown and represents an important risk to the solid
world growth assumptions in the baseline.

[]{#t1 .anchor}

![](media/image9.wmf){width="6.509722222222222in"
height="7.010416666666667in"}

[]{#t2 .anchor}

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[]{#t3 .anchor}

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height="8.849305555555556in"}

[]{#Crops .anchor}**Crops**

Steady U.S. and global economic growth assumed in the baseline provides
a favorable demand setting for field crops, supporting longer run
increases in consumption, trade, and prices. Additionally, the Energy
Policy Act of 2005 mandates renewable fuel use in gasoline (with credits
for biodiesel) to reach 7.5 billion gallons by calendar year 2012
(nearly double 2005's level), which underlies strong expansion of
corn-based ethanol production in the projections.

Global livestock production rises in the baseline in response to growing
incomes and demand for meats, which supports gains in world feedgrain
trade. Despite a depreciation of the U.S. dollar relative to many
currencies in the last several years, the recent strengthening of the
dollar (U.S. agricultural export-weighted basis) is projected to
continue. 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 limits U.S. export gains.

Baseline assumptions for field crops reflect the Farm Security and Rural
Investment Act of 2002 (2002 Farm Act), which is assumed to continue
through the projection period. Income support to field crop producers is
provided by marketing assistance loans, loan deficiency payments,
counter-cyclical payments, and fixed direct payments. During the
baseline period, area enrolled in the Conservation Reserve Program (CRP)
is assumed to rise to 39.2 million acres from about 35 million acres
currently enrolled. 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 2005's level of about 243 million acres, remaining near
245 million acres throughout the projections, as higher producer net
returns keep land in production. Yield increases also contribute to
production gains.

![](media/image12.wmf){width="4.709027777777778in"
height="3.341666666666667in"}

![](media/image13.wmf){width="4.7in" height="2.997916666666667in"}

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.
Some benefits to growing crops may not be fully reflected in a single
year's net returns, such as agronomic benefits of crop rotations.
Nonetheless, while consideration of these multiyear factors can also
affect planting choices, measures of farmers' response to net returns
based on historical data implicitly include these effects.

-   Corn, wheat, and soybeans account for about 87 percent of acreage
    for the eight major field crops. The cropping mix shifts 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 significantly in the initial years of the
    projections, as larger domestic ethanol production from corn
    increases demand, raising corn prices and net returns. In the longer
    run, increasing exports also underlie higher corn acreage. The
    increase in corn plantings is facilitated, in part, by a reduction
    in soybean area.

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-   Wheat plantings range between 57 million and 59 million acres.
    Moderate growth in domestic and export demand is partly met by
    rising yields, thus limiting price increases and incentives to
    plant.

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-   Relatively higher energy-related production costs for corn in 2006
    are expected to provide an initial boost to soybean plantings.
    However, acreage planted to soybeans then declines through the
    remainder of the projections as more favorable returns to corn
    production draw land from soybeans.

![](media/image14.wmf){width="4.7in" height="2.997916666666667in"}

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 2010/11.

-   Large increases are projected in corn used for ethanol production
    over the next several years. The Renewable Fuel Program of the
    Energy Policy Act of 2005 mandates the volume of renewable fuel to
    be included in gasoline (with biodiesel credits) for each calendar
    year through 2012, reaching almost double current levels. This
    program predominantly affects ethanol production, which is primarily
    produced from corn. Additionally, relatively high prices for oil
    contribute to favorable comparative returns for ethanol production,
    providing further economic incentives for expansion in production
    capacity over the next several years.

-   Feed and residual use of corn rises only slowly in the baseline as
    increased feeding of distillers dried grains (DDG), a coproduct of
    dry mill ethanol production, helps meet growing livestock feed
    demand. (Note: When a bushel of corn is used in the production of
    ethanol, the entire bushel is accounted for in the fuel alcohol use
    category, because the DDG coproduct, even though used in livestock
    feeding, is no longer corn.) 

-   Gains in food and industrial components of domestic corn use (other
    than for ethanol production) are projected to be smaller than
    increases in population. For example, consumer dietary concerns
    limit increases in the combined use of corn for high‑fructose corn
    syrup, glucose, and dextrose to about half the rate of population
    gain.

-   As incomes grow in the rest of the world, especially in developing
    economies, consumers shift to more meat in their diets, which
    requires more feed grains for meat production. To support this
    growth in meat production, global trade in feed grains expands in
    the baseline. U.S. corn exports show very little growth over the
    next several years as more corn is used domestically in the
    production of ethanol. However, increased production and exports
    from Argentina, Brazil, and China are assumed during this period.

-   In the longer run, after growth in ethanol production in the United
    States slows, U.S. corn exports rise in line with global trade to
    support growth in global meat production. Additionally, U.S. corn
    exports to Mexico are boosted because of the phase-down and
    elimination of the tariff rate on over-quota corn imports from the
    United States, shifting some U.S. exports to corn from sorghum,
    which already has tariff-free status. As a result, U.S. market share
    of global corn trade stabilizes in the latter years of the
    projections.

> ![](media/image15.wmf){width="4.7in" height="2.997916666666667in"}

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

-   Domestic demand for wheat in the United States reflects a relatively
    mature market. After declining from 2000 to 2004, food use of wheat
    resumes moderate gains. Growth is somewhat slower than population
    increases, reflecting dietary adjustments by some consumers to
    smaller overall portions, including lower carbohydrates.

-   Feed use of wheat, a low-value use of the crop, shows only small
    increases in the baseline. Projected gains in wheat feed and
    residual use are driven by growth in the livestock sector,
    relatively lower wheat prices compared with corn, and increases in
    production.

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-   U.S. wheat exports increase after 2008/09 as income and population
    in developing countries grow, raising global wheat consumption and
    trade. Competition from the European Union (EU), Canada, Argentina,
    Australia, and exporters from the Black Sea region continues,
    holding the U.S. market share relatively constant near 23 percent
    for most of the projections. Market shares for Australia, Argentina,
    and the Black Sea region increase, while shares for Canada and the
    EU decline.

![](media/image16.wmf){width="4.7in" height="2.997916666666667in"}

Domestic use of soybeans continues to rise slowly, but U.S. soybean
exports decline due to moderate production gains and increased global
competition.

-   Growth in domestic soybean crush is largely driven by increasing
    demand for domestic soybean meal, mostly because of rising feed
    demand for expanding meat production. Domestic demand for soybean
    meal is tempered somewhat by a rising volume of corn coproducts from
    the production of ethanol.

-   With initially large stocks, low prices help U.S. soybean exports
    approach 1.1 billion bushels in the next several years. Exports then
    decline to under 1.0 billion 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.

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-   U.S. exports of soybean meal and soybean oil also face strengthening
    competition from South American producers, limiting gains in U.S.
    soybean meal exports and reducing soybean oil exports.

![](media/image17.wmf){width="4.7in" height="2.997916666666667in"}

Mill use of upland cotton in the United States continues to fall through
the projection period from its peak in 1997/98. Upland cotton exports
rise after 2006 as more cotton processing occurs in developing countries
with lower labor costs.

-   Textile and apparel import quotas that had been established under
    the Multi-Fiber Arrangement were eliminated at the start of calendar
    year 2005. As a result of this and other factors, apparel imports by
    the United States continue to 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, which is projected at less than 40 percent of its 1997/98
    level at the end of the projection period.

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-   The baseline assumes that the upland cotton user marketing
    certificate program (Step 2) ends after the 2005/06 cotton marketing
    year. U.S. upland cotton exports initially decline in 2006/07, but
    then grow moderately throughout the remainder of the projections.

-   Growth in the textile industry in China slows from the rapid
    expansion of recent years, reducing growth in China's cotton import
    demand. As a result, world cotton consumption and trade slow as
    well. With global trade growth slowing, gains in U.S. cotton exports
    after 2006/07 allow the United States to maintain a cotton trade
    share of about 37‑38 percent, down from over 40 percent recently.

> ![](media/image18.wmf){width="4.7in" height="2.997916666666667in"}

Steady expansion in domestic food use of rice is projected over the
baseline, although the rate of expansion is well below rates in the
1980s and 1990s. U.S. rice exports are projected to expand moderately in
the latter part of the projection period.

-   Growth in domestic use of rice is largely due to an increasing share
    of the U.S. population of Asian and Latin American descent, with
    imports of specialty rices from Asia accounting for a growing share
    of domestic use. Use of rice in processed foods and pet foods also
    increases. Overall, these factors result in a small, but steady,
    rise in per capita rice use in the United States.

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-   U.S. rice exports are projected to decline in 2006/07 and then
    remain flat through 2009/10 as a relatively tight domestic market
    keeps the U.S. price premium over Asian competitors high. In the
    later years of the projections, U.S. production growth exceeds gains
    in domestic use, reducing the price premium, which increases U.S.
    competitiveness in global markets and raises U.S. rice exports.

-   Global rice prices are projected to increase about 3 percent per
    year, exceeding \$8 per hundredweight (rough basis) by the end of
    the baseline. Slower production growth in Asia and growing worldwide
    import demand for rice are behind the steady increase in global
    prices.

![](media/image19.wmf){width="4.7in" height="3.0in"}

U.S. stocks‑to‑use ratios for corn and soybeans are up sharply at the
start of the projections after 2 consecutive years of large production.
Large corn and soybean stocks are reduced early in the projections and
stocks‑to‑use ratios for those crops decline from their initial high
levels. Later in the projections, prices rise and encourage additional
production, resulting in a leveling of stocks-to-use ratios for these
crops. The stocks‑to-use ratio for wheat rises through 2008/09, largely
reflecting weak exports, but declines in subsequent years as exports
strengthen.

![](media/image20.wmf){width="4.7in" height="2.997916666666667in"}

As with corn and soybeans, the stocks‑to‑use ratio for cotton is
initially high due to large 2004 and 2005 production. Again, similar to
corn and soybeans, the cotton stocks-to-use ratio declines and then
flattens in the later years of the projections. In contrast, reduced
2005 yields lower the rice stocks-to-use ratio, with rice stocks and the
stocks-to-use ratio gradually increasing over the projection period.

![](media/image21.wmf){width="4.7in" height="2.997916666666667in"}

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

-   Over the next couple of years, corn prices rise from the lows of
    2005/06 as a return to trend yields and lower acreage reduce
    production and overall supplies, while increases in ethanol
    production strengthen corn demand. In the longer run, yield growth
    is sufficient to meet slower ethanol production gains and moderate
    export growth, resulting in stable stocks-to-use ratios and prices
    for corn.

-   Similarly, soybean stocks decline from initial large levels and
    prices rise through the early years of the projections. In the
    longer run, soybean prices level off as the stocks-to-use ratio
    stabilizes near 8 percent, reflecting lower exports and reduced
    soybean acreage as land shifts to corn.

-   Greater foreign competition and weaker U.S. wheat exports initially
    reduce wheat prices. Prices then rise through the remainder of the
    projection period as domestic demand and exports increase moderately
    and the stocks-to-use ratio declines.

![](media/image22.wmf){width="4.7in" height="2.997916666666667in"}

**Note:** Sugar supply and use projections for fiscal year (FY) 2006 are
based on those in the November 2005 *World Agricultural Supply and
Demand Estimates* (WASDE) report, adjusted for an increase in the FY
2006 tariff-rate quota (TRQ) of 450,000 short tons, raw value (STRV)
that USDA announced on December 2, 2005.

The U.S. sugar baseline projections are highly integrated with
projections for Mexico. A continuation of current sugar policies is
assumed for both countries.

-   U.S. sugar policies are set out in the 2002 Farm Act; Chapter 17 of
    the U.S. Harmonized Tariff Schedule that includes commitments made
    by the United States under Uruguay Round Agreement on Agriculture;
    the North American Free Trade Agreement (NAFTA); and the Central
    American and Dominican Republic Free Trade Agreement. The sugar
    price support program includes the loan rate program and domestic
    marketing allotments. The loan rate for raw sugar is 18 cents per
    pound and the rate for refined beet sugar is 22.9 cents per pound.
    After 2006, as part of the sugar marketing allotment program, the
    Overall Allotment Quantity (OAQ) is calculated by the formula set
    out in the 2002 Farm Act. The OAQ is the sum of desired ending
    stocks and deliveries for domestic food and beverage use less the
    sum of 1.532 million STRV and beginning stocks, including any stocks
    owned by the Commodity Credit Corporation (CCC). Desired ending
    stocks are assumed at 14.5 percent of total use (all sugar
    deliveries and exports).

-   Mexican sugar policies are bound by the NAFTA. Additionally, the
    20-percent tax that the Mexican Government levies on the consumption
    of beverages that use high-fructose corn syrup is assumed to
    continue in the projections despite being ruled inconsistent with
    international trade rules by a World Trade Organization panel. This
    tax limits the amount of Mexican sugar available for export to the
    United States.

Growth of sugar consumption in the United States exceeds growth in
production in the baseline. U.S. sugar consumption is assumed to grow at
the same rate as does population, implying constant per capita sugar
consumption after 2006. With sugar prices nearly constant in a range of
21-22 cents a pound for most of the baseline, there is no appreciable
growth in area planted to sugar crops. Projected increases in production
come from growth in yields.

On January 1, 2007, the U.S. high-tier NAFTA tariff falls to 1.51 cents
a pound for raw sugar imports and 1.60 cents a pound for refined sugar
imports, with each falling to zero in 2008. Because U.S. sugar prices
are substantially higher than world levels, the destination of all
Mexican sugar exports is the United States. With increased stocks in
Mexico following large 2005 and 2006 production, Mexican exports of
sugar are high in 2007 and 2008, but then fall back to more moderate
levels after Mexican stocks are reduced.

In the United States, high levels of sugar imports from Mexico in FY
2007 and FY 2008 result in a domestic surplus of sugar and
market-clearing sugar prices below the minimum to avoid forfeiture in
2008 without CCC removals. CCC is projected to own a modest 95,000 STRV
at the end of fiscal year 2008.

Starting in FY 2010, additional tariff-rate quota (TRQ) sugar is needed
to supplement domestic production and NAFTA imports in meeting domestic
consumption requirements. TRQ imports grow from 1.373 million STRV in FY
2010 to 1.639 million STRV in FY 2016. Because these imports are needed
to meet the OAQ, sugar imports above 1.532 million STRV do not cause the
OAQ to be suspended. (Technically, unfilled OAQ from insufficient
production is reassigned to imports, as per the 2002 Farm Act.)

![](media/image23.wmf){width="4.7in" height="2.997916666666667in"}

Legislation enacted in October 2004 ended the U.S. tobacco marketing
quota and price support program beginning with the 2005 crop year. A
buyout of tobacco quotas accompanied the termination of the program.
With the elimination of tobacco programs, which had been in effect since
1938, producers are no longer restricted in the location or quantity of
tobacco they produce, nor do they receive price support for the tobacco
they sell. As part of the quota buyout, stocks of tobacco currently held
by grower-owned cooperatives will be sold in a manner that does not
destabilize tobacco markets.

-   With the end of the tobacco program, leaf production in the baseline
    initially declines as some farmers exit the industry. Starting in
    2006, expansion by the remaining growers causes production to
    recover slowly in the projections as production costs decline due to
    the elimination of costs associated with acquiring quota and as
    economies of scale are achieved on fewer, larger farms.
    Additionally, production shifts to areas such as the Coastal Plain
    of North Carolina and western Kentucky, where producers can achieve
    more economically viable scales of operation.

-   Leaf prices fell in 2005/06 and are projected to remain lower than
    during the last several years under the tobacco program, making U.S.
    leaf more competitive in global trade. Exports of tobacco leaf are
    projected to increase, reversing the generally downward trend of
    recent years. Nonetheless, the tobacco industry will continue to
    face 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 baseline period. Per capita
    consumption declines as those who smoke find fewer opportunities to
    smoke in public places and the cost of cigarettes increases due to
    higher prices and taxes. Exports of cigarettes will likely stabilize
    near current levels.

![](media/image24.wmf){width="4.7in" height="2.997916666666667in"}

U.S. imports of horticultural products (fruit and nuts, vegetables,
greenhouse and nursery products, essential oils, beer, and wine) are
forecast to continue outpacing exports, with net imports expected to
increase about \$8 billion from 2005 to 2015. 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 exchange value of the U.S. dollar vis-à-vis currencies of other
    countries is an important factor affecting trade. The dollar's
    overall appreciation during the next 10 years slows export demand
    for U.S. horticultural products and raises U.S. import demand.

-   U.S. horticulture imports are expected to grow by about 4 percent
    annually through 2015. The European Union is the top source of U.S.
    horticulture imports, accounting for \$7.4 billion out of a total
    \$25.8 billion in 2005. Mexico is the second biggest source of U.S.
    horticulture imports, which amounted to \$6 billion in 2005. 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. horticulture exports are expected to grow by 3 percent a year
    through 2015. Exports of almonds and other tree nuts as well as
    noncitrus fruits will lead export growth of fruit and nuts. Exports
    of fresh and processed vegetables will be stronger than nursery and
    greenhouse crops. Exports of wine, beer, and essential oils are also
    expected to increase. Major export markets for U.S. horticultural
    products include Canada, Japan, and Southeast Asia.

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-   The production value of U.S. horticulture crops is forecast to grow
    by 2.3 percent annually over the next decade. The total farmgate
    production value in 2005 is estimated at \$47.5 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.

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[]{#Livestock .anchor}**Livestock**

Livestock sector projections over the baseline period reflect increasing
production, strong domestic demand, and strengthening exports for meat.
Meat exports grow through the projection period as global incomes rise
and meat demand increases. The baseline assumes a gradual rebuilding of
U.S. beef exports to Japan and South Korea. While overall meat exports
benefit from stronger foreign economic growth in the baseline, U.S. beef
exports do not return to levels attained prior to the December 2003
discovery of bovine spongiform encephalopathy (BSE) in Washington State.

With rising grain prices, due largely to expansion of corn-based ethanol
production, returns to U.S. red meat production are generally lower than
in recent years, slowing beef and pork production gains, particularly in
2010-15. Larger increases in poultry output result in poultry becoming a
larger proportion of total U.S. meat consumption. Overall, annual per
capita consumption of red meats and poultry grows from 220 pounds in
2005 to 231 pounds in 2015.

![](media/image42.wmf){width="4.7in" height="2.997916666666667in"}

![](media/image43.wmf){width="4.469444444444444in"
height="2.7020833333333334in"}

U.S. beef production increases from the sharp declines of 2003 and 2004.
Despite the loss of export markets following the case of BSE in late
2003, strong domestic demand for beef and restrictions on imports of
Canadian beef and cattle pushed producer returns higher. Together with
favorable forage and feedgrain supplies, this led to the retention of
cows and heifers for future expansion. Cattle herds are expected to
increase from cyclical lows near 95 million head in 2004 to near 103
million head at the end of the projections, with much of the gain
occurring in the next several years. Rising slaughter weights augment
the herd expansion, leading to strong beef production gains through
2009, with more moderate increases over the remainder of the
projections. Pork production grows slowly as the coordinated/integrated
industrial structure continues to dampen the traditional U.S. hog cycle.
Poultry production continues to rise, but less rapidly than during the
1990s due to the maturity of domestic demand and slower export growth.

The trend toward larger livestock systems continues throughout the
baseline period. Efficiency gains allow production to expand while real
prices generally decline. Production of all meats slows in the second
half of the projections, reflecting higher feed costs as more corn is
used in the production of ethanol.

-   Strong demand for consistent, higher quality beef continues in the
    domestic hotel and restaurant market, and increasingly in the retail
    market. Also, the rebuilding of beef export markets is primarily for
    high-quality beef. Increasing movement toward transparent animal
    identification in international trade will strengthen quality
    assurance and the shift toward Prime/Choice beef.

-   Increased efficiency of the U.S. hog breeding herd is reflected in a
    continued shift to larger, specialized, more efficient operations
    and in the decline of smaller, less efficient operations. For the
    baseline, the increase in efficiency slows since larger, more
    efficient operations already account for a large share of the U.S.
    pig crop.

-   Production coordination and market integration between the United
    States and Canada continues in the hog sector. Canada is the major
    supplier of live swine imports by the United States. Imported feeder
    pigs produced in Canada are finished and processed in the United
    States, where processing costs are lower.

-   The poultry sector has benefited from gains in efficiency at both
    the production and processing levels that reflect economies of scale
    associated with the industry's horizontal and vertical integration.
    Projected gains in efficiency over the next decade are smaller than
    in the past 25 years.

> ![](media/image44.wmf){width="4.7in" height="2.997916666666667in"}

Livestock prices are projected to average somewhat lower than the high
levels of 2004, with producer returns generally lower as well.

![](media/image45.wmf){width="4.7in" height="2.997916666666667in"}

U.S. consumers buy more meat, but spend a smaller proportion of
disposable income for these purchases, continuing a long-term trend.
Over the next 10 years, consumer meat expenditures decline from about 2
percent to 1.3 percent of disposable income. Poultry expenditures
continue to increase as a share of consumer spending on meats.

![](media/image46.wmf){width="4.7in" height="2.997916666666667in"}

Higher levels of total per capita meat consumption are projected over
the next decade, largely reflecting continued increases in poultry
consumption. On a retail-weight basis, per capita consumption rises to
231 pounds from the 2005 level of 220 pounds.

-   Although declining toward the end of the projections, per capita
    consumption of beef remains at relatively high levels through the
    baseline because of strong domestic demand for high-quality beef.
    Additionally, although beef exports grow, they do not return to 2003
    levels in the projections, thereby limiting price increases seen by
    U.S. consumers.

-   Pork consumption remains stable at about 50-51 pounds per person
    throughout the projections.

-   Per capita consumption of relatively lower priced poultry increases
    throughout the baseline, allowing poultry to gain a larger share of
    total meat consumption and meat expenditures.

![](media/image47.wmf){width="4.7in" height="2.997916666666667in"}

U.S. meat exports rise throughout the baseline period as global economic
growth increases demand for meats. A gradual recovery in beef exports to
markets such as Japan and South Korea is also critical to the
projections. The baseline assumes that Brazil and Argentina will not be
recognized as free of foot-and-mouth disease (FMD) by key importing
countries, such as Japan, which limits trade competition in those
markets.

**Beef**

-   U.S. beef exports primarily reflect demand for high-quality fed
    beef, with most U.S. beef exports typically going to markets in
    Pacific Rim nations. The loss of those markets following the BSE
    case in the United States in late December 2003 caused U.S. beef
    exports to be sharply reduced. However, with a gradual recovery in
    U.S. beef exports to Japan and South Korea assumed in the baseline,
    U.S. beef exports are projected to rise slowly.

-   U.S. imports of processing beef from Australia and New Zealand
    decline in the baseline as more, lower quality processing beef comes
    from domestic sources with the rebuilding of the cattle herd. The
    United States is a net beef importer by volume throughout the
    projections as the recovery of high-quality fed beef exports does
    not reach prior levels.

**Pork**

-   U.S. pork exports benefit from reduced beef exports as import demand
    shifts among competing meats. Pacific Rim nations and Mexico remain
    key markets for long-term growth of U.S. pork exports. Canada
    continues to be a strong competitor in these markets. Brazil also is
    a major pork exporter. However, without nationwide FMD-free status,
    Brazil focuses its pork exports on Russia, Argentina, and Asian
    markets other than Japan and South Korea.

-   While increased efficiency in U.S. pork production limits
    production-cost increases and enhances the competitiveness of U.S.
    pork products, longer term gains in U.S. pork exports will be
    determined by costs of production and environmental regulations
    relative to competitors. Such costs tend to be lower in countries
    with growing pork industries, such as Brazil.

**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 strong economic growth and rising
    consumer demand for meat, with much of the higher demand being for
    poultry 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, China, and
    Vietnam, are expected to be limited to fully cooked products.

> ![](media/image48.wmf){width="4.7in" height="2.997916666666667in"}

The sharp decline in beef exports in 2004 lowered the overall meat
export share of the total value of domestically produced meat from about
11 percent in 2003 to under 8 percent, based on a measure that weights
exports of beef, pork, and chicken by farm-level prices. While U.S. meat
exports increase to over 11 percent of production value by the end of
the projections, the domestic market remains the dominant source of
overall meat demand.

![](media/image49.wmf){width="4.7in" height="2.997916666666667in"}

Relatively favorable farm milk prices in 2004 and 2005 encouraged
increases in milk cow numbers in 2005 and 2006. Combined with an upward
trend in output per cow, this resulted in relatively strong gains in
milk production and lower prices in 2005, which are also expected for
2006. Smaller production gains are projected over the rest of the
baseline.

-   Productivity gains are expected to boost milk output per cow and
    total milk production throughout the projections. Further
    development of large, specialized operations in most regions will be
    a significant contributor to these gains.

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-   Growth in milk output per cow is projected to slow in the baseline
    as gains are less easily boosted by simply increasing the amount of
    concentrate feeds fed.

-   Milk cow numbers are expected to decline after 2006 at a relatively
    slow pace. Increasing specialization of dairy farms over time (and
    the associated less attractive salvage uses for dairy capital and
    other inputs) makes exit rates from milk production lower than in
    past decades.

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-   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 decline slowly.

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-   Farm-level milk prices decline in 2006 due to relatively large
    production increases. Prices then rebound somewhat in 2007 as milk
    production gains are smaller. Projected milk prices are then
    relatively flat for several years, but rise over the last part of
    the baseline as production gains slow further. Nonetheless, milk
    price movements are projected to be less than the general inflation
    rate after 2007.

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[]{#US_Ag_sector_agg_indicators .anchor}**U.S. Agricultural Sector
Aggregate Indicators**

**Farm Income, Food Prices, and U.S. Trade Value**

Longrun developments for the U.S. farm sector reflect steady domestic
and international economic growth, which support gains in consumption,
trade, and prices. Although export competition is projected to continue,
global economic growth, particularly in developing countries, provides a
foundation for gains in world trade and U.S. agricultural exports.
Combined with increases in domestic demand, particularly growth in corn
used for ethanol production, the results are generally rising market
prices and cash receipts. Rising production expenses and lower
government payments offset the gains in cash receipts and other sources
of farm income, holding net farm income relatively stable from 2006 to
2015, after declining from historically high levels in 2004 and 2005.
Consumer food prices are projected to rise more slowly than the general
rate of inflation.

![](media/image58.wmf){width="4.7in" height="2.997916666666667in"}

Net farm income falls over the next several years from the historically
high levels in 2004 and 2005, and then stabilizes over the remainder of
the projections.

-   Decreases in cash receipts, lower government payments, and higher
    production expenses push net farm income down in 2006. Growing
    demand then boosts cash receipts after 2006. Rising farm production
    expenses and reductions in government payments to farmers largely
    balance the gains in cash receipts and other farm income, keeping
    projected net farm income relatively flat near \$54 billion a year.
    Nonetheless, net farm income remains higher than the average in the
    1990s of about \$48 billion.

## 

![](media/image59.wmf){width="4.7in" height="2.997916666666667in"}

Direct government payments to farmers are projected to fall from \$23
billion in 2005 to under \$13 billion in 2011-14, and then to \$11.5
billion in 2015 when the tobacco quota buyout payments end.

-   As projected market prices rise, price‑sensitive payments decline
    toward the end of the projections. Consequently, fixed direct
    payments under the 2002 Farm Act and conservation payments account
    for a larger share of direct government payments.

-   With government payments declining, the agriculture sector relies
    increasingly 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 5 percent at the end of the projections.

-   To account for the possibility of both higher and lower prices than
    the baseline's deterministic (point estimate) prices, a stochastic
    estimation process has been adopted to project expected direct
    government payments. This process captures the asymmetry in farm
    program outlays due to stochastic (random) shocks (see box, page
    [62](#OLE_LINK4)).

[]{#OLE_LINK4 .anchor}**Projected Government Payments Reflect Stochastic
Estimation Procedure**

To reflect variability in agriculture due to stochastic (random) shocks,
projections for government payments for 2007-15 reflect ***stochastic
estimates*** for price‑sensitive payment categories. These payment
categories include marketing loan benefits, counter-cyclical payments
(CCPs), and dairy market loss payments (2007 only). Commodities covered
are corn, barley, sorghum, oats, wheat, rice, cotton, soybeans, and
milk. USDA adopted this approach to capture the effects of random shocks
on expected budgetary outlays and government payments.

In the stochastic procedure, ***statistical distributions for projected
prices and production*** (where appropriate) are used to derive weighted
average, mean expected estimates for payments. This is done because
government payments are asymmetric across a distribution of expected
prices. For example, counter-cyclical payments for corn are zero for
market prices above \$2.35 per bushel. However, since there is a
distribution of expected prices around any deterministic
(point-estimate) price projected in the baseline, with a \$2.35
projected corn price, there is some probability of lower prices
occurring, and thus some likelihood of corn counter-cyclical payments
being made. Consequently, mean expected payments calculated across the
distribution of prices for any year are different than payments
calculated at the deterministic price projected for that year.

The Economic Research Service's ***Food and Agricultural Policy
Simulation (FAPSIM) model*** was used to generate price distributions
for each commodity, with corresponding production distributions
calculated that are consistent with those price distributions. FAPSIM is
an econometric model of the U.S. crop and livestock sectors that
includes cross‑commodity linkages and dynamic effects over time.

The major source of stochastic variability in agriculture is yields.
Thus, ***random yield shocks*** were used in FAPSIM to represent this
uncertainty. While there is variability in other supply and demand
components, less of that variability is stochastic in nature.

Comparisons of ***stochastic and deterministic payments for corn*** are
shown in the following two charts. The first chart indicates that
stochastic marketing loan benefits for corn are above deterministic
benefits and that stochastically derived marketing loan benefits extend
into higher price ranges. These results reflect the nonlinearity of
marketing loan benefits calculated as a payment rate times production.
Lower prices (with higher payment rates) correspond to higher production
levels, which give a larger increase in estimated benefits than the
reduction in benefits associated with higher prices (with a lower
payment rate) and corresponding lower production.

A similar analysis of CCPs for corn is summarized in the second chart.
Results indicate that deterministic CCPs are at their maximum level when
season average prices are at or below the loan rate of \$1.95 per
bushel. Stochastic CCPs, in contrast, are less than the maximum for a
range of prices below \$1.95 because the probability of prices greater
than \$1.95 is taken into account. Similarly, deterministically derived
CCPs are zero for season average prices of \$2.35 per bushel and above.
Stochastic CCP estimates, in contrast, are above zero for a range of
prices above \$2.35 because the distribution-based approach takes into
account the probability of lower prices.

**\--continued**

**Projected Government Payments Reflect Stochastic Estimation
Procedure**\--continued

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Total production expenses increase at near the general inflation rate in
the projections. These expenses are divided into three categories in the
chart above: farm-origin (seed, feed, and feeder livestock),
manufactured (fuel, fertilizer, pesticides, and electricity), and other
(labor, interest, and other expenses).

-   The largest percentage increase is for "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 higher
    debt facilitated by rising gross cash income.

-   Increases in manufactured-input expenses reflect continued
    relatively high oil prices and expansion of crop production. After
    large increases in 2004-06 due mostly to the rise in 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,
    reflecting moderate increases in most farm-commodity prices. 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.

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-   Cash operating margins tighten over the projection period as
    expenses rise while decreases in government payments slow gains in
    gross cash incomes. By 2015, cash expenses represent about 80
    percent of gross cash income, compared with an average of 73 percent
    in 2000-05.

![](media/image63.wmf){width="4.7in" height="2.99375in"}

Stable net farm income projected in the baseline 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, as well as rising demand for nonagricultural land uses,
    such as housing and recreation.

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

-   Farm debt moves up less rapidly than asset values in the
    projections, resulting in gains in overall farm sector equity. The
    debt-to-asset ratio declines moderately from 13.4 percent in 2005 to
    about 12.4 percent at the end of the projections, continuing a
    decline from over 20 percent in the mid-1980s.

![](media/image64.wmf){width="4.7in" height="2.997916666666667in"}

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

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

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

> ![](media/image65.wmf){width="4.7in" height="2.997916666666667in"}

The value of U.S. agricultural exports rises in the baseline due to
increasing global income and food demand, which raise both export
volumes and prices. Strong domestic economic growth and consumer demand
also boost imports throughout the projections, continuing to reflect
U.S. consumer preferences for a wide variety of foods.

-   Strengthening 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. Overall, the value of U.S. agricultural exports is projected
    to grow from \$64.5 billion in fiscal year 2006 to \$84 billion in
    2015.

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-   High-value product (HVP) exports continue to grow in importance,
    accounting for almost two-thirds 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 imports rise to \$84 billion in 2015, reflecting
    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.
    Imports of processed foods are expected to continue growing in
    importance, accounting for almost half of U.S. agricultural imports
    by 2015.

-   Overall, the U.S. agricultural trade balance is projected to show a
    moderate surplus through most of the baseline, although it will
    remain smaller than in the past two decades. Although the trade
    balance is a closely watched measure, it is not an indicator of
    export competitiveness or import dependence. Trade is a means of
    providing for the needs and wants of consumers that are not
    satisfied domestically (such as bananas and coffee) or are produced
    more cheaply elsewhere (such as fresh-cut flowers and pineapples).
    The lower U.S. agricultural trade surplus does not signal reduced
    competitiveness of the U.S. farm sector, but rather U.S. consumers'
    preference for a wide variety of foods and beverages.

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[]{#Agricultural_trade .anchor}**Agricultural Trade**

With strong world economic growth, global agricultural trade is
projected to rise throughout the baseline. Agricultural trade will
remain very competitive, reflecting expanding production in a number of
foreign countries.

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 global trade agreements. Trade is also affected
by disease-related concerns 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 trade, especially to those regions where limited
land availability or agroclimatic conditions preclude expanding domestic
crop production, such as North Africa, the Middle East, and East and
Southeast Asia.

Strong competition is expected in international commodity markets, not
only from traditional exporters such as Argentina, Australia, and
Canada, but also from countries that are making significant investments
in their agricultural sectors, including Brazil, Russia, Ukraine, and
Kazakhstan.

Rapid expansion of ethanol and biodiesel production in some countries is
projected to have a significant impact on global demand for corn and
vegetable oils and on world price relationships. The continued expansion
of oilseed crushing capacity in a number of countries is expected to
augment the demand for oilseeds more than for protein meals and
vegetable oils.

Baseline trade projections to 2015 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 baseline incorporates
the effects of trade agreements and domestic policy reforms in place or
signed by November 2005.

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
agricultural technology and changes in consumer preferences are assumed
to continue evolving based on past performance and analysts' judgments
regarding future developments.

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Rising unabated since the early 1990s, global trade in soybeans and
soybean products has surpassed wheat---the traditional leader in
agricultural commodity trade---and total coarse grains (corn, barley,
sorghum, and other). Continued strong growth in global demand for
vegetable oil and protein meal is expected to maintain soybean and
soybean-product trade well above wheat and coarse grains trade
throughout the next decade.

-   These three major commodity groupings---wheat, coarse grains, and
    oilseeds (including soybeans)---compete with each other and with
    other crops for increasingly limited temperate cropland. However,
    previously uncropped land in tropical regions of Brazil and
    Indonesia is being converted to soybean and palm oil production.

-   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 developing countries
    in Africa and the Middle East.

-   In the projections, total area planted to all crops changes little
    in most countries other than Brazil, Argentina, and Indonesia.
    Growth in global production is derived mostly 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 and livestock and horticultural
    products.

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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,
Mexico, and Egypt. World wheat trade (including flour) expands by 20
million tons (18 percent) between 2006 and 2015 to more than 130 million
tons.

-   Egypt maintains its position as the world's largest importing
    country, as imports climb slowly to nearly 9 million tons. Imports
    by Brazil, another large importer, are projected to surpass 7
    million tons. Brazil's climate does not favor wheat, and in some key
    wheat-producing states, winter corn is expected to have better
    returns than wheat.

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-   Imports by developing countries in Sub-Saharan Africa, North Africa,
    and the Middle East rise 7 million tons and account for nearly 40
    percent of 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. Nigeria has emerged as a major wheat importer.

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

-   Stocks of low-quality wheat are large at the beginning of the
    projection period. Low prices for this feed-quality wheat during the
    next couple of years, and 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, for
    example, is projected to substitute 1 million tons of feed wheat for
    corn annually by 2015.

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The top five wheat exporting nations (the United States, Australia, the
European Union (EU), Canada, and Argentina) account for about 75 percent
of world trade from 2006 through 2015. This is down from the average of
85 percent during the latter part of the 1990s, mostly due to increased
exports from the Black Sea area. U.S. wheat exports are projected to
account for about 23 percent of global wheat trade, down from 25 percent
in recent years.

-   Shares of the world wheat market held by Canada, the EU, and the
    United States decline slightly, offsetting increases by Australia,
    Argentina, Ukraine, and Kazakhstan.

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-   In Canada, increased demand for barley and oilseeds is expected to
    cause wheat area to decline, which causes Canadian exports to trend
    slowly downward.

-   The EU lowered the set-aside rate from 10 percent to 5 percent in
    2004 in response to the drought-reduced 2002 crop and low stock
    levels. These projections assume that the set-aside rate reverts
    back to 10 percent for the duration of the projections.

-   Russia, Ukraine, and Kazakhstan have become significant wheat
    exporters in recent years. Low costs of production and investment in
    their agricultural sectors have enabled their world market share to
    climb to 14 percent in recent years. Exports from Ukraine and
    Kazakhstan are projected to continue gaining market share, more than
    offsetting a slight decline in the share held by Russia. However,
    because of the region's weather extremes, high year-to-year
    volatility in production and trade can be expected.

-   Exports by Turkey, China, and other minor exporters trend slowly
    downward during the projection period.

-   Although India has exported some wheat in recent years, exports are
    expected to cease as stocks are drawn down.

![](media/image74.wmf){width="4.704166666666667in"
height="3.308333333333333in"}

Growth in trade of coarse grains is strongly linked to expansion of
livestock activities in regions unable to meet their own forage and feed
needs. Key growth markets include Mexico, North Africa and the Middle
East, China, and Southeast Asia.

-   Corn is the dominant feed grain traded in international markets.
    Corn accounts for an average of 76 percent of all coarse grain trade
    through the projection period, followed by barley (16 percent), and
    sorghum (5 percent).

-   The commercialization of livestock feeding has been a driving force
    behind the growing dominance of corn in international feedgrain
    markets as well as the gains in global protein meal 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.

-   World coarse grain trade is projected to increase about 2 percent a
    year, with corn accounting for a growing share. Mexico's composition
    of imports accounts for most of the shift. Following the 2002 and
    2003 drop in U.S. sorghum production and exportable supplies,
    Mexico's imports of kibbled corn (processed corn that is tariff
    free) rose sharply, reaching a record 2.6 million tons (whole-corn
    equivalent) in 2004/05. Under the North America Free Trade Agreement
    (NAFTA), Mexico's over-quota tariff on U.S. and Canadian corn is
    eliminated by 2008. As Mexico's over-quota tariff on corn imports is
    further reduced, Mexico's grain imports continue shifting from
    sorghum to corn. After 2008/09, kibbled corn imports 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 2011/12.

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World coarse grain trade expands about 19 million tons (18 percent) from
2006 to 2015. About two-thirds of global coarse grain supplies are 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 as consumers tend to shift consumption toward wheat,
rice, and other foods as their incomes rise.

-   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.

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-   Mexico's corn imports are projected to rise from 7.3 million tons in
    2006 to more than 13 million tons in 2015. Imports will be
    stimulated by rising poultry production and a steady reduction in
    Mexico's over-quota tariff on corn imports from the United States to
    zero by January 1, 2008. Some corn imports will substitute for
    imports of sorghum, which already have tariff‑free status.

-   North Africa and the Middle East experience continued growth in
    import demand for grain and protein meals through 2015, as rising
    populations and increasing incomes sustain strong demand growth for
    domestically produced animal products.

-   Increasing meat imports will limit coarse grain imports in Japan,
    South Korea, and Taiwan. By 2015, low-priced feed wheat is projected
    to replace about 1 million tons of South Korean corn imports.

-   The EU's imports of corn from other Eastern European countries,
    particularly Romania and Bulgaria, are expected to increase as the
    latter countries prepare for accession to the EU.

![](media/image76.wmf){width="4.7in" height="3.2006944444444443in"}

The United States dominates world trade in coarse grains, particularly
corn. However, increasing use of corn for U.S. ethanol production is
assumed to limit export growth. The U.S. corn sector faces increased
competition from exports by non-EU Eastern Europe, Argentina, and
Brazil. Still, the U.S. share of world corn trade is projected to grow
from 60 percent in recent years to 63 percent by 2015 as few countries
have similar capability to respond to rising international demand for
corn.

-   Argentina, with a small domestic market, remains the world's second
    largest corn exporter. As Argentina's economy expands, investments
    and planted area gradually return to corn production over the
    baseline, with exports projected to rise from 11 million to 16
    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 continues exporting about 2 million
    tons of corn to its neighboring countries. Uncertainties associated
    with its land reform program are assumed to limit increases in
    production.

-   Corn exports from non-EU Eastern European countries, primarily
    Romania and Bulgaria, rise to nearly 3 million tons by 2015.
    Favorable resource endowments, increasing economic openness, greater
    investment in their agricultural sectors, and preparation for
    joining the European Union are behind the projected gains in
    production and trade.

-   Brazil's corn exports nearly double during the next decade, rising
    to 4.5 million tons, in response to higher corn-to-soybean price
    ratios. Brazil targets niche market demand for nongenetically
    modified (GM) grain. However, strong growth in domestic demand from
    its livestock sector limits more rapid expansion.

-   China's corn exports decline in the baseline, reflecting
    strengthening domestic demand driven by its expanding livestock
    sector. It is assumed that Chinese policy will tend to favor
    importing soybeans rather than corn.

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As more U.S. corn is used to produce ethanol, China is assumed to
increase it corn production, slowing its decline in exports and its
increase in imports. Nonetheless, China is projected to become a net
corn importer in 2012/13 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 waiver 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 experienced a large buildup of corn stocks in the mid- to late
    1990s due to a combination of favorable weather and local
    self-sufficiency policies that boosted grain production to record
    levels. In the last 6 years, China's corn consumption exceeded
    production, and stocks have declined sharply. Because a continued
    drop in stocks is unsustainable, China is projected to increase
    imports and reduce exports, and to eventually become a net corn
    importer, as livestock feeding continues to increase in response to
    income growth and rising meat demand.

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Global barley trade expands throughout the baseline, driven by rising
demand for both malting and feed barley.

-   Feed barley imports by North African and Middle Eastern
    countries---where barley is preferred as a feed for large
    populations of camels, goats, and sheep---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 baseline. Saudi
    Arabia's barley imports are used primarily as feed for camels,
    goats, and sheep.

-   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. China's
    breweries use rice and other grains, as well as malting barley,
    which limits the growth in imports of malting barley. Expansion in
    China's brewing capacity is being aided by foreign investment in the
    industry. Australia and Canada are China's main sources of malting
    barley imports.

![](media/image79.wmf){width="4.704166666666667in"
height="3.4027777777777777in"}

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 baseline period.

-   Barley production is expected to increase in the EU-25 as a result
    of Common Agricultural Policy (CAP) reform and EU enlargement. The
    abolition of EU intervention for rye, combined with higher barley
    prices in the acceding countries, will stimulate the allocation of
    more area to barley production. Within the enlarged EU-25, barley
    trade will rise. However, EU-25 exports to non-EU countries are
    projected to hover around 3 million tons over the projection period
    (16 percent of world trade).

-   The FSU remains a major barley exporter throughout the baseline as
    exports exceed 5 million tons. Together, the FSU and EU-25 account
    for about 50 percent of world barley trade throughout the baseline.

-   Malting barley is a different variety and 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 in the latter half of the projection period.

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World sorghum trade, which averaged nearly 7 million tons during the
last decade, declines to just above 5 million tons by the middle of the
projection period before rising through the remainder of the baseline.
This trade pattern is driven almost entirely by Mexico.

-   Mexico is the world's leading sorghum importer, although its imports
    fell in 2002 and 2003 due to reduced U.S. production and exportable
    supplies. Since then, Mexico's sorghum imports have recovered
    somewhat. However, sorghum's share of Mexico's total coarse grain
    imports declined as imports of duty-free kibbled corn increased
    rapidly. Whole-grain corn imports also are rising as Mexico's
    over-quota tariff on U.S. and Canadian corn is reduced to zero
    by 2008. In the projections, Mexico's sorghum imports increase
    slightly in the later years, but remain around 3 million tons. Even
    at this reduced import level, Mexico is expected to account for more
    than 55 percent of world imports.

-   Japan imports a fairly constant volume of sorghum (1.3 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
    about 80 percent of world trade in recent years. During the
    projection period, the U.S. share declines slightly as its sorghum
    exports to Mexico account for a smaller share of world trade.

-   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 only rise slightly during the
    projection period.

-   Brazil has begun to export small quantities of sorghum and the
    volume is projected to rise during the projection period. Because of
    special soil characteristics in the Campos Cerrado region of Brazil,
    sorghum is increasingly planted between crops of soybeans or cotton
    to protect soils from the negative effects of solar radiation.

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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. World soybean trade grows at
an average annual rate of 3.6 percent through the projection period,
compared with rates of 2.8 and 2.2 percent for soybean oil and soybean
meal.

-   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 grows faster than for either
    soybean meal or soybean oil throughout the baseline. 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 soybean 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 soymeal exports rises from about 32 percent in
    recent years to 45 percent by 2015.

-   The expansion in Argentine soybean area slows as incentives to grow
    corn and sunflower seed improve and conversion of new farmland
    approaches its practical limits.

![](media/image82.wmf){width="4.7in" height="3.3743055555555554in"}

-   The EU has been the world's leading importer of soybean meal, and
    until 2002, of soybeans. However, increases in grain and rapeseed
    meal feeding are expected to continue to slow the growth in EU
    soybean and soybean meal imports. Increased barley production due to
    2003 CAP reforms, greater supplies of coarse grains from acceding
    countries, and more rapeseed meal available as a result of the
    biofuels initiative, combine to slow the growth of soybean meal
    consumption. These factors are only partially offset by an increase
    in the dairy quota that would increase soybean meal feeding.

-   China will face policy decisions regarding tradeoffs in producing or
    importing corn and soybeans. The baseline projections assume that
    Chinese policies will tend toward maintaining domestic corn
    production and importing soybeans. Thus, China accounts for over 70
    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.

-   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 over the baseline. This process occurs most
    noticeably in Japan.

-   As Argentina seeks to operate its expanding crushing facilities at
    full capacity, it is projected to increase its soybean imports from
    Brazil and other South American countries to nearly 3 million tons a
    year by the end of the period.

![](media/image83.wmf){width="4.704166666666667in"
height="3.1013888888888888in"}

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

-   With continuing area gains, Brazil maintains its position as the
    world's leading exporter of soybeans and soybean products. Although
    combating soybean rust disease increases production costs, soybeans
    remain more profitable than other crops in most areas of Brazil. It
    has been 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 Central West, the growth rate for Brazil's soybean
    planted area is projected to average nearly 4 percent a year,
    reaching about 30 million hectares by 2015.

-   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. To more fully utilize its large
    and expanding crushing capacity, while diverting some land to corn
    production and exports, it is assumed that Argentina will import
    some soybeans from Brazil, Paraguay, Uruguay, and Bolivia.
    Argentina's soybean exports hold steady at about 7 million tons.

![](media/image84.wmf){width="4.704166666666667in"
height="3.5055555555555555in"}

-   Despite increased domestic feeding of grains, the EU remains the
    world's principal destination for soybean meal throughout the
    projection period. Lower import prices for meal relative to soybeans
    pressure crush margins, curtailing soybean imports in favor of
    soybean products.

-   The North Africa and Middle East region becomes a larger importer of
    soybean meal in the projections as the demand for livestock feed
    boosts import demand in a number of countries.

-   Latin America, Southeast Asia, and the former Soviet Union remain
    important growth markets for soybean meal, provided avian influenza
    can be controlled.

-   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 slow the
    growth in soybean meal imports.

![](media/image85.wmf){width="4.7in" height="3.0972222222222223in"}

-   Argentina, Brazil, and the United States remain the three major
    exporters in international protein meal markets.

-   Argentina, the world's largest exporter, increases its share of
    soybean meal exports from less than 45 percent in recent years to
    more than 53 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 and continues to expand soybean meal exports 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 meal consumption

-   Significant expansion in domestic crushing in China and large
    imports of oilseeds in the baseline result in Chinese soybean meal
    exports rising to more than 1 million tons annually by the end of
    the projections. China's exports, along with small increases in
    exports from South America, keep international protein meal markets
    very competitive.

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-   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.

![](media/image86.wmf){width="4.7in" height="3.2993055555555557in"}

-   Import demand for soybean oil rises in nearly all countries and
    regions. Although India and China remain the world's largest
    importers, income and population growth in the North Africa and
    Middle East region and in Latin America (particularly Central
    America and the Caribbean) drive more rapid gains in soybean oil
    imports.

-   In India, lower tariffs on soybean oil (held in check by World Trade
    Organization (WTO) tariff-binding commitments) compared with tariffs
    for other vegetable oils support continued large imports of soybean
    oil. Other factors that contribute to India becoming the world's
    largest soybean oil importer 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.

-   In China, growing demand for high-quality vegetable oils outpaces
    domestic oil production and fuels a small expansion in soybean oil
    imports. Land-use competition from other crops constrains area
    planted to vegetable oil crops in China.

![](media/image87.wmf)

A strong emphasis on exporting soybean products pushes Argentina's and
Brazil's combined share of world soybean oil exports from less than 80
percent in recent years to about 85 percent by the end of the baseline.

-   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 the exports of
    products rather than soybeans. Increases in 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.

-   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 throughout the baseline, 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 biodesel.

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Global rice trade is projected to grow 2.5 percent per year from 2006
through 2015. By 2015, global rice trade is projected to reach nearly 33
million tons, nearly 15 percent above the record set in 2002.

-   Long-grain varieties 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.
    Indonesia, Nigeria, Iran, Iraq, the Philippines, and Saudi Arabia
    are typically the top long-grain import markets.

-   Medium- and short-grain rice account for 10-12 percent of global
    trade, with Japan, South Korea, Taiwan, Turkey, and Jordan 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 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 22 percent of the
    increase in rice trade.

-   Sub-Saharan Africa and the Middle East are also major destinations
    for internationally traded rice. In both regions, strong demand
    growth is driven by rapidly expanding populations. But opportunities
    to expand production are limited due to constraints such as
    agroclimatic conditions in the Middle East and infrastructure
    deficiencies in Sub-Saharan Africa. Sub-Saharan Africa accounts for
    30 percent of the increase in world rice trade during the projection
    period.

![](media/image89.wmf){width="4.7in" height="2.8993055555555554in"}

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

-   Thailand and Vietnam, the world's largest rice-exporting countries,
    account for nearly half of all rice exports in the baseline. Both
    countries produce and export primarily long‑grain rice. Rising
    production, mostly due to higher yields, and declining per capita
    consumption, drive the expansion in exports from both countries.

-   The United States is projected to remain the third largest
    rice-exporting country during the first half of the baseline. Rising
    domestic demand and a slower growth rate in yields constrains the
    expansion of U.S. rice exports.

-   Midway through the baseline, India becomes 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.

-   In recent years, Pakistan has replaced China as the world's
    fifth-leading exporter. This is due primarily to declining exports
    from China rather than an increase in Pakistan's exports. Pakistan
    has little ability to expand rice area, and its agricultural sector
    is confronting a growing water shortage. Rice exports are stable at
    around 2.2 million tons. Pakistan exports both high-quality basmati
    and low-quality, long-grain rice.

-   Rice exports from China have declined from over 2 million tons in
    most years during the half-decade ending in 2003 to less than 0.9
    million tons during the last few years. Production growth is
    projected to be very slight during the next decade as higher yields
    are nearly offset by stagnant-to-declining area planted to rice.
    Consumption growth is negligible as declining per capita rice
    consumption offsets 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.

![](media/image90.wmf){width="4.7in" height="3.2006944444444443in"}

Completion of the Multi-Fiber Arrangement (MFA) phaseout at the end of
calendar year 2004 eliminated the quotas that governed much of the
world's trade in textiles and apparel for more than 30 years. These
restrictions were removed per WTO commitments by the United States, the
EU, and Canada, and their removal has been a major influence on world
trade patterns in cotton, textiles, and apparel. For apparel production,
labor costs are decisive in determining the location of production. As a
result, textile production and raw cotton consumption will increase in
countries where labor costs are low. High-cost labor markets in Europe
and East Asia continue to reduce their cotton imports through the
baseline.

-   The textile industries in China, India, and Pakistan are the major
    beneficiaries of the MFA's elimination.

-   China has been importing record amounts of cotton following the
    depletion of government stocks in 2003/04. 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 46 percent of world imports
    by 2015.

-   India's textile industry has been accelerating in recent years, but
    cotton use is not expected to grow as rapidly as in China, despite
    India's growing textile exports. India's export orientation and pace
    of income growth have generally lagged China's, limiting its growth
    in cotton consumption.

-   In recent years, Turkey's textile industry has benefited from
    favorable trade access to the EU, its major export market for
    textiles and apparel. However, the end of the MFA quotas will now
    give lower cost competitors the same favorable access to EU markets.
    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 lower wage countries.

![](media/image91.wmf){width="4.7in" height="2.997916666666667in"}

Globalization is expected to continue to move raw cotton production to
countries where resource endowments and technology result in the lowest
production costs. Land is a key input factor. 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, Australia, and Brazil.

-   The United States continues as the world's leading cotton exporter
    throughout the baseline period, with annual exports remaining around
    16 million bales. Exports dip to 15.5 million bales in 2006/07, but
    grow to almost 17 million bales by 2015/16.

-   The Central Asian countries of the former Soviet Union have been the
    principal competitors of the United States in world raw cotton
    markets for the last decade. However, government policies in Central
    Asia promoting investment in textiles have increasingly resulted in
    exports of textile products rather than exports of raw cotton

-   Sub-Saharan Africa has overtaken Central Asia as the principal
    competitor. Its cotton exports have risen in large part due to
    economic reforms. A large correction in the foreign exchange value
    of the currency of the major cotton exporting countries of West
    Africa in 1994 led to nearly a decade of growth in West Africa's
    cotton production. 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 ending
    marketing board monopolies. Continued increases in output are
    expected as producers take advantage of more export-oriented
    government policies.

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-   Improved Indian cotton crop yields, in part due to the adoption of
    GM cotton, have raised India's output in recent years, increasing
    exportable supplies. This is expected to continue in the early part
    of the projection period.

> ![](media/image92.wmf){width="4.704166666666667in"
> height="3.0027777777777778in"}
>
> Increased market access achieved under global trade agreements was
> behind much of the gains in animal product trade over the past decade.
> During the baseline, per capita income growth in a broad number of
> importing countries is the driving force behind rising global meat
> demand. However, animal diseases remain a dampening force in world
> meat trade.

-   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
    and 2005, Canadian beef exports recovered all of the decline
    following its 2003 BSE case. Canadian exports to the United States
    of live cattle under 30 months of age are assumed to continue.
    Canadian beef exports, after an initial decline associated with the
    increase in live cattle exports, are projected to remain flat over
    the baseline period.

-   EU enlargement results in greater shipments between the EU-15 and
    the acceding 10 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 beef production and
    the need to remove beef from the domestic market.

-   Argentine exports rose sharply during the last 2 years. However,
    export taxes and other recent policy changes have made Argentina's
    exports less competitive. Beef exports are projected to decline
    throughout the baseline, but remain above their pre-2004 levels.

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-   The baseline assumes that Brazil does not gain nationwide FMD-free
    status. However, exports from Brazil's expanding pork sector are
    expected to be competitive in Russia and other price-sensitive
    markets, and in non-FMD-free markets.

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-   U.S. poultry exports face strong competition from other countries.
    Brazilian poultry production and exports rise rapidly, bolstered by
    low production costs and very competitive prices in international
    markets.

-   Because of avian influenza, Thailand's exports of chilled and frozen
    poultry meat have been banned by importers. However, Thailand's
    exports of fully cooked poultry products have expanded rapidly and
    partially offset the loss of uncooked exports.

> ![](media/image93.wmf){width="4.704166666666667in"
> height="3.4027777777777777in"}

Traditionally, beef trade occurred largely between developed countries.
However, Brazil and India have become large exporters of lower quality
beef that is imported by lower income countries and countries with less
stringent import restrictions concerning FMD. The baseline assumes
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
    higher quality beef. U.S. beef exports to these countries are
    projected to rebuild. Overall imports by Japan and South Korea rise
    to levels attained prior to the U.S. BSE case in 2003, but the
    United States loses market share because of the increased presence
    of Australia and New Zealand in these markets.

-   U.S. beef imports, primarily of grass-fed ground beef and other
    processed products from Australia and New Zealand, decline slightly
    through the period. However, rising Asian imports of beef from
    Australia and New Zealand enable these exporters to maintain their
    trade levels.

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

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-   The baseline assumes 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-subsidized beef exports as well as Brazilian beef.

![](media/image94.wmf){width="4.7in" height="3.2993055555555557in"}

-   Mexican pork imports increase nearly 400,000 tons between 2006 and
    2015, making Mexico the fastest growing pork importer. Increases in
    income and population are the primary drivers of Mexico's increasing
    demand for pork products.

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-   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 issues and imported feed costs. In
    South Korea and Japan, consumer concerns about BSE boost pork
    consumption and imports.

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```
-   As with beef, the baseline assumes that the TRQ that Russia imposed
    for pork in 2003 remains in effect until 2009. Although the TRQ
    initially lowers 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.

-   China's pork production and exports continue to rise rapidly.
    Although its imports also rise, China's net pork exports rise
    slightly during the projection period.

![](media/image95.wmf){width="4.704166666666667in"
height="3.3555555555555556in"}

-   Russia is expected to remain the world's largest poultry importer,
    with gains in consumer income fueling increased demand for poultry
    products. Even with rapid gains in production, Russia's domestic
    output is expected to lag gains in domestic demand.

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```
-   Russia's TRQ on poultry imports is assumed to remain in effect
    thorough 2009. Over this period, the low-tariff quota expands slowly
    and the over-quota tariff rate is gradually lowered. During the
    quota period, imports from the United States are given the largest
    share of the quota, averaging approximately 75 percent of the total.

-   In Mexico, the world's second largest importer, strong economic
    growth raises per capita poultry consumption. Domestic poultry
    production rises rapidly but lags increasing consumer demand.

-   Poultry consumption growth in China is met largely by expanding
    domestic production, but imports are also projected to grow.

-   Exports from Thailand and China will be limited to fully cooked
    products for most of the projection period because of avian
    influenza. Most of these exports are likely to be higher value
    boneless products. For Thailand, exports of cooked chicken products
    replace some, but not all, of the decline in its frozen poultry
    exports.

-   Poultry imports into Saudi Arabia continue to rise throughout the
    baseline. However, consumer preference for freshly killed birds also
    keeps domestic production growing.

-   Rising consumer incomes in many developing countries is expected to
    provide growing markets for lower valued poultry products.

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[]{#List_of_tables .anchor}**List of Tables**

Page

Table 1. U.S. macroeconomic assumptions [17](#t1)

Table 2. Global real GDP growth assumptions [18](#t2)

Table 3. Population growth assumptions [19](#t3)

Table 4. Summary policy variables for major field crops, 2004-2015
[33](#t4)

Table 5. Conservation Reserve Program acreage assumptions [33](#t5)

Table 6. Planted and harvested acreage for major field crops, baseline
projections [34](#t6)

Table 7. Selected supply, use, and price variables for major field
crops, baseline projections [35](#t7)

Table 8. U.S. corn baseline [36](#t8)

Table 9. U.S. sorghum baseline [37](#t9)

Table 10. U.S. barley baseline [38](#t10)

Table 11. U.S. oats baseline [39](#t11)

Table 12. U.S. wheat baseline [40](#t12)

Table 13. U.S. soybean and products baseline [41](#t13)

Table 14. U.S. rice baseline, rough basis [42](#t14)

Table 15. U.S. upland cotton baseline [43](#t15)

Table 16. U.S. sugar baseline [44](#t16)

Table 17. Flue-cured tobacco baseline [45](#t17)

Table 18. Burley tobacco baseline [45](#t18)

Table 19. Horticultural crops baseline: Production, values, and prices,
calendar year [46](#t19)

Table 20. Horticultural crops baseline: Exports and imports, fiscal year
[47](#t20)

Table 21. Per capita meat consumption, retail weight [55](#t21)

Table 22. Consumer expenditures for meats [55](#t22)

Table 23. Beef baseline [56](#t23)

Table 24. Pork baseline [57](#t24)

Table 25. Young chicken baseline [57](#t25)

Table 26. Turkey baseline [58](#t26)

Table 27. Egg baseline [58](#t27)

Table 28. Dairy baseline [59](#t28)

Table 29. Farm receipts, expenses, and incomes in nominal dollars
[68](#t29)

Table 30. Farm receipts, expenses, and incomes in 1996 dollars
[68](#t30)

Table 31. Consumer food price indexes baseline [69](#t31)

Table 32. Changes in consumer food prices, baseline [69](#t32)

Table 33. Summary of U.S. agricultural trade projections, fiscal years
[70](#t33)

Table 34. Coarse grains trade baseline projections [97](#t34)

Table 35. Corn trade baseline projections [98](#t35)

Table 36. Sorghum trade baseline projections [98](#t36)

Table 37. Barley trade baseline projections [99](#t37)

Table 38. Wheat trade baseline projections [100](#t38)

Table 39. Soybean trade baseline projections [101](#t39)

Table 40. Soybean meal trade baseline projections [102](#t40)

Table 41. Soybean oil trade baseline projections [102](#t41)

Table 42. Rice trade baseline projections [103](#t42)

Table 43. All cotton trade baseline projections [104](#t43)

Table 44. Beef trade baseline projections [105](#t44)

Table 45. Pork trade baseline projections [106](#t45)

Table 46. Poultry trade baseline projections [106](#t46)