Statement of Keith Collins
Chief Economist, U.S. Department of Agriculture
Before the Committee on Agriculture
U.S. House of Representatives
Grand Island, Nebraska
February 15, 1999

Mr. Chairman and members of the Committee, I welcome the opportunity to discuss the economic outlook for U.S. agriculture. Over the past year, the near-term outlook changed dramatically as adverse weather reduced farm income in some regions, and the Asian financial crisis and large global commodity production caused a sharp drop in farm prices and the value of agricultural exports. With crop yields at trend levels in 1999, major crop prices will likely remain at low levels over the next year, and record total meat and poultry production is likely to prevent a strong rebound in livestock prices. Increased government assistance enacted in 1998, of nearly $6 billion, is helping to maintain farm income and limiting financial hardship in the near term. But with weak exports and prices in 1999, farm financial stress is likely to rise. Over a 2-4 year horizon, economic recession in a number of countries should give way to economic recovery, increased demand for U.S. agricultural products, and a gradual improvement in farm prices and incomes.

Macroeconomic Overview

In 1996 and 1997, positive economic growth in the United States, near record indicators of consumer confidence, and the lowest unemployment rate since 1973 bolstered domestic demand for agricultural products, while an expanding world economy and declining barriers to trade supported expansion in U.S. agricultural exports. In 1998, the U.S. economy remained strong, but the foundation for world food demand deteriorated, as Japan, South Korea, Malaysia, Philippines, Thailand, Indonesia, Russia, Saudi Arabia, and Brazil all saw their economies contract. After rising an estimated 3.4 percent in 1997, the world economy grew only 1.9 percent in 1998, the lowest rate of growth in 5 years.

World economic growth is likely to slip a little more in 1999, growing only about 1.7 percent. The U.S. economy may slow as a strengthening dollar further increases the U.S. trade deficit, but inflation, interest rates, and unemployment remain at low levels. Most analysts do not expect Southeast Asia's economies to turn around until 2000, but recessionary pressures are expected to weaken in 1999, with Japan's economy bottoming out and South Korea poised for recovery. However, economic growth will likely slow in Latin America, pulled down by Brazil's currency crisis. And, the Russian economy could decline sharply in 1999.

Outlook for U.S. Agricultural Exports

Lower world market prices and export volume reduced U.S. agricultural exports to $53.6 billion in FY 1998, 10 percent below FY 1996's record-high $59.8 billion. For FY 1999, the U.S. Department of Agriculture (USDA) forecasts exports to drop to $50.5 billion, as lower export prices more than offset increased volume. Lower world prices will likely reduce the value of oilseed and product exports by nearly $2 billion. In addition, low supplies and reduced competitiveness will lower cotton exports, and the Russian financial crisis is forecast to lower poultry exports. Reduced exports to Japan, Taiwan, South Korea, and Southeast Asia account for 80 percent of the drop in the value of U.S. agricultural exports during FY1996-99.

Pacific Asia, including Japan, South Korea, and Taiwan, is the most important market for U.S. agricultural products, accounting for 37 percent of total U.S. agricultural export sales this past year. Over the coming decade, rapid income growth in Pacific Asia will stimulate expansion in demand for U.S. farm products. Other important growth markets include our North American Free Trade Agreement (NAFTA) partners, Canada and Mexico. In FY 1998, these two countries imported nearly $13 billion in U.S. agricultural products accounting for nearly one-quarter of all U.S. agricultural exports.

Generally, USDA does not expect Brazil's economic problems, if contained, to lower greatly U.S. agricultural exports. In FY 1998, Brazil was the 2lst largest market for U.S. agricultural exports, importing $0.6 billion in U.S. agricultural products or only about 1 percent of total U.S. agricultural exports to all destinations. However, for some commodities, such as rice, Brazil is a very important market. In FY 1998, rice exports to Brazil amounted to nearly one-fifth of total U.S. rice exports. USDA forecasts a drop in U.S. agricultural exports to Brazil to $0.5 billion in FY 1999.

Brazil is slightly more important as a source of U.S. agricultural imports, ranking as the 8th largest U.S. agricultural import supplier. Brazil accounts for over one-half of U.S. orange juice imports. Other agricultural imports from Brazil include prepared and preserved beef or veal, sugar, coffee and tobacco. In addition, Brazil is a major U.S. competitor in the soybean market.

An Overall Assessment from the Farm Income and Finance Perspective

Cash Receipts and Expenses. With strong demand and record or near-record market prices for several crops, farm crop cash receipts reached a record $112 billion in 1997. Lower crop prices caused crop cash receipts to fall to less than $105 billion last year. For 1999, USDA projects cash receipts for crops will decline to $102 billion, $10 billion below the record and the lowest level in 4 years, as crop prices retreat further. Compared with 1997, corn cash receipts may be down by over $4 billion, wheat cash receipts down by over $2 billion, and soybean cash receipts down by nearly $4 billion in 1999.

Livestock receipts reached nearly $97 billion in 1997. Livestock receipts declined by about $3 billion last year, as record high prices and receipts for milk were more than offset by sharply lower prices and reduced receipts for cattle and hogs. This year, lower red meat production will likely lead to higher prices and receipts for cattle and hogs, while poultry receipts remain about the same and more milk production reduces prices and receipts for milk. Total livestock receipts will likely improve in 1999, as the increase in cattle and hog receipts more than offset lower milk receipts.

Declining interest rates, fuel prices, and feed costs have helped farmers reduce their production costs, offsetting some of the decline in cash receipts. Total production expenses declined 2 percent from 1997 to 1998, the first significant drop in more than a decade. In 1999, USDA forecasts total farm expenses to be $186 billion, up only slightly from last year.

Government Payments. Legislation passed last year along with provisions of the Federal Agriculture Improvement and Reform Act of 1996 (the 1996 Act) are helping to offset much of the loss in farm income resulting from crop losses and lower crop prices. USDA's Economic Research Service (ERS) estimates direct government payments, which do not include net indemnity payments under the Federal crop insurance program, to farmers reached nearly $13 billion in calendar 1998 and will total about $11 billion in 1999, up from $7.5 billion in 1997. For the 1990's, government payments exceeded these levels only in 1993, when payments reached $13.4 billion.

In October, Congress passed and the President signed legislation providing about $5.7 billion in additional direct payments to farmers. Nearly $2.9 billion of these payments were paid out as additional Production Flexibility Contract (PFC) payments in late 1998. USDA will distribute the remaining payments during the first half of 1999, with the bulk going to crop producers who suffered 1998 and prior-year crop losses. Congress also passed legislation last year enabling producers to receive 100 percent of their FY 1999 PFC contract payments before January 1, 1999, rather than receiving half in mid-December or mid-January and the rest by September 30, 1999. This legislation increased calendar 1998 PFC payments by about $0.6 billion and reduced calendar 1999 PFC payments by the same amount.

Under the 1996 Farm Bill, crop producers received PFC payments of $5.7 billion in FY 1998 and will receive $5.5 billion in FY 1999. Other direct payments provided under the 1996 Farm Bill include loan deficiency payments, which are paid to producers when crop prices fall below the announced loan rate, and payments to producers participating in conservation programs. In 1998, loan deficiency payments were record high with producers receiving about $1.8 billion in loan deficiency payments.

Farmers and ranchers receive about $2 billion in direct payments annually under USDA's conservation programs. The largest of these programs is the Conservation Reserve Program (CRP). Under this program, farmers receive an annual rental payment and partial payment for establishing appropriate cover as compensation for taking fragile land out of crop production. Currently, over 30 million acres are enrolled in the CRP helping to enhance wildlife habitat, reduce soil erosion, and improve water and air quality. Under the Environmental Quality Incentives Program (EQIP), USDA provides cost-share payments to farmers and ranchers who adopt sound conservation and manure management practices. This and other conservation programs are helping producers reduce soil erosion, enrich soil productivity, and improve water quality and wildlife habitat.

Financial Situation. It is hard to characterize simply the financial condition of so diverse an industry as U.S. agriculture. Aggregate financial indicators portray a sector with problems in some areas but generally performing adequately entering 1999, due in part to higher government payments authorized last year. Net farm income--gross cash income less gross cash expenses--in 1998 of $59 billion was down only slightly from the record of nearly $61 billion in 1997. Farm debt has risen 2-3 percent per year in recent years, but the value of farm assets has grown faster. Consequently, farm equity has steadily increased and the debt-to-asset ratio has remained steady at about 15 percent, down from over 20 percent in the mid-1980s.

In 1999, however, aggregate indicators suggest increasing financial stress. USDA forecasts net cash farm income will fall to $55.5 billion in 1999. U.S. average farm real estate values may rise slightly, reflecting low inflation and borrowing costs, but land values will decline in some regions. Meanwhile, farm debt could decline as farmers reduce their borrowing in response to added government payments, low prices, and reduced spending on equipment and other production inputs. However, if farm income declines as projected, farm operators will have less income available in 1999 to meet principal and interest payments.

Farmers will likely use a larger proportion of their debt repayment capacity--the level of debt that could be supported by current incomes--in 1999, since the reduction in debt is not anticipated to be sufficient to offset lower net cash income. USDA estimates that farm debt repayment capacity could increase to 57 percent in 1999, up from 55 percent in 1998 and 51 percent in 1996. In addition, many producers struggled with cash flow in 1998 resulting from low prices and adverse weather, and these problems will worsen if low prices linger, as USDA now expects.

Looking ahead at individual commodities reveals an unsettling picture. Continued low hog, cattle, and crop prices will place additional financial pressures on producers who specialize in the production of these commodities and are already highly leveraged. Hog prices could continue to remain below break-even levels for most producers for much of 1999, and cattle prices, which have been low for quite some time, may still not be strong enough to return a profit for some producers for much of the year. For principal crops, net cash income could fall sharply. In 1999/2000, the net cash income (production value plus government payments minus total cash expenses) from wheat, corn, soybean, upland cotton and rice production could drop to $17 billion, compared with over $19 billion in 1998/99 and the average of $22.7 billion for the previous 5 years.

Outlook for Major Crops

Wheat and Rice. The story of the U.S. wheat market over the past 2 years has been rising production, weak exports, rising stocks and declining prices after successive years of strong prices in the mid-1990's. In 1998/99, U.S. wheat production reached 2.6 billion bushels, as record yields more than offset a 6 percent drop in planted acres from a year earlier. Total wheat supplies--the sum of carryin stocks and production--increased 12 percent in 1998/99, compared with the prior year, providing the largest supply of wheat in more than a decade. The strong increase in supplies has pressured wheat prices, which USDA forecasts will average $2.65-$2.75 per bushel for the 1998/99 season, down from $3.38 last year and will likely end up being the lowest season-average price in 8 years.

Total domestic use is likely to increase about 8 percent in 1998/99, as lower wheat prices this past summer increased feed use. In contrast, weak global demand and strong overseas competition could lower U.S. wheat exports, despite increased donations to Russia and several other needy countries. Exports of soft red winter wheat may be less than half of the 1997/98 level due to larger supplies of similar wheat in several importing and in competing exporting countries. Hard wheats, especially those with higher proteins, have fared better because of strong demand by several countries for blending with their lower quality crops and reduced supplies in Canada. Even with the expanding total use of U.S. wheat, USDA estimates that carryover stocks at the end of the 1998/99 season, compared with total use, will be the highest since 1987/88.

On the world front this season, global wheat production is down 4 percent from 1997/98's record, as area and yield each declined around 2 percent. The European Union (EU) harvested a record-large crop in 1998/99 because of record yields. Australia is expecting a larger crop as favorable planting conditions led to expanded area. Argentine producers, however, cut plantings in response to low prices. Canadian producers also cut plantings, but production was about unchanged from 1997/98 due to higher yields. With production down and world consumption up modestly, world wheat carryover stocks for 1998/99 will decline, a positive development for U.S. producers.

Unfortunately, global import demand may be down 9 percent this season because of bigger crops in several key importing countries, such as Pakistan and North Africa. China will again remain a small importer because of another large crop and huge stocks, while large production and Government stocks are sharply reducing India's import needs. For Indonesia, the financial crisis and the elimination of the consumer flour subsidy has sharply reduced wheat imports. Latin America may see limited demand growth, but little year-to-year change is likely for East Asia.

For 1999/2000, U.S. fall winter wheat plantings were down 7 percent from a year earlier and the lowest since 1972/73. If spring wheat acres are similar to last year and yields remain near the historical trend, USDA expects a 1999/2000 crop of around 2.2 billion bushels. However, large carryin stocks will be partially offsetting and supplies may still be the second largest since 1990/91. World stocks may decline again as consumption exceeds production. A tighter but ample U.S. and global stocks situation should raise U.S. prices but only moderately--on the order of 10-15 percent--in 1999/2000, and USDA does not expect substantial price improvement unless adverse weather lowers global wheat production.

The U.S. rice market has performed surprisingly well compared with expectations prior to enactment of the 1996 Act that generally foresaw declining U.S. rice production. In 1998/99, U.S. rice production exceeded 188 million hundredweight (cwt.), up 3 percent from last year and the second largest crop on record. All States produced larger rice crops in 1998, except California because of adverse weather there in 1998. Supporting the increase in plantings has been strong domestic demand and exports over the past two seasons and firm prices. In 1998/99, USDA estimates the farm price will average $8.25-$8.75 per cwt., down from $9.70 last year.

Domestic use of rice is likely to remain strong in 1999/2000, but exports will face strong competition. Rough rice sales to Latin America are likely to be affected by economic problems there, and the global long-grain milled market will be very competitive, particularly with lower-priced rice from Thailand and Vietnam. Currently, U.S. long-grain rice is selling at about a $70-$80 premium to similar grade Thai rice, compared with a typical premium of $25-$40 in many of the high-quality markets in the Middle East, Africa, and Europe. The U.S. price premium could return to more a normal level in 1999/2000, pushing the average U.S. farm price of rice below this season's level.

Corn and Other Feed Grains. U.S. feed grain production in 1998/99 exceeded more than 271 million metric tons, up 4 percent from last year and the second highest on record. The corn crop rose 6 percent to the second highest level in history, while grain sorghum production dropped 18 percent and barley and oats production were little changed from 1997/98. Drought reduced corn production in Texas and across several Southern States. However, these production losses were more than offset by gains elsewhere, especially in the northern and western edges of the Corn Belt. Minnesota, Kansas, Nebraska and the Dakotas all had record corn crops in 1998.

Corn supplies in 1998/99 are up 10 percent from last year, because of the larger crop and bigger carryin stocks. The strong increase in supplies has dampened feed grain prices and sharply increased projected carryover levels. While USDA forecasts total use of corn to be the second highest level on record, total use will not approach 1998 production. U.S. ending stocks of corn on September 1, 1999, are likely to be up nearly 500 million bushels from last year to their highest level since 1992/93. As a result, USDA's corn price forecast of $1.80-$2.10 per bushel for 1998/99 is down from $2.43 last year, and this year's season-average price will likely be the lowest in more than a decade.

USDA expects gains in feed use and expanding use for ethanol and high fructose corn syrup production will push domestic use of corn to a new record in 1998/99. U.S. corn exports are likely to rebound from 1997/98's low level as Argentina's crop declines, but stagnant global demand and continued strong competition from South Africa and China will limit the increase in exports. Also, low-priced foreign supplies of other coarse grains, especially barley, are limiting import demand for corn.

Global coarse grain production fell slightly during 1998/99, as smaller crops in the former Soviet Union, Eastern Europe, and Argentina offset higher U.S. production and a rebound in China's corn crop from the drought-reduced 1997 level. Corn production declined in Eastern Europe as yields dropped from last year's high level. USDA expects Argentina's crop to decline as early dry conditions and more favorable prices caused farmers to shift some area to later-planted soybeans. China's corn production rebounded in 1998 and stocks are rising, but low world prices are likely to keep its exports below the 1997/98 pace.

USDA projects global corn imports to be down slightly from last year, despite expanding demand in North Africa, the Middle East, and Latin America, excluding Mexico. A larger crop could reduce slightly Mexico's corn imports and Asian demand continues to shrink. Indonesia's imports will be minimal as domestic production is sufficient to meet the needs of its sharply reduced poultry industry. Mixed feed production is dropping in South Korea as the financial crisis cuts meat demand.

Assuming trend yields, U.S. corn supplies could be up again in 1999/2000 as sharply higher beginning stocks more than offset a smaller crop. Domestic use will continue to expand, but the year-to-year gains will be less than in recent years because of reduced livestock production. U.S. corn exports are likely to rise in 1999/2000 as import demand continues to rise in North Africa, the Middle East, and Latin America and demand begins to recover in Mexico and parts of Asia. However, U.S. export gains could be limited by stronger Argentine production and exports in 1999. Thus, in the absence of adverse weather, corn production and total use may about balance, leaving U.S. corn carryover stocks at high levels in 1999/2000 and the price outlook for feed grains about unchanged.

Soybeans and Other Oilseeds. Producers have responded to the planting flexibility provisions of the 1996 Act by expanding soybean acreage and production. In 1998, U.S. producers planted 72.4 million acres to soybeans, up from 70.0 million acres last year and from 64.2 million acres in 1996. U.S. soybean production was record high both in 1997 and 1998.

In 1998/99, total U.S. soybean supplies are record high, approaching 3 billion bushels and up 5 percent from the previous season. However, total soybean use is likely to fall about 3 percent in 1998/99, as domestic use stagnates and U.S. exports face strong competition from Brazil and Argentina. As a result, USDA now expects 1998/99 U.S. carryover stocks to increase to 410 million bushels, more than double last year's level and the highest carryover in more than a decade. The increase in ending stocks is pressuring farm soybean prices which are expected to decline from an average of $6.47 per bushel last season to $5.00-$5.40 in 1998/99. This season's average price could end up being the lowest since 1986/87.

Other than China and Mexico, there are few foreign markets that will likely import more soybeans this season. For 1998/99, USDA projects a 3 percent decline in global soybean imports. EU crushers have run down supplies of rapeseed and sunflowerseed. Given the comparatively large stocks remaining in South America, U.S. export commitments continue to trail last year's pace. But, the size of the South American soybean crop depends on weather in the critical months of January and February. Conditions at the moment are generally favorable but rainfall has been slightly short of normal in Argentina and Southern Brazil.

The recent devaluation of the Brazilian real could lead to more pressure on soybean prices this spring and summer as Brazil markets this year's crop more quickly than normal. This would further reduce 1998/99 U.S. exports and add to U.S. carryover. On the other hand, larger Brazilian exports in 1998/99 could help U.S. exports in 1999/2000 by reducing the South American carryin. In addition, lower world prices in 1998/99 may cause South American growers to reduce oilseed plantings in 1999, reducing competitor supplies.

U.S. soybean planted acreage in 1999 is likely to increase slightly from last year's record and foreign competition will likely remain intense. Returns from planting soybeans continues to remain strong relative to other crops. The marketing assistance loan rate for soybeans relative to other crops and greater use of herbicide-resistant soybeans, which has cut costs, may encourage some producers to expand soybean plantings. In addition, yield potential has risen sharply in recent years, as producers have expanded plant population counts and used improved soybean varieties adapted to their area. Yields also have been resilient to adverse weather. With trend yields, U.S. soybean production in 1999 could exceed last year's record.

The demand for soybeans and soybean products both the U.S. and the rest of the world will expand in 1999/2000 but below the growth rates of recent years. Use in Asian countries may at least stabilize and a few may actually show some recovery. China's consumption of both protein feeds and vegetable oils should rise 2-4 percent but well below growth in recent years. In both the U.S. and the EU, protein use should expand by 1-3 percent helped by lower protein prices and a small increase in red meat and poultry production. However, the increase in demand is not likely to be enough to avoid a further increase in U.S. soybean carryover and even lower soybean prices in 1999/2000, which could average below $5 per bushel.

Cotton. Cotton plantings fell 3 percent in 1998, resulting in the lowest cotton planted area since 1992. However, U.S. cotton production in 1998/99 fell by over 25 percent from last year, resulting in the smallest crop in 9 years, as adverse weather affected all four cotton-producing regions. Drought was especially severe in Texas, where farmers abandoned a record 42 percent of planted acres. Due to the drop in cotton production, total U.S. cotton supplies in 1998/99 are down by over 20 percent, compared with last season. Despite tighter supplies and ending stocks, cotton prices so far this season have averaged below last year as demand has softened.

USDA projects domestic mill use at 10.4 million bales, down 8 percent from last year. The decline in domestic mill use primarily reflects rising cotton textile and apparel imports, which are amply available at low prices because of the drop in Asian demand. U.S. imports have risen at an annual rate of 20 percent since the beginning of calendar 1997 and are projected to reach about 14.0 million-bale equivalents this season. The cotton textile trade deficit of approximately 9.5 million-bale equivalents is equal to 45-50 percent of estimated total U.S. end-use consumption of cotton.

Tight U.S. supplies and the loss of Step 2 payments have reduced the ability of U.S. cotton to compete in world markets and increased the prospects for substantial cotton imports later this year. U.S. cotton exports could drop to only 4.2 million bales, down from 7.5 million bales last year and the lowest since 1985/86. USDA forecasts U.S. raw cotton imports of 350,000 bales during 1998/99, down slightly from 2 years ago but up sharply from last season. Imports will probably surge after the Step 3 quotas trigger in late February.

Both world cotton production and consumption are down in 1998/99. World production is down 7 percent from last season, due mainly to production declines in China and the United States. China's crop is estimated to be down 6 percent from last year. World consumption is projected down 2 percent from last year, the largest year-to-year decline since 1974/75. Reasons for falling consumption include the Asian economic crisis, increased competition with polyester due to surplus synthetic fiber production capacity in Asia, economic problems in Russia and Brazil and increased competition from textile exports from countries such as Indonesia and Thailand.

Lower prices for alternative crops could keep U.S. cotton plantings in 1999 at near last year's level. While plantings may be about unchanged in 1999, U.S. cotton production could be up about 25 percent with a return to trend yields. A much larger crop would improve U.S. cotton's competitiveness in world markets, thereby reducing imports and increasing exports from this season's projected levels. However, weak world demand could limit export growth and U.S. ending stocks could rise in 1999/2000, further pressuring cotton prices. Textile imports are likely to remain strong in 1999/2000 and limit growth in domestic mill use.

Outlook for Livestock

Cattle. The average price received for all beef cattle fell 6 percent in 1998. USDA had expected cattle prices to strengthen during the second half of 1998 following steady herd liquidation since late 1995. However, low cattle prices and drought in southern States caused producers to continue to reduce their herds, increasing cattle available for placement into feedlots. In addition, with good northern forage supplies and producers trying to keep animals on grass longer with the hope of receiving higher prices, ranchers placed heavier animals into feedlots raising average dressed slaughter weights from 699 pounds in 1997 to 723 pounds this year. The continuing liquidation and heavier slaughter weights caused beef production to increase by 1 percent in 1998.

The economic problems in Asia and Russia as well as herd reductions in many major beef exporting countries caused the U.S. beef trade balance to worsen in 1998. U.S. beef imports increased about 11 percent, as world trade slowed and more product was moved into the strong U.S. economy. In comparison, U.S. beef exports rose 1 percent with reduced exports of higher value cuts to Asian countries only partially offset by higher exports to Mexico. On a weight basis, however, net imports equal less than 2 percent of U.S. beef production.

Beef production will likely decline in 1999 as slaughter levels and weights fall, and lower production should bolster cattle prices in 1999. Cattle inventories have declined since 1996, and the 1998 calf crop was the lowest since 1952. USDA expects the combination of fewer slaughter cattle and lower dressed weights to reduce beef production in 1999 by about 3 percent to 25.0 billion pounds.

Much of the year-to-year decline in beef production will not occur until the second half of the year. During early January, producers indicated that the number of heifers over 500 pounds that they are retaining for beef cow replacement was 4 percent below a year earlier. This will make almost the same number of heifers available for placement into feedlots through the first half of 1999 as last year. In the second half of the year, USDA expects producers' increased retention of heifers for the breeding herd and lower slaughter weights will reduce year-over-year beef production by 5 percent. For all of 1999, USDA expects cattle prices to average $63-$68 per cwt. in 1999, compared with $61.48 last year and $66.32 two years ago.

U.S. beef trade is likely to be more in balance in 1999 as import growth slows and U.S. government donations of beef increase. Largely due to food aid to Russia, U.S. beef exports are projected to increase about 8 percent. In comparison, declining beef supplies in Canada and Oceania are expected to reduce the growth in U.S. beef imports to about 4 percent in 1999.

Hogs. Hog production increased by 10 percent in 1998, reflecting strong returns the previous 2 years and expansion of large hog operations. Producers expanded inventories to the point that by September 1, 1998, there were 63.5 million hogs on farms, the highest since 1980. Large productivity increases and structural change also fueled the inventory expansion. Increases in pigs per litter, litters per sow per year, and weight per animal slaughtered have combined to raise pork produced per breeding animal by 20 percent since 1988.

The abnormally large year-to-year increase in pork production caused hog prices to tumble from year ago levels. For all of 1998, slaughter hog prices averaged $31.67 per cwt., down from over $51 in 1997 and the lowest since 1972. In December, hog supplies strained processing capacity causing hog prices to drop to the $10 per cwt. range. Weekly hog slaughter frequently reached 2.2 million head during the fourth quarter of the year, with weekday kills of over 400,000 head and Saturday kills of 200,000. Total fourth quarter slaughter reached 27.6 million head, 1 million more than the fourth quarter of 1994, the last time hog prices plunged.

Larger hog imports were a factor in overall price declines in 1998, but not a major factor. The strong U.S. dollar rate of exchange with the Canadian dollar, large hog production, low prices in Canada, and labor problems at Canadian hog packing plants led to U.S. imports of Canadian hogs of 4.1 million head in 1998, about 4 percent of U.S. pork production, and up from 3.2 million head in 1997. Canadian hog imports reached a higher level in late 1997 and early 1998, and they maintained that level so that weekly imports during the low-priced fourth quarter were not much different than during the third quarter.

Despite the weak world economy and the strong U.S. dollar, U.S. pork exports actually increased sharply in 1998. Through November, the United States exported more than 1 billion pounds of pork, up almost 20 percent from the same period in 1997. In contrast, pork imports totaled 635 million pounds through November, up 11 percent for the same period in 1997. The United States continued to be a major market for pork from Canada and Denmark in 1998, while the major U.S. export markets included Japan, Russia, Mexico and Canada.

USDA expects continued large hog supplies to pressure processing capacity and prices during the first half of 1999. The market hog inventory on December 1, 1998, was 2 percent above a year earlier. However, pork production could be up about 5 percent during the first half of 1999, as continued low prices provide a further incentive for producers to reduce the breeding herd. In addition, low prices could cause producers to market hogs at heavier weights. Hogs prices will likely average in the $25-$35 per cwt. range during the first half of 1999, which would be below breakeven for most producers.

As hog slaughter begins to decline in the second half of 1999, prices should rise above last year's level, particularly in the fourth quarter. Producers have already responded to the exceptionally low prices in the last half of 1998 by reducing the breeding herd which on December 1 was 4 percent below a year earlier. In addition, producers have indicated intentions to farrow 7 percent fewer sows during March-May compared with a year earlier. This implies a fractional decline in third quarter pork production but a 10-percent drop for the fourth quarter. For all of 1999, USDA forecasts hog prices to average $33-$35 per cwt., 4-10 percent higher than last year.

U.S. pork exports are likely to increase about 10 percent in 1999, while imports remain steady. Increased pork exports to Mexico, Japan, and other markets are likely to more than offset lower exports to Canada and Russia. The economic crisis could limit U.S. pork exports to Russia to donations under food aid programs, causing exports to Russia to fall below the level achieved in 1998. Exports to Canada may also trend downward, as restructuring and expansion of the Canadian pork industry reduces the demand for U.S. pork products.

Continued low hog and pork prices for much of 1999 is likely to limit the growth in pork imports, and U.S. live hog imports could fall below last year. Slaughter capacity increases in Manitoba, the settlement of labor disputes in Canadian hog slaughter plants, and Ontario hogs increasingly moving to slaughter in Quebec under buying agreements may lower U.S. hog imports from Canada in 1999 but only slightly.

Broilers. The rate of growth in broiler production was only 2 percent in 1998, as production was negatively affected by below-normal egg hatching rates. Consequently, broiler prices for all of 1998 averaged 7 percent above 1997, weakening during the fourth quarter with the loss of the Russian market and higher U.S. production. In response to higher prices and a return to more normal hatching rates, USDA expects broiler production will be up nearly 6 percent in 1999. The increase in production could lower the price of broilers from over $0.63 per pound last year to $0.57-$0.61 per pound in 1999.

Broiler meat exports will probably remain weak through much of 1999. The loss of the Russian market is unlikely to be offset by gains in other markets, and first-half exports could be 20-25 percent lower than in 1998. Exports in the second-half of 1999 may increase relative to 1998, especially if sales opportunities with Russia reappear.

Dairy. Farm-level milk prices were record-high in 1998, averaging $15.38 per cwt., compared with $13.34 in 1997. The sharp increase in farm-level milk prices reflected modest growth in milk production and strong demand for milk products. In 1998, milk production was adversely affected by weather in California, Texas, and the Southeast. In addition to high milk prices, lower feed prices boosted dairy producers' incomes in 1998.

Dairy farmers appear to be reacting to the record-high milk prices and low feed costs over the past year by expanding milk production, which is projected to average about 2 percent higher in 1999. After being up only fractionally for most of the year, milk production increased by nearly 3 percent during the last 2 months of 1998. In response to the increase in milk production, which supported higher cheese production, wholesale cheese prices fell sharply in January dropping by about $0.60 per pound. The sharp decline in the price of cheese will lead to a steep drop in farm-level milk prices over the next few months. For all of 1999, USDA expects farm-level milk prices to average about $1 per cwt. lower than last year--putting them about halfway between the 1997 and 1998 levels--but the decline could be even steeper if recent monthly year-over-year increases in milk production are maintained through much of 1999.

Outlook for Retail Food Prices

The Consumer Price Index (CPI) for food increased by 2.2 percent in 1998, while the CPI for all items increased by 1.6 percent in. Last year, lower retail prices for beef, pork, eggs, and nonalcoholic beverages were more than offset by higher prices for dairy products, fish and seafood, fats and oils, fruits and vegetables, cereal and bakery products, and sugar and sweets. Retail dairy product prices increased by 3.6 percent in 1998, reflecting the sharp increase in farm-level prices. Strong vegetable oil prices caused the CPI for fats and oils to increase by 3.7 percent and weather problems in California, Florida, Texas, and in some importing countries pushed up retail prices for fresh fruits and vegetables by more than 7 percent last year.

USDA expects the CPI for food will increase by 2-2.5 percent in 1999. Retail prices for fruits and vegetables should be up only modestly in 1999, assuming there are fewer weather problems in the major fruit and vegetable growing areas this year. In addition, continued large supplies of red meat and poultry will likely prevent retail prices for meat and poultry from increasing much in 1999.

Key Uncertainties in the Outlook

There are many uncertainties that could affect markets and the well-being of market participants over the next 1 to 2 years. Three key factors follow:

Weather and agricultural production. Last year's heavy rain and flooding in California and drier than normal conditions in the Southern Plains and South highlighted the role of weather in crop production and farm financial conditions. The current La Niña weather event is having a limited effect on U.S. agriculture, with the possible exception of the December freeze in California that severely reduced citrus production. La Niña is not expected to be a major factor affecting global or U.S. crop production this year. However, weather forecasting remains imprecise and the possibility remains that adverse weather could cause a major shortfall in world crop production and a strong increase in prices from current levels.