Let me begin by thanking the Chairman for the opportunity to appear before the Committee to provide information concerning the outlook for U.S. agriculture. The Food and Agricultural Policy Research Institute (FAPRI) is a joint project between the University of Missouri and Iowa State University. Furthermore, we have formal relationships with Texas A&M University to examine market and policy changes at the farm level, with the University of Arkansas to analyze the world rice market, and with Arizona State University to examine the fruit and vegetable sector. My testimony represents the work of several analysts at these institutions and is designed to provide an update to the FAPRI outlook presented to Committee staff in March of this year.

As 1998 has progressed, attention has increasingly been focussed on the downward pressure on prices for a number of the major commodities. This, of course, is occurring at the same time that some regions of the country are experiencing severe drought conditions, with the combination of the two putting even greater pressure on some producers. In regards to the lower prices, no single cause can be identified, but rather a combination of fundamental developments in the supply and demand of the commodities.

World grain and oilseed markets are being pressured by increased production that has allowed stocks to rebuild from the tight levels of 1995 and 1996. The higher production is due both to increased area and generally favorable yields. In response to strong price signals in 1995 and 1996, the area devoted to the major crops has shown a significant increase. For the 1996-98 period, world wheat area has averaged 4% above the 1991-95 period. Area devoted to the major oilseeds in 1998 is a 7% increase from two years earlier, with much of the increase due to higher soybean plantings in the U.S. and South America.

Coupled with increased area, world markets have also seen generally favorable yields since 1995. If current projections for 1998 prove accurate, world coarse grains will see a third successive year of above-average yields. In the past thirty years, we can only find one example, the 1984-87 period, when there were as many consecutive years above trend.

Price pressure due to increased supplies is not isolated to the crop markets. For livestock, the most notable example is pork. After seeing strong prices in 1996 and much of 1997, pork producers responded with increased herds and additional production. For 1998, production is expected to be 9% above a year ago. As a result, the annual average price is projected to be as much as 25% below the 1997 number.

At the same time that production has increased, there are concerns about the strength of world demand. Most notably is the Asian financial crisis. Currency devaluations have reduced purchasing power in what had been one of the strongest growth regions. For total U.S. trade, the real trade-weighted exchange shows a 20% appreciation in the dollar since 1995.

Initially, the consensus was for a quick downturn and recovery. As the problems have persisted, most economists are becoming increasingly pessimistic about the scope and severity of the situation. For U.S. agriculture, these problems are translating into reduced exports into that region, with corn being one of the hardest hit. Compounding the problems for U.S. corn exports has been the presence of China as an increased exporter.

Barring any major production problems, crop and livestock prices will average substantially lower in 1998 and 1999 than what was observed in the 1995-97 period. However, we must remember that prices in those years were much above historical levels. In addition, those prices brought increased area, which together with good yields, gave more production. These additional supplies have increased export competition and are the primary reason for the lower prices. A secondary reason is, of course, the Asian financial situation. It is also difficult to attribute much of the current price situation to specific provisions of the 1996 FAIR Act.

We should not forget that lower crop prices do provide benefits for the livestock sector in the way of lower feed costs. However, when we net out the positives and negatives and look at U.S. net farm income, the result will be certainly be negative when compared to recent times. For 1998 and 1999, FAPRI projects that net farm income will average $46 billion, a drop of 12% from the record level in 1996.

While the news sounds rather bleak and certain regions are under tremendous stress, the U.S. agricultural economy, as a whole, is still in much better shape than the early to mid 1980's. Income levels are well above those of the earlier period and debt-to-asset ratios have remained at relatively low levels.

In closing, Mr. Chairman, I would like to thank you for the opportunity to address the Committee and welcome any questions.

• Despite a decline in U.S. wheat area to 65.8 million acres, above-average yields will push wheat production above 2.5 billion bushels.
• Increased supplies should build wheat ending stocks above 850 million bushels for the 98/99 marketing year.
• The season average farm price is expected to fall to $2.90 per bushel for the current marketing year.
• 1999 will likely bring even lower wheat area in response to the weak prices. Assuming some strengthening in exports, farm prices should recover somewhat.

• The sluggish pace will keep corn exports below 1.5 billion bushels for the 1997/98 marketing year. The weak exports are the result of the Asian economic crisis, China continuing to export corn, and an increased supply of feed-quality wheat on world markets.
• For 1998, increased area and yield will give 3 consecutive years of corn production in excess of 9 billion bushels.
• Large crops and weak exports will push ending stocks above 1.75 billion bushels for the 98/99 marketing year, four times the level observed at the end of the 95/96 marketing year.
• The season average farm price is projected to average $2.20 per bushel for 98/99.
• With relatively more weakness in the wheat and soybean markets, corn area should increase slightly in 1999, keeping pressure on prices.

• The U.S., Brazil, and Argentina have all responded to market signals with increased area. For 1998, U.S. area is 10 million acres, or 16%, above the 1995 level.
• With a projected yield of 39 bushels per acre, total soybean supplies are expected to reach 3 billion bushels for the 98/99 marketing year.
• The demand side will not keep pace with the increased supplies as soybean ending stocks rise above 375 million bushels.
• The 98/99 season average farm price will average approximately $5.50 per bushel, down $1 from the previous year’s level.
• Barring a significant reduction in plantings or yield, soybean supplies are likely to increase further in 1999.

• In response to lower cotton prices, producers reduced upland plantings by almost 1 million acres in 1998.
• Yield potential has been greatly reduced due to the drought conditions in Texas, dryness in the Southeast, and excessive moisture in California. The result will be an upland cotton crop of 14 million bales, the smallest since 1989.
• Upland cotton prices will average $0.69 per pound for the 98/99 marketing year, an increase of $0.05 from the previous year.
• Upward price strength will be dampened due to reduced imports by Asia and good crops in other major-producing countries.

• Production for 1998 is expected to exceed the 1997 level by approximately 400 million pounds due primarily to heavier slaughter weights.
• Nebraska-direct steer prices have been pressured this year with additional supplies of beef and a slower growth in exports. Prices are projected to decline to $65 per cwt in 1998.
• Prices are projected to exceed $70 per cwt in 1999 as supplies of beef decline by over 1 billion pounds.

• Hog prices are projected to remain below $40 per cwt on an annual average basis for both 1998 and 1999.
• Production of pork continues to occur at record levels. 1998 production is estimated at 18.8 billion pounds, an increase of 1.5 billion pounds over the 1997 level.
• Exports of pork this year have exceeded earlier predictions as the decline in prices has sent more pork out of the country than anticipated. Current expectations suggest exports of 1.2 billion pounds for 1998.

• Price volatility in the dairy sector will likely continue for the next few years as the sector adjusts to less government intervention.
• Federal order reform can cause the regional outlook for the dairy sector to change from where it is today. The details of the reform will dictate to what extent regional impacts will occur.

• Lower crop and livestock receipts will push 1998 net farm income below $45 billion. The drop in farm income is mitigated by lower production expenses, especially feed costs.
• Market receipts should hold steady in 1999 as higher livestock receipts offset declines in crop receipts.