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Number 94-08, February 25, 1994

1994 District Agricultural Outlook
The U.S. Department of Agriculture's (USDA)
overall forecast for the agricultural economy in
1994 is for moderate improvement; but there will
be some winners and some losers. This year's
winners appear to be growers of field crops,
fruits, and nuts, while tougher conditions are in
store for vegetable and livestock producers.
This Weekly Letter applies the USDA's forecast
to the Twelfth Federal Reserve District, factoring
in the unique risks, opportunities, and issues facing Twelfth District farmers. On the positive side,
the District's great agricultural diversity lessens the
overall risk due to weakness in any particular
crop. In addition, District farmers should benefit
from both the growth of their major export markets in the Pacific Basin and the progress on
opening foreign markets that was achieved in
1993. On the downside, the substantial control
of agricultural land and water by the federal government leaves District farmers vulnerable to
increasingly strict environmental regulations.

The globalization of exports
U.S. agricultural exports to the booming economies of Mexico and several countries in Asia
should be strong in 1994. TheUSDA forecast for
1994 puts U.s. agricultural exports at a record of
almos't $4 bi II ion- to Mexico and at $2 billion to
South Korea and Taiwan. Despite japan's sluggish
economy, U.s. agricultural exports to that country
in 1994 should come in at a record $8.9 billion.
Exports to the European Community (Ee), which
is still in an economic slump, are expected to be
$7 billion in 1994, the same as 1993, and exports
to the former Soviet Union, Eastern Europe, and
China are likely to decline in 1994.
Prospects beyond 1994 are substantially en-


by several trade agreements reac.hed last

year, such as NAHA, the successful completion
of the Uruguay Round of the GATT, and marketopening agreements reached with certain Asian
countries. These agreements will reduce trade
barriers and help increase exports of many u.s.
agricultural products, especially to Mexico, the
European Community (EC), and japan and South
Korea. For example, by the time NAFTA is fully
implemented over the next 15 years, U.s. agri-

cultural exports to Mexico are expected to reach
$10 billion annually.
The mix of agricultural exports expected to increase in 1994 favors District agricultural producers. Exports of most bulkagricultural commodities,
like wheat and corn, are forecast to fall this year,
while exports of some of the field crops that the
District produces in substantial volumes, like
cotton and rice, are expected to increase. In addition, U.s. exports of high-value products, like
vegetables, fruits, and nuts, which District growers excel in producing, are forecast to rise in 1994.

Regulatory risks
Federal regulations and water supply issues once
again pose an important risk to the 1994 District
agricultural outlook. The Clinton administration
appears committed to overhauling the system for
regulating pesticides with an eye towards reducing pesticide use by farmers. The administration's
plan proposes to replace the zero-risk standards
of the 35 year-old Delaney clause, which is
viewed as impractical and not widely enforced,
with a standard of "reasonable certainty of no
harm to consumers offood:' Under this plan, all
pesticides would face re-approval using the new
standard. The Environmental Protection Agency
will ban production and importation of the
widely used pesticide methyl bromide by january 2001. The chemical is used on a variety of
crops in the District, especially strawberries,
grapes, and almonds.
Interior Secretary Babbitt is expected to revisit
issue of raising grazing fees this year. For 1994,
grazing fees on national forest and Bureau of
Land Management lands will be $1.98 per animal unit per month, a 6 percent increase from
1993. Secretary Babbitt's original plan ca!!ed for
an increase to $4.28 per animal unit per month.
Reform of the Endangered Species Act designed
to clarify its goals and use also may occur'in
1994. Increasing use of the Act has substantially
cut back land use andwater allocations for many
District farmers.
District water supplies generally should be adequate in 1994. In California, precipitation and

snowpack levels so far this water year have been
below normal, but the substantial run-off from
last year should be enough to keep water deliveries near normal. As of January 1, California's
reservoirs held 101 percent of their long-term
average level. Of greater concern to California
farmers is the shift in water allocation to the environment. The Central Valley Improvement Act,
Clean Water Act, and proposed Bay-Delta Plan
all mayreallocate a substantial amount of water
from agriculture for environmental purposes.

The outlook for specific commodities:

Field crops
Rising incomes for District field crop growers
should bring a positive boost to the District agricultural economy in 1994. Prices and exports are
expected to rise for the District's most important
field crops. The USDA expects a small decrease
in U.S. cotton production, but cotton production
should rise 4 percent in Arizona because of
higher yields and 1 percent in California because
of increased plantings. A global rice production
shortfall is expected to boost rice prices 40 to
60 percent from 1992-1993. Amid the overall
production decline, California rice production
is expected to increase, however, because of
increased acreage.
The outlook for potato growers is less clear. Potato
prices are expected to increase from 10 to 30 percent in 1994, but reduced yields and quality due
to the coldest growing season on record suggest
production in Idaho \vill fal! 4 percent. \AJashington potato growers should see strong returns,
with production up 23 percent, reaching record
levels and yields. Dry bean prices are forecast
to rise in 1994 and production is expected to increase 9 percent in Idaho, 24 percent in Washington, but fall 12 percent in California.
Increasing export opportunities for District field
crop growers significantly improve the outlook
for 1994. NAFTA will help solidify the gains
many District cotton growers have already made
in Mexico. in the past two years,
exports of
cotton to Mexico have quadrupled, with California's San Joaquin Valley accounting for 90 percent
of the increase. Trade breakthroughs in traditionally closed markets also will help District field
crop farmers in 1994. California rice growers expect to export about one-third of this season's
rice crop to Japan, the first U.S. ric~ exports to
Japan since 1970.


In general, sluggish income growth for District
vegetable farmers will weaken the 1994 District
agricultural outlook. Prices for many key vegetables are forecast to decline in 1994 because of
high District production and increased imports
of some crops. The USDA expects the number of
acres of lettuce harvested this season to increase
6 percent in California, but fall 33 percent in Arizona. Lettuce prices in California currently are
down from last year's levels. Increases in the
number of acres harvested are forecast for carrots
(up 19 percent), broccoli (up 4 percent) and celery (up 5 percent). Prices for these vegetables are
expected to decline in 1994 from last year's levels.
Fresh tomato prices are expected to fall 20 percent from last season. Imports of tomatoes from
Mexico are expected to increase this year. The
USDA expects California's important processing
tomato crop to increase 14 percent this season,
but low carryover stocks will help push prices
higher in 1994.
USDA forecasts show that the District's melon
crop still has not overcome the whitefly problems. Cantaloupe acreage in Arizona increased
substantially this season, rising 61 percent from
last season, but honeydew melon acreage is
down 25 percent in Arizona and harvested acres
of California cantaloupes or honeydews are still
low enough that the USDA did not report estimates for 1994. Sales in California's important
greenhouse and nursery industry, which slumped
in 1993, 'lvill depend in part on a pick-up in economic activity in the state during 1994.

Fruits and nuts
Higher prices and expanding export markets will
raise incomes of District fruit and nut producers,
improving the 1994 District outlook. The USDA
forecasts a smaller
apple crop and 6 percent
higher prices in 1993-1994. Washington apple
growers will see solid income gains as apple production in the state is expected to rise slightly
from last season. District grape production was
mixed in 1993. The table grape crop showed
solid production increases and raisin production
increased 5 percent from 1992. The wine grape
crush was slightly smaller than in 1992.


Citrus fruit producers should see healthy income
gains overall in 1993-1994, but conditions for
specific crops will be mixed. In California, 19931994 orange production is forecast to fall 1 per-

cent overall and 13 percent for navel oranges
from 1992-1993. Navel orange prices currently
are up 13 percent from a year ago. The USDA
expects lemon production in Arizona and California, where most of the nation's lemon crop is
produced, to drop 1 percent from last season.
Lemon prices are expected to remain close to
last season's levels.
USDA production estimates vary for many important District nut crops this season, mostly
reflecting the alternate season bearing cycle of
nut trees. In California, almond production is
expected to fall 14 percent from last season and
almond prices to rise. California walnut production is expected to rise 7 percent while prices
should fall slightly during the 1993-1994 season.
In Hawaii, the number of acres devoted to raising
crops continues to decline. The number of acres
devoted to papaya production was 8 percent beIowa year ago, but production increased 4 percent because of better growing conditions. Sugar
cane production is expected to decline 5 percent
from last season.
Growing export markets will provide an additional boost to District fruit and nut farmers in
1994. The USDA forecasts
fruit and nut exports to reach $3.7 billion in 1994, a 9 percent
increase from 1993. Apple exports are likely to
increase this year as exports to Europe expand
and the potential for exports to Japan develops.
On January 1, 1994, the 20 percent Mexican tariff
on U.S. almonds was eliminated, paving the way
for increased almond exports.


livestock and dairy


Weak conditions for District livestock and dairy

producers vIi!! be a drag on the overall District
agricultural economy in 1994. Livestock producers' incomes will be caught in a squeeze of
lower prices and higher feed costs. Livestock
producers are expected to endure shrinking
profit margins rather than initiate significant herd
reductions. Cattle on feed inventories currently
are above year-earlier levels and are expected to
remai n relatively high through the first half of 1994.

In 1993, the U.S. dairy industry continued a longterm shift from the Mid-West to the West, and
this trend is expected to continue in 1994. The
Mountain and Pacific regions now account for a
quarter of the U.S. milk supply. Increased supplies and lower demand will push milk prices
down 3 percent in 1994. Use of the hormone
bST, which increases milk production in dairy
cows, will be allowed beginning in the first quarter of 1994. The USDA forecasts virtually no
effect on total milk use and little effect on milk
production in 1994.
Improved foreign market access will spur livestock and dairy export growth in 1994. The
USDA forecasts
livestock, dairy, and poultry
exports to reach a record $8.5 billion in 1994.
Much of the gain will come in exports to countries with close links to District agriculture, like
Japan, South Korea, and Mexico. Beef exports
should get a boost in 1994 because NAFTA
brought about the removal of the 15 to 25 percent tariff Mexico had imposed on U.S. beef.
The 20 percent duty Mexico places on other
meat products will be phased out more gradually.



The bottom line
In 1994, the District agricultural economy will
improve solidly. Overall farm income will increase as gains for field crop, fruit, and nut
farmers overcome losses for vegetable, livestock,
and dairy producers. Strong agricultural export
growth will produce income gains for farmers of
a variety of products throughout the District. Export opportunities should expand in the future
since District farmers are well-positioned to benefit from the world's fastest growing agricultural
export markets in Latin America and Asia. Regulatory changes, especially environmental regulations that alter vvater allocations, introduce a
degree of uncertainty to the 1994 District agricultural outlook, however.

Stephen O. Dean
Senior Research Associate

Opinions expressed in this newsletter do not necessarily reflect the views of the management of the Federal Reserve Bank of
San Francisco, or of the Board of Governors of the Federal Reserve System.
Editorial comments may be addressed to the editor or to the author.... Free copies of Federal Reserve publications can be
obtained from the Public Information Department, Federal Reserve Bank of San Francisco, P.O. Box 7702, San Francisco 94120.
Phone (415) 974-2246, Fax (415) 974-3341.

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Index to Recent Issues of FRBSF Weekly Letter



Bank Lending and the Transmission of Monetary Policy
Summer Special Edition: Touring the West
The Federal Budget Deficit, Saving and Investment, and Growth
Adequate's not Good Enough
Have Recessions Become Shorter?
California's Neighbors
Inflation, Interest Rates and Seasonality
Difficult Times for Japanese Agencies and Branches
Regional Comparative Advantage
Real Interest Rates
A Pacific Economic Bloc: Is There Such an Animal?
NAFTA and the Western- Economy
Are World Incomes Converging?
Monetary Policy and Long-Term Real Interest Rates
Banks and Mutual Funds
Inflation and Growth
Market Risk and Bank Capital: Part 1
Market Risk and Bank Capital: Part 2
The Real Effects of Exchange Rates
Banking Market Structure in the West
Is There a Cost to Having an Independent Central Bank?
Stock Prices and Bank Lending Behavior in Japan
Taiwan at the Crossroads


The FRBSF Weekly Letter appears on an abbreviated schedule in June, July, August, and December,