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It is interesting to take a look back at the developments that influenced the industry over the past year. Below is a list of what we at Doane feel are the Top 10 Developments for 2003.

10. The collapse of the textile industry. One of the less desirable results of trade reform has been the surging imports of textile and apparel products, primarily from China. Domestic production has plunged over the past couple of years, with plants closing, filing for bankruptcy and laying off workers. Over the past few years, textile companies have cut more than 300,000 jobs, and under WTO rules, the import quotas will be completely removed at the end of 2004. The textile issue has had an impact on our trade relations with China.

9. High natural gas prices and the resulting increase in fertilizer prices. In February 2003, natural gas prices roared higher, taking production costs for nitrogen fertilizers with them. This came at a critical time as farmers were making decisions about 2003 crop acreage. Farmers across the country felt the impact, but the impact was greatest in Plains states where natural gas is used to power irrigation systems. Higher production costs probably caused some farmers to cut back on corn planting last spring as production costs rose. The continuing drought in the western states also played a role in farmers' planting decisions.

8. Beginning of the economic recovery. Tax rebates and lower tax rates boosted economic activity as consumers spent their newfound money. But the recovery has had little impact on unemployment as the gains in output have been generated through higher productivity. Still, good consumer demand has provided a boost for domestic consumption, and the sharp drop in the value of the dollar has boosted exports. Meanwhile, the government deficit has exploded to more than $500 billion. At some point these factors will cause interest rates to rise, pushing the dollar higher, but that may not happen until the second half of 2004 or later.

7. Wheat crop failure in Europe and the former Soviet Union. Wheat production in the EU-15 is put at 91 million tonnes in 2003, down from 104 million a year earlier. The crop in Eastern Europe went from 30.5 million tonnes in 2002 to 21 million in 2003, and the countries of the former Soviet Union produced 62 million tonnes this year, a drop of almost 40 percent from last year. In total, this is a year-to-year drop of 58 million tonnes (more than 2 billion bushels). This huge drop in competitive supplies is the reason U.S. wheat exports will jump to an estimated 1.1 billion bushels this year, the highest level since 1995-96.

6. Policy developments, or the lack of developments. On the lack of development side, Congress failed again to pass an energy bill that sets a renewable fuels standard (RFS). There is no immediate impact on ethanol demand, but efforts to get financing for new ethanol plants may be affected. Long-term, the RFS will be needed to drive ethanol use higher. Congress may pass the bill in early 2004, but the divisive provision that protects MTBE makers from liability is still a stumbling block. Congress also decided to delay the implementation of mandatory country-of-origin labeling until 2006. Congress did pass a disaster aid bill early in the year, but even that accomplishment had a downside. For the first time, Congress had to take the money for disaster aid away from other farm program spending. With this new precedent, future disaster aid programs will be difficult to implement.

5. Collapse of the World Trade Organization talks. This round of negotiations is much more difficult than previous rounds because developing countries are demanding concessions from developed countries. They believe that poverty and hunger problems can be eased if developing countries have access to huge markets in developed countries and if developed countries' subsidies are eliminated. These are not concessions developed countries are willing to make. At the very least, the WTO round has been set back, and it is possible that it may fail altogether. This has triggered an effort by the United States to negotiate several smaller free trade agreements, such as the FTAA and the CAFTA. While efforts to reduce trade distortions worldwide founder, there are signs of rising protectionism.

4. Weather. Data shows that August of 2003 was the driest on record in a large part of the principal corn and soybean-growing region of the United States. While the adverse weather hit corn and soybean fields alike, the results were far different. The 2003 corn yield hit a record 143.2 bushels per acre, while the soybean yield plunged to 33.8 bushels per acre, about 15 percent below trend. Soybean yields were hurt by bad weather this summer, but a heavy infestation of aphids also took a toll. The aphid problem may continue into 2004. Soybean yields have fallen short of trend in four of the past five years, causing some farmers in key growing areas to consider reducing soybeans in their crop rotations. While the drought persisted across the Plains states, timely rainfall allowed for a big rebound in wheat yields this year, and many cotton producers will see record productivity. For the most part, 2003 was a pretty good year for crop production, despite far from ideal weather.

3. Emergence of China's markets. For several years, China has been the most important market for soybeans, and that dominance continues. China is projected to import 22 million tonnes of soybeans this year, up from 10 million tonnes two years ago. China accounts for one-third of all soybean trade, eclipsing the EU, which dominated world trade for decades. Due to a poor crop in 2003, China will also import a huge amount of cotton. USDA puts China's imports at 7 million bales, up from 3 million last year, and virtually no imports two years ago. China's growing appetite for foreign cotton has been a saving grace for the U.S. cotton market, which has seen domestic use collapse. Based on the available data, China will soon have to import significant amounts of wheat and will at least have to cut back on corn exports. How China deals with the looming grain deficit will have huge implications for U.S. and world markets. Near the end of the year, trade relations between the two countries took a sour turn when the United States took steps to limit imports of some Chinese textiles and televisions. A full-fledged trade war with China would hurt U.S. agriculture.

2. Record-high net cash farm income. Production of most crops was high in 2003, despite less-than-ideal weather. Improving export prospects for most crops due to the weakness in the dollar and lower competitive supplies has allowed for relatively strong prices. Cash receipts for feed grains, food grains and cotton should all be up in 2003, and high prices for soybeans may more than offset the drop in output. Livestock cash receipts will also be higher this year, especially for cattle. Finally, the combination of the shift in the timing of payments and the additional money for disaster aid will cause total government payments to rise by about $8 billion. Even with higher production costs, the result is a big jump in net cash farm income. Higher farm income and very positive cash flow for most producers will help to support the input supply industry in 2004.

1. Record-high cattle prices. In May, a cow in Canada was diagnosed with BSE (mad cow disease), which triggered a ban on imports of live cattle and beef from Canada. The case of the disease did not hurt beef demand in the United States as was initially feared. But the import ban cut down on beef supplies to the market, which encouraged U.S. cattle feeders to market cattle early. This pulled down cattle weights, further reducing beef output. Early in the year, feedlot placements had been down, and this reduced the number of cattle available for slaughter as we headed into the last half of the year. Finally, beef production dropped sharply in the fourth quarter, pushing fed steer prices up over the $100 per cwt. level. Fed steer prices peaked at $115/cwt. in mid-October, a full $30 higher than the previous peak set in March of 1993. But bad news struck the cattle industry just as the year ended. A cow from Washington state tested positive for BSE, the first case ever in the United States. Prices plunged, losing about $20 in the course of 10 days. Most of the impact from this discovery will play out during 2004, but the sudden reversal in the outlook for the cattle market is amazing.

This completes the list of top developments in 2003. Others would no doubt rank the issues differently and might even include things left off of this list. But most of the developments in 2003 will continue to influence the agriculture sector into 2004 and perhaps for several more years into the future. However, a year from now when we wrap up developments in 2004, the list will undoubtedly include factors that are not anywhere on the horizon. AM

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