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Agriculture
AN EIGHTH DISTRICT PERSPECTIVE
FALL 1985

The PIK Failure: A Postmortem
Just two years ago, the United States undertook a broad
and very costly program to reduce its enormous stockpiles
o f all major crops. The allegation at the time was that these
surplus stocks were keeping crop prices and farm incomes
low. To raise farm income, then, first required substantial
liquidations o f surplus stocks.
With this objective in mind, the payment-in-kind (P IK )
program was adopted for the 1983-84 crop year. A t a direct
expense to taxpayers o f approximately $15 billion, P IK gave
farmers an incentive to keep large portions o f their acreage
out o f production. A lso, rather than receiving all o f their
payment for participating in government acreage reduction
programs in cash, farmers received some payments in the
form o f surplus grain produced in previous years and put
into storage under short-term (C o m m o d ity C red it
C o rp o ra tio n ) or lon g-term (fa rm er-ow n ed reserve)
government loan. Together, the combination o f sharply
prices, large surpluses and declining real farm income unless
production incentives are reduced, stringent production
reduced planted acreage and the use o f stored grain as
controls are rigorously enforced or large new sources o f
payments to farmers—with the unexpected contribution o f
commodity demand are found.
a severe drought— led to substantial reductions in crop
surpluses by early 1984. Presumably, P IK should have set
the stage for an upward trend in crop prices.
Crop prices are supported primarily by loan rates, while
Yet, 1986 is expected to begin with the largest carry-over
income is supported by target prices and deficiency
stocks in history for wheat and soybeans, while corn in
payments. Under provisions o f the price support loan-rate
storage w ill likely match its 1982 pre-PIK level. Moreover,
prices o f these and other major supported crops— cotton,
program, producers who comply with grain program
rice, sorghum— have fallen to levels at or below 1982 prices.
requirements (for instance, reduced acreage) are eligible for
In fact, the prices o f these crops in real terms are below
a nonrecourse loan. Producers then have two options: they
their 1982 values. Aside from a one-year blip, associated
either can hold their grain and market it at their discretion,
with a one-time change in inventories, real farm income has
or they can obtain a loan. The value o f a loan is determined
continued to fall and the cost o f government farm programs
by the loan rate multiplied by the number o f bushels
has risen (see chart 1).
placed in storage. T h e loan rate is a legislatively
As final debate on the new farm bill proceeds, it is
determined price per bushel that serves, essentially,
important to ask how the effects o f such a
as a price floor.
broad and expensive program to reduce
The loan is in effect for less than one year.
surplus stocks could have such a transient
I f market prices do not rise to levels
effect on both crop prices and carry-over
substantially above the loan rate over the
THE
period
o f the loan, farmers can forfeit their
stocks. T h e answ er is that current
FEDERAL
RESERVE
incentives to produce crops in the U.S. lead
grain to the C C C as full payment for the loan.
HANK of
Forfeiture o f grain in this manner contributes
to excess crop supplies at the levels o f price
ST. IXUIS
to C C C grain stocks. In contrast, i f market
supports specified by commodity programs.
prices should rise above loan rates, farmers
Then, as now, we can continue to expect low




Methods of Supporting Crop Prices

FALL 1985

FEDERAL RESERVE BANK OF ST. LOUIS
Chart 2
ALL GRAIN STOCKS

1974

1975

1976

1977

1978

1979

may elect to repay the loan, remove their grain from storage
and sell it.
Producer income is supported directly by target prices
and deficiency payments. I f market prices are below the
target price established by law, farmers receive a transfer
payment from the government for the size o f the price
differential. A n advantage to this program is that deficiency
payments effectively raise farmers’ incomes without
generating higher prices to consumers or the purchase o f
large surplus stocks by the government. A disadvantage is
that deficiency payments can become very expensive to
taxpayers i f large quantities o f grain are eligible for the
maximum payment.

The Failure of PIK
Ignoring the effects o f surplus grain production overseas,
which certainly have contributed to low er crop prices and
higher grain surpluses w orldw ide, the important failure o f
P IK was the absence o f a coincident effort to reduce
production incentives over the longer run. Chart 2 illustrates

1980

1981

1982

1983

1984

1985

how the production incentives o f the loan rate and target
price policies have caused a secular increase in the quantity
o f grain held in storage over the period since 1974. Stocks
w ere at a relatively low level o f $27.6 million metric tons
after the Soviet grain sales in 1973-74. Surplus grain
gradually accumulated until the drought o f 1980 caused
sharply reduced harvests and decreased carry-over stocks.
Incentives to produce and to store grain increased surplus
stocks about 70 percent within the next year, however, and
added nearly another 40 percent to stocks in 1982. P IK and
the drought cut stocks almost in half during the 1983-84
crop year but, only two years later, the carry-over is again
near 1982 levels.
The P IK program’ s seeming inability to effect more than
just temporary improvements in farm income and in grain
prices suggests that more fundamental changes in farm
policy are in order. Such changes need to address the
existing incentive structure which encourages levels o f
production inconsistent with market signals and leads to high
levels o f surplus stock, low prices and incomes, and higher
taxpayer costs.
— Michael T . Belongia and Kenneth C. Carraro

Agriculture— An Eighth District Perspective is a quarterly summary o f agricultural conditions in the area served
by the Federal Reserve Bank o f St. Louis. Single subscriptions are available free o f charge by writing: Research
and Public Information Department, Federal Reserve Bank o f St. Louis, P.O . Box 442, St. Louis, Missouri 63166.
View s expressed are not necessarily official positions o f the Federal Reserve System.____________________________




FEDERAL RESERVE BANK OF ST. LOUIS

FALL 1985

EIGHTH DISTRICT AGRICULTURAL DATA
Percent Change
July
1985

Prices and Costs1

June
1985

CONSUMER PRICE INDEX (% change)
Nonfood
Food

0.3%
- 0 .2

PRODUCTION COSTS FOR FARMERS (% change)
All inputs
Fertilizer
Agricultural chemicals
Fuels and energy

- 0 .7
0.0
0.0
0.5

- 0 .7
0.0
0.0
0.0

- 0 .7
0.0
0.0
- 0 .5

-0 .1
0.2
0.2
-0 .1

- 2 .0
- 2 .9
- 0 .8
2.5

- 3 .3
- 8 .2
- 0 .8
2.0

PRICES RECEIVED BY FARMERS (% change)
All products
Livestock
Crops

- 0 .8
0.0
- 1 .6

- 1 .6
- 3 .0
-0 .8

- 3 .2
0.0
- 5 .0

- 0 .3
0.1
- 0 .7

- 9 .6
-1 0 .3
- 8 .0

-1 4 .7
-9 .1
-1 9 .6

FEEDER CATTLE
Wholesale price - Kansas City ($/cwt.)

$65.40

$60.76

$61.52

$65.28

- 7 .2

- 3 .9

FEEDER PIGS
Wholesale price - So. Missouri ($/head)

$39.74

$31.74

$32.70

$39.12

-8 .1

- 4 .4

0.2%
0.1

Aug.
1985

0.2%
-0 .1

A v e ra g e
fo r 1984

0.3%
0.3

Y ear-To-D ate
19852

2.6%
- 0 .4

Sam e Month
Year Ago

3.8%
0.4

BROILERS
Wholesale price - 12-city ($/lb.)

53.40$

52.20$

50.10$

55.54$

2.6

- 2 .7

TURKEYS
Wholesale price - New York,
8-16 lb. young hens ($/lb.)

68.13C

72.84$

78.37$

74.46$

-1 9 .5

8.2

CORN
Wholesale price - No. 2, yellow - St. Louis ($/bu.)

$ 2.79

$ 2.72

$ 2.47

$ 3.27

-1 0 .2

-2 5 .8

SOYBEANS
Wholesale price - No. 1, yellow - Central Illinois ($/bu.)

$ 5.78

$ 5.58

$ 5.28

$ 7.05

-1 1 .6

-2 0 .4

WHEAT
Wholesale price - No. 1, hard winter Kansas City ($/bu.)

$ 3.38

$ 3.17

$ 3.00

$ 3.80

-2 0 .2

-2 1 .1

LONG-GRAIN RICE
Wholesale price - Arkansas ($/cwt.)

$18.00

$17.75

$17.75

$18.43

- 1 .8

- 3 .4

- 2 .3

-1 8 .9

COTTON
Average price received by U.S. Farmers ($/lb.)

57.50$

58.00$

54.50$

65.47$

U.S. Exports

Apr.
1985

May
1985

June
1985

A v e ra g e
for 1984

169.0
65.4
76.0
4.6
577.8

138.0
33.1
63.0
5.0
453.0

108.0
18.2
90.0
4.2
375.3

162.1
59.6
134.2
5.4
580.4

Percent Change

Corn (mil. bu.)
Soybeans (mil. bu.)
Wheat (mil. bu.)
Rice (rough equivalent, mil. cwt.)
Cotton (thou, bales)




Y ear-To-D ate
19852

-4 8 .1 %
-7 9 .2
-3 2 .8
-8 .1
-4 3 .1

Sam e Period
Y ear Ago

- 3.6%
-5 5 .7
-2 0 .4
-1 0 .8
-1 6 .4

3

Non Real Estate Farm Debt Outstanding
PCAs3

Banks
O utstanding

Percent Change

Outstanding

Percent Change

($ millions)

6/84 - 6/85

6/83 - 6/85

($ millions)

6/84 - 6/85

$40,108
2,949
523
741
1,429
369

-2 .8 %
- 2 .6
- 4 .3
7.0
-8 .1
- 6 .3

4.1%
7.1
8.4
17.9
- 6 .2
- 3 .4

$16,316
NA
336
305
357
312

-1 6 .5
NA
-1 9 .8 %
-3 1 .5
-2 2 .7
-2 9 .0

U.S.
Eighth District4
Arkansas
Kentucky
Missouri
Tennessee

6/83 - 6/85

-2 1 .5
NA
-2 1 .0 %
-4 4 .4
-2 5 .9
-3 9 .7

Agricultural Bank Loan Perform ance5
Percent of Net Loan

Percent of Overdue
Farm Loans at

Charge-O ffs at
Agricultural Banks

Agricultural Banks
6/85

U.S.
Eighth District4
Arkansas
Kentucky
Missouri
Tennessee

3.6%
4.3
3.8
3.6
4.6
3.5

6/84

6/83

2.2%
2.4
2.3
2.0
2.3
2.6

3.1%
3.5
2.2
4.4
4.0
2.9

6/84

6/85

.41%
.32
.24
.34
.51
.58

.79%
.60
.41
.39
1.18
.55

Agricultural Production Loan Interest Rate6
PCAs

Banks

Eighth District Average

8/85

8/84

11.8%

13.6%

7/85
12.0%

7/84
12.6%

1 The consumer price index components are seasonally adjusted. All other data are not seasonally adjusted.
2 Percent change from December of previous year, based on the most recent month available.
3 Source: Farm Credit Banks of Louisville and St. Louis, Farm Credit Administration.
4 Includes all of AR and parts of IL, IN, KY, MO, MS and TN.
5 Agricultural banks are defined as those with more than 25 percent of total loans in agricultural loans.
6 Interest rate data are for different dates. PCA rates are weighted averages for Arkansas and Missouri, not adjusted for stock purchase requirements.
Source: Farm Credit Banks of St. Louis.




6/83

.29%
.23
.17
.32
.33
.51


Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102