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March 24, 1978

100 Percentof What?
It is just-after sunrise as the army of
tractors makes its way through the outskirts of the city. Within a few hours
the steps of the state capitol will be
crowded with angry farmers - their
fists raised in the air as they chant: "'no
dough, no sow, no grow.'" If the scene
is the nation's capitol, the farmers may
opt (as they did last week) for a multimedia presentation with goats and
roosters roaming the grounds and
halls of Congress. Despite all this, the
protests may not match in size and intensity the anti-war demonstrations of
the '60's and early 70's-and in the
last analysis, they may not be as successful either.

low feed-grain prices and rising beef
prices, the cattle industry is recovering
after three very difficult years. But cattle producers are doing well partly because grain farmers are doing poorly.
In February, corn was fetching 15
percent less than a year ago and 34
percent less than its 1974 average.
And while wheat prices have begun to
recover, they are still 37 percent under their 1974 average ..Even grain
farmers who have diversified by
planting soybeans are in no better
shape, since soybean prices are
roughly 25 percent lower than a year
ago.

Demand

flOlll' parity

Who are these farmers, why are they
so angry, and what do they want?
While the protests have involved many
types of farmers, the typical participants appear to be younger grain
farmers from the Great Plains. The
demonstrators are younger than average, not simply because youth is generally more dissatisfied but because the
cost-price squeeze has more strongly
affected the younger, more recent entrants to agriculture. These new farmers, enticed by the price boom of
1973, paid an entry price (in the form
of very high-priced land) that was
much too high to be supported by
subsequently declining crop prices.
Many older, established farmers are
still making money, even at today's depressed prices, but those who are trying to payoff mortgages for land
acquired since 1974 find their books
filled with red ink.

Parity can be confusing because it is
used sometimes as a noun, and sometimes as an adjective modifying such
terms as price, ratio, index, and income. Moreover, there are adjusted
and unadjusted, original and modernized versions of parity. But the concept basically is quite simple.

Fortunes are very uneven in farming
today. Fruit and vegetable farmers
generally did quite well last year. With

Parity refers to the relationship between the prices farmers received for
their goods and the prices they paid

In this situation, angry grain farmers
are demanding government action to
raise their prices. They were dissatisfied with the help they got from the
Food and Agriculture Act of 1977,
even though that piece of legislation
was criticized by many observers for
the extra burden it imposed on taxpayers. Instead, they are pushing for "'just'"
treatment in the form of 100 percent
of "'parity'" - a traditional concept
which until six months ago had all but
disappeared from most discussions of
the farm situation.

(continued on page 2)

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Opinions expressed in this nevvsleuer do not
necessarily reflect the views of the management of the
Federal Reserve Bank of San Francisco nor of the Board
of Governors of the federal Reserve System.
I

out for their business and living expenses in the 'golden age'" prior to
World War I. During the 1 91 0-14 period, this ratio was about as high as it
had been in any other time of the preceding century. And except for the
two World Wars and the Korean War,
the ratio has never again reached that
pre-WWI peak. It fell short even during
the massive export-led farm boom of
1973.
According to the concept of parity, a
farmer should be able to trade a bushel
of wheat or corn or whatever he
sends to market for the same quantity
of fertilizer, tractors, clothing, and
shelter as he did-inth-e 1910"'"14period:
The paritypriceof any commodity
(and note that we are now referring to
an individual commodity) is thus the
price which preserves the 1 910-14
purchasing power of that commodity.
It is calculated by multiplying the 1 91 014 price of the commodity by the percentage increase over the intervening
years in the parityindex the index,
on the 1910-:14 base, of prices paid
out by farmers for items they must use
in both producing food and living.
Thus, because this parity index of
prices farmers pay for production and
consumption goods now stands at
about 740 percent of its 1 91 0-14 level,
the current parity price of wheat is
$6.51, or 7.40 times the 88¢ that wheat
was fetching in 1910-14. Since the
market price of wheat is currently
$2.58, wheat farmers could be said to
be receiving only about 40 percent of
parity. Actually, the figure is closer to
50 percent according to a 'modernized'" formula, in which the parity

2

prices of specific commodities are
adjusted for their movements relative
to other agricultural prices during the
preceding decade. But even by this
new parity calculation, the current
market prices of most agricultural
commodities are considerably below
parity - at 56 percent for both corn
and cotton, 65 for soybeans, 66 for
cattle, 78 for rice, and 81 for hogs.
For an overall measure of farmers' purchasing power, Agriculture Department statisticians calculate the parity
ratio- that is, the index of all prices received by farmers divided by the index
of prices paid out by farmers. (Don't
confuse theparityratiowith the parity
index,the latter simply being a cost index serving as the denominator of the
former.) Last month this parity ratio
stood at 67, or 33 percent less than
protesting farmers seem to think is .
fair - ""fair'"being the way things were
during the golden age some sixty
years ago.

Expensive
idea
Should farmers receive 100 percent of
parity? A recent Harris Poll found that
80 percent of the American public
were sympathetic to the protesting
farmers, in some cases even if a rise in
food prices were to result from meeting farmers' demands. About 54
percent were willing to accept a 5percent rise in food prices to guarantee farmers 100 percent of parity, and
about 19 percent were willing to go
along with a 10-percent rise in food
prices. However, to move from 67 to
100 percent of parity would require a
farm-price increase of 50 percent, and
since farm prices account for about 40

PARI TY RAT 1 0

(1910·14: 100)

125

75
50

percent of retail food prices, shoppers
would end up paying about 20
percent more for their food. Mr. Harris
didn't ask who would be willing to pay
a 20-percent food premium, but one
can guess that a positive response
would be rare.
Even in the days when the farm lobby
was very strong, farm prices were never supported at 100 percent of parity.
Legislation typically supported commodities at 60 to 90 percent of parity,
with tobacco farmers usually doing
better than most. When today's consumer lobby realizes what full parity
would actually cost, the idea probably
won't get very far in C;:ongress.
If farmers confined their activities to
the market-place and actually did strike
in the sense of not planting this spring,
prices would skyrocket as buyers bid
for the scarce supplies. However, given the debt burden faced by most
farmers, they could not afford to skip
a growing season. Besides, farmers.
would benefit from high prices only if
they had products to sell. According to
a January 1 planting survey, farmers
generally intend to plant almost as
much as last year's ve·ry large acreage,
so there is little sign of the tractor demonstrations translating themselves into
substantive market action.
Wrong idea?
A more basic issue involves the validity
of the parity concept itself. Should society attempt to freeze the terms of
trade between any two sectors in the
economy? Relative prices change in response to short-run shifts in supply
and demand, but also in response to

3

longer-term changes in technology
and productivity. Between 1910 and
1970, output per man-hour rose 5.3
times on the farm but only 4.3 times in
the total economy, so that the labor
cost of farm goods has fallen relative to
other goods. If other factor costs did
not move in an offsetting fashion, competition would have caused farm
prices to fall relative to non-farm
prices, with no reduction in the relative rate of return to farming. If one
sector of the economy fails to earn an
adequate long-term rate of return,
then too many resources are being
devoted to that sector. Left to its own
devices, the market will encourage
those resources (including- people) to
leave that sector for others offering
higher rewards, the result being a rising
rate of return to the sector experiencing this resource outflow. Ensuring an
artificially higher rate of return to that
sector means that too many resources
will remain in it and, at the same tir:ne,
other sectors will have to be taxed in
order to subsidize its rate of return.
Farm legislation held prices artificially
high in the 1950's and 1960's, with the
result that too many farmers systematically produced too much food. When
the constantly rising stocks of grain became too burdensome, more Federal
funds were required to persuade farmers to hold down production. The result was very costly. Few people,
farmers included, want to begin that
cycle again, yet that is precisely what
high support prices would do. For all
of its nice-sounding connotations of
economic justice, 100 percent of parity could be a dangerous path to tread.
Michael ·Gorham

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BANKING OATA-TWE LF TH FEDERAL
RESERVE STRI
DI
CT
(Dollar amounts in millions)
Selected Assets and liabilities
large Commercial Banks

Amount
Outstanding
3/8/78

Loans(gross, adjusted) and investments*
Loans (gross, adjusted)- total
Security loans
Commercial and industrial
Real estate
Consumer instalment
U.s. Treasury securities
Other securities
Deposits (lesscash items)- total*
Demand deposits (adjusted)
U.s. Government deposits
Time deposits- total*
Statesand political subdivisions
Savingsdeposits
Other time deposits:j:
Large negotiable CD's

107,856
84,545
1,990
26,104
28,378
14,969
8,930
14,381
105,351
29,642
219
73,526
6,456
31,503
32,816
14,647

Weekly Averages
of Daily figures

Week ended
3/8/78

Member Bank Reserve Position
ExcessReserves(+)/Deficiency (-)
Borrowings
Net free(+)/Net borrowed (-)
federal funds-Seven large Banks
Interbank Federalfund transactions
Net purchases(+)/Net sales(-)
Transactionswith U.s. security dealers
Net loans (+)/Net borrowings (-)

Change
from
3/1/78
+
+
+
+
+
+
+
+
+
+

+

-

+
+
+

1,907
628
191
94
107
6
1,214
65
2,115
1,343
360
1,009
64
150
776
723

Change from
year ago
Dollar
Percent
+ 14,477
+ 13,070
484 .
+
+ 2,867
+ 6,285
+ 2,571
65
+ 1,472
+ 12,543
+ 2,874
47
+ 9,199
954
+
131
+
+ 7,340
+ ?,818

-

-

Week ended
3/1/78

+ 15.50
+ 18.29
+ .32.14
+ 12.34
+ 28.45
+ 20.74
0.72
+ 11.40
+ 13.51
+ 10.74
17.67
+ 14.30
+ 17.34
0.42
+
28.81
+ 65.90

-

+

Comparable
year-ago period

113
9
104

8
23
31

+

65
1
64

+ 1,328

+ 1,132

+

140

370

+

108

+
+

+

657

+

+

*Includes items not shown separately. :j:lndividuals,partnerships and corporations.
Editorial comments may be addressed to the editor (William Burke) or to the author, , ..
Information on this and other publications can be obtained by calling or writing the Public Information
Section, federal ReserveBank of Sanfrancisco, P.O, Box 7702, SanFrancisco 94120.Phone (415) 544-2184.