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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
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