TRADITIONALLY, FARMERS borrowed at 8 percent to buy the seed and fertilizer for each year's crop. But this year, some farmers will be paying twice as much. For the farmers, this increased interest cost comes on top of the rapidly rising prices of the fuel and chemicals that this country's agriculture uses in vast quantities. The effects can't be predicted precisely, but eventually it will mean higher food prices.
For city dwellers and consumers, the squeeze on the farmers illustrates the ambiguity of the attack on inflation.Policies necessary to reduce inflation in general will, inevitably, push up some particular prices. High interest rates are essential to the administration's strategy to stabilize prices. But those rates certainly increase farmers' production costs. Similarly, lifting price controls from oil and natural gas is essential to hold down American consumption. But most of the farmers' fertilizers and pesticides are based on oil and gas.
Among the farmers, there is a chorus of demands for more federal help. But the Federal Reserve Board has already made one important concession, and there is not likely to be anything further this season. The Fed has offered money at its discount rate -- currently 13 percent -- to any bank that will lend it to farmers. Those loans can cost the farmers as much as 17 percent. But without the Fed's special action, the rates for farmers would have gone well over 20 percent. The Fed has given the farmers rates that are much below those for most other commercial borrowers, but far above those to which they are accustomed.
The effect will be a drop in the use of fertilizer and chemical sprays this year, although no one is quite sure how much of a drop. It will presumably mean slightly smaller crops. That in turn could lead to higher food prices -- although the major determinants this year, as always, will be the weather and foreign demand.
This year's planting is already well under way, but farmers will certainly press for greater preferences on credit in the future. Do they really need it? An answer is likely to emerge from the coming year's experience. If production remains high and farm prices are fairly stable, it will indicate that agriculture's financial resources are adequate. That outcome seems likely, but not certain. This country is now enbarked, not voluntarily, on a great experiment in the effects of high interest rates. The impact on agriculture will be measured in next winter's grocery bills.