At first glance, the apparent logic and simplicity of President Reagan's announced plan to make payments-in-kind (PIK) to farmers is appealing. Any program that promises simultaneously to improve depressed farm prices and income and reduce swelling government outlays ($12 billion) for commodity programs stands a good chance of playing well in both Washington and Peoria.
But will it work? And is it good farm and food policy?
The administration seems determined to make the program attractive to cash-hungry farmers. For not planting up to 30 percent of their 1983 base acreage of wheat and feed grains (25 percent for cotton), farmers would receive quantities of commodities equal to as much as 80 to 90 percent of that acreage's "normal" yields. To participate in PIK, farmers must first comply with already announced cropland diversion programs (20 percent for wheat and feed grains, 25 percent for cotton).
Together, the two programs could idle as much as half of the 1983 base acreage, with farmers receiving payment either in cash or in kind on as much as 80 percent of the acreage. And, if a 25-to-30-percent PIK is not sufficiently alluring, the administration will consider allowing whole farms to be withdrawn from production on a bid basis.
In theory, this administrative sleight-of- hand should produce several results: the farmer reduces his out-of-pocket costs by not producing on as much as 50 percent of his cropland--or possibly his whole farm--while receiving cash and commodities to dispose of as he sees fit; 1983 production is reduced and market prices increased from otherwise prevailing levels; and the current large supplies of stocks (government-owned and/or farmer- owned under government programs), stock management costs and government budget exposure in 1983-84 all are reduced. A close look at the implications and risks of the program, however, reveals something short of a panacea.
At maximum, as much as 100 million acres of cropland could be idled under PIK and diversion programs. Although certainly not all farmers will participate, and some "slippage" will occur because of "phantom" acres, diversion of least productive land, and use of fertilizer and other land-substitutes, production declines could be substantial. Poor weather here and abroad combined with large-scale participation in PIK could force prices sharply upward throughout world agricultural markets.
But the opposite also could happen. Since payments in kind would come from market- insulated stocks owned either by government or by farmers under government programs, PIK commodities would increase the supply of "free" stocks--and a combination of PIK, favorable weather here and elsewhere, and weak demand could push market prices down in late 1983 and in 1984. To limit the downside market risk for PIK participants, the Senate Agriculture Committee during the lame-duck session approved a floor for PIK commodities at no less than 75 percent of their government- guaranteed 1983 prices, themselves scheduled to increase under other legislation. If retained, that provision raises the anomalous possibility of government having to repurchase its own stocks of commodities! The House voted to exempt PIK from the current ceiling of $50,000 for government payments to any individual participant, raising potential equity problems.
Managing the program and minimizing its potentially uneven impacts among farmers and regions will require a vast web of administrative rules and regulations. Even if they can be made operational in time for farmers' decision-making for 1983--which is doubtful --the result will be further government intrusion in the farm economy. And this from an administration dedicated to the free market.
The rationale for this inconsistency is that PIK is an emergency (one- or two-year) program designed to cope with a short-term economic crisis in agriculture. Further, the administration contends, PIK is the only feasible weapon at hand to attack the twin economic and political problems of a depressed agriculture and burgeoning budget outlays-- a contention unfortunately close to the mark.
No one disputes that agriculture is experiencing one of its most difficult years since the 1930s. But the same could be said for other sectors of the economy, including agriculture-supply industries that could be hurt by PIK.
Until demand for farm products can be strengthened at home and abroad through economic recovery, some assistance to agriculture may be warranted, especially since government policies partly caused the current overexpansion in production. But where do we draw the line? And should we risk shutting down the productive capacity of millions of acres of cropland when weather-induced shortages are all too possible in an inherently unstable world agriculture? The lessons of the 1960s and 1970s should not so quickly be forgotten.
PIK and similar short-run palliatives to deal with the "farm problem" mirror the disarray that plagues U.S. agricultural policy in general. Despite fundamental changes in the structure and economics of agriculture in recent decades, farm price and income policy is largely bound by concepts and legislation of the 1930s.
More specifically, PIK reflects the glaring absence of an adequate food security policy to mitigate the effects of chronically unstable food supplies. Although current U.S. commodity stocks are large, global stocks--at 17 percent of annual use--are not out of line by historical standards, and probably are minimal. A U.S food security policy--preferably coordinated international food security policies --designed to reduce the instability of food supplies would view current U.S. abundance as an opportunity to build valuable reserves against future production shortfalls. Instead, the U.S. inclination is to short future markets and manage domestic stocks to improve farm prices and incomes. Until the two objectives are clearly differentiated for policy purposes and until Congress and the administration give higher priority to long-run food security, U.S. programs will serve neither objective very well.
PIK can be made to work, if the price is right. It even can be rationalized as necessary under current circumstances. But as long- range farm and food policy it's like using aspirin to treat malaria--the symptoms may be eased for a while, but there's no cure in sight.