A Note

on the CCC

With no prospects for a dramatic turnaround in agricul-
ture, the PIK program was announced to prevent further
deterioration and to help bring Government spending
under control. PIK does not require any additional
cash outlay as an enhanced paid diversion program would
have required. By using commodities for which funds
have already been disbursed, CCC incurs no further
outlays but does incur losses to the extent that monies
already spent cannot be recovered through future loan
repayments or the sale of CCC stocks.

However, without the PIK program, large surplus stocks
would have been held indefinitely--especially since

the law prohibits CCC from selling its stocks at below
specified minimum levels that far exceed today's price
levels. Moreover, the CCC would have experienced losses
due to deterioration in the quality of stocks held

over an extended period of time. In addition, the CCC
would have continued to pay interest and storage charges.

Thus, the loss to CCC represented by the value of the
commodities used for PIK payments has to be tempered
by the reduction in the future costs associated with
carrying large stocks. The dramatic reduction in
acreage that is expected from the PIK program for
1983 crops is very likely to impact on prices and
stocks for the next few years, and this will also
tend to reduce future outlays for price support loans
and target price payments.

When the PIK program was announced in January, the
expectation was that it would generate savings of
about $600 million in FY 1983 and about $3 billion

in FY 1984 when compared to a continuation of the
existing programs. This estimate of savings was
developed, however, assuming a much lower level of
acreage reduction than is apparent as a result of the
signup report of March 22. The higher level of
acreage reduction will likely result in additional
budget savings in FY 1984 as there should be less need
for price support loans, and the acreage base on
which target price deficiency payments are computed
will be smaller. The net resuit of the higher signup
is that outlays could be reduced by more than the $3
billion estimated in the fiscal 1984 budget.

Commodity price support programs are operated and
financed through the CCC. To carry out its functions,
CCC borrows funds from the U.S. Treasury and repays
these borrowings, with interest, from receipts and
from appropriations provided by Congress to reimburse
the CCC for its net realized losses. The CCC's
outstanding borrowings from the Treasury cannot
exceed $25 billion.



Broilers

Dairy

C. Farm Income

14

reflected in higher breakeven prices until the second
half of 1983 and in 1984. Breakeven prices based on
feed and nonfeed costs, excluding the cost of feeder
cattle themselves, are expected to rise about $3.50
per cwt of gain for cattle marketed when the full
impact of PIK is felt in 1984. Given only modest
improvement in consumer demand and sensitivity to
higher meat prices, higher feed costs will reduce
feeder cattle prices, cutting profits and halting
any plans for expansion of the cattle cycle here in
1984. However, as consumer demand rises with economic
recovery and meat output is tempered, cattle prices
will strengthen and encourage renewed expansion in
1985 and beyond.

The March Hogs and Pigs report indicated that hog pro-
ducers were expanding their herds because of the high
hog prices and low feed prices enjoyed over the last
year. The sharpest increases in production were con-
centrated in the Southeast and in States on the fringe
of the main hog- and grain-producing areas. The higher
feed prices now likely with PIK will probably slow or
halt production increases early in 1984. Larger pork
output will put pressure on hog prices this summer and
fall, while higher corn and soybean meal prices will
raise production costs, Almost 80 percent of the
market hogs are produced on farrow-to-finish operations
which are concentrated in the Corn Belt. Feeder pig
prices are already declining and are expected to
pressure feeder pig producers, particularly in grain-
deficit areas, to begin reducing their breeding

herd. On balance, pork production in 1984 will be
about the same as in 1983, but hog prices will be
slightly higher.

The increase in broiler production expected late in
1983 is likely to moderate, in part due to PIK, as
producers react to higher costs and weak broiler
prices. The impact of PIK will be greater in 1984,
as low returns late in 1983 cause producers to slow
production increases even further. On balance, the
number of broilers produced in 1984 is expected to
be about the same as in 1983, and broiler meat produc-
tion may be up less than 1 percent, compared with the
2-percent increase expected before PIK. Prices are
also expected to be higher.

While PIK may raise the cost of milk production margin-
ally, it will have little impact on production.
Supplies will continue to exceed use unless returns

to milk producers are reduced.

The PIK program improves the outlook for net farm
income in 1983 and 1984, Although the volume of PIK
commodities marketed remains uncertain, net farm
income is expected to range from $18 to $22 billion
this year. This income level compares with the $15



UNITED STATES DEPARTMENT OF AGRICULTURE POSTAGE AND FEES PAID

U.S. DEPARTMENT OF
WASHINGTON, D.C. 20250 ‘AGRICULTURE
AGR 101
aacaioness FIRST CLASS

PENALTY FOR PRIVATE USE, $300

To stop mailing [1] or to change your address [_]
send this sheet with label intact, showing new
address, to EMS Information, Rm. 440-GHI,
USDA, Washington, D.C. 20250.

Appendix table. Effects of PIK on production, stocks, and use--continued

5 Crop Year
Commodity : 1981: 1982: 1983 Prob. variation
Soybeans :
Acreage harvested (mil. acres): 66.4 70.8 ==
Yield per acre (bu.) z 30.1 32.2 --
Supply :
Beginning (mil. bu.) g 318 266 380
Production (mil. bu.) 3 2000 2277 2100 +200/-200
Total supply (mil. bu.) H 2318 2543 2480 +200/-200
Use 3
Domestic (mil. bu.) s 1123 1213 1225 +70/-70
Exports (mil. bu.) Hf 929 950 970 +70/-70
Total use (mil. bu. : 2052 2163 2195 +100/-100
Total ending stocks (mil. bu.) : 266 380 285 +75/-75

Season-average price ($bu.) & 6.04 5.55 5.50-7.25

1/ 1982 is complying base, and 1983 is enrolled base as a percent of total base.
2/ 1983 CUA (conserving use acreage) based on enrollment.

3/ Corn/sorghum CUA is assumed to be 84 percent corn and 16 percent sorghum.

4/ | Weighted average, August-December.

‘U.S. GOVERNMENT PRINTING OFFICE: 1983-380-930:ERS-1309

(Sus ear Sr hc TS



I. THE RATIONALE
FOR PIK

An Initial Assessment of the Payment-in-Kind Program (PIK)

April 1983

The 1983 acreage reduction programs were put into
place against a backdrop of a serious and worsening
problem of farm surpluses. Weak domestic demand
for farm products, combined with the first drop in
exports in more than a decade, has kept total use of
U.S. farm products roughly constant over the last 18
to 24 months. The crops harvested in 1981 and 1982
were record large, however, and much of the increase
in output both years has accumulated as stocks.

By the end of the 1982/83 season, grain and oilseed
stocks will be nearly 3 billion bushels above the
levels needed to meet pipeline requirements and pro-
tect against swings in weather and fluctuations in
demand in the United States and abroad. Individually,
stocks of wheat, corn, cotton, and rice are expected to
exceed generally accepted carryover needs by 50 to 150
percent.

These rising stocks, in turn, resulted in sharply lower
commodity prices, depressed farm incomes, and rising
Government farm program expenditures. Farm prices for
wheat, corn, and cotton fell 10 to 25 percent from
mid-1981 to late 1982. Farm incomes fell a fifth to

a 4-year low of $20 billion in 1982. Government
expenditures in support of agriculture tripled to set
a $12-billion record in fiscal 1982 and are forecast

to increase further, possibly to $18 billion, in fiscal
1983.

While many of the factors that combined in 1981 and
1982 to depress demand for U.S. farm products should
be temporary, their impacts are expected to continue
through 1983 and into 1984, With demand in both the
domestic and export markets likely to continue weak,
large crops again in 1983 would have generated even
larger stocks, lower commodity prices and farm income,
and increased Government outlays. The surplus stocks
carried over at the end of the 1983/84 season could
have approached 4 billion bushels.



The CCC price support programs act as a safety ret

when conditions in the farm sector are unfavorable,

as they tend to provide a floor price for the commodity.
These programs are, for the most part, also what is
referred to as an “entitlement"--anyone who meets

the legal and regulatory criteria for eligibility is
entitled to receive program benefits. Therefore, CCC
outlays tend to rise when economic conditions are

poor and decrease when economic conditions are favor-
able to farmers.

CCC outlays for any fiscal year are generally related
to the previous crop year. The change in outlays
from one year to the next is a result of crop and
economic conditions, farm program provisions, and
participation in the various commodity programs.

For example, FY 1983 outlays are largely a function
of the already-harvested 1982 crop.

VI. CONSEQUENCES The 1983 acreage reduction programs were a necessary
OF PIK ON THE first step toward preventing a further buildup in farm
LONGER TERM surpluses. Given average weather, at least part of
SUPPLY-DEMAND the surpluses built up in 1981 and 1982 will be carried
BALANCE over into 1984. Carryover stocks at the end of the

1983 crop year are likely to be in excess of levels
generally accepted as necessary by as much as 500
million bushels of corn (the equivalent of production
from 4-1/2 million harvested acres), nearly 400
million bushels of wheat (the equivalent of 10-12
million acres), and 1-1/2 million bales of cotton
(the equivalent of 1-1/2 million acres).

As table 4 suggests, the most serious supply imbalance
is likely to be in wheat. Projected 1983/84 ending
stocks suggest a less serious problem for corn,
cotton, and rice.

Table 4. U.S. carryover stocks of major PIK crops

3 Wheat Fy Corn : Rice : Cotton 1/

Year : Mil. bu. : Mil. bu. : Mil. cwt 3: Mil. bales
1980 : 989 1034 16.5 _ 2.7
: 2/ (43.2) (14.3) (11.3) (22.9)
1981 : 1164 2286 49.0 6.6

(44.3) (32.9) (32.6) (55.9) = §

1982 : 1582 3434 65.2 8.0
(66.1) (47.4) (47.1) (74.1)
1983 2/ : 1440 1875 34.2 5.6
(59.8) (26.0) (24.1) (47.9)

1/ Includes upland and extra-long staple cotton.
2/ Stocks as a percent of use are shown in parentheses.

21

(GRD nes Gs 7



Appendix table. Effects of PIK on production, stocks, and use--continued

: Crop Year
Commodity +1981 : 1982 : 1983 Prob.variation
Sorghum
Use z
Domestic (mil. bu.) : 442 366 436 +55/ -55
Exports (mil. bu.) : 249 225 250 +40/ -40
Total use (mil. bu.) 3 691 591 686 +80/ -80
Total ending stocks (mil. bu.) sy 297 547 561 +80/ -80
FOR (mil. bu.) 2 232 475 --
CCC (mil. bu.) : 43 50 --
Free (mil. bu.) : 22 22 =
Season-average price ($/bu.) : 2.39 2.45 2.55-2.95
Rice
Participation 1/ (percent) H —— 78 96
Acreage harvested (mil. acres) 4 3.79 3.25 --
CUA 2/ (mil. acres) : = 4 1.7
Yield per acre (cwt.) : 4819 4742 --
Supply 3
Beginning (mil. cwt.) > 16.5 49.0 65.2
Production & imports (mil.cwt) 183.0 154.7 111.0 +1/  -7
H Total supply (mil. cwt.) 199.5 203.7 176.2 +7/  -7
| Use:
Domestic (mil. cwt.) 59.4 61.0 64.5 +3/ 0-3
Exports (mil. cwt.) 82.1 67.5 67.50 +9/ -9
Residual (mil. cwt.) 9.0 10.0 10.0
Total use (mil. cwt.) 150.5 138.5 142.0 +11/ -11
Total ending stocks (mil.cwt.) 49.0 65.2 34.2 +11/ -11
CCC (mil. cwt.) 19.0 35.0 =
Free (mil. cwt.) : 30.0 30.2 —
| Season-average price ($/cwt.) > 9.05 8.00 8.50-10.00
Upland cotton gs
Participation 1/ (percent) é = 78 95
Acreage harvested (mil. acres) 2 13.8 9.8 =
| CUA 2/(mil. acres) ¢ -- 1.6 6.7
Yield per acre (1bs.) 3 542 581 --
| Supply: 2
Beginning (mil. bales) 2 2.6 6.6 7.9 +0.6 -0.6
Production & imports (mil.bale) : 15 .6 11.9 9.1 +1.31 -1.3
Total supply (mil. bales) ¢ 18.2 18.5 17.0 +1.6 -1.6
Use:
Domestic (mil. bales) 3 5.2 5.4 5.6 +0.7  -0.7
Exports (mil. bales) z 6.6 5.4 6.0 41.5 -1.5
Total use (mil. bales) : 11.8 10.8 11.6 +1.9 -1.9
Difference unaccounted 3
(mil. bales) : 2 2 al
Total ending stocks (mil. bales) : 6.6 7.9 5.5: +2.0 -2.0
Season-average price (1b.) > 54.3 4/ 58.1 --
23

oe es ee ae eee



Financial

impacts

18

Use of pesticides is expected to drop 12 to 15 percent.
However, agricultural pesticides account for a small
share of the output of the chemical industries involved
and a small portion of the sales of most input suppliers.
Thus, the reduction in pesticide use will have little
impact on manufacturers or retailers. But, it could
seriously affect some custom operators.

Seed producers and retailers, particularly those con-
centrating in program crops, will be more severely
impacted because of the direct relationship between
acreage planted and seed use. On the other hand, pro-
ducers of grass and legume seeds can expect a surge
in demand and substantial price increases, because
these seeds will be used for cover crops on the
expanded conservation use acreage. Some shortages of
these seeds have already been experienced.

Fuel use is expected to decline by 8-10 percent. The
decline is not in proportion to 1983's reduction in
acreage because equipment must be used to plant
cover crops on conserving acreage. Except for those
cases where farmers are the primary clientele and
program commodities are the primary farm enterprise,
lower fuel use will have little effect on wholesale
suppliers or retailers.

Table 3. Selected agricultural production expenditures
with and without the 1983 PIK program

Item : Without PIK : With PIK

Billion dollars
Expenditure:
Seed
Fertilizer
Pesticides
Fuel 3
Farm machinery :
(purchases & : -
repairs) H 19.7 18.2

OPar
wows

Total z 45.9 41.0

The PIK program is expected to improve the cash flow
position of many farmers in 1983 and 1984 and, in
turn, reduce their credit needs and outstanding

debt. Operating credit needs during 1983 are expected
to decline by $2.5-$3.0 billion due to the PIK-related
reduction in input expenses. This decline is expected
to be mostly for short-term borrowing rather than



10

The 1983 programs are likely to be more effective than
past programs, primarily because of the magnitude of
the acreage involved and the tight restrictions on
alternative uses of idled land.

Compared to 1981, when no acreage programs were in
place, harvested acreage of soybeans and the seven
program crops--feed grains, wheat, rice, and cotton--
will probably be down 53-57 million acres in 1983.
Without PIK, the ARP and PLD programs alone were
likely to have reduced harvested acreage by 10 to 15
million acres from the 1981 record and possibly by
as little as 2 to 4 million acres from the 1982
level.

Since the best land will remain in production and
farmers can concentrate their efforts on improving
cultivation practices, yields (assuming average
weather) will be higher than usual and help assure
adequate supplies despite the large reduction in
plantings.

The PIK program is also designed to have a positive
impact on conservation. During the 1970's, because
of rapidly increasing grain prices and encouragement
to plant fence to fence, producers brought into pro-
duction land subject to hazards, particularly erosion.
This added cropland was often better suited for hay,
pasture, or forest uses. Due to the rush to bring
this land into production, conservation practices
that could have been used to protect fragile land
under annual cropping uses were often neglected.

Now, with high enrollment in PIK and the other reduc-
tion programs, farmers will be putting much of this
fragile acreage into conserving uses. Program regu-
lations require that conserving use acres be protected
against erosion and weeds. This will be an incentive
for farmers to remove some of their most fragile

lands from annual crop use. Farmers will be able to
apply conservation practices such as terracing or
drainage without having to disturb growing crops
because the land will be idled anyway. Other land
less subject to hazards can benefit from the nitrogen-
fixing legumes and grasses used as cover crops and
the general rotation helpful for controlling weeds,
insects, and disease.

There is also considerable incentive to apply perma~
nent conservation practices on conserving use acreage;
cost sharing is being of fered through the Agricultural
Conservation Program for establishing permanent cover
on conserving acreage. Moreover, if the producer
establishes such cover, the land will be eligible for
designation as conserving use acreage in any acreage
reduction program offered through the 1985 crop year.
Multi-year retirement of such acreage will not reduce



Finally, farmers could submit sealed bids indicating
the percentage of their program yield they would accept
as in-kind compensation for idling their entire base
acreage. As the program was first announced, no more
than 50 percent of the acreage base for any one
commodity could be removed from production in a

county.

After evaluating the signup for the ARP, PLD, and
10-30 percent PIK programs, the Secretary of
Agriculture announced that whole base bids would be
accepted for corn, sorghum, wheat, and upland cotton,
but only to the extent that no more than 45 percent of
a county's acreage base for each of these crops

would be in a conserving use. No whole base bids
were accepted for rice. 1/

Mechanical harvesting is not allowed on the acres idled.
Grazing is restricted to non-growing months on that
portion of land that must be devoted to a conserving
use to comply with the programs. However, winter wheat
producers will be allowed to hay and graze their wheat
acreage planted before January 12 as long as the wheat
stand is destroyed by a date designated by the local
ASCS committee.

Participants will be able to collect their commodity
payments on a PIK availability date set to coincide
with the normal start of harvest for each commodity

by region. Producers participating in the program who
have outstanding farmer-owned reserve or regular loans
must allow the CCC to liquidate as much of these loans
as necessary to met their PIK payments. Farmers faced
with liquidating regular or reserve loans will not

have to pay accumulated interest charges on liquidated
loans.

Producers not holding regular or reserve loans, or who
do not have enough of a commodity under loan to meet
their PIK compensation requirements, will receive CCC
stocks. The CCC can also require that producers obtain
a regular loan on their 1983 crops, which can be
liquidated to cover their PIK payments. This option is
expected to be used sparingly.

1/ If a county already exceeded the 45-percent
limit under the 10-30 percent option, no bids were
accepted. However, enrolled farmers were not required
to alter their intentions under the 10-30 option to meet

the 45-percent requirements.



II. MAJOR
FEATURES OF
THE PROGRAM

Even with the voluntary acreage reduction (ARP) and
the cash paid land diversion (PLD) programs announced
for the major 1983 crops last fall, stocks would
most likely have continued to increase for wheat,
rice, corn, sorghum, and cotton. The substantially
larger acreage reduction needed to begin reducing
surpluses could not be obtained through the ARP and
PLD programs without significantly higher Government
outlays in a period when increased deficit spending
could have delayed the general economic recovery.

The payment-in-kind program (PIK) announced in January
was designed to idle this substantially larger acreage
without increasing Government outlays. By paying
producers to idle acreage with the surplus commodities
puilt up in the farmer-owned reserve or held by the
Commodity Credit Corporation (CCC), the PIK program,
complemented by the ARP and PLD, aims at:

-reducing production and stocks at the same
time;

-ensuring adequate market supplies;

-minimizing direct Government outlays in
support of agriculture;

-improving conservation practices;
-increasing farm incomes; and

-helping to ease storage problems.

The ARP, PLD, and PIK programs in place for 1983 gave
farmers a number of participation options. Farmers
could choose not to participate in any of the programs.
Farmers participating in the ARP and PLD programs
announced last fall are required to idle up to 20
percent of their acreage bases. The two programs
require that this idled acreage be put into a con-
serving use that generally entails planting a cover
crop to protect the land against weeds and erosion.

Farmers participating in the ARP and PLD programs also
had the option to idle an additional 10 to 30 percent
of their base acreage and allocate it to a conserving
use if they agreed to participate in the PIK program.
As compensation, they will receive in-kind payments
on their PIK acres equal to a percentage--80 to 95,
depending on the commodity--of their farm program
yield established by the Agricultural Stabilization
and Conservation Service (ASCS) (see table 1).



for intermediate or long-term credit. An additional
reduction in demand for operating credit can be expected
as a result of the added capital available to farmers
from direct program payments made in 1983. Direct
payments to farmers will also permit them to reduce out-
standing debt, improve liquidity, and replace depreciated
capital items toward the end of the season.

Employment The national employment effects of PIK will be small,
impacts owing to the capital intensity of many input industries.

But, some regional or local impacts on employment and
economic activity in the food- and fiber-processing
and distribution system will be significant. At the
local level, for instance, cotton-ginning firms and
rice-drying firms could face a 25-percent decline in
the demand for their services. Industries dealing
in agricultural inputs will be most affected. Firms
that will face significant declines in demand for
their services include those that retail or transport
inputs; apply fertilizer, lime, pesticides, and other
chemicals; and service farm machinery and equipment,

On the other hand, some increase in demand for both
truck and rail transportation is expected from higher-
than-normal feed shipments into deficit areas. Corn
and sorghum movements may be greatest into the three
largest deficit regions (Southeast, Delta, and Pacific).
Shipments are expected to increase the most to the
Southeast. The PIK program may also influence grain
flows within major producing regions, resulting in an
increase of short-haul truck transportation.

PIK could affect around one-twentieth of 1 percent of
total U.S. employment and possibly 2-3 percent of
employment in agriculture-related industries. Not all
the workers affected will lose their jobs; some will
face shorter work weeks or temporary layoffs, and some
may face longer-term unemployment. As the $3 billion
of added farm income generated by PIK works its way
through the farm and nonfarm economy in late 1983 and
through 1984, some additional jobs will be created to
partially offset the effect of PIK.

Vv. COST PIK is expected to have little impact on Government out—
IMPLICATIONS lays in support of agriculture in fiscal 1983. In

fiscal 1984, however, PIK could reduce outlays substan-
tially. Government expenditures in support of agricul-
ture increased sharply in 1982 as producers put a
record volume of products under loan and as the defi-
ciency payments made by CCC grew in response to sharply
lower commodity prices. In the President's budget
issued in January 1983, the estimate of CCC outlays

for FY 1983 was placed at an alltime high of $18.3
billion--58 percent more than last year's record and
nearly five times as much as was spent only 2 years
ago.

19

en a



III. EFFECTS

ON THE FARM
SECTOR

The bids will show the quantity of grain under loan a
farmer will liquidate and the percent of that quantity
to be paid as in-kind compensation. The factors to
be used in considering bids will be the total cost to
CCC, location of the grain, class of grain, and total
CCC needs. In those cases where liquidation bids

are involved, farmers will receive the product imme-
diately to market, feed, or store at their discretion.
Any farmer will be eligible to liquidate loans, and
participating farmers may offer to liquidate any loans
they hold over and above the quantity needed to cover
their PIK payments.

To promote the orderly marketing of PIK commodities,
producers will receive up to 5 months' storage pay-
ments beginning on their local PIK availability date
(see table 1 for rates). Producers receiving PIK
grain from reserve grain stored on-farm will be
eligible for additional compensation equivalent to a
7-month farmer-owned reserve storage payment, adjusted
for any unearned storage, regardless of when title

to the grain is assumed.

Producers who signed up for PIK but fail to comply
with program requirements will be ineligible for
program benefits and will be assessed liquidation
damages equal to 20 percent of the target price for
their 1983 crop times the volume of PIK payments
they would have received for participating.

The signup for all of the PIK crops was unexpectedly
large in all regions of the United States. The USDA
enrollment report released in mid-March indicated that
farmers signed up 83 percent of their corn/sorghum,
cotton, wheat, and rice acreage bases. If all enrollees
comply and plant the maximum acreage allowed under

the different programs they opted for, a record 82
million acres of cropland will be put into conserving
uses. This compares with the peak of 60-64 million
acres idled under the programs in place during the
Jate 1960's and early 1970's (figure 1).

For every acre of land idled and devoted to a conserving
use under the 1983 programs, actual harvested acreage
is likely to be reduced by 0.7 acre, compared with
0.5-0.6 acre per acre idled under previous land diver—
sions. 2/

2/ This discrepancy--between the amount of acreage
idled and the amount that harvested acreage is reduced--
is due to increased planting by nonparticipants and
other factors.



@= An Initial Assessment

fer Of the Payment-in-Kind
> Program

PKEPK
Ada As

PK PK



Grain sorghum

and other feed

Upland cotton

Rice

Soybeans

12

With average weather, production of the other feed
grains will also be down, largely because of an expected
15-20 percent decline in sorghum production. Among the
feed grains other than corn, only sorghum was eligible
for PIK. But in spite of the sharp reduction in out-
put and an increase in total use, sorghum production

is still likely to be greater than use, leading to a
slight increase in stocks. Corn price strength

should carry over to the other feed grains.

Producers signed up 95 percent of their upland cotton
base and committed nearly 7 million acres to conserving
uses. Assuming average weather, production is projected
to fall by 2.8 million bales from the 11.9 million har-
vested in 1982. Stocks could fall by 2.4 million bales,
but the remaining 5.5 million will be more than ade-
quate to meet domestic needs and export demand,

Producers enrolled 96 percent of their rice base acreage
in the ARP, PLD, and PIK programs. With average weather
conditions, this should reduce production as much as

30 percent from 1982. With domestic use likely to be up
5-6 percent in 1983 and with exports unchanged, total
use will substantially exceed production and eliminate
most surplus stocks. Hence, a significant increase in
season-average farm prices is possible. Whole base

bids for rice were not accepted to guard against
unacceptably tight supplies--especially of long grain
rice--in case of bad weather or an unanticipated surge
in foreign demand.

The PIK, ARP, and PLD will also affect 1983/84 soybean
supply, use, and price. Participants in the 1982

corn and cotton programs planted less than the maximum
acres allowed for these crops. This allowed them to
increase soybean acreage in response to relatively
attractive prices, Compared to early 1982, soybean
prices are now lower relative to both the market and
target prices of corn and cotton. Hence, it is likely
over the coming year that participants will plant the
maximum acreage allowed in corn and cotton and decrease
soybean acreage from 1982 levels.

Nonparticipating farmers are also likely to reduce soy-
bean acreage in 1983 to take advantage of more attrac-—
tively priced corn and cotton. Moreover, a substantial
drop in double-cropped soybeans is likely because of
the heavy wheat signup in the South.

With average weather, soybean production could be
around 2.1 billion bushels in 1983, 8 percent below
1982. Higher grain prices would contribute to a
slight increase in total use, causing ending stocks
to fall to 285 million bushels. Under these circum-
stances, the average farm price would rebound sharply
from 1982/83 to possibly $5.50-$7.25 a bushel.



A. Crop
Sector

Wheat

Corn

a farmer's acreage base. This approach permits
farmers considerable flexibility in managing the farm
production base for future program participation.

PIK's impact on the farm economy will be most direct
in the crop sector. With PIK in place, surplus stocks
will be drawn down sharply in 1983/84. With average
weather and the limited strengthening in demand for
farm products forecast for 1983/84, ending stocks will
pe down nearly 50 percent for rice, 35 percent for feed
grains, 30 percent for cotton, and about 10 percent
for wheat (see appendix table). Because of this
closer supply-demand balance, prices should improve.

Wheat farmers--who signed up 86 percent of their acreage
bases in the ARP, PLD, and PIK programs combined--could
idle as many as 32 million acres. However, farmers who
signed up for the ARP and PLD but not for PIK can
withdraw from the two former programs any time without
paying liquidation damages. Approximately 20 percent
of the conserving use acreage falls in this ARP/PLD
category. Thus, dropout could be a factor in the

wheat program if producers withdraw and take advantage
of improved prices (see the appendix table).

Under average weather conditions, wheat production in
1983 is expected to fall below 2.3 billion bushels,
compared with 2.8 billion in both 1981 and 1982.

With total use up slightly, stocks at the end of the
1983/84 season would total about 1.4 billion bushels.
Stocks held in the farmer-owned reserve could be
reduced substantially by PIK payments, and ccC-owned
stocks will be reduced to the 147-million-bushel
minimum required for the Food Security Reserve. Wheat
prices will be stronger in 1983/84, perhaps averaging
$3.50-$3.90 per bushel, compared with $3.45 in 1982/83.

Corn and sorghum producers enrolled 78 percent of the
corn/sorghum base in the ARP, PLD, and PIK programs,
with conservation use acreage totaling almost 40
million acres (for signup and compliance purposes, the
corn and sorghum bases are considered one). Despite
some dropout from the ARP/PLD program because of
higher corn and sorghum prices, more than 35 million
acres are expected to be put into conserving use.
Average weather in 1983 could result in a corn crop
roughly two-thirds ‘the size of the 1982 record and a
sorghum crop 15-20 percent below last year. As a
result, corn stocks are likely to be drawn down nearly
1.6 billion. bushels from the 1982 carryover of 3.4
billion. The stock reduction will be concentrated

in CCC-owned stocks and the farmer-owned reserve. The
season-average corn price for 1983/84 is expected to
be 20 to 40 cents per bushel higher--ranging from
$2.70 to $3.10--than it would have been without PIK.



CCC stocks will not be sufficient to meet all of USDA's
PIK obligations for corn, sorghum, and wheat. This

will necessitate CCC's acquiring additional supplies
from producers. The CCC is offering to liquidate regular
and farmer-owned reserve loans held by farmers. The

CCC purchase price of the grain will be the amount
required to liquidate the CCC loan, except farmers

who believe that they need additional compensation to
liquidate may submit competitive bids on the amount of
of compensation thay may be needed.

Table 1. Major provisions of the 1983 acreage reduction programs

Commodity
Grain :Barley:Upland:
sorghum:& oats:cotton: Rice

Program features

Wheat : Corn

Acreage Reduction Program (ARP)
--% base to be idled 3 15 10 10 10 20 I5

Paid Land Diversion Program (PLD):
--% base to be idled 3 5 10 10 10 1/ 5

Payment-in-Kind Program (PIK)

--% base to be idled : 10-30 10-30 10-30 NA 10-30 10-30
--PIK offer rate 3 95 80 80 NA 80 80
$ per bushel $ per pound

--Annualized storage payment H

rate for PIK commodities : 0.265 0.265 0.265 NA 2/ 0.0085
--Liquidation damages for 3
withdrawing from PIK : 0.86 0.572 0.544 NA 0.152 0.0028

NA = Not applicable.

1/ Cotton producers have the option to place up to 5 percent of their
base acreage under a paid diversion program. Participation in the
diversion program is not required for program benefits.

2/ The storage payment rate for cotton producers will be the approved

rate charged by the warehouse where the cotton is stored.



Appendix table. Effects of PIK on production, stocks, and use

Crop Year
Commodity 1981 1982 1983 Prob. variation
Wheat
Participation 1/ (percent) -- 48 86
Acreage harvested (mil. acres) : 81.0 78.8 --
CUA 2/ (mil. acres) - 5.8 32.1
Yield per acre (bu.) 34.5 35.6 --
Supply: :
Beginning (mil. bu.) 3 989 1164 1582
Production & imports (mil.bu.): 2802 2813 2268 +225/ -225
Total supply (mil. bu.) 3 3791 3977 3850 +225/ -225
Use 3
Domestic (mil. bu.) zi 854 870 910 +80/ -80
Exports (mil. bu.) 3 1773 1525 1500 +150/ -150
Total use (mil. bu.) 2 2627 2395 2410 +200/ -200
Total ending stocks (mil. bu.) : 1164 1582 1440 +200/ -200
FOR (mil. bu.) 3 562 1050 -- 7
CCC (mil. bu.) 3 187 180 =
Free (mil. bu.) 3 415 352 =
Season-average price ($/bu.) : 3.65 3.45 3.50-3.90
Corn 3
Participation 1/ (percent) s = 29 78
Acreage harvested (mil. acres) : 74.7 73.2 --
CUA 2/ (mil. acres) == 2.1 3/ 33.2
Yield per acre (bu.) 109.8 114.8 --
Supply
Beginning (mil. bu.) 1034 2286 3434
Production & imports (mil.bu. ): 8203 8398 5641 +575/ -575
Total supply (mil. bu.) 9237 10684 9075 +575/ -575
Use
Domestic (mil. bu.) 4984 5200 5100 +365/ -365
Exports (mil. bu.) zi 1967 2050 2100 +250/ -250
Total use (mil. bu.) : 6951 7250 7200 +550/ -550
Total ending stocks (mil. bu.): 2286 3434 1875 +550/ -550
FOR (mil. bu.) : 1310 2750 --
CCC (mil. bu.) 302 475 --
Free (mil. bu.) 674 209 -—
Season-average price ($/bu.) 2.50 2.55 2.70-3.10
Grain sorghum
Participation 1/ (percent) 3 = 38 78
Acreage harvested (mil. acres) : 13.7 14.2 -
CUA 2/ (mil. acres) H = Z 6.2
Yield per acre (bu.) z 64.1 59.0 --
Supply: :
Beginning (mil. bu.) Hy 109 297 547
Production & imports (mil.bu) : 879 841 700 +70/ -70
Total supply (mil. bu.) A 988 1138 1247 +70/ | -70

22



purchases improve as farm income increases. Overall, farm production
expenses are expected to decline 2 to 4 percent from the $144 billion
estimated for 1982. This will be the first such decline since 1953 and
is tied mostly to the 5- to 7-percent fall in farm input use expected as
a result of PIK.

PIK could affect around one-twentieth of 1 percent of total U.S. employment
and possibly 2 to 3 percent of employment in agriculture-related industries.
This does not mean that all workers affected would lose their jobs, but
rather that some would face shorter work weeks or temporary layoffs and
others would face longer-term unemployment. Firms which produce or deal
in inputs or services for crop production will be most heavily affected.

PIK's impact on U.S. farm exports in 1983 is not expected to be significant.
Slightly higher export prices will offset a small reduction in export volume
and may raise export value $500 million, possibly to $37 billion.

PIK will have little if any effect on food prices in 1983. Although grain
prices are expected to rise, the grain farmer receives only a small share of
the consumer's food dollar. Effects on retail food prices may be a little
greater in 1984, particularly in the second half as meat supplies tighten.

Figure 1
Area Harvested Plus Conserving Uses, 1970-83

Million acres
300 ;-

275 \-
Area harvested plus a

area in conserving use wo IN
ae yo .

\

\

200 »* Area harvested

250

225

175 bo
1970 75 80
Crop year

Note: Shaded area shows acreage in conserving use.



to $19 billion forecast for 1983 in December 1982,
prior to the announcement of PIK. The preliminary
estimate for calendar 1982 is $20.4 billion. Net
farm income is expected to increase again in 1984,
as the prices farmers receive for their products
improve and as their marketings increase.

Cash receipts The impact of PIK on 1983 net farm income will be
and gross farm concentrated in reduced production expenses and
income increased Government payments. Cash receipts and

gross farm income are likely to decline in 1983 as a
result of PIK, but then rise in 1984. Crop cash
receipts are expected to decline from the $75 billion
forecast for 1982, possibly to $64-$68 billion. This
decline will occur primarily as a result of a drop
in marketings and changes in loan activity. Though
ultimately the PIK commodities--with a market value
of $7-$9 billion--will be sold or fed by participating
farmers, not all of this will take place in 1983.
Although market prices for crops were relatively low
in 1982, heavy use of the commodity loan programs--
particularly farmer-owned reserve loans-—buoyed the
cash receipts realized by crop farmers $3 to $4
billion. In 1983, reduced production will help move
market prices above 1982 levels.

Much of PIK's impact on livestock receipts will occur
after 1983. Cash receipts from livestock are expected
to be up fractionally in 1983 to around $70 billion.
The forecast of livestock cash receipts has declined
more than $1 billion since the advent of PIK, but
very little of this decline was due to the PIK announce-
ment. The drop from previous 1983 livestock receipt
forecasts is due largely to the impact of the March
Hogs and Pigs report, which indicated larger pork
production and lower prices this year than expected
earlier.

| Taken together, cash receipts for crops and livestock
| in 1983 could fall 5-7 percent from the $144 billion
| expected for 1982, due in large part to PIK's direct
and indirect impacts on marketings, prices, and loan
| activity. The drop in cash receipts will be softened
by changes in Government payments. Cash payments
for deficiency, diversion, storage, and conservation
programs are forecast to range from $4 to $5 billion
in calendar 1983, contributing to gross farm income.
Cropland diversion payments will add over $1 billion,
more than offsetting an expected deficiency payment
drop that will result from higher market prices and
smaller production. With the value of PIK payments
in 1983 exceeding $5 billion (valued at the loan
rate), total Government transfers could reach $10
billion. Another $1 billion in PIK payments could

| 15

| Se eee ee ee



Iv. EFFECTS
ON THE NON-
FARM SECTOR

Input industry
impacts

in import demand, higher U.S. export prices because
of PIK could increase the value of 1984 exports by
about $1 billion. Should weather abroad prove except-
ionally unfavorable, the United States still would

pe in a position to meet world import demand.

With substantially fewer acres planted, farmers will

use less seed, fertilizer, fuel, and pesticides and will
need less operating capital. Farmers will also reduce
use of farm equiment, thus extending its life and
reducing the need for repairs. But the improved cash
flow positions that many farmers are likely to experience
because of reduced production expenses and higher income
should allow many operators to make capital

purchases or reduce debt.

The impact of PIK on the input industry, in the short
run, will be the most pronounced. However, in the
longer term, recovery in input demand should occur
sooner with the 1983 programs in place than if excess
commodity stocks continued to depress market prices
for several years.

Fertilizer use is likely to decline by about 12 to 14
percent (table 2). With the industry already suffering
from serious excess capacity due to slack demand and
increased imports, some additional production facilities
--primarily ammonia plants--are likely to close. Since
prices are also likely to soften, the drop in fertilizer
manufacturers’ revenues is also likely to be greater
than the decline in use (table 3). This effect will
extend to fertilizer retailers, particularly in the major
corn-producing areas, where the volume of business
could drop off more sharply than in other areas.

For the farm machinery industry, expenditures for repairs
will decline by 12 to 15 percent. Machinery purchases
are also likely to decline, but only by about 2-3 per-
cent. Given the program's positive impact on farmers’
cash flows, the machinery sector should recover from

its current slump sooner than if the low income-cash
flow problems continued.

Table 2. Reduction in input use as a result of the 1983 PIK program

Input

Seed : Fertilizer : Pesticides : Fuel : Machinery : Machinery

2 : : purchases :_ repairs

Change in Use

on nnn n= PET COME Ren

12-15

12-14 12-15 8-10 2-3 12-15

17

| er ce See re) Gee A ee



SUMMARY
PIK Takes Record Acreage Out of Production

Acreage of wheat, cotton, rice, corn, and grain sorghum is expected to

be cut by a record amount in 1983, as farmers take land out of production
under the USDA payment-in-kind (PIK) program and other acreage limitation
programs. This adjustment, of unprecedented scope, should set the stage
for higher farm prices and incomes in 1983 and beyond.

Under average weather conditions, the production declines associated with
the 1983 acreage decrease could be a fifth for wheat and grain sorghum, a
quarter for cotton and rice, and a third for corn. By the close of the
1983/84 marketing year, stocks of wheat could be almost 10 percent below
year-earlier levels. Rice stocks may be down about 50 percent, cotton by
30, and corn by 45. Even soybean acreage, which is not eligible for PIK,
should drop as less soybeans are double-cropped and as nonparticipating
farmers switch to corn and cotton because of improving prices for these
program crops. Soybean production may be off almost a tenth, and stocks
are likely to decline 25 percent.

PIK and other acreage reduction programs were initiated against a backdrop
of serious and worsening farm surpluses. Weak domestic demand, declining
exports, and record-large 1981 and 1982 harvests had increased stocks,
lowered commodity prices, depressed farm income, and boosted Government
expenditures. PIK participants, in exchange for idling a portion of their
cropland, will receive compensation in-kind from the crops held by the
Commodity Credit Corporation or in the regular and farmer-owned reserve
programs.

Net farm income in 1983 is now forecast to range between $18 and $22 bil-
lion. PIK's impact will be concentrated in production expense savings
rather than in a rise in cash receipts. Although grain prices will improve,
crop cash receipts are forecast to decline from 1982's preliminary estimate
of $75 billion, possibly to $64-$68 billion. This decline will be due in
large part to PIK's impact on marketings, prices, and loan activity. Live~
stock receipts are expected to rise fractionally to around $70 billion.
Overall, cash receipts from crops and livestock could fall 5-7 percent

from the $144 billion of 1982.

Stronger feed prices will raise production costs in the livestock sector
and temporarily increase cattle and hog marketings as some producers retain
fewer breeding animals. Prices of feeder cattle and feeder pigs could be
under downward pressure well into next year. The current expansion in hog
production is expected to end early in 1984. On balance, pork production
in 1984 will be about the same as in 1983, but hog prices will be slightly
higher. As consumer demand for meat rises with economic recovery and as
meat output is tempered by a higher cost structure, cattle and poultry
prices will also improve.

Reduced plantings and harvestings will cut farmers' use of seed, fertilizer,
and pesticides and need for repairs between 12 and 15 percent. Fuel use
will drop 8 to 10 percent. Machinery purchases will be much less affected
and could be down as little as 2 to 3 percent. Historically, machinery

3

a ee oo Lae eA CN See



Approved by the World Agricultural Outlook Board and
summary released March 31, 1983

CONTENTS

Page

Summary 3

I. The Rationale for PIK 5
II. Major Features of the Program 6
III. Effects on the Farm Sector 9
A. Crop Sector ll

B. Livestock Sector 13

Cc. Farm Income 14

D. Food Prices 16

E. Farm Exports 16

Iv. Effects on the Nonfarm Sector 7
v. Cost Implications 19

vI. Consequences of PIK on the Longer Term Supply-Demand Balance 21

This report was prepared in the Economic Research Service with cooperation
from the World Agricultural Outlook Board, Agricultural Conservation and
Stabilization Service, Foreign Agricultural Service, and the Office of
Budget and Policy Analysis. .

This analysis of the PIK program was prepared on the basis of information
available March 30. The impacts described here could change significantly
as more definitive information becomes available.

2 Second Printing

i



An unfavorable

weather scenario

B. Livestock
Sector

Cattle

The proportion of acreage likely to be idled in the
crop sector in 1983 is large enough for some to raise
questions about the adequacy of supplies should U.S.
and foreign weather prove unusually unfavorable.

There is a relatively low probability-—about 1 in 3 for
the United States only, and roughly the same for the
rest of the world--that a serious weather-related
production shortfall will develop. The probability

of weather-reduced yields simultaneously in both the
United States and the rest of the world is even lower
about 1 in 7. Should such a situation develop, crop
supplies in the United States would tighten signifi-
cantly. Prices could rise sharply as the ratio of
stocks to use would slip into the price-sensitive

range for most of the program crops. Nevertheless,

the supplies available in the United States would be
adequate to meet domestic needs and exports, and the
crop sector would be in a more balanced position in
1984.

The effects of PIK on the crop sector are strong enough
to spill over into the livestock sector. While much

of this livestock impact will be delayed until 1984
because of the lag between rising feed costs and live-
stock production decisions, recent and prospective
changes in feed costs and supplies are affecting the
livestock sector.

Initially, livestock marketings may increase somewhat
as some producers alter production decisions. This
could result in larger meat supplies in the short run,
causing prices to decline later in 1983. However,
livestock inventories are already at relatively low
levels. In the longer term, nevertheless, livestock
production will be smaller than with continued low-cost
feed as breakeven costs rise. Since livestock prices
typically rise proportionally more than any drop in
output, livestock receipts are likely to eventually
be higher with PIK.

Higher feed prices will force feeder cattle prices
down, as feedlot operators attempt both to keep
operating costs down and to place fewer animals on
feed. Large numbers of young cattle are also likely
to be removed from PIK wheat grazeout acreage in
late spring; most of these animals will be placed on
feed for at least a short period or will go directly
to slaughter. However, cattle feeders will be reluctant
to fill their lots at current feeder cattle prices,
so feeder cattle prices could be under downward
pressure late this spring and perhaps well into next
year.

Since cattle are normally on feed for 3 to 5 months and
the other inputs used in feedlot operations are gen-
erally contracted for when the animal is initially
placed on feed, PIK's higher feed prices will not be

13



be delayed until 1984 as a portion of farmers take
advantage of the 5 months of storage assistance.
But despite higher Government payments and marginal
increases in other farm income sources, gross farm
income could fall 1-3 percent in 1983,

Production More than offsetting the expected drop in gross farm
expenses income will be a decline in production expenses of

possibly 2-4 percent from the $144 billion estimated
for 1982. It will be the first drop in production
expenses since 1953. The decrease is due primarily
to the 5-7 percent fall in overall farm input use
expected as a result of PIK and the other acreage
limitation programs. Lower input prices, especially
for manufactured inputs, plus an easing in farm
interest rates will also help keep expenses below
the 1982 level. Expenditures for industrial inputs,
including seed, may decline by about $5 billion.
Partially offsetting this drop will be a $2-billion
increase in farm-origin input expenses, especially
feed.

D. Food Prices The PIK program will have little or no effect on food
prices in 1983. The higher commodity prices antici-
pated as a result of PIK could raise the farm value
of some items such as grains as much as 10 percent.
However, given the small share of the retail price
of cereals and bakery products related to farm prices,
PIK's higher 1983 farm prices will have little effect.
Food prices are currently expected to increase 2 to
4 percent in 1983, compared with a 4-percent increase
in 1982 and a 7.9-percent increase in 1981.

The higher grain prices likely as a result of PIK will
increase livestock production costs, farm prices, and
eventually retail meat prices in 1984, The impact

of the higher livestock prices likely with PIK will

be limited, however, since farm livestock prices account
for less than half of the consumer's meat dollar. Thus,
food price increases in 1984 could be up to 1 percent-
age point higher as a result of PIK. Second-half
increases will be the sharpest.

E. Farm Exports PIK's impact on U.S. farm exports is not expected to
be significant in fiscal 1983, Higher export prices

will work to reduce the volume of products shipped in
the crop sector in particular. However, this drop in
volume should be small, and the increase in export
prices will work, on balance, to raise the value of
exports as much as $500 million to possibly $37
billion.

The impact of PIK on farm exports in fiscal 1984 will
depend on a number of developments, such as weather,
economic recovery, and how aggressively the other
exporters move to expand production and exports. Assum-
ing average weather and some recovery-related growth

16

1 EE |