ECONOMIC CONDITIONS IN THE FARM SECTOR

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP86M00886R002000030001-9
• Release Decision: RIFPUB
• Original Classification: K
• Document Page Count: 14
• Document Creation Date: December 21, 2016
• Document Release Date: August 20, 2008
• Sequence Number: 1
• Publication Date: April 9, 1984
• Content Type: MEMO

Approved For Release 2008/08/20 : CIA-RDP86M00886R002000030001-9
THE WHITE HOUSE
WASHINGTON
Date: 4/11/84 Number: 168965CA Due By:
Subject: Cabinet Council on Food and Agriculture Chaired by the President
Tuesday. April 17. 1984 - 2:00 P.M. - Cabinet Room
Vice President
State
Treasury
Defense
Attorney General
Interior
Agriculture
Commerce
Labor
HHS
HUD
Transportation
Energy
Education
Counsellor
GSA
EPA
OPM
VA
SBA
^
CEA
CEQ
OSTP
Baker
Deaver
Darman (ForWN Staffing)
Jenkins
Mc Farlane
Svahn
CCCT/Gunn
CCEA/Porter
CCFA/
CCHR/Simmons
CCLP/Uhlmann
CCMA/Bledsoe
CCNRE/
The President will chair a meeting of the Cabinet Council on
Food and Agriculture on Tuesday, April 17, 1984 at 2:00 P.M.
The agenda is as follows:
- Farm Sector Debt (background paper attached)
~+^~~ ~+? U Craig L. Fuller ^ Katherine Anderson [] Dqn Clarey
Assistant tothea Pr 'd
asp ent ^ Tom Gibson [yLarry Herbolshetm er
for Cabinet Affairs Associate Director
456-2823 Office of Cabinet Affairs
456-2800 Z--3 00-D
Approved For Release 2008/08/20 : CIA-RDP86M00886R002000030001-9
 DEPARTMENT OF AGRICULTURE
OFFICE OF THE SECRETARY
WASHINGTON, D.C. 20250
Recently there have been many news reports concerning the state of the farm
economy and its weak financial condition. At the same time, prices for most
major farm commodities are up significantly from the recent past and we are
projecting near-record net farm income in 1984. This paper attempts to put
this apparent paradox into perspective by suggesting that the hardships, al-
though real, are not evenly distributed among the farm population and not as
pervasive as implied. The sector's financial problems are not being felt by
most operators. Many of the debt problems are highly concentrated in parti-
cular regions where drought and market developments have combined to cause
severe impact. A major contributing factor to the problems of producers of
certain commodities was excessive purchases of land and machinery in the last
5 years at inflated prices using capital borrowed at high interest rates with
the expectation of continued double-digit inflation and land price escalation.
o While much improved from a year ago, financial conditions in the farm
sector are not as good as they could be and are particularly severe for
operators who planned on continued inflation in the 1980's . While
roughly half of all farmers are debt-free, about 15 percent of the
operators with heavy debt burdens and hard-hit by last summer's drought
face serious income and cash flow problems. These farms account for
about one-third of the gross cash receipts of the farm sector. An even
larger group faces significant losses in equity as the value of their
assets drop after several decades of appreciation due in large part to
rapid inflation. Ultimately, 2-4 percent may be forced out of business
this year compared with 1.5 percent last year. While not unusual for
other sectors of the economy, agriculture is not accustomed to these
levels.
o It is important to recognize that much of this hardship is the result of
a more general deflationary transition at work throughout the economy.
Agriculture is not the only sector with individuals who over-extended
themselves in the late 1970's based on the expectation of continued
double-digit inflation and sharply rising interest rates. Banks, home-
owners, builders, and others who sought to hedge and benefit from in-
flation are in the same position. It is perhaps more severe for agri-
culture since the sector is both interest-rate and export-sensitive and
the world economy has not yet rebounded with the U.S. recovery.
o In addition to the early 1980's reversal in inflation, a wide range of
supply and demand factors here and abroad combined to generate the
financial problems currently troubling the sector. The market reversals
the sector has suffered since 1981 are without precedent and were aggra-
vated by embargoes and rigid farm programs that Congress would not adjust
 when the economic environment changed. Agriculture's financial diffi-
culties also relate to what in retrospect were poor business decisions
in the late 1970's that involved purchasing land and machinery at inflated
prices using borrowed capital at high interest rates. Factors outside
the sector, such as macroeconomic developments, have also played a major
role. Farm lenders, for example, are responding to monetary conditions
in the general economy and putting more emphasis on farmers' ability to
repay loans on the basis of cash flow rather than on asset appreciation
as was traditionally the case. This transition has worsened the sector's
financial problems.
o The Administration has taken steps to ease these financial problems. The
1983 acreage reduction programs, reinforced by drought, brought commo-
dity supplies into closer balance with demand and raised lagging farm
prices. While costly in the short term, the 1983 programs were critical
in keeping agriculture viable and limiting government payments over the
medium term of 2-4 years under what have become essentially farmer entitle-
ment programs. The Farmers Home Administration, which accounts for 11
percent of the farm credit outstanding, has been able to stay with over
97 percent of its farm borrowers in FY 1983.
And after 2 years of debate, a compromise bill on 1984 program provisions
was recently passed by Congress reducing the high support levels that
contributed to past surpluses. Enough acreage should also be idled
under the 1984 acreage reduction programs to help minimize the rebuilding
of troublesome surpluses later this year while at the same time reducing
future federal budget exposure. Action has also been taken to expand
export programs and to improve trade relations with key importing countries
such as the Soviet Union.
o Longer term improvements, however, depend on dealing with more basic
problems such as rigid farm policy. At the President's request the
Cabinet Council on Food and Agriculture has initiated a comprehensive
review and assessment of food and agriculture policies and programs
as part of the Administration's preparations for the 1985 Farm Bill.
Public hearings are being held to increase awareness of the advantages
and disadvantages of alternative farm programs and the full cost of in-
flexible programs that isolate farmers from the market. These efforts
should lead to a consensus on the policies needed for a competitive
agriculture's ability to adjust to changing market conditions without
large-scale government intervention.
However, many of agriculture's problems are outside the reach of farm
policy. Monetary and fiscal policy and the interest rates they influence,
for example, have become critical in determining farm production costs,
domestic demand for farm products, and--via exchange rates--export demand
as well. For every one percentage point change in the interest rate on
farm debt outstanding, farm income changes by $2-3 billion; for every ten
percent change in the value of the dollar internationally, agricultural
exports change by at least five percent. With agriculture integrated
more closely than ever into the domestic and international economy,
farm financial conditions are increasingly determined outside the sector
and independent of farm policy.
 While much improved from a year ago, financial conditions in the farm sector
remain under stress. This past summer's PIK program and drought reduced
surpluses of most farm products. Commodity prices, with the exception of
wheat, have strengthened (Figure 1). However, commodity futures for 1984
crops and farm asset values continue under pressure from what the market sees
as a persistent problem of excess productive capacity in agriculture.
Lagging commodity prices in 1981 and 1982 and reduced marketings at higher
prices this past summer and fall have left many farmers facing cash flow and
income problems. Many are also experiencing large-scale equity losses. They
are now paying for overinvesting in expanding capacity during the high infla-
tion-low interest rate period of the 1970's with high interest payments and
depreciating assets in the 1980's (Figure 2).
As a result, rates of return in the sector have dropped off sharply from the
1970's and were actually negative in 1982 and 1983 (Figure 3). While the
sector can ultimately expect increased returns to its revalued assets, in the
short term 10-15 percent of farm operators face financial pressure and 2-4
percent may be forced out of business this year compared with about 1.5 percent
last year. Although low relative to other sectors of the economy, agriculture
is not accustomed to these levels.
Financial pressures have eased somewhat since late 1982 and 1983 in many areas
as large-scale government payments buoyed farm incomes above what they would
otherwise have been (Figure 4). The most serious problems are now concentrated
among new entrants into the sector--farmers with large debt burdens at high
interest rates and hard-hit by the drought. Continued recovery in 1984, which
now seems likely with reduced surpluses and more normal weather, will be critical
in returning agriculture to a more viable economic position.
Representatives of the American Bankers Association and the Independent Bankers
Association of America, speaking for the agricultural banks which hold two-thirds
of the farm loans in the banking system, have indicated in most instances they
will continue to furnish credit to their farm customers this year. Typically,
they report that they are requiring higher leveraged operators, most of whom
expanded their operations rapidly during the late 1970's, to make modifications
in their asset holdings.
The losses of the cooperative Farm Credit System's production credit associa-
tions (short-term lenders) are reported to be over $200 million for the year.
This represents close to 40 percent of the total amount this lending institution
has lost in its entire history. While the financial stability of the Farm
Credit System is still sound, weaknesses in individual production credit asso-
ciations have resulted in the liquidation of some units and consolidation of
other neighboring units in the Midwest and Northwest and a few isolated locations
in the Southeast. Examiners are applying strict standards and are closely
scrutinizing the quality of loans being made. The result within this system
is that producers, already under stress, are finding it more difficult to obtain
as much credit as before or be offered any credit at all because of reduced
credit-worthiness.
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-4-
The Farmers Home Administration (FmHA) was able to stay with over 97 percent
of its 271,000 farm borrowers in FY 1983. Special servicing actions to help
farmers were up by 40 percent in FY 1983 compared to FY 1982. Entering
FY 1983, 65,022 borrowers were helped because FmHA worked out deferral, re-
scheduling and subordination agreements. The agency deferred principal and
interest payments for 2,925 farmers and rescheduled or reamortized loans
for 30,804 borrowers.
Over the longer run, however, the economic position of the sector and these
operators in particular depends on addressing the more basic problems--
particularly the macroeconomic and farm policy issues. At the request of
the President, the Cabinet Council on Food and Agriculture is undertaking a
reexamination of farm policy, and the Department of Agriculture is conducting
public hearings in anticipation of the 1985 Farm Bill debate. But even with
more appropriate farm programs, however, forces outside agriculture such as
macroeconomic policy and foreign developments will continue to be major deter-
minants of the economic state of agriculture.
The Market Reversals of the 1980's
A wide range of economic, political, and weather factors here and abroad com-
bined at the start of the 1980's to throw the farm sector into a deep economic
downturn. Demand for U.S. farm products actually declined in contrast to
the 3-4 percent per year growth of the 1970's. At the same time, the sector's
capacity to produce reached an all-time high and farmers found themselves de-
pendent on high capacity utilization rates and strong commodity prices to meet
income and debt service needs.
The more flexible farm programs the Administration sought in its 1981 Farm Bill
proposals were rejected by Congress. The rigid programs ultimately passed by
the Congress aggravated the problems generated by stagnant demand by making
it attractive for producers to continue operating at full capacity--even if it
entailed lower-than-anticipated returns and producing for government programs
at considerable taxpayer expense rather than producing for the open market.
The most dramatic of the factors contributing to this situation was declining
foreign demand for U.S. farm products. The world farm trade environment shifted
dramatically from the 5-6 percent growth pace of the 1970's to virtual stagna-
tion during the early 1980's. Global recession reduced per capita incomes and
slowed growth in demand for farm products. Efforts in many of the largest
importing countries to increase self-sufficiency, including more protectionist
trade policies, slowed growth in import demand even more sharply. International
financial and debt problems left many countries unable to purchase even the
more limited imports they would otherwise have purchased.
The U.S.'s competitive position in this bearish world market also weakened
sharply with the appreciation of the dollar, the aftermath of the Soviet embargo,
strained political relationships with key importing countries, such as Iran,
and increasingly aggressive marketing by the other exporting countries. As a
 result, slowed growth in world trade translated into a sharp drop in U.S. farm
exports (Figure 5). This outcome contrasts sharply with previous expectations
that the major issue of the early 1980's would be expanding capacity fast
enough to feed the world.
Growth in domestic demand for farm products also weakened during the early
1980's.. At play were the same economic considerations, exacerbated by high
real interest rates, that made stock holding more expensive and farm product
users willing to draw down their commodity stocks to control costs. This
combination of weak domestic and export demand slowed growth in overall demand
for U.S. farm products from 3-4 percent during the 1970's to less than 1 percent
in the early 1980's.
Agriculture's Expanding Capacity to Produce...
The 1970's strong growth in demand and the high farm returns that accompanied
it generated a sharp increase in investment in expanding the sector's capacity
to produce, including a net addition of over 50 million cropland acres. The
crop sector's capacity to produce expanded 3-4 percent over the late 1970's
compared with 1-2 percent over the 1950's and 1960's (Figure 6). Farmers ex-
panded acreage, accelerated their adoption of new technologies, and increased
input use.
The low real interest rates, high inflationary expectations, and the rapid asset
appreciation of the 1970's were critical in making the capital investment
underlying these gains in capacity possible and the adjustments of the 1980's
inevitable (Figure 7). Real interest rates were negative during much of the
period and rapidly rising asset values and equity provided farmers with the
incentive as well as the collateral base to expand. High commodity prices
and large marketings worked to keep the interest expense associated with this
capital expansion small relative to net cash income--on average less than 20
percent over the 1970's compared to approximately 15 percent over the 1960's.
The farm programs put in place over the last decade encouraged this expansion
in capacity. Rising support levels during the late 1970's in particular reduced
risk sharply and guaranteed producers a minimum return in many cases equal to
or greater than the variable costs of production. Wheat loan rates, for example,
increased from $1.37 per bushel in the mid-1970's to $3 in 1980--a 220 percent
increase in five years. Target prices for wheat increased from $2.05 per bushel
to $3.63 in 1980--a 177 percent increase. As a result, production for government
programs, as distinguished from production for the open market, became a viable
alternative.
While originally designed to the contrary, the 1981 Farm Bill institutional-
ized this setting by legislating high and rising supports that would have had
little impact on the market if demand had continued strong, but became a serious
impediment to adjustment as market conditions shifted. Congress narrowly approved
the legislation because they felt it did not escalate support prices rapidly
enough for farmers. Since 1980 the wheat loan rate has increased to $3.30 per
bushel--a 10 percent increase. Wheat target prices will rise to a projected
 $4.38 per bushel level based on the Agricultural Programs and Adjustment Act
recently passed by Congress--a 20 percent increase over five years.
Despite the dramatic moderation in the rate of increase in price supports,
they remained above market clearing levels in the early 1980's when the markets
signaled lowered needs and ultimately reductions in capacity. Many farmers kept
their capacity utilization levels high by producing for government programs
established by Congress. This mix of sharply slower growth in demand, high
production, and rigid farm programs resulted in large surpluses, record govern-
ment outlays, and serious financial pressure on the sector.
Record government payments helped to support farm incomes at levels higher than
market forces would otherwise have dictated to help soften the inevitable come-
down. But farm assets fared less well. With their income-earning capacity
down and speculation reduced due to lower inflation rates, land values in par-
ticular fell off sharply after 3 decades of uninterrupted gains due in large
part to rampant inflation. Moreover, with interest rates up sharply and incomes
weaker, the cost of the capital investments made in the 1970's increased dramati-
cally. While a limited number of farmers are facing bankruptcy and foreclosure,
most are facing equity losses.
Perhaps the best indicator of the ultimate impact of this combination of
weaker than expected commodity prices and marketing receipts and the higher-
than-expected costs, both for producing farm products and financing the
investments in capacity made in.the 1970's, was the change in interest pay-
ments relative to net cash income. Annual interest payments increased from an
average of 20 percent of net cash income over the 1970's to over 50 percent
during the early 1980's (Figure 8).
Administration Initiatives
In this setting, the Administration took a number of initiatives designed both
to ease financial problems in the farm sector and to minimize the federal
budget exposure.
Commodity Programs
The 1983 acreage reduction programs, reinforced by the drought, were temporary
measures designed to reduce excessive stocks, minimizing short and medium term
government expenditures in support of agriculture. Farm income was enhanced
without shorting the market (Figure 9). It also defused Congressional pressure
for more radical measures such as mandatory acreage controls. But while PIK
worked well to deal with the surplus problem in 1982 and 1983, it alone could
not solve more basic problems. Use of PIK-type programs over the longer run
would quite likely work counter to both the sector's and the general economy's
interests in encouraging a competitive agriculture capable of meeting domestic
farm needs and supplying a large and growing share of the world market.
The programs proposed for the 1984 crop year include a package of acreage pro-
grams, frozen target prices, and increased funding to expand our commercial
and concessional sales abroad (Figure 10). This 1984 program, following the
 sharp stock draw-downs made in 1983, should work to keep financial and economic
conditions in the farm sector improving and government program expenditures
moderating.
Credit Programs
More than two years ago USDA formed an ad hoc agricultural credit task force
composed of members of the agricultural executive committees of the American
Bankers Association, Independent Bankers Association of America, and the Gover-
nor of the Farm Credit System. This group has met regularly to monitor credit
and credit-related conditions and to encourage additional cooperation between
the various financial entities.
The Farmers Home Administration has continued to expand the use of contracted
services to utilize the loan servicing of commercial bank entities. On
March 28, 1984, I announced the implementation of an Approved Lenders Program
which was developed jointly with commercial bankers and the Farm Credit System
to significantly encourage the use of guaranteed loan programs. Guarantees
can play a significant role in strengthening the position of commercial and
Farm Credit lenders and enhancing their ability to continue supplying credit
to existing borrowers.
The Administration has increased its budgeted short-term farm lending funds
from $850 million in FY 1981 to a request for slightly more than $2 billion in
the 1985 budget. This has enabled us to assist producers in working through
their current stress situation.
The Administration has moved to substantially strengthen and promote the Federal
Crop Insurance program as the primary farm risk management tool for use by
producers. It has also taken steps to eliminate improper and abusive use of
emergency lending programs which tend to exacerbate the financial problems of
some producers already in difficulty.
The resolution of many of the factors that contributed to or exacerbated the
farm decline of the early 1980's depends in part in the longer term on the
farm policies and programs enacted in 1985. At issue is whether traditional
farm policy programs and tools such as acreage reductions, loan rates, target
prices, and reserves can meet the policy needs of a rapidly changing farm
sector and a volatile international market while effectively promoting the
broader interests of the general economy.
The structure of agriculture has changed dramatically since the inception of
many of the programs put in place in the 1930's. The business of farming has
changed dramatically as farmers moved from purchasing less than half to over
two-thirds of their inputs from outside the sector and the average farm expanded
from a 150-acre family enterprise to a 450-acre operation. The sector is
increasingly falling into two groups--one made up of up to 1-2 million small
farmers, many with part or most of their incomes from off-farm sources, that
produce less than 20 percent of the sector's output, and 400,000 medium and
large operators without other sources of income that produce 60-80 percent of
the sector's product.
 Both of these shifts raise serious questions about the appropriateness of
commodity programs designed to effectively manage supply though a combina-
tion of price supports, acreage adjustments, and payment limitations. Per
capita incomes of farm people have also grown fast enough to almost equal
nonfarm incomes and in the process eased one of the critical problems cited
to justify traditional farm programs.
The Administration has undertaken a number of initiatives in anticipation of
the 1985 Farm Bill debate. Cabinet Council discussions and USDA public hearings
on farm policy are being held in an effort to develop a consensus regarding
the better farm policies that both agriculture and the general economy need to
strengthen the sector's capacity and incentive to adjust to changes in market
conditions without large-scale government intervention.
However, even with farm policy reforms in 1985, forces outside the sector--
such as macroeconomic developments--will continue to be a major determinant
of the economic state of agriculture.
High interest rates have had a particularly pronounced impact on agriculture by
increasing the cost of operations and investment capital fast enough to make
interest payments the sector's largest single expense item. A 1 percent change
in interest rates on all farm debt outstanding currently translates into a
$2-3 billion change in the sector's net income.
Domestic demand for farm products has been reduced by high interest rates,
both through their dampening impact on economic activity and demand for direct
use and stock holding. In many cases, processors of farm products both here
and abroad took advantage of the buyer's market in the early 1980's to pass
the rising cost of holding stocks back down the processing line to farmers and
the federal government where the price-depressing impact of stocks tends to be
greatest. While the impact is difficult to quantify with any precision, farmer
incomes clearly suffered from the lower commodity prices resulting from this
shift.
High interest rates also forced up the value of the dollar and weakened the
sector's competitive position in the world market. USDA analysis suggests that
up to $6 billion in foreign sales and possibly $2-3 billion in farm incomes were
lost over the last 2 years as a result of the stronger dollar. While the other
sectors of the economy were also affected by high interest rates, agriculture's
growing dependence on capital borrowed on the open market, the particularly
bearish impact of changes in stock holding, and the sector's critical dependence
on exports to dispose of up to a third of its product, made the impact of higher
interest rates particularly severe.
Progress in achieving desired economic growth, keeping inflation low, and re-
ducing Federal budget deficits could very well have a greater impact on the
well-being of farmers over the next several years than farm programs. It is
important that we not lose sight of these linkages as agricultural policy is
developed in the coming year.
 320 -
Cash Markets
March
November-
December
Item
Unit
1983
1984
1984?
Corn
$/bu.
2.82
3.37
3
02
Wheat
$/bu.
4.18
3.85
.
3
80
Soybeans
$/bu.
5.81
7.77
.
7
31
Cotton
Ct/lb.
66.1
74.9
.
75
1
Broilers
Ct/lb.
44.3
62.0
.
n
a
Hogs
$/cwt.
50.94
47.00
.
.
56
92
Cattle
$/cwt.
64.03
68.48
.
64.17
Eggs
Ct/doz.
69.1
91.0
n.a.
1982
1983'
1984'
Billion Dollars
Net Farm Income
30.1
22.1
21.23
31.36
Net Cash Income
' Projected.
34.7
36.3
41-42
38-41
350-
340-
330 -
310
300 -
290
280-
270 -J
260 -
230,
240 -i
250 -
FIGURE 1
AVERAGE U.S. MARKET PRICES AND INCOME
FIGURE 2.
REAL FARM EQUITY
1970 - 1984
1970 1972 1974 1976 1978 1980 1982
YEAR
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FIGURE 3.
FARM SECTOR RATES OF RETURN
26 1970 - 1964
,1974 1976 1976
YEAR
FIGURE 4.
NET FARM INCOME AND GOVT PAYMENTS
YEAR
+ EXCL PAYMENTS
 FIGURE 5
Slowed Growth in World Trade Translates
into a Drop in U.S. Farm Exports
World Farm Trade U.S.. Farm Exports
Million Tons
1978 382
137
1979 404
147
1980
1981 435
162
1982 437
152
1983 Estimated 437
144
1984 Projected 437
140
FIGURE 6
GROWTH IN CAPACITY TO PRODUCE CROPS
0 I I I I I I I ;0 I 1 I r"1Tr'
1955-59 60-64 65.69 -74 75-79 50-83
YEAR
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 FIGURE 8
INTEREST PAY'TS/NET CASH INCOME RATIOS
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FIGURE 9
PIK, reinforced by the drought, was a temporary remedy
o Reduced excessive stocks
o Enhanced farm income
o Minimized direct outlays in support of agriculture
o Eased storage problems
o Increased acreage devoted to conserving uses
o Assured adequate market supplies
FIGURE 10
Administration Initiatives
COMMODITY PROGRAM INITIATIVES:
1984 Cash Paid Diversion Program for Wheat, Plus PIK
Reduced Wheat than Rates to Increase Exports
1984 Freeze Target Prices of All Commodities With Cash
Diversion if Stocks are Excessive
EXPORT EXPANSION:
CREDIT INITIATIVES:
BUDGET SAVINGS:
Increased Export Credit and Food Aid Funding
Increased High-Value Export Promotion Funding
Improved Trade Relations with USSR
Increased Drought Assistance and Economic Emergency
Loans
Doubled FmHAtOpe rating Loari'anj1Loan Guarantee Levels
.Il