Trying to harvest a policy to keep farm sector competitive

Recently, there has been much in the news about the financial condition of the United States farm sector. The articles have brought into full view the current, and somewhat confusing, situation of farm foreclosures during a period of higher commodity prices and large government outlays for farm programs.

As a result, many are debating the type of farm policy needed to meet the future needs of agriculture and the citizens of this country. It is important to understand the need for an effective farm policy in the future and to become involved in the current debate.

Agriculture is our largest industry. Broadly defined - from the farm to the retail grocery store - it accounts for about 20 percent of the entire gross national product. Our food and fiber system also employs about 20 percent of the nation's work force. US agricultural exports represent the largest contributor to our balance of payments, accounting for some $20 billion a year. Also, every activity - and nearly 35,000 more jobs.

Agriculture also provides US consumers with the highest quality and most reasonably priced food and fiber supply in the world. The share of US disposable income spent on food has declined to 16 percent from the almost 19 percent spent 20 years ago. In real terms (1972 dollars), food prices have only risen about 9 percent in the last decade compared with an 18 percent increase in per capita disposable income.

Agriculture is the most efficient industry we have in the US. Today, each farmer produces, with help from others in the industry, enough agricultural products to sustain almost 80 people.

Moreover, our agricultural sector is the major exporter of food for the rest of the world. Because of our rich land, favorable climate, and advanced technology and infrastructure, the US has a competitive advantage over most other countries of the world.

Agriculture exports and international food aid not only provide economic growth and serve humanitarian needs, they also promote a safer world: If major world powers' economies are inextricably tied to one another in international trade, I believe it is less likely that there will be major confrontations.

Public support for US agriculture dates back to the creation of the Department of Agriculture, the people's department, in 1862.

It was indeed the people's department: More than 55 percent of the American people were engaged in production agriculture.

Early in the department's history it was recognized that it was in the public's interest to promote agricultural development.

Particular emphasis was given to agricultural research and the dissemination of useful results to the nation's farmers. The American farmer responded by adopting this new technology at a breakneck pace. Output increased and productivity was enhanced.

The ability of markets to absorb the increased output grew less rapidly, however, and the 1920s and '30s were characterized by low commodity prices, farm incomes far below levels in the rest of society, and widespread farm failures.

In response to this situation the farm programs of the New Deal, starting in 1933, were developed in an effort to provide for price and income support - a dramatic departure from past policies.

The New Deal's farm programs worked largely through the use of nonrecourse loans. When prices were low, farmers could use the commodities they produced as collateral for federal loans. If prices failed to rise above loan levels, farmers could forfeit their collateral to the federal government. In subsequent years, if prices rose, the government could sell forfeited commodities back onto the market. The loan rate per unit of commodity was set at a level expected to generate acceptable farm incomes each year.

It became clear soon after implementing the support programs of the '30s that growth in farm productivity was further encouraged by higher and more stable prices. At the same time, higher prices reduced demand for farm products, both at home and abroad. As a result, large government stocks accumulated, overhanging the market and increasing taxpayers' costs. Supply control programs were then implemented to try to idle some of the excess capacity.

Over time, in an effort to become more competitive and reduce the chronic surpluses that plagued the agricultural sector in the 1950s and '60s, Congress moved toward a system that separated support of commodity prices from support of incomes.

The Agriculture and Consumer Protection Act of 1973 established an entirely separate income-support program.

Target prices were set by law or formula at levels determined to be high enough to protect farmers' incomes. A ''deficiency'' payment, calculated as the difference between a target price and the higher of the loan rate or market prices, was made available directly to farmers. This direct payment system allowed loan rates to be set at levels that were less likely to interfere with the functioning of the market.

Programs have also been implemented over the last three decades with the purpose of increasing the demand for farm commodities, while at the same time achieving a specific social objective.

These programs include food assistance programs - such as school lunches and food stamps. In addition, the PL 480 program (Food for Peace) was introduced in 1954 to make surplus commodities available on a donation basis or under highly concessional sales terms to countries in need. Today, we also have export promotion and credit programs to enhance commercial demand for our products abroad.

Farm policies today continue to center on the nonrecourse loan program, reserves, supply adjustment programs, and deficiency payments to support incomes. But while farm policy tools have changed little in the past 50 years, farming in the US has undergone dramatic changes.

Some of the key points to keep in mind when considering the current farm situation and future farm policy include:

* The number of people who depend directly on agriculture production for a living is relatively small. In 1983, the farm sector was made up of about 2.4 million farms, with only 3 percent of the population living on farms. This contrasts sharply with the 25 percent of the population living on 6 million farms in the '30s. Further, a little over 10 percent of our farms account for about two-thirds of the sales of agricultural products; the remaining 90 percent of farms produce about one-third of the output and their occupants depend heavily on off-farm employment to supplement their incomes.

* The farm sector has become well integrated with the US and world economies. As farms have become more mechanized and larger in size, farmers have become more dependent on purchased inputs, and production is largely financed by borrowed capital. By contrast, in the 1930s, farmers still relied to a large degree on farm-generated production inputs and internal financing. Farmers now purchase about three-fourths of their total inputs from off the farm, compared with one-fifth in 1930. At the same time, exports have grown to where they now account for the production from about one-third of US acreage. In 1970 we exported $7 billion worth of agricultural commodities; today we export close to forces outside of their control. Interest rates and international currency exchange rates are now two of the farmers' greatest concerns. Both of these have a correlation to the federal deficit.

* Current farm programs are expensive, encourage excessive production, and reduce our competitiveness in world markets. Government outlays in fiscal years 1982 and '83 were successive records, at $11.7 billion and $18.9 billion, respectively. Although fiscal year 1984 outlays are projected to decrease to $5. 6 billion, this figure is still roughly double the average annual outlay for the 1971-80 period. The large expenditures result primarily from price supports being above market-clearing levels much of the time. This also reduces our competitiveness in world markets, lowering export values and commodity prices.

* SOOentional acreage reduction programs required for farm-program benefits are not operating effectively. Program slippage has become a serious problem in the administration of the acreage reduction programs. Farmers who participate often intensify cultivation of acreage remaining in production and idle the least productive acreage. Nonparticipating farmers expand acreage to capitalize on expected higher commodity prices likely to be generated by acreage reduction programs. The higher commodity prices also encourage producers in other major exporting countries to expand production.

* Soil and water conservation problems are becoming increasingly serious. Farmers have expanded their acreage to erosion-prone areas as an additional 50 million acres have been brought into production since 1970. In our efforts to address this growing problem it has become clear that the programs of all government agencies are not entirely consistent with sound land and water conservation use. Data suggest that newly irrigated lands, using underground water, are primarily growing price-suppported crops.

* The low nominal cost of credit during the 1970s encouraged agriculture to overinvest in capacity, resulting in inevitable adjustments in the '80s. Real interest rates were low, and even hit negative values at times, during the 1970 s. Rapidly rising asset values and equity, spurred by continued high inflation expectations and readily available credit, provided farmers with the incentive as well as the collateral base to expand. Relatively strong commodity prices and large export demand kept the interest expense associated with this capital expansion small relative to net cash income.

Generally, conditions in the farm sector have improved for 1984 compared with the past three years. Overall, farm prices are currently well above those of last year. In addition, new crop future prices for most of the spring-planted crops are reasonably strong. Stronger demand has been generated by accelerated world economic growth, increased US real disposable income, and some easing of the strength of the dollar. Also, US supplies have been reduced to more workable levels by last year's payment-in-kind (PIK) program and drought. Farm income continues to improve, with moderate inflation and relatively stable interest rates helping to hold down production costs.

Although conditions have improved, there is concern that commodity prices will weaken this fall after harvest. Also, some believe that farm asset values continue to be pressured by what the market sees as a problem of long-term excess capacity for agriculture.

Bankers are requiring more security for agricultural loans and not basing loan amounts on the presumption of land appreciation. This gives rise to an apparent paradox: More farmers face financial difficulties at the same time that conditions for the sector as a whole have improved.

Perhaps the most important point is that financial problems are not being felt evenly across the farm sector. Many of the problems are highly concentrated in particular regions, where drought and past years' low prices have combined to place farmers in financial stress. Financial problems are also concentrated among large producers - five-sixths of all farm debt is owed by one-third of farm operators. A major contributor to the problems of some producers is the excessive purchases of land and machinery in the last five years at inflated prices using money borrowed at high interest rates. These actions were based on the expectation of continued high rates of inflation and land appreciation.

But many of agriculture's problems are outside the reach of farm policy per se. For example, monetary and fiscal policy - and the interest, currency exchange, and inflation rates they influence - have become critical in determining farm production costs and demand for farm products here and abroad.

At President Reagan's request, the Cabinet Council on Food and Agriculture has initiated a comprehensive review and assessment of food and agriculture policies and programs. A working group within the Cabinet Council has been given a threefold mandate: to discuss the future course of food and agriculture policy with interested parties in and out government; to review and assess current food and farm programs; and to prepare a list of food and agriculture policy options by early 1985 for consideration by the Cabinet Council and the President.

US Agriculture Secretary John R. Block is holding hearings around the country to gain valuable input from producers, consumers, farm input suppliers, and exporters on the future course of US agricultural policy.

We hope that these efforts will lead to a consensus on the policies needed for a competitive agriculture sector to adjust to changing market conditions without large-scale and costly government intervention.

The next is scheduled to appear Aug. 15.

US farmers are the most efficient and productive in the world. But during the last few years, the economic plight of many of them has worsened. The Monitor asked three agriculture specialists to share their views on US farm problems and what can be done to help solve them. William G. Lesher is assistant US secretary of agriculture for economics.