Real Trouble on the Farm

By George J. Church.

The hours are long and the work back-breaking. There always seems to be too much of something: rain, sun, insects, sometimes even crops. The whole way of | life almost seems an anachronism in a land of expressways and glass skyscrapers. But somehow the farmer managed to get by, helped by his own skill and, for the past half-century, a sympathetic Government that kept a floor under the prices of major crops through fat years and lean.

But now many farmers are not getting by. Foreign markets are disappearing, land values are tumbling, banks are hesitant to extend loans. The auctioneer's hammer is falling on land and buildings held for generations by the same farm families; white crosses are appearing in Midwestern courthouse squares to commemorate the growers forced out of business. And in Washington the Government is absorbed in a fierce debate about federal assistance to farmers. The issue: do most programs any longer make sense or, as the Reagan Administration contends, have they become an unjustifiable burden on taxpayers while serving to undermine the economic security of rural America that they were designed to protect?

The debate began last week with a verbal explosion touched off by--who else?--the Administration's self-appointed sayer-out-loud of the politically unthinkable: Budget Director David Stockman. At a Senate Budget Committee hearing, he was asked what relief the Administration was willing to extend to farmers who are unable to repay their loans. His reply: "For the life of me, I cannot figure out why the taxpayers of this country have the responsibility to go in and refinance bad debt that was willingly incurred by consenting adults who went out and bought farmland when the price was going up and thought that they could get rich, or who went out and bought machinery and production assets because they made a business judgment that they could make money." If the Administration did relent and help farmers to get loans renewed, he added, it would be in the hope of winning votes for the sweeping rewrite of farm-price-support policies that Reagan is about to propose. Said Stockman: "Basically we are threatened with a kind of blackmail."

That did it. "This Administration obviously doesn't give a cocklebur for rural America," stormed Democratic Senator James Exon of Nebraska. E. ("Kika") de la Garza, the Texas Democrat who heads the House Agriculture Committee, sneered that what Stockman was really saying was "Let's cut off the arms and legs of the patient. Then he'll be 30 lbs. lighter and less of a burden." Farm Belt Republicans were equally outraged. Senator Charles Grassley of Iowa, in a letter to Stockman, asked him to "please refrain from sermonizing on the free market, which seems most hypocritical from a Government that has been the root cause of the current farm-economy crisis."

The Administration failed to quell the uproar by announcing, the day after Stockman's testimony, a change in the rules under which it is offering $650 million in loan guarantees to banks that renew credit to debt-burdened farmers (the previous rules were so unattractive to rural bankers that they have accepted only $25 million in guarantees since the program began last September). Bipartisan groups of legislators, claiming that tens of thousands of farmers face bankruptcy before they can get their crops planted this spring, readied bills to force a vastly greater expansion of loan guarantees. One measure being drafted by Grassley and his Kansas Republican colleague, Senator Nancy Kassebaum, would increase the amount available to $4 billion. Exon and Oklahoma Democrat David Boren vowed a filibuster that would prevent the Senate from transacting any other business until it passed some such bill.

In the midst of that battle, an even bigger bomb will go off. The Administration next week will send Congress a bill to begin dismantling the whole structure of crop loans, cash subsidies and acreage restrictions that has built up around American agriculture over the past half-century. It would begin a five-year transition to a system under which farmers would plant as much as they chose and sell their crops for whatever price they could get, with the Government providing only minimal insurance against disaster.

The fight over that proposal is likely to make the battle over credit guarantees look like a warm-up skirmish. To Stockman and Secretary of Agriculture John Block, the current farm troubles are a sign that 52 years of heavy Government involvement in agriculture have led both farmers and taxpayers to a dead end. Rural prosperity, they believe, can be rebuilt in the long run only by a long-overdue and surely painful transition to a leaner system that forces farmers to compete with little Government aid in markets at home and abroad. Says Block: "This country can no longer afford large, explosive, open-ended budget expenditures (for farm price supports). This country can no longer afford farm policies that do not allow us to be competitive in the world. This country can no longer afford policies that misallocate farm resources."

To which opponents reply in effect that what the country really cannot afford is Block's farm program. In this view, Uncle Sam has made himself a virtual financial partner of American farmers--a bossy and often capricious partner, to be sure, but by now an indispensable one who must not be allowed to abandon farmers to their fate. Indeed, while the Administration tries to get the Government out of agriculture, some farmers and their allies are taking the diametrically opposite approach. One bill proposed by Democratic Senator Tom Harkin of Iowa would increase farm price supports, by about 30% on wheat, and institute tough planting controls to hold down output.

On both sides, partisans are waging the battle with nearly religious intensity. The free-market fervor of the Administration's supporters is matched by the devotion of many of its critics to the medium-size family farm, not just as an economic interest but as the foundation of a clean and virtuous way of life that must be protected. Says Grassley: "It's almost a public utilitarian value to maintain the family farm. It's basic to the humanitarian responsibility of Government."

There are, of course, less passionate participants in the debate: farmers and lawmakers who agree that agriculture should be weaned from dependence on Government but fear that the Reagan Administration is trying to move too fast at the worst possible time. Jack Stone, president of the California-based Western Cotton Growers Association, comments ruefully, "Over the years, our farmers have been for more world-competitive, market-oriented programs. Now that we may be forced into them, it's scaring us."

On Capitol Hill, many legislators would like to duck the whole problem. Their strategy is to provide what De la Garza calls a "blood transfusion" to farmers in the form of a quick and major expansion of credit guarantees and buy time to figure out what longer-range reforms to make. Congress must write some sort of farm bill by Sept. 30, unless it wants to reinstitute the 1949 law, which provided much higher price supports than anyone would advocate now (all subsequent farm laws, including the one passed in 1981, technically have been amendments to the 1949 act, passed usually for four years at a time). But it is entirely possible that Congress will settle for a temporary, patchwork extension of the current law.

That, however, would prolong rather than end the battle. No one regards the current program as a long-range solution to anything. Quite the contrary; the one proposition that nearly everyone could agree on is that the current farm policy is a mess. It is a voracious devourer of tax dollars and a bloater of deficits. By the time the 1981 law expires, price-propping expenditures will total $53 billion, or more than three times as much as the Government shelled out during the four years governed by the 1977 law (and five times what the framers of the 1981 act expected). Anticipated outlay in 1985 alone: $15 billion. The law encourages production of goods nobody wants. Standout example: the 768 million lbs. of cheese that the Government has bought and is holding in storage--more than 3 lbs. for every man, woman and child in the country. Other unsold mountains, including goods stockpiled by farmers with Government help: 1 billion bu. of wheat, 650 million bu. of corn. And as a crowning irony, the act has left many farmers, after 52 years of Government protection, little better off than their forebears were during the Great Depression that gave birth to the farm price-support system.

Big, efficient farmers, it is true, are still making money, and the hordes of small operators who farm essentially as a sideline while working in factories, stores and offices are also getting by (70% of the 2.4 million enterprises that the Government classifies as "farms" produce less than $40,000 worth of commodities a year and are run by people who get most of their income from other jobs). But many of the roughly 650,000 full-time farmers who grow $40,000 to $500,000 worth of food or fiber a year are losing money; a fair number may not survive.

The seeds of the trouble were sown, recklessly, in the 1970s. That was a decade of high prosperity in the croplands. Worldwide demand for U.S. grain and fiber boomed. The Government advised farmers to plant fence to fence, and growers happily complied. They could sell all they raised at prices often well above the federal support levels.

Farmers borrowed heavily to bring more land into cultivation and buy machinery. Their debts zoomed from less than $50 billion at the start of the '70s to around $200 billion now. To hear some of their elected representatives tell it, the bankers practically begged farmers to take loan money. Says Senator Harkin: "We had bankers going up and down the road like Fuller Brush salesmen during the '70s. They couldn't get farmers to borrow enough." Interest rates skyrocketed, but so did the value of farmland, which was regarded as a scarce resource in a hungry world. The loans secured by farm real estate looked repayable.

Then the bottom fell out. Beginning in 1981, worldwide recession abruptly slashed demand for U.S. farm products. By then the value of agricultural land had been bid so high that many farms could no longer earn enough from crop sales, even at Government-supported prices, to repay the loans. Land values began to tumble, making the loans secured by the land look shakier still. Interest rates fell, but not as fast as prices; rates remained high enough to increase the burden on farmers.

Worst of all, perhaps, export demand shriveled. Exports have become vital, not just to the prosperity but to the survival of many U.S. farms. Under Secretary of Agriculture Daniel Amstutz estimates that, using modern mass- production techniques and breakthroughs promised by biogenetic research, the U.S. could soon grow enough grain and fiber to feed and clothe itself comfortably operating at just half its full crop-growing capacity; the rest could be profitably employed only by selling overseas. But U.S. farm exports, after multiplying more than six times, from $7 billion in 1970 to a peak of $43.8 billion in 1981, fell more than 20% in the next two years, and are reviving only slightly now: the 1985 total is expected to be $36.5 billion.

The drying up of world markets can be traced to many causes. The recession of the early '80s, which is now only a memory in the U.S. but has ebbed much more slowly in the rest of the world, was one factor. The pileup of debt in poor countries during the 1970s, and the difficulties they have had in repaying it during the '80s, has crimped their ability to buy American-grown food. The remarkable strength of the U.S. dollar against foreign currencies is perhaps the biggest cause of all; it forces overseas buyers to pay out more francs, pounds or yen to buy American wheat, corn or soybeans. The muscle-bound dollar is primarily an ironic consequence of gargantuan U.S. budget deficits, which keep American interest rates high and entice foreign investors to convert their currencies into dollars, bidding up the greenback's price, in order to pour money into American investments.

But Reagan Administration experts suspect that Government price supports accelerated the loss of overseas markets. The supports no longer contribute much to inflation within the U.S.; in nine of the past ten years, food prices have risen no more than prices generally. The increase in food prices last year was about 4%, almost exactly the same as the rise in all consumer prices. One reason: farmers today get less than 30 cents of every dollar that Americans spend for food; the rest goes for labor, processing, packaging and transportation costs.

But the supports do keep prices of many American-grown foods well above those prevailing in the rest of the world. The supports are a complex mixture of loans and cash payments from the Government to farmers, who sometimes have to restrict planting to qualify for them. They guarantee the farmer a minimum income per bushel, which he can collect from Uncle Sam if private buyers will not pay that much; they keep market prices near the support level. In the case of wheat, which gets more subsidy ($3.8 billion this year) than any other American crop, the basic U.S. support level is $3.30 per bu. and the market price in January averaged $3.37. Some grades have recently sold for 24% more than Argentine wheat.

The supports, says Amstutz, "created a cushion of comfort for others" in world markets. Farmers in Brazil, Argentina, the European Community and elsewhere expanded production, secure in the knowledge that they could undersell U.S. farmers. And the supports kept American farmers from cutting prices to get back the lost sales; growers have no incentive to take a lower price overseas than they could get from the Government.

The loss of export sales, combined with the drop in land values, makes it harder than ever for farmers to pay off their suddenly crushing debts. Under Secretary of Agriculture Frank Naylor estimates that perhaps 40,000 farmers have debts equal to 70% or more of their shrinking assets. "They are not necessarily out of business," he says, "but they will have to do something to improve their position this year in order to be able to operate next year. It may be selling off a piece of land or a piece of machinery. Depending on how good they are as managers, and how able they are to do something with their operations to reduce the debt load, they may or may not make it."

Another 160,000 or so farmers, Naylor's figures indicate, are carrying a debt load equal to between 40% and 70% of their assets and "are not in imminent danger." His explanation of why not: "If you had no improvement whatever in the farm economy, they could continue their operations for two to five years / before they would be completely wiped out." Meanwhile, those farmers are in no position to buy tractors, cars, clothes or much of anything; their troubles are dragging down the whole economy in Iowa, Nebraska, northern Missouri, southern Minnesota, western Illinois, Kansas and other parts of the grain belt.

What to do? Congress almost certainly will force the Administration to make more loan guarantees than it wants to do. That sort of bailout would keep some farmers in business a while longer. But farmers would still face a decline in land values that Administration experts think has some way to go. Says one Agriculture Department economist: "If you go out to Iowa and have to pay $3,500 an acre for land, there is no way you can raise enough corn or beans on that land to make it pay for itself, assuming 12% interest. You just cannot do it. But if that land comes down to $1,800 or $2,000 an acre, it might make sense for you to buy it." Which does not answer the question of what might have happened to the previous owner.

In the long run, the Administration insists, U.S. agriculture can return to prosperity only by winning back its foreign markets, and it cannot do that unless the Government snatches away its price supports. To that end, the bill the Administration will send to Congress next week aims at the most thorough rewrite of farm laws since the original Agricultural Adjustment Act of 1933. Key elements:

Crop Loans. These are the basic price-support mechanism. After harvest, the Government lends a farmer money on his unsold crop at a rate set by the Agriculture Department under guidelines established by Congress. If the farmer can sell the crop for more money, he does, repays the loan and pockets the difference. But if market prices are low, the farmer keeps the loan money and the Government takes over the crop. The produce must be stored until it can be sold for more than the loan rate--which could be never.

Under the Administration plan, loan rates would be set each year at 75% of the average market price for the previous three years. Thus farmers would be protected only against a sudden and exceptionally sharp price drop. And protected only temporarily at that, because the Administration bill would also force them to repay the loans in a year or so and sell the crops for whatever they could get.

Target Prices. These are set at levels that supposedly cover farm production costs but in fact are often determined by political negotiation. They are higher than the loan rates, in the case of 1985-crop wheat, $4.38 per bu. vs. $3.30. Growers who qualify, sometimes by agreeing to restrict production, sell their crops to private buyers. But if the market price falls below the target price, the Government makes up the difference with a cash "deficiency payment," up to a maximum representing the difference between the loan rate and the target price--$1.08 per bu. on 1985 wheat. The Administration bill would in effect phase out the program. Target prices would be reduced gradually until they were no higher than the loan rates. At that point there would be no more deficiency payments and the target prices would be virtually meaningless.

Acreage Restrictions. They would be eliminated. Farmers would simply plant as much as they thought they could sell.

The Administration would set a cap of $200,000 on crop loans to any one farmer. That would answer one frequent and justified criticism of present farm policies: they give the most help to the biggest farmers, who need it least.

Officials stress that these changes would be phased in gradually. But there is no question that the cumulative effect would be severe. One indication: the Administration bill is eventually supposed to slash Government spending on farm-income support to some $3.5 billion to $5 billion a year from the present $15 billion. Some farmers would probably go broke with that little Government help, but the Agriculture Department contends that those who survive will eventually profit by growing and selling more to the world at competitive prices.

Stockman got off to a reverse-English start in selling this program by privately proposing a "contract" to influential Senators: their pledge to vote for the bill in return for the change in loan-guarantee rules that the Administration announced last week. The Senators not only refused but threw at him the same "blackmail" charge he later made to the Budget Committee. Serious debate on the farm bill will probably not begin until late summer, and then it will be enmeshed with the fight over the sweeping cuts in government spending for other domestic programs that the Administration is proposing. The outcome may depend on log-rolling between rural and urban lawmakers, trading votes for their favorite programs.

The full farm-policy changes the Administration seeks are probably too drastic for Congress to accept in this session. But Reagan, Block and Stockman have at least opened a debate going well beyond the usual wrangles over so many cents per bushel to the fundamentals of farm policy. Should its goal be to keep farmers in business or to produce an industry able to compete in world markets, and in an era of $200 billion budget deficits, how much can taxpayers reasonably be required to shell out? In that debate, the opponents can muster plenty of humanitarian emotion, but the Administration has hard economic reality on its side.

With reporting by Sam Allis and Gisela Bolte/ Washington, with other bureaus