. SERVICE CONGRESSIONAL RESEARCH UBRARYOF CONGRESS Q Q‘ , I 4.. .1111 7.. AGRICULTURE: PARITY, PARITY, PARITY ISSUE BRIEF NUMBER IB77116 AUTHOR: ‘Mayer, Leo Senior Specialist, Agriculture THE LIBRARY OF CONGRESS CONGRESSIONAL RESEARCH SERVICE MAJOR ISSUES SYSTEH Darn ORIGINATED 13 DATE UPDATED 9_§4_2__1_4 FOR ADDITIONAL INFORMATION CALL 287-5700 0821 CRS- 1 IB77116 UPDATE-08/21/80 f"SQE-2EEIHl-lQ§ Parity, defined by Webster as "the state of being equal or equivalent," has been a goal of American agriculture since the 1920s when the phrase "equality for agriculture" came into popular use. Since then, there have been repeated attempts by American farmers to gain economic parity, generally through protest movements like those in early 1978 and early 1979. A protest movement of farmers in the early 1930s led Congress to pass the Agricultural Adjustment Act of 1933, which initially formalized the concept of parity. As written into law, parity was a mathematical comparison of prices farmers paid and prices they received. This ratio of prices, called the parity ratio, became a widely used barometer of how well farmers were faring economically. Numerically, the ratio was set equal to 100 for the period 1910-14. In the years thereafter, prices paid by farmers (the denominator) went up faster than prices received by farmers (the numerator) and the ratio of the two price indexes, the parity ratio, declined. In July 1980 the ratio was 6Q, down 7 points from a year earlier. Two other parity measures -- parity income and parity prices -- are described below. §A9E§BQQ!D-A§2-2QLlQZ_AEALl§l§ The historical "roots" of parity go back to the decade following World War I. Throughout that turbulent period, which led up to the Great Depression of 1929, American agriculture suffered from low prices and depressed farm ii’1omes. At the exhortation of their government, American farmers had geared up production to meet a national emergency, World War I. When the war ended in 1918, foreign demand for American grain and cotton dropped sharply, leaving large amounts of farm output without a market. These surpluses depressed farm prices and thrust depression-like conditions on farm families. As farm prices plunged and farm incomes declined, farmers cut back on purchases of all types of manufactured goods. This action hit farm machinery makers hard because they also had geared up production during the war period. when there was no Federal response to the severe income problem of farmers, leaders in the farm supply companies began to push plans of their own. Two of these leaders, George N. Peak and Hugh 5. Johnson, with the Moline Plow Company of Holine, Illinois, saw the problem in simple terms: farm prices had dropped after the war but prices of manufactured items had not. ‘Their answer: reestablish farm prices to their former level and thereby rebuild farm purchasing power. Peak and Johnson took this idea to the National Agricultural Conference of 1922. When the response was favorable, their next step was to draft a pamphlet titled "Equality for Agriculture" that outlined the problems that low farm prices caused. They also proposed a somewhat complicated solution: separate farm markets into two markets, a domestic market and an export m ket. Next, maintain the prices of farm commodities in the domestic market at a fair exchange value. This idea was developed more fully by personnel of the 0.3. Department of Agriculture and drafted into legislation by the Senate Drafting Service in CRS- 2 IB77116 UPDATE-O8/21/80 1923. It was introduced into Congress on Jan. 16, 192fl, by Senator Hcnary of Oregon and Representative Haugen of Iowa. The ncflary-Haugen Plan, as it came to be known, was to face Congress in ’ each session between 1924 and 1928. Twice it was defeated by the House c Representatives and twice it passed Congress only to Abe vetoed by the President. Its major contributions were the national debate it generated on agricultural issues and the numerical concept that it developed for measuring L "fair" prices for agriculture. The bill's numerical concept for measuring a "fair" price sounded complex: A fair price at any point in time was defined as that price that would hear the same relation to the general price level as the price of the commodity had during the period immediately prior to World War I. But it actually was fairly simple. To illustrate, the pre-war price of wheat was 98 cents when Athe WPI (wholesale price index), which measured the general price level, had a value of 100. By 1923, the WP: stood at 156 and farm proponents argued that a fair price for wheat was 156% of 93 cents or $1.53 per bushel. This concept would later become known as the "parity price" for wheat. The actual price recieved by farmers for wheat in 1923 was 92 cents per bushel. Le9;§lat;z§_§ga2tme2t-9:-22r;t1 The defeats of the original “fair” price plans between 192a and 1928 were not the result of congressional and Presidential disfavor with the price concept but rather with the export dumping and domestic price fixing necessary to maintain such prices. Consequently, when the Great Depression struck in 1929, the concept of fair farm prices continued to be stressed even thong the other aspects of the ncflary-Haugen plan were quietly shelved. = A By 1933, the severe economic conditions facing agriculture created an environment favorable to the passage of emergency farm legislation. This legislation, the Agricultural Adjustment Act of 1933, part of which was later declared unconstitutional, included a fair price objective for farm products. Fair farm prices, it stated, were prices that "give agricultural commodities a purchasing power with respect to articles farmers buy, equivalent to the purchasing power of agricultural commodities in the base period." The base period was specified as 1910-191n. The 1933 AAA charged the Secretary of Agriculture to implement the price objective, which at that point was not yet referred to as parity. The legislation established a new numerical method for calculating "fair" prices. The new method related the prices received by farmers to those they paid for inputs, rather than to the level of’ wholesale prices received by nonfarm sellors. The reasoning was that farmers bought items at retail rather than wholesale prices, so their "fair" selling prices should reflect changes in the retail prices paid. The retail prices used were those that the Department of Agriculture had earlier included in a new statistical series called the Prices Paid Index. That index was similar to the WPI in one respect -- it was given a base value of 100 for the period 1910-191fl. 3szi§;2a§_9f-£a;;t1-£ri2e§ CRS- 3 IB77116 UPDATE‘08/21/80 The years of efforts to pass farm legislation in the pre—1929 era built up a strong and well-organized farm pressure group. when it finally achieved s tcess in establishing the goal of fair prices in the 1933 AAA, there was s-;ong pressure for further action to improve farm prices. one of the first steps came in 1935 when Congress was encouraged to include interest payments on farm mortgages and tax payments on farm real estate in the Prices Paid Index. Since both interest payments and real estate taxes were rising faster than other input prices, their addition to the Prices Paid Index tended to increase its level and, in turn, increase the level of parity prices. The next step came in 1936 after the Supreme Court ruled parts of the 1933 Act unconstitutional. Congress responded Iy passing the Soil Conservation and Domestic Allotment Act. It included another concept of parity -- parity income. Instead of using a measure of parity based only on prices, Congress now based it on net income, thus bringing quantities of products purchased and quantities of products sold by farmers into the calculation. The language in the 1936 Act specified that the Secretary of Agriculture was to reestablish, as rapidly as practicable, "the ratio between the purchasing power of the net income per person on farms and that of the income per person not on farms that prevailed during the five-year period August 1909—July 191a." While parity income had many advantages, it soon became obvious that it was far more complex and difficult to calculate than parity prices. In vgeneral, accurate calculations could not be completed until after farmers sold their products, often at the end of the year. when farm prices slumped badly in mid-1937, Congress was not willing to wait until the year's end for t’~ statistical results. Steps were taken to reestablish a concept of parity based on prices. This was accomplished in the 1937 »Agricultural uarketing Act. Congress directed the Secretary of Agriculture to "establish prices to farmers at a level that will give agricultural commodities a purchasing power with respect to articles which farmers buy, equivalent to the purchasing power of agricultural commodities in the base period." The next revision of the parity concept came in the 1938 Agricultural Adjustment Act, the culmination of a decade of efforts by farm groups for effective farm legislation. The 1938 AAA finally defined parity prices in the law. In addition, it spelled out the methodology for calculating parity prices. In reality, this meant that the technical methodology that had been developed by the Department of Agriculture after passage of the 1933 Act was incorporated into the 1938 law wand thereafter could only be changed by Congress. The following simple formula for calculating a particular commodity price ‘was adopted: Average Price Current Value Current during the x of Prices = Parity Base Period A Paid Index Price (1910-19114) (1910-1ll=100) This formula was useful for its simplicity but it soon gave results that c ated problems. The primary problem was the fixed relationship between dllferent commodity prices. In the case of each commodity, its price in the 1910-1914 period was multiplied by the same: number, that is, the current value of the Index of Prices Paid. This resulted in a constant relationship between the parity prices of different commodities regardless of evolving cns- u IB77116 UPDATE-03/21/80 market relationships or even changes in the costs of production. This meant that some commodities, mainly crops where technological change was raising yields per acre, were experiencing very favorable returns per acre relative to other commodities. This soon resulted in overproduction of those commodities. The problem remained until the tumultuous policy-making yeaxpm after World War II when changes finally were made in the parity formula. Among the many battles over Farm Policy in the Post-World War II period, the attempt to change the computation of parity prices was among the most difficult. Strong farm interests were present on all sides and the issue had been around long enough so that it was relatively well understood. Any change meant higher parity prices for some products and lower prices for others. In the compromise Farm Act of 1908, a "transitional" parity formula was developed to pave the way for more flexible parity prices. A "modernized" parity formula would become effective but not until Jan. 1, 1950- This date was later extended due to the Korean War. The change in the parity formula was designed primarily to remove the fixed price relationships. The new concept accomplished this by replacing the base year price (1910-191a) with a moving average of prices received by farmers for each commodity. This moving average was specified as the most recent 120-month average of prices received by farmers for the specific commodity. As currently calculated, a 10-year average price is determined each January. It is then used each month during the following calendar year in parity price calculations. For example, the 1970-1979 average is used in 1980. In actual use, the 10-year average price is first deflated by dividing, it by the average value of the Index of Prices Received by farmers (with 1910-191u=1oo) during the same 10-year period. This yields an "adjusted base price." This "adjusted base price" is then multiplied by the current month's Index of Prices Paid to give the current month's parity price for that commodity. The formula for a given commodity becomes: Average Price of Current Current Commodity over the Month's Month's most recent 10-year Index of Parity period x Prices = Price for ___________ _ ____ Paid by specifici Average Index of Farmers commodity Prices Received (1910-1910: by Farmers over the v 100) most recent 10-year period (1910-191u=1oo) These calculations are made once each month by the Statistical Reporting Service of the Department of Agriculture and published in its periodical, Ag;;gg;;gg§l_g;;gg§; They provide a base set of “fair” farm commodity prices for comparison with current market prices. E§e§-2£-Pa£i: Prisee CRS— 5 1377116 UPDATE-08/21/80 Following are some of the more significant uses of parity prices: (1) .1.‘9._y.ee§m-<.=heI.19e§-;1e_2he..222:2.1;e§iu9_292e£.9:_e.uuiL.2:: 2- §91.l;llQ*1i£1.:. A iomparison of the parity price with the price actually received by farmers for a commodity gives a measure of the change in the per unit purchasing power for that commodity. £une.12§Q-ze£m-2_i2e§ 100% Actual 13e1_=i:c.z Aerie: Wheat (bushel) $6.57 3.82 Corn (bushel) fl.55 2.73 Cotton (pound) 1.09 0.50 Soybeans (bushel) . 11.00 6.97 milk (all) (cut) 1 13.20 12.50 Beef cattle (cut) 83.30 62.60 Hogs (cvt) 77.90 u1.oo Eggs (dozen) 1.05 0.51 (2) 1'9- deterring- §t_122.<2I_:3'-.:2I_:i2e..‘ le1;e.1.'.-5..-. Historically. legislation requiring or authorizing the United States Department of Agriculture to s‘ port prices of agricultural commodities has not specified the dtllars—and—cents prices at which the commodities are to) be supported. Instead, legislation indicated a specific percentage of parity, or a range in percentage of parity, at which the commodity must or may be supported. Since 1974, parity prices no longer determine support prices for such commodities as the food and feed grains, and upland cotton. Price support for those commodities are based on "target prices" specified in the law. Parity prices are used for milk, however. 7 (3) 19.. e§2ini_.§.*.:er_ aerlseziugzegreemeut. end- merhetiegzeréer 2r99.r;a...I;§.-. Parity prices are used in the administration of marketing-agreement and marketing-order programes for dairy, fruits, vegetables, and certain other agricultural commodities, including nuts, tobacco, and hops, as provided in the Agricultural Marketing Agreement Act of 1937, as amended. Under such programs, the handling of an applicable commodity is subject to regulation; the statute authorizes no action that has for its purpose the maintenance of prices to farmers above the parity level. The third type of parity measure -- besides parity prices and parity income -- is the so-called parity ratio. while simple in concept, it may be the most complex to interpret and evaluate. As it evolved over the years a’ er the 1933 AAA was passed, it was simply the ratio of "prices received by farmers“ and “prices paid by farmers." The Department of Agriculture, using its technical talents, had gathered data on both sets of prices from farmers and other businesses beginning as early as 1910. These prices were then combined, using proper statistical techniques, into the two indexes -- prices CBS- 6 IB77116 UPDA'.l'E’08/21/80 paid and prices received -- and publication began in 1922. Each index was set equal to 100 for the base period 1910-1914. The ratio of the two indexes was termed the “parity ratio." The question is: what does it tell us? Given below is the Department c- tAgriculture's explanation from the December 1977 issue of Agricultural. Prices: The Parity Ratio provides an indication of the per unit purchasing power of farm commodities generally in terms of the goods and services currently bought by farmers, in relation to purchasing power of farm products in the 1910-191a base period. Thus, a Parity Ratio greater than 100 indicates that the average per unit purchasing power of all farm products is higher than in 1910-1914. . The Parity Ratio is a measure of price relationships; not a measure of farm income, of farmers’ total purchasing power, or of farmers‘ welfare. The latter depends upon a number of factors other than price relationships, such as changes in production efficiency and technology, quantities of farm products sold, and supplementary income, including that from off-farm jobs and federal farm programs. ‘ An adjusted parity ratio is computed and published which incorporates and reflects supplementary income from federal farm programs. A “Preliminary Adjusted Parity Ratio reflecting Government payments" based on the forecast of direct Government payments for the year is published each month in AGRICULTURAL PRICES. ' of considerable importance to farmers is what factors are included in the Prices Paid Index. Given below are the cost components and their individual importance in the Index. cRs- 7 1377115 UPDATE-O8/21/80 PRICES PAID’INDEX: RELATIVE IMPORTANCE OF COMPONENTS COHHODITY GROUP RELATIVE IMPORTANCE 1971-1973 June 15, 1977 Percentage Consumer Price Index (CPI) gggg g§;Q Production §2;§ Qggfi Feed 11.8 12.2 Feeder Livestock 11.7 7.4 Seed 1.8 2.1 Fertilizer 4.2 5.1 Agr. Chemicals 1.7 1.6 Fuels 8 Energy 3.5 fl.2 Farm 8 Motor Supplies 2.2 2.0 Autos 6 Trucks . 2.5 2.8 Tractors 6 S-P Machines 4.5 5.u other Machinery 2.7 3.3 Building 8 Fencing 3.6 fl.O Farn Service 8 Cash Rent 7.u 9.3 I2£a;_§2u22QiLis§ §§=Q élgfl Interest M.0 5.0 Taxes 2.8 2.fl Farm Wage Rates 5.2 5.2 5.1.1-..li.e2§ _ _- __ _ .__-.......-....lQ_..-..Q...-..2.._....1<.3.Q.-..Q_-.... It is the monthly publication of data that go into the parity ratio that has made it so appealing to those who follov the farm situation closely. It provides a score card on agriculture once each month much like the monthly consumer price index, the unemployment rate, and the more comprehensive economic indicators do for the general econony. CRS- 8 IB77116 UPDATE~O8/21x80 Given below are the historical and more recent levels of the Economic Trends in Agriculture Farm Income Parity Income per Pars Panily as 3 Percent parity ratio and other measures of the economic health of agriculture. Net Assets 3220 F.1;sa;n.2..f;.amia9..A1.-l....§911.:.2.<2§-_..<.2.f...I.i.2z:.:§r.5:;w._ 1910-1914 100 5 620 —— - 1915-1919 109 1,035 -- - 1920-192u 39 752 -- -- 1925-1929 91 9a2 -- -- 1930-1934 69 usu -- -- 1935-1939 35 _734 $1,152 no.2 1940-195a 100 1,uuo 2,199 17.3 1995-1949 109 2,500 3,473 59.7 1950-1959 93 2,533 3,955 58.0 1955-1959. 93 2,637 u,o97 19.5 1950-1954 79 3,123 5,301 58.6 1965-1969 7 u,162 8,692 70.7 1970-1971 79 7,u57 1u,6o5 35.3 1975 76 7.617 7,539 88.4 1976 1 7,712 13,793 77.7 1977 66 7,139 19,035 81.5 1973 71 10,035 22,865 90.6 P 5”» er Q 4; T-T1131 5 9,073 18,796 27,796 38,010 51,345 72,939 109,fi95 158,725 180,725 207,7fl2 306,961 CR3- 9 IB77116 UPDATE-08/21/80 rhese data indicate that the trend in the parity ratio has been downward since 1950. In contrast, other measures of the farm economy have shown an r ward trend. Income per farm has increased, particularly if income from no farm sources is included. The net equity of farm families has increased =dranatically, despite the falling parity ratio. The different economic pictures indicated by the parity ratio and income *neasures suggest a weakness in one or the other of these measures. The weight of informed opinion has been that the parity ratio is the weaker measure of farn—econonic conditions.~ “ First, there is the fact that the parity ratio only measures prices. It does not include any measure of the quantities of inputs purchased or the quantities of products sold. as farms increase in size and take advantage of economies of scale, this weakens the comparison of the parity ratio in one time period with that of another time period. Second, the parity ratio does not take into account anya improvements in farm productivity. one source of improved productivity has been rising crop yields. Risingzcrop yields have meant that for a given amount of purchasedi inputs, a greater amount of output is produced. In turn, gross sales can be increased and even with higher input prices, i.e., a falling parity ratio, net returns may be higher. This accounts for much of the rise in farm incomes and asset values at the same time that the parity ratio was falling. Third, the parity ratio does not take into account shifts in the tastes and preference of consumers. Such shifts can reduce (or increase) the "a aunts of a commodity othat is purchased. and result in a decline 59¢ increase? in its price and a fall qor increase} in the parity ratio. If the ratio falls for this reason, however, it .differs from the typica; interpretation of a declining parity ratio -— that is, in this instance, the falling price is reflecting a permanent change in the market rather ‘than a temporary oversupply or a temporary fall in demand. Propping up the falling price will only result in a buildup of stockpiles of the affected commodity. y Fourth, hecanse the parity ratio does not take quantities into account, it ignores the opportunity of producers to cut back on purchases during a period of rising input prices or to cut back on sales during a period of falling product prices. Such measures can temporarily offset the impact of adverse changes in prices. However, these measures can only be effective for short periods or time. » L§§L§L§2 I 19! In the 95th Congress, 2d session, the following legislation was passed and Lsigned into law by the President: p..1... 95-279 (ma. 6782) Emergency Agricultural Act of 1978. as introduced, permitted marketing orders under the Agricultural Adjustment Act, as reenacted and amended by the A dcnltural Marketing Agreement Act of 3937, to include provisions concerning marketing promotion, including paid advertisement, of raisins. Authorised distribution among producers of the prcrata costs of such promotion. Introduced Apr. 29, 1977; referred to the Committee on Aqricultnre. Passed House, amended, on Oct. 33, 197?. S. 2690 was cns—1o IB77 1 16 UPDATE-0 8/21/80 incorporated into the measure on mar. 13, 1978 (see below). Measure passed Senate, amended and with provisions similar to S. 2481 inserted (see below) on Mar. 21, 1978. 1A motion to disagree with the Senate amendments was passed in the House on Mar. 22, 1978, and conferences were scheduled to begin C” April 3. Conference report filed in House (H.Rept. 95-1ouu) on April 6 Senate agreed to report on April 10. The conference report was rejected in the House on April 12. However, on April 2n the House requested further conference. On May 1, 1978, a second conference report (H.Rept. 95-1103), which excluded the flexible parity concept from the act, was submitted by Hr. Foley. On May 2 the Senate agreed to the conference report by a voice vote. on May a, the House agreed to H.Bept. 95-1103 by a 212-182 vote. On May 16, 1978, the President signed H.R. 6782 into law. In the 96th Congress, the following legislation has been introduced: S. 1 (Dole et al.) Amends the Agricultural Act of 19fl9 to require the Secretary of Agriculture to put into operation coordinated set-aside and price support programs for the 1980 and 1981 crops of wheat, feed grains, and cotton. Extends the current price support authority for milk, and sets the minimum price support for sugar. Amends the Food stamp Act of 1977 to remove the ceiling on authorizations. Amends the Agricultural Trade Development and Assistance Act of 1954 to require minimum exports of United States farm commodities. Establishes the National Agricultural Production Cost and Statistical Standards Board. Introduced Apr. 15, 1979; referred to Committeeu on Agriculture, Nutrition and Forestry. S. 80 (Nelson) Amends section 201 of the Agricultural Act of 19fl9, as amended, to extend until Sept. 30, 1981, the requirement that the price of milk be supported at not less than 80 per centum of the parity price thereunder. Introduced Jan. 18, 1979; referred to Department of Agriculture for report and to Subcommittee No. 3 on Feb. 12, 1979. S. 418 (Kassebaum et al.) Amends the Agricultural Act of.19u9: (1) to set the established prices for individual producers for the 1979 and 1980 crops of wheat and corn, and for the 1979 crop of upland cotton, at levels related to such producers’ voluntary set—asides. Establishes a National Agricultural Production Cost and statistical Standards Board. Introduced Feb. 9, 1979; referred to Committee on Agriculture, Nutrition and Forestry. LflflMARY' OF WASHINGTON UNIVERSITY 37; LOWS - M0. 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