Payment-in-Kind Program Compensates U.S. Farmers to Abstain from Planting Summary

  • Last updated on November 10, 2022

Under a payment-in-kind program, American farmers who agreed not to plant portions of their land were paid with government surplus commodities. The program had wide-ranging effects, including increased crop production in other countries.

Summary of Event

The U.S. Department of Agriculture (USDA) established and administered the payment-in-kind (PIK) program under the statutory authority granted by the Agricultural Act of 1949, as amended, and the Commodity Credit Corporation Charter Act. The PIK program thus was designed and implemented within existing statutory authority but did not receive specific congressional authorization. The program was offered to farmers who agreed to reduce their planting of wheat, feed grains (primarily corn and grain sorghum), rice, and upland cotton beyond what was called for in the 1983 programs for those crops. The basic concept behind the program was that farmers were offered commodities as payment for reduction of this additional acreage. Agriculture;payment-in-kind program[payment in kind program] Payment-in-kind program[Payment in kind program] Department of Agriculture, U.S.;payment-in-kind program[payment in kind program] [kw]Payment-in-Kind Program Compensates U.S. Farmers to Abstain from Planting (Jan. 11, 1983) [kw]Program Compensates U.S. Farmers to Abstain from Planting, Payment-in-Kind (Jan. 11, 1983) [kw]U.S. Farmers to Abstain from Planting, Payment-in-Kind Program Compensates (Jan. 11, 1983) [kw]Farmers to Abstain from Planting, Payment-in-Kind Program Compensates U.S. (Jan. 11, 1983) [kw]Planting, Payment-in-Kind Program Compensates U.S. Farmers to Abstain from (Jan. 11, 1983) Agriculture;payment-in-kind program[payment in kind program] Payment-in-kind program[Payment in kind program] Department of Agriculture, U.S.;payment-in-kind program[payment in kind program] [g]North America;Jan. 11, 1983: Payment-in-Kind Program Compensates U.S. Farmers to Abstain from Planting[05110] [g]United States;Jan. 11, 1983: Payment-in-Kind Program Compensates U.S. Farmers to Abstain from Planting[05110] [c]Agriculture;Jan. 11, 1983: Payment-in-Kind Program Compensates U.S. Farmers to Abstain from Planting[05110] [c]Trade and commerce;Jan. 11, 1983: Payment-in-Kind Program Compensates U.S. Farmers to Abstain from Planting[05110] Block, John Lesher, William Amstutz, Dan Dole, Bob

Historically, the USDA has used a number of production adjustment mechanisms to take cropland out of production. These mechanisms are part of a group of farm programs designed to stabilize and enhance commodity prices and farm incomes. The Agriculture and Food Act Agriculture and Food Act (1981) of 1981 authorized cropland reduction programs for the 1981-1985 crops of wheat, rice, cotton, and feed grains.

The USDA administers these farm programs through its Commodity Credit Corporation Commodity Credit Corporation (CCC) and its Agricultural Stabilization and Conservation Service Agricultural Stabilization and Conservation Service (ASCS). The CCC is a government-owned and -operated corporation created in 1933 to stabilize, support, and protect farm income and prices; to assist in maintaining balanced and adequate supplies of agricultural commodities; and to facilitate the orderly distribution of these commodities. The CCC also encourages farmers to store commodities when stock levels are higher than needed to meet foreign and domestic demand. The CCC has no operating personnel. Its programs are carried out primarily through the personnel and facilities of the ASCS.

Despite the commodity programs that were in place, a number of trends began to evolve in the early 1980’s that made these traditional approaches ineffective and costly means of controlling surplus agricultural commodities. In testimony before the U.S. House of Representatives on December 16, 1982, Secretary of Agriculture John Block outlined some of the factors that had come together to cause the downward pressures on prices and income that farmers were experiencing in the early 1980’s. The first of these was a large global supply of crops, a result of record world production of grains, oilseeds, and cotton in the preceding several years. The United States alone was holding about 150 million tons of grain stocks, equivalent to approximately 60 percent of the world’s carryover and more grain than the country exported annually.

The Soviet grain embargo of 1980-1981 had been imposed in response to the Soviet invasion of Afghanistan. This embargo cost the United States a major market, as the country came to be viewed by the Soviets as an unreliable supplier. The share of grain imported into the Soviet Union from the United States fell from 70 percent to 30 percent. Other major exporters gained at the expense of the United States: Canada’s share of Soviet imports doubled, Australia’s tripled, and Argentina quadrupled its grain sales to the Soviet Union.

Concurrently with record world production of grains, oilseeds, and cotton, demand had been weak. World use of feed grains had been growing at a rate of sixteen million metric tons per year during the previous twenty years, but use of feed grains had not increased for the preceding four years. In a similar vein, world wheat consumption had been increasing by ten million metric tons per year from 1960 to 1980 but had been flat since. To compound matters, the value of the U.S. dollar relative to ten major currencies was at its highest level since 1969. This increased the price of U.S. commodities in terms of foreign currencies despite the decline in prices in U.S. dollar terms.

Secretary Block cited the fact that many exporting countries competed unfairly through the use of subsidies and other impediments to trade. In particular, the European Community spent $6 to $7 billion annually on export subsidies. In addition, financial problems in Poland, Romania, Mexico, Brazil, Portugal, and other middle-income countries that represented a significant portion of the foreign demand for U.S. farm products had adversely affected export potential.

These elements had combined to produce huge stocks and weak demand, with prices falling as a result. Farm program expenditures had therefore increased drastically. In fiscal year 1980, expenditures were $2.7 billion, and in fiscal year 1982, expenditures were $11.6 billion. By 1983, federal outlays were $18.9 billion, a sevenfold increase from 1980. Because of this situation, the USDA had some difficult decisions to make regarding the final 1983 program.

During Ronald Reagan’s presidency, the federal government’s approach to improving price and farm income prospects for future years was to take action so as not to fall victim to the temptation of legislating near-term prosperity through higher price supports or other rigid nonmarket actions. Officials thought that yielding to this temptation would only encourage farmers to produce more, in response to artificially high prices, at a time when the market was strongly signaling the need for less.

The Department of Agriculture introduced the payment-in-kind program to rectify the situation. William Lesher, assistant secretary of agriculture for economics, and Dan Amstutz, undersecretary of agriculture for international affairs and commodity programs, were both instrumental in developing aspects of the program. The USDA had a number of reasons for selecting the PIK program to address the situation rather than expanding its acreage reduction program (ARP) or its program of paid land diversion (PLD), both of which paid farmers to take land out of production and thus reduce their harvests. First, paying farmers in commodities for idling acres would not significantly increase farm program budget outlays in the short term. The commodities used to make payments would be those acquired by the CCC or farmer-owned commodities held by the CCC under price-support loans. These commodities had already been paid for. A second rationale was that “paying” farmers with these commodities would reduce the surplus stocks, and USDA storage payments on these commodities would decline. Finally, the USDA did not constrain PIK payments to the $50,000 limit that individual farmers could receive under other farm programs. The intended result was that large farmers who restricted their participation in ARPs in the past because of this limitation would participate more fully in the PIK program.

The USDA instituted the PIK program with the following objectives: to reduce production of wheat, corn, grain, sorghum, cotton, and rice; to reduce these commodities’ total ending stock levels; to ease commodity storage problems; to ensure adequate supplies of commodities; to increase net cash farm income; and to minimize government farm program outlays over the long term. Even though the program did not require new legislation, it was given strong support on Capitol Hill from Bob Dole, a politically influential senator from Kansas with a large agricultural constituency.

Significance

The PIK program removed an additional 49.2 million acres of cropland from production in 1983 beyond the 26.8 million acres that would have been taken out under previously announced farm programs. Determining the impact of the PIK program is complicated because of a drought that occurred during the summer of 1983. The drought’s effects were especially severe because of when and where it happened. It occurred toward the end of July and August, the prime growing season for such major crops as corn and grain sorghum, and was most severe in the top crop-producing states of Illinois, Iowa, Kansas, Missouri, and Oklahoma.

It is interesting to note that the drought had effects similar to those of the PIK program. It contributed to reduced production of some PIK commodities, especially corn and grain sorghum. This reduced production resulted in reduced total ending commodity stock levels and further eased storage problems for PIK commodities. The drought also contributed to increased commodity prices, which increased farmers’ net cash incomes in 1983. Consequently, to determine the PIK program’s impact as it related to the broad objectives the USDA had established, it is necessary to isolate the impacts of the PIK program from those of the drought.

The U.S. General Accounting Office performed an analysis regarding the design, impact, and cost of the PIK program. Its findings indicated that the PIK program and the drought had the following effects. Production of the five PIK commodities fell by about 35 percent, with 18 percent of the reduction attributable to PIK and 17 percent to the drought. Total ending stock levels of PIK commodities fell by about 62 percent, with 35 percent of the reduction attributable to PIK and 27 percent to the drought. Storage problems for the USDA were eased by reducing PIK commodities held under government loan and government ownership by about 75 percent, with 43 percent attributable to PIK and 32 percent to the drought. Stock levels of corn and cotton at the end of 1983 were short by about 1 billion bushels and 500 million pounds, respectively, of those considered necessary to ensure sufficient carryover levels. PIK and the drought combined to cause the corn stocks to be short, but PIK alone caused the cotton stocks to be short. Net cash farm income rose by about $12 billion, with about $9.2 billion attributable to PIK and $2.8 billion to the drought.

The USDA estimated that the program cost approximately $10 billion. These costs included the cost of the commodities, storage payments made to farmers, diversion payments made to farmers for taking a certain percentage of their cropland out of production, distribution costs for PIK commodities, and potential interest forgiven for loans that farmers had received on crops. The cost of commodities was almost 90 percent of the total. Participation in the program included 831,751 farmers, 93 percent of whom were individuals and 7 percent of which were corporations or partnerships. The average PIK payment per farmer was $10,627.

One of the major impacts of the PIK program occurred to farm-support industries, including those producing farm equipment, seed, and fertilizer. On February 21, 1984, Agriculture Secretary John Block testified before the Agriculture Subcommittee of the U.S. House of Representatives Committee on Appropriations regarding the impact on the input supply industries. He indicated that unit sales of major production items such as seed, fertilizer, pesticides, and farm machinery were down 10 to 15 percent overall in 1983 compared to 1982, and down 20 to 30 percent for PIK crops. Total expenditures for these items were estimated to have dropped about $5 billion, with most of the difference attributed to PIK. Machinery sales were depressed by the drought as well as by PIK. Before the drought took effect, machinery sales had been increasing.

A number of foreign countries expanded crop production as a result of the U.S. PIK program. Total foreign wheat production in 1983 increased by 4.5 percent. Production by major competing countries (primarily Australia and Canada) increased by 8.5 percent, and production by the major importers increased by 2.4 percent. Total foreign rice production increased by 4.4 percent in 1983. Major competitors increased output by 2.4 percent, and production by major importers decreased by 0.6 percent. Total foreign corn acreage in 1983 increased by 4 percent. The area planted in corn by major competing nations actually decreased by 2 percent, while major importers increased acreage by 6 percent. Agriculture;payment-in-kind program[payment in kind program] Payment-in-kind program[Payment in kind program] Department of Agriculture, U.S.;payment-in-kind program[payment in kind program]

Further Reading
  • citation-type="booksimple"

    xlink:type="simple">Clarke, Sally H. Regulation and the Revolution in United States Farm Productivity. New York: Cambridge University Press, 1994. An epilogue discusses the credit crisis of the 1980’s.
  • citation-type="booksimple"

    xlink:type="simple">Knutson, Ronald D., J. B. Penn, Barry L. Flinchbaugh, and Joe L. Outlaw. Agricultural and Food Policy. 6th ed. Upper Saddle River, N.J.: Prentice Hall, 2007. Good general farm policy text. Focuses on various issues affecting agricultural and food policy and gives positions of government officials and interest groups on these issues. Understandable and easy to read. Several references to the PIK program.
  • citation-type="booksimple"

    xlink:type="simple">Paarlberg, Don. Farm and Food Policy: Issues of the 1980’s. Lincoln: University of Nebraska Press, 1980. Paarlberg, assistant secretary of agriculture during the presidential administrations of both Dwight D. Eisenhower and Richard M. Nixon, gives a knowledgeable overview of American farm policy. Devotes a full chapter to discussion of commodity programs.
  • citation-type="booksimple"

    xlink:type="simple">Tweeten, Luther. Farm Policy Analysis. Boulder, Colo.: Westview Press, 1989. A more analytic treatment of agricultural policy than some texts, with abundant use of graphs. Two chapters on the history of commodity programs. Briefly mentions the PIK program.
  • citation-type="booksimple"

    xlink:type="simple">U.S. Congress. House. Committee on Agriculture. Payment-in-Kind Program. 97th Congress, 2d session, December 16, 1982. Testimony by Secretary of Agriculture John Block before the House Committee on Agriculture, discussing the proposed PIK program. Contains a good prepared statement by the secretary outlining the reasons for the proposed program and how it was to be implemented. Also contains some graphs depicting the situation.
  • citation-type="booksimple"

    xlink:type="simple">U.S. Congress. House. Committee on Appropriations. Subcommittee on Agriculture, Rural Development, and Related Agencies. Agriculture, Rural Development, and Related Agencies Appropriations for 1985. 98th Congress, 2d session, February 21, 1984. Testimony by Secretary of Agriculture John Block regarding the 1983 PIK program. He briefly discusses the impact of PIK on support industries, the value of PIK commodities given away in connection with the program, and the impact of the PIK program on crop production in foreign countries.
  • citation-type="booksimple"

    xlink:type="simple">U.S. Congress. Senate. Committee on Small Business. Subcommittee on Small Business: Family Farm. Impact of the Payment-in-Kind Program on Agricultural Support Industries. 98th Congress, 1st session. Senate hearing 98-348. Washington, D.C.: U.S. Government Printing Office, 1983. Documents testimony by a number of agricultural input suppliers and outlines the adverse impacts of the PIK program on their businesses.
  • citation-type="booksimple"

    xlink:type="simple">U.S. General Accounting Office. 1983 Payment-in-Kind Program Overview: Its Design, Impact, and Cost. Washington, D.C.: U.S. Government Printing Office, 1985. Government report goes into detail regarding the background, implementation, and results of the 1983 PIK program and critiques the program’s effectiveness.

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