A brief history of Parity Pricing and the present day ramifications
of the abandonment of a Par Economy
By Kevin Engelbert, Organic Dairy Farmer, Nichols, NY
Added January 22, 2013
The basic premise of parity pricing is the belief that the selling price of a product or produce should go up or down in the same amount as the prices of the inputs used in its production. Another way to phrase the idea of parity price: the parity price of a particular commodity is the price giving a unit of the commodity a comparable purchasing power to that in the base period. The concept of parity is also widely applied in industrial wage contracts as a means of preserving the real value of wages.
The concept of parity pricing first surfaced in the early 1900s, when people realized that agriculture production must exchange on par with the rest of the economy, because the US economy is based on division of labor. Once farming became proficient enough to provide more food than the individual farmer needed to feed his family, the spinoff of labor then allowed the development of an industrial economy. So even though agriculture has fewer people involved in farm production, it still has the same economic function to preform and must generate the same buying power as all other sectors of the economy. In other words, to function properly an economy in a democratic republic must be a par economy.
Introduction of “Fair Exchange Value” or Parity Pricing
At a conference on agricultural policy called by Secretary of Agriculture Henry C. Wallace in 1922, the parity concept was introduced. Parity was also then referred to as “fair exchange value”. The conference’s goal was to figure out a way to maintain a fair price to farmers for the products they produced. At the same time, many farm groups were forming in an effort to lobby the government to ensure farmers received a fair price for the agricultural commodities they produced.
As political pressure rose, the McNary-Haugen Bill was introduced in Congress in January 1924. The bill proposed to control agriculture prices by having the federal government purchase excess supply. The bill passed Congress, but was vetoed by President Calvin Coolidge.
Nothing was acted upon, and the accumulation of money into fewer and fewer hands resulted in the Stock Market crash of 1929, and the ensuing Great Depression.
Between 1919 and 1933, wholesale agricultural prices declined by 67%, and even though the Hoover administration passed the Agricultural Marketing Act in 1929, which introduced limited supply controls, the price decline continued. During that era, politicians of both major political parties realized the implications of an unfair pricing system with regards to agriculture. They knew that having a plentiful supply of food was not just a matter of national necessity, but also a matter of national security. The U. S. Constitution authorized Congress to regulate the value of money – not in terms of simply printing, but in terms of goods, commodities, and labor that exchanged for money.
Agricultural Adjustment Act of 1933
The Agriculture Adjustment Act of 1933 (AAA of 1933) included the first use parity prices in the determination of commodity prices. Politicians and agricultural leaders realized that prices for farm products were not in themselves of primary significance. Of far greater importance was what farm products would buy in terms of clothing, energy, feed, machinery, fertilizer, services, and other items farmers needed for living and food production. The 1933 AAA authorized Congress to reestablish commodity prices that would give farmers the purchasing power, with respect to items they buy, equivalent to the purchasing power of agricultural commodities in a ‘base’ period.
In 1933, the Secretary of Agriculture’s economic advisers stated that the period of 1909-1914 was “one of considerable agricultural and industrial stability . . . with equilibrium between the purchasing power of city and country; the most recent period when the economic conditions, as a whole, were in a state of dynamic equilibrium.” As a consequence, the goal of agricultural policy for the next 45+ years was based upon the idea of raising and then maintaining farm product parity. With regard to dairy, the price support program based it values on the parity price of milk, with the Secretary given the discretion to set the price in the range of 75-95% of the parity price.
Agricultural Adjustment Act of 1948
By 1948, due to widespread criticisms of the parity price concept from economists and from political pressure, the Agricultural Adjustment Act of 1948 (1948 AAA) was enacted. Critics charged that using the period of 1909-1914 as the constant base period did not take into account the improved technologies and methods used on farms. In spite of the flawed logic (there were even more improved technologies and methods used in industrial production), the 1948 AAA changed the base price concept from the average of 1910-1914 prices (the year 1909 was dropped) for individual commodities to “adjusted base prices” which are the most recent 10-year average prices received for the commodity deflated by the corresponding 10-year average of the index of prices received for all commodities. The “parity index” is the ratio of the general level of prices for articles and services that farmers buy, wages paid for hired labor, interest on farm indebtedness, and taxes on farm real estate on a given 10-year period in relation to the general level of such prices, wages, rates, and taxes during the period January 1910 to December 1914.
So, the 1948 AAA defined the “new” parity prices as the product of the adjusted base prices and the parity index. The change allowed relative parity of individual agricultural commodities to be based on recent performance and to fluctuate in response to changing market conditions. The 1948 AAA also marked the beginning of our current state of economic conditions: the declining rate of profit for industry, the loss of liquidity in our banks, the never ending increases in inflation, and the continuing loss of farms and farm land – all from the loss of farm parity. The logic that famers gained more from advances in technology and productivity than other sectors of the economy was flawed, but the change placated those clamoring for an adjustable parity base.
1980 Farm Bill and the Agricultural Food Act of 1981
The final critical event in the history of parity pricing – there are many minor laws and changes that I haven’t touched upon – was the passage of the 1980 Farm Bill, which resulted in the Agriculture and Food Act of 1981. By 1983 parity was completely phased out as a factor in setting the support price for milk, and that marked the end of ‘cost of production’ playing any role in setting the price for raw milk. Instead, the powers that be trumpeted the “free market” as the determinate in establishing the price of raw milk. We all know now that the “free market” does not exist.
When famers do not receive parity price for the products they provide, that essentially represents a form of theft. True wealth comes from the earth’s natural resources: farming, fishing, mining, lumbering, etc. When the people engaged in those endeavors, and the products they are responsible for, do not receive parity price for their work, a par economy cannot function properly. The results are the situations with regard to the economy in general, and the dairy industry in particular, that we find ourselves in today.
Remember, the U.S. Constitution charged the government with the responsibility to “coin the money, and regulate the value thereof”. To do so involves regulating imports so that American money could be stabilized in terms of American production costs and expenses for doing business. The flaw in government and economist’s thinking centers on the concept of a global economy. You cannot have continuous, long-term prosperity in the US while subjecting American businesses to world economic conditions. The pressure to do away with parity pricing came from businesses forced to compete with cheaper foreign products.
The argument against parity pricing in the late ‘70s and early ‘80s centered on the over production of milk in the US. In actuality, the increase in imports was the true cause. Had the government regulated imports though tariffs and other constraints, as they were required to do in the U.S. Constitution, there would have been no surplus. Abraham Lincoln once said “If we buy rails from England, we will have the rails, but England will have our money. If we make the rails here, we will have both the rails and the money.” What a disservice to our country businesses and government have committed when that line of thought has been abandon for the sake of profits and control.
When the primary producers receive a fair price for their products, the money they receive circulates in the economy, and has a multiplier effect of approximately 7. In other words, they spend their money and by doing so make money available to consumers (industrial and retail workers) who then have the means to purchase their products. When primary producers do not receive a fair price for their products, the money they would have received accumulates in the hands of a few (upper level management and politicians, via political contributions and speaking fees, for the most part). The concentration of money in the hands of a few eventually leads to an economic depression. Currently our government has embarked on programs of quantitative easing (printing money) to try to stimulate the economy and prevent a collapse. That approach only delays the inevitable and makes the forthcoming debacle worse.
Lack of Parity Pricing led to increase in Government Debt
Another consequence of the lack of parity pricing has been the increase in the government’s debt. In 1910-1914 the U.S. essentially had no debt – the par economy was functioning properly and earned income was generated rather than borrowed. As the percent of parity in setting prices lessened, the nation’s debt increased, and since parity pricing was abandon, our country’s debt has soared. The government has taken away the benefits of a par economy, and the result has been to enlarge the market for government services, and government regulations. The government services and the expansion of the private sector service industries cannot be sustained without parity for agricultural commodities unless there is unsound debt expansion.
Economists, and most people who have never tried to earn a living by milking cows, contend that if parity pricing had not been done away with in the early ‘80s that the glut of milk would have been worse. I believe the oversupply of milk was forced on dairy producers by doing away with parity prices. When a dairy farm sees a drop in the price they receive for their milk, they basically have four options: 1) a lower standard of living, 2) increase their production, 3) develop off-farm income, or 4) sell their cows. Politicians, economist, and all the businesses that handle the milk once it leaves the farm don’t care if 9 out of 10 dairies go out of business, as long as the 10th dairy expands enough to make up the difference. The short-sighted approach derives from greed as well, because again, the profits that farmers should be receiving are going elsewhere.
There has been a myriad of programs designed to keep farmers enslaved to the government and agribusinesses, among them price supports, subsidies, compelled reduced production, government purchases, land set asides, milk marketing orders, milk income loss payments, environmental grants, and other programs. All of those programs represent an attempt to substitute earned income with debt income, which cannot be sustained. They have resulted in the loss of farm land and farmers, but at a rate slow enough to avoid a much needed change in policy.
Above, in the chart, are a few statistics that shed some light on the situation.
Even with the price of milk determined using a percentage of parity pricing from the 1950s until the early 1980s, there was a mass exodus of people engaged in dairying in that time period. From the 1980s on the exodus has been forced by the government. Dairy farming is a very hard, demanding occupation, and the continued loss of dairies does not bode well for the long-term food security of our nation. The US continues to lose over 3,000 acres of farm land per day, 365 days per year, and that’s not land in set-aside programs or land allowed to revert to forest, that’s prime, productive land lost to either development or mining – permanently removed from agriculture. Politicians are so oblivious to the seriousness of the situation that some actually tell FFA students to not get involved in agriculture because food production will be moved overseas in the near future. Can you imagine the lives lost if we depend on foreign countries for our food in the same manner we depend on foreign sources of oil?
Are CAFO’s the Answer?
Some will argue that the move towards larger and larger farms results in more efficient production, and that parity pricing would slow the inevitable. Let’s look at what we have with large Confined Animal Feedlot Operations (CAFOs):
Many of the systems CAFOs use in their operations are financed or even paid for by the government (methane digesters, manure storage facilities, heat exchangers, etc.) through grants or cost/share programs. And paying immigrants less than the actual value of their labor is the equivalent of importing cheaper food. Does anyone honestly believe that these types of operations are truly sustainable for many generations? Even though CAFOs may make relatively large profits now, the dependency on cheap, abundant energy and water, along with government subsidies, makes their long-term future virtually impossible. Small family dairy farms, paid parity price for their milk, are truly sustainable with no government payments and no risks to the environment, either short or long term. Also, consumption of conventional fluid milk has been trending downward for decades, which I contend must be influenced to a least a small degree by the taste and quality of the milk being produced on the large CAFOs.
Our Government’s Cheap Food Policy
What else do we have to show for the government’s long standing cheap food policy? We have a country becoming more and more dependent on imported foods. Not only that, but a country where one out of six children suffers from hunger. When you include those that go unreported and those who are malnourished, the numbers are even higher. The cheap food policy gives the government more control, and more reasons to tax, but also leads to additional debt from the programs created that try to deal with hunger in the United States. In short, all the benefits promised by doing away with parity pricing for agriculture have not been born out. In fact, the results have been an absolute disaster when studied against the context of our history.
With the concern regarding the upcoming Farm Bill and the ‘Fiscal Cliff’, I doubt there’s enough wisdom and courage in Washington to do what should be done; there hasn’t been for over 30 years. Before there’s any hope of the right action being taken, at least three major changes would have to made in our political system: 1) term limits for Congressmen and Senators, 2) politicians would have to abide by the laws they write for the populace, and 3) no monetary gain in any form from the government once a politician leaves office. Our founding fathers never envisioned the noun ‘career’ being used as an adjective for the noun ‘politician’, and that represents the biggest problem with our State and Federal governments. They also never envisioned food being taken for granted in the US and the disastrous policies that would result.
So, with regard to conventional milk production, I doubt we will see a return to parity pricing in our lifetimes. Organic farming has always held out the hope that farmers would be more fairly compensated for their efforts. Presently, that is not the case. Consumers have shown they are willing to pay a higher price for organic food, which doesn’t have any hidden costs like conventional food. The fact that organic dairy farmers receive an even smaller percentage of the consumer dollar than conventional dairy farmers does not bode well for the future. Parity pricing, or at least 90% of parity, would allow organic farmers to compete for land, encourage young people to return to the family farm, and provide consumers with the money to be able to purchase organic products. Currently, that money is being stolen from organic farmers and heading them down the same path as conventional dairies.
On another note, I’m sure everyone has read about the impending financial crisis our country faces. The massive debt that we continue to accumulate will lead to the collapse of our economy and eventually, not just the steady inflation we’ve had since doing away with a par economy, but hyper-inflation. On the present course our country will go into receivership. No one can agree on what to do because none of the politicians want to give up the power and control the government has accumulated. Many of the more pessimistic economists believe that the collapse should be happening right now. Oddly enough, there are some signs that the economy is improving, such as the unemployment rate edging downward and industrial output edging upward. The reason for the surprising trends, which none of the experts seem to know why, is that conventional grain prices and a lot of other agricultural commodities have been rising towards their parity price for over a year. Organic grain farmers are actually receiving parity price, so they are justly compensated for the raw materials they provide. That in turn provides the money for the people employed in the industrial and service sectors to purchase the end products that use those commodities. A par exchange between all sectors of the economy would eventually result in balanced government budgets, and a restoration of our freedoms.
To summarize, parity prices for agriculture will not result in over supplies of raw materials. The only time in the last 100 years that there have been agricultural surpluses is when prices were at less than parity, because at less than parity the income needed to consume the production is not created – there isn’t enough earned income moving through the economy. Instead, the income is being concentrated in a few hands and the government is forced to borrow money to operate. With the subsequent inflation and at less than parity prices, farmers are forced to increase the supply of the products they produce if they want to stay in business. The parity price for raw milk in November of 2012 was $52.10/cwt., or about $4.50/gallon. Consumers are paying well over $8.00/ gallon for organic milk, but organic dairy farmers are only receiving about $2.75 out of that approximately $8.50. The selling price could remain the same while $4.50/gallon was paid to organic dairy farmers, based on the markups used with conventional milk. Currently, for all practical purposes that additional $1.75/cwt., which should be paid to the producer of the raw material, is being stolen. If organic dairy farmers were paid parity price for their milk, the way organic grain producers currently are for their grain, then organic agriculture, and the United States, would have a bright future.
Kevin Engelbert farms in Nichols, NY with his wife Lisa. He recently completed a five year term on the NOSB, from 2006 to 2011.