What is Parity, When and Why?

Brad WilsonEconomic Justice, Farmer Voices on Parity, History of Parity

In the past few years there's been increasing talk about farm parity and related subjects like supply management. On the other hand, most farm bill advocates, or at least most of the new farm bill advocates from outside of the Family Farm Movement, need to know WHAT parity is, WHEN it was, and WHY it was and is needed. This paper answers those questions.

Defining Parity

Farm parity means many things in various contexts. There are highly technical operational definitions of it, complex economic interpretations and common meanings. Different interest groups and academic groups understand parity differently. Of these interests and groups, those in the Family Farm Movement have been the primary advocates for parity.

The word “parity” for general non-farm use, is defined in the Merriam Webster online dictionary, as “the quality or state of being equal or equivalent.”[1] This is a useful introduction to parity. Applied to farming, parity represents economic equality for farmers that is also economic justice. Comparisons of equality can be made in a variety of ways, such as in comparison to other times, the rest of the economy, or parts of it, and various comparisons within agriculture.

The National Agricultural Library (NAL) gives the following definition of parity for agriculture: “A level for agricultural commodity prices maintained by governmental support and intended to give farmers the same purchasing power they had during a selected base period.”[2] Purchasing power for agriculture as a whole is shown by a ratio between various “prices received by farmers” divided by an index of “prices paid by farmers.” The key base period is 1910-1914, when the many sectors of agriculture were doing well.

Besides being a comparison or equality between different time periods, parity has also generally meant equality between farm and city, and between farmers and other businesses, including the input and output industries that sell to and buy from farmers. This can be seen in the similar returns on equity or assets of farmers and corporations during the parity years, as contrasted with other years.[3] Since parity is defined for a long list of farm products, it is also a comparison between these crop and livestock products at any point in time, and within product categories over time.[4]

100 Percent of Parity

Parity, as "prices received" divided by "prices paid," is a ratio or percentage, where 100% sets the standard for an adequate, "normal" level of economic farm justice. So "100% of Parity" is the definition for achieving "parity." 100% of parity over all is computed for all of agriculture (as operationally defined in how USDA calculates it). In a similar way, a wide range of individual farm prices are computed as parity prices or as a percent of parity, as a percent of the specific "parity price" in dollars and cents, for that crop or livestock product for a given year. Here are some examples for the year 1946. The parity price for wheat was $1.71, the per bushel and average market price was $1.74, or 102% of parity. The parity price of hogs in 1946 was $14.00 per hundredweight, while the market price was $17.30 or 124% of parity. The parity price of fresh snap beans was $2.27 per bushel, while the average market price was $2.40 or 106% of parity. The parity price for processing pears was $77.70 per ton, while the market price was $91.70 or 118% of parity. The overall parity ratio that year was 121%.[5]

Parity as an Absolute Minimum Standard

In general, parity was defined and implemented as a fixed standard of equality and economic justice. In contrast, NAL's definition of parity lends itself to economic relativism, a floating standard, and some work by USDA has moved in that direction. The original 1910-1914 base period was chosen, not arbitrarily, but carefully, as a time when farmers had achieved an adequate general equality compared to their costs of production and compared to the rest of the economy. Starting in the late 1950s or early 1960s, however, USDA supplemented the parity standard with a series of weaker and weaker, unequal base periods, (i.e. ranging from 1957-1959=100, where 1957-1959 averaged about 83% of true parity, to 2011=100, where 2011 averaged 41% of true parity). The lower standard, called "rigged parity" by Family Farm Movement leaders, was relabeled as "100%".[6] In this way, "by the stroke of a pencil," the buyers of farm products were given an advantage over farmers.

As an absolute standard, parity is like the concept of "living wage," defined as an adequate standard for meeting basic human needs. Throughout history the "minimum wage," by contrast, has been criticized as an inadequate standard, and it has often been allowed to fall, by not being adjusted for inflation over long periods of time. Parity and living wage are minimum standards that are also adequate or just standards. Each is based upon a minimum "floor" standard (minimum farm price floors and minimum wage floors) that are also adequate standards. Minimum farm price floors were set at 90% of parity for basic crops and 85% of parity for nonbasic crops during the parity years of 1942-1952[7] with a goal of achieving 100% of parity farm price levels. This is equivalent to adjusting for inflation every year, and contrasts with the history of minimum wage floors.

What are Parity Farm Programs?

Parity levels are not just minimum standards to protect against cheap prices, though that is the usual need. They're also maximum standards, for occasional times when farm prices are considerably higher than the parity standards. The programs were designed in this way, to fix farm prices that were both too low and too high, opposing both extremes.

To achieve these goals, there were four general parts to the parity programs. On the bottom side of price there were: 1. minimum farm Price Floors, 2. backed up by Supply Reductions, as needed, to balance supply and demand. On the top side of price there were 3. maximum farm Price Ceilings, 4. to trigger the release of stored Reserve Supplies, as needed to address price spikes due to production shortages or other causes. Over the years there were variations in how, and how well, the four components were implemented.

Market order programs for fruits and vegetables make up a second kind of parity farm program. These programs achieved parity farm prices for a long list of fruit and vegetable products during the parity years (1942-1952).[8] These programs “approached the problem of producers' prices indirectly, in that they didn't have direct price floors, but did manage the 'quantity, quality, and rate of shipment to market," and achieved prices of 100% of parity or more for a lot of fruits and vegetables..”[9] Even today, according to USDA, parity standards are used in 45 fruit and vegetable market order programs, but not for the purpose of achieving actual “parity” (or “living wage”) price levels.[10]  That is, they look at parity or percentages of parity (quite low for about everything in recent years), but don’t have a goal of achieving anything close to parity (as seen in the results). Like the direct price floor programs (where price floors were lowered from 1953-1995), price standards were also lowered in the fruit and vegetable programs.

The original parity programs also included eight livestock products, starting with wool, in 1938. Of these hogs, chickens, turkeys, and eggs were ended by 1951, and butterfat in 1971. Milk, wool and mohair were continued into the 1990s, with milk price floor programs ending in 2014.[11]

Trade components are also often considered to be important parts of making parity programs work. Most important are provisions to prevent dumping into the United States, importing farm products below costs or below parity levels which would hinder parity programs. Dumping was addressed through tariffs and trade agreements, such as an international wheat agreement[12]. Trade rules have been especially important in the sugar program, where a number of countries have been allowed to export sugar to the United States, but based upon minimum price levels established by farm programs.

WHEN were the “Parity” Farm Programs?

The crisis of the Great Depression, which was especially severe for agriculture, led to the invention of the farm bill and the parity programs. The original programs of 1933 through 1941 did not include price floors set high enough to achieve parity market prices.[13] During the 1930s, then, price floor programs were few and low.[14] For example, only two price floor programs, for corn and cotton were started in 1933, one type of tobacco was added in 1937, wheat, wool and mohair were added in 1938, and others were added later.

The parity standard did not become the goal for farm programs until the 1940s. At that time the farm programs were used by the banking committees as a private sector, government managed stimulus to create wealth and help fund the war effort.[15] It took this second crisis for the United States Congress to muster up the political will to institute economic justice for farmers. Many more farm products were given price floors during the 1940s, and major price floor levels were raised up to or toward parity standards (i.e. a floor at 90% or 85% of parity with a goal of 100% of parity as a result).[14]

During the resulting farm program “parity years” of 1942-1952, 100% of parity or more was actually achieved for U.S. agriculture as a whole every year.[16]  In general, these results were widely shared across a wide range of crop and livestock products, as mentioned above, including major and minor "field crops" and a long list of fruits and vegetables operating under market order programs.[7]

These benefits contrasted starkly with the losses of the Great Depression, when debt and tenancy increased greatly and the number of full and part owners decreased. During the parity years, losses of tenants continued, but some of the losses went into ownership. From 1940-1950, for example, the number of nonwhite full and part owners in the South increased by 12%, and the number of white full and part owners increased by 13%.

After 1952, price floors were lowered gradually over more than four decades, and then ended. A full 100% of parity for agriculture as a whole was never achieved again after 1952, though a few individual crops continued to achieve parity during the 1950s, such as burley tobacco and peanuts, according to USDA data. After 1954, the highest point for major crops during these years was in 1973 and 1974, following the huge Russian grain sale, when 91% and 86% of parity was achieved, respectively. During at least one of these two years the major grain prices rose above 100% of parity, as did sugarcane and sugar beet prices. Soybean and peanut prices rose to just under 100% of parity. [17]

WHY Were and Are the Parity Farm Programs so Desperately Needed?

It is important to understand why minimum farm price floors were needed in agriculture. The reason is that free markets chronically fail for agriculture. These markets are characterized by price inelasticity. [18] They “lack price responsiveness” [19] “on both the supply and demand side for aggregate agriculture.”[20] These terms mean that supply and demand don’t balance out, with farmer supply going down and/or consumer demand going up. (See also Harwood Schaffer’s writing on this topic here at Disparity to Parity.)

These reasons are related to the unique characteristics of production agriculture.[21] Unlike concentrated industries like farm implement and automobile manufacturers, farmers have very tiny market shares, and they cannot manage their inventories to have any impact on the prices they receive.[22] Farmers also make planting decisions far ahead of when they sell their crops. For example, they can get better deals on input purchases bought well ahead of time, such as in the fall, for spring planting. Harvest comes the following fall, and, for storable crops, much of it might not be sold until the following spring, a year and a half after the purchase of specific inputs for specific crops. So farmers can't viably change their behavior much in response to market conditions.

Additionally, new land isn't created and dismantled like the creation and dismantling of factories. It's a given, and a farmer’s assets and asset costs (i.e. taxes & insurance) are relatively stable. Here again, farmers' acreages (tied closely to supply levels) are not changed much in relation to changing market prices, and market prices don't much self-correct.

Similar factors occur on the demand side.[23] Consumers’ stomachs and appetites are only so big, and so people don't much change what they eat in response to farm price changes. Industry is similar. There is little effective response when farm market prices change. Self-correction of farm market prices does not effectively occur.

Free market failure was a problem for 60 years prior to the farm bill and the Great Depression.[24] Though the Depression was a key to the creation of the parity farm programs, the programs were not created in forms that applied only to the conditions of the Depression. Instead, the programs addressed the chronic need for market management that continues today.

The primary result of the lack of price responsiveness is that farm market prices are chronically cheap, below full costs and well below parity standards.[25] This means that, without adequate parity programs farmers, farming communities, farming states and the United States all lose money on sales across their boundaries and borders most of the time. Prices higher than parity, where price ceilings and reserve supplies are needed, are rare.

What is Parity, When and Why? by Brad Wilson is licensed under CC BY 4.0