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Parity price: A policy of the past, a past full of history

Ben Yale Published on 16 March 2011

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He was one of the best known Americans of his time, in popularity trailing only his contemporaries Richard Nixon and Billy Graham, both of whom would play important roles in his life. He served as Secretary of the Treasury under Nixon.

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His first cabinet position was Secretary of the Navy in the Kennedy administration. He resigned that position to run for governor of Texas, which he won. As governor, he sat in front of Kennedy as they rode through Dallas in November of 1963. He, too, took a bullet from the assassin’s gun.

His name – John Connally. With all of this fame, what nearly took him down was a 1971 fight over dairy policy, milk price parity to be more specific.

Forty years later, the calls for a “parity price” for milk continue. The USDA still computes and reports it each month, even though it has not used the number in any milk pricing program since 1983. The USDA has no obligation to use it, only to report it.

In January in its monthly report, Agricultural Prices , it reported a “milk parity price” of $46.80 per hundredweight (cwt), or more than twice the all-milk price (the average price producers received on all milk) for the same period.

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The term “parity” in economics generally refers to the equivalence between two currencies in the price of a commodity. Parity was used for years by the U.S. government to connect the dollar to gold or silver.

The term was first used for agricultural policy in the Agricultural Adjustment Act of 1938. Parity in this context represented an equal exchange relationship between the economic status of people living on farms and people not on farms. That is, those on the farm are as prosperous as those in the city.

In 1933, the secretary’s economic advisers stated that the period of 1909-14 was “one of considerable agricultural and industrial stability ... with equilibrium between the purchasing power of city and country.” It was “the most recent period when 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 this idea of raising and maintaining this farm product parity through price supports, subsidies, compelled reduced production, government purchases and other programs. Over time it became a benchmark to measure the level of government involvement as well as producer prices.

This index is calculated of prices paid for goods and services used in production and in family living in relation to the base period. The government estimates the quantities of these products and services. The family living relies upon the consumer price index.

About 30 other factors such as feed, chemicals, machinery, vehicles, rent, fuels and other costs are computed and indexed to the 1910-1914 period. The number reported for January 2011 is 2,574.

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This means that prices should increase by 2,574 percent over the base period to have the same per-unit purchasing power that a producer would have had in 1910-1914. (1909 was dropped from the formula in 1948.)

Using this number as well as index of prices paid by farmers and related parity ratios with 1910-1914 equal to 100, the USDA computes and reports parity on the last day of each month along with the numbers, tables and indexes supporting the number in Agricultural Prices , a monthly publication of USDA NASS.

The USDA recognizes that parity pricing does not clearly present the economic conditions on the farm today. In its monthly report on parity prices for 17 basic commodities, over 90 non-basic commodities and 53 discontinued non-basic commodities, it says, “The parity ratio is a measure of price relationships; not a measure of farm income, farmers’ total purchasing power or 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 programs.”

This is an important qualification. Congress authorized the secretary, in setting minimum prices for the milk orders, to consider parity. However, if the secretary felt that the parity price was unreasonable, he could consider other economic factors.

In other words, it is not an obligation to use parity prices but an obligation to consider whether such parity is even appropriate. The USDA does not use parity pricing in setting minimum prices.

Originally, the dairy price support program did base its values on the parity price of milk. The secretary was given some discretion in the range of 75 percent to 90 percent. Changes in the percent had real impact.

A move of five points on the index would result in an additional $300 to $500 million for producers. Lobbying for higher parity in the price support program was a mainstay of milk lobbying in the ’60s and ’70s.

On March 12, 1971, the USDA denied the dairy cooperatives’ request for raising the percent of parity in the dairy support price. On March 22, the three big cooperatives contributed $422,000 to President Nixon’s re-election campaign.

On March 23, USDA Secretary Hardin met with President Nixon and Connally to discuss the matter. On March 25, the price support was raised from 80 percent of parity to 85 percent, representing an increase of 27 cents per hundredweight, or about $300 million in higher milk prices.

Smelling something sour, Congress investigated. During these investigations, Nixon claimed executive privilege and refused to turn over notes and other material concerning the March meeting about raising parity. Several months later, the administration admitted it had a tape recording of the meeting.

Based on this tape, statements by the man who allegedly delivered the cash and other evidence, a grand jury indicted Connally for bribery for receiving two payments of $5,000 in exchange for using his position with Nixon to raise the milk support price and then lying about it.

Later that year, the House Committee on the Judiciary passed three articles of impeachment, including one on obstruction of justice. This article stated that Nixon had used his office to avoid investigation and prosecution of the many crimes that were committed.

Among those crimes was the receipts of payments from milk cooperatives by various government officials to get their help in raising the percent of parity paid in the milk price. Facing certain impeachment by the House, in July of 1974 President Richard Nixon resigned.

None of this distracted dairy producers from continuing to demand that the Congress pass legislation raising the percent of parity used in price support. The number remained at the 80 percent level through the Ford and Carter administrations. The law required semiannual, and even quarterly, adjustments.

Though it was not at 100 percent of parity, the price support level was very profitable. By the early 1980s, the nation was awash in milk. The USDA held emergency hearings to amend federal milk orders to equitably allocate the costs associated with the excess milk.

Cooperatives were forced to ship it great distances or operate powder plants at much lower returns. At that time there was no Class IV or equivalent, so milk going into powder represented a real loss to the cooperatives.

During the flush periods, there were days in which milk had to be dumped because there was no market for it. Fights broke out among milk haulers, who were forced to make longer trips. Government purchases of butter, powder and cheese had filled caves and warehouses with mountains of these products.

To stop the slop of extra milk, in 1983, Congress removed parity as a factor in price support and fixed a price. The secretary was to reduce it further if purchases of milk products were too high.

In 1985, the secretary was ordered to deduct 50 cents per cwt from producers’ checks and, if government purchases exceeded 5 billion pounds, deduct another 50 cents.

In 1996, the FAIR Act scheduled reductions in the price support with elimination of the program planned in 2000. The price support program was reinstated in 2002 with fixed prices and exists today as the dairy product price support program, again at fixed prices. Parity is nowhere to be found.

The demand for parity continues. The high number of $46.80 per cwt is appealing. But parity price does not represent the value of milk produced today. The USDA has made that clear.

Rather, parity represents the price that a 1910-1914 era dairy farmer would need to farm the way he did and live the way he did a century ago. Who today wants to return to that Third World existence?

The milk produced on those farms would be unmarketable today. Milk was harvested by hand, milking into open pails. There was no separate milk house, cooled milk tanks, sanitary lines or quality standards at all. Workers were exposed to bovine TB and other serious diseases.

The feed provided less nutrition; cows milked about 3,000 to 4,000 pounds per year. The only remaining vestige of 1910 dairy in America is the barns that still dot rural landscape.

Family living was not much better. There rarely was electricity or indoor plumbing. Most of the machinery was horse-powered. Telephone, radio, television, Internet and satellite TV were decades off.

Health care was primitive. There were no vaccines or antibiotics. Deaths of mothers during childbirth and children were high. The average life span was 50.

Even with prices that are lower, the American dairy farmer has a buying power and lifestyle today immeasurably better than that of a century ago.

The use of parity in pricing proved that even with lots of numbers, the government cannot properly price milk. At the same time, giving price discretion to government officials is not the answer either. With so much at stake, it tempts the unscrupulous to corrupt our democracy.

Fortunately the system worked, and those involved in the parity scandal were called to account. In his trial, Connally for witnesses called two first ladies, Jackie Kennedy and Lady Bird Johnson, several fellow cabinet members and the evangelist, Billy Graham.

A total of 25 officials from the Nixon administration, including four cabinet members, and a number of dairy cooperative executives were eventually convicted and imprisoned for various crimes, not all involving fixing milk prices.

Nixon and Connally were not among them. Nixon was pardoned, and Connally was acquitted. PD

PHOTO
The term “parity” in economics generally refers to the equivalence between two currencies in the price of a commodity. Parity was used for years by the U.S. government to connect the dollar to gold or silver. Illustration by Mercedes Opheim.

Ben Yale

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