Getting PIK-ed to Pieces

By Janice Castro

Curtailed planting means deep cuts in sales for farm suppliers

The enormous cutback in planting this year under the new federal payment-in-kind (PIK) program may be a bonanza for some farmers. In return for not planting corn, wheat, rice and cotton crops, farmers will receive up to 95% of their normal yield of these commodities free from Uncle Sam's warehouses. This is an economical way for the Government to reduce the cost of storing surpluses, and it should help the farmer by removing the glut that has caused prices to plunge. But where does it leave the marketers of such items as fertilizer and farm equipment, already suffering from depressed sales because of the recession? As they say on the farm, up the creek.

The PIK program will cause the greatest idling of American farmland ever. Up to 82.3 million acres, or 20% of all U.S. cropland, will be left unsowed. With some $5 billion less being spent to produce crops this year, as many as 50,000 workers in the farm sector, from cotton ginners to wheat cutters, could be hurt, according to a U.S. Department of Agriculture impact statement on PIK.

Sellers of farm equipment will be among those hit in 1983. Cash-squeezed farmers had cut back on purchases of new equipment even before this year, leaving manufacturers and dealers with huge inventories. The DOA projects that PIK will reduce spending for purchases and repair of tractors, combines and other machinery by an additional 8% this year, to $18.2 billion. Says Emmett Barker, president of the Chicago-based Farm & Industrial Equipment Institute, a trade group: "The size of the acreage cutback can't help but be disastrous to many businesses. There is no way that you can take 6 million acres out of cultivation in Iowa, for example, and expect everyone in farm equipment to survive."

Some manufacturers are slashing prices. Chicago-based International Harvester, which has laid off 32% of its workers in the past year and now faces another year of poor demand, has offered its farm customers such incentives as a price freeze at 1982 levels and deferral of interest on some sales financed by the company. Some farm equipment dealers may be forced out of the business. Noting the lack of federal programs to help suppliers, John Deere Dealer Willis Schmitt of Holy Cross, Iowa, says, "We suffer as much as the farmer, maybe more."

Makers of fertilizers and pesticides will fare little better. In the past two years, U.S. use of fertilizers has fallen from 53.3 million tons to an estimated 43 million tons. This year industry experts estimate that even though many U.S. ammonic plants, which produce nitrogen fertilizer, have already been closed, those that remain will be operating at only 73% of capacity. As a result, prices are falling and profits are being squeezed. International Minerals and Chemical, a major fertilizer maker in Northbrook, Ill., will earn only about $3 per share this year, compared with $4.56 last year, according to Dean Witter Reynolds Analyst George Krug. He thinks that the Williams Cos., a big fertilizer producer in Tulsa, Okla., will earn about $1.50 this year, down from $3.32 in 1981. One saving note: since farmers expect higher prices, they plan to use extra fertilizer on the acreage they plant this year to increase productivity.

Seed sellers will not suffer as much as other suppliers. Reason: farmers will be buying groundcover seeds to prevent erosion on acreage set aside under PIK. Some such seeds are already in short supply. Says Bob Reichert, a spokesman for DeKalb-Pfizer Genetics, a major seed producer: "Corn, soybean and sorghum seeds will suffer, but our Sudax, a sorghum sudan grass seed, is almost sold out, and our nitrogen-fixing alfalfa blends are in good demand. That eases the impact on us."

Though suppliers and dealers will suffer this planting season, most agree that PIK is necessary to improve farmer income. As surpluses are reduced and prices rise, they feel, farmers will want to plant more next year, and will have the money to buy supplies. Says Boyd Bartlett, senior vice president for John Deere, the major equipment maker in Moline, Ill.: "PIK is going to help farmers, and what's good for them is good for us in the long run." Manufacturers are now looking for ways to convert billions of dollars' worth of PIK contracts into cash that can be used to buy tractors, seed and other supplies. Last week International Harvester announced a plan to help farmers find grain merchants willing to advance them cash now in exchange for the PIK grain due to be delivered next fall. Farmers, of course, could make such deals on their own, but Harvester hopes that some of those it helps will use the cash to buy its equipment.

A new Atlanta-based company called AGRI-PIK Services, Inc., intends to reap profits from the PIK program by bringing together participating farmers and their suppliers. Though farmers will not receive the Government grain until harvest time, they do have certificates showing how much grain they will get then. AGRI-PIK has devised a system whereby a farmer can use the certificate to obtain credit from a number of suppliers now.

To do so, the farmer turns over his PIK certificate to AGRI-PIK as security against purchases he wishes to make from dealers on the new company's roster. Those dealers then check the value of the certificate with AGRI-PIK, register the purchase that the farmer is making, and deliver the goods to the farmer. The dealers are, in effect, extending free credit to the farmer, assured that they will be paid when the PIK grain is sold next fall. AGRI-PIK charges manufacturers an enrollment fee of $1,000 to participate in this plan; dealers pay $100. For each transaction, AGRI-PIK will collect a l 1/2% commission from both the farmer and the dealer. Says President Ronald Posluns: "We can move the farmer's buying power up from fall to spring." And make this growing season a lot less painful for those who rely on the farmer's business.

--By Janice Castro. Reported by Lee Griggs/Chicago and Gisela Bolte/ Washington

With reporting by Lee Griggs, Gisela Bolte This file is automatically generated by a robot program, so viewer discretion is required.