The Situation in Wheat

F. SCHNEIDER, JR.

THE summer's declines in wheat prices, which carried the principal "futures" to as low as 96 cents a bushel at Chicago, and which dropped the price on the farm to the neighborhood of 80 cents, have disconcerted Washington, depressed the northwestern farmer and caused much searching for the economic whys and wherefores. The election of Magnus Johnson in Minnesota has been attributed in part to the unsatisfactory level of prices for farm products, and while it is possible to exaggerate the importance of events of the season or the year, the farmer's discontent with the disparity between the prices of the things he sells and buys unquestionably is a political factor of the first rank. That his position is not of negligible importance to other forms of business and to the country at large may be seen from the fact that fear of the farm bloc has been having much influence on the value of railroad stocks, while many commentators on financial subjects believe that reduced purchasing power in the agricultural districts will result in a slowing down next year in the rate of general business activity.

Politically speaking, the situation is the more ironic because of the existence during the last two years of a militant farm bloc, which generally was successful in enforcing its demands, and of an administration which was anxious to placate the farmer element and which went far in the sacrifice of principle to attain this end. Certainlythe pet remedies of the farmer politicians and of politicians in general have had a fair trial, with what results the farmer only too well knows.

First of the political remedies to be tried was the Emergency Tariff Act, which went into effect in May, 1921. This act, which was designed primarily' to help the farmer and which was the particular pet of the farm bloc, prescribed a duty of 35 cents a bushel on wheat. In the Fordney-McCumber bill of September, 1922, this duty was placed at 30 cents a bushel. The farmer was told, and the farm bloc appeared actually to believe, that this tariff would raise the price of wheat in the United States and so compensate for the losses which the farmer would suffer on account of the increased duties on manufactured goods. The price of the' things which the farmer would have to buy would, of course, be greater than if he were permitted to buy foreign goods more freely, but, so the argument ran, his extra 30 cents a bushel on wheat, not to mention 15 cents a bushel on corn, would much more than compensate for the in crease in his living expenses. The farmer was to be "taken care of". The beneficence of the politico-financiers upon these occasionsisequalledonly by their rapacity.

Never was a greater swindle perpetrated than by the propounders of this argument. Never was a greater blunder committed than this one by the farm bloc, which accepted, or rather embraced this interpretation of the future. When the Emergency Tariff went into effect the price of wheat on the farm was in the neighborhood of $1.10. By the time the permanent tariff act took effect the price had fallen to about 90 cents. Lately it has been at 80 cents or even less. The 35 and 30 cent duties, in other words, quite failed to protect the farmer, while in the meantime he saw the cost of thg things he had to buy rise materially. It is small wonder that he is resentful.

But the attempts to bolster up the price of farm products by political expedients were not limited to the tariff. Much was made of new credit measures. The farmer, according to this theory, had been discriminated against in the matter of credit. He did not have the facilities to market his crops properly. Government credits, according to one school of politics, would settle the whole business. The Federal Reserve system must be put at the farmer's disposal. To satisfy this clamor the allowable duration of bills issued against farm products which could be rediscounted with the Reserve banks was increased first to six and later to nine months, a concession which most conservative observers considered inimical to the real purpose of the system—that of maintaining a central reserve of liquid commercial credit.

IN addition, Congress, by the Agricultural Credits Act of 1923, created a whole new system of Federal Intermediate Credit Banks which are to rediscount agricultural paper for private banks or to lend directly to cooperative associations, the length of the loans or discounts to be between six months and three years. Congress also authorized another system of National Agricultural Credit Corporations, which were to be private institutions dealing directly with the farmers. Yet the decline in wheat prices continued. One other major attempt to intervene in favor of the farmer has been furnished by the Futures Trading Act. This bill was inspired by the idea that grain prices decline because of the activity of wicked bear speculators. Accordingly, Congress passed a law providing that trading in grain futures be under government regulation and that all trades exceeding a comparatively modest number of bushels must be reported, with all the details of the transaction, to the authorities at Washington. The theory was that speculators on the bear side thus would be scared off. Yet the decline in wheat continued and many competent observers have expressed the opinion that that market was weaker than it would have been had not the speculative buying which frequently comes in on a severe decline been scared of! by this law.

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All these disconcerting experiences might have been spared the politicians, and many of these disappointments might have been spared the farmer if the politicians, particularly those of the farm bloc, had taken a firm hold on fundamentals at the start. If instead of trying to doctor up the patient with quack nostrums, the real disease had been diagnosed and the slow but logical treatment had been started, the results would have been far less wasteful and much more satisfactory. The real determining factor in the price of wheat is, as all economists and wheat traders know, the world supply and demand relationship. Wheat is an important factor in international trade and its price is determined in the world market.

Properly to understand the situation it must be remembered that western Europe has been in the habit of importing about 600,000,000 bushels of wheat each year, and that this grain has come principally from the United States, Canada, Argentina, Australia, India and Algeria. The grain from these several countries obviously comes into competition, so that larger or smaller crops in any one of these countries, and for that matter in Europe, are what determine the world price established in the London market. Since in our own case something like 30 per cent of our wheat crop must be exported at the world price, it follows that the price at home will be vitally affected by the world situation. As a matter of fact the price at home always is affected by the world price. Whether he likes it or not, the wheat grower will, as long as he continues to raise a considerable part of his crop for export, find himself in an unavoidable "foreign entanglement".

TURNING now to the existing world situation, the explanation for the weakness in wheat prices will be found principally in greatly expanded production in Canada and the United States, combined with a gradual recovery in European agricultural production which coincides with an European industrial depression. Before the war the United States produced about 700,000,000 bushels a year; in 1922 the output amounted to 856,000,000 bushels. Before the war Canada's harvests yielded about 200,000,000 bushels; last year they furnished 400,000,000 bushels. The six exporting countries mentioned above produced nearly 450,000,000 bushels of wheat more last year than was their custom before the war.

Part of this surplus production was drawn forth by war conditions, which resulted in large decreases in European acreage, and part was a response to Russia's disappearance as an exporting country. Since the return of peace, however, Europe gradually has been recovering her grain production and even Russia now shows signs of making a start at resuming her exports. At the same time the Ruhr crisis, which has brought a relapse in European trade and renewed the depreciation of several of the important foreign exchanges, has tended to reduce consumption. As a result, representatives of our Department of Agriculture consider that European imports are likely to be fifty or seventy-five million bushels smaller this year than last. The inference, with large crops again growing in Canada and the United States, is clear.

These being the circumstances, the futility of the various political remedies for low wheat prices is the more obvious. Since we arc a wheat exporting country, importing only small amounts of harder Canadian grains for blending purposes, an import duty could not possibly lift the price here. Such a duty could in no way assist our farmer in disposing of his surplus in competition with those of other exporting countries. Its imposition was an empty and misleading gesture. Politically it represented an exceedingly short-sighted policy.

Nor could the new credit facilities materially affect the situation. Holding grain off the market could be no remedy for a situation which embraced existing stocks of grain which already were too large, particularly with new crops in the making. What was needed was to get more wheat eaten and less wheat grown. Fresh extensions of credit would hinder rather than help these corrective developments. Meanwhile the attempt to restrict speculative activity and to stop the decline in prices in that fashion may be likened to shooting the score-keeper in order to avoid the defeat of your favorite baseball nine. Certainly the Trading in Futures Act has been about as helpful as such a procedure would be.

AFTER all, the natural remedy for a redundant situation in any commodity, and wheat is a fair example, is a decline in price. Unprofitable prices cause smaller production and stimulate consumption. This is precisely what is needed in the present situation. After low prices have prevailed for a certain period the balance is restored and prices recover to a more normal level. To have maintained prices above their natural level would have been merely to stimulate production and so aggravate rather than better the fundamental situation.

Admitting that our government should employ all proper means to improve the position of the farmer, it is clear that the one useful thing which might have been done would have been to concentrate on increasing consumption. As domestic consumption already is high, the principal opportunity would come in the case of Europe. And there the problem would center on restoring the purchasing power of the industrial population, which means that the trade depression would have to be mitigated, which in turn means that the reparations impasse would have to be broken. Only by using its influence on the side of such a settlement and by being willing to contribute something to it, can our government really render the farmer any substantial assistance.