New Marketing Issues Via Pik Certificates

The Food Security Act of 1985 permits payment of farm program benefits in part with PIK certificates. PIK certificates can do things that cash alone cannot do. This special capacity gives PIK certificates special value. A market determined premium has existed for them from the beginning. Briefly during the harvest of 1986, premiums were as high as 30 percent. To date, premiums have rarely been much less than 5 percent. In this paper we will attempt to better understand the reasons for the PIK certificate premiums and explore an alternate design of the system that would, for the most part, eliminate them. A second objective of this paper is to understand how the special powers of PIK certificates are capable of changing the market environment itself. The fact that PIK certificates can acquire grain owned by the CCC, in the Farmer Owned Reserve, in the Special Producer Storage Loan Program, or under 9-month loan at approximately current market prices is an important change in the rules. Previously, CCC inventory had been available to the market only at prices well above the loan rate, with minor exceptions pertaining to the condition of the grain. Farmer Owned Reserve inventory was available at prices at or above a trigger-release price. The traditional 9-month loan program and the SPSLP tend to support prices at levels above the loan rate plus interest carrying charges. The availability of these supplies to the market via a new set of rules creates a radical new market environment, something closer to a free market (Kennedy) (Westcott and Hanthorn). Additional topics discussed include the role of PIK certificates toward alleviating storage shortages, toward creating a defacto marketing loan, and toward possible USDA control of regional markets.