The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
/ Some Aspects of the Livestock Credit Problem in the Current Economic Situation Remarks by Chas. N. Shepardson, Member, Board of Governors, Federal Resei*ve System, at the annual convention of Texas and Southwestern Cattle Raisers Association, Houston, Texas, on March 20, 1957. It is always a pleasure to return to Texas and I truly appreciate the honor of being invited to address your Association, especially since you v ave had a little rain. When Mr. Stewart wrote to me, he failed to suggest a but I assumed by reason of my present position that he expected me to u say something about the money and credit situation. Frankly, I would have ^esitated to accept if it hadn't rained for it was beginning to look as though Either credit nor anything else would do much good if the drought continued. And u > nere, let me say that I know as do you that, welcome as these rains have ho j they are only a start on what we need. But they do give some basis for °f better seasons ahead and some justification for forward planning. First, I would like to discuss briefly the general economic picture, past two years we have had a high level of economic activity in most t ors ive of the economy with demand for goods and services exceeding produc- Ca pacity in many lines, especially in the metal industries. We have had ^ally full employment and a rising level of wages, which have meant inease d consumer purchasing poirer. This, coupled with the easing of consumer ^stal m ^ment credit terms in 1955* resulted in increasing demands and a corresn ponds 2 pressure on prices. This in turn stimulated demand for expansion of Plant and equipment and a further pressure on prices, particularly on indus^ial r ^ aw materials. - 2 The problem confronting us in this situation can best be illustrated ky comparing it with the beef cattle situation ten years ago. r You will remem- that with the end of rationing, following the war, beef consumption rose A om pounds per capita in 19U5 to 68 pounds in 191*7. This rising demand ^ Prodi rising prices of beef, which in turn stimulated the interest in beef • ction and rising prices for cattle to enlarge existing herds or estab- lish n u ew herds. I do not need to tell you that if you hold back more animals for hp>v) expansion you temporarily have less available for current marketing. With a strong consumer demand, this automatically results in higher prices, m turn tends to curtail marginal consumption. Eventually, however, in- ase d production from the expanded plant, in this case the expanded cow herds , » °egins to hit the market and the price trend is reversed, the severity Ending upon the degree of over-expansion. This is what happened to cattle. As post-war consumer demand outran production, beef cattle populan topped 9 per cent from January 19U5 to December 19h7, while beef and *ttle ^ c p-cices rose. er ^°Ur y ars Then expansionary forces began to dominate the picture. of cattle dropped 23 per cent and calves 37 per cent in the next while total numbers rose 29 per cent. The price of cows rose 100 cent steers 122 per cent, and calves lh7 per cent above 19li5 levels. A Per c wi shrinking supplies of slaughter beef and rising consumer prices, P^ta consumption dropped from 68 pounds in 19ii7 to 55 pounds in 1951. In that ysar the increased production from this expanded cow herd began to *t the i , mmarket a waveSlaughter that was rates augmented by theabout increasing bought manyin areas. increased U5 perpressure cent andof the Of cows dropped 50 per cent in two years. h - 3 Unfortunately, it is difficult to reverse such an expansionary tr end over night. yea Cattle population continued to increase until this past r when drought and other factors finally brought about a reduction of about four 2 per cent. The fact that prices have been fairly stable over the past years, in spite of the increasing supply, is due in large measure to the consumer buying power which permitted an increase in per capita con- Option from the low figure of pounds in 1951 to 81* pounds last year. Here I want to pay tribute to the cattle raisers generally and to triis Association in particular for the outstanding job that has been done in demoting beef consumption. Certainlv, one of the major problems of agri- Cu ^-ture is that of increasing per capita utilization of animal products with higher land requirements and thereby facilitating the diversion of more ailci the production of surplus crops to the production of meat, milk and p °ultry products. But let us turn back to our general economic situation for a moment. Th 8 b °om phase of the cattle cycle which I have just recounted took place in per Xc iod 0 f abundant money and credit and with no restraint whatsoever in the essiVe expansion which ultimately proved so disastrous to cattle producers. + took place in this relatively small sector of the total economy is illus* 1Ve of the problem facing the economy in general during the past two years. ^ herring to this as a small sector, I fully realize its importance to you the fact remains that the gross income from beef cattle amounts to nar S * 1.5 per cent of the gross national product. Demands on productive ° ^ s both for expansion and consumption have exceeded current producU ts Ca Pacity in most sectors of the economy with resulting inflationary ure s on prices. - h - relatively stable level of prices in 1953 and 195k appeared to continue ln 1955 largely because of the drop in farm prices, i^hich tended to offset rise in industrial prices. With the slight up-turn in farm prices in consumer prices, which had held fairly stable through 1953, '5U and lev U8 at an index of about ll!i.5 based on 19kl-k99 rose to an index level of lr i December 1956. It was in the light of this situation that the Federal Reserve attempted over the past two years to resist these inflationary pressures, has been done by retarding the rate of growth in the money and credit u Pply of the country. Contrary to the belief of some, there has not been Eduction in available credit. But to have met all of the demands for 3?e dit would only have increased the competition for available goods without easing the supply and the effect would inevitably have been a further '^ Crease in prices and a corresponding further shrinkage in the value of the ^llar. Obviously, the price increases that have occurred are evidence of Q fact that this policy was not as effective as might have been desired. fact > this rise in prices accounted for approximately half of the almost Million increase in Gross National Product this last year. Part of this ^PPage way have been due in part to misjudgment as to degree or timing of a nd monetary restraint. *e<Ht a . On the other hand, it must be remembered that e and monetary policy is not the only factor in the picture. Fiscal J of government and labor-management negotiations of wages are also contributing factors. Wage increases adjusted to productivity - 5 increases may have little or no inflationary effect but those in excess of Productivity increases can be inflationary in periods of strong demand, at until further advances in productivity bring costs back in line. Of course, all segments of the economy and all areas of the country n n + subject to the same demand pressures concurrently. °t It is much like the surface of the ocean. We speak of sea level yet no one ever saw the sea It is always in motion with waves and troughs that are constant^ ch 2lng. So with the economy; automobiles and housing had a boom year in I955 • lhey were both down in 1956, but this was balanced in a large measure by ^^ e*traordinary rise in industrial plant and equipment. True, agriculture has been in an unfavorable position for several years mu • ihere is no evidence, however, that its difficulty is in any way due "to COS+ ^ or availability of credit. With a rapidly rising population, an increasin Per capita consumption of food, and an unsurpassed level of consumer clla sing power, it is quite evident that agriculture's principal problem is ces^ Productive facilities. PriCe Past 01 In fact, the rise that has taken place in the farm land in the face of falling prices of farm products over the Se veral years may be in part a result of too easy credit. Present land Mces -•-n many areas may not reflect realistic appraisal of the long-time reas S TTcapacity of the land. This is especially true in some of the drought Unusually favorable seasons, plus abnormal world markets during the a yea ar s, brought a lot of land into cultivation that should normally be in p . capitalization of that land on the basis of wartime yields and prices Warded readjustments that must be made sooner or later. - 6 Reverting submarginal cropland to grass has been going on for some tinie A > especially in the Southeast, as you well know. It is not improbable this may ultimately have some effect on the price of western range lands. n as the other hand, observation of the inflation that has taken place in the t fifteen years and fear of further inflation have caused many people to °0i- at land as a good hedge against further attrition in the value of the dolXav, r * This, together with the need to enlarge existing units to a more ic* Ca -ent has created a demand for land that continues to exert an upward SUr e in prices. thisadds risetoinhis land prices costs may add thepurchased book value of a ftan's holdings,While it also overhead on to land and it Mainly increases the difficulty of a new man getting into business if k°Pes to pay for the land from his operations on it. Again looking at the broad economic picture, it has seemed to be the b ®st Policy, and in fact the only policy under present law, to combat these %latin ° n a r T pressures by restricting the total amount of available credit and °ving Qrced + the market to determine the allocation of that credit. f Lenders are become more selective in their extension of credit. Marginal bori ooth for current consumption needs and for speculative investment in ^sion of plant and equipment, are forced to curtail their expenditures, uucing the demand pressure on prices. red This means that some wants must until an orderly and sustainable growth can increase our productive to meet demand. Of course, no one likes the restraints that impinge fr eedom of action but without some restraint and pruning of the more ^cuiati ive expansions we could well a mushroom that business would ultiy c H i l y °Hapse of its own weight, justhave as happened in growth the cattle a few - 7 Naturally, this credit restraint has resulted in a rise in interest r *tes. i.Toney i s like ^ y other commodity and when demand exceeds supply the P^ice o r interest rate goes up. tne Credit costs, however, are but a fraction of total cost of operation and to the extent that credit restraint is success^ minimizing rising prices for the goods and services that make up the operating costs, some rise in interest rates would seem to be a small ^rice to pay for general price stability. And now let us turn to the situation confronting the cattle industry th is time. The drought may not be broken but certainly it is cracked and future looks more promising than it has in some time. There are several things that should be considered as we look ahead. Th f irst of these, particularly in the worst of the drought areas, is the ees tablis}11Tlent of range and feed reserves. Everyone familiar with the live- St c ° k business realizes that adequate feed supplies are the basis of a sound Unfortunately, drought is different from many other types of natdisasters. In case of a flood or a tornado, for example, the event is over and it is possible to assess the damage and proceed with plans for ehab ilitation. 0ns In the case of drought, the condition may run on for several and there is no way of predicting its duration or intensity. In an susceptible to frequent drought, the prudent man will maintain a conserVe stocking rate on his range and a roughage supply adequate to provide at i st one and preferably two years' reserve. ervt ly in the past. Some men have done this con- When drought began to impinge on their reserves too they reduced their herds rather than accumulate excessive debt for this way they avoided unnecessary damage to their ranges and - 8 °°nserved their assets so as to be in position to restock as conditions improved. as These men should have little difficulty in getting back into business their ranges recover and they have opportunity to rebuild their feed re- serves. Other men let their optimism run away with their better judgment. y were running too close to the line for comfort to start with. At the fj sign of drought, they were short of feed but, with more optimism than ^U(%ment in many cases, they bought feed hoping for a better day soon. As the °aSht continued, they went further into debt and their stock fell off in as they tried to stretch limited supplies of expensive feed too far. Some nf UJ - these have already been squeezed out of business. Others are still gln e on but they have incurred feed bills that exceed the value of their he^g * addition, their ranges have been so badly depleted as to require ^ favorable seasons to reestablish themselves. ^ke not In many cases, it will only time but money for reseeding and other range rehabilitation ^sur es take ae * In fact, it may be a question as to whether some of them shouldn't . losses and get out rather than to incur further debt that would ir Sose . ^ impossible burden on any future operations. Unfortunately, there are also some operators who, through lack of y in this type of business or because of inadequate holdings to provide c ient operation, can never hope to make a satisfactory living in their °ituation. Unue ^ of It is no kindness to encourage such individuals to con- unsound operation rather than to seek other opportunities for the itable employment of their time and talent. Many, however, are potentially good operators and are deserving of ^elp in getting back on their feet. form Part of this help may be through some Soil Bank or Deferred Grazing program for drought-stricken range lands. understand that the Department of Agriculture is still considering the possibility of such a program. e/e ral safeguards. Any such program, it seems to me, should have It should be limited to the drought-stricken areas of rac *itional range land; it should require a minimum term equal to the con- "tinUe d duration of the drought plus the 'necessary time to rehabilitate the I'ClF go . > possibly two or even three years to prevent too early and too heavy ^zing of o f immature growth; and it should provide safeguards for the interest ^nants. There will doubtless be need for additional credit for restocking 0ri an i intermediate term basis. Personally, I favor the proposal to extend e m aximum term on FHA livestock loans beyond the present three-jrear limit. many cases, collateral for such loans will be slim at best. In such cases xn cases of fully adequate collateral, loans should be based not only ° n thp collateral and the integrity of the borrower but also on the soundness of hj operation and the probability that it can produce an adequate return liQ • , HUidate the debt under normal conditions. tage . 0 u Certainly, there is no advan- the borrower or the community to extend credit that can only be repaid Sh liquidation of the operation. In connection with this need for credit, I would hope and expect that e and cooperative lenders would meet that needpast. in allTo credit-worthy cases Maximum of their ability as they have in the the extent that ^ i the t i °nal credit is needed from FHA, I would hope that it would be available - 10 at T* •Reasonable rates but not at rates so far below current market rates as to ro P incentive for borrowers to seek to shift from private credit sources to vide government credit. Aside from credit and the condition of the ranges, there is another Pr°t>lem to be considered. The heavy reduction in cattle population in the °uthwest has not resulted in a corresponding reduction in numbers for the nati0n ua as a whole. Many of the cattle lost to Texas and the Southwest have ftoved to other states and the national total is still excessive. With bog**Rapidly growing population and a continued effort to promote increased consumption, our current rate of production can be absorbed in time at Cre asingiy favorable prices. Even gradual restocking can be accomplished °u"t undue pressures in the market. On the other hand, too rapid expan- lead to a build-up of speculative fever and over-expansion such as h u the industry just a few years ago. °uSh that again so soon. Certainly, we do not want to go In fact, the present favorable corn-hog ratio to another build-up in hog production next year, which could have ^verse effect on beef consumption. In this connection, some restraint on the availability of credit ve *** serv. as an effective deterrent to the establishment, expansion, or even N a t i o n of too many unsound or inefficient operations. Certainly, there °^ht to v oe little credit for restocking available to the man who has abused his fan ge and exhausted his resources. bQ ea > Ca Hard as this may be on the individual it may be the best thing both for him and the industry as a whole n find his opportunity in some other field. In this respect, the - 11 situation is far different from that after the dust bowl days of the thirties. Then the entire economy was at low ebb and unemployment was high. Today, even with some abatement of inflationary pressures in certain Motors, the economy is still running at a high level with full employment and rising level of personal income, which means increased alternative opporturi ity for the man who finds himself with inadequate resources to continue a or ranch operation. In conclusion, I want to congratulate the cattlemen of the Southwest on +>m courageous manner in which you have faced and battled the devastating ^ect of these past drought years. 1116 Most of you have suffered severe losses. have failed and others may do so unless we continue to get an improvement father. x only hope that everyone will be more conscious than ever of the as of drought and the necessity of adjusting operations to feed reserves even •p it means decimating herds before feed bills eat up whatever equity is in them. Credit may bridge a temporary period of losses, but it can- taalke r the place of income over extended periods without incurring a burden that ttill be too great even under favorable operating conditions. I realize that I haven't told 3'ou anything that most if not all of you ictn't know in the beginning. I know, too, that I haven't suggested any- the way of easier or cheaper credit - first, because it would only rather than solve the problem, and, second, because it is not within the p o We r of the Federal Reserve System to extend or withhold credit in selected n ^ uur prime objective in our responsibility to the economy as a whole is that volume of credit essential to the full utilization of our - 12 re sources and the sound growth of the economy while maintaining a stable value the dollar. We believe that, in the long run, the most equitable alloca- tio n of available credit will be accomplished through the competitive forces of the market and that your local lenders who are dependent on your business their own existence can more adequately judge your needs and your credit than can the Federal Reserve Board sitting in Washington. ass I can ure you, however, that the Board is constantly studying the credit condi- tion s and needs of all segments of the economy, including the rapidly changing of agriculture,as it attempts to assess the over-all requirements of economy. of a I would point out, however, that as the technological advances gHculture increase its credit requirements, they also call for more bus- j e Ss ' anci management, including forward planning and the establishment of feed financial reserves if agriculture is to merit the credit terms that may appropriate to its needs.
@FedFRASER