Full text of Agricultural Highlights : May 1983

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DALLAS
Federal Reserve Bank of Dallas

May 1983

Cattle Prices: Will the Economic Recovery Help?
The movement of Texas live cattle
prices over the last half of 1983 will be
determined, as always, by the number
and weight of cattle brought to market
and by consumers’ willingness to buy
beef. Affecting cattle supplies are
short-run seasonal factors and longer
term decisions on breeding herd size.
As the economy recovers from the
recession, consumers’ incomes will
rise. Larger incomes lead to greater
retail beef sales which filter back to
strengthen live cattle prices.
Supply: Seasonal and Longer Run
Forces
Over the course of a calendar year,
the supply of cattle reaching the
market is fairly predictable. Fewer cat­
tle are marketed in the spring. Relative­
ly more cattle are slaughtered in the
fall. Thus prices peak in the spring and
bottom out in the fall. The reasons for
these within-year variations in supply
are largely biological.
Beneath the seasonal variation is a
long and powerful economic cattle cy­
cle. This cycle traditionally has a
period of between 9 and 17 years. It is
caused primarily by cattle producers
overreacting to price signals: over­
building breeding herds in times of
good prices and overcutting them as
prices fall. Currently the Texas cattle
market is in the seasonal high price,
low supply period and is stranded on a
plateau on the upward side of the
latest cattle cycle that started in 1979.
Demand for Beef
A United

States

Department of

Agriculture (USDA) study shows that
the most important determinants of
consumer beef demand are retail beef
prices and consumers’ incomes. The
depressed consumer incomes during
the recessions of 1980 and 1981-82
meant lower beef consumption. Reduc­
ed beef consumption is reflected in
cattle markets as lower prices for live
cattle.
Now the economy and consumers’
incomes appear to be growing. Accord­

ing to the USDA, a 10-percent increase
in consumers’ income will increase re­
tail beef and veal purchases 6.5 per­
cent. As retail sales increase, retail
beef prices begin to rise. This price
signal is transmitted back to live cattle
prices which, in turn, begin to move
upwards.
Recovery and Cattle Prices
One way to estimate the effect of the
(Continued on back page)

Farm Failures Decline
The number of farmers going out of
business in the Eleventh District ap­
pears to have fallen. According to the
April 1 Agricultural Credit Survey, 1.7
percent of the farmers with loans from
commercial banks went out of
business during the six months ending
March 31, 1983. This is down from an
estimated 3.6 percent for the last six
months of 1982 and is well below the
expectations expressed by bankers in
the January 1 survey. These results in­
dicate that there were fewer farm
failures in the first quarter of 1983 than
in the third quarter of 1982.
Respondents indicate that heavy
participation in the payment-in-kind
(PIK) program and recent increases in
some crop and livestock prices ac­
count for the improvement in farmers’
financial positions. A farmer’s par­
ticipation in the PIK program reduces
his need for operating funds for the
crop year by cutting input usage and
eliminating harvesting costs for the

set-aside acreage. (Some planting and
maintenance costs will still be in­
curred on the retired acres because of
program requirements.) PIK has also
improved farm income prospects by
guaranteeing yields on the set-aside
acres, effectively reducing production
uncertainty. The reduced need for
operating funds and improved farm in­
come prospects have allowed bankers
to carry marginal farmers for at least
another year.
Expectations of future farm failures
have also fallen. In the January 1
survey, bankers expected that an
average of 6.6 percent of the farmers in
their trade area would completely or
partially liquidate farm capital assets
during the first quarter of 1983. During
the second quarter, only 2.6 percent of
the farmers with loans from commer­
cial banks are expected to liquidate
some or all of their farm capital assets.
— Brian G aluardi

AGRICULTURAL CREDIT CONDITIONS
APRIL 1, 1983
C o m p a r e d ___________________ Percent of respondents
with one
_________
1982
1983
year ago
Apr. 1
July 1
Oct. 1
Jan. 1

Item

Demand fo r lo a n s ..........................
A va ila b ility o f fu n d s ......................
Renewals or e x te n s io n s ...............
Rate of loan re p a ym e n t...............
A m ount of collate ral re q u ire d . . .
Num ber of referrals to:
Correspondent b a n k s ...............
N onbank cred it a g e n cie s.........

Apr. 1

G reater
Less
G reater
Less
Greater
Less
Greater
Less
G reater
Less

18
44
36
10
62
3
3
62
54
2

26
38
36
13
70
2
3
69
63
1

27
41
35
16
67
3
2
65
64
1

26
30
37
11
67
4
5
64
61
1

18
36
45
8
52
7
7
49
59
1

Greater
Less
Greater
Less

11
11
26
7

13
23
28
11

12
12
19
12

8
12
28
8

9
17
20
11

Source: Federal Reserve Bank of Dallas.

RURAL REAL ESTATE VALUES
APRIL 1, 1983
______ Average Dollars Per Acre
________ Cropland________
Dryland
Irrigated
Ranchland

Eleventh D istrict Average . . .

718

Texas Average .......................

708

1,081

545

From January 1,1983 .............

-2.3

3.5

1.4

From A pril 1,1982 ...................

-6.0

0.9

-2.0

1,039

558

Percent change in D istrict average1

1. Percent changes calculated from data adjusted for sample variation.
Source: Federal Reserve Bank of Dallas.

COMMERCIAL SLAUGHTER: TEXAS (LIVEWEIGHT)

TEXAS MID-MONTH PRICES: LIVESTOCK
-

-

1

9

8

1

I

SOURCES: U.S. Department of Agriculture.
Federal Reserve Bank of Dallas.

1982

I

1983

100 DOLLARS PER CWT -----------------------------------------

80

cu |-----------------------1-----------------------1-------------'

1981

1

SOURCES: U.S. Department of Agriculture.

1982

1

1983

AGRICULTURAL BRIEFS
Higher commodity prices and lower interest rates bode well for farmers
• The number of new cattle placed on feed in
Texas during the first quarter was 25 percent
below a year ago, while national placements
were 9 percent less. Firmer prices in the third
quarter should result as the lower placements
this past winter translate into a lower beef sup­
ply during the summer compared to last year.
• The success of the payment-in-kind (PIK) pro­
g ra m -id lin g acreage in return for com­
modities—means that farmers will use less
seed and agricultural chemicals. Estimates
range from 64.4 percent fewer sales of
pesticides in the Northern High Plains to a 12.5
percent decline in seed sales in the Southern
Low Plains.
• Interest rates on farm operating loans fell in the
first quarter of 1983, the fourth consecutive

INDEX OF PRICES RECEIVED: TEXAS

quarterly decline. Rates dropped 0.8 percent­
age point to 13.3 percent, the lowest rate
recorded since October 1980. Agricultural loan
rates, however, have not fallen as fast as the
cost of funds to banks. The Federal funds rate,
for example, fell 5.9 percentage points from
March 1982 to March 1983; farm loan rates fell
only 4.6 percentage points during this same
period.
• Texas crop prices have generally moved up­
wards in the last four months for several
reasons: tight supplies caused by stocks being
tied up in Government programs, improved ex­
port and domestic demand, and positive expec­
tations about PIK. Texas cotton prices in April
were up 16 percent since December, sorghum
17 percent, wheat 6 percent and corn 2 percent.

TEXAS MID-MONTH PRICES: CROPS

i— 200(1977 = 100) ------------------------------------------------

8 DOLLARS ---------------------------- DOLLARS PER POUND 2.00
(UPLAND COTTON)

LIVESTOCK AND PRODUCTS
-

6

—

4

-

2

ALL WHEAT1

1.60

—

1.20

—

.80

~

.40

—I

----- ----- \ „ z '
CORN1

UPLAND COTTON
■—

100
1981

1982

1983

SOURCES: U.S. Department of Agriculture.
Federal Reserve Bank of Dallas.

CASH RECEIPTS FROM AGRICULTURE: TEXAS

■—

0

r

1981

T

1982

1983

1

1. Corn and All Wheat quoted in dollars per bushel; Grain Sorghum quoted in
dollars per hundredweight.
SOURCE: U.S. Department of Agriculture.

INTEREST RATES ON AGRICULTURAL LOANS
I—

20 PERCENT --------------------------------------------------------------------

I-----------------------1
-----------------------1
-------------1981
1
1982
1
1983

1

SOURCE: Federal Reserve Bank of Dallas.

Cattle Prices (cont.)
current economic recovery on 1983 cat­
tle prices is to compare prices during
the recovery with prices that would
prevail if economic growth were zero.
An econometric model was used to
generate two sets of monthly cattle
prices for all of 1983. One set reflected
economic recovery, the other, zero
economic growth.
A typical forecast of the economy for
the rest of this year predicts slow
growth. One such forecast, by Chase
Econometrics, calls for a 1.6-percent
increase in real consumer expen­
ditures for food in the third quarter and
a 2.7-percent increase in the fourth.
This forecast was used as a model in­
put to derive estimates for cattle prices
in the case of recovery. For the con­
tinued recession case, consumer ex­
p en ditures were kept at th e ir
December 1982 level for all of 1983. In
both cases, the historical monthly
distribution of cattle marketings was
used to forecast monthly cattle

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The payment-in-kind (PIK) program
has been an overwhelming success in
terms of farmer participation, in Texas
and nationally. The USDA had
predicted that in the entire United
States, 23 million acres would be
retired under PIK. The actual number
turned out to be 82 million, 350 percent
more.
For the five PIK crops, the retired
acres in Texas totaled 9.3 million out of
a 23.1 million acre base. Texas wheat
farmers idled 44 percent of their 7.4
million base acres, while corn and
sorghum farmers put 35 percent of
their 6.9 million acres into conserva­
tion uses. Cotton farmers will not plant
cotton to 43 percent of their 8.1 million
acres, and rice farmers have set aside
46 percent of their 625 thousand acres.
Corn, sorghum and rice farmers face
the best prospects for price increases.
Texas wheat and cotton farmers
should expect little price improvement.

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jected yearly production of 5.8 million
pounds.
Under these conditions, it was
estimated that the economic recovery
has slowly boosted monthy cattle
prices over levels that would have
prevailed if the economy had remained
mired in recession. With the assumed
recovery, May cattle prices are 4 to 5
percent higher than if the recession
had continued. The effect of the
recovery on cattle prices will become
stronger as the recovery picks up
steam. By December, 8 to 9 percent of
the live cattle price will represent the
impact of the recovery. In terms of
revenue, the assumed economic
growth in 1983 will add around 5 per­
cent to gross ca ttle marketing
receipts. The economic recovery, as
projected, seems to provide strong
market support for Texas cattlemen.

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