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DALLAS
Federal Reserve Bank of Dallas

November 1984

Risk Taking Pays Off in Texas Agriculture
Over the past several years, weatherrelated calamities have struck Texas
agriculture. The drought of 1982-84
and the Christmas freeze of 1983 in the
Lower Valley are some examples of the
harsh treatment that the Texas climate
provides ranchers and farmers.
Because Texas climatically divides the
wet Southeast United States from the
dry Southwest, the risk of weathercaused economic calamity varies wide­
ly among agricultural producers.
Variability of income is one measure
of risk. An examination of the 1969-83
period shows that higher risk in Texas
agriculture is usually rewarded with
higher returns.

sales and the variation in those
receipts for both crops and livestock
operations were calculated using
Reporting Service data for the 1969-83
period. From these statistics a crude
version of the theoretical risk premium
was constructed, and the 15 crop
reporting regions were ranked accord­
ing to the riskiness of their agriculture.
For total cash receipts, the northwest
quadrant of Texas is the riskiest, an
area that includes the Panhandle, the
High Plains, and the Low Plains. By
this same measure, the Lower Valley
and the Trans-Pecos areas are the
least risky.

The Reward for Taking Risk

Texas Shielded from Declines in Agricultural Exports

Economic theory suggests that a
risk premium must exist for an in­
dividual to be attracted to a risky in­
vestment. The greater the risk, the
higher the risk premium must be. For
example, speculators in agricultural
futures markets can have sizable
returns on an investment, but the level
of risk also can be high. Passbook ac­
counts at federally insured banks yield
much lower returns, but there is hardly
any risk. The size of the risk premium
needed to entice an individual into a
risky investment can be related to the
variations and average level of invest­
ment income over time.

Exports of U.S. agricultural com­
modities are far below the level a few
years ago. Increased competition and
the strong U.S. dollar can explain much
of the decline. Agricultural income suf­
fers because foreign countries are a
significant market for U.S. com­
modities. The export decline has not
been as severe for Texas as for other
major agricultural states, however,
because the mix of crops and livestock
produced in Texas is not as heavily
weighted toward exports.

Regional Risk and Return

The Texas Crop and Livestock
Reporting Service divides Texas into 15
crop reporting regions. To estimate
relative regional risk, average gross

Decline in Farm Exports

Since the late 1960s the value of U.S.
a g ric u ltu ra l exports has grown
significantly, constituting an increas­
ing share of agricultural income. In
1968, exports were 14 percent of U.S.
farm cash receipts; the share had
grown to 30 percent by 1981. This

To calculate the return on invest­
ment (ROI), additional information was
needed on farm and ranch assets and
costs of production. These data for
1978 and 1982 were gathered from the
quadrennial Census of Agriculture.
Only full-time farmers and ranchers
were considered. In both years a gross
measure of ROI and a limited net ROI
(not all production expenses were
netted out) were examined. The returns
in all cases show similar rankings.
Greater Returns to Higher-Risk Regions

Statistical analysis indicates that
(Continued on back page)

growth ended in 1982, when the value
of farm exports fell 20 percent, fol­
lowed by a 1-percent decline in 1983.
Several factors have contributed to
the decline in exports. Increased
foreign competition has played a
significant role. The impact of competi­
tion has been exacerbated by the ap­
preciation of the dollar. A strong dollar,
relative to currencies of other
agricultural exporting countries,
means that U.S. agricultural com­
modities are more expensive for
importing countries than commodities
produced by other exporters.
Impact on Texas Agriculture

The decline in exports reduced total
U.S. agricultural cash receipts. Of the
major farm states, however, Texas has
probably been the least affected. While
(Continued on back page)

PRIME INDICATORS OF THE TEXAS AGRICULTURAL ECONOMY
TEXAS CASH RECEIPTS

INDEX OF
PRICES RECEIVED: TEXAS

PRICES RECEIVED/PRICES PAID’

i— 170 (1977 = 100)

r-

120 (1977 = 1 0 0 )--------------------------------------

ALL FARM PRODUCTS
1984
-

•—

110

80 r
f

SOURCE: U.S. Department of Agriculture.

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A S O N D

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1. Prices received by farmers in Texas divided by prices paid by farmers
nationwide (No separate series exists for prices paid in Texas).

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

INTEREST RATES ON TEXAS FARM LOANS1

TEXAS FARM REAL ESTATE VALUES*1
—

12 HUNDRED DOLLARS PER ACRE---------------

—

10

—

8

—

6

i—

23 PERCENT----------------------------------------------------------------

IRRIGATED CROPLAND

DRYLAND CROPLAND

’81 I

1982

I

FEDERAL LAND BANK ASSOCIATIONS

1983

I

’81 I

1984

1982

I

1983

1. FLBA rates are for farm real estate loans.
SOURCES: Quarterly Survey of Agricultural Credit Conditions,
Federal Reserve Bank of Dallas.
Federal Credit System.

1. 3 quarter centered moving average.
SOURCE: Quarterly Survey of Agricultural Credit Conditions,
Federal Reserve Bank of Dallas.

ELEVENTH DISTRICT AGRICULTURAL LOANS
Bankers report whether the variable is “ greater,” “ the same,” or “ less” than a year ago.
Percent reporting “ greater” or “ less” are depicted below.

DEMAND FOR LOANS *

AVAILABILITY OF FUNDS *

i-

60 PERCENT OF BANKS REPORTING

|—

-

40

’81 I

1982

I

1983

I

55 PERCENT OF BANKS REPORTING

1984

COLLATERAL REQUIRED *

RENEWALS OR EXTENSIONS *

i—

|-

80 PERCENT OF BANKS REPORTING

* SOURCE: Quarterly Survey of Agricultural Credit Conditions,
Federal Reserve Bank of Dallas.

80 PERCENT OF BANKS REPORTING-

I

1984

AGRICULTURAL BRIEFS
Interest rates and land values steady, more cattle, no citrus
• Interest rates on agricultural loans by Eleventh
District banks varied little during the third
quarter of 1984. Agricultural operating loans
hovered around 14.8 percent, unchanged from
the second quarter. Most operating loans have
variable-rate provisions. Thus, recent interest
rate declines in national credit markets should
show up quickly in agricultural loan rates.
• Average land values in the District also stayed
fairly constant during the July-September
period. The average adjusted values for District
dry cropland, irrigated cropland, and ranchland
held near $779, $1,019, and $618 per acre,
respectively. Land values in drought areas con­
tinued to decline in the third quarter of 1984. In
the Rolling Plains, for example, the fall in thirdquarter land values ranged from 3.6 percent for
irrigated cropland to 4.4 percent for ranchland.
• The drought that has plagued Texas still
lingers. Droughts are measured by evapotranspiration (plant needs), soil moisture recharge,
and runoff. The Palmer index (PI) includes all
three and is a good indicator of climatic

drought. It reveals that portions of South Texas
bounded roughly by Del Rio, San Antonio,
Corpus Christi, and McAllen are in moderate
drought conditions. The PI also shows that an
area of long-term drought is pushing out of
western Oklahoma into the eastern Panhandle.
• Texas cattlemen are steering the national fed
beef market with their marketing plans. Texas
fed beef producers are planning to increase
their marketings 25 percent in the fourth
quarter of 1984. Total planned U.S. fed cattle
marketings for the October-December period
are up 5 percent from the same period last year.
Without Texas, the national intentions are
down slightly. Many of these marketings seem
to reflect herd liquidation, raising questions
about future beef supplies.
• The citrus crop of oranges and grapefruit, nor­
mally produced in great abundance in the
Lower Rio Grande Valley, will be tiny. The
Christmas freeze of 1983 caused so much
damage that regular crop forecasts are not
being made.

TEXAS COMMODITY MARKET PRICES
UPLAND COTTON

ALL WHEAT

GRAIN SORGHUM

r—

-

4.4 DOLLARS PER BUSHEL -

i— 6.5 DOLLARS PER HUNDREDWEIGHT—

-

4.1

-

72 CENTS PER POUND-

/
!—

40

1J. IFr

I..1
I ~ NI . . DI r .
M A> M
J . 1 J, 1A. IS„ O

1..*

SLAUGHTER STEERS
75 DOLLARS PER HUNDREDWEIGHT —
A

I
SOURCE: U.S. Department of Agriculture.

SOURCE: U.S. Department of Agriculture.

FEEDER STEERS

CORN

r-

55

80 DOLLARS PER HUNDREDWEIGHT —
75

F M A M J

J

Z\

<—

A S O N D

SOURCES: Texas Department of Agriculture.
Federal Reserve Bank of Dallas.

3.8 DOLLARS PER BUSHEL-

1983

1 J r ' i i 1 . 1. ! 1 I 1 . I J c U L . L I

J

1983

1982

SOURCE: U.S. Department of Agriculture.

■—

5.7

2.2
’

SOURCES: Texas Department of Agriculture.
Federal Reserve Bank of Dallas.

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SOURCE: U.S. Department of Agriculture.

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Risk Taking (cont.)

Exports (cont.)

for Texas agriculture the regions fac­
ing higher risks also generally earn
higher returns on investment. The
northwest quadrant of Texas does earn
higher than average returns, and in the
Northern High Plains the return on in­
vestment is almost twice the average
for the state. Most areas characterized
by low risk levels, such as the TransPecos and the Edwards Plateau,
earned returns on investment that were
less than the state average. The Lower
Rio Grande Valley was estimated to
have the lowest risk and the highest
returns on investment. Valley agricul­
ture is very diversified, which keeps
risks low while irrigation and highvalue specialty crops boost returns.
The Valley risk-return equation is sure
to change a fte r fast w in te r’ s
devastating freeze.
—Hilary H. Smith

specific state data on exports are not
available, the relative importance of ex­
ports can be estimated by comparing
the agricultural commodities produced
in a state with those that are important
in the U.S. agricultural export trade.
Nationally, the most important ex­
ported commodities are wheat, soy­
beans, and feed grains. These crops
make up over half the value of all U.S.
agricultural exports. In Iowa and
Illinois, these crops constitute about
50 percent of cash receipts, making
such states especially sensitive to
changes in agricultural export volume.
The Texas mix of agricultural pro­
duction is less export-intensive. About
half the cash receipts come from cattle
and calves. Livestock products are
only a small proportion of total agricul­
tural exports, which helps to insulate
Texas from changes in the export
market.
Although Texas is less vulnerable
than other states to changes affecting

the major export crops, exports are still
important to Texas agricultural cash
receipts. Cotton and rice figure prom­
inently in the export trade, and Texas
does produce significant amounts of
wheat, soybeans, and feed grains. The
combined value of the five crops is 25
percent of Texas cash receipts—one
reason why the state’s cash receipts
fell 8 percent from 1981 to 1983 as ex­
ports declined.
Cash receipts from exports are
showing some slight improvement in
1984. This can be attributed to the con­
tinuing world economic recovery,
which has led to increased consump­
tion of grains, used for livestock
feeding, and of cotton. The poor wheat
crop in the Soviet Union is also playing
a role by increasing world demand for
wheat. Despite this improvement in ex­
ports, however, the level will still be
sig n ifican tly below the peak of
1980-81.
—Roger H. Dunstan

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