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review by the Federal Reserve Bank of Chicago Business Conditions December 1972 Contents The trend of businessemployment gains widespread 2 District farmers and the expanding cattle-feeding industry 5 Federal Reserve Bank of Chicago OF BUSINESS Employment gains widespread The upturn in employment that began early in 1971 continued and gathered strength throughout 1972. In November 1972, 85 million Americans, including mem bers of the armed forces, held full or parttime jobs—up 2.2 million from November 1971. Nationally, unemployment was re duced to 5.2 percent of the labor force from 6 percent in November 1971. While employment has increased in al most all sectors and areas, the strength of the uptrend has varied, especially when re cent levels of employment are compared with the levels prior to the recession. For example, manufacturing employment, al though up 4 percent nationally from a year ago, is still 5 percent below its 1969 peak. Output of manufacturing industries is achieving all-time highs month by month, but employment has not increased propor tionately because workweeks have length ened and output per man-hour, productivity, has increased substantially. M idw est em p lo y m en t g ain s In October, the most recent month for comparable state data, total nonfarm wage and salary employment in the nation was up 3.8 percent from the October 1969 level, with all of the gain coming in the past year. Iowa was the only Seventh District state to ap proximate the national employment per formance, reflecting vigorous prosperity in farm-related activities, especially in farm machinery output. Wisconsin reported wage and salary em ployment in October 2.4 percent higher than the level of three years ago, aided by the revival of output of capital goods and rec reational vehicles. Indiana had only just regained the 1969 employment level in Octo ber. Despite gains in the past year, Michi gan employment was still down 1 percent from the 1969 level, and Illinois employ ment was still short by 2 percent. Employ ment in Illinois is dominated by the Chicago metropolitan area, which accounts for al most 70 percent of the state’s employment and was 3 percent less in October 1972 than in October 1969. Manufacturing employment in Iowa had returned to the 1969 level in October. Wis consin manufacturing employment was still short of the 1969 level by 5 percent, the same as in the nation. Indiana was down 6 percent. The most important industrial states of the Midwest, Illinois and Michi gan, report the slowest comeback in manu facturing employment with October payrolls 8 percent and 7 percent, respectively, below the 1969 peaks. In virtually all areas of the nation, in creases in employment in nonmanufacturing activities—especially trade, services, and state and local government—continued to rise throughout the 1970-71 period of sup- Business Conditions, December 1972 Wage and salary employment surged in 1972; but most Midwest states lagged the national pace percent, 1969 =100 percent, 1969 =100 percent, 1969 =100 percent, 1969 =100 percent, 1969 =100 3 Federal Reserve Bank of Chicago pressed growth. The general lag in employ ment in the Seventh District reflects, in large part, the greater relative importance of manufacturing in this five-state area— 32 percent of total payroll employment, compared to 26 percent for the nation. The supply of civilian workers is no longer being augmented by reductions in the num ber of men in the armed forces. From Sep tember 1969 to last June, the armed forces were reduced steadily from 3.5 million to 2.4 million and have remained at about that level since then. The sharp drop in Defense Department procurement, starting in 1969, gave way to a moderate rise starting in early 1972 and some defense contractors are hiring workers again. U n em p lo ym en t in the M idw est 4 The only Seventh District state reporting unemployment above the national average is Michigan, with 8 percent unemployed in October, seasonally adjusted, compared to 5.5 percent for the nation. The unemploy ment problem has been chronic in Michi gan in recent years and continues despite some alleviation provided by the boom in motor vehicle output. Other district states estimate lower unemployment ratios than the nation, with October figures ranging from 2.2 percent in Iowa to 4.4 percent in Illinois. Unemployment in all areas has declined in the past year and especially in recent months. A further improvement is expected for 1973. Nevertheless, unemployment rates remain above the very low levels of 1968 and 1969 (3.5 percent for the nation), and there is scant hope that the pre-recession levels will be matched, or closely ap proached, in 1973, even with continued rapid expansion of the general economy. The unemployment problem is partly a matter of matching people and jobs. Some employers already are facing problems in re cruiting workers. Accountants, engineers, machinists, welders, and other skilled work ers are in short supply in many areas. Other firms report shortages of suitable trainees, recruits for second and third shifts, and people who will accept hard, dirty, or “menial” jobs. Unemployment is a relatively greater problem in the large metropolitan areas and especially in the older sections of central cities. Various factors have encouraged business firms to transfer their activities to suburbs, smaller towns, and rural areas. O u tlo o k is fa v o ra b le Real output of goods and services is ex pected to rise 6 to 6.5 percent in 1973, about the same as in 1972, and well above the average long-term increase of less than 4.5 percent annually. Output per man-hour in the nonfarm pri vate economy was up more than 5 percent from a year earlier in the third quarter of 1972, and a similar rise for the year as a whole is probable. The unusually large in crease in productivity can be expected to moderate in the period ahead, as less ex perienced workers are hired, second shifts are added, and less efficient facilities and sources of supply are utilized. The long-term average annual rise in productivity has been about 3 percent. These prospects suggest that the recent rate of gain in employment will be main tained or accelerated, and that unemploy ment will moderate further. With especially favorable sales gains anticipated for the mo tor vehicle and capital goods industries in the Seventh District, this region should participate, at least proportionately, in the national economic improvement. Business Conditions, December 1972 District farmers and the expanding cattle-feeding industry Beef production will reach 22.4 billion pounds in 1972, up more than 700 million pounds from 1971, and marking the tenth consecutive year of expanded output. Since the mid-1960s, ever-larger supplies of beef have been consumed at ever-higher prices, attesting to the rapid growth in demand for beef in recent years. The nation’s growing appetite for beef has resulted in a rapid expansion of the cattle-feeding industry. Prior to 1950, most cattle were marketed directly from pasture. Now, over threefourths of all cattle slaughtered are fat tened on grain rations in feedlots. Although farmers in Seventh District states—principally Iowa, Illinois, and Indi ana—have expanded their cattle-feeding op erations, their competitors in the Plains and Western states1 have expanded far more rapidly. Cattle marketed from feedlots in the 23 major feeding states totaled 12.6 mil lion head in 1960, and 35 percent of these cattle came from feedlots in the Seventh District states. Total marketings from feedlots have grown to an estimated 26.7 million head in 1972, but the Seventh District states share of marketings has declined to less than 22 percent of the total. By contrast, fed cat tle marketings in the Plains and Western states increased from 52 percent of the total in 1960 to 70 percent in 1972. 'The Plains states are Nebraska, Kansas, and South Dakota. The Western states are Texas, Ok lahoma, Colorado, Idaho, New Mexico, Arizona, California, Washington, Oregon, and Montana. W h a t's behind the sh ift? The advent of the large, commercial feedlot is the most obvious and most important factor contributing to the geographical shift in beef production. For purposes of defini tion, a feedlot with a 1,000-head, one-time capacity is usually considered “commer cial.” In recent years, the lots showing the most rapid expansion have been those with a capacity of 8,000 head and over. There were just over 2,200 commercial feedlots in the 23 major feeding states in 1971. Although they accounted for only 1 percent of all feedlots (commercial and non- Americans consuming more beef at higher prices pounds * W e ig h t e d * * E s t im a t e . av erag e p r ic e f o r a l l r e t a i l c u t s . 5 Federal Reserve Bank of Chicago ditions and slow consumer acceptance of grain-fed beef. Two events appear to have been catalysts that triggered rapid expan sion of large feedlots in these areas. One was a change in federal farm programs that curbed wheat and cotton acreage. The other was the development of a drought-resistant, high-yielding, hybrid grain sorghum (a feed grain). As acreage was shifted from cotton and wheat to grain sorghum, these areas changed from deficit to surplus feed pro ducers, greatly enhancing the competitive position of western livestock feeders. The a d v a n ta g e s of being big commercial), they marketed 58 percent of the fed cattle produced in these states. Large-scale commercial feedlots were pio neered in California and Arizona where rapid postwar increases in population cre ated a sizable deficit in local beef supplies relative to consumption. An added factor was that cattle feeding provided an outlet for by-products from the sugar beet and vegetable industries in these states. At the same time, large retail food chains were rapidly developing in the West. These stores maintained national policies of providing high-quality, USDA choice-graded grainfed beef, rather than the lower-quality grassfed beef that traditionally had been raised in the West. Development of commercial cattle feed ing in Texas, Oklahoma, and Kansas was re tarded until the late 1950s by drought con Numerous studies have demonstrated that large-scale feedlots have definite cost ad vantages over smaller lots. The major sources of these “economies of scale” arise from spreading labor costs and overhead expenses (taxes, depreciation, insurance, etc.) over more units of production, i.e., pounds of beef. Bigness also results in more subtle advantages that are not easily quanti fied but may be most significant. These in clude savings through large quantity pur chases of feed and feeder cattle, and better knowledge of “the market” through the con tinuous buying and selling activities inherent in large-scale operations. Large lots also may be able to attract more buyers and obtain premium prices because of their established reputations and because they nearly always have cattle of varying weights and grades ready for immediate delivery. Being large also enables feedlot owners to successfully integrate into other related businesses—such as feed milling, slaughtering, and transpor tation. Large feedlots also are able to attract outside investment capital by custom-feed ing cattle for others, such as ranchers, pack ers, and outside investors. It is now esti- Business Conditions, December 1972 mated, for example, that 90 percent of the cattle in feedlots in the Texas Panhandle re gion are owned by someone other than the feedlot operator. Custom feeding allows feedlot owners to utilize their facilities more fully to achieve the cost savings of high volume. In recent years, “cattle-feeding clubs” and tax shelter plans have been developed to at tract new investors. Often, the ability to de fer tax liability on income from nonfarm sources is more important to investors than the profitability level of cattle feeding. W h y not th e Corn Belt? Probably one of the main reasons cattle feeding in the Midwest continues to be dominated by thousands of small operations with most farmer-feeders marketing from 50 to 300 cattle per year is that this wellestablished and reasonably efficient cattle feeding system was already in place in these areas. As a result, expansion in cattle feed ing in the central Corn Belt has come about, albeit more slowly, through enlarging exist ing operations rather than establishing en tirely new facilities which may entail a com plete reorganization of the farming business and large initial outlays of capital. Also a sort of “birds of a feather” phenomenon may be operative whereby similar business or ganizations tend to cluster together. Rea sons for this include the availability of experienced labor, and the proximity of suppliers and markets geared to serve a particular type of business operation. In many cases, an entrepreneur seeking to es tablish a huge, western-type feedlot in the central Corn Belt might be considered a maverick by the local business and finan cial community—a factor making chances of success more risky because of lack of understanding and cooperation of local lenders and supply firms. Economic fo rces There are good economic reasons why cattle feeding has largely remained a sup plementary enterprise on midwestern farms —or in many cases been discontinued. Al ternative uses for available resources (land, labor, capital, and management) are often more profitable. The central Corn Belt with its natural endowment of fertile soil and climatic conditions has always had a com petitive advantage in the production of corn and soybeans. And in the decade of the 1950s and early 1960s, technological ad vances in hybrid seed corn, herbicides and pesticides, and farm tractors and machinery further enhanced profitability and encour aged specialization in crop production. This was manifested in the sharp rise in Midwest farms that derived most of their income from crops. While the total number of farms has trended downward, the proportion of “cash grain farms” has increased. Special ized crop farms, for example, accounted for over 54 percent of all commercial farms in Illinois in 1964—up from 48 percent in 1959. During this same period, the proportion of Illinois commercial farmers specializing in raising cattle and hogs declined from 34 percent to 29 percent. Similar trends oc curred in Indiana and Iowa. In the latter half of the Sixties, however, high livestock prices relative to grain prices encouraged more livestock feeding, and data from the 1969 Census of Agriculture indicate the trend toward specialized crop farming has leveled off. Another economic trend that favors cash grain farming over large livestock opera tions has been the increase in the proportion of farmers that hold off-farm jobs. The Mid west is a major industrial region as well as an important agricultural region, and the Federal Reserve Bank of Chicago expanding economy of the 1960s resulted in increased availability of off-farm jobs. As more and more farmers have found off-farm employment, many undoubtedly curtailed livestock raising—an operation that requires year-round attention. Financing The substantial initial investment and high operating capital requirements of a major feedlot also may be barriers to entry into large-scale cattle feeding for many Corn Belt farmers. The initial capital outlay for land, equipment, and machinery for a 10,000-head capacity feedlot is estimated to total over $500,000 in the Southwest. Op erating costs of a 10,000-head lot total more than $6 million annually. Assuming 70 per cent of operating costs are financed, and with a turnover rate of just over two times per year, this would require about $500,000 of operating credit on a continuous basis. Obviously, financing a business of this size might require going outside the local area for funds. Moreover, it might necessitate a complete reorganization of the farm busi ness, typically a sole proprietorship, into a corporate or partnership form more amen dable to sophisticated financing techniques. C lim ate Climate conditions in the central Corn Belt are a natural obstacle to large-scale feedlot operations. Moisture conditions— conducive to high corn and soybean yields —require large overhead investments in paved feeding floors for large concentra tions of livestock. Harsh midwestern winters require greater outlays for shelter. Environ mental pollution problems may inhibit de velopment of large-scale feedlots to a greater extent in the more densely populated Corn Belt states than in the more sparsely popu lated West. Livestock operations and their attendant waste disposal and odor problems, however, have come under public attack in both regions. The future The cattle-feeding economy has under gone substantial change in recent years. Whether the current westward shift in cat tle feeding will continue in the future is un certain. The economies of scale available to large, western-type feedlots, however, seem likely to remain a pervasive force. Changes in relative prices of grains and livestock, limited water and feed supplies in some areas of the West, and changes in gov ernment programs as well as many other factors could alter current trends. One thing seems certain though; the demand for fed beef will expand rapidly in the years ahead as a growing U. S. population be comes still more affluent. Corn Belt farm ers that do not adopt the cost savings avail able through economies of scale, or develop other means to better utilize their resources and reduce costs, will continue to get a smaller share of the beef market. BU SIN ESS C O N D IT IO N S is p u b lish ed m o nth ly b y the F e d e ra l R ese rve B a n k of C h ica g o . G eo rg e W . Cloos w a s p r im a rily resp o n sib le fo r the a rtic le "T h e trend of b u sin e ss—e m p lo y m ent g a in s w id e s p re a d " an d D ennis B. S h a rp e fo r "D istrict fa rm e rs an d the e x p a n d in g c a t tle -fee d in g in d u stry . Su b scrip tio n s to Business Conditions a re a v a ila b le to the p u b lic w ith o u t c h a rg e . For in fo r m atio n co ncern ing b u lk m a ilin g s , a d d re ss in q u irie s to the R esearch D e p a rtm e n t, F e d e ra l R eserve B a n k of C h ic a g o , B o x 8 3 4 , C h ic a g o , Illin o is 6 0 6 9 0 . US a review by the Federal Reserve Bank of Chicago Index for the year 1972 Month Pages February June August September 11-16 19-23 2-7 10-20 December 5-8 March 2-7 A g ricu ltu re an d fa rm fin an ce What’s happening to meat prices?.................................................... Seventh District farmland values..................................................... Agriculture—midyear review and outlook...................................... The Farm Credit System................................................................... District farmers and the expanding cattle-feeding industry..................................................................... B an kin g an d cred it Credit rise boosts consumption......................................................... Growing time deposits—at what cost to the small bank?.......................................................................... Rural bank needs for external funds................................................ Member bank reserve requirements— heritage from history..................................................................... Bank credit cards................................................................................ April May 8-16 12-19 June July 2-18 8-16 Month Pages January April 2-32 2-7 July October 2-7 2-7 December 2-4 March November 8-15 2-16 February August September October 2-10 8-12 2-9 7-12 May 2-12 Economic conditions/ g e n e ra l Review and outlook—1971-72........................................................... The trend of business........................................................................ The trend of business— the economy at midyear................................................................. The trend of business........................................................................ The trend of business— employment gains widespread....................................................... Housing FHA mortgage insurance and subsidies............................................ Mobile homes and the housing supply.............................................. In tern a tio n a l econom ic tren d s Restrictions on world trade............................................................... Capital flows and the dollar............................................................... Directory of international organizations.......................................... The travel gap...................................................................................... Public fin a n ce Meeting public needs: an appraisal.................................................
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